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Wunderlich Securities analysts have no clue on economics and AGNC.

I have one question for the unnamed Wunderlich Securities analyst(s).  Do you think that short term interest rates will rise faster than longer term interest rates in the next one or two years?  Their answer has to be no.  Otherwise, they wouldn’t have said what they said in the article below.

The research firm expects “market trends could support higher debt to equity ratios going forward because collateral is relatively dear in the marketplace.” While not every Index member is a dividend payer, the Index does sport a yield of 10%.

Wunderlich notes wider spreads and adequate liquidity will support returns on equity of over 17% on average this year and could provide support with the potential for multiple expansion.

Interest rates will rise from these artificially low rates manufactured from Federal Reserve digital money creation.  I have posted about this here: http://bit.ly/RatesRise .  Interest rate spreads will tighten when the Federal Reserve’s quantitative easing (QE2) ends in June.  If the Fed stop printing money for a year like they did for most of 2010, then the recession will continue.  Short term interest rates will rise faster than long term rates.  This is the precursor to an inverted yield curve.  The inverted yield curve has preceded almost every recession since the end of World War II.

If the Federal Reserve starts printing money again (QE3) before the onset of another recession, then perhaps the interest rate spreads won’t tighten as quickly.  But the Fed will be sowing the seeds of a bigger calamity later.  American Capital Agency Corp. (AGNC) and the other mortgage REITs are going to have to slash dividends and their stock prices will take huge losses because their asset values will erode.

Ask yourself this question: Did Wunderlich Securities warn their clients that a financial crisis was eminent in 2007?  I can’t find any warnings using the search terms “Wunderlich Securities” + “financial crisis”.  I do know that Peter Schiff, EuroPacific Captial, is an advocate of the Austrian school of economics.  He is on the list of those who warned of the financial crisis: http://marketplayground.com/2010/11/20/twelve-who-forecast-the-financial-crisis/   No one from Wunderlich saw the crisis coming.  Why should you trust them now on mortgage REIT dividend stability?

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Wunderlich Sees Stability In Mortgage REIT Dividends (NLY, AGNC, NRF, CIM, CLNY)

by Jason Smith | May 2nd  |  Filed in: Stock Sector News

The Mortgage Investment Stocks Index is up 0.1% after Wunderlich Securities said metrics reported by the firms in this group that have reported first-quarter earnings speak to the stability of dividends currently in place. Wunderlich notes fewer than half the mortgage REITs under coverage have delivered first-quarter results, but company reports and current market trends indicate stable payouts for investors.

The research firm expects “market trends could support higher debt to equity ratios going forward because collateral is relatively dear in the marketplace.” While not every Index member is a dividend payer, the Index does sport a yield of 10%.

Wunderlich notes wider spreads and adequate liquidity will support returns on equity of over 17% on average this year and could provide support with the potential for multiple expansion.

Shares of Annaly Capital Management (NLY), the largest Index member by market value are fractionally lower today. Annaly has a yield of 13.9%, based on past distributions. With a yield of 19.2%, based on past distributions, American Capital Agency (AGNC) is modestly higher while Northstar Realty Finance (NRF) with a yield of 7.9%, based on past distributions, is soaring 3%. Chimera Investment (CIM) and Colony Financial (CLNY) are both lower by half a percent. Those stocks yield 13.8% and 6.9%, based on past distributions, respectively.

Investors can track dozens of high-yielding indexes at tickerspy.com.

Link to original article: http://www.tickerspy.com/newswire/?p=4402

Jefferies likes AGNC's innovative approach to risk management. Yikes!

Jefferies thinks American Capital Agency Corp. (AGNC) is fairly valued.  Words like “innovative approach to risk management” makes me think of Enron and their “innovative approaches”.  Likewise, words like “sophisticated hedging strategy” sounds to me like a house of cards propped up with counterparty risk.  The financial health of AGNC’s unnamed hedging counterparties cannot be determined.  Would you want to enter into a hedge with Lehman Brothers, AIG, or any other bankster?

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American Capital Agency's (NASDAQ: AGNC) reported 1Q11 results were $0.12 above consensus and book value grew 7% Q/Q. Despite substantial ROE outperformance and the most innovative approach to risk management in the REIT space, Jefferies views the shares as fairly valued. AGNC currently trades to a 1.15 multiple of book value, a justifiable premium to the pure-play Agency REIT average of 1.1x.

During the quarter, AGNC doubled the size of their investment portfolio. Surprising to Jefferies was the company's focus on fixed-rate product, which represented 82% of the total portfolio at quarter-end. Importantly, AGNC does not own TBA mortgages, but rather the company tends to focus on specified pools.

In 1Q11, AGNC increased its exposure not only to plain vanilla interest rate swaps, but also swaptions, synthetic I/O securities, and TBA and Treasury positions in order to increase the duration of their hedge portfolio. AGNC clearly employs the most sophisticated hedging strategy in the mortgage REIT space, Agency or non-Agency.

Jefferies has a $29 PT and Hold rating on AGNC

American Capital Agency closed Tuesday at $28.83

Read more: http://www.benzinga.com/analyst-ratings/analyst-color/11/04/1036131/jefferies-comments-on-american-capital-agency-following-#ixzz1KlL2IMiU

American Capital Agency (AGNC) reports 1Q2011 earnings; dividend still not safe.

American Capital Agency Corp. (AGNC) dividend is not safe.  It has a current dividend payout ratio of 107.6%.  Any payout ratio above 100% is a warning to the dividend investor to expect a cut in the future.  The company earned $1.30 per share for its reoccurring business operations of borrowing short (repurchase agreements) and lending long (agency securities).  But that wasn’t enough to cover the $1.40 quarterly dividend per share.

The company earned another $0.18 per share from the net realized gains on sales of agency securities, derivatives, and trading securities.  You can’t count on reoccurring income from these sales and hedges.

The company reported an improvement to its book value from $24.24 to $25.96.  Remember this – AGNC’s liabilities are real, but its asset values must be questioned.  The housing market is not done being clobbered and the government guarantees on agency securities are empty promises.  I place little faith in the book values of financial companies.  Think Lehman Brothers and their nice book value prior to their implosion.

