Mortgage-Bond Repo Lenders Stiffen Some Loan Terms, Invesco Says

Short-term funding secured by mortgage bonds is tightening after prices on securities used as collateral became more volatile and providers scale back their balance sheets before year-end, Invesco Mortgage Capital Inc. Chief Investment Officer John Anzalone said.

The down payments demanded for loans that are secured by mortgage securities lacking government backing have risen at some providers during the past two months, Anzalone said today in a telephone interview. The so-called haircuts in repurchase-agreement, or repo, loans typically range from 20 percent to 30 percent, depending on the types of bonds serving as collateral, after holding steady in a range of 15 percent to 30 percent, he said.

“I wouldn’t say we’ve seen a widespread trend of everybody’s raising their haircuts,” he said. Instead, “the more aggressive players have moved back toward everybody else.”

Lending terms are tightening after holding steady as the value of some securities dropped as much as 40 percent from highs earlier this year. Haircuts protect lenders such as banks and money-market funds against price declines in the collateral in the event the borrower defaults.

The real estate investment trust managed by Atlanta-based Invesco Ltd. fell 5.8 percent last week, after cutting its dividend to 65 cents a share, from 80 cents. The REIT rose 2.1 percent in New York trading today to $14.80 a share after announcing plans to buy back as many as 7 million shares and explaining the cut, which stemmed partly from the “market environment and portfolio repositioning” affecting its funding.

Higher Repo Rates

In repo financing, securities such as Treasuries and mortgage bonds are sold to a lender with an agreement by the borrower to buy them back later. A basis point is 0.01 percentage point.

The REIT, which relies on more than 20 counterparties for financing, has also seen interest rates on repo increase as providers seek to reduce their balance sheets to bolster capital ratios heading into the end of the calendar year. Such activity is typical behavior this time of year, Anzalone said, and “we totally expect that to normalize as we roll things in January.”

The cost of one-month repo financing for government-backed mortgage securities rose to 29 basis points as of 3:33 p.m., from 20 basis points on Nov. 4, according to data from ICAP Plc, the world’s largest inter-dealer broker.

Some types of non-agency home-loan securities lacking government backing have dropped as much as 40 percent since their highs in the first quarter, Bruce Richards, co-founder of hedge fund Marathon Asset Management LP, said Dec. 1 on Bloomberg Television.

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