September 2, 2011
To Whom it May Concern:
I have been employed by a company that is considered a RIC and we operate under the 1/1 leverage constraint. We were tax exempt, 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. This was driven by the asset class we were investing in, corporate debt. The yield spread over treasuries was at a minimum about 800 bp. The issue of late in the asset class is the compression of spreads as our borrowing costs remain high while the yields on the assets have been driven down by cheap money from banks that are permitted to have greater leverage. To maintain yields to continue lending to American businesses, we had to take on greater risk (i.e., lower quality, riskier assets). We were nonetheless still having trouble attracting investors at the lower yield levels.
I, in truth began investing in mREITs for the greater dividend yield albeit paying taxes at ordinary rates on the income. I invested at a time when there was a great deal of distress in the mortgage markets (I.e., atypical risk in the mortgage market). Were the yields not where they were/are, it would be highly unlikely that I would have invested and likely the case for many investors. The yields are obviously driven by the leverage and low cost of funds which is also benefiting the mortgage holders. Were these companies to become RICs and be required to reduce leverage, their
income and dividend yield would be crushed and in my opinion become an unattractive investment (inappropriate risk/return). These REITs serve a vital role in providing liquidity to the mortgage market and the yields offered attract us investors. Absent the yield opportunity, I suspect liquidity from these sources would dry up. As to the technical aspect of whether these are closed end funds, I will leave that to others, but clearly at one point in time they were not classified as such. Also, what about commercial REITs, holding mortgages of commercial properties? Why single out mREITs?
Any change here will wipe out both wealth and income of many investors, citizens, retirees, etc. To what end, the "protection" of investors. Investors in REITs know they are highly leveraged and gain comfort that the assets are mortgages not high risk corporate loans. This market is functioning perfectly fine and has been for years, why mess with it? Yields will decline as the economy recovers, until then, these yields need to be in place to attract needed private liquidity to the mortgage market. I am assuming this review is not coming from pressure from banking institutions struggling to attract depositors due to low yields on savings. In my opinion US banks have had enough support and subsidy by the US govt. In many ways their greed resulted in this mess we are trying to dig out, the mREITs have nothing to do with it.