Liquidity Fears, Repo Flu Infect Agency mREITs

Bloomberg is reporting that agency mortgage-backed bond spreads have reached their highest levels since 1986. This news, coupled with the Thornburg (TMA) meltdown related to repurchase agreements, has spread fear and doubt to the agency mREITs, who were all off sharply in yesterday's trading.

All the agency mREITs have thus far been virtually unaffected by the credit crunch, as their paper is implicitly guaranteed by the GSEs and has remained liquid throughout the credit freeze. However, as buyers remain on strike and the credit crunch continues to travel up the mortgage security food chain, investors are nervous that even the agency mREITs may receive significant margin calls under the terms of their repurchase agreements. Should spreads widen to the point where margin calls go out to the agency mREITs, the effect would be devastating, since this group of mREITs typically does not utilize term-financing. Their entire portfolios are funded by repo agreements and warehouse lines.

Should the crisis deepen to the point that GSE-backed paper is subject to forced sales, even Fannie (FNM) and Freddie (FRE) could be seriously crippled by the downward mark-to-market spiral that would result.

Disclosure: none