Q3 2021 MFA Financial Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the MFA Financial Inc. Third quarter earnings Conference call.
At this time all lines are in a listen only mode. Later, we'll conduct a question and answer session. If you have a question at any time you make you up by pressing one and then zero. Once again, if you have a question or comment you can make it up by pressing one and then zero.
If you need assistance during the call you May Press Star and then zero and an operator will assist you offline and as a reminder, today's conference call is being recorded.
Now I'd like to turn the conference over to Mr. House Fords. Please go ahead.
Thank you operator, and good morning, everyone. The information discussed on this conference call today may contain or refer to forward looking statements regarding MFA financial Inc, which reflect management's beliefs expectations and assumptions as to Mfa's future performance and operations when used statements that are not historical in nature, including those.
Words, 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.
<unk> those described in Mfa's 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 in any forward looking.
Statements. It makes for additional information regarding Mfa's use of forward looking statements. Please see the relevant disclosure in the press release announcing Mfa's third quarter 2021 financial results. Thank you for your time I would now like to turn the call over to Mfa's, CEO and President Craig Knutson.
Thank you Hal.
Good morning, everyone I'd like to thank you for your interest in and welcome you to MFA Financial's third quarter 2021 financial results webcast also with me today are Steve <unk>, our CFO <unk> Christiansen and Brian Wilson, our co chief investment officers and other members of senior management.
The third quarter was a transformational quarter for MSA and as we sit here today, we are excited about our company and enthusiastic about our future. We continue to execute on our strategy to grow our portfolio and reduce and term out liabilities, our third quarter financial results featured strong earnings.
And book value growth on the credit side continued strong housing trends have bolstered the value of the underlying assets securing the mortgages, we own thus lowering 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.
Yes.
MFA his tireless efforts to find attractive new investments were also rewarded in the third quarter as record asset acquisitions.
<unk> run off and lead to portfolio growth of $1 5 billion.
Please turn to page four.
We reported GAAP earnings of <unk> 28 per share for the third quarter, largely driven by gains of $43 9 million or <unk> 10 per share related to our acquisition of Lima one.
These gains resulted from the difference between the fair value of our Lima, one purchase relative to our basis and our previous investments in both common equity and preferred equity of Lima, one both of which were impaired early on in the pandemic.
Our net interest income from our loan portfolio increased by 15% over the second quarter to 55 million from $48 million.
GAAP book value was $4 82.
Up 17, 437% from June 30, and economic book value was five who was $5 27.
Up 15, <unk> or two 9% from June 30.
Economic return was also strong for the quarter, five 8% GAAP and four 9% economic book value, our leverage ticked up slightly over the quarter to $2 two to one versus one eight to one.
At June 30, and we paid a tencent dividend to shareholders on October 29.
Please turn to page five.
We acquired $2 billion of loans in the third quarter, the highest quarterly loan purchase volume in our history and we grew our loan portfolio by $1 5 billion to $7 billion.
These purchases included $820 million of agency eligible investor loan.
Okay.
Sorry about that so these loan purchases included $840 million of agency eligible investor loans and $485 million.
A business purpose loans and.
In fairness, it's likely their purchases of agency eligible investor loans will taper somewhat in future quarters, given the recent removal of the cap on GSE investor loan purchases. The business purpose loan acquisitions included approximately $170 million of loans that were on Lima one's balance sheet at July one.
But as good motor will discuss shortly we move one's origination volume continues to grow.
And their October production was the highest month ever.
So while $1 5 billion of portfolio growth was an extraordinary quarter. We believe that we are well positioned with our originator partners to continue to grow our portfolio.
Our net interest income increased versus Q2 by 5% to $61 8 million we.
We continue to make excellent progress and liquidating Oreo properties as we capitalized on strong housing trends and for borrowers still negatively impacted by Covid. We can offer modifications <unk> repayment plans to allow them to stay in their homes restore their payment status to current and retain their equity in their homes.
Please turn to page six.
