Mortgage bond sales flood market, sparking pleas for U.S. help

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A crisis in credit markets deepened over the weekend and into Monday as a cluster of funds that own mortgage bonds sought to sell billions in assets to meet investor redemptions, sparking pleas for government intervention.

The sales included at least $1.25 billion of securities being listed by the AlphaCentric Income Opportunities Fund, according to people with knowledge of the sales. It sought buyers for a swath of bonds backed primarily by private-label mortgages as it sought to raise cash, said the people, who asked not to be identified discussing the private offerings. The fund plunged 17% on Friday, bringing its total decline for the week to 31%.

Colony Capital CEO Tom Barrack said on Sunday that the U.S. commercial-mortgage market is on the brink of collapse.
Colony Capital CEO Tom Barrack said on Sunday that the U.S. commercial-mortgage market is on the brink of collapse.

Amid the selling, the Structured Finance Association, an industry group for the asset-backed securities market, asked government leaders on Sunday to step in. The Federal Reserve announced Monday that its new wave of initiatives to support the shuttered U.S. economy would include the Term Asset-Backed Securities Loan Facility, which is designed to support the issuance of bonds backed by collateral like auto loans, credit card debt and student loans. It will also buy agency commercial mortgage-backed securities, according to a statement.

“The coronavirus has resulted in severe market dislocations and liquidity issues for most segments of the bond market,” AlphaCentric’s Jerry Szilagyi said in an emailed statement on Sunday. “The Fund is not immune to these dislocations” and “like many other funds, is moving expeditiously to address the unprecedented market conditions.”

The best way to obtain favorable prices is to offer a wider range of securities for bid, Szilagyi said. He declined to discuss the amount of securities the fund put up for sale.

Funds that buy up bonds of all kinds — from debt of America’s largest corporations to securities backed by mortgages — have struggled with record investor withdrawals amid choppy trading conditions in fixed-income markets. The rush to unload mortgage-backed securities signals that a credit meltdown that began with corporate bonds is spreading to other corners of the market.

Real estate billionaire Tom Barrack said on Sunday that the U.S. commercial-mortgage market is on the brink of collapse and predicted a “domino effect” of catastrophic economic consequences if banks and the government don’t take prompt action. The chief executive officer of Colony Capital warned in a white paper of a chain reaction of margin calls, mass foreclosures, evictions and, potentially, bank failures due to the pandemic.

The AlphaCentric fund invests primarily in private-label mortgage-backed securities. Its top holdings at the end of 2019 included so-called legacy RMBS like subprime mortgage bonds issued before the 2008 financial crisis, as well as more recently-issued securities backed by home loans that had been modified.

Mortgage real estate investment trust AG Mortgage Investment Trust said in a statement Monday that it failed to meet some margin calls on Friday and doesn’t expect to be able to meet future margin calls with its current financing. The company said it was in discussions with its counterparties about forbearance agreements and will fulfill its missed margin calls on Monday.

The Structured Finance Association Sunday in a letter to U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell said that “the future path of the pandemic has significantly disrupted the normal functioning of credit markets.”

“We can most likely expect a continuation of price volatility across the bond market spectrum until the panic selling and market uncertainty subsides or government agencies intervene to support the broader fixed-income market,” Szilagyi said in the AlphaCentric statement.

Bloomberg News