Mortgage REITs Respond Positively to Fed Movesadmin
Rates Near Zero Percent Should Help Offset Book Value Losses
Executives for several mortgage real estate investment trusts held hastily arranged conference calls last week to allay jitters over the health of the capital markets.
They said the Federal Reserve Board’s emergency action Sunday helped buffer some of the volatility roiling the sector. In addition to cutting the federal funds borrowing rate to near 0%, the Fed is giving mortgage REITs another boost by buying $500 billion of Treasury securities and $200 billion of mortgage-backed securities issued by government-sponsored lenders including the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., better known as Fannie Mae and Freddie Mac. The move is intended to support market liquidity.
“Now to put the magnitude of this announcement in perspective, the total liquidity offered to the market over the coming weeks, is larger than the [Fed’s] current $4.3 trillion balance sheet, and each of these actions altogether should provide a meaningful tailwind to our business,” David Finkelstein, newly appointed CEO of Annaly Capital Management, one of the nation’s largest mortgage REITs, said in a Monday morning conference call.
The company acknowledged the market still presents risk, despite lower pricing and new capital flowing toward such investments. But with respect to government-sponsored, mortgage-backed securities, this is arguably the cheapest the sector has been since the onset of the crisis, Finkelstein added.
“As the dust settles, we expect this to be an incredibly attractive time for our business model,” he said.
About 93% of Annaly’s portfolio is made up of government-sponsored, mortgage-backed securities.
At the end of February, the REIT’s book of business was down just under 3%. As of March 11, it was down roughly an additional 7% to 8%.
Annaly is eyeing a surge in loan repayments, which can reduce an investor’s income while it seeks to redeploy capital. The REIT said prepayments would be double what it had been expecting for the quarter.
The fact that the Fed brought interest rates down to near zero is a very welcome offset to a higher pace of prepays in the REIT’s overall earnings picture, Finkelstein said.
Analysts at investment banking firm KBW said in a note to clients that one key rationale for the Fed returning to the mortgage-backed securities market is to help narrow the very wide mortgage spreads that had started to show.
KBW expects mortgage REITs will respond positively to the Fed’s actions, especially since their stocks are now trading well below book value.
“Even though fast prepayment speeds will remain a headwind on earnings, lower repo borrowing costs should help offset that,” KBW analysts wrote. “Additionally, tighter spreads should allow book value to partially recover from mark-to-market losses incurred over the last few weeks as spreads have widened sharply.”
PennyMac Mortgage Investment Trust, which holds about $2.8 billion in mortgage-backed securities, said Monday it has recognized significant losses on government-sponsored investments known as credit risk transfers. Such securities were created in 2013 to effectively transfer a portion of the risk associated with credit losses within pools of conventional residential mortgage loans from the government-sponsored enterprises to the private sector.
PennyMac said it was curtailing further such investments and plans to do more investing in other types of mortgage assets.
New Residential Investment Corp. also held an unscheduled conference call to address the current state of the company and the overall industry. It too noted that the improved liquidity in the market from the Fed’s action should be a powerful catalyst for the mortgage REIT industry.
The REIT said it is highly likely to be an active buyer of its own stock at current levels.