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Mortgage REITs (MORT) catch the eye of D.C., with the Financial Stability Oversight Council...

Mortgage REITs (MORT) catch the eye of D.C., with the Financial Stability Oversight Council reportedly set to cite the industry as a potential source of market vulnerability. The companies have seen assets quadruple to over $400B since 2009, but Annaly (NLY) CEO Wellington Denahan notes their capital bases have risen as well. A Two Harbors (TWO) presentation (page 8) shows mREITs are relatively small players in the MBS market. Maybe the Fed and the GSEs just don't like the competition. Annaly and American Capital (AGNC) are the 2 biggest mREITs, with Two Harbors a distant 3rd.
Comments (42)
  • smurf
    , contributor
    Comments (3941) | Send Message
    Leave it to the govt. to screw up a good thing.
    18 Apr 2013, 11:42 PM Reply Like
  • bill d
    , contributor
    Comments (1899) | Send Message
    I thought they were here to help? Oh - that's right - it's an oxymoron.
    18 Apr 2013, 11:51 PM Reply Like
  • Regarded Solutions
    , contributor
    Comments (16081) | Send Message
    this is unbelievable.
    18 Apr 2013, 11:47 PM Reply Like
  • justaminute
    , contributor
    Comments (581) | Send Message
    They compete with Fannie and Freddie and the government hates competition.
    18 Apr 2013, 11:57 PM Reply Like
  • IncomeYield
    , contributor
    Comments (1622) | Send Message
    Are they signaling an end to QE and the start of higher rates. They send out a scout to warn on TV about muni bonds and now mREITs.


    Looks and sounds suspicious. Specifically the SEC guy warned about bond prices and rates.


    MLPs will be next. :)


    Stretch for yield never ends well. How will the Fed "fix" the bond market dive (if it dives). The world bond market dwarfs the stock market. World wide mark-to-market losses. How will that look?
    19 Apr 2013, 12:07 AM Reply Like
  • IncomeYield
    , contributor
    Comments (1622) | Send Message
    My wild guess is that the Fed has to cave on the savers issue. They flatten the yield curve somehow raising the short end so savers get a 2 to 3% CD, but they keep the long end (10 to 30 years) low.


    A twist of Operation Twist.
    20 Apr 2013, 11:20 AM Reply Like
  • Dividend Living
    , contributor
    Comments (262) | Send Message
    Could the Government put a cap on leverage used?
    19 Apr 2013, 01:04 AM Reply Like
  • CincinnatiRick
    , contributor
    Comments (410) | Send Message
    Yes and a whole lot more. Dodd and Frank are gone but the evil they did will live long after them. And the administration and "independent" agencies can do the nasty without any need to go back and ask the current or future Congresses for anything.
    19 Apr 2013, 01:19 AM Reply Like
  • june1234
    , contributor
    Comments (2570) | Send Message
    What bubble? the largest REIT in the country Simon property group is trading at a 40% premium from its housing bubble high
    19 Apr 2013, 03:59 AM Reply Like
  • jmodrkrk
    , contributor
    Comments (94) | Send Message
    Well since the article was on Mortgage REITs and not Equity REITs... but I agree these are small players depite their growth in AUM relative to that of GSE's and commercial banks.
    19 Apr 2013, 12:31 PM Reply Like
  • Tack
    , contributor
    Comments (13204) | Send Message
    Look on the bright side. We get a buying opp if the market panics over this otherwise meaningless news.
    19 Apr 2013, 04:18 AM Reply Like
  • Exonian
    , contributor
    Comments (4) | Send Message
    Think back a few months ( remember the " financial cliff " ) and the Federal Government was the world's biggest cause of " market vulnerability"! Where was the Finacial Stability Oversight Council
    then!! Asleep at the wheel?
    19 Apr 2013, 06:00 AM Reply Like
  • Kurtwalter
    , contributor
    Comments (61) | Send Message
    The SEC has made comments about "high" leverage in the past, and questioned whether this was appropriate for REITs, but nothing has happened.
    19 Apr 2013, 06:17 AM Reply Like
  • Patrick Harden
    , contributor
    Comments (428) | Send Message
    Mortgage REITs are no more risky than any other levered closed-end bond fund. Their levels of leverage are higher than most CEFs because they are able to rely on an exception to the Investment Company Act and avoid being subject to that regulation. The banking industry has to be behind this attack - they are just angry that mortgage REITs can avoid all the compliance costs of financial regulation as non-depository institutions. Not one agency-backed mortgage REIT blew up during the financial crisis. Those that did blow up had much risker holdings and the market was fully aware of it.
    19 Apr 2013, 08:15 AM Reply Like
  • adrian816
    , contributor
    Comments (177) | Send Message
    Annaly seem to be one of the more cautiously-run REITs. Lower returns than AGNC for less leverage. Aren't agency mREITs backed by Fannie Mae and Freddy Mac?
    19 Apr 2013, 08:29 AM Reply Like
  • itscalledcommonsense
    , contributor
    Comments (562) | Send Message
    "and a Two Harbors (TWO) presentation (page 6) shows mREITs are relatively small players in the MBS market"


