WASHINGTON, DC-In August, New York-based asset manager Van Eck Global launched Market Vectors Mortgage REIT Income ETF, an exchange-traded fund with a pure play exposure to the mortgage REIT marketplace. The investment rationale was an easy one to explain: yields from mortgage REITs have been higher in recent years than those provided by equity REITs and other income-oriented products, said Jan van Eck, principal at Van Eck Global, at the time. For investors seeking yield--and who isn’t--the ETF was a timely one. 

That is one plus for these REITs now, courtesy of Washington, DC. Another is, of course, the likely winding down, sooner or later, of Fannie Mae and Freddie Mac. Mortgage REITs are well positioned to step in to at least partially fill the breach, Larry Stephenson, NorthMarq's executive vice president and director of Capital Markets, tells GlobeSt.com.

“Mortgage REITs are looking to deliver extra yield, which means they are looking for higher leverage--equity or mezz positions,” Stephenson says. However, he goes on to say, the deals that can support that much debt that are stable and well performing are few and far between, at the moment at least. 

“Mortgage REITs need size and scale to make such transactions work--large mezz positions, which means the underlying debt must be quite significant,” he says.

All in all, it would look to be the ideal time to be a mortgage REIT, or at least a shareholder in one, except for a third trend, again emanating from Washington, DC--the Securities and Exchange Commission’s recent vote to move forward with a concept release on the interpretative issues related to status under the Investment Company Act of 1940. The Act defines which companies should be exempted from the Investment Company Act of 1940. Mortgage-related vehicles that purchase or otherwise acquire mortgages and liens in real estate have this distinction. If that changes, mortgage REITs’ business models could easily be upended.

A recent report from SNL Interactive--not to mention an onslaught of comments from the industry--suggests that the SEC is focusing on a barn from which the horse long escaped: Mortgage REITs have been noticeably deleveraging, with the overall debt-to-equity ratio down from prior years, the report essentially found. This report, as well as the comments, should have some impact at the SEC, industry advocates hope.

If the SEC leaves the mortgage REITs to their status quo, the assets are--for the reasons above--well positioned to perform well, despite the recent dip in REIT valuations. “Anything security that offers a dividend, especially in the REIT sector, is a positive for investors,” SNL Financial’s Keven Lindemann tells GlobeSt.com. “The number of REITs that are increasing their dividends is growing each year after a period when several had to cut or eliminate them.”