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The success of the mortgage REIT industry (both in garnering AUM and providing shareholder...

The success of the mortgage REIT industry (both in garnering AUM and providing shareholder returns) is swell, writes Sober Look, but will end as another chapter in the story of leverage. Borrowing short and lending long, the companies are exposed to rising rates and the chance of financing being cut off - threatening not just shareholders, but U.S. mortgage markets.
Comments (50)
  • Point well taken. But for anyone who is watching, the Fed cannot raise short term rates. For budgetary reasons alone the Fed Funds rate will be pegged very very very low for the forseeable future. The yield curve will steepen at some point very dramatically, but FF will staya where they are. They literally have.
    11 Sep 2012, 12:34 PM Reply Like
  • I agree with what you have said and would like to add to the comments on US mortgages. Right now, Fannie and Freddie are the only players in the secondary mortgage market and to secure funds for future purchases they need to sell some of what they have on their balance sheet. Now enter the M REIT's, who else is in the market to buy MBS? There has to be a spread for them to continue purchasing the MBS. If it isn't there, they don't buy, and if they don't buy, mortgage money will slow to a trickle, which will depress the housing market, which the federal government wants to avoid at all costs. This is simple rationale, but my belief is the government will not allow housing to go down again without doing everything they can, and right now, they can keep the interest rates down which is propping up housing prices all by itself. This should keep the spread large enough for quite some time, which will keep the dividends coming and provide stability for the share prices.
    11 Sep 2012, 04:12 PM Reply Like
  • spot on, these guys don't know what they're talking about. In fact, as I write this the FED promised to continue ZIRP through 2015--I bet it gets extended beyond that.
    12 Sep 2012, 11:00 AM Reply Like
  • The author is correct but with ZIRP until at least 2014 there are other investments I would be worried about. Financing wont be cut-off until rates go up.
    11 Sep 2012, 12:38 PM Reply Like
  • When the economy starts improving and rates inching up...everyone will head for the door. Is this maybe the reason TWO has actually started buying hard leverage an improvement of the economy and deflect the damage that rising interest rates will create?
    11 Sep 2012, 12:41 PM Reply Like
  • It seems that everyone who dismisses mREITs point out the same issue: their success is dependent upon the difference between short-term interest rates and long-term mortgage rates. These people need to do their homework, rather than trying to spread fear.
    11 Sep 2012, 12:41 PM Reply Like
  • Investing without fear is foolhardy.
    11 Sep 2012, 12:52 PM Reply Like
  • Who do the mREITs borrow from?


    What is the term?


    Who controls the rates?


    Please provide references or point me to supporting documents.
    11 Sep 2012, 12:44 PM Reply Like
  • You ask the right questions and they don't borrow with the FED but with banks at libor +. They also issue new shares. In my view, refinancing is the biggest risk mReits face currently, particularly if a big bank fails here or in Europe. The Inter bank market will dry and ST rates will sky rocket even if the FED rate stays at 0.25%. I'm long AGNC, MTGE and ARR.
    11 Sep 2012, 01:30 PM Reply Like
  • AGNC has most of that information in the investor presentations on their website.
    11 Sep 2012, 01:37 PM Reply Like
  • what will happen when we reach the "Financial Cliff"?


    It is talked about so much but what are the details and will it affect mREITs?
    11 Sep 2012, 12:49 PM Reply Like
  • My personal opinion (you know what they say about opinions) is that the overall market would suffer a tremendous downdraft and investors would head for the returns of mREITs.
    11 Sep 2012, 01:12 PM Reply Like
  • I ain't scared yet! Go spread fear to someone else. Until the fed raises short terms rates, it ain't gonna happen. If the fed raises rates the effects will be painful across the economy. Hell, let the fed raise rates, maybe then the banks will have to raise CD rates back up to something less ridiculous. Why in the world do you think we investors are in these REITs in the first place. We have been forced to by the Fed.
    11 Sep 2012, 12:51 PM Reply Like
  • The rates any bank charges is based on the rates established by the Fed. mREITs use short-term loans, and the Fed supports a Zero-Interest-Rate Policy (ZIRP), and will apparently through 2014. Thus, the interest paid by mREITs is extremely low.
    11 Sep 2012, 12:52 PM Reply Like
  • The link in the story is probably the best analysis I have seen of the potential downfall if the yield spread were to decline. The best takeaway for me is that the REPO credit is not a mark to market arrangement. This gives me enough confidence to maintain my current position that helps my income situation but I have limited it to 1.5% of my portfolio value because of the risk. The loan call provisions on the REPOs seem to have set duration. But, the agreement needs to be carefully examined to thoroughly assess the risk involved. It may cause a forced selling of the bond portfolio in a sharply declining market if rates were to increase.


