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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
___________________________________________________________________________ 
FORM 10-Q
(Mark One) 
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2020
 
or 
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                              to                             
 
Commission File Number: 1-13991
MFA FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________________ 
 
Maryland
 
 
 
13-3974868
 
 
(State or other jurisdiction of incorporation or organization)
 
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
 
 
 
350 Park Avenue, 20th Floor
 
 
 

 
 
New York
New York
 
 
 
10022
 
 
(Address of principal executive offices)
 
 
 
(Zip Code)
 
 (212) 207-6400
(Registrant’s telephone number, including area code)
_____________________________________________

Not Applicable 
(Former name, former address and former fiscal year, if changed since last period)
____________________________________________________________________ 

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
MFA
New York Stock Exchange
7.50% Series B Cumulative Redeemable
Preferred Stock, par value $0.01 per share
MFA/PB
New York Stock Exchange
6.50% Series C Cumulative Redeemable
Preferred Stock, par value $0.01 per share
MFA/PC
New York Stock Exchange
8.00% Senior Notes due 2042
MFO
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No x

453,242,244 shares of the registrant’s common stock, $0.01 par value, were outstanding as of June 10, 2020.
 

Explanatory Note

On May 6, 2020, MFA Financial, Inc. (the “Company”) furnished information in a Current Report on Form 8-K (the “Form 8-K”) pursuant to the Order (Release No. 34-88465) of the U.S. Securities and Exchange Commission (the “SEC”), dated March 25, 2020 (the “Order”). The Order provides registrants, including the Company, with the ability to extend the dates by which certain filings are required to be made with the SEC, in light of operational challenges presented by the COVID-19 pandemic. In the Form 8-K, the Company disclosed that, while it had fully implemented its business continuity plan and had transitioned to a remote work environment in response to the operational and health risks associated with the COVID-19 pandemic, the disruption and volatility in the financial markets triggered in large part by the pandemic had a significant impact on the Company’s operations and financial position. As a result, the Company’s management had to devote significant time and attention to address such matters, which had diverted management resources from completing tasks necessary to timely file this Quarterly Report on Form 10-Q for the three months ended March 31, 2020 (the “Quarterly Report”) on or before the original filing deadline of May 11, 2020. In light of the foregoing circumstances, and in reliance on the Order, the Company disclosed in the Form 8-K that it did not intend to file the Quarterly Report by May 11, 2020. The Company, in reliance on and as permitted by the Order, is hereby timely filing this Quarterly Report within 45 days from the original filing deadline.



Table of Contents

MFA FINANCIAL, INC.

TABLE OF CONTENTS
 
 
Page
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents



MFA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
 (In Thousands Except Per Share Amounts)
 
March 31,
2020
 
December 31,
2019
 
 
(Unaudited)
 
 
Assets:
 
 

 
 
Residential whole loans:
 
 
 
 
Residential whole loans, at carrying value ($5,055,177 and $4,847,782 pledged as collateral, respectively) (1) (2)
 
$
5,934,042

 
$
6,069,370

Residential whole loans, at fair value ($718,343 and $794,684 pledged as collateral, respectively) (1)
 
1,243,792

 
1,381,583

Allowance for credit and valuation losses on residential whole loans held at carrying value and held-for-sale
 
(218,011
)
 
(3,025
)
Total residential whole loans, net
 
6,959,823

 
7,447,928

Residential mortgage securities:
 
 

 
 

Non-Agency MBS, at fair value ($1,331,674 and $2,055,802 pledged as collateral, respectively)
 
1,119,940

 
2,063,529

Agency MBS, at fair value ($568,704 and $1,658,614 pledged as collateral, respectively)
 
553,413

 
1,664,582

Credit Risk Transfer (“CRT”) securities, at fair value ($263,225 and $252,175 pledged as collateral, respectively)
 
254,101

 
255,408

Mortgage servicing rights (“MSR”) related assets ($877,204 and $1,217,002 pledged as collateral, respectively)
 
738,054

 
1,217,002

Cash and cash equivalents
 
116,465

 
70,629

Restricted cash
 
216,902

 
64,035

Other assets
 
1,171,639

 
784,251

Total Assets
 
$
11,130,337

 
$
13,567,364

 
 