The company remains highly leveraged 7.4 times.  I don’t like this.  It is a house of cards with an attractive dividend yield.  Net interest rate spreads remain the same as last quarter.  This will not change until interest rates rise.  Interest rates will rise.  It is only a matter of time before this house of financial cards comes crashing down.  Austrian economists predicted the the 2007-2008 crash back in 2005.  They are predicting another crash in the next few years depending on the actions of the Federal Reserve and the commercial bankers.

In summary:

·         Dividend - AGNC has a spectacular 19% dividend yield based on shaky leverage and an inflationary Federal Reserve.  A cut is coming in the next year.

·         Earning power - Its dividend is not supported by its reoccurring operations.  Its three year average earnings per share of $1.18 would only be slightly improved by a continuation of this quarter’s performance for the rest of 2011.  Only new capital issues and the occasional sale of some agency securities at a gain are keeping it afloat.

·         Balance sheet - Its balance sheet is horrible because its like a banks: borrowed short and lent long.  The moment that its 25 unnamed credit suppliers cease to rollover its short term debts the whole house of cards will come crumbling down.

You can view the earnings press release here: http://prn.to/AGNC1Q

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BETHESDA, Md., April 25, 2011 /PRNewswire/ -- American Capital Agency Corp. (“AGNC” or the “Company”) (Nasdaq: AGNC) today reported net income for the first quarter of 2011 of $133.5 million, or $1.48 per share, and book value of $25.96 per share.

FIRST QUARTER 2011 FINANCIAL HIGHLIGHTS

·         $1.48 per share of net income

o    $1.30 per share, excluding $0.18 per share of other investment related income

·         $1.68 per share of taxable income(1)

·         $1.40 per share first quarter dividend

·         $0.42 per share of undistributed taxable income as of March 31, 2011

o    Undistributed taxable income increased $16 million to $55 million

·         $25.96 book value per share as of March 31, 2011

o    Increased $1.72, or 7%, from $24.24 per share as of December 31, 2010

·         22% annualized return on average stockholders’ equity (“ROE”) for the quarter(2)

OTHER FIRST QUARTER HIGHLIGHTS

·         $28 billion investment portfolio value as of March 31, 2011

·         13% constant prepayment rate (“CPR”) for the first quarter of 2011(3)

o    11% CPR for the month of April 2011(4)

·         7.6x leverage as of March 31, 2011(5)

o    7.4x average leverage for the quarter

·         2.58% annualized net interest rate spread for the quarter

o    2.42% net interest spread as of March 31, 2011

·         $1.75 billion of net proceeds raised from equity offered during quarter

o    $1.61 billion raised in two follow-on offerings

o    $141 million raised pursuant to a Controlled Equity Offering(SM) Sales Agreement and via direct share purchase plan share issuances

o    All equity raised was accretive to book value

Here is the press release in its entirety:

BETHESDA, Md., April 25, 2011 /PRNewswire/ -- American Capital Agency Corp. (“AGNC” or the “Company”) (Nasdaq: AGNC) today reported net income for the first quarter of 2011 of $133.5 million, or $1.48 per share, and book value of $25.96 per share.

FIRST QUARTER 2011 FINANCIAL HIGHLIGHTS

·         $1.48 per share of net income

o    $1.30 per share, excluding $0.18 per share of other investment related income

·         $1.68 per share of taxable income(1)

·         $1.40 per share first quarter dividend

·         $0.42 per share of undistributed taxable income as of March 31, 2011

o    Undistributed taxable income increased $16 million to $55 million

·         $25.96 book value per share as of March 31, 2011

o    Increased $1.72, or 7%, from $24.24 per share as of December 31, 2010

·         22% annualized return on average stockholders’ equity (“ROE”) for the quarter(2)

OTHER FIRST QUARTER HIGHLIGHTS

·         $28 billion investment portfolio value as of March 31, 2011

·         13% constant prepayment rate (“CPR”) for the first quarter of 2011(3)

o    11% CPR for the month of April 2011(4)

·         7.6x leverage as of March 31, 2011(5)

o    7.4x average leverage for the quarter

·         2.58% annualized net interest rate spread for the quarter

o    2.42% net interest spread as of March 31, 2011

·         $1.75 billion of net proceeds raised from equity offered during quarter

o    $1.61 billion raised in two follow-on offerings

o    $141 million raised pursuant to a Controlled Equity Offering(SM) Sales Agreement and via direct share purchase plan share issuances

o    All equity raised was accretive to book value

“Our American Capital Agency team delivered another strong quarter with our strategy of actively managing the portfolio,” said John Erickson, AGNC Executive Vice President and Chief Financial Officer. “This strong performance occurred in a quarter marked by significant global economic and political events, which required the periodic reconsideration of investment strategies. Even in this challenging environment, we grew our book value by 7% to $25.96 per share and earned $1.48 per share of net income while taking steps to reduce risk. In addition, we have added to our AGNC investment staff to broaden our expertise, improve our depth and address the Company’s significant growth.”

“We continue to believe the combination of strong asset quality and diversification, coupled with a thoughtful hedging strategy, which includes some optional protection, remains critical to our ability to achieve our dual mandates of generating attractive returns for our shareholders and protecting book value within reasonable bands,” said Gary Kain, President and Chief Investment Officer of AGNC. “During the first quarter of 2011, the Company raised over $1.7 billion in new equity and continued to produce solid returns across a wide range of different measures.  Book value, undistributed taxable earnings and what many analysts call ‘core earnings’ were all higher during the quarter, despite lower leverage resulting from the typical time lags associated with deploying new capital.”

INVESTMENT PORTFOLIO

As of March 31, 2011, the Company’s investment portfolio totaled $28.2 billion of agency securities, at fair value, comprised of $22.9 billion of fixed-rate agency securities, $4.9 billion of adjustable-rate agency securities (“ARMs”) and $0.4 billion of collateralized mortgage obligations (“CMOs”) backed by fixed and adjustable-rate agency securities(6).  As of March 31, 2011, AGNC’s investment portfolio was comprised of 44% </= 15-year fixed-rate securities, 5% 20-year fixed-rate securities, 32% 30-year fixed-rate securities(7), 18% adjustable-rate securities and 1% CMOs backed by fixed and adjustable-rate agency securities.  

