MFA's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: MFA Financial, (MFA)

MFA Financial, Inc. (NYSE:MFA)

Q1 2014 Earnings Conference Call

May 01, 2014 10:00 AM ET

Executives

Danielle Rosatelli – Investor Relations

William S. Gorin – Chief Executive Officer

Gudmundur Kristjansson – Senior Vice President

Craig L. Knutson – President & Chief Operating Officer

Stephen D. Yarad – Chief Financial Officer

Analysts

Arren Cyganovich – Evercore Partners

Steve C. DeLaney – JMP Securities LLC

Douglas M. Harter – Credit Suisse Securities LLC

Joel Houck – Wells Fargo Securities LLC

Henry J. Coffey – Sterne, Agee & Leach, Inc.

Dan L. Furtado – Jefferies LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial Inc., First Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Danielle Rosatelli. Please go ahead.

Danielle Rosatelli

Good morning. 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 operation.

When used, statements that are not historical in nature, including those containing words such as will, believe, expect, anticipate, estimate, plan, continue, intend, should, could, would, may, 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 MFA’s Annual Report on Form 10-K for the year ended December 31, 2013; 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 first quarter 2014 financial results.

This discussion today also contains non-GAAP financial measures. Information relating to comparable GAAP financial measures maybe found in the first quarter of 2014 earnings release and earnings presentation slides, each of which has been filed with the SEC and posted on our website at mfafinancial.com We encourage you to review that information in conjunction with today’s discussion. Thank you for your time.

I would now like to turn this call over to Bill Gorin, MFA’s Chief Executive Officer.

William S. Gorin

Thanks a lot Danielle. I would like to welcome everyone to the MFA’s first quarter 2014 financial results webcast. With me today are Craig Knutson, MFA’s President and Chief Operating Officer, Gudmundur Kristjansson, Senior Vice President, Steve Yarad, CFO and other members of Senior Management.

Turning to Slide 3, Danielle? Great, so on Slide 3, you could see that in the investment environment characterized by very low short-term interest rates, MFA continues to generate consistent and attractive results. In the first quarter, we’ve generated net income of $72.4 million or $.0.20 per common share. Dividends per share was also $0.20 consistent with the prior quarter.

Book value per common share increased approximately 2% to $8.20 as of March 31, from $8.06 as of December 31, 2013. Based on continued improvements in the Loan-To-Value Ratio of the loans underlying our Non-Agency MBS portfolio, and other factors. In the first quarter, we again transferred a sizable amount, approximately $36 million from credit reserve to accretable discount.

MFA remains positioned for a more flexible monetary policy, but in federal reserve based on measures of labor markets, core inflation and other incoming economic data. By pursuing our strategy of investing across the residential mortgage asset universe, we continue to find opportunities to generate yields without increasing interest rate exposure.

In the quarter, our yield on interest earning assets increased, while our estimated effective duration, a measure of our interest rate sensitivity decreased. It’s important to remember that equity sensitivity, the changes in interest rates is impacted by both duration and the leverage realized, and we continue to maintain the leverage ratio of approximately three times.

Obviously, asset selection is what drives both our income and our interest rate sensitivity. But I’d like to point out three attributes of our assets, which I believe set us apart. First, we hold $5.7 billion base amount of Non-Agency MBS, with an average amortized costs of approximately 74% at par. We have a credit reserve of $ 1 billion against these assets, and these assets generated a loss adjusted yield of 7.8% in the first quarter.

Second, we continue to maintain our historical preference for adjustable rate and hybrid MBS. Two thirds of all our MBS are adjustable or hybrid, but only one third fixed rate. And third, within the fixed rate universe, none of our Agency MBS of 30 years, they’re all adjustable hybrid or the shorter 15 year fixed rate.

Turn to the next slide please. On Slide 4, you could see that, despite change in interest rates and prepayments fees, our key metrics have remained generally consistent. They’re generally consistent from the fourth quarter of last year to this quarter. And even going back to the first quarter of 2013, they’re fairly consistent with the positive trend, small positive trend, our yield on interest earning assets has gone up, and that interest rate spread has gone up, and our leverage ratio has gone down somewhat.

