Ahead of the Bell: Mortgage REITs

Shares of mortgage real estate investment trusts could be ready for an upturn, as their exposure to the demise of Lehman Brothers Holding Inc. is manageable, according to a Keefe, Bruyette & Woods analyst.

In a note to investors Tuesday, Bose George said these REITs have been reducing their exposure to Lehman over past few months and their exposure seems "relatively small." For example, Hatteras Financial Corp. has $104 million out of $4.4 billion in exposure to Lehman, which George believes is representative of its peers too.

Additionally, the prices of agency mortgage-backed securities will stay stable and could rise Tuesday amid a likely rally in Treasurys and because the Treasury can directly buy them to support this market. This will allow the REITs to sell these securities without a loss.

George believes the REITs will continue to generate "very attractive earnings" through next year as "the likelihood that the Fed's next move is a rate cut has increased materially," the analyst wrote.

George maintains an "Outperform" rating on the mortgage REITs despite the possibility of significant market volatility Tuesday.