DeMarco Trade "the mother of all pre-payment waves."
Tuesday, November 13, 9:48 AM They're calling it the "DeMarco Trade," and it's nailing mortgage REITs (at least those who focus on Agency paper) already stung by vanishing interest spreads. Agency MBS paper has been falling in price since the election, as Ed DeMarco's days as FHFA chief seem numbered, paving the way for principal forgiveness, "the mother of all pre-payment waves."
What makes you think DeMarco is qutting? He is independent and President can't fire him. Also if the company stock buyback occurs, won't that raise the earnings per share which would stabalize the dividend or even increase it?
If you give someone who is underwater (but current on their payments) mortgage forgiveness, then do I get a check from Freddie/Fannie if I'm not underwater? Freddie/Fannie and the Fed will be the ones to take big hits? Furthermore, what happens in 3-5 years when home values rise another 10% or more? Regardless of who becomes FHFA chief, mortgage forgiveness has way too many problems.
MTGE is heavy on mortgages that already went through HARP-1 or things that have low LTV (not underwater). Yes, they do have some of these underwater mortgages as well, but if mortgage forgiveness has any change, my two cents says that MTGE will sell these (the Fed is buying, right?). Last I looked, a slightly higher (short-term) higher CPR was already factored into their model. Overall, however, CPR here is expected to remain low and stable. But hey, let the lemmings sell; this is now trading 10% below BV. Another 5% or 10% should be good enough for MTGE to start their buy-back.