MFA Financial, Inc. (MFA) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the MFA Financial Inc., Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, Mr. Hal Schwartz. Please go ahead.

Thank you, operator, good morning everyone. 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 of 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, should, could, would 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, 2018, 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 that 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 2019 financial results. Thank you for your time. And I would now like to turn this call over to MFA's CEO and President, Craig Knutson.

Thank you, Hal. Good morning everyone. I'd like to thank you for your interest in and welcome you to MFA Financial's third quarter 2019 financial results webcast. With me today are Steve Yarad, our CFO; Gudmundur Kristjansson; and Bryan Wulfsohn, our Co-Chief Investment Officers and other members of senior management. Rates markets experienced continued volatility in the third quarter of 2019. Global growth slowdown concerns and trade tension contributed to a decision by the Fed to cut rates at the end of July. August brought a furious rates rally with 10-year rates plunging from 214 in mid July to 145 by Labor Day and 2 year rates falling by approximately 40 basis points during the same period. We witnessed an abrupt reversal in the first two weeks of September, when 2 year rates, retraced almost this entire 40 basis points range while 10 year rate backed up 45 basis points. The Fed again reduced the funds rates in the middle of September and then followed with a third rate cut last week. We also witnessed some surprising liquidity in the repo markets in mid-September, with overnight funding rates as high as 5% for a brief period for decisive action by the Fed settled these markets. Needless to say, for levered investors in mortgage assets, this environment has been extremely challenging. While we cannot claim to have anticipated the stunning developments in rates markets, MFA's investment strategy is very much intentionally not dependent on accurately predicting interest rate moves and we are happy to report that the market turmoil in the third quarter had very little impact on our financial results. MFA's investment acquisition strategy particularly are focused on purchase performing loans in which we include Non-QM, fix and flip, and single-family rental loans is proving to be a durable model. The groundwork that we laid beginning in early 2017 gains further traction as our origination partners grow their businesses at least in part to MFA's continued appetite to purchase volumes. Additionally, during the third quarter of 2019, MFA made investments in the form of capital contributions to several of our origination partners. MFA's reputation as a reliable buyer of residential whole loans and dependable capital partner has enabled us to source of significant volume of whole loans, including in some cases transactions with limited competition. Despite the difficult mortgage environment, we continue to make investments that provide solid returns on equity. Please turn to Page 3. MFA's GAAP earnings per share was $0.20 in the third quarter and we paid $0.20 dividends to common stockholders on October 31st. MFA has paid a $0.20 dividend now for 24 consecutive quarters. Core earnings was also $0.20 per share in the third quarter. We acquired 1.1 billion of assets in the third quarter including 918 million of whole loans. Our investment portfolio decreased slightly during the quarter, but this was primarily due to opportunistic sales of high coupons 30-year fixed rate MBS in order to share prepayment exposure prior to some high monthly prints. As previously mentioned, we made 100 million of capital commitments to several origination partners during the quarter. These range from new or additional equity contributions in all cases, minority stakes to preferred stock investments, some of which could include warrants from common equity to convertible debt investments also with warrants. This strategy is consistent with our approach whereby we provide capital in the form most suitable for our origination partners. Our book value was essentially unchanged at $7.09 per share and our economic return for the quarter was 2.5% or 10.1% annualized. We've introduced a new measure of book value, economics book value to highlight the fair market value or the significant class of our assets. Loans held at carrying value, which were 4.97 billion as of September 30. Because GAAP accounting stipulates that these assets be shows at carrying value on our balances sheet, their fair value, which is now 5.12 billion or $145 million more than the carrying value is not reflected in our reporters book value. Since the fair value of these assets represents the expected value, if we were to sell them, we believe that they're including in economics book value more accurately represents the value of our assets. Please turn to Page 4. Third quarter investment activity was very strong as we purchased approximately $1.1 billion of assets, including 918 million of whole loans. The majority of our whole loan purchases were purchased performing loans, Non-QM fix and flip and single-family rentals as our acquisition of these assets slightly exceeded our investments in these assets of 913 million in Q2. The process of acquiring these assets is very different from that associated with our other asset classes, as we generally purchased those directly from originators rather than from The Street or through bulk offerings. Through our willingness and ability to explore various arrangements including flow agreements, strategic alliances, and minority equity investments, we've been able to partner with originators to source attractive new investments while enabling them to grow with support from MFA as a reliable provider of capital. We were also during the quarter able to purchase an additional $133 million of RPL/NPL MBS Please turn to Page 5. As we have shown previously, our expanding investments in newly originated loans or purchased performing loans is beginning to have a meaningful impact on our interest income. These loans are included in our loans held at carrying value on our balance sheet. Recall that we also include loans purchased as re-performing loans or purchase credit impaired loans in our loans held at carrying value. In the third quarter, all loans at carrying value produced $64.2 million of interest income this is versus $101 million for all of 2018 and $57.9 million in Q2 of 2019. More notably, $53.6 million of this $64.2 million was from purchased performing loans, up from $46.9 million in the third quarter. As we continued to grow our balance sheet, we will add marginally more leverage, particularly on our residential whole loans held at carrying value. We would expect this leverage ratio will continue to increase modestly as our portfolio assets can easily support leverage of 3 to 4 times whether through repo borrowing or securitizations. For our credit-sensitive whole loans, we've committed significant resources to our asset management efforts. We recognized that by immersing ourselves in the complicated and sometimes messy details of managing credit-sensitive loans that we can achieve better outcomes and improved returns. As good as our third-party services are there's a tangible benefit to direct oversight and involvement in decision-making. And finally, our legacy non-agency portfolio continues to perform well and contribute materially to our financial results, generating a yield in the most recent quarter of 10.3%. Please turn to Page 6. To summarize our strategy and initiatives for the rest of 2019 and into 2020, we expect to continue to increase our investments in purchased performing loans, specifically Non-QM, fix and flip and single-family rental. When and if we are able to grow our other existing asset classes at attractive levels, we will obviously continue to do so. And as always, we are constantly evaluating new investment opportunities. Given our track record, we are usually among the first to see new opportunities as we have demonstrated the ability and willingness to help structure these deals and invest in size. We'll likely continue to execute strategic sales of legacy Non-Agency MBS. This is all part of managing a mature portfolio and includes sales or bonds or relatively high prices with little additional upside, sales of callable bonds at a premium, and sales of low loan count or odd-lot position sizes at attractive round lot levels We have managed our agency CRT portfolio by selling the season deals trading at very tight spreads and high dollar prizes earlier in the year before the rally and rate cuts prices of these securities to weaken due to prepayment concerns. This portfolio is now 378 million which is nearly half what it was in early 2018. And finally, we'll look to optimize our capital structure through the use of additional leverage including securitization. That said, I think our leverage will still likely be the lowest in the peer group. Turn to Page 7. Market conditions have been difficult for many in our space particularly as volatility in the rates markets have made investors in agency MBS challenging. Because MFA's investment strategy is much more mortgage credit focused, we've been able to continue to make sizable investments in assets that produce attractive returns. We just don't have the exposure to prepayments that most of our peer do and our business and earnings power is much less tied to the shape of the yield curve. Our stable book value and consistent earnings are a result of an investment strategy that does not depend on accurately predicting interest rate changes, and executing reactionary investments and hedging activities. To our considerable efforts to partner in creative ways with handful of originators, we are confident that we'll be able to source additional volume of purchase performing whole loans for the foreseeable future. As we continue to grow these portfolios, we are increasing the earnings power of our business. MFA's investment initiatives are firing on all cylinders. We remain optimistic that will continue to drive earnings through balance sheet growth. And now, I'd like to turn the call over to Steve Yarad, who will provide further details on the financial results for the quarter.