This slide illustrates the components of our investment portfolio and also the nature of our asset based financings the increase of approximately $1 billion in mark to market financing versus last quarter is primarily related to our agency eligible investor loans, which are financed with traditional repo as.
Bridge to securitization.
Please turn to page seven.
We closed the Lima, one acquisition on July one thanks to a lot of hard work both at MSA and at Lima, one despite the normal challenges associated with the corporate acquisition. We moved one did not Miss a beat in the third quarter as they originated over $400 million of loans during the quarter we have.
An excellent relationship with Jeff Tennyson and his team at Lima, one having worked closely with them for over four years now.
As many of you probably know there've been two recent announcements of acquisitions of similarly large business purpose lenders, we are admittedly biased, but we strongly believe that we bought the best lender in this space and we're excited to welcome the Lima, one team to the MSA family. We're confident that we can provide lima with the <unk>.
Resources to continue to grow and accelerate their business. There are no doubt efficiencies that we can cultivate over time to lower cost and to that point, we've already taken steps to reduce Lima as interest expenses.
<unk> will review some of the accounting aspects of this transaction shortly.
Please turn to page eight.
We continued to execute on our securitization strategy in the third quarter pricing our fifth non QM deal in August as luck would have it we priced this deal with yields were at their lowest levels in the quarter subsequent to quarter end, we priced our first agency eligible investor securitization in October.
<unk>, we structured 312 million bonds, and we retain a 5% vertical slice of the deal.
Please turn to page nine.
Finally, you may have noticed that we've added a corporate responsibility section to our website environmental social and governance issues have never been as prevalent as they are today and the focus on ESG and investment decisions is real and growing.
MFA has been committed to these principles for years, but we have been remiss and communicating our endeavors and policies to support. These principles publicly we will always continue to improve our efforts, but we are proud to finally communicate our substantial progress to date.
And I will now turn the call over to Steve yard to talk about additional details of our financial results.
Thank you Craig.
Please turn to slide 10 for an overview of our third quarter 2021 financial results.
Craig has already noted MFA delivered strong results for the quarter that were driven by record quarterly loan portfolio growth and certain purchase accounting adjustments related to the Lima on acquisition as well as the inclusion of Lima on earnings.
MFA has consolidated result.
Before discussing the core portfolio results in more detail I'd like to take a minute to discuss the impact of Lima loan purchase accounting on our income statement for the third quarter as well as on that quarter end balance sheet.
Firstly earnings include gains totaling $43 $9 million that relate to the Lima, one purchase transaction.
This includes the following.
$38 9 million gain arising from revaluing, our previously held investment of approximately 43% of Lima one's common equity.
GAAP purchase accounting requires that the previously held interest in <unk>.
Adjusted at closing to the fair value implied by the current transaction.
We impaired the value of that prior investment by $21 million back in March of 2020, and valuations of mortgage originators were highly uncertain.
Sequentially, the $38 9 million gain includes the reversal of prior impairment charge, while the remaining $18 million represents the incremental adjustment to reflect the prior investment at fair value implied by the car transaction.
An additional gain was recorded as Lima repaid its outstanding preferred equity and full of which MFA held roughly half.
The gain recorded reflects a $5 million impairment reversal.
That impairment was also initially recorded in March 2020.
Secondly, under the required GAAP purchase accounting to consolidate Lima one.
<unk> balance sheet, we recorded $28 million of intangible assets and $61 6 million of residual goodwill.
Intangible assets include the value allocated to customer relationships. The Lima, one brand name and internally developed technology.
These assets are amortized over the estimated useful lives with $3 3 million of amortization expense recorded this quarter.
The residual goodwill asset represents the difference between the purchase price paid to acquire <unk> and the fair value of net assets acquired including the intangible assets.
Goodwill is not amortized under current GAAP, but is subject to periodic impairment testing.
Further detail on the purchase accounting for Lima, one is provided in our 10-Q, which we expect to follow at it today.
Turning now to the core components of our Q3 2021 results. The key items to highlight are as follows.
Net interest income of $61 8 million was $2 8 million higher or 5% higher sequentially.
As Craig noted residential whole loan net interest income again increased this quarter by 15% primarily due to impressive.
