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More on the Wunderlich downgrade of the mREITs (REM +1.2%), (MORT +1.3%): The "lack of liquidity...

More on the Wunderlich downgrade of the mREITs (REM +1.2%), (MORT +1.3%): The "lack of liquidity reached crisis levels" on Friday, says the team. "Price discovery has become a very uncertain process and we believe there is a risk that some entity - be it a mREIT or a hedge fund - could fail to meet margin requirements ... while we hope to be wrong in this case, equity investors need to be mindful of the potential downside scenarios."
Comments (47)
  • MobilePreacher
    , contributor
    Comments (515) | Send Message
     
    what? Lack of liquidity in what? MBS's? and if so what duration? What exactly was the crisis level? Come on Wunderlich, you are supposed to be professionals.
    8 Jul 2013, 03:45 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2724) | Send Message
     
    MBS is an $6 trillion market - I doubt that the Fed would be hinting at easing is the second largest financial market on the planet was undergoing the strains that are implied here.
    8 Jul 2013, 04:35 PM Reply Like
  • daro
    , contributor
    Comments (1677) | Send Message
     
    I think you misperceive what MREITs do. they borrow money to buy MBS. when rates rise, the MBS go down in value (like any other bond). the lenders might want additional collateral to protect them in case rates rise further and MBS values on existing portfolios drop more (stock brokers do the same with stocks bought on margin). so the margin issue has nothing to do with credit quality. it has to do with rising interest rates and how much a lender will lend on MBS with a certain coupon rate or the value of the MBS. since most mREITs are leveraged at 6 or 7 to 1, the margin issue is not trivial. if rates go back down then it is not an issue. if rates continue up, it could be an issue based on the cash on hand and the leverage of the particular mREIT. remember, leverage has a clear relationship to risk.
    8 Jul 2013, 11:02 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1630) | Send Message
     
    daro - How do mREITs borrow money? Is it truly on margin, or is it an outright loan with a fixed interest rate? Also, don't they also often just sell more stock and buy MBS's with the proceeds? There is no issue from rising long term rates from that, is there?
    9 Jul 2013, 10:23 PM Reply Like
  • Rubenov
    , contributor
    Comments (430) | Send Message
     
    Typical bandwagoner ANALysts
    8 Jul 2013, 03:47 PM Reply Like
  • Hendershott
    , contributor
    Comments (1616) | Send Message
     
    So there is no market for mortgages? Why is WFC up?
    8 Jul 2013, 03:50 PM Reply Like
  • JHHAlpha
    , contributor
    Comments (239) | Send Message
     
    Scare mongering. The MREITs hedge with treasuries that can now be sold for a profit. Wunderlich shows it's a scammer.
    8 Jul 2013, 03:52 PM Reply Like
  • JHHAlpha
    , contributor
    Comments (239) | Send Message
     
    Fed tapering is to create an image for the Congress, with Fed charter renewal due in Dec, that it is earnest about not sowing the seeds for hyperinflation. Fact is that servicing US debt at higher interest rates would motivate the rating agencies to warn again about the serviceability of the $17 T plus debt. The higher interest rates have also worked to make import easier, the trade balance worse, thus decreasing jobs here, and hurting recovery for housing and auto financed sales. With rates settling a notch higher for Fed PR accomplished, the interest rate profit spread for the MREITs has been substantially increased.
    8 Jul 2013, 03:57 PM Reply Like
  • Micro_Cap_Maven
    , contributor
    Comments (105) | Send Message
     
    I would have to say this is one of the more likely signals I've seen yet, that we've neared or hit a bottom for the time being in this sector. To make a call like this AFTER such a major rout for the sector is simply laughable (where were these guys 3 months ago). And to try to base it off a risk of some unknown phantom "entity" might not meet margin requirements is just a joke.
    8 Jul 2013, 03:58 PM Reply Like
  • chopchop0
    , contributor
    Comments (3872) | Send Message
     
    yup. time to back up the truck
    8 Jul 2013, 08:36 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1630) | Send Message
     
    I suspect many investors see this as just catching up to the current environment. The panic in prices pressured them to downgrade, and they're now watching intently so they can put in an upgrade to save face.
    9 Jul 2013, 10:29 PM Reply Like
  • Wileycoy
    , contributor
    Comments (58) | Send Message
     
