Colin Prescott (00:04):
Welcome to Understanding Edge, where we take a closer look at the trends and themes shaping today's fixed income markets. I'm your host today, Colin Prescott. I'm the managing director of business development here at Diamond Hill. I'm joined by Douglas Gimpel. Doug's our senior portfolio specialist and author of our monthly fixed income commentary. Doug, thanks for being here. Let's get into it. All right, Doug, let's touch on a few of the topics that we're hearing about that relate to policy and tease out some of the ways that those are impacting the markets. The first one being the executive order proposed on banning institutional buyers in single family homes. Give us just a quick rundown of what exactly has been proposed and what that means and how it impacts the market overall.
Douglas Gimple (00:46):
Yeah. So I think the problem we're going to have here with a lot of this stuff is that there isn't a lot of detail. And so it felt like the administration's just kind of throwing things against the wall, see what's going to stick. And so for the ban on institutional buyers, it was just that. There was no clarification. Now in the last couple of days, we did get a little bit of clarification where they denoted that an institutional buyer would be deemed as anyone or any entity that owns a hundred or more homes that they're then renting out. If we look at that market, you're looking at roughly 0.67% of the US housing market and about 7% of all single family rentals. So whatever the goal may be, it doesn't feel like it's going to do a whole lot, like whether it's to make housing more affordable, it doesn't feel like there's enough there to change things. And important to note that it would be a ban on buying going forward.
Colin Prescott (01:48):
Not existing portfolios?
Douglas Gimple (01:49):
Correct. It doesn't change, at least in the way it was proposed, it doesn't change anything for institutional owners that have over a hundred homes. And frankly, it hasn't changed anything yet at all, but it's just a proposal, one of the many that they're trying to throw out there to reduce everyday living expenses, make housing a little bit more affordable.
Colin Prescott (02:12):
What about the administration's directive for Fannie and Freddie to begin buying RMBS? What does that mean and how does that impact things?
Douglas Gimple (02:21):
Yeah, so that's a little bit different. We had, I think it was January 8th, it was announced or proclaimed. And then the following day, the head of the FHAA, Bill Pulte, came out and said, "Yep, we're on it. We're going to do it. " And they told us, us the market, that they had already bought three billion in agency mortgages. So they've started it, but outside of that pronouncement, we have absolutely no insight as to what exactly they've done, how much they've done, what part of the curve they're buying, what mortgages they're buying. I mean, there's a lot of uncertainty around that. And the idea around the pronouncement was to lower mortgage rates. And we've seen a little bit of a dip in mortgages. They're at around 6.15. They're down about four or five basis points from where they were before the announcement. So maybe that's worked a little bit, but not really.
And then if we look at it from an investment standpoint, spreads in the mortgage market have compressed, but really from 22 basis points on the day of the announcement to a low point of about 14, and then now around 19. So spreads are tighter, reflecting traders anticipating another buyer in the market but we're not going to see a lot of impact until we have more clarity because if they're just doing 200 billion just, but 200 billion, are they doing all of it in the first quarter? Are they doing it spread out throughout the year? Is this just the first tranche of purchases? Are they going to do 200 billion in this quarter, 200 billion next quarter? If you spread it out over the entire year, the impact's going to be negligible because it's 200 billion in an $11 trillion market. But if you're going to do a lot more than that, then you have to address how are they going to pay for it.
Colin Prescott (04:23):
So fair to say that those first two policy headlines maybe haven't had a huge impact on things, although we'd classify them as something more monitoring, as more data comes out, more clarity comes out. What about the other policy headline we heard about recently, which related to credit cards and potentially banning rates above 10% for consumers? What's the impact of that? And is it more impactful with regard to future access to capital for consumers?
Douglas Gimple (04:51):
So the first pronouncement was a 10% cap on credit card APR, annual percentage rate for a year. So Senate Bill 381, which came out in February of 2025, brought by Bernie Sanders and Josh Hawley. Two guys who probably couldn't agree on anything else, but that came out with kind of a five-year moratorium on credit card interest rates, 10% limit, and it hasn't gotten out of committee. It's just in the banking committee right now. So it'll sit there for a while. I don't know if it'll ever go anywhere. Probably not. But so this pronouncement of 10% for a year is a little bit different, not as aggressive, but it creates a very real problem if this were to happen. And there's a couple ways of looking at it. You can look at it from the market standpoint. So how does this impact credit card ABS deals, asset backed security deals?