Portfolio growth and the ongoing impact of securitization to lower the cost of financing.
Our net interest spread was essentially flat to last quarter to nine 8%.
Okay.
The seasonal allowance on a carrying value loans decreased for the six quarter in a row and at September 30 is $44 1 million down from $54 3 million at June 30.
A decrease reflects continued run off of the carrying value loan portfolio and adjustments to macroeconomic and loan prepayment speed assumptions used in our credit loss modeling.
This reversal to a seasonal reserves positively impacted net income for the quarter by $9 7 million.
Actual charge off experience continues to remain very modest with approximately $2 1 million of net charge offs taken in the nine month period ended September 32021.
Pricing on loans held at fair value and was higher than the end of the second quarter, particularly on purchased nonperforming loans and business purpose loans.
This primarily drove the net gains recorded a 21 8 million.
Approximately $11 3 million of this amount relates to business purpose loans originated at par the Lima, one during the third quarter.
Because we elected fair value option on <unk> lines quarter, and they are mark to market based on estimated third party sale process.
In addition to the fair value gains on originated loans Lima. One also contributed $9 6 million of origination servicing and other fee income during the quarter, reflecting strong origination volumes. Good Mandel will discuss this in more detail shortly.
Finally, operating and other expenses, excluding the amortization of Lima, one intangible assets with $30 1 million for the quarter.
This includes approximately $10 3 million of expenses, primarily compensation related at Lima one.
MFA only G&A expenses this quarter.
Approximately $14 5 million.
Which is in line with that normal run rate.
Moving forward, we would expect that consolidated G&A expense to run at 20 at around $25 million per quarter absent significant changes in Lima, one origination volumes.
<unk>.
Other loan portfolio related costs, meaning does not related to Lima, one loan origination and servicing.
It to run at around $5 million to $7 million quarter.
That will fluctuate based on the level of loan acquisition activity.
Portfolio management expenses and costs incurred to the extent, we continue to favour securitization over warehouse financing.
And with that I will turn the call over to Brian.
Thank you Steve.
Turning to page 11.
Home prices showed continued strength over the quarter.
We saw prices increase and a year over year rate of 18%.
We have however seen the pace of month over month increases moderate a bit as the dramatic increase in home prices have had a slight impact on affordability.
All of the same fundamental factors remain at play such as low inventory demographic trends and historically low rates.
The unemployment rate is now down below 5% as economic activity continues to increase.
All of these factors combined with monetary and fiscal support continue to keep mortgage credit performance strong and should bode well for continued credit performance in the near term.
Turning to page 12.
Non QM origination volume remained elevated over the quarter and we were able to purchase almost $700 million of loans, which represents another significant quarter over quarter increase.
Prepayment speeds remain elevated over the quarter.
The three month average CPR for the portfolio was 39.
We executed on our fifth securitization in the third quarter, bringing the total amount of collateral securitized over $2 billion <unk>.
We expect to bring another securitization of non QM loans in the fourth quarter.
These securitizations continue to lower our financing costs and at the same time have provided additional stability to our borrowings.
Securitizations combined with non Mark to market term facility have resulted in approximately 50% of our non QM portfolio funded with non mark to market leverage at the end of the quarter.
We expect to continue to be a programmatic issuer securitization as it is currently the most efficient form of financing for our portfolio.
Turning to page 13.
The non QM portfolio has exhibited strong performance coming back from the uncertainty created by the onset of the pandemic.
We've seen steady improvement in delinquency percentages as our loss mitigation tactics employed has been effective.
We instituted a deferral program at the onset of the pandemic in an effort to help our borrowers manage through the crisis.
Currently.
Have a very small handful of non QM borrowers and forbearance for deferral plans.
For borrowers that did receive forbearance many of them are either current today or on a repayment plan to be current within one to two years' time.
In the third quarter, we saw a 60 plus day delinquency rates improved by two 5%.
And third day delinquencies dropped by 3%.
In addition, approximately 30% of those delinquent loans made a payment in the most recent month.
