MFA Financial, Inc. (MFA) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial, Inc. Second Quarter Earnings 2021 Conference Call. [Operator Instructions]. I would now like to turn the conference over to 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 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, 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, 2020, 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 it makes. For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in the press releases announcing MFA's second quarter 2021 financial results. Thank you for your time. I would now like to turn this call over to MFA's CEO and President, Craig Knutson.

Thank you, Hal. Good morning, everyone. I would like to thank you for your interest in and welcome you to MFA Financials Second Quarter 2021 Financial Results webcast. Also with me today are Steve Yarad, our CFO; Gudmundur Kristjansson and Bryan Wulfsohn, our co-Chief Investment Officers and other members of senior management. The second quarter of 2021 was a difficult period for mortgage investors, particularly for those invested in agencies. Strong economic data and early fed chatter about tapering, pushed mortgage spreads wider and a rally in rates coupled with a flattening curve caused prepayment levels to remain elevated, while never completely immune to general mortgage market trends, MFA's investment strategy intentionally mitigates many of these interest rate risks. Through asset selection that emphasizes credit versus interest rate sensitivity, and shorter duration assets that again limit interest rate risk our portfolio performed quite well during the second quarter of 2021. And our book value was stable. On the credit side, continued very strong housing trends have bolstered the value of the underlying assets securing the mortgages that we own thus lowering LTVs. Robust housing prices have also created a strong tailwind for delinquent mortgages and REO properties as these trends lead to improved resolutions and outcomes. MFA's tireless efforts to find attractive new investments were also rewarded in the second quarter as our asset acquisitions exceeded run off for the first time since late 2019. This progress is due to continued growth from many of our origination partners as well as our ability to analyze and source new investment opportunities. With financial markets awash in liquidity sourcing attractive investment opportunities has been very challenging this year. But we are starting to fire on all cylinders and we feel good about our continued growth prospects. Please turn to page 4. We reported GAAP earnings of $0.13 per share for the second quarter largely driven by a solid increase in net interest income. Contributions from credit loss reserve reversals were more modest this quarter versus Q1, 8.8 million versus 22.8 million. As were unrealized gains on fair value loans 6 million in Q2 versus 31 million in Q1. GAAP book value was $4.65, up $0.02 from March 31 and economic book value was $5.12 up $0.03 from March 31. Economic return both GAAP in economic for the second quarter was 2.6% and this follows economic returns in Q1 of 3.6% and 5% respectively. Our leverage ticked up slightly over the quarter to 1.8 to 1 versus 1.6 to 1 and we paid a $0.10 dividend to shareholders on July 30 which is a 33% increase from the dividend paid in April. Please turn to page 5. Digging into the numbers a little more our efforts to lower interest expenses through securitizations had a visible impact on our second quarter earnings as interest expense declined by $4.5 million or 15% from the first quarter. And the larger of the two securitizations executed in the second quarter had limited impact on the full quarter because it priced on June 10. Net interest income for the second quarter increased by $8 million, or 16% versus the prior quarter. We continue to make excellent progress in liquidating REO properties as we capitalize on strong housing trends and for borrowers who are still negatively impacted by COVID we've been able to offer modifications and/or repayment plans to allow them to stay in their homes, restore their payment status to current and retain the equity in their homes. Please turn to page 6. As previously announced, we completed the acquisition of Lima One on July 1 and we're very excited to welcome the Lima One team to the MFA family. We expect that this transaction will significantly increase our purchase of business purpose loans and by providing a strong capital base and expertise in securitization we will also further enhance Lima One's already existing profitability and growth potential. Please turn to page 7. Again, continuing the theme of aggressively taking advantage of available market opportunities. We executed two additional securitizations on over 850 million of UPB at attractive levels in the second quarter. As you can see on this page, AAA yields on bonds sold for the Non-QM One deal was 112 basis points and 110 basis points on the RPL One deal and the blended cost of debt for both deals was in the 130s. We expect to complete at least two additional securitizations in the third quarter. Please turn to page 8. We illustrate our investment portfolio and summarize our asset backed financing on this slide. Our investment portfolio grew by $300 million in the second quarter, which is a milestone of sorts, as is the first quarter in the last six quarters that our portfolio has increased. New loan acquisitions in the second quarter were $857 million which is more than two times the last three quarters combined. The composition of our portfolio has not changed materially since March 31 other than for the addition in Q2 of agency eligible investor loans, which Brian will discuss shortly. On the financing side, you can see that two thirds of our asset back financing is non-mar-to-market with over 70% of the non-mark-to-market financing in the form of securitization as we continue to turn out and reduce the cost of non-mark-to-market debt. And I will now turn the call over to Stephen Yarad to discuss additional details of our financial results.

