Here’s what Annaly Capital could do with the $ 2.3 billion she just raised
One of the toughest challenges for the US government since the Great Recession of 2008-2009 has been to rebuild the mortgage financing system. During the crisis, Fannie Mae and Freddie mac were saved by the government, which took a 79% stake in the companies. Since then, almost all mortgage loans issued in the United States have been guaranteed by the American taxpayer.
The government recently took a step in reducing its footprint by limiting guarantees for investment properties. What does this mean for Annaly Capital (NYSE: NLY), a Mortgage Real Estate Investment Trust (REIT)?
Annaly sells her commercial mortgage portfolio
Annaly Capital recently announced that it has entered into a deal to sell its commercial mortgage operations to investment firm Slate Asset Management for $ 2.3 billion. This will include investments in equities, loans and commercial mortgage-backed securities. Annaly will redeploy this capital into residential and corporate assets. This transaction is somewhat perfectly timed, given the change in government policy.
The government wants to limit its guarantee of investment real estate loans
In the final days of the Trump administration, Treasury Secretary Steven Mnuchin sent a letter to the Federal Housing Finance Agency (Fannie Mae and Freddie Mac’s curator) urging them to limit the number of residences to 7%. secondaries and government-insured investment properties. of the wallet. This created a reaction in the mortgage markets which made these loans more difficult to obtain and much more expensive. The rates have increased by around 0.75% typically for these types of loans.
Real estate investment loans have been profitable in the past
According to the Urban Institute, these loans were incredibly profitable for Fannie Mae and Freddie Mac, even before the rate hike. The originators who still wish to grant these loans are looking for a new outlet. Mortgage REITs like Annaly will be the perfect buyers. Investment home loans generally require the borrower to make a 25% down payment and have a good credit rating. Professional real estate investors aren’t likely to leave a property when they’ve invested so much equity, so these loans are pretty solid credits.
Second, the directive to Fannie Mae and Freddie Mac could easily be removed with a stroke of the pen from Treasury Secretary Janet Yellen. The Treasury could just ask the FHFA to remove the restrictions and nothing will change. If Annaly had a portfolio of these loans, they would reap an exceptional gain as these loans would suddenly become more valuable as they can now be guaranteed by the government. So mortgage REITs like Annaly get a great risk-adjusted return if nothing changes, and a bargain if they do.
The goal is to reduce the government’s footprint in the mortgage market
Ultimately, the government hopes the move will revive the private label mortgage-backed securities market, which collapsed during the financial crisis. This is generally a bipartisan consensus that the taxpayer should not bear substantially all of the credit risk in the US mortgage market, and certainly not for investment property or vacation homes. If the directive is pushed back in Washington, it will be the other high risk loan limits (in other words, low credit rating and low down payment loans) that are often targeted at first-time buyers. House.
The mortgage REIT industry generally doesn’t like the volatility of the bond market, and the past year has been nothing but volatile. That said, a new asset class of mortgage lending (loans that comply with government guidelines but not insured by the government) is developing, which should offer an attractive risk / reward mix for the industry. Annaly negotiates with one to two digits dividend yield, just below the book value. Income investors should take a look. Annaly is one of the my CAPS choices.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.