 
 
 
Liabilities:
 
 
 
 
Repurchase agreements
 
$
7,768,180

 
$
9,139,821

Other liabilities
 
921,482

 
1,043,591

Total Liabilities
 
$
8,689,662

 
$
10,183,412

 
 
 
 
 
Commitments and contingencies (See Note 10)
 


 


 
 
 
 
 
Stockholders’ Equity:
 
 
 
 
Preferred stock, $.01 par value; 7.50% Series B cumulative redeemable; 8,050 shares authorized;
8,000 shares issued and outstanding ($200,000 aggregate liquidation preference)
 
$
80

 
$
80

Preferred stock, $.01 par value; 6.50% Series C fixed-to-floating rate cumulative redeemable;
12,650 shares authorized; 11,000 shares issued and outstanding ($275,000 aggregate liquidation preference)
 
110

 

Common stock, $.01 par value; 874,300 and 886,950 shares authorized; 453,138 and 452,369 shares issued
and outstanding, respectively
 
4,531

 
4,524

Additional paid-in capital, in excess of par
 
3,906,613

 
3,640,341

Accumulated deficit
 
(1,548,361
)
 
(631,040
)
Accumulated other comprehensive income
 
77,702

 
370,047

Total Stockholders’ Equity
 
$
2,440,675

 
$
3,383,952

Total Liabilities and Stockholders’ Equity
 
$
11,130,337

 
$
13,567,364

 

(1)
Includes approximately $185.9 million and $186.4 million of Residential whole loans, at carrying value and $516.4 million and $567.4 million of Residential whole loans, at fair value transferred to consolidated variable interest entities (“VIEs”) at March 31, 2020 and December 31, 2019, respectively. Such assets can be used only to settle the obligations of each respective VIE.
(2)
Includes Non-QM loans held-for-sale with an amortized cost of $965.5 million and a net carrying value of $895.3 million at March 31, 2020.


The accompanying notes are an integral part of the consolidated financial statements.

1

Table of Contents

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
Three Months Ended
March 31,
(In Thousands, Except Per Share Amounts)
 
2020
 
2019
Interest Income:
 
 
 
 
Residential whole loans held at carrying value
 
$
83,486

 
$
49,620

Non-Agency MBS
 
32,551

 
54,001

Agency MBS
 
8,861

 
18,441

CRT securities
 
2,962

 
6,200

MSR-related assets
 
14,207

 
10,620

Cash and cash equivalent investments
 
486

 
764

Other interest-earning assets
 
2,907

 
1,306

Interest Income
 
$
145,460

 
$
140,952

 
 
 
 
 
Interest Expense:
 
 

 
 
Repurchase agreements
 
$
72,698

 
$
70,809

Other interest expense
 
11,061

 
8,217

Interest Expense
 
$
83,759

 
$
79,026

 
 
 
 
 
Net Interest Income
 
$
61,701

 
$
61,926

 
 
 
 
 
Provision for credit and valuation losses on residential whole loans and other financial instruments
 
$
(150,827
)
 
$
(805
)
Net Interest Income after Provision for Credit and Valuation Losses
 
$
(89,126
)
 
$
61,121

 
 
 
 
 
Other Income, net:
 
 
 
 
Impairment and other losses on securities available-for-sale and other assets
 
$
(419,651
)
 
$

Net realized (loss)/gain on sales of residential mortgage securities and residential whole loans
 
(238,380
)
 
24,609

Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings
 
(77,961
)
 
8,672

Net (loss)/gain on residential whole loans measured at fair value through earnings
 
(52,760
)
 
25,267

Net loss on Swaps not designated as hedges for accounting purposes
 
(4,239
)
 
(8,944
)
Other, net
 
2,228

 
1,565

Other (Loss)/Income, net
 
$
(790,763
)
 
$
51,169

 
 
 
 
 
Operating and Other Expense:
 
 
 
 
Compensation and benefits
 
$
8,899

 
$
8,554

Other general and administrative expense
 
4,575

 
4,645

Loan servicing and other related operating expenses
 
11,164

 
10,234

Costs associated with restructuring/forbearance agreement
 
4,468

 

Operating and Other Expense
 
$
29,106

 
$
23,433

 
 
 
 
 
Net (Loss)/Income
 
$
(908,995
)
 
$
88,857

Less Preferred Stock Dividend Requirement
 
$
5,215

 
$
3,750

Net (Loss)/Income Available to Common Stock and Participating Securities
 
$
(914,210
)
 
$
85,107

 
 
 
 
 
Basic (Loss)/Earnings per Common Share
 
$
(2.02
)
 
$
0.19

Diluted (Loss)/Earnings per Common Share
 
$
(2.02
)
 
$
0.19



The accompanying notes are an integral part of the consolidated financial statements.

