How Dangerous Is This Investment Practice?
Mortgage real estate investment trusts (mREITs) are again under scrutiny. The Financial Times reports that the New York Fed is investigating how much exposure banks have to this investment vehicle, which has become increasingly popular since the 2008 financial crisis. The trusts secure long-term real estate investments through short-term borrowing in the repo market, and the practice allows short-term borrowing to finance a long-term investment.
Private discussions by regulars are a “deep dive” into mREITs, according to a source familiar with the matter who spoke to the Financial Times. The discussions and investigation are not the first time this year worry has clouded over mREIT holdings.
Federal Reserve Board Governor Jeremy Stein voiced concern in a speech in St. Louis, Missouri, in February. He said the mREIT sector grew from $152 billion at year-end 2010 to $398 billion at the end of the third quarter of 2012. He also included the following chart, illustrating the rapid growth of mREITs.