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Ginnie in a hurry

REITs struggling to meet margin calls

US MBS rallied yesterday (25 March) in the wake of the announcement that Congress has agreed the terms of a US$2trn stimulus package. However, they remain well down on the week, say dealers.

“The Fed announcement has firmed things up. It has stabilised the market but not taken away all the spread widening,” says one. But the market is far from recovered. It is still one dominated by risk-off trading.

The extent of the spread widening depends greatly on the type and condition of the asset in question. But, for example, triple A-rated conduit CMBS started the week at around Treasuries plus 225bp/250bp, widened sharply to plus 325bp/350bp and then have come back to a mid-market of around plus 275bp by the close on 24 March - representing a widening of perhaps 50bp so far this week.

Fannie Mae DUS paper has widened from swaps plus 155bp to 190bp, while, at the other end of the credit spectrum, agency CRT paper is perhaps 8%-9% down on the week.

But these are very much approximate prices. As a dealer stresses: “People don’t know where the market is.”

There is also a certain amount of disagreement about how liquid the market is. Some say that it has become very illiquid, citing the fact that certain assets have begun trading at a dollar price rather than a spread - normally a sign of an illiquid market.

Others say that a lot of paper has changed hands. A bid list of over US$1bn was circulated last Sunday - normally a day on which no trading is ever done - but on this occasion over US$400m traded.

“If people are forced to sell, they have to sell, right?” says one market watcher.

No class of buyer has had to shed more paper than mortgage REITs, which have been caught in the pincer movement of investors demanding redemption while at the same time being forced to meet margin calls as the value of MBS plummeted. They also are facing increasingly higher refunding costs in the repo market.

It’s a perfect storm and a number of mortgage REITs have, over the last few days, announced that they have become technically insolvent.

Since the end of last week, AG Mortgage Investment Trust, Invesco, ED&F Man Capital and MFA Financial have disclosed that they are unable to meet their margin requirements. ED&F Man was reportedly asked to put up US$100m on Friday alone.

Two Harbors, a so-called hybrid mortgage REIT, also announced on 23 March that it is suspending both Q1 preferred stock and common stock dividends “to preserve liquidity and long-term stockholder value.”

On the same day, MFA reported that "due to the turmoil in the financial markets resulting from the global pandemic of the COVID-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties, and have also experienced higher funding costs in respect of its repurchase agreements."

It could not meet its margin calls, it added, and further notified counterparties it did not expect to be able to meet forthcoming margin calls at any date in the near future. Chapter 11 bankruptcy protection is the only option.

The market is concerned that the wholesale economic collapse caused by the Covid-19 pandemic means that many mortgage-holders will not be able to pay their loans, rendering billions of dollars of mortgage-backed paper much diminished in value. Although agency-issued MBS is protected by an implicit government guarantee, this paper has also tumbled in price, partly because to meet margin calls mortgage REITs choose to sell the most highly rated paper on which they will take a smaller loss.

“Even triple-A paper is getting sold because people are looking to sell where they will lose the least,” explains one dealer.

AG Mortgage Investment Trust yesterday filed a suit against RBC claiming that the margin calls it received from the firm are subjective and don’t reflect the true value of the CMBS it holds

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