NEW YORK, NY -- (Marketwire) -- 01/21/13 -- High yielding mortgage REITs after an impressive start to 2012, began to show volatility in the fourth quarter. Increases in prepayments and stimulus measures by the Federal Reserve have pressured spreads and as a result a number of mortgage-based REITs have lowered their dividends. Research Driven Investing examines investing opportunities on Real Estate Investment Trusts and provides equity research on ARMOUR Residential REIT, Inc. (NYSE: ARR) and Chimera Investment Corporation (NYSE: CIM).
REITs trade like stocks, but by law, they must pay out 90 percent of their taxable income to shareholders as dividends. Dividend returns for Mortgage REITs are partially dependent on interest rate spreads.
Freddie Mac on Thursday reported that average U.S. rate on the 30-year fixed mortgage fell to 3.38 percent, hovering near the 40 year low of 3.31 percent seen in November. According to Freddie Mac 30-year mortgage rates average 3.66 percent in 2012, which was the lowest average seen in 65 years. Low mortgage rates allow homeowners who are underwater with their mortgages to refinance, and in turn increase prepayments on mortgages. Mortgage prepayment rates at the beginning of the fourth quarter 2012 soared to 7 year highs.
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ARMOUR is a Maryland corporation that invests primarily in hybrid adjustable rate, adjustable rate and fixed rate residential mortgage-backed securities issued or guaranteed by U.S. Government-sponsored entities. The Company had estimated taxable REIT income available to pay dividends of $86.4 million in the third quarter of 2012.
Chimera Investment Corp. invests in residential mortgage loans, residential mortgage-backed securities, real estate-related securities and various other asset classes. The Company's principal business objective is to generate income from the spread between yields on its investments and its cost of borrowing and hedging activities. The company offers a quarterly dividend of $0.09 per share.
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