Rising Interest Rates Will Crush Mortgage Sector Margins

Key Takeaways

• Rising interest rates, weak mortgage market growth, and evolving fintech disrupt Chimera’s core revenue streams and threaten long-term competitive positioning.
  
• Heavy exposure to credit-sensitive assets and increased regulation heightens risks of declining margins, asset write-downs, and profit instability.
  
• Diversified revenue streams, strong credit performance, and prudent portfolio management position Chimera for resilient earnings and stability amid changing market conditions.

Catalysts

Operates as a real estate investment trust (REIT) in the United States.

• A persistent rise in interest rates over the coming decade threatens to suppress Chimera’s profitability by increasing funding costs and simultaneously depressing the value of their mortgage-backed securities portfolio, placing structural pressure on both net interest margins and book value.
  
• Ongoing declines in home affordability, along with stagnating homeownership rates—especially among younger generations—will likely constrain mortgage market growth, reducing origination volumes and limiting revenue opportunities for Chimera’s loan and MBS pipeline.
  
• The accelerating pace of technological innovation in mortgage origination and fintech lending threatens to reduce the relevance and returns of traditional mortgage-backed securities, potentially eroding Chimera’s long-term revenue streams and weakening competitive positioning.
  
• Heavy reliance on credit-sensitive and legacy non-agency MBS leaves Chimera exposed to potential asset write-downs if credit quality deteriorates or spreads widen, increasing the risk of lower interest income and heightened volatility in reported earnings and book value.
  
• Increasing regulatory scrutiny on mortgage REITs, higher prepayment risks, and greater competition from large financial institutions and fintechs may steadily compress net margins and return on equity, undermining Chimera’s ability to sustain or grow future profits.

Chimera Investment Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Chimera Investment compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Chimera Investment's revenue will decrease by 1.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 38.3% today to 52.6% in 3 years time.
• The bearish analysts expect earnings to reach $164.8 million (and earnings per share of $1.21) by about May 2028, up from $125.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, down from 8.4x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Chimera Investment Future Earnings Per Share Growth

Risks

• The company’s successful acquisition and integration of Palisades has accelerated growth in assets under management and third-party advisory income, supporting further revenue diversification and potentially stabilizing and expanding earnings over the long term.
  
• Chimera has demonstrated an ability to organically generate and redeploy capital via refinancing and re-securitization, unlocking nearly $287 million in investable cash at low reinvestment hurdles, which could improve net margins and increase return on equity going forward.
  
• Despite industry housing headwinds, Chimera maintains resilient credit performance, demonstrated by stable serious delinquencies (below 10% for RPLs), high borrower equity, and historic lows in delinquencies across the broader mortgage landscape—this mitigates risks of major losses in revenue or book value.
  
• The expansion and balancing of the portfolio toward Agency MBS and MSRs, alongside prudent hedging and liability management, positions the company to potentially benefit from normalization in housing and credit markets, supporting steady economic net interest income.
  
• The consistent growth in third-party asset management and fee income, combined with strong liquidity and a durable funding structure featuring limited mark-to-market facilities, strengthens Chimera’s platform to withstand market volatility and maintain stable earnings and dividends over the long term.

Valuation

• The assumed bearish price target for Chimera Investment is $11.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Chimera Investment's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $16.5, and the most bearish reporting a price target of just $11.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $313.5 million, earnings will come to $164.8 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $13.03, the bearish analyst price target of $11.5 is 13.3% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.