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Executives

Stewart Zimmerman – Chairman and CEO

William S. Gorin – President

Stephen D. Yarad – CFO

Craig L. Knutson – EVP

Ron Freydberg – EVP

Harold Schwartz – SVP and General Counsel

Kathleen Hanrahan – SVP and CAO

Shira Finkel – SVP

Goodmunder Christiansen – VP

Danielle Rosatelli – Accounting/Operations Assistant

Analysts

Jason Weaver – Sterne, Agee & Leach

Ryan O'Steen – KBW

Stephen Laws – Deutsche Bank

Steven Delaney – JMP Securities

Jason Arnold – RBC Capital Markets

Rick Shane – JPMorgan

Christopher Donat – Sandler O'Neill

Daniel Furtado – Jefferies & Co.

Michael Widner – Stifel Nicolaus

Jim Young – West Family Investments

MFA Financial, Inc. (MFA) Q3 2012 Earnings Call November 6, 2012 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial Inc. Third Quarter 2012 Earnings Conference 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 conference is being recorded.

I would now like to turn the conference over to our host Ms. 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 reflects 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 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’re made.

These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors including, but not limited to those relating to changes in interest rates and the market value of MFA’s investment securities; changes in the prepayment rates on the mortgage loans securing MFA’s investment securities; changes in the default rate and management’s assumptions regarding default rate on the mortgage loans securing MFA’s MBS, MFA’s ability to borrow to finance its assets; implementation of or changes in government regulations or programs affecting MFA’s business; MFA’s ability to maintain its qualification as a real estate investment trust for federal income tax purposes; MFA’s ability to maintain its exemption from registration under the Investment Company Act of 1940, and risks associated with investing in real estate related assets, including changes in business conditions and the general economy.

These and other risks, uncertainties and factors, including those described in MFA’s Annual Report on Form 10-K for the year ended December 31, 2011, its quarterly report from 10-Q for the quarters ended March 31, 2011 and June 30th 2012 and other reports that it may file from time-to-time with the Securities and Exchange Commission 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 2012 financial results. Thank you for your time.

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

Stewart Zimmerman

Good morning everybody and thank you for joining our third quarter 2012 earnings call. Before we begin the call I would like to express our condolences to our friends at Annaly on the passing of Mike Farrell a noted leader in our industry. We do express our condolences and we hope that with the passing of time the pain somewhat eases.

As far as MFA is concerned again I would like to welcome to our third quarter 2012 earnings call. Joining me this morning on the call are Bill Gorin, President; Steven Yarad, Chief Financial Officer; Ron Freydberg, Executive Vice President; Craig Knutson, Executive Vice President; Harold Schwartz, Senior Vice President and General Counsel; Kathleen Hanrahan, Senior Vice President and Chief Accounting Officer; Shira Finkel, Senior Vice President.

Today we announced financial results for the third quarter ended September 30, 2012. Recent financial results and other significant highlights for MFA include the following, and I’m still going to go over the couple of bullet points that we have in the press release that you have seen and then kind of open the call for questions.

The third quarter net income per common share of $0.21 or core earnings per common share of $0.19. Book value per common share grew to $8.80 as of September 30, 2012 compared to $7.45 as of June 30, 2012, and $6.74 as of December 31st, 2011. This 18% increase in book value per share in the third quarter and the 30% increase in book value per share in the first nine months 2012, are the results of our total return strategy of investing in both Agency and discounted Non-Agency mortgage backed securities.

On October 31, 2012 we paid our third quarter 2012 dividend of $0.21 per share to stockholders of record as of October 12, 2012. Couple of other items I would just like to go over with you quickly is that at quarter end our debt to equity ratio was 3.2 to 1, and in this low interest rate environment core earnings per share were $0.19 versus $0.20 in the second quarter. Our Agency portfolio with an average amortized cost of 103.2% of par as of September 30, 2012, and generated 2.66% yield in the third quarter.

