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business newsMortgage REITs Annaly, Capstead, Hatteras Offer Attractive Opportunities
With the 10-year Treasury yielding less than 2.5% and the broad equity market in disarray, these companies at least offer some return for the risk.
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Pay Us Later
One of the great ironies of this whole housing mess is that those who have come out the other side are now enjoying one Garden of Eden-like environment of steep yield curves and seizure of refinancing or prepayments. The faster the prepayment rate, the quicker cash flows are paid back to the bond investors, and therefore the shorter the life of the fixed-income investment. When prepay speeds slow down, the average life of the bond's cash flows are extended, which is good for mortgage investors. For example: Currently NLY's and HTS's portfolios are trading around $102.50; if prepayments were to occur, that is everyone paid back at par, it would cause a 2.5% haircut in annual returns.
Despite the recent steep drop in interest rates, high unemployment, overleveraged consumers, many homes underwater (mortgages higher than homes value), and a generally overburdened system have prevented any significant refinancing or repayments to occur.
A Risk Worth Taking
We already know that unless there is some drastic policy change, short-term borrowing costs will remain near nil until mid-2013. There is some risk ahead of the election that the current administration may make a move for massive restructuring or principal forbearance for homeowners in which bond holders will bear a significant cost. But given current yields, it seems they're being paid for that risk.
As for the financial stability of these mortgage-based REITs, they are on much more solid ground than prior to the 2008 meltdown. Most have deleveraged to around 5x-6x book value from the 15x-20x during the housing bubble. This would allow them to better withstand another leg down in home prices and defaults.
With the 10-year Treasury yielding less than 2.5% and broad equity market in disarray, these mortgage-backed REITs at least offer some return for the risk you’d be taking.
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