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I'm a very new investor. I've spent many hours of research learning, and plan to spend many more, but currently I do have a lot to learn.

I have recently been reading a lot about REIT ETF's. Many of them seem stable to me, for example investing in properties that are rented out to health care facilities, and similar. And biggest of all, I've found quite a few that currently have a 10% or above dividend yield.

I'm basically wondering what the catch is. With 10% or higher dividend yield in dividends alone, I'd almost think you wouldn't even be able to buy them because people would be fighting over them so much. I know dividends can be cut, but even if they were cut down to 1/3 or even 1/4, many of these would still have equal or higher yields than a great deal of the ETF's out there that still are talked about often. Unless perhaps people in general just hope that growth of other stocks/ETF's will outperform an ETF with dividend yield, but not a lot of growth?

Maybe someone can understand what I'm trying to ask and clear this up for me a bit?


PS: My primary investment goal is to be able to preserve the value of the assets I have (keep up with inflation), while gaining an additional stream of income to make everyday life just a little easier and not have to work quite as hard.

Member Summary
Most Recent Posts
I thought I would add some interesting things from NLY's most recent 10k(emphasis mine):


That means that all 1 month LIB... (more)

dshibb (Mar. 11, 2013 @ 11:25p) |

You have to do your own due diligence. For pure stats, yahoo finance is a good source. For some informed opinions and ... (more)

atp2000 (Mar. 16, 2013 @ 2:47p) |

An etf devoted to mReits is REM. But does have a significant concentration in NLY.

gingermae (Mar. 16, 2013 @ 4:35p) |

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carl1864 said:   I'm a very new investor. I've spent many hours of research learning, and plan to spend many more, but currently I do have a lot to learn.

I have recently been reading a lot about REIT ETF's. Many of them seem stable to me, for example investing in properties that are rented out to health care facilities, and similar. And biggest of all, I've found quite a few that currently have a 10% or above dividend yield.

I'm basically wondering what the catch is. With 10% or higher dividend yield in dividends alone, I'd almost think you wouldn't even be able to buy them because people would be fighting over them so much. I know dividends can be cut, but even if they were cut down to 1/3 or even 1/4, many of these would still have equal or higher yields than a great deal of the ETF's out there that still are talked about often. Unless perhaps people in general just hope that growth of other stocks/ETF's will outperform an ETF with dividend yield, but not a lot of growth?

Maybe someone can understand what I'm trying to ask and clear this up for me a bit?


PS: My primary investment goal is to be able to preserve the value of the assets I have (keep up with inflation), while gaining an additional stream of income to make everyday life just a little easier and not have to work quite as hard.


Because REIT's have to pay out 90% of their earnings in dividends and for that reason their dividends are highly variable. A blue chip offering a dividend might be only paying half of their net income and therefore will be substantially more stable, but also a lower yield.

10% is a great deal if you think that the REIT can continue to spit out that much net income. But with 10% the market is telling you that they don't believe it.


Also sometimes they're issuing dividends in excess of their net income and also sometimes they're issuing stock dividends which just dilute the shares by giving you more shares(this is rare though). Without knowing specific REITs it's hard to say exactly what that specific REIT's culprit is, but most of them should be covered in the above reasons.

REIT dividends are taxed at ordinary income rates and not qualified dividend rates.

REITS with these yields are viewed as potentially unsafe. Dividends far GREATER than earnings come from selling new stock or borrowing, in addition to not replacing any of the depreciating asserts. That is not a sustainable business model. If something appears too good to be true it usually is.

Squeezer99 said:   REIT dividends are taxed at ordinary income rates and not qualified dividend rates.

That too!

I've seen Vanguard's REIT ETF "VNQ" recommended over the years at Motley Fools Reit board. This is one of the best places to learn about reits. http://boards.fool.com/.

Also, both Vanguard and MF are good places in general for new investors.

Their stock prices don't appreciate much, if at all.

carl1864 said:   I'm basically wondering what the catch is .
The catch is that when a stock pays a dividend, the price goes down by that much afterwards (ex market movements overnight). Dividends are not "free money".