ASSET YIELDS, COST OF FUNDS AND NET INTEREST RATE SPREAD

During the quarter, the annualized weighted average yield on the Company’s average earning assets was 3.39% and its annualized average cost of funds was 0.81%, which resulted in a net interest rate spread of 2.58%, unchanged from the fourth quarter of 2010.  As of March 31, 2011, the weighted average yield on the Company’s earning assets was 3.47% and its weighted average cost of funds was 1.05%(8).  This resulted in a net interest rate spread of 2.42% as of March 31, 2011, an increase of 14 bps from the weighted average net interest rate spread as of December 31, 2010 of 2.28%(9).  

The weighted average cost basis of the investment portfolio was 104.4% (or 104.0% excluding interest-only strips) as of March 31, 2011. The amortization of premiums (net of any accretion of discounts) on the investment portfolio for the quarter was $48.0 million, or $0.53 per share.  The unamortized net premium as of March 31, 2011 was $1.2 billion.

The Company’s asset yield benefitted from purchases of higher yielding securities late in the fourth quarter of 2010 and during the quarter as the Company invested capital from its recent capital raises subsequent to recent increases in interest rates and from a decline in the projected CPR for the remaining life of the Company’s investments. Premiums and discounts associated with purchases of agency securities are amortized or accreted into interest income over the estimated life of such securities, using the effective yield method. Given the relatively high cost basis of the Company’s mortgage assets, slower prepayment projections can have a meaningful positive impact on asset yields.  The projected CPR for the remaining life of the Company’s investments as of March 31, 2011 was 10%; a decrease from 12% as of December 31, 2010.  The decrease in the projected CPR is largely due to purchases of lower coupon securities during the quarter coupled with increases in both spot and forward interest rates. The actual CPR for the Company’s portfolio held in the first quarter of 2011 was 13%, a decrease from 18% during the fourth quarter of 2010.  The most recent CPR for the Company’s portfolio for the month of April 2011 was 11%.

The Company’s average cost of funds declined 9 basis points from 0.90% for the fourth quarter of 2010 to 0.81% for the first quarter of 2011, due largely to timing differences between asset settlements and the initiation of new interest rate swap contracts. These differences led to lower effective swap costs during the quarter than is expected to occur in future periods. The cost of funds as of March 31, 2011 includes both current and forward starting swaps balances, net of expirations, within three months of quarter end.

LEVERAGE AND HEDGING ACTIVITIES

As of March 31, 2011, the Company’s $28.2 billion investment portfolio was financed with $22.0 billion of repurchase agreements, $0.1 billion of other debt(10) and $3.3 billion of equity capital, resulting in a leverage ratio of 6.6x.  When adjusted for the net payable for agency securities not yet settled, the leverage ratio was 7.6x as of March 31, 2011.  The average leverage for the quarter was 7.4x as the Company deployed capital from its recent equity raises.

Of the $22.0 billion borrowed under repurchase agreements as of March 31, 2011, $5.7 billion had original maturities of 30 days or less, $8.7 billion had original maturities greater than 30 days and less than or equal to 60 days, $5.8 billion had original maturities greater than 60 days and less than or equal to 90 days and the remaining $1.8 billion had original maturities of 91 days or more. As of March 31, 2011, the Company had repurchase agreements with 25 financial institutions.    

The Company’s interest rate swap positions as of March 31, 2011 totaled $15.1 billion in notional amount at an average fixed pay rate of 1.79%, a weighted average receive rate of 0.25% and a weighted average maturity of 3.6 years.  During the quarter, the Company increased its swap position, including forward starting swaps ranging up to twelve months, by $8.5 billion in conjunction with an increase in the portfolio size.  The new swap agreements entered into during the quarter have an average term of approximately 4.2 years and a weighted average fixed pay rate of 1.93%. The Company intends the use of swaps with longer maturities to protect its book value and longer term earnings potential.

The Company also utilizes swaptions to mitigate the Company’s exposure to larger changes in interest rates.  During the quarter, the Company added $1.6 billion of payer swaptions at a cost of $17.2 million and $0.3 billion of receiver swaptions at a cost of $0.4 million. During the quarter, $0.3 billion of payer swaptions from a previous quarter expired or were sold.  As of March 31, 2011, the Company had $2.1 billion in payer swaptions outstanding at a market value of $21.3 million.

As of March 31, 2011, 68% of the Company’s repurchase agreement balance and other debt were hedged through interest rate swap agreements. If net unsettled purchases and sales of securities are incorporated, this percentage declines to 60%.  These percentages do not reflect the swaps underlying the payer swaptions noted above, which have an average maturity of 6.1 years.

OTHER INCOME, NET

During the quarter, the Company produced $15.8 million in other income, net, or $0.18 per share.  Other income is comprised of $4.2 million of net realized gains on sales of agency securities, $31.0 million of net realized gains on derivative and trading securities and $19.4 million of net unrealized losses, including reversals of prior period unrealized gains and losses realized during the current quarter, on derivative and trading securities that are marked-to-market in current income.  

The net gains and losses (realized and unrealized) on derivative and trading securities generally represent instruments that are used to supplement the Company’s interest rate swaps (such as swaptions and short or long positions in “to-be-announced” mortgage securities (TBA’s), Markit IOS total return swaps(11) and  treasury securities). Under accounting rules, these positions are not in hedge relationships and consequently are accounted for through current income instead of shareholders’ equity.  The Company uses these supplemental hedges to reduce its exposure to interest rates.

TAXABLE INCOME

Taxable income for the first quarter of 2011 was $1.68 per share, or $0.20 higher than GAAP net income per share for the quarter. The primary difference between tax and GAAP net income is unrealized gains and losses associated with derivatives marked-to-market in current income for GAAP purposes but excluded from taxable income until realized or settled. Taxable income for the first quarter of 2011 benefited from the settlement of gains derived from short TBA positions and payer swaptions entered into during the fourth quarter of 2010. As of March 31, 2011, net unrealized gains that have been recognized for GAAP, but excluded from taxable income, totaled $10 million. Assuming no change in market prices as of March 31, 2011, the Company anticipates recognizing most of these net gains as taxable income during the second quarter of 2011.

NET ASSET VALUE

As of March 31, 2011, the Company’s net asset value per share was $25.96, or $1.72 higher than the December 31, 2010 net asset value per share of $24.24.  