Our Non-Agency portfolio at an average amortized cost of 72.6% of par as of September 30, 2012 and generated a loss adjusted yield of 6.65% in the third quarter.

We are pleased with the quarter. Hope that folks on the call understand that this has been a very difficult environment in which to work and very proud of the team and how we progressed during the quarter. So I continue to thank you for your continued interest and input for MFA Financial. And at this time I would like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we go to the line of Jason Weaver, Sterne Agee. Please go ahead.

Jason Weaver – Sterne, Agee & Leach

Hi guys, good morning. Thanks for taking my questions. First I would like to get your perspective on when it’s a little over half of the Non-Agency portfolio that five months to reset bucket. It’s still running, I see at 14.3 CPR. Can you talk a little bit on the makeup of those bonds and what do you think is holding that prepays there at such a low level?

Stewart Zimmerman

Craig, do you want to handle that? Craig?

Operator

I will now go to the line of Bose George, KBW. Please go ahead.

Ryan O'Steen – KBW

Good morning, this is actually Ryan O'Steen on for Bose. My first question is just looking at the portfolio breakout, it looks like most of the incremental purchases on the Agency side were in the 15 year bucket. Can you just kind of talk about your asset allocation going forward, what do you like looking at new purchases?

Stewart Zimmerman

Bill?

Danielle Rosatelli

Excuse me, this is Danielle. They can't hear the call. Can you hear the questions?

Unrecognized Company Representative

We hear the questions and we are starting to answer but then somebody else cut international.

Danielle Rosatelli

Yeah, and thus they cannot answer the questions from their host line.

Unrecognized Company Representative

We are responding but – we can hear the question, we are responding but then another question cut in.

Operator

Okay. We heard nothing coming from the host conference room. I apologize.

Craig Knutson

All right. So we apologize. We had some problem with the conference room that we are in. so we are all in a small office. So I guess we can maybe do the second question and then we can go back to the first question because clearly nobody could hear the response.

Stewart Zimmerman

Craig if it’s okay could we just change that order? Why don’t we respond to the first question and then we will do the second question?

Craig Knutson

Sure, okay. So Jason asked about the Non-Agencies that have less than two years to reset with an average reset of five months, and about the speeds on those and maybe why they are not faster. I guess the way to think about those are, those are for the most part if not exclusively post reset hybrid securities. So they are post reset 5-1s or 7-1s that have already come up again to their fixed rate period. The reason I would imagine that we don’t see fastest piece on those is because when those reset, they reset the typically LIBOR plus 200 or LIBOR plus 225. So the coupon actually resets down on those securities. The original coupon was probably 5.5 or so. But the coupon resets down. So a little bit more complicated because in some cases they begin amortizing, so they amortize over the balance of 25 years. But that’s why I don’t think – because the coupon went down by so much. That’s why we are not typically seeing the prepayments go up on those. It’s not your typical reset that you see on a sub-prime security but for instance where the margin might be 600 and the payment would go up at the reset. In many cases here the payment actually goes down. So, Jason if that doesn’t answer your question or if you have a follow-up why don’t you come back into the queue, and you want to go to the…

Stewart Zimmerman

Why don’t we go to the second one now?

Ryan O'Steen – KBW

Yeah, and thanks. I was just curious about how you are thinking about capital allocation on your investments.

Stewart Zimmerman

Bill, why don’t you want to run by that on?

William Gorin

Yeah. Capital allocation remaining fairly consistent, which is about 60% of our asset agencies and 40% Non-Agencies. In the third quarter it actually was a challenge because the Non-Agencies were appreciating. So we had to buy agencies just to keep the relationship the same. So it’s the same asset allocation we have had throughout the year.

Ryan O'Steen – KBW

Okay. And just in terms of prepayments it looks like there is a bit of a spike in the short reset arms that was kind of offset by a decline in the 15 year bucket. Any updates on the trends since quarter ended what your expectations are?

