Annaly's New Units Target `Left Out' Mortgage Lenders and Their Securities

Annaly Capital Management Inc.’s plan to start lending to mortgage bankers will allow it to finance those “left out” of a market more dominated by the biggest companies than in the past and provide new sources of bonds to buy, Chief Executive Officer Michael Farrell said.

The company, the largest real estate investment trust that invests in mortgage bonds, said in a statement yesterday it had formed a new unit, Shannon Funding LLC, that will provide so- called warehouse loans to home lenders. The New York-based REIT is targeting $100 million to $200 million of credit lines next quarter and about $1 billion by late 2011, Farrell said today.

Annaly joins mortgage-debt investors and brokers including Redwood Trust Inc., BlackRock Inc. and Gleacher & Co. in seeking to take advantage of retreats in the home-lending market created by a jump in homeowner defaults. Warehouse lending, a “loss- leader” during the housing boom, can now be a profitable business, a Wunderlich Securities Inc. analyst said. Annaly hopes it will also help it acquire securities, Farrell said.

“The smaller to middle-market mortgage originators have been left out,” Farrell said in a telephone interview. “The capital we can provide to them will allow us to develop relationships over time” that may help fill “our huge buy need every month” created by mortgage bonds it holds paying down.

Those securities created by customers probably would initially be government-backed mortgage bonds with specific loan characteristics such as properties in certain states, he said. Eventually they may include other residential- and commercial- mortgage debt that two other REITs it manages, Chimera Investment Corp. and CreXus Investment Corp., focus on, he said.

Warehouse Loans

Outstanding warehouse-line commitments, used by mortgage bankers to fund new loans and hold the debt until sales, declined to about $27 billion on June 30 from more than $200 billion in 2007, according to data from newsletter National Mortgage News and trade group Mortgage Bankers Association.

Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co. accounted for almost 57 percent of new mortgages in the first half of this year, according to industry publication Inside Mortgage Finance. In 2006, the top three lenders, Countrywide Financial Corp., Wells Fargo and Washington Mutual Inc., accounted for 35.4 percent. Bank of America purchased Countrywide and JPMorgan acquired Washington Mutual assets and liabilities in 2008.

‘Well-Timed’

The new unit is “well-timed and a welcome addition to the options available to originators,” Merrill Ross, an analyst at Wunderlich Securities in Baltimore, wrote today in a report. She rates the company’s shares, which have returned 13.8 percent this year through yesterday assuming reinvested dividends, a “buy.”

“Under current conditions, the concentration of competitors and the lack of financing available to smaller originators has created a pricing opportunity that could allow Shannon to be profitable within a few quarters of operations,” she said.

Shannon may focus on mortgage companies with between $5 million and $10 million of net worth, Farrell said. Earlier this year, Annaly hired former Bank of Ireland Plc executives as part of an initiative in which it plans to make corporate loans to “middle-market” companies, he added.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net