Turning to Slide 5, you see that book value increased in the quarter due primarily to depreciation of Non-Agency assets. Again, book value was $8.6 it’s now $8.20 that’s about a 2% increase in the quarter.

Now turning to Page 6, Gudmundur will give some more detail about the interest rate sensitivity of our assets and our hedging strategy.

Gudmundur Kristjansson

Thank you, Bill. On Slide 6, we show MFA’s net duration as well as the duration of our assets and hedging instruments. The top part of the table displays the duration of our Agency and Non-Agency assets broken down into buckets by coupon reset.

On March 31, we estimated that the duration of our assets was 2.1, the one half of the table shows the duration of our hedging instruments, which consists of interest rate swaps with maturities of up to. On March 31, we estimated the duration of our hedging instruments to be negative 3.6.

Finally, when we combine the duration of our assets hedging instruments, we estimate MFA’s net duration to be 0.83 as of March 31. Our net durations declined 70 basis points in the first quarter primarily because we added short and post-reset hybrid ARMs on the agency side as well as adding $200 million of on average six year swaps on the hedging side. MFA’s interest rate risk continues to be low as shown by a low duration, but in addition to that, extensive risk in our portfolio remains limited as two-thirds of our assets are adjustable rate mortgages or hybrid ARMs.

Now, I’ll turn the call back over to Bill who will discuss our asset allocation.

William S. Gorin

Thanks, Gudmundur. Turning to page 7, represent our assets, yields and spreads broken out into four categories: Agency MBS, Non-Agency MBS, new category here re-performing loan/non-performing loan MBS, and then cash and other.

In the quarter, we identified attractive investment opportunities and grew both our Agency and Non-Agency MBS holdings. As I mentioned, we grew another asset type RPL/NPL MBS which will break out here for the first time. This $200 million of RPL/NPL securities are just an example of the type of residential mortgage asset that fits very well into our investment strategy, when and if available advantageous prices. These RPL/NPL securities are unrated. There are senior most tranches backed by re-performing or non-performing residential mortgage loans, the 2005, 2006 and 2007 vintage.

The average subordination level on these securities is approximately 55%. So we are comfortable with the credit exposure. The coupon on the securities increased by 300 basis points if the asset has not been retired by the end of the third year, so we are comfortable with the interest rate exposure. In addition because these assets trade near par due to the subordination and three year reset, we’re comfortable utilizing debt to equity ratio just in excess of three types. So just an example of when the asset classes we’ve identified and we put $200 million to work in this as of this quarter. Returning to the final column, the total, you can again see that leverage, yield and spreads have remained fairly consistent and attractive in the quarter.

With that, I’d like to turn the presentation over to Craig to provide some details as to the improving housing metrics and how they are impacting MFA’s portfolio.

Craig L. Knutson

Thank you, Bill. On Slide 8, we continue to see improvement in the LTV’s underlying our Non-Agency portfolio. This is due primarily to both home price depreciation and also mortgage amortization. As a result, we again adjusted our future estimates of expected losses resulting in a $35.9 million transfer from credit reserve to accretable discount. And again this increase in accretable discount will increase the interest income prospectively over the remaining life of these Non-Agency MBS.

Turn to Slide 9, so more on LTVs. On the left hand side, I would call your attention to the green line. This is the LTV of the total portfolio. Again, you can see it decline from the beginning of 2012 from 105 to about 82 today. But it also points out if you look back just to a year ago March of 2013 that average LTV was about 95, so we’ve seen about 13 points of improvement in that LTV, just in the last 12 months.

On the right hand side, I would call your attention to two lines, first the grey line, these are the delinquent loans and these are the delinquent loans in the portfolio. The percentage of those with LTV is over 100%. Again if you look back a year to March of 2013, it was approximately 50% of those loans at LTVs greater than 100%. And the numbers declined to almost 25% of those loans.

The second line that I would call your attention to is the orange lines, so these are the current loans with LTVs greater than 100%. And the reason that we are focused on current loans with LTV is over 100% or these are what we would call the at-risk loans. So these are the loans that we might worry might default in the future because the borrowers are under water.

So if you look at the last year change there, last year current loans with LTV is greater than 100%, it was a little more than 35% that number is less than half of that now. It’s down close to 15%, so very good LTV improvements.

