The Securities and Exchange Commission (SEC) could hurt the housing recovery if it imposes tighter restrictions on real estate investment trusts that purchase and securitize mortgages, according to industry comments filed with the agency.

In August the SEC issued a “concept” release, seeking public comments on whether mortgage REITs should be regulated under the Investment Company Act (ICA) like mutual funds.

SEC chairman Mary Schapiro expressed concerns that investors are beginning to view mortgage REITs in the same light as mutual funds. Currently, mortgage REITs are excluded from ICA regulation.

Commenters warn that revoking the ICA exemption would impose tight leverage restrictions on mortgage REITs, reducing their ability to accumulate mortgage assets and generate profits for investors.

The Mortgage Bankers Association (MBA) noted the mere issuance of the concept release has had a "chilling effect" on the mortgage REIT sector. "Such a change has the potential to reduce investor interest in mortgage REITs, thereby restricting a critical source of liquidity" for the mortgage market, MBA said in its comment letter.

Annaly Capital Management, the nation's largest residential-related REIT, contended that investors know the difference between REITs and mutual funds. "We believe there is no confusion in the marketplace among investors" when it comes to buying shares of a REIT or a mutual fund. Annaly has a market capitalization of $16 billion.

Mortgage REIT Redwood Trust stressed that Congress never intended to regulate mortgage companies under the ICA. The ICA exclusion is needed so mortgage REITs can "efficiently and effectively carry out their business," Redwood said.

The California-based REIT has sponsored the only privately issued single-family MBS since the financial crisis.

Several commenters urge SEC commissioners to refrain from taking any further actions with respect to the concept release and to make their intentions known soon.

"We are concerned that prolonged uncertainty regarding the commission actions following this concept release will negatively impact mortgage REIT activity," MBA said. Trade group president and chief executive David Stevens signed the comment letter.

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