Thanks, Craig. Please turn to slide 9 for an overview of our second quarter 2021 financial results. As Craig has already noted, MFA delivered solid results for the second quarter highlighted by higher net interest income and our residential hold on investments. Before diving into the details, I want to point out two important changes that impact the way our results are presented this quarter. Firstly we changed the way we present interest income on residential home loans which we've elected the fair value option at acquisition. Prior to this quarter we presented the coupon payments received along with non-interest income from fair value loans in other income on our income statement. We now present interest income on loans accounted for at fair value as part of net interest income while non-interest income, which primarily reflects market value changes, continues to be presented in other income. Prior period comparative amounts for interest income and net interest income discussed on this call, as well as in our press release issued this morning in 10-Q which we expect to fall into today are reclassified to conform to this new presentation approach. Secondly, as we noted in our last earnings call starting this quarter we decided to elect a fair value option for all acquisitions that purchase performing loans. This includes acquisitions of Non-QM, fix and flip, single family rental, and agency eligible investor loans. Purchase performing loans acquired prior to this quarter continued to be accounted for at carrying value. So we will continue to present the economic book value metric to capture the impact of fair value changes for these loans. We believe these changes in accounting method and presentation will serve to simplify the reporting of our results over time. Further, we can now present interest yield and net interest spread information for all loans in our portfolio which should make our results in a review more comparable to our peers. In addition, we believe that using fair value accounting is the best way to properly capture the impact of Lima One origination and servicing activities for loans originated by Lima and held on MFA's consolidated balance sheet. Turning out of the detail of our Q2, 2021 results. Net income the common shareholders was 58.5 million or $0.13 per share. The key items impacting our results are as follows. Net interest income of 59 million was 8 million or 16%. higher sequentially. Craig also noted interest expense again declined primarily due to the ongoing efforts to use securitization and other forms of more durable and lower cost financing. Interest income on our loan portfolio was also approximately 5 million higher primarily driven by higher pre-payments, and lower delinquency levels on purchase credit deteriorated and purchase non-performing loans. Similarly to the prior quarter, interest income from our securities investments included approximately 8 million of accretion on an MSR term note investment that was redeemed at par, but that we had taken an impairment charge on in Q1 of 2020. And net interest spread increased to an impressive 3.02% this quarter, while additional securitizations will continue to meaningfully benefit funding costs overall spread levels should moderate in future periods as prepayment speeds declined in line with seasonal factors. We reduced our overall CECL allowance on carrying value lines to 54.3 million reflecting lower loan balances and adjustments to estimated levels of future unemployment and home price appreciation used in our credit loss modeling. This reversal and other net adjustments to our CECL reserves positively impacted net income for the quarter by 8.9 million. After the significant increase in CECL reserves taken in Q1, 2020, when uncertainty related to COVID-19 economic impacts were at their highest, we reduced our CECL reserves by approximately 90 million in the subsequent five quarters. Actual charge off experience continues to remain very modest with approximately 1.6 million of net charge offs taken in the six month period into June 30, 2021. Pricing on loans held at fair value continues to be firm. Net gains of 6 million were recorded primarily reflecting the impact of market value changes. Finally, our operating and other expenses were 22.8 million for the quarter in line with the previous quarter. And with that, I will now turn the call over to Bryan Wulfsohn.

