12 REITS Could Leap On Increased Refinancing

by: Ry Frank

Mortgage real estate investment trusts (mREITs) should see a lot more business and increased revenues in the coming months because of a big rise in the number of mortgage-refinancing applications. The Mortgage Bankers Association reported that the number of people applying for refinancing increased by 9.2% in just one week, that of May 7 through 11 alone, according to a Reuters report.

The organization's seasonal index indicates that the number of mortgage refinancing applications was up by 13%. That should translate into a lot more business for REITs, such as like Annaly Capital Management (NYSE:NLY), Hatteras Financial (NYSE:HTS), MFA Mortgage Investments (NYSE:MFA) and Anworth Mortgage Asset (AHN). It could also translate into higher revenues, dividends and earnings per share for these organizations.

The picture for mREITs seems to be getting even better, because mortgage refinancing now makes up 74.9% of the mortgage business, according to the MBA. That confirms speculation that REITs are now the biggest players in the mortgage business. In contrast, the demand for new mortgages is actually falling -- the number of people seeking finance for home purchases actually fell by 2.4% in the last survey.

The number of refinancing applications is growing on the other hand; it increased by 2.8% in the latest Mortgage Bankers survey, rising from 72.1% to 74.9%. That would indicate that there's a huge untapped demand for mortgage refinancing out there, and banks and other traditional financial institutions don't seem to be meeting it.

If they are reliable, then these figures would seem to indicate that very good times are ahead for mREITs. Their business and stock values should grow dramatically over the next few months, even if a large percentage of those refinancing applications get turned down.

It should also be noted here that the level of refinancing might even be higher than the statistics indicate. The MBA survey only covered 75% of U.S. residential mortgage applications. That too would be very good news for mREITs, but very bad news for those trying to sell homes in this market. One REIT that could be hurt by falling demand for single family homes is Two Harbors Investment (NYSE:TWO), which has begun buying single family homes as an investment. Two Harbors's stock price could fall on the news of a fall in home sales.

Europe Debt Crisis Could Boost Mortgage REITs

The only things that could put the brakes on continued mREIT growth would be a rise in interest rates or an inability to find more financing. Neither of those events is likely to happen any time soon. A more likely scenario will be that more capital is about to flow into the mREIT business.

Most observers, including British Prime Minister David Cameron, expect the debt crisis to get worse, not better in the near future. That means that a lot more capital is going to be flowing into U.S. markets in an attempt to escape the mess in Europe. Since mREITs are one of the biggest success stories in U.S. finance, a lot of that capital is going to flow straight into them.

Expect mREITs to enjoy both higher levels of financing and increased business for the next several months. This should lead to a jump in stock values for those REITs that specialize in single family residential, including PennyMac Mortgage Trust (NYSE:PMT), Capstead Mortgage (NYSE:CMO), Chimera Investment Trust (NYSE:CIM), Cypress Sharpbridge Investments -, or CYS Investments (NYSE:CYS), Dynex Capital (NYSE:DX), and Newcastle Investment (NCT).

Refinancing Market could Grow

The refinance business could get even better because applications for mortgage refinance are at a historic low, in spite of interest rates, that are also at a historic low. That means there are many more potential customers for mREIT products out there who haven't checked out refinancing yet.

Part of the reason why the level of refinancing is low is that banks are leery of refinancing mortgages. Writers and mortgage industry observers Ilyce Glink and Samuel Tankin noted that banks and other lenders seem to turning down refinancing for almost any reason. That would indicate that they are afraid of anything that smells like a sub-prime mortgage.

This would indicate that there could be a huge market for non-guaranteed and sub-prime refinancing that has not has not been tapped yet, so. So the potential of this business has barely been touched. The problem is that the mREIT would have to figure out a way to do an end run around the banks and go directly to the homeowners. One potential way to do this would be through independent local mortgage brokers.

If some mREIT figures out how to market its products directly to homeowners, it could vastly increase its business. That could lead to higher stock values and dividends if that REIT could find enough financing to sustain that level of business. So far, this does not seem to have happened yet, but in today's environment, it's probably only a matter of time before it happens.

Proposed Mortgage Law could help some mREITs

One danger to mREITs that's been mentioned is competition from Uncle Sam in the form of federally guaranteed refinancing. This is not likely to happen, and even if it did, some mortgage REITs would actually benefit. U.S. Senators Barbara Boxer (D-California) and Robert Menendez (D-New Jersey) have introduced a proposed law called the Responsible Homeowners Refinancing Act, which is supposed to help another three million owners refinance their mortgage.

If it were to pass, this law would presumably help REITs like Annaly, MFA, Apollo Commercial R.E. Finance (NYSE:AMTG), and Hatteras, which specialize in refinancing federally-guaranteed mortgages by increasing their business. In fact, it could be a bonanza for them and raise their stock values to new heights.

The likelihood of the law passing is low because Boxer and Menendez are Democrats. The Democrats control the Senate, but not the U.S. House of Representatives. There is no way that the Republicans will let the Democrats pass a politically popular law that could help President Obama's re-election effort. Expect this measure to go nowhere because Republicans don't want to help Obama.

Expect such a law to be revived next year, but it would only pass if one party controls both houses of Congress and the White House. That situation is unlikely because of the current political fragmentation in the country. Some sort of compromise legislation that would increase financing is also likely, but it would have to be linked to mortgage reforms that both parties like.

A List of Mortgage REITs is Available

So how many publicly-traded mortgage REITs are there? That question is hard to answer because a new one seems to be popping up everyday, but there is at least one website that is trying to keep track of them.

Derivative Detective lists 38 publicly-traded mortgage Real Estate Investment Trusts, and this list seems incomplete. The list includes the big names, such as Annaly and American Capital Agency (NASDAQ:AGNC), but it also includes a plot of smaller players. Unfortunately, it does not break the trusts down by the type of mortgages that they underwrite. Still, it is the only list of such REITs that we have been able to locate online.

One prediction here is the number of publicly-traded mortgage REITs is probably about to grow. The potential business for several additional big residential mortgage REITs is certainly out there. The only thing that could keep such ventures from flourishing would be a lack of capital. Expect more mREITs to appear, but don't expect them to enjoy the kind of double digit earnings per share that some of the existing companies are showing.

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