FIRST QUARTER 2011 DIVIDEND DECLARATION

On March 7, 2011, the Board of Directors of the Company declared a first quarter 2011 dividend of $1.40 per share payable on April 27, 2011, to stockholders of record as of March 23, 2011. Since its May 2008 initial public offering, the Company has paid or declared a total of $499.2 million in dividends, or $14.66 per share.  After adjusting for the first quarter 2011 accrued dividend, the Company had approximately $55 million of undistributed taxable income as of March 31, 2011, an increase of $16 million from December 31, 2010. Undistributed taxable income per share as of March 31, 2011 was $0.42 per share.  

(1) Based on the weighted average shares outstanding for the quarter.  Please refer to the section on the use of Non-GAAP financial

Foolish recommendations for AGNC from economic fools

Here is another glowing article from The Motley Fool CAPS community about AGNC:
http://www.fool.com/investing/general/2011/04/15/4-star-stocks-poised-to-pop-...

These people do not understand economics. The author discounts the risk that interest rates will rise enough in the next few months which would hurt AGNC's profitability. The Federal Reserve is scheduled to end it's quantitative easing 2 (QE2) buying of US treasuries this summer. Interest rates are already rising despite the Fed's efforts. They will go even higher when the Fed ceases to inflate. The Fed has been buying around 80% of the US bonds auctioned since QE2 started. The US government will continue to spend more than $1.6 trillion dollars than they extort in taxes. This is bad for AGNC because risk of US government default increases and the guarantees of agency securities will be an easy target of congress to cut.

QE 2 is Fed chairman Bernanke's panicked reaction to the threat of a double dip recession. It is inflating like crazy right now. Once QE 2 is over If the Fed ceases to inflate for more than a year like it did in 2010, then a new financial crisis will emerge bigger than the crisis of 2008. Banks will possibly cut off AGNC from cheap short term borrowings (repurchase agreements) or cease lending to the altogether. This would destroy their profitability very quickly. Also their agency securities would lose value which would compound AGNC's problems. Interest rates go higher than they are now in that situation also.

The party is almost over for all the high dividend mortgage REITs. Their fates are in the hands of the commercial bankers, the Federal Reserve, and the US Congress. I wouldn't want my high dividend stock portfolio exposed to those assclowns.

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Is AGNC really a low P/E stock?

The current price/earnings ratio of AGNC is highly deceptive:

Morningstar reports a forward P/E of 6.1.

Google Finance reports a P/E of 3.69.

Yahoo! Finance reports a P/E (ttm) of 3.53.

These are all low numbers.  Single digit P/E ratios usually indicate possible value investments.  But let’s take a closer look at AGNC’s earnings.  Let’s adjust them for the amazing increase in the number of shares issued and used to leverage up the purchase more agency securities in the government subsidized mortgage market.

American Capital Agency Corp. (AGNC)

Shares: 124.63 M (only 36 M at end of 2010)

Market price: $27.83

Dividend yield: 20.1%

Quarterly dividend: $1.40

(EPS adjusted for drastic changes in capitalization)

                        Net inc.

            EPS     Avail.              Adj. EPS

2006

2007

2008    $2.36   $35 M              $0.28

2009    $6.78   $119 M            $0.95

2010    $7.89   $228 M            $2.31

Three year average earnings equals $1.18 per share.  Value investments typically start below 12 times average earnings.  In AGNC’s case 12 times average earnings equals $14.16 per share.  20 time average earnings equals $23.60 per share.  AGNC is currently selling for 23.6 times average earnings.  This is above 20 which makes a purchase of AGNC above $23.60 a speculative purchase.

Suddenly those low current P/Es don’t seem to hold up anymore when you calculate AGNC’s average earning power over the past three years.

I have warning in other articles that AGNC is will not be able to pay its hefty $1.40 dividend with so many new shares being issued.   If it uses the proceeds of the public offering to pay the current quarter’s dividend, then it is just bidding time before it disappoints shareholders with a larger dividend cut in the future when net income decreases due to a narrowing of the interest rate spread.  That’s how they make their money.

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American Capital Agency Corp. (AGNC) Downgraded by Zacks Investment Research to "Neutral".

I downgraded American Capital Agency Corp. (AGNC) a several months ago because it isn’t earning enough money to sustain the quarterly $1.40 dividend payment.  You can see in this downgrade from Zacks that the company only earned $1.26 last quarter.

Click here to see all my analysis on AGNC: http://www.myhighdividendstocks.com/category/high-dividend-stocks/american-capital-agency-corp

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Link to original article: http://www.americanbankingnews.com/2011/04/01/american-capital-agency-corp-agnc-downgraded-by-zacks-investment-research-to-neutral/#

American Capital Agency Corp. (AGNC) Downgraded by Zacks Investment Research to “Neutral”

April 1st, 2011 • View CommentsFiled Under • by ABMN Staff

Filed Under: Analysts DowngradesMarket NewsZacks

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Equities research analysts at Zacks Investment Research downgraded shares of American Capital Agency Corp. (NASDAQ: AGNC) from an “outperform” rating to a “neutral” rating in a research note to investors on Thursday. The analysts currently have a $30.00 price target on the stock.

Analyst Meenu Goyal wrote, “We are changing our long-term recommendation for American Capital from Outperform to Neutral as we anticipate it to perform in line with the broader market. American Capital focuses exclusively on fixed-rate agency securities guaranteed by the U.S. government, which limits its credit risks. American Capital is also among a selected group of companies who have increased its dividend during the economic crisis. The company paid a total of $364.0 million in dividends or $13.26 per share since its initial public offering in May 2008. However, increased volatility and deterioration in the broader residential mortgage and RMBS markets limits the upside potential of the company going forward. “

Separately, analysts at Keefe, Bruyette & Woods, Inc upgraded shares of American Capital Agency Corp. from a “market perform” rating to an “outperform” rating in a research note to investors on Friday, February 11st. Also, analysts at Deutsche Bank (NYSE: DB) raised their price target on shares of American Capital Agency Corp. from $28.00 to $30.00 in a research note to investors on Wednesday, February 9th. They now have a “hold” rating on the stock.

Shares of American Capital Agency Corp. traded down 0.75% during mid-day trading on Friday, hitting $28.9226. American Capital Agency Corp. has a 52 week low of $24.06 and a 52 week high of $30.68. The stock’s 50-day moving average is $29.43 and its 200-day moving average is $28.91. The company has a market cap of $2.654 billion and a price-to-earnings ratio of 3.69.

