The repo market is used by investors and dealers to finance their securities holdings. Rates are typically below unsecured borrowing costs because the loans are collateralized.
In a repo arrangement, a lender sends cash to a borrower in return for collateral such as Treasuries or mortgage bonds which the borrower agrees to repurchase as soon as the next day. Interest and credit protection for the lender is built into how much cash gets extended and returned.
"People often get uncomfortable with the amount of the paper that has to get rolled over every month" by mortgage REITs using repo, Matthew Howlett, an analyst at Macquarie Group Ltd., said in a telephone interview. "There's always potentially liquidity problems. And when there's an issue with the banks that provide the liquidity, it can become an issue for the REITs."
Many of the mortgage REITs survived the global financial crisis that peaked after Lehman Brothers Holdings Inc. failed in 2008, said Howlett. "At the end of the day, the model still works and we'll still get through this."
Anworth's dividend cut is also weighing on mortgage REIT shares by reminding investors of the dangers of rising prepayments amid record low mortgage rates, he added. Under accounting rules, REITs that bought bonds for more than face value need to write off the premiums faster as prepayments rise.