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Monday Morning Cup of Coffee: Mortgage REITs slip; ratings agencies get class action

Monday Morning Cup of Coffee takes a look at news from the HousingWire weekend newsdesk with more coverage on bigger issues.

These are interesting times for real estate investment trusts. As the post-July 4 holiday week came to a close, REITs that invest in mortgage loans withstood a significant stumble, according to a Bloomberg report.

An index compiled by the financial market news service placed the drop at 3.9%, with top companies American Capital Agency Corp. and Annaly Capital Management registering the most marked at 5%, the report said.

The slump is being put down to mounting reports that the Federal Reserve is about to rein in its asset purchases, commonly known as tapering. The latest slip, Bloomberg reported, came amid “better-than-forecast” employment figures, with data suggesting 195,000 jobs were added in June: The jobs figures “stoked speculation the Federal Reserve will begin to reduce the size of its asset purchases.”

The performance of the mortgage REITs, meanwhile, represented the asset class’ worst showing since October 2011.

Elsewhere, the jobs report got a somewhat positive spin: Unemployment remained unchanged at 7.6%, the Department of Labor said Friday as the statistics were released. The underemployment rate, however, climbed to 14.3% from 13.8%, national newspaper USA TODAY reported — “a broader gauge of joblessness.” The construction industry gained 13,000 jobs, it noted.

A report from online real estate search engine, Trulia, gave the June jobs performance a cautious welcome.

“This morning’s jobs report was another strong improvement but shows that the housing recovery still has a long way to go,” said Jed Kolko, Trulia’s chief economist and vice president of analytics. “Construction employment rebounded more slowly in Q2 than in the previous two quarters. Unemployment among construction workers remains well above normal, and employment among young adults is too low for a full recovery in housing demand.”

According to a report carried by Law 360, Standard and Poor’s Ratings Services and the parent company of Moody’s Investors Service have been hit with a class action in California state court over claims the top credit ratings agencies “issued inflated ratings on residential mortgage-backed securities.” The First National Bank and Trust Co. of Rochelle, Ill., raised the case on the eve of Independence Day, July 3, the litigation-tracking publication said.

The New York Times reported on the latest broadside to the banking sector’s beloved risk self-assessment: The latest blow, the newspaper's DealBook blog said, is contained in new evidence that unravels chinks in the armor of “the models that tell lenders how much capital they need.” It’s a high-stakes game, and one that could turn the capital requirements and bank-borrowing pendulum somewhat on its head. The powerful band of global regulators behind the most recent banker wake-up call — known as the Basel Committee — looked to slice open “where justified diversity of risk ends and where fiddling begins,” the newspaper said. The result: Their study found swinging variations. It’s not all down to foul play, The New York Times notes. But:

“The appropriate risk weight for a Spanish mortgage will differ from a similar asset in Germany. What investors are rightly worried about is that the ‘own model’ system allows banks to assign different risk weights to exactly the same loan – and that their own national regulators are complicit.”

Thus, the case for standardization has gained some more muscle, the newspaper concludes.

The Federal Deposit Insurance Corp. did not close any banks during the long weekend.

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