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Ask a Fool: How Will QE3 Affect Mortgage REITs?

Worldwide Invest Better Day 9/25/2012

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 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 (NYSE: NLY  ) , 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 (NYSE: CIM  ) and Hatteras Financial (UNKNOWN: HTS.DL  ) , 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.

Click the green button to join the thousands of people celebrating Worldwide Invest Better Day on Sept. 25!

Anand Chokkavelu has no positions in the stocks mentioned above. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 19, 2012, at 4:43 PM, BigBuckssss wrote:

    Im not too sure about your premise..Seems to me that the 10 yr has actually bottomed and rates are rising..I am very long AGNC @$32.51 and have an additional bid in at $33.33 hoping for another secondary..MReits are going to be great for years to come..

  • Report this Comment On September 19, 2012, at 5:34 PM, Rollerofthedice wrote:

    I believe the Fed's action to keep long-term rates low for a longer period of time is GOOD for mREITs, certainly in the long term. It appears to me that the most significant risk to these investments is an increase in long-term rates and a Fed commitment to keeping them down is very beneficial.

  • Report this Comment On September 19, 2012, at 10:08 PM, Ken311 wrote:

    long-term rates are already at record lows. short-term rates can't get much closer to zero. if long-term rates do take a significant drop, it will hurt mREITS.

    these companies profit on spread, not on low interest rates. go on and watch the yield curve like a hawk. the flatter this curve gets, the less profit these companies can generate.

    please try to understand what you invest in.

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