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Invesco Mortgage Capital Inc. Message Board

  • oldschoolbuilder oldschoolbuilder Oct 7, 2011 9:00 PM Flag

    5 yr swap rates now at 140+ bps--up 35 bps from the bottom

    Not sure anyone noticed that 5-yr swaps have backed up significantly in yield recently. This is good news for IVR's mark to market BV (as they use 4.5 yr avg duration swaps as a hedge against their MBS). Swaps are up 20 bps since the Aug 18 secondary offering which adds an additional $0.40 or so cents per share to BV. Payment protected agency MBS prices have also held their own given steady CPRs (while lower coupon newer vintage agency MBS that are held by other MREITs had a big spike in CPRs). This means IVR's BV is holding fairly steady here after the fall in July and August, likely in the $16.50-17.00 range, despite some (likely temporary) back-up in non-agencies and CMBS. The non-agency securities that IVR owns should be money good in the long run--a lot of recent senior Re-Remics and senior CMBS. Can't look at Markit and assume the same moves for the stuff IVR owns. The negative swaps mark is going to go away over time, eventually accreting into BV to the tune of $4+ per share. Historical BV here is close to $20, there has been no OTTI on credit assets and probably won't be, and you're getting the stock here at around 70% of this figure with a 20%+ yield. Investors are being way too pessimistic or aren't doing their homework.

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    • Man you are one grizzly bear. Let's focus on what is likely and not the worst case doomsday scenario.

      The dozens of MBS reits that went bankrupt had unbelievably high leverage and/or really cruddy assets and liquidity dried up. Not the case here--lots of liquidity, good assets, plenty of flexibility if things do get out of hand. No capital raise is necessary here--I'm thinking a buyback is more appropriate (and doable, although the company may choose to stay conservative).

      I guess you think that the CMBS market is highly uniform and all commercial real estate loans are going to blow up. No differentiation in underwriting, collateral, subordination, credit protection, or price paid for the assets. I am not going to try to change your mind here. You have a right to your opinion, I just wanted to present some facts that may lend credence to a different perspective.

    • You may not have noticed, BUT THE WORLD DID COME TO AN END for DOZENS of MBS REITs that had tye EXACT SAME BUSINESS MODEL as this one.

      Even GIANT BANKS required bailouts.

      As we see now, the problem was NEVER FIXED.

      As for loss scemnarios in CMBS being somehow overstated, maybe that will turn out to be he case.

      You still have to survive to find out, and SPOs might prove a tad bit difficult o arrange in these markets these days.

    • The same "world is coming to an end" predictions were made in 2008 and early 2009 and then it didn't happen. Credit assets (not including sub-prime as the jury is still out there) were pricing in just ridiculous loss scenarios--which didn't even come close to coming to fruition--and when investors figured that out these assets rallied enormously. When IVR discloses that 50% of its CMBS holdings have 15% or more subordination on avg adjusted LTVs in the 60s and 70s you are talking about default rates and severities each greater than 50% before any principal losses would be sustained by this large piece of the portfolio. The CMBX is pricing in some silly scenarios at this point (as it did in 2009) and it's because it is an easily manipulated derivatives vehicle. If you think we are going into a depression then I agree you shouldn't own anything credit related. At this point, howver, an investment in IVR is an investment in the top of end of the credit stack at a point in time when credit markets have already priced in a very unlikely scenario for ultimate realized losses.

      Not saying the rubberband can't stretch further into unreasonable territory but ultimately it will snap back sharply.

    • Sure, but by your logic all the bank losses are temporary too. In fact, everything is FINE in credit land, right?


      In case you havent noticed, this is the WEAKEST recovery on record.

      rates are zero, the FED is diwn to buying bonds fir its own portfolio, the Federal Gov is getting ready to cut a TRILLION in soening, the States are broke, and financial services, the largest privae employment base, is looking at DRACONian layoffs.

      Credit may not get better, in fact an objective look at the world would suggest that ut will not.

      LOkk at CMBS, as an example. You have a TRILLION in balloon loans rolling over in the next 5 years. THERE IS NO CMBS MARKET THAT US OPEN RIGHT NOW TO REFINANCE THESE LOANS.

      Borders, the 3rd largest mall tenant in the USA, put uts portfolio on the market and tyre were ZERO BIDDERS.

      European banks are loaded with US property THEY now have to sell.

      S&P REFUSES TO EVEN RATE the much ballyhoed CMBS 2.0, and that market has shut down after less than a year of so called "superior underwriting."


      HOPE is not a business model, as Obama has duscovered.

    • I think the statements made at JMP could not have been reasonably made if your assessment of the company is correct. They could not "believe" in their collateral and their book if they had been decimated in the preceding quarter to the extent your portray. If you're correct they have no credibility.

      As I said, we'll know shortly.

      BTW, losses in hedges are essentially an accounting fiction unless they are traded or speculative. They essential mean that rates were locked at higher than current values, but their impact occurs in net interest margin. It's like saying you "lost" money on your 4% mortgage because rates are now 3% even though your payments haven't changed. I've obviously over simplified over hedging the book isn't the worst management sin I've ever witnessed - it's just a judgement about managing interest rate risk.

      Quality is a bit elusive. An investable thesis is more relevant, perhaps, and the idea that selling in IVR is over baked is an investable thesis, if correct.

      Can't think of any reason to invest in a regulated bank.


    • I think you may be missing my point here.

