Analysts at investment bank Keefe, Bruyette & Woods expect real estate investment trusts to report weaker earnings in the fourth quarter as prepayment speeds rose and reinvestment spreads narrowed. As interest rates rose at the end of last year, the weighted-average constant prepayment rate, or CPR, for Fannie Mae mortgage-backed securities stayed above 25% throughout the quarter. Even in nonagency residential mortgage-backed securities, prepayment speeds picked up, continuing to rise even in January, according to the Royal Bank of Scotland. But KBW expects better performances from REITS that invested in this sector, because these securities were purchased at such high discounts. It would be a reversal from the third quarter, when Redwood Trust earned $20 million and PennyMac earned $7.7 million as both grew investments in their distressed portfolios. Still, coming out of these possible struggles at the end of 2010, KBW expects 2011 to be a good year for residential mortgage REITs. "The increase in longer rates toward the end of 4Q bodes well for operating earnings in 2011 as reinvestment spreads should be higher and prepayments lower," KBW said. "We continue to expect the residential mortgage REITs to generate strong dividends in 2011." Write to Jon Prior. Follow him on Twitter: @JonAPrior