Daily Management Review

Post Fed Purchase Mortgage REIT Rebound, Do We Stop Worrying?


Fed’s purchase move brings in some “positive effect on liquidity” besides lightening the panic stricken securities related to loans.

On last Friday, mortgage related shares fell whereby indicating the fact that the moves taken by the Federal Reserve had brought in some “positive effect on liquidity” as well as releasing the “coronavirus-related panic about securities linked to commercial and residential loans”.
This month, “Mortgage Real Estate Investment Trusts”, in short REIT, has been criticised due to the fear of rising “non-payment of loans” while the Fed focusses on “thawing the market in U.S. Treasury debt and not enough on mortgage-backed securities”. According to last week’s statement of the executive chairman of Colony Capital Inc., a “real estate investment company”, the “commercial real estate mortgage market” of the U.S. stood “on the brink of collapse”.
On Friday, first New York Fed bought “$1.04 billion of the $1.83 billion that was offered in a sign of eagerness by dealers to offload”, while also informing that it would purchase “$3 billion in agency CMBS” in the coming week. Later on the same day, Fed also told that it would purchase “up to $40 billion a day next week of agency MBS”. As per Reuters:
“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”.
Even though, the market seems to be recovering for mortgage REIT, the analysts fear more struggle given the fact that some tenants may not pay following the economic slides which is likely to take place in the coming two months.
Not only rental revenue but the occupancy levels for small to “mid-sized businesses” will also reduce at the same time, while it may not be the case with “large enterprise tenants”. In the words of the Director of Equity Research at CFRA, Ken Leon:
“The second quarter is going to be pretty ugly for commercial real estate”.
“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.”
Furthermore, one of the “senior research analysts” at Piper Sandler, Kevin Barker informed that the market experience double selling resulting in irrationality whereby pushing companies “with god asset” to sell them. And Barker added:
“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”.