Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K.
GENERAL
We are an internally-managed REIT primarily engaged in the business of investing, on a leveraged basis, in residential mortgage assets, including residential whole loans, residential mortgage securities and MSR-related assets. Our principal business objective is to deliver shareholder value through the generation of distributable income and through asset performance linked to residential mortgage credit fundamentals. We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return.
As previously disclosed, as a result of the market disruptions experienced related to the unprecedented conditions arising in connection with the onset of the COVID-19 pandemic in early 2020, during the first and second quarters of 2020 we engaged in asset sales and took other actions that significantly changed our asset composition. In particular, we sold all of our Agency and Legacy Non-Agency MBS investments, and substantially reduced our investments in MSR-related assets, RPL/NPL MBS and CRT securities. As a result of these actions, our primary investment assets as of December 31, 2020, are comprised of our residential whole loans. During the second quarter, to further help stabilize our financial position and liquidity, we entered into a $500 million senior secured credit agreement. In addition, during the second quarter, in conjunction with our previously disclosed exit from forbearance arrangements with lenders, we entered into several new asset-backed financing arrangements and renegotiated financing arrangements for certain assets with existing lenders, which together resulted in us essentially refinancing the majority of our investment portfolio.
During the third and fourth quarters of 2020, we continued to make significant progress on initiatives to lower the cost of financing our investments with more durable forms of borrowing. For example, we completed a $390 million securitization transaction of Non-QM assets in early September, which generated $92.7 million of additional liquidity and lowered the funding rate for the associated assets by approximately 165 basis points. In addition, during the fourth quarter we completed two Non-QM securitizations totaling $951.6 million, which generated $214.6 million of additional liquidity and lowered the funding rate for the associated assets by approximately 193 basis points. Additionally, during the fourth quarter we undertook steps to reduce our exposure to higher cost forms of financing that we had obtained in connection with our exit from forbearance in the second quarter. On October 9, 2020, we repaid $400 million of the principal outstanding on the senior secured loan, and the remaining balance of this facility of $81.25 million was repaid on October 30, 2020. The repayments were made without penalty or yield maintenance. Subsequent to the end of the fourth quarter, we completed a securitization solely consisting of $217.5 million of Business Purpose Rental Loans, generating approximately $48.4 million of additional liquidity. As the weighted average coupon of the bonds sold was approximately 1.06%, this transaction is expected to lower the funding rate of the underlying assets by more than 150 basis points. In addition, on January 6, 2021, we redeemed all of our outstanding $100 million aggregate principal amount of 8.00% Senior Notes Due 2042. In connection with this redemption, we recorded in our fourth quarter interest expense a non-cash charge of approximately $3.1 million representing remaining unamortized deferred expenses incurred when the Senior Notes were originally issued in 2012.
At December 31, 2020, we had total assets of approximately $6.9 billion, of which $5.3 billion, or 77%, represented residential whole loans acquired through interests in certain trusts established to acquire the loans. Our Purchased Performing Loans, which as of December 31, 2020 comprised approximately 65% of our residential whole loans, include: (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 (or 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 (or 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 (or Single-family rental loans), and (iv) previously originated loans secured by residential real estate that is generally owner occupied (or Seasoned performing loans). In addition, at December 31, 2020, we had approximately $161.0 million in investments in residential mortgage securities, which represented approximately 2% of our total assets. At such date, our portfolio included $104.2 million of CRT securities and $56.8 million of Non-Agency MBS which were primarily comprised of RPL/NPL MBS. At December 31, 2020, our investments in MSR-related assets were $239.0 million, or 3% of our total assets. Our MSR-related assets include term notes whose cash flows are considered to be largely dependent on MSR collateral and loan participations to provide financing to mortgage originators that own MSRs. Our remaining investment-related assets, which represent approximately 5% of our total assets at December 31, 2020, were primarily comprised of REO, capital contributions made to loan origination partners and MBS and loan-related receivables.
The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income and the market value of our assets, which is driven by numerous factors, including the supply and demand for residential mortgage assets in the marketplace, the terms and availability of adequate financing, general economic and real estate conditions (both on a national and local level), the impact of government actions in the real estate and mortgage sector, and the credit performance of our credit sensitive residential mortgage assets. Changes in these factors, or uncertainty in the market regarding the potential for changes in these factors, can result in significant changes in the value and/or performance of our investment portfolio. Further, our GAAP results may be impacted by market volatility, resulting in changes in market values of certain financial instruments for which changes in fair value are recorded in net income each period, such as CRT securities, and certain residential whole loans. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense) and prepayment speeds, the behavior of which involves various risks and uncertainties. Interest rates and conditional prepayment rates (or CPRs) (which measure the amount of unscheduled principal prepayment on an asset as a percentage of the asset balance), vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. With the adoption in January 2020 of new accounting standards for the measurement and recognition of credit losses, and given the extent of current and anticipated future investments in residential whole loans, our financial results are impacted by estimates of credit losses that are required to be recorded when loans that are not accounted for at fair value through net income are acquired or originated, as well as changes in these credit loss estimates that will be required to be made periodically.
With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings to increase; (ii) the value of certain of our residential mortgage assets and, correspondingly, our stockholders’ equity to decline; (iii) coupons on our adjustable-rate assets to reset, on a delayed basis, to higher interest rates; (iv) prepayments on our assets to decline, thereby slowing the amortization of purchase premiums and the accretion of our purchase discounts, and slowing our ability to redeploy capital to generally higher yielding investments; and (v) the value of our derivative hedging instruments, if any, and, correspondingly, our stockholders’ equity to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings to decrease; (ii) the value of certain of our residential mortgage assets and, correspondingly, our stockholders’ equity to increase; (iii) coupons on our adjustable-rate assets, on a delayed basis, to lower interest rates; (iv) prepayments on our assets to increase, thereby accelerating the amortization of purchase premiums and the accretion of our purchase discounts, and accelerating the redeployment of our capital to generally lower yielding investments; and (v) the value of our derivative hedging instruments, if any, and, correspondingly, our stockholders’ equity to decrease. In addition, our borrowing costs and credit lines are further affected by the type of collateral we pledge and general conditions in the credit market.
Our investments in residential mortgage assets expose us to credit risk, meaning that we are generally subject to credit losses due to the risk of delinquency, default and foreclosure on the underlying real estate collateral. Our investment process for credit sensitive assets focuses primarily on quantifying and pricing credit risk. With respect to investments in Purchased Performing Loans, we believe that sound underwriting standards, including low LTVs at origination, significantly mitigate our risk of loss. Further, we believe the discounted purchase prices paid on certain non-performing and Purchased Credit Deteriorated Loans mitigate our risk of loss in the event that, as we expect on most such investments, we receive less than 100% of the par value of these investments. (see Part I, Item 1A., “Risk Factors - Credit and Other Risks Related to our Investments” and Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” of this Annual Report on Form 10-K.)
Premiums arise when we acquire an MBS at a price in excess of the aggregate principal balance of the mortgages securing the MBS (i.e., par value) or when we acquire residential whole loans at a price in excess of their aggregate principal balance. Conversely, discounts arise when we acquire an MBS at a price below the aggregate principal balance of the mortgages securing the MBS or when we acquire residential whole loans at a price below their aggregate principal balance. Accretable purchase discounts on these investments are accreted to interest income. Purchase premiums, which are primarily carried on certain of our CRT securities and Non-QM loans, are amortized against interest income over the life of the investment using the effective yield method, adjusted for actual prepayment activity. An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the interest income earned on these assets.
CPR levels are impacted by, among other things, conditions in the housing market, new regulations, government and private sector initiatives, interest rates, availability of credit to home borrowers, underwriting standards and the economy in general. In particular, CPR reflects the conditional repayment rate (or CRR), which measures voluntary prepayments of a loan, and the conditional default rate (or CDR), which measures involuntary prepayments resulting from defaults. CPRs on our residential mortgage securities and whole loans may differ significantly. For the year ended December 31, 2020, the weighted average CPR on our Non-QM loan portfolio was 22.5%.
It is generally our business strategy to hold our residential mortgage assets as long-term investments. On at least a quarterly basis, excluding investments for which the fair value option has been elected or for which specialized loan accounting is otherwise applied, we assess our ability and intent to continue to hold each asset and, as part of this process, we monitor our residential mortgage securities and MSR-related assets that are designated as AFS for impairment. A change in our ability and/or intent to continue to hold any of these securities that are in an unrealized loss position, or a deterioration in the underlying characteristics of these securities, could result in our recognizing future impairment charges or a loss upon the sale of any such security.
Our residential mortgage investments have longer-term contractual maturities than our financing liabilities. Even though the majority of our investments have interest rates that adjust over time based on short-term changes in corresponding interest rate indices (typically following an initial fixed-rate period for our Hybrids), the interest rates we pay on our borrowings will typically change at a faster pace than the interest rates we earn on our investments. In order to reduce this interest rate risk exposure, we may enter into derivative instruments, which in the past have generally been comprised of Swaps. The majority of our Swap derivative instruments have generally been designated as cash-flow hedges against a portion of our then current and forecasted LIBOR-based repurchase agreements. Following the significant interest rate decreases that occurred late in the first quarter of 2020, we unwound all of our Swap transactions at the end of the first quarter.
Recent Market Conditions and Our Strategy
At December 31, 2020, our residential mortgage asset portfolio, which includes residential whole loans and REO, residential mortgage securities and MSR-related assets, was approximately $6.0 billion compared to $13.1 billion at December 31, 2019. As previously disclosed, we engaged in asset sales and took other actions during 2020 related to the impact of the unprecedented conditions created by the COVID-19 pandemic, that significantly changed our asset composition. As a result of these actions, our primary investment asset as of December 31, 2020 is our residential whole loan portfolio.
The following table presents the activity for our residential mortgage asset portfolio for the year ended December 31, 2020:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
December 31, 2019
|
|
Runoff (1)
|
|
Acquisitions
|
|
Sales
|
|
Other (2)
|
|
December 31, 2020
|
|
Change
|
Residential whole loans and REO
|
|
$
|
7,860
|
|
|
$
|
(1,920)
|
|
|
$
|
1,345
|
|
|
$
|
(1,780)
|
|
|
$
|
70
|
|
|
$
|
5,575
|
|
|
$
|
(2,285)
|
|
MSR-related assets
|
|
1,217
|
|
|
(77)
|
|
|
4
|
|
|
(683)
|
|
|
(222)
|
|
|
239
|
|
|
(978)
|
|
Residential mortgage securities
|
|
3,984
|
|
|
(558)
|
|
|
160
|
|
|
(3,000)
|
|
|
(425)
|
|
|
161
|
|
|
(3,823)
|
|
Totals
|
|
$
|
13,061
|
|
|
$
|
(2,555)
|
|
|
$
|
1,509
|
|
|
$
|
(5,463)
|
|
|
$
|
(577)
|
|
|
$
|
5,975
|
|
|
$
|
(7,086)
|
|
(1) Primarily includes principal repayments, cash collections on Purchased Credit Deteriorated Loans and sales of REO.
(2) Primarily includes changes in fair value and adjustments to record lower of cost or estimated fair value adjustments on REO.
At December 31, 2020, our total recorded investment in residential whole loans and REO was $5.6 billion, or 93.3% of our residential mortgage asset portfolio. Of this amount, (i) $4.2 billion is presented as Residential whole loans, at carrying value (of which $3.5 billion were Purchased Performing Loans and $673.7 million were Purchased Credit Deteriorated Loans), and (ii) $1.2 billion is presented as Residential whole loans, at fair value, in our consolidated balance sheets. For the year ended December 31, 2020, we recognized approximately $258.8 million of income on Residential whole loans, at carrying value in Interest Income on our consolidated statements of operations, representing an effective yield of 4.91% (excluding servicing costs), with Purchased Performing Loans generating an effective yield of 4.90% and Purchased Credit Deteriorated Loans generating an effective yield of 4.99%. In addition, we recorded a net gain on residential whole loans measured at fair value through earnings of $94.2 million in Other Income, net in our consolidated statements of operations for the year ended December 31, 2020. At December 31, 2020 and 2019, we had REO with an aggregate carrying value $249.7 million and $411.7 million, respectively, which is included in Other assets on our consolidated balance sheets. During 2020, we sold Non-QM loans with an amortized cost of $1.8 billion, realizing losses of $273.0 million and sold Residential whole loans, at fair value with an aggregate unpaid principal balance of $24.1 million, realizing net losses of $0.8 million.
During 2020, economic conditions were negatively impacted by the unprecedented conditions resulting from the COVID-19 pandemic. In response to the financial impact of the COVID-19 pandemic on borrowers, and in compliance with various federal and state guidelines, starting in the first quarter of 2020 we offered short-term relief to certain borrowers who were contractually current at the time the pandemic started to impact the economy. Under the terms of such plans, for certain borrowers a deferral plan was entered into where missed payments were deferred to the maturity of the related loan, with a corresponding change to the loan’s next payment due date. In addition, certain borrowers were granted up to a seven-month
“zero pay” forbearance with payments required to resume at the conclusion of the plan. For these borrowers, delinquent payments were permitted to be placed on specified repayment plans. While the majority of the borrowers granted relief have resumed making payments at the conclusion of such deferral and forbearance periods, certain borrowers, particularly in our Non-QM loan portfolio, continue to be impacted financially by the COVID-19 pandemic and have not yet resumed payments. When these borrowers became more than 90 days delinquent on payments, any interest income receivable related to the associated loans was reversed in accordance with our non-accrual policies. At December 31, 2020, Non-QM loans with an amortized cost of $148.4 million, or 6.4% of the portfolio, were more than 90 days delinquent. For these and other borrowers that have been impacted by the COVID-19 pandemic, we are continuing to evaluate loss mitigation options with respect to these loans, including forbearance, repayment plans, loan modification and foreclosure. In addition, at December 31, 2020, Rehabilitation Loans to fix and flip borrowers with an amortized cost of $136,3 million, or 23.4% of the portfolio were more than 90 days delinquent. Because rehabilitation loans are shorter term and repayment is usually dependent on completion of the rehabilitation project and sale of the property, the strategy to resolve delinquent rehabilitation loans differs from owner occupied loans. Consequently, forbearance and repayment plans are offered less frequently. However, we seek to work with delinquent fix and flip borrowers whose projects are close to completion or are listed for sale in order to provide the borrower the opportunity to sell the property and repay our loan. In circumstances where the borrower is not able to complete the project or we are not able to work with the borrower to our mutual benefit, foreclosure or other forms of resolution are pursued.
