September 4, 2011
Your commission has requested public comment on the treatment of asset-backed issuers as well as real estate investment trusts (REITs) and other mortgage-related pools under the Investment Company Act.
I would urge the SEC to not make substantive changes in the treatment of Mortgage-Related Pools under the Investment Company Act. Our economy and housing problems would be very negatively impacted with higher long-term interest rates if MREITS were to be damaged since they are currently the only major non-federal government source of funds for mortgages and provide massive liquidity to the market as well as investment vehicles for investors of all types.
For over fifty years, Mortgage REITS have provided individual investors, pension funds, non-profit groups, and others the opportunity to invest in professionally managed real estate portfolios with the necessary leverage to produce equity like returns . MREITS provide potential investors with transparency and the clarity needed to make informed investing decisions. They clearly state whether the underlying mortgages are agency guaranteed or not, the percentages of each type, and the amount of leverage they employ in order to generate their revenue stream. Some, such as American Capital Agency Corp. (AGNC), for example, invest in agency pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government agency or a U.S. Government sponsored entities.
The company funds its investments primarily through short-term borrowings structured as repurchase agreements. It has elected to be taxed as a REIT under the Internal Revenue Code of 1986. As a REIT, the company would not be subject to U.S. federal or state corporate taxes on its taxable net income to the extent that the company distributes its annual taxable net income to its stockholders.
MREITS are not mutual funds, nor do they operate in any similar fashion to mutual funds, ETFs, or closed end funds.
MREITs serve a vital role in providing liquidity to the mortgage market and the yields offered attract us investors (paying out 90% of earnings in dividends.) To attract investors to the asset class our dividend yield needed to be well in excess of treasuries and dividends payable from taxable corporations. Absent the yield opportunity, I suspect liquidity from these sources would dry up.
Investors in MREITs, especially those who invest entirely in U.S. Government agency guaranteed mortgages (such as AGNC does) know that the MREITs employ leverage in order to generate returns and they feel relatively secure knowing that the underlying assets are mortgages backed by the full faith and credit of the U.S. government.
At least they did until your commission issued its sweeping and reckless statements that contained the threat to potentially change the way in which MREITS might be treated tax-wise under the Investment Company Act.
The SECs investigation into possible changes in the structure of REITS comes at the same time the sector is being rocked by uncertainty relative to rumors speculating about the administration considering forcing massive refis, and news that the big banks are being sued. Perhaps the timing was mere coincidence, but all of the recent uncertainty caused by other government actions or proposals, including this one caused by your agency, is resulting in massive damage to the MREIT sector.
The consequence of how this investigation is being perceived by the public has had, and is continuing to have a devastating effect on the entire MREIT sector, sending stock prices plunging, threatening shareholder value, the viability of individual MREIT corporations, and thereby reducing liquidity for the secondary mortgage market at a time when liquidity remains essential to the housing markets recovery.
If your commissions primary concern is with the rating agencies that rate the quality of the assets are under review, then that is a separate issue and should have no impact on the holders of U.S. Government guaranteed mortgages such as the ones that AGNC purchases (that carry no implied credit risk), yet even 100% government backed MREITS such as AGNC are being greatly harmed as a consequence of your commissions actions and the uncertainty you have interjected into the marketplace.
I urge you to provide greater clarity about the rationale behind the investigation in order to clarify exactly which sort of REITs concern the commission, and why.
I most sincerely urge you to leave the structure and tax treatment of MREITS, (especially agency backed MREITS), unchanged as the model has been working perfectly well for many years as IS, despite fluctuating market conditions, and any change in the structure at this point, (such as removing the Investment Company Act exclusion), would decimate investors of all classes, turn MREITS into poor investments, thereby force well performing MREITS out of business, and most importantly, would do great harm to the liquidity MREITS are able to supply to the housing market, thereby impeding the housing market recovery and further damaging the US economy.