Mortgage REITs shore up finances as they address virus, market risks

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Mortgage real estate investment trusts are taking stock of their financial ability to respond to market shocks and other concerns stemming from the coronavirus.

Agency REITs, which were bolstered by the Federal Reserve's mortgage-backed securities purchases, may be best positioned to address the challenge, according to a report by analysts Eric Hagen and Bose George at Keefe, Bruyette & Woods.

REITs that "are prudently managing leverage and liquidity and therefore have deployable assets or unencumbered cash on hand" also are in a relatively good position to persevere despite the recent drop to a crisis-era low in valuations, the analysts said.

However, leveraged mortgage REIT investments are showing signs of strain. For example, the market volatility has triggered the mandatory redemption of UBS Investment Bank's 2xLeveraged Mortgage REIT exchange-traded notes due Oct. 16, 2024 because the value of the securities fell below $5.

Several individual mortgage REITs have released market updates as a result of the market volatility — or other factors.

PennyMac Mortgage Investment Trust, for example, recorded an 8% drop in book value as of market close on March 16 compared to year-end 2019. However, it was driven primarily by marks on agency credit-risk transfer and the Federal Housing Finance Agency's decision to wind down the front-end risk-sharing it's been doing with single-family originators, according to KBW.

Redwood Trust estimated that its book value Monday was down 5% due to market volatility compared to year-end 2019. It noted that as of Monday it had an unrestricted cash position of more than $400 million, a "diversified funding profile" that includes almost $3 billion in warehouse capacity and implemented business-continuity protocols.

New Residential Investment Corp.'s book value was down roughly 3%. It expects $125 million to $150 million in mortgage banking earnings for the quarter, according to its market update late last week.

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