Mortgage Real Estate Investment Trusts (REITs) are a type of investment vehicle that specialize in investing in mortgage-backed securities and other mortgage-related assets. The mortgage REIT industry has grown in recent years, as investors seek out high-yielding investments in a low-interest rate environment.
Mortgage REITs generate income by borrowing money at short-term interest rates and investing in long-term mortgage-backed securities. The difference between the short-term borrowing rate and the long-term mortgage yield is the profit margin for the REIT. This strategy allows mortgage REITs to generate high levels of income for their investors, often yielding more than other types of REITs and traditional fixed-income investments.
However, the mortgage REIT industry is also subject to several risks, including interest rate risk, credit risk, and liquidity risk. Interest rate risk arises from the fact that mortgage REITs borrow at short-term rates and invest in long-term assets, meaning their profits are sensitive to changes in interest rates. Credit risk refers to the possibility of defaults or other problems with the underlying mortgages in the REIT’s portfolio. Liquidity risk refers to the possibility that the REIT may have difficulty selling its investments to meet its obligations, particularly during periods of market turbulence. Despite these risks, mortgage REITs continue to be popular among investors, particularly those seeking high-yielding income investments. The mortgage REIT industry has undergone significant changes in recent years, including increased regulation and increased competition from other types of REITs and investment vehicles. However, the industry remains a significant component of the overall REIT market and is likely to continue to play an important role in the future.
Mortgage REITs generally are in the business of buying packages of residential mortgages from either Fannie Mae or Freddie Mac (agency mortgages) or from other originators of residential mortgages.
Some Mortgage REITs are commercial mortgage REITs meaning they buy mortgages or arrange financing for those building commercial buildings of all types.
It is noted that the coupons of Mortgage REIT preferred stocks are generally higher than many other issuers of preferred stock. This is simply because Mortgage REITs are perceived to be of higher risk, in particular when the general economy is heading toward a recession.
Like preferred stock of all REITs mortgage reits pay dividends that are NOT qualified for preferential tax treatment. The logic is simply that the REIT escapes a level of taxation as they are required to pay out 90% of their taxable income to shareholders thus someone must pay taxes and that is the common and preferred stock owners.
The issues which are entirely GREY pay monthly dividends.