American Capital Agency Corp. (AGNC), Chimera Investment Corporation (CIM): Don’t Invest in a Bank Stock Without Reading This First

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But, signing documents at the loan closing table is not always the end of the road for the freshly printed loan documents. Banks will take hundreds of these loans and then sell them to investors in the form of a now all-too-familiar mortgage-backed security.

Who buys these securities? Potentially very wealthy individuals, hedge funds, sovereign wealth funds, the U.S. Treasury, and, potentially, a mortgage-focused REIT. And that is exactly how we will invest in mortgages and bypass the bank.

Mortgage REITs (mREITs) are, fundamentally, very similar to other REITs. The only truly material difference is that mREITs only, or nearly only, invest in mortgages. Some choose to invest only in mortgage securities issued through government-sponsored entities, while others choose to invest in government-issued and non-government issued securities.

American Capital Agency Corp. (NASDAQ:AGNC) is a mREIT that invests exclusively in government-issued mortgage securities. The company has a market cap of nearly $9 billion and sports an impressive dividend yield of 19%. American Capital funds its investments with short term borrowings, putting it at risk for changes in the interest rates. If short-term rates rise faster than long-term rates, the company’s earnings will be squeezed. This fear has sent the stock price markedly lower since May, dropping from $33 to the low $20s in just over 60 days.
Chimera Investment Corporation (NYSE:CIM). is another mREIT, one that invests more broadly than American Capital Agency Corp. (NASDAQ:AGNC), taking positions in government-issued, non-government issued, and also commercial securities. Because of the same interest rate concerns mentioned above, Chimera Investment Corporation (NYSE:CIM) has been in the crosshairs of short sellers of late. The decline in stock price has not been as pronounced, however, with Chimera Investment Corporation (NYSE:CIM) losing about 10% versus the 30%+ decline for American Capital Agency Corp. (NASDAQ:AGNC). Chimera currently has a dividend yield of 12%.

Save the gambling for Vegas
The only thing certain about the future of banking in the U.S. is uncertainty. Loans, of the pure and unadulterated variety, have proven to be a profitable and safe investment for thousands of years. Before clicking “Confirm” on your next bank stock investment, consider sidestepping the risk, complexity, and regulators with a combination of commercial and mortgage REITs.

The article Don’t Invest in a Bank Stock Without Reading This First originally appeared on Fool.com and is written by Jay Jenkins.

Fool contributor Jay Jenkins has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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