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Background on MFA Financial

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MFA Financial

MFA Financial (MFA) is a mortgage real estate investment trust (or REIT) that invests in both agency (government-guaranteed) and non-agency (non-guaranteed) mortgage-backed securities. Its portfolio is primarily invested in hybrids, adjustable-rate mortgages (ARM), and 15-year fixed-rate mortgages.

The company chooses to invest in these types of assets in order to minimize interest rate risk. As a REIT, it must distribute 90% of its income to its shareholders, and it isn’t subject to income tax at the corporate level. This means it has outsized dividend yields, which can be volatile. Over the past 12 months, MFA has paid a dividend yield of 10%.

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MFA focuses on lower-duration mortgage-backed securities

MFA Financial invests in mortgage-backed securities, which are backed by 15-year fixed-rate mortgages, hybrid adjustable-rate mortgages, and adjustable-rate mortgages. This lowers their duration, which is a measure of interest rate risk. By investing in adjustable-rate securities and shorter maturity fixed-rate mortgages, they tend to have less interest rate risk than the giants like Annaly Capital (NLY) and American Capital Agency (AGNC), which have large investments in fixed-rate 30-year mortgage-backed securities.

Because REITs use leverage to increase returns, properly hedging interest rate risk is of critical importance. MFA has been adding to its portfolio of nonperforming and re-performing loans. These securities add some credit risk, but they have higher expected returns. These securities are usually purchased at a discount to face value, so they not only pay a coupon—if performing—but they also accrete toward par during the life of the loan.

Investors that want to invest in the mortgage REIT sector should look at the iShares Mortgage Real Estate ETF (REM). Investors that are interested in making directional interest rate bets should look at the iShares 20-year bond fund (TLT).

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