Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC): Should Investors Fear This Financial Reform?

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Impact outside of the mREITs
The uncertainty around the Agencies’ future is surely an unwelcome headline, but if the government is still the ultimate backstop, there may not be any real change in the risk profile of what would formerly be known as an “Agency MBS.” Given the liquidity and “risk-free” profile of these fungible-like securities, their importance to the entire financial system is great.

For example, in 2012, Bank of America Corp (NYSE:BAC) held a roughly $372 billion asset pool which it designated as “Global Excess Liquidity Sources.” The bank defines these assets as “high-quality, liquid, unencumbered securities,” which it can “quickly obtain cash for … even in stressed market conditions, through repurchase agreements or outright sales.” Of Bank of America’s $372 billion, 73% was U.S. agency securities and MBSes.

Not a reason to fret
Given the proliferation of Agency MBSes across the entire financial system, any legislation decision to alter the government’s hand in the mortgage market will carefully consider the broader impact on the market. Despite both sides of the aisle appearing to agree on the need for reform, actual changes are surely several years away and will most likely be delayed until the U.S. government has recouped the cost incurred when bailing out the crumbling institutions in 2008.

In the meantime, the noise coming from the volatility of Fannie Mae’s common shares and grand bipartisan statements will continue to be just that for the mREITs: noise. The main risk remains management’s ability to effectively position the book to avoid drastic short-term dividend cuts and continue to build a sustainable asset base.

The article Should Investors Fear This Financial Reform? originally appeared on Fool.com and is written by David Hanson.

David Hanson has no position in any stocks mentioned. You can follow David on Twitter. The Motley Fool owns shares of Bank of America Corp (NYSE:BAC).

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