2

Table of Contents

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(UNAUDITED)
 
 
Three Months Ended
March 31,
(In Thousands)
 
2020
 
2019
Net (loss)/income
 
$
(908,995
)
 
$
88,857

Other Comprehensive Income/(Loss):
 
 
 
 
Unrealized gains on securities available-for-sale
 
124,410

 
22,103

Reclassification adjustment for MBS sales included in net income
 
(23,953
)
 
(17,009
)
Reclassification adjustment for impairments included in net income
 
(344,269
)
 

Derivative hedging instrument fair value changes, net
 
(50,127
)
 
(10,445
)
Amortization of de-designated hedging instruments, net
 
1,594

 
(341
)
Other Comprehensive Income/(Loss)
 
(292,345
)
 
(5,692
)
Comprehensive income before preferred stock dividends
 
$
(1,201,340
)
 
$
83,165

Dividends required on preferred stock
 
(5,215
)
 
(3,750
)
Comprehensive Income Available to Common Stock and Participating Securities
 
$
(1,206,555
)
 
$
79,415

 
The accompanying notes are an integral part of the consolidated financial statements.

3

Table of Contents

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
 
 
Three Months Ended March 31, 2020
(In Thousands, 
Except Per Share Amounts)
 
Preferred Stock
6.50% Series C Fixed-to-Floating Rate Cumulative Redeemable - Liquidation Preference $25.00 per Share
 
Preferred Stock
7.50% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Income
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2019
 

 
$

 
8,000

 
$
80

 
452,369

 
$
4,524

 
$
3,640,341

 
$
(631,040
)
 
$
370,047

 
$
3,383,952

Cumulative effect adjustment on adoption of new accounting standard ASU 2016-13
 

 

 

 

 

 

 

 
(8,326
)
 

 
(8,326
)
Net loss
 

 

 

 

 

 

 

 
(908,995
)
 

 
(908,995
)
Issuance of Series C Preferred Stock, net of expenses
 
11,000

 
110

 

 

 

 

 
265,919

 

 

 
266,029

Issuance of common stock, net of expenses
 

 

 

 

 
1,106

 
7

 
680

 

 

 
687

Repurchase of shares of common stock (1)
 

 

 

 

 
(337
)
 

 
(2,652
)
 

 

 
(2,652
)
Equity based compensation expense
 

 

 

 

 

 

 
1,266

 

 

 
1,266

Accrued dividends attributable to stock-based awards
 

 

 

 

 

 

 
1,059

 

 

 
1,059

Change in unrealized gains on MBS, net
 

 

 

 

 

 

 

 

 
(243,812
)
 
(243,812
)
Derivative hedging instrument fair value changes and amortization, net
 

 

 

 

 

 

 

 

 
(48,533
)
 
(48,533
)
Balance at March 31, 2020
 
11,000

 
$
110

 
8,000

 
$
80

 
453,138

 
$
4,531

 
$
3,906,613

 
$
(1,548,361
)
 
$
77,702

 
$
2,440,675


(1)  For the three months ended March 31, 2020 includes approximately $2.7 million (337,026 shares) surrendered for tax purposes related to equity-based compensation awards.


The accompanying notes are an integral part of the consolidated financial statements.