As the economic recovery continues we expect our portfolio's credit performance 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 for their debt service will sell their home in order to get the return on their equity.
Turning to page 14.
In September.
<unk>, the FHFA and treasuries suspended the 7% cap on investor loan purchases for Fannie Mae and Freddie Mac for at least one year.
We took advantage of the opportunity.
Over the quarter acquiring over $2 billion or acquiring over $1 billion in loans. Since we started purchasing these loans in the second quarter from our existing originator relationships at attractive prices.
This new announcement limits the opportunity size for the time being but could arise again in the future.
We executed on our first securitization of this collateral.
Subsequent to quarter end and expect to execute another before the end of the year.
Yes.
This is another example of our ability to adapt to an ever changing environment and a testament to our strong originator relationships and a competitive environment.
Turning to page 15.
Our RTL portfolio of approximately $700 million continues to perform well.
81% of our portfolio remains less than 60 days delinquent.
Although the percentage of the portfolio is 60 days delinquent status was 19% almost 30% of those borrowers continue to make payments.
Prepay speeds in the third quarter continued to be elevated in a three month CPR of 17.
More and more of our borrowers are gaining equity with the increase in home prices and are taking advantage of the low interest rate environment.
We have a small amount of borrowers still receiving COVID-19 assistance and believe the impact from Covid will be de minimis on our RPM portfolio going forward.
Turning to page 16.
Our asset management team continues to push performance of our NPL portfolio.
<unk> has worked in concert with our servicing partners to maximize outcomes on our portfolio.
This slide shows the outcomes for loans that were purchased prior to the year ended 2020.
38% of loans that were delinquent at purchase either performing or paid in full.
48% have either liquidated or oreo to be liquidated.
Our sales of Oreo properties have continued as at an accelerated pace at advantageous prices.
Over the quarter, we sold almost three times as many properties as the number of loans, we converted to Oreo.
14% are still in nonperforming status.
Our modifications have been effective is almost three quarters are underperforming or have paid in full.
We're 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 to <unk> to walk you through our business purpose loans.
Thanks, Bryan turning to page 17.
We closed our acquisition of Lima won a leading nationwide business purpose originator at the beginning of the quarter.
This acquisition solidifies <unk> position as a leading capital provider to the BPL space, which we believe offer some of the most attractive opportunities to deploy capital in the residential mortgage space.
Our team has wasted no time utilizing our collective strengths to take the business to new Heights Lima.
Lima, one originated over $400 million of business purpose loans in the third quarter, a record quarter for the company and a 34% increase over second quarter origination levels.
We saw strong demand for all of Lima products and continued to experience the benefits of Lima diversified product offerings, which offer financing solution to residential real estate investors with short and long term investment strategies in the single family and small balance multifamily markets.
September origination of over $150 million was a record month for the company.
With that record was short lived as the fourth quarter is off to a strong start with October volumes setting a new record with originations of over $170 million.
One of the key benefits of this transaction is Lima, <unk> ability to provide MFA with a reliable flow of high quality high yielding assets.
Difficult to source in the marketplace.
When we announced the transaction in May we also mentioned that we believe that Lima has the potential to grow substantially beyond the run rate at the time of $1 2 billion annual origination.
We are already seeing that play out as we now expect full 2021 origination volume of between $1 4 billion to $1 5 billion in the third and fourth quarter volume suggest continued growth into 2022.
In addition to the benefit of adding assets to our balance sheet Lima, as a profitable company Lima.
Lima generated $10 6 million of net income from origination and servicing activities in the quarter, representing an annualized return on allocated equity of approximately 30%.
We have been very impressed by Lima operational efficiency as they are consistently closed over 450 loan units in the last few months.
Up from about 300 units per month in the first quarter.
We believe our team's experience with closing large volume of loans and scaling up operational capacity quickly.
Is up nicely for future growth.
We added $600 million of BPL financing capacity in the quarter in the third quarter as we closed on two new financing facilities.
These facilities allow for financing of a broad range of BPL assets and will support the continued growth of our BPL strategy.
