Agency Reits get pounded.

If you read our blog you know by now we love agency reits.  These are real estate investment trusts that buy nothing but government guaranteed paper and make money on the spread between the current interest rate from which they borrow money and the higher longer term mortgage rates.  These stocks have been taking a pounding in the last few days since Mr. Bernanke introduced QE 3 saying it was going to be exclusively a buying of mortgage securities in an effort to push low mortgage rates even lower. 

The Fed chief is now blowing his horn as loud as his can saying GO BUY A HOUSE!!  Well with mortgage rates for 30 year loans now approaching 3% anyone with decent credit needing a home needs to step up to the plate.  Heck if you can go with a 20 year loan the rates are approaching 2.75%. This folks is essentially free money for the long term and if rates were the only issue people would be buying like never before. Unfortunately bad credit, uncertainty in future home prices, and lastly employment concerns are keeping this market from a outright boom.  The Chairman has no more bullets at this point. 

Back to the agency reits.  Most of the stocks are down from $2 to $4 and this is due to the concern that the spread for prior purchases of government paper is going to be a loser for the holders now. Yes that very well might be, but the difference between current paper and soon to be issued paper is quite small here and we believe the reits will be able to handle it just fine with a few quarters of reorganizing their mortgage portfolios and moving forward. The real risk always with agency reits is not lower rates, but HIGHER rates. That kills all profits when you are holding paper where the new borrowing rate is higher than what are lending money at currently.  

Well maybe fools rush in where angels fear to tread but we see panic here. 

So to us this sell off which is a panic moment and at some point buyers will see the value and step in is an opportune time to do some buying ourselves.  So for those headed to the door we offer our resources to take these agency reits at lower prices with still great double digit dividends and guaranteed mortgage paper from you.  We suggest you do the same.  Picking from any of these reits is likely a winner, but we prefer AGNC and HTS.  

We currently hold AGNC as an option.