Unrecognized Company Representative

Yeah, well on the Agency side with its well advertised that the Fed is now purchasing about – growing their Agency portfolio by about 40 billion a month and they have extended their rate guidance until 2015 where they anticipate a key breakthrough. And on top of that there is also the – they are not going to stop buying mortgages and not going to raise rates until they see a meaningful recovery in the labor markets.

So, basically they are obviously putting a lot of pressure in terms of increasing prepays by keeping mortgage rates low. So when we think about prepayments on the Agency side we think the probability of increases in prepayment had actually gone out. And you’ve obviously, you know, opposing forces in terms of GEPs [ph] going up but we do think that the Fed is set towards that.

In terms of our own portfolio, basically what we have been adding on the Agency side has been – a majority of new acquisitions has been in 50 year fixed and in prepayment types of collateral, lower loan balance or high LTV paper, and as you look at the changes on the Agency side you’ll notice the allocation has gone from 22% to approximately 29%, and most of those bonds we added there were lower coupons but also on top of that prepayment product collateral.

Craig Knutson

I think he asked about subsequent to quarter end, October speed.

Unrecognized Company Representative

Oh so October speed was 18 CPR. Also in the Q that’s coming out later today we’ve added a couple of tables to increase the disclosure on the Agency side. We are basically – we break the portfolio into 15 years and hybrids and kind of show the allocation to prepayment for that collateral in different segments. That should help give people and investors more and a better handle on kind of prepayment exposure and interest rate risk.

Ryan O'Steen – KBW

Great, thanks. Looking forward to that detail. I will hop off.

Stewart Zimmerman

Thank you.

Operator

I will now go to the line of Stephen Laws, Deutsche Bank. Please go ahead.

Stephen Laws – Deutsche Bank

Hi, good morning.

Stewart Zimmerman

Good morning.

Stephen Laws – Deutsche Bank

Appreciate the color on the asset split going forward. One follow-up there, can you maybe quantify what yields you are seeing on new investments or spreads or however you guys prefer to look at it on the Non-Agency side of the new investments today?

Craig Knutson

Sure. On the Non-Agency side it really varies by product type. So I would say the cleanest assets with these price launch, the cleanest assets are probably as low as 4%, call it 4 to mid-4s. On the other side of the spectrum it might be as wide as 5 to 6. I would say the area that we are focusing is sort of in the middle or so. So somewhere, give or take around 5% loss adjusted yields.

Stephen Laws – Deutsche Bank

Okay great, and then clearly we are seeing some securitizations on a couple of jumbo deals, you’ve got some remit transactions I believe, NorthStar just did a CMBS deal, are you guys seeing any kind of additional options opening up there for maybe some non-recourse financing to grow back there, can you talk about what you are seeing in those markets?

Craig Knutson

The last resecuritization that we did was Non-Agency securities within February. We then did a structured financing transaction subsequent to that a few months later than that. I think it closed on June 30th actually which was – we achieved substantially the same economic and legal benefits that we did with the resecuritization. So, the resecuritization market is build there, unfortunately the only rating Agency that’s really still involved in that is DBRS and those securities don’t have quite the market acceptance that a resecuritization with S&P or other rating agencies would. So, at least for the time being we haven’t done another resecuritization.

The Redwood type deals those are on whole loans obviously those are on new originations not existing securities, so those are a little bit different although market acceptance of those deals, at least the last one was very, very good.

So, it’s something that we continue to monitor, but like I said, with only one rating Agency is DBRS, those deals are a little bit more difficult than they were. If we were to do one unrated, because it happens on unrated deals, the execution on that senior bonds is really not that attractive relative to where we can get long term financing, because we are close to a billion dollars of long term financing on these securities as well. So it’s a constant trade off in the execution and sort of what the market gives us.

Stephen Laws – Deutsche Bank

Great, I appreciate the color on that. And one final question if I may. Looking at the June Q and I haven’t had a chance to look at the most recent one. It looks like you had – you know, 18% to 20% of your slot book was resetting within six months of June 30th, most of which was at about 4.45%. As that rolls off and matures in the next three to four months, how should we think about as that being replaced, will you guys add new swaps and hold that constant while that swap percentage come down, if you are adding these swaps where exactly are you going to look so I can think about building a pricing into my model.

