The recent spike in 10-year Treasury rates as well as concerns over the vitality of repossession lines has caused considerable damage to the agency residential mortgage-backed securities sector, analysts claim.
As a result of market volatility, the values of agency RMBS and the book values of agency mortgage real estate investment trusts are experiencing negative impacts, according to Sterne Agee’s latest report.
"On Friday, 10-year Treasury rates jumped 19 basis points and our fear is that book values will continue to fall, repo dealers will start to reduce advance rates at the same time mREITs want to buy agency bonds, and the dividends at agency only mREITs will fall over the next few quarters to levels more in line with reported core earnings per share," said analysts Henry Coffey, Jr. and Calvin Hotrum of Sterne Agee.
Two externally managed mREITs, Two Harbors Investment Corp (TWO) and AG Mortgage Investment Trust (MITT) operate with blended strategies and as a result are suffering some of the down pressure on book values.
However, it’s nothing akin to what the agency mREITs are experiencing, Sterne Agee analysts explained.
For instance, AG Mortgage Investment Trust is expected to produce a quarterly dividend of $0.70 to $0.80 per quarter and estimate current book value of $18.82.
Similarly, Two Harbors has made a number of dynamic shifts in its agency portfolio this quarter such as owning interest-only strips and subprime bonds.
Additionally, the company’s book value is positively skewed toward higher rates.
On the flip side, there are companies with rising book values and good dividend coverage.
For instance, MFA Financial (MFA) has the bulk of its capital invested in nonagency bonds.
As a result, the company will experience a modest decline in book values due to the lower valuations placed on the agency assets it holds, Sterne Agee explained.
Improving trends in consumer credit quality as well as rising home price appreciation will continue to aid mREITS that do not have their books focused solely on agency bonds.
"Given the overall sell-off in the mREIT sector and the concerns expressed above, we are reducing our price targets on a number of mREITs we actively follow," the analysts concluded.