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KKR Financial (NYSE: KFN) was a mortgage Real Estate Investment Trust (M-REIT) formed by Kohlberg, Kravis Roberts & Co (KKR) with an Initial Public Offering June 23, 2005. It was established in 2004 to invest in residential and commercial mortgage loans and mortgage-backed securities. It raised $795 million in private placement funds, and $849 million from its IPO. This was the second largest REIT IPO in the history of the industry.

KKR Financial could also invest in corporate loans, debt securities, asset backed securities and equity securities.

It was part of Kohlberg, Kravis Roberts, an alternative asset manager with three business lines: private equity, fixed income and capital markets. They specialize in large, complex leveraged buyouts.

KKR Financial Was Formed to Profit From the Real Estate Boom - Not Bust

KKR Financial became a loser during the subprime mortgage crisis. In September 2007, Henry Kravis and George Roberts put up $270 million, but that couldn't stop it from losing more money as the market in mortgages continued to go downhill during the crisis.

By February 20, 2008 KKR Financial delayed payment on commercial paper and had to negotiate with its creditors. It eventually had to convert from a REIT to a limited liability company, and is now known as KKR Financial Holdings, LLC.

The fate of KKR Financial illustrates the danger of mortgage REITs.

Next: Apollo Residential Mortgage -- invests in residential mortgages and residential mortgage backed securities.

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