Q2 2021 MFA Financial Inc Earnings Call
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Ladies and gentlemen, and thank you for standing by and welcome to the MFA financial second quarter 2021conference call.
At this time all lines are in a listen only mode. Later, we will conduct the question and answer session and instructions will be given to you at that time.
If you need assistance during the call Press Star and then zero and an operator will assist you off line and as a reminder, today's conference call is being recorded.
I would now like to turn the conference over to Hal Schwartz. Please go ahead.
Thank you operator, and good morning, everyone. The information discussed on this conference call today and may contain or refer to forward looking statements regarding the MFA financial Inc, which reflect management's beliefs expectations and assumptions as to Mfa's future performance and operations. When used statements that are non historical in nature, including those containing work.
<unk> such as will believe expect anticipate estimate should could would or similar expressions are intended to identify forward looking statements. All forward looking statements speak only as of the date on which they are made these types of statements are subject to various known and unknown risks uncertainties assumptions and other factors, including those described in the MFA.
The annual report on form 10-K for the year ended December 31, 2020, and other reports that it may file from time to time with the Securities and Exchange Commission. These risks uncertainties and other factors could cause mfa's actual results to differ materially from those projected expressed or implied and any forward looking statements. It makes.
For additional information regarding MFA is use of forward looking statements. Please see the relevant disclosure and the press release announcing Mfa's second quarter 2021 financial results. Thank you for your time I would now like to turn this call over to MFA, CEO and President Craig Knutson.
Thank you Hal and good morning, everyone I'd like to thank you for your interest in and welcome you to MFA Financial's second quarter 2021 financial results webcast and also with me today are Steve <unk>, our CFO, good Monday, Christiansen, and Brian Wilson, our co chief investment officers and other members.
<unk> of senior management.
The second quarter of 2021 was a difficult period for mortgage investors, particularly for those invested and agencies strong economic data and early fed chatter about tapering pushed mortgage spreads wider and a rally and rates coupled with the flattening curve caused prepayment levels to remain Ella.
<unk>, while never completely immune to general mortgage market trends Mfa's investment strategy intentionally mitigates many of these interest rate risks.
Through asset selection that emphasizes credit versus interest rate sensitivity and shorter duration assets that again limit interest rate risk our portfolio performed quite well during the second quarter of 2021, and our book value was stable on the credit side continued very strong housing trends of.
Bolstered the value of the underlying assets securing the mortgages that we own thus lowering the ltvs.
Robust housing prices have also created a strong tailwind for delinquent mortgages and Oreo properties as these trends lead to improved resolutions and outcomes.
MFA and tireless efforts to find attractive new investments were also rewarded and the second quarter as our asset acquisitions exceeded runoff from the first time since late 2019. This.
This progress is due to continued growth from many of our origination partners as well as our ability to analyze and source new investment opportunities with financial markets awash in liquidity sourcing attractive investment opportunities has been very challenging this year, but we are starting to fire on all cylinders and we feel good.
About our continued growth prospects.
Please turn to page 4.
We reported GAAP earnings of <unk> 13 per share for the second quarter, largely driven by a solid increase and net interest income contributions from credit loss reserve reversals were more modest this quarter versus Q1, $8.8 million versus $22.8 million as.
Were unrealized gains on fair value loans, and 6 million in Q2 versus $31 million and Q1 GAAP book value was $4.65 up <unk> <unk> from March 31, and economic book value was $5.12 of.
Of <unk> from March 31 economic.
The return both GAAP and economic for the second quarter was 2.6% and this follows economic returns and Q1 of 3.6% and 5% respectively.
Our leverage ticked up slightly over the quarter to 1.8 to 1 versus $1.6 to 1 and we paid of Tencent dividend to shareholders on July 30, which was of 33% increase from the dividend paid in April.
Please turn to page 5.
Sure.
