Wednesday, January 15, 2014

Mortgage Reits Specializing in Servicing Rights

With the ten year note quickly retracing some of its recent back-up yield it strikes me as the opportune time to add positions benefiting from the next upward movement in rates.  While the employment report was soft the economy is undeniably on the mend.  At some point the artificial fed bid has to end driving rates up -- in the meantime there is little likelihood we make  a substantial mark down.   One type of mortgage Reits are especially levered to an upward move in rates -- those specializing in Mortgage Servicing Rights.  Servicing rights are essentially an annuity stream for the life of the mortgage.   They decline in value as rates drop since the mortgage they are tied to is more likely to prepay and the annuity stream will end shortly.  As rates rise the opposite holds true and the projected annuity stream grows longer -- increasing the value of the MSRs.  Two mreits that specialize in MSRs are CHMI and NRZ.  I recommend NRZ over CHMI as the latter often purchases MSRs from an affiliated company posing potential conflict of interest. 

As always do your own research.


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