WE’RE HEARING that it hasn’t been easy to be a real estate investment trust mortgage-backed securities investor recently, but some people think that won’t last, and which could make this a relatively cheap time to buy into the sector.
The second quarter was difficult for everyone in the fixed income sector, especially those involved in the mortgage-backed securities market, Gary Kain, president and chief investment officer at mortgage-backed securities real estate investment trust American Capital Agency Corp. acknowledged this week during his company’s second-quarter earnings call.
American Capital Agency Corp. recorded a comprehensive loss for the second quarter of $936 million, or $2.37 per common share, but its stock was up in the wake of the earnings, suggesting its loss was not as bad as some expected.
Kain said he thinks there has been an “overreaction” by investors in response to speculation about the duration of the Federal Reserve’s mortgage-backed securities buying. His view is that with mortgages cheaper, the yield curve as relatively steeper, and the potential for shrinking supply in the mortgage-backed securities sector if the Federal Reserve continues to buy the bonds, the securities could become attractive.
According to Yahoo Finance, the mean analysts’ recommendation for American Capital Agency Corp. at deadline this week was 2.4 on a scale from one to five on which a one is considered a “strong buy” and a five is considered a “sell.”
Kain stressed that the recent volatility in response to upward pressure on rate-indicative bond yields has indeed been a negative, and the company has been reacting to it defensively, citing historical experience showing that in such an environment prioritizing risk management has been the way to go.
The company is trying to manage its risks regardless of interest rate direction. Executives noted in the call, for example, that they have not ruled out the possibility of a drop in interest rates that could cause the prepayment risk to recur. Many have become less concerned about this risk due to recent increases in rate, but that could change quickly, they noted.
While some have raised questions about risks in the financing area Kain said financing has been readily available. Losses on MBS have been greater in the generic mortgage-backed securities than in those that trade outside the main TBA market as specified pools, he noted. There will be more pressure on the sector if interest rates rise than if they fall, Kain said.
Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.
