This Powerful Washington Figure Is Worried About These mREITshttp://www.fool.com/investing/dividends-income/2014/06/12/this-powerful-washington-figure-is-worried-about-t.aspx Amanda Alix
June 12, 2014
Over the past few months, mortgage REITs like Annaly Capital Management (NYSE: NLY), Invesco Mortgage Capital and Two Harbors (NYSE: TWO) have been using the Federal Home Loan Banking system to access funding, and new Federal Housing Finance Agency chief Mel Watts is worried.
By setting up so-called captive insurance units, these mREITs have accessed FHLB windows in order to borrow at lower rates than they might find at other banks, all while enjoying the implicit government guarantee that the federal banking system represents.
Shadow banking, revisited
This isn't the first time U.S. financial regulators have trained their steely gaze upon mREITs, particularly Annaly. Last spring, chatter sprung up in regards to reining in these companies through new rules and regulations – with Annaly of particular concern, due to its enormous stable of assets.
Two Harbors, which was also feeling some pressure, quickly responded to the perceived threat by noting just how small the mREIT sector really was in the mortgage debt market – especially compared to Fannie Mae and Freddie Mac.
Things simmered down for a while, until the International Monetary Fund piped up last fall, calling for additional regulatory oversight of mREITs. The IMF was particularly concerned about the trusts having a destabilizing effect upon the $5 trillion repurchase agreement market, where mREITs usually obtain their short-term funding. If interest rates spiked, the theory went, companies like Annaly might sell off their huge stores of mortgage bonds as their values plummeted.
Should Watts worry?
Agency-heavy mREITs like Annaly Capital have always loved the added security of MBSes backed by Fannie and Freddie, so it stands to reason that they might be inclined to make their sources of funding a bit safer, as well.
But the method they are using is questionable. Captive insurers have been scrutini