by Sabrina R. Pellerin, Steven J. Sabol and John R. Walter – Federal Reserve Bank of Richmond
Over the last decade, those real estate investment trusts (REITs) that invest predominantly in mortgage-backed securities (MBS) have grown rapidly; so much so, that some observers have expressed concerns that the largest might pose systemic risks for the broader economy. The two largest MBS REITs (or mREITs), which account for 54 percent of all mREIT assets, have been the focus of special attention from policymakers and the press.
Size is just one reason for recent scrutiny. Observers have also raised concerns along the following three dimensions:
1) mREITs invest in fairly long-term assets but fund themselves with short-term liabilities, implying that they are sensitive to interest rate and liquidity risks;
2) they hold large portfolios of one type of asset, such that if mREITs became troubled and were forced to liquidate holdings, MBS prices might be driven down;
3) and the assets that they hold, predominantly government agency-backed MBS, play an important role in the function of the home mortgage market, implying that if policymakers became concerned that mREITs might fail, these policymakers might feel compelled to intervene to prevent such failures.
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source: http://www.richmondfed.org/publications/research/working_papers/2013/pdf/wp13-19.pdf
