Did the SEC Shaft Mortgage REITs?

So the SEC is going on a tirade against short selling after public pressure forced them to do something. However, exactly how and why were the 799 financial firms selected for the temporary short selling prohibition chosen? Granted, most of the companies on the list are bank holding companies, which make sense. However, there were a few oddball choices, such as Apollo Investment Corp. (AINV), which is a business development company, and FBR Capital Markets (FBCM). None of the mortgage-focused real estate investment trusts, which play an important role in loan origination for the primary market and which purchase numerous mortgages and MBS in the secondary market, made the list.

Aren't these financial firms as well with "frozen" assets on the balance sheet? As Paulson said:

The federal government must implement a program to remove the illiquid assets that are weighing down our financial institutions and threatening our economy.

Tell that to struggling REITs like Redwood Trust (RWT), Chimera Investment Corp. (CIM), or worst of all, Thornburg Mortgage (TMA). These mortgage REITs all hold high-quality yet illiquid assets on their balance sheets.

Short sellers have encircled these firms, knowing that mortgage REITs, by their very nature, depend on access to the capital markets to support their portfolio of mortgages and MBS, yet they aren't worthy of being included on the SEC's no-short selling ban list? If we're going to prop up everyone's stock price, let's try to be fair about it. Mortgage trusts play a very important role in adding liquidity to the market for non-GSE conforming debt. They also provide a source of valuable income to individual investors like you and me.

If we're going to make a bread line, let's promote the mortgage REITs closer to the front. These companies purchase so-called "illiquid" assets, distribute income to shareholders, and establish a market for people who don't fit in the Freddie/Fannie box. Mr. Cox and the SEC staff, please throw us a bucket. We'll help bail.

Disclosure: No positions.

 

Comments

[JohnKing:]

"high-quality yet illiquid assets"

Are you kidding me?

What kool-aid have you been drinking? How can an asset be high quality yet illiquid?

2008 Sep 22 08:24 AM

[User 267080:]

tma had good paper the banks with bad paper took them down to cover their deals

2008 Sep 22 09:39 AM

[Cerebus:]

JohnKing:
Looks like someone needs a refresher as to what illiquid means. Direct from investopedia:

"The state of a security or other asset that cannot easily be sold or exchanged for cash without a substantial loss in value. Illiquid assets also cannot be sold quickly because of a lack of ready and willing investors or speculators to purchase the asset. The lack of ready buyers also leads to larger discrepancies between the asking price (from the seller) and the bidding price (from a buyer) than would be found in an orderly market with daily trading activity.

Some examples of inherently illiquid assets include houses, cars, antiques, private company interests and some types of debt instruments. On the other end of the spectrum, most listed securities traded at major exchanges, such as stocks, funds, bonds and commodities are very liquid, and can be sold instantaneously during regular market hours at fair market price.

Illiquid securities carry higher risks than liquid ones; this becomes especially true during times of market turmoil when the ratio of buyers to sellers may be thrown out of balance. During these times, holders of illiquid securities may find themselves unable to unload them at all, or unable to do so without losing a lot of money."

Since the credit markets are pretty much frozen at the moment due to the turmoil mentioned in para 3 above, even well seasoned performing mortgage paper is illiquid at the moment. I don't have a problem with the "high quality yet illiquid assets" statement. Whether or not the companies mentioned do own high quality assets is a seperate issue and definately open to debate.

My Porsche is pretty nice, but I don't think that I can use it to pay my dinner tab. I'd call it a "high quality yet illiquid asset..."

2008 Sep 22 10:10 AM

[Ishortyou:]

REIT's are hurting pretty bad now a days.

2008 Sep 22 11:41 AM

[DaveW:]

The market felt the same way, URE down -14.0%, SRS up 15.7% (long as of friday).

2008 Sep 22 05:31 PM

[fayzer:]

How do we get the "Attention" of the "Powers that be" to include these
Reits in the bail out package? As a holder of TMA shares, I'm really
feeling the pain in my Roth account and as a retiree on a fixed income,
I see my future literally going down the drain --- H E L P !!

2008 Sep 23 11:42 AM

[User 272143:]

REIT's are really hurting pretty bad now a days. The market felt in the same way, URE down -14.0%, SRS up 15.7% as mentioned above. As a holder of TMA shares, I'm really feeling the pain.
==============
Michel
[url="foreclosures.gov-aucti..."]Foreclosed Homes[/url]

2008 Sep 28 09:58 PM

[User 272143:]

REIT's are really hurting pretty bad now a days. The market felt in the same way, URE down -14.0%, SRS up 15.7% as mentioned above. As a holder of TMA shares, I'm really feeling the pain.
==============
Michel
[url=foreclosures.gov-aucti...]Foreclosed Homes[/url]

2008 Sep 28 09:58 PM

[User 272143:]

REIT's are really hurting pretty bad now a days. The market felt in the same way, URE down -14.0%, SRS up 15.7% as mentioned above. As a holder of TMA shares, I'm really feeling the pain.
==============
Michel
Foreclosed Homes

2008 Sep 28 10:01 PM

[User 272143:]

REIT's are really hurting pretty bad now a days. The market felt in the same way, URE down -14.0%, SRS up 15.7% as mentioned above. As a holder of TMA shares, I'm really feeling the pain.
==============
Michel
Foreclosed Homes

2008 Sep 28 10:03 PM

[User 272453:]

At the point TMA had to sell their souls to remain afloat and almost went bankrupt, their delinquency rate was .42%. Probably the highest quality, best performing mortgage securities in the country. It didn't matter.

2008 Sep 29 04:08 PM

[Rafinato1:]

I dont get it. I take 1,000 dollars of some good hard earned money and invest it in TMA stock about 10/02/08 I should have given it to a BUM..............

2008 Oct 29 08:13 PM

[Rafinato1:]

You'll be surprised when "TMA" sores again....:)

2008 Oct 29 08:24 PM

[Glen Bradford:]

Hey, Patrick Harden --- shoot me an email gbradfor at purdue dot edu.

Taking a deeper look at AHR.

May 17 07:13 PM

[H.J. Huneycutt:]

What do you mean how can an asset be high quality, but illiquid? If I run a highly profitable company, my most efficient factory is "high quality", but that doesn't mean it's liquid. Likewise, stocks of nearly bankrupt companies are "low quality", but they are very liquid.


On Sep 22 08:24 AM JohnKing wrote:

> "high-quality yet illiquid assets"
>
> Are you kidding me?
>
> What kool-aid have you been drinking? How can an asset be high quality
> yet illiquid?
>
>
>

May 17 07:33 PM