    That is not what that presentation says at all. Reading comprehension FTW.
    19 Apr 2013, 09:32 AM Reply Like
  • SA Editor Stephen Alpher
    , contributor
    Comments (543) | Send Message
    From the presentation:


    Commercial banks hold about 38% of all mortgage debt outstanding
    GSEs and the Fed 22%
    Other 8%
    Insurance Cos. 8%
    Credit unions 7%
    Non-bank lenders 5%
    mREITs 3%
    19 Apr 2013, 09:41 AM Reply Like
  • Patrick Harden
    , contributor
    Comments (428) | Send Message
    "itscalledcommonsense" is generally known to be a comment troll on all things mortgage REIT. The statement regarding the influence of mREITs in the MBS market was factual and appropriate.
    19 Apr 2013, 09:49 AM Reply Like
  • quiburon
    , contributor
    Comments (16) | Send Message
    The Fed should be delighted that mREITs are helping to accomplish the fed's stated goal re rates.
    19 Apr 2013, 09:58 AM Reply Like
  • kingdad
    , contributor
    Comments (944) | Send Message
    Freddie and Fannie were used as Political appointee Plums and inconjunction with the FHA and other Federal Mortgage lending programs were the Primary reason that America saw a Financial Collapse because of Democrat appointee mismanagement, Political campaign contributions from the Organizations and their leadership, and the refusal of the Democrat controlled Congress to address Multiple times the ever-increase threats of major, then catastrophic problems within those Orgs while Democrat leaders, esp. Barney Frank, who was sleeping with the #2 guy at Freddie, sought ways to keep the bad monetary lending policies in place and further assured the Financial collapse of our Economy. Facts are a terrible thing and the long and clear History here is that the Congress knew and refused to do anything to prevent the Implosion while lining their own pockets with cash from these orgs,
    19 Apr 2013, 10:02 AM Reply Like
  • Jacob Teague
    , contributor
    Comments (107) | Send Message
    This is a good thing. Too many players are entering the agency mReits space and this should discourage them.
    19 Apr 2013, 10:04 AM Reply Like
  • IncomeYield
    , contributor
    Comments (1622) | Send Message
    Yes, that's the point. An explosion of Royalty Trusts and MLPs also, and the PEPs and CLXs of the world have doubled and tripled. How have the new RTs worked out so far?


    The latest bubble is obviously the bond bubble, yield stretch. We just gotta figure out the collateral damage when it pops.
    20 Apr 2013, 11:25 AM Reply Like
  • Jonathan Christopher
    , contributor
    Comments (283) | Send Message
    Stability Council "Reportedly" commenting? Please verify the source of this information. It is irresponsible to post this kind of potentially disruptive information without some official source.
    19 Apr 2013, 10:06 AM Reply Like
  • Dividend Living
    , contributor
    Comments (262) | Send Message
    The Wall Street Journal is the one doing the reporting on this one. There is a link in the original post if you are a subscriber to the WSJ. It was written by Deborah Soloman. It also states that this report of the Financial Stability Oversight Council that will come out next week may set the stage for stricter oversight of the industry.
    19 Apr 2013, 10:24 AM Reply Like
  • ChrisTesta
    , contributor
    Comments (137) | Send Message
    I guess the mortgage REITs didn't pay bribes to their Senators. mREITs pose systemic risk? Why don't they take a look at the Federal Reserve. FSOC, CFPB, etc. all these alphabet soup agencies are compeltely and utterly useless. I have more respect for people that scrub toilets than people that work for them; at least they make an honest living.
    19 Apr 2013, 10:53 AM Reply Like
  • Dividend Living
    , contributor
    Comments (262) | Send Message
 barrons has an overview of the fears expressed in the origional WSJ piece, but leaves out all the people saying the industry doesnt need oversight.
    19 Apr 2013, 10:55 AM Reply Like
  • TwistTie
    , contributor
    Comments (2476) | Send Message
    All highly leveraged "things" are potential sources of market vulnerability.


