First, its was AG Mortgage Investment Trust which on Friday said it failed to meet some margin calls and doesn’t expect to be able to meet future margin calls with its current financing. Then it was TPG RE Finance Trust which also hit a liquidity wall and could not repay its lenders. The, on Monday it was first Invesco, then ED&F Man Capital, and now the mortgage mayhem that erupted as a daisy-chain of mortgage REITs suddenly imploded, has taken down MFA Financial, whose crashing stock was halted after the company reported that “due to the turmoil in the financial markets resulting from the global pandemic of the COVID-19 virus, the Company and its subsidiaries have received an unusually high number of margin calls from financing counterparties, and have also experienced higher funding costs in respect of its repurchase agreements.”
As a result of this liquidity run, at the close of business on March 23, 2020, “the Company did not meet its margin calls.”
Further, on March 23, 2020, the Company notified its financing counterparties that it does not expect to be in a position to fund the anticipated volume of future margin calls under its financing arrangements in the near term as a result of market disruptions created by the COVID-19 pandemic.
How much money are we talking about here? Approximately $10 billion: “The company’s aggregate obligations under its various financing arrangements is about $9.5 billion.”
And since its only other alternative is immediate Chapter 7, the company said that it is in discussions with its financing counterparties with regard to entering into forbearance agreements.
Why is the m-REIT house of cards suddenly tumbling? The simplest answer is that the market is suddenly freaking out that as a result of the coronavirus depression, homeowners will not be able to pay down their mortgages, created a liquidity cascade that goes from debtor, to the various intermediary entities, all the way to the original creditors. And the m-REITs and various other mortgage arrangers, which are some of the key intermediaries, are caught smack in the middle.
As Bloomberg explains, investors in MBS are suddenly facing the perfect storm of collapsing asset values, a frozen market and panicked client redemptions as “holders of mortgage-backed securities are fielding redemption requests from clients, margin calls from jittery counterparties and drops in their valuations, forcing the funds to solicit offers on billions in assets in emergency sales over the weekend” in the form of numerous BWICs as highlighted earlier.
“The pain continued Tuesday with Invesco Mortgage Capital, a real estate investment trust that invests in mortgage-backed securities, also saying it’s no longer able to fund margin calls. If forced sales accelerate, bond prices could fall and put pressure on other investors to mark down or sell their holdings too.”
Besides crushing those long various MBS, that fallout from the ongoing liquidity squeeze is popping up in far more bizarre ways across the property market, including higher interest rates for home loans “leading listing companies such as Zillow to suspend buying programs and prompting industry players from real estate brokers to mall owners to plead directly to President Donald Trump for relief.”
While the Fed did step in early on Monday, when it surprised markets with its announcement that it is buying unlimited amounts of Treasury bonds and mortgage securities to keep borrowing costs low, the Fed’s intervention has limits, with the “central bank focusing on securities consisting of so-called agency home loans and commercial mortgages that were created with help from the federal government.”
There are about $10 trillion of U.S. mortgage-backed securities, of which about 14% don’t meet that criteria, according to the Securities Industry and Financial Markets Association. According to Bloomberg calculations, when that total is compared to the Fed’s of about $16 trillion in total U.S. mortgages, “the central bank’s announcement suggests that roughly half of all property loans will be eligible for purchase.”
And while the Fed is trying to restore order, so far all there is, is panic:
Flagstar Bancorp, one of the nation’s biggest lenders to mortgage providers, said Friday it stopped funding most new home loans without government backing. Other so-called warehouse lenders are tightening terms of financing to mortgage providers, either raising costs or refusing to support certain types of home loans. One prominent mortgage funder, Angel Oak Mortgage Solutions, said Monday it’s even pausing all loan activity for two weeks. It blamed an “inability to appropriately evaluate credit risk.”
Also retreating: A new generation of sophisticated home flippers, who use data and debt to buy and sell homes in quick order. Zillow said Monday it has stopped purchasing homes, following rivals SoftBank-backed Opendoor and Redfin Corp. “No one can say what a fair price is right now, so we’re not making any instant offers,” Redfin Chief Executive Officer Glenn Kelman said last week.
While in normal times banks, who benefit from the Fed’s QE would gladly step in and buy from this firesale, these are anything but normal times, as banks are now also facing liquidity pressures – such as clients drawing down on tens of billions in mortgages – making it hard for them to step in by making or purchasing mortgages others are dumping.
As Bloomberg concludes, for Wall Street, the moment that crystallized the extent of problems in mortgage markets came Sunday, when some firms rushed to raise cash by flooding bank clients with BWICs requesting offers for their bonds backed by home loans. “Eager sellers included investor AlphaCentric Income Opportunities Fund and Annaly Capital Management Inc., a mortgage REIT.”
“I ran dealer desks for over 20 years,” said Eric Rosen, who oversaw credit trading at JPMorgan Chase & Co., ticking off the collapse of Long-Term Capital Management, the bursting of the dot-com bubble some 20 years ago, and the 2008 global financial crisis. “And I never recall a BWIC on a weekend.”
Eric may not, but here at Zero Hedge we do recall weekend BWICs: they took place on September 15, 2008. The next day Lehman filed for bankruptcy.