As I referenced in yesterday's column, "What Is the Fed Waiting For?" I'll address the mortgage real estate investment trusts (REITs) in this column.
I haven't discussed the agency mortgage REITs since last summer, but this is a good time because so much that impacts them has transpired since, and more is about to.
I began writing about the mortgage REITs as long-term hold income vehicles for retail investors following the collapse in their values in mid-2013, which was a part of what became known as the "taper tantrum."
The "taper tantrum" was the bond market's reaction to then-Fed Chair Ben Bernanke announcing that the Fed would probably begin reducing its purchases of long-end Treasuries and agency mortgage-backed securities (MBS) later that year, as part of the process of beginning to wind down the third round of quantitative easing.
The immediate response by the bond market was to sell long-end Treasuries and MBS, causing yields to spike and the values to decline.
The panic selling resulted in mortgage rates rising at the fastest rate in history.
That caused investors to become worried about the market value of the existing mortgages held by the REITs and they responded by selling them.
I started advocating them as long-term income vehicles in November of that year because the selling, in my opinion, had been overdone.
Since then, the fears of rising rates have been muted a bit, but there've been overhanging concerns about the potential impact of loan modification programs and principal forgiveness on the mortgages held by the REITs.
We are getting some clarity on both fronts now, though, that should alleviate those fears.
There is a big push by the federal government to finally resolve the remaining legacy mortgage issues left from the last housing crisis.
The loan modification programs are being terminated at the end of this year, and as I discussed in the column, "These Banks and Insurers Are the Big Winners From New Fannie Mae Rules," the rescission of the "continuity of obligation" rule will allow for an acceleration of the resolution of nonperforming mortgages held by the banks.
That process will also make new mortgages available for purchase by the REITs.
On the principal reduction issue, the Federal Housing Finance Agency has announced that although it will finally be allowed, it will be limited to only 33,000 known mortgagors.
That's a tiny number of mortgages.
The important issue for the REITs is that these aggravating concerns are largely resolved and investors can focus all their worry on interest rates again.
This is also where things get a little dicey.
As I've written about over the past few columns, there is growing confusion about the state of the economy and what the Fed's monetary policies will be in the near future.
Depending on whether an analysis of Fed logic on the economy leans toward the nascent wage pressures or the lack of consumption, the debate among pundits concerning the potential for rate hikes is beginning to sound like the Miller Lite beer commercials from the 1980s; tastes great, less filling.
Unlike the debate concerning Fed rate decisions over the past year, which have been limited to whether the Fed will or will not raise rates, the newly forming evidence on economic activity is supportive of logical arguments for either tightening or loosening monetary policy.
So far, the Fed has not addressed this issue, and until the FOMC members do, the transparency of Fed logic they've pursued will increasingly become opaque, with capital market participants in all asset classes perceiving this to be indicative of increasing risks.
I don't know when the FOMC members will address this issue, but the longer they wait the more likely it is that markets move away from risk, which in the broadest sense would require a marginal shift away from equities and toward bonds.
That should be supportive of long-end bonds and help to keep yields and mortgage rates low, stable and with a trend toward declining.
More importantly, regardless of whether the Fed decides to focus on wage pressures, which is supportive of raising rates, or on the lack of growth in consumption and price inflation, which is supportive of at least punting on rates, long-end yields and mortgage rates should not move up, even if the Fed raises short-end rates.
The totality of all this is supportive of the prices for the mortgage REITs, and I continue to believe they are excellent income vehicles.