During 2020, we sold our remaining investments in Agency MBS for $1.5 billion, realizing losses of $19.3 million, and disposed of all of our Legacy Non-Agency MBS for $1.1 billion, realizing gains of $168.2 million. As of December 31, 2020, our RPL/NPL MBS portfolio totaled $53.9 million. During 2020, we sold $200.7 million of these securities, realizing a loss of $60.2 million. The net yield on our RPL/NPL MBS portfolio was 5.64% for 2020, compared to 5.04% for 2019. In addition, our investments in MSR-related assets at December 31, 2020 totaled $239.0 million. During the three months ended March 31, 2020, we recognized an impairment loss related to our term notes backed by MSR collateral of $280.8 million based on our intent to sell, or the likelihood we would be required to sell, such notes. Later in 2020, we sold $711.7 million of term notes backed by MSR-related collateral, realizing a gain of $28.7 million. The net yield on our MSR-related assets was 7.26% for 2020, compared to 5.19% for 2019. Our investments in CRT securities totaled $104.2 million at December 31, 2020. During 2020, we sold $243.0 million of CRT securities, realizing a loss of $27.0 million.
We adopted the new accounting standard addressing the measurement of credit losses on financial instruments (CECL) on January 1, 2020. CECL requires that reserves for credit losses be estimated at the reporting date based on expected cash flows for the life of the loan or financial asset, including anticipated prepayments and reasonable and supportable forecasts of future economic conditions. For 2020, we recorded a provision for credit losses on residential whole loans held at carrying value of $13.4 million. The total allowance for credit losses recorded on residential whole loans held at carrying value at December 31, 2020 was $86.8 million. In addition, as of December 31, 2020, CECL reserves for credit losses totaling approximately $1.2 million were recorded related to undrawn commitments on loans held at carrying value. Further, we recorded an allowance for credit losses on other financial instruments of $9.0 million as of December 31, 2020. We did not record a provision for credit losses on other financial instruments for 2019.
Our GAAP book value per common share was $4.54 as of December 31, 2020. Book value per common share decreased from $7.04 as of December 31, 2019. Economic book value per common share, a non-GAAP financial measure of our financial position that adjusts GAAP book value by the amount of unrealized mark-to-market gains on our residential whole loans held at carrying value, was $4.92 at December 31, 2020, a decrease from $7.44 as of December 31, 2019. The decrease in GAAP and Economic book value during 2020 primarily reflects the net loss recorded for the year, the net reduction in amounts recorded in shareholders equity related to AFS securities and derivative hedging transactions, the impact of dividends distributions and the combined impact of the transactions that occurred in the fourth quarter that resulted in the repurchase and the exercise of warrants issued in connection with the senior secured term loan. For additional information regarding the calculation of Economic book value per share including a reconciliation to GAAP book value per share, refer to page 54 under the heading “Economic Book Value”.
For more information regarding market factors which impact our portfolio, see Part I, Item 1A. “Risk Factors” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” of this Annual Report on Form 10-K.
Information About Our Assets
The table below presents certain information about our asset allocation at December 31, 2020:
ASSET ALLOCATION
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|
|
|
|
|
|
|
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|
|
|
|
|
|
(Dollars in Millions)
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|
Residential Whole Loans, at Carrying Value (1)
|
|
Residential Whole Loans, at Fair Value
|
|
Residential Mortgage Securities
|
|
MSR-Related Assets
|
|
Other,
net (2)
|
|
Total
|
Fair Value/Carrying Value
|
|
4,108
|
|
|
1,217
|
|
|
161
|
|
|
239
|
|
|
1,137
|
|
|
6,862
|
|
Financing Agreements with non-mark-to-market collateral provisions
|
|
(906)
|
|
|
(253)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,159)
|
|
Financing Agreements with mark-to-market collateral provisions
|
|
(839)
|
|
|
(285)
|
|
|
(89)
|
|
|
(125)
|
|
|
—
|
|
|
(1,338)
|
|
Less Securitized Debt
|
|
(1,261)
|
|
|
(254)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,515)
|
|
Less Convertible Senior Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(225)
|
|
|
(225)
|
|
Less Senior Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(100)
|
|
|
(100)
|
|
Net Equity Allocated
|
|
$
|
1,102
|
|
|
$
|
425
|
|
|
$
|
72
|
|
|
$
|
114
|
|
|
$
|
812
|
|
|
$
|
2,525
|
|
Debt/Net Equity Ratio (3)
|
|
2.7
|
x
|
|
1.9
|
x
|
|
1.2
|
x
|
|
1.1
|
x
|
|
|
|
1.7
|
x
|
(1)Includes $2.3 billion of Non-QM loans, $563.4 million of Rehabilitation loans, $442.5 million of Single-family rental loans, $136.2 million of Seasoned performing loans, and $630.3 million of Purchased Credit Deteriorated Loans. At December 31, 2020, the total fair value of these loans is estimated to be approximately $4.3 billion.
(2)Includes $814.4 million of cash and cash equivalents, $7.2 million of restricted cash, $249.7 million of real estate owned, and $47.1 million of capital contributions made to loan origination partners, as well as other assets and other liabilities.
(3)Total Debt/Net Equity ratio represents the sum of borrowings under our financing agreements noted above as a multiple of net equity allocated.
Residential Whole Loans
The following table presents the contractual maturities of our residential whole loan portfolios at December 31, 2020. Amounts presented do not reflect estimates of prepayments or scheduled amortization.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Purchased Performing Loans (1)
|
|
Purchased Credit Deteriorated Loans (2)
|
|
Residential Whole Loans,
at Fair Value
|
Amount due:
|
|
|
|
|
|
|
Within one year
|
|
$
|
551,385
|
|
|
$
|
363
|
|
|
$
|
4,008
|
|
After one year:
|
|
|
|
|
|
|
Over one to five years
|
|
53,638
|
|
|
3,783
|
|
|
5,203
|
|
Over five years
|
|
2,916,601
|
|
|
669,562
|
|
|
1,207,691
|
|
Total due after one year
|
|
$
|
2,970,239
|
|
|
$
|
673,345
|
|
|
$
|
1,212,894
|
|
Total residential whole loans
|
|
$
|
3,521,624
|
|
|
$
|
673,708
|
|
|
$
|
1,216,902
|
|
(1)Excludes an allowance for credit losses of $43.5 million at December 31, 2020.
(2)Excludes an allowance for credit losses of $43.4 million at December 31, 2020.
The following table presents, at December 31, 2020, the dollar amount of certain of our residential whole loans, contractually maturing after one year, and indicates whether the loans have fixed interest rates or adjustable interest rates:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Purchased Performing Loans (1)(2)
|
|
Purchased Credit Deteriorated Loans (1)(3)
|
|
Residential Whole Loans
at Fair Value (1)
|
Interest rates:
|
|
|
|
|
|
|
Fixed
|
|
$
|
996,198
|
|
|
$
|
484,943
|
|
|
$
|
902,797
|
|
Adjustable
|
|
1,974,041
|
|
|
188,402
|
|
|
310,097
|
|
Total
|
|
$
|
2,970,239
|
|
|
$
|
673,345
|
|
|
$
|
1,212,894
|
|
(1)Includes loans on which borrowers have defaulted and are not making payments of principal and/or interest as of December 31, 2020.
(2)Excludes an allowance for credit losses of $43.5 million at December 31, 2020.
(3)Excludes an allowance for credit losses of $43.4 million at December 31, 2020.
For additional information regarding our residential whole loan portfolios, see Note 3 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.
Residential Mortgage Securities
Non-Agency MBS
The following table presents information with respect to our Non-Agency MBS at December 31, 2020 and 2019. During the three months ended June 30, 2020, we disposed of substantially all of our investments in Legacy Non-Agency MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
Non-Agency MBS
|
|
|
|
|
Face/Par
|
|
$
|
57,847
|
|
|
$
|
2,195,303
|
|
Fair Value
|
|
56,766
|
|
|
2,063,529
|
|
Amortized Cost
|
|
49,042
|
|
|
1,668,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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CRT Securities
At December 31, 2020, our total investment in CRT securities was $104.2 million, with a net unrealized gain of $18.0 million, a weighted average yield of 7.36% and a weighted average time to maturity of 18.5 years. At December 31, 2019, our total investment in CRT securities was $255.4 million, with a net unrealized gain of $6.2 million, a weighted average yield of 4.18% and weighted average time to maturity of 10.3 years.
Agency MBS
During the six months ended June 30, 2020, we disposed of all of our Agency MBS. At December 31, 2019, our total investment in Agency MBS was $1.7 billion, with a net unrealized loss of $3.4 million and a weighted average coupon of 3.83%.
MSR-Related Assets
At December 31, 2020 and 2019, we had $239.0 million and $1.2 billion, respectively, of term notes issued by SPVs that have acquired the rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. At December 31, 2020, these term notes had an amortized cost of $184.9 million, gross unrealized gains of approximately $54.0 million, a weighted average yield of 12.30% and a weighted average term to maturity of 9.2 years. At December 31, 2019, these term notes had an amortized cost of $1.2 billion, gross unrealized gains of $5.2 million, a weighted average yield of 4.75% and a weighted average term to maturity of 5.3 years.
We have participated in a loan where we committed to lend $32.6 million of which no amount was drawn at December 31, 2020. The facility expires in August, 2021.
Tax Considerations
Current period estimated taxable income
We estimate that for 2020, our taxable loss was approximately $3.9 million. We have until the filing of our 2020 tax return (due not later than October 15, 2021) to declare the distribution of any 2020 REIT taxable income not previously distributed.
Key differences between GAAP net income and REIT Taxable Income
Residential Whole Loans and Residential Mortgage Securities
The determination of taxable income attributable to residential whole loans and Non-Agency MBS is dependent on a number of factors, including timing of principal and interest payments, defaults, loss mitigation efforts and loss severities. Potential timing differences arise with respect to the accretion of discount and amortization of premium into income as well as the recognition of realized losses for tax purposes as compared to GAAP. For example: a) impairments generally are not recognized by us for income tax purposes until the asset is written-off or sold; b) capital losses may only be recognized by us to the extent of its capital gains; capital losses in excess of capital gains generally are carried over by us for potential offset against its future capital gains and c) tax hedge losses resulting from the termination of interest rate swaps by us generally are amortized over the remaining term of the swap.
In estimating taxable income for such investments during the year, management considers estimates of the amount of discount and premium expected to be accreted. Such estimates require significant judgment and actual results may differ from these estimates. Moreover, the deductibility of realized losses and their effect on discount accretion and premium amortization are analyzed on an asset-by-asset basis and, while they will result in a reduction of taxable income, this reduction tends to occur gradually and, primarily for Non-Agency MBS, in periods after the realized losses are reported. In addition, for securitization and resecuritization transactions that were treated as a sale of the underlying residential whole loans or MBS for tax purposes, taxable gain or loss, if any, resulting from the unwind of such transactions is not recognized in GAAP net income.
Use of fair value accounting for certain residential whole loans and residential mortgage securities for GAAP, but not for tax, gives rise to potential timing differences. In addition, for tax purposes the residential whole loans contributed to a variable interest entity (or VIE) used to facilitate our second quarter 2017 and fourth quarter 2020 loan securitization transactions were deemed to be sold for tax purposes, but not for GAAP reporting purposes.
Our total Non-Agency MBS portfolio for tax differs from our portfolio reported for GAAP primarily due to the fact that for tax purposes: (i) certain of the MBS contributed to the VIEs used to facilitate MBS resecuritization transactions were deemed to be sold; and (ii) the tax basis of underlying MBS considered to be reacquired in connection with the unwind of such transactions became the fair value of such securities at the time of the unwind. For GAAP reporting purposes the underlying MBS that were included in these MBS resecuritization transactions were not considered to be sold. Consequently, our REIT taxable income calculated in a given period may differ significantly from our GAAP net income.
Securitization transactions result in differences between GAAP net income and REIT Taxable Income
For tax purposes, depending on the transaction structure, a securitization and/or resecuritization transaction may be treated either as a sale or a financing of the underlying collateral. As a result, the income recognized from securitization and resecuritization transactions may differ for tax and GAAP purposes. For tax purposes, we own or may in the future acquire interests in securitization and /or resecuritization trusts, in which several of the classes of securities are or will be issued with original issue discount (or OID). As the holder of the retained interests in the trust, we generally will be required to include OID in our current gross interest income over the term of the applicable securities as the OID accrues. The rate at which the OID is recognized into taxable income is calculated using a constant rate of yield to maturity, with realized losses impacting the amount of OID recognized in REIT taxable income once they are actually incurred. For tax purposes, REIT taxable income may be recognized in excess of economic income (i.e., OID) or in advance of the corresponding cash flow from these assets, thereby affecting our dividend distribution requirement to stockholders. In addition, for securitization and/or resecuritization transactions that were treated as a sale of the underlying collateral for tax purposes, the unwinding of any such transaction will likely result in a taxable gain or loss that is likely not recognized in GAAP net income since securitization and resecuritization transactions are typically accounted for as financing transactions for GAAP purposes. The tax basis of underlying residential
whole loans or MBS re-acquired in connection with the unwind of such transactions becomes the fair market value of such assets at the time of the unwind.
