Sober Look | Sep 12, 2012 03:02AM ET
With the GSEs (Fannie Mae and Freddie Mac) forced to shrink their balance sheets (this discussion ), a great deal of the new capital for these products is coming from ETFs. With the popularity of mREITs, REIT ETFs growth has also exploded. Take for example Market Vectors Mortgage REIT Income ETF (MORT). The chart below shows MORT's shares outstanding growth since the ETF's launch.
What's more, they tend to finance long-term mortgage securities with short-term repo. Typically they borrow from banks for 60-90 days and just roll their loans. Banks don't have to use much capital for securitized short-term loans, so they generally extend credit lines to REITs with no trouble. The repo lines to mortgage REITs have grown as quickly as the assets. The financial crisis of 2008 had little impact on the growth, which has been close to exponential.
At the same time banks will get concerned about their massive exposure to REITS via repo lines and will inevitably require more collateral for the same amount of repo loans or shrink/pull the credit lines altogether. This deleveraging could result in a disastrous scenario of forced selling and rising mortgage rates - and as in 2008 falling mortgage securities prices will precipitate more forced selling.
It is great to see the private sector step in for the GSEs to meet some of the excess mortgage demand. But unlike banks who are limited in their ability to grow leverage (although it is quite high) and have access to deposits and the Fed for funding, the deleveraging of these "shadow banking" entities could pose a significant risk to the US mortgage markets (and potentially the economy as a whole) should interest rates begin to rise.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.