    Those who tout these funds say the bonds are guaranteed. But the REPO credit would have to be paid if the worst scenario were to occur. It wouldn't only be a cut in the dividend - the investor in this could lose his entire principle.
    11 Sep 2012, 01:04 PM Reply Like
  • The only major and perhaps imminent threat to the mReit sub-sector is Bernanke and his plan to enter the MBS marketplace. This would have an effect on mReits but nowhere near the disastrous results that many of these doom and gloom clowns seem to see around every corner. As it might apply to Refis, many have already refinanced over the past 2 yr period and it is not going to be in their short-term best interests to ReFi again. Some of those who haven't done it may try but given the banks tighter standards many would not be successful couple that with the increased costs of Refis and they shouldn't pose a significant threat though they could have a small impact on overall earnings that could translate into a lowering of current Dividend rates though by a small rate. Should this occur the mReits will still be the premier dividend class as far as returns go.


    I just get tired of these Doom and Gloomers, they haven't been right in years but it won't stop them. I guess if you tell a Big Lie often enough some of the dimwits will begin to believe it is fact.
    11 Sep 2012, 03:17 PM Reply Like
  • As it turns out, Fed efforts to lower long-term rates have failed. ReFi's are down 15% in the past year, primarily because of stringent lending policies by banks, etc. As long as employment is a shaky feature of the economic landscape there will likely be no major increase in ReFi's.
    11 Sep 2012, 04:03 PM Reply Like
  • Like any investment, you must factor in risk versus reward and also the tolerance that you have. In this case, my thoughts are as follows.
    1. The economy is a minimum two years out for any significant recovery. Somewhat shorter if we change presidents and somewhat longer if we don't.


    2. The economy will not turn in a dramatic fashion, but slowly. As it does show signs of life, the Fed will be reluctant to choke it off with a rise in short term borrowing, but wait to see if a substantial recovery is really there.


    3. So 2015 is not out of reason. But when it does, both short term and long term rates will rise together. So some spread will remain for REITs to harvest. The better managed ones will shed current long term debt and secure new debt obligations. So these REITs will remain profitable, though maybe adjusted.


    4. Look, if your return on the dividends drops to 8%, you are still beating out anything else out there for income investors.


    Thoughts anyone, or did I completely miss the mark.
    11 Sep 2012, 01:08 PM Reply Like
  • I certainly couldn't have said it better.
    12 Sep 2012, 08:43 AM Reply Like
  • i disagree. Most mreits hedge their interest rate risk with the same banks lending them money. If anything the risk ultimately will fall on the banks which as usual are TBTF and will be bailed out by the FED's as usual
    11 Sep 2012, 01:09 PM Reply Like
  • I have owned NLY for a few years, and never expected to receive the 14%-15% dividend it was paying at the time, forever. The yield will most likely drop at some point as it did in 2006-07. But it survived the 2003 bond rally and subsequent sell-off very well. By the time the yield is forced down with a bear flattener, we'll have 50% more shares generating income. My macro-expectation is that it will generate an 8% plus return over 2 decades. That's my reason for owning NLY.
    11 Sep 2012, 01:25 PM Reply Like
  • Granted that yield depends on the purchase price, when you purchased NLY, the present distribution, and whether you reinvest the distributions. Are you not well ahead of where you would have been, had you not grabbed the reins and taken the ride on NLY.


    Granted you ran into a gully in 2006-07, and distributions dropped to $0.57, but reinvestment would have bought shares at $12 instead of $20, and now be worth $17.63, a capital gain of 47%, plus the distributions and reinvestments made since. At the present distribution of $2.20, your yield, or if reinvested, your increase in number of shares for this year, works out to about 12.5%. By the rule of 72, you would double your investment about every 5-3/4 years. So, no matter how the prudent investor computes it, your current portfolio must be handsomely many times what it was when you started. You are way ahead of the nay sayers who said you couldn't do it.


    And if, according to you expectation of 8% over 2 decades, you stick with your plans, your portfolio will be worth 225% of the amount with which you started. Since there have been more good years than bad ones, I'm guessing that looking on the bright side, especially as compared to those standing on the side lines wagging their fingers and spewing negativity on their parade.


    And if you reinvest the distributions, in effect you reduce the average cost per share, increasing you yield each time, until you reach a point of exceeding 100% yield by receiving more distributions per year than your original capital invested. Its a win, win, win.


    So laugh all the way to the bank, and take no thought of those who know not what they do.
    11 Sep 2012, 02:49 PM Reply Like
  • The article is correct, that a flattening yield curve and ever higher levels of leverage make the mREITs a somewhat risky investment. But the double digit dividend returns reflect that higher risk level with higher anticipated returns. Stick with managers who know what they are doing (AGNC).