William Gorin

Yeah, so, it’s not the percentage of REPO that we look at as much as how much interest rate exposure do we have on the asset side and how much of that we have in hedge. What you will actually see is our interest rate exposure has gone down in the last couple of quarters, you know, the duration during the last couple of quarters.

Stephen Laws – Deutsche Bank

The duration now at the end of the third quarter was 21 basis points.

William Gorin

Still, there is not a compelling need to replace all these swaps, incrementally there might be some new swaps, but it’s not – in no way as we restructure now we see dollar for dollar replacement of the swaps that runoff.

Stephen Laws – Deutsche Bank

What is our percentage in terms of our swap position now?

Unidentified Company Representative

It’s about 43% versus the Agency REPO.

Stephen Laws – Deutsche Bank

Right, which is approximately where it’s been.

Stewart Zimmerman

Yeah, that sounds about roughly where it’s been from our outlook there as well.

Unidentified Company Representative

I think it’s really – as Bill said we are very comfortable with our interest rate exposure and that really is the key, that’s just putting on swaps as they have been doing it, because we are in such a low interest rate environment. But really looking at the portfolio and trying to make sure that we have – in fact ameliorated the risk that does exist.

Stephen Laws – Deutsche Bank

Well, great, it looks like there is nice benefits in earnings next year from these higher cost swaps and churn. Thank you.

Operator

[Operator Instructions] I will now go to the line of Steve Delaney, JMP Securities, please go ahead.

Steven Delaney – JMP Securities

Thank you. Good morning everyone and congratulations on a 21% total return in the third quarter.

Stewart Zimmerman

Thank you.

Steven Delaney – JMP Securities

Just don’t have that kind of quarter very often, so enjoy it.

Stewart Zimmerman

Thanks.

Steven Delaney – JMP Securities

I guess a couple of things. You reported your – obviously that return came from the growth in book and especially the strong performance in the Non-Agency RMBS. It looks like bonds from what we saw at 5 to 6 points, I think your specific portfolio up 6.5, we are seeing things kind of flat since September 30, just wondering Craig if you are sort of seeing the same thing in market place as far as dollar prices on cash bonds.

Craig Knutson

Steve, I would say, again it always depends on your specific bond. But I would say generally the Non-Agency sector has been pretty strong since the end of the quarter. I would say we are certainly not up a lot, but, overall the sector is probably up at least half a point and maybe as much as a point on some bonds.

Steven Delaney – JMP Securities

All right, good. So, certainly haven’t given anything back it does sound like.

Craig Knutson

Those who feel like it.

Steven Delaney – JMP Securities

Yeah. There was only a – despite the higher prices, the lower yields and you went through sort of your 4% to 5% unlevered yield, the overall Non-Agency portfolio yield though in the third quarter held up pretty good at 6.65 only down 10 basis points from 6.75, I mean should we imply for that. I mean given us the speeds and we know things are only repaying at a fairly measured rate, but it also looks like you are really not trying to necessarily force a lot of new bonds in at these lower returns. Am I interpreting that correct and do you see that 6.65 yield as being reasonably stable over the next couple of quarters.

Craig Knutson

A couple of things Steve, it’s hard obviously to predict the future. I think what you will see in our Q is we added about $300 million of Non-Agencies in the third quarter. I think the number was 295, and we have added a billion in change, but 1.0 something in the first nine months of the year. So the third quarter was more or less kind of that average acquisition rate during the year. It was probably a little bit higher early in the year.

As far as yields, there are a lot, a lot of moving parts to that yield number. So one part – and you will notice it in the queue and I think we mentioned it in our press release as well, we released approximately $54 million from our credit reserve to our accretable discounts. That’s on a total of about $800 million amortized cost of Non-Agencies. It’s about a third of the portfolio. So they were reviewed in the third quarter, those were last reviewed in the fourth quarter of last year. So the $800 million on which we change those assumptions where we moved that $50 million of credit reserve, it increased the yield on those bonds on a weighted average by approximately 40 basis points. So that’s one moving part.