American Capital Agency Corp. last announced its quarterly results on Tuesday, February 8th. The company reported $1.26 earnings per share (EPS) for the previous quarter, beating the Thomson Reuters consensus estimate of $1.25 EPS by $0.01. During the same quarter in the prior year, the company posted $1.79 earnings per share. The company’s quarterly revenue was up 185.1% on a year-over-year basis. On average, analysts predict that American Capital Agency Corp. will post $0.00 EPS next quarter.

American Capital Agency Corp. (AGNC) is a real estate investment trust (REIT). AGNC earns income primarily from investing in residential mortgage pass-through securities and collateralized mortgage obligations. These investments consist of securities, for which the principal and interest payments are guaranteed by United States Government-sponsored entities, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) or by a United States Government agency, such as the Government National Mortgage Association (Ginnie Mae). The Company is externally managed by American Capital Agency Management, LLC, a subsidiary of a wholly owned portfolio company of American Capital, Ltd.

For more information about Zacks Investment Research’s equity research offerings, visit Zacks.com.

Even Jim Cramer is skeptical about AGNC.

Jim Cramer is now a critic of American Capital Agency Corp. (AGNC).

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by Jason Smith | March 28th  |  Filed in: Dividend News

MORTGAGE REITS METRICS

Avg. Market Cap:

$1.3B

Avg. P/E Ratio:

10.9

Avg. Div Yield:

9.8%

Following comments by “Mad Money” host Jim Cramer about the group, the Mortage Investment Stocks is trading lower by 0.1% today.

Surprisingly, American Capital Agency (AGNC) is up 1% after Cramer questioned how the company can feature such a high yield. Shares of American Capital Agency currently yield a whopping 19.3% based on past distributions. Shares of Annaly Capital Management (NLY) are down about half a percent despite Cramer saying that is the one stock in the group that he recommends. “I feel real good about that one,” Cramer said in reference to Annaly.

Among other high-yielding mortgage REITs, Northstar Realty Finance (NRF) is up 2%. Those units now yield 8% based on past distributions. PennyMac Mortgage (PMT), with its 9.2% yield based on past distributions, is up 1%. Anworth Mortgage Asset (ANH), with a yield of 12.3% based on past distributions, is down 1% while Capstead Mortgage (CMO), which also sports a 12.3% yield based on past distributions, is down half a percent.

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Link to original article: http://www.tickerspy.com/newswire/?p=4245

AGNC has a whopping dividend, but diminishing earning power and a weak balance sheet.

Disclosure: I don’t own AGNC.

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Bad News for Mortgage REIT AGNC. Housing Prices Headed Lower.

The financial press is reporting today that house prices are headed back down following the ill conceived government stimulus known as the “First Time Home Buyer” subsidy.

http://www.reuters.com/article/2011/02/22/us-usa-economy-confidence-idUSTRE71L3XL20110222

I believe these continued adverse developments in the broader residential mortgage market will negatively impact the earnings of high dividend stock American Capital Agency Corp. (AGNC).  The following risk excerpt from AGNC’s 2009 annual report states the risk quite succinctly:

Continued adverse developments in the broader residential mortgage market may adversely affect the value of the agency securities in which we invest.

In 2008 and 2009, the residential mortgage market in the United States experienced a variety of unprecedented difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns. Many of these conditions are expected to continue in 2010. Certain commercial banks, investment banks and insurance companies announced extensive losses from exposure to the residential mortgage market.  These losses reduced financial industry capital, leading to reduced liquidity for some institutions. These factors have impacted investor perception of the risk associated with real estate related assets, including agency securities and other high-quality RMBS assets. As a result, values for RMBS assets, including some agency securities and other AAA-rated RMBS assets, have experienced a certain amount of volatility. Further increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the

performance and market value of our agency securities.

We invest exclusively in agency securities and rely on our agency securities as collateral for our financings.  Any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. The agency securities we invest in are classified for accounting purposes as available-for-sale. All assets classified as available-for-sale are reported at fair value, based on market prices from third-party sources, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. As a result, a decline in fair values may reduce the book value of our assets.  Moreover, if the decline in fair value of an available-for-sale security is other-than-temporarily impaired, such

decline will reduce earnings. If market conditions result in a decline in the fair value of our agency securities, our financial position and results of operations could be adversely affected.

There really is a double-dip recession.  It never went away.  Federal Reserve counterfeiting and government stimulus just papered over the problems for many months.  The structural problems caused by fractional reserve banking and government deficit spending are not only present, but they have worsened.  Prices must drop to clear markets and to bring supply and demand into balance.

There is a glut of unemployed people, there is a glut of houses, and businesses are not hiring.  These facts are finally imposing reality on some people.  More people will default on their mortgage payments when housing prices decline.  They will join a growing number of strategic defaulters (people who could make their mortgage payments but chose not to).  This occurs because their loans exceed the dollar price of their homes and also due to the resentment against bankers who receive Federal Reserve and US government bailouts.

Look at this chart.  The trend is clearly down.  Keep this in mind as you watch the short video clip at the end of this article.

Image001

[D]ata showed single-family home prices fell in December, bringing them closer to the low seen in 2009.

The S&P/Case Shiller composite index of 20 metropolitan areas declined 0.4 percent in December from November on a seasonally adjusted basis, as expected.

For the year, prices fell 2.4 percent, slightly more than the 2.3 percent decline analysts had forecast.

While the composite held above its 2009 low, 11 cities hit their lowest levels since home prices peaked in 2006 and 2007, the report showed.

Unadjusted for seasonal impact, home prices fell 1 percent for the month, leaving them just 2.3 percent above their April 2009 troughs, S&P said.

VIDEO: House prices drop; Case-Shiller: 10 city index

Robert Shiller, Yale University Professor of [Keynesian] Economics, and David Blitzer, S&P 500 Index Committee chairman, discusses [housing price] declines in the 10 and 20 City Indices.

VIDEO http://on-msn.com/HousingDown

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AGNC reports $1.26 per share in net income in really small print. The headline was $2.50 per share net income

If you just read the earnings headline, then you are missing the whole story.  Here are a few noteworthy line in the AGNC press release:

·         American Capital Agency Corp. (AGNC) reports $1.26 net income per share, excluding $1.24 of other income (mostly the sale of agency securities and derivatives paying off).  AGNC’s earning power is less than their dividend payments.

