Why the Mortgage REIT Sector Was Slammed
Jul 5th 2013 4:44PM
Updated Jul 5th 2013 4:46PM
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of mortgage real estate investment trusts -- those which purchase mortgage-backed securities and loans -- were pounded, including Anworth Mortgage Asset , and ARMOUR Residential , which lost as much as 13% and 10%, respectively, following today's strong jobs data.
So what: U.S. jobs data released today showed that the U.S. created 195,000 jobs in June compared to a forecast from economists of 165,000. The considerably better-than-expected jobs report could signal that the Federal Reserve's plan to wind down its $85 billion in monthly bond purchases, which include long-term U.S. Treasuries and mortgage-backed securities, may begin relatively soon. The wind down is complicated in that it'll stop pumping free money into the market, which has helped artificially reduce long-term lending rates. Low lending rates help boost the net interest margin of highly leveraged mREITs. Conversely, with the Fed purchasing fewer mortgage-backed securities, there will be a more purchasable selection for mREITs to choose from, which should serve them positively.
Now what: While rising interest rates aren't good news for the mREIT sector, I'd say that investors, on the whole, are largely overreacting to the news. Admittedly, it depends which road of the sector you decide to go down. Agency-backed mREITs like Annaly Capital Management and American Capital Agency purchase only mortgage-backed securities which are backed by the federal government. This means that they're both covered in case of default. On the other side of the equation are non-agency backed MBS purchasers, who have no backing from the government if their loans default. While agency-backed MBS purchasers' net interest margins are smaller than non-agency backed companies, their dividends are a lot safer. Both Anworth and ARMOUR also invest in agency-backed mortgage-backed securities, so I'd say that today's move lower could represent an intriguing opportunity, but would highly advise you dig deeper into each unique company.
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