Mortgage REIT shares can fall when interest rates change because the move can lower the market value of mortgage assets, raise or alter financing costs, change borrower prepayments, and widen mortgage spreads relative to benchmark rates. Hedges may offset some rate exposure but cannot eliminate every risk. The effect varies by the REIT’s portfolio and financing, and a rate move does not produce a predictable share-price change for every company.
How interest rates affect a mortgage REIT
A mortgage REIT holds mortgage loans or mortgage-backed securities and often borrows to finance them. Its results depend on both the value and income of those assets and the cost and structure of its financing. A change in rates can affect each side differently.
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Existing mortgage assets can lose market value
When market yields rise, the value of many existing fixed-income securities tends to fall, including mortgage securities. ARMOUR Residential REIT said in its 2025 annual report that interest-rate increases tend to reduce the market value of its assets. The impact depends on the securities held and how their expected cash flows respond to rates. ARMOUR Residential REIT’s 2025 annual report.
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Funding costs can squeeze income
Mortgage REITs commonly use borrowing to hold mortgage assets. If funding costs rise or reprice sooner than the income earned on assets, the net interest spread—the difference between asset income and financing costs—can narrow, putting pressure on net interest income. How much it matters depends on the timing and terms of asset and liability repricing, as well as hedges; it is not a guaranteed outcome for every REIT. ARMOUR Residential REIT’s 2025 annual report.
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Rate changes alter prepayments and duration
When mortgage rates rise, refinancing often becomes less attractive, so borrowers may repay mortgages more slowly. That can extend the expected life, or duration, of mortgage securities and leave an investor holding lower-yielding assets for longer. When mortgage rates fall, refinancing and prepayments can accelerate; principal returned sooner may have to be reinvested at lower yields. Invesco Mortgage Capital describes generally higher prepayments on Agency residential mortgage-backed securities during falling mortgage-rate periods, while cautioning that the pattern is not assured in every circumstance. Invesco Mortgage Capital’s 2025 Form 10-K.
Why hedges do not remove all the risk
Interest-rate swaps and other derivatives can offset some exposure to benchmark interest-rate moves. But a mortgage security’s yield does not always move in step with a comparable Treasury yield. The difference is called basis risk: if that spread widens, mortgage assets may lose value relative to the benchmark even when a REIT has hedged benchmark-rate exposure.
AG Mortgage Investment Trust explains the limitation directly: “Consequently, while we use interest rate swaps and other hedges to protect against moves in interest rates, such instruments will generally not protect our net book value against basis risk.” AG Mortgage Investment Trust’s 2025 Form 10-K.
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Not every mortgage REIT holds the same assets. Agency mortgage-backed securities, mortgage servicing rights (MSRs), and interest-only securities can respond differently to the same rate and prepayment environment. Two Harbors reports that when rates fall and prepayments rise, its 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. Two Harbors’ Form 10-Q for the quarter ended September 30, 2025.
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In that filing, Two Harbors reported a 6.0% prepayment rate for its MSR portfolio during the three months ended September 30, 2025. That is a figure for this company, portfolio, and period—not a sector-wide measure of how rates affect mortgage REITs. Two Harbors’ Form 10-Q for the quarter ended September 30, 2025.
Why a falling share price is not the same as falling book value
Book value reflects a company’s reported net assets under its accounting and valuation methods. A share price also reflects what investors expect about future income, risk, and the value they are willing to pay for those assets. A change in book value or net interest income can therefore help explain a share-price move, but it does not determine that move one-for-one.
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The cited company filings describe rate sensitivity, funding, spreads, and prepayments for their own businesses. They do not establish a universal percentage change in mortgage REIT share prices for a given interest-rate move, nor do they show what share of any particular price change came from each mechanism.
What to compare when evaluating mortgage REIT rate exposure
For a company-specific view, look at its latest filings and compare the exposures that determine how rate changes flow through its assets, financing, and hedges:
Quick Recap
- Asset composition: Agency and non-Agency mortgage securities, MSRs, and interest-only securities may react differently to rates and prepayments.
- Leverage and funding: Consider how much the company borrows and how its funding costs can change.
- Repricing and maturity mismatch: Compare when asset yields reset or cash flows arrive with when liabilities reprice or mature.
- Hedges and basis risk: Identify what the hedges are designed to offset and what exposures remain.
- Prepayment assumptions: Assess how changes in refinancing behavior could alter asset cash flows and duration.
- Scenario disclosures: Review the company’s reported sensitivity of book value and net interest income to rate scenarios, noting that these are assumption-based company disclosures, not universal forecasts.
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