Finally on Slide 10, this is a breakdown of our non-delinquent, so these are the loans that are current. So as I just said the at-risk loans or the current loans that have high LTVs, and you can see over on the right hand side, we have fewer and fewer of these high LTV or at-risk current loans, less than $200 million of over 110%. Keep in mind also that these underlying loans are on average eight years seasons.

And again I would point to the left hand side here to the loans with LTVs less than 60% and between 61% and 80%. Those are all very refinance eligible. So LTV is below 80% assuming borrowers have good credit, they would be able to refinance these loans and again because of the significant discount that we paid for non-agency assets, any pre-payment at par is obviously a good thing.

Slide11, this is the transition rate. So this is the rate at which loans that are current – in the current period are transitioned to 60 days delinquent. And you can see after a peaking during the crisis in 2009, that number has continued to come down would back down now to basically levels where we saw transition rates in late 2007, 2008. So again, though a very good trend.

And finally Slide 12, so this shows this credit reserve that we talked about. And you can see on the right hand side that credit reserve is a little over $1 billion as Bill mentioned, which represents about 18% of the face amount. And then on the left hand side, our purchase price of 74%. So basically, we’ve purchased these assets at a dollar price of 74% and because we have credit reserve equal to 18% of the face, we are accreting that 74% to 82%. So we are assuming that we get back approximately $0.82 on the dollar on these securities.

And again at the very bottom, that purple section the accretable discount is about $400 million or about 8%. So that’s what we accrete into income. So whenever we move money from our credit reserve to accretable discount, credit reserve goes down, the accretable discount increases.

And with that I will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Arren Cyganovich with Evercore. Please go ahead.

Arren Cyganovich – Evercore Partners

Thanks. I was just curious on the Non-Agency CPRs that had come down, seeing that the LTVs have come down a lot in the portfolio, expected maybe the voluntary repayments where that prepayments would actually start coming through at a faster pace. What are your thoughts on that side of it?

William S. Gorin

I think we’ve seen prepayments across the board lower in the first quarter and this will be in the queue that comes later today, but the voluntary speeds – we show a CPR of about 12%. The voluntary is a little less than 8%. So the default rate in the quarter was 2.8% and the voluntary rate was 7.7%.

Arren Cyganovich – Evercore Partners

Okay. And then, I guess in terms of the reinvestment of your Non-Agency, what are you seeing in terms of new yields and what kind of leverage are you able to put on those new investments?

William S. Gorin

In legacy, is that what you’re referring to?

Arren Cyganovich – Evercore Partners

Yes, legacy Non-Agency?

William S. Gorin

Legacy Non-Agency, I would say depending on the asset and depending on the day they probably yield between 4.5% and 5%. We’ve actually seen our financing cost improve a little bit. We’ve actually seen some new players in the financing market. So haircuts range from, I would say, low of maybe 15% or 20% to high as 30% or so. So I think our overall leverage ratio is still less than two times. That’s not really by design. It’s more by accidents as assets depreciate. Our leverage numbers go down.

Arren Cyganovich – Evercore Partners

Okay. And then lastly, just a quick one on comp expense increase quarter-over-quarter and I guess overall operating expenses increase. What’s driving that? Is that more of a new run rate that we’re at from the first quarter?

Stephen D. Yarad

Thanks, Arren, this is Steve Yarad. I think to answer your question I’d like to make the following observations about SG&A. So as you noted, SG&A was a little higher in the first quarter. It was $10.4 million and that compares to $7.6 million for the fourth quarter of 2013 and about $8.5 million for the first quarter of 2013. And I think it’s important to note that in the fourth quarter SG&A was about $1 million lower because we made some adjustments to our incentive compensation accrual to reflect actual balances paid for 2013.

When you compare to the run rate for most of last year, it’s about $1.5 million higher and that’s primarily due to compensation and technology budgetary expenses in support of that residential asset and investment strategy.

