After a somewhat lethargic year for mortgage REITs, 2013 seems to be starting out kinder to mREITs of all stripes. As I mentioned previously, Annaly Capital Management, Inc. (NYSE:NLY) seems particularly well-positioned to take off, but recent news doesn’t apply just to buyers of Fannie- and Freddie-backed mortgage backed securities like Annaly, ARMOUR Residential REIT, Inc. (NYSE:ARR), and American Capital Agency Corp. (NASDAQ:AGNC).
Without further ado, let’s dive right in and see what recent news items bode well for these companies that make investors money by borrowing short and lending long.
As fans of the mREIT sector well know, prepayments of loans in these companies’ MBS portfolios is bad news indeed. Seeing nice, higher-rate mortgages paid off and replaced with lower coupon models is surely painful, and compresses spreads even more. This scenario helped Annaly’s spread decline to a paltry 0.95% for the fourth quarter, even more disappointing when compared with American Capital Agency’s more robust 1.63%. Though Armour released some financial data last week, it didn’t reveal the health of its own spread.
It’s always darkest before the dawn, however, and recent mortgage news is definitely looking brighter. The Mortgage Bankers Association released numbers showing that refinance activity has slowed, great news for constant prepayment rates.
Another plus in the MBA report notes that 30-year mortgage rates are up around 3.78%, the highest since last August. Short-term rates staying low while long-term rates climb is just the type of news mREITs and their investors love to hear.
Fed debates slowing of QE3
This news is a real crowd-pleaser. The fact that more people are feeling good enough about the economy to dip their toes into the job pool pleases the Fed, making it feel that its open-ended bond purchasing program is working its magic. While many on the Federal Reserve Board also feel this way, there is a growing chorus of members who think the time has come to consider winding down the monetary easing policy. Minutes from the December meeting show that some advocated termination of QE3 by the middle of this year.
So far, there are no firm answers, and it is expected that the Fed will have quite a debate over this issue next month. However, just the whispers, becoming louder and louder, regarding the end of QE3 is music to the ears of mREIT aficionados.
New MBS offerings
The new reality thrust upon the industry as a result of QE3 has caused new interest in non-agency offerings, as evidenced by a recent announcement that JPMorgan Chase & Co. (NYSE:JPM) is interested in selling private-label securities made up of jumbo mortgages.
These MBSes, made up of mortgages of more than $417,000 and not backed by the government, are considered high quality, and other securities of this type have sold like hotcakes. Jumbos often sport higher interest rates as well — another plus.
Will these instruments tantalize agency REITs? American Capital Agency may be immune, but Armour changed its charter in 2011 to allow for non-agency purchases, though it hasn’t done so. And, as we all know, Annaly is testing the waters with a new venture in the form of Crexus Investment Corp (NYSE:CXS), which invests in commercial paper — proving that even diehard agency mREITs can embrace change when the times call for it.
The opportunity is there, though these mREITs may not need to expand their horizons too much if the current tide of good news keeps flowing.
The article 3 Bits of Great News for Mortgage REITs originally appeared on Fool.com and is written by Amanda Alix.
Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool owns shares of Annaly Capital Management and JPMorgan Chase.
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