Thanks, Craig. For the third quarter of 2019, MFA's net income to common shareholders was 91.8 million or $0.20 per share. GAAP earnings were consistent overall with the prior quarter and again covered dividend distributions. In addition, core earnings which excludes the impact of unrealized gains and losses on certain investments in residential mortgage securities and related hedges that are included in GAAP earnings hedge period was also $0.26 of the common share. Please turn to Page 8 where we present additional information on the highlight MFA's net income this quarter, which were as follows. Other income was $0.01 per common share higher this quarter and the fact of the following. One, a continued strong contribution from residential whole loans measured at fair value through net income. Consistent with our prior periods, the majority of income generated by fair value loans refers coupon and other cash receipts. Two, higher net income impact of realized gains on sales of residential mortgage securities as we continue to opportunistically manage these portfolios; and three, improved performance of our 30-year agency MBS and related hedges. Net interest income was $0.01 per common share loan this quarter. The key drivers of MFA's third quarter net interest income. One as Craig noted, the continued growth of that portfolio purchased performing loans, which drove net interest income for residential whole loans 25% higher than the prior quarter. Lower amounts invested in residential mortgage securities. Portfolio around is reinvested primarily in whole loans. In addition, the prior quarter included approximately 3 million of accretion income recognized from the early redemption at par of legacy non-agency securities that have been held at a discount. And three, the included in quarter of interest expenses on our convertible bond that was issued last quarter in June. Finally, operating and other expenses were consistent overall with the prior quarter. SG&A expenses this quarter were 1.5% of equity and this has been longer than expected run rate. And now, I'll turn the call over to Gudmundur Kristjansson, who will provide more details of our investment activity and portfolio performance for the third quarter.

