Citing climate risk, investors bet against mortgage market

(Reuters News, 29 Sep 2019) David Burt helped two of the protagonists of Michael Lewis’ book The Big Short bet against the U.S. mortgage market in the run-up to the 2008 financial crisis. Now he’s betting against the market again, but this time, the risk is not from underwater subprime mortgages, it’s from homes sinking under water.

As he did then, Burt has given up his full-time job to make that bet. He left his role as a portfolio manager at the $1 trillion Wellington Management last year to start an investment firm, DeltaTerra Capital, which aims to help clients manage climate risk, and, where possible, take advantage of ways the market has not yet priced in that risk. His first investment strategy is targeting residential mortgage-backed securities, or RMBS, with exposure to climate hot spots like Texas and Florida.

In doing so, Burt is joining the ranks of a small number of investors who have become worried that climate risk is underpriced in these securities, which are pools of home loans sold to investors.

“The market’s failure to integrate climate science with investment analysis has created a mispricing phenomenon that is possibly larger than the mortgage credit bubble of the mid-2000s,” Burt wrote in a presentation to prospective clients.

Most mainstream investors remain skeptical of the impact of climate change on their portfolios or argue that they are diversified enough not to have to worry about the risks.

Burt and at least three other investors said in interviews with Reuters that they think the risk is real. They argue that a growing body of academic research and data shows that hurricanes, flooding and other disasters pose a far larger threat than is currently being priced into mortgage securities.

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Reuters News, 29 Sep 2019: Citing climate risk, investors bet against mortgage market