It's hard to believe, but one of the hottest sectors in the market right now is in the center of credit crisis gripping the capital markets. Mortgage REITs, which were all but left for dead in early 2007, have exploded on the scene as the Fed has lowered interest rates and more investors have dared to call a bottom in the lending market.

On Tuesday, business development company bellwether American Capital Strategies (ACAS) decided to throw its hat in the ring, filing a $400 million IPO for American Capital Agency Corporation, a newly-formed REIT focused on agency-guaranteed residential mortgage backed securities. American Capital's decision to enter the arena is hardly surprising given the 53% year-over-year gain for the stock of established agency mREIT Annaly Capital Management (NLY) and the astonishing 122% year-over-year return by Capstead Mortgage (CMO). Although ACAS has no experience operating a REIT, it does have considerable experience meeting the onerous qualifications of being a BDC and it has hired talented and knowledgeable personnel. With the temporary expansion in conforming loan limits, there may well be a greater supply of agency-backed RMBS available to American Capital.

Meanwhile, the existing agency mREITs are busy exploring new territory themselves. Following the success of Annaly's launch of Chimera Investment Corporation (CIM), which is trading some 25% above its November IPO price of $15, MFA Mortgage (MFA) has also filed its own $250 million IPO for MFResidential Investments, Inc. (proposed ticker: MFR). Much like Chimera, MFR will focus on investing in investment-grade non-agency RMBS. In the prospectus, MFR's management cites:

[C]oncerns about increased mortgage delinquencies, declining home prices and rising unsold home inventory have caused many investors to question the underlying risk and value of mortgage assets across the ratings spectrum. Many traditional mortgage investors have suffered losses in their residential mortgage portfolio, resulting in a decline in the availability of capital to fund the purchase of mortgage assets. These factors have resulted in mortgage assets trading at lower prices and higher yields, creating attractive spread investment opportunities for us. Hard to believe that just two years ago, MFA was trading at just $6/share, while subprime lender New Century Financial (NEWCQ.PK) was trading north of $38/share. Such is life in the mREIT jungle. It will be interesting to see how this new cycle of mortgage REITs fare.

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Patrick Harden

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