Thank you, Steve. Turning to page 10. Housing has continued to push higher over the quarter. The pace of annual home price increases have reached levels not seen in over 40 years. Historically, low rates, demographic trends and a severe lack of supply have all contributed to the rise in prices. Unemployment rate has broken through 6% and is expected to continue to move lower with the economy reopening. All of these factors combined with monetary and fiscal support have played a part in keeping mortgage credit performance strong and bode well for the continued credit performance in the near term. Turning to page 11. Non-QM origination volume increased over the quarter has raised operative borrower borrowers have been dropping. We purchased over 370 million over the second quarter which is an increase of 85% over the previous quarter. Prepayment speeds increased over the quarter, with the drop in rates to Non-QM borrowers. The three months average CPR for the portfolio was 40. We executed on a securitization in the second quarter, bringing the total amount of collateral securitized to approximately one and three quarters billion. We expect to bring another securitization of Non-QM loans in the third quarter. These securitizations have lowered our financing costs, and at the same time have provided additional stability to our borrowings. Securitization combined with non-mark-to-market term facility has resulted in over 70% of our Non-QM portfolio to be financed with non-mar-to-market leverage. We expect to continue to be a programmatic issuer of securitizations as it is currently the most efficient form of financing for our portfolio. Turning to page 12. COVID impacted our borrowers significantly as many of our borrowers are owners of small businesses that were affected by shutdowns across the country. We instituted a deferral program at the onset of the pandemic in an effort to help our borrowers manage through the crisis. Through our services we granted almost 32% of the portfolio temporary payment relief, which we believe helped put our borrowers in a better position for long term payment performance. Subsequent to June of 2020, we reverted to a forbearance program instead of a deferral as the economy opened up. The forbearance program instituted is largely now determined by state guidelines. In the second quarter we saw serious delinquency rates improve by a 10th of a percent, and 30 day delinquencies dropped by 1.4%. In addition, almost 40% of those delinquent loans made a payment in June. Many delinquent borrowers are in repayment plans which will cause them to cure their delinquency status over the next 6 to 12 months. As the economic recovery continues, the portfolio's credit performance should continue to improve. Our strategy of targeting lower LTV loans should mitigate losses under a scenario with elevated delinquencies. In many cases borrowers which no longer have the ability to afford their debt service will sell their home in order to get the return of their equity. Turning to page 13. Updated letter agreements between the Treasury and the GSE relating to the 2008 senior preferred stock purchase agreement restricted the percentage of loans purchased by the GSE is backed by investor properties in second homes to 7%. This change created a dislocation in the marketplace, requiring originators to look for alternative outlets for their loans backed by investor properties. We are able to source over 300 million of this product in the second quarter from our existing originator relationships at attractive prices. We expect to execute on our first securitization of this collateral in the third quarter, with more to follow through the opportunity process. This is another example of our ability to adapt to an ever changing environment and a testament to our strong originator relationships and a competitive market environment. Turning to page 14. Our RPL portfolio of 1 billion has been impacted by the pandemic but continues to perform well. 81% of our portfolio remains less than 60 days delinquent. Although the percentage of 60 the portfolio six days of delinquent in status is 26% a quarter of those borrowers continue to make payments. Prepayment speeds in second quarter moderated and continue to be elevated at a three month CPR of 15 as mortgage rates continue to be historically low, and more borrowers gained equity with the increased home prices. While 30% of our RPL borrowers were impacted by COVID, we have worked with our services to provide assistance to borrowers and have seen improvement in delinquency levels over the quarter. Turning to page 15. Our asset management team continues to push performance of our NPL portfolio. The team has worked in concert with our servicing partners to maximize outcomes on our portfolio. This page shows the outcomes for loans that were purchased prior to the year ended 2019. 38% of loans that were delinquent at purchase are now either performing or paid in full. 47% of either liquidated or REO to be liquidated. Our sales of REO properties have continued at an accelerated pace at advantageous prices. We have been able to cut REO portfolio in half since the pandemic began. 15% are still a non performing status. Our modifications have been effective, as almost three quarters are either performing or paid in full. We are pleased with these results as they continue to outperform our assumptions at the time of purchase. And now I'd like to turn the call over to Gudmundur to walk you through our business purpose loans.

