Another DFR update - I know you are probably sick of reading notes about DFR but this will capture some thoughts about the market too.
DFR dropped 11% today, which doesn't look so bad relative to the 60+% decline of Thornburg (TMA) mortgage. They announced after the close that they were delaying their dividend payment to a point when their liquidity would be better -- not a good sign really especially when you try to convince people that your book value is near $14 and your stock is around $8 (if your book value is so good, why are you having liquidity issues). TMA does jumbo loans -- those that are larger than Fannie and Freddie are legally able to buy/securitize.
You would think jumbo loans would be fine given that these are for wealthy people -- you would be wrong. These jumbos are also facing liquidity risks just like other parts of the mortgage market. These are loans that right now are having a tough time finding investors -- basically anything that isn't guaranteed by Fannie, Freddie and Ginnie is struggling. So what is the difference between TMA and DFR? One major difference is that TMA originated its own loans -- they have offices and loan officers that convince buyers to use them for their mortgages. DFR is just an investment pool -- they buy mortgage backed securities that are based on mortgages originated by someone else. The difference is in terms of what liquidity requirements there are. Originators are being attacked more. I don't know for sure that origination is the problem for TMA but it makes sense given that has been the problem for many others in the mortgage market.
TMA's book value was down to $14 from $19 at the start of the quarter -- quite a drop in such short time frame. I would not be suprised if DFR's book value has also been hurt this quarter -- life isn't just roses for them I assume otherwise the stock wouldn't be $7. I still think they have the liquidity to make it but one never knows -- diversification matters. David Merkel raised the issue of increased margin even for agency and AAA prime quality mortgages today -- if that is true it puts DFR in more pressure. TMA, just like LUM, said they were fine until the last week -- that's how a liquidity crisis works -- it sneaks up on you when you get complacent and takes you out before you know what hit you. If it happened slowly, people would be able to react and save themselves.
the saga will continue....
2 comments:
I'll share it with you first, Kyle, though I will be posting it at my blog this evening. Margin levels have doubled for both agency and AAA collateral 1.5%-> 3.0% and 5%->10% respectively. My calculation is that it moves the cushion that DFR has from $228 million to $30 million. But there is at least still a cushion; not like some, as that great moral philosopher Eeyore might say.
This is not good, but so long as margin requirements don't increase any further, DFR should not be killed. That said, there is not a lot of provision for adverse deviation here. This will only rationalize when companies with balance sheets find the mortgage securities so compelling, that the market clears. After that, the total mortgage market will rationalize, in order of increasing risk.
Thanks for the heads up David. I left a comment on your blog and paraphrased it and added some other points into recent post of mine too.
If DFR uses up their extra liquidity this month, I wonder if the mortgage market will have normalized by the time they have to do another repo in September? should prove intersting. Guess the question would be at what price do banks or others with balance sheets start buying MBS or enter into repos? Would that price level save DFR?
Kyle
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