Mortgage REITs borrow against mortgage-backed securities to hold portfolios larger than their equity, and use derivatives and other positions to manage some interest-rate exposure. Leverage can amplify income when asset returns exceed financing costs, but it also magnifies losses and can trigger urgent collateral demands. Hedges may soften rate shocks; they do not eliminate mortgage-spread, prepayment, funding or liquidity risk.
How mortgage REIT leverage works
Many mortgage REITs finance mortgage-backed securities (MBS) through repurchase agreements, or repo. A repo is secured borrowing structured as a sale of securities with an agreement to repurchase them later. The lender advances cash against collateral, with the collateral value exceeding the cash advanced by a margin called a haircut. The agreed interest rate and term determine part of the borrowing cost and how soon the REIT must renew its funding.
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Borrowing lets a REIT hold more mortgage assets than its equity alone could buy. If the income on those assets exceeds repo interest and other costs, leverage can raise returns on equity. The reverse also holds: falling asset prices, rising financing costs or other losses have a larger effect relative to the REIT’s equity. Because repo is often short-term financing for longer-lived mortgage assets, the company must manage both the value of its collateral and its ability to renew funding.
Two Harbors describes repo as a primary funding source for Agency RMBS and says the amount financed is limited to a specified percentage of the assets’ market value. The exact financing terms and portfolio differ by issuer, so leverage is not a stand-alone measure of risk.
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What leverage figures tell you—and what they do not
Mortgage REITs may disclose measures such as at-risk leverage, debt-to-equity or economic leverage. The calculation can depend on which debt, assets, equity and forward-settling securities are included. Before comparing two issuers, check each company’s definition and reporting date; similarly named ratios may not be directly comparable.
AGNC says it generally expects leverage between six and ten times tangible stockholders’ equity, while warning that it may remain outside that range for extended periods. That is AGNC’s stated approach, not an industry standard. AGNC reported 7.2x at-risk leverage to tangible equity at December 31, 2025, and 7.4x at June 30, 2026. These are dated, company-specific snapshots.
| AGNC reported measure | December 31, 2025 | June 30, 2026 |
|---|---|---|
| At-risk leverage to tangible equity | 7.2x, AGNC 2025 Form 10-K | 7.4x, AGNC June 30, 2026 reporting |
| Hedge ratio | 77%, excluding option-based hedges under AGNC’s description; AGNC 2025 Form 10-K | 82%, based on specified interest-rate swaps and Treasury hedges relative to funding liabilities under AGNC’s definition |
| Unencumbered cash and Agency RMBS | $7.6 billion, equal to 64% of tangible equity; AGNC 2025 Form 10-K | Not stated in the cited AGNC June 30, 2026 figures |
| Duration gap | Not stated in the cited AGNC 2025 Form 10-K figures | 0.7 year; AGNC June 30, 2026 reporting |
The change between two reported dates does not, by itself, show whether risk rose or fell: the portfolio, market conditions and calculation details matter. In particular, AGNC’s 2025 and 2026 hedge-ratio descriptions are not identical. Do not read either figure as the percentage of losses covered or use it as a sector benchmark.
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What mortgage REIT hedges do
Mortgage REITs can use interest-rate swaps, swaptions, Treasury securities or futures, options and other instruments. In a common swap, parties exchange fixed and floating interest payments. Depending on its direction, size and terms, a swap can offset some changes in short-term financing expense or the portfolio’s sensitivity to benchmark rates. Issuers choose different instruments and objectives to fit their portfolios.
A hedge ratio compares hedge notional with a company-defined funding or exposure base. It describes the scale of certain hedges relative to that base; it does not mean the same percentage of a REIT’s losses is insured. AGNC’s 82% figure at June 30, 2026, for example, reflects specified swaps and Treasury hedges relative to funding liabilities as defined by the company.