Thanks Bryan. Turning to page 16. We closed the previously announced acquisition of Lima One on July 1. We're very excited about this transaction. And I would like to give a shout out to the entire MFA and Lima One teams that worked diligently and collaboratively towards closing the transaction quickly. Lima One is a leading nationwide originator of business purpose loans or BPLs with a strong brand recognition in the BPL borrower community. They serve the needs of short and long term borrowing strategies in the BPL space by offering a diverse set of products including fix and flip and new construction loans, long term rescue loans, and small balance multifamily value and bridge loans. Lima has originated over 3 billion since inception, and has shown that they can reliably originate over 1 billion annually, with a clear path to grow significantly beyond that. The acquisition enhances our position as a significant capital provided the BPL space, which we believe offers some of the most attractive opportunities to deploy capital in the residential mortgage space. This acquisition will provide MFA reliable access to high quality, high yielding assets that are difficult to source in the marketplace. At closing of the acquisition 152 million of business purpose loans to our balance sheet, the integration of Lima One into the MFA family as smooth and efficient. The working relationship we have built over the last four years across our organizations has been a tremendous asset in the integration and allowed Lima One to continue to earn high quality loans and service customers without any issues. One of the key initiatives has been to quickly use MFA's balance sheet and reputation to substantially improve the financing of Lima's assets and origination going forward. We've already refinanced expensive financing, a BPL securitization and subordinate does that Lima needed to put in place during 2020, which will save over 500 basis points in financing costs over time. And we are in the process of adding additional financing lines to meet the expected growth of the business going forward. Turning to page 17 where we will discuss the fix and flip portfolio. Our portfolio declined modestly by about 32 million in the second quarter, as principal pay downs continue to exceed loan acquisitions. Limited acquisitions last year led to our current season loan portfolio, where we see completed projects getting sold quickly into a strong housing market leading to high repayment rates. We expect this trend to change going forward as purchase activity has picked up meaningfully. Second quarter loan acquisitions more than doubled from the first quarter as we acquired 68 million in UPB and 180 million in max loan amounts in the quarter. As a reminder, fix and flip loans finance the acquisition, rehabilitation and construction of homes. Typically a certain amount of the loan is held back in the form of a construction hold back. This explains the difference between UPB on day one, and the max loan amount which represents the fully funded loan at the completion of project. Third quarter acquisitions are on track to increase even further, as we've already added in excess of 160 million max loan amount or fix and flip loans with the acquisition of Lima as well as other seller relationships, we expect purchase activity to be strong going forward and expect the fix and flip portfolio to grow again in the third quarter. The fix and flip portfolio delivered strong income in the second quarter, with average portfolio yields of approximately 6.4% in the quarter. The housing market continues to be extremely strong with record low mortgage rates and low levels of inventory supporting annual home price appreciation in excess of 15%. In addition, we continue to see unemployment declining and overall economic activity improving across the country. The combination of these positive economic fundamentals low initial LTVS on our loans, and the efforts of our experienced asset management team continues to lead to acceptable outcomes on our delinquent loans. 60 plus days delinquent loans continue to decline and drop 29 million to 120 million at the end of the second quarter. And what is really encouraging is that we continue to see a solid amount of loans pay off in full out of 60 plus. The loans pay off in full from serious delinquency, we often collect default interest, extension fees and other fees to pay off. For loans where there is meaningful equity in the property these can add up. Since inception we have collected approximately 4.8 million in these types of fees across our fix and flip portfolio. 60 plus days delinquency as a percentage of UPB declined 4% of 28% and remains elevated. But keep in mind that we have purchased over 2.1 billion of fix and flip loans and had over 1.5 billion pay off in full. Due to the short term nature of fix and flip loans with expected payoff in about 6 to 12 months. delinquent loans can be outstanding for longer than performing loans due to time it takes to complete foreclosure. As our purchase activity was limited last year in performing loans paid off, the delinquency percentage increased as one would naturally expect as our portfolios _. As we now grow our portfolio again and continue to have positive outcomes on serious delinquent loans, we expect both the dollar amount as well as percentage going to seem to continue to decline going forward. And so far in the third quarter, we continue to see positive delinquency trends. Finally, the fix and flip longer serves continues to trend down in the second quarter, declining by 2.1 million, primarily due to improved economic expectations and a strong housing market. Turning to page 18. Our stable family rental loan portfolio continues to deliver attractive yields and strong credit performance. The portfolio yield has remained steady in the mid to high 5% range post-COVID and was 5.76% in the second quarter. Underlying credit trends remain solid and 60 plus day delinquencies declined 90 basis points to 4.9% at the end of the second quarter. Purchase activity increased significantly from the first quarter as we purchased 102 million of single family rental loans in the second quarter, and grew the single family rental portfolio for the second quarter in a row. The pace of acquisitions has continued to accelerate into the third quarter, and we have already added approximately 100 million in the month of July. The acquisition of Lima One will significantly bolster our ability to source single family rental loans and we believe that we will be able to continue to grow our acquisition volume as well as for single family rental portfolio in the near future. Over two thirds of our single family rental portfolio is financed with non-mar-to-market financing, and over 50% to securitizations. We priced our first single family rental securitization in the first quarter of 2021, where the weighted average coupon of bonds sold was only 106 basis points. Going forward, we expect to programmatically execute single family rental securitizations to finance our rest of loans with the next deal expected in the fourth quarter. With that I will turn the call over to Craig for some final comments.

