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Latest Unintended Casuality Of QEtc.: Mortgage REITs

Tyler Durden's picture


In the four weeks since Bernanke unveiled QEtc. and its focus on the MBS market, mortgage REITs have slumped - losing more than half the year's gains amid heavy volume. The selling pressure is warranted as these vehicles tend to be owned by investors seeking high-yield dividend plays - and as such any risk to that stream means high-beta selling. With re-investment opportunities miserly - thanks to Bernanke's ZIRP and spread repression - dividend-paying ability remains questionable.

MORT (mortgage REIT) ETF year performance...

As CRT's Ken Hackel points out,

"the basic business model has 3 major hot buttons that can shut off the earnings power - asset yields, liability costs, and access to leverage. However given that


1) REIT portfolios are mostly owned at significant premiums; that


2) prepay speeds on those portfolios are in the process of accelerating quite sharply, and


3) that reinvestment opportunities are miserly, thanks to Fed activities resulting in low interest rates and tight spreads, potential risks to that dividend paying ability are visible.


The next few weeks and months are likely to be a challenging time for the MBS REIT industry, as each company takes steps to shore up its balance sheet and replace runoff in ways that keeps equity investors on board."

 We think it's important to watch all 3 hot buttons, wary of any signs of further stress as yet another unintended consequence of Bernanke's action comes to bear - this time perversely on the exact sector he believed would benefit.


And arguably - mortgage REITs dividend yield spread has merely normalized relative to the market... does that still seem fair compensation?



Charts: Bloomberg

Your rating: None

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Mon, 10/15/2012 - 13:03 | 2890921 CPL
CPL's picture

Goodbye useful tax loopholes!


Hello soul crushing loss.

Mon, 10/15/2012 - 13:07 | 2890941 disabledvet
disabledvet's picture

"But soon those stupid country folk will be forced to live in our hell!"

Mon, 10/15/2012 - 13:47 | 2891352 Stock Tips Inve...
Stock Tips Investment's picture

This is another consequence of the Fed's plan, in fact, over the coming weeks and months will see this sector pressured by financial and monetary circumstances. Beware of the positions taken.

Mon, 10/15/2012 - 16:36 | 2891832 ndotken
ndotken's picture

Buy the dip .... just buy the fucking dip .....

Mon, 10/15/2012 - 13:21 | 2890978 BandGap
BandGap's picture

Shit, I moved 1/2 of my retirement savings into REITs about a month ago. The other 1/2 went into precious metals and mining. There is no fucking place to hide these days.


Mon, 10/15/2012 - 13:51 | 2891327 Midas
Midas's picture

If you bought it for income you might not suffer too much if you are patient.  If you bought it to flip you have a problem.  Looking at the chart for NLY for the last ten years it has ranged from 11 to 20 and sits at 15.5 right now.  If you throw in the dividends I think very few people would be in negative territory.  I know that isn't the greatest vote of confidence, but some of my investments have turned out a hell of a lot worse.  And yeah, the Bernank is seeing to it that nobody stands a chance..

Mon, 10/15/2012 - 14:04 | 2891418 CPL
CPL's picture

Sure there is.


Stop.  Paying.  Taxes.


That simple.  Somehow it was acceptable to dump paying the bank on mortgages.  Why would you continue to fund the source of the problem?

Mon, 10/15/2012 - 14:49 | 2891547 death2Tyrant-asauras
death2Tyrant-asauras's picture

no, their aint.


the issues are systemic and there is no happy ending here.

Mon, 10/15/2012 - 13:23 | 2890983 whatsinaname
whatsinaname's picture

I saw some mREIT stocks getting hit recently probably due to the drop in the spreads between Tres and MBS ?

Mon, 10/15/2012 - 13:03 | 2890923 vote_libertaria...
vote_libertarian_party's picture

uhhhh....buy buy buy?

Mon, 10/15/2012 - 13:06 | 2890931 DoChenRollingBearing
DoChenRollingBearing's picture

Slightly O/T, but I DO have to find income investments to discuss...  Yields are so low it is killing those of us dependent on getting income from investments.  Ideas are most welcome!  Anything I receive by gmail @ my name that goes into my upcoming article on INCOME I will attribute to you (or not), however you instruct.

