The SEC's review has rattled the mortgage REIT industry, which analysts call a narrow-but-important source of liquidity for the housing market. Property prices are depressed, demand for new home loans is low, and banks and government-sponsored agencies Fannie Mae and Freddie Mac are still trying to sell their backlogs of foreclosed homes.
"If the SEC were to regulate [mortgage REITs], to make their strategies unprofitable or unable to generate the necessary returns, they would be stanching a good bit of the flow of private capital to the housing and housing finance markets," said analyst Rich Eckert of B. Riley & Co., LLC.
He said mortgage REITs can play "an even larger role in the post-Fannie and Freddie world when you are eventually able to privatize the mortgage market. Why would you want to shut these players out?"
Eckert, who covers real-estate companies including American Capital Agency Corp., Anworth Mortgage Asset Corporation and Hatteras Financial Corp., said he does not think the SEC will ultimately remove the exemption for all mortgage REITs.
Other analysts also downplayed the likelihood of widespread regulatory changes to the industry, but warned about the possible consequences if the SEC does in fact remove the exemption.
"This exemption has serious implications for mortgage REITs in terms of leverage, legal liability, capital raising and hedging," analyst Jason Stewart of Compass Point Research & Trading LLC wrote in a note to clients this month.
"While we believe the odds of wholesale changes to the exemption are low, the implications of any changes could be significant."
Even just the prospect of increased regulation has derailed some deal activity in the mortgage REIT sector.
Real-estate companies that invest in mortgage securities were one of the hottest sectors for initial public offerings at the beginning of the year, the Wall Street Journal said on Wednesday. But the SEC's review has cooled many of those plans. Now mortgage REITS "are among the least likely to go public anytime soon," the Journal reported.
--This article first appeared on American Banker