Mortgage REITs

Real Estate Investment Trusts

Real Estate Investment Trusts is a company that financially supports real estates. REITs generate a good income. REITs allow investors to possess the quality property. It also gives investors dividends basing on their shares. The operation of this company is transparent because it leases space and takes rent on the property it has invested in. After that, the shareholders are given accrued profits in the form of dividends. The accumulated returns shared among the shareholders are more than three-quarters of what is acquired from the real estate (Lantushenk & Nelling, 2017). The United States has REITs that range from equity, mortgage, private, and public non-listed real estates. In my essay, I will discuss the mortgage.

Mortgages

Mortgages are unique forms of loans that have been secured in the form of land or a house. Mortgages may be either residential or commercial, where someone acquires share so that they can be listed on the stock exchange (Lantushenk & Nelling, 2017). The mortgage REITs are always advised to produce their financial records so that investors can look at it when the need arises. However, like other financial firms, mortgage face peril of making loses such as interest rate risk, credit risk, prepayments and, rollover risks.

Common Format of REITs

All the REITs have the common underlying format that guides them. There is always capital to invest in. Financing of the real estate needs to be clear, and it should meet the regulations set up basing on the type of the Real Estate being handled (Nazlioglu, Gormus, & Soytas, 2016). More so, there should be the current listing requirements so that transparency can be enhanced both by local and foreign investment. The events and income acquired are usually highlighted to improve the transparency to all investors. The distribution requirements are as well structured as Real Estate Investment Trust to avoid any fraud or mistrusts. Limitation on foreign assets is not allowed as someone can invest even outside the United States. It is stated that three-quarters of the United States gross assets have to be retained in the rental business (Lantushenk & Nelling, 2017). Furthermore, it is said that if the property is disposed of in the United States, the rental company should not be taxed.

Holding of Mortgage REIT

The holding of mortgage REIT may be in the hands of many people or even one person. In case an investor buys shares, they will appear in stock exchanges. Sometimes shares are purchased from an exchange traded fund. It is attracting the investors because of its high profits. It is worthy to note that the economy of the United States has tremendously risen as a result of mortgage and nearly 1.8 million homes are received finance from the mortgage (Nazlioglu, Gormus, & Soytas, 2016). However, sometimes mortgage can be held privately and released to investors by not including the stock exchange. The local holding of such property is known as the public non-listed REITs.

Financial Performance of Mortgage

The financial performance of mortgage before the real estate crash of 2007 was characterized by low banking rates. Banks gave big loans to investors because there was enough security attached to loans (Lantushenk & Nelling, 2017). Banks held a large number of other securities in their portfolio so that they could compensate themselves in case of any defaults in payments.

The financial performance of mortgage after the real estate crash of 2007 was characterized by a lot of restrictions. Mortgage borrowing reduced because the recession had taken place. The prices of houses elsewhere increased which made it hard for most people to acquire them (Nazlioglu, Gormus, & Soytas, 2016). The interbank lending of cash reduced as fear had engulfed many banks that they might encounter a great loss. Lending charges at that moment had been increased by many banks as well.

Future of REITs

The future of REITs as a real estate finance tool faces a risk of losing more cash thus posing a risk to both local and foreign investors. The risk of money shortage may occur in future because the competing funds are not only invested in real estate but they are also invested in the other part of the market such as information technology, farm produce, and manufacturing products (Nazlioglu, Gormus, & Soytas, 2016). Investing in different commodities rather than real estate poses both risks in finance, economy, and politics of a state (Nazlioglu, Gormus, & Soytas, 2016). The trusts will, therefore, be declared bankrupt situations that will make them dispose their commodities on a loss. Political risk occurs when the property is withheld in another country which makes its value to depreciate at a higher rate (Nazlioglu, Gormus, & Soytas, 2016). On the other hand, some investors see the future of Real Estate Investment Trusts lucrative as they aim to recover losses incurred before 2007 crash.

Overall

Overall, REITs have contributed to economic development at both regional and international level. Investors are attracted to getting mortgages that have better security. Mortgages have their advantages and disadvantages depending on the economy of the country. Before 2007, REITs enjoyed much security and investors acquired property on favorable terms. After 2007, banks feared lending money since the economy in most countries was not stable.

References

Lantushenko, V., & Nelling, E. (2017). Institutional Property-Type Herding in Real Estate Investment Trusts. The Journal of Real Estate Finance and Economics, 54(4), 459-481.

Nazlioglu, S., Gormus, N. A., & Soytas, U. (2016). Oil prices and real estate investment trusts (REITs): Gradual-shift causality and volatility transmission analysis. Energy Economics, 60, 168-175.