Capstead Repositioning Takes Toll

Capstead Mortgage Corp., Dallas, has reported that the recently completed repositioning of its mortgage securities portfolio has resulted in losses of approximately $255 million and a reduction in the company's earnings potential."Due to the continued high level of mortgage prepayments and the possibility of further declines in long-term interest rates, we concluded it was prudent to substantially reduce the company's exposure to mortgage prepayments," said Capstead chairman and chief executive officer Ronn K. Lytle. The company sold its entire $977 million investment in interest-only securities, as well as $659 million of Fannie Mae and Freddie Mac adjustable-rate mortgage securities and $656 million of Ginnie Mae ARM securities, Mr. Lytle said. In addition to the loss of $255 million, the company said it expects to take an impairment charge of about $45 million on its mortgage servicing portfolio due to high prepayment rates. "The total charge will reduce total stockholders' equity from $857 million at March 31, 1998 to approximately $705 million at June 30, 1998," Mr. Lytle said. He said the company's net interest margin is "unlikely to improve" in the near future. "Additionally, the decreased asset levels and the disposition of the interest-only securities, while prudent from a risk management perspective, have diminished the company's earnings potential," he said. Capstead's third-quarter dividend is expected to be "considerably lower" than the previous estimate of 40-45 cents, Mr. Lytle said.