In this article, I look into how QE3, more particularly the Fed’s MBS purchase program, affects agency mortgage REITs. I discussed my approach for agency mortgage REIT analysis in this prior article.
A few days ago, the Fed laid out its plan to buy about $40bb of agency MBS per month over the next several months. The price of mortgage-backed securities has since gone up, and their yields have come down significantly. As a consequence, many fear that REITs investing in these bonds would see their income drop, which would imply lower dividends in the future.
However, I think that in fact QE3 will not have a negative effect for two main reasons:
- The spread between primary and secondary mortgage rates will widen as the Fed pushes MBS yields tighter.
- The increase in book value of REIT MBS positions will largely compensate for the loss in interest.
I illustrate my logic with Armour Residential (ARR). I like it as an example because I own it.
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Recently I was evaluating my investment goals and the way I was saving money for investing. In many of my previous posts I preached a way of saving into non transaction fee mutual funds, which would allow investing small amounts let’s say $50 every month without paying a fee. Then I could see something I didn’t like. Those funds locked my money for 6 months. If you sell prior to that test period you will pay a back fee. Another issue with this is that the return on those mutual funds was very low, many times they didn’t even keep up with the market and in many occasions lost value. 
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