I think the other comments I’d like to make, if you look at our compensation, G&A to equity ratio at the end of the first quarter, it’s running at about $1.3 million and we believe that’s the low end of our peer group that exclusively invest in Agency MBS. And the follow-up comment I’d make is that if you look at the run rate, the expenses for 2014, we think where we are and what anticipate for the rest of the year subject to any significant changes in our compensation accrual will be consistent with what we said in the first quarter.

Arren Cyganovich – Evercore Partners

Okay. Thank you.

Operator

Thank you. Our next question from the line of Steve DeLaney with JMP Securities. Please go ahead.

Steve C. DeLaney – JMP Securities LLC

Thanks. Good morning, everyone. I wanted to touch on this new asset class a little bit if I could. It looks like the $45 million of equity – you’re about 1.5% of equity and I’m just curious if internally you have sort of a target there assuming you can find suitable assets to purchase. How big could this bucket become?

William S. Gorin

Well, as I mentioned during the presentation, we like the asset depending upon price and when they’re available and actually we’re one of the larger buyers over the last 12 months of this asset class. So it’s not a huge asset class. It could grow and it’s highly depended on price, but, Steve, what’s important about is an example of where we can get paid to take an investment position in asset if not rated that we can understand the credit very well and we were not adding interest rate exposure. But if it was available to same terms in a larger side it’ll be a larger part of our portfolio.

Steve C. DeLaney – JMP Securities LLC

Got it. Yes, and it’s just an extension of your residential credit team that you’ve build that’s monitoring your legacy MBS. And looking at kind of the comparable return, I don’t want to beat it to that, but I think it might grow. I’m just trying to look at this asset relative to your legacy portfolio. And if we take your leverage figures and your spread figures, I’m getting sort of a gross ROE on the legacy MBS of about $11.3 million and the new asset class models out to about $10.8 million. So close slightly below in terms of ROE, but I’m curious how you view the new asset class, the duration profile and potential rate risk relative to the legacy MBS given how high the dollar prices have moved in the legacy portfolio?

William S. Gorin

Yes, Steve, you got that exactly right. The ROEs are comparable, but we do believe there’s a lot less interest rate exposure in this asset and that’s why we’ve allocated more to this asset and a little bit less to the Non-Agency growth and you have it exactly right. We think since the coupon steps up after three years, there is now lot of interest rate exposure in this asset and that’s why we’re comfortable, runs a little more leverage on this asset too.

Steve C. DeLaney – JMP Securities LLC

Okay, good. That’s helpful. Okay. And then lastly, I don’t want to beat this up too much, but we expected – book was great, up 2%, but we actually were thinking it might a little better. We saw ball prices up somewhere 1 to 2 points in the first quarter. And just curious if there is anything there that we might have missed or we need to think about it a little bit differently.

William S. Gorin

Great, good question. Well, I don’t know exactly what you’re doing, but I can tell you what we’re doing.

Steve C. DeLaney – JMP Securities LLC

That’s what I really want to know is what you’re doing.

William S. Gorin

First of all, and we’ve said this before, I just want to reinforce to everyone, that while we don’t say our assets are prime, we describe it and the terminology changes over time. At origination the average FICO score of the homeowners was 725. These loan balances were in excess of 400,000. They tend to be at the higher end of the credit quality. Right now they are priced in high 80s. So if some people might be compelling to us to say an ABX index or some other index, it might not be relevant, it might not be a completely good correlation between the value of our assets and some other index pointed out.

The only thing I do want to point out is our equity goes up by our OCI and our OCI, which is the other comprehensive income, basically is a measure of unrealized gains. So when you look at unrealized gains, you really have to look at two factors. One, what’s happening to the market value of the assets, which you could do on your own by looking at the right index. You also have to know what’s happening to the amortized cost basis. It’s a difference between the market value and the amortized cost basis, which is ending up in OCI. Because the Non-Agency yield is approximately 7.8% while our coupon yield is 5.2%, there is accretion because we paid a discount.

The costs basis moves upward because we are booking more income than the coupon the amortized cost moves up at somewhat, so you can’t just take the change in market value, the tax rate to change in comprehensive income and therefore the change in book value. I know that’s a long explanation, but hopefully that helps to answer the question.

Steve C. DeLaney – JMP Securities LLC

No, I think that does and I think the point – I think what we have to focus from your side is the fact that this yield is picking up as you transfer from credit reserve to accretable, we are just getting a bigger impact quarter-to-quarter from that cost basis I think than we maybe we were a year ago.