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MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
 
 
Three Months Ended March 31, 2019
(In Thousands, 
Except Per Share Amounts)
 
Preferred Stock
7.50% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Income
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018
 
8,000

 
$
80

 
449,787

 
$
4,498

 
$
3,623,275

 
$
(632,040
)
 
$
420,288

 
$
3,416,101

Net income
 

 

 

 

 

 
88,857

 

 
88,857

Issuance of common stock, net of expenses
 

 

 
1,066

 
7

 
544

 

 

 
551

Repurchase of shares of common stock (1)
 

 

 
(370
)
 

 
(2,610
)
 

 

 
(2,610
)
Equity based compensation expense
 

 

 

 

 
992

 

 

 
992

Accrued dividends attributable to stock-based awards
 

 

 

 

 
435

 

 

 
435

Dividends declared on common stock ($0.20 per share)
 

 

 

 

 

 
(90,097
)
 

 
(90,097
)
Dividends declared on preferred stock ($0.46875 per share)
 

 

 

 

 

 
(3,750
)
 

 
(3,750
)
Dividends attributable to dividend equivalents
 

 

 

 

 

 
(256
)
 

 
(256
)
Change in unrealized losses on MBS, net
 

 

 

 

 

 

 
5,094

 
5,094

Derivative hedging instruments fair value changes, net
 

 

 

 

 

 

 
(10,786
)
 
(10,786
)
Balance at March 31, 2019
 
8,000

 
$
80

 
450,483

 
$
4,505

 
$
3,622,636

 
$
(637,286
)
 
$
414,596

 
$
3,404,531


(1)  For the three months ended March 31, 2019, includes approximately $2.6 million (370,244 shares) surrendered for tax purposes related to equity-based compensation awards.

The accompanying notes are an integral part of the consolidated financial statements.


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Table of Contents

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Three Months Ended
March 31,
(In Thousands)
 
2020
 
2019
Cash Flows From Operating Activities:
 
 

 
 

Net (loss)/income
 
$
(908,995
)
 
$
88,857

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 
Loss on sales of residential whole loans at carrying value
 
145,791

 

Loss/(gain) on sales of residential mortgage securities and MSR-related assets
 
92,589

 
(24,609
)
Gain on sales of real estate owned
 
(3,107
)
 
(1,398
)
Gain on liquidation of residential whole loans
 
(1,105
)
 
(4,684
)
Impairment and other losses on securities available-for-sale and other assets
 
419,651

 

Accretion of purchase discounts on residential mortgage securities, residential whole loans and MSR-related assets
 
(12,114
)
 
(15,915
)
Amortization of purchase premiums on residential mortgage securities and residential whole loans, and amortization of terminated hedging instruments
 
15,266

 
7,620

Depreciation and amortization on real estate, fixed assets and other assets
 
3,582

 
432

Equity-based compensation expense
 
1,273

 
998

Unrealized losses on residential whole loans at fair value
 
74,556

 
1,060

Provision for credit and valuation losses on residential whole loans and other financial instruments
 
150,827

 

Unrealized losses on residential mortgage securities and interest rate swap agreements (“Swaps”) and other
 
82,464

 
200

Increase in other assets
 
(37,811
)
 
(8,770
)
Decrease in other liabilities
 
(9,653
)
 
(6,709
)
Net cash provided by operating activities
 
$
13,214

 
$
37,082

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Purchases of residential whole loans, loan related investments and capitalized advances
 
$
(1,119,464
)
 
$
(1,021,557
)
Principal payments on residential whole loans
 
508,855

 
233,724

Principal payments on residential mortgage securities and MSR-related assets
 
539,882

 
391,641

Proceeds from sales of residential mortgage securities
 
1,009,316

 
208,306

Purchases of residential mortgage securities and MSR-related assets
 
(162,607
)
 
(327,221
)
Proceeds from sales of real estate owned
 
52,042

 
23,963

Purchases of real estate owned and capital improvements
 
(5,606
)
 
(5,923
)
Additions to leasehold improvements, furniture and fixtures
 
(176
)
 
(391
)
Net cash provided by/(used in) investing activities
 
$
822,242

 
$
(497,458
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 
Principal payments on repurchase agreements
 
$
(12,903,818
)
 
$
(18,879,173
)
Proceeds from borrowings under repurchase agreements
 
12,216,862

 
19,509,794

Principal payments on securitized debt
 
(37,418
)
 
(25,501
)
Payments made for settlements and unwinds of Swaps
 
(88,405
)
 
(21,478
)
Proceeds from issuance of Series C Preferred Stock
 
275,000

 

Payments made for costs related to Series C Preferred Stock issuance
 
(8,912
)
 

