The carnage in the mortgage REIT sector that began in May has extended into June, as investors flee and the trusts watch their stock prices and book values plummet. Nerves are still jangling from Fed Chair Ben Bernanke’s comments regarding the end of quantitative easing, and it doesn’t look like things are going to quiet down any time soon.
All mREITs are taking it on the chin
The agency crew, led by heavy hitters Annaly Capital Management, Inc. (NYSE:NLY), American Capital Agency Corp. (NASDAQ:AGNC), and ARMOUR Residential REIT, Inc. (NYSE:ARR), have all been close to hitting 52-week lows, but the blood-letting hasn’t stopped there. Even hybrid mortgage REITs, which also buy some non-agency paper, have plunged, as well. Two Harbors Investment Corp (NYSE:TWO), which enjoyed such a nice lift post-earnings about a month ago, recently sunk to new lows, and Invesco Mortgage Capital Inc (NYSE:IVR) has also slipped, even after its CIO’s recent show of faith, making a sizable insider purchase of stock less than two weeks ago.
In a way, the sector shot itself in the foot by staging a massive sell-off of mortgage-backed securities, which have fallen in value as long-term interest rates have risen, and markets price in a Fed retreat from QE3. Of course, the selling caused prices to drop further, creating a kind of sinkhole that sucked in the mREITs, pulling them under.
This action is exactly what the Financial Stability Oversight Council has been fretting about, though its main concern is destabilization of markets, rather than crashing mREITs. Despite the girth of Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC), mREITs as a group hold only about 5% of all MBSes. Even so, the FSOC is concerned about their ballooning pile of assets, and is considering tightening regulations on the entire sector.
How long can this continue?
Since much of the market volatility has centered on Fed policy as it reacts to the health of the economy, it seems that Friday’s upcoming jobs report for the month of May will very likely keep things wobbly for the rest of the week — and, depending upon the unemployment picture, far beyond that.