SIE Understanding Products and Their Risks Question 77: Answer and Explanation

Question: 77

Which of the following type(s) of REITs resemble banks in how they earn a profit?

• A. Hybrid REITs
• B. Equity REITs
• C. Mortgage REITs
• D. Hybrid and Equity REITs

Correct Answer: C

Explanation:

C: Choice C is correct because a mortgage REITs' profits come from the difference between the mortgage loans made to real estate owners and the amounts borrowed from investors. Generally, the mortgages purchased are guaranteed by a federal agency or the federal government itself. Banks earn a profit on the difference between the interest paid on deposits and the rates on loans made to borrowers. Choice A is incorrect because, while some profit is made on the interest differential, profits also come from rents and gains from buying and selling of business properties. Choice B is incorrect because Equity REITs, the most common type of REITs, do not make their profit from interest differential, but from rents and business real estate purchases and sales. Choice D is incorrect because hybrid and equity REITs do not make their profit only from interest rate differences.