CARES Act and Consequences
I find the mREIT sector to be very interesting right now. But, I have one big question.
What are the consequences of the CARES Act?
This article, which I tweeted this morning, explains the issue perfectly. The number of people that aren’t going to pay their mortgage is going to be unprecedented. While the numbers talked about originally were maybe 10%, as the article points out that is now looking like it could be 30%+ for Fannie and Freddie and 60% for Ginnie.
If those homeowners don’t pay their mortgages, the mortgage servicers have to. That is a whole lot of money that has to be forwarded on by banks and non-banks like Mr. Cooper and New Residential.
The government seems to be not really sure how to deal with this. Or is at odds with how to.
A really smart guy I talk to said it best I think – to paraphrase, he said: I don’t know how this plays out, but it is a big risk to owning anything mortgage related until it gets settled.
If this does get settled or if you want to take the risk it is going to get settled, there are some interesting opportunities out there. There are agency mREITs that are way below their already reduced book values. There are originators that are seeing great margins on refi’s. There are whole loan mortgage owners which are really badly beaten up (but probably also very risky). And there are servicers that are in the middle of the tsunami, but again, are very beaten down. All could be very interesting in the right circumstances. I added a couple small positions in the agency mREITs. I’d like to make these much larger, and if there is some clarity on how these servicer advances play out, I probably will.