Mortgage rates moved up last week and reached the highest point since July 2024. Per the Freddie Mac report, the average rate on a 30-year fixed-rate mortgage was 6.91% as of Jan. 2, 2025, up from 6.85% a week earlier. 

The latest spike in mortgage rates follows the Federal Reserve’s slower rate-cutting timeline. The Fed has indicated cutting benchmark interest rates just twice in 2025 to fight inflation, whereas four reductions were expected earlier for 2025.

Despite rising mortgage rates, investors can consider buying mREIT stocks like NexPoint Real Estate Finance NREF, Two Harbors Investment Corp TWO and MFA Mortgage Investments, Inc. MFA for generating solid returns in 2025.

Road Ahead for mREITs

In recent weeks, with a rise in mortgage rates, purchase applications and refinancing activities declined. Per a Mortgage Bankers Association report, the refinance share of mortgage activity decreased to 39.4% of total applications as of Jan. 2, 2025 from 44.3% in the week earlier. 

Nonetheless, the U.S. economy is expected to continue its growth in 2025, although at a slightly slower pace than in 2024. This, along with interest rate cuts, will gradually lower mortgage rates. Given the increasing supply and relatively high mortgage rates, house price appreciation may remain moderate.

This, along with increased home sales, should strengthen purchase originations by 2025. Refinance volumes are also likely to rise due to falling mortgage rates.

With a gradual decrease in mortgage rates, improving purchase originations and refinancing activities, mREIT companies will likely witness book value improvement in 2025 as spreads in the Agency market tighten, driving asset prices. Also, with lower Fed rates, earnings pressure for highly leveraged mREITs will ease to some extent as funding costs stabilize.

Further, mREITs primarily focus on leveraged investments in Agency residential mortgage-backed securities (RMBS), including residential mortgage pass-through securities and collateralized mortgage obligations. The long-term outlook for Agency MBS is favorable. Agency MBS spreads have remained in a range that supports positive long-term risk-adjusted returns for leveraged mREIT companies.

3 mREIT Stocks Worth Betting On

Investors can consider the following mREIT stocks with lucrative dividend yields and strong growth projections to generate healthy returns in 2025. In the past year, these three stocks have outperformed the industry.

Price Performance

Image Source: Zacks Investment Research

NexPoint: The company based in Dallas, TX, originates, structures and invests in first mortgage loans, mezzanine loans, preferred equity and alternative structured financings in commercial real estate properties, as well as multi-family commercial mortgage-backed securities.

NREF continues to identify and attract investment opportunities across its target markets and asset classes with a commitment to thorough evaluation aimed at enhancing shareholder value. The company remains optimistic about the resilience of the residential sector, especially in the current interest rate environment.

Its investments in the multi-family and single-family segments are well-positioned, supported by historical performance and a favorable rent versus own dynamic that provides long-term momentum for the sector. NexPoint closed on a highly accretive SASB financing in early October that recapitalized all of its outstanding debt stack with a fixed rate execution and strong interest from the market at tighter pricing than anticipated. NREF management expects to monetize them in 2025.

The company’s net interest income (NII) declined in the first nine months of 2024, as NII plunged 50.3% to $6.4 million from the prior-year period. As of Sept. 30, 2024, NexPoint’s book value per share decreased to $16.90 from $17.84 as of Sept. 30, 2023. Nonetheless, with the Fed rate cuts, the company’s NII is expected to improve.

NREF has a current dividend yield is 12.96%. It has increased its dividend four times in the last five years and has a payout ratio of 161%.

NexPoint Real Estate Finance, Inc. Dividend Yield (TTM)

The Zacks Consensus Estimate for 2025 earnings is pegged at $2.44 per share, indicating a year-over-year increase of 41.6%.

NexPoint currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

TWO Harbors: The company has established an investment portfolio primarily composed of RMBS with mortgage servicing rights (MSR) at its core. This portfolio has less exposure to changes in mortgage spreads than portfolios without MSR while maintaining the benefits of spread tightening and declining volatility. As of Sept. 30, 2024, the company’s total portfolio had 74.7% exposure to Agency RMBS.

High-quality investment returns are Two Harbors' primary emphasis, and its combined approach aims to maximize value extraction from MSR assets for the benefit of shareholders. The company is also enhancing its investment portfolio with more revenue and hedging options.

TWO’s financials have been adversely impacted by high interest rates. Higher rates led to a surge in the company’s borrowing costs, which resulted in a net interest loss in the nine months ended Sept. 30, 2024. With the falling interest rate, Two Harbors’ earnings pressure should be alleviated as funding costs come down, allowing the company to increase its dividend payout.

TWO’s current dividend yield is 15.73%. It increased its dividend four times in the last five years. Two Harbors has a payout ratio of 161%.

Two Harbors Investments Corp Dividend Yield (TTM)

The Zacks Consensus Estimate for the company’s 2025 earnings is pegged at 85 cents per share, indicating a year-over-year increase of 81.9%. It currently flaunts a Zacks Rank of 1.

MFA Mortgage Investment: This leading specialty finance company invests in residential mortgage loans, residential MBS and other real estate assets. Through Lima One Capital, its wholly-owned subsidiary, MFA also originates and services business purpose loans for real estate investors.

The company is making significant progress in its MB portfolio and loan originations, boosting its financial performance. MFA added $293.9 million of Agency MBS in the third quarter of 2024, bringing its Agency MBS portfolio to $993.5 million. MFA Mortgage also acquired or originated $565 million of high-yielding residential mortgage loans in the third quarter of 2024. 

In the first nine months of 2024, MFA’s NII increased year over year. With future rate cuts, its NII is expected to improve further.

MFA Mortgage’s current dividend yield is 13.93%. It increased its dividend four times in the last five years. The company has a payout ratio of 94%. 

MFA Financial, Inc. Dividend Yield (TTM)

MFA Financial, Inc. dividend-yield-ttm | MFA Financial, Inc. Quote

The Zacks Consensus Estimate for 2025 earnings is pegged at $1.62 per share, indicating a year-over-year increase of 3.6%. MFA Mortgage currently carries a Zacks Rank of 2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Two Harbors Investments Corp (TWO) : Free Stock Analysis Report

MFA Financial, Inc. (MFA) : Free Stock Analysis Report

NexPoint Real Estate Finance, Inc. (NREF) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research