·         They paid a $1.40 dividend for 4Q2010.  Their net income doesn’t cover the dividend.  Dividend payout ratio was 111% excluding the irregular income items.

·         Leverage increasing in the quarter.  Leverage for the year equaled 7.8x; leverage for the quarter 8.4x.  AGNC, like all banks, are borrowed short and lent long.  They have a horrible balance sheet.

·         “As of December 31st, 2010, the Company had repurchase agreements with 22 financial institutions.”  They are 22 financial institutions away from a debt rollover problem.  Their current liabilities (repurchase agreements) dwarf their current assets.  That creates a weak balance sheet dependent on other institutions.

Delusional quote from the company’s chief investment officer, Gary Kain:

            “As we look ahead,” continued Mr. Kain, “we believe that the economic and competitive landscape is very favorable for our industry.  The changes we are witnessing at the GSE’s, coupled with the prepayment environment that is likely to be more benign, should provide for an attractive backdrop for mortgage investors.  When you combine this with a very steep yield curve, and a Federal Reserve that is likely to keep short term funding rates low for an extended period of time, we continue to remain optimistic.”

The yield curve will not remain steep with short term rates low and longer term rates much higher.  The front end (the short term) rates will rise and eventually it will invert.  Inverted yield curves occur when short term rates are higher than long term rates.  An inverted yield curve usually signals a recession is coming.  In our case it will be the double-dip recession.  Ben Bernanke said that QE2 would  lower mid-term interest rates.  The opposite is happening.

Conclusion: AGNC lacks earning power and a strong balance sheet.  Mr. Kain is a delusional Keynesian.  He will be speaking on February 10th, 2011.  You can see so for yourself.

American Capital Agency Corp. (Nasdaq: AGNC) ("AGNC" or the "Company") announced today that Gary Kain, Chief Investment Officer, is scheduled to make a presentation at the Credit Suisse 12th Annual Financial Services Forum on Thursday, February 10, 2011 in Miami, FL. The AGNC presentation is scheduled to begin at 2:45pm ET. The presentation will be webcast live and archived for 90 days on the AGNC website at http://ir.agnc.com.

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Here is the press release from AGNC: http://bit.ly/AGNC_4Q2010_earnings

American Capital Agency Reports $2.50 Earnings Per Share and $24.24 Book Value Per Share

 

BETHESDA, Md., Feb. 8, 2011 /PRNewswire/ -- American Capital Agency Corp. ("AGNC" or the "Company") (Nasdaq: AGNC) today reported net income for the fourth quarter of 2010 of $138.1 million, or $2.50 per share, and book value of $24.24 per share.

FOURTH QUARTER 2010 FINANCIAL HIGHLIGHTS

·         $2.50 per share of net income

o    $1.26 per share, excluding $1.24 per share of other investment related income and excise tax

·         $1.64 per share of taxable income(1)

·         $1.40 per share fourth quarter dividend paid on January 27, 2011

·         $0.60 per share of undistributed taxable income as of December 31, 2010

o    Undistributed taxable income was $39 million as of December 31, 2010, essentially unchanged from September 30, 2010

·         $24.24 book value per share as of December 31, 2010

o    Increased from $23.43 per share as of September 30, 2010

o    Increased from $23.78 per share, pro forma, as of September 30, 2010 when adjusted for the follow-on equity offering that closed on October 1, 2010

·         42% annualized return on average stockholders' equity ("ROE") for the quarter(2)

OTHER FOURTH QUARTER HIGHLIGHTS

·         $13.5 billion portfolio value as of December 31, 2010

o    18%(3) constant prepayment rate ("CPR") for the fourth quarter of 2010

o    16% CPR in December 2010 (based on data released in January 2011)

·         7.8x(4) leverage as of December 31, 2010

o    8.4x average leverage for the quarter

·         2.58% annualized net interest rate spread for the quarter

·         $354 million of net proceeds raised from follow-on equity offerings during the quarter(5)

o    $227 million raised from a follow-on equity offering that settled on December 14

o    $127 million raised pursuant to a Controlled Equity Offering(SM) Sales Agreement

o    In January 2011 raised an additional $719 million from a subsequent follow-on equity offering

o    All equity raised was accretive to book value

2010 FULL YEAR FINANCIAL HIGHLIGHTS

·         $7.89 per share of net income

o    $4.50 per share, excluding $3.39 per share of other investment related income, amortization expense associated with the termination of interest rate swaps during 2009 and excise tax

o    34% ROE

·         $5.60 per share dividends declared

o    $6.76 per share of taxable income(6)

o    Undistributed taxable income increased from $22 million as of December 31, 2009 to $39 million as of December 31, 2010

·         $1.76 per share or 7.8% increase in book value

o    Increased from $22.48 as of December 31, 2009 to $24.24 per share as of December 31, 2010

·         33% economic return

o    Represents the combination of dividends paid plus book value appreciation over the year

·         29% total return to shareholders

o    Represents the combination of dividends paid or accrued plus share price appreciation over the year

“We are proud of the performance of AGNC in 2010, successfully navigating multiple challenges in our markets,” said Malon Wilkus, Chief Executive Officer of AGNC, “We delivered a 33% economic return to our shareholders in 2010, counting dividends paid plus book value appreciation and a 34% return on equity.  We accomplished this due to the outstanding insights of Gary Kain our Chief Investment Officer and the AGNC team whose focus on relative value within the agency market proved highly successful.  During the year, we also expanded the team, deepening and enhancing our overall capabilities.  We are excited about the opportunity to perform for our shareholders in 2011 and beyond.”

"2010 was an extremely volatile year," said Gary Kain, Chief Investment Officer of AGNC, "where every quarter had significant and unique challenges in the mortgage market.  Despite this difficult backdrop, we were able to produce strong returns for our shareholders each quarter, broaden our shareholder base, and meaningfully grow our company.  We paid $5.60 per share in dividends for the year and grew our book value per share by $1.76 from $22.48 as of December 31, 2009 to $24.24 as of December 31, 2010.  We view the combination of these two metrics as an essential part of shareholder value creation over the long term.  We are proud of these accomplishments and believe that our emphasis on asset selection coupled with our active approach to portfolio management was instrumental to this success."