Taxable income of consolidated TRS subsidiaries is included in GAAP income, but may not be included in REIT Taxable Income
Net income generated by our TRS subsidiaries is included in consolidated GAAP net income, but may not be included in REIT taxable income in the same period. Net income of U.S. domiciled TRS subsidiaries is included in REIT taxable income when distributed by the TRS. Net income of foreign domiciled TRS subsidiaries is included in REIT taxable income as if distributed to the REIT in the taxable year it is earned by the foreign domiciled TRS.
Results of Operations
In this section, we discuss the results of our operations for the year ended December 31, 2020 compared to the year ended December 31, 2019. For a discussion related to our results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Year Ended December 31, 2019, which was filed with the SEC on February 21, 2020, and is available on the SEC’s website at www.sec.gov and on our website at www.mfafinancial.com.
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
General
For 2020, we had a net loss available to our common stock and participating securities of $709.2 million, or $1.57 per basic and diluted common share, compared to net income available to common stock and participating securities for 2019 of $363.1 million, or $0.80 per basic and $0.79 per diluted common share. Following the unprecedented disruption in residential mortgage markets due to concerns related to the COVID-19 pandemic that was experienced late in the first quarter and into the second quarter of 2020, management was focused on taking actions to bolster and stabilize our balance sheet, improve our liquidity position and renegotiate the financing associated with our remaining investments. The actions included disposing our Agency and Legacy Non-Agency MBS portfolios, substantially reducing our investments in MSR-related assets, RPL/NPL MBS and CRT securities and sales of certain residential whole loans. These disposals resulted in net realized losses for the year totaling $188.9 million. Further, we recorded impairment losses on certain residential mortgage securities and MSR-related assets of $344.4 million. We also recorded impairment losses on other assets of $72.4 million, primarily related to write-downs of the carrying values of investments in certain loan originators. In addition, as we had entered into forbearance agreements with the majority of our remaining lenders that were in place for most of the second quarter, our financing costs were dramatically increased during this period. The combination of the impact of asset sales and higher financing costs during the forbearance period resulted in the significant reduction in net interest income from our investments. During the year ended December 31, 2020, we also incurred unusually high professional services and other costs in connection with negotiating forbearance arrangements with our lenders, entering into new financing arrangements and reinstating prior financing arrangements on the exit from forbearance. Finally, we recorded losses totaling $57.0 million on terminated Swaps that had previously been designated as hedges for accounting purposes, expenses totaling $25.3 million on the early payment of a senior secured credit agreement and $10.5 million of net unrealized losses on residential mortgage securities measured at fair value through earnings. These losses were partially offset by $94.2 million in net gains on our residential whole loans measured at fair value through earnings. Further, we recorded a provision for credit losses on residential whole loans held at carrying value and other financial instruments of $22.4 million, which includes a provision for credit losses on undrawn commitments of $1.2 million, during the year ended December 31, 2020.
Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense) and prepayment speeds on our investments. Interest rates and CPRs (which measure the amount of unscheduled principal prepayment on a bond or loan as a percentage of its unpaid balance) vary according to the type of investment, conditions in the financial markets and other factors, none of which can be predicted with any certainty.
The changes in average interest-earning assets and average interest-bearing liabilities and their related yields and costs are discussed in greater detail below under “Interest Income” and “Interest Expense.”
For 2020, our net interest spread and margin were 0.66% and 1.24%, respectively, compared to a net interest spread and margin of 1.96% and 2.35%, respectively, for 2019. Our net interest income decreased by $158.7 million, or 63.66%, to $90.6 million from $249.4 million for 2019. For 2020, net interest income for our residential mortgage securities and MSR-related asset portfolios decreased by approximately $118.5 million compared to 2019, primarily due to lower average amounts invested in these securities due to portfolio sales in the current period. Net interest income also includes lower net interest income from residential whole loans held at carrying value of approximately $23.0 million for 2020 compared to 2019 primarily due to lower yields earned on these assets and higher funding costs as a result of entering into forbearance agreements. In addition, we also incurred approximately $16.2 million in interest expense related to the senior secured credit agreement we entered into during the second quarter of 2020 and approximately $6.6 million higher interest expense on our Convertible Senior Notes issued in June 2019. Net interest income for 2020 also includes $38.1 million of interest expense associated with residential whole loans held at fair value, reflecting a $6.8 million decrease in borrowing costs related to these investments compared to 2019. Coupon interest income received from residential whole loans held at fair value is presented as a component of the total income earned on these investments and therefore is included in Other Income, net rather than net interest income. On January 6, 2021, we completed the redemption of our Senior Notes. In connection with this redemption, we recorded in our 2020 interest expense a non-cash charge of approximately $3.1 million representing remaining unamortized deferred expenses incurred when the Senior Notes were originally issued.
Analysis of Net Interest Income
The following table sets forth certain information about the average balances of our assets and liabilities and their related yields and costs for the years ended December 31, 2020 and 2019. Average yields are derived by dividing interest income by the average amortized cost of the related assets, and average costs are derived by dividing interest expense by the daily average balance of the related liabilities, for the periods shown. The yields and costs include premium amortization and purchase discount accretion which are considered adjustments to interest rates.
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|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
Average Balance
|
|
Interest
|
|
Average
Yield/Cost
|
|
Average Balance
|
|
Interest
|
|
Average Yield/Cost
|
(Dollars in Thousands)
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential whole loans, at carrying value (1)
|
|
$
|
5,267,932
|
|
|
$
|
258,764
|
|
|
4.91
|
%
|
|
$
|
4,372,653
|
|
|
$
|
243,980
|
|
|
5.58
|
%
|
Agency MBS (2)
|
|
390,876
|
|
|
8,852
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|
|
2.26
|
|
|
2,220,246
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|
|
55,901
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|
|
2.52
|
|
Legacy Non-Agency MBS (2)
|
|
267,417
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|
|
28,828
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|
|
10.78
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|
|
1,265,843
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|
|
146,646
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|
|
11.58
|
|
RPL/NPL MBS (2)
|
|
158,432
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|
|
8,936
|
|
|
5.64
|
|
|
1,059,046
|
|
|
53,424
|
|
|
5.04
|
|
Total MBS
|
|
816,725
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|
|
46,616
|
|
|
5.71
|
|
|
4,545,135
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|
|
255,971
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|
|
5.63
|
|
CRT securities (2)
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|
151,133
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|
|
7,521
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|
|
4.98
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|
|
384,583
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|
|
18,583
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|
|
4.83
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|
MSR-related assets (2)
|
|
495,582
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|
|
35,957
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|
|
7.26
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|
|
1,014,943
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|
|
52,647
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|
|
5.19
|
|
Cash and cash equivalents (3)
|
|
502,598
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|
|
676
|
|
|
0.13
|
|
|
195,795
|
|
|
3,393
|
|
|
1.73
|
|
Other interest-earning assets
|
|
102,447
|
|
|
9,850
|
|
|
9.61
|
|
|
105,718
|
|
|
7,152
|
|
|
6.77
|
|
Total interest-earning assets
|
|
7,336,417
|
|
|
359,384
|
|
|
4.90
|
|
|
10,618,827
|
|
|
581,726
|
|
|
5.48
|
|
Total non-interest-earning assets
|
|
1,785,408
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|
|
|
|
|
|
2,459,369
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|
|
|
|
|
Total assets
|
|
$
|
9,121,825
|
|
|
|
|
|
|
$
|
13,078,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized financing agreements (4)(5)
|
|
$
|
5,067,519
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|
|
$
|
202,851
|
|
|
4.00
|
%
|
|
$
|
8,586,684
|
|
|
$
|
292,050
|
|
|
3.40
|
%
|
Securitized debt (6)
|
|
725,200
|
|
|
22,947
|
|
|
3.16
|
|
|
632,265
|
|
|
23,294
|
|
|
3.68
|
|
Convertible Senior Notes
|
|
224,462
|
|
|
15,581
|
|
|
6.94
|
|
|
129,886
|
|
|
8,965
|
|
|
6.94
|
|
Senior Notes (7)
|
|
96,894
|
|
|
11,138
|
|
|
8.31
|
|
|
96,837
|
|
|
8,047
|
|
|
8.31
|
|
Senior secured credit agreement
|
|
147,643
|
|
|
16,241
|
|
|
11.00
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total interest-bearing liabilities
|
|
6,261,718
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|
|
268,758
|
|
|
4.24
|
|
|
9,445,672
|
|
|
332,356
|
|
|
3.52
|
|
Total non-interest-bearing liabilities
|
|
129,170
|
|
|
|
|
|
|
230,434
|
|
|
|
|
|
Total liabilities
|
|
6,390,888
|
|
|
|
|
|
|
9,676,106
|
|
|
|
|
|
Stockholders’ equity
|
|
2,730,937
|
|
|
|
|
|
|
3,402,090
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$9,121,825
|
|
|
|
|
|
$13,078,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest rate spread (8)
|
|
|
|
$
|
90,626
|
|
|
0.66
|
%
|
|
|
|
$
|
249,370
|
|
|
1.96
|
%
|
Net interest-earning assets/net interest margin (9)
|
|
$
|
1,074,699
|
|
|
|
|
1.24
|
%
|
|
$
|
1,173,155
|
|
|
|
|
2.35
|
%
|
(1)Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.
(2)Yields presented throughout this Annual Report on Form 10-K are calculated using average amortized cost data for securities which excludes unrealized gains and losses and includes principal payments receivable on securities. For GAAP reporting purposes, purchases and sales are reported on the trade date. Average amortized cost data used to determine yields is calculated based on the settlement date of the associated purchase or sale as interest income is not earned on purchased assets and continues to be earned on sold assets until settlement date.
(3)Includes average interest-earning cash, cash equivalents and restricted cash.
(4)Collateralized financing agreements include the following: Secured term notes, Non-mark-to-market term-asset based financing, and repurchase agreements. For additional information, see Note 6, included under Item 8 of this Annual Report on Form 10-K.
(5)Average cost of repurchase agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.
(6)Includes both Securitized debt, at carrying value and Securitized debt, at fair value.
(7)Interest expense for 2020 includes a non-cash charge of $3.1 million recorded in the connection with the redemption of these notes that was completed early in 2021. The yield presented for the period excludes the impact of that charge.
(8)Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.
(9)Net interest margin reflects annualized net interest income divided by average interest-earning assets.
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates (yield/cost) and changes in the volume (average balance) of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) the changes attributable to changes in volume (changes in average balance multiplied by prior rate); (ii) the changes attributable to changes in rate (changes in rate multiplied by prior average balance); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately, based on absolute values, to the changes due to rate and volume.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
Compared to
|
|
|
Year Ended December 31, 2019
|
|
|
Increase/(Decrease) due to
|
|
Total Net Change in Interest Income/Expense
|
(In Thousands)
|
|
Volume
|
|
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
Residential whole loans, at carrying value (1)
|
|
$
|
46,182
|
|
|
$
|
(31,398)
|
|
|
$
|
14,784
|
|
Residential mortgage securities
|
|
(168,639)
|
|
|
(51,778)
|
|
|
(220,417)
|
|
MSR-related assets
|
|
(32,978)
|
|
|
16,288
|
|
|
(16,690)
|
|
Cash and cash equivalents
|
|
2,230
|
|
|
(4,947)
|
|
|
(2,717)
|
|
Other interest earning assets
|
|
(227)
|
|
|
2,925
|
|
|
2,698
|
|
Total net change in income from interest-earning assets
|
|
$
|
(153,432)
|
|
|
$
|
(68,910)
|
|
|
$
|
(222,342)
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
Residential whole loan at carrying value financing agreements
|
|
$
|
25,863
|
|
|
$
|
9,216
|
|
|
$
|
35,079
|
|
Residential whole loan at fair value financing agreements
|
|
(4,697)
|
|
|
909
|
|
|
(3,788)
|
|
Residential mortgage securities repurchase agreements
|
|
(100,010)
|
|
|
(6,427)
|
|
|
(106,437)
|
|
MSR-related assets repurchased agreements
|
|
(14,176)
|
|
|
2,049
|
|
|
(12,127)
|
|
Other repurchase agreements
|
|
(1,427)
|
|
|
(499)
|
|
|
(1,926)
|
|
Securitized debt
|
|
3,178
|
|
|
(3,525)
|
|
|
(347)
|
|
Convertible Senior Notes and Senior Notes
|
|
11,452
|
|
|
(1,745)
|
|
|
9,707
|
|
Senior secured credit agreement
|
|
16,241
|
|
|
—
|
|
|
16,241
|
|
Total net change in expense from interest-bearing liabilities
|
|
(63,576)
|
|
|
(22)
|
|
|
(63,598)
|
|
Net change in net interest income
|
|
$
|
(89,856)
|
|
|
$
|
(68,888)
|
|
|
$
|
(158,744)
|
|
(1)Excludes residential whole loans held at fair value which are reported as a component of non-interest-earning assets.
The following table presents certain quarterly information regarding our net interest spread and net interest margin for the quarterly periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Earning Assets and Interest-
Bearing Liabilities
|
Quarter Ended
|
|
Net Interest Spread (1)
|
|
Net Interest Margin (2)
|
|
|
December 31, 2020
|
|
1.07
|
%
|
|
1.49
|
%
|
September 30, 2020
|
|
0.03
|
|
|
0.76
|
|
June 30, 2020
|
|
(0.90)
|
|
|
0.02
|
|
March 31, 2020
|
|
1.82
|
|
|
2.20
|
|
|
|
|
|
|
December 31, 2019
|
|
2.33
|
|
|
2.68
|
|
September 30, 2019
|
|
1.82
|
|
|
2.19
|
|
June 30, 2019
|
|
1.90
|
|
|
2.29
|
|
March 31, 2019
|
|
1.98
|
|
|
2.41
|
|
(1)Reflects the difference between the yield on average interest-earning assets and average cost of funds.
(2)Reflects annualized net interest income divided by average interest-earning assets.
