The mortgage real estate investment trust sector faced many challenges in May, ranging from rising rates to Federal Reserve tapering uncertainty.

REITs posted weak performance over May, with total returns the lowest since September 2011, according to the Royal Bank of Scotland

Several stocks of publically traded mortgage REITs continued their post-earnings downturn with some of the largest firms hitting 52-week lows.

For instance, Annaly Capital Management is down more than 16% since its recent peak in March.

Additionally, the Dow Jones Equity All REIT index is 11% below its May 21 peak.

“This aggregate index is currently around late 2012 levels, which we recall was when REIT speculation grew over prepay-related fears,” said Jeana Curo and Ashley Gam, MBS analysts for RBS.

All of these factors combined have made it difficult for REITS to bring new deals to market.  

If anything, several REITs reduced mortgage holdings. 

"We estimate agency mortgage REITs have sold somewhere in the neighborhood of $30 billion," analysts explained. 

They added, "While there was some opportunistic adding in the cheaper payups, overall activity was light."

Given all the elements this month, RBS was hard pressed to find any REITs that invest in agency MBS.

Going forward, however, REITs can still supply some buying power to the specified pool market, potentially at reduced leverage ratios or in shorter duration instruments, analysts stated. 

However, until market volatility dies down it’s unclear how much demand REITs will actually produce. 

"As of now, with eight out of top ten mortgage REITs reporting price: book ratios below 100%, any raises in the near term seem less likely," RBS concluded.

cmlynski@housingwire.com