Thanks, Steve. Turn to Page 9. The third quarter was another active quarter for our investment team as we acquired approximately 1.1 billion of assets and sold approximately 330 million of assets in the quarter. We continue to grow our holdings of residential whole loans at a strong pace, purchasing over 900 million in the third quarter. 2019 has been a strong year for whole loans to acquisitions, as we have an average purchase an excess of 900 million of whole loans in each quarter this year. This robust pace of acquisitions is primarily due to our success and expanding our pace of acquisitions with Non-QM, fix and flip, and SFR loans this year. Portfolio loan up is elevated in the quarter, as we experienced an increase in early redemptions of NPL/RPL MBS, and we strategically sold 257 million of higher coupon third year agency MBS, and a gain of 2.8 million to reduce the prepayment risk in our agency MBS portfolio as we expect prepayments to remain elevated. We also opportunity sold 77 million of legacy and CRT securities in the third quarter, realizing 14.9 million of gains. Turn to Page 10. We continue to execute on the strategic plan we you laid out in 2017, as our holding with Non-QM, fix and flip, and SFR loans continues to grow and add meaningfully to earnings. Our success in incorporating these new loan products into our investment strategy continues to be the primary driver of portfolio growth. Since the third quarter of 2017, our whole loans portfolio has grown from about 90% of our investment portfolio to approximately 54% as of the end of the third quarter. The main reason for this growth has been the Non-QM, fix and flip, and SFR loans which have grown from zero in the third quarter of 2017 to over 4 billion at the end of the third quarter 2019. In addition, Non-QM, fix and flip and SFR loans now account for approximately 60% of the whole launched portfolios and approximately third of the total investment portfolio. We're extremely happy with the progress we've made on incorporating these loan products into our investment strategy and are excited to continue to grow these holdings in the future. Turn to Page 11. MFA's investment strategy which emphasizes credit risk over interest rate risk continues to deliver attractive yields and spreads. Our credit sensitive assets continue to benefit from positive credit fundamentals and lower per payments sensitivity. Yield and interest earning assets averaged 5.32% in the quarter, while the net interest rate spread was 182 basis points. Short-term rates continue to fall into third in the fourth quarter of this year in response to multiple Fed rate cuts and lower expectations for interest rates and growth in general. Year-to-date, one month LIBOR declined by 73 basis points with approximately 63 basis points of that declines happening in the second half of the year. MFA has and continues to be well placed to benefit from falling short-term rate as most of our asset financings are based on 1 or 3-month LIBOR rates and the percentage of repo that is hedged with pay fixed swaps, remains relatively low at about 37%. Turning to Page 12. Here, we show the yields, cost of funds and spreads for our holdings as well as the equity allocated to each asset class. Our largest asset class in terms of dollar amount invested as well as equity allocated continues to be whole loans of carrying value, is over 50% of MFA equity allocated to it. In addition, whole loans in general including whole loans on fair value continue to represent the majority of our equity allocation at around 60% of MFA's equity. Whole loans of carrying value yielded 5.52% in the quarter for the leverage for this asset class increase in this order to 1.9 times debt to equity compared to 1.5 times debt to equity in the second quarter. As you said before, we expect the leverage on this asset class to continue to send up overtime. Turning to Page 13 where we take a look at MFA's interest rate sensitivity. Our asset duration changed little in the quarter and remained relatively low at 160 basis points at the end of the quarter. We actually managed our hedge position this quarter and winding 75 million of higher paying longer data swaps earlier in the quarter when we sold some higher coupon 30-year agency MBS and adding 500 million of 2-year pay fix swaps at a rate of 1.39% at the end of August, when rates were closer lowest for the quarter. As a result, our swap notional balance increased by 425 million or the average pay fixed rate on swap decline 70 basis points or 2.25%. Finally, our net duration was relatively unchanged and remains relatively low and 114 basis poin1ts at the end of the quarter. Turning to Page 14, we continue to move to various interest rate cycles and experienced large changes in interest rates over a short period of time. It is important to remember that MFA strategy remains focused on maintaining a low and stable interest rates duration while emphasizing credit sensitive assets over interest rate sensitive assets. Our strategy has consistently limited quarterly changes in book value. Since 2014, the largest quarter-over-quarter decline in book value is in 4% with the average changing book value of less than 2%. As before by limiting book value fluctuations, we believe MFA will have the same power to take advantage of new opportunities as they arise. With that, I will turn the call over to Bryan, who will talk about our credit investments in more detail.