The REITS you are referring to that have 10%+ yields do not invest in real estate. These are mortgage REITS. They are buying mortgage loans and most of them are very leveraged- debt is usually at least 7X equity. Within the mortgage REITS there are agency REITS, which buy mortgages that are guaranteed by a governmental agency such as Fannie Mae, and non-agency REITS which buy mortgages that are not guaranteed. There are two types of risks with these REITS- default risk (for the non-agency REITS), and interest rate risk (for both types of mortgage REITS). You have to be careful with these REITS- the yields are high to reflect the risks involved. If you are looking to invest in one, I would check to see if it agency or non-agency, the price to book value, the leverage ratio, and the stability of the dividend payment over the last 3 years.

xerty said:   Dividends are not "free money".

+1

When it comes to fixed income investments, return OF investment matters much more than return ON investment.

I have owned AGNC for over 1.5 yrs and it has constantly given me dividends between 14% to 16%, and ofcourse I have it setup to do dividend reinvest. To be honest it does seem like too good to be true, but I think I am going to ride this boat for a little longer. Besides I only have 10% of my portfolio in this stock so I should be ok. Make sure to keep diversified and not do anything silly like buying 50k of REIT.

psYcon said:   I have owned AGNC for over 1.5 yrs and it has constantly given me dividends between 14% to 16%, and ofcourse I have it setup to do dividend reinvest. To be honest it does seem like too good to be true, but I think I am going to ride this boat for a little longer. Besides I only have 10% of my portfolio in this stock so I should be ok. Make sure to keep diversified and not do anything silly like buying 50k of REIT.

Do you realize what you own? Do you realize what specific market conditions allow it earn net income and what specific market conditions will cause it to produce losses?

I obviously have no objection to any person owning something like that, but that usually assumes someone sophisticated enough to understand what it is that they're essentially buying. And no it's not real estate or really much of anything to do with real estate.

No affiliation from me but this site and this particular writer is very informative on REIT's http://seekingalpha.com/article/1116791-4-reits-that-rock-like-t...

dcrespo said:   No affiliation from me but this site and this particular writer is very informative on REIT's http://seekingalpha.com/article/1116791-4-reits-that-rock-like-t...

No offense to that guy and you, but after scanning over that entire article I see zero that would convince me of anything. I don't care about their share performance(that is actually the opposite of what I want if I'm looking at value) and I don't care about how large of REIT portfolio they have. If I'm going to pay attention I want to see analysis that would lead me to believe that a particular REIT is very good at finding properties that represent strong cash flow on investment spent. Return on equity likely being the most valuable metric.

xerty said:   carl1864 said:   I'm basically wondering what the catch is .
The catch is that when a stock pays a dividend, the price goes down by that much afterwards (ex market movements overnight). Dividends are not "free money".

Often the price of a stock will rise enough to anticipate capturing the dividend.

psYcon said:   I have owned AGNC for over 1.5 yrs and it has constantly given me dividends between 14% to 16%, and ofcourse I have it setup to do dividend reinvest. To be honest it does seem like too good to be true, but I think I am going to ride this boat for a little longer. Besides I only have 10% of my portfolio in this stock so I should be ok. Make sure to keep diversified and not do anything silly like buying 50k of REIT.

Depending on portfolio size, 10% invested in a risky business can either be nothing to worry (very small portfolio) or highly risky (if you have anything other than a very small portfolio).

rpi1967 said:   xerty said:   carl1864 said:   I'm basically wondering what the catch is .
The catch is that when a stock pays a dividend, the price goes down by that much afterwards (ex market movements overnight). Dividends are not "free money".

Often the price of a stock will rise enough to anticipate capturing the dividend.


Come on!

The only change a dividend announcement creates is the knowledge that net income will be going to shareholders instead of retained earnings which shareholders also own. In the theoretical construct it changes zero with the exception of how much do shareholders believe that cash would be put to good use or not if retained. Otherwise broad moves occur largely irrespective of dividend information. Stocks will mostly go up in price regardless if a dividend is announced or not.

Now all of this exists in practical theory of cash to be reinvested on a companies balance sheet that you own vs. cash on your own balance sheet. It doesn't mean that for example a ton of bond investors wont cross the chasm and buy equities in search of yield perverting the marketplace courtesy of ZIRP, but generally speaking wisely reinvested retained earnings are just as valuable if not more valuable than dividends.

carl1864 said:   Maybe someone can understand what I'm trying to ask and clear this up for me a bit?


PS: My primary investment goal is to be able to preserve the value of the assets I have (keep up with inflation), while gaining an additional stream of income to make everyday life just a little easier and not have to work quite as hard.


