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OPINION

Sideways: Private market problems are going public

Private lending vehicles that are structured to maximize fees are looking dangerously fragile, and mismarking of asset values could spark legal disputes.

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Real estate investment trusts (REITs) that invest in mortgages have become an early source of market instability in the coronavirus crisis. Forced sales of mortgage-backed securities by REITs that are facing collateral calls from dealers seem to have been a factor in the Federal Reserve’s dramatic extension of support for bond markets.

Some lending vehicles are fully independent, but many firms that are under pressure are part of bigger private investing groups. A mortgage lender sponsored by private equity firm TPG said on March 23 that it is suspending a dividend payment and may run out of money, for example.

A mortgage investment trust run by investment group Angelo Gordon said on the same day that an unusually high number of margin calls meant that it missed a deadline and did not expect to be able to meet future demands. And an Invesco mortgage unit made the same statement the following day.

The failure of a structured vehicle does not necessarily entail a substantial financial cost for a bigger private lending parent.