Should Mortgage REITs Fear This Man?

Mel Watt is in charge at the FHFA. What does this mean for mortgage REIT's high yields?

Jan 21, 2014 at 8:12PM
Mel

FHFA's Director, Mel Watt

There's a new man in charge of the mortgage business, Mel Watt, and the mortgage industry is worried. As director of the Federal Housing Finance Agency, he'll have nearly absolute control over the federally backed mortgage business.

Why it matters for mREITs
Mortgage REITs including American Capital Agency (NASDAQ:AGNC) and Annaly Capital Management (NYSE:NLY) are in the business of buying and holding mortgages for investment. Most mortgages they own are agency-backed mortgages, and thus under the regulatory authority of the FHFA -- and Mel Watt.

One of many industry concerns is that Watt will extend or expand the Home Affordable Refinance Program to allow more borrowers to refinance at lower rates.

No big deal, right? Not exactly.

When a mortgage is refinanced, the principal is repaid. For investors, that means getting paid back early, often at a disadvantageous time for the investor.

Consider this: You buy a mortgage-backed security yielding 6%. Rates plummet to 3.5%. The mortgages you own are refinanced and you receive your money back. But now, with rates much lower than before, you're forced to reinvest at 3.5%, not the 6% you were earning before. This is exactly what happened when HARP 1 came into being.

Should you worry about another HARP?
Let's see, using an mREIT's SEC filings.

American Capital Agency does a very good job of breaking out its actual agency-backed mortgage holdings, which you can find on page 26 of its last supplement. Here, we can evaluate American Capital Agency's potential exposure to a new refinancing plan, or an extension to the current Home Affordable Refinance Program. (Unfortunately, Annaly Capital doesn't provide a breakout, either in its supplements or its SEC filings. American Capital Agency is likely a good proxy for Annaly Capital's agency portfolio, however.)

What we're looking for is how much of American Capital Agency's portfolio is yielding as much or more than the current rate on a similar mortgage. For instance, if American Capital Agency holds 30-year MBSes yielding 8%, then clearly these are at a serious risk of refinancing, because 30-year mortgage rates are currently about 4.4%. No rational person would keep a high-balance mortgage at 8% when current rates are nearly half that.

Here's American Capital Agency's table of MBS holdings:

Agnc Portfolio

So, let's make quick work of the numbers. American Capital Agency has about $8.6 billion in relatively high-yielding 15-year MBSes. For 20-30-year mortgages, it holds about $5.9 billion in MBSes with a higher yield than current mortgage rates.

Looking at the worst case, we can assume Watt extends HARP to every agency loan, and every borrower takes the deal. In such a scenario, American Capital Agency would see some $14.5 billion in refinances, or roughly 20% of the portfolio as of the last earnings call. This, of course, assumes mortgage rates stay where they are right now.

Is this a big deal?
Hardly. We're looking at the worst possible case. In all reality, either a combination of a low mortgage balance, ignorance, or high closing costs would keep the bulk of homeowners from refinancing. Thus, it's likely that even if HARP were extended or expanded, mREITs would escape largely unaffected.

The point I want to make here is that mREITs have already been through the first round of HARP. They reconstructed their portfolios to avoid refinancing risk. And when the 30-year mortgage rate dropped to 3.5% in 2013, everyone who wanted to refinance already did.

Mel Watt's appointment to the FHFA may be a big deal to some in the mortgage industry (banks, for completely different reasons), but his appointment means next to nothing for mortgage REITs. If there was ever a terrible reason to sell shares of your mREIT, it's because the FHFA has a new director.

Nine high-yield stocks to buy and hold forever
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a
free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Fool contributor Jordan Wathen has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers