So Much for That Mortgage REIT Bull Market

The carnage is amazing in the mortgage REITs. I was looking for some bull markets about a month ago and asked readers for some ideas [Thank you Readers - Found a Bull Market - 4 Mortgage REITs]. After doing some work in this group which was not an area I've invested in before I jumped into MFA Mortgage Investments (MFA).

So that did not work out so well; I am going to place the blame on my readers since I'm already mourning Thornburg Mortgage (TMA). Well these were my 2 positions that were supposed to yin when the rest of my portfolio yanged - and they sure are doing it... but in the wrong direction.

I have a watch list of the 5 major players and all are down between 15-30%. Annaly Capital Management (NLY) which is supposed to be the best of breed is down 18%. This is amazing to watch because these companies take government backed bets (paper backed by Fannie and Freddie)... and the crisis of confidence is getting so bad, even that is not deemed safe anymore.

While this clearly is painful, simply due to the panic in the markets and no sense of logic I am going to cut 1000 of 2500 shares in MFA Mortgage, even at a 30% loss. The action makes no sense, but that doesn't mean investors won't flee in utter panic so I want to reduce exposure a bit. Even if it means eating a loss. I am selling these shares for around $6.75 and taking a bit hit. My exposure is now down to 1% of portfolio though. I don't know how to handle the rest frankly - unless the government is going out of business and/or one believes they will allow Fannie and Freddie to go out of business this action makes little sense.

But I have to say I wish I never tried to follow the Kool Aid herd into finding some "financial" picks that would go up with then Kool Aid about housing rebounding in half a year was in effect. These 2 positions really hurt, especially back to back. Thankfully I have a lot of good positions offsetting these two, but it is a lot of capital I need to make up, over $30K lost in these two positions in just over a month. Which means if I never touched these 2, I'd have close to 3% better performance. Blah. Simply a toxic waste pool ... now i know what it feels like to be a Citigroup (C) investor. But I am a bit disgusted I went down this path when I had avoided all this junk since last summer. Even I was infected by the Kool Aid virus...

• Shares of real estate investment trusts that invest in mortgages plunged Thursday after one of Thornburg Mortgage Inc.'s banks declared the lender in default.
• Keefe, Bruyette & Woods analyst Bose George downgraded Anworth Mortgage Asset Corp. and MFA Mortgage Investments Inc. because he expects book value to decline and expects the companies to hold onto more cash to handle uncertainties in the market. Shares of Anworth Mortgage Asset Corp. tumbled $1.89, or 21.4 percent, to $6.96. Shares of MFA Mortgage sank $1.38, or 15.9 percent, to $7.31. Bose removed Annaly and Capstead from the firm's "Best Ideas List."
• Among other real estate investment funds with steep declines, Anthracite Capital Inc. lost more 11 percent to $5.30, CBRE Realty Financial Inc. fell 18.8 percent to $3.23, Deerfield Capital Corp. sank almost 24 percent to $2.19, Capstead Mortgage Corp. plunged 23.5 percent to $12.47, and Annaly Capital Management plummeted almost 15 percent to $16.45.

Disclosure: Long MFA Mortgage Investments, Thornburg Mortgage in fund; no personal position

Comments

[jjason:]

About 18 months ago I first read that investors should be careful when investing in housing. It follows that builders, mortgage reit's, reit's that invest in apartments, banks and others would be involved in any downturn. I was a real estate broker for 30 years and a general appraiser too and was very busy in the 1989-1990 S&L disaster.

So, some folks saw it coming. Back then, I owned Anworth Mortgage ( lost $400) and NLY (lost $300). The $700.00 loss was a excellent learning lesson. I learned not to put much faith in the management of these firms and the B/S that they tell us on CNN. So I tracked many of these firms as the "unwinding" began and for every drop in market price I thought "maybe it's time to buy". But I always look at the fundamentals...like debt to equity ratio and total debt to equity ratio. If the total debt to equity ratio is over 2.0, I will not be interested in a DECLINING REAL ESTATE MARKET.