Digging into the numbers a little more of our efforts to lower interest expenses through Securitizations head of visible impact on our second quarter earnings as interest expense declined by $4.5 million or 15% from the first quarter and the larger of the 2 securitizations executed in the second quarter had limited.
Impact on the full quarter because of price on June 10th net.
Net interest income for the second quarter increased by $8 million or 16% versus the prior quarter. We continue to make excellent progress and liquidating Oreo properties as we capitalized on strong housing trends and for borrowers who are still negatively impacted by Covid, we have been able to offer modification.
<unk> <unk> repayment plans to allow them to stay in their homes and restore their payment status, the current and retain the equity and their homes.
Please turn to page 6.
And as previously announced we completed the acquisition of Lima, 1 on July 1 and we're very excited to welcome the Lehman 1 team to the MFA family. We expect that this transaction will significantly increase our purchase of business purpose loans, and providing and by providing a strong capital base and expertise and.
And securitization, we will also further enhance lima ones already existing profitability and growth potential.
Please turn to page 7.
And again, continuing the theme of aggressively taking advantage of available market opportunities. We executed 2 additional securitizations on over $850 million of <unk> at attractive levels and the second quarter. As you can see on this page AAA yields on bonds sold for.
For the non QM, 1 deal was 112 basis points and of 110 basis points on the RPM of 1 deal and the blended cost of debt from both deals and the <unk> we.
The complete at least 2 additional securitizations and the third quarter. Please turn to page 8.
We illustrate our investment portfolio and summarize our asset backed financing on the slide.
Our investment portfolio grew by $300 million and the second quarter, which is the milestone of sorts and as it is the first quarter and the last 6 quarters that our portfolio has increased.
New loan acquisitions in the second quarter were $857 million, which is more than 2 times the last 3 quarters combined the.
The composition of our portfolio has not changed materially since March 31 other than for the addition, and Q2 of the agency eligible investor loans, which Brian will discuss shortly on the financing side you can see the 2 thirds of our asset backed financing is non mark to market with over 70% of the.
And non mark to market financing in the form of securitization as we continue to term out and reduce the cost of non mark to market debt.
And I will now turn the call over to Steve yard to discuss additional details of our financial results.
Thanks, Greg Please turn to slide 9 for an overview of our second quarter 2021 financial results.
As Craig has already noted MFA delivered solid results for the second quarter highlighted by a higher net interest income and our residential Halle and investments.
Regarding into the details I want to point out 2 important changes that impact the way our results of presented this quarter.
Firstly, we've changed the way we present interest income on residential whole loans of which we have elected the fair value option and acquisition.
Proud of this quarter, we presented the coupon payments received along with noninterest income from fair value lines in other income on our income statement.
We now present interest income on loans accounted for at fair value as part of net interest income, while noninterest income, which primarily reflects market value changes continues to be presented and other income.
Prior period comparative the math to interest income and net interest income discussed on this call as well as and our press release issued this morning, and 10-Q, which we expect to file as of today are reclassified to conform to this new presentation approach.
Secondly, as we noted in our last earnings call. Starting this quarter, we decided to elect the fair value option for all acquisitions of purchased performing loans.
This includes acquisitions of non QM fix and flip single family rental and agency eligible and best of lines.
Purchase performing loans acquired prior to this quarter continue to be accounted for at carrying value. So we will continue to present, the economic book value of metric to capture the impact of fair value changes for these loans.
We believe these changes and accounting method and presentation will serve the simplify the reporting of the results over time.
Further we can now present interest yield and net interest spread information for all lines and our portfolio you should think.
Thank you and results as you to review and more comparable to our peers.
In addition, we believe the using fair value accounting is the best way to properly capture the impact of Lima ones and origination and servicing activities per loans originated by the Lima and held on the MFA has consolidated balance sheet.
Turning now to the detail of our Q2.2021 results.
Net income to common shareholders was $58.5 million or <unk> 13 per share.
The key items impacting our results are as follows.
Yes.
Net interest income of $59 million was 8 million of 16% higher sequentially.
