The Lazy Days of Summer Lie Ahead for mREITs

Thanks to the Federal Reserve, the well-pummeled mortgage REIT sector can expect a reprieve from the thumping it has been taking over the past few weeks. The release of the Federal Open Market Committee meeting minutes on the last day of July left no room for doubt: The Fed will continue with its current quantitative easing program -- at least until its next meeting.

That means that, after the tumult caused by second-quarter earnings reports dies down, mREITs can expect some smooth sailing as long-term rates back down, and market jitters over the QE3 taper take a vacation until mid-September.

Not a moment too soon
Mortgage REITs can certainly use a break. After a nice rally following the news that sector heavyweight American Capital Agency (NASDAQ: AGNC  ) got its book value problem under control, things got ugly again. As Treasury bond yields rose on good economic news before the Fed's announcement on Wednesday, mREITs fell once again into the abyss.

Things weren't helped along by earnings announcements by hybrid trusts Invesco Mortgage (NYSE: IVR  ) and Dynex Capital (NYSE: DX  ) , either. Invesco showed lower core earnings compared to the first quarter, as well as a drop in book value of 12.4% from Q1. Dynex showed an increase in earnings per share from the linked quarter of $0.20 but suffered a book value plunge of nearly 15% from the first quarter.

Mortgage rates were a consideration
Though the FOMC minutes described economic expansion as "moderate," the committee was obviously concerned about the rise in mortgage rates. In describing its intention to stay the course on QE3, the FOMC noted that the continuation of the monetary easing is meant to push mortgage rates lower, thus strengthening mortgage markets. The committee also reiterated its expectation that the federal funds rate will not rise until unemployment hits 6.5%.

The continued presence of the Fed in the mortgage-backed securities market, in addition to dwindling interest rates, will be a welcome boost to book values. As legacy MBSes regain some of their lost value, mREITs will be able to breathe a little easier. The reminder that they may also expect to enjoy ultra-low short-term borrowing costs is an added bonus.

September isn't that far away
Mortgage REITs have been scrambling to rectify the bad situation they have found themselves in, as well. American Capital Agency, for example, has taken great pains to rejigger its portfolio and adjust its hedging strategy. Hatteras Financial (NYSE: HTS  ) , which delivered the worst of the book value declines at just over 20%, has announced the hiring of a former Wells Fargo (NYSE: WFC  ) manager who will serve as Senior Managing Director of Risk and Strategy at Atlantic Capital Advisors, the team that manages Hatteras.

Though the announcement from the Fed will give the sector some much-needed rest, mREITs need to stay alert. This idyll won't last long, and the interlude must be used to plan for the future. The meeting minutes from Ben Bernanke and his team shouldn't lull mortgage REITs into taking it easy, since September -- and the next FOMC meeting -- is truly just around the corner.

Mortgage REITs look like they are in for a breather, but the eventual demise of QE3 means that there will be more turmoil -- and, possibly, more dividend cuts. If you are wondering whether income investing a thing of the past -- and you're an investor who prefers returns to rhetoric -- you'll want to read The Motley Fool's new free report "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.


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