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Non-Agency Mortgage REITs: Part 9 - "Fellow Travelers"

|Includes:Ellington Financial LLC (EFC), MMAC, WAC

In the 1950's, during the Red Scare, the term "fellow traveler" was used to demean those who took positions similar or identical to the positions taken by actual, hard-core "card carrying" communists (I often wondered how they would classify an absent-minded communist who was always misplacing his card or leaving it at home). I am using the term to mean companies similar in operation to the companies covered in this series of articles. This section is devoted to companies which are former REITs, often confused with REITs and similar to REITs and engage in business activities the same or analogous to the activities of the REITs in this sector. That means, they are primarily engaged in owning, originating or managing mortgages or mortgage backed securities that are not guaranteed or sponsored by a federal agency. One of the companies is a former REIT; I have often been asked about the others because they are frequently confused with REITs. Each of these companies may be of interest to the same group of investors who are interested in the companies featured in the first 8 articles in this series.

The table below provides information concerning Ellington Financial (NYSE:EFC), Walter Investment (NYSEMKT:WAC), Municipal Mortgage & Equity (MMAB.PK) and Centerline Holding (CLNH). With respect to each company, I have provided the symbol, Monday's closing price, the Pre-Crash high, the Post-Crash low, and the current dividend yield. All numbers are based upon data obtained from Yahoo Finance.

  Price High Low Yield
EFC $24.05 --------- $16.69 11.7%
WAC $43.03 $850.00 $5.00 --------
MMAB.PK $0.68 $32.20 $0.11 ---------
CLNH $0.08 $24.78 $0.05 ----------

EFC was not publicly traded until the Fall of 2010, so that there are no Pre-Crash numbers. Of the four companies, only EFC currently pays dividends. WAC's Pre-Crash high has been adjusted to reflect a reverse split. It is obvious that the three companies which existed prior to the Crash were devastated and that investors have become somewhat gun shy with these stocks. The non-agency mortgage space was brutal through the Crash and these stocks really got trashed.

EFC is run by a group of math wizards and invests in roughly equal amounts of agency and non-agency mortgage backed securities. If it were a REIT, EFC would likely be considered a "hybrid" and so it should be compared with the companies in that sector. It also has a smaller amount of commercial mortgage backed securities and some commercial loans. EFC uses considerable leverage but has been able to maintain a relatively stable share price since public trading commenced. The securities EFC owns are complex and hard to value and presumably the "pinball wizards" of EFC have developed expertise at pricing and trading complex securities which are often misunderstood and misgauged by the market. The company has done well but it has not had to go through the wringer of the Crash as the others have. For fiscal year 2012, it appears that the company is on track to earn between $5 and $6 a share and so it is attractively priced.

WAC used to be a REIT but discontinued REIT status recently, presumably so that earnings could be retained and redeployed into the business. WAC had a secondary offering in October at $42 a share and has been buying up servicing rights on pools of mortgages. WAC works on troubled loans and in some cases just has servicing rights while in other cases owns the loans themselves. It is somewhat similar to PennyMac Financial (NYSE:PMT) and would be classified as a residential non-agency mortgage REIT if it were a REIT. WAC has recently become qualified to originate Fannie Mae loans and apparently plans to transition some existing borrowers into these loans as a means of retaining the borrowers on WAC's group of serviced loans. WAS stock has had quite a roller coaster ride through the crash but seems to be stabilizing in what is a more "normal" credit environment.


MMAB.PK originates, owns and manages tax exempt bonds secured by affordable housing that are typically issued by governmental entities. It also holds certain other assets. MMAB.PK PRESENTS VERY IMPORTANT TAX ISSUES FOR INVESTORS. MMAB.PK is a partnership treated as a pass through entity for tax purposes and each year issues each of its shareholders a K-1. Tax consequences to the individual shareholder have no relationship to distributions received by the shareholder. In other words, you can owe a lot of taxes even though you have received no dividends. For example, at the end of 2012, MMAB.PK renegotiated a loan with a lender and generated roughly $2 a share in capital gains which many shareholders will have to report on their 2012 tax returns even though the shares are worth considerably less and no distribution was received in 2012. MMAB.PK has been in a long Kabuki drama with its lenders and has periodically gotten modifications of terms allowing it to avoid default. The most recent modification was in December and appears to be significant although it is by no means an "All Clear" signal. At any rate, the stock has recently popped and there has been a fair amount of insider buying. This may be a "diamond in the rough" but it may also be another substance in the rough. I would advise potential investors to read the financials carefully and to be sure that they understand the tax consequences of investing.

CLNH is also involved in affordable housing. Unlike MMAB, CLNH has transitioned away from partnership status and is now treated for tax purposes like a normal corporation. CLNH manages large funds or partnerships that are consolidated on its financials creating the normal amount of confusion endemic to this sector. Its website provides "adjusted" financials breaking out the consolidated SPEs. CLNH also appears to periodically renegotiate loan terms with its lenders, many of whom also appear to own significant equity in CLNH. It is still operating in the sense of originating new loans and it is difficult to discern exactly what value there is in CLNH common equity. It has been losing money but a great deal of the loss has been in the consolidated partnerships which may not really have significant impact on the value of CLNH common equity. Recently, CLNH filed at the SEC indicating its intention to implement a 1 for 5000 reverse stock split designed to reduce the number of shareholders and thereby terminate its registration as a public company which would save considerable administrative expense. Positions of fewer than 5000 shares would receive 7 cents a share cash. I have not been able to find any information indicating the timing of this transaction. This is obviously a very risky investment but, if the proposed reverse split occurs, an investor may at least be able to perceive somewhat of a "floor" under his investment.

I have bought some MMAB.PK as a pure crap shoot but I would not advise anyone to put any money they will need any time in the near future into MMAB.PK or CLNH. EFC and WAC are interesting and I may do a follow up on one or both of them. Investors interested in this sector should keep an eye on EFC and WAC as well.

Disclosure: I am long MMAB.PK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Stocks: EFC, MMAC, WAC