Now there’s the threat of a negative feedback loop: if lenders to mortgage REITs get antsy and change the terms or if rates go up, it could lead to more margin calls and forced sales that would further push down those mortgage-backed securities, causing further margin calls and forced sales…. The process has reversed: forced sales are pushing up mortgage rates.Īnd they have soared: average interest rates for 30-year fixed-rate mortgages with loan balances of $417,500 or less jumped to 4.68% in the week ending July 5, up over a full percentage point from 3.59% in early May, according to the Mortgage Bankers Association. Now, leverage is accelerating the plunge. Turns out, REITs have tripled their holdings of agency debt since 2009, and in gobbling up everything in sight, they were in part responsible for creating the mortgage bubble and in the process forcing mortgage rates down to ridiculously low levels. That happened massively, Bloomberg reported, citing JPMorgan Chase: in just one week in June, they “needed to sell about $30 billion” in agency debt “to maintain the amount of borrowing relative to their net worth.” Forced sales aggravated the hemorrhaging in the mortgage-bond market, “which had the worst quarter since 1994.” Where REITs get in trouble is when the prices of mortgage-backed securities decline, and when loan terms change. But REITs don’t face that flood of redemptions investors have to sell their shares, at plunging market prices. And when the Fed actually stops buying those securities and allows long-term rates to go back to normal? Last time a bubble burst, so from 2007 to 2008, REITs caved nearly 70%, and some, such as New Century Financial, American Home Mortgage Investment, or Luminent Mortgage, went bankrupt.īond-fund investors yanked $60 billion out of their funds in June alone, the largest monthly redemptions ever. Yet, the Fed hasn’t even begun tapering its bond purchases of $85 billion a month, including $40 billion in mortgage backed securities. Instead of jobs, it created asset bubbles, risks, and fees. At every step, fees are extracted by Wall Street – a veritable bonanza. The more equity they raise, the more securities they buy, and the more they borrow to maintain leverage. During the first quarter, in a last-minute flurry before the air started hissing out of the greatest bond bubble in history, mortgage REITs raised a total of $7.4 billion. Those who got bamboozled into buying it are sitting on a loss of 34.3%. So on February 28, in an example of impeccable Wall Street timing, American Capital Agency priced its most recent offering at $31.60 a share and raised $2 billion. Issuing stock is what REITs do on a routine basis. Just about the price at which it went public. On Wednesday, the stock closed at $20.74, down 43.6% from its September high. Its stock hit a high of $36.77 in September last year, all along paying out dividends sometimes exceeding 20%. It had ballooned by a factor of 60 in 4 years. By December 31, 2012, it had $100.4 billion in assets. As of September 30 that year, it had $1.7 billion in assets. It went public in May 2008 at $20 a share. American Capital Agency, the second largest, is even better: its entire history is linked to the Fed’s zero-interest-rate policy and money-printing binge. Annaly Capital Management, the largest mortgage REIT with $126 billion in assets as of March 31, dropped 34% from its September high to $11.53 on Wednesday most of it since mid-March. Instead of getting their hands dirty in the real economy, they manufacture dividends, fees, and all sorts of goodies for insiders – while the party lasts.īut now the Fed, leery of the risks these drunken partiers were taking on, knocked on the door of that party and threatened to crash it. By distributing 90% of their profits, they avoid having to pay income taxes. Along the way, they issue more stock and borrow even more. They borrow short-term in the repo market at near-zero interest rates, thanks to the Fed, then turn around and buy long-term government-guaranteed mortgage-backed securities issued by bailed-out Fannie Mae, Freddie Mac, and Ginnie Mae. But now the pendulum is swinging back, and the bloodletting has started. Among the big winners were mortgage Real Estate Investment Trusts – and those who got fat on extracting fees. The asset bubbles the Fed’s money-printing and bond-buying binge has created are spectacular, the risk-taking on Wall Street with other people’s money a sight to behold.
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