Thank you, Gudmundur. Please turn to Page 15. The current stage of mortgage credit continues to be supported by housing and economic fundamentals. Housing affordability has picked up in recent months as mortgage rates have declined at the same time home builders have been growing more positive on the housing market over the year. Home prices continued their year-over-year growth. The CoreLogic National Home Price Index was up 3.6% in August from a year ago. Net employment rate remained low throughout the quarter and was 3.6% in October. The supply of homes available remained limited and has declined further. All these factors should continue to support stability and growth to home prices. The last recorded 90-day mortgage delinquencies are still down at levels around 1%, and we expect delinquency to remain low as we believe underwriting standards are still prudent today. Turning to Page 16, our loan strategy had another successful quarter of acquisitions. We acquired over 900 million on loans consisting of over 550 million of non-term loans and approximately 375 million on business purpose loans. We were able to add several new counterparties in the Non-QM to business purpose loan space over the quarter. And as Greg mentioned, we made additional strategic investments and originators of the quarter, which we believe created a stable source for attractive assets into our portfolio. We continue to be pleased with our seasoned loan portfolios performance with our diligent asset management team oversight. Our loans appear on our balance sheet on two lines. Loans held recurring value $5 billion and loans held at fair value of $1.5 billion. The selection is permanent and we made at the time of acquisitions. Typically, we elect carrying value for purchase performing loans and re-performing loans and fair value for non-performing loans. Turning to Page 17. Our RPL portfolio continues to perform well. 87% of our portfolio remains less than 60 days delinquent. In addition, although 13% of the portfolio 60 days or greater, almost 30% of those loans have been making payments over the last 12 months. And with the recent rallying race, we have seen prepayment speeds for our RPL portfolio increase. With an amortized cost of $0.84 on $1 prepayment are positive. We expect to see alleviative prepayment speed in its lower mortgage rate environment as our borrowers gain access to new financing options as our credit continue to improve. Turning to Page 18. Our exceptional asset management teams oversight of servicing decisions and active management of employees have enhanced returns. The team has worked in concert with our servicing partners to more quick get loans to re-perform as well as limit and reduce timelines to resolution. This slide shows the outcomes for loans that were purchased prior to September month end 2018 therefore only for more than 1 year. 35% of loans that were delinquent at purchase are now either performing or paid in full and 41% have either liquidated or REO to be liquidated. The 24% are still a non-performing status. [Our modifications] have been affective, at 76% either performing or paid in full. We are happy with these results as they continue to outperform our assumptions at the time of purchase. Turning to Page 19. Again, we had another successful quarter of growth to our Non-QM portfolio. To date, we've acquired over $3.1 billion of unpaid principal down, including over $1.5 billion this year, and continue to work with our origination partners and strategic relationship. A variety of different loan types can be considered non-cat range from structural features, such as an interest-only period or turn greater than 30 years, so the way income is documented for the use of bank payments for self employed borrowers, were loans with the higher debt to income ratios and still on. We believe underwriting of these loans is prudent. The portfolio has a weighted average loan to value ratio of 56% and a FICO score over 700. The credit performance has performed as expected, is around 1%, six days and we're going to bring. Leverage is attainable to the warehouse lines and securitization. As noted before, securitization execution has improved this year and we expect to securitize should conditions once. With a low interest rate environment and currently learning, yield on these assets trade in the mid 4% range. And we are able to achieve low double-digit ROEs with appropriate leverage. And now, I'd like to turn the call back over to Gudmundur to walk you through our business purpose loans.