    A CHICKEN LITTLE!!!!!
    8 Jul 2013, 04:04 PM Reply Like
  • whysaduck
    , contributor
    Comments (82) | Send Message
     
    More than a little chicken sheet!
    8 Jul 2013, 05:24 PM Reply Like
  • Whitehawk
    , contributor
    Comments (3129) | Send Message
     
    Hedging is an ancillary activity, to mitigate input cost or currency risk. A vehicle such as a REIT or MLP needs a sustainable and defendable business model first with assets that throw off enough cash and debt/leverage that is kept in check. If hedging of asset risk is a large part of that model, I would consider the model questionable.
    8 Jul 2013, 04:04 PM Reply Like
  • irnet31
    , contributor
    Comments (102) | Send Message
     
    Don't blame Wunderlic and the other so=called professional's Blame yours your self's for reading and acting on this crap!
    8 Jul 2013, 04:12 PM Reply Like
  • FlaYankee
    , contributor
    Comments (123) | Send Message
     
    Seems like a bit late to cry "Wolf" especially after the carnage in the sector over the last couple of months. This worst case scenario is highly unlikely and it wouldn't make any sense trading on such an unlikely possibility. Of course, panic selling in never a strategy but buying in such an environment can prove to be quite lucrative over the long term. Will add to my positions on further weakness. Long NCT, ZFC and AI.
    8 Jul 2013, 04:22 PM Reply Like
  • worldbank
    , contributor
    Comments (166) | Send Message
     
    Nice to see that NLY investors took this "call" in stride.. Stock up 3% and holding it's gains with some volume after markets.
    Next few days will help determine if a bottom is in.
    8 Jul 2013, 04:25 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (1758) | Send Message
     
    Liquidity risk for agency MBS with limited trading of TBA's on Friday the 5th of July used as an example? Really?

     

    This is a very large market, with hundreds of players, trading billions of dollars a day, which the fed is both very active in and has a vested interest in keeping liquid. I'll go out on a limb here and guess the lack of trading was probably due to no one being at their desk on the 5th. I mean it's summer, it's 4th of July weekend and it's the Friday sandwiched in between a major Thursday holiday and that weekend.

     

    My wife works in VA administration and there were three whole people who went to work that day (out of a few hundred) simply because the boss made a rule that 3 people have to be there at all times in case there's a major catastrophe that happens during a major holiday weekend. You think maybe there's a few bond trades, particularly with the fed, who didn't work that day?
    8 Jul 2013, 04:31 PM Reply Like
  • FreeStateYank
    , contributor
    Comments (803) | Send Message
     
    Some of my best 'bargains' were purchased the day after a major holiday when most people are off... The Friday after Thanksgiving when Dubai went kerplewie was a really wonderful day! Picked up all sorts of 'deals' and sold out w/i a week or so w/ 10%+ gains. Love it. Wish there were more days like these.

     

    I totally agree that anyone basing an opinion on a sector based on Friday's volume and pricing is not a rational voice. Again, I went shopping on the 5th and have done quite well...
    9 Jul 2013, 02:05 AM Reply Like
  • REIT Analyst
    , contributor
    Comments (491) | Send Message
     
    I think that as equity research analysts the people at wunderlicht got access to a couple junior traders on an MBS desk, who had never seen a move that size. Of course the senior guys and gals were out on July 5th. So they got that side of the story, end of the world perception by traders who have been doing this 2 years and 3 weeks. Makes for a great story though. But it is just irrelevant I think.
    8 Jul 2013, 04:38 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2724) | Send Message
     
    Very good call about a "lack of liquidity" on a July 5th Friday.
    8 Jul 2013, 04:52 PM Reply Like
  • lsk5689
    , contributor
    Comments (20) | Send Message
     
    Reits buy mortgage backed securities with borrowed money at short term rates and collect payments at long term rates. The difference (rate spread) is profit. Recently the Fed hinted at easing QE which caused a rise in long term rates. The short term rates were unchanged. Am I the only one who thinks this scenario should have increased the rate spread and therefore Reit's profits?
    8 Jul 2013, 04:50 PM Reply Like
  • Be Here Now
    , contributor
    Comments (4971) | Send Message
     
