mREITs: Excess returns or dividend bubble?

I've been warning investors about the risks associated with mortgage REITs (mREITs) such as Annaly Capital Management (NYSE: NLY ) and American Capital Agency (NASDAQ: AGNC ) for more than a year and a half. Finally, regulators are waking up to the the potential problem these companies pose. Last Friday, The Wall Street Journal reported that the Financial Stability Oversight Council mREITs could finger mREITS as an area of vulnerability in financial markets in its annual report.

mREITs borrow money on a short-term basis to invest in mortgage securities and they collect the difference between their borrowing cost and the interest their bond inventory generates. Because they borrow in short-term funding markets, they are continually rolling those borrowings over -- an Achilles' heel in distressed markets. Along with junk bonds, mREITS represent, to my mind, the most obvious example of excess directly attributable to the Fed's ultra-loose monetary policy. At some point, that policy will end, but not before investors have likely suffered significant losses on these frothy vehicles.

Source: Motley Fool

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