Real estate investment trusts that invest in mortgage debt lost approximately 6 percent in value in just one week in October, extending a decline that began after the Federal Reserve announced that it would purchase an additional $40 billion of securities per month, National Mortgage News reported Oct. 16.
Some analysts have said that the Fed action, known as QE3, has lowered bond yields, tightened spreads and reduced homeowner borrowing costs, negatively impacting the firms’ earnings and dividends.
“As a company we’ve been through a lot of challenges,” Wellington J. Denahan-Norris, co-CEO of Annaly, one of the largest mortgage investing REITs in the U.S., told National Mortgage News. “Having such a large non-economic competitor is certainly posing a unique set of challenges.”
Mortgage REITs are losing investors who have been interested in average annual dividend yields currently around 13 percent, or nearly seven times that of Standard & Poor’s 500 index companies. The companies use money raised through share sales and borrowed funds to invest in government-backed mortgage securities and housing debt at risk from defaults — or both.
While dividends likely will fall, they are well above those of competing investments, such as high-yield corporate bonds that also are being pushed down by central bank efforts to stimulate the economy. Junk yields dropped to a record low 6.95 percent last month, according to a Bank of America Merrill Lynch index, National Mortgage News reported.
“It’s not just at the mortgage REITs where the returns in this market are being put under assault,” Denahan-Norris told National Mortgage News. “It’s the general global landscape where you have an incredible mispricing of risk that’s being delivered at the hands of the academics at the central banks of the world.”
Aside from competition from the Fed, a second challenge to mortgage REITs comes from increased homeowner refinancing spurred by record rates. The refinancing will require companies to quickly write off the premiums they paid for bonds and reinvest them at lower yields. Applications to refinance mortgages climbed last month to the highest since 2009.
“We are getting to a crossroads where refinancing activity will be pretty severe,” Merrill Ross, an analyst for Baltimore-based Wunderlich Securities Inc., told National Mortgage News. “The days of wild returns are in the rear-view mirror.”