Greg also noted interest expense again declined primarily due to the ongoing efforts to use securitization and other forms and more durable and lower cost financing.
Interest income on our loan portfolio was also approximately 5 million higher primarily driven by higher prepayments and lower delinquency levels on purchased credit deteriorated and purchased non performing loans.
Similarly to the prior quarter interest income from our securities investments included approximately $8 million of accretion on an MSR term net investment that was redeemed at par, but that we had taken an impairment charge on and Q1 of 2020.
And net interest spread increased to 2 and impressive 3.0% to 2% this quarter and while additional securitizations will continue to meaningfully benefit funding costs overall spread levels should moderate in future periods as prepayment speeds declined in line with seasonal factors.
We reduced our overall seasonal allowance on carrying value lines to $54.3 million, reflecting lower loan balances and adjustments to estimated levels of future unemployment and home price appreciation used the net credit loss modeling.
This reversal and other net adjustments to our seasonal reserves positively impacted net income for the quarter by $8.9 million.
After the significant increase in face of reserves taken in Q1 and 2020 when uncertainty related to COVID-19, economic impacts were at the highest.
We have reduced the seasonal reserves by approximately $90 million and the subsequent 5 quarters.
Charge off experience continues to remain very modest with approximately $1.6 million of net charge offs taken and the 6 months period ended June 32021.
Pricing on loans held at fair value continues to be firm.
Net gains of 6 million and were recorded primarily reflecting the impact of market value changes.
Finally, operating and other expenses were $22.8 may and for the quarter in line with the previous quarter.
And with that I will now turn the call over to Brian Wilson.
Thank you Steve.
Turning to page 10.
Housing has continued to push higher over the quarter.
And the pace of annual home price increases have reached levels not seen and over 40 years.
And historically low rates demographic trends and of sphere lack of supply have all contributed to the rise in prices.
The unemployment rate has broken through 6% and is expected to continue the move lower with the economy reopening.
All of these factors combined with monetary and fiscal support have played a part and keeping mortgage credit performance strong and bode well for the continued credit performance and the near term.
Turning to page 11.
Non QM origination volume increased over the quarter as rates after the borrower borrowers have been dropping we purchased over $370 million over the second quarter, which is an increase of 85% over the previous quarter.
The prepayment speeds increased over the quarter with the drop in rates to non QM borrowers.
The 3 months average CPR for the portfolio was 40.
We executed on the securitization and the second quarter, bringing the total amount of collateral securitized to approximately 1 and 3 quarters of $1 billion, we expect to bring another securitization of non QM loans and the third quarter.
The securitizations have lowered our financing costs and at the same time have provided additional stability to our borrowings.
The securitization combined with non mark to market and term facility has resulted in over 70% of our non QM portfolio to be financed with non mark to market leverage.
We expect to continue to be of programmatic issuer of securitization as it is currently the most efficient form of financing for our portfolio.
Turning to page 12.
The COVID-19 impacted our borrowers significantly as many of our borrowers are owners of small businesses and were affected by shutdowns across the country. We instituted the deferral program at the onset of the pandemic and an effort to help our borrowers manage through the crisis.
Through our Servicers, we granted almost 32% of the portfolio of temporary payment relief, which we believe helped put our borrowers and are better positioned for long term payment performance.
Subsequent to June of 2020, we reverted to a forbearance program instead of the deferral as the economy opens up.
The forbearance program instituted is largely now determined by state guidelines.
And the second quarter, we saw seriously delinquent serious delinquency rates improved by a 10th of a percent and 30 day delinquencies dropped by 1.4% and addition, almost 40% of those delinquent loans made a payment in June.
Many of delinquent borrowers are and repayment plans, which will cause them to cure their delinquency status over the next 6 to 12 months.
And the economic recovery continues the portfolio of credit performance should continue to improve.
