iTechGuides is reader-supported. When you buy through links on our site, we may earn an affiliate commission. As an Amazon Associate I earn from qualifying purchases. Learn more
Mortgage REITs use borrowed money—often short-term repurchase-agreement financing—to hold mortgage-backed securities on a scale larger than their equity. Leverage can increase returns when asset income exceeds borrowing and other costs, but it also magnifies losses and can create urgent cash demands when collateral values fall. Interest-rate hedges can reduce some rate exposure; they generally do not eliminate mortgage-spread risk, prepayment risk or liquidity risk.
How does leverage work at a mortgage REIT?
A mortgage REIT, or mREIT, holds mortgage assets and often finances them with repurchase agreements, commonly called repos. A repo is structured as a sale of securities with an agreement to repurchase them later. In practical terms, the REIT pledges securities as collateral and receives cash. The lender advances only a specified portion of the collateral’s market value; the difference is the collateral cushion, or haircut. The repo’s rate and term affect the cost and availability of that funding.
Borrowing lets the REIT hold more mortgage assets than it could with equity alone. If income from those assets exceeds borrowing costs and other expenses, the difference can support returns on equity. But a fall in asset values, rising funding costs or a demand for more collateral can work in the opposite direction. Since repo funding is often short-term while mortgage assets can be longer-lived, the REIT also faces the need to renew financing and maintain acceptable collateral values.
Leverage figures are not automatically comparable between issuers. A filing might report “at-risk leverage,” debt-to-equity or economic leverage, and the calculation can depend on how the company treats debt, to-be-announced mortgage securities (TBAs), assets and equity. AGNC Investment Corp. says it generally expects leverage of six to ten times tangible stockholders’ equity, but warns that it can remain outside that range for extended periods. That is AGNC’s stated expectation, not an industry standard.
#1 Best Overall
A dated example—not an industry benchmark
AGNC reported 7.2x at-risk leverage to tangible equity at December 31, 2025, and 7.4x at June 30, 2026. Both figures are AGNC-specific snapshots using its stated measure; they do not establish a sector average. When evaluating a leverage figure, check the issuer’s definition and reporting date before comparing it with another company’s number.
What do mortgage REIT hedges do?
Mortgage REITs may use interest-rate swaps, swaptions, Treasury securities or futures, options and other instruments. In a common swap structure, parties exchange fixed and floating interest payments. Depending on the contract’s direction and terms, a swap or another hedge can offset some change in short-term financing expense or portfolio value as benchmark rates move. The instrument mix and objective differ by issuer.
Rank #2
A hedge ratio compares hedge notional with a funding or exposure base defined by the company. It does not mean that the same percentage of losses is covered. AGNC reported an 82% hedge ratio at June 30, 2026, based on specified interest-rate swap and Treasury hedges relative to funding liabilities and subject to its calculation rules. Its reported duration gap was 0.7 years on that date. The hedge ratio and duration gap describe different things: one compares notionals with a defined base; the other reflects a difference in the interest-rate sensitivity or duration of assets and liabilities under the company’s methodology.
Why a hedge may not prevent book-value losses
Mortgage-backed securities can lose value relative to benchmark interest rates even when a benchmark-rate hedge behaves as intended. This is mortgage-spread, or basis, risk. AGNC’s 2025 Form 10-K says its hedging strategies generally are not designed to protect net book value from spread risk; Invesco Mortgage Capital describes the same basic exposure. A hedge against benchmark-rate movements therefore should not be read as protection against every market move affecting mortgage securities.
Mortgage cash flows also change when borrowers refinance or prepay. Falling mortgage rates can encourage refinancing and shorten the expected lives of mortgage assets. When rates rise, slower prepayments can extend those lives. These shifts can change portfolio duration and weaken the match between assets and hedges. A hedge ratio by itself does not show how well the instruments match the portfolio under changing prepayment behavior.
Can a mortgage REIT face a margin call?
Yes. If pledged securities lose enough market value, or a lender increases its required haircut, a repo counterparty may demand cash or additional collateral. Invesco Mortgage Capital says lenders may issue a margin call when the collateral cushion falls below the required haircut, and that its ability to meet calls is affected by leverage, haircuts and security-price changes.
Rank #4
The pressure can compound: market stress may reduce the value of pledged securities while also lowering the value of unpledged holdings and the financing available against them. If the REIT lacks liquidity or cannot refinance, it may have to sell assets under adverse conditions. That can turn a market decline into a liquidity problem and potentially deepen losses.
Quick wins for a faster PC:
Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Clear out junk files and repair common Windows errorsFree Scan →Scan for outdated or missing drivers - takes under a minuteDriver Scan →Liquidity indicators to examine
- Cash and unencumbered assets: Look for assets available to support collateral calls or other funding needs, and note how the company defines “unencumbered.”
- Repo counterparties and terms: Review funding sources, counterparty concentration, maturities and collateral haircuts, where disclosed.
- Leverage and market sensitivity: Consider how much borrowing the company uses alongside the value and rate sensitivity of its assets.
- Funding access under stress: Read the issuer’s discussion of available financing and what could happen if counterparties demand more collateral or will not renew borrowing.
AGNC reported $7.6 billion of unencumbered cash and Agency RMBS at December 31, 2025, equal to 64% of its tangible equity. This is a dated, company-specific disclosure, not a promise that liquidity will remain at that level or a figure directly comparable without checking other issuers’ definitions.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How should investors compare mortgage REITs?
Compare companies using the same reporting dates where possible, and read each issuer’s definitions rather than treating headline ratios as standardized. A similar leverage or hedge ratio can describe portfolios with different mortgage exposures, funding terms, prepayment behavior and liquidity resources.
| Area to compare | What to check in the filings | Why it matters |
|---|---|---|
| Leverage | Reported measure, included debt and securities, equity base, reporting date and company definition | Shows the scale of borrowing relative to the company’s chosen asset or equity base; inconsistent definitions can make headline ratios misleading. |
| Mortgage exposure | Agency versus non-Agency holdings and the related credit exposure | Different mortgage assets carry different risks; a leverage number alone does not describe the assets being financed. |
| Funding | Repo and other funding sources, counterparties, maturities and haircuts | Shows refinancing dependence and the conditions that may trigger collateral demands. |
| Hedges | Instruments, notional amounts, company-defined hedge ratio and what the calculation excludes | Clarifies which exposures the hedge is intended to address; the ratio is not a percentage of losses insured. |
| Rate and spread sensitivity | Duration gap, sensitivity under rate scenarios and discussion of mortgage-spread or basis risk | Shows how benchmark-rate movements and spread changes may affect assets and liabilities differently. |
| Liquidity | Cash, unencumbered assets and disclosures about funding available for collateral calls | Helps assess whether the company may be able to meet demands without selling assets in a stressed market. |
How to read recent figures in context
AGNC’s 2025 Form 10-K reported that the Bloomberg US Mortgage Backed Securities Index returned 8.6% in 2025, which AGNC described as the index’s best annual performance since 2002. That is an index result for that calendar year, not a return for all mortgage REITs and not a forecast. AGNC’s year-end 2025 disclosures also included a 77% hedge ratio, excluding option-based hedges under its description; its June 30, 2026 disclosure reported 82% under the company’s stated calculation. Differences in dates and exclusions matter when reading those figures together.
The latest interim AGNC figures cited here are as of June 30, 2026; later company reports may supersede them. These issuer examples illustrate how the metrics are reported, but they do not establish typical leverage, hedge effectiveness or liquidity for the mortgage REIT sector.
What’s actually slowing this PC down?
Pick the symptom - the matching free tool is one click away.
Quick Recap
Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.
