Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Two Harbors Investment Corp (TWO), PennyMac Mortgage Investment Trust (PMT), Newcastle Investment Corp. (NCT): The Best mREIT Bargains

Page 1 of 2

Given the low yields provided by fixed-income instruments, high-yielding mortgage REITs may offer an attractive opportunity for investors.

What are mortgage REITs?
Mortgage REITs invest in mortgage-backed securities (MBSes) using short-term financing. Since their investments are long term in nature, they yield interest farther out on the yield curve. The cost of financing these investments is lower because the borrowing is short term.

As a result, mortgage REITs earn a spread between the interest received (on assets) and interest paid (on financing). By law, at least 90% of the income earned by an mREIT has to be shared with its investors. To offset this high payout, mortgage REITs are taxed at a preferred rate.

Two Harbors Investment CorpOpportunity in difference
Two Harbors Investment Corp (NYSE:TWO)PennyMac Mortgage Investment Trust (NYSE:PMT), and Newcastle Investment Corp. (NYSE:NCT) are mREITs that follow a different strategy than the largely followed mREITs like Annaly Capital Management and American Capital Agency, and this is why they may offer great opportunities.

The odd one out
According to a recent research note published by analysts at Credit Suisse, Two Harbors Investment Corp (NYSE:TWO) is one of the rare mortgage REITs that could report an increase in book value if the rates continue their upwards journey. Analysts estimate a moderate increase in the company’s book value at the end of the current quarter, as opposed to sectorwide book value declines.

The reason for this is the structure of its investment portfolio. According to its latest quarterly disclosures, Two Harbors Investment Corp (NYSE:TWO) has an investment portfolio that is well diversified with an ideal mix of MBSes backed by government guarantees (agency MBSes) and MBSes that are not backed with any such guarantees (non-agency MBSes.)

The company is also making progress toward further diversifying its portfolio through the addition of mortgage servicing rights (MSRs.) These are rights to service a mortgage that are sold by the loan originator to specialized companies.

Distressed loans reap profits
Like Two Harbors Investment Corp (NYSE:TWO), PennyMac Mortgage Investment Trust (NYSE:PMT) also has a diverse asset base that primarily includes residential mortgage loans. PennyMac Mortgage Investment Trust (NYSE:PMT) also happens to be one of the few mortgage REITs that recently reported an increase in its book value, when most of its peers were losing book value. The company’s second-quarter performance remained better than expected, mostly because of a gain on sale margins.

Going forward, analysts at Credit Suisse expect a nearly 1% increase in PennyMac Mortgage Investment Trust (NYSE:PMT)’s book value. The company sees an opportunity in distressed mortgage loan acquisitions and acquisition of bulk MSRs. PennyMac Mortgage’s MSRs deliver more return under rising interest rates. When rates go up, refinancing slows down — this extends the average life of an MSR, making it more valuable for the company.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

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 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!