QE3 May Pose At Least Some Dividend Risks To High-Yield Mortgage REITS (NLY, AGNC, CIM, MFA, STWD, IVR, HTS, CYS, ANH, MORT)

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Ben Bernanke and the FOMC delivered today on the promise of quantitative easing to start buying mortgage-backed securities to the tune of $40 billion per month.  The measure would allow for $23 billion or so this month and the Federal Reserve will continue reinvesting its principal and interest receipts. By targeting mortgage-backed securities we wanted to see how this impacts the high-yielding mortgage REIT sector which still offers investors yields of 10% and higher in many cases.

The good news is that the mortgage REIT sector is not tanking on the news that the Federal Reserve is targeting mortgage-backed securities. The bad news is that we are not seeing unilateral waves of new buying now that the FOMC formally extended its “exceptionally low rates” out to at least mid-2015 from a previous ongoing timeframe of “at least through late in 2014.” The excerpt we took from the FOMC statement is here:

….the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.  The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.  These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Here is how some of the key active issues are reacting in the space (with most recent dividend yields according to Yahoo! Finance):

Annaly Capital Management, Inc. (NYSE: NLY) down 0.6% at $17.65; 12.5% yield.

American Capital Agency Corp. (NASDAQ: AGNC) up 0.6% at $36.15; 14% yield.

Chimera Investment Corporation (NYSE: CIM) up 2.7% at $2.79; 13.4% yield.

MFA Financial, Inc. (NYSE: MFA) down $0.01 at $8.35; 11% yield.

Starwood Property Trust, Inc. (NYSE: STWD) up[ 1.4% at $24.34; 7.4% yield.

Invesco Mortgage Capital Inc. (NYSE: IVR) up 0.4% at $21.05; 12.3% yield.   Hatteras Financial Corporation (NYSE: HTS) up 0.4% at $29.42; 12.2% yield.

Cypress Sharpridge Investment (NYSE: CYS) up 2 cents at $14.63; 13.7% yield.

Anworth Mortgage Asset Corporation (NYSE: ANH) is up 1 cent at $6.94; 10.4% yield.

As far as the key ETF, the Market Vectors Mortgage REIT ETF (NYSEMKT: MORT) is up by 0.5% at $28.06 and we would note that this was a 52-week high above the prior high of $27.93.

If the FOMC is going to target new-issue MBS you might think that it would support the values inside the holdings of each of these.  That may be the case, but perhaps it also means that these mortgage-REITs now have to compete more and more with the Treasury as far as what the cost of buying new mortgages will be in the months ahead.

Does that mean that income distribution and interest payments will be lower ahead? If so, again IF, then that could pressure these dividend payments maybe starting in 2013. So far these have managed to hold up much better than the critics have expected and some have seen strong recoveries from the pre-summer lows this year.

JON C. OGG

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