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Levered MBS = Big Yield



August 09, 2010 – Comments (2) | RELATED TICKERS: NLY

Leveraged mortgage-backed securities -- four words associated with the financial crisis, housing crash, and the recession. Unless you're an investor in Annaly Capital Management (NYSE: NLY). Then those four words mean a big, fat dividend payout every quarter.

Can the big payouts continue?  Here's my swing at a SWOT on Annaly.

Feel free to add your thoughts below or at the article.

Fool on!


2 Comments – Post Your Own

#1) On August 13, 2010 at 12:47 PM, ikkyu2 (98.18) wrote:

I didn't realize you were contributing to the Fool now, Russ.  How'd I miss that?

I commented on a recent Fool bull pitch for NLY.  What it boiled down to was, why should I switch all my MBS/REIT investing to NLY?  I'm doing so well, with the exact same business model, in New Century and Novastar Financial.

I feel like people have very short memories.  New Century had a sky high share price and was paying a 35% yield on it; 6 weeks later the share price was 0 and the company was in receivership.  It really doesn't take much in the way of defaults ('non-performing assets') to totally tank this business model; I know you're well aware of this, in fact I think I learned about it from you.  

You might have considered mentioning something about it in your latest article ;)

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#2) On August 13, 2010 at 10:08 PM, rd80 (94.72) wrote:

I started contributing late last year.  I'm usually short of ideas and time, so don't publish as many pieces as most others.  I had enjoyed blogging and decided to give freelancing a try.  So far I'm having fun with it, The Fool tolerates me and the editors are good folks to work with.

NLY is a different business model than New Century or Novastar - I think I scored more points red thumbing New Century than any other stock I've played in CAPS.  New Century and Novastar were subprime lenders and held at least some of the loans they made.  I think very few of their assets met Frannie standards.  If I recall correctly, they also got hit with push backs when firms that bought their loans found mistakes or misrepresentations, the subprime lenders had to buy the crap back.

NLY isn't a lender; it borrows short, buys MBS and pockets the spread.  Credit risk is controlled by only buying paper issued or backed by Frannie or gov't agencies, so there is almost no credit risk.  If the loans in the MBS default, Fannie, Freddie or a gov't agency is on the hook to make them whole.

There is interest rate risk since it borrows short and buys longer maturity paper.  A tick up in short term rates would eat into the spread.  A tick up in long term rate mortgage rates would hit the value of the MBS held and might hurt the ability to finance.

I don't own NLY, but am a nervous holder of HTS which operates nearly the same business model.  The trigger that would cause me to sell is the Fed hiking short term rates or hinting that a hike is imminent.

Good swapping comments with you again, hope all's well.

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