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1 Reason Mortgage REITs Are Struggling

The last five years have been a veritable bonanza for mortgage REITs. With historically low short-term interest rates and, until now, less demand for mortgage-backed securities, companies like Annaly Capital Management (NYSE: NLY  ) and American Capital Agency (NASDAQ: AGNC  ) have been raking in profits.

Like all good things, however, this too has come to an end. The most widely cited catalyst for the change is the Federal Reserve. In September of this year, the Fed unleashed a third round of quantitative easing, whereby the central bank is expanding its balance sheet by purchasing long-dated securities. Most importantly, the measure is aimed specifically at reducing MBS yields -- the same yields that mortgage REITs rely on to make money.

But while the Fed's impact can't be denied, it's nevertheless only one reason mortgage REITs are bound to suffer going forward. The other reason is that the market itself, irrespective of the Fed's involvement, has simply gotten way too crowded. As you can see below, all but two of the largest mortgage REITs that specialize in agency-backed paper have popped up since the financial crisis began.

Source: SEC's EDGAR Database.

The impact of this is simple: Because more money is vying for approximately the same supply of agency-backed MBSes, the prices of the latter will invariably remain elevated and their yields concomitantly depressed. With this in mind, investors in these vehicles should start preparing themselves for a future of less spectacular returns than they've experienced in the past.

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Read/Post Comments (3) | Recommend This Article (11)

Comments from our Foolish Readers

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  • Report this Comment On December 12, 2012, at 1:23 PM, divnut wrote:

    So John, what's your bottom line here as far as holding, selling or waiting for a big dip to buy in, if one is coming ? Personally, I bought in at $31.45 a

    few days ago and looking forward to at least a divy

    of 12%, but if you expect a big drop in the pps, then it's not going to be profitable to hold onto it.

  • Report this Comment On December 12, 2012, at 5:12 PM, crazyeconprof wrote:

    Hey Divnut,

    AGNC has been my largest holding for a few yrs now, but I sold it all over past month. The divid. will be cut substantially .... likely tomorrow.!!

    The net interest margin has compressed and earnings have been cut in half since last year. I will buy some of it back after price drops..

  • Report this Comment On December 12, 2012, at 5:16 PM, crazyeconprof wrote:

    PS I have a limit order in @ $25/share.

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