"As we look ahead," continued Mr. Kain, "we believe that the economic and competitive landscape is very favorable for our industry. The changes we are witnessing at the GSE's, coupled with a prepayment environment that is likely to be more benign, should provide for an attractive backdrop for mortgage investors.  When you combine this with a very steep yield curve, and a Federal Reserve that is likely to keep short term funding rates low for an extended period of time, we continue to remain optimistic."

INVESTMENT PORTFOLIO

As of December 31, 2010, the Company's investment portfolio totaled $13.5 billion of agency securities, at fair value, comprised of $9.1 billion of fixed-rate agency securities, $3.9 billion of adjustable-rate agency securities ("ARMs") and $0.5 billion of collateralized mortgage obligations ("CMOs") backed by fixed and adjustable-rate agency securities(7).  As of December 31, 2010, AGNC's investment portfolio was comprised of 40% </=15-year fixed-rate securities, 6% 20-year fixed-rate securities, 22% 30-year fixed-rate securities(8), 29% adjustable-rate securities and 3% CMOs backed by fixed and adjustable-rate agency securities.  

ASSET YIELDS, COST OF FUNDS AND NET INTEREST RATE SPREAD

During the quarter, the annualized weighted average yield on the Company's average earning assets was 3.48% and its annualized average cost of funds was 0.90%, which resulted in a net interest rate spread of 2.58%, versus the third quarter of 2010 net interest rate spread of 2.21%.  As of December 31, 2010, the weighted average yield on the Company's earning assets was 3.31% and its weighted average cost of funds was 1.03%.  This resulted in a net interest rate spread of 2.28% as of December 31, 2010, an increase of 12 bps from the weighted average net interest rate spread as of September 30, 2010 of 2.16%.  

The weighted average cost basis of the investment portfolio was 104.9% (or 104.5% excluding interest-only strips) as of December 31, 2010. The amortization of premiums (net of any accretion of discounts) on the investment portfolio for the quarter was $33.2 million, or $0.60 per share.  The unamortized net premium as of December 31, 2010 was $626.3 million.

The Company's asset yields benefited from a decline in the Company's projected CPR for the remaining life of its investments and from purchases of higher yielding securities toward the end of the quarter as the Company invested capital from its December capital raise after interest rates increased. Premiums and discounts associated with purchases of agency securities are amortized or accreted into interest income over the estimated life of such securities using the effective yield method. Given the relatively high cost basis of the Company's mortgage assets, slower prepayment projections can have a meaningful positive impact on asset yields.  The Company's projected CPR for the remaining life of its investments as of December 31, 2010 was 12%. This reflects a decrease from 18% as of September 30, 2010.  The decrease in the Company's projected CPR is largely due to increases in interest rates coupled with new purchases of lower coupon securities near the end of the quarter. The actual CPR for the Company's portfolio held in the fourth quarter of 2010 was 18%, an increase from 15% during the third quarter of 2010.  The most recent prepayment speed for the Company's portfolio for the month of January 2011 was 12%.

The cost of funds at the end of the quarter reflects both a higher relative interest rate swap portfolio to borrowings at the end of the quarter compared to the average during the quarter, as well as a temporary increase in repurchase agreement financing rates extending over the end of the year.

LEVERAGE AND HEDGING ACTIVITIES

As of December 31, 2010, the Company's $13.5 billion investment portfolio was financed with $11.7 billion of repurchase agreements, $0.1 billion of other debt(9) and $1.6 billion of equity capital, resulting in a leverage ratio of 7.5x.  When adjusted for the net payable for agency securities not yet settled, the leverage ratio was 7.8x as of December 31, 2010.  Due in part to the equity raise the Company completed towards the end of the fourth quarter, the Company's leverage at the end of the quarter was lower than the average leverage for the quarter of 8.4x.

Of the $11.7 billion borrowed under repurchase agreements as of December 31, 2010, $3.3 billion had original maturities of 30 days or less, $5.7 billion had original maturities greater than 30 days and less than or equal to 60 days, $1.5 billion had original maturities greater than 60 days and less than or equal to 90 days and the remaining $1.2 billion had original maturities of 91 days or more.  As of December 31, 2010, the Company had repurchase agreements with 22 financial institutions.    

The Company's interest rate swap positions as of December 31, 2010 totaled $6.5 billion in notional amount at an average fixed pay rate of 1.61%, a weighted average receive rate of 0.26% and a weighted average maturity of 3.1 years.  During the quarter, the Company increased its swap position by $2.5 billion in conjunction with an increase in the portfolio size.  The new swap agreements entered into during the quarter have an average term of approximately 3.8 years and a weighted average fixed pay rate of 1.35%.

The Company also utilizes swaptions to help mitigate the Company's exposure to larger changes in interest rates.  During the quarter, the Company added $850 million of payer swaptions at a cost of $4.6 million. The Company also had $200 million of payer swaptions from a previous quarter expire during the fourth quarter.  As of December 31, 2010, the Company still had $850 million in payer swaptions outstanding at a market value of $16.8 million.      

As of December 31, 2010, 55% of the Company's repurchase agreement balance and other debt were hedged through interest rate swap agreements. If net unsettled purchases and sales of securities are incorporated, this percentage declines to 53%.  These percentages do not reflect the swaps underlying the swaptions noted above.

OTHER INCOME, NET

During the quarter, the Company produced $68.5 million in other income, net, or $1.24 per share.  Other income is comprised of $10.4 million of net realized gains on sales of agency securities, $20.6 million of net realized gains on derivative and trading securities and $37.5 million of net unrealized gains, including reversals of prior period unrealized gains and losses realized during the current quarter, on derivative and trading securities that are marked-to-market in current income.  

Sales of agency securities during the quarter were largely driven by actions taken by the Company in the ordinary course in response to changing relative values perceived by the Company.  

The net gains (realized and unrealized) on derivative and trading securities generally represent instruments that are used to supplement the Company's interest rate swaps (such as swaptions, short or long positions in "to-be-announced" mortgage securities (TBA's) and short or long positions in treasury securities); however, these are not in hedge relationships for accounting purposes and consequently are accounted for through current income as opposed to shareholders' equity.  The Company uses these supplemental hedges to reduce its exposure to interest rates, which, given the increase in interest rates experienced in December, resulted in the significant net derivative gains discussed above and helped to protect the Company's book value.

