After a $ 50 billion loss, no one comes to save the mortgage market

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(Bloomberg) – The mortgage-backed securities market was in free fall. The fear was widespread and the banks seized collateral.

For example, Tom Barrack, chairman of the real estate investment trust Colony Capital Inc., released a 1,800-word plea for the Federal Reserve to buy bonds backed by homes, cars, and other assets, and for banks to stop margin calls.

That was last Saturday. The week since then, three top investors in the sector hired restructuring advisors, two others sold $ 7 billion of debt at a discount, and publicly traded US mortgage REITs lost more than $ 12 billion in market value, resulting in a total decrease of $ 12 billion this year, at least $ 50 billion.

The slaughter shows no signs of waning. Prominent asset managers such as Blackstone Group Inc., TPG and Apollo Global Management Inc. have been drawn into the turmoil of the coronavirus pandemic, with the associated mortgage REITs losing an average of more than two-thirds of their value in 2020.

The pandemic has paralyzed trade in the United States, unemployed nearly 10 million people within a few weeks, and raised concerns that large numbers of businesses and individuals will fail to pay rent and mortgage payments. As a result, investors are fleeing residential and business debt that is not being stopped by the federal government.

Read more: Nobody knows what will happen if the rent is due on April 1st

“Nobody wants to buy these securities if the underlying contracts don’t work,” Barrack wrote in his article on Medium, especially when it remains unclear how long the disruption will last.

That said, no one except Barry Sternlicht from Starwood Capital Group, JP Morgan Chase & Co. and others looking for deals as billions of dollars in debt hit the block.

Sternlicht, which manages $ 60 billion, said in a letter to shareholders last week that its company plans to “take advantage of market turmoil” despite its publicly traded REIT shares falling 61% this year through Thursday this Thursday.

TCW, an asset manager that manages approximately $ 217 billion, buys selectively. This also applies to family offices, according to the people familiar with the transactions. And JPMorgan, the largest US bank, said Monday that it had raised up to $ 10 billion to invest in dislocated markets, including loans and real estate.

“Buyers in this market are currently about willingness and ability,” said Mark Fontanilla, who owns a structured finance consultancy for market strategies. “Things are so uncertain that you have to have stable, usable capital to be able to hold positions due to the uncertainty, especially less liquid ones.”

Why the mortgage market needs its corrections: QuickTake

In some cases, asset managers’ private funds bid to have assets unloaded from their own publicly traded REITs. New Residential Investment Corp., managed by the Fortress Investment Group, sold bonds with a face value of USD 6.1 billion. One of the buyers was a company that was also associated with Fortress, the company said in a message on Thursday.

REITs with too much leverage and too little liquidity were the most productive sellers. The leverage used to increase returns in good times is now compounding losses. This is usually done through so-called repurchase agreements or repos, through which borrowers deposit securities as security. If the value of these assets goes down, they will have to deposit more collateral or cash. If they cannot meet margin calls, banks can liquidate the assets and lower prices even further.

“I don’t think the amount of leverage people used is inappropriate,” said Eric Reilly, a partner in Mayer Brown’s banking and finance group. “To get the return investors are looking for, whether you are a public REIT or a fund, it is difficult to invest in high quality assets and get your return.”

Last month, five mortgage REITs informed investors that they could not meet margin calls and started negotiating forex agreements with their lenders. Other REITs canceled, delayed or modified dividends, or liquidated riskier parts of their portfolio. While private funds also use leverage, they often have access to liquidity through capital calls, which makes them more flexible than their publicly traded competitors. But they are not necessarily immune. Your problems may be less obvious due to the loose disclosure requirements.

“There are many more mortgage and real estate funds than mortgage REITs,” said Reilly. “There are probably a few funds in some form in need for every mortgage REIT you see.”

In the meantime, the market is waiting for the Fed to support Barrack by including non-agency mortgage-backed securities in its intervention efforts.

For an aid program to work, all parties, including non-bank lenders, must be part of the bailout program, Reilly said.

“It’s nobody’s fault,” he said. “It came out of the blue from all over the world and basically slapped people in the mouth.”

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© 2020 Bloomberg L.P.


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