If it were not enough for the Federal Reserve to keep buying mortgage backed securities, just think of what this entire REIT sector will look like if the Federal Government adds another splash of its influence onto non-agency mortgages.
Annaly Capital (NYSE:NLY) cannot catch a break even when I believed they might have caught a break, as I outlined in this recent article. As it turns out, the administration is floating an idea that could place greater pressure on Annaly, as well as the entire mortgage REIT sector. Take a look at this Seeking Alpha "Market Current":
"Wednesday, December 26, 7:10 AM The Obama Administration considers expanding its mortgage-refinance program to include those loans not held by the GSE's. Fannie and Freddie back just 50% of the nation's mortgages, leaving a big chunk of the 10.8M underwater mortgage loans not qualified for the HAMP. What happened to weaning the nation off of public mortgage finance?"
As of now, this is just chatter and sort of a "trial balloon" that the administration is floating to get a feel for the market reaction.
As noted in this WSJ report, the Obama Administration is not thrilled with the way the current HAMP II program is going. Since non-agency backed mortgages are another 1/2 of the equation, they are toying with the idea of entering that mortgage business also:
"The Obama administration is considering expanding its mortgage-refinancing programs to include borrowers whose mortgages aren't backed by the government and who owe more than their homes are worth, according to people familiar with the discussions."
What Has Been Happening
In trying to keep this simple, let me just say that with all of the MBS buying that the Fed has been doing, as well as the programs that the government has launched (MHAP, HARP, HAMP, HAMP II), there are still plenty of homeowners who are underwater and cannot refinance. If their mortgages are not government backed, they do not qualify for any of the programs.
Since the government views a strong housing recovery as a backbone to an economic recovery, as well as an employment recovery, the thinking could be that if a program was in place to help mortgage holders of all kinds, it would make the immediate goals appear attainable. After all, if a homeowner who owns a $200k home (purchased for $500k in 2006) with a $300k mortgage at a 6.5% rate and a "nut" of $3k per month is "allowed" to refinance through a new government plan, down to the current 3.40% mortgage rate (30 year fixed), that homeowner could slice the monthly "nut" in half roughly.
What the government might expect is to have that money recycled back into the economy, because the homeowners could not WAIT to spend it on other stuff, right?
On top of that, the foreclosure rate going forward could drop as those homeowners could then afford the monthly payments more easily.
At least this is the theory. In reality, it has not happened quite as well as the government thought it would in the first place. So of course that means the government should expand the program so more folks have a shot!
As further noted in the WSJ report:
"Such a move would benefit borrowers and provide a boost to the economy by unleashing cash that homeowners could spend elsewhere. But one proposal being considered would also transfer potentially riskier loans held by private investors into the taxpayer-supported mortgage giants Fannie MaeFNMA 0.00%and Freddie MacFMCC -0.35%.
About 22% of all homes with a mortgage, or around 10.8 million homes, were worth less than the outstanding balance at the end of June, according to CoreLogic. That number has fallen from 12.1 million at the end of last year as home prices have picked up, but around 10% of all homeowners with a mortgage are still deeply underwater."
Call me a skeptic, but if the other plans are not working, why add even more on top of what has failed?
What This "Plan" COULD Impact
If the new plan actually does come to fruition, it might not have a great impact on our economy, but it will most certainly impact the mortgage REIT sector. This "honor" has been held mostly by the mREIT companies, most notably Annaly Capital.
The mREIT stocks have been under pressure since the Fed announced their intention to buy $40 billion MBS every month until hell freezes over, and has just restated their position with another $45 billion in bond purchases every month as well (taking over from where Operation Twist ended).
This has placed even more stress on the profitability of Annaly, whose business is so large that they cannot turn over their inventory quickly enough, and who has under-leveraged to be conservative. This has come back to bite them. The share price of the stock has dropped as well as the dividend having to be slashed. Total return over the last few months has turned decidedly negative.
Not a pretty picture for investors.
Nothing much has changed in any metric used to view NLY or its stock:
Everything has gone down; mortgage rates, the share price, and the dividends. The spread on the curve has remained stable and therein lies the conundrum.
It is my opinion, that the government not only wants to have the non-agency mortgages refinanced, but they also want to push the rates down even further, for all mortgages.
It does not take a brain surgeon to figure out that if the government begins using the same approach to non agency mortgages as they have with the agency backed mortgages, that the hybrid mortgage REIT companies could feel the pinch (like CreXus (NYSE:CXS)), as well as the non-agency mortgage REIT companies (like Chimera (NYSE:CIM)).
Please do your own research and do not make any investment decisions based on this article. That being said, I feel quite strongly that if the government ramps up its efforts in this area again, it could further hinder the profits not just of Annaly, but of every business in the entire mortgage REIT sector.
I won't fight the Fed, OR Capitol Hill.