The second moving part as you know, those Non-Agency yields are also sensitive to the forward curve.

Stephen Laws – Deutsche Bank

Right.

Craig Knutson

So the forward curve actually brought yields down a little bit in the third quarter versus the second quarter. But again looking out into the future, should the curves steepen and the forward curves steepen, then that will give rise to increase in yield. Unfortunately there are a lot of moving pieces so it’s very hard to handicap exactly what happens to that yield number.

Steven Delaney – JMP Securities

Understand. One final thing, just as far as the dividend relative to reported core earnings, we have been able to or you have been able to reward shareholders with a slightly higher dividend payout relative to co-earnings because your taxable EPS has exceeded core due to the difference in timing on loss recognition. It looks like that was about $0.02 in the third quarter. Can you just give us any feel for whether – I assume that difference certainly used to be wider. It’s tightened down a little bit but do you expect there will still be a penny or so of excess of taxable over cores we looked out over the next couple of quarters?

William Gorin

As we told you over the course of the year, they should be coming together closer, the taxable and the core. And you are right to point out, it looks like the taxable income exceeded the core because that dividend matches taxable income. The exact timing and the forecast – it’s hard to tell you because taxable is based on actual defaults.

Steven Delaney – JMP Securities

Right.

William Gorin

Impossible to predict because we don’t control the services. So, it looks like taxable will exceed or be generally in line with core over the next couple of quarters. But we can't predict more closely than that because we don’t control actual foreclosures.

Steven Delaney – JMP Securities

Right. Good quarter, thanks for the color.

Operator

I will now go to the line of Jason Arnold, RBC Capital Markets. Please go ahead.

Jason Arnold – RBC Capital Markets

Hi, good morning guys. Can you just – if you could talk about the supply of Non-Agency MBS to purchase? And then just as a follow-up, I guess assuming we eventually get some more new issue of supply in the Non-Agency space eventually being kind of the key operator. Is that a market that you would expect to participate in? Thanks.

Stewart Zimmerman

This is Stewart. Let me answer the second part and we will turn it over to Craig. Yes, we would expect to participate in that market. It’s a market we find very attractive, again depending on of course what the yields are at the target. But that is a market that we look forward to participating in if and when it comes back. I would like to say when it comes back. But, Craig, do you want to handle the other part?

Craig Knutson

As far as existing supply of the ’05, ’06. ’07 vintage Non-Agencies, there continues to be supply. It’s at least recently as you would expect very much a seller’s market. So, many of these would become trade on an all or none basis, those are difficult for dealers to bid because typically it’s hard to get orders on bond. But there still is supply. Obviously the levels are tighter and we have to look a little bit harder at various securities to find bonds that are as attractive to us. But we are still able to find bonds, we bought a bond yesterday. So the supply is still there.

Stewart Zimmerman

Great. Just to remind everybody and remind me too, what do we purchase in Non-Agencies during the quarter, third quarter?

Craig Knutson

$295 million.

Jason Arnold – RBC Capital Markets

All right. So just shy of $300 million.

Jason Arnold – RBC Capital Markets

Excellent, okay thanks. And then just one other quick follow-up. I guess you mentioned you did have a little bit of a release on the credit reserve side for your Non-Agency bonds and you still have a very conservative mark there on that front. I guess what would be the biggest moving part that would get you to revise kind of those credit loss expectations? Would it be home prices going up more or would it be the loss severities, I know there is a lot of moving parts there. But I guess I just wanted to kind of hear your perspective on that because that’s a big swag of the total directional value there with the bonds.

