The adage "Where there's smoke there's usually fire" probably explains the concerns about regulators' queries into whether REITs still warrant an exclusion permitting them to use significant leverage in their business models. The issue is especially relevant since REITs are primary buyers of agency RMBS and many view them as the likeliest buyers of private-label RMBS when that market's health returns .

The Securities and Exchange Commission's (SEC) concept release, published Aug. 31, explicitly said that companies engaged in the mortgage banking business were excluded from regulation under the Investment Company Act of 1940 because they were not considered to be issuers in the investment company business. Times have changed, however, and today a wide variety of companies, many unforeseen 70 years ago, now rely on that exclusion. The SEC is concerned that current guidance is insufficient for companies to judge correctly their status under the 1940 act, and that SEC staff no-action letters over the years may have led firms to interpret the exclusion beyond its intended scope. "The commission is concerned that certain types of mortgage-related pools today appear to resemble in many respects investment companies such as closed-end funds and may not be the kinds of companies that were intended to be excluded from regulation under the act by Section 3(c)(5)(C)," the concept release said.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.