    These names have been popular on SA for well over a year, so I know there are a few of us on this site who have much lower cost basis than where shares currently are. If anyone is very nervous, sell some of the positions, and let the profits ride and re-invest. The hard decision was to buy AGNC after the IPO in the teens and low 20's. Selling in the mid-30's after collecting $20 something dollars a share in dividends shouldnt make people uncomfortable at all.
    11 Sep 2012, 01:44 PM Reply Like
  • There sure are a lot of "The author is right but I am smart enough to sell at the top" comments in here.
    11 Sep 2012, 01:45 PM Reply Like
  • Because the author didnt say anything new or shocking. "mREITs are leveraged. They make money on the spread between borrowing and investing. If that spread goes against them, with their high leverage, they'll lose money." Yes, those are the risks, but he didnt add any new unforeseen risk, or any real insight into why rates are going to increase before the Fed has indicated they will.
    11 Sep 2012, 01:53 PM Reply Like
  • He didnt add any new informaiton to you perhaps. Should there be no discussion for others?
    That doesnt change the fact of peoples reactions. That yes they acknowledge the risks but will sell before it falls. Or that he is spreading fear and doom and is to be ignored! Some do not even know AGNC is leveraged! Those are the people this article is for. Plenty of people have said that over the years in plenty of markets.


    I'm long long AGNC since 2009. I actually agree with your sentiment above my first post.
    11 Sep 2012, 04:36 PM Reply Like
  • Then you and I are probably in the same boat: I like the stock when it traded much closer to book value, and therefore with a higher yield. The new money coming in is pushing the yield down, hurting the amount of shares I get each time the dividend is re-invested.


    Management at AGNC has been great, the conference calls and investor presentations are fairly easy to figure out if you take the time, and they have done a fantastic job forecasting their actions. Unless the price to book begins approaching 2x, or there's a change in management, I'm going to hold the name. I use to trade options in it around the secondary's, but the shares hardly drop on those announcements anymore.
    11 Sep 2012, 04:48 PM Reply Like
  • Those were some great post ex-div date drops we had in the past!
    11 Sep 2012, 04:58 PM Reply Like
  • I think the key word in this current environment, would be,
    Yes this high dividend situation cannot go on indefinitely, but
    it can certainly go on well into late 2013 and most likely into
    That gives us at least a 4 quarter window to make more money
    with these mortgage real estate investment trusts.
    The important point is, when do we make our exit.
    That means continually monitoring the whole package on a
    daily basis.
    Some of these Mreits will do better than others because their,
    overall management approach is more sound.
    Pay attention to the details and make moves that make sense
    and you'll most likely be okay.
    No, I don't think things will change that much this fall, and that
    in itself, is a good starting point.
    Just remember, it is your money, and your risk tolerance that
    Good luck all,
    11 Sep 2012, 01:46 PM Reply Like
  • Been doing well with mymReits CIM ARR AGNC And I ain"t quitten yet.
    11 Sep 2012, 01:57 PM Reply Like
  • Many mREITs have been periodically releasing shares in order to raise the capital to buy down their short-term debt. Others are diversifying their holdings. Since REITs have to pay 90% of their profits back to shareholders (for tax purposes), it is in their interest to maintain as large a difference between income and liabilities as possible.
    11 Sep 2012, 02:03 PM Reply Like
  • Isn't it a sad statement on the human condition that humans prefer to focus on the negative, never accepting that what they think about is going to become their own self fulfilling prophesy. The negative thinkers will find their doom and gloom to bear witness that if the worst hasn't yet happened, it soon will. Fear begets fear. Perception of lack attracts lack just as a magnet attracts iron shavings.


    The power of positive thinking, positive expectation, positive thoughts expressing in writing and voice will light a path for the positive to follow. I love investing, perceiving my abundance, and drawing it to me with positive expectations.


    These perpetual nay-sayers, doom and gloomers, cannot block the joy of my abundance, but they do receive exactly as they give, receive in form and manifestation everything they do unto others, because universal law always gives them what their every thought asks to perceive as their reality.