Mon, 10/15/2012 - 13:09 | 2890947 redpill
redpill's picture

Have you considered getting into the business of manufacturing high quality rolling bearings?

Mon, 10/15/2012 - 13:58 | 2891397 BandGap
BandGap's picture

High quality ben wah?

Mon, 10/15/2012 - 13:14 | 2890958 disabledvet
disabledvet's picture

Oracle Communications. That will quickly become the world's first trillion dollar company. The dividend is small...I agree...but once it goes up 1000 fold suddenly you'll have some survival money...in addition to the guns, land, ammo and gold of course.

Mon, 10/15/2012 - 16:14 | 2891784 sessinpo
sessinpo's picture

What's this about some company becoming the first trillion dollar company. Governments did that a long time ago.

Mon, 10/15/2012 - 20:56 | 2892659 Payable on Death
Payable on Death's picture

Tax liens. I'm in a fund projecting 10% IRR. Nominal returns are 18%-24%. The focus is on a few states that are not so automated that large institutions can bid returns down to ZIRPish levels.

I say "projecting" because results are still pending. I invested in 2010, 2011, and 2012. The 2010 fund has repaid 95% of principal, with an appropriate number and value of liens still outstanding to get to that 10%/yr. And, this is the rub: you WILL get your money back, the question is WHEN.

Mon, 10/15/2012 - 13:08 | 2890945 Quinvarius
Quinvarius's picture

Since the Fed decided to become a REIT, the MBS REIT business is like trying to swim in a baby pool with an elephant.  Plus the Fed's business model is to lose money.  You can't compete with stupidity of that magnitude.

Mon, 10/15/2012 - 14:59 | 2891586 Fox Moulder
Fox Moulder's picture

How can you lose money when you can always make more?

Mon, 10/15/2012 - 13:11 | 2890952 DollarDive
DollarDive's picture

I don't know if  you heard, but there's a rumor.  Yes..... it's possible that Apple might.... might, not will, but might just introduce their new IPAD mini.  I can't imagine what it will do.  It sounds too good to be true... but yes, it was leaked to the media that they MIGHT... be introducing the IPAD Mini!!  Holy F'in WOW !

Mon, 10/15/2012 - 13:14 | 2890959 Quinvarius
Quinvarius's picture

So they are making an iphone with no ability to make calls?

Mon, 10/15/2012 - 13:35 | 2891164 Alpha Monkey
Alpha Monkey's picture

Uh.. it's called an IPod touch...

Mon, 10/15/2012 - 13:45 | 2891348 aerojet
aerojet's picture

Yes, only a little bit...bigger.  But not as big as an iPad.  It's for those people who need a screen that is 7" exactly, because 5" is too small, but 9" is too big.  Why all the odd numbers?  Eventually, they will just produce an i-whatever in every screen size in 1cm increments.  It's kind of like how Smith & Wesson made revolvers in 1 7/8", 2 1/2", 3", 4", 5" (sometimes), 6", and 8 3/8" but they aren't interchangeable, you're pretty much stuck with the length you chose, and then you get all these collectors who, for reasons unknown, think they need to own an example of that same model in every barrel length offered mainly so they can take group photos of the collection and post it on the Internet.  I'm holding out for a 22" iPad...

Mon, 10/15/2012 - 13:16 | 2890966 LawsofPhysics
LawsofPhysics's picture

So banks are running out of profitable scams?  Fuck them.

Mon, 10/15/2012 - 13:17 | 2890970 buzzsaw99
buzzsaw99's picture

many understand the risk posed to holders of morts from defaults but the risk of early repayment by non-deadbeats will be equally vicious in the coming years due to zirp. People can get 4% or whatever tax-free and risk-free just by paying down their mortgages. Why the fudge would they want to put it where the maggots can steal it for a measy nirp?

Mon, 10/15/2012 - 13:25 | 2890993 Ham-bone
Ham-bone's picture

Why would non=deadeats pay down mortgages when they can refi eventually under 3%, plus write off the interest.  Eventually it will be damn near w/o interest expense.  Time to leverage up, not down.  With even worse implication eventually for the REITs.