Thank you Gudmundur. We are pleased with the results of the second quarter of 2021 and even more excited about the future at MFA. Our investment initiatives are picking up steam as our asset acquisitions outpaced runoff for the first time since late 2019. We're continuing to execute our strategic plan to lower in terms of borrowing costs and we're beginning to see the results of this activity in our income statement. The strength of the housing industry has obvious positive implications for our mortgage credit investments and our acquisition of Lima One is an important initiative that will enhance our ability to deploy future capital in the BPL sector and grow our future earnings power. Operator, please open up the line for questions.

Certainly. [Operator Instructions] We will go to the line of Bose George with KBW. And your line is open.

Hey, everyone, this is actually Mike on for Bose. A couple questions on Lima One was there any goodwill created as a result of the transaction?

Hi Mike this is Steve Yarad. So the transaction didn't close until July 1. So there will be some goodwill with the transaction was still working through the purchase price allocations and some other items of that nature. So we'll discuss that more fully on our next earnings call. Lima One results aren't consolidated into MFA results until the third quarter is not consolidated as of June 30.

That's how fun and then last quarter you got to I think it was $0.08 to $0.12 cents of accretion from the transaction 2021. I was just wondering is that still the case for 2021? And then how are you thinking about accretion into 2022?

So I think that accretion number that we talked about was an estimate for a 12 month period, not for the calendar year. 21. And again it's very early to tell and a lot of things are changing. But I have no reason to think that that that's inaccurate, or that that's changed materially since we talked on the last call.

That's helpful and then one thing we've heard a lot is just the competition and returning to the BPL space. I was just wondering if you could talk through some of the economics on the loans that you purchase from Lima One versus other originators? And just how that looks?