Craig Knutson

Sure. And what causes us to change as you pointed out, there are a lot of moving parts, there are a lot of pieces to that. I would say if we were to see sustained faster prepayment fees, obviously that would probably indicate that we could release more of the credit reserve. The way we really look at it is most of those changes are due to the fact that when we look at a bond and we look at the mortgages underneath that, and we look at the number of bonds, the number of mortgages that we are liquidating in our assumptions. And given the pay histories, and again every six months, every year that goes by we have another string of pay history and couple that with some home based depreciation or at least firming, and add to that the fact that many of these possibilities at hybrids are now amortizing. So the home owner is now actually paying principal back because the rates are low. They actually pay quite a bit of principal even in that first year. So it’s a whole combination of things.

But typically what leads that decision is we look and say, you know what, we think we are probably liquidating too many of the loans that are current today. And so, when we make those assumption changes we dial back our expectation of future liquidations of loans that are current today. That makes sense?

Jason Arnold – RBC Capital Markets

That helps a lot. That’s great, thank you very much.

Craig Knutson

You bet.

Operator

I will now go to the line of Rick Shane, JPMorgan. Please go ahead.

Rick Shane – JPMorgan

Hey guys, thanks for taking my question. When you look at the embedded gains in the portfolio and the difference between the Agency book and the Non-Agency book, how do you think about leveraging those gains given particularly the prepayment risk associated with the Agency book. Part of what triggered that question was Bill’s comment at the beginning that you increased the Agency book this quarter modestly in order to maintain balance. Is that going to be the strategy or do you think at some point you may make more of a tactical call in terms of what's going on in the market where you want to be slightly more overweight?

William Gorin

When you say overweight, overweight, which?

Rick Shane – JPMorgan

One or the other – I mean…

William Gorin

So Rick as we’ve explained, there are certain limitations in terms of Agency [inaudible] that are mortgage REIT on my phone, so we really cannot increase substantially our Non-Agency allocations from where we are.

Rick Shane – JPMorgan

Got it. And when you look at the – that’s helpful Bill. I appreciate that. And the other element of that is that when you look at the embedded gains in the portfolio, and again your overall growth doesn’t fully reflect the embedded gains. But you take a little bit of leverage on the embedded gains. How do you sort of think about that in terms of the differences between the unrealized gains on the Agency book and the Non-Agency book?

William Gorin

Good question Rick. So ,you are right, we have a cost basis and it’s an old cost basis. But you need to know what the asset is going to yield going forward based on new value, and Goodmunder and Craig do a great job of that. So we might have paid 102. But if we could sell the asset at 107 and we decide not to sell it, what’s our incremental return for moving that asset. That’s exactly how we look at it. We very selectively sold some agencies in the third quarter. But, basically, we are happy holding what we have. But we look at it the way you mentioned Rick.

Rick Shane – JPMorgan

Okay, great, thank you.

Operator

I will now go the line of Chris Donat, Sandler O'Neill, please go ahead.

Christopher Donat – Sandler O'Neill

Hi, good morning everyone. I think I’ll just ask one philosophical question here with some of the other mortgage REITs announcing share repurchase authorizations, just what philosophically your view on MFA taking a similar course.

Stewart Zimmerman

This is Stewart. We do have a plan in place I think it’s correct to [inaudible] about 4 million shares. We continue to look at that in terms of if that’s something we should implement again looking at our book value and looking at our share price. We continue to do that. We have in fact implemented share repurchases in the past and right now we continue to look at it. That’s really the best answer I can give you.

William Gorin

There is another thing to add, we are not investment constrained. Because we don’t tie ourselves only to agencies but across the residential mortgage investment universe. We are actually looking at attractive investment opportunities and we have good use of capital.

Christopher Donat – Sandler O'Neill

Okay, thanks very much.

Operator

I will now go to line of Daniel Furtado with Jefferies. Please go ahead.

Daniel Furtado – Jefferies & Co.

Good morning. Thank you for the opportunity to ask a couple of questions. The first is, does the natural hedging dynamics between the Agency and Non Agency books change if at all if the Non-Agency borrowings were to move closer to par value?