The following table presents the components of the net interest spread earned on our Residential whole loans, at carrying value for the quarterly periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Performing Loans
|
|
Purchased Credit Deteriorated Loans
|
|
Total Residential Whole Loans, at Carrying Value
|
Quarter Ended
|
|
Net
Yield (1)
|
|
Cost of
Funding (2)
|
|
Net
Interest
Spread (3)
|
|
Net
Yield (1)
|
|
Cost of
Funding (2)
|
|
Net
Interest
Spread (3)
|
|
Net
Yield (1)
|
|
Cost of
Funding (2)
|
|
Net
Interest
Spread (3)
|
December 31, 2020
|
|
4.57
|
%
|
|
2.77
|
%
|
|
1.80
|
%
|
|
5.16
|
%
|
|
3.02
|
%
|
|
2.14
|
%
|
|
4.66
|
%
|
|
2.81
|
%
|
|
1.85
|
%
|
September 30, 2020
|
|
4.58
|
|
|
3.42
|
|
|
1.16
|
|
|
4.89
|
|
|
3.22
|
|
|
1.67
|
|
|
4.63
|
|
|
3.39
|
|
|
1.24
|
|
June 30, 2020
|
|
5.17
|
|
|
6.34
|
|
|
(1.17)
|
|
|
5.07
|
|
|
6.03
|
|
|
(0.96)
|
|
|
5.15
|
|
|
6.30
|
|
|
(1.15)
|
|
March 31, 2020
|
|
5.10
|
|
|
3.44
|
|
|
1.66
|
|
|
4.84
|
|
|
3.39
|
|
|
1.45
|
|
|
5.07
|
|
|
3.43
|
|
|
1.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
5.24
|
|
|
3.61
|
|
|
1.63
|
|
|
5.79
|
|
|
3.51
|
|
|
2.28
|
|
|
5.31
|
|
|
3.59
|
|
|
1.72
|
|
September 30, 2019
|
|
5.55
|
|
|
3.92
|
|
|
1.63
|
|
|
5.76
|
|
|
3.79
|
|
|
1.97
|
|
|
5.58
|
|
|
3.90
|
|
|
1.68
|
|
June 30, 2019
|
|
5.71
|
|
|
4.22
|
|
|
1.49
|
|
|
5.75
|
|
|
3.98
|
|
|
1.77
|
|
|
5.72
|
|
|
4.17
|
|
|
1.55
|
|
March 31, 2019
|
|
5.93
|
|
|
4.27
|
|
|
1.66
|
|
|
5.77
|
|
|
4.06
|
|
|
1.71
|
|
|
5.89
|
|
|
4.21
|
|
|
1.68
|
|
(1)Reflects annualized interest income on Residential whole loans, at carrying value divided by average amortized cost of Residential whole loans, at carrying value. Excludes servicing costs.
(2)Reflects annualized interest expense divided by average balance of repurchase agreements and securitized debt. Total Residential whole loans, at carrying value cost of funding include, 3, 5, 3, 5 and 6 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, respectively. Cost of funding for the quarter ended June 30, 2020 includes the impact of amortization of $10.7 million of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes. The amortization of these losses increased the funding cost by 116 basis points for Purchased Performing Loans, 107 basis points for Purchased Credit Deteriorated Loans, and 115 basis points for total Residential whole loans, at carrying value during the quarter ended June 30, 2020. At June 30, 2020, following the closing of certain financing transactions and our exit from forbearance arrangements, and an evaluation of our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring. In addition, cost of funding for the quarter ended June 30, 2020 is significantly higher than prior periods as it reflects default interest and/or higher rates charged by lenders while we were under a forbearance agreement. In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.
(3)Reflects the difference between the net yield on average Residential whole loans, at carrying value and average cost of funds on Residential whole loans, at carrying value.
The following table presents the components of the net interest spread earned on our residential mortgage securities and MSR-related assets for the quarterly periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage Securities
|
|
MSR-Related Assets
|
Quarter Ended
|
|
Net
Yield (1)
|
|
Cost of
Funding (2)
|
|
Net Interest
Rate
Spread (3)
|
|
Net
Yield (1)
|
|
Cost of
Funding
|
|
Net Interest
Rate
Spread (3)
|
December 31, 2020
|
|
7.22
|
%
|
|
2.71
|
%
|
|
4.51
|
%
|
|
12.27
|
%
|
|
2.67
|
%
|
|
9.60
|
%
|
September 30, 2020
|
|
6.75
|
|
|
3.60
|
|
|
3.15
|
|
|
11.79
|
|
|
3.43
|
|
|
8.36
|
|
June 30, 2020
|
|
6.09
|
|
|
5.23
|
|
|
0.86
|
|
|
9.96
|
|
|
6.21
|
|
|
3.75
|
|
March 31, 2020
|
|
5.40
|
|
|
2.72
|
|
|
2.68
|
|
|
4.74
|
|
|
2.56
|
|
|
2.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
6.54
|
|
|
3.26
|
|
|
3.28
|
|
|
4.88
|
|
|
2.82
|
|
|
2.06
|
|
September 30, 2019
|
|
7.44
|
|
|
3.21
|
|
|
4.23
|
|
|
5.26
|
|
|
3.23
|
|
|
2.03
|
|
June 30, 2019
|
|
5.42
|
|
|
2.98
|
|
|
2.44
|
|
|
5.34
|
|
|
3.48
|
|
|
1.86
|
|
March 31, 2019
|
|
5.34
|
|
|
2.98
|
|
|
2.36
|
|
|
5.39
|
|
|
3.56
|
|
|
1.83
|
|
(1)Reflects annualized interest income on divided by average amortized cost. Impairment charges recorded on MSR-related assets resulted in a lower amortized cost basis, which impacted the calculation of net yields in subsequent periods.
(2)Reflects annualized interest expense divided by average balance of repurchase agreements, including the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration and securitized debt. Agency MBS cost of funding includes 78, 36, 1, (9) and (13) basis points and Legacy Non-Agency MBS cost of funding includes 52, 24, 1, (14) and (20) basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, respectively. Cost of funding for the quarter ended June 30, 2020 includes the impact of amortization of $278,000 of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes. The amortization of these losses increased the funding cost by 174 basis points for total RPL/NPL MBS during the quarter ended June 30, 2020. At June 30, 2020, following the closing of certain financing transactions and our exit from forbearance arrangements, and an evaluation of our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring. In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.
(3)Reflects the difference between the net yield on average and average cost of funds.
Interest Income
Interest income on our residential whole loans held at carrying value increased by $14.8 million, or 6.1%, for 2020 to $258.8 million compared to $244.0 million for 2019. This increase primarily reflects a $895.3 million increase in the average balance of this portfolio to $5.3 billion for 2020 from $4.4 billion for 2019, partially offset by a decrease in the yield (excluding servicing costs) to 4.91% for 2020 from 5.58% for 2019.
Due to previously discussed asset sales and impairment charges, the average amortized cost of our residential mortgage securities portfolio decreased $4.0 billion to $1.0 billion for 2020 from $4.9 billion for 2019 and interest income on our residential mortgage securities portfolio decreased $220.4 million to $54.1 million for 2020 from $274.6 million for 2019. Interest income on our MSR-related assets decreased by $16.7 million to $36.0 million for 2020 compared to $52.6 million for 2019. This decrease primarily reflects a $519.4 million decrease in the average balance of these investments for 2020 to $495.6 million compared to $1.0 billion for 2019, partially offset by an increase in the yield to 7.26% for 2020 from 5.19% for 2019. The yield increased primarily due to the impact of impairment charges recorded during 2020 on the amortized cost of these assets.
Interest Expense
Our interest expense for 2020 decreased by $63.6 million, or 19.1%, to $268.8 million, from $332.4 million for 2019. This decrease primarily reflects a decrease in our average repurchase agreement borrowings to finance our residential mortgage securities portfolio, MSR-related assets and residential whole loans held at fair value partially offset by an increase in our average borrowings to finance residential whole loans held at carrying value and an increase in financing rates on our financing agreements. In addition in 2020, we incurred interest expense of approximately $16.2 million related to the senior secured credit agreement we entered into during the second quarter of 2020 and higher interest expense of $6.6 million on our Convertible Senior Notes issued in June 2019. On January 6, 2021, we completed the redemption of our Senior Notes. In connection with this redemption, we recorded in our 2020 interest expense a non-cash charge of approximately $3.1 million representing remaining unamortized deferred expenses incurred when the Senior Notes were originally issued. The effective interest rate paid on our borrowings increased to 4.24% for 2020, from 3.52% for 2019.
Provision for Credit Losses on Residential Whole Loans Held at Carrying Value and other financial instruments
For 2020, we recorded a provision for credit losses on residential whole loans held at carrying value of $13.4 million (which includes a provision for credit losses on undrawn commitments of $1.2 million) compared to a provision of $2.6 million for 2019. In addition, we recorded a provision for credit losses on other financial instruments of $9.0 million for 2020. We did not record a provision for credit losses on other financial instruments for 2019. As previously discussed, on January 1, 2020, we adopted the new accounting standard addressing the measurement of credit losses on financial instruments (CECL). With respect to our residential whole loans held at carrying value and other financial instruments, CECL requires that reserves for credit losses are estimated at the reporting date based on expected cash flows over the life of the loan or financial instrument, including anticipated prepayments and reasonable and supportable forecasts of future economic conditions.
Other Income, net
For 2020, Other (Loss)/Income, net decreased by $832.0 million, to a $606.1 million loss, compared to $225.9 million of income for 2019. The components of Other Income, net for the years ended 2020 and 2019 are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
Impairment and other losses on securities available-for-sale and other assets
|
|
$
|
(425,082)
|
|
|
$
|
(180)
|
|
Net realized (loss)/ gain on sales of residential mortgage securities and residential whole loans
|
|
(188,847)
|
|
|
62,002
|
|
Net gain on residential whole loans measured at fair value through earnings
|
|
94,213
|
|
|
158,330
|
|
Transfer from OCI of loss on swaps previously designated as hedges for accounting purposes
|
|
(57,034)
|
|
|
—
|
|
Expenses recognized on payoff of Senior secured credit agreement
|
|
(25,287)
|
|
|
—
|
|
Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings
|
|
(10,486)
|
|
|
7,080
|
|
Liquidation gains on Purchased Credit Deteriorated Loans and other loan related income
|
|
5,945
|
|
|
14,711
|
|
Other
|
|
457
|
|
|
(16,086)
|
|
Total Other (Loss)/Income, net
|
|
$
|
(606,121)
|
|
|
$
|
225,857
|
|
Operating and Other Expense
During 2020, we had compensation and benefits and other general and administrative expenses of $56.7 million, or 2.08% of average equity, compared to $52.6 million, or 1.55% of average equity, for 2019. Compensation and benefits expense decreased $1.2 million to $31.0 million for 2020, compared to $32.2 million for 2019, primarily reflecting a reduction in annual bonus compensation for the current year period partially offset by a provision for estimated severance costs in connection with a reduction in workforce that occurred in the third quarter of 2020. Our other general and administrative expenses increased by $5.3 million to $25.7 million for 2020 compared to $20.4 million for 2019, primarily due to higher costs for professional services, corporate insurance, administrative expenses associated with financing arrangements, corporate income tax and the write-off of certain internally developed software and deferred financing costs, partially offset by lower costs associated with deferred compensation to Directors in the current year period, which were impacted by the changes in our stock price. In addition, during 2020 we also incurred professional service and other costs of $44.4 million related to negotiating forbearance arrangements with our lenders entering into new financing arrangements and reinstating prior financing arrangements on the exit from forbearance.
Operating and Other Expense during 2020 also includes $40.4 million of loan servicing and other related operating expenses related to our residential whole loan activities. These expenses decreased compared to the prior year period by approximately $1.5 million, primarily due to lower servicing fees and non-recoverable advances on our residential whole loan and REO portfolios, partially offset by costs related to loan securitization activities.
Selected Financial Ratios
The following table presents information regarding certain of our financial ratios at or for the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Quarter Ended
|
|
Return on
Average Total
Assets (1)
|
|
Return on
Average Total
Stockholders’
Equity (2)(3)
|
|
Total Average
Stockholders’
Equity to Total
Average Assets (4)
|
|
Dividend
Payout
Ratio (5)
|
|
Leverage Multiple (6)
|
|
Book Value
per Share
of Common
Stock (7)
|
|
Economic Book Value per Share of Common Stock (8)
|
December 31, 2020
|
|
2.12
|
%
|
|
7.24
|
%
|
|
35.72
|
%
|
|
0.94
|
|
1.7
|
|
$
|
4.54
|
|
|
$
|
4.92
|
|
September 30, 2020
|
|
4.17
|
|
|
13.85
|
|
|
33.23
|
|
|
0.29
|
|
1.9
|
|
4.61
|
|
|
4.92
|
|
June 30, 2020
|
|
4.33
|
|
|
15.70
|
|
|
30.08
|
|
|
—
|
|
2.0
|
|
4.51
|
|
|
4.46
|
|
March 31, 2020
|
|
(26.72)
|
|
|
(26.58)
|
|
|
24.99
|
|
|
—
|
|
3.4
|
|
4.34
|
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
2.92
|
|
|
11.90
|
|
|
25.48
|
|
|
0.95
|
|
3.0
|
|
7.04
|
|
|
7.44
|
|
September 30, 2019
|
|
2.79
|
|
|
11.24
|
|
|
25.80
|
|
|
1.00
|
|
2.8
|
|
7.09
|
|
|
7.41
|
|
June 30, 2019
|
|
2.74
|
|
|
10.91
|
|
|
26.13
|
|
|
1.00
|
|
2.8
|
|
7.11
|
|
|
7.40
|
|
March 31, 2019
|
|
2.66
|
|
|
10.40
|
|
|
26.71
|
|
|
1.05
|
|
2.7
|
|
7.11
|
|
|
7.32
|
|
(1)Reflects annualized net income available to common stock and participating securities divided by average total assets.
(2)Reflects annualized net income divided by average total stockholders’ equity.
