Keefe, Bruyette & Woods expects the next round of mortgage real estate investment trust earnings to be lower than the previous quarter’s, but believes book values will be higher.
Narrower spreads on investments and higher prepayments are expected to be the drivers of an earnings decline between the second and third quarters, KBW said in a residential mortgage-backed securities REIT earnings preview report.
Citing the high prepayments, KBW said it finds hybrid mortgage REITs relatively more appealing “at the moment.”
KBW expects higher book values for agency MBS REITs and believes nonagency REITs book values “performed well.”
It noted that 30- and 15-year agency MBS prices were up 0.5%-2% for most coupons as of quarter-end, with the lower coupons with fixed rates targeted by the
KBW also noted that prepayment-protected securities, such as those backed by loans that have been refinanced through the Home Affordable Refinance Program, have outperformed by an estimated 0.25%-1%.
In the nonagency RMBS sector, KBW said indices it uses to track subprime credit assets with top AAA ratings show them ending the quarter up 17% on average, while indices it uses to track prime credit assets show them up 4%-5%.