Thanks, Bryan. Turning to Page 20, we had another successful quarter of business purpose loan acquisitions in the third quarter, as we purchased over 375 million in UPB and undrawn commitments in the quarter. Since we started acquiring business purpose loans at the end of 2017, we have purchased over 6,500 loans with over 2 billion in UPB and undrawn commitment. We're excited about our progress and expect to continue to expand our acquisitions business purpose loan in the future. At the end of the third quarter, we have 969 million of UPB fix and flip loans with additional 126 million of undrawn commitments. Credit metrics continue to be strong and performance has been in line with our expectations. Our target yield for this asset class remains at around 7%. We held $754 million of SFR loans at the end of the third quarter. Similar to the fix and flip loans, the credit metrics and performance remained strong and in line with expectations. Our target yield for this asset class is in the mid 5% range. With that, I will turn the call over to Craig for some final comments.

Thank you, Gudmundur. In summary, we remain very active in the investment market. We purchased over of assets in the third quarter of 2019, which growth in our home loan portfolio has resulted in materially higher interest income over the last three quarters and we expect further such increases as we move forward in 2019 and into 2020. While we have made excellent progress in growing our asset based, we have further capacity to continue to increase our investments by adding leverage to our balance sheet. This concludes our presentation. Operator, will you please open up the call for questions.

[Operator Instructions] And our first question will come from the line of Rick Shane from JP Morgan.

Charlie, actually, on for Rick this morning. I noticed an uptick in the delinquencies on the fix and flip loan portfolio this quarter. Is there anything in particular that's driving that? Just curious because they're relatively short-term loans, and wondering if that's kind of a typical seasoning curve or if it's growth driven, or if there's anything else we should be thinking about there?

I think it's just more of a function of our maturing of the portfolio. We would expect overtime as the portfolio seasons and it reaches a steady state delinquency, and I think based upon what we're seeing, it's in line with our expectations. A 60 plus delinquency rate anywhere between 4% and 8% is quite common for these types of loans. And so we feel like it's in line with expectations.

The next question is from Eric Hagen from KVW.

Actually on the credit for single-family rental and other business purpose loans, can you just describe the servicing of those assets? It seems like it's obviously a little bit of an esoteric servicing model. I mean I'm thinking about the guy who's in the middle of a rehab of the property ready to sell it, but he defaults in the middle of rehabbing it. I mean how does that -- can you describe how that works?

Eric, you cut out on the first part of your question. I'm sorry, could you repeat the first part of the question?

Oh, sure. I was just asking about the servicing kind of model of the business purpose loans, specifically for the single-family rental and fix and flip. I mean it just seems like a bit of an esoteric asset class where a default would -- it might be challenging to capture the value of your asset once a borrower defaults on something like that.

Thanks for the question, Eric. I think in terms of the single-family rental, the service thing there is more similar to regular resi mortgage servicing. Many of these loans is, simply one property one loans. So, the servicing is fairly straightforward. In some cases, it might be one loan multiple properties, and that aspect the servicing is not necessarily more complicated. It's just simply if you have to foreclose, it involves a few more steps. But at the end of the day, the SFR servicing is somewhat similar to regular resi. In terms of the fix and flip of the business proposition, you are right, is more moving pieces. And so in a nutshell, the way that the servicing work is, most cases, we're requiring the servicing retain. So the originator stays on us as the servicer, and that has multiple benefits. First, we're working with experienced people in the business purpose space, we have extensive experience managing these types of loans and servicing these types of assets. But also, they have deep relationship with the borrowers, for a lot of these originators and services. These are repeat customers who have multiple loans who come back to over time. So they understand their needs, they understand the dynamics on the ground, in particular information on the local geography. And so what happens in practice is that, yes, the loans is a short term loan, but there is a draw mechanism, there's an inspection mechanism. So you are throughout the lifetime of alone, you have multiple touch points where you're figuring out one, how they targeted going, have they met their milestones, and so on and so forth. So you have a lot of visibility, what's going on the ground. And to the extent that something goes wrong, the key piece there is one, the loan was profitably underwritten at the time of purchase, meaning the LTV at the beginning and the LTV throughout the life of the loan is appropriately priced. And then, if you need to step in and work through the property, if you have the appropriate resources you need to do that so. And there's two aspects to that. One is you're working with tight accomplished services originals, but also as you know, from our previous experiences, and ongoing experiences, we're working through our nonperforming loan portfolio. We have extensive experience in loss mitigation foreclosing on properties, owning and managing REO. And so we feel that all those in-house expertise here, along with the excellent partners in this room quite well positioned to kind of work through any issues that might arise.