(3)For the quarter ended March 31, 2020, the amount calculated reflects the quarterly net income divided by average total stockholders’ equity.
(4)Reflects total average stockholders’ equity divided by total average assets.
(5)Reflects dividends declared per share of common stock divided by earnings per share.
(6)Represents the sum of our borrowings under financing agreements and payable for unsettled purchases divided by stockholders’ equity.
(7)Reflects total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.
(8)“Economic book value” is a non-GAAP financial measure of our financial position. To calculate our Economic book value, our portfolios of Residential whole loans at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these loans. For additional information please refer to page 54 under the heading “Economic Book Value”.
Economic Book Value
“Economic book value” is a non-GAAP financial measure of our financial position. To calculate our Economic book value, our portfolios of Residential whole loans at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these loans. This adjustment is also reflected in the table below in our end of period stockholders’ equity. Management considers that Economic book value provides investors
with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for all of our residential mortgage investments, irrespective of the accounting model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders’ Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.
The following table provides a reconciliation of our GAAP book value per common share to our non-GAAP Economic book value per common share as of the quarterly periods below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended:
|
(In Millions, Except Per Share Amounts)
|
|
December 31, 2020
|
|
September 30, 2020
|
|
June 30, 2020
|
|
March 31, 2020
|
|
December 31, 2019
|
|
September 30, 2019
|
|
June 30, 2019
|
|
March 31, 2019
|
GAAP Total Stockholders’ Equity
|
|
$
|
2,524.8
|
|
|
$
|
2,565.7
|
|
|
$
|
2,521.1
|
|
|
$
|
2,440.7
|
|
|
$
|
3,384.0
|
|
|
$
|
3,403.4
|
|
|
$
|
3,403.4
|
|
|
$
|
3,404.5
|
|
Preferred Stock, liquidation preference
|
|
(475.0)
|
|
|
(475.0)
|
|
|
(475.0)
|
|
|
(475.0)
|
|
|
(200.0)
|
|
|
(200.0)
|
|
|
(200.0)
|
|
|
(200.0)
|
|
GAAP Stockholders’ Equity for book value per common share
|
|
2,049.8
|
|
|
2,090.7
|
|
|
2,046.1
|
|
|
1,965.7
|
|
|
3,184.0
|
|
|
3,203.4
|
|
|
3,203.4
|
|
|
3,204.5
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment to Residential whole loans, at carrying value
|
|
173.9
|
|
|
141.1
|
|
|
(25.3)
|
|
|
(113.5)
|
|
|
182.4
|
|
|
145.8
|
|
|
131.2
|
|
|
92.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity including fair value adjustment to Residential whole loans, at carrying value (Economic book value)
|
|
$
|
2,223.7
|
|
|
$
|
2,231.8
|
|
|
$
|
2,020.8
|
|
|
$
|
1,852.2
|
|
|
$
|
3,366.4
|
|
|
$
|
3,349.2
|
|
|
$
|
3,334.6
|
|
|
$
|
3,296.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP book value per common share
|
|
$
|
4.54
|
|
|
$
|
4.61
|
|
|
$
|
4.51
|
|
|
$
|
4.34
|
|
|
$
|
7.04
|
|
|
$
|
7.09
|
|
|
$
|
7.11
|
|
|
$
|
7.11
|
|
Economic book value per common share
|
|
$
|
4.92
|
|
|
$
|
4.92
|
|
|
$
|
4.46
|
|
|
$
|
4.09
|
|
|
$
|
7.44
|
|
|
$
|
7.41
|
|
|
$
|
7.40
|
|
|
$
|
7.32
|
|
Number of shares of common stock outstanding
|
|
451.7
|
|
|
453.3
|
|
|
453.2
|
|
|
453.1
|
|
|
452.4
|
|
|
451.7
|
|
|
450.6
|
|
|
450.5
|
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements include the accounts of all of our subsidiaries. The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements, giving due consideration to materiality. Actual results could differ from these estimates.
Our accounting policies are described in Note 2 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K. Management believes the policies which more significantly rely on estimates and judgments to be as follows:
Allowance for Credit Losses on Residential Whole Loans
An allowance for credit losses is recorded at acquisition, and maintained on an ongoing basis, for all losses expected 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, including related economic forecasts, the value of the underlying collateral and our ability to collect on any other forms of security, such as a personal guaranty provided either by the borrower or an affiliate of the borrower.
Fair Value Measurements - Residential Whole Loans
GAAP requires the categorization of fair value measurements into three broad levels that form a hierarchy. The following describes the valuation methodologies used for our financial instrument investments categorized as level 3 in the valuation hierarchy, which require the most significant estimates and judgments to be made.
We determine the fair value of our residential whole loans after considering valuations obtained from a third-party who specializes in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price appreciation. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield. Certain business purpose loans, primarily rehabilitation loans with an original loan terms of nine to thirteen months, that are performing are valued at their carrying amount given their relatively short term to maturity and expectation of full repayment. For non-performing rehabilitation loans, adjustments to the carrying value are made to record the loan at estimated fair value based on an evaluation of several factors, including the period the loan has been delinquent, the status of the project and the estimated value of the underlying collateral. The estimation of cash flows used in pricing models is inherently subjective and imprecise. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value.
Residential whole loans, at fair value are recorded on our consolidated balance sheets at fair value and changes in their fair value are recorded through earnings. With respect to Residential whole loans, at carrying value, the fair value for these loans is disclosed in the footnotes to the consolidated financial statements and changes in their fair value do not impact earnings.
Recent Accounting Standards to Be Adopted in Future Periods
In August 2020, the Financial Accounting Standards Board (or FASB) issued accounting standards update (or ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (or ASU 2020-06). ASU 2020-06 was issued in order to reduce the complexity associated with recording financial instruments with characteristics of both liabilities and equity by eliminating certain accounting models associated with such instruments and enhancing disclosure requirements. ASU 2020-06 is effective for us for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We do not expect ASU 2020-06 to have a material impact on our accounting or disclosures.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash generally consist of borrowings under repurchase agreements and other collateralized financings, payments of principal and interest we receive on our investment portfolio, cash generated from our operating results and, to the extent such transactions are entered into, proceeds from capital market and structured financing transactions. Our most significant uses of cash are generally to pay principal and interest on our financing transactions, to purchase residential mortgage assets, to make dividend payments on our capital stock, to fund our operations, to meet margin calls and to make other investments that we consider appropriate.
We seek to employ a diverse capital raising strategy under which we may issue capital stock and other types of securities. To the extent we raise additional funds through capital market transactions, we currently anticipate using the net proceeds from such transactions to acquire additional residential mortgage-related assets, consistent with our investment policy, and for working capital, which may include, among other things, the repayment of our financing transactions. There can be no assurance, however, that we will be able to access the capital markets at any particular time or on any particular terms. We have available for issuance an unlimited amount (subject to the terms and limitations of our charter) of common stock, preferred stock, depository shares representing preferred stock, warrants, debt securities, rights and/or units pursuant to our automatic shelf registration statement and, at December 31, 2020, we had approximately 8.7 million shares of common stock available for issuance pursuant to our DRSPP shelf registration statement. During 2020, we issued 235,635 shares of common stock through
our DRSPP, raising net proceeds of approximately $1.0 million. During 2020, we did not sell any shares of common stock through our ATM Program.
On March 2, 2020, we completed the issuance of 11.0 million shares of our Series C Preferred Stock with a par value of $0.01 per share, and a liquidation preference of $25.00 per share plus accrued and unpaid dividends, in an underwritten public offering. The total net proceeds we received from the offering were approximately $266.0 million, after deducting offering expenses and the underwriting discount.
During the year ended December 31, 2020, we repurchased 14,085,678 shares of our common stock through the stock repurchase program at an average cost of $3.61 per share and a total cost of approximately $50.8 million, net of fees and commissions paid to the sales agent of approximately $141,000. In addition, as previously discussed, during the year ended December 31, 2020 we repurchased 17,593,576, warrants for $33.7 million that were included in the stock repurchase program. At December 31, 2020, approximately $165.7 million remained outstanding for future repurchases under the repurchase program.
Financing agreements
Our borrowings under financial agreements include a combination of shorter term and longer arrangements. Certain of these arrangements are collateralized directly by our residential mortgage investments or otherwise have recourse to us, while securitized debt financing is non-recourse financing. Further, certain of our financing agreements contain terms that allow the lender to make margin calls on us based on changes in the value of the underlying collateral securing the borrowing. As of December 31, 2020, we had $1.3 billion of total unpaid principal balance related to asset-backed financing agreements with mark-to-market collateral provisions and $2.7 billion of total unpaid principal balance related to asset-backed financing agreements that do not include mark-to-market collateral provisions. Repurchase agreements and other forms of collateralized financing are renewable at the discretion of our lenders and, as such, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time. The terms of the repurchase transaction borrowings under our master repurchase agreements, as such terms relate to repayment, margin requirements and the segregation of all securities that are the subject of repurchase transactions, generally conform to the terms contained in the standard master repurchase agreement published by the Securities Industry and Financial Markets Association (or SIFMA) or the global master repurchase agreement published by SIFMA and the International Capital Market Association. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts (or the percentage amount by which the collateral value is contractually required to exceed the loan amount), purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default and setoff provisions. Other non-repurchase agreement financing arrangements also contain provisions governing collateral maintenance.
With respect to margin maintenance requirements for agreements secured by harder to value assets, such as residential whole loans, Non-Agency MBS and MSR-related assets, margin calls are typically determined by our counterparties based on their assessment of changes in the fair value of the underlying collateral and in accordance with the agreed upon haircuts specified in the transaction confirmation with the counterparty. We address margin call requests in accordance with the required terms specified in the applicable agreement and such requests are typically satisfied by posting additional cash or collateral on the same business day. We review margin calls made by counterparties and assess them for reasonableness by comparing the counterparty valuation against our valuation determination. When we believe that a margin call is unnecessary because our assessment of collateral value differs from the counterparty valuation, we typically hold discussions with the counterparty and are able to resolve the matter. In the unlikely event that resolution cannot be reached, we will look to resolve the dispute based on the remedies available to us under the terms of the repurchase agreement, which in some instances may include the engagement of a third party to review collateral valuations. For certain other agreements that do not include such provisions, we could resolve the matter by substituting collateral as permitted in accordance with the agreement or otherwise request the counterparty to return the collateral in exchange for cash to unwind the financing. For additional information regarding our various types of financing arrangements, including those with non mark-to-market terms and the haircuts for those agreements with mark-to-market collateral provisions, see Note 6 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.
We expect that we will continue to pledge residential mortgage assets as part of certain of our ongoing financing arrangements. When the value of our residential mortgage assets pledged as collateral experiences rapid decreases, margin calls under our financing arrangements could materially increase, causing an adverse change in our liquidity position. Additionally, if one or more of our financing counterparties choose not to provide ongoing funding, our ability to finance our long-maturity assets would decline or otherwise become available on possibly less advantageous terms. Further, when liquidity tightens, our
counterparties to our short term arrangements with mark-to-market collateral provisions may increase their required collateral cushion (or margin) requirements on new financings, including financings that we roll with the same counterparty, thereby reducing our ability to use leverage. Access to financing may also be negatively impacted by ongoing volatility in financial markets, thereby potentially adversely impacting our current or future lenders’ ability or willingness to provide us with financing. In addition, there is no assurance that favorable market conditions will exist to permit us to consummate additional securitization transactions if we determine to seek that form of financing.
Our ability to meet future margin calls will be affected by our ability to use cash or obtain financing from unpledged collateral, the amount of which can vary based on the market value of such collateral, our cash position and margin requirements. Our cash position fluctuates based on the timing of our operating, investing and financing activities and is managed based on our anticipated cash needs. (See “Interest Rate Risk” included under Item 7A. of this Annual Report on Form 10-K and our Consolidated Statements of Cash Flows, included under Item 8 of this Annual Report on Form 10-K.)
At December 31, 2020, we had a total of $4.1 billion of residential whole loans, residential mortgage securities and MSR-related assets and $7.2 million of restricted cash pledged to our financing counterparties. At December 31, 2020, we had access to various sources of liquidity including $814.4 million of cash and cash equivalents. Our sources of liquidity do not include restricted cash. In addition, at December 31, 2020, we had $61.9 million of unencumbered residential whole loans. Further, we believe that we have unused capacity in certain borrowing lines, given that the amount currently borrowed is less than the maximum advance rate permitted by the facility. This unused capacity serves to act as a buffer against potential margin calls on certain pledged assets in the event that asset prices do not decline by more than a specified amount.
