Real estate investment trusts (REITs) that purchase mortgage-backed securities are playing a prominent role in the current market turmoil, dumping their holdings in response to margin calls by their banks. The mortgage Reits entered the coronavirus crisis owning an estimated $500bn of bonds backed by property loans and have come under pressure because they use short-term borrowings to squeeze higher returns from their holdings. “
Shares in Annaly Capital and AGNC Investment, the two largest mortgage Reits, have been cut in half in recent weeks. A smaller peer, AG Mortgage, fell 38 per cent on Monday after saying “it does not expect to be in a position to fund the anticipated volume of future margin calls under its financing arrangements in the near term”.
The mortgage Reits fund themselves by pledging bonds in return for cash in the short-term funding, or “repo”, markets, and have assets valued at as much as 10 times their common equity. The high leverage allows them to pay dividends well in excess of the yields on the bonds they buy. Because of their legal structure, the Reits are obliged to pay out substantially all of their earnings to shareholders.
The falling value of their mortgage bonds, driven down by the rush for cash and worries about defaults as the coronavirus leaves homeowners unemployed, has pushed the Reits past their leverage limits, forcing them to sell bonds into an already weak market.FINRA arbitration is a dispute resolution process offered by the Financial Industry Regulatory Authority (FINRA) to resolve conflicts between investors, brokerage firms, and individual brokers. Unlike traditional court litigation, arbitration is typically faster and less formal. In this process, an impartial arbitrator or a panel of arbitrators listens to both parties’ arguments and evidence before making a binding decision. This method is often chosen for its efficiency and lower costs, making it an attractive option for investors seeking resolution without the complexities of a court trial. The arbitration process is governed by specific rules and procedures, ensuring a fair and equitable hearing. While the decision is final and generally cannot be appealed, parties can still settle the dispute before the arbitration concludes. FINRA arbitration serves as a crucial mechanism in maintaining market integrity and protecting investors’ rights.