Mortgage REITs (mREITS) are different from the previous 12 REIT sectors because mortgage REITs do not actually own any properties. Instead, mREITs provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities (MBS), and earning income from the interest on these investments.
mREITs generally focus on either the commercial or residential mortgage markets, but there are some mREITs that invest in both residential MBS and commercial MBS. Plus, mREITs provide liquidity that is essential for the real estate market.
The biggest risk associated with mREITs is that fluctuations in interest rates affect the net interest margin, which is the mREITs primary source of income.
mREITs were particularly hard hit in the beginning of the pandemic, taking a huge hit in February and March. mREITs faced a liquidity crisis as a result of the extreme market turmoil in the beginning of the pandemic. Since then, most mREITs have been able to rebound and have delivered a considerably better return.