March 25, 2020 / 9:30 PM / 12 days ago

UPDATE 1-AG unit seeks ruling to prevent RBC from auctioning off mortgage debt

(Adds details of market disruptions, context)

By Nichola Saminather

March 25 (Reuters) - An AG Mortgage Investment Trust unit on Wednesday sought to prevent Royal Bank of Canada (RBC) from auctioning off nearly $11 million of its commercial mortgage-backed securities the lender is a counterparty to, according to a court filing.

RBC, Canada’s biggest bank, and other lenders have taken advantage of lack of liquidity created by a flight of investors from non-government-debt to mark down these assets and “to trigger widespread margin calls,” AG MIT CMO, the AG subsidiary, said in a request for a temporary restraining order and injunction filed in the U.S. Southern New York District Court.

A RBC spokeswoman declined to comment.

Mortgage real estate investment trusts (REITs) have been savaged recently as recession fears driven by the new coronavirus outbreak spurred risk aversion and concerns about home loan defaults, prompting a deluge of margin calls from lenders.

The exclusion of some parts of the mortgage-backed debt market from the Federal Reserve’s stimulus measures has prompted criticism by investors and warnings that the U.S. commercial real estate mortgage market is on the brink of collapse.

Mortgage REITs like AG fund operations by selling mortgage bonds to lenders in exchange for short-term loans, with an agreement to repurchase them at a pre-determined price on an agreed-upon date.

A decline in the securities’ market values prompts demands from the lenders for additional payments, known as margin calls.

RBC issued margin calls to AG on Monday, AG said in the filing. On Tuesday, AG learned that RBC intended to conduct a CMBS auction on Wednesday at 11 a.m. EST, including AG’s bonds, according to the filing.

It was unclear if the auction went ahead. A lawyer for AG did not immediately respond to requests seeking comment.

Such an auction would “likely precipitate a chain reaction of other banks being pressured to foreclose on other (mortgage real estate investment trusts’) pledged securities, all at prices informed by the fire sale that Defendants seek to hold,” AG said in the filing.

The Wall Street Journal earlier reported that RBC was seeking bids on Wednesday for more than $600 million of debt tied to commercial mortgages.

AG on Monday reported an “unusually high” number of margin calls from financing counterparties.

It said that it did not expect to be able to fund the anticipated volume of future margin calls, and that it was discussing agreements with counterparties to hold off on exercising their rights. (Reporting By Nichola Saminather in Toronto and Brendan Pierson in New York; Editing by Denny Thomas and Cynthia Osterman)

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