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A free scan shows the junk files, broken settings and background clutter dragging Windows down - then fixes them in one click.Free scan · Windows 10 & 11Mortgage REIT shares can fall when interest rates change because the move can reduce the value of mortgage assets, raise or otherwise alter funding costs, change mortgage prepayments, and widen the gap between mortgage-security yields and benchmark rates. Hedges may soften some interest-rate exposure, but they do not remove every risk. The outcome depends on each REIT’s assets, financing and hedges; there is no universal share-price response to a given rate move.
How interest rates can pressure mortgage REITs
Mortgage REITs hold mortgage-related assets and typically finance those holdings with borrowed money. Rate changes can therefore affect both sides of the balance sheet, as well as the expected cash flows from the mortgages. Company filings describe several distinct channels, and they can operate at the same time.
Mortgage asset values can decline
When market yields rise, the value of existing fixed-income securities, including mortgage-backed securities, can fall: newer investments may offer higher yields, making older lower-yielding assets less valuable. ARMOUR Residential REIT said in its 2025 annual report that interest-rate increases tend to reduce the market value of its assets. The size of the effect depends on the portfolio and its sensitivity to rates.
Funding costs may rise faster than asset yields
A mortgage REIT’s net interest income depends in part on the difference between what its assets earn and what it pays to finance them. If borrowing costs adjust more quickly than asset yields, that spread can narrow and income can be squeezed. The result depends on the company’s financing, asset repricing and hedges; a rate increase does not guarantee the same income effect at every REIT.
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Prepayments change the timing and value of cash flows
When mortgage rates rise, borrowers generally have less incentive to refinance. Mortgage prepayments can slow, extending the expected life of mortgage assets and changing their sensitivity to further rate moves. When rates fall, refinancing and prepayments can accelerate, returning principal sooner and requiring reinvestment at then-current yields. Invesco Mortgage Capital’s 2025 Form 10-K describes generally higher prepayments on Agency residential mortgage-backed securities during falling mortgage-rate periods, while noting that the pattern is not guaranteed in every circumstance.
Mortgage spreads can move independently of benchmark rates
Mortgage securities do not always move in step with Treasuries or other benchmark rates. The difference between mortgage-security yields and comparable Treasury yields is commonly called the mortgage basis. If that spread widens, mortgage assets can lose value relative to the benchmark even when a REIT has hedged some benchmark-rate exposure. AG Mortgage Investment Trust’s 2025 Form 10-K explains that its interest-rate swaps and other hedges generally will not protect net book value against basis risk.
Why hedges do not eliminate the risk
Interest-rate swaps and other hedges can offset some exposure to changes in benchmark rates. They are not a guarantee that a REIT’s asset values, funding costs or earnings will remain stable. A hedge may address one rate exposure while leaving other risks—particularly changes in mortgage spreads, prepayment behavior or the relative repricing of assets and liabilities—uncovered. The relevant question is what the hedge is designed to offset, not simply whether the company says it hedges.
Why the portfolio mix changes the result
Mortgage REITs do not all hold the same kinds of assets. Agency mortgage-backed securities, mortgage servicing rights (MSRs) and interest-only securities can respond differently to the same rate move. Two Harbors reports that when rates fall and prepayments rise, Agency pools generally increase in value while its MSRs and interest-only securities generally decrease; it reports the inverse relationship when rates rise and prepayments fall. A portfolio that combines these positions can behave differently from one concentrated in Agency mortgage-backed securities.
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Two Harbors also reported a 6.0% prepayment rate for its MSR portfolio during the three months ended September 30, 2025. That is a company- and portfolio-specific operating figure, not a sector-wide measure or a general forecast of how mortgage REIT shares respond to interest rates.
Share price is not the same as book value
Book value reflects the reported value of a company’s assets and liabilities per share. The market price also reflects investors’ expectations about future income, risks and other company-specific factors. A change in book value can help explain a REIT’s position, but it is not a direct prediction of the share-price change. The company filings cited here describe rate, spread, prepayment, funding and income risks; they do not establish what share-price move should follow a particular rate change.
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How to compare mortgage REITs’ rate exposure
Rather than assume two mortgage REITs will react alike, compare the exposures each company discloses:
- Asset composition: Identify its mix of Agency and non-Agency mortgage assets, MSRs and interest-only securities.
- Financing and leverage: Review how the company funds its portfolio and how much borrowing it uses.
- Repricing mismatch: Compare how quickly asset yields and financing costs can adjust, as well as the maturity profile of each.
- Hedges and basis risk: Check which rate exposures the hedges address and what remains exposed to mortgage-spread changes.
- Prepayment assumptions: Consider how refinancing behavior could change the expected life and cash flows of the assets.
- Scenario disclosures: Read the company’s sensitivity tables for net interest income and book value, noting that they are scenario analyses based on assumptions—not universal outcomes or share-price forecasts.
These disclosures help explain why rate changes can affect mortgage REITs differently. They do not, by themselves, establish a predictable share-price response or rank one company above another.
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