A REIT that holds mortgages and mortgage-backed securities rather than buildings, earning the spread between asset yields and its own short-term borrowing costs.
The business is a levered carry trade. Agency mortgage securities are financed through repurchase-agreement borrowing at multiples of equity, often six to eight times, and the profit is the spread between what the assets yield and what the repo costs.
That structure is fragile in two specific ways. If short rates rise faster than asset yields, the spread compresses toward nothing. If asset prices fall, repo lenders demand more collateral, forcing sales into a falling market, which is how several mortgage REITs impaired their book value permanently in 2008 and again in March 2020.
High headline yields on these vehicles reflect the leverage and the risk, not a free income stream. Book value per share over time is the more revealing measure than the distribution rate.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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