amREIT NIrvana !!

It doesn’t get any better than this.

The long end of the curve is rallying like crazy, so new capital (and reinvested mortgage principal) won’t get quite as fat a spread, but low repo rates for the next eight quarters is simply amazing.

The FOMC sez:

The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013

On top of that, the bond market rally will result in surprise increases in book value this quarter.  That should make the nervous nellies that have been dumping amREITs feel safe getting back into the pool.

The only cloud that could ruin this silver lining is a liquidity crisis.  That won’t come from mortgage land, but could come from CDS land.  If it does happen, we could experience a disruption in the repo market.

So let’s find out how such a liquidity crisis could happen.

Most likely, that potential crisis would be because one or more of our TBTF banks, or Europe’s, has written so many CDS contracts on one or another sovereign that they can’t really pay off in the case of a default.  If one goes, of course we will have to assume that any or all of them might tip over.

And let’s not forget that the United States of America almost went into default.

Unfortunately, we have party caucus leaders in our Congress who think it is now a legitimate negotiating strategy to threaten default.  We also have a potential future Presidents who didn’t want ANY increase in our debt ceiling, which would have automatically required us to renege on some of our financial obligations.

I know my credit card companies have told me that default on anyone else’s credit card will be considered a default on their card, irregardless of my payment record with them.  Do YOU know how default for US obligations is written into the private CDS contracts JP Morgan and others have written with their clients?  Of course you don’t.  That is protected proprietary information. Even the gross size of their exposure is hidden by law (Commodities Futures Modernization Act of 2000).

And even though we might change that lack of disclosure some time soon, the cuts in funding for the Commodities Futures Trading Commission and the forced delays and extended “comment periods” for proposed regulations mean no such transparency exists yet.

Now for the good news:

After the Lehman collapse, the repo market between private counterparties did indeed shut down.

Within a week, the Fed was providing repo for MBS, for corporate bonds, and almost anything else.  And they did it for non-banks, a first in their history as a central bank and chief bank regulator.

So the mechanism already exists to save the amREITs if JP Morgan et. al. back off from providing financing.  They even have the alphabet-soup issues resolved with a couple of acronyms ready to dust off and reuse.

So welcome to amREIT nirvana.  There might be some scary days ahead, but the basic business model is going to mint earnings for the next couple of years.


PS It’s not a bad time to be a bank, either.  Most banks have an amREIT hidden inside them, after all.


4 Responses to amREIT NIrvana !!

  1. Taymere says:

    Bought mREIT call options yesterday and sold this afternoon for > 100% 24 hr gains. Also backed up the truck on mREIT shares yesterday and got in well below BV on my favorite one. The shares are for keeping not for trading.

  2. Taymere says:

    I just had the wild idea that it would be reasonable to let most the short term swaps roll off without buying more as they expire, or even to pay to terminate them and use only swaptions instead for the next two years in light of the FOMC statement that they are on hold till mid 2013. From today’s 2q11 10q AGNC SEC filing there are $8.8M and $59.6M fair value swaps expiring in less than one year and less than three years respectively. If say $50M of that is rendered unnecessary by the Fed announcement then $5BN worth of MBS would then have a NIM equal to their coupons. That would be 1/8th of the $40BN portfolio immediately yielding ~1.4% more NIM than it was when it was hedged which is a big big big deal. No wonder mREITS rallied 10% after the FOMC announcement.

    What do you guys think? Would it be reasonable just to run with only swaptions that could be exercised in the event that borrowing costs spike for reasons independent of the Fed for the next few years in light of the FOMC statement? We would still need at least swaptions in case WWIII or some other event forces the Fed to renege on it’s mid 2013 pledge. Opinions?

    • hhill51 says:

      That’s actually a key part of a number of the amREITs arsenals already. I would expect that there will be some amount of rolling off the hedges, or purchase of “2s-into-10s” and the like. Hedging is always a portfolio exercise that actually takes more attention than the long side MBS.
      You still won’t get a NIM equal to their full coupon as much as you’ll get a higher average NIM. Don’t expect too much, however, because the rally in the long end means the monthly reinvestment will be at a lower yield, with more exposure to prepayment risk down the line.

      Net net, I would expect the fourth quarter earnings and next year to stabilize about where they were in the second quarter (as a general rule)… I’m still not ready to voice opinions on a company by company basis because I may end up dealing with one or more of them professionally some time in the next year.

  3. JRC says:

    The FOMC just nailed the left end of the yield curve to the floor. After the market panic subsides, I believe the right end will flap up as investors seek yield elsewhere.

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