Yes. It's a great question. The space has gotten more attention, certainly because rates are low, and there's a decent amount of competition to acquire assets in general. And that's why we believe it is important that was what else the thought the reason is going into the acquisitions to have solid control over the sourcing of the assets. And so by acquiring Lima One, we have acquired one of the leading originator in the space one has an established relationships with various fix and flip investors, as well as a show on the track record to originate in excess of a billion dollars of loans a year. So from that perspective we feel that we've taken pole position in ability to source the assets, relative to some other people have to go out and identify various sellers and find multiple sellers to acquire loan. So I think that is an important distinction is that we have now achieved through the acquisition of Lima One. In terms of the economics, look, I mean, the loans that Lima originates, we put them on our balance sheet at cost. And so the question is what does that mean. So usually on the BPL side, the fix and flip side, you're acquiring loans at a net coupon, and the originator retains anywhere from 100 basis points up to 200 basis points on the servicing spread. So if an originator is creating a loan with an 8% coupon an investor would acquire it at a pass rate of 6%. For us we put the full 8% coupon on our balance sheet. So from that perspective we reap the benefit from the full coupon of the loan, which is obviously beneficial. On the single family rental side those loans trader premium in the marketplace. Again, we'll put those loans on our cost which probably as a benefit of up to 100, to 150 basis points in terms of difference in terms of yield to our balance sheet. So I hope that answered some of your questions. And I guess if I missed some just feel free to follow up.

No, that's very helpful. Thanks. And then just one more for me. Can you provide an update on how book value has trended since quarter end?

So we don't really have marks yet for month end July but I have no reason to think that book value has changed appreciably since June 30.

Great. Thanks for taking the questions.

Thank you. Next we will go to the line of Douglas Harter with Crédit Suisse. And your line is open.

Excuse me. I was on mute there. This is -- on for Doug Harter. Just a few questions. So first you discussed the securitizations in the quarter. And I believe you mentioned that you foresee 2Q and 3Q and I believe the blended cost was somewhere in the range, what was it 130 bits I think, on the two quarter, is that correct?

It was in the 130s. Yes.

In the 130s. Thank you. If you could just give us some color kind of going forward as to what you think, sort of what you'll see blended, or the sizing of the securitizations in 3Q and going forward, and maybe if you think you can continue to get your cost of funds down with this strategy or if you're sort of flooring out?

Yes. I mean securitization spreads have come in a bit. So incrementally we'll see better funding costs. But as we continue to move away from some of our higher costs funding to lower cost funding. It won't be as dramatic as it has been in the past but there still is room for improvement.

And you just see that for, I guess, maybe the next two quarters, and at some point, it's going to start to pour out here or do you see it going on 12 months or further than that?

Well, it's really a function of future acquisitions. I mean, as acquisitions continue to grow, you should expect that will continue to securitize.

And second question is exciting with the additions surpassing run off this quarter what do you think your capacity for growth is sort of going forward here? Do you see that being the trend kind of on a go forward basis, and sort of could you size that?

I mean, at this point it's too early to try to size that. I think I said in my prepared remarks that we feel pretty good about our future growth prospects. So it's been a difficult year towards the attractive investments, because nothing is really cheap. And there's a lot of money chasing everything out there. But I think we've worked really hard this year on existing originator relationships, on establishing some new ones and, and it takes time, but I think you saw a pretty significant impact in the second quarter. And that won't go away. In terms of absolute numbers it's impossible to predict what they'll be, but like I said, we feel pretty good.

Thank you. [Operator Instructions] And we will go to the line of Eric Hagen with BTIG. And your line is open.

Hi, thanks. Good morning. Hope you guys are well. I want to hear about how you're thinking about risk management in the Non-QM portfolio on the outlook for credit losses maybe more generally. I mean, obviously, the pay downs have been faster, business rates are low and is strong, and what it says about the borrowers that haven't been able to refi including the portion which are still classified as seriously delinquent and what the resolution looks like.

Sure, thanks Eric. So when we looked at the portfolio, and said 60 plus is around 7 and change percent. But 40% of those borrowers are making payments. So when we offer it up, either forbearance, or deferrals and borrowers are sort of still struggling coming out of the pandemic, instead of bringing themselves current by making one lump sum payment, we put them on repayment plans. So what that does is those borrowers really will become current over the next 6 to 12 months, as they make their, as they follow through on their repayment plan, because it take some time, their delinquency status doesn't really catch up until the end of that plan. So we're showing a higher level of delinquency now, but in actuality, like when you think about what's paying versus what's not paying, it's something like 3% to 4% that's not paying.

