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They're calling it the "DeMarco Trade," and it's nailing mortgage REITs (at least those who...
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Tuesday, November 13, 2012, 9:48 AM ETThey're calling it the "DeMarco Trade," and it's nailing mortgage REITs (at least those who focus on Agency paper) already stung by vanishing interest spreads. Agency MBS paper has been falling in price since the election, as Ed DeMarco's days as FHFA chief seem numbered, paving the way for principal forgiveness, "the mother of all pre-payment waves."
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But let's put this in perspective, folks: who and what gets "written off" under a principal forgiveness plan. First, there is no way on god's green earth that they're going to make the mbs holders take the hit on principal write-downs. Cramming something like a principal loss on a govt guaranteed (if only by implication for Fannie and Freddie) instrument would destroy the bond markets. No one would ever be able to finance another home in the US. So basically what'd you have is FNMA and Freddie (i.e. the taxpayers) eating the difference to make the bondholder whole. The net effect to the bondholder is a prepayment, not a principal loss. You, me, and the taxpayers are going to swallow the really ugly pill.
So who'd be in line to get this kind of relief? First, it would be, by definition, people who are underwater, i.e. folks who bought in 2005-2008 who haven't already found a way to refinance. Where are those kinds of mortgages? In high coupon (probably 4.5, 5, and above), low loan balance loans. This hasn't exactly been the bread and butter slice of the market where the mortgage reits have accumulated. Some of these folks are probably in GNMAs; others are in off-the- run, higher coupon mbs stashed away by passive holders like pension funds. I'd assume mbs that's been HARPed already would be ineligible.
Are they going to push something like this after shoving out Demarco? Probably. Is it going to destroy the mbs market, particularly recent vintage 3.5s and 4s where the mortgage reits are currently parked? Not a chance.
LLBs are particularly concentrated in lower credit, and would be the most likely to be prime target for cramdown refis.
By and large principal forgiveness will not be a big factor on many agency pools, because the loans are not strongly delinquent. On non agencies it will be a larger factor, but positive in many cases (better have a quick return of principal, albeit for a lower amount, than an extended liquidation).
My wife told me about her friend's niece who is "squatting" in LA.
We don't need no stinkin' mortgages.
Unfortunately a good deal of Fear and Panic have helped escalate a bad situation into a really Bad one as the short sellers have stepped in to foment distrust, worry and fan the flames of economic malaise between Congress and the WH coupled with the ever expanding reach and clawing grasp of the Federal Gov't to increase regulations and inject itself into every aspect of the Private lives of its citizens.
Also, there is no way prepayments will increase for that program, the govt will take the hit (US taxpayers)
Book value per share for AGNC as of Sept. 30th was around 32.5. The general trend is UP not down. The question is whether the net actual value of assetts is decreasing relative to the stock price. I'm no expert in that area but its hard to think that the narrowing of rate spreads due to QE3 can have that big of an effect. Also IMHO, the DeMarco rumor is not whats going on. Something else is going on much more sinister.
See http://bit.ly/UmxGBF
Principal reduction=write-off=pr... This is no diff than when a mortgage goes to foreclosure. Fannie and Freddie make the bondholder whole, but minus the premium. It's exactly the same problem as that posed by refinances, i.e. you get paid back at par.
Right now we have roughly on FNMAs:
3s -- 105
3.5s -- 106.5
4s -- 107
4.5s -- 107.5
You cannot separate the faster prepays from the lower rate environment, both being consequences of the Fed's action. Accounting for both, prices are *up*
More details here http://seekingalpha.co...
Also long TWO & KCAP.
QE3 turning out as we described in Q1, but a very manageable environment if you have the right positions. You can design a portfolio that will continue to perform well despite the challenges of QE3.
Menendez-Boxer Bill – as written, only 3% of our portfolio is exposed in any way, shape or form to that Bill – little effect if enacted. Only affects loans originated before June 2009 ---we have little, if any exposure there.
On Ed Demarco – has done a great job (in coordination with Obama’s HUD and Treasury departments). FHA, on its own without Demarco, came up with the same June 2009 date Ed Demarco recommended. Idiosyncratic policy risk is at an all time low.
No change in MREIT space regarding dividends
We try to be as agnostic around interest rates as we can be – we use our expertise to position to a range of possible scenarios.
Repo market –we’ve seen no changes seen on the repo side. Our repo agreements have no ties to market cap or stock price – realistically, no changes in terms, nor have we any concerns.
Stock buybacks – we use real-time looks at book value to buyback stock. It’s a way to build book value.
http://seekingalpha.co...