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ARMOUR Residential REIT, Inc. Message Board

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  • michaelmcmx michaelmcmx May 6, 2011 8:54 AM Flag

    Other Reits----Question

    Understand once the FED raises the interest rates most, if not all, of these kinds of REITs will take a nose dive. I have several and know our days are numbered. We are good through this year but not 2012.

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    • jackhiller May 6, 2011 9:20 AM Flag

      The Fed generally manages the short rates. As an unusual measure to prop the economy and avoid a double did down or worse (Depression), under QE2 it took the unusual action to buy long dated treasuries to also reduce the long rates.

      Now, I assume you understand that the MREITs make most of their income by using their equity to borrow at the relatively low short rte (now being kept close to zero for an indefinite future by the Fed) to buy mortgages yield a much higher rate. Leveraging on the equity is running for the MREITs between about 8-9 times to increase profitability from the short to long (mortgages) rate spread.

      When finally the Fed believes the economy is strong enough to begin worrying more over inflation than recession/depression, it will star raising the short rates--and that's when your logic fails. At that time the long rates will have move even higher over inflation concerns to actually initially increase the rate spread and profitability.

      The risk for the MREITs is initially not so much from the short rate raising their borrowing costs as it is from the fact that the equity from their mortgage portfolio (their book equity) shrinks, and if it shrank quickly, they could be forced to sell out of their portfolio at a loss. Because of this risk, the market is requiring the high yield we see.

      To moderate the risk of portfolio losses, the MREITs take several steps, to include, deleveraging, using derivatives that gain in value when the short rates go up, and using derivatives that gain in value when the mortgage rates go higher (compensating for their mortgage portfolios losing mark to market book value).

      If you do not fully understand how the MREITs manage thru the interest rate cycles, you should not be investing or trading them.

      Based on your post, you should stay away.

      Best of luck

    • I understand your concern...The government has manipulated the numbers especially CPI. We are closer to 11.2% inflation, (Energy,food,medicine) and 19.7% unemployment (55-62 year old) having the most difficulty finding decent employment, not Wal-mart or McDonald's.
      Others 17-34, are also finding jobs rough...So...QE III will come about and the Dollar will continue to fall. raising rates before Presidential election in Nov 2012 IS NOT AN OPTION. OBAMA will not permit or kiss his chances good-bye.

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