Javelin Mortgage Investment Corp (JMI), Invesco Mortgage Capital Inc (IVR): Some Hybrids Need to Be Avoided on Book Value Concerns

Even though Two Harbors Investment Corp (NYSE:TWO) also has a relatively large Agency MBS holding, it is expected to benefit from its new investments, which include credit sensitive assets and mortgage servicing rights (MSRs). The increased presence of credit sensitive loans makes Two Harbors’ book value less interest rate sensitive. A stronger economy depicted by the rising interest rate environment drives their prices up as risk of default diminishes. So, in fact the book value moves proportionally to changes in interest rates, partially offset by the inverse relationship between the book values of Agency MBS and interest rates. The addition of MSRs will act to further increase the company’s earnings.

Conclusion

Given the volatility in the mortgage markets, I recommend investors don’t invest across the hybrid mortgage REIT space without looking at the prospects of each hybrid mREIT individually. Currently, Invesco Mortgage Capital Inc (NYSE:IVR) and Javelin Mortgage Investment Corp (NYSE:JMI) are not positioned to benefit. However, Two Harbors Investment Corp (NYSE:TWO) is.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Some Hybrids Need to Be Avoided on Book Value Concerns originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.