The table below presents certain information about our borrowings under asset-backed financing agreements and securitized debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed Financing
|
|
Securitized Debt
|
Quarter Ended (1)
|
|
Quarterly
Average
Balance
|
|
End of Period
Balance
|
|
Maximum
Balance at Any
Month-End
|
|
Quarterly
Average
Balance
|
|
End of Period
Balance
|
|
Maximum
Balance at Any
Month-End
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
$
|
2,833,649
|
|
|
$
|
2,497,290
|
|
|
$
|
2,823,306
|
|
|
$
|
1,202,292
|
|
|
$
|
1,514,509
|
|
|
$
|
1,514,509
|
|
September 30, 2020
|
|
3,511,453
|
|
|
3,217,678
|
|
|
3,613,968
|
|
|
610,120
|
|
|
837,683
|
|
|
837,683
|
|
June 30, 2020
|
|
4,736,610
|
|
|
3,692,845
|
|
|
5,024,926
|
|
|
538,245
|
|
|
516,102
|
|
|
541,698
|
|
March 31, 2020
|
|
9,233,808
|
|
|
7,768,180
|
|
|
9,486,555
|
|
|
558,007
|
|
|
533,733
|
|
|
594,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
8,781,646
|
|
|
9,139,821
|
|
|
9,139,821
|
|
|
590,813
|
|
|
570,952
|
|
|
594,458
|
|
September 30, 2019
|
|
8,654,350
|
|
|
8,571,422
|
|
|
8,833,159
|
|
|
617,689
|
|
|
605,712
|
|
|
621,071
|
|
June 30, 2019
|
|
8,621,895
|
|
|
8,630,642
|
|
|
8,639,311
|
|
|
645,972
|
|
|
627,487
|
|
|
649,405
|
|
March 31, 2019
|
|
8,282,621
|
|
|
8,509,713
|
|
|
8,509,713
|
|
|
675,678
|
|
|
659,184
|
|
|
679,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
7,672,309
|
|
|
7,879,087
|
|
|
7,879,087
|
|
|
699,207
|
|
|
684,420
|
|
|
702,377
|
|
September 30, 2018
|
|
6,594,050
|
|
|
7,278,270
|
|
|
7,278,270
|
|
|
665,572
|
|
|
714,203
|
|
|
744,521
|
|
June 30, 2018
|
|
6,189,916
|
|
|
5,892,228
|
|
|
6,319,178
|
|
|
432,283
|
|
|
518,655
|
|
|
523,490
|
|
March 31, 2018
|
|
6,519,390
|
|
|
6,558,860
|
|
|
6,558,860
|
|
|
357,819
|
|
|
351,278
|
|
|
361,002
|
|
(1)The information presented in the table above excludes $230.0 million of Convertible Senior Notes issued in June 2019 and $100.0 million of Senior Notes issued in April 2012. The outstanding balance of both the Convertible Senior Notes and Senior Notes have been unchanged since issuance. Subsequent to the end of the third quarter of 2020, we repaid in full the outstanding principal balance of the senior secured term loan facility. Subsequent to the end of the fourth quarter of 2020, we redeemed all of our outstanding Senior Notes.
Cash Flows and Liquidity for the Year Ended December 31, 2020
Our cash, cash equivalents and restricted cash increased by $686.9 million during the year ended December 31, 2020, reflecting: $6.4 billion provided by our investing activities, $5.7 billion used in our financing activities and $38.4 million provided by our operating activities.
At December 31, 2020, our debt-to-equity multiple was 1.7 times compared to 3.0 times at December 31, 2019. At December 31, 2020, we had borrowings under asset-backed financing agreements of $2.5 billion of which $2.3 billion were secured by residential whole loans, and $213.9 million were secured by residential mortgage securities and MSR-related assets. In addition, at December 31, 2020, we had securitized debt of $1.5 billion in connection with our loan securitization transactions. At December 31, 2019, we had borrowings under asset-backed financing agreements of $9.1 billion, of which $4.7 billion were secured by residential whole loans, $1.6 billion were secured by Agency MBS, $1.1 billion were secured by Legacy Non-Agency MBS, $495.1 million were secured by RPL/NPL MBS, $203.6 million were secured by CRT securities, $962.5 million were secured by MSR-related assets and $57.2 million were secured by other interest-earning assets. In addition, at December 31, 2019, we had securitized debt of $571.0 million in connection with our loan securitization transactions.
During 2020, $6.4 billion was provided by our investing activities. We paid $1.5 billion for purchases of residential whole loans, loan related investments and capitalized advances, and purchased $163.7 million of Residential mortgage securities and MSR-related assets. In addition, during 2020, we received cash of $633.2 million from prepayments and scheduled amortization on our Residential mortgage securities and MSR-related assets, and we sold certain of our investment securities, MSR-related assets, and other assets for $3.8 billion, realizing net gains of $85.0 million. While we generally intend to hold our MBS and CRT securities as long-term investments, we may sell certain of our securities in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions. In particular, during 2020, we sold our remaining Agency MBS and Legacy Non-Agency MBS portfolios and substantially reduced our investments in MSR-related assets and CRT securities. During 2020, we received $1.8 billion of principal payments on residential whole loans and loan related investments and $279.8 million of proceeds on sales of REO.
In connection with our repurchase agreement financing and Swaps (if any), we routinely receive margin calls/reverse margin calls from our counterparties and make margin calls to our counterparties. Margin calls and reverse margin calls, which requirements vary over time, may occur daily between us and any of our counterparties when the value of collateral pledged changes from the amount contractually required. The value of securities pledged as collateral fluctuates reflecting changes in: (i) the face (or par) value of our assets; (ii) market interest rates and/or other market conditions; and (iii) the market value of our Swaps. Margin calls/reverse margin calls are satisfied when we pledge/receive additional collateral in the form of additional assets and/or cash.
The table below summarizes our margin activity with respect to our repurchase agreement financings and derivative hedging instruments for the quarterly periods presented:
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral Pledged to Meet Margin Calls
|
|
Cash and Securities Received for Reverse
Margin Calls
|
|
Net Assets Received/(Pledged) for Margin Activity
|
For the Quarter Ended (1)
|
|
Fair Value of Securities Pledged
|
|
Cash Pledged
|
|
Aggregate Assets Pledged For Margin Calls
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
$
|
—
|
|
|
$
|
2,004
|
|
|
$
|
2,004
|
|
|
$
|
—
|
|
|
$
|
(2,004)
|
|
September 30, 2020
|
|
—
|
|
|
2,526
|
|
|
2,526
|
|
|
2,199
|
|
|
(327)
|
|
June 30, 2020
|
|
—
|
|
|
108,999
|
|
|
108,999
|
|
|
322,682
|
|
|
213,683
|
|
March 31, 2020
|
|
30,187
|
|
|
213,392
|
|
|
243,579
|
|
|
67,343
|
|
|
(176,236)
|
|
(1)Excludes variation margin payments on the Company’s cleared Swaps which are treated as a legal settlement of the exposure under the Swap contract.
We are subject to various financial covenants under our financing agreements, which include minimum liquidity and net worth requirements, net worth decline limitations and maximum debt-to-equity ratios. We were in compliance with all financial covenants through December 31, 2020.
During 2020, we paid $113.5 million for cash dividends on our common stock and dividend equivalents and paid cash dividends of $29.8 million on our preferred stock. On December 17, 2020, we declared our fourth quarter 2020 dividend on our common stock of $0.075 per share; on January 29, 2021, we paid this dividend, which totaled approximately $34.0 million, including dividend equivalents of approximately $137,000.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements and Schedule
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Page
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Financial Statements:
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All other financial statement schedules are omitted because the required information is not applicable or deemed not material, or the required information is included in the consolidated financial statements and/or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
MFA Financial, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of MFA Financial, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income/(loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and Schedule IV – Mortgage Loans on Real Estate (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission”, and our report dated February 23, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the allowance for credit losses on residential whole loans held at carrying value
As discussed in Notes 2 and 3 to the consolidated financial statements, the Company adopted ASU No. 2016-13, Financial Instruments — Credit Losses (ASC Topic 326), as of January 1, 2020, and the Company’s total allowance for credit losses on residential whole loans held at carrying value as of December 31, 2020 was $86.8 million (the December 31, 2020 ACL). The Company estimated the December 31, 2020 ACL using a current expected credit losses methodology for each of its loan portfolio segments which is based on relevant information about historical experience, current conditions, and reasonable and
supportable forecasts that affect the collectability of the loan balances, specific to the Company’s loan portfolio segments grouped by shared risk characteristics which include Non-Qualified Mortgages (non-QM loans), Rehabilitation loans, Single-Family Rental loans, Seasoned Performing loans, and Purchased Credit Deteriorated loans. These expected credit losses are generally calculated based on the estimated probability of default and loss severity of loans in the portfolio, which involves projecting each loan’s expected cash flows based on their contractual terms, expected prepayments, and estimated default and loss severity rates. These results were not discounted. The default and loss severity rates were estimated based on the following steps: (i) obtaining historical experience through an entire economic cycle for each loan type or, to the extent the sufficient historical loss experience for a given loan type was not available, publicly available data derived from the historical loss experience of certain banks deemed generally representative of the portfolio, (ii) obtaining historical economic data (U.S. unemployment rates and home price appreciation) over the same period, and (iii) estimating default and loss severity rates during three distinct future periods based on historical default and loss severity rates during periods when economic conditions similar to those forecasted were experienced. The default and severity rates were applied to the estimated amount of loans outstanding during each future period, based on contractual terms and expected prepayments. Expected prepayments are estimated based on historical experience and current and expected future economic conditions, including market interest rates. The three future periods included: (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 period economic conditions (U.S. unemployment rates and home price appreciation) are projected to equal historical averages. The Company forecasts future economic conditions based on forecasts provided by an external preparer of economic forecasts, as well as its own knowledge of the market and its portfolio. The Company generally considers multiple scenarios and selects the one that it believes results in the most reasonable estimate of expected losses. The Company may apply qualitative adjustments to these expected loss estimates, which are determined based on a variety of factors, including differences between the Company’s loan portfolio and the loan portfolios represented by available proxy data, and differences between current (and expected future) market conditions in comparison to market conditions that occurred in historical periods.
We identified the assessment of the December 31, 2020 ACL associated with the Company’s non-QM loans, Rehabilitation loans, and Purchased Credit Deteriorated loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the December 31, 2020 ACL for these loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the December 31, 2020 ACL methodology, including the methods and models used to estimate the expected prepayments and default and loss severity rates and their significant assumptions. Such significant assumptions included the economic forecast scenario and macroeconomic assumptions, the reasonable and supportable forecast periods, the composition of the publicly available data derived from the historical loss experience of certain banks, and the historical experience period. The assessment also included the evaluation of the qualitative factors and their significant assumptions. Such significant assumptions were sensitive to variation, such that minor changes in the assumption can cause significant changes in the estimates. The assessment also included an evaluation of the conceptual soundness and performance of the prepayment, default and loss severity models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the December 31, 2020 ACL estimate, including controls over the:
•development of the ACL methodology
•development of the prepayment, default and loss severity models
•identification and determination of the significant assumptions used in the prepayment, default and loss severity models
•development of the qualitative factors, including the significant assumptions used in the measurement of the qualitative factors
•analysis of the ACL results, trends, and ratios.
We evaluated the Company’s process to develop the December 31, 2020 ACL estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•evaluating the Company’s ACL methodology for compliance with U.S. generally accepted accounting principles
•evaluating judgments made by the Company relative to the development and performance testing of the prepayment, default and loss severity models by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•assessing the conceptual soundness and performance testing of the prepayment, default and loss severity models by inspecting the model documentation to determine whether the models are suitable for their intended use
•evaluating the methodology used to develop the economic forecast scenarios and underlying macroeconomic assumptions by comparing it to the Company’s business environment and relevant industry practices
•evaluating the economic forecast scenario selected through comparison to publicly available forecasts
•evaluating the length of the historical experience period and reasonable and supportable forecast periods by comparing them to specific portfolio risk characteristics and trends
•assessing the composition of the publicly available data derived from the historical loss experience of certain banks by comparing to specific portfolio risk characteristics
•evaluating the methodology used to develop the qualitative factors and the effect of those factors on the ACL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models.
We also assessed the sufficiency of the audit evidence obtained related to the December 31, 2020 ACL by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimates.
Assessment of the valuation of residential whole loans, at fair value
As discussed in Notes 2, 3 and 14 to the consolidated financial statements, the Company records certain residential whole loans at fair value on its consolidated balance sheet as a result of a fair value election made at the time of acquisition. As of December 31, 2020, the recorded balance of the Company’s residential whole loans, at fair value was $1.2 billion. The Company determines the fair value of its residential whole loans held at fair value after considering valuations obtained from a third-party that specializes in providing valuations on residential mortgage loans. The valuation approach depends on whether the loan is considered performing or non-performing at the valuation date. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using third party derived assumptions for forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on third party derived assumptions, including the property’s appraised value, estimated time to liquidate the loan, expected liquidation costs, and home price index. Estimated cash flows for both performing and non-performing loans are discounted using yields to arrive at an exit price for the asset.
We identified the assessment of the valuation of residential whole loans, at fair value as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, was involved in determining the estimate assumptions, including the forecasted prepayment, default and loss given default rates, property appraised value, estimated time to liquidate the loan, expected liquidation costs, and home price index, which are not readily observable in the market and subject to significant measurement uncertainty. The evaluation of the assumptions to determine the valuation of residential whole loans, at fair value, required subjective and complex auditor judgement as the assumptions used were sensitive to variation, such that minor changes in home prices and/or credit quality of the borrower can cause significant changes in the estimate.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of residential whole loans, at fair value. We involved valuation professionals with specialized skills and knowledge who assisted in evaluating the Company’s internal controls specific to the (1) assessment of whether the third-party aforementioned derived assumptions used to determine the fair value reflect those which a market participant would use to determine an exit price in the current market environment and (2) assessment of the third-party developed valuation techniques and models.