Our strategy of targeting lower LTV loans should mitigate losses under a scenario with elevated delinquencies and many cases borrowers, which no longer have the ability to afford their debt service will sell their home and order to get the return of their equity.
Turning to page 13.
Updated letter of agreements between the Treasury and the Gse's relating to the 2008 senior preferred stock purchase agreement restricted the percentage of loans purchased by the Gse's backed by Investor properties, and the second homes and 7%.
This change created of dislocation and the marketplace acquiring originators to look for alternative outlets for their loans backed by Investor properties.
We were able to source over $300 million of this product and the second quarter from our existing originator relationships at attractive prices.
We expect to execute on our first securitization of this collateral and the third quarter with more to follow should the opportunity persists.
This is another example of our ability to adapt to and ever changing environment and a testament to our strong originator relationships and a competitive market environment.
Turning to page 14.
Our RTL portfolio of $1 billion has been impacted by the pandemic, but continues to perform well.
81% of our portfolio remains less than 60 days delinquent.
Although the percentage of 60 with the portfolio of 6 days of delinquent and status was 26% of <unk>.
Order of those borrowers continue to make payments.
Prepayment speeds and the second quarter moderated a bit but continue to be elevated and of 3 months CPR of 15.
And as mortgage rates continue to be historically, low and more borrowers gain equity with the increase of home prices.
About 30% of our RPM of borrowers were impacted by Covid and we have worked with our servicers to provide assistance to borrowers and have seen improvement and delinquency levels over the quarter.
Turning to page 15.
Our asset management team continues to push performance of our NPL portfolio the <unk>.
Team has worked in concert with our servicing partners to maximize outcomes on our portfolio.
This page shows the outcomes for loans that were purchased prior to the year ended 2019.
38% of loans that were delinquent at purchase and are either performing or paid in full.
47% of either liquidated or Oreo to be liquidated.
Our sales of Oreo properties have continued and accelerated pace at advantageous prices, we have been able to cut the Oreo portfolio and have since the pandemic began.
15% are still of nonperforming status.
Our modifications have been effective is almost 3 quarters are either performing or paid in full we.
We are pleased with these results as they continue to outperform our assumptions at the time of purchase.
And now I'd like to turn the call over the good lender to walk you through our business purpose loans.
Thanks, Brian.
And to page 16.
We closed the previously announced the acquisition of <unk> on July 1.
Very excited about this transaction and I would like to give a shout out to the entire MFA and Lima 1 team.
Work diligently and collaboratively towards closing the transaction quickly.
Neither 1 is the leading nationwide originator of business purpose loans of EPS.
With the strong brand recognition and the BPL borrower and community.
They serve the needs of short and long term borrowing strategy and the BPL space by offering a diverse set of products, including fix and flip and new construction loans longterm rest of the loans and small balance multifamily value at and bridge loans.
Lima has originated over 3 billion since inception and has shown that they can reliably originate over $1 billion annually with a clear path to grow significantly beyond that.
The acquisition enhances our position as the significant capital provided the detailed space, which we believe offers some of the most attractive opportunities to deploy capital and the residential mortgage space.
And this acquisition will provide MFA and reliable access to high quality high yielding assets and our <unk>.
The call to source and the marketplace.
At closing of the acquisition.
$152 million of business purpose loans to our balance sheet the inch.
The creation of Lima, 1 into the MFA family and smooth and efficient the.
Working relationship we have built over the last 4 years across our organization has been a tremendous assets and the integration and allowed <unk> to continue towards the and high quality loans and service the customers without any issues.
1 of the key initiatives has been to quickly use of msa's balance sheet and reputation to substantially improve the financing of <unk> assets and origination going forward, we've already refinanced expenses financing, the BPL securitization and subordinate debt and Lima and needed to put in place through 2020, which will save over 500 basis points of <unk>.
Dancing cost overtime.
And we are and the process of adding additional financing lines to meet the expected growth of the business going forward.
Turning to page 17, where we can.
Discuss the fix and flip portfolio.
