More Opportunities for Mortgage REITs

Plummeting values in both the housing market and financial assets have created a lot of opportunities in the residential mortgage arena, according to Michael Commaroto, CEO of Apollo Residential Mortgage (NYSE: AMTG).

In a video interview with REIT.com in New York at REITWeek 2012: NAREIT's Investor Forum, Commaroto spoke about changes in the residential mortgage industry and current drivers of growth.

The residential mortgage sector has been one of the top performing sectors in the second half of 2012. Commaroato said he attributes that performance to both book value growth and dividend yield.

"Both of those are really driven by the fundamentals of the industry, and the fundamentals that are really driving it are asset selection, both on the agency side of the business and non-agency side of the business," he said.

Since the beginning of the housing crisis and economic recession, Commaroto said business has changed for the better for mortgage REITs. On the agency side, he said the housing crisis has resulted in stability in prepayment rates.

"Personal balance sheets have gotten so hammered as part of the recent recession and property values have gotten so depressed that it became harder for people to refinance," he said. "Banks also became much more risk adverse."

As a result, he said, prepayments, "which were a big bane of existing mortgage REITs," are more predictable in this type of market environment.

"So you have much more predictability and stability around a property," he said. "That, coupled with a steep yield curve, has created a lot of value in the agency space."

Commaroto also said he's happy to be a hybrid REIT right now.

"We have the ability to be on both sides of the market, being on the agency and non-agency side," he said, adding that currently Apollo is over-weighted on the agency side. The company just raised $200 million in fresh capital in April.

"We're looking at this point to rotate out some of the agencies we bought and invest in non-agencies," he said.