New York Fed looks at risks of mortgage trusts
MReits could be vulnerable to a sharp increase in interest rates
Jeremy Stein, governor of the US Federal Reserve, warned about the risk of MReits. Photograph: Andrew Harrer/Bloomberg
Regulators at the New York Fed have been investigating the exposure of banks to a type of mortgage investment vehicle that has proliferated since the financial crisis amid concerns that a rapid rise in interest rates could trigger a sell-off.
The private discussions, described by one person as a “deep dive” into the topic, underscore regulators’ growing concerns about the rapid expansion of mortgage real estate investment trusts.
MReits finance their purchases of long-term mortgages with short-term borrowings, known as repo, secured from dealer banks.
The worry is that MReits could be vulnerable to a sharp increase in interest rates which would force the vehicles to reduce quickly their holdings of mortgage- backed securities and set off a wider firesale.
That could potentially lead to further problems in the vast $4.5 trillion repo market, where big banks also secure large amounts of funding by pawning their mortgage- backed and other securities.
“In the spring they came into a lot of the banks and kind of did a deep dive in that topic,” one person familiar with the discussions said.
MReits have been on regulators’ radar at least since February when Jeremy Stein, Fed governor, spoke about the possibility of overheating in credit markets. In the speech, Mr Stein described MReits’ reliance on short-term repo borrowing to finance their longer-term MBS purchases as “essentially a levered carry trade”.
– Copyright The Financial Times Limited 2013