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Mortgage rates fall with bond yields, affecting REITs like Annaly

Brent Nyitray, CFA, MBA

Mortgage rates fall with bond yields, affecting REITs like Annaly (Part 1 of 4)

Every week, the Mortgage Bankers Association (or MBA) puts out an index of mortgage application activity

Mortgage applications are relevant to a number of industries—from banks to non-banks, to mortgage REITs like Annaly (NLY) and American Capital (AGNC), to homebuilders like KB Home (KBH), Lennar (LEN), and Toll Brothers (TOL). This series will break down the different indices and help you learn what insight you can glean from them. If you’re a bank, you’re looking at these indices and trying to determine whether you’re competitive in all the segments you want to be competitive in. If you’re a non-bank, you might be looking to see if you’re gaining share or losing share. If you’re a mortgage REIT, you’re focusing on the refinance index and what it might mean for prepayments going forward. And if you’re a homebuilder, you’re watching the purchase index as a way to gauge future demand.

Mortgage rates fall slightly as bonds yields increase

The average 30-year fixed-rate mortgage fell 4 basis points, from 4.26% to 4.22%, while the ten-year bond yield fell 12 basis points after some weaker economic data. The Fed decided to start tapering at the December FOMC meeting and reduced its pace of purchases by $5 billion a month. It made similar moves at the January and March FOMC meetings. Given how much issuance has fallen, the Fed’s footprint was getting bigger even though it wasn’t increasing purchases. It made sense for the Fed to reduce purchases. The fear, of course, is that the absence of Fed activity will make mortgage rates rise even if the ten-year yield stays the same.

Mortgage banking has become a lot more competitive as rates have increased. The refinance business has fallen off a cliff and bankers are cutting employees and rates. This is affecting the REITs that have banking exposure, like PennyMac (PMT), Nationstar (NSM), and Redwood Trust (RWT). Nationstar reported disappointing earnings, but Redwood performed better. The large banks reported volumes down nearly a third from Q4 to Q1. It’s so competitive in the jumbo space that the rate on jumbo loans has actually fallen below the conforming rate. That said, servicing has become a valued commodity, which helps Ocwen (OCN), although it’s facing heavy scrutiny from regulators. As rates have stabilized, they’ve helped even agency REITs with heavy leverage and duration exposure like Annaly (NLY) and American Capital Agency (AGNC).

Continue to Part 2

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