Our portfolio declined modestly by about $32 million and the second quarter as principal Paydowns continue to exceed loan acquisitions.
Limited acquisitions last year led to our currencies and the loan portfolio, where we see completed projects getting sold quickly into a strong housing market leading to high repayment rates.
We expect these funds to change going forward as purchase activity has picked up meaningfully.
Second quarter loan acquisition more than doubled from the first quarter as we acquired $68 million of UTP and $118 million and Max loan amount and the quarter.
As a reminder, fix and flip loans financed the acquisition rehabilitation and construction of homes.
<unk> of certain amount of the loan is held back in the form of the construction of holdback, which explains the difference between the UTP and day, 1 and the Max loan amount, which represents the fully funded loan at the completion of projects.
Third quarter acquisitions are on track to increase even further as we have already added in excess of 160 million Max loan amount of fixed and flip loans since the launch.
With the acquisition of Lima, as well as other seller relationships, we expect purchase activity to be strong going forward and expect the fixed income portfolio to grow again in the third quarter.
And it takes the portfolio delivered strong income and the second quarter with average portfolio yield of approximately 6.4% and the quarter.
The housing market continues to be extremely strong with record low mortgage rates and low levels of inventory supporting annual home price depreciation and excess of 15%.
In addition, we continue to see unemployment declining and overall economic activity improving across the country.
The combination of these positive economic fundamentals low initial ltvs on our loans and the efforts of our experienced asset management team continues to lead to acceptable outcomes and our delinquent loans.
60, plus day delinquent loans continued to decline and dropped $29 million of $120 million at the end of the second quarter and.
And what is really encouraging is that we continue to see of solid amount of loans pay off and fall out of 60 plus.
The loans pay off and fall from serious delinquency of you often collect default interest extension fees and the other piece of payout.
For loans, where there is meaningful equity and the property of these can add up since inception, we have collected approximately $4.8 million and these types of fees across our fixed income portfolio.
60, plus day delinquency of the percentage of <unk> declined 4% of 28% and remains elevated we'll keep in mind that we have purchased over $2.1 billion of fix and flip loans and had over $1.5 billion payoff in full.
Due to the short term nature of fixed and flip loans with expected payout and about 6 to 12 months delinquent loans can be outstanding for longer than performing loans due to time. It takes the complete foreclosure.
Our purchase of activity was limited last year, and performing loans paid off and delinquency percentage increase of 1 would naturally expect the portfolio shrank.
As we now grow our portfolio again and continued sales positive outcomes from seriously delinquent loans, we expect both the dollar amount as well as a percentage of delinquency to continue to decline going forward and.
And so far and the third quarter, we continued to see positive delinquency trends.
Finally, the fixed income of loan reserves continue to trend down and the second quarter planning of our $2.1 million, primarily due to improved economic expectations and the strong housing market.
Turning to page 18.
Sure.
Our single family rental loan portfolio continues to deliver attractive yields and strong credit performance of.
The portfolio yield has remained steady and the mid to high 5% range post Covid and was 576% and the second quarter.
Underlying credit trends remained solid and 60 plus day delinquencies declined 90 basis points to 4.9% at the end of the second quarter.
Purchase activity increased significantly from the first quarter as reported $102 million of single family rental loans and the second quarter and grew the single family rental portfolio for the second quarter and our ROE.
The pace of acquisitions has continued to accelerate into the third quarter and we have already added approximately $100 million and the month of July.
The acquisition of Lima, 1 will significantly bolster our ability to sort of single family rental loans and we believe the W will be able to continue to grow our acquisition volume as well as the single family rental portfolio and the near future.
Over 2 thirds of our single family of restaurant portfolio is financed with non mark to market financing and over 50% from Securitizations.
Price and the first single family rental securitization and the first quarter of 2021, where the weighted average coupon of funds sold was the only 106 basis points.
Going forward, we expect to programmatically execute single family rental Securitizations to finance the rest of the loans with the next deal expected in the fourth quarter.
