CHARLOTTESVILLE, VA-A shudder ran through the mortgage REITcommunity when the Securities and Exchange Commission voted to moveforward with a concept release on the interpretative issues relatedto status under the Investment Company Act of 1940. To be sure, theSEC is in the beginning stages of its review and there are anynumber of paths it could take, from an interpretative release ornew rulemaking, to a confirmation of the status quo. If it opts forthe former, however, it could have a significant impact on theway mortgage REITs operate.

That is because the key tenets of the act prevent companies fromexcessively borrowing and issuing senior securities. A report fromSNL finds that mortgage REITs tend to have higherdebt-to-equity ratios than their investment company counterparts.The median ratio for all mortgage REITs is about 3.32x, comparedwith 0.37x for investment companies.

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That said, mortgage REITs have been deleveraging, in some casessignificantly, even before the SEC suggested it might shake thingsup. “Mortgage REITs have already been reducing debt over couple ofyears--pretty dramatically too--and you can see that in their debtto equity ratios now,” SNL analyst Tom Mason tellsGlobeSt.com. “They are significantly lower than a few yearsago.”