Bloomberg News

Mortgage REITs Rise to Reverse Tumble on Financing Concern

October 04, 2011

(Updates with closing share prices in second paragraph.)

Oct. 4 (Bloomberg) -- Real estate investment trusts that buy U.S. mortgage debt rose, erasing losses that had reached the steepest since December 2008 amid concern that their main source of financing could be roiled by European bank woes.

Mortgage REITs including Annaly Capital Management Inc. and American Capital Agency Corp. rose 1 percent at 4:15 p.m. in New York, after earlier falling as much as 6 percent, according to a Bloomberg index tracking 33 shares. The stocks swung to gains as U.S. stocks rallied amid speculation that European Union officials are examining how to recapitalize the region’s banks. Losses over the past two days among the REITs had reached as much as 11.1 percent, the biggest drop in almost three years.

France and Belgium pledged today to support Dexia SA after the bank’s board met to discuss a possible break-up as Europe’s sovereign-debt crisis reduced its ability to obtain funding. While the repurchase-agreement, or repo, market for government- backed mortgage bonds that many REITS rely on for funding is in “good” shape, it may face pressure if Europe’s banks need to retrench, American Capital President Gary Kain said.

“We see that as being a potential pressure on rates, not on availability,” Kain, whose company had $43.6 billion of assets as of June 30, said today in a telephone interview. Higher rates are possible in part because the Federal Reserve is selling short-term Treasuries in its “Operation Twist” program that began this month, he said.

Kain’s Bethesda, Maryland-based firm hasn’t seen European banks pulling out of the market and “we have had no major line reductions,” he said. “If anything over the last couple of weeks, we have had” the credit lines go up in size.

Repo Rates

The cost of one-month repo financing for agency mortgage securities fell 2 basis points today to 25 basis points as of 3:01 p.m., according to data from ICAP Plc, the world’s largest inter-dealer broker. The rate has climbed from 20 basis points on Aug. 31, tracking increases in the benchmark London interbank offered rate. A basis point is 0.01 percentage point.

Declines in mortgage REIT’s may have also reflected concern about the companies’ investment opportunities, said Richard Eckert, an analyst at B. Riley & Co. Anworth Mortgage Asset Corp. yesterday announced a dividend two cents lower than its previous quarterly payout, saying higher homeowner refinancing eroded returns, and said it plans to buy back as much as 2 million in shares.

Deploying Capital

The share repurchases are “a signal to me they cannot find enough ARM assets at their targeted spreads and ROEs to fully deploy their capital, so they are returning it to shareholders,” Eckert wrote in an e-mail, using acronyms for adjustable-rate mortgages and return on equity.

John Hillman, a spokesman for Santa Monica, California- based Anworth, said Chairman and Chief Executive Officer Lloyd McAdams wasn’t available to comment. Jay Diamond, a spokesman for Annaly, didn’t return a message.

The repo market is used by investors and dealers to finance their securities holdings. Rates are typically below unsecured borrowing costs because the loans are collateralized.

In a repo arrangement, a lender sends cash to a borrower in return for collateral such as Treasuries or mortgage bonds which the borrower agrees to repurchase as soon as the next day. Interest and credit protection for the lender is built into how much cash gets extended and returned.

‘Uncomfortable’ Roll

“People often get uncomfortable with the amount of the paper that has to get rolled over every month” by mortgage REITs using repo, Matthew Howlett, an analyst at Macquarie Group Ltd., said in a telephone interview. “There’s always potentially liquidity problems. And when there’s an issue with the banks that provide the liquidity, it can become an issue for the REITs.”

Many of the mortgage REITs survived the global financial crisis that peaked after Lehman Brothers Holdings Inc. failed in 2008, said Howlett. “At the end of the day, the model still works and we’ll still get through this.”

Anworth’s dividend cut also weighed on mortgage REIT shares by reminding investors of the dangers of rising prepayments amid record low mortgage rates, he added. Under accounting rules, REITs that bought bonds for more than face value need to write off the premiums faster as prepayments rise.

--Editors: John Parry, Pierre Paulden

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

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


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