Mortgage REITs expect to remain active players in the asset-backed market this year, even with an anticipated decline in loan origination volumes.
New Century Financial Corp. announced Thursday that it expects to resume executing securitizations in its REIT portfolio, starting with $2 billion in the first quarter.
New York Mortgage Trust also considers securitization an important part of its strategy, said CFO Michael Wirth, though he declined to be specific about potential volume. The company - which Wirth described as an "active" REIT because it originates the loans it securitizes - issued three deals last year: $228.7 million in December; $239.5 million in July; and $416.7 million in February. They were all backed by whole ARMs.
With tightening spreads, originating and holding loans to be securitized is not as attractive as it was in the spring of 2004, when New York Mortgage Trust became the first active prime mortgage REIT to go public through an IPO, Wirth said.
But the financing flexibility is still appealing, he added.
In the fourth quarter, market dynamics leveled off any financial advantage securitization might have had over selling the whole loans to third parties, Wirth said.
"But I think it's coming back in favor now, where you'd much rather originate, hold and securitize, rather than sell to third parties," he said. "But that's the nice thing about being an active REIT. You can evaluate the market dynamics and you have some options."
Will there be more REITs?
One REIT trend that is leveling off is the number of new players. The impetus for mortgage companies to convert to REITs is not as strong as in past years, according to analysts at Fitch Ratings.
"Most of the attraction to convert to REIT status is the success of REITs in attracting capital - on the equity side and on the debt side," said Tara Innes, a managing director at Fitch. "With the fundamentals going sideways at best for mortgage REITs, their ability to attract that capital is compromised, unrelated to REIT status."
The statistics also suggest a trend toward fewer IPOs. Data from the National Association of Real Estate Investment Trusts, the Washington-based trade association for REITs, indicates that the number of IPOs dropped off in 2005, particularly for residential mortgage REITs.
Of 11 REIT IPOs last year, only four were mortgage REITs and, of those four, only two were in home financing, KKR Financial Corp. and ECC Capital Corp. That's down from 29 IPOs in 2004, when 13 were mortgage REITs and nine of those were in home financing, the largest being New Century.
Or will there be mergers?
The Fitch analysts anticipate consolidation might become a more dominant trend in the mortgage industry this year.
"A lot of these companies are still small, and with declining volume across the sector, it may be more economical for them to join forces with another company," said Matt Gallino, a senior director at Fitch. "But the other part of it is: to the extent that short-term interest rates stopped rising - and we've started to hear from the Fed that there's a light at the end of the tunnel - that would probably be a good thing for the portfolios of a lot of these companies."
Also in the coming year more mortgage REITs might move into originating and servicing, possibly through acquisitions, the Fitch analysts said. That would continue a trend seen last year with mortgage REITs like Friedman Billings Ramsey.
"A lot of mortgage REITs that are out there today are what we would call financial engineers, in the sense that they tend not to have in-house servicing and in-house operating platforms where they are actually originating mortgages themselves. All they are really doing is purchasing assets on the secondary market," Gallino said. "Some of these guys may go out and try to buy or build a platform."
That would increase their fee-generating opportunities and enhance their otherwise pressured profitability, Innes added.
FBR moved into subprime mortgage originating last year with the purchase of First NLC Financial Services. First NLC then tapped the asset-backed securities market several times, most recently with a $397 million issue in November led by its new parent company.
Guidelines not a worry
As for higher interest rates affecting guidelines, the Fitch analysts expressed optimism, saying they expect to see tightening, particularly as the industry reacts to Fed criticism of mortgage products like I/Os being extended to weak borrowers.
"We believe we've seen some evidence so far that there has been, and will continue to be, a degree of tightening," Gallino said.
John Kriz, a managing director in real estate finance for Moody's Investors Service, also expects the bias to be toward tightening.
"I think everyone in the industry is thinking about how the single-family housing market is beginning to soften and how that could affect creditworthiness," Kriz said. "Companies are taking a fresh look at their underwriting criteria, and we would expect more of that."
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