Gary Kain spent 20 years at Freddie Mac managing as much as $800 billion of bonds before the U.S. took over the company. Since 2009, he’s used his knowledge of the home-loan market to help turn American Capital Agency Corp. into the fastest growing mortgage debt investor.

American Capital’s assets grew to $100.5 billion at the end of last year from less than $5 billion three years earlier, making the Bethesda, Maryland-based real estate investment trust the largest after Annaly Capital Management Inc., in an industry that’s drawing attention from investors and the Federal Reserve for its double-digit yields and rapid expansion.

REITs bought more than $100 billion of government-backed mortgage securities in 2012, the most since at least the credit crisis, and will purchase another $60 billion in 2013, JPMorgan Chase & Co. estimated this month. Fed Governor Jeremy Stein pointed to the expansion of mortgage REITs, which have amassed almost $400 billion of the debt, during a speech last month on risky behavior in credit markets influenced by the central bank holding borrowing costs near zero for a fifth year and investors searching for high-yielding assets.

“Agency mortgage REITs deserve attention in particular because they have exploded in size,” said John Gilbert, chief investment officer at General Re-New England Asset Management, a unit of Warren Buffett’s Berkshire Hathaway Inc. that oversees $64 billion. “We’ve been dealing with the unintended consequences of monetary policy for a long time. We have to be on the lookout for the downside.”

Best Returns

American Capital, along with growing the fastest, has also been one of the most successful of the mortgage REITs. Since Kain, 48, was named chief investment officer, it’s returned 261 percent, including reinvested dividends, almost double the returns of a 34-company index.

The firm was started by private-equity financier Malon Wilkus and went public in February 2008, just as the Fed was responding to the biggest financial crisis since the 1930s.

Wilkus, chief executive officer of investment firm American Capital Ltd., hired Kain to help “navigate the evolving mortgage landscape,” he said in a statement at the time. The original management team had left in January 2009, about four months after the government seized Fannie Mae and Freddie Mac, when loan losses pushed the two firms to the brink of bankruptcy.

Kain, now president of the REIT, joined the firm when it held a little more than $2 billion and the Fed was preparing to start buying government bonds to resuscitate the housing market.

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