Everyone is saying that when the interest rates rise, the reits are going to crash and the wheels are going to come off, but the Fed is buying huge amounts of the exact same things as all of these reits, while maintaining "theoretical" control over interest rates. So, if what everyone is saying is correct, when the Fed ends QE, it means their portfolio of MBS should crash and burn as well. Why would the Fed do that to themselves? It's like going out and buying something today and paying $15,000, while knowing all along that in 6 months it will only be worth $500. Would you knowingly do that to yourself? Probably not! It makes no sense! I think this is all being driven more by fear than actual logic. I could be wrong, but we'll all have to wait and see!
Where did you come from an island. The government buys $2,500 hammers and $500 screwdrivers. It called taking care of you big contributors, they are just stealing your hard earned taxes. Where are you from? This has been going on for 100's of years. The taxpayers and the voters are perfs and they will be holding the bag, like the stockholders in M-REIT's.
Yes you're right, the government does buy $2,500 hammers and $500 screwdrivers, but the difference is they aren't buying them with the intention of eventually reselling them on the open market. If that were the intention, I would imagine the strategy would change drastically. Since the Fed can manipulate rates, they have theoretical pricing power over their MBS holdings. I know they buy these things with printed money, but it is still in their best interest to get the best resell rates possible. If you could buy something for nothing and get 2-3% for it, or since you would have general control of the pricing power, you could manipulate the market to get an even better price, what would you do? I just don't believe that it doesn't matter to them at all what they can get out of these holdings. Remember the term "Don't fight the Fed!"
I guess I just have a hard time believing that all of the directors of these mreits would be willing to buy back shares and buy hundreds of thousands, or in some cases, millions of dollars of their stocks with their own money if they really thought there was a serious chance of bankruptcy. I know that no one can intentionally pick an exact bottom, and even people who run companies still sometimes buy at the top, but they definitely have a better view of the inner workings of their own companies than any of us. If it were me in their position, I couldn't imagine throwing tons of my own money at a stock I thought was going bankrupt in a few months. The only way we as investors can protect ourselves, is to make our exposure to mreits a portion of a diversified portfolio. If they do all indeed go bankrupt like everyone on here seems to be saying, then we as longs will only lose a small portion, and not all, of our investment funds. With that said, most opportunities come in times of the most uncertainty!
I believe they would buy even if there was on 5% of success. I know three family members that owned Corus Bank in Chicago, that was buying their shares as they fell from the mid -thirties in 2006 - 2007, and then when it hit twenty, they were buying 100,000 share blocks monthly, then it fell to $10 and they were buying 500,000 share blocks. Mind you, back in 2006, all three sons were worth almost $800,000,0000 each. They kept buying even at $5. Six months later after $5 they were taken over by the FDIC. The stock dropped to $.30/sh. and a few months later to $.06. I remember seen the SEC statements where those three sold 25,000,000 shares between $1 - $2 a few weeks before the takeover by the FDIC. The total value each got was like $50 million. They went from 25,000,000 x $36 = $900,000,000. From $900,000,000 ti $50,000,000 in little over 3 years, all because they bet wrong on the condo mortgages in Miami, Las Vegas, and San Diego, during the housing boom. From Billionaire's to millionaires, in 3 years they lost 95% of their investment.
Raybans2 is correct...i.e. if they ever do lose on any paper, they just have the Treasury cover it. You know, Obama nominated Mel Watts to head the FHFA -"O" wants a rate reduction on the agency paper (a 'cramdown')...Now, obviously that would hurt the MBS paper...and the Fed holds a lot of it and buys $40-45 Billion each month....So, doesn't the admin and the Fed know what the repercussions of a cramdown would be to the FED holdings? I imagine they do, but they're still willing to cramdown rates on agency paper & take the hit on their MBS holdings(well, maybe they will succeed or maybe not...but that's what they've desired, to help a few homeowners)...So, does that make sense? I've gotten the feeling that govt wants to control the whole MBS market, so they can artificially set rates and keep mortgage rates low / housing hot....This economy has few other "drivers" to rely on, besides housing....
ps...I suspect that when 'taper' comes, it'll be a reduction of bond purchases, but they'll possibly not tinker with their MBS purchases...If mortgage rates rise, that could really hurt the recovery...So, I'd expect them to try to keep a lid on mortgage rates by continuing to buy MBS paper....(They'll not be selling their existing MBS holdings, at the very least)
When you buy govt bonds you cannot lose money (except for default) MBS are amortizing and the money comes back every month at par. The treasuries will mature and the govt does not have to repay anyone at maturity, even the monthly interest comes out of one pocket and goes into the other. All they did there is just dole out the money to buy them.
The Fed doesn't mark their balance sheet to market. There is actually considerable fear over the point you made. Right now the Fed is paying the US Treasury about $90 billion per year in profit from their investments. By a recent measure, if short term rates rise above 4.3%, the US Treasury will have to send money to the Fed.
you must also understand people who make the stock move are not trolling these boards, people on these boards are holding tens to max hundreds of shares. the stock is manipulated so less informed common investor would panic sell while these bigger fishes scoop up the shares.