TAXABLE INCOME

For the quarter ended December 31, 2010, GAAP income exceeded taxable net income by $0.86 per share.  This was comprised of $0.18 per share of net temporary differences between GAAP and taxable income related to premium amortization and net realized gains, as well as $0.68 per share of net unrealized gains, net of prior period reversals, associated with derivatives marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled.

NET ASSET VALUE

As of December 31, 2010, the Company's net asset value per share was $24.24, or $0.81 higher than the September 30, 2010 net asset value per share of $23.43, or $0.46 higher than pro forma net asset value per share of $23.78, when adjusted for the follow on equity offering that settled on October 1, 2010.  

FOURTH QUARTER 2010 DIVIDEND DECLARATION

On December 17, 2010, the Board of Directors of the Company declared a fourth quarter 2010 dividend of $1.40 per share payable to stockholders of record as of December 31, 2010, which was paid on January 27, 2011. Since its May 2008 initial public offering, the Company has paid or declared a total of $364.0 million in dividends, or $13.26 per share.  After adjusting for the fourth quarter 2010 accrued dividend, the Company had approximately $39 million of undistributed taxable income as of December 31, 2010, essentially unchanged from September 30, 2010. Undistributed taxable income per share as of December 31, 2010 was $0.60 per share.  

The Company has also announced the tax characteristics of its 2010 distributions. The Company's 2010 distributions of $5.60 per share consisted of $4.93 per share of ordinary income and $0.67 per share of long-term capital gains for federal income tax purposes. AGNC stockholders should receive an IRS Form 1099-DIV containing this information from their brokers, transfer agents or other institutions. For additional detail please visit the Company's Investor Relations website at www.AGNC.com.

(1) Based on the weighted average shares outstanding for the quarter.  Please refer to the section on the use of Non-GAAP financial information

(2) Annualized ROE based on net income and average monthly stockholders' equity for the q

These charts show the continuation of the housing crisis. This spells trouble for REITs.

The information in these charts below can't be good for high dividend mortgage REIT stocks like American Capital Agency Corp. (AGNC).  Make sure you read the five important points at the end of the charts.
 
I believe that Fannie Mae, Freddie Mac, and Ginnie Mae pick up the tab (pay off the mortgage) when homeowners with these mortgages walk away from their loans.  This results in an acceleration of prepayments to owners of government backed agency securities like AGNC.  Prepayments can also occur from refinancing.  AGNC does not like prepayments.  It hurts their profits.
 
This excerpt from AGNC's 2009 annual report explains prepayments for those of you who have never heard of them:
 

Agency securities differ from other forms of traditional debt securities, which normally provide for periodic payments of interest in fixed amounts with principal payments at maturity or on specified call dates. Instead, agency securities provide for a monthly payment, which may consist of both interest and principal. In effect, these payments are a “pass-through” of the monthly interest and scheduled and unscheduled principal payments (referred to as “prepayments”) made by the individual borrower on the mortgage loans, net of any fees paid to the issuer, servicer or guarantor of the securities.

 

The investment characteristics of agency securities differ from those of traditional fixed-income securities. The major differences include the payment of interest and principal on the securities on a more frequent schedule, as described above, and the possibility that principal may be prepaid at par at any time due to prepayments on the underlying mortgage loans. These differences can result in significantly greater price and yield volatility than is the case with traditional fixed-income securities.

 

Various factors affect the rate at which mortgage prepayments occur, including changes in the level and directional trends in housing prices, interest rates, general economic conditions, defaults on the underlying mortgages, the age of the mortgage loan, the location of the property and other social and demographic conditions. Generally, prepayments on agency securities increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may not always be the case. We may reinvest principal repayments at a yield that is higher or lower than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets.

 

When interest rates are declining, the value of agency securities with prepayment options may not increase as much as other fixed income securities. The rate of prepayments on underlying mortgages will affect the price and volatility of agency securities and may have the effect of shortening or extending the duration of the security beyond what was anticipated at the time of purchase. When interest rates rise, our holdings of agency securities may experience reduced returns if the owners of the underlying mortgages pay off their mortgages slower than anticipated. This is generally referred to as extension risk. 

New Credit Suisse Recast Chart

 
Credit Suisse has released an updated version of their popular Mortgage Reset & Recast Chart.

Here is the new one:

9085247 New Credit Suisse Recast Chart

Here is last year’s chart:

CreditSuisseResetMarch09 1024x721 New Credit Suisse Recast Chart

And, here is the original:

IMFresets New Credit Suisse Recast Chart

There are some thoughts to consider:

  1. There are about 2.5 years of huge resets and recasting ahead.  Because the foreclosure pipeline is already so backlogged, people who stop making payments during this stretch could easily end up waiting another 1-2 years before their homes are actually foreclosed upon.  Even without all of the foreclosures still to come from unemployment, it is easy to see this foreclosure crisis being with us well into 2014-2015.
  2. Because mortgage interest rates are low, “resets” are less of a problem right now. Today, “recasts” are the real threat.  A recast refers to the changing of payment options for Option-Arm loans.  Many borrowers bought the biggest home they could “afford”, using minimum payments to qualify. When the minimum payment option disappears, their monthly expense will “recast” to a substantially-higher amount, regardless of what interest rates do.
  3. Most Option-Arm loans were concentrated in higher-income areas and generally used to buy more expensive homes.  Banks that are holding lots of these on their books, like Wells Fargo, have been fairly proactive in modifying these loans now, while long term rates are low.  It will be interesting to watch, however, if many of these high-end borrowers will walk away from their mortgages as high-end prices continue to fall.
  4. Though rates are currently low, you can see how sensitive the market would be to rate hikes.  The Fed’s MBS repurchase program, the Euro, Greece, Spain, China’s Treasury holdings…all of these factors will likely weigh on mortgage rates in the coming years and have profound effects on our overall economy.
  5. Note the volume of Agency, Alt-A, and Prime loans that will be resetting over the next few years.  These were generally to more qualified buyers with good credit.  If this crowd begins to feel that walking away from their mortgages is socially acceptable, then the housing market will suffer substantially.

Link to original article: http://bayarearealestatetrends.com/2010/03/new-credit-suisse-recast-chart/