Bloomberg is reporting that agency mortgage-backed bond spreads have reached their highest levels since 1986. Meanwhile, Reuters is reporting that Dutch-listed affiliate of private equity firm Carlyle Group said it received margin calls totaling more than $37 million from seven financing parties on Wednesday and was unable to meet the demands for extra collateral to cover its market positions for four of them. This branch of Carlyle invests in agency RMBS.
This news has spread fear and doubt to the agency mREITs today, who are all off sharply in early morning trade. All the agency mREITs have thus far been virtually unaffected by the credit crunch, as their paper is implicitly guaranteed by the GSEs and has remained liquid throughout the credit freeze. However, as buyers remain on strike and the credit crunch continues to travel up the mortgage security food chain, investors are nervous that even the agency mREITs may receive significant margin calls under the terms of their repurchase agreements. Should spreads widen to the point where margin calls go out to the agency mREITs, the effect would be devastating, since this group of mREITs typically does not utilize term-financing. Their entire portfolios are funded by repo agreements and warehouse lines.
Should the crisis deepen to the point that GSE-backed paper is subject to forced sales, even Fannie and Freddie could be seriously crippled by the downward mark-to-market spiral that would result.
1 comments:
There is extra pressure on the small cap mREIT stocks that has nothing to do with market forces. There is a large short interest in most of them. There is a trading pattern where OUT OF THE MONEY PUT options are being sold in conjunction with share buys that give the share buyer a lower stock price than market. They are then using these shares to depress the share prices of the stocks.
We are taking about 200,000 share and 2,000 PUT transactions where the stock is acquired for $2.00 a share below market price and then being dumped.
If you watch the option volumes, you can see these trades and the share price is cratered the next day. I known that is it happening in DFR, AFN, RAS, and others with large option volume. JRT starts trading options this month so watch for their share price to go to $1.00 along with the others.
It has nothing to do with fundamentals. It is a short covering scheme. Many small investors are getting killed while the SEC lets it happen.
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