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Analysts optimistic on 3Q MBS REIT earnings

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The investment bank Keefe, Bruyette & Woods expects real estate investment trusts that invest in mortgage-backed securities to report stronger earnings in the third quarter. With the end of the GSE buyouts, prepayment speeds slowed on agency MBS, peaking for Fannie Mae 30-year MBS at 29.9% in April and dropping down to 24.9% in September. KBW expects non-agency MBS REITs to show strong returns on better performing pools. Book values remained relatively stable in the third quarter, according to KBW, which estimates non-agency MBS prices to be up an average of 5% during the quarter. Below is the market share of agency MBS to other securities (from JP Morgan Fixed Income research). While the more affordable lending environment has helped third quarter numbers, more record-breaking interest rates could jumpstart prepayment speeds, hurting investors. Further out to the fourth quarter, KBW suggests interest rates will continue to trend down, and if that persists, prepayments will likely increase and reinvestment spreads will fall. Still, KBW maintains it is still too early to predict the impact of a possible quantitative easing on behalf of the Federal Reserve. In September, KBW revised its economic outlook to see no increase in the Fed Funds rate until 2012 and stable interest rates through the same time. Write to Jon Prior.

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