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Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC): Are Rates Headed Higher?

Either way, it’s worthwhile remembering that mortgage rates, even if they increase from here, are still likely to remain dirt-cheap on a historical basis. Will it cost more to buy a house? Yes. But the cost won’t be inordinately expensive compared to what, say, your parents or grandparents paid.

The more interesting question concerns what will happen to financial companies that hold mortgage-backed securities for investment purposes. As mortgage rates go up, the value of these go down, putting downward pressure on book values across the financial industry.

The hardest-hit have been mortgage REITs, which maintain massive, and often exclusive, portfolios of MBSes. The following chart illustrates the impact of this on the book values of four such mREITs: Annaly Capital Management, Inc. (NYSE:NLY)American Capital Agency Corp. (NASDAQ:AGNC)ARMOUR Residential REIT, Inc. (NYSE:ARR), and Two Harbors Investment Corp (NYSE:TWO).

NLY Book Value Per Share Chart

While the downward trend for all of these companies began in the latter half of last year, it’s accelerated over the last eight months. Just since the beginning of the year, for instance, ARMOUR Residential REIT, Inc. (NYSE:ARR)’s book value per share is off by 20%, American Capital Agency Corp. (NASDAQ:AGNC)’s by 19%,  Annaly Capital Management, Inc. (NYSE:NLY)’s by 18%, and Two Harbors Investment Corp (NYSE:TWO)’ by 9%. Indeed, the carnage in the MBS market has spared no one.

The article Mortgage Rates: Why They Could Explode Higher This Month originally appeared on and is written by John Maxfield.

John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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