The US has an estimated $16 trillion dollar Market for Residential & Commercial Mortgage-Backed Securities .
The business model of a mortgage REIT is to buy long-term residential and/or commercial mortgage-backed securities and leverage them up by borrowing short-term, including in the repo market if they can, while posting the RMBS or CMBS as collateral. A mortgage REIT makes money off the spread between the borrowing rates and the yields of the mortgage bonds, and they multiply their profits through leverage.
As Wolf Street says, during the Good Times, it was like free money, and the mortgage REITs paid big-fat yields. But suddenly, the Good Times were up.
Everyone was trying to unload them, and their prices dropped, and therefore collateral values dropped, and financing counterparties sent out margin calls to get more cash or collateral to make up for the dropping collateral values. And then all heck broke loose.
On Monday, TPG RE Finance Trust — sponsored by private-equity giant TPG which had spun it off in an IPO in 2017 — announced that it had still been able to meet margin calls by posting cash collateral, but “if the requirements to post additional cash collateral continue to be material,” there is “no certainty” it would be able to meet future margin calls. To preserve liquidity, it would “delay” paying its previously announced dividend.
TPG RE’s shares [TRTX] plunged 30% on Monday and 13% on Tuesday to $4.30 and are down nearly 80% from last glory-day February 20.
“The Company is engaging in active discussions with its lenders and other potential sources of financing, but it cannot predict whether it will be able to agree to terms with such parties on an expedited basis,” it said.
And it’s going for a government bailout, it said: “The Company is also monitoring the potential availability of government programs.” Taxpayer to the fore.
On the same day, AG Mortgage Investment Trust, announced that it had not been able to meet margin calls “as a result of market disruptions created by the COVID-19 pandemic.” Shares [MITT] plunged another 24% today, to $2.14, having collapsed from over $16 on February 20.
“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the COVID-19 virus, the Company and its subsidiaries have received an unusually high number of margin calls from financing counterparties,” it said
It was able to meet margin calls until Friday March 20, when it “missed the wire deadline” and notified the financing counterparties that it would fulfill the margin calls on Monday March 23 but would not be able to meet the anticipated future margin calls.
AG Mortgage said that it’s trying to get the financing counterparties to enter into a forbearance agreement and not take ownership of its securities that back the margin loans.
On Tuesday, it was mortgage REIT Investco Mortgage Capital that issued an announcement that it had failed to meet margin calls on Monday, blaming “the turmoil in the financial markets resulting from the global pandemic”
The announcement caused the already beaten down shares of Investco Mortgage Capital [IVR] to crash another 53% to $2.52. Back on February 20, they were still over $18. Investco Mortgage Capital added:
Through Friday, March 20, 2020, the Company had timely met all margin calls received. However, on Monday afternoon, March 23, 2020, the Company notified its financing counterparties that it was not in a position to fund the margin calls that it received on March 23, 2020, and that the Company did not expect to be in a position to fund the anticipated volume of future margin calls under its financing arrangements in the near term as a result of market disruptions created by the COVID-19 pandemic.
It said it is trying to get the counterparties to enter into a forbearance agreement and not take ownership of the securities that back the margin loans. And “to preserve liquidity,” it said it would also “delay” paying the already announced dividends on its common stock, and on its three series of preferred stock.
Also on Tuesday MFA Financial announced that it had received “an unusually high number of margin calls from financing counterparties,” and that by the close of business on Monday, it couldn’t meet those margin calls.
Its shares (MFA) had started out the day in the positive at just under $3 and then plunged 87% during the day, to $0.36. On February 20, before the market chaos started, shares were still over $8 a share. MFA Financial blamed the repo-market where it “had experienced higher funding costs,” and the mortgage market turmoil triggered by COVID-19.
And MFA Financial said:
On March 23, 2020, the Company notified its financing counterparties that it does not expect to be in a position to fund the anticipated volume of future margin calls under its financing arrangements in the near term as a result of market disruptions created by the COVID-19 pandemic.
If MFA fails to meet the margin calls, the financing counterparties can take ownership of the securities that secured the margin loan. The company is now trying to get its financing counterparties to enter into forbearance agreements, where the counterparties would refrain from exercising their rights and remedies they have in case of default, but it could not “predict” whether these talks would succeed.
