Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Down Go the MREITs

The collapse of revenues at the mortgage real estate investment trusts, the so-called MREITs, is another indication that America is facing Mortgage Meltdown: Round Two. It looks as if the mortgage securities market is about to collapse again with potentially catastrophic results.

Some investors have long touted these funds that invest in mortgage backed securities as good sources of income because they have historically paid high dividends. Yet those with common sense have avoided these vehicles because they are extremely volatile.

Well, it looks like our good friend Mr. Market has proven the doubters right. Some of the most popular MREITs are going down into the death spiral fast. The revenues at some of these trusts seem to be in freefall.

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Revenue in Freefall

Annaly Capital Management (NYSE: NLY), the largest and most visible of the MREITs, has lost nearly $2 billion since September 2014. Annaly reported a TTM revenue of -$901.19 million on March 31, 2015; that’s frightening because as recently as September 2014 Annaly reported a TTM revenue of $1.059 billion. That means Annaly lost almost two billion dollars in around six months.

What’s truly scary is that it was not just Annaly. Another giant MREIT, American Capital Agency (NASDAQ: AGNC), reported a TTM revenue of -$203 million on March 31, 2015. As recently as March 2014 American Capital was reporting a TTM revenue of $1.051 billion. That means American Capital’s revenue fell by more than $1 billion in a year.

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Also hurting was Invesco Mortgage Capital (NYSE: IVR); Invesco Mortgage reported a TTM revenue of -$103.27 million on March 31, 2015. In March 2014 Invesco Mortgage reported a TTM revenue of $37.76 million.

Okay, to be fair, some MREITs were able to buck the trend; Two Harbors Investment (NYSE: TWO) reported a TTM revenue of $577.31 million on December 31, 2014. That was up slightly from December 2013, when it reported a TTM revenue of $555.59 million. Not coincidently, Two Harbors recently branched out into commercial property investment.

Why MREIT Revenue Should Scare You

The MREIT numbers should scare us because these companies make their money by investing in residential mortgage backed securities. These companies profit when mortgages are not in foreclosure and average people are making mortgage payments.
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If companies like Annaly and American Capital are hurting, it indicates that large numbers of Americans are simply not making their mortgage payments, a suspicion verified by the rising number of foreclosures, which increased by 20% in March 2015. The new wave of foreclosures and bank repossessions that started in March is already claiming its first victims, MREITs.

MREITs, like real estate in some regions, went through a bubble in recent years. As recently as December 2013 Annaly reported a TTM revenue of $3.97 billion. Well, now its mortgage backed securities have proven to be worthless; if the mortgages are worthless, one has to wonder about the value of the real estate that backs them.
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Attack of the Zombie Assets

Is Mr. Market telling us that a lot of American real estate is worthless and that a lot of the mortgages out there are not worth the paper they are printed on? It sure sounds like it. Mr. Market might be insane, but he does not lie.


One reason for Annaly’s problems could be that a lot of those mortgages are zombie assets; that is, the amount of money owed on the assets exceeds their actual value. The assets continue to live on because nobody can afford to liquidate them, hence the term zombie assets.

It looks as if another bubble has burst, and that bubble could be a signal that the entire real estate market could collapse again. One has to wonder how long this insanity and these zombie markets can continue.

My prediction is that Annaly is very close to the death spiral and American Capital Agency will soon follow it. I just hope the collapse of these trusts does not bring down the entire real estate market and trigger a new financial crisis.