Mortgage REITs use borrowing to hold mortgage-backed securities portfolios larger than their equity, and use hedges to offset some interest-rate exposure. Leverage can magnify returns when asset income exceeds financing and other costs, but it can also magnify losses and create urgent cash demands when collateral values fall or funding terms tighten. Hedges can reduce some benchmark-rate mismatches; they do not eliminate mortgage-spread, prepayment, extension, or liquidity risk.
How mortgage REIT leverage works
A mortgage REIT often finances mortgage-backed securities (MBS) with short-term borrowing through repurchase agreements, or repo. Repo is structured as a securities sale with an agreement to repurchase them later. The lender advances cash against the securities, subject to terms that include a financing rate, maturity, and a collateral haircut—the gap between the cash advanced and the collateral’s market value.
Why repo creates leverage
Borrowing lets a REIT hold more assets than it could buy with shareholder equity alone. If the income on those assets exceeds borrowing costs and other expenses, leverage can increase the return on equity. The reverse also applies: falling asset values, higher funding costs, or losses on hedges can reduce equity more sharply than they would in an unleveraged portfolio.
Two Harbors describes repo as a primary funding source for Agency residential MBS and says financing is limited to a specified percentage of asset market value. Because the borrowing is short-term while mortgage assets can remain outstanding much longer, the REIT must renew funding and maintain sufficient collateral as market conditions change. That creates both refinancing risk and collateral-value risk.
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Why leverage figures are not interchangeable
AGNC Investment Corp. says it generally expects leverage between six and ten times tangible stockholders’ equity, while warning that it can remain outside that range for extended periods. That is AGNC’s stated approach, not a sector target. Issuers use different measures—including at-risk leverage, debt-to-equity, and economic leverage—and may count debt, TBA positions, assets, or equity differently. Compare the definitions and reporting dates before comparing the ratios.
What mortgage REIT hedges do—and do not do
How interest-rate hedges work
Mortgage REITs may use interest-rate swaps, swaptions, Treasury securities or futures, options, and TBAs. In a common swap structure, the parties exchange fixed and floating interest payments. Depending on the contract’s direction and terms, a swap or another hedge may offset some movement in funding expense or portfolio value when benchmark interest rates change. Issuers choose instruments and hedge objectives to fit their portfolios, so the mix is not uniform.
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How to read a hedge ratio and duration gap
A hedge ratio compares hedge notional with a company-defined funding or exposure base. It is not the share of potential losses guaranteed to be covered: its meaning depends on what the company includes in the numerator and denominator and which instruments it excludes. Duration gap is another company-reported measure, indicating a mismatch between the interest-rate sensitivity of assets and liabilities under the issuer’s methodology. Neither metric alone captures every risk in an MBS portfolio.
Why hedges may not protect against spread and prepayment risk
Mortgage securities can lose value relative to benchmark-rate instruments even when benchmark rates move as a hedge was designed to address. This is mortgage-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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Mortgage cash flows also change with borrower prepayments. When mortgage rates fall, refinancing can accelerate and shorten the life of securities; when rates rise, slower prepayments can extend it. These changes alter asset duration and can weaken the match between a portfolio and its hedges. AGNC’s 2025 Form 10-K characterizes spread fluctuation between investment yields and the benchmark rates linked to its hedges as an inherent risk of leveraged MBS investing.
How a margin call can become a forced sale
A repo lender requires a cushion between the collateral’s value and the amount advanced. That cushion can shrink if securities fall in price or a lender increases its haircut. Invesco Mortgage Capital states that lenders may issue a margin call when the collateral cushion falls below the required haircut; the REIT then needs to provide cash or additional securities.
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- Collateral weakens: the market value of pledged MBS declines, or the lender raises the required haircut.
- The lender demands support: the REIT must post cash or eligible securities to restore the required cushion.
- Liquidity is tested: if available cash and unencumbered assets are insufficient, the company may need to obtain new funding, reduce positions, or sell assets.
- Stress can compound: market pressure may also reduce the value of unpledged assets and the financing available against them, making it harder to meet the call without selling into adverse conditions.
Invesco’s disclosures link liquidity to leverage, haircuts, and security-price changes. A margin call is therefore not just a valuation issue: it is a time-sensitive funding obligation whose consequences depend on the REIT’s available liquidity and ability to refinance.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What to compare when evaluating mortgage REITs
Use filings from the same reporting period where possible, and compare the risk chain from assets to financing to liquidity—not a single ratio in isolation.
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- Leverage: identify the issuer’s definition, the equity base, and which financing or positions are included.
- Asset mix: distinguish Agency exposure from non-Agency exposure and assess the related credit risk.
- Funding: review repo and other funding sources, lender concentration, maturities, and collateral haircuts.
- Hedges: identify instruments, notional, the company-defined hedge ratio, and any exclusions.
- Rate sensitivity: examine duration gap and disclosed sensitivity under different rate scenarios.
- Spread exposure: look for disclosures about mortgage-spread or basis risk, which benchmark-rate hedges may not offset.
- Liquidity: assess cash and unencumbered assets available to meet collateral calls, alongside disclosures on funding access.
Two REITs can report similar leverage or hedge ratios while holding assets with different durations, prepayment behavior, spread exposure, credit risk, and funding terms. Their definitions and portfolio disclosures determine whether the figures are meaningfully comparable.
Issuer-reported figures: dates and definitions matter
The following figures are examples reported by AGNC Investment Corp.; they are not sector averages. The latest AGNC interim figures included here are as of June 30, 2026.
| Reported item | Figure | Period and qualification |
|---|---|---|
| At-risk leverage to tangible equity | 7.2x | AGNC, December 31, 2025 year-end; company-defined at-risk measure. |
| Hedge ratio | 77% | AGNC, December 31, 2025 year-end; excludes option-based hedges under AGNC’s description. |
| Unencumbered cash and Agency RMBS | $7.6 billion, or 64% of tangible equity | AGNC, December 31, 2025 year-end. |
| At-risk leverage to tangible equity | 7.4x | AGNC, June 30, 2026; company-defined at-risk measure. |
| Hedge ratio | 82% | AGNC, June 30, 2026; measured against funding liabilities using the company’s stated definition and exclusions. |
| Duration gap | 0.7 years | AGNC, June 30, 2026; company-reported measure. |
| Bloomberg US Mortgage Backed Securities Index total return | 8.6% | Calendar year 2025; AGNC’s 2025 Form 10-K reported this as the index’s best annual performance since 2002. This is an index result, not AGNC’s return. |
These snapshots describe the dates and metrics shown; they do not establish a permanent liquidity position or a standard leverage, hedge, or return level for mortgage REITs as a group.
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