What are Mortgage REITs?

Mortgage real estate investment trusts (mortgage REITs or mREITs) are specialized types of real estate investment trusts that generate income by investing in mortgage loans or mortgage-backed securities (MBS). Unlike equity REITs, which own and manage physical properties, mREITs primarily earn profits through the interest on the mortgages or the difference between the borrowing costs and the interest income they collect, often referred to as the "spread."

These entities play a vital role in the real estate market by providing liquidity to both residential and commercial property financing. Mortgage REITs can invest in various types of mortgages, including residential, commercial, or government-guaranteed loans, and their performance is heavily influenced by interest rate fluctuations, market conditions, and credit risk management.

How Does a Mortgage REIT Work?

Mortgage REITs are real estate investment trusts that use investor capital to fund mortgages or purchase mortgage-backed securities (MBS). Mortgage REIT investors then earn income from the interest on the mortgages included in the REIT. Examples of the kinds of assets you might typically find in a mortgage REIT include:

• Residential mortgages 
• Commercial mortgages
• Securities backed by residential mortgages
• Securities backed by commercial mortgages
• A combination of securities backed by both residential and commercial mortgages

In addition to relying on interest earned from mortgage-backed securities to generate returns, many mortgage REITs (mREITs) also own income property. 

Benefits of Mortgage REITs

Although equity REITs might get a greater share of the attention, mREITs also offer investors a wealth of benefits.

• Passive Income: mREITs generate income through interest from loans rather than rental income. They allow investors to build wealth without the operational responsibilities of loan servicing. Mortgage lending is a lucrative sector, providing consistent income opportunities.
• Liquidity: mREITs are easier to sell compared to institutional assets in equity REITs. Additionally, agency-backed mortgage securities are highly liquid due to their federal government guarantee.
• Increased Investor Security: Mortgage-backed securities are secured by real estate assets, offering a safety net in case of borrower defaults. When it comes to agency-backed securities, the federal government backing that makes them so liquid also provides increased security for investors.
• Dividends: mREITs typically offer higher dividend yields compared to equity REITs. While equity REIT dividends may range from 3% to 5%, many mREITs provide yields of 6% to 10%.
• Necessity: Mortgage lending is fundamental to the U.S. real estate market, supporting millions of active loans. Investing in mREITs supports a critical economic engine and contributes to the broader economy.

Risks of mREITs

While mREITs offer attractive benefits, they also come with significant risks:

• Interest Rate Sensitivity: Most mREITs rely on short-term debt to purchase the securities they profit from, making them highly sensitive to interest rate fluctuations. When rates rise, the cost of refinancing existing debts carried by the mREIT increases. That eats into profits and lowers investor dividends. When rates fall, it becomes easier for borrowers to pay off their loans early or refinance them.
• Borrower Default: Every loan within an mREIT portfolio carries the risk of default. Economic downturns can lead to widespread defaults, significantly reducing the interest income available to pay investors. Non-agency-backed loans are especially risky, as they lack government guarantees, leaving mREITs responsible for losses in the event of defaults.
• Economic Volatility: Broader economic challenges, such as recessions or housing market downturns, can exacerbate the risks of both interest rate changes and borrower defaults.

How to Invest in mREITs

Investing in mREITs is simple. Many of them are publicly traded, which means you can buy them through a brokerage app the same way you can any other stock. One great place to start your search for mREIT investment opportunities is this list of Benzinga’s best online stock brokers.

Largest Mortgage REITs

Discussed below are some of the largest mortgage REITs.

Annaly Capital Management Inc. (NYSE: NLY)

Annaly Capital Management is one of America’s largest mREITs. This REIT has been in operation for nearly 25 years and is nearly 14 times larger than the average-size mortgage REIT. This large size allows it to operate with a heavily diversified portfolio. Annaly Capital Management has a market cap of $10.6 billion.

Starwood Property Trust Inc. (NYSE: STWD)

Starwood Property Trust is an mREIT focussed on mortgage-backed securities and mortgage origination in the commercial real estate sector. Its 2009 IPO was the third-largest REIT IPO in U.S. history and at the time, made it the largest blind pool company to ever be listed on the New York Stock Exchange. Since the IPO, Starwood has lent more than $51 billion in capital and acquired $2.4 billion in equity in commercial real estate assets. 

Starwood has a highly diversified portfolio that includes:

• Multifamily
• Hotels
• Office
• Industrial
• Retail

It has a heavy focus on risk mitigation through diversification. Its current share price is lingering around $20 and has a total market capitalization of around $6.4 billion. 

AGNC Investment Corp. (NASDAQ: AGNC)

AGNC is America’s second-largest internally managed residential mREIT. It specializes in agency-backed securities and has a market cap of just over $8.5 billion. AGNC’s management model prioritizes efficiency and cost management, which is why its operating expenses are only 0.08% of its equity capital.

Its current portfolio is worth an estimated $61.5 billion, and the assets break down as follows:

• ~92% or $54.6 billion in 30-year fixed mortgages
• ~3% or $1.7 billion in 15-year fixed mortgages
• ~3% or $1.7 billion in credit risk transfer (CRT) and non-agency mortgages
• ~2% or $1.5 billion in 20-year fixed mortgages
• ~1% or $300 million in constant maturity treasury (CMT) and adjustable-rate mortgages

Mortgage REIT ETFs

Investors can also gain exposure to mortgage REITs through exchange-traded funds (ETFs). A few prominent ETFs that offer exposure to mREITs include:

Industry Overview

Quarterly Performance Data

REIT Alternatives

REITs provide a low-cost and simple way to invest in real estate. However, they aren't the only option available to generate passive income through real estate with a low minimum investment.

Real estate crowdfunding offers investors the ability to decide which properties they want to invest in while still enjoying passive income at a fraction of the cost of traditional methods of investing in real estate. Here are some of our favorite real estate crowdfunding platforms.

Investing in Mortgage REITs

The REIT investment sector features a much larger variety of potential offerings than just equity REITs. Specifically, mortgage REITs allow investors to take advantage of mortgage-backed securities for passive income. Investors who are already heavily involved in equity REITs or traditional offerings who want to diversify their portfolios may want to take a look at this sector for new opportunities. 

The beauty of this sector is that the mortgages that finance single-family homes and commercial real estate are going to be necessary for as long as these properties are sold. That means mREITs have the potential to generate reliable investor returns for the long-term future. As with all investments, the risk of loss remains, but it’s also true that mREIT offerings have outperformed equity REITs overall. 

Frequently Asked Questions