Mortgage Real Estate Investment Trusts, also known as Mortgage REITs or MREITs, are companies that, like their Equity REIT cousins, were made possible through legislation passed by Congress in 1960 to help enable individuals from all walks of life to gain the benefits of investment in real estate debt and equity.
Congress specifically noted that these beneficial characteristics include “greater diversification of investment,” “expert investment counsel” and the means of “collectively financing projects which the investors could not undertake singly.”
A key part of the original REIT legislation requires REITs to distribute most of their income each year to their shareholders in the form of dividends. REITs are permitted to deduct from their corporate taxable income every dollar they pay out, while shareholders pay tax on the dividend income they receive, generally at ordinary income tax rates. This dividend distribution requirement is fundamental to the ability of REITs to deliver the continuing income and performance benefits characteristic of real estate debt and equity investment.
The Mortgage REIT industry: a diverse marketplace
There are two main types of REITs, generally referred to as Mortgage REITs and Equity REITs. Mortgage REITs provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities (MBS) and earning income from the interest on these investments, while Equity REITs invest in real estate equity by acquiring properties – such as shopping malls, office buildings or apartments – and collecting rents from their tenants.
Mortgage REITs invest in residential and commercial mortgages, as well as residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). Mortgage REITs typically focus on either the residential or commercial mortgage markets, although some invest in both RMBS and CMBS.
Most residential Mortgage REITs invest in “agency” RMBS, which are issued by Fannie Mae and Freddie Mac, often referred to as U.S. government-sponsored enterprises (GSEs), or Ginnie Mae. Agency RMBS constitute the bulk of assets held by Mortgage REITs today. However, residential Mortgage REITs also may invest in RMBS issued by other financial institutions (non-agency or private-label RMBS) and residential mortgage loans.
Commercial Mortgage REITs provide financing for commercial real estate. They may invest in commercial mortgages and commercial real estate loans, as well as both rated and unrated CMBS, mezzanine loans, subordinated securities or construction loans, and may participate in loan securitizations.