It all depends on the specific REITs you are looking at, but these are generally some factors when looking at REITs
  • Ordinary Income/Non-qualified dividends (mentioned above) - Thus, you should put REITs in tax-advantaged accounts such as IRAs and employer-sponsered accounts (401k, 403b, etc).
  • Leverage - Many REITs use a high degree of leverage. This is a real risk you need to keep in mind. It does amplify growth and earnings when things are good, but it also amplifies losses when things are bad
  • Buying specific REITs (as opposed to general REIT funds) isolates risk - You are at the mercy of how real estate in that particular sector grows or shrinks. Others mentioned that some are MBS, mortgage back security REITs. In those cases, if mortgage defaults shoot up, the REIT gets slaughtered. Similar, a REIT investing in malls can get creamed if there is a lack of occupancy due to a bad economy.
  • In the big-picture, REITs give you exposure to real estate - This means you need to take look at the big picture of all your investments, in the market and outside, to see if this is appropriate. For instance, someone who has multiple rental properties likely has sufficient real estate exposure in their total portfolio and thus, would likely shy away from REITs.
  • In this above big-picture view, you should consider REITs much more like other stocks rather than bonds - REITs behave/correlate much more to stocks than bonds. Thus, you should treat the expectations from REITs as you would other stocks and not assume since they are a "steady" income stream, that you would put them in your "bond" buck of your total portfolio.
  • If you follow a total market index, you already have some REITs - REITs are part of the US and worldwide market. So if you have a Total Market fund (US or some other country), you already have some REITs to the extent that the REIT's market capitalization compares to the total market.
  • IMO, REITs should never be more than 10% of your total portfolio. You are taking on greater risks and overweighting real estate that, in my opinion, outweighs the increased earnings IF you have more than 10% your holdings in REITs (non-diversification risk)


Full Disclosure:
I own a total US REIT fund, so I have exposure to all the REIT markets in addition to the exposure I already get from other investments that may also hold REITs (like a Total Market fund as discussed above)

as far as I understand, the dividend yield of REITs may vary with the interest rates. Today the yields are high due to record low rates but the moment rate increases happen the yields will drop , so yea there is associated risk . However based on what I've read the rates may stay like this until at least 2014 so the case could be made to add REITs to your portfolio if only temporarily.

psYcon said:   as far as I understand, the dividend yield of REITs may vary with the interest rates. Today the yields are high due to record low rates but the moment rate increases happen the yields will drop , so yea there is associated risk . However based on what I've read the rates may stay like this until at least 2014 so the case could be made to add REITs to your portfolio if only temporarily.

Close!

Dividend yields vary as a measurement of safety and net income available for dividend. mREIT's are never really safe so they wont ever have a falling yield on that measurement. Instead their income will fall and their share prices will crash. So it's not whether or not dividend yields will just 'vary' with interest rates it's actually much worse than that. Their income comes from borrowing short duration and lending long duration. If short duration rises a bit the income 'will vary'(i.e. go lower) causing share prices to fall, but if the short rates invert against their very long rates it wont be a question of them having a low yield from where you bought in, but instead the mREIT will take on losses against very little retained earnings and they'll go bankrupt.

So I don't see any problem with anybody holding them if you want to walk that tightrope, but understand that well before short rates cross that particular mREIT's long rates the value of their shares will plummet in anticipation of short rates rising in the future because nobody wants to be there holding the bag when the thing does go bankrupt.

So you had the right idea, but it isn't a function of how much profit they make it's a function of whether they'll be profitable at all(likely not). Personally, I might even be bullish on the asset class for the time being, but I'm also not necessarily the type that enjoys picking up nickles in front a bulldozer if you catch my drift


Basically the moment that LIBOR crosses 2% it's likely game over for the vast majority of mREITs out there and you'll likely have been taken massive losses on them well before that.

psYcon said:    However based on what I've read the rates may stay like this until at least 2014 so the case could be made to add REITs to your portfolio if only temporarily.

Keep in mind the market tends to build that kind of info into pricing ahead of time.

From what you have posted, you're a little out in front of your skis on this one.

edit: Not to mention the very fact that an inexperienced investor has started a new thread looking for information on how to buy in.

carl1864 said:    My primary investment goal is to be able to preserve the value of the assets I have (keep up with inflation),

If this is the case, then a money market, savings account or short term CD seems appropriate.

