MFA Financial Seems Fine To Me

May. 7.12 | About: MFA Financial, (MFA)

In October 2010, MFA Financial (NYSE:MFA) financed $246.3 million of its non-agency residential mortgage-backed securities (RMBS). In February 2011, the company reaped $488.4 million in cash, selling $1.32 billion of non-agency RMBS.

In March 2011, the company announced the public offering of 65,000,000 common stocks, the proceeds of which were to be used in buying additional MBS or repayment of repurchase agreements (most probably to support the previous month's action).

Perhaps, this was not enough! The company again priced $100 million 8% senior notes offering. The proceeds are expected to reach around $96.5 million, again planned to be used for the purposes. Well, you can't really understand how the process works, but it is wise to know that this exchange program are all a part of re-securitization procedure, and helps the company maximize returns and hedge risks safely.

Are you interested to know how the company performed financially? William Gorin, MFA's President, added:

In the first quarter, book value per share increased by approximately 11% due primarily to appreciation within our Non-Agency portfolio. While housing fundamentals remain weak, we believe that we have appropriately factored this into our cash flow projections and credit reserve estimates. Our Non-Agency MBS loss adjusted yield of 6.92% is based on projected defaults that are approximately twice the amount of underlying mortgage loans that are presently 60+ days delinquent. These underlying mortgage loans were originated on average more than five years ago so that we have access to more than 60 months of payment history. In the first quarter we continued to add multi-year financing that serves to reduce our reliance on short-term repurchase agreements for Non-Agency MBS. While this financing is incrementally more expensive than short-term repo financing by approximately 100-150 basis points, we believe the certainty of the committed term outweighs the additional cost.

If you ask me, the heavy inclination towards agency MBS (invested 1.5 times more than that in non-agency MBS) and short-term dependency on non-agency MBS (of less than 2 years ARM period) shows two main things. The company has more reliance and trust on the agency MBS, which indicates security in the coming few years. And the short term of the non-agency MBS with adjustable rate interest rate will make sure, interest rates don't fall all of sudden to pose prepayment risk for the investors.

But one thing, asset allocation toward agency MBS has decreased since last year, and it will decrease further due to reverse repurchase agreements, which means you might end up with more of non-agency MBS as your primary income source. Is the company focusing hard on gaining more agency MBS in the coming few years with the capital raised? Or, does Gorin feel that diddling with non-agency MBS is right in these economic times? Though it must be noted that the interest rate spread is much higher and debt to net equity ratio is much lower, in case of non-agency MBS. I guess the management does have the risks borne in mind.

And if you check the balance sheet, you will see the numbers of repos increasing, for which the company is liable. So, the company will acquire MBS in the future. What is it - agency or non-agency?

It's a tricky situation, but since the company's net profit margin of 63.7% is still higher than Anworth's (NYSE:ANH) 54.81%, Penny Mortgage Investment's (NYSE:PMT) 50.1% and Redwood Trust's (NYSE:RWT) 11.6%, we can still hope for the best. But it must also be remembered that the company is somewhat riding on the overpriced lines, and the stock price increase of over 12% in the last six months shouldn't be a factor influencing your decision.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.