The main reason that mortgage investment companies should come back is that, as Chairman, Ben Bernanke has turned the Federal Reserve into the largest mortgage investment company in the world. During The Great Recession, the Federal Reserve, to inject liquidity into the banking system, bought hundreds of billions worth of mortgage backed securities from Fannie Mae, Freddie Mac, and other entities. These assets are now on the balance sheet of the Federal Reserve. In 2007, before the massive purchaes of securities to save private sector financial institutions from bankruptcy, the Federal Reserve had about $700 billion on its balance sheet, mostly Treasury bonds. Now the Federal Reserve has about $3 trillion on its balance sheet, much of it in mortgage backed securities.
In keeping interest rates low through Quantitative Easing II and other balance sheet machinations, the value of mortgage backed securities has risen. With control over the direction of interest rates, the Federal Reserve is in the unique and enviable position of being able to dictate the value of its balance sheet. Investors looking for higher yields are now paying more than what mortgage backed securities were marked on the books.
Other factors are at play, too. The value of mortgage backed securities was driven too low by too much overreacting and too much “hot money.” Even if a single mortgage payment is never made and the house is foreclosed upon, it still has value. The land alone is generally considered about one third the value of a property. This is now being realized by investors.
Small cap investors should follow mortgage investment companies, as there is upside due to the overreaction of the market. In addition,  the Federal Reserve will act to ensure the value of its balance sheet. The real estate market in the US is not coming back anytime soon, but mortgage investment companies should rebound from the bottom with the Federal Reserve at the lead.
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