    You are not alone. That is their business model, and once the mREITs have time to roll over into the higher yielding bonds, their dividends will go up.
    8 Jul 2013, 04:57 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2724) | Send Message
     
    Rising rates mean that the current value of their holdings has dropped tho. So spreads are rising but book values are falling.
    8 Jul 2013, 05:36 PM Reply Like
  • jaylauriano
    , contributor
    Comments (9) | Send Message
     
    Great point. 'Seems this could imply a major increase in dividend yield if REITs keep trading at a discount to book value. But for how long?
    8 Jul 2013, 05:46 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1630) | Send Message
     
    Hopefully, the increase in rate spread makes up for the decrease in MBS value and they have time to roll their affected assets forward.
    9 Jul 2013, 10:34 PM Reply Like
  • vixstox
    , contributor
    Comments (4) | Send Message
     
    sounds like a bottom to me.
    8 Jul 2013, 04:55 PM Reply Like
  • rollingstone100
    , contributor
    Comments (62) | Send Message
     
    I sold nearly all my Mreits but now think they are close to a bottom and may be ready to buy a couple as a speculation. It is just so hard to evaluate these securities. Rising rates is a benefit on one hand due to more interest income, but decreases BV on the other and which is going to impact the share price the most?......
    8 Jul 2013, 04:55 PM Reply Like
  • jmf3210
    , contributor
    Comments (107) | Send Message
     
    This is quite some outfit. Wunderlich waits until there's a nice 30-percent drop in stock prices before slapping on a 'sell?' Way to be on top of it, Wunders.
    8 Jul 2013, 05:13 PM Reply Like
  • hummerh25
    , contributor
    Comments (99) | Send Message
     
    When they start borrowing $$ to pay the dividend, take a truck load of them to the dump.
    8 Jul 2013, 05:19 PM Reply Like
  • worldnet1
    , contributor
    Comments (65) | Send Message
     
    MTGE was $25.00 + - Now it's about 16.60. Wow you guys are really able to call the market!! Gimme a break - get lost
    8 Jul 2013, 05:44 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1630) | Send Message
     
    mREITs are not for short term price watchers...ever!
    9 Jul 2013, 10:36 PM Reply Like
  • FrankieV
    , contributor
    Comments (6) | Send Message
     
    Regarding the collapse in mreit values, I keep following the change in the yield curve. It seems that the longer maturities are rising and the shorter maturities are about the same. Over time, isn't this a good thing for the mreits?
    8 Jul 2013, 06:31 PM Reply Like
  • jshtarp
    , contributor
    Comments (28) | Send Message
     
    Well, at least they offered MREIT investors some great insight by suggesting they could choose to hold or sell. Ya gotta admire a bold call like that !!!!
    8 Jul 2013, 06:32 PM Reply Like
  • MobilePreacher
    , contributor
    Comments (515) | Send Message
     
    It amazes me how uninformed wall street analysts can be sometimes.
    8 Jul 2013, 08:03 PM Reply Like
  • Gerry V
    , contributor
    Comments (3) | Send Message
     
    The smart people received the call and unloaded their shares before the slaughter. These criminals spread the panic and will buy back the same m reits when they bottom out. This is why the rich get richer and the poor get poorer. Don't panic if you sell at these prices you will definitely incur a loss and will lose out on the high dividends so you will lose two times. This is a no brainier. This is just another scam to help banks raise their mortgage rates but in turn prevent people from buying houses. Remember the Barney Franks that caused the mortgage crisis and the downfall of the world economy a few years ago. These people should be prosecuted to the full extent of the law. Remember until recently congressmen couldn't be prosecuted for insider trading. You do that and the SEC would throw you in jail. Remember we are the gov't and we can vote these crooks out of office. Put all elected officials in the same social security system and health care as you and I and see how fast they find money for the people that work for a living and are entitled benefits. These benefits were paid for by the working people and your money was raided to provide benefits to people that don't want to contribute to society.
    8 Jul 2013, 08:54 PM Reply Like
  • notta lackey
    , contributor
    Comments (131) | Send Message
     
    Ignore Wunderlich for the following reasons:

     

    1. There were probably 14 traders at their desks in all of Wall Street on July 5th. That is why the big fish chose to short the crap out of this sector on that day.