And with that I will turn the call over to Craig for some final comments.
Thank you good longer we are pleased with the results of the second quarter of 2021, and even more excited about the future at MFA, our investment initiatives are picking up steam as our asset acquisitions outpaced runoff for the first time since late 2019.
And we're continuing to execute our strategic plan to lower and term out borrowing costs and we're beginning to see the results of this activity and our income statement. The strength of the housing industry has obvious positive implications for our mortgage credit investments.
And our acquisition of Lima, 1 is an important initiative that will enhance our ability to deploy future capital in the BPL sector and grow our future earnings power and operator, Please open up the line for questions.
Certainly and ladies and gentlemen, if you wish to ask a question. Please press 1 and then zero on your Touchtone phone.
We are here tone and acknowledging that you have been placed and Q you may remove yourself from queue by pressing the same 1 zero command.
So once again, 1 and then zillow for your questions or comments.
We will go to the line of Bose, George with <unk> and your line is open.
And.
Hey, everyone. This is actually Mike Smith on for Bose.
A couple of questions on labor 1 was there any goodwill created as a result of the transaction.
Hi, Mark this is Steve Jared So the transaction didn't close until July 1st So there will be some goodwill with the transaction, we're still working through the purchase price allocations and some other items of that nature. So, we'll and we'll discuss that more fully on our next earnings call.
<unk> results are consolidated into the MFA results until the third quarter of it and not consolidated as of June 30.
Okay, Great. That's helpful. And then last quarter you guided to I think it was 8 tenths of 12.
The accretion from the transaction 2020..1 I was just wondering is that still the case for 2020..1 and then how are you thinking about accretion into 2022.
So I think that accretion number that we talked about was an estimate for a for a 12 month period and not for the calendar year of 2021.
And again, it's very early to tell and and a lot of things are changing but I have no reason to think that.
And that's inaccurate or the thats changed materially since some since we've talked on the last call.
Okay, Great that's helpful and then.
The 1 thing we've heard a lot of its just the competition and returning to the BPL space. I was just wondering if you could talk through some of the and the.
Economics on the loans that you purchased from Lima, 1 versus other originators and just.
And how that looks.
Yes, it's a great question.
So, yes, I mean the.
Space has gotten more attention.
Certainly because rates are low and there is a.
The decent amount of competition to acquire assets in general.
And that's why we believe it is important and it was 1 of them.
Part of the reasons going into the acquisitions to have.
Solid control over the sourcing of the assets and so by acquiring Lima 1.
We have acquired 1 of the.
The leading originator and the space 1 is an established relationships with the various.
6 of the flip and investors as well as the show on the track record to originate in excess of $1 billion of.
Loans per year, so from that perspective, we feel that we have.
And you've taken full position and the ability to source the assets.
Relative to some other people will have to go out and identify areas of sellers and find multiple sellers to 2 acquired loans. So I think that is an important distinction that we have now achieved 2 of the acquisition of Lima 1.
In terms of the.
In terms of the economics look I mean, the loans. The Lima originates we put them on our balance sheet at cost and this will be.
And as what does that mean, so we usually and the BPL side.
The flipside of Youre acquiring loans and.
The net coupon and.
The originator retains anywhere from 100 basis points of up to 200 basis point and the servicing spread so if and originators, creating along with an 8% coupon and an investor would acquire it.
And the pass through rate of 6% for US we put the full 8% coupon on our balance sheet. So from that perspective, we reap the benefit the.
Full coupon of the loan which is obviously the beneficial.
On the single family rental side, those loans traded at a premium and the marketplace.
Again, we will put those loans on our costs, which probably is the benefit of up to 100 and 150 basis points in terms of the difference in terms of yields to our balance sheet.
And so I hope that answers some of your questions and I guess if of missile and just feel free to follow up.
No. That's very helpful. Thanks, and then just 1 more from me have you provide and update on how book value has trended since quarter end.
