Help me out here. The market is pricing in some doomsday event.The worst case scenario is that spreads come in so much that it is impossible for MREITS to make money. Right? At that time, wouldn't the manager just bring down leverage, hold the MBS for their interest and wait for spreads to widen out?
I don't see interest rates going up anytime soon so the only way I see book value getting damaged is if the manager of the MREIT makes some really stupid moves with leverage/hedges that backfire. Am I missing something? All thoughts are appreciated.
Thanks Kevin. I haven't made the move to options yet but it helps me understand. Although MREITs are not traded much there is one hell of a large option market on these things which is making the PPS go insane. Long term investors can either choose to ignore the PPS or freak out and sell.
One thing is for sure. Anybody calculating the present value of future cash flows from these Mreits (I.e. dividend discount model) has to be licking their chops right now.
CPR will eat into book a little bit over time as it turns over a portfolio.
The good news is AGNC is the most efficient at managing CPR I have seen for a pure agency reit.
And beyond that generally the new reits have the lowest CPR since they all have brand new MBS.
I guess the point is the worst case scenario is no dividend ever again. So....help me understand.....AGNC is now trading at 85% of book value. This assumes no dividend ever again and an inability to liquidate the portfolio to pay back the book value to the shareholders. Is this logical? Please short sellers and bears pile on here and give me your nightmare projections because I fail to see the worst case scenario here. Bring it.