Capitol Acquisition Corp. (CLA) announced Thursday a newly organized real-estate investment trust, Two Harbors Investment Corp., and its sale to the REIT, forming a company that will focus on securities made up of pools of mortgages.

The deal comes less than two years after the U.S. housing bubble burst, and seeks to make money off distressed home loans and the ongoing turbulence in the market for such securities.

Also, the deal is being announced about five months before Capitol Acquisition faces a deadline to make an acquisition or liquidate.

Management of the new REIT hopes to get a boost from its investments in mortgage securities if a federal program aimed at thawing debt markets is extended to home loans that aren't covered by the umbrella of Fannie Mae (FNM) and Freddie Mac (FRE), the two government-controlled mortgage finance giants.

There are "historic dislocations" in the mortgage market that present investment opportunities, said Mark Ein, chairman and chief executive of Capitol Acquisition, during a conference call Thursday. Ein will be the vice chairman of the new REIT.

Under the deal's terms, stock of Capitol Acquisition, a so-called special purpose acquisition company, or SPAC, will be converted into shares of the privately held REIT, Two Harbors.

The REIT will be managed by Pine River Capital Management LP, an investment adviser with $800 million of assets. Pine River's focus includes distressed credit and arbitrage. Brian Taylor, founder and chief executive of Pine River, will serve as chairman of Two Harbors after the deal is completed.

The Two Harbors investment team will be led by co-chief investment officers Steve Kuhn and Bill Roth. Kuhn joined Pine River from Goldman Sachs Group Inc.'s (GS) asset management division in January 2008. Roth will join the company June 16, after working at Citigroup Inc. (C) since 1981. Most recently, Roth was a part of Citi's trading group that invested the bank's funds in asset-backed securities, including mortgages.

The REIT's investment strategy is to garner returns from distressed and discounted mortgage securities that have fallen out of favor in the current credit bust. Two Harbors also will buy home loans that meet the guidelines of Fannie and Freddie.

If the government's Term Asset-Backed Securities Loan Facility, or TALF, aimed at reviving lending to consumers, is extended to include non-agency mortgage securities, it "could provide a large one-time increase in value of securities," said Kuhn in the call.

The transaction is expected to be closed by the end of the third quarter. Capitol shares ended Wednesday at $9.61, and were trading at $9.73, up 1.2%, in afternoon trading Thursday. The stock went public in November, 2007, at around $9.

A so-called SPAC, Capitol raised $250 million in its initial public offering. SPACs are formed as empty shells, and raise money during an IPO, which is then used to finance a business purchase.

While the management of a SPAC is vetting purchases, the money is parked in a trust that invests in relatively risk-free securities, such as U.S. government debt. Typically, if management hasn't signed an agreement for an acquisition within 18 to 24 months, the company is dissolved and the money is returned to investors.

Capitol had 24 months from November 2007 to consummate a business combination or else liquidate.

SPACs were in vogue in 2007, as major investment banks began underwriting these deals and more hedge funds became interested in the structures. But activity fell off steeply in 2008 along with the broader IPO market.

-By Aparajita Saha-Bubna and Lynn Cowan, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com

(Tess Stynes contributed to this story.)