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  • MGIC - An Opportunity Through Mortgage Credit Exposure [View article]
    Hello Michael,

    Thank for your interesting comment.
    As you point out I did not discount the current assets, but I viewed that as an investment portfolio, which is essentially fairly liquid securities and could be turned into cash very quickly. But you're right that applying a discount is a useful metric to look at. You can easily adjust the numbers: A 10% discount on the investment book would be about $1, and taking $1 off will reduce the "net" valuation. The relative effect is not very large however, about 6% in relative terms.

    Feel free to message me with your questions.
    Aug 25 02:24 PM | Likes Like |Link to Comment
  • MGIC - An Opportunity Through Mortgage Credit Exposure [View article]
    If I follow you correctly, your analysis is this:
    "Clearly [...] will be worth $9 or $10 from the charts".
    And your state that there is no point in putting together any other analysis (particularly fact-based or knowledge-based) since you already know the answers.
    On all accounts, your comment is entirely unsubstantiated, so I would appreciate if you could actually provide elements that justify your points.
    Why is this momentum stuff more valid than analysis?
    Why is it "clearly" so?
    Why do all the numbers or analysis I discussed in the article not answer the question?
    Are you saying that there is no difference between's something's potential value and its market price?
    Why expect a 15-25% gain? Why not something else?
    Aug 24 05:06 AM | 1 Like Like |Link to Comment
  • MGIC - An Opportunity Through Mortgage Credit Exposure [View article]
    We know rather well how home prices have affected agency loan performance, by looking at how high default rates were through the crisis, as a function of local home price appreciation. On rather bad paper (2007 vintage), defaults were about 18% in places with -45% HPI locally, and about 6% in places where HPI was about flat. In a case where home prices would be down 10% (which would already be a very serious stress relative to what home prices have been doing recently), you would expect defaults to increase, and if on top of that you assumed that MGIC's portfolio was all as bad as the 2007 vintage, then you would expect about 9% of defaults. The first stress I discussed in the article is even stronger than that.
    So you are right that bad home prices are a negative, but (1) reasonable scenarios would not be very bad and (2) even unreasonable scenarios do not have an overly negative impact on the analysis.
    Aug 24 04:55 AM | Likes Like |Link to Comment
  • MGIC - An Opportunity Through Mortgage Credit Exposure [View article]
    Reperforming loans are to a large extent modified loans, it's only recently that one has started seeing loans curing for real. The historical performance of these modified loans was very ugly a few years back, but at that time, loans that had been never delinquent so far were also defaulting at very high rates. The important aspect here is how much worse these modified/reperforming loans are versus squeaky clean loans. And the data seems to indicate they are about twice as bad.
    Aug 22 01:39 PM | Likes Like |Link to Comment
  • MGIC - An Opportunity Through Mortgage Credit Exposure [View article]
    Hi Rob,

    Thank you for your comment.

    First about the dividend, I did not factor any payment (which of course on the plus side would send a good signal, but on the minus side takes cash out of the company) in order to simplify the analysis of fair value. In a sense whether the cash is in your pocket or in the company does not make a huge difference to the financial aspect of the calculation.
    Separately, there's the question of business growth, and there I also wanted to keep things simple and try to err on the conservative side.

    The large discrepancy you point out in yields (and which I should have thought of addressing in the article -- sorry) is simply due to the fact that the net income is evolving over time. Right now there are large amounts of claims coming through, which for the moment implies a fairly small net income. But as I think I have explained in detail, these claims will be logically declining over time, at a fairly fast rate, as (a) bad legacy paper is flushed out and (b) claims on new paper ramp slowly and to a much lower level.
    Aug 22 10:24 AM | 1 Like Like |Link to Comment
  • Should An Intelligent REIT Investor Buy CapStead Mortgage? [View article]
    I think the right way to frame this question would be in terms of spread volatility on the particular assets that CMO has been holding. Period.
    Then this would raise the question of ARM vs FRM production, future home price growth (only driver of net mortgage production), and refis from ARM into FRMS or reciprocally, which will depend on the slope of the curve.

    Also as a side note, the book's duration, given that it's presumably hedged, has essentially nothing to do with the required spread.
    Mar 25 09:17 AM | 2 Likes Like |Link to Comment
  • CYS Investments: Potential Total Return Of 20% Makes An Ideal Buy [View article]
    Still, if you were correctly hedged (ie reflecting CYS's effective duration of over 20 yrs) and had the right amount of 10-yr trsy shorts, you would have been about flat today.
    Investing in mREITs without a proper hedge for residual interest rate exposure just means taking an unknown amount of interest rate risk.
    Mar 19 07:49 PM | Likes Like |Link to Comment
  • CYS Investments: Potential Total Return Of 20% Makes An Ideal Buy [View article]
    CYS might go to 1x book, but what if book drops by 20%?
    Mar 19 01:54 PM | Likes Like |Link to Comment
  • How Does An Intelligent Investor Navigate Mortgage REIT Risk? [View article]
    Ever heard of hedging interest rate risk?
    Mar 19 09:30 AM | 4 Likes Like |Link to Comment
  • Hatteras not a fan of Kain strategy [View news story]
    This argument that they would lose control of the hedging is BS. As if hedges changed significantly in an unpredictable manner.
    Feb 12 11:31 AM | 8 Likes Like |Link to Comment
  • A Genius Move By American Capital Agency Corp [View article]
    I think there is an additional parameter you did not address: opacity. CYS is fairly open about its positions, which makes its performance predictable. ANH barely gives you a sector distribution. So because of this I would expect CYS to be a more natural target.
    Feb 11 03:37 AM | 7 Likes Like |Link to Comment
  • American Capital Agency: Conference Call Turned Circus Act [View article]
    I'd think the backwardation on 3.5s is because the market prices in much less issuance than before, so you would only get delivered the more seasoned stuff that pays faster, which, given their $ price and steepness of the forward curve, is a benefit.
    Feb 10 07:23 AM | 3 Likes Like |Link to Comment
  • American Capital Agency: Conference Call Turned Circus Act [View article]
    Wrong.
    I think it is a safe assumption that AGNC knows how to hedge these REITs they're buying. And you would not know how.
    Feb 8 06:08 PM | 5 Likes Like |Link to Comment
  • How Mortgage REITs Hedge Interest Rate Exposure [View article]
    Rob,

    This would make perfect sense indeed, but management is generally paid as a % of equity, so buying back stock, in spite of its accretive effect, does not compensate the loss in fees in most cases.
    That is why in general it take a much deeper discount to see a buy back than a premium to see a secondary.

    Back of the envelope, if you get 2% of equity, but the equity is down 10%, now you only have 1.8% of the prior equity so you lose 0.2% of equity in fees. If as management you own ~5% of the stock (and that would be a lot, I think), you stand to make 5% x 10% (share of stock bot back) x 20% (discount) = 0.1%. So it does not make sense.
    Jan 2 10:29 AM | Likes Like |Link to Comment
  • Assessing The Q4 2013 Dividend Of Western Asset Mortgage Capital [View article]
    Typo above, I mean low 14s for the BV. Basically I take 16.76 they stated end of Nov, update that a bit because MBs prices went down vs swaps (say shave off 0.50), and take out the 2.35 -- trading at ~15 now, they are just as rich as they were before.
    Dec 26 01:05 PM | Likes Like |Link to Comment
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