I believe you will find that that the real reason for the share decline of MREIT's today is concern that they will announce lower yields to offset margin compression, resultant from the flattening of the yield curve and the open ended $ 40 billion/month mortgage purchases by the FED. I commented in greater detail about the overall risk/reward in a blog several minutes ago. For purposes of disclosure I have reviewed the financials in some detail and the experience of management and made a rather large buy today.
Mortgage REITs continue to get repriced for lower yields going forward with earnings reports from JPMorgan and Wells Fargo not bringing good news. Both banks reported sliding net interest margins and booming mortgage business (some if not most of which is refinancing) - an ugly combination for leveraged owners of MBS.
You make a good observation, but the comparison is a bit of apples and oranges. JPM and WFC make their money originating and servicing loans. The vast majority of their mortgages are then resold to the GSE's...... FNME, Freddie Mac and others. The MREIT's then acquire those loans after they have been packaged and securitized . The underlying economics between banks fee based placement and servicing business and MREITS interest arbitrage is very different. They occupy separate places in the mortgage food chain.
Have you learned nothing from these selloffs? Sept 28th WMC did a $266mm deal at 1.1X Book Value. Priced at $22.20. Plenty of others have also priced deals in the 3rd quarter. Among them was AGNC pricing a $1.091 Billion deal at 1.16X BV. The buyers aren't all stupid. When the sector gets hit like it has this week, you should be a buyer and not a seller.
I think many investors realize mReits can be risky even though they don't necessarily understand what exactly the risk is. I've read about some noise about cpr concens as a result of QE3. There is also noise on business channels about interest rates going up. We'll know soon enough with 3rd Q reports if the cpr concerns have merit. As for interest rates going up would require an economic miracle - recession/depression in Europe, slowing in developing markets, stalled growth in incomes of working Americans would have to be reversed ( which is something the previous QE's have failed to achieve). Initially when the fed had turned on the printing press I thought there was a risk of inflation. But then I pointed out we had a $5 trillion whole to fill in the financial and real estate markets. Well, real estate markets and financial markets have stabelized and in the case of financial we've seen a rebound. And yet, no inflation, no need for higher interest rates. No real improvement in employment. My belief is that some of the good benefits of the QE's is absorbed by the defecit spending in Washington. Food stamps, extended unemployment benefits, foreign aid and wars, etc. are not stimulative and therefore do not cause inflaction. Call it a mild depression or The Great Recession, for the aforementioned reasons, I expect we're going to be here for a while - not exactly panic conditions for mReits.
Lotta moving parts but basically you have declining spreads and at least this week declining MBS prices, esp.. the long duration assets that WMC holds. Toxic cocktail to be sure.
I trust WMC management. They definitely know what they are doing. But nobody should be in Mreits unless they can stomache a major 20-40% pullback. Also know that WMC will like CYS be among the most vulnerable to falling MBS prices because of their overweight in 30 year paper.
Let's assume for modeling purposes that you are right and look at the impact of a 20-40% decline, extreme to be sure. A decline of this magnitude would likely be caused by a cut in dividend with the stock declining proportionally to reestablish value parity. If WMC cuts the dividend by 20%, from 15.5% to 12.4% the shares could retrench to $ 16.92 from today's $ 21.15 close., the net effect is nearly a wash, albeit with a time delay to recover lost share price via dividend payout. This is indeed the risk, losing the time value of invested funds. The reward is a 15.5% yield and potential for appreciation. To put it in context let's look at the frequency of this happening at two of the longest tenured MREIT's AGNC and NLY. Other than two very brief flash crashes lasting a fraction of one day, AGNC experienced one 20% decline from early January - early March 2009. Industry veteran NLY experienced a 42% decline from June 2005-November 2005, and nothing between 20%-40%. Absent the very short lived flash crashes at AGNC, the rare declines of this magnitude, transpire over several months. The frequency and magnitude of declines is much greater at poorly run MREITS or those that use the proceeds of secondary's offerings to pay dividends to existing shareholders rather than investing the funds acquiring new mortgage bundles or prudent hedges.