The Commercial Real Estate Alpha Site

Even after the Federal Reserve moved early this week to pump unlimited amounts of capital into the federally backed mortgage securities markets, real estate investment trusts involved in real estate financing and mortgage acquisitions still faced cash shortages.

The economic fallout from stay-in-place orders and business closings instituted to contain the spread of the coronavirus pandemic has intensified the need for cash. Financing parties have now stepped up their demand for additional collateral to back the mortgage REITs’ assets that are declining in value.

A handful of mortgage REITs have reported being hit with these margin calls, including TPG RE Finance Trust, Anworth Mortgage Asset and AG Mortgage Investment Trust. Since the Fed’s announced actions, New York Mortgage Trust and Invesco Mortgage Capital also reported receiving margin calls.

New York Mortgage Trust said it notified its financing counterparties that it does not expect to fund the existing and anticipated future margin calls under its financing arrangements in the near future.

Invesco Mortgage Capital said that it has received an unusually high number of margin calls from financing counterparties. The REIT has started discussions about entering into agreements to suspend taking any actions should it default on its financing arrangements. It said it could not predict when or whether the agreements might be reached.

On Wednesday, Exantas Capital said it received written notices from affiliates of the Royal Bank of Canada alleging that events of default had occurred with respect to about $225 million in financing agreements.

Exantas said it is disputing RBC’s notices and intends to vigorously assert its rights. If the REIT fails to deliver additional collateral or otherwise meet margin calls when due, its counterparties may demand immediate payment of outstanding amounts owed.

Weekend Warning

Thomas Barrack, executive chairman and chief executive of Colony Capital, took to the internet over the weekend to warn of impending disaster in the real estate financing industry. In a personal essay posted on Medium, an online publishing platform, Barrack wrote the growing demand for additional cash collateral and loan repayments was increasing the “danger of inciting a liquidity freeze. A market collapse of this magnitude would have catastrophic follow-on effects across the American economy.”

Colony Capital manages Colony Credit Real Estate, a commercial real estate finance REIT.

“Loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and home owners, landlords, developers, hotel operators and their respective tenants and employees,” Barrack wrote.

Like others in the industry, Barrack called for more federal action to support the purchase of portfolios of commercial mortgage loans from mortgage REITs or debt funds.

The Structured Finance Association was among those calling for Fed action. Following the Fed’s announcement to provide unlimited amounts of support for government-issued securities, the association said the actions did not go far enough.

“We hope this is simply a first step on their part,” SFA CEO Michael Bright said in a statement. “We are certainly pleased with these initial steps, but we also call on the Fed to expand eligible collateral permissible for [a Term Asset-Backed Securities Loan Facility] — specifically to include residential and commercial mortgages — and increase its size as market conditions warrant so that all credit markets can unfreeze and prevent further economic degradation.”

Analysts with investment banking firm KBW said the Fed’s very heavy support over the past week was indicative of just how bad the margin call activity has been.

“It moreover demonstrates the lack of liquidity and flexibility that buyers have to generate a bid, even though wide spreads imply that mortgages are especially cheap right now,” KBW wrote in a note to clients.