We involved valuation professionals with specialized skills and knowledge, who assisted in:
•evaluating the methodology and assumptions used to determine the property appraised value used by the Company for a sample of residential whole loans at fair value
•evaluating that the methodology used by the Company in determining the property appraised value is in accordance with U.S. GAAP
•developing a fair value estimate for a sample of residential whole loans at fair value using the evaluated property appraised value, estimated time to liquidate the loan, expected liquidation costs, and home price index assumptions used by the Company and publicly available external market data collectively with independently developed valuation models and/or inputs and comparing the results of our estimate of fair value to the Company’s fair value estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
New York, New York
February 23, 2021
MFA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per Share Amounts)
|
|
December 31,
2020
|
|
December 31,
2019
|
Assets:
|
|
|
|
|
Residential whole loans:
|
|
|
|
|
Residential whole loans, at carrying value ($2,704,646 and $4,847,782 pledged as collateral, respectively) (1)
|
|
$
|
4,195,332
|
|
|
$
|
6,069,370
|
|
Residential whole loans, at fair value ($827,001 and $794,684 pledged as collateral, respectively) (1)
|
|
1,216,902
|
|
|
1,381,583
|
|
Allowance for credit losses on residential whole loans held at carrying value
|
|
(86,833)
|
|
|
(3,025)
|
|
Total residential whole loans, net
|
|
5,325,401
|
|
|
7,447,928
|
|
Residential mortgage securities, at fair value ($161,000 and $3,966,591 pledged as collateral, respectively)
|
|
161,000
|
|
|
3,983,519
|
|
Mortgage servicing rights (“MSR”) related assets ($238,999 and $1,217,002 pledged as collateral, respectively)
|
|
238,999
|
|
|
1,217,002
|
|
Cash and cash equivalents
|
|
814,354
|
|
|
70,629
|
|
Restricted cash
|
|
7,165
|
|
|
64,035
|
|
Other assets
|
|
385,381
|
|
|
785,057
|
|
Total Assets
|
|
$
|
6,932,300
|
|
|
$
|
13,568,170
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Financing agreements ($3,366,772 and $0 held at fair value, respectively)
|
|
$
|
4,336,976
|
|
|
$
|
10,031,606
|
|
Other liabilities
|
|
70,522
|
|
|
152,612
|
|
Total Liabilities
|
|
$
|
4,407,498
|
|
|
$
|
10,184,218
|
|
|
|
|
|
|
Commitments and contingencies (See Note 10)
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
Preferred stock, $0.01 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, $0.01 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, $0.01 par value; 874,300 and 886,950 shares authorized; 451,714 and 452,369 shares issued
and outstanding, respectively
|
|
4,517
|
|
|
4,524
|
|
Additional paid-in capital, in excess of par
|
|
3,848,129
|
|
|
3,640,341
|
|
Accumulated deficit
|
|
(1,405,327)
|
|
|
(631,040)
|
|
Accumulated other comprehensive income
|
|
77,293
|
|
|
370,047
|
|
Total Stockholders’ Equity
|
|
$
|
2,524,802
|
|
|
$
|
3,383,952
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
6,932,300
|
|
|
$
|
13,568,170
|
|
(1)Includes approximately $1.4 billion and $186.4 million of Residential whole loans, at carrying value and $382.3 million and $567.4 million of Residential whole loans, at fair value transferred to consolidated variable interest entities (“VIEs”) at December 31, 2020 and 2019, respectively. Such assets can be used only to settle the obligations of each respective VIE.
The accompanying notes are an integral part of the consolidated financial statements.
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands, Except Per Share Amounts)
|
|
2020
|
|
2019
|
|
2018
|
Interest Income:
|
|
|
|
|
|
|
Residential whole loans held at carrying value
|
|
$
|
258,764
|
|
|
$
|
243,980
|
|
|
$
|
100,921
|
|
Residential mortgage securities
|
|
54,137
|
|
|
274,554
|
|
|
322,475
|
|
MSR-related assets
|
|
35,957
|
|
|
52,647
|
|
|
28,420
|
|
Other interest-earning assets
|
|
9,850
|
|
|
7,152
|
|
|
923
|
|
Cash and cash equivalent investments
|
|
676
|
|
|
3,393
|
|
|
2,936
|
|
Interest Income
|
|
$
|
359,384
|
|
|
$
|
581,726
|
|
|
$
|
455,675
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
Asset-backed and other collateralized financing arrangements
|
|
$
|
242,039
|
|
|
$
|
315,344
|
|
|
$
|
224,143
|
|
Other interest expense
|
|
26,719
|
|
|
17,012
|
|
|
8,043
|
|
Interest Expense
|
|
$
|
268,758
|
|
|
$
|
332,356
|
|
|
$
|
232,186
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
$
|
90,626
|
|
|
$
|
249,370
|
|
|
$
|
223,489
|
|
|
|
|
|
|
|
|
Provision for credit and valuation losses on residential whole loans and other financial instruments
|
|
$
|
(22,381)
|
|
|
$
|
(2,569)
|
|
|
$
|
(773)
|
|
Net Interest Income after Provision for Credit and Valuation Losses
|
|
$
|
68,245
|
|
|
$
|
246,801
|
|
|
$
|
222,716
|
|
|
|
|
|
|
|
|
Other Income, net:
|
|
|
|
|
|
|
Impairment and other losses on securities available-for-sale and other assets
|
|
$
|
(425,082)
|
|
|
$
|
(180)
|
|
|
$
|
(1,259)
|
|
Net realized (loss)/gain on sales of residential mortgage securities and residential whole loans
|
|
(188,847)
|
|
|
62,002
|
|
|
61,307
|
|
Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings
|
|
(10,486)
|
|
|
7,080
|
|
|
(36,815)
|
|
Net gain on residential whole loans measured at fair value through earnings
|
|
94,213
|
|
|
158,330
|
|
|
137,619
|
|
Loss on terminated swaps previously designated as hedges for accounting purposes
|
|
(57,034)
|
|
|
—
|
|
|
—
|
|
Other, net
|
|
(18,885)
|
|
|
(1,375)
|
|
|
(2,877)
|
|
Other (Loss)/Income, net
|
|
$
|
(606,121)
|
|
|
$
|
225,857
|
|
|
$
|
157,975
|
|
|
|
|
|
|
|
|
Operating and Other Expense:
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
31,042
|
|
|
$
|
32,235
|
|
|
$
|
28,423
|
|
Other general and administrative expense
|
|
25,666
|
|
|
20,413
|
|
|
17,653
|
|
Loan servicing, financing and other related costs
|
|
40,372
|
|
|
41,893
|
|
|
32,814
|
|
Costs associated with restructuring/forbearance agreement
|
|
44,434
|
|
|
—
|
|
|
—
|
|
Operating and Other Expense
|
|
$
|
141,514
|
|
|
$
|
94,541
|
|
|
$
|
78,890
|
|
|
|
|
|
|
|
|
Net Income/(Loss)
|
|
$
|
(679,390)
|
|
|
$
|
378,117
|
|
|
$
|
301,801
|
|
Less Preferred Stock Dividend Requirement
|
|
$
|
29,796
|
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
Net Income/(Loss) Available to Common Stock and Participating Securities
|
|
$
|
(709,186)
|
|
|
$
|
363,117
|
|
|
$
|
286,801
|
|
|
|
|
|
|
|
|
Basic Earnings/(Loss) per Common Share
|
|
$
|
(1.57)
|
|
|
$
|
0.80
|
|
|
$
|
0.68
|
|
Diluted Earnings/(Loss) per Common Share
|
|
$
|
(1.57)
|
|
|
$
|
0.79
|
|
|
$
|
0.68
|
|
The accompanying notes are an integral part of the consolidated financial statements.
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
|
2018
|
Net (loss)/income
|
|
$
|
(679,390)
|
|
|
$
|
378,117
|
|
|
$
|
301,801
|
|
Other Comprehensive Income/(Loss):
|
|
|
|
|
|
|
Unrealized gains on securities available-for-sale
|
|
420,281
|
|
|
20,335
|
|
|
(150,642)
|
|
Reclassification adjustment for MBS sales included in net income
|
|
(389,127)
|
|
|
(44,600)
|
|
|
(51,580)
|
|
Reclassification adjustment for impairments included in net income
|
|
(344,269)
|
|
|
(180)
|
|
|
(1,259)
|
|
Derivative hedging instrument fair value changes, net
|
|
(50,127)
|
|
|
(23,342)
|
|
|
14,545
|
|
Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk
|
|
(2,314)
|
|
|
—
|
|
|
—
|
|
Reclassification adjustment for losses/(gains) related to hedging instruments included in net income
|
|
72,802
|
|
|
(2,454)
|
|
|
—
|
|
Other Comprehensive Loss
|
|
(292,754)
|
|
|
(50,241)
|
|
|
(188,936)
|
|
Comprehensive (loss)/ income before preferred stock dividends
|
|
$
|
(972,144)
|
|
|
$
|
327,876
|
|
|
$
|
112,865
|
|
Dividends required on preferred stock
|
|
(29,796)
|
|
|
(15,000)
|
|
|
(15,000)
|
|
Comprehensive (Loss)/Income Available to Common Stock and Participating Securities
|
|
$
|
(1,001,940)
|
|
|
$
|
312,876
|
|
|
$
|
97,865
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
(In Thousands,
Except Per Share Amounts)
|
|
Preferred Stock
6.5% Series C Fixed-to-Floating Cumulative Redeemable - Liquidation Preference $25.00 per Share
|
|
Preferred Stock
7.5% 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
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(679,390)
|
|
|
—
|
|
|
(679,390)
|
|
Issuance of Series C Preferred Stock, net of expenses
|
|
11,000
|
|
|
110
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
265,942
|
|
|
—
|
|
|
—
|
|
|
266,052
|
|
Issuance of common stock, net of expenses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,792
|
|
|
138
|
|
|
7,315
|
|
|
—
|
|
|
—
|
|
|
7,453
|
|
Repurchase of shares of common stock, net of expenses (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,447)
|
|
|
(145)
|
|
|
(53,432)
|
|
|
—
|
|
|
—
|
|
|
(53,577)
|
|
Equity based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,715
|
|
|
—
|
|
|
—
|
|
|
6,715
|
|
Change in accrued dividends attributable to stock-based awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
856
|
|
|
—
|
|
|
—
|
|
|
856
|
|
Dividends declared on common stock ($0.125 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(56,546)
|
|
|
—
|
|
|
(56,546)
|
|
Dividends declared on Series B Preferred stock ($1.875 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,000)
|
|
|
—
|
|
|
(15,000)
|
|
Dividends declared on Series C Preferred stock ($1.345 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,796)
|
|
|
—
|
|
|
(14,796)
|
|
Dividends attributable to dividend equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(229)
|
|
|
—
|
|
|
(229)
|
|
Change in unrealized losses on MBS, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(313,115)
|
|
|
(313,115)
|
|
Derivative hedging instrument fair value changes and amortization, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,675
|
|
|
22,675
|
|
Warrants issued and repurchased, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,608)
|
|
|
—
|
|
|
—
|
|
|
(19,608)
|
|
Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,314)
|
|
|
(2,314)
|
|
Balance at December 31, 2020
|
|
11,000
|
|
|
$
|
110
|
|
|
8,000
|
|
|
$
|
80
|
|
|
451,714
|
|
|
$
|
4,517
|
|
|
$
|
3,848,129
|
|
|
$
|
(1,405,327)
|
|
|
$
|
77,293
|
|
|
$
|
2,524,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
(In Thousands,
Except Per Share Amounts)
|
|
Preferred Stock
7.5% 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
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
378,117
|
|
|
—
|
|
|
378,117
|
|
Issuance of common stock, net of expenses
|
|
—
|
|
|
—
|
|
|
3,145
|
|
|
26
|
|
|
12,299
|
|
|
—
|
|
|
—
|
|
|
12,325
|
|
Repurchase of shares of common stock (1)
|
|
—
|
|
|
—
|
|
|
(563)
|
|
|
—
|
|
|
(4,118)
|
|
|
—
|
|
|
—
|
|
|
(4,118)
|
|
Equity based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,230
|
|
|
—
|
|
|
—
|
|
|
9,230
|
|
Accrued dividends attributable to stock-based awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(345)
|
|
|
—
|
|
|
—
|
|
|
(345)
|
|
Dividends declared on common stock ($0.80 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(361,033)
|
|
|
—
|
|
|
(361,033)
|
|
Dividends declared on preferred stock ($1.875 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,000)
|
|
|
—
|
|
|
(15,000)
|
|
Dividends attributable to dividend equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,084)
|
|
|
—
|
|
|
(1,084)
|
|
Change in unrealized losses on MBS, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,445)
|
|
|
(24,445)
|
|
Derivative hedging instruments fair value changes, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,796)
|
|
|
(25,796)
|
|
Balance at December 31, 2019
|
|
8,000
|
|
|
$
|
80
|
|
|
452,369
|
|
|
$
|
4,524
|
|
|
$
|
3,640,341
|
|
|
$
|
(631,040)
|
|
|
$
|
370,047
|
|
|
$
|
3,383,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
|
For the Year Ended December 31, 2018
|
(In Thousands,
Except Per Share Amounts)
|
|
Preferred Stock
7.5% 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, 2017
|
|
8,000
|
|
|
$
|
80
|
|
|
397,831
|
|
|
$
|
3,978
|
|
|
$
|
3,227,304
|
|
|
$
|
(578,950)
|
|
|
$
|
609,224
|
|
|
$
|
3,261,636
|
|
Cumulative effect adjustment on adoption of new accounting standard for revenue recognition
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
295
|
|
|
—
|
|
|
295
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
301,801
|
|
|
—
|
|
|
301,801
|
|
Issuance of common stock, net of expenses
|
|
—
|
|
|
—
|
|
|
52,420
|
|
|
520
|
|
|
391,625
|
|
|
—
|
|
|
—
|
|
|
392,145
|
|
Repurchase of shares of common stock (1)
|
|
—
|
|
|
—
|
|
|
(464)
|
|
|
—
|
|
|
(3,392)
|
|
|
—
|
|
|
—
|
|
|
(3,392)
|
|
Equity based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,999
|
|
|
—
|
|
|
—
|
|
|
7,999
|
|
Accrued dividends attributable to stock-based awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(261)
|
|
|
—
|
|
|
—
|
|
|
(261)
|
|
Dividends declared on common stock ($0.80 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(339,244)
|
|
|
—
|
|
|
(339,244)
|
|
Dividends declared on preferred stock ($1.875 per share)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,000)
|
|
|
—
|
|
|
(15,000)
|
|
Dividends attributable to dividend equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(942)
|
|
|
—
|
|
|
(942)
|
|
Change in unrealized losses on MBS, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(203,481)
|
|
|
(203,481)
|
|
Derivative hedging instruments fair value changes, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,545
|
|
|
14,545
|
|
Balance at December 31, 2018
|
|
8,000
|
|
|
$
|
80
|
|
|
449,787
|
|
|
$
|
4,498
|
|
|
$
|
3,623,275
|
|
|
$
|
(632,040)
|
|
|
$
|
420,288
|
|
|
$
|
3,416,101
|
|
(1) For the year ended December 31, 2020, includes approximately $2.7 million (360,534 shares) surrendered for tax purposes related to equity-based compensation awards. For the year ended December 31, 2019, includes approximately $4.1 million (562,815 shares) surrendered for tax purposes related to equity-based compensation awards. For the year ended December 31, 2018, includes approximately $3.4 million (464,429 shares) surrendered for tax purposes related to equity-based compensation awards.
