By Sabrina R. Pellerin, David A. Price, Steven J. Sabol, and John R. Walter – Federal Reserve Bank of Richmond
A class of investments known as mREITs-real estate investment trusts that invest primarily in mortgage-backed securities (MBS)-has grown substantially during the period of low interest rates since the 2007-08 financial crisis. Regulators and other observers increasingly have expressed concern in recent months about risks to the fi nancial system from the growth of mREITs.This concern is rooted in a number of characteristics of mREITs, including high leverage, a high degree of maturity mismatch (investments in long-term assets funded by short-term liabilities), and a relatively low degree of regulatory supervision.
At the same time, however, policymakers may be reluctant to place too heavy a hand on mREITs, given the desirability of an active, liquid market for MBS. An examination of the role of mREITs suggests that although investors in mREITs do face signifi cant risks on a number of fronts, the extent of the risks to the fi nancial system as a whole is uncertain.
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Assessing the Risks of Mortgage REITs
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source: http://www.richmondfed.org/publications/research/economic_brief/2013/pdf/eb_13-11.pdf