Categorized | Investing

Real Estate Stocks Tumble After News of Tightened Regulations

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As if the news for the real estate market couldn’t get any worse, stocks of mortgage-back securities took a significant fall on Thursday after the SEC announced the possibility of tighter regulations regarding their practices. There has not yet been an official announcement as to whether the tightened regulation standards will be enforced, and if so, when they take effect. However, investors are very concerned that such regulations could further damage the market, particularly real estate investment trusts.

This new threat of tightened regulation standards against mortgage real estate investment trusts, or REITs, actually comes as the result of the Investment Act that was passed in 1940. Real estate investment trusts were initially considered exempt form that piece of legislation due to a statute included within the Act. However, the SEC believes that the statute was written without having any idea as to just how prevalent mortgage securities and investors would become.

Many REIT stocks plummeted as a result of the news of the possible changes in regulation standards, as many analysts believe the trusts may lose any ability to make use of the same levels of leverage that they have in the past. It is through the use of high leverage that enables REITs to provide strong returns on equity. By limiting the amount of leverage that these trusts can use, it is widely believed that the value of REIT stocks will fall even further.

Some analysts are skeptical of the news, and believe that the SEC won’t actually act on their findings from reviewing the Investment Act. They believe that tightened regulations would cripple the mortgage market even further, and thus, the SEC may hold off on any such actions for the time being.

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About Drew Wilson

Drew focuses on the Commercial and Mortgage/Finance categories.

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