So we don't we don't really have March yet for.
Sure.
The month in July, but I have no reason to think the book value has changed appreciably since June 30.
Great. Thanks for taking the questions.
Thanks, Mike.
Thank you next we will go to the line of Doug Harter with Credit Suisse and your line is open.
Excuse me it was on mute there. This is John <unk> on for Doug Harter.
A few questions. So first you discussed the securitizations and the quarter and I believe you mentioned that you foresee 2 and 3 Q and.
And I believe the blended cost was somewhere in the range was what was the.
130 bps I think on the 2 that you did this quarter is that correct.
It was in the 100 thirty's yet and.
And the 130, okay. Thank you.
You could just give us some color of kind of going forward as to what you think sort of what you'll see blended or the sizing of the securitizations and <unk> and going forward and maybe if you think you can continue to get your cost of funds down with the strategy or if you are sort of flooring out.
Yes, I mean securitization spreads have come in a bit so incrementally.
We'll see better funding cost, but as we continue to move away from some of our higher cost funding to the lower cost funding.
Won't be as dramatic as it has been in the past, but theyre still has room for improvement.
Okay, Great and you just see that for.
And I guess, maybe the next few quarters and at some point is going to start to floor out here or do you see it going on 12 months or are.
Part of that.
Well, it's really a function of future acquisitions right.
Okay and is that.
Physicians continue to grow you should expect that we'll continue the securitized.
Okay, Okay, great and.
Second question is exciting with the additions.
Surpassing run off this quarter.
What do you think your capacity for growth very sort of going forward do you see that being the.
The trend kind of on a go forward basis and.
Sort of could you size that.
I mean at this point, it's too early to try to try to size that I think.
I've said in my prepared remarks that we feel we feel pretty good about our future growth prospects. So it's been it's been of a difficult year and a source attractive investments because nothing is really cheap and theres a theres a lot of money chasing everything out there, but I think we've worked really hard this year on <unk>.
<unk> originated relationships on establishing some new ones and and you know it takes time, but I think you saw a pretty significant impact and the second quarter and that will go away in terms of absolute numbers.
Impossible to predict what the big but like I said, we feel we feel pretty good.
Okay, great. Thank you so much.
Thank you and.
And for any other questions or comments, Chris 1 and Inc.
Okay.
Yes.
Okay.
And we will go to the line of Eric Hagen with BT and EE and your line is open.
The holds good morning Hope you guys are well.
1 of the here about how youre thinking about risk management, and the non QM portfolio and the outlook for credit losses, maybe more generally I mean, obviously, the paydowns and had been faster.
And as rates are low and HPA is strong and so I'm curious what it says about the borrowers that haven't been able to refi, including the portion of which are still classify the seriously delinquent and what the resolution looks like.
And so.
Sure. Thanks, Thanks, Eric so when.
When we looked at the portfolio and.
And you said 60, plus is around 7 and change percent.
But 40% of those borrowers are making payments. So when we offer it up either forbearance or deferrals and borrowers are sort of still struggling and coming out of the pandemic instead of.
Bringing themselves current by making 1 lump sum payment, we put them on repayment plan.
So what that does is the.
Those borrowers really will become current over the next 6 to 12 months as they make their as they follow through on their repayment plan because it takes some time their delinquency status doesn't really catch up until the end of that plan.
And we're showing the.
A higher level of delinquency now, but in actuality like the.
When you think about what's paying versus what's not and it's something like <unk>.
And 3% to 4% that's not Tang.
And Eric I would also point out on page 11, we show that the the weighted average LTV of that non QM portfolio is 63, 6% and thats.
Based on origination so given what housing prices have done the obviously the mark to market LTV is.
Probably considerably lower at this point, so I think that's probably the best risk mitigate right. There is the LTV, but as Brian said.
If we put borrowers on repayment plans and it takes 12 months for them to catch up they're going to show as delinquent until they've completely caught up.
