Capstead Mortgage Corp., a REIT that invests in GSE-backed MBS, is warning that higher prepayments will hit the market in the second and third quarters because of efforts by Fannie Mae to "buy out" delinquent loans from MBS pools.

Capstead also believes that government-sponsored loan modifications will play a role in faster prepayment speeds on the securities it buys, possibly putting its earnings under some pressure.

Capstead earned $40 million in the first quarter, a slight decline from the same period a year ago. Fannie began its buyouts of delinquent loans from MBS pools in March and will continue the effort in the coming months.

By purchasing nonperforming loans out of pools, the GSE avoids forwarding those payments to the ultimate bondholder--a move that can save Fannie money but reduces the bond's yield to the investor. Capstead is publicly traded and monitors prepayments closely.

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