Our inflation has been running fairly low for several years. If this continues, then even at these historically low interest rates (MM, CD), you are not losing very much at all to inflation. Lots of people like to complain about this, but recall the late 70's and early 80's. Whoohoo, we're making 12% on our CD's!!! However, inflation was 12%+, so you were actually going backwards. Keep that in mind for today's low inflation and low interest rates. It's really quite a bit better than it was in some previous times.

carl1864 said:    while gaining an additional stream of income to make everyday life just a little easier and not have to work quite as hard.

If this is your goal, then REITS or dividend paying stocks are options to consider. As others have stated, these come with other risks -- especially risk of interest rates rising, leading to lower value of the REIT.

So these two goals are a bit at odds with each other. A broadly diversified portfolio attempts to diversify these risks over several asset classes.

debentureboy said:   carl1864 said:    My primary investment goal is to be able to preserve the value of the assets I have (keep up with inflation),

If this is the case, then a money market, savings account or short term CD seems appropriate.

Our inflation has been running fairly low for several years. If this continues, then even at these historically low interest rates (MM, CD), you are not losing very much at all to inflation. Lots of people like to complain about this, but recall the late 70's and early 80's. Whoohoo, we're making 12% on our CD's!!! However, inflation was 12%+, so you were actually going backwards. Keep that in mind for today's low inflation and low interest rates. It's really quite a bit better than it was in some previous times.

carl1864 said:    while gaining an additional stream of income to make everyday life just a little easier and not have to work quite as hard.

If this is your goal, then REITS or dividend paying stocks are options to consider. As others have stated, these come with other risks -- especially risk of interest rates rising, leading to lower value of the REIT.

So these two goals are a bit at odds with each other. A broadly diversified portfolio attempts to diversify these risks over several asset classes.


If you measure risk based upon variation from inflation adjusted dollars, people way underestimate the risk in cash and way overestimate the risk in for example equities because they benchmark everything against how it performed against cash. Over any very long term period cash represents the most risk of any single asset class and isn't even close. Over any very long term period diversified equities represent the least risk and it's not even close. Over any short period of time cash represents the least risk and it's not even close. Over any short period of time equities represent the most risk and it's not even close. Fixed income at different durations fall at different points in the middle.

It all a factor of time and functions of imbalances.

psYcon said:   I have owned AGNC for over 1.5 yrs and it has constantly given me dividends between 14% to 16%, and ofcourse I have it setup to do dividend reinvest. To be honest it does seem like too good to be true, but I think I am going to ride this boat for a little longer. Besides I only have 10% of my portfolio in this stock so I should be ok. Make sure to keep diversified and not do anything silly like buying 50k of REIT.

I remember a FWF thread on AGNC about a year ago...

dshibb -- Well said.

With the mREIT's you are taking a bet on Ben Bernanke. If he continues to print money and keep short term interest rates low, they'll continue to produce 10+% dividends. When that changes the mREITs will spend more money on their hedges than they make on the rate spreads, and you'll probably see a few years of very low dividends until the interest rate picture stabilizes again. Buying the mREITs is effectively betting on politics.

What's good entry price to buy AGNC within a month? $31.90? Does anyone know when is the next dividend date for AGNC?

Squeezer99 said:   REIT dividends are taxed at ordinary income rates and not qualified dividend rates.

No they are not. the firm will provide income reallocation after the year end so you never know what those original income will turn out today. I have seen plenty turned into 100% return of capital.

jfunk138 said:   With the mREIT's you are taking a bet on Ben Bernanke. If he continues to print money and keep short term interest rates low, they'll continue to produce 10+% dividends. When that changes the mREITs will spend more money on their hedges than they make on the rate spreads, and you'll probably see a few years of very low dividends until the interest rate picture stabilizes again. Buying the mREITs is effectively betting on politics.

Current dividend yields don't fall on risky assets, share prices do. If an mREIT has a 10% dividend yield on income of $10 million and their net income falls to $5 million than the dividend yield isn't going to drop to 5% and signal that it's now safer for you. Instead the share price is going to fall to the amount likely where $5 million is 12% of the share price to reflect the fall in income and increased risk. That would represent a 60% drop in your share price.

Now that might mean that your dividend rate falls relative to the price you bought at, but that is only a reasonable way to look at it if you presume that the share prices will come back to where they were, but in this instance they wont because the very thing that caused them their share prices to fall, higher short rates, is going to continue to move against you.


