Finally, Mortgage REITs Catch a Break

May has been a rather drab month for mortgage REITs, and the entire sector has been in a slump since industry heavy American Capital Agency and its hybrid cousin American Capital Mortgage reported lackluster numbers early on. Then came a similarly depressing earnings announcement from Western Asset Mortgage , which reflected some of the same problems faced by the trusts under Gary Kain's care.

Yesterday, however, the mREITs rallied in a big way, making us wonder: Is this is the dawn of a new day, or just a fluke?

Book values take a nosedive
Like American Capital Agency and American Capital Mortgage, Western Asset saw its book value plunge in the first quarter because of a decrease in the value of its portfolio of mortgage-backed securities. Also like its two fellows, the trust sustained per-share losses -- which, for Western Asset, came to $1.18, while the others reported losses of $1.57 and and $1.66 per share, consecutively, on their stable of agency MBSes.

Reminiscent of Gary Kain's explanation of his two trusts' plunge in book value, Western Asset's CEO Gavin James chalked it up to market jitters regarding the end of QE3, something that he, much like Kain, doesn't believe will be happening in the near future. Again, Western Asset has seen improvements in book value as the market has calmed, just as Kain reported.

Is the recovery real?
The recent revival of the sector -- which was in the red for nearly two weeks -- could be based on the unruffling of investors' feathers as fears of a QE3 exit recede, at least for the moment. Why, suddenly, is this concern ebbing?

Most likely, the jump is the aftereffects of a few bits of dour economic news, which caused Treasury bond prices to shoot up, dropping the yield. Lousy housing data, a dip in consumer prices, and an unexpected uptick in jobless claims all conspired to push prices of Treasuries upward, as the idea of the Fed's bond-buying spree coming to a close lost steam in the wake of these somewhat grim announcements.

If the economic winds blow in another direction, could the mortgage REITs suffer another severe depression? That could happen, of course, but I don't think it will. I think there will be a moderation in the sector, with the extreme pendulum swings winding down in the absence of abysmal earnings reports, as well as the realization that unemployment is nowhere near the magic number of 6.5% that triggers a QE3 halt.

The mREIT sector will likely settle out of their volatility soon, as things begin to get back to normal. Meanwhile, Gavin James just took the opportunity to increase his stake in Western Asset Mortgage by nearly 13%. A show of faith? I'd say so.

Investors love mortgage REITs because of their scrumptious dividends, but can they keep it up for the long haul? If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report, "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.

The article Finally, Mortgage REITs Catch a Break originally appeared on

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.