04-11-2015, 07:46 AM
(This post was last modified: 04-11-2015, 07:47 AM by hendi_alex.)
That is a naive view, IMO. MREITs don't usually fail because of defaults. They fail because of yield compression or yield inversion or they fail because mark to market for assets falls and causes covenant breaches. If mark to market becomes the issue, then the lender will own the agency paper and the REIT will no longer be in business.
None of the REITs cited IN THE PREVIOUS POST failed because of defaults. Margins were being squeezed, but mark to market and covenant breaches is what got them.
While agency paper has an implicit guarantee against default, the value of CMOs(collaterized mortgage obligations) vary depending upon market demand. The income that the holdings kick out are purely dependent upon the spread between the average lending rate received by the REIT and the short term borrowing rate tat the REIT has to pay for borrowings against the asset. As pointed out above, both of these present a serious level of risk, even to holders of agency paper.
None of the REITs cited IN THE PREVIOUS POST failed because of defaults. Margins were being squeezed, but mark to market and covenant breaches is what got them.
While agency paper has an implicit guarantee against default, the value of CMOs(collaterized mortgage obligations) vary depending upon market demand. The income that the holdings kick out are purely dependent upon the spread between the average lending rate received by the REIT and the short term borrowing rate tat the REIT has to pay for borrowings against the asset. As pointed out above, both of these present a serious level of risk, even to holders of agency paper.
Alex