Annaly Capital Management, Inc. (NLY) Is Still The Best Pick In REITs: Starwood Property Trust, Inc. (STWD), Redwood Trust, Inc. (RWT)

The recovery of the housing market is creating a recovery in the jumbo mortgage market (these are large mortgages that are granted to wealthy home buyers). These loans have not been popular since the financial crisis mainly because they are not insured by any government sponsored entity, and are therefore considered risky.

With that said, one mREIT that has been receiving some attention lately is Redwood Trust, Inc. (NYSE:RWT) , which has been packaging and selling jumbo mortgage-backed securities, and doing so profitably. Jumbo loans have been growing as the housing market for high-end property rebounds.  In New York, for example, the jumbo market on Long Island in the first six months of 2012 has grown to $4.3 billion, in comparison to $2.4 billion for the first half of 2011. Jumbo loans in this region are defined as loans exceeding $625,000, though in other areas the figure is lower at around $400,000.

Another trend that is helping to boost this market is the growth of the non-agency MBS market. With the Fed’s QE3 program keeping down yields in agency MBS, the growth of private label securities has accelerated. Redwood Trust, Inc. (NYSE:RWT) has been leading the pack and has introduced several such offerings to the market since 2010. These securities have consisted of loans to credit-worthy borrowers, and there have been no defaults since Redwood started marketing these instruments. As a result, Redwood Trust, Inc. (NYSE:RWT) showed net income of $42 million in the latest quarter compared to a $3 million loss year over year. The market for jumbo loans is expected to grow by 15% this year, and as long as the housing market continues to improve, this stock looks like a good investment.

Annaly is easily the largest and arguably the best-managed of the companies in this industry. Borrowing costs should stay low at least through 2015 judging by the pronouncements of the Fed. I expect the company to maintain a double-digit dividend yield, which makes it an excellent investment for income investors. Investors should consider buying the stock with the expectation of enjoying these returns over the next few years.

The article Annaly Is Still The Best Pick In REITs originally appeared on Fool.com and is written by Maxwell Fisher.

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