And Eric, I'll just add one thing is that it defies logic a little bit, but you do see it on fix and flip loans. So an operator may finish a project and the house is listed. And he's on. He's on to the next project, and he's committed capital for the next project. And you'll quite often see this where we'll miss a payment or two while the house is on the market. And he knows he is going to sell him, he's going to pay off the loan, but he's also the next thing. So it's a little surprising because you wouldn't necessarily expect it, but it's just a fact. And it occurs, it occurs somewhat frequently in this space.

That was exactly the kind of detail I was looking for. I mean, Craig, you noted that we should expect leverage to tick up a little bit. The model can handle between 3 and 4x. I'm just trying to square this way. I mean you've got some really high-yielding positions that aren't levered very much that are rolling off the portfolio and being replaced with some of the business purpose loans, which you guys have talked a lot about. And admittedly, those can handle higher leverage. I'm just trying to understand if what you're trying to guide us to is earnings increasing over time? Or is this -- is the higher leverage really just there to basically keep earnings level?

I mean, I would say I look at the additional leverage capacity as a way to grow our assets, right? And so, the obvious one is whole loans at carrying value, which is about $5 billion sort of 1.9 times levered. So, that's really the glaring example of where you could add more leverage. And as Bryan said, you shouldn't be surprised as securitizations as the security at some point here. So I don't think, we're not trying to guide earnings or anything else, it's really how we fund additional balance sheet growth? And I think, you know, it'll be through marginally higher leverage. That said, I think our leverage ratio is 2.8 times. So, and I think, it's maybe picked up a little bit over the last year. But it moves fairly slowly, right? It's one sort of leverage is $3.5 billion of blowing. So you don't expect that to change in a quarter.

And then just one housekeeping. On the warehouse lines that you guys talked about with Non-QM and other whole loans, is that -- is the balance of that embedded in the repo you show on balance sheet? Or I guess it's not warehouse, it isn't technically a repo. I'm just trying to understand where that shows up.

Yes. Yes, it does.

Okay. What is the balance of the warehouse lines? And what's the cost of financing on that?

The balance, I mean, again, we have several warehouse line and it would say upwards of 3 billion-ish give or take on the amount we're borrowing on those. And then you would say the cost of financing is anywhere from LIBOR plus 150 to LIBOR plus 200 and change depending on the assets.

[Operator Instructions] And we'll move to the line Kenneth Lee.

Just a brief follow-up on the previous question. In terms of bringing the leverage ratio up and it sounds as if there could be some opportunity to grow assets within the whole loans portfolio, but as well you're also ramping up the business purpose loans. But just wondering in this current environment, where can we see more than relative asset growth coming from? Is it more from the whole loans or the business purpose ones as it ramps up?

Well, I guess just as a technicality, we would include the business purpose loans in our whole loans. But I think, that's where we expect our, the majority of our growth to confirm is on what we call purchase performing loans. So it's primarily non-QM fix and flips in single family rental. Bryan?

The market size as it relates to non-QM is probably bigger than the business perfect base, and if you're trying to fix and flip. So where you seen the growth sort of there and around 2 to 1 give or take for current. I mean it could stay the same, but if we're able to source additional investments on the fix and flip and SFR side, we could see additional growth there as well.

And just one follow-up, if I may, you talked about near-term outlook for some strategic sales of legacy and on agencies as well as some agency sales, I just wondering, when you look out towards the near-term or the potential implications in terms like investments spreads from that activity.

I don't think we've purchased legacy non-agencies in any material size for years. So, as I said earlier, it's really managing a mature portfolio. So that portfolio is, on average, those loans are probably 14 years old. So it's examples are selling a bond that's callable at a premium, selling bonds that we think don't really have much additional upside in terms of performance. And then, in other cases, selling small pieces, low loan count bonds, or odd-lot positions that would typically trade at a concession to a market price, where if we see that same CUSIP trade in the market, we can get around that execution for it. And sales of legacy non-agencies, we've been consistently managing that portfolio in this fashion for probably the last five years. And so I don't really think that'll change, but we don't expect that that portfolio will grow certainly.