William Gorin

Good question. Actually I have to tie back to Craig’s answer to Steve Delaney on this one. Earlier on we talked about the fact that a lot of our Non-Agencies are in the adjustable period. And Craig mentioned if the forward curve goes down the yields on our Non-Agencies goes down. On the other hand if the forward curve moves up the yields on our Non-Agencies move up in that period. You don’t really actually have to wait for the coupon to reset because of the Non-Agencies purchase of deep discounts with low ratings. You booked your earnings based on expected yields and the expected yields we use for the assumption of coupons is based on the forward curve. If the forward curve moves up, the yields on the Non-Agencies will move up in that quarter. So, yes, despite the fact that prices ever appreciate our cost base is about 73 and our average mark is now 80. So with the still deep discount one so they are not yet sensitive to prices and that lets a change of par, and what’s important is that yield will adjust quickly if interest rates do go up. So, yes, we do still think they are a natural hedge against movements in interest rates.

Craig Knutson

And Dan, one thing I would add to that is as the Non-Agencies increase in price and not increase from the 70 to 80 but to the extent that we are seeing prices, you know, in some securities it could be in the 90s or even higher, to the extent that those are – certainly if they are fixed rate securities or if they 10-1s with still many years to the reset, we do start to think about those as possibly having some interest rate expense activity.

Daniel Furtado – Jefferies & Co.

Got you. Thank you for the clarity on that. It’s very helpful. And I don’t know to what extend you can comment on this. But, what are your expectations regarding the GSEs potential issuance of credit securities?

Craig Knutson

You know, we have been looking at this for a long time, traditionally they have been underpaid for the credit risk they are taking. They might be surprised at how much the private might want to be paid to accept this credit risk. So we are not sure where they are going to end up. But that’s how we are thinking about it..

Stewart Zimmerman

I would also add to that that at least in my opinion and the company’s opinion there will be an entity whether it’s called Fannie, whether it’s called Freddie, and again whether the pricing is different there will be a guaranteeing entity.

Daniel Furtado – Jefferies & Co.

Understood. Okay, thanks for your time everybody and congratulations on a strong quarter.

Stewart Zimmerman

Thank you.

Operator

I will now go to the line of Mike Widner, Stifel Nicolaus, please go ahead.

Michael Widner – Stifel Nicolaus

Hey guys. I’m not going to be quite as philosophical. If we talked just about this little election that’s coming up today, I’m wondering what your view is – you know, let’s just imagine the two possible scenarios in Obama continuation or Romney’s victory. Are either one of those good from mortgage REITs in general, Agency side or Non-Agency side, you know, is either scenario better than the other and I guess maybe wondering if you could talk a little bit about some of the risks and specifically let me show out there on the Romney side, you know, some of the stuff we are reading and hearing lately as about, one of his chief economic advisor is Hubbard over there in New York with you guys. Being supportive of refi programs as well and giving more Americans a chance to refi at all time low rates, using that as a mechanism for basically stimulating the economy. It seems like there is a – again if that is to be believed and it seems that there is a bias actually in both parties for, you know, more free money for more people for the longer which doesn’t necessarily tend to be the greatest thing in the world for securities being held at high dollar values. But, anyway, wondering if you could compare and contrast and not necessarily tell us which way you are going to vote or what not. But, how do you see it shaping up and is there any better scenario than another one?

Stewart Zimmerman

Let me just give a pre-ample and then Bill, Craig or Ron or somebody else will have something to add. When you look on the Agency side in terms of free money and in terms of prepayments and what it might or might not mean. One thing is to have a type of premium exposure we have, the other thing is to have the premium exposure that may be twice that. So that doesn’t give me a lot of odds in terms of which side wins. And again and unfortunately I think many times when we listen to whichever side what they say during an election campaign is sometimes very different than what they wind up doing and/or what they can do or what they are able to do. But fellows if you wanted to give some more clarity just go ahead.

