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Summers' Exit Will Give Mortgage REITs Some Breathing Room

By Amanda Alix - Sep 16, 2013 at 11:15AM

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Have the doves prevailed?

The Federal Reserve was poised to be front and center this week, as it prepares for its Federal Open Market Committee meeting Tuesday and Wednesday. Then, out of the blue, former Bill Clinton Treasury Secretary Larry Summers withdrew his name from the short list of those under consideration to be the next Chair of the Federal Reserve.

The sometimes-brusque politician felt that hearings surrounding his "possible confirmation" would cause too much turmoil, considering concerns regarding his part in deregulating the financial industry under Clinton, as well as some ill-conceived comments regarding women's math aptitude during his Harvard presidency.

Is this bit of news a good thing for mortgage REITs? You bet it is.

More liquidity?
Janet Yellen, the current Vice-Chair of the Fed, now looks to be holding the brass ring. One of the stewards of quantitative easing, Yellen is considered much more dovish than Summers, and more apt to support a slow, well-considered tapering of Federal Reserve monetary easing policies. She has experience in this realm that Summers lacked, and is credited with being aware of the advent of the financial crisis while others seemed oblivious.

This development will likely give battered mREITs like Annaly Capital (NLY 0.80%), Armour Residential (ARR 0.14%), and American Capital Agency (AGNC 0.34%) a huge boost as investors begin to feel less panic regarding a tapering of the current QE3 program. Markets have responded to the Summers announcement by soaring skyward, apparently feeling relief and confidence about the fate of the taper.

For the heavily agency-weighted trusts above, the news should give them some much-needed respite from falling book values and share prices. Annaly has lost 10% of its value in the past three months, while American Capital Agency has lost almost 5%. Armour has been stung badly, with a nearly 15% drop in share price during that time period. The idea that the Fed will maintain its monthly purchases of mortgage-backed securities backed by agencies Fannie Mae and Freddie Mac -- the type they invest in as well -- will surely be music to their investors' ears.

Not all sewn up yet
There is a chance, however, that Yellen won't be appointed. President Barack Obama was fond of Summers, and may not like the fact that he was effectively forced to withdraw. In that scenario, appointing Yellen may be considered giving the complainers their way. Also, there could be another candidate waiting in the wings: Former Fed Vice Chair Donald Kohn, currently of the Brookings Institution, has reportedly also been interviewed for the slot.

Then again, current chair Ben Bernanke won't be leaving his post until January, and the brouhaha about Summers might have no real effect on this week's FOMC meeting at all.

Right now, however, the market is riding high. The most important thing to remember is that QE3 was never meant to last forever, and the program will, at some point, cease to exist. Before that time, mortgage REITs will experience more pain, but it won't be fatal. Watchful investors planning for the long haul may find themselves able to pick up some of their favorite mREITs at bargain prices.

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Stocks Mentioned

Annaly Capital Management, Inc. Stock Quote
Annaly Capital Management, Inc.
NLY
$6.32 (0.80%) $0.05
AGNC Investment Corp. Stock Quote
AGNC Investment Corp.
AGNC
$11.76 (0.34%) $0.04
ARMOUR Residential REIT, Inc. Stock Quote
ARMOUR Residential REIT, Inc.
ARR
$7.33 (0.14%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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