* Mortgage REITs to be a driving sector for IPOs -banker
* Six IPOs in pipeline; none at this time last year
* REITs laying groundwork for mortgage industry overhaul
* Pimco, Apollo, TCW among those planning REIT IPOs
NEW YORK, April 8 (Reuters) - A raft of U.S. mortgage real estate investment trusts from big asset managers like Pimco and TCW are expected to hit the market in the coming months, as investors look to profit from a recovery in the mortgage bond market.
Buying mortgage bonds now is tricky: The housing market is still healing from the worst downturn since the Great Depression. But real estate investment trusts, which pay out almost all of their net income as dividends, are attractive to investors because of those high dividends, particularly when returns in so many other markets are so low, bankers said.
A mortgage REIT usually raises money from investors and uses the proceeds to buy mortgage bonds. The current weakness in mortgage bond prices only further improves potential returns for investors.
"The market that we're in today is conducive to seeing mortgage REITS (go public)," said Frank Maturo, co-head of equity capital markets at Bank of America Merrill Lynch.
Speaking at the Reuters Global Mergers and Acquisitions Summit in New York this week, he added mortgage REITs will be one of the sectors driving U.S. IPO activity this year.
Not every mortgage REIT that has filed to go public will successfully tap the markets -- investors are picky now, analysts said.
But big asset managers are also eager to compete in the $10.6 trillion U.S. mortgage finance industry as it weans itself from government support, which could create huge profits for investors that position themselves properly.
PREPARING FOR CHANGES
The industry is facing a profound overhaul as the Obama administration and Congress plan to dismantle Fannie Mae and Freddie Mac, mortgage finance companies the government took over when they came to the brink of failure in mid-2008.
While the task is seen taking five years or more, the means for private companies must be in place for the transition to begin, industry analysts said.
"There needs to be a critical amount of capital (raised) to make the mortgage market able to function without the amount of government support it has today," said Richard King, chief executive officer of Invesco Mortgage Capital Inc (IVR.N), a mortgage REIT that went public in 2009.
The reform may wind down federal guarantees, which support 90 percent of all new lending, opening the door to private investors. Until then, REITs can capitalize on "agency" mortgage-backed securities produced under the government-backed models of Fannie Mae, Freddie Mac and the Federal Housing Administration, which essentially have no credit risk.
REITs are also salivating over the more than $1 trillion in mortgage-backed securities expected to be sold by the Federal Reserve, a massive raft of supply for a market where government agencies are no longer key buyers, said Merrill Ross, equity analyst at Wunderlich Securities.
"(Mortgage REITs) are all trying to rise to the occasion," said Ross, who follows 11 publicly traded mortgage REITs.
"They're trying to rush in to fill the gap, and it's economically feasible now because there's a great desire to stabilize the mortgage industry."
PAVING THE WAY
Of the 11 REITs now in the IPO pipeline, six plan on investing in mortgage assets -- and all submitted paperwork to go public in the past few weeks, according to Ipreo, which provides capital markets data and analytic services.
At this time last year, only one of the 12 REITs planning to go public was a mortgage REIT, according to Ipreo.
The mortgage REITs on file to go public include those launched by Apollo Global Management (APO.N), TCW and Angelo Gordon. Pimco, the largest bond fund manager in the world and the latest to jump on the bandwagon, filed for an IPO of up to $600 million this week. [ID:nN05165147]
Some of these attempts may fail, however, given the costs of raising capital and skeptical IPO investors.
Apollo in its filing boasted it has the knack of seeing turns in the mortgage industry. As an example, it said a fund it managed purchased subprime mortgage lender WMC Mortgage Corp in 1997 and sold in 2004 ahead of the housing bust, generating a 28.3 percent gross internal rate of return.
"There are definite barriers to entry," said Invesco's King, adding the "best of the breed" will get done.
The firms have each underscored the expectation of a major shift for the housing finance industry. Until that unfolds, they plan to invest in the common and relatively cheap agency residential MBS, products of Fannie Mae, Freddie Mac and the government entity Ginnie Mae.
"You have to get the capital, get it deployed, and be at right place at the right time," King said. (Reporting by Alina Selyukh and Al Yoon; Editing by Gary Hill)