Duration gap is another useful, but limited, measure. It estimates the difference between the interest-rate sensitivity of assets and liabilities. AGNC reported a 0.7-year duration gap at June 30, 2026. That dated estimate does not capture every source of price or funding risk, and mortgage cash flows can change as borrowers prepay or extend their loans.
Why hedges do not remove mortgage-spread risk
A benchmark-rate hedge and an MBS investment do not necessarily move together. Mortgage securities can lose value relative to benchmark rates when mortgage spreads widen, even if the hedge responds as intended to changes in those rates. This is often called spread or basis risk. AGNC says its hedges generally are not designed to protect net book value from spread risk; Invesco Mortgage Capital describes the same basic exposure.
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Random freezes, missing sound and display glitches usually trace back to one bad driver. Find and replace yours safely.Free scan · under a minutePrepayments can also change the effective duration of mortgage assets. When mortgage rates fall, borrowers may refinance, shortening the expected life of securities and potentially making a hedge less well matched. When rates rise, refinancing may slow and mortgage cash flows can extend, leaving assets exposed for longer than expected. These changes mean a hedge that offsets one rate scenario may not offset another equally well.
Credit exposure also depends on what the REIT owns. Agency and non-Agency MBS do not have identical risk profiles, so a comparison should account for the portfolio’s composition rather than relying on a leverage or hedge statistic alone.
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How repo margin calls can become a liquidity problem
If pledged collateral falls in value or a repo lender raises its haircut, the lender may demand cash or additional securities to restore the required cushion. That demand is a margin call. Invesco Mortgage Capital says lenders may issue one when the collateral cushion falls below the required haircut; the REIT’s ability to meet calls is affected by leverage, haircuts and security-price changes.
Stress can compound the problem: falling prices may reduce the value of pledged assets while also reducing the value of unpledged holdings and the amount of new financing available. If a company cannot meet a collateral demand or refinance maturing borrowing, it may have to sell assets in an unfavorable market. The resulting loss of assets or realized losses can further constrain its choices.
When assessing this risk, look beyond the leverage ratio to the resources and terms that determine whether the REIT can meet calls and renew funding:
- Liquidity: cash and unencumbered assets that could be used to meet collateral demands.
- Funding structure: repo counterparties, borrowing maturities, other funding sources and collateral haircuts.
- Concentration: whether funding or collateral exposure depends heavily on a small number of counterparties or asset types.
- Disclosure timing: the date of each metric. A reported balance is a snapshot, not a guarantee that liquidity will remain available through a later market shock.
A practical framework for comparing mortgage REITs
Use filings from the same reporting period where possible, and read the definitions alongside the figures. A useful comparison follows the path from the assets a REIT owns to the funding it needs and the protections it uses:
- Identify the portfolio. Compare Agency and non-Agency exposure and the associated credit risks.
- Check leverage definitions. Record each issuer’s measure, included items and reporting date rather than assuming the ratios are equivalent.
- Examine financing terms. Review repo and other funding sources, counterparties, maturities and collateral haircuts.
- Read the hedge disclosures. Note instruments, hedge notional, the company-defined ratio and what exposures the hedge is intended to address.
- Consider rate sensitivity. Review duration gap and sensitivity under rate scenarios, while accounting for how prepayments and extensions can alter asset duration.
- Separate benchmark-rate risk from spread risk. Determine whether the filing explains exposure to widening mortgage spreads or other basis movements.
- Assess call-paying capacity. Compare cash and unencumbered assets with the funding and collateral terms that may create liquidity demands.
Similar leverage or hedge ratios can mask meaningful differences in asset duration, prepayment behavior, spreads, credit exposure and funding terms. The measures are most useful together, with their definitions and dates attached.
How market performance fits into the picture
Market returns can provide context, but an index result is not a mortgage REIT’s return. AGNC’s 2025 Form 10-K reported that the Bloomberg US Mortgage Backed Securities Index returned 8.6% in 2025, its best annual performance since 2002. That index statistic does not establish how any individual REIT performed: company results also depend on leverage, funding costs, hedges, portfolio composition and other factors.
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