And Eric would also point out on page 11, we show that the weighted average LTV of that Non-QM portfolio is 63.6%. And that's based on origination. So given what housing prices have done obviously the mark-to-market LTV is probably considerably lower at this point. So I think that's probably the best risk mitigant right there is the LTV. But as Bryan says, if we put borrowers on repayment plans, and it takes 12 months for them to catch up they're going to show with delinquent until they've completely caught up.

Right and then a follow up on Lima One, I think you guys said last quarter, maybe reiterated today, you expect around a billion to be on boarded over the next year. And you'd maybe look to capitalize that with around $200 million to $300 million. And so I'm curious if your expectations there have changed that I think you also noted that there's some new financing lines that you were looking into. So curious what the structure and costs of that funding is expected to look like.

So yes, that's right expectation. That hasn't changed. I mean, I think Lima has, as Craig said in his comments, they're on track to do 1.3 billion this year. So as you think of an annual run rate, they certainly have the capacity to do 1.3 billion and we think they're very well set up to grow beyond that. So we're kind of excited about that. And so that expectation has not changed. And look, I mean, yes, I think we're working on various financing initiatives. And as you also know we've securitized the single family rental loans earlier this year. So that type of origination that comes out of Lima is right to roll into a securitization. And we expect to do another one of those in the fourth quarter of this year. As it relates to the fix and flip loans, I think what will happen over time is that we'll have a combination of warehouse financing, which we already have in place, as well as look into and look to issue our own revolving securitization structure to finance some of those assets. And that's where some of the synergies comes in, where MFA can use our expertise, the capital market to more efficiently finance the fix and flip loans over time. As it relates to cost I mean financing costs you can broadly say on fix and flip loans are probably anywhere from mid to high 2% to low 3% depending on if you're on warehouse line, or you do a securitization and that kind of seems to be what we're seeing.

You're looking into a securitization for those loans. One more for me, I guess I'm surprised to see a big delinquent pipeline for the fix and flip simply because HBV has just been so strong and there's this feels like there's this clear incentive for investors to get their property on the market. And so I'm just hoping for some color around potentially clearing that pipeline in order to be able to focus really on the product that's coming in from Lima One going forward.

Sure, yes. As I have said in my prepared remarks some of these things relate to the imbalance or difference between the fact that delinquent loans opposite to 30 year mortgages is outstanding longer in the physical workspace, as opposed to performing loans because performing loans on average have a lifespan of 6 to 12 months. And delinquent loans that you are carrying today, they may actually be from 2018 or 2019 instances as opposed to most of the performing loans have already paid off. And so as our purchase activity was somewhat limited last year and that we have sizable prepayments in the portfolio 9 to 12 months, the percentage has increased simply because our portfolios is smaller. But more importantly over the last 6 to 9 months, we have seen in each quarter the delinquencies decline. In fact, the 60 plus that UPB has come down by over 60 million over the last three quarters. And so what we're really seeing is that there is some delays and getting to properties because the foreclosure moratorium and delays last year. But on the resolutions that we've had both pay off out of 60 plus and I remember correctly, I think 25 million paid off in full out of 60 plus in the last quarter. So those would be owners that said okay, I have so much equity in the property, I need to figure out how to get it. And so and the other is the REO that we have foreclosed on as I liquidated, our losses to principal have been deminimis. So from that perspective we feel pretty positive on our progress and we continue to reduce that population over time with really no positive outcomes and again the key is home prices, as Craig pointed out, are rising at over 15% annually. And so from that perspective it supports obviously, all collateral in terms of the base value.

And this does conclude the conference your questions Eric.

I am sorry. [Operator Instructions] and at this time I am showing no further questions. Thank you. Please continue.

So I want to thank everyone for interest in MFA financial and we look forward to our next update when announce third quarter results in November.

Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.