And finally, the increased rental loan acquisition volume from the Lima, One acquisition has accelerated our timeline for our next business purpose rental loan securitization, which we now expect to close in the fourth quarter.
Turning to page 18.
Jamie will discuss the fix and flip portfolio.
The portfolio grew by over $160 million or 37% in the quarter purchase activity picked up significantly as we closed on the Lima acquisition, including loans on their balance sheet and benefited from very strong origination activity.
In total we purchased approximately $230 million <unk> with $350 million Max loan amount in the quarter and have added over 95 million maximum loan amount so far in the fourth quarter.
As a reminder, fixed and flip launched financed the acquisition rehabilitation and construction of homes typically a certain amount of loan is held back in the form of a construction holdback, which explains the difference between <unk> on day, one and the Max loan Amman, which represents a fully funded loan at the completion of projects.
The fixed and flip portfolio delivered strong income in the third quarter with an average portfolio yield of 711% in the quarter, a 667 basis points increase from the second quarter.
The housing market remains extremely strong with record low mortgage rates and low levels of inventory supporting annual home price appreciation in excess of 15%.
In addition, we continued 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 on our delinquent loans.
Yeah.
60, plus day delinquent loans continue to decline and dropped $13 million or about 10% to $107 million at the end of the third quarter and we continue to see a solid amount of loans pay off in four out of 60 plus.
When loans pay off in full from serious delinquency, we often collect default interest extension fees and other fees to pay off.
For loans, where there is meaningful equity in the property. These can add up.
Since inception, we have collected approximately $5 6 million and these types of fees across our fixed portfolio.
60, plus day delinquency as a percentage of <unk> declined 10% to 18% and remained somewhat elevated.
One thing to note here is at Lima originated fix and flip loans held by MSA have approximately 5% 60 day delinquency speaking to the quality of origination and servicing.
Almost all of the 60 plus day delinquent loans were originated prior to March of 2020 and are simply working their way through the appropriate loss mitigation activities.
Due to the short term nature of fix and flip loans is expected to pay off in about six to 12 months delinquent loans can be outstanding for longer than performing loans due to the time it takes to complete foreclosure.
Keep in mind that we have acquired over $2 $2 billion of fix and flip loans and have had over $1 6 billion payoff in full as.
As our purchase activity was limited last year in performing loans paid off and delinquency percentage increased as one would naturally expect as our portfolio shrank.
As we now grow our portfolio again and continue to have positive outcomes from sheer hosted delinquent loans, we expect both the dollar amount as well as percentage delinquency to continue to decline going forward.
Turning to page 19.
Our single family rental loan portfolio continues to deliver attractive yields and strong credit performance.
The portfolio yield has remained steady in the mid to high 5% range post Covid and was 576% in the second quarter.
Underlying credit trends remained solid and 60 plus day delinquency declined 140 basis points to three 5% at the end of the third quarter.
Purchase activity more than doubled from the second quarter as we acquired over $250 million of single family rental launched in the quarter.
A record quarterly acquisition volume.
The <unk> of our portfolio grew by 39% to $717 million at the end of the third quarter.
Acquisition activities have remained robust in the fourth quarter as we've already added over $70 million in the month of October.
The acquisition of Lima, <unk> has significantly boosted our ability to source single family rental loans, and we believe and we will be able to continue to grow our single family rental portfolio in the near future.
Approximately 50% of our single family rental portfolio is financed with non mark to market financing and slightly over one third through securitizations.
We price our first single family rental securitization in the first quarter of 2021 and expect to close another one in the fourth quarter.
We expect to programmatically execute single family rental securitization to efficiently finance our portfolio.
And with that I will turn the call over to Craig for some final comments.
Thank you good monitor.
We are pleased with the results of the third quarter of 2021, and even more excited about the future at MFA.
Our investment initiatives are picking up steam and contributing to portfolio growth, we're continuing to execute our strategic plan to securitize, our assets and term out durable financing. We move one is firing on all cylinders and the strength of the housing industry is obvious positive implications for our mortgage credit investments.
Cynthia Please open up the line for questions.