      IVR has essentially no credit losses embedded in its credit portfolio, yet trades like it has massive losses simply because of a temporary overreaction and huge risk version in the credit markets. It has no real losses in its agency book but trades like the mark to market losses on its hedges are permanent. Higher interest rates will erode part of the agency gains but not a lot as the higher coupon MBS have not rallied nearly as much lower coupons. I am not looking for meaningfully higher long term rates any time soon nor am I expecting any major credit improvement or improvement in housing. I do expect that market particpants will ultimately separate good credit assets from bad and price them accordingly.

      The large banks have lots of subordinated exposure, home equity, credit card, subprime, CDS, etc. which IVR has no exposure to. IVR just has a clean book yet trades like it doesn't. As credit markets settle down spreads on higher quality assets will narrow in a big way driving significant BV accretion. Plus I get a big dividend to wait until that actually occurs.

    • Yes, the backup in 5 year swaps helps a little (although your next BV calculation will be for Q end and will not capture the move you reference), but the carnage in CMBS and now NON Agency is going to swamp any marginal improvement in swaps.

      You are simply uninfirmed or deliberately innacurate when it comes to the "seniority" of the CMBS ( it is AJs and AMs and BBB to a large degree, and thise bonds have been DESTROYED on Markit), the non agency stuff--reremiced or not--is now getting taken apart and even your Agency is not all specified pools and thus immune to the spike in CPRs we are in the middle of. that trade has been crowded for months, and all the new $ they raised and plowed into Agencies to underhedge the swap book went into the coupons that are prepaying fastest.

      The book is 13-14, on its way to single digits.

      If Non Agency really rolls over so will this Company. You LONGS should PRAY for a nuclear REFI plan. Without it, California JUMBOs are dead meat.

      ASK FITCH.

      • 2 Replies to entropy_98_98
      • Check out the slides IVR put out for the JMP Conference on CMBS referencing credit enhancement in the portfolio. The lower tranches they own are the CMBS 2.0 of the late 2010 and early 2011 vintages -- which are newly originated loans based on much tougher underwriting standards with current LTVs in the low 60s. Lots of subordination here. The older vintage CMBS IVR holds are various AAA tranches (AJs and AMs and Seniors), but no BBBs or As or AAs, that have been cherry picked in the midst of and after the financial crisis with decent subordination and lots of paydowns having already happened which enhances credit protection further for what is still remaining in the pools. Remember these loans are 5+ years old already. The chart with IVR's current credit support should be illustrative as to the high level of protection embedded in this portfolio. 75% of the CMBS has credit support above 10% with nearly half the portfolio having above 15% credit protection. So while there has definitely been spread widening due to a massive flight to quality the underlying portfolio should experience no credit losses. IVR buys these based on loan level data so looking at Markit doesn't tell the whole story. Also, while painful in the temporary hit to BV this is a $1.2 bil portfolio that has probably been already marked down by $150-200 mil or so on a mark to market basis. I don't think we get another $200 mil hit, and even if it happens it should ultimately reverse as these are MONEY GOOD ASSETS.

        The non-agency rollover, as you put it, would have to be very dramatic for any credit losses to be sustained by IVR. The Re-Remics, which account for 60% of the portfolio, are 3 year average duration securities with enormous subordination (former AAAs bought at a big discount by someone else, then re-securitized with IVR buying the senior AAA piece)--probably 50%+ from the original LTV. The legacy jumbos and Alt-As are already 4+ years old (hence further principal paydowns have already happened) and were cherry picked from specific pools and purchased at around 70 cents on the dollar. Payment speeds have been running ahead of expectations here. Again, the panicky market is leading to some negative marks that will prove temporary but the panic will subside ultimately given that these assets are MONEY GOOD as well.

        Finally, the agency MBS book held here is heavily weighted to higher coupons and payment protected securities such as low balance, investor owned properties, etc. These have performed well but should be valued even higher by the market as CPR speeds have remained lower and pay-ups for these securities have continued to rise.

        The big picture is that there are big negative mark to market hits that will ultimately subside to reveal a much higher BV than the current stock price reflects. There is plenty of liquidity here to post additional margin and there are still plenty of unencumbered assets. If IVR wanted to temporarily reduce its leverage and wait out the panic in the market that has caused its BV to be depressed (and perhaps somewhat further near term) it could easily do so even if it meant a temporarily lower dividend (but even at say $2.50 it would still be a high teens yield and that would rise back up when the panic passes).

        I simply don't subscribe to the doomsday scenario you paint as I am confident the underlying asssets will be fine and there are many levers these guys can pull to ride out the storm. My time horizon is 2-3 years, and I think I can double my money here if you include dividends and capital appreciation from current levels. That doesn't mean the stock can't go lower first but ultimately the fear trade will subside, the higher quality credit assets will rally, the swaps will roll off, and I get paid well to wait in the meantime.

      • Took your advice and checked Markit

        CMBX AAA DIWN 10 points since quarter end
        CMBX AM DOWN 20 points since quarter end
        CMBX AJ DOWN 25 points since quarter end

        IVR owns ALL of these securities AND BBBs which are too ugly to mention

        AS for Non AGENCY

        PRIMEX FRM is down 6 points since quarter end ACCELERATING in recent dats

        PRIMEX ARM is worse, down 7-8 and REALLY accelerating as resets in ARMs hit California JUMBOs.

    • Finally, a post with substance. Thank you.

    • Thank you for a well researched report. Lately we have been getting a lot of posters with nothing to say except IVR is eithr going up or down with nothing more to add.

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