My goal here is to estimate Armour Residential REIT Inc.'s (ARR) book value based on the information it has recently provided, and based on the market prices of the various instruments close enough to those it holds.

First, as a word of caution, I should say I have not been able to exactly figure out what these guys at ARR did to burn 50c in BV between the end of Dec. and mid-Feb. (from 7.30 to 6.70 roughly). MBS prices moved a little, but not to that extent, and hedges would have compensated a little bit.

Now their duration gap went from 0.3 to over 1 year, which is as if they had gone down in coupon (which I think they did to some extent based on the average reported coupon), combined with unchecked extension of the book.

So I'm just guessing it must have had some kind of

Beyond the impact on financial stocks in general, as well as broad indices, it seems reasonable to expect that the main exposure that mREITs would have to the situation in Cyprus is through their funding rates, which are essentially based on short Libor rates.

In a situation where bank runs become a risk, one would expect Libor to increase, all else being equal. Banks should become less willing to lend to each other, just like what happened back in 2008/2009 (but here not due to CDS exposure but rather to the fear that whoever you lend money to might be the target of a bank run).

So the question becomes, how does a spike in Libor affect mREITs?

First let's look at the assets themselves. Below is a table run showing constant OAS pricing in a 100bps flattener/inversion in the very short end of the curve (1 to 15 months).

Chimera Investment Corporation (CIM) is worth looking into essentially for two reasons: (1) it is a hybrid mortgage REIT buying agency and non-agency bonds, which means that not many people really understand what it does, and (2) it has not published its accounts for a year, leaving many potential investors in the dark. With such opaqueness, CIM should be ripe for significant potential mispricing.

In addition, CIM's parent company, Annaly (NLY), has recently decided to acquire Crexus (CXS), another mortgage REIT specialized in commercial mortgages. So the question has come up as to whether it could make sense for NLY to also purchase CIM. If that were to happen, it would force a rapid realization of CIM's book value (or thereabouts) by its shareholders.

In this article, I estimate CIM's book value and "fair" value, following a bottom-up approach. I attempt to price CIM's various bond holdings

In this article (part 1), I covered the basics of non-agency mortgage-backed securities. Now in part 2, I look into how hybrid mortgage REITs manage their non-agency MBS investments, and into the risks associated with these securities. As a reminder, I covered how to analyze agency REITs in this article.

Some hybrid REITs I am using as examples are AG Mortgage Investment Trust (MITT), Invesco Mortgage Capital (IVR), Two Harbors Investment Corp (TWO), American Capital Mortgage Investment Corp (MTGE), and Chimera Investment Corp (CIM). I also include Ellington Financial (EFC) as a useful comparison benchmark.

As we will see, it is not only "the housing market" that drives risks and value; it is also servicing behavior, and particular differences in bond structures can have a huge impact. One important consequence (to be more developed in a future article) is that certain servicer

In this article, I look into how QE3, more particularly the Fed's MBS purchase program, affects agency mortgage REITs. I discussed my approach for agency mortgage REIT analysis in this prior article.

A few days ago, the Fed laid out its plan to buy about $40bb of agency MBS per month over the next several months. The price of mortgage-backed securities has since gone up, and their yields have come down significantly. As a consequence, many fear that REITs investing in these bonds would see their income drop, which would imply lower dividends in the future.

However, I think that in fact QE3 will not have a negative effect for two main reasons:

• The spread between primary and secondary mortgage rates will widen as the Fed pushes MBS yields tighter.
• The increase in book value of REIT MBS positions will largely compensate for the loss in interest.

I illustrate

After covering the analysis of agency mortgage REITs, I now turn to their close cousins, hybrid mortgage REITs. Readers interested in agency mortgage REITs should also read this other article by Portfolio Management 101 which also looks at REITs with a good and sound rational approach.

Hybrid mortgage REITs hold non-agency residential mortgage-backed securities (MBS) in addition to agency MBS. REITs must hold a significant fraction of agency MBS or whole-loans in order to qualify as REITs, so there are no "pure" non-agency REITs.

Given the extent of the subject, this article is broken down into two parts, the first one here focusing on the raw material purchased by these hybrid REITs, i.e. non-agency MBS, and how to analyze them. Part 2 will focus more specifically on how the REITs manage their non-agency portfolios and how to measure and quantify their potential returns and risks. Both articles are

In this article I look at where the value is coming from in agency mREITs, by decomposing their assets and liabilities. I show that for the most part, these REITs make money by shorting naked options, and the main differentiating factors are first leverage, and then size to some extent. This approach is applicable to Armour Residential REIT (ARR), American Capital Agency Corp. (AGNC), Hatteras Financial Corp. (HTS), and Annaly Capital Management Inc. (NLY) among others.

Note that I am simplifying many things, but that's for clarity sake.

An agency mREIT essentially buys and holds agency residential mortgage-backed securities (MBS), financed through repo, and hedged with a variety of derivative or cash positions, including Treasurys, swaps, swaptions, Treasury options and TBAs. The first step is to understand the assets side, and we will go through the hedging strategies next.

Agency MBS are bonds backed by pools of mortgages, the credit