September 1, 2011
This is not a good idea.
Mortgage REITS, especially Agency REITS, are not the same as mutual funds. The quality of their investments is innately higher, and in many cases is prequalified by the agency issuing the securities they buy.
They do not borrow indiscriminately. They borrow from the Federal Reserve, which is delirious to have the opportunity to put the money into the economy right where it is most needed. They collateralize their borrowings on the quality securities they have bought and the cash that investors have entrusted to them. And they carefully hedge risks to their investments.
Rather than reclassifying them as the sorts of Investment Companies already listed in the Act, it would be better to add them as a new class of Investment Company, with leverage limits appropriate to the method by which they currently do business, and requirements to maintain their hedging.
To do otherwise would require the mortgage REITS to unwind 80 to 90 percent of their portfolios. This would be devastating to their shareholders, and would also eliminate a significant conduit for liquidity from the Fed and to the housing market. It would destroy the companies and pull the rug out from under a housing market that is just barely stabilizing after the last secular disaster it suffered. The knock-on effects to the rest of the economy are fairly well documented by the last few years of recession, unemployment, and debt crisis.
I'm not sure anyone wants that again, no matter what minor benefit a simple reclassification would serve.