Ask a Fool: How Will QE3 Affect Mortgage REITs?

In the spirit of better investing and in celebration of the first Worldwide Invest Better Day coming up on Sept. 25, Motley Fool analysts will be answering user- and reader-submitted questions leading up to the big event. "Ask a Fool" anything, and we'll do our best to help you invest better.  

In the following short video, senior analyst Anand Chokkavelu fields a question posed by Fool.com reader Terry, who wonders, "If we get QE3, how should that affect REITs like NLY?"

"QE3" refers to the Federal Reserve's recently confirmed plan to lower long-term interest rates by buying up mortgage-backed securities, and "NLY" is Annaly Capital, a real estate investment trust, or REIT. In this context, we're referring specifically to mortgage REITs -- a list that includes other big names such as Chimera and Hatteras Financial, to name a few. All have similar business models in that they try to borrow cheaply, at short-term rates, and then lend effectively at longer-term rates by buying mortgage-backed securities.

The lowering of long-term interest rates will constrict the amount of spread these companies make, ultimately lowering their profitability as well as their potential to pay out dividends to shareholders -- which is the big attraction of mortgage REITs in the first place.

QE3 won't be a good thing for these companies. Watch the video for Anand's full take on the situation, including what else to keep in mind beyond the interest-rate spread.