Benefit from Bernanke's Mortgage-Backed Securities Plan

NEW YORK (TheStreet) -- "Don't fight the Fed" goes the old bromide, and I couldn't agree more. Testifying before Congress on Wednesday, Federal Reserve Chief Ben Bernanke said that the Fed could decide to sell its mortgage-backed securities (MBS) more slowly than originally anticipated.

This is really important insight because, as he intimated on Capitol Hill, the Fed may even decide not to sell its MBS supply and let them mature. You might recall that back in June 2011, the Fed announced that its exit strategy on MBS was to sell them during "the next 3 to 5 years." This would be after the Fed started raising short-term interest rates.

Since then the economic conditions have become nastier, so Bernanke is wisely changing his tune. "We haven't done a new review of the exit strategy yet. I think that's what counts the most here we will have to do that sometime soon," the Fed Chairman said.

This intimated that a slower exit strategy (selling of its huge MBS supply) could be stretched out for another year and thus makes it less of an economic event when the Fed reduces the size of its holdings. What wonderful news this is for the mortgage REITs that have been sold off before his MBS clarifications.

Take Annaly Capital Management ( NLY), the largest of its type with a market cap of around $14.65 billion. NLY is a specialty real estate investment trust (REIT) that benefits from low interest rates on the MBS supply.

That's because it engages in the ownership, management, and financing of a portfolio of these types of investment securities. The company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans.

Annaly Capital also invests in Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association debentures. It's almost as if they're partnering with the federal government and the Federal Reserve in helping make a market in all these types of MBS. If you own shares of NLY, currently trading around $15.49, your dividend yield-to-price is an astounding 11.65%!

When it appeared that the Fed might dump (sell) its hoard of MBS, investors in the Mortgage REITS like NLY worried that would have driven the value of its MBS portfolio as interest rates would rise.

That fear has subsided now that Dr. Bernanke is saying things like, "We're quite comfortable that we can exit by selling its MBS or letting them mature in a way that is both smooth and in which we provide lots of information to markets in advance, so they will know what's coming and be able to anticipate."

Looking at the five-year chart below, you'll most likely conclude that now may be a good time to consider owning shares of NLY. You might want to "scale in" and do some Jim Cramer-style "schnitzeling." Keep in mind that NLY has already lowered its dividend due to "yield compression." Up to now that's impacted its trailing twelve month "cash dividend payout ratio", which I expect will improve.

NLY Chart NLY data by YCharts

This compression has caused NLY to increase leverage to generate enough dividends. Its leverage is still not as high as their biggest competitor (market cap of $10.73 billion) which is American Capital Agency ( AGNC), which is being sold off after announcing that it sold 50 million common stock shares.

The share offering netted $1.58 billion in gross proceeds, which AGNC said it plans to use to acquire more agency securities and for general corporate purposes. Yesterday, shares dropped 3.5% on 10-times-average daily volume to close around $31.71. Here's a similar chart to the NLY chart above. AGNC Chart AGNC data by YCharts

With a yield-to-price of 15.8% and its cash dividend payout ratio so low (technically quite comparable to NLY's payout ratio), yield-chasing investors may prefer AGNC, although we can't rule out an unexpected dividend decrease. Both NLY and AGNC don't report earnings until April 29.

The Fed's cache of MBS has mushroomed to nearly $1 trillion since the Great Recession began in 2008. If the unemployment rate in the U.S. falls below 6.5%, the Fed and Bernanke could change their minds about the exit strategy for its heavy MBS load.

Bernanke didn't rule out the possibility of raising interest rates ahead of schedule, but did say, "I don't see any radical shift in the way this is going to happen," when he spoke before the House Financial Services Committee.

He commented on the ongoing unacceptable unemployment numbers and it left me believing that he and the Open Market Committee aren't ready to abandon their accommodative monetary policies anytime in the foreseeable future. He even guess-timated that unemployment wouldn't fall to 6% until 2016.

This bodes well for interest-rate-sensitive investments like REITs and greatly reduces the anxiety some have felt about mortgage REITs like NLY and AGNC. I'm planning to average into shares carefully and let the share price come to me.

As of the time of publication the author is only long shares of AGNC but not any other of the companies mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

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