Also let me ask you a question. For an mREIT that is investing in agency MBS with let's say a generous 5% yield how can they legitimately today fully hedge their interest rate risk away and earn any net income today? The truth is that if they truly were fully hedged with their high cost of overnight capital likely almost all of their net income on the spread would be used up paying for that hedge. So either we can presume that they're magical or we can presume that they aren't fully hedged and their interest rate swaps(if they have any) only comprise a portion of their positions. So much for the notion that their hedges will kick in and save their profitability.

Instead it is my guess that the real hedges that are put on are put on by non agency MBS REITs and are predominately CDS hedges against their portfolio to protect against default risk and practically all of them are leaving themselves exposed to yield curve risk on their overleveraged MBS portfolios.

By the way I should be careful not to lump all mREITs into the same boat. There is one mREIT that I've been and still remain very bullish on and it has done extremely well(on an absolute tear at the moment actually and still cheap), but it's completely different than your typical mREIT. They are actually in the business of providing a value added service in the mortgage market and they buy and sell around that service. Basically it's truly a business not a portfolio using the mREIT tax structure.

As an ironic note it's founded by 2 people from a place you wouldn't normally find value in betting on and has a name that would probably scare more investors away than anything.

But it represents the single biggest conviction buy on an individual equity(mREIT) I've had in a couple of years because I so believe the business model makes sense.

Shouldn't share the name of it though(could be construed as pumping for me).



Edit: I will say what it that they do though. What they do is they go into the secondary mortgage market and they are after mortgage loans that are currently delinquent that the bank would like to get rid of for a cheap price. They then have their team of analysts take a look at the loan pool and comb through it individually for a few things:
1) Make sure the value of the collateral is high enough to make sure that no loss will occur on the sale if needed
2) Being selective towards borrowers that likely have the means to pay their mortgage, but don't.
Essentially they're combing through a pool to pick out only those that look like strategic defaulters with homes valued at slightly more than the acquisition cost of their mortgage(a mortgage that is maybe 45 cents on the dollar). They then selectively take those mortgages and leave the rest with the bank.

They then immediately turn around and approach the home owner with offers to restructure the mortgage in a big way. Their target is usually around 25-30% reduction of the principal. If they succeed they wait until the homeowner makes a few mortgage payments and then resell the mortgage onto the market as current. A mortgage bought at 45 cents that is bargained down to 70-75 cents on the dollar and sold for maybe 65-70 cents of the original principal value represents a 45-55% return on investment over maybe a year. That is insane. Now if the homeowner doesn't agree to a modification than they just foreclose and sell at maybe 50-55 cents on the dollar and after their costs for handling it they break even.

Plus it's a good deal for all parties. The homeowner gets a large write down of their mortgage, they make a large profit between the bank distressed sell price and the new current loan value. And it's a good deal to the bank because they can't do the loan mods themselves because if they grant it to 1 person they're going to induce others to do it as well. Better to just sell it to a 3rd party and have them handle it.

By the way key metric here: AGNC is levered at 9.2 to 1 on book because that is how it makes it's profit. The company I'm referring to is levered 2 to 1 on book because it makes it's money in restructuring. AGNC has a 15% dividend yield and the company I'm referring to has a 10% yield. And as of today AGNC is paying out 120% of it's net income(i.e. borrowing more money to pay you--there is a word for that) and the company I'm referring to is at the moment paying out 72% of it's net income(which means they'll have to bump it up to comply with REIT rules). Hmmm! This one is tough!

I should also make clear(since I didn't before) that there is a huge difference between owning a *highly levered* mREIT holding predominately agency MBS and owning a *non or low levered* mREIT holding non agency MBS. The former represents an extreme bet on interest rates(would you borrow on margin at 9 to 1 leverage and invest in 30 year treasuries?) and the latter represents a reasonable bet on yield compression in the non agency MBS market. I might love to own the latter, but I would never touch the former with a 10 foot pole. AGNC fits in the category of the former.

The current interest rate scenario is not completely unprecedented. 2004-2006 showed a rapid increase in short term lending rates, but another mREIT (NLY) weathered the storm just fine through this period (AGNC didn't exist yet).

http://finance.yahoo.com/echarts?s=^IRX+Interactive#symbol=^irx;...

Don't get me wrong, there is substantial risk to owning the mREITs right now but the story is not as bleak as some are portraying here.