Certainly and ladies and gentlemen, if you wish to ask a question once again press, one and then zero.
We are here Tom indicated that you had been placed in Q you may remove yourself from Keybanc. Your question is answered by pressing the same one.
Once again.
And thank you all for your questions or comments.
And our first question will come from the line of Steve.
Delaney with JMP Securities your.
Your line is open.
And Steve check you mute button your line is open <unk>.
My apologies thanks, everyone.
I was on mute congratulations on not only a great quarter, but the integration of Lima.
And exciting future for you guys, where you set up now.
My question on that and to Craig and I guess, Steve yard.
Obviously with an acquisition okay.
Got accounting purchase accounting adjustment so it makes things a little.
Little complex and then on an ongoing basis of course, you're always going to have fair value I was just curious if.
Youre going to consolidate Lima, one okay.
But.
I assume it's structured as a separate Trs and should we expect youre going to try to take a lot of loans, but do they have the ability to sell loans to third parties beyond originate and sell beyond your balance sheet capability. So that stand alone you could see.
Them as a.
As a profit center somewhat on a standalone basis in terms of gain on sale origination and servicing fees.
Thanks, Thanks, David Steve yard.
Scott and maybe Craig can add comments as well.
Just in terms of the accounting yes.
Once fully consolidated on our balance sheet now.
And you'll note in our 10-Q that we release slate and today, we're not sort of showing it as a separate segment, it's fully integrated into <unk> operations.
But you're right, there's some potential for in the future for us to show it as a separate segment depending on how we when we get through this initial period of integration and we optimize the financing arrangements and the capital that we allocate to Lima.
There is some potential for that.
Sure I think initially in this quarter.
Taken in almost all of the production of Lima, and this in this quarter.
And that's it's been obviously as you say the portfolio growth.
<unk> been able to enjoy.
I'll, let <unk> speak to the feature more specifically, but it doesn't have to be that way in the future going forward. So.
Okay. Thanks.
So Steven answer to your question, Yes, we most certainly has the ability to to sell loans I think at this point I.
I think we are.
Happy taking their production on our on our balance sheet.
But that could change in the future in terms of of how we presented right.
Because they are consolidated the loans and the Best example is the rental loans. So the rental loans, we used to pay a significant premium for us. So we probably pay as much as 104 or even 105 for the rental loans and Lima and book a gain on sale because they are consolidated we actually we actually buy those loans at par now, but because we elected fair value.
Denmark.
Value of those loans to the market value. So if they're worth 105, they get back to 105. So we preserve that origination economics. If you will that we used to have it used to be in the form of gain on sale now it comes in through other income before our fair value Mark, but we do we do try to preserve those economics.
And as with good under said, we made a significant contribution to our net income of over $10 million in.
In the third quarter so.
It's a profitable operation, yes, some of the geography changes a little bit.
But suffice to say, it's not just a source of loans as a source of income as well.
Let me reiterate yes, so just to reiterate <unk> comment there in my comments I noted that we have.
The $21 8 million of fair value gains that we had in the third quarter about $11 3 million of that was these fair value marks on originated lines at Lima, one really lock them from their power origination to the fair value at quarter end.
And Steve I know taxes as the entire differ.
Different animals.
But is it possible that as we go forward just in terms of.
REIT taxable income and Trs income is it possible that over as we move forward that there may be some residual retained.
After tax income at the Lima, one trs level that could help boost book value rather than all earnings having to be paid out as dividends to shareholders.
Yes, that's a great point, having suddenly with the tariff structure that has the ability to retain earnings in a trs which could potentially.
<unk> book value, it's very complicated, though it depends a lot on the way you're structured <unk> capitalized.
And and the like and one of the things you have to manage in terms of managing a trs as.
There are certain REIT tax tests that limit the amount.
Capital you can have in a Trs and sometimes you have to make.
<unk> added new Trs to manage the <unk>.
The asset test at the right level and as you do that those distributions cause income to be generated at the REIT level. So it's it is certainly possible.
