3 Ways To Profit From Higher Mortgage Rates As The 30-Year Fixed Rises Back Above 7%

As the average 30-year fixed mortgage rate climbs back above 7%, according to Freddie Mac, many homebuyers are feeling the squeeze. Higher borrowing costs, combined with a persistent inventory shortage, have made the dream of homeownership increasingly elusive for many Americans. However, while rising mortgage rates may be bad news for prospective homebuyers, they can present unique opportunities for savvy investors. Here are three ways to potentially profit from the current high-rate environment.

Mortgage REITs (mREITs)

Mortgage real estate investment trusts (mREITs) are companies that invest in mortgage-backed securities and other real estate-related assets. One example is AGNC Investment Corp. AGNC, which provides private capital to the U.S. housing market by investing in residential mortgage pass-through securities and collateralized mortgage obligations.

The potential upside of investing in mREITs like AGNC is the attractive dividend yield. AGNC currently offers a forward dividend yield of 15.21%, with an annual payout of $1.44 per share. For income-focused investors, this can be a compelling proposition.

However, it’s important to note that mREITs can be sensitive to interest rate fluctuations, and their dividends are not guaranteed. AGNC’s 5-year dividend growth rate (CAGR) is -7.79%, indicating that payouts have been under pressure in recent years. As with any high-yield investment, it’s crucial to do your due diligence and understand the risks involved.

Mortgage-Backed Securities ETFs

Another way to gain exposure to the mortgage market is through exchange-traded funds (ETFs) that invest in mortgage-backed securities. The iShares MBS ETF MBB is one such option, offering investors access to a broad range of U.S. mortgage-backed bonds issued by government-sponsored enterprises like Ginnie Mae, Fannie Mae, and Freddie Mac.

Investing in MBB can provide diversification benefits, as the fund holds a wide variety of mortgage-backed securities. This can help mitigate the impact of any single default or prepayment. Additionally, MBB offers a relatively attractive yield, with an average yield to maturity of 5.46% as of May 29, 2024.

However, like mREITs, mortgage-backed securities ETFs can be impacted by interest rate changes and prepayment risk. If rates fall and borrowers refinance their mortgages, the fund’s holdings may be paid off earlier than expected, reducing the overall yield. Conversely, if rates rise and prepayments slow, the fund’s average maturity may extend, increasing its sensitivity to further rate increases.

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Private Market Investments

Private market investments can offer an intriguing alternative for accredited investors seeking potentially higher returns. One such opportunity is the Residential Mortgage Opportunistic Fund, available on the Yieldstreet platform. This fund focuses on acquiring pools of first-mortgage residential loans that were initially purchased by government-sponsored enterprises but are now trading at attractive discounts in the secondary market.

The fund’s investment strategy centers around “agency kick-out” mortgages – loans that were returned to originators due to minor non-fraud documentation errors, despite the borrowers making all payments. These mortgages are typically trading at discounts of 20% or more, compared to their historical average of around 5%.   

By partnering with Premier Lending, a mortgage originator with extensive experience selling loans to GSEs, Yieldstreet aims to cure and correct these documentation errors, refinance a portion of the portfolio, and realize potential profits for investors. Additionally, the fund’s focus on high-quality credit (targeting ~70% LTV, 700+ FICO borrowers) and diversification across geographies and property types help mitigate risk.

Access offering details for the Residential Mortgage Opportunistic Fund on Yieldstreet. 

With a high target yield and expected term of 18 months, the Residential Mortgage Opportunistic Fund presents an appealing opportunity for qualified investors to capitalize on the current dislocation in the mortgage market. Of course, private market investments come with their own set of risks, including illiquidity and potential loss of principal, so it’s essential for investors to carefully review the offering documents and consider how the investment fits into their overall portfolio.

Lemons Into Lemonade 

While rising mortgage rates may present challenges for homebuyers, they can also create opportunities for investors willing to think outside the box. Whether through mREITs, mortgage-backed securities ETFs, or private market investments like those available on Yieldstreet, there are multiple avenues to potentially profit from the current high-rate environment. As always, investors should do their own research, understand the risks involved, and consult with a financial advisor to determine which strategies best align with their individual goals and risk tolerance.

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