William S. Gorin

That’s exactly right, that’s what you – first time you’ve seen the trend of the amortized cost moving up, it move from 72 to 74 something. Steve.

Stephen D. Yarad

Yes.

William S. Gorin

So, exactly consistent.

Steve C. DeLaney – JMP Securities LLC

Thanks a lot for the comments, Bill.

William S. Gorin

Thank you.

Operator

Thank you. Our next question comes from the line of Douglas Harter with Credit Suisse. Please go ahead.

Douglas M. Harter – Credit Suisse Securities LLC

Thanks. I guess sort of sticking to that point Bill. Could you sort of contrast where the market value of your non-Agency is relative to the level of credit reserves you have against them.

William S. Gorin

Sure. Steve?

Stephen D. Yarad

So at the end of the quarter the average market value of the non-Agency, it’s in roughly 88.3, and I am not sure. Well, actually if you even look it on a gross basis and if you just turned – if you have the press release there on page four, you see the market value of the non-Agency is about $5.1 billion, and the credit reserve was about $1 billion. That answers your question.

Douglas M. Harter – Credit Suisse Securities LLC

Right. So, I guess I was just trying to get a sense of to whether the market was implying that you still had a more credit reserves to be released over time.

William S. Gorin

Well. I don’t know if you can make that conclusion, but I will say that the market price is somewhat higher than what we hope to realize. But there is not a variable there, it’s the coupon on a fixed rate is higher than the market yields. You could still rationally expect to get less than the market price and still generate a 5% yield. For example, 6% coupon and the market price is 88, it doesn’t means the market then you can get back 88, the market could be saying, you are going to get back 84, but you are going to booking a higher coupon over the like. Does that answer your question Doug?

Douglas M. Harter – Credit Suisse Securities LLC

Yes. That’s helpful. And then on the re-performing loans what is the advance rate that you are getting when you finance them just to compare that to the leverage that you are using.

Stephen D. Yarad

So the haircuts range from 20% to 25% to 30%, I think if you look at the 3.4 leverage ratio number that would imply an average haircut of about 29%, I think the average haircut probably is above 27% or so.

Douglas M. Harter – Credit Suisse Securities LLC

Got it.

William S. Gorin

Let me just make another point, in no way we try to maximize the debt on our non-Agency. The fact that leverage has gone down, is correct, because the assets have depreciated, it’s also because, we know it’s all readily available. We don’t have to use the leverage. We know that leverage is there if we wanted.

Douglas M. Harter – Credit Suisse Securities LLC

That make sense. Thank you.

William S. Gorin

You are welcome.

Operator

Thank you. Our next question comes from the line of Joel Houck with Wells Fargo. Please go ahead.

Joel Houck – Wells Fargo Securities LLC

Thanks good morning. Maybe just drill down into the accretable discount a little more I mean you see it obviously the nice impact on the yield, and that will I guess translate into higher, current income for shareholders as we go forward. When you think about the market value assets are 88, I think you said you’re basically accreting a 82% recovery value. Is the right way to think about it and I heard your comments earlier Bill, about the coupon, as we take into considerations. But you’re seeing to me that before trying to mould this out that 88 would – assuming HPA doesn’t do anything crazy in this year that’s kind of where we’re headed toward, maybe not as high as that given your comments about the coupon, but can you maybe provide some color on that and give us some help modeling?

William S. Gorin

Well, in terms of the direction of the prices for Non-Agency assets, people continue to like this asset class and they’re not making a lot more of this. So I can’t. I don’t know if I agree that they’re not going to team to move up from here.

Joel Houck – Wells Fargo Securities LLC

Well, I guess, Bill, I was asking more like the accretable discount seems 82% recovery value. You might have added the assets were 88. So I’m trying to see how much that gap would close assuming that there is no more increase in the price of the asset. Does that make sense?

Stephen D. Yarad

So it’s hard to say because it depends on the assets. So if you look at hybrid securities, those are typically structured as pass-through. So if the coupons get modified the coupons goes down, because we’re getting the coupon, which is the gross coupon less from servicing spread, but if you look at higher coupons and it’s not just fixed rate as Bill mentioned, although we do have a significant amount of fixed-rate bonds in our non-agency portfolio.

