Mortgage REITs, also known as mREITs, are a type of real estate investment trust. They primarily earn profit through the net interest margin. This is the difference between the interest income on the mortgage assets they hold and the interest cost of the capital they use to fund these assets. This structure allows mREITs to invest in mortgages and mortgage-backed securities (MBS).

The operation of mortgage REITs significantly hinges on interest rates. Their investment returns and borrowing costs are sensitive to rate changes. A rise in interest rates might increase funding costs for mREITs, impacting their net margins. Conversely, a decrease can lower borrowing costs and enhance profits. This interest rate sensitivity differentiates mREITs from other types of REITs, as they predominantly deal with financial assets rather than direct real estate holdings.

By investing in mortgage-backed securities, mortgage REITs support both residential and commercial real estate sectors. They provide liquidity and flexibility in the mortgage market, which is critical to sustaining real estate financing flow. Through a strategic blend of interest income and potentially capital gains, mortgage REITs deliver unique benefits for investors seeking exposure to the mortgage segment of the real estate industry.