Capstead Mortgage Corp. is curtailing its purchases of agency-mortgage-backed securities and reevaluating its investment strategy.

The real estate investment trust said it has increased its holdings of agency-mortgage securities only 1.9%, to $5.4 billion, in the second quarter and expects the portfolio will not grow this quarter. The portfolio grew 165% in the first quarter.

Higher mortgage rates this year have led to slower prepayments, improving the return on Capstead's mortgage-backed investments. But short- term rates have also increased, raising borrowing costs.

Though securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae have no credit risk, Capstead said, it faces reduced interest margins when interest or prepayment rates rise. "There can be no assurance of an increasing or even stable common dividend," the company said.

The company is considering several real estate-related activities, though it said it may stick to agency securities.

Last year, Capstead was rocked by prepayments and ended up selling its mortgage-servicing unit, Capstead Inc., to Residential Funding Corp., a unit of General Motors Acceptance Corp.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.