The Wall Street Journal: Mortgage firm struggles to meet margin calls amid market volatility

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Several investment funds focused on mortgage investments are examining assets sales, and at least one is struggling to meet margin calls from lenders, the latest signs of turmoil in crucial areas of the credit markets.

In recent days, a cascade of selling has hit the market for mortgage bonds, helping spark unprecedented action by the Federal Reserve on Monday morning to aid markets. AG Mortgage Investment Trust, MITT, -19.22%, a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, AG Mortgage said.

“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties,” AG Mortgage said Monday morning. The company said it had met “or is in the process of meeting all margin calls received,” though it acknowledged missing the wire deadline for some on Friday.

On Friday evening, the company “notified its financing counterparties that it doesn’t expect to be in a position to fund the anticipated volume of future margin calls under its financing arrangements in the near term,” AG Mortgage said in its statement, which added the company is in discussions with its lenders “with regard to entering into forbearance agreements.”

Over the weekend, hedge funds, insurance companies and private-equity firms examined AG’s holdings, according to people close to the matter. It isn’t clear if a sale of any assets will take place. The firm’s market capital, above $700 million before the coronavirus crisis, is down to $92 million.

The company’s shares fell to $4.56 on Friday from $16.66 a month or so ago. The stock dropped 38% on Monday to $2.81.

A company spokesman declined to comment.

See also: Here’s a breakdown of the Fed’s expanded rescue programs to keep credit flowing during the pandemic

Separately, investment firms are preparing offers for assets held by other REITs, according to one of the investors involved in the AG situation.

Two Harbors Investment Corp., which has about $1.2 billion in market cap, said last week that it was focused on raising liquidity and reducing leverage. It also delayed an announcement about its first-quarter dividend.

AlphaCentric, a fund company, said in a statement that its Income Opportunities Fund is looking to raise cash by selling assets, “as investors react to coronavirus fears by fleeing chaotic markets and seeking safe havens in cash.”

Investors pulled record amounts of money out of bond funds last week, according to Bank of America Corp. calculations. Some $5.2 billion came out of funds that invest in mortgage-backed securities, which pool home loans into fixed income investments.

Mortgage REITs, which typically use borrowed money to juice their returns, have been particularly susceptible investments as mortgage-backed securities sold off in recent weeks. Analysts at JPMorgan estimate that mortgage REITs need to sell between $40 billion and $80 billion of mortgage-backed securities to reduce leverage, or nearly one-quarter of their holdings. Their share prices have in some cases dropped more than double the broader market, with some down more than 60% so far this year.

An expanded version of this story appears on WSJ.com

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