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Kim_Gatley
Kim Gatley
S
enior Vice President & Director of Research at REOC San Antonio

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Mortgage REITs Fill Void Left By Banks

bank vaultKeefe, Bruyette & Woods has published a report detailing how mortgage REITs have begun picking up the slack that’s increasingly being left by banks. Opportunities for mREITs stem not only from the reluctance of the banking system to devote capital to residential mortgages, but also from their own operating model, says KBW.

“The share of residential mortgages on bank balance sheets has fallen dramatically”—from about 40% of bank loans at the peak of the housing bubble to 28% last year—“but also more importantly the absolute size of total residential mortgage loans (1-4 family mortgages) has been contracting on bank balance sheets,” according to KBW’s report, prepared by analysts Michael Widner and Eric Hagen. While total loans and leases at banks have grown 11.2% aggregate over the past three years, one- to four-family mortgages have contracted by 6.1%, or $581 billion. The increasing level of scrutiny by regulators since the 2008 global financial crisis, along with increasing capital requirements, has had much to do with this.

KBW notes that this pullback “is not entirely a ‘real estate’ phenomenon, or a ‘consumer finance’ phenomenon. Multifamily mortgage lending at banks has grown, and commercial real estate financings have also grown,” as these segments have also grown at mREITs. “Consumer auto lending and credit card portfolios also continue to grow at banks.”

Although the direction of regulation in these other consumer-related lending areas is open to debate, “the path for residential mortgage lending has been pretty clear,” KBW says in its report. “The shrinking role of banks in residential mortgage lending leaves opportunity for those in a position to fill the void.” The mREITs are poised to fill that void, thanks to their narrower focus, greater operating efficiencies, permanent mortgage capital and “relative freedom from the brunt of the regulatory cycle.”

Click to read entire article: Mortgage REITs Fill Void Left By Banks (GlobeSt., 05-27-15)

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