A mortgage REIT (mREIT) is a real estate investment trust that focuses on mortgages and mortgage-backed securities rather than physical properties. Unlike equity REITs, which own buildings, mREITs derive most income from the interest earned on mortgage loans and the payments from MBS.
Many mREITs fund their mortgage portfolios with borrowings and short-term funding. They earn a net interest income by the difference between the interest received on loans or securities and the cost of funds, adjusted for credit losses and prepayments. Some own agency securities issued by government-sponsored enterprises such as Fannie Mae, Freddie Mac, or Ginnie Mae, which carry various credit characteristics; others invest in non-agency RMBS with private-label credit risk. Some mREITs also own mortgage servicing rights (MSRs), which can provide additional income streams. Because REITs must distribute at least 90% of taxable income to shareholders, mREITs often feature higher dividend yields relative to other stock types.
mREIT performance is highly sensitive to interest rates, yield curves, and credit performance of the underlying mortgages. Leverage is common, which can magnify both gains and losses. Prepayment risk, liquidity risk, and regulatory changes to the housing finance system can affect value and income.
In portfolios, mortgage REITs offer exposure to mortgage credit and interest-rate sensitivity through a stock investment vehicle, but they come with higher income volatility and leverage risk.
A mortgage REIT might hold a portfolio of agency MBS financed with short-term borrowings, seeking to earn net interest income as rates move.
Real Estate Investment Trust (REIT) · Mortgage-backed securities (MBS) · Agency mortgage-backed securities (Agency MBS) · Non-agency mortgage-backed securities (Non-Agency MBS) · Mortgage servicing rights (MSRs) · Leverage · Net interest margin (NIM)