Should I Invest in Mortgage REITs (mREITs)?

A mortgage REIT (mREIT) suits you only if you want high current income and can accept sharp drops in both the share price and the dividend when interest rates or mortgage prices move. An mREIT is a company that owns mortgages or mortgage-backed securities instead of buildings, borrows heavily to buy more of them, and must pay out at least 90% of its taxable income as dividends to keep its tax status. AGNC Investment Corp., one of the largest, borrowed about 7.2 dollars for every dollar of shareholder equity at the end of 2025, and its book value per share fell 22.9% in the first quarter of 2020. A mortgage-backed securities fund can be a lower-risk choice if it holds similar bonds and avoids borrowing or other strategies that magnify gains and losses.

How you can make money from other people's mortgages compares mREITs with the other ways to own mortgage debt.

How do mortgage REITs make money?

An mREIT earns the spread, the difference between the interest its mortgage assets pay and the interest it pays on its own borrowing. Most of that borrowing is repurchase agreements, or repos: short-term loans secured by the bonds themselves, which the mREIT must keep renewing. AGNC's repo loans had a weighted average of 11 days left to maturity at the end of 2025. At the end of 2019, repos funded 56% of all mREIT assets, $380 billion in total, according to the Federal Reserve Bank of Dallas.

The spread alone is small. In 2025, AGNC's assets yielded an average of 4.90% and its borrowing and hedging cost 2.98%, a spread of 1.92 percentage points. Hedging uses contracts or investments to try to offset losses from interest-rate changes. Leverage, buying assets with borrowed money, turns that thin spread into a large dividend. A simplified example with AGNC's 2025 averages, before operating costs:

• Tangible equity (equity excluding goodwill) of $1.00 plus $7.40 borrowed buys $8.40 of mortgage bonds.
• Interest earned: $8.40 x 4.90% = $0.412.
• Interest paid: $7.40 x 2.98% = $0.221.
• Net income: $0.412 - $0.221 = $0.191, or about 19.1% on the $1.00 of equity.

The same borrowing works in reverse when the bonds lose value, which how leverage works shows with a home purchase. AGNC says it generally expects its leverage to run between 6 and 10 times its equity.

How do agency and non-agency mREITs differ?

Agency mREITs hold mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae, so missed payments by homeowners do not reduce what the REIT receives. AGNC's annual report notes that only the Ginnie Mae guarantee is backed by the full faith and credit of the federal government. Fannie Mae and Freddie Mac have operated under federal conservatorship since September 2008. Agency mREITs still face interest-rate risk and price risk on the bonds, and they offset their low credit risk with high leverage.

Non-agency mREITs hold mortgage loans or securities with no government-related guarantee, such as loans to borrowers who do not meet Fannie Mae or Freddie Mac rules. They take credit risk, the risk that borrowers stop paying, in addition to rate risk, and their assets are harder to sell quickly in a falling market. Hybrid REITs hold both. What a mortgage-backed security is explains how agency and private-label securities are built.

Why do book value and dividends swing when rates move?

Book value per share is the REIT's assets minus its debts, divided by its shares. Because the borrowing stays the same when bond prices fall, every loss lands on the equity, magnified by the leverage. AGNC's 2025 annual report estimates these effects on its own portfolio:

The mortgage spread is the extra yield mortgage bonds pay over Treasury bonds. AGNC says its hedges are generally not designed to protect book value from that spread risk.

A second risk is the margin call. When pledged bonds lose value, repo lenders demand more collateral or cash. A REIT that cannot pay must sell bonds into a falling market or default on its loans.

What happened to mREITs in March 2020?

In March 2020, as COVID-19 hit markets, mortgage bond prices fell sharply relative to Treasurys and repo lenders raised collateral demands. The Dallas Fed reports that mREIT balance sheets shrank by $158 billion, or 23%, in the first quarter of 2020 and that mREIT stock values fell more than 50% on a weighted-average basis. The Federal Reserve announced on March 15, 2020, that it would buy at least $200 billion of agency mortgage-backed securities. By April 8, AGNC reported that the agency market had strengthened since quarter end, in large part because of that Fed support.

Two companies show the agency and non-agency difference:

• AGNC (agency): Tangible book value per share fell from $17.66 to $13.62, a 22.9% drop, in the first quarter of 2020. AGNC met all its margin calls but cut its monthly dividend from $0.16 to $0.12 per share in April 2020. It still paid $0.12 a month ($1.44 for the year) in 2025.
• MFA Financial (mostly non-agency loans and securities): Book value per share fell from $7.04 to $4.34. MFA could not meet all its margin calls late in the quarter, which put it in default under its repo agreements. It canceled a $0.20 common dividend it had already declared and signed forbearance agreements, in which lenders agree to hold off on enforcing their rights for a set period, with most of its lenders.

How are mREIT dividends taxed?

Most REIT dividends are taxed as ordinary income at your regular rate, not at the lower rates for qualified dividends, because the REIT itself pays little or no corporate tax. AGNC reports that 100% of its 2025 common dividends were taxable as ordinary income. Two boxes on your Form 1099-DIV can lower the bill:

• Box 5, Section 199A dividends. These may qualify for a deduction of up to 20% on Form 8995 or 8995-A if you held the shares for more than 45 days. Your total qualified business income deduction is generally capped at 20% of taxable income before the deduction, after subtracting net capital gain and qualified dividends.
• Box 3, nondividend distributions. This is a return of your own money. Up to your remaining cost basis (your investment in the shares for tax purposes), it is not taxed when paid but reduces that basis, increasing a later taxable gain or reducing a loss. Any excess is taxable as capital gain when received, even without a sale.

Holding mREIT shares in an IRA or other tax-deferred account postpones the tax until you withdraw, which removes the ordinary-income drawback while the shares stay in the account.

Who should choose an mREIT over an MBS fund?

An mREIT fits if you want high current income and can hold through a 20% to 40% drop in book value and a dividend cut, as AGNC and MFA shareholders saw in 2020, without needing to sell. A mortgage-backed securities (MBS) fund can offer less volatility if it holds similar bonds with little or no leverage. Mutual funds must follow federal investment company rules that, as the SEC notes, limit how much a fund can borrow, while mREITs such as AGNC operate under an exemption from those rules. Check the fund's prospectus for borrowing and derivatives, contracts tied to assets or rates that can magnify gains and losses despite those limits. In AGNC's table above, the leverage turns a 0.8% change in the hedged portfolio into a 7.7% change in book value. MBS funds versus individual MBS covers that choice, and how MBS differ from other bonds explains why prepayments make their prices behave differently.

Before buying a specific mREIT, check four things in its latest 10-K or 10-Q on the SEC's EDGAR site:

1. Asset mix. The share of agency versus non-agency assets, which sets its credit risk.
2. Leverage. Debt divided by equity, and the range management says it targets.
3. Rate and spread sensitivity. The table in Item 7A of the 10-K or Part I, Item 3 of the 10-Q (market risk) estimating the change in book value for each rate move.
4. Economic return. The change in book value plus dividends paid, as a share of starting book value. AGNC reported a 22.7% economic return for 2025 and negative 20.2% for the first quarter of 2020. A high dividend can hide a larger fall in book value, and economic return shows the net result.

What kind of REITs there are compares mREITs with equity REITs that own property.