It could be hybrid. It could be 10 ones, for instance, issued in 2007. So those still have close to 6% coupons that they had at origination, but these are fading at 4.5% to 5% yield. You could conceivably be getting back much less than you paid for the bond, right, and the way fixed rate deals are structured, it’s a fixed coupon. So even if the underlying loans get modified, they still have to pass through a 6% coupon. So you could actually get significantly less than you pay for. So it’s not a one-to-one relationship and different bonds affect the credit reserves and the equitable discount in different ways.

William S. Gorin

Joel, let me add a copy I’ve said on this. It’s highly data-driven, and there’s still 0.2 years to go on these assets and right now using best estimates of projected cash flows we expect to get back into. But we’ve proven to be somewhat conservative the last couple of years and we’ve had to make our adjustments. I think if you’d this question a couple of years ago, I think that number was 78. So whether it eventually ends up at 82 or 88, we don’t know, but the housing trends continue to be positive and we will adjust as we get new data each quarter, but unfortunately we can’t tell you what the number will be.

Joel Houck – Wells Fargo Securities LLC

Okay. Well, it sounds like the number one number we should focus on maybe HPA as that plays out, because that seems to drive lower LTVs, which then obviously the impact the ultimate amount that you’re going to realize.

William S. Gorin

HPAs and amortized principal payments really helps too.

Joel Houck – Wells Fargo Securities LLC

Yes. Okay. So, obviously you guys have warned a few that got through the volatility last year in good fashion. If we think about this year, obviously valves come in a bit or quite a bit here the first four months, but there is a notion and there’s a big debate about what’s going to happen if the Fed really ends QE. If we start to see some spread widening, particularly in the back half of the year what MFA is kind of – give your strategy in terms of maybe capturing some attractive returns and longer assets that maybe you traditionally haven’t focused on to your credit or is the view, hey, we’re just going to stick to kind of the shorter duration portfolio and because that’s what works and there is no need to kind of deviate from the strategy.

William S. Gorin

So spread is very relevant if you are hedging your interest rate exposure, absolutely yield is also very important and based on the absolute yield and in exactness of hedging of 30 year Agency assets, spreads about very wide for us to make that move. Does that help you, but certainly 15 years we’ve been there when the spreads were attractive and continue to like that asset class depending on pricing.

Joel Houck – Wells Fargo Securities LLC

So again maybe a better way to ask, if we just saw normalization in the 30 year that wouldn’t be enough to get MFA really that interested, it has to be greater than just and normalization I’m talking maybe 25 and 30 basis points widening from here?

William S. Gorin

Yes, I don’t think that – we haven’t owned 30 year Agency’s’ yet in the last 18 years and you’d have to take some extreme opportunity for us to change our strategy there.

Joel Houck – Wells Fargo Securities LLC

Okay, fair enough, thanks Bill.

William S. Gorin

Sure.

Operator

Thank you. Our next question comes from the line of Henry Coffey with Sterne, Agee. Please go ahead.

Henry J. Coffey – Sterne, Agee & Leach, Inc.

Yes, good morning everyone and thank you for taking the call. In sort of dissecting the quarter and looking at the REIT performers, are all of those bonds are, is there a mix between bonds and whole loans, I wasn’t certain about that?

Craig L. Knutson

Harry, it’s Craig. They are all bonds, they are all securities. They are unrated and there is a senior piece, typically these yields get structured with 50% or 55% credit enhancements and it’s a fixed rate coupon. It’s typically non callable for one year, but if the securities are still outstanding after three years, the coupons stepped up by 300 basis points.

Henry J. Coffey – Sterne, Agee & Leach, Inc.

How much sort of insight, when you buy the bonds and the individual loan takes to your cat and how sensitive are you in terms of were actually to servicing these assets?

William S. Gorin

It’s a good question. We get a lot of detail about the underlying and we do focus on the credit. We also focus very much on issuers and servicers in fact, we’ve probably met with most if not all of the issuers of these securities.

