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Royal Bank of Canada sued by REIT over commercial mortgage-backed securities margin calls

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Royal Bank of Canada is using the coronavirus pandemic to seize a large portfolio of assets at rock-bottom prices, a New York real estate investment trust claims.

In a suit filed Wednesday in federal court in Manhattan, a subsidiary of AG Mortgage Investment Trust Inc. said it received March 23 margin calls from Canada’s largest lender. According to the complaint, RBC said the REIT’s commercial mortgage-backed securities have “drastically declined” in value due to the crisis, allowing the bank to demand additional cash or securities to meet requirements.

But the trust says the calls are entirely subjective and don’t actually reflect the true value of the CMBS. While many other banks have agreed not to pursue remedies against mortgage real estate investment trusts, RBC has refused — and planned to hold an auction Wednesday that included US$11 million of the trust’s assets, the lawsuit says.

RBC declined to comment on the lawsuit.

The coronavirus is wreaking havoc in the US$16-trillion U.S. mortgage market, which is suffering its worst turmoil in more than a decade. Firms that invest in mortgage-backed securities are facing margin calls and sinking valuations, forcing them to solicit offers on billions in assets in emergency sales.

‘Fire-Sale Prices’

RBC “is hitting the accelerator to unlawfully seize and unload a large portfolio of plaintiffs’ assets at fire-sale prices into the seized markets which will have a cascading effect in the market for mortgage-based assets,” the lawsuit said.

The bank’s auction “would not only dramatically and prejudicially underprice these securities to Plaintiffs’ detriment, but would also likely precipitate a chain reaction of other banks being pressured to foreclose on other mREITs’ pledged securities, all at prices informed by the fire sale that defendants seek to hold,” the trust said in the suit.

The REIT is seeking a court order blocking the auction and stopping RBC from taking any actions against its assets “pending compliance with the parties’ agreements and current government guidance and regulations designed to stabilize the economy.”

AG Mortgage Investment Trust announced Monday it failed to meet some margin calls and doesn’t expect to be able to meet future margin calls with its current financing. Eric Hagen, an analyst at KBW, said other firms are also likely facing margin calls “especially given the challenging overall environment for sourcing liquidity.”

Shares of AG Mortgage Investment Trust rose 27 per cent to US$2.725 in New York Wednesday after earlier rising as much as 69 per cent amid a broad surge in REIT stocks.

The case is AG MIT CMO v RBC (Barbados) Trading Corp. 20-cv-2547, U.S. District Court, Southern District of New York.

Bloomberg.com

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