MFA Financial’s holdings
As of June 30, MFA Financial (MFA) held $13.6 billion in assets, a slight decrease from the $13.9 billion it held at the end of the first quarter. This included $5.3 billion in agency MBS (mortgage-backed securities) and $6.2 billion in non-agency MBS. The agency MBS portfolio is basically winding down.
NPL and RPL bonds
At the end of the quarter, MFA held about $2.6 billion of non-performing (or NPL) and re-performing (or RPL) mortgage-backed securities. These securities pay a coupon of about 3.6% and have step-up features that increase the coupon by 300 basis points over time. The issuer can call the bonds after 12 months, and typically that’s what happens. These bonds have about 50% credit enhancement, which means they’ve subordinated bonds that can’t receive principal or interest until the senior debt is paid off. MFA has a credit reserve of $849 million against future losses on these bonds.
MFA Financial holds about $129 million of the new credit risk transfer (or CRT) securities issued by Fannie Mae. These are relatively new MBS that are intended to shift some of the credit risk of Fannie and Freddie securities from the taxpayer to private investors. These securities work a little differently than a typical MBS. The coupon payments on CRT securities are paid by Fannie Mae and Freddie Mac and the principal payments received are based on the performance of loans in a reference pool of recently securitized MBS. As the loans in the underlying reference pool are paid, the principal balance of the CRT securities is paid. As Fannie Mae experiences delinquencies on these securities past a certain threshold, the losses pass on to holders of the CRT bonds.
Net effect of this portfolio
The net effect of this portfolio is to position MFA for an economic environment of rising interest rates—which you can trade via the iShares 20 year bond fund (TLT)—improving home price appreciation, and an expanding economy. MFA’s duration risk (interest rate risk) is much lower than Annaly’s (NLY) or American Capital Agency (AGNC). Investors who buy into that forecast would do well to consider rotating into MFA. Note that investors who want to bet on the REIT sector as a whole should look at the iShares Mortgage Real Estate Capped ETF (REM).