You see, the two ratios are different... and sometimes the d/e ratio is lower than the td/e ratio. It is the large borrowings that are the problem with TMA and others; along with the decrease in the underlying assets. Margin call after margin call da,da,da.

Common shareholders are the last to recover anything. The secured creditors are first in line.

Sorry You lost so much money, Mark.

If Jack is following this blog, I double checked TMA's total debt to equity ratio using Standard and Poors research and I was right. It is 17 to one. $34 billion dollars of debt and $2 billion dollars of equity. And TMA has been downgraded, I believe.

2008 Mar 07 11:13 AM

[Hysteria:]

¨The action makes no sense, but that doesn't mean investors won't flee in utter panic so I want to reduce exposure a bit. Even if it means eating a loss.¨

Thank you for contributing to the UTTER PANIC, as you so say, by your very actions. Indeed, it is exactly this attitude, ¨get me out no matter what!¨ that will cause this crash to be so severe. Thanks for adding to my short positions!

2008 Mar 07 11:17 PM

[Andrew:]

Thanks for sharing Mark, I also hold NLY and bought some TMA.pr.f last week at the "bargain price" of $7.

The only thing that will help mortgage reit unit prices now is government intervention.....Fed start buying mortgages.

Beyond the short term panic, these reits will face a tough recovery over the next few years because of a credit contraction in US financial system.

Despite of recent criticism of the Fed, I believe it is doing the right thing for long term economic growth by deflating the credit bubble. I believe they will: let the weakest players die; severely wound the average, and scar the strongest (at least enough to keep them in check for another 10 yrs). However, I do believe we are getting close to the end of the lesson at this point. Afterall, this is an election year. I believe NLY will be a survivor, although I'm not sure if it will break $20 any time soon. I'm going to be content in collecting my 5%ish yield. As for TMA, we'll find out over the next couple of weeks whether they are one of the survivors in the financial jungle or merely one of the weak.

Hey, here's a hot tip......try getting into commodities, oil and gold.....it's really working well.......no way will they go down from here because they are finite resources.

2008 Mar 08 09:14 AM

[haydete:]

Everyone says that home gamers look for the gain, professionals look to avoid loss. I've learned (perhaps now you have too) to set stop loss orders. I used to think gee, a 10% stop loss seems so far away that it'll never happen...

2008 Mar 08 11:40 AM

[ggtryin:]

Any idea of why there would be a buy order of over 1.5 million shares of TMA at the closing bell on Friday? It resulted in an increase of about 50cents a share.

2008 Mar 08 03:54 PM

[johnthebear:]

There is a simple answer to your investment needs.

IYR is the Dow Jones Real Estate Index. For every $10,000 it goes down, SRS goes up $20,000.00. Check it out, I did and I bought 200 shares of in SRS on Friday. The bulls made a run at the REITs late Friday, resulting in a small loss for the day, but with the news of late, that small loss will be recovered in seconds.

2008 Mar 08 11:09 PM

[Kunst:]

"Hey, here's a hot tip......try getting into commodities, oil and gold.....it's really working well.......no way will they go down from here because they are finite resources."
-- So is air. When all the lemmings are heading the same direction, it's time to ask if you want to be part of that crowd. Every mountain has a top.

"I used to think gee, a 10% stop loss seems so far away that it'll never happen..."
-- How many times do we have to learn the same lesson? If something is shooting up like a rocket to the heavens, that might not go all the way to infinity. Don't be greedy. If you had a 10% or even 20% stop loss on the Nasdaq in 2000, you would have walked away with a lot more money than those who kept waiting for it to come back. Ask yourself how far your investment would have to fall to make you reassess your reasons for holding it. That could be a really good place for a TSL. After all, if it drops a bunch and you get stopped out, you can always rebuy it if careful thought convinces you that's the right thing to do, maybe even at a lower price.

As for SRS, that was a great investment a year ago. I think it's seen its best days for now. You make money by betting on what hasn't happened yet.

2008 Mar 09 06:06 PM