Agency mortgage REITs discuss post-Fed MBS market

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Related Companies Annaly Capital Management (NLY) Capstead Mortgage Corp. (CMO) Chimera Investment Corp. (CIM) Hatteras Financial Corp. (HTS)

Related Documents Transcript (ET) Chimera Investment Corp. 11/3/2009 Transcript (ET) Capstead Mortgage Corp. 10/29/2009 Transcript (ET) Annaly Capital Management 10/29/2009 Transcript (ET) Hatteras Financial Corp. 10/28/2009 Press Release (PR) Annaly Capital Management 10/9/2009, filed on 10/9/2009

Related Articles 11/4/2009 Newsflash: Fed funds rate unchanged

The Federal Open Market Committee on Nov. 4 reiterated the Federal Reserve's intention of gradually slowing the pace of its purchases of both agency debt and agency MBS as agency mortgage REITs continue to express their preparedness for that apparent eventuality.

The Fed continues to expect, as it announced in September, that its planned $1.25 trillion in MBS purchases and $175 billion in agency debt purchases will be completed by the end of the first quarter of 2010 to promote a smooth transaction in markets.

"The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets," the FOMC said in its Nov. 4 statement.

Mortgage REITs appear to be prepared for a variety of outcomes come March 31, 2010.

"We don't know for sure when the Fed is going to stop their MBS purchases and what the impact will be on [adjustable-rate mortgages] specifically, but we do need to be in an opportunistic position when they do," Hatteras Financial Corp. CEO Michael Hough said on an Oct. 28 conference call. "In the event the spreads widen for any reason and ARMs become more attractive to us, we have plenty of room to grow the portfolio."

Annaly Capital Management Inc. Chairman and CEO Michael Farrell provided his unique take on the situation on an Oct. 29 call, saying the Fed had done "an admirable job" in supporting the mortgage market. But, he added, "We think that this is going to be an extremely volatile exit."

At the same time, Annaly had earlier described the September FOMC announcement as "unquestionably" positive for agency MBS for several reasons. First, the company said, the announcement that the Fed would buy all the $1.25 trillion authorized under the program would ease concerns about its buying less than the committed amount. Second, the Fed would have to purchase $70 billion per month to complete the program by March 2010, an amount that equates to about 70% of total origination. Lastly, Annaly said, the Fed would avoid a "potentially dramatic sell-off in both the MBS and Treasury market via duration coming into the market" as a result of its continuing to purchase securities through March 2010.

Beyond March 2010, Annaly predicted, wider spreads are likely. But just how wide remains to be seen.

"You can't assume that you know exactly what's going to happen when the Fed does stop," Annaly Chief Investment Officer Wellington Denahan-Norris explained on the company's Oct. 29 call. "We just want to be in a position to take advantage of what we think may happen. We could be wrong. We have to be prepared to be wrong."

Capstead Mortgage Corp. CEO Andrew Jacobs commented briefly during an Oct. 29 call with his thoughts regarding what might happen come March 2010.

"I don't think anybody is expecting them to start dumping pass-throughs on the market," he said in reference to agency pass-through securities.

Chimera Investment Corp. executives said on a Nov. 3 conference call that they are staying in a relatively defensive position for the time being, even given the company's focus on nonagency paper, citing the potential risk that the government "somehow bungles its exit from the agency market." The Chimera executives said they do not expect the Fed to sell agency MBS in the marketplace. Rather, they believe the Fed will "buy them, pull them and take them out of the market."

The consistency of the Nov. 4 FOMC statement with its September statement on the topic of agency MBS purchases was hardly the only noteworthy development to emerge from the document as it pertains to mortgage REITs. The FOMC's comments on monetary policy served to ameliorate, at least for the time being, concerns about higher interest rates in the near term.

"The Committee … continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period," the FOMC stated.

That is good news for a sector that generally stands to benefit from continued accommodative monetary policy.