Proceeds from issuances of common stock
 
687

 
551

Dividends paid on preferred stock
 

 
(3,750
)
Dividends paid on common stock and dividend equivalents
 
(90,749
)
 
(90,198
)
Net cash (used in)/provided by financing activities
 
$
(636,753
)
 
$
490,245

Net increase in cash, cash equivalents and restricted cash
 
$
198,703

 
$
29,869

Cash, cash equivalents and restricted cash at beginning of period
 
$
134,664

 
$
88,709

Cash, cash equivalents and restricted cash at end of period
 
$
333,367

 
$
118,578

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Interest Paid
 
$
80,158

 
$
81,435

 
 
 
 
 
Non-cash Investing and Financing Activities:
 
 
 
 
Transfer from residential whole loans to real estate owned
 
$
50,693

 
$
65,160

Dividends and dividend equivalents declared and unpaid
 
$

 
$
90,353

Receivable for unsettled MBS, MSR-related asset, and residential whole loan sales
 
$
419,583

 
$

The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents
MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020

 
1.   Organization
 
MFA Financial, Inc. (the “Company”) was incorporated in Maryland on July 24, 1997 and began operations on April 10, 1998.  The Company has elected to be treated as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.  In order to maintain its qualification as a REIT, the Company must comply with a number of requirements under federal tax law, including that it must distribute at least 90% of its annual REIT taxable income to its stockholders.  The Company has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. (See Note 2(n))
 
2.   Summary of Significant Accounting Policies
 
(aBasis of Presentation and Consolidation
 
The interim unaudited consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in accordance with these SEC rules and regulations.  Management believes that the disclosures included in these interim unaudited consolidated financial statements are adequate to make the information presented not misleading.  The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.  In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at March 31, 2020 and results of operations for all periods presented have been made.  The results of operations for the three months ended March 31, 2020 should not be construed as indicative of the results to be expected for the full year.
 
The accompanying consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with GAAP.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could differ from those estimates, which could materially impact the Company’s results of operations and its financial condition.  Management has made significant estimates in several areas, including impairment, valuation allowances and loss allowances on residential whole loans (See Note 3), mortgage-backed securities (“MBS”) (See Note 4) and Other Assets (See Note 5), valuation of MBS, CRT securities and MSR-related assets (See Notes 4 and 14), income recognition and valuation of residential whole loans (See Notes 3 and 14), valuation of derivative instruments (See Notes 5(c) and 14) and income recognition on certain Non-Agency MBS (defined below) purchased at a discount. (See Note 4)  In addition, estimates are used in the determination of taxable income used in the assessment of REIT compliance and contingent liabilities for related taxes, penalties and interest. (See Note 2(n))  Actual results could differ from those estimates.

The Company has one reportable segment since it manages its business and analyzes and reports its results of operations on the basis of one operating segment: investing, on a leveraged basis, in residential mortgage assets.
 
The consolidated financial statements of the Company include the accounts of all subsidiaries. All intercompany accounts and transactions have been eliminated. In addition, the Company consolidates entities established to facilitate transactions related to the acquisition and securitization of residential whole loans completed in prior years. Certain prior period amounts have been reclassified to conform to the current period presentation.


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Table of Contents
MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020

(bResidential Whole Loans (including Residential Whole Loans transferred to consolidated VIEs)

Residential whole loans included in the Company’s consolidated balance sheets are primarily comprised of pools of fixed- and adjustable-rate residential mortgage loans acquired through consolidated trusts in secondary market transactions. The accounting model utilized by the Company is determined at the time each loan package is initially acquired and is generally based on the delinquency status of the majority of the underlying borrowers in the package at acquisition. The accounting model described below for Purchased Credit Deteriorated Loans that are held at carrying value is typically utilized by the Company for Purchased Credit Deteriorated Loans where the underlying borrower has a delinquency status of less than 60 days at the acquisition date. The Company also acquires Purchased Performing Loans that are typically held at carrying value, but the accounting methods for income recognition and determination and measurement of any required credit loss reserves (as discussed below) differ from those used for Purchased Credit Deteriorated Loans held at carrying value. The accounting model described below for residential whole loans held at fair value is typically utilized by the Company for loans where the underlying borrower has a delinquency status of 60 days or more at the acquisition date. The accounting model initially applied is not subsequently changed.

