What happened

Annaly Capital Management (NLY 1.33%) did not have a great month in September as its stock price plummeted 33.5%, according to S&P Global Market Intelligence. 

September was the cruelest month since the pandemic, as the S&P 500 fell 9.3%, while the Nasdaq Composite dropped 10.5%, and the Dow Jones Industrial Average was off by 8.8%.

So what

Annaly Capital, a mortgage real estate investment trust (REIT), was considerably worse than the overall market as it proved to be a difficult month for housing stocks.

As a mortgage REIT, Annaly Capital invests in mortgages and mortgage-backed securities, earning revenue on the interest payments. Its portfolio is primarily in agency mortgage-backed securities (MBS), which are backed by the federal government.

Annaly was hit particularly hard by the Federal Reserve Board's most recent rate hike in September, when it increased the federal funds rate by another 75 basis points. This, in turn, had the effect of bumping up mortgage interest rates to 6.8% in the last week of September -- the highest they have been since 2006.

This has slowed down the housing market, as refinancing and new mortgage applications have dropped significantly, while home prices keep rising -- up 7.7% year over year in August. With high interest rates and high home prices, people are less inclined to buy or refinance, which hurts mortgage REITs like Annaly.

Now what

It is also notable that Annaly did a 1-for-4 reverse stock split in early September, which also sent the stock price tumbling. That means that every four issued and outstanding shares of the company's stock will be converted into one share. So that means, as of Sept. 26, the share price increased by a factor of four to about $20 per share. Investors perhaps saw it as an attempt to shore up the falling stock price, which is down 45% year to date.

There is not a lot of good news on the horizon for mortgage REITs, as the Fed is expected to keep pushing interest rates higher until inflation comes down. This means that mortgage rates will remain high, at least in the near term, and that should further slow the housing market.

However, as a REIT, Annaly is required to pay out 90% of its earnings to dividends, so it remains one of the higher yielding dividend stocks on the market. The reverse stock split boosted its dividend payout by four, from $0.22 to $0.88 per share, and its yield sits at an extremely high 18.8%.

Annaly Capital reports third-quarter earnings on Oct. 26.