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Western Asset Mortgage Capital Corporation Message Board

  • eyesandears51 eyesandears51 Oct 12, 2012 2:50 PM Flag

    MREITS Revisited:WMC- Opportunity and Risk

    Previously, I discussed some of the issues and opportunities associated with Mortgage REITS. The Fed has committed to an open ended plan to lower long term mortgage rates by buying US guaranteed paper from FNME, FREDDIE MAC, GNME, and others. Please remember that only the value of the mortgage is protected from default. Premature loan payoff's or refi's at a lower rate are an investor risk. While the intent of QE-3 is to provide assured long term liquidity and low rates for mortgages, it does nothing to affect bank loan qualification standarts. Namely if the prospective homeowner is self employed, retired, changed jobs/careers, or is credit impared, low mortgage rates are only accessable to the subset of applicants who qualify.

    The impact on the MREIT's, such as WMC,AGNC, NLY, CIM, are twofold with one big mitigating factor. The positive: The Fed's QE-3 increases the value of the existing portfolio of these MREIT's since their average interest rate is now higher than market. The negative: By pushing down long term mortgage rates, the Fed is encouraging able mortgage holders to payoff existing loans and refi at a lower rate. Consequently, the MREIT's projected redemption rate for their portfolio may accelerate. New securitized mortgages purchased from FNME, et. al. will carry a lower interest than those redeemed. This process will be gradual since refinancing is time consuming, and not all buyers can meet stringent bank qualification criteria. MREIT's make their margin by arbitraging the spread between low cost short term cost of capital ( borrowing) with buying long term higher rate mortgages. QE-3 over the longer term can result in spread compression. Mitigating factors: Most MREIT's hedge some or all of their portfolio against accelerated redemption rates. This varies widely from one company to another. Firms such as WMC and AGNC have a very cost and coverage effective series of layered hedges. Secondly, QE-3 will ultimately expand the pool of those who can obtain new mortgages. MREIT's making higher margin on fewer mortgages may be offset by realizing lower margins on a larger number of mortgages.

    MREIT's are not suitable for all investors, but monthly/quarterly dividend payouts of 12-14%, combined with the opportunity for share price appreciation and the risk of lower stock price is worthy of attention.

    Comments welcome.

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    • I wonder if there is a measure of how many people are in the refi window- given the low rates over the last several years- I would assume most have refi'd- a drop form 4.0-3.5% may not be worth taking depending on remaining balance and life of loan.

      I am also wondering about the actual backlog in bank owned homes (the real backlog)- I think there is enough there to mitigate any price increases due to increasing demand form either lower rates and/or longer term people cashing out to smaller houses as population ages

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