Annaly Capital Management Inc.'s plan to start lending to mortgage bankers will let it finance those "left out" of a market more dominated by the biggest companies than in the past and supply new sources of bonds to buy, Chief Executive Officer Michael Farrell said.

The company, the largest real estate investment trust that invests in mortgage bonds, said Tuesday it has formed a unit, Shannon Funding LLC, that will make warehouse loans to home lenders. The New York REIT is targeting $100 million to $200 million of credit lines next quarter and about $1 billion by late 2011, Farrell said Wednesday.

Annaly joins mortgage debt investors and brokers including Redwood Trust Inc., BlackRock Inc. and Gleacher & Co. in seeking to take advantage of retreats in the home lending market created by the jump in homeowner defaults. Warehouse lending, a "loss-leader" during the housing boom, can now be a profitable business, said Wunderlich Securities Inc. analyst Merrill Ross.

Annaly hopes it will also help it to buy securities, Farrell said.

"The smaller to middle-market mortgage originators have been left out," Farrell said. "The capital we can provide to them will allow us to develop relationships over time" that may help fill "our huge buy need every month" created by the paying down of the mortgage bonds it holds.

The securities created by customers probably would initially be government-backed mortgage bonds with specific loan characteristics, such as properties in certain states, he said. Eventually they may include other residential and commercial mortgage debt that are the specialties of two other REITs it manages, Chimera Investment Corp. and CreXus Investment Corp., he said.

Outstanding warehouse-line commitments, used by mortgage bankers to fund originations and hold the debt until sales, declined to about $27 billion at June 30, from more than $200 billion in 2007, according to data from National Mortgage News and the Mortgage Bankers Association.

The Shannon Funding unit may focus on mortgage companies with $5 million to $10 million of net worth, Farrell said.

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