Henry J. Coffey – Sterne, Agee & Leach, Inc.

And then again, the theme always with MFA has been, that you’re going to match credit risk more than interest rate risk. Is there an opportunity to expand the general idea this asset class by looking at things like a whole loan purchases, Ginnie Mae early buyouts, distressed loans other sort of something where you’d be buying a more granular asset and perhaps partnering with the right servicer. Or are you going to be focused, just on sort of bond classes?

William S. Gorin

Good question, Henry. So we have devoted a lot of resources to be able to analyze, these somewhat seasons, somewhat credit sensitive securities and the skill does work on loans. We gave an example of the RPL/NPL securities and we do find merits in looking at individual loans to, so it’s something that you may see over time.

Henry J. Coffey – Sterne, Agee & Leach, Inc.

Great thank you very much.

Stephen D. Yarad

You are welcome.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Daniel Furtado with Jefferies. Please go ahead.

Dan L. Furtado – Jefferies LLC

Hey, thanks everybody. You may mentioned one or two these early questions and if so I apologies, but did you disclose the LTVs and severities that are running on the MPL book, currently?

Stephen D. Yarad

We’ve not no.

Dan L. Furtado – Jefferies LLC

And is that something you’re willing to do or no?

Stephen D. Yarad

We will consider it, sure.

Dan L. Furtado – Jefferies LLC

Okay. And then about how many servicers are associated with that NPL book? Just roughly they are like one or we’re looking at 10.

William S. Gorin

It was probably closer to 5 or 6.

Dan L. Furtado – Jefferies LLC

Okay. And so I guess the idea was 50%, I guess it depends on the LTVs, but with the 50% subordination levels the basic pieces here is that so long as loss severities are higher than 50% you should be money-good in these positions.

William S. Gorin

Well, that is true, but in addition, the typical structure has all of the cash flow. So all of the interest and principals from the entire deal get paid to that front bond.

Dan L. Furtado – Jefferies LLC

Okay, so very similar to re-REMIC then it’s just kind of how to think about the structure.

William S. Gorin

Yes, although re-REMIC typically have coupons on underlying securities on the non-rated securities.

Dan L. Furtado – Jefferies LLC

Okay.

William S. Gorin

In this case all of the cash flow in most cases goes to the senior bond.

Dan L. Furtado – Jefferies LLC

Understood, okay. Okay, so that completely locked out even on the interest side the subs are.

William S. Gorin

You’re right.

Dan L. Furtado – Jefferies LLC

Okay. And then turning to kind of like the broader theme and I know this is probably difficult to answer. But I mean how do you see or do you know what are your expectations for emerging asset classes in the mortgage market. Or I guess more specifically the development and timing of the non-QM mortgage market. I mean do you see like we’re getting towards the cusp of seeing something here in terms of a real development or do you think this is still pretty far down field?

William S. Gorin

Our assets whether they’d be securities, new securities, old securities or loans tend to be older vintage. So with less focused we are not an originator, which is seems to be a tough business right now. The people we talked to in the non-QM are all spending a lot of time with their lawyers on these issues. And the question is how much more are you going to get paid to own these loans versus the uncertainty of collecting. And the legal defenses against collecting. So we don’t yet have the answer and we are probably not going to be at the forefront of this answer. We will be glad to a follower here.

Dan L. Furtado – Jefferies LLC

Right, I understand. Okay, well, hi, thanks for the comments everybody.

William S. Gorin

You are welcome.

Operator

Thank you. There are no further questions at this time.

William S. Gorin

Great, thanks operator, and thank you all for participating in the first quarter 2014 MFA webcast.

Operator

Ladies and gentlemen, this conference will be made available for replay after 12 PM Eastern today until August 1, 2014 at midnight. You may access the AT&T Executive playback service at any time by dialing 1-800-475-6701 and entering access code 326076. International participants may dial 1-320-365-3844. Again those numbers are 1-800-475-6701 and access code 326076, and international participants may dial 1-320-365-3844. That does conclude our conference for today. Thank you for your participation, you may now disconnect.

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MFA Financial (MFA): Q1 EPS of $0.20 beats by $0.01. Revenue of $80.25M (-2.8% Y/Y) misses by $0.85M.