Throughout May and June, we had been issuing warnings and highlighting research notes from Wall Street indicating that there was potentially a huge risk in the high-yield dividend mortgage real estate investment trust (REIT) sector. With the Fed’s quantitative easing including the absorption of almost all mortgage-backed securities and supply of new conventional mortgage loans, then investors had to factor in what became the inevitable rise in interest rates as fears grew that quantitative easing would end and that the bond buying would taper.

Now we have word from Hatteras Financial Corp. (NYSE: HTS). Its earnings report actually was higher than a year ago at $0.66 per share, versus $0.62), but its net interest income dropped down to $63.4 million from $71.4 million. Do not be fooled by the earnings. The real issue here is that Hatteras saw its book value get massacred. That book value per share tanked to $22.18 from $28.18, just in the one quarter-over-quarter comparison.

It turns out that the decline in Hatteras’ mortgage securities value outpaced what it was hedged for in interest rates. This is where yet another risk arises in the super-high dividend yield mortgage REIT sector. The fallout is being seen elsewhere in the sector.

Annaly Capital Management Inc. (NYSE: NLY) is supposed to be the best-run and most-respected mortgage REIT of the group. Its shares are down 2.6% at $11.69, against a 52-week range of $11.19 to $17.75. This has a dividend yield that is listed as being north of 13%. Does it seem obvious that investors are concerned about a drop in book value here as well? If Annaly is considered in the pinnacle of the mortgage REIT sector, how does a drop of about 35% from its year high sound?

Javelin Mortgage Investment Corp. (NYSE: JMI) has to stand out as a reality check for anyone who just looks at screens and numbers without question. Its dividend yield screens out at 21%, now that the share price is lower. This mortgage REIT has fallen 2.3% on Wednesday to $13.27, against a 52-week range of $12.72 to $20.20. That also represents a price drop of almost 35% from its peak in the past year.

American Capital Agency Corp. (NASDAQ: AGNC) is down 3.5% at $21.30, with close to a 19% yield, but this is down well over 40% from its 52-week high of $36.77. One thing to consider here in American Capital Agency is that even after this huge drop has been seen, it still has a market capitalization of $8.45 billion, according to Yahoo! Finance.

Two Harbors Investment Corp. (NYSE: TWO) screens out as “only” having a 12% dividend, but its shares are down 2.8% to $9.84, against a 52-week range of $9.17 to $13.05. Two Harbors is down only about 25% from its peak in the past year.

If you want to see how bad things really are in the high-yield dividend mortgage REIT sector, all you have to do is look at the Market Vectors Mortgage REIT ETF (NYSEMKT: MORT). Its stock price is down 3% to $23.61, against a 52-week range of $19.70 to $29.90, making its drop about 21% from its yearly high.

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