    It would be unfair to leave the mREITs out.


    Our tax dollars cry out for inclusiveness...


    (From the Treasury's web site...)


    "The Council is charged with identifying risks to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States' financial system."


    I feel like I'm getting my money's worth.
    19 Apr 2013, 11:24 AM Reply Like
  • bdarken
    , contributor
    Comments (426) | Send Message
    See any elected officials on the FSOC roster?"
    (from FSOC/Treasury website)


    Secretary of the Treasury, who serves as the Chairperson of the Council;
    Chairman of the Board of Governors of the Federal Reserve System;
    Comptroller of the Currency (OCC);
    Director of the Bureau of Consumer Financial Protection (CFPB);
    Chairman of the Securities and Exchange Commission (SEC);
    Chairperson of the Federal Deposit Insurance Corporation (FDIC);
    Chairperson of the Commodity Futures Trading Commission (CFTC);
    Director of the Federal Housing Finance Agency (FHFA);
    Chairman of the National Credit Union Administration (NCUA); and
    an independent member with insurance expertise who is appointed by the President and confirmed by the Senate for a six-year term.


    The nonvoting members, who serve in an advisory capacity, are:


    The Director of the Federal Insurance Office;
    A state insurance commissioner designated by the state insurance commissioners;
    A state banking supervisor designated by the state banking supervisors; and
    A state securities commissioner (or officer performing like functions) designated by the state securities commissioners.


    Can you smell shakedown?
    19 Apr 2013, 11:51 AM Reply Like
  • johnbbbb
    , contributor
    Comments (25) | Send Message
    Never, never trust public statements that come from the mouths of Democrats concerning money.
    19 Apr 2013, 12:26 PM Reply Like
  • johnbbbb
    , contributor
    Comments (25) | Send Message
    And RINO's also.
    19 Apr 2013, 12:27 PM Reply Like
  • searcher
    , contributor
    Comments (1614) | Send Message
    Regulation with very few exceptions ultimately favors the well capitalized and entrenched competitor. See little to fear.
    19 Apr 2013, 01:01 PM Reply Like
  • Pinkrabbit
    , contributor
    Comments (186) | Send Message
    On the flip side I think the Dem's will tread lightly considering how many folks are using REIT dividends to prepare themselves for retirement or are using the dividends to live on after retirement. Messing with REITs is like messing with social security in my view.
    19 Apr 2013, 01:02 PM Reply Like
  • justaminute
    , contributor
    Comments (581) | Send Message
    They don't care. They want to be the ones passing out the candy. Besides, if you own stocks, you are obviouly rich and should be paying more taxes so that the "poor" get their fair share.
    19 Apr 2013, 01:41 PM Reply Like
  • Bryce_in_TX
    , contributor
    Comments (2648) | Send Message
    I've never seen any analysis of Thronburg Mortgage, Inc, (TMA) after it filed for Chapter 11 bankruptcy in 2009. Looks like they didn't have sufficient capital to meet margin calls, as best I can determine. As far as what they invested in, it doesn't get any better, IMO. However, this does appear to be an exception or anomaly to the general case based on my limited knowledge. Wonder if any of the government officials involved with the FSOC had investments in TMA?


    "Thornburg Mortgage's customers are typically affluent and with superior credit. According to the company's own figures (as of March 31, 2007) the average borrower had an annual income of $204,012 and a FICO score of 743. The rate of borrower default on these loans has also historically been significantly lower than the industry average.[6"


    TMA's delinquencies were only 1.6% according to Bloomberg. Who would a thunk it could happen to TMA?


