Mortgage securities rebound as Fed starts buying, concerns persist

By Herbert Lash
People walk wearing masks outside The Federal Reserve Bank of New York in New York

By Herbert Lash

NEW YORK (Reuters) - Mortgage-related shares rose and volatility dropped on Friday, a sign moves by the Federal Reserve had some positive effect on liquidity and coronavirus-related panic about securities linked to commercial and residential loans.

Mortgage Real Estate Investment Trusts (REIT) have been slammed this month on concerns that non-payment of loans will rise as U.S. economic activity grinds to a halt, and that the Fed is focusing its attention on thawing the market in U.S. Treasury debt and not enough on mortgage-backed securities.

Last weekend, Thomas Barrack, executive chairman of real estate investment company Colony Capital Inc. <CLNY.N>, said the U.S. commercial real estate mortgage market "stands on the brink of collapse", and predicted "domino effect" of catastrophic consequences if banks and the government didn't take immediate action on COVID-19.

On Friday, in the first open market operation with a new commercial mortgage-backed securities (CMBS) program, the New York Fed bought $1.04 billion of the $1.83 billion that was offered in a sign of eagerness by dealers to offload. The Fed said it would buy $3 billion in agency CMBS next week in similar operations.

Late Friday it said it will buy up to $40 billion a day next week of agency MBS, which are issued by National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac).

The spread between the performance of the 10-year U.S. Treasury note and indexes that track CMBS have narrowed since Tuesday, suggesting recent Fed actions have stopped a plunge in mortgage REITs - companies that issue loans or buy commercial or residential mortgage-backed securities (MBS) as investments.

(Graphic: CMBS performance with Fed moves, https://fingfx.thomsonreuters.com/gfx/mkt/13/4048/4004/Pasted%20Image.jpg)


The Fed on Monday rolled out an extraordinary array of programs to backstop an economy reeling from restrictions on commerce after its first emergency effort on March 3 and other actions failed to tamp down fears not enough was being done.

By Tuesday the Fed's big "bazooka" moment had turned around the U.S. equity markets, which began the biggest three-day rally since the Depression for the Dow industrials as a $2 trillion stimulus bill in Congress also gained traction.

Invesco Mortgage Capital <IVR.N> shares closed at $4.69 on Friday after plunging from a two-year high of $18.28 last month to a low of $2.46 on Wednesday. The stock only once before this month had traded below $10 a share in more than a decade.

MFA Financial <MFA.N> shares jumped 9.4% to $1.86 on Friday, up from an all-time low of 32 cents on Tuesday, after it too plummeted 96% from February. A prior low was $3.98 during the depths of the financial crisis in October 2008.

While the market turned around for mortgage REITs, analysts say more pain may come as some tenants are likely to stop paying rent when the economy slides sharply in April and May.

Rental revenue will go down as will occupancy levels, which may not be true for large enterprise tenants but it certainly will be challenging for the small, mid-sized businesses, said Ken Leon, director of equity research at CFRA who covers both banking and REITs, primarily in the office sector.

"The second quarter is going to be pretty ugly for commercial real estate," Leon said.

"Even in an optimistic scenario, which would be a V-shaped recovery sometime in the third quarter, the second quarter is probably going to be negatively impacted."

How much debt is refinanced or payments delayed is still unknown, said Kevin Barker, a senior research analyst at Piper Sandler who covers mortgage and consumer finance companies.

The market had experienced forced selling on top of forced selling, which caused markets to be irrational and companies with good assets were forced to sell, Barker said.

"This is a story that causes a major change to how the market treats mortgage REITs going forward and how they view leverage and funding. We might have a much different industry six months from now than we do today," Barker said.



(Reporting by Herbert Lash; Additional reporting by Chuck Mikolajczak, Sinead Carew, Lance Tupper and Jonelle Marte; Editing by Alden Bentley and Daniel Wallis)