Subject: File No. S7-34-11
From: Brian M.

September 26, 2011

As an investment professional with experience at the GSEs (Freddie Mac and Fannie Mae), an investment bank based in London, and a large hedge fund, I feel compelled to make a case for the importance of mortgage REITs as they are currently structured in the financial system.

Because (most) mortgage REITs are engaged solely in the business of real estate or mortgage security investment, they have a very narrow and well defined mandate. They not only provide investors (retirees, long-term savers, and personal investors) with liquidity and a diversification opportunity into the broader US mortgage market, they also provide an important, stable bid to the US housing market when other investors (banks, real money funds, hedge funds, etc) are forced to delever due other risky exposures on their balance sheets. It is in such times of stress that mortgage REITs are able to link stable, longer-term money with the US housing market. Moreover, it is precisely their ability to leverage and provide high dividend returns that gives them a captive source of long-term, stable capital. The existence of mortgage REITs thus in turn provide a stable bid supporting the US mortgage market despite falling asset prices.

Taking away the tax advantages and ability to leverage will result in a reallocation of capital from that of longer-term investors looking for yields to that of shorter term investors looking to profit from the rise and fall of MBS prices, and this will amplify the volatility of the US mortgage market as mortgage REITs will have to buy/sell assets more rapidly in response to a more volatile share price or NAV.

With respect to other concerns, perhaps it would be more appropriate to focus on internal management and corporate governance. While market risk is very well managed by the REITs, it may be possible that corporate governance is slightly more neglected, particularly by both the much smaller organizations (such as non-listed firms) or those that are extremely large and more broadly focused, involved in multiple types of assets/markets.

Any changes to the classification of mortgage REITs should be taken with great care and distinguish between their market risk versus operational risk. Furthermore, not all mortgage REITs are created equal - for instance, those that focus solely on Agency MBS (securities that are also on the Federal Reserve's balance sheet) carry vastly different market/operational risks than much larger REITs with a heavy commercial real estate or broader focus. Any steps towards greater regulation can be quite welcome, particularly on the operational side, but too significant changes in their structure can result in significant adverse consequences damaging capital formation and not reducing, but increasing volatility in the US mortgage market in times of larger financial stress.