     

    2. Illiquidity? A hedge fund, maybe. A mREIT, never. There are only 3 kinds of illiquidity that this article on MFA could apply to:

     

    A. MFA's non-agency sector. However, as a hybrid, most of their stuff is in agencies, and it wouldn't take much selling of their holdings to meet margin calls.

     

    B. Agency REIT illiquidity. I have invested in this sector off and on for 15 years. They used to have much higher leverage, but sold at premiums to book. This is a multi-trillion dollar market. They might have to take a point or two hit to dump overnight as a worst case scenario, but with their leverage down, it would hurt, but there would be no collapse.

     

    C. Short term funding illiquidity. REPO lenders could refuse to renew, but the REITs have also learned their lesson years ago and now have many more REPO lenders. Repo lending is extremely cheap, far below 1% because it is extremely short term, i. e., it is slush money that is not committed long term at a decent rate. REPO lending beats getting nothing and almost nothing else. 30-90 day money will always be ultra cheap and they can replace funders easily at the contract expiration. Illiquidity would be reflected in rates zooming to maybe 1%. That would reduce mREIT profits, but hardly cause a crisis.
    8 Jul 2013, 09:16 PM Reply Like
  • smurf
    , contributor
    Comments (4520) | Send Message
     
    Wunderlich? Thought this was some kind of IQ test. LOL.
    8 Jul 2013, 10:00 PM Reply Like
  • agberg75
    , contributor
    Comments (26) | Send Message
     
    I've held CIM for two years. When Leon Cooperman turns bearish, then I might sell. But not based on this report.

     

    P.S. I've been quite impressed with CIM's yield...until I saw that NTI is double it.
    8 Jul 2013, 10:41 PM Reply Like
  • richbar
    , contributor
    Comments (893) | Send Message
     
    Wunderlich? Weren't they the one that called for Apple going to 3,000 when it set its 700 high?
    8 Jul 2013, 11:22 PM Reply Like
  • Be Here Now
    , contributor
    Comments (4971) | Send Message
     
    If that is true then I definitely know who not to believe.
    9 Jul 2013, 01:22 AM Reply Like
  • WheresTheDough
    , contributor
    Comments (186) | Send Message
     
    I think one of the problems and reason for dramatic fall in mREITs is that no one really knows the the precise drop in BVs. Only guesses because mark to market BV is very difficult to precisely measure. The uncertainty adds to the drama and also the uncertainty in the effectiveness in the hedges. I'm up to my ears in mREITS and bought more during the slaughter. Based on faith that BV, although unknown, will not go to 0 regardless of leverage, margin calls and hedge ineffectiveness. Betting on receiving those juicy dividend payments regardless of capital unrealized loss in the short to medium term.
    9 Jul 2013, 07:49 AM Reply Like
  • MobilePreacher
    , contributor
    Comments (515) | Send Message
     
    lets make it clear... they said their was a lack of liquidity in the ACTUAL MBS's that mREITs buy. That is stupid, silly, misinformed and whatever negative descriptors you can come up with. Does this analyst even have an associates degree?
    9 Jul 2013, 08:04 AM Reply Like
  • REIT Analyst
    , contributor
    Comments (491) | Send Message
     
    Most (not all) analysts in this sector come from the more traditional equity/financials area. They do not have an intuitive, and even less technical understanding of MBS markets. I don't think they lack in formal training or in "time on the street". They are just close to clueless regarding the structured products mREITs trade, beyond the basics. They talk to MBS traders or strategists so they can repeat stuff that makes them sound like they actually *analyzed* the stuff.
    9 Jul 2013, 08:11 AM Reply Like
  • jeezuz30
    , contributor
    Comments (441) | Send Message
     
    Well then sounds like it's time to load up on some unloved mreits
    9 Jul 2013, 10:08 AM Reply Like
  • jmf3210
    , contributor
    Comments (107) | Send Message
     
    Yes
    , I think July 5 must have been 'take your child to work day' at Wunderlich.
    9 Jul 2013, 03:57 PM Reply Like
  • valoris
    , contributor
    Comments (2) | Send Message
     
    "Blood in the streets"....perhaps a buying "opportunity"?
    10 Jul 2013, 03:34 AM Reply Like
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