02/03/2023 | by Nicole Funari

Debt financing through mortgages is the most common way people and businesses buy their homes and commercial properties. Mortgage REITs (mREITs) allow investors to help finance mortgages and benefit from the interest paid. mREITs purchase or originate mortgages and invest in mortgage-backed securities for residential and commercial real estate.

Residential mREITs typically don’t originate mortgages but are investors in mortgage-backed securities (RMBS) holding mortgages originated by other institutions. Commercial mREITs engage in a wide range of activities that can include originating, funding, servicing, and restructuring loans secured by commercial real estate, as well as investing in commercial mortgage-backed securities (CMBS).

The majority of residential mREIT holdings are agency-backed—guaranteed by the U.S. federal government. mREITs typically manage and mitigate risk associated with their short-term borrowings through conventional, widely used hedging strategies, including interest rate swaps, swaptions, interest rate collars, caps or floors, and other financial futures contracts. mREITs also manage risk in other ways, such as adjusting the average maturities on their assets as well as their borrowings and selling assets during periods of interest rate volatility to raise cash or reduce borrowings.

mREITs have a high dividend yield: 13.43% at the end of 2022 compared to 3.97% for equity REITs. mREITs paid $1.9 billion in dividends by the third quarter of 2022. Many investors use mREITs as part of an income generating portfolio. mREITs were not immune to the market downturn in 2022, finishing the year with an annual return of -26.6%, as earnings were pressured by unrealized losses on investments and derivative positions measured at fair value. As interest rates have stabilized, mREIT earnings recovered at the end of 2022.

  • 1 million: mREITs help finance one million homes in the U.S.
  • 3.04%: The Trepp Commercial Mortgage Backed Security delinquency rate was 3.04% in December, down from its pandemic high of 10.32%
  • 6.13%: The 30-year fixed rate mortgage averaged 6.13% in January 2023, up almost 3.5 percentage point from the pandemic low at the end of 2020