Refinance Program Bust: Stay With mREITs

Includes: MFA, NLY, NYMT, PMT
by: Joseph Poma

Yesterday the whitehouse announced that President Obama was "taking action" and was eager to help homeowners. It was his move in the chess match that has been waging on between the president and the banking behmoths and it seems as though this most recent move is the equivalent to capturing a pawn when he could have taken a rook.

The grand announcement that was made: the cap that limited refi's to only those who owed up to 25% over what their home was worth was removed. With approximately 11 million borrowers whose homes are underwater, this seems at first sight to be a phenomenal move that will greatly ease the burden on many home owners and even stimulate the economy. There are a few caveats in the new program though that make it less potent than many had hoped for.

Refi's will only be given to those home owners who are current on their mortgages and whose mortgages are backed by a GSE (Government Sponsored Enterprise). The program will not write down the mortgage principle that is underwater, but rather extend the term of the loan and lower the interest rate to create a lower monthly payment for the borrower. This program will not help those people who are delinquent on their payments, meaning that based on FHFA approximations, only 1 million borrowers will actually benefit from the new program.

As much as those one million home owners will be grateful for the lowered monthly payment, the truth is that on the broad scale of things, the announcement is more of a stalemate than a checkmate for the administration. As such, I continue to recommend those mREIT's that are trading at a discount to book value. Since the government refinance program will be affecting less than 10% of existing mortgages, and those mREIT's should be well diversified through the use of MBS's, the negative implications should be minimal.

Which mREITs I recommend:

Annaly Capital Management (NYSE:NLY)

NLY management is some of the best in the industry and currently this REIT trades at a slight discount (2%). Worries about the company's dividend have arisen because of the unknowns in the administration's mortgage plans. However as we've seen yesterday, those worries may have been unwarranted. This may be why the stock popped 2.5% during the trading day.

MFA Financial (NYSE:MFA)

Currently yielding 14.79%, this stock is trading at a 13% discount to book value and has 85% of float held by institutions. What should be cautioned is that the current payout ratio is over 100% which means that the current dividend may be at risk for being cut if income is not improved over the coming months. Be wary with this one.

PennyMac Mortgage Investment Trust (NYSE:PMT)

PMT has a huge cash balance, 28.77/share in cash, and is currently priced 7% below book value. The forward P/E is trading 28% below the current P/E ratio which offers growth for the future while maintaining a 11.49% yield for the time being.

New York Mortgage Trust (NASDAQ:NYMT)

NYMT sports a 14.86% yield while being priced 22% below book value.

As an added assurance, all mREIT's listed above are trading below the average analyst price target.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. All information and charts obtained through,, and

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