Bloomberg News

Mortgage REITs Fall on Financing Concern as Repo Rates Rise

July 29, 2011

(Updates with closing share prices in second paragraph.)

July 29 (Bloomberg) -- Real estate investment trusts that buy mortgage debt tumbled, adding to their biggest weekly loss in more than a year, on concern the markets that finance them will be roiled if the U.S. government defaults on its debt.

A Bloomberg index of shares of 32 mortgage REITs, including New York-based Annaly Capital Management Inc. and Atlanta-based Invesco Mortgage Capital Inc., dropped as much as 8.5 percent today, the most since May 6, 2010. The stocks pared the losses to 2 percent at 4:15 p.m. in New York.

The companies fell as the cost of overnight repurchase agreement, or repo, financing for government-backed mortgage securities jumped 9 basis points to 20 basis points as of 12:21 p.m., the highest since Jan. 19, according to data from ICAP Plc. Executives from REITs including Invesco Mortgage, Hatteras Financial Corp. and American Capital Agency Corp. told analysts on earnings calls this week that while repo rates were climbing, the gain was modest and so-called haircuts, or the down payments required for the loans, weren’t changing.

“This week we’ve seen our financing rates on repo rolls go up like a basis point or two, but no change in haircuts,” Richard J. King, Invesco Mortgage’s chief executive officer, said on a conference call yesterday, according to a transcript. A basis point is 0.01 percentage point.

Increases Vary

Financing terms still haven’t changed “at all” and, while rates have moved higher, the increase varies by dealer, Invesco Mortgage Chief Investment Officer John Anzalone said today in a telephone interview. His company, which invests in both government-backed agency mortgage securities and other property- linked debt, is overseen by Invesco Ltd., which manages about $650 billion of assets.

In repo financing, securities such as Treasuries and mortgage bonds are sold to a lender with an agreement by the borrower to buy them back later. Haircuts protect lenders against price declines in the collateral, in the event the borrower defaults.

With the U.S. potentially facing an inability to pay its debt or a credit-rating downgrade, President Barack Obama told the nation today in an address that both parties must support any plan to cut the deficit and raise the federal debt ceiling and that a proposal from House Republicans won’t meet that test.

Overnight mortgage-bond repo rates have climbed from 0.04 percentage point on July 22, according to ICAP, the world’s largest inter-dealer broker. Mortgage REIT shares have fallen 6.5 percent over the past week, the biggest weekly decline since May 2010, according to Bloomberg data.

‘Nothing Has Changed’

“It’s just an equity market event,” Kenneth A. Steele, chief financial officer at Winston-Salem, North Carolina-based Hatteras, said today in a telephone interview. “Nothing has changed in the things that affect us that we, or anyone we’ve talked to, has seen.”

Down payments on mortgage-bond and Treasury repo “are unlikely to rise barring a spike in price volatility and/or a sharp decline” in values, Credit Suisse Group AG analysts led by Mahesh Swaminathan wrote in a report yesterday.

They now range from 3 percent to 5 percent, depending on the counterparty, King said.

Mortgage REITs have raised more than $14.2 billion this year in secondary equity sales and initial public offerings, the most since at least 2004 and more than the double the previous high of $6 billion in 2007, according to SNL Financial, a Charlottesville, Virginia-based financial information and research provider. Some of the REITs invest in bonds and loans without government backing, and don’t rely on repo financing.

‘Unbelievably Strong’

Gary Kain, president of Bethesda, Maryland-based American Capital Agency, said today in a telephone interview that the mortgage-bond repo market remains “unbelievably strong.”

A change of 1 percentage point or 2 percentage points in haircuts would “honestly not be a big event,” because they have fallen by about 3 percentage points to 4 percentage points since the start of 2009, and mortgage REITs haven’t responded by increasing their leverage, which is now about eight times, he said.

In the event of tighter borrowing terms, REITs generally have a “very generous buffer” of liquidity that they could use to avoid selling holdings to raise cash, BNP Paribas SA analyst Anish Lohokare in New York wrote in a report yesterday.

Jay Diamond, a spokesman for Annaly, didn’t return an e- mail seeking comment.

REITs’ holdings in the $5.2 trillion agency mortgage-bond market have grown by between about $80 billion and $90 billion this year as they raised capital, Nomura Securities International Inc. wrote in a July 15 report. REITs now own about $190 billion to $200 billion, according to Nomura’s Ohmsatya Ravi.

Government-backed mortgage bonds rose today. Fannie Mae’s 4 percent securities climbed about 0.8 cent on the dollar to 101.6 cents, the highest since Nov. 30, essentially tracking a gain in similar-duration Treasuries, according to data compiled by Bloomberg.

--Editors: Richard Bedard, Pierre Paulden

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net;

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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