By Amey Stone

If you need current income and are concerned that interest rates are headed lower, take a look at mortgage real estate investment trusts, or mREITs. Don't back up the truck, but with yields of 14% or more, a little can go a long way.

MREITs are publicly traded companies that manage pools of mortgages or mortgage-backed securities. They can focus on residential or commercial mortgages, or a specific region. They live in the esoteric world of high-yielding, often highly leveraged income plays like business development companies, or BDCs, and closed-end funds. That leverage allows them to pay out far more in dividends, typically monthly, than the mortgage income they collect.

The biggest mREITs are Annaly Capital Management (NLY) and AGNC Investment $(AGNC)$, which both yield 14%. They trade at a premium to their book value per share, which suggests it isn't a great time to jump in, but that's just one of many factors to weigh. Perhaps more salient: MREITs tend to get a tailwind when the Federal Reserve lowers rates.

But make no mistake, these income plays are very complex and can be volatile. They generally trade based on the spread mortgages earn over Treasury yields (the wider the better). Like banks, they usually benefit from a steep yield curve so they can borrow at lower rates and lend at higher rates, improving their net interest margin. The yield curve steepened this year, but predicting what the Fed will do next is no easy task.

MREITs stumbled about 1% on Wednesday when Fed Chair Jerome Powell said investors shouldn't count on a December rate cut. In March through early April, mREITs fell about 20% due to worries that the Fed would be reducing MBS held on its balance sheet and that the federal government might not maintain its implicit guarantee of agency MBS, and because of economic pain set off by tariffs. The yield spread on MBS got very wide and then came back in as the mortgage market recovered, but is still wider than historically, says Peter Federico, CEO of AGNC.

Fact is, it's truly hard to predict how mREITs will perform based on interest rates or the real estate market because they are highly complex and can deploy a variety of hedges. That's the main argument for buying a passive vehicle, says Coulter Regal, a product manager at VanEck Funds. "If you're not willing to do a deep dive into individual mREITs, we think a broad basket is a great way to get access to the whole industry," Regal adds.

There are two main index exchange-traded funds. The iShares Mortgage Real Estate $(REM)$ yields 8.4% and has returned 9.5% year to date. VanEck Mortgage REIT Income $(MORT)$ has returned 7.7% year to date and yields 13%. Annaly, AGNC, and Starwood Property Trust (STWD) make up more than a third of each fund.

Mark Grant, chief global strategist at Colliers Securities, argues that mREITs' monthly income stream matters more than fluctuations in stock prices. He highlights three that focus on residential mortgages: AGNC; Armour Residential REIT $(ARR)$, which yields 18%; and Orchid Island Capital (ORC), which yields 19%. My colleague Paul R. La Monica recently covered 9% yielder Rithm Capital (RITM), which focuses on the recovering office market and is the fourth largest holding in Van Eck's mREIT ETF.

Federico says lower mortgage rates could boost the value of AGNC's long-duration holdings (since fixed-income prices move inversely to interest rates). But if mortgage rates fall too fast, prepayments could crimp the value of existing MBS. He's encouraged that the federal government reaffirmed its implicit guarantee of agency mortgages earlier this year.

"This is a fascinating time in our market," he says. "There are so many crosscurrents." For him that's fun. Investors who like to stay atop trends and earn double-digit yields might find it gratifying, too.

Write to Amey Stone at amey.stone@barrons.com

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October 31, 2025 21:30 ET (01:30 GMT)

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