And the next question is from Henry Coffey from Wedbush.

When we look at some of these strategic investments you're making in your origination partners, what's, and is the total balances about 100 or your investments you make this quarter were about 100?

The investments you make this quarter were about 100. Total balance is close to 123 million at the end of the quarter.

What are the economic, I mean, besides the fact that you probably get equity position. What are the other economic benefits? Is there like a preferred coupon and interest rate? Is there some positive access to the origination flow that you wouldn't get without this investment? What when you look at the economic returns and then 123 million, what are the components of that?

Sure. So, as I said, Henry, they range from common to preferred, often with warrants and convertible debt. So yes, obviously, the preferred has a coupon which without getting into the specific governance, it's a pretty healthy coupon, it's provides a good ROE, same with the convertible debt. In terms of the other economic benefit that we get, it's a couple of things. One I think, to the extent of these originators are successful and they grow their business and they increase their enterprise value. We have a piece of that. So, remains to be seen, but that's certainly a possibility. But the other thing that it does is it cements our relationship with these originators. Again, these are minority equity states, so these are not controlling interests. But these arrangements could range from a flow agreement to a commitment over time, or in some cases, they're even less formal. But it's all part of having sort of an active partnership with a handful of originators. And I'll mention that we haven't made any investments in originators that we haven't bought loans from already. So, what we found is there's no better way to get to know an originator and how they think about credit and underwriting than to own loans. So typically, it starts slowly with some transactions and it grows over time.

And are we talking about 2 or 3 originators or 10 or 20? How diversified is this position?

I would say it's safe to say it's between those two number ranges that you mentioned.

You mean 15. How about -- no, when you look at the securitization opportunities, what are the funding dynamics? And that, Steve, how does it -- is it just an alternative to LIBOR? Or is it a fixed coupon? Is it as more of a steady state? Is at a higher advanced rate? Maybe you could go through and obviously, you would be against the loans with carrying value? Maybe give us send us a sense of what that would look like?

We'll have Bryan speak to that.

Hey, Henry. Yes, one of the things that you would be fixing your funding cost that would be one advantage. The next advantage would be yes, you can increase leverage. I mean, at this point at our company is only 2.8 times leverage as a whole. And that asset class is 1.9 times and the whole loans that carrying value. So implementing the securitization and adding leverage without adding additional loans to sort of create additional interest expense on our balance sheet. So the key is growing the asset side and then optimizing the financing side that passed after that.

So that the coupon slightly higher than what you're paying?

The coupons, no, the coupon would probably be a little bit lower, but then you have to factor deal costs and alike.

And then, finally, the reporting of a fair value book value is very helpful. And a good prep for CECL How does that play out when you have a whole portfolio of loans that has never really produced any losses?

That's a very good question.

I guess, Henry, the question is what are we expecting with CECL transition? So I think we said, that is one of the difficulties that we have, we're somewhat unique, given our limited last history to try translate our past limited experience and come up with what our CECL reserve will be day one. We're still working through that. We're getting pretty close to coming up with, what we think our transition numbers will be. Well, that's fair to say that we're still running some scenarios and trying to make some elections around discounting or not discounting cash flows. And also the possibility of even electing fair value option for a portion of our portfolio and avoiding CECL together, who will do that. So it's a little early for us to speculate. At this point, work had day one transition number would be. So I'm not going to do that this time. Right, in terms of, we have had limited last history and therefore the, my expectation at this time is that the day one, impact of CECL is not going to be that significant to our overall financial position. Although it is fair to say as you transition to a life of loan reserving approach compared to an incurred loss approach that we currently use, that you would expect high reserve under that model.

I mean the two things that people have said about CECL. One is that it's basically solving a problem that doesn't exist. But the other thing is that it because banks have such as a strict capital regime to work with. Whereas the rating agencies they've sort of been doing CECL since day one. And then it creates more flexibility and opportunity for according non-bank financial. And have you had any read from your, the marketplace in terms of what opportunities CECL could create, or is it really too early to tell?

I think it's a little early to tell. I don't think that's really the way we're looking at it, but it certainly will have an impact on the non-bank financial players who aren't used to looking at loan loss reserving in this way.

Thank you and at this time, there are no further questions in queue. Please continue.

Alright, thanks. This concludes our presentation. Thank you for your interest in MFA and for joining us today. We look forward to speaking with you again next quarter.

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