With the stock market down 9% the past three months and the Federal Reserve trying to lower long-term rates, mortgage REITs have taken a beating. The iShares FTSE NAREIT Mortgage Plus Capped Index Fund
Investors have soured on mortgage REITs for three main reasons. One, with the markets gyrating, people are worried about anything they deem risky. Understandably, mortgage REITs that focus on risky assets such as Chimera Investment
Secondly, investors are worried about anything with large amounts of debt. Mortgage REITs use short-term repurchase agreements, or repos, to leverage their purchases of low-yielding mortgage securities. For example, American Capital Agency
Third, people are worried about the effect of the Fed's plan to bring down long-term interest rates. If the Fed's plan works, homeowners may refinance their mortgages. This would be a problem for mortgage REITs, which bought mortgages at a premium to their face value. If homeowners refinance early, the mortgage REIT would only get back par on their investment.
None of these reasons are that strong. It would be far worse for mortgage REITs if the Fed raised short-term rates. However the Fed has said it will not raise rates for at least two years, and if slow economic growth and deleveraging continue, interest rates are likely to remain low. As equity prices are no longer debt-fueled, generating income from investments is important.
There are now some high-quality REITs priced at or below book value to help you do just that:
Annaly Capital Management
Source: Yahoo! Finance.
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Dan Dzombak's musings and articles he finds interesting can be found on his Twitter account: @DanDzombak. The Motley Fool owns shares of Annaly Capital Management and Chimera Investment. 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.