Mortgage Firm Struggles to Meet Margin Calls as Market Turmoil Continues
AG Mortgage Investment examining asset sale amid coronavirus pandemic
An investment fund focused on mortgage investments is struggling to meet margin calls from lenders and is examining a possible asset sale, the latest sign of turmoil in crucial areas of the credit markets.
In recent days, a cascade of selling has hit the market for mortgage bonds, helping spark unprecedented action by the Federal Reserve on Monday morning to aid markets. The AG Mortgage Investment Trust, MITT -39.01% Inc., a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, the company said.
“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties,” AG Mortgage said Monday morning. The company said it had met “or is in the process of meeting all margin calls received,” though it acknowledged missing the wire deadline for some on Friday.
The missed deadline was due to a logistics glitch, according to someone close to the matter.
On Friday evening, the company “notified its financing counterparties that it doesn’t expect to be in a position to fund the anticipated volume of future margin calls under its financing arrangements in the near term,” AG Mortgage said in its statement, which said the company is in discussions with its lenders “with regard to entering into forbearance agreements.”
Over the weekend, hedge funds, insurance companies and private-equity firms examined AG’s holdings, according to people close to the matter. It isn’t clear if a sale of any assets will take place. The firm’s market capital, above $700 million before the coronavirus crisis, is down to $150 million.
The company’s shares fell to $4.56 on Friday from $16.66 a month or so ago. In trading on Monday morning, the stock fell almost 40% to $2.86.
A company spokesman wouldn’t comment.
Separately, investment firms are preparing offers for assets held by other REITs, according to one of the investors involved in the AG situation.
On Monday morning, the Fed said it would support financial markets by buying mortgages and other bonds. The Fed has intervened in the mortgage market recently, buying large amounts of mortgage bonds to hold on its balance sheet. On Monday it said it would make those purchases essentially unlimited. It isn’t clear how the Fed decision would affect AG Mortgage or others in that business.
In recent days, a number of funds in the mortgage market and other areas of the bond market have moved to raise cash to meet investor withdrawal requests and shore up their portfolios. Investors often sell mortgage bonds when they need cash because they are easy to trade, despite trouble in recent days. Investors pulled record amounts of money out of bond funds last week, according to Bank of America Corp. calculations. Some $5.2 billion came out of funds that invest in mortgage-backed securities, which pool home loans into fixed income investments.
Mortgage REITs, which typically use borrowed money to juice their returns, have been particularly susceptible investments as mortgage-backed securities sold off in recent weeks. Analysts at JPMorgan estimate that mortgage REITs need to sell between $40 billion and $80 billion of mortgage-backed securities to reduce leverage, or nearly a quarter of their holdings. Their share prices have in some cases dropped more than double the broader market, with some down more than 60% so far this year.
Concern about losses in mortgage bonds could feed turmoil in the overall mortgage market that ultimately drives up borrowing costs for consumers looking to buy homes and refinance. Mortgage rates have risen in recent weeks, despite a fall in benchmark rates.
Before the market’s recent tumble, REITs had been a growing presence in the market, stepping in as investors during a time in which the Federal Reserve was reducing its holdings of mortgage bonds.