The need for private capital to return to mortgage financing is a major discussion point in the future of U.S. housing. REITs are an ideal vehicle for bringing in that private capital. However, before this can occur, a couple of things need to happen, said Calvin Schnure, a mortgage market economist at the National Association of Real Estate Investment Trusts (NAREIT).
First the mortgage sector has to "return to more normal market credit conditions," he said. "Right now the mortgage market is heavily influenced by distressed assets, and there are the normal-arms' length transactions that reflect a more typical credit risk. People who are modeling credit exposure can't figure out how to price this because there is so much uncertainty with it. It's nearly impossible to determine a reasonable price for mortgage credit risk, and related to that is the reasonable level of capital required for a private-sector investor."