Managing Risk At ARMOUR
Risk management at any corporation, particularly a securities firm is inevitable. This is particularly the case at ARMOUR. At ARMOUR Residential REIT, risk management is critical to successes and failures. Involved mostly in hybrid variable rate, and fixed rate of mortgage-backed securities, risk happens every day. Risk at ARMOUR is never something that is taken lightly by quality assurance managers. Risk is something that is carefully weighed, examined, and mitigated.
ARMOUR has strategic policies in place to help mitigate risk. These are firm policies committed to lowering risk and improving cash available in the event interest rates rapidly increase, or in the event a financial collapse were to occur. ARMOUR’s investment strategies also involve some risk; therefore policies are set to help protect investors from risk.
The primary risks involved with ARMOUR include risks associated with early payment, increasing interest rates, and concerns associated with ARMOUR’s ability to fund portfolios. Each of these risks are addressed below.
1. Managing prepayment risk. To assist with prepayments ARMOUR has in place a policy that allows ARMOUR to purchase mortgage securities at prices in excess of 100 cents on the dollar. This allows the company to pay top dollar prices for all securities. ARMOUR will also review delinquencies and refinancing to help address premiums traditionally associated with prepayment premiums.
2. Increasing interest rates. Interest rates are sometimes beyond the control of ARMOUR. At present ARMOUR would put into place a systematic program that would increase the cost of funding but allow asset yields to remain constant or allow them to change at a rate that remained slower than the rise in interest rates. This would allow a total decrease in net interest spread earned and accompanying potential dividends that ARMOUR would pay out. If funding costs and asset yields still resulted in a discrepancy, ARMOUR may consider selling assets at prices far lower than the original payment price to help offset costs and fees associated with high interest rates.
3. Funding portfolios. There are currently several strategies in place to protect portfolios and earnings from rising rates, including a strategy that focuses on shorter duration assets. The objective of ARMOUR’S current hedging program is to promote cash flow if rates rise, and decrease cash flow and decline in value if rates decline. ARMOUR’S goals include protecting assets and liabilities for all clients.
ARMOUR also seeks to help mortgage borrowers or homeowners pay off their loans at any time. This is a challenging task, and must take into consideration many factors including different interest rates. It is possible that a company including ARMOUR may over hedge, and under hedge. ARMOUR’s primary
goals include maintaining proper hedging that will protect against these factors and interest rate fluctuations as best as possible.
ARMOUR insists on paying out all dividends monthly and conducting all business in an honorable fashion. All business matters are handled in a transparent manner. This also contributes to the legitimacy and risk management potential of the company.