My advice would be to stay away from NLY and AGNC and the other agency REITS. With the Fed committed to buying MBS for the foreseeable future the yields on agency MBS will decline. When the yield declines the Net Interest Margin (difference between the rate they earn and the cost of the repo financing to purchase MBS) compresses and therefore you get selloffs in the stocks and the stocks are at risk of having to cut their dividends.

Id go with AMTG which is about ~35% comprised of non-agency mortgages. These will trade less on where yields go and more on where spreads go. As the world improves, the credit spread vs. nonagency will compress and the prices of nonagency MBS will increase. THis will drive higher prices in the stocks and overall improvement in the book value of the more non-agency focused m-REITS.

stanolshefski said:   psYcon said:   I have owned AGNC for over 1.5 yrs and it has constantly given me dividends between 14% to 16%, and ofcourse I have it setup to do dividend reinvest. To be honest it does seem like too good to be true, but I think I am going to ride this boat for a little longer. Besides I only have 10% of my portfolio in this stock so I should be ok. Make sure to keep diversified and not do anything silly like buying 50k of REIT.

Depending on portfolio size, 10% invested in a risky business can either be nothing to worry (very small portfolio) or highly risky (if you have anything other than a very small portfolio).


10% is 10%. If your portfolio is $5,000, $500 is your risky investment. If its $5,000,000, then you have $500,000 at risk. The bigger the portfolio, the bigger the absolute potential loss, but the better one is positioned to absorb the loss. An old rule was 5% risky investments, but I think less for small accounts and more for large accounts is appropriate.

As far as these high yield REITs, I think the cliff is ahead, but it's been several years where that's been the opinion. I've stayed out, but if I ever buy in, you'll know it's right before the stock prices plunge and dividends go to zero.

jfunk138 said:   With the mREIT's you are taking a bet on Ben Bernanke. If he continues to print money and keep short term interest rates low, they'll continue to produce 10+% dividends. When that changes the mREITs will spend more money on their hedges than they make on the rate spreads, and you'll probably see a few years of very low dividends until the interest rate picture stabilizes again. Buying the mREITs is effectively betting on politics.

THIS!


when you buy mREIT's you are betting the interest rates will stay low. its a good bet right now because the fed has said they want to keep the rates artifically lower through 2014. but - these things tank when the deadlines draw near of the supposed rate decisions by the fed.

jfunk138 said:   The current interest rate scenario is not completely unprecedented. 2004-2006 showed a rapid increase in short term lending rates, but another mREIT (NLY) weathered the storm just fine through this period (AGNC didn't exist yet).

http://finance.yahoo.com/echarts?s=^IRX+Interactive#symbol=^irx;...

Don't get me wrong, there is substantial risk to owning the mREITs right now but the story is not as bleak as some are portraying here.


Okay this easy to explain.

In the mortgage market you have basically 4 risk factors. Interest rate risk, default risk, collateral risk(house prices), and prepayment risk. If you are sitting on Alt-A or Subprime mortgages your primary risk factors are default risk and collateral risk which are correlated(interest rate risk and prepayment risk is less of an issue because you're already getting high yields). If you are like NLY holding predominately prime and agency MBS than traditionally your primary risk factors are interest rate risk and prepayment risk(which are non correlated and run inversely to each other).

So in 2004, a levered firm like NLY holding almost exclusively prime and agency MBS likely had an average mortgage interest rate over it's entire pool of around 5% with likely at least a 1/3 of their mortgage book in ARMs(probably as much as a half) plus they had on some hedges. They probably figured that prepayment rates were about 4-5 years at low interest rates because people refinance when interest rates are low. So when short rates started rising a large portion of their book went up with it(ARMs), some hedges kicked in, the yield curve losses that they sustained on their fixed book was partially offset by longer prepayment rates, etc. And their income fell to 0 to slightly negative. On the flip side their CDO brethren invested in $hitty subprime MBS collapsed and went bankrupt under the bigger risks which was default and collateral risk.

