Orchid Island Capital: Likely Trading Above NAV Due To Collapse In Mortgage-Backed-Securities

Feb. 24, 2022 6:09 PM ETOrchid Island Capital, Inc. (ORC)26 Comments
Harrison Schwartz profile picture
Harrison Schwartz
13.42K Followers

Summary

  • Lenders that borrow in the short-term market and lend at long-term maturities see their net-interest margins collapse with the yield curve.
  • Mortgage REIT stock prices are falling dramatically as their book values drop with higher mortgage spreads.
  • Orchid Island Capital has significant downside risk in the current situation due to its high leverage and lack of hedges against spiking mortgage spreads.
  • I estimate Orchid Island's book value has declined to around $3.1 per share, though an extensive range around this figure should be used since we do not know its specific sensitivity to spread risk.
  • Accounting for the impending impact of Fed rate hikes and potential continued climb in mortgage spreads, ORC's losses may extend dramatically.
Housing market risk

BrianAJackson/iStock via Getty Images

While the S&P 500 is just now officially in a correction, some stock market segments have been in one for months. Most notably, those sectors with high-interest rate exposure, such as lenders. As short-term rates have skyrocketed and the yield curve has flattened, many have

This article was written by

Harrison Schwartz profile picture
13.42K Followers
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Disclosure: I/we have a beneficial short position in the shares of NLY either through stock ownership, options, or other derivatives. 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.

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