By Joseph Hogue
NEW YORK (StreetAuthority) -- I have a deal for you. I am willing to lend you funds at around a quarter of a percent for a short term, say a month. I will not raise the rate each time you come back to take out a new loan and I will not interfere with how you use the funds.
The only thing I ask in return... well, I won't ask anything in return. It's pretty close to free money. Deal?
The Federal Reserve extended this offer to a select group of investment companies and has guaranteed its continuance with its most recent policy meeting. The central bank lowered its growth and inflation estimates for the U.S. economy, meaning that rock-bottom rates are here to stay until well into 2014.Also important, the Fed will continue to reinvest its incoming funds into mortgage-backed securities, or MBS, which will help support the housing market. It's a great deal if you can get it -- and you can! Not directly of course, unless you have an inside track to Bernanke & friends at the Federal Reserve, but you can participate through shares of mortgage real estate investment trusts, or mREITs.
mREITs: Making Money the Easy WayThese companies borrow money backed by their assets at a one-month rate of around 0.29%, and then invest the loan in higher-yielding mortgage securities, usually paying around 2.6%. Now this spread of 2.3% is not so enticing until you understand that mREITs use leverage to borrow between seven and 10 times the amount of assets they possess. This can allow a $10 billion company to collect $2.3 billion in interest income, a 23% return. In addition to the great rate on funding, these companies are exempt from federal taxes as long as they pay out at least 90% of income to stockholders. With a stabilizing housing market and little growth elsewhere in the economy, mortgage-backed securities are receiving a lot of attention. Especially from some of the smartest investors in the world. Pimco's bond guru, Bill Gross, borrowed a record $88 billion in January to bet on MBS, which is now 54% of his flagship Total Return Fund. Warren Buffett and Fortress Investment Group are at odds over who will buy Residential Capital's mortgage portfolio when it goes to auction.
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