MFA Was Proactive, but Missed the Rally

| About: MFA Financial, (MFA)

One stock that was struggling and that should have been rallying hard on this Fed news was MFA Mortgage (NYSE:MFA) - it appears they are cutting back leverage in this scary market (which is a good, conservative thing to do considering how the mortgage REITs have been dismembered of late). With that said, in a normal functioning market, I'd be buying more of this position, but since any company in this space could in theory be called to the carpet by random acts of fear, the use of logic is not working.

Even management is indicating the same if you read between the lines; again when government- backed debt instruments are flailing, it is just scary - nothing is sacred. So I'll err on the side of caution and just sit this one out, even if I find this action to be very proactive. Funny how the market punishes the company for being pre-emptive. In a "normally functioning" market, these shares are a complete and utter bargain. In "this market" any company could literally be $1 tomorrow if people begin to panic.

  • MFA Mortgage Investments Inc. said it will sell assets to reduce its debt-to-equity levels, or leverage, amid continued stress in the financial industry.
  • After the closing bell Monday, the mortgage real estate investment trust said that since Friday, it has sold about $1 billion in mortgage-backed securities, including approximately $950 million of securities backed by a government agency and $50 million of 'AAA-rated' non-agency MBS at a loss of about $15 million.

  • MFA Mortgage also terminated repurchase agreements at no cost and about $525 million of associated interest rate swap agreements at a cash cost of approximately $31 million. The company said its available cash balance currently totals about $348 million, and its $19 million of unpledged agency MBS also is available to meet future margin calls.

  • To date, MFA said it has satisfied all of its margin calls -- or lenders demanding their money back. "We have made this strategy adjustment because it is our view that credit conditions are tightening, rapidly and indiscriminately," the company said in a statement.

  • MFA said that recent credit events impacting other leveraged public and private companies increases the probability of increased margin requirements in the future for all repurchase agreement borrowers, including MFA. In addition, the company is concerned about declining values for many financial assets including agency and 'Triple-A' rated MBS.

  • The company forecast first-quarter earnings of 18 cents per share, up from 16 cents in the 2007 fourth quarter, but below analysts' consensus estimate of 24 cents per share, according to a Thomson Financial poll.

  • "We have undertaken these actions to decrease potential future liquidity risks," MFA said in a statement. "We believe that while many financial institutions may face the risk of systemic margin calls, our strategy is to get ahead of the curve and reduce leverage consistent with our own discipline. We believe this strategy will reduce the uncertainty reflected in MFA's share price."

Disclosure: Long MFA Mortgage in fund; no personal position