MFA Financial company profile
MFA Financial (NYSE:MFA) is a mortgage real estate investment trust (REIT). The company invests primarily in whole loans, business purpose loans, and mortgage servicing rights. Historically, MFA has invested in mortgage-backed securities (MBS) as well. However, the 2020 COVID-19 pandemic caused many mortgage REITs to adjust their investment policies.
Most investors are familiar with the REIT business model. REITs generally develop real estate and then rent it out. Examples include mall REITs, office REITs, and apartment REITs. These companies generally borrow at attractive rates and earn rental payments. The difference between their rental income and their financing costs and expenses is their profit margin.
Mortgage REITs are different: They do not invest in buildings but rather in debt (or mortgages). Instead of earning rental income, mortgage REITs earn interest. By using leverage (i.e., borrowed money), they can turn investments that pay 4% into an 8% dividend yield. Here is how it works.
If a company has $10 billion in equity, theoretically, it could invest that $10 billion in assets. However, the company could also choose to borrow $50 billion and invest that money. This gives the company outsized investing power and is why mortgage REITs more closely resemble banks than real estate companies.
While leverage can magnify profits, it also magnifies losses and is a true double-edged sword. We saw this happen to the mortgage REIT sector during the early days of the COVID pandemic.
MFA invests primarily in residential whole loans instead of MBS. Most mortgage REITs are considered agency REITs, which invest in MBS issued by Fannie Mae or Freddie Mac and are insured by the U.S. government.
MFA concentrates its portfolio on whole loans, which are not guaranteed by the government. These loans pay a higher rate of interest, although MFA is bearing the credit risk (i.e., the risk that the borrower doesn't pay back the loan).
MFA's residential loan portfolio consists of newly originated loans that do not meet the government's definition of a "qualified mortgage," or non-QM. These loans are often made to borrowers who don't qualify for a traditional mortgage due to self-employment income or other factors. MFA also invests in business-purpose loans for professional investors. These are often rental income loans or fix-and-flip loans.
MFA also invests in credit-deteriorated and nonperforming loans. These are loans on which the borrower is delinquent or nonpaying. MFA will purchase these loans at a discount to face value and work with the borrower to modify the loan or take it through the foreclosure process. Finally, MFA invests in mortgage servicing rights, which are esoteric securities that rise in value as interest rates increase.
As of June 30, 2021, MFA Financial had a $5.8 billion residential whole loan portfolio. Of this $5.8 billion, approximately $3.8 billion are performing loans, $581 million are credit-deteriorated loans, and $1.2 billion are nonperforming.
During this quarter, the overall portfolio had an effective yield of 5.48%, which is much higher than agency REITs like AGNC Investment, which earned 2.37% on its portfolio of government-guaranteed MBS in the quarter ending June 30, 2021.
MFA Financial news
Early in the COVID-19 pandemic, the MBS market became highly illiquid as investors became nervous about the effects the disease might have on the economy. Securities that could be bought and sold easily became illiquid as sellers outnumbered buyers.
Since most REITs post their investments as collateral for loans, their banks require the value of the collateral to be more than the value of the loan. If the collateral declines in value, the REIT must either sell the collateral to pay off the loan or post additional cash.
During Q2 2020, MFA could not post the additional collateral, and it entered into forbearance agreements with its creditor banks. The company was able to sell off enough of its asset portfolio to satisfy the loans; however, the company that exited forbearance was vastly different from the company that entered.
MFA sold off its agency MBS portfolio and some of its credit-risk transfer securities. The company reduced its reliance on loans that require mark to market and is doing more securitizations. While securitizations have a higher cost of capital, they are much safer for the issuer since they don't require the issuer to post margin.
Since exiting forbearance, MFA has focused on building its non-QM portfolio and its business-purpose loan portfolio. It recently acquired Lima One Capital, which is an originator and servicer of business-purpose loans. The acquisition will help MFA build its line of business in this sector.
MFA Financial stock price
MFA stock began 2020 at around $7.80 a share. Once the COVID pandemic began, the company was beset with margin calls and bottomed out under $1 per share. MFA cut its quarterly dividend from $0.20 per share to $0.05 per share, took out an emergency loan and raised equity, and was able to repay its debts during the summer of 2020.