For the home of capitalism, America does affordable housing pretty well. Better than Australia, anyway. The US has managed to blend commercial undertakings, with the help of Government-aided firms such as Freddie Mac, with a social good. Investors are happy too.
According to Clayton DeGiacinto, the founder of Axonic Capital in New York, the trick is to focus on the money first and foremost. “In the lending business, it’s all about capital preservation,” he says. “The new regulatory environment has helped this happen… We can make more money now. Before the crisis [GFC] there were a lot more people taking a cut – mortgage brokers, mortgage conduits, larger mortgage conduits and then they’d be selling [the loans]on Wall Street. Goldmans and others all did that. So, there’s six or more people taking a bit of the money out from the person who actually needed it.”
DeGiacinto knows what he’s talking about. He left Goldman Sachs in 2008, where he led a mortgage trading desk in fixed income, commodities and currencies, to build a mortgage investment platform at Tower Research Capital and then to start Axonic Capital credit funds. Like a surprising number of fund managers, he is ex-Army, having graduated from West Point and served in the US 25th infantry division (Hawaii). He also did an MBA at Wharton School at the University of Pennsylvania.
On a visit to Australia last week, DeGiacinto said his firm “really thinks about the risk we’re taking”. After the establishment of the US Government Credit Risk Transfer Program in 2012, Axonic set up a partnership with Freddie Mac (the Federal Home Loan Mortgage Corporation) and the property group CBRE, which gives it an advantage before the taxpayer tax a loss in the event of a default.
“I’m a mortgage originator,” he says. “I look down before I look up. This is a for-profit business, but it’s profit with a purpose. It’s up to us to source the money… And it’s up to us to do a better job.”
Of the US$10 trillion-odd in US housing mortgages, about US$6 trillion is guaranteed by government-backed agencies. Unlike Australia, US mortgages reside with the property, not the mortgagee.
DeGiacinto also says that America has “never really been a home-ownership country… When house prices went down during the crisis, people just exited.”
Axonic is represented in Australia by Allen & Partners. Scott Riedel, an Allen & Partners director, says the investment is a good diversifier, with or without the social good impact. “We focus on the credit and the risk levels of the capital structure,” he says. “We really think about the risk we’re taking.”