    19 Apr 2013, 01:59 PM Reply Like
  • Tack
    , contributor
    Comments (13204) | Send Message
    TMA's creditors saw a chance to use technical covenant breaches to attach TMA's great portfolio in a money grab, simple as that.
    19 Apr 2013, 02:21 PM Reply Like
  • mikeg999
    , contributor
    Comments (69) | Send Message
    Not true-rapidly declining collateral value caused TMA's creditors to demand additional capital. Lacking access to any source, it had no choice but to file for protection under CH. 11.


    Unfortunately, the same forces that caused TMA's demise also hit others including GE but the later was deemed to big to fail and was offered access to the Fed. as a bank holding company. Recall CIT was also deemed to important to small business but still failed despite TARP funds and easy access to credit.
    20 Apr 2013, 12:13 AM Reply Like
  • IncomeYield
    , contributor
    Comments (1622) | Send Message
    Yes, this was also a variation on the mark-to-market stuff that was hurting and benefiting other financials also.
    20 Apr 2013, 11:28 AM Reply Like
  • jpm1jr
    , contributor
    Comments (50) | Send Message
    It is beyond ludicrous to have the bureaucrats of the FSOC commenting about the "market vulnerability" of the mreits. These are some of the best managed , financially cautious, and transparent entities out there. The main source of instability is the FED, over whom there is no oversight at all. Followed by the TBTF banks, who have the overseers in their pockets.
    20 Apr 2013, 10:28 AM Reply Like
  • Floyd Brown
    , contributor
    Comments (48) | Send Message
    It may be made to look like the Government is doing this but scratch a bit deeper an look for someone in the private sector looking for help.
    20 Apr 2013, 11:15 AM Reply Like
  • activetrader
    , contributor
    Comments (38) | Send Message
    There's no foul here and if you have a long-term view, I see no reason to lose sleep over this. From one perspective, Annaly, et al is at or very near the bottom from an earnings point of view. That means that returns to investors, particularly is this area where 90% of the profits are required by law to be distributed are far more likely to increase or remain as they are for now rather than decrease. In the longer term, as interest rates rise, additional funds from investors will be utilized at higher rates of return. The so-called "margin squeeze" means status quo for current funds and that's OK with me.
    20 Apr 2013, 12:28 PM Reply Like
  • Bryce_in_TX
    , contributor
    Comments (2648) | Send Message
    Let me state an overlooked fact, but one which is important in my view. It seems that tax income is called "profits" or "earnings". While that is true from an income tax perspective. IRS regs are a hodge podge of regulations created over decades, not to accurately measure the revenues and expenses of a company, but to bring in revenue to the government. The 179 deduction is a good example of what I am talking about, allowing an asset to be fully or significantly written off in the year of purchase. Tax profits in the majority of cases are not an accurate measure of a company's true profits. From a management perspective, using such a measure, rather than GAAP can get you into deep do do using it to make business decisions. Much of it is cash basis accounting, and not accrual. If tax basis does work for a business, that business's revenues and expenses are either largely non-credit based, or the tax rules are based on accrual accounting or GAAP.


    I cringe when I hear someone call tax income "profits" or "earnings". It is taxable income, that's all. I understand what you are saying, but still, if it is repeated enough, the idea will become "truth" simply because it is repeated enough. And it seems we are there already. If tax accounting was a valid basis for measuring a company's financial performance, FASB, the AICPA, and the SEC would have adopted it a long time ago.


    Example: Your annual revenues are about $500,000. You buy a $100,000 piece of equipment to use in your business, which the 179 deduction allows you to write off in the year of purchase. That is material to figuring your net income. Using tax basis accounting and taxable income, you are going to be materially wrong in your net income or "earnings" number, since the equipment will last you for a period of years, not just the year of purchase.


    Similarly, paying for insurance for more than one year, or recording a prepayment for a sale will be recorded differently for taxes versus accrual accounting.


    Then there are meal expenses, only 50% of which you may deduct for tax purposes. The list goes on and on. There are many legitimate business expenses only partially allowed for tax purposes, or not at all.
    20 Apr 2013, 12:44 PM Reply Like
  • searcher
    , contributor
    Comments (1614) | Send Message
    Point taken. The convenience of 'short hand' often assumes an unwarranted authority merely by repetition in increasingly dubious context. Especially dangerous is our tendency to reify accounting terminology in forms congenial to the argument at hand. We can even lead ourselves astray by assigning precision to the terminology used that shifts according to our bias.
    20 Apr 2013, 01:56 PM Reply Like
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