Mon, 10/15/2012 - 13:49 | 2891360 LawsofPhysics
LawsofPhysics's picture

So long as you don't have to buy food or fuel, that will work.

Mon, 10/15/2012 - 13:56 | 2891387 aerojet
aerojet's picture

I've refinanced a couple of times already.  I'm down to, I think 3.5% and there is no real reason to refi again at 3% or 2.75% because it would be better to just pay off more principal at this point.  I only did the second refi because I paid off a big chunk at once and then wanted a lower monthly payment so I could take on some other risk, which in my case, was finding a new job--if anything had gone wrong with the new job and I wanted to quit, I built myself a huge cushion in my monthly expenses where I could be unemployed for over a year and not have to worry about paying the bills.  As it turns out, I like my new job and it's been fine for 14 months now.  You just never know, though.  And yes, I could have hung onto the "big chunk" and used that to pay bills while not employed, but there was really not place else I could get any kind of return on that money, anyways.  My old load was in the 5% range.



Mon, 10/15/2012 - 15:37 | 2891696 buzzsaw99
buzzsaw99's picture

serial refis is exactly what the maggot bankers want. origination fees go straight into their bonus check. Many are using the same logic that aerojet has. 4% tax free is like 5% really meanwhile savings draw nirp. You may not agree with what I say but the logic of it is impeccable. Watch and see if what I wrote doesn't happen over the next ten years. Half the country will take on more debt and fail, the other half will pay it off and laugh.

Mon, 10/15/2012 - 13:20 | 2890975 SafelyGraze
SafelyGraze's picture

"unintended casualty" suggests that the fed doesn't war-game their strategies

hard to imagine this could be true

Mon, 10/15/2012 - 14:06 | 2891424 CPL
CPL's picture

Not really,


None of them have worked a day in their lives.  What do they know about work or business?

Mon, 10/15/2012 - 13:22 | 2890981 fonzannoon
fonzannoon's picture

Where is Pimco in this mess? Didn't they load up on these things? Their flagship fund is doing fine.

Mon, 10/15/2012 - 13:24 | 2890991 whatsinaname
whatsinaname's picture

Actually the PRRIX is doing better than PTTRX. Wondering why ?

Mon, 10/15/2012 - 13:27 | 2890992 Dr. Engali
Dr. Engali's picture

I think Pimco loaded up on MBS ...look for them to load up on reits for the next round of QE.

Mon, 10/15/2012 - 13:23 | 2890982 fonzannoon
fonzannoon's picture


Mon, 10/15/2012 - 13:37 | 2891252 jimcg
jimcg's picture

I've owned some of these (AGNC< CYS< HTS< NLY< CMO) for the past two years and have enjoyed outsized dividend gains plus some price appreciation as well.

Maybe I just got lucky and never understood the business model to begin with (wouldn't be the first time LOL), but my understanding was that they made money from the spread between their borrowing costs (near 0%)and mortgage rates...Aside from the prepayments and refinancing which are greater than normal, I really do not see any effective change in the dynamics of their model, in fact, I see QInfinity having a longer tern stabilizing effect on their borrowing costs and slowly increasing mortgage cost as also being beneficial. Actually thought (think) that QInfinity was very positive for these investments...in spite of the current market reaction.

If I'm wrong, can someone tell me where?


Mon, 10/15/2012 - 13:43 | 2891335 DollarDive
DollarDive's picture

They're OK till they're not...... when everyone runs for the exits - just be out before everyone else.

Mon, 10/15/2012 - 13:42 | 2891330 Mattress Money
Mattress Money's picture

Im lost?

Mon, 10/15/2012 - 13:48 | 2891354 Nobody For President
Nobody For President's picture

Isen't central planning wonderful?


Wadda mean, unintended consequences?

Mon, 10/15/2012 - 14:09 | 2891430 Seasmoke
Seasmoke's picture


Mon, 10/15/2012 - 19:15 | 2892461 Michigan
Michigan's picture

I thought Ben was gonna make those housing rises levitate with QEternity?

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