The Tool Desk
Outbyte Driver Updater FREEFix the driver behind crashes, sound loss and screen glitchesFind Drivers →Outbyte PC Repair FREERepair Windows errors before they cause bigger problemsFix Now →Mortgage REIT shares can fall when interest rates change because rates affect both the value of the mortgage assets they own and the cost and behavior of the financing behind them. Changes in mortgage prepayments and the spread between mortgage securities and benchmark bonds can add further pressure. Hedges may reduce some interest-rate exposure, but they do not remove every risk—and no single rate move guarantees the same share-price response across mortgage REITs.
How interest rates affect a mortgage REIT
A mortgage REIT (mREIT) invests in mortgages or mortgage-backed securities and often borrows money to finance those holdings. The gap between income from its assets and the cost of financing them contributes to net interest income. Because assets, borrowing and hedges can respond to rate changes on different schedules, a rate move can affect several parts of the business at once.
Existing mortgage assets may lose market value
When market yields rise, the fixed payments on existing mortgage securities are generally less attractive than the yields available on newly issued securities. Their market prices can therefore fall. ARMOUR Residential REIT says in its 2025 annual report that increases in interest rates tend to reduce the market value of its assets. A lower asset value can put pressure on reported book value, which is the value of assets minus liabilities attributable to shareholders.
Funding costs can squeeze the income spread
Mortgage REITs commonly use borrowing to hold mortgage assets. If their funding costs rise sooner or faster than the yields earned on their assets, the net interest spread—the difference between those borrowing costs and asset yields—can narrow. A narrower spread can reduce net interest income. The outcome depends on how quickly the assets and liabilities reprice and on the company’s financing and hedge structure; a rise in rates does not necessarily affect every mREIT’s income in the same way. ARMOUR discusses these rate and funding exposures in its 2025 annual report.
What’s actually slowing this PC down?
Pick the symptom - the matching free tool is one click away.
#1 Best Overall
Why mortgage prepayments change the rate picture
Mortgage securities can behave differently from bonds with a fixed maturity because homeowners can repay or refinance their loans early. Those prepayments affect how long an mREIT holds an asset and what it can earn on the money when principal comes back.
When mortgage rates rise: slower prepayments and extension risk
When refinancing becomes less attractive, borrowers generally prepay less. The remaining mortgage assets can then stay outstanding longer than expected, extending their duration and leaving the investor holding them for longer. Invesco Mortgage Capital’s 2025 Form 10-K describes this relationship for Agency residential mortgage-backed securities (Agency RMBS), while noting that prepayment patterns are not guaranteed in every circumstance.
When mortgage rates fall: faster prepayments and reinvestment risk
When refinancing becomes more attractive, borrowers may repay mortgages faster. The mREIT receives principal sooner and may have to reinvest it at then-current yields, which can be lower. Faster prepayments can also change the expected duration and value of mortgage assets. Invesco’s 2025 Form 10-K says Agency RMBS prepayments are generally higher during periods of falling mortgage rates, but the relationship is not certain in every circumstance.
Why hedges do not eliminate losses
Mortgage REITs may use interest-rate swaps and other instruments to offset some exposure to changes in benchmark rates. Those hedges can help, but they do not necessarily move in value in step with the mortgage securities being hedged.
Rank #3
One important remaining exposure is basis risk: the risk that the spread between mortgage-security yields and comparable Treasury yields changes. If that spread widens, mortgage securities can lose value relative to Treasuries even if a hedge offsets some movement in benchmark rates. AG Mortgage Investment Trust explains in its 2025 Form 10-K: “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.”
Portfolio mix can change the direction of the effect
Not every mortgage REIT owns the same assets. Alongside Agency RMBS, a company may hold mortgage servicing rights (MSRs) or interest-only securities, among other investments. These assets can respond differently to rate-driven changes in refinancing and prepayments, so the overall portfolio may not behave like a simple collection of mortgage bonds.
Rank #4
Two Harbors Investment Corp. describes this contrast in its Form 10-Q for the quarter ended September 30, 2025. It reports that when rates fall and prepayments rise, Agency pools generally increase in value while its MSRs and interest-only securities generally decrease; when rates rise and prepayments fall, it reports the inverse relationship. The filing also reports a 6.0% prepayment rate for Two Harbors’ MSR portfolio during that quarter. That is a company- and portfolio-specific operating figure, not a typical sector rate or a measure of how mREIT shares respond to a rate change.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why a share-price drop is not the same as a book-value decline
Book value reflects the reported value of a company’s assets and liabilities. A share price is set in the market and also reflects investors’ expectations about future income, risks and other factors. A change in book value can help explain investor concern, but it does not translate mechanically into an equal percentage move in the share price.
Free tools Windows power users keep installed
One-click scans. No signup required.
The cited company filings describe asset values, income, funding, spreads, prepayments and rate sensitivities. They do not establish a universal share-price response to a defined rate change or quantify what portion of a particular share-price move came from each factor. A company’s scenario sensitivity is based on its own assumptions; it is not a forecast for the whole sector.
What to compare when evaluating mortgage REITs
To understand why two mREITs may react differently to the same rate environment, compare their disclosures on these company-specific factors:
- Asset composition: the mix of Agency RMBS, non-Agency assets, MSRs and interest-only securities.
- Leverage and funding: how much the company borrows and the kinds of funding it uses.
- Repricing mismatch: how quickly asset yields and liability costs change as rates move.
- Hedges and basis risk: what exposures the hedges are intended to offset and which risks remain.
- Prepayment assumptions: how the company estimates changes in refinancing and the duration of its assets.
- Rate-sensitivity disclosures: the company’s modeled effects on net interest income and book value under specified scenarios, including the assumptions behind those scenarios.
These dimensions help explain exposure; they do not determine how a stock will trade. The SEC filings cited above are company disclosures, not a controlled cross-company study, current market data or a forecast for any security.
Quick Recap
Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.
Quick wins for a faster PC:
Clear out junk files and repair common Windows errorsFree Scan →Scan for outdated or missing drivers - takes under a minuteDriver Scan →Repair Windows errors before they cause bigger problemsFix Now →