William Gorin

Yeah. So if things run down the middle it doesn’t matter. So I think Mike your question is to tell the extremes, and talking about making prepay is easier. So marginally people continue to make prepays easier for Agency guaranteed assets, right, it’s just been a trend over the last five, six years. What happens if they go all the way and make prepays easier for Non-Agencies? We have a two or three point premium on our agencies, we have close to a 30 point discount on our Non-Agencies. So if you do get to an extreme tail we are not at risk there. It could be a gain for us. Look, we are very supportive of what Ben Bernanke has done. So, we have mixed feelings. But either way – I think as Stewart mentioned we don’t see extreme changes because what they say and what happens is two different things. But at the extremes we think our portfolio was well protected.

Michael Widner – Stifel Nicolaus

So in short you guys see yourselves as – I don’t want to necessarily say uniquely positioned but relative to a lot of the pure Agency guys, it sounds like what you are saying is, look, you have got a lower premium and that inherently makes you less subject to the risk. And then on the Non-Agency side faster prepays are better, so…

Stewart Zimmerman

Mike, rather than comparing those to the Agency folks I mean if you just look at ours as an entity I think we are very well positioned.

Michael Widner – Stifel Nicolaus

It sounds like you are not concerned really either way that there is much of a…

Stewart Zimmerman

Let’s say I have a personal bias that we are not going to discuss on this call.

Michael Widner – Stifel Nicolaus

Yeah. Well, aside from the personal bias. I mean when it comes to – just given the way you have positioned the portfolio it doesn’t seem like there is necessarily a disaster scenario or a big downside risk that you see as balanced one way or – one side as much more dangerous to you than the other just because of the way you have uniquely positioned the portfolio.

Stewart Zimmerman

I think that’s fair.

Michael Widner – Stifel Nicolaus

Okay. Well appreciate the comments and the color and I am hoping that maybe in the next quarter you can get to the 20% Q over Q book value. 18 was nice but let’s try.

Stewart Zimmerman

Yeah, we will go for it.

Operator

I will now go to the line of Jim Young, West Family Investments. Please go ahead.

Jim Young – West Family Investments

Yeah hi. Could you talk about the factors that drove your decision to transfer to the accretable discounts from your credit reserve, the 54.1 million, and from what you see in the current quarter would you expect that level to be similar and increase or decrease? Thank you.

Craig Knutson

It’s impossible for me to predict the next couple of quarters. We review approximately a third of the portfolio every quarter. So we reviewed a third of the portfolio during the third quarter, the thing that we would have to change that credit reserve are faster prepayments, pay histories, transition rates to go down. But basically as I said before it’s typically a case where – and we do this on a bond by bond basis obviously where we believe that we are probably liquidating too many of the loans that are current today. So, we are still assuming that anyone that’s delinquent today default. Where the art meets the science here is on the loans that are current today, how many of those loans will go bad in the future.

And so, the assumption changes are typically built around that number of the future expected defaults from loans that are current today. So it’s a variety of factors that influence those. Again, with a third of the portfolio that we went through, it’s about 1.4 billion phased amount, it was about 800 million amortized cost amount that we changed our credit reserves on, and it added about 40 basis points of yield to those bonds. So we will do another survey during the fourth quarter and we will do another third in the first quarter of next year. So it’s obviously good news, it’s good to see that our original functions were probably a little bit heavy but it’s a quarter by quarter and a bond by bond thing.

Michael Widner – Stifel Nicolaus

Okay, thank you.

Operator

Speakers there are no more callers in queue. Please go ahead.

Stewart Zimmerman

Well thank you very much everybody. We appreciate your continued interest in MFA Financial and look forward to speaking with you next quarter.

Operator

Ladies and gentlemen this conference will be available for replay after 12 noon today through February 6, 2013. You may access the AT&T executive replay system at any time by dialing 1800-475-6701 and entering the access code of 270066, and international participants dial 320-365-3844. Both numbers again are 1800-475-6701 and 320-365-3844, access code 270066. Ladies and gentlemen that does conclude our conference for today thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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