The accompanying notes are an integral part of the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MFA FINANCIAL, INC.
|
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
|
2018
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(679,390)
|
|
|
$
|
378,117
|
|
|
$
|
301,801
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Losses/(gains) on residential whole loans and real estate owned, net
|
|
243,933
|
|
|
(79,948)
|
|
|
(70,579)
|
|
Gains on residential mortgage securities and MSR related assets, net
|
|
(74,515)
|
|
|
(69,082)
|
|
|
(24,492)
|
|
Impairment and other losses on securities available-for-sale and other assets
|
|
425,082
|
|
|
180
|
|
|
1,259
|
|
Loss on terminated swaps previously designed as hedges for accounting purposes
|
|
57,034
|
|
|
—
|
|
|
—
|
|
Accretion of purchase discounts on residential mortgage securities, residential whole loans and MSR-related assets
|
|
(35,103)
|
|
|
(70,383)
|
|
|
(82,904)
|
|
Amortization of purchase premiums on residential mortgage securities and residential whole loans, and amortization of terminated hedging instruments
|
|
46,052
|
|
|
45,216
|
|
|
29,270
|
|
Provision for credit and valuation losses on residential whole loans and other financial instruments
|
|
22,121
|
|
|
2,569
|
|
|
773
|
|
Net valuation and other non-cash losses included in net income
|
|
44,055
|
|
|
24,815
|
|
|
19,208
|
|
Decrease/(increase) in other assets
|
|
39,930
|
|
|
(34,262)
|
|
|
(26,487)
|
|
(Decrease)/increase in other liabilities
|
|
(50,803)
|
|
|
18,553
|
|
|
32
|
|
Net cash provided by operating activities
|
|
$
|
38,396
|
|
|
$
|
215,775
|
|
|
$
|
147,881
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
Purchases of residential whole loans, loan related investments and capitalized advances
|
|
$
|
(1,477,320)
|
|
|
$
|
(4,591,422)
|
|
|
$
|
(3,055,434)
|
|
Proceeds from sales of residential whole loans, and residential whole loan repurchases
|
|
1,510,902
|
|
|
(6,769)
|
|
|
(3,405)
|
|
Principal payments on residential whole loans and loan related investments
|
|
1,825,606
|
|
|
1,378,529
|
|
|
531,909
|
|
Purchases of residential mortgage securities and MSR-related assets
|
|
(163,748)
|
|
|
(1,008,215)
|
|
|
(2,604,234)
|
|
Proceeds from sales of residential mortgage securities, MSR-related assets, and other assets
|
|
3,790,148
|
|
|
908,697
|
|
|
538,668
|
|
Principal payments on residential mortgage securities and MSR-related assets
|
|
633,194
|
|
|
2,098,416
|
|
|
2,327,817
|
|
Purchases of real estate owned and capital improvements
|
|
(10,198)
|
|
|
(20,110)
|
|
|
(13,367)
|
|
Proceeds from sales of real estate owned
|
|
279,786
|
|
|
108,012
|
|
|
121,304
|
|
Additions to leasehold improvements, furniture and fixtures
|
|
(4,862)
|
|
|
(1,879)
|
|
|
(1,133)
|
|
Net cash provided by/(used in) investing activities
|
|
$
|
6,383,508
|
|
|
$
|
(1,134,741)
|
|
|
$
|
(2,157,875)
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
Principal payments on financing agreements with mark-to-market collateral provisions
|
|
$
|
(21,810,920)
|
|
|
$
|
(67,463,756)
|
|
|
$
|
(67,063,283)
|
|
Proceeds from borrowings under financing agreements with mark-to-market collateral provisions
|
|
14,008,042
|
|
|
68,724,021
|
|
|
68,327,462
|
|
Principal payments on other collateralized financing agreements
|
|
(1,733,345)
|
|
|
(114,386)
|
|
|
(97,969)
|
|
Proceeds from borrowings under other collateralized financing agreements
|
|
3,803,150
|
|
|
—
|
|
|
419,970
|
|
Payment made for other collateralized financing agreement related costs
|
|
(1,699)
|
|
|
—
|
|
|
(2,497)
|
|
Proceeds from issuance of convertible senior notes
|
|
—
|
|
|
223,311
|
|
|
—
|
|
Payments made for settlements and unwinds of Swaps
|
|
(60,022)
|
|
|
(40,029)
|
|
|
(61,502)
|
|
Proceeds from settlements on Swaps
|
|
—
|
|
|
—
|
|
|
65,393
|
|
Proceeds from issuance of series C preferred stock
|
|
275,000
|
|
|
—
|
|
|
—
|
|
Payments made for costs related to series C preferred stock issuance
|
|
(8,948)
|
|
|
—
|
|
|
—
|
|
Proceeds from issuances of common stock
|
|
7,441
|
|
|
12,325
|
|
|
392,474
|
|
Payments made for costs related to common stock issuances
|
|
—
|
|
|
—
|
|
|
(329)
|
|
Payments made for the repurchase of common stock through the share repurchase program
|
|
(50,835)
|
|
|
—
|
|
|
—
|
|
Proceeds from the issuance of warrants
|
|
14,041
|
|
|
—
|
|
|
—
|
|
Payments made for the repurchase of warrants
|
|
(33,650)
|
|
|
—
|
|
|
—
|
|
Dividends paid on preferred stock
|
|
(29,796)
|
|
|
(15,000)
|
|
|
(15,000)
|
|
Dividends paid on common stock and dividend equivalents
|
|
(113,508)
|
|
|
(361,565)
|
|
|
(329,759)
|
|
Net cash (used in)/provided by financing activities
|
|
$
|
(5,735,049)
|
|
|
$
|
964,921
|
|
|
$
|
1,634,960
|
|
Net increase/(decrease) in cash, cash equivalents and restricted cash
|
|
$
|
686,855
|
|
|
$
|
45,955
|
|
|
$
|
(375,034)
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
$
|
134,664
|
|
|
$
|
88,709
|
|
|
$
|
463,743
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
821,519
|
|
|
$
|
134,664
|
|
|
$
|
88,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Paid
|
|
$
|
254,270
|
|
|
$
|
330,398
|
|
|
$
|
232,657
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in securities obtained as collateral/obligation to return securities obtained as collateral
|
|
—
|
|
|
—
|
|
|
(505,850)
|
|
Transfer from residential whole loans to real estate owned
|
|
96,766
|
|
|
257,701
|
|
|
215,038
|
|
Dividends and dividend equivalents declared and unpaid
|
|
34,016
|
|
|
90,749
|
|
|
90,198
|
|
Payable for unsettled residential whole loan purchases
|
|
—
|
|
|
—
|
|
|
211,129
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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
(a) Basis of Presentation and Consolidation
The accompanying consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“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, 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.
(b) Residential 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 financing 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
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
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 financing agreement 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 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, and interest accruals are reversed against income, 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).
Charge-offs to the allowance for loan losses occur when losses are confirmed through the receipt of cash or other consideration from the completion of a sale; when a modification or restructuring takes place in which we grant a concession to a borrower or agree to a discount in full or partial satisfaction of the loan; when we take ownership and control of the underlying collateral in full satisfaction of the loan; when loans are reclassified as other investments; or when significant collection efforts have ceased and it is highly likely that a loss has been realized.
The aggregate allowance for credit losses is equal to the sum of the losses expected over the life of each respective loan. Expected losses are generally calculated based on the estimated probability of default and loss severity of loans in the portfolio, which involves projecting each loan’s expected cash flows based on their contractual terms, expected prepayments, and estimated default and loss severity rates. The results were not discounted. 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 default and severity rates were
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
applied to the estimated amount of loans outstanding during each future period, based on contractual terms and expected prepayments. Expected prepayments are estimated based on historical experience and current and expected future economic conditions, including market interest rates. The three future 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 period economic conditions (U.S. unemployment rates and home price appreciation) are projected to equal historical averages. In addition, a liability is established (and recorded in Other Liabilities) each period using a similar methodology for committed but undrawn loan amounts. The Company forecasts future economic conditions based on forecasts provided by an external preparer of economic forecasts, as well as its own knowledge of the market and its portfolio. The Company generally considers multiple scenarios and selects the one that it believes results in the most reasonable estimate of expected losses. The Company may apply qualitative adjustments to these results as further described in Note 3. For certain loans where foreclosure has been deemed to be probable, loss estimates are based on whether the value of the underlying collateral is sufficient to recover the carrying value of the loan. This methodology has not changed from the calculation of the allowance for credit losses on January 1, 2020 pursuant to the transition to Accounting Standards Update 2016-13 as described below under “New Accounting Standards and Interpretations,” other than a change in the reversion period from one year to two years to reflect the expected ongoing impact of current conditions (see Note 3).
Purchased Credit Deteriorated Loans
The Company has elected to account for these loans as credit deteriorated as they have experienced a more-than-insignificant deterioration in credit quality since origination and were acquired at discounted prices that reflect, in part, the impaired credit history of the borrower. Substantially all of these loans have previously experienced payment delinquencies and the amount owed may exceed the value of the property pledged as collateral. Consequently, these loans generally have a higher likelihood of default than newly originated mortgage loans with loan-to-value ratios (“LTVs”) of 80% or less to creditworthy borrowers. The Company believes that amounts paid to acquire these loans represent fair market value at the date of acquisition. Loans considered credit deteriorated are initially recorded at the purchase price on a net basis, after establishing an initial allowance for credit losses (their initial cost basis is equal to their purchase price plus the initial allowance for credit losses). Subsequent to acquisition, the gross recorded amount for these loans reflects the initial cost basis, plus accretion of interest income, less principal and interest cash flows received. These loans are presented on the Company’s consolidated balance sheets at carrying value, which reflects the recorded cost basis reduced by any allowance for credit losses. Interest income on such loans purchased is recorded each period based on the contractual coupon net of amortization of the difference between their cost basis and unpaid principal balance (“UPB”), subject to the Company’s nonaccrual policy.
Residential Whole Loans at Fair Value
Certain of the Company’s residential whole loans are presented at fair value on its consolidated balance sheets as a result of a fair value election made at the time of acquisition. For the majority of these loans, there is significant uncertainty associated with estimating the timing of and amount of cash flows that will be collected. Further, the cash flows ultimately collected may be dependent on the value of the property securing the loan. Consequently, the Company considers that accounting for these loans at fair value should result in a better reflection over time of the economic returns for the majority of these loans. The Company determines the fair value of its residential whole loans held at fair value after considering portfolio valuations obtained from a third-party that specializes in providing valuations of residential mortgage loans and trading activity observed in the market place. Subsequent changes in fair value are reported in current period earnings and presented in Net (loss)/gain on residential whole loans measured at fair value through earnings on the Company’s consolidated statements of operations.
Cash received (or accrued) representing coupon interest payments on residential whole loans held at fair value is not included in Interest Income, but rather is included in Net (loss)/gain on residential whole loans measured at fair value through earnings on the Company’s consolidated statements of operations. Cash outflows associated with loan-related advances made by the Company on behalf of the borrower are included in the basis of the loan and are reflected in unrealized gains or losses reported each period.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(c) Residential Mortgage Securities
Prior to the quarter ended June 30, 2020, the Company had invested in residential MBS that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae”) (collectively, “Agency MBS”), and residential MBS that are not guaranteed by any agency of the U.S. Government or any federally chartered corporation (“Non-Agency MBS”). The Company disposed of its investments in Agency MBS during 2020 and has substantially reduced its investments in Non-Agency MBS. In addition, the Company has investments in CRT securities that are issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As the loans in the underlying pool are paid, the principal balance of the CRT securities is paid. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company.
Designation
MBS that the Company generally intends to hold until maturity, but that it may sell from time to time as part of the overall management of its business, are designated as “available-for-sale” (“AFS”). Such MBS are carried at their fair value with unrealized gains and losses excluded from earnings (except when an allowance for loan losses is recognized, as discussed below) and reported in Accumulated other comprehensive income/(loss) (“AOCI”), a component of Stockholders’ Equity.
Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of AOCI to earnings as a realized gain or loss using the specific identification method.
The Company had elected the fair value option for certain of its previously held Agency MBS that it did not intend to hold to maturity. These securities were carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations.
The Company has elected the fair value option for certain of its CRT securities as it considers this method of accounting to more appropriately reflect the risk-sharing structure of these securities. Such securities are carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations.
Revenue Recognition, Premium Amortization and Discount Accretion
Interest income on securities is accrued based on their outstanding principal balance and their contractual terms. Premiums and discounts associated with Agency MBS and Non-Agency MBS assessed as high credit quality at the time of purchase are amortized into interest income over the life of such securities using the effective yield method. Adjustments to premium amortization are made for actual prepayment activity.
Determination of Fair Value for Residential Mortgage Securities
In determining the fair value of the Company’s residential mortgage securities, management considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity (see Note 14).
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Allowance for credit losses
When the fair value of an AFS security is less than its amortized cost at the balance sheet date, the security is considered impaired. The Company assesses its impaired securities, as well as securities for which a credit loss allowance had been previously recorded, on at least a quarterly basis and determines whether any changes to the allowance for credit losses are required. If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then the Company must recognize a write-down through charges to earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date. If the Company does not expect to sell an impaired security, only the portion of the impairment related to credit losses is recognized through a loss allowance charged to earnings with the remainder recognized through AOCI on the Company’s consolidated balance sheets. Impairments recognized through other comprehensive income/(loss) (“OCI”) do not impact earnings. Credit loss allowances are subject to reversal through earnings resulting from improvements in expected cash flows. The determination as