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