Today the story is completely different. You have:
1) Stabalization in the housing market at valuations against rent that make financial sense and mortgage servicing back into the historical percentage range of income(Not much real collateral risk)
2) Delinquency rates are falling as a percentage of total loans from a very high number and should continue to get better, even if they were to get worse they likely wouldn't rise above where they were in 2008(in an extreme example) due to improved underwriting based on new valuations and a clearing out of most of the people that would go delinquent(less default risk)
3) ***You have Ben Bernanke buying agency MBS, but not non agency MBS. That has brought mortgage rates down to 3.5% territory, that has brought the net yield on agency MBS even lower in many instances, and has basically converted them into the pricing of a non risk asset. And it has created the situation where prepayment risk has now been converted into non prepayment risk because as interest rates rise you would prefer if people would prepay their mortgages given the very low money losing yields attached to those mortgages. So it has now created an opposite risk and correlated those 2 risks that were previously uncorrelated.
4) And to solve this problem of ever lowering compression yields in the agency MBS market firms have just taken on more leverage. So now you're looking at firms that are levered 10 to 1 on a likely 3.75% portfolio paying cost of capital of probably around 1.5%. Their expenses and limited hedges likely cost them about 75 basis points. They are then left with 1.5% in net yield spread levered at 10 to 1 on almost an exclusively fixed book. That means all that has to happen is that their cost of capital rises to 3% and they're bankrupt or they experience even more yield compression bringing down their portfolio to 3.25% and all that has to happen is their cost of capital rise 1% to 2.5% and they're bankrupt.

I say all of this fully acknowledging the fact that short rates can stay low for as long as 10 years. The dirty little secret behind the curtain is that even if Bernanke did increase the FFR it likely wont have any impact on short rates. They've created so much liquidity that banks don't need Fed money to operate they have plenty of deposit money. If they experience any pressure on their deposit money to go up by even 10 basis pts they'll just shed liquidity and send many of the depositors elsewhere who also wont want a large amount of excessive liquidity at any cost. Nobody needing or wanting excess liquidity means that deposit rates stay low and therefore short rates stay low until inflation causes the nominal sizes of loans to increase requiring more liquidity to fund them(using up the excess).

But again I'm not in the business of picking up nickles in front of a bulldozer.

Thank you for all the replies this far. This is a great deal of information, being so new, I've been reading over it a few times, as well as doing additional googling to try and digest, and understand it all.

When it comes to these mortgage REIT's, I don't think I would want one leveraged 9 to 1. Partly risk, but even more so, juggling debt, potentially among many of these dishonest financial institutions is not congruent with my values. I would not want to own shares in a business or group of businesses that does that.

So is there a good way to find out which types of mortgage reits are more on the up and up, owning real property, not being highly leveraged, running a secure business model that is not likely to collapse? Or do you really have to just invest many hours googling and researching each potential stock / etf one by one, reading articles, etc?

carl1864 said:   Thank you for all the replies this far. This is a great deal of information, being so new, I've been reading over it a few times, as well as doing additional googling to try and digest, and understand it all.

When it comes to these mortgage REIT's, I don't think I would want one leveraged 9 to 1. Partly risk, but even more so, juggling debt, potentially among many of these dishonest financial institutions is not congruent with my values. I would not want to own shares in a business or group of businesses that does that.

So is there a good way to find out which types of mortgage reits are more on the up and up, owning real property, not being highly leveraged, running a secure business model that is not likely to collapse? Or do you really have to just invest many hours googling and researching each potential stock / etf one by one, reading articles, etc?


Do you know how to calculate leverage for a company? You go to yahoo finance for their ticker symbol and you click on balance sheet. You then take total assets divided by owners equity and you have your book leverage for the company. That calculation can be used for any business.

Maybe this is a good time to either come to 1 of 3 conclusions. 1 commit to a large amount of reading on how to value a business, 2 rely upon a professional, or 3 invest in a broad index of what you're after through something like an ETF where you don't have to worry as much about the valuation of individual securities because the answer to your question is a mostly yes you'll have to read a lot.

jfunk138 said:   The current interest rate scenario is not completely unprecedented. 2004-2006 showed a rapid increase in short term lending rates, but another mREIT (NLY) weathered the storm just fine through this period (AGNC didn't exist yet).

http://finance.yahoo.com/echarts?s=^IRX+Interactive#symbol=^irx;...

Don't get me wrong, there is substantial risk to owning the mREITs right now but the story is not as bleak as some are portraying here.


In 2004 NLY was trading at about $20 and paying 50 dividends.

By 2006 it was down to under $11 and the dividend was 10.

They didn't go bankrupt but I would not say they weathered that storm "just fine".

Skipping 4 Messages...
An etf devoted to mReits is REM. But does have a significant concentration in NLY.



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