Mortgage REITs
Mortgage REITs primarily buy commercial and residential mortgage-backed securities. Many of the 33 mortgage REITs focus on mortgage securities that are government guaranteed by Freddie Mac and Fannie Mae.
Mortgage REITs make money by borrowing short-term and using the proceeds to buy longer-term mortgage securities. This spread, along with leverage, is how returns are boosted. During the 2008 crisis, a large number of investors panicked and dumped financial institutions that relied on short-term debt for ongoing financing.
Mortgage REITs represent < 10% of the almost $7 trillion securitized residential and commercial mortgage market. The hedging tools used by mortgage REITs may or may not offset a steep drop in bond prices if rates do rise. The mortgage REIT industry says they are significantly hedged against a rise in interest rates by their use of interest rate swaps.