Mortgage REITs Poised to Benefit from Role in Emerging Housing Finance Market

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The years since the financial crisis have seen a flurry of new mortgage REITs, most of which are pursuing a simple but compelling business strategy: buy high-yielding or distressed mortgage assets at a bargain price, leverage them with debt financing at historically low interest rates, and realize profits as the assets pay off or liquidate, all while conducting this business through a tax-advantaged vehicle. This strategy has encompassed the full spectrum of mortgage asset types, ranging from single-family residential mortgage loans to commercial mortgage loans, from private-label mortgage-backed securities (“MBS”) to government-guaranteed MBS, and from whole loans to complex securitized and derivative interests. Most of the new mortgage REITs focus on one or more of these asset types, and pursue strategies ranging from holding assets to maturity to aggressively foreclosing upon and liquidating defaulted mortgage loans.

With a large amount of high-yielding and distressed mortgage assets from before the financial crisis still available in the marketplace and “new” distressed assets still coming online as a result of the continuing residential real estate recession, and with the prospect of substantial government mortgage holdings being sold into the private markets, this trend shows no sign of weakening. Indeed, mortgage REITs reportedly raised a notable $6.6 billion of capital between December 2010 and March 31, 2011, which would support purchases of $40-$65 billion of mortgage assets at normal leverage rates.

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Morrison & Foerster LLP on:

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