REAL ESTATE MORTGAGE TRUSTS (REMTs or mREIT)
More significant to real estate finance are the REMTs. Attracting millions of dollars through the sale of beneficial shares, REMTs expand their financial bases with strong credit at their commercial banks and make mortgage loans on commercial income properties.
Many of these are properties constructed for the investment portfolios of the REITs. In fact, many REMTs are owned by either a parent company REIT or a commercial bank.
The REMT’s main sources of income are mortgage interest, loan origination fees, and profits earned from buying and selling mortgages. Although these trusts participate in long-term permanent financing, they are more inclined to invest in short-term senior and junior loans, where higher potential profits prevail.
Risks of Mortgage REIT
- Changes in interest rates can impact earnings for mortgage REITs. Similarly, lower interest rates may lead more borrowers to refinance or repay their mortgages - and the REIT has to reinvest at a lower rate.
- Most mortgage securities that REITs buy are backed by the federal government, which limits the credit risk. However, certain mREITs may be exposed to higher credit risk, depending on the specific investments.