Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



2 Reasons Not to Panic Over mREITs

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

The mortgage REIT sector has taken a beating since the election, as investors worry that four more years of an Obama administration will continue to squeeze the life out of the popular investment vehicles.

For those looking for a reason or two to look on the bright side, search no further than American Capital Agency's (Nasdaq: AGNC  ) own Gary Kain. The Bank of America Merrill Lynch Banking and Financial Services Conference gave American Capital's CEO the perfect pulpit from which to make his proclamation: Sure, times are tough for mREITs, but there are good reasons not to panic.

Reason No. 1: Portfolios can be arranged to minimize risk
Kain talked first about the biggest bugaboo scaring investors in the mREIT sector – the prepayment risk issue. While admitting that this problem has accelerated because of QE3, he also noted that there are ways to position a mortgage-backed security portfolio to dampen the chances of prepayment.

The secret sauce here is to pick investments featuring low-principal loans, since fees associated with refinancing will seldom be considered a bargain on such a mortgage, offering a sort of built-in insurance policy. Kain also notes that he likes HARP loans, the government-backed refinance program for underwater borrowers. While these loans are written for LTVs that normally would not qualify, this is also a one-shot deal, meaning that these loans will not be refinanced again, obliterating prepayment risk.

Reason No. 2: Tax rate issues won't affect mREITs
Noting that fiscal cliff issues are upsetting investors -- particularly the fact that tax rates on dividend income might ratchet upwards if no action is taken by Congress -- Kain brings up a very salient fact: REIT dividends will experience no major changes, since they have always been treated as regular, not investment, income. No worries on that score, at least, though changes in the overall tax code may affect income tax rates in general.

Fool's take
American Capital's CEO notes that the current economic environment presents challenges but feels that good management techniques will tamp down much of the risk. This in itself should give investors heart, particularly those with interests in well-managed entities like American Capital, Annaly Capital Management (NYSE: NLY  ) and Armour Residential  (NYSE: ARR  ) .

Like American Capital, both Annaly and Armour are also positioning themselves to ride out tough times. Annaly recently made a bid to purchase CreXus Investments (NYSE: CXS  ) in order to diversify its MBS portfolio, and Armour has bumped up its portfolio percentage of adjustable-rate mortgages to nearly 22%, giving it some hedge against prepayments.

Mortgage REITs are far from out of the woods, but the best of breed have been checking the headwinds, and planning accordingly. Even if dividends suffer in the short term, investors can rest assured that the best-managed companies have nowhere to go but up.

Annaly Capital Management has a history of paying huge dividends to shareholders. But there are some crucial issues investors have to understand about Annaly's business model before buying the stock. In this brand-new premium research report on the company, our analyst runs through these absolute must-know topics, as well as the future opportunities and pitfalls of their strategy. Click here now to claim your copy.

Read/Post Comments (0) | 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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2117192, ~/Articles/ArticleHandler.aspx, 10/23/2016 12:47:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
AGNC $19.48 Down +0.00 +0.00%
American Capital A… CAPS Rating: ***
ARR $22.46 Up +0.10 +0.45%
ARMOUR Residential… CAPS Rating: ***
CXS.DL.DL $0.00 Down +0.00 +0.00%
CreXus Investment CAPS Rating: ***
NLY $10.08 Down -0.05 -0.49%
Annaly Capital Man… CAPS Rating: ****