You could look at it from the consumer standpoint, or you can look at it from the economic standpoint. So if you go to 10% on all credit cards right now, credit card asset backed securities are revolving deals. So that immediately goes into those ABS deals that are already out there, and that creates huge problems for investors because you blow through a lot of the guardrails that are kept in place. You get rid of, or you eliminate the excess spread, which is where investors get a lot of the protection. So there's a lot of things that would happen within credit card ABS. And again, this isn't something that we think is highly likely, but it is something we have to think about. From the consumer standpoint, you're looking at, and the American Bankers Association did a study actually addressing Senate Bill 381, but you can apply that here.
And it says that, based on their analysis, 74 to 85% of open credit card accounts in the nation would either be closed or have their credit lines drastically reduced. So think about that. Even if you're using your credit card for day-to-day, you pay it off every month, your limit is going to go away, or it's going to reduce, or the credit card's going to go away. Between 137 million and 159 million cardholders would no longer be able to utilize their credit cards. So think about that as well. And then consumers, even consumers with credit scores above 600, which call that kind of near prime, 71 to 85% would see their accounts closed or experience significant reduction in their credit limit. And then finally, tighter credit underwriting standards, reduced credit limits, higher fees to make up for the revenue they're not getting off of that excess spread and the potential elimination of benefits and rewards.
So all the little things we've come to accept with credit cards would go away. And what does that mean for the economy? That means that people are spending less. And so it would be a huge impact to the consumer, to the economy, to the markets. And you've got the big issuers. So think JP Morgan, Capital One, Bank of America, they'd be fine because they're broad diversified financial institutions, maybe they just reduce their credit card business, maybe they get rid of it, but then you have companies that their business is credit cards and they would most likely disappear. So I don't think a lot of thought has gone into it. It's just kind of thrown out there as another way to reduce expenses for consumers. But at the end of the day, while you may save on what you're paying for your carried interest or your carried balance on your credit card, at the end of the day, it's going to hurt a lot more when you don't have that access anymore.
Colin Prescott (08:39):
So it sounds pretty impactful both to the existing and the future outlook for this space, I guess across the Diamond Hill fixed income desk, how have we either reshaped portfolios or thought differently about the opportunities we see in the market?
Douglas Gimple (08:53):
Yeah. I mean, we've been looking at kind of upgrading the portfolio, increasing higher quality based not just on these pronouncements or on the credit card pronouncement in particular, but more so the uncertainty around the economy going forward. We had tariffs have now been declared illegal by the Supreme Court. Do we get rebates? Do we get another form of tariffs, which it feels like it's already coming out. Geopolitical uncertainty, just everything that's going on right now, we've gotten a little bit more defensive in the portfolio. Our credit card exposure has been pretty minimal across our strategies. And interesting to note that when this initially came out, credit card spreads widened out. They've since come right back in and they're actually tighter now than they were before the pronouncement, but there's been no issuance of credit card yet since the beginning of the year. And last year, we saw a sizable amount higher than what we saw in 2024, and we've seen absolutely nothing so far, and we're almost done with February.
So that I think is indicative of the uncertainty that these companies feel that they use these issuances to fund their business, and they're kind of just waiting on the sidelines to see what happens. But from our standpoint, it's obviously something that we keep an eye on. Jingwei, who's our analyst on the credit card ABS and ABS in general, is at the West Coast structured product convention. And so it'd be interesting to hear what he has to say regarding what the industry is thinking about this.
Colin Prescott (10:32):
All right. Let's switch gears a little away from some of the policy impacts and more towards some of the industry or sector specific headlines we've been seeing. I think you and I had traded a couple emails recently about office delinquency and the chart that we had seen that shows today's office delinquency near or even above the financial crisis levels. Can you talk a little bit about that, what we're seeing and how we're positioning portfolios amidst some of those headlines?
Douglas Gimple (11:02):
So to your point, the email that you had sent me, and we've talked about this, but specifically office CMBS delinquency has now reached 12.34% in January, which is an all time high. So we've exceeded the financial crisis. Early days of COVID, this is the highest we've ever been. And the latest increase, so we went from 11.31% to this 12.34% where we're currently at. It was mainly driven by a small number of very large deals, including two in New York City, Worldwide Plaza and one New York Plaza that are now in delinquent status. And so the numbers aren't as high, but the size of the deals are bigger. And so if we take a step back, office delinquency has risen really since 2022 when rates took off, it's gone from 1.6% in mid 22 to that current level just above 12% like we talked about. And it's the combination of higher interest rates, weak leasing demand, and the ongoing, though it's lessening a bit, that the impact from hybrid and work from home.
