NEW YORK (
) -- Fears of a government-induced increase in mortgage refinancing activity, which have put pressure on mortgage real estate investment trusts (REITs), are excessive, according to a pair of analysts following the sector.
Mortgage REITs had already been taking it on the chin even before the Nov. 6 presidential election, but the pain has only accelerated since then. Since Sept. 21, the
Market Vectors Mortgage REIT ETF
had dropped 14.36%, including a fall of 5.21% since the election, going into Thursday open. Two of the most widely-followed mortgage REITs,
American Capital Agency Corp.
Annaly Capital Management
were off their mid-September highs by 21.9% and 26.2%, respectively.
The sector rebounded a bit on Thursday, however, as MORT was up 3.08% in mid-afternoon trading.
Mortgage REITs use leverage to buy mortgage backed securities (MBS), profiting off of the difference between their yield and their borrowing costs. They pay out a hefty dividend--frequently yielding in the double digits.
Keefe Bruyette & Woods analyst Bose George believes fears over refinancing are an important reason for the selloff. An increase in refinancing is negative for mortgage REITs because it forces them to reinvest high-yielding MBS that they bought in previous years at interest rates that have fallen to new lows.
In a note published Thursday, George cites investor concern over proposed legislation from Sen. Barbara Boxer (D., Calif.) and Robert Menendez (D., NJ) that would increase refinancing opportunities through the Home Affordable Refinance Program (HARP).
"While these changes would increase the pool of potential HARP borrowers and make HARP refinances easier, we believes that mortgage industry capacity constraints are likely to limit the ability of originators to meaningfully increase HARP volume," George writes.
For the same reason, George isn't too worried about concerns President Obama will replace Federal Housing Finance Authority director Ed Demarco--a staunch opponent of many refinancing programs. Again, George doesn't believe banks can handle all that much more refinancing.
On Tuesday, another analyst, Gabe Poggi, called refi-related fears "the largest source of anxiety" coming from investors in mortgage REITs. He cites the argument from his Washington-focused colleague, Ed Mills, who argues replacing DeMarco will be more difficult than investors realize.
"We believe it is underappreciated how difficult it is to replace the head of FHFA," Mills wrote the day after President Obama won the election. "The statute establishing the agency requires any vacancy to be filled internally, all from positions held by individuals philosophically similar to DeMarco. The President can attempt to appoint a new director, but that requires Senate approval - something that will be difficult with Senate Republicans still with enough votes to block confirmations. A recess appointment is possible, but we have not had an official congressional recess in almost 2-years. The recess appointment of Richard Cordray to head the CFPB was different in that there was a vacancy, which does not exist here," Mills wrote.
Even if DeMarco is replaced, any new director would be limited by the charter governing FHFA oversight of government sponsored enterprises
, according to Poggi. He contends the charter would have to be changed "before anything more material could likely be accomplished," to further spur refinancing, and that such a change "would take significant time."
Finally, Poggi argues the Obama Administration will be reluctant to tinker further with HARP. While the first revision of HARP (widely referred to as HARP 2.0) was a success, a second revision would likely spur MBS investors to demand higher coupons to compensate them for "the risk of constant government intervention."
Refinancing in 2012 is expected to total $1.2 trillion--a 28% jump from 2011,
according to Oct. 24 forecasts from the Mortgage Bankers Association
. The group expects that number to drop "to $760 billion in 2013 and $360 billion in 2014 as rates increase and fewer borrowers find it beneficial to refinance," according to the Oct. 24 statement.
Written by Dan Freed in New York
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