Okay.
And then a follow up on Lima, 1 I think you guys said last quarter, maybe you reiterated today.
That's around $1 billion.
And to the Onboarding over the next year and you'd maybe look to capitalize that with around 200 of $300 million.
And so I'm curious if your expectations there have changed and I think you also noted that there is some new financing lines that youre looking into sort of curious with the structure and cost of that funding is expected to look like.
Yes.
Yes.
And that expectation and.
And that Hasnt changed I mean, I think Lima as Craig said in his comments. They are on track to do $1.3 billion. This year. So as you think of an annual run rate.
The necessarily have the cash capacity to do $1.3 billion and we think they are very well set up to grow beyond that so we're kind of excited about that and.
And that expectation has not changed.
And look I mean, yes, we are.
And we're working of areas.
The financing initiatives and as you also know we have securitized the single family of rest of the loans earlier. This year. So net type of origination that comes out of the legal right to roll into the securitization.
And we expect to do another 1 of those.
And the fourth quarter of this year.
And it relates to the fix and flip loans I think will happen over time and that will have a combination of warehouse and seeing which you already have in place as well as look into and look to issue our own revolving securitization structure structure to finance some of those assets.
And Thats, where some of the synergies comes in where we're MFA can use our expertise and the capital markets.
To more efficiently finance the.
The fix and flip.
Loans over time as it relates to costs and financing costs.
You can broadly say on fix and flip loans and probably anywhere from mid to high 2% low 3%.
And depending on if youre on the warehouse line or the securitization and that kind of.
Seems to be what we're seeing.
We'll be here that youre looking into the securitization for those loans.
1 more from me I guess I'm surprised to see of big delinquent pipeline for the fix and flip.
Because the HBA has just been so strong.
And there was this feels like there's clear incentives for investors to get the property on the market and.
I'm, just hoping for some color around potentially clearing and that pipeline.
In order to be able to focus really on the product that's coming in from the oil and going forward.
Sure Yeah as I said in my prepared remarks.
Some of these these things relate to the imbalance of difference between the fact that delinquent loans.
Opposite to the 30 year mortgages.
The outstanding longer and the fixed line space as opposed to performing loans, because performing loans and average.
And the life span of 6 to 12 months and.
And the delinquent loans net carrying today, they may actually be from 2018 and 2019 of instances.
Opposed to most of the performing loans and have already paid off and so as our purchase activity was somewhat limited.
And last year and net.
We haven't sized simple prepayments and the portfolio over the last 9 to 12 months.
The percentage increase simply because.
Our portfolio is smaller but more importantly over the last 6 to 9 months, we have seen and each quarter as delinquencies decline and in fact, the 60 plus day of UCP has come down by.
And by over $60 million over the over the last.
3 quarters and.
So what we're really seeing is that.
So there were some delays in getting the properties because of the foreclosure moratorium and delays last last year.
But on the resolutions that we've had both payoffs out of 60, plus the net remember correctly I think 25.
And paid off and full of out of 60, plus and the last quarter. So those would be owners that said, okay, and so much equity and the property and need to figure out how to how do we get it.
And so and the other day is the.
<unk> that we have foreclosed on and then liquidated our losses to the principal had been de minimus. So from that perspective, we feel pretty positive.
Our progress and we continue to reduce that that population over time with the really positive outcomes and again the key is home prices as Craig pointed out the right thing at over 15%.
Annually and so from that perspective, it supports obviously, all collateral and tours of the base.
Base value.
Okay.
And.
And does that conclude the conference Eric.
Okay.
Yes, okay. Okay.
Thank you very much and.
And thank everyone.
Questions operator.
And I'm sorry, if there are questions you can hit 1 zero.
Okay.
And at this time I'm showing no further questions and thank you. Please continue.
Okay. Thank you so I want to thank everyone for your interest and MFA financial and we look forward to our next update when we announce third quarter results in November.
Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service you may now disconnect.