Work from home, it's starting to, it feels like wind down. I think there's a portion of the workforce that will now always be work from home. And that's just part of the evolution of what we've learned coming out of COVID. But when we look at the loans originated during that peak optimism, 2018 to 2021, they're now struggling. They're struggling to refinance at these higher levels because think back to 2018, 19, 20, 21, rates were incredibly low, artificially so, but you were putting these deals together at really low levels. Now it's 2026. These five-year deals are coming up and you have to refinance at higher rates and that's going to be very painful. So I mean, for us, when we look at it, we're still investing very selectively in office CMBS.
Colin Prescott (13:09):
What kind of stuff specifically do we like there?
Douglas Gimple (13:12):
Yeah. I mean, you're looking at either class A properties, so you can tier them as class A, class B, class C, highest to lowest quality. So more recent constructions that's been completed or renovations that have been completed, deals that broadly diversified. And what I mean by that is it's not two or three tenants. It's multiple tenants across many, many floors and in areas that you have to be selective as well. So not as much in Chicago, selectively in New York, selectively in the Bay Area. As AI has taken off and everybody's starting a company associated with AI, they need office space. And so we've seen the San Francisco market come back very strong, but again, we're being very, very selective in what we're looking at because we want to make sure we understand what we own and the risks associated with it. So things that we would avoid.
Anything like an office that's being converted into residential. There's too many unknowns, too much uncertainty. You don't know what they find when they tear everything apart. Are they going to be able to get it done on time, on budget? So we want the clear cut opportunities that we can understand and really dig into.
Colin Prescott (14:30):
I’m glad you brought up some of the AI and tech build out. One of the headlines we see a lot is on these data centers. And I'm curious from the fixed income desk, do we have any views on how these are getting funded and affecting the securitized market? And is it anything that we've participated in or found interesting?
Douglas Gimple (14:48):
So data centers have grown exponentially as you would expect, and I mean securitized deals. And what's interesting in our market is that they can be issued either as CMBS, commercial mortgages, or as ABS. And the way that we've looked at that as CMBS, you're buying or you're securitizing that deal with the building and everything in it. With ABS, it's more almost like a whole business securitization where you're securitizing the revenue associated with, and I don't understand data center, how it works or the language, but whoever's using those data centers, they're paying you and that is what is being securitized, that revenue. So from our standpoint, we've looked more at the CMBS market than we have on the ABS side because the ABS side, you're reliant upon that data center generating the revenue, whereas on the CMBS side, you're getting the building and everything in it.
And so that's the differentiator. And I would also note we haven't been incredibly active, have not been incredibly active in that part of the market, very selective and very limited exposure in what we're doing.
Colin Prescott (16:00):
The other headline that we've seen a lot to start this year has been around private credit. And obviously this has been an area that many of our clients have looked to and no secret that it's run pretty hot, but fast forward to today, you'll see a lot of headlines about some of these funds being gated or BDCs trading at pretty deep discounts to NAV. Any comments broadly about these markets or how we've experienced some of that seep into the public securitized markets?
Douglas Gimple (16:29):
Yeah. I mean, as you know, we're not investing in that part of the market, but to your point, they're not brothers, but maybe distant cousins from some of what we're doing on the securitized side. We really haven't seen it kind of seep into what we're doing. We see there's some crossover. There's asset backed financing as opposed to asset backed securitization. On the ABS side, that market continues to thrive. I mean, we saw record issues in 2024, quickly supplanted by record issuance in 2025. January, we saw 31 billion in issuance so far in February through Monday, which was I think the 20th we've seen or the 23rd, we've seen 36 billion in issuance. So that market continues to thrive. And I think the story there is that there's enough out there for everyone. Whether you're doing it through private credit, whether you're doing it through public securitization, there's definitely the volume out there.
I think with some of the private credit, and you alluded to some of the gating that we've seen making headlines, that's starting to be a little bit more concerning for that market, not necessarily for our market. And it remains to be seen. We'll have to see how the rest of the year plays out, but that is an area that we keep an eye on. Again, we don't invest there, but we do keep an eye on it because we know that there are ramifications for the entire market if things start to unravel there a little bit.
Colin Prescott (18:01):
I also wanted to chat about some of the nichey areas within the market. I know unrated securities has felt like a ripe hunting ground for bottom up managers like ourselves and been able to find diamonds in the rough there over the years. But last episode, we talked a little bit about more managers getting into the securitized space. I'm curious, with more eyeballs on securitized in general, have we seen this market expand or any spread compression here or just evolve in the types of sectors that are maybe tapping this unrated part?
Douglas Gimple (18:36):
Yeah. I mean, it continues to grow and expand. And I think whatever you can securitize at this point, people are looking to do. And so whether it's rated or not rated, I think when it's not rated, I know when it's not rated, we get a little bit more spread to pay for that or to pay you for that as an investor. We've seen more into the non-rated space, but it's, again, to your point, it's more of those kind of esoteric deals.