The Company’s residential whole loans pledged as collateral against repurchase agreements are included in the consolidated balance sheets with amounts pledged disclosed parenthetically.  Purchases and sales of residential whole loans that are subject to an extended period of due diligence that crosses a reporting date are recorded in our balance sheet at amounts reflecting management’s current estimate of assets that will be acquired or disposed at the closing of the transaction. This estimate is subject to revision at the closing of the transaction, pending the outcome of due diligence performed prior to closing. Residential whole loans purchased under flow arrangements with loan origination partners are generally recorded at the transaction settlement date. Recorded amounts of residential whole loans for which the closing of the purchase transaction is yet to occur are not eligible to be pledged as collateral against any repurchase agreement financing until the closing of the purchase transaction. Interest income, credit related losses and changes in the fair value of loans held at fair value are recorded post settlement for acquired loans and until transaction settlement for sold loans. (See Notes 3, 6, 7, 14 and 15)

Residential Whole Loans at Carrying Value

Purchased Performing Loans

Acquisitions of Purchased Performing Loans to date have been primarily comprised of: (i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (“Non-QM loans”), (ii) short-term business purpose loans collateralized by residential properties made to non-occupant borrowers who intend to rehabilitate and sell the property for a profit (“Rehabilitation loans” or “Fix and Flip loans”), (iii) loans to finance (or refinance) non-owner occupied one-to four-family residential properties that are rented to one or more tenants (“Single-family rental loans”), and (iv) previously originated loans secured by residential real estate that is generally owner occupied (“Seasoned performing loans”). Purchased Performing Loans are initially recorded at their purchase price. Interest income on Purchased Performing Loans acquired at par is accrued based on each loan’s current interest bearing balance and current interest rate, net of related servicing costs. Interest income on such loans purchased at a premium/discount to par is recorded each period based on the contractual coupon net of any amortization of premium or accretion of discount, adjusted for actual prepayment activity. For loans acquired with related servicing rights retained by the seller, interest income is reported net of related serving costs.

An allowance for credit losses is recorded at acquisition, and maintained on an ongoing basis, for all losses expected to be incurred over the life of the respective loan. Any required credit loss allowance would reduce the net carrying value of the loan with a corresponding charge to earnings, and may increase or decrease over time. Significant judgments are required in determining any allowance for credit loss, including assumptions regarding the loan cash flows expected to be collected, the value of the underlying collateral and the ability of the Company to collect on any other forms of security, such as a personal guaranty provided either by the borrower or an affiliate of the borrower. Income recognition is suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful (i.e., such loans are placed on nonaccrual status). For nonaccrual loans other than Fix and Flip loans, all payments are applied to principal under the cost recovery method. For nonaccrual Fix and Flip loans, interest income is recorded under the cash basis method as interest payments are received. Interest accruals are resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or it is legally discharged. Modified loans are considered “troubled debt restructurings” if the Company grants a concession to a borrower who is experiencing financial difficulty (including the interpretation of this definition set forth in OCC Bulletin 2020-35).


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Table of Contents
MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020

The aggregate allowance for credit losses is equal to the sum of the losses expected to be incurred over the life of each respective loan. These losses were estimated by projecting each loan’s expected cash flows based on their contractual terms, expected prepayments, and estimated default and loss severity rates. The default and severity rates were estimated based on the following steps: (i) obtained the Company’s historical experience through an entire economic cycle for each loan type or, to the extent the Company did not have sufficient historical loss experience for a given loan type, publicly available data derived from the historical loss experience of certain banks, which data the Company believes is generally representative of its portfolio, (ii) obtained historical economic data (U.S. unemployment rates and home price appreciation) over the same period, and (iii) estimated default and severity rates during three distinct future periods based on historical default and severity rates during periods when economic conditions similar to those forecasted were experienced. The three periods were as follows: (i) a one-year forecast of economic conditions based on U.S. unemployment rates and home price appreciation, followed by (ii) a two-year “reversion” period during which economic conditions (U.S. unemployment rates and home price appreciation) are projected to revert to historical averages on a straight line basis, followed by (iii) the remaining life of each loan, during which pe