NEW YORK--(BUSINESS WIRE)--Given their reliance on repo funding, U.S. agency mortgage REITs (mREITs) and other leveraged investors could face pressures to liquidate some of their MBS holdings if repo lenders were to tighten the terms and availability of funding, according to Fitch Ratings in a new report. Such a deleveraging scenario could in turn create a ripple effect that extends to the broader mortgage markets as a whole.
The potential catalyst for agency MBS repo disruptions could be market-driven, such as a short term spike in interest rates. Or, the disruption could be precipitated by increased risk aversion among repo lenders. In any event, a repo market disruption could compel agency mREITs to liquidate some MBS holdings, given repos on average comprise about 90% of their liabilities, based on Fitch's sample of five of the largest agency mREITs.
Agency mREITs rely on repo funding from dealer banks, who in turn borrow through the triparty repo market. U.S. money market funds, known for being short-term risk-averse investors, are major repo lenders to dealer banks within the triparty market. Therefore, risk aversion by either dealer banks or money funds could negatively affect mREITs' repo funding terms and availability.
If, as a result, mREITs were compelled to deleverage and liquidate some of their MBS holdings, this incremental selling pressure could affect MBS pricing. Recent research by the Federal Reserve Bank of New York, for example, indicated that a one-day liquidation of more than $4 billion in agency MBS could drive price declines.
Thus, a repo funding disruption in which leveraged MBS investors need to liquidate some of their holdings could create negative knock-on effects for the $6.7 trillion agency MBS market more broadly. Major holders include U.S. commercial banks, with more than $1.3 trillion in agency MBS as of March 2013.
'Shadow Banking Mortgages: mREITs and Repos' is available at 'www.fitchratings.com' or by clicking on the above link.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Shadow Banking Mortgages: Agency mREITs and Repos