NEW YORK (TheStreet) --Mortgage REITs were having a brilliant year in 2012, but ran into a brick wall some three weeks ago, and there is some disagreement among analysts over whether the sector will redeem itself when companies report third quarter earnings.
From the start of the year through Sept. 21, Market Vectors ETF Trust (MORT), a mortgage REIT exchange traded fund, gained 23.87%, not counting its sizeable dividend yield (currently just below 10%). From Sept. 24 through Thursday, however, the fund has fallen 5.5% on worries over shrinking dividends.
Some commentators have pinned the blame on QE3--specifically, the Federal Reserve's Sept. 13 announcement that it would buy long-dated mortgage backed securities in an effort to stimulate home purchases by lowering the mortgage rate for prospective new homebuyers.
Mortgage REITs use leverage to buy mortgage backed securities (MBS) and profit on the spread between the dividend income and their (relatively lower) cost of raising money to buy more MBS. Lower yields on long-dated MBS means rising book values for mortgage REITs because the MBS they own rise in value. However, the lower long term yields mean that when MBS mature, the mortgage REITs must reinvest their earnings at lower yields.Further, mortgage REITs face a rising risk of prepayment as homeowners pay off mortgages in order to refinance at lower rates. However, Sterne Agee analyst Jason Weaver argues in a report published Thursday these risks "have been apparent for some time, thus we find it unlikely to be the driver of recent sector weakness as commonly cited." Rather, Weaver attributes the recent selloff to investors pocketing gains and reallocating money to sectors that haven't performed as well. Barclays analyst Mark DeVries, however, expressed concern on Tuesday that attempts by REITs such as American Capital Agency Corp. (AGNC), Annaly Capital Management (NLY)and CYS Investments (CYS), which focus on MBS issued by government-sponsored enterprises Fannie Mae (FNMA)and Freddie Mac (FMCC) to hedge their exposure to rising interest rates may have offset their QE3-driven book value gains. Weaver, on the other hand, does not share those concerns. He sees "a good possibility of significant upside surprises" on earnings and book value, particularly for American Capital Agency Corp. He did not address Annaly or CYS in his report.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV