The following message was updated on 4/7/2022 1:27:02 PM.
While great for income, these businesses often fall like dominoes during macro financial stress or when spreads narrow for too long. Dropping asset prices also can trigger a rapid collapse. Dropping mortgage rates with lots of refinancing activity can be a negative. They use a lot of leverage, up to 10X so can quickly drop through equity and breach covenants that wipe out both common and preferred share holders. That said, they often go a decade or longer essentially printing money for their share holders. The businesses make money in several ways: loan originations, lending long at higher rate and borrowing short term at a lower rate, servicing CMO/CDO types of assets. Releases are often murky, giving the appearance of transparency but with key info tightly guarded by insiders. IMO these represent fair weather plays on a tight leash and are not suitable for the typical conservative investor. This represents MHO and I an no expert in understanding these complicated business models. Tread carefully when attracted to their typical 9%-12% yields.