Buy mREITs on Mortgage Lender Shortage: ARMOUR Residential REIT, Inc. (ARR), Two Harbors Investment Corp (TWO), Invesco Mortgage Capital (IVR)

Page 1 of 2

Mortgage REITs have suffered enough at the hands of the Fed’s easing. However, I believe the situation has overturned. This article reviews the latest poor housing data, reasons for the housing sector’s underperformance and the consequences it will have on US mortgage REITs.

Tumbling Housing Figures

According to the latest weekly survey of the Mortgage Bankers Associations [MBA], the US housing statistics continue to deteriorate, despite the Fed’s best efforts to speed up the recovery of the same. The Market Composite Index, which measures mortgage loan applications, decreased 3.8% over the prior week after making seasonal adjustments. Without the adjustments, the index decreased 3% over the same time period. Similarly, the seasonally adjusted Refinance Index fell 5% to its lowest since the week ending Dec 28, 2012. Even though the refinance share of mortgage activity remained the same over the prior week at 77% of total applications, it is still at its lowest since July 2012.

Over the same time period, one witnessed a moderate decline in mortgage rates. The average 30-year fixed rate mortgage rate with conforming loan balances and jumbo loan balances decreased 1 basis point to 3.77% and 3.93%, respectively. This recent moderate decline in mortgage rates is offset by the hike in rates since the beginning of the year. The average 30-year mortgage rate surged 17 basis points while the average 15-year mortgage rate increased 12 basis points to 2.76%. The reason for such an increase in mortgage rates is said to be the shortage of mortgage lenders.

Lost Appetite

Mortgage rates have continued to climb since the beginning of the year, despite the Fed’s best efforts to keep them at their lowest. Low rates would have meant cheaper borrowing thus speeding the US housing recovery. The reason for the rise in rates is said to be the loss in appetite by some of the biggest mortgage lenders.

Some of the biggest mortgage lenders have show their reluctance in originating mortgages. Banks like Citigroup Inc. (NYSE:C) and Bank of America Corp (NYSE:BAC) suffered credit losses and write-downs totaling $258 billion from mortgages from the second quarter of 2011 to the third quarter of 2012. During the third quarter of 2012, mortgage originations at BAC declined 37% over the prior year. Mortgage lending at Citigroup was down 5% over the same time period. When these large mortgage lenders exit, they create an imbalance.

Page 1 of 2