As shown in exhibit 7, they have grown rapidly in the past few years, from $ billion at year-end 2010 to $ billion at the end of the third quarter of 2012. One interesting aspect of this business model is that its economic viability is sensitive to conditions in both the MBS market and the repo market.
If MBS yields decline, or the repo rate rises, the ability of mortgage REITs to generate current income based on the spread between the two is correspondingly reduced. 18  Indeed, Shleifer and Vishny’s (1997) classic treatment of fire sales is based not on a leverage mechanism, but on rapid performance-based flows out of open-end funds.