To grow book value through retaining earnings in a Trs, but I'll, just say subject to managing the overall REIT tax tests.
Understood helpful. Thank you for the comments.
Thanks, Steve.
Our next question will come from the line of Stephen laws with Raymond James.
One moment.
And your line is open.
Good morning.
Congrats on a very nice quarter and a lot of progress you guys have made.
This quarter.
Can you talk about extended.
Can you talk about where youre seeing the best opportunities kind of across these business segments. I mean, it seems like a lot of strength I know you did mention that the agency eligible.
With the change in caps or caps been lifted to taper off some but.
Where are you seeing the best most attractive Roe as.
As you look to.
No.
Put money out the door here in the coming quarters.
Sure. Thanks for the question Stephen.
Clearly on the business purpose side.
<unk> went through some of the yields there.
We see fantastic ROE on on really the entire business purpose sector.
Non QM as well I mean, that's also been a big horse for US we've done five securitizations now of non QM loans. So we're a known securitize a known name in the marketplace. So I think we've got a good machine set up there as well.
As you said on the agency.
Agency eligible investor loans with the with the cap being lifted again it remains to be seen.
Where that opportunity is.
But I will say that that opportunity existed before that cap went into place as well so it really depends on.
It really depends on where the loans trade, where the securitization execution gets done.
That could be an opportunity going forward.
We don't necessarily expect that that's maybe are our highest opportunity right now.
Appreciate the color there.
That's on the Oreo.
$7 million of gains I think through the 151 sales there and I think the remaining Oreo balance just shy of $200 million.
Talk about timing.
You think about the.
The ability or opportunity to continue to sell down those Oreo assets.
The housing market has certainly been a big tailwind for Oreo is.
As Ed Fay, who runs Fay servicing we'll always tell you right you are.
Oreo properties are generally not your winners, but I think.
Our team has done a fantastic job of taking advantage of strong real estate prices to continue to liquidate those and one of the places that that Oreo.
Holdings.
Into become losses is through.
On Reimbursable expenses right. So it's the it's the taxes and insurance that you pay on the property, while you're trying to maybe get it fixed up to sell and I think given what's happened with home prices.
Most of those advances or many of those advances are now recoverable. So I think thats part of how you see.
Some of the some of the profit there as is.
Is it just taken advantage of strong housing prices. So we will continue to to try to move those out.
As best we can and take advantage of this market.
Great and switching to financing cost table in the press release, it really lays it out pretty clearly across the segments, but you've made a really produced it without a dramatic shift in yield driven.
So how much work is there how much more opportunity to continue to reduce the financing cost in different segments.
Any additional legacy transactions, you can collapse and if so how much how much opportunity is there to do that.
So I don't know that we have all that much of legacy.
Re securitization, we did a couple of those in 2021.
But I think.
On the business purpose side.
<unk> talked about and on the non QM side.
Still an opportunity to securitize now we've seen short rates tick up a little bit since the end of September. The two year got went from basically 25 basis points to 50 basis points, so that that does cut into the.
The savings and securitization the securitization market ebbs and flows as well I think right right now there's there's a lot of securitization activity and so spreads widened a little bit but spreads widen spreads tightened I think we view it as yes, its been a significant say.
Savings for much of this year, you can remember, we sold triple as at 1% or less than 1% yields.
And we knew that was great at the time, that's not necessarily the case today.
But I think the securitization still makes a lot of sense, even if those savings aren't as significant as they used to be because it does turn out that financing again, it's it's nonrecourse non mark to market. So it's that durable financing that we're looking for.
So I think we'll continue to do it but.
The savings may not be as significant as they were on some of the earlier transactions this year.
Well as you mentioned a lot of positive characteristics of that type of financing so.
Thanks for the comments this morning, Craig I have a good weekend.
Thank you Steven you too thank you.
Next we'll go to the line of Bose, George with <unk> and your line is open.
Hey, guys. This is actually Mike Smith on for Bose, Congrats on a really strong quarter. Just another question around thanks, Mike It sounds like it sounds like the economics on the larger purchasing from Lima one.
