05/28/2010

REITs Building Teams for Issuance Efforts

Several mortgage REITs are creating securitization-structuring staffs, with an eye toward issuing bonds that they would retain.

Those on the hunt include MFA Financial; NewCastle Investment, run by minority owner Fortress Investment; and Starwood Capital's Starwood Property Trust.

While Newcastle has had a presence as a structured-product issuer before, the REITs' main functions in the sector have been as investors. Their apparent strategy now is to buy pools of new and seasoned home loans for securitization, and then keep most of the resulting bonds while distributing the rest to outside investors.

Indeed, word was circulating a few weeks ago that a number of REITs were looking into the possibility of becoming issuers.

The reason? The operations want to keep buying mortgage bonds, but see a do-it-yourself approach as the only way to ensure an adequate supply of acceptable paper. Some cite a lack of near-term offerings from Wall Street banks. Others would be hesitant to buy from those institutions anyway, after getting burned on earlier deals that went bad. "We would be happy to buy those from others, if we could be comfortable that we could buy as good a quality as we can manufacture ourselves," one REIT official said.

A number of other REITs are hiring securitization-structuring professionals for similar initiatives. They include Annaly Capital unit Chimera Investment, which told investors a few weeks ago that it wanted to start issuing. Outside the REIT world, Pimco has been gearing up for an issuance program.

While REITs haven't been big issuers in the past, the thought is that they are well positioned to carve out an ongoing presence. Banks have been turned off to the market in part by proposals that would force issuers to retain portions of their deals, but REITs don't share those concerns - as they would keep large chunks of their bonds anyway (see article on this page). "We don't plan to securitize as a business," another REIT executive said. "We'll only do it to invest in the credit pieces."

Some REITs have found motivation in the activities of Redwood Trust, which issued $211.1 million of bonds backed by jumbo loans from Citigroup on April 23. The Mill Valley, Calif., operation has been among just a few REITs to operate active securitization programs in the past, and has had a structuring team in place for some time. Private National Mortgage Acceptance, or PennyMac, also has been adding securitization specialists since its 2007 founding.

The next REIT offering, perhaps from PennyMac, could come by the end of June. But near-term dealflow might prove slow as other shops focus on amassing collateral. Some are working to team up with originators that would write loans to their standards, which could take months. Redwood isn't planning a follow-up transaction for the immediate future either.

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