Buy mREITs On Impeding Housing Recovery: ARMOUR Residential REIT, Inc. (ARR), Annaly Capital Management, Inc. (NLY)

Page 1 of 2

In the wake of the Fed’s quantitative easing efforts, several factors are partly impeding the recovery of the US housing market. Yet three mortgage REITs — American Capital Agency Corp. (NASDAQ:AGNC), ARMOUR Residential REIT, Inc. (NYSE:ARR), and Annaly Capital Management, Inc. (NYSE:NLY) — look particularly well-positioned to benefit from this situation.

ARMOUR Residential REIT, Inc. (NYSE:ARR)Background On Easing

The U.S. Federal Reserve has been busy doing its best to accelerate the US housing recovery through its quantitative easing programs. One such program, better known as QE3, aimed to purchase mortgage-backed securities worth $40 billion a month, with the objective of keeping mortgage rates at their lowest. The Fed thought low rates would make borrowing cheaper and housing more accessible. Furthermore, programs like Home Affordable Refinance Program (HARP) were launched to help borrowers with underwater mortgages refinance. The results of these efforts proved favorable, as mortgage rates touched their lowest point in  recorded history, and refinancing picked up.

Mortgage Markets Update

However, since the beginning of the current year, mortgage rates started climbing, and refinancing slowed down. The 30-year mortgage rate climbed 19 basis points to 3.53% during the year, while the 15-year rate surged 12 basis points to 2.76%. According to the latest MBA weekly survey, mortgage applications decreased 3.8% over the prior week. A similar decline was observed in the prior weekly survey. The refinance share remained the same at 77% of the total applications, however, the same remains at its lowest since July 2012.

Part of the reason for such an obstruction in the recovery of the US housing sector was the lack of cooperation from some of the largest mortgage lenders. The five largest mortgage lenders have shown reluctance in originating mortgages, following unpleasant memories of the 2008 crisis.

mREITs Ready To Exploit

While this shortage of mortgage lenders is killing the Fed’s efforts to accelerate the US housing sector, US mortgage REITs are on their way to exploit the situation.

Mortgage REITs, which earn a spread between the MBS yields and the cost of their funds, were under tremendous pressure following the launch of the third round of quantitative easing or QE3. They experienced compression in their spreads and the resultant dividend cuts, particularly during the fourth quarter of 2012. The aforementioned slow down in refinancing and a hike in mortgage rates make me all the more bullish on mREITs.

The hike in rates would mean higher MBS yields, while the slowdown in refinancing activity would translate into slower prepayments and the resultant lower amortization costs. Therefore, I believe American Capital Agency, ARMOUR Residential REIT, Inc. (NYSE:ARR), and Annaly Capital Management, Inc. (NYSE:NLY) are all set to report higher spreads for the first quarter of the current year.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!