    Looking a gift horse in the mouth does not change the gift, but only the perception of the gift. AGNC, ARR, NYMT, AI. AMTG. TWO, MTGE, RSO, CYS, and WHZ all continue to perform very well for me, according to my positive expectations, drawing wonderful abundance, with total disregard for the prophets of doom. And I have no doubt the false prophets will finally be persuaded how wonderful these are, just as these peak and we get out of them, and the doom sayers ride the down trend so that they can say, "see, I told you." There are those who buy low, reap high yields, and eventually sell high. And there are those who bad mouth all good things, wait and buy high, and then sell low to prove that what hasn't gone wrong already, will soon destroy them. It is all about a decision to maintain a positive or negative state of mind, then finding "facts" that "prove" and bear witness to the decision already made. I am always preferring what is occurring, because it always represents my chosen state of mind.
    11 Sep 2012, 02:08 PM Reply Like
  • Amen! and see my comments written before I read yours.
    11 Sep 2012, 03:21 PM Reply Like
  • 'DITTO'
    13 Sep 2012, 10:24 AM Reply Like
  • AMEN, Frank Ellis
    11 Sep 2012, 02:24 PM Reply Like
  • nice comment Frank.
    Seriously, you need to come preach in my church. My minister has been doom and gloom for years.....
    11 Sep 2012, 02:42 PM Reply Like
  • Or maybe you should find a different voice to minister the positive. I give anyone three strikes, three ministering of negative, then dismiss myself from their presence. I can minister positive to myself, just by choosing deliberately the thought I allow into mind, the thoughts I focus attention upon. I choose. I do not accept doom and gloom. If my employee, or member of my family, or someone I write to, or someone I work with, does one hundred things, and only one of them good, I focus and appreciate that one good thing, and gently lift them up to more and more positive. That way I live in an ever more positive world, because I deliberately cause it. Nurture the positive, and it grows and blooms.
    13 Sep 2012, 06:25 PM Reply Like
  • nly all the way. even a drop in the dividend by 50% gives you a 6% return. better than any bank will give you.
    11 Sep 2012, 03:40 PM Reply Like
  • I'm concerned that the spread the mREITs garner is 1-2 percent, yet their giving a 12%-13% return. Does anyone else think this is suspicious? I love it - I'm an investor, but it does give me pause.
    11 Sep 2012, 04:10 PM Reply Like
  • Leverage. A 1.5% returns times 8x leverage gets you 12% returns.
    11 Sep 2012, 04:26 PM Reply Like
  • Concerned about risk? Invest some funds from the dividends in an instrument you believe to be safer.
    11 Sep 2012, 04:54 PM Reply Like
  • Actually, I'm using the dividends to buy stock in non-REITs. As long as their share price keeps going up, I figure I can use their dividends to other purposes.
    11 Sep 2012, 05:08 PM Reply Like
  • The USA is in debt up to its ears. Our interest payments are becoming quite onerous even at current low interest rate levels. Who in his right mind thinks that the Fed will be raising those rates any time soon?
    11 Sep 2012, 09:14 PM Reply Like
  • Apparently, all of the "Negative Norberts" who keep reminding us that mREITs are dangerous investments because interest rates could rise.
    12 Sep 2012, 11:49 AM Reply Like
  • Hi guys and gals, I apprecaite your comments and agree the negativity is over a year away to take place. My concern is when you all start selling at once when certain triggers associated with rising interest rates takes place. I hold AGNC since 2009 so am very positive re the results. Just wary.
    12 Sep 2012, 04:29 AM Reply Like
  • Unless congress passes legislation to mitigate sequestration and extend--at least some of the Bush tax cuts--the stock markets will swoon. How much, your guess is as good as mine. The 'swoon" (for lack of a better word) will take down every public equity. My money says holders of individual investment grade corporate bonds will do just fine. I have a bunch of individual and corporate bonds, but also inter alia hold CYS (my favorite) PSEC, NLY, AGNC, AAR, IAU, EXC (hate, but will hold), and PEMDX. If I ever sell my VWIAX, VWELX or VGHCX, it means the barbarians are at my door and you should flee as well.
    12 Sep 2012, 04:52 AM Reply Like
  • Does anybody have a pair of chain mail leggings I can borrow?
    12 Sep 2012, 12:05 PM Reply Like
  • Why not just accept 14 to 18% dividends while they last instead trying to second guess the market. It is what it is. AGNC not only pays a good div but the price action aint bad either
    12 Sep 2012, 08:32 PM Reply Like
  • Unfortunately I am just now being introduced to these mREITs but I sure like what they have done for my portfolio in the past several months. I should say fortunately I finally stumbled on them and I would agree that interest rates likely won't go anywhere anytime soon for the reasons people have already cited. I've bitched and griped for several years that we keep getting figures that indicate no inflation while all the things we buy every day seem to double every few years and now thankfully I've found a way to play along with the charade instead of fight it. Its better to make a few bucks than continually bang your head into a wall just because you know you are right. The management of these companies are my heros for taking advantage of what the Fed has given them and then given me the opportunity to participate. My dipshit broker never breathed a word of it to me and is still pushing loaded mutual funds at me. My thanks to the spammer that finally tipped me off and to you guys that help keep me informed. I'm going to sell right at the top if you'll kindly inform me when that happens.
    13 Sep 2012, 02:24 AM Reply Like
  • FYI
    MITT went ex div today with a 77 cent dividend, the Stock price minus the div is back up 50+ cents as of 9:50am So I guess the mReits are happy with Bernanke's actions. NLY, AGNC, CYS, ARR and other mReits all Up today - some up big.


    Looks like this sector ain't dead yet.
    14 Sep 2012, 10:38 AM Reply Like
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