Analysts believe real estate investment trusts in the residential mortgage-backed securities space will report flat earnings for the first quarter of 2012 when compared to 4Q 2011, analysts with Keefe, Bruyette & Woods said.  

The flat earnings will be driven primarily by relatively stable net interest spreads and the fact that prepayment speeds on government-sponsored enterprise MBS fell slightly from the fourth quarter despite an increase in prepayment rates.

"Dividends, which are generally a good indicator of earnings for the sector, have been flat or modestly down," KBW wrote in its report. "We expect slightly weaker book values for the agency MBS REITs in 1Q (generally in the 1-2% range). We forecast higher book values for mortgage REITs that invest in credit risk given the rally in nonagency MBS."

Lower interest rates earlier in the first quarter also caused lower reinvestment spreads for much of the period, the research firm said. 

Book values for agency MBS REITs are expected to fall moderately. Meanwhile, KBW says book values for nonagency MBS investors could increase 6% to 7% at most companies in the first quarter due to a sudden rally in credit assets at the end of 2011.

"We remain positive on most of the residential MBS REITs based on dividend expectations, although we do not expect meaningful improvements in book values," KBW said."The cheapest names that we have outperform ratings on are MFA (MFA) among the hybrid mortgage REITs and Anworth (ANH) among the agency MBS REITs."