And it'll take a while if they have the legs and they are around for a while, that they'll start to get rated at some point. And we've seen that with other parts of the market that started out either unrated or rated by one entity or rated by an entity that's not S&P Moody's or Fitch, which are the big three that to be included in the index, you have to be rated by those. But I think we'll continue to see more and more, and the market's definitely grown. And whether we're talking asset backed securities or we're talking non-agency commercial or non-agency residential, all three areas have experienced phenomenal growth over the last couple of years and specific to kind of either not rated or not widely trafficked, something like reverse mortgages have grown and really any way for homeowners to get access to the equity in their home.
That area has grown exponentially from really 2023 to 2025, and we continue to see that. And yes, securitized is getting a little bit more run in the headlines and from other managers, but I think there's tons of opportunity if you're willing to look for it. But to your earlier point, we've definitely seen spreads tightening in. And that's the story across fixed income, right? I mean, it's investment grade corporate, it's high yield corporates. It's securitized across the board with the occasional hiccup, whether it was Tree Colore, the bankruptcy in September, we saw subprime auto spreads widen out a little bit. They've come back in. Credit card pronouncement, we saw spreads widen out, they've come back in again. That tells me that there are enough investors and the investor base is diverse enough that we continue to see money flowing into this part of the market.
Colin Prescott (20:57):
Another area you mentioned earlier was whole business securitization. I know it's not historically been something we spend an awful lot of time on, but I'm curious on your thoughts overall. Within the past few years, we saw some businesses like Jersey Mike's comes to mind sell to private equity, but recently completing a large whole business securitization. What's that mean exactly and comments overall about this type of deal broadly?
Douglas Gimple (21:22):
Yeah. So it's been around for a while, but it's just, I think, starting to pick up steam. I always used to joke about, if you think of any unhealthy food, then they've probably done a whole business securitization. So Wendy's, Jersey Mike's, which is maybe a little bit healthier, but Burger King, Arby's, but then you get things like Massage Envy, which I guess carries its own kind of headline risk. You've got preschools, the private preschools have started to do that, but really it's about you're securitizing the revenue associated with the business. And for us, when we look at it, it's much more of a corporate decision than it is a securitized decision. So for example, if Subway does a securitization, you're not getting the ovens, you're not getting the location, you're getting the revenue tied to the franchise. And if they have a public relations nightmare and they start closing stores because they're losing money, then you feel that pain.
And so for us, we put that in kind of the more corporate-esque type of ABS and not necessarily what we were looking to do. And they've done really well and you continue to see that sector broaden and grow, but again, it doesn't necessarily fit into what we're trying to do, but it is, as you pointed out, Jersey Mike's did a deal, it continues to grow. You see it a couple deals every week, every other week. And at some point, maybe we do start to look at that a little bit closer, but our trepidation still remains.
Colin Prescott (23:11):
Any other comments on the market that we didn't hit on today?
Douglas Gimple (23:15):
Well, I mean, we have a new Fed chair, a proposed Fed chair, I should say, which I thought was pretty interesting because you've got someone that's historically pretty hawkish going into a role that the president wants to be very dovish. And so there's a lot going on with the Fed, whether it's Warsh coming in, Powell potentially leaving, because remember his chairmanship's up in May, but he doesn't have to leave till 2028, so he could stay. Steven Moran, does he stay? Does he go? His term is done, but he's still there until we figure out who fits what spot. Because if Powell stays, then Moran's spot has to go to Warsh. And then we have the Lisa Cook issue as well, which hopefully that will be resolved. It feels like it's going to kind of go away, but there's just a lot of uncertainty with the Fed.
Does Warsh come in and follow orders or does he come in like Powell did? He was appointed by Trump. He comes in and says, "Well, no, we're going to do what the Fed is supposed to do. We're going to remain independent." So I think that's one of the many kind of uncertainties that are out there, but I think that he was probably the safest bet for that position to give us some continuity. He served before. He was instrumental in the financial crisis. I think he was a little too young, whatever it was, 10 years ago, 12 years ago, but now it seems like he's ready, but we'll have to see.
Colin Prescott (24:50):
Great. Well, thanks again for joining me, Doug, and sharing your insights. It's always great to hear from you and get your take on what's happening across the markets. Thanks again to all of our listeners. You can read Doug's full fixed income commentary along with other of our fixed income insights at www.diamond-hill.com. We'll be back soon with more conversations on the trend shaping fixed income, but until then.