Real estate investment trusts (REIT) are growing rapidly, according to The Wall Street Journal’s Ben Eisen. Real-estate investment trusts that buy residential home loans increased their mortgage-bond portfolios by almost 28% to $308 billion over the 12 months through March, the largest stockpile in six years, and according to Eisen, are poised to continue to grow as the government’s housing market role shrinks.
Though these firms are small compared to the mortgage market as a whole, Eisen notes that some analysts express concern that they are putting more of the mortgage market into the hands of leveraged firms with minimal oversight, noting that some risky REITs went bust during the last financial crisis. However, some suggest that REITs make up an optimal backbone for the mortgage market, leveraging less risk than before the financial crisis and able to quickly raise and deploy money when they see an opportunity.
“If you want to have more private capital in the market, you need to manage the risks,” Calvin Schnure, SVP for Research and Economic Analysis at Nareit, told the Journal. “Mortgage REITs hedge all of those risks.”
REITs have been buying mortgages traditionally within the domain of Fannie Mae and Freddie Mac, putting them into private mortgage bonds, while also buying securities from Fannie Mae and Freddie Mac that transfer default risk associated with the mortgages they back.
Shrinking the Federal Footprint
As part of the Federal Housing Finance Agency’s (FHFA) plan to shrink the government’s footprint in the mortgage market, FHFA Director Mark Calabria is looking to take Fannie and Freddie out of conservatorship.
“I see my goal as setting a path to end the conservatorship” for the companies, he said in an interview with Wall Street Journal, adding that “they have to be stronger, healthier companies” compared to before the 2008 housing crisis.
“My objective is to get us to a spot where we don’t have to worry about the system blowing itself up,” he continued.
Among Calabria’s concerns is the “qualified mortgage patch,” which allows more highly leveraged homebuyers to obtain Fannie and Freddie-eligible mortgages. Patch usage has grown in the last few years, and according to Calabria, changing the patch would be a key tool to shrink Fannie and Freddie without a full overhaul, though he states that he does not intend to do away with it entirely.
“I can draw Fannie and Freddie a map,” he said. “Fannie and Freddie are going to have to be the ones who meet the mileposts.”
Calabria stated that he is awaiting completion of plans ordered by President Donald Trump to refashion the mortgage system, set to be completed around June.