Despite the overall struggles and uncertainty of the mortgage industry in recent years, mortgage real estate investment trusts (REITs) enjoy a unique advantage over both banks and other non-bank entities, according to a report by Morrison Foerster.
As the new market takes shape and new regulations are being implemented, REITS have a competitive edge that offer them the opportunity to take a larger and more integral role in the future of the mortgage market.
Many REITs have recently employed the successful tactic of buying high-yield and distressed mortgages assets, leveraged with debt financing at low rates, and make profits as the assets mature.
This strategy has been used throughout all the mortgage asset types and has helped the REITs industry raise $6.6 billion between December 2010 and March 31, 2011. Due to the abundant availability of high-yielding and distressed mortgages still resulting from the crisis, this approach is likely to continue with profitability.
Another attractive quality that REITs offer is exemption from both taxes as well as the heavy regulation that is currently being imposed on the banks. They are not burdened with the same strict capital requirements as the banks, which are expected to only worsen with the implementation of Basel II and III and the Dodd-Frank Act in the coming months.
While REITs’ levels are subject to the watchful eye of credit agencies and lenders, they escape the high costs associated with compliance to firm regulations, and, as a result, are in a better position to break-even or profit in the market.
Nonetheless, the outlook on REITs and their continued success is dependent upon the availability of long-term financing.