A bit better I'm, just wondering if there's any appetite for another strategic transaction, maybe in the non QM or different area just to continue.
Sure.
Your lead sourcing channels.
Sure. Thanks for the question, Mike I guess.
The short answer is we always take the phone calls.
I think.
We're really happy with our Lima.
One transaction you know that in the past, we've we've taken minority equity stake interests in originators that was sort of the strategic.
Approach that we had two originators in the case of Lima, one that turned into a corporate acquisition. So the possibility certainly exists.
But these fees transactions are.
They're pretty complicated I think in the case of Lima, one that was a really compelling transaction for us.
Like I say, we take all the phone calls.
Yes.
Great great. Thanks, a lot for taking the question.
Sure.
Thank you.
And at this time I'm showing no further questions in queue.
And actually we do have a question now from the line of.
Eric Hagen with BTG.
Your line is open.
Hi, Thanks, good morning.
A couple of questions first one is hey, good morning couple of questions. Here can you can you borrow against the unrealized fair value Mark that you have in the loans that are held at carrying value.
And then typically MSA is managed and agency portfolio as a liquidity offset to the credit risk that you're taking is there an intention to do that going forward.
Okay.
So on the ones that are carrying value.
Depending on where they are on a mark to market line or a non mark to market line.
Yes.
Certainly.
Capacity to have additional borrowing capacity as value of those assets appreciate it.
Right.
Any sort of traditional financing that we do right away from securitization is based on the value of the asset so the.
The lender doesn't care, what the carrying value as they care what the market value was right.
So that's that's really the only relevant number and in terms of agencies.
Yes, we've owned agencies in the past.
And at some point in the future we may own agencies again, I think at least as we look at it right now we see better opportunities in credit.
Most of the investments that we're making are probably shorter in terms of duration than we than what we'd see in the agency market, but.
Just because we don't own agencies doesn't mean, we're not it doesn't mean that we're allergic to them.
Also just keep them from a liquidity perspective, as you alluded to that I mean, our leverage is very low around two times and we have we have tremendous amount of cash to our balance sheet. So if you think about from a liquidity perspective, that's really not why we would we don't agencies at this time and so as Craig pointed out.
Because we are funding a lot better opportunities away from that it doesn't seem to be a lot of pointing on.
Thanks, Yeah. The latter half of what you said I think addressed really what I was getting at which is the liquidity rather than.
Sure.
The investment opportunity per se.
But it feels like the risk adjusted opportunity Youre getting in the software, which is taking credit risk at least ties back to some.
A form of liquidity.
Other than just borrowing against the value of <unk>.
Although somewhat illiquid credit asset.
Yeah.
Okay.
Maybe two on the fix and flip you guys noted a couple of other transactions in the space recently I think those originators typically focus on higher balance fixed and flips like high end style homes.
In the east and West Coast can you guys sort of classify the types of loans that Lima, one is doing and how you guys see yourselves as competitive in that.
Kind of zone in the markets.
Yes.
Great point, yes.
Lima has historically been fairly diversified in their approach to originating in the BPL space and they really are all across the country, but they don't really have a heavy presence in California, where you have larger loan balances and.
So on average the loan sizes for Lima, 6% flip were probably around three.
$300000 as opposed to some of these other companies that you referred to which are substantially higher and so one of the benefits. We see from Lima is that they have incredibly high operational capacity to produce a large number of loans in a very diversified borrowing base and so what that means is that at least from our perspective.
The way, we see it it's a lot easier to scale up Lima by either increasing number of units or go after higher loan balances to get more volume as opposed to on the opposite side, if youre targeting hi, hi.
Higher loan balances and a small number of clients it feels harder to scale up from there. So we feel pretty good about Lima, and where they where they sit.
It provides a tremendous amount of opportunity to scale it up in various ways.
Got it thank you very much.
Thanks, Eric.
And at this time I'm showing no further questions in queue. Please continue.
Alright. Thank you everyone for your interest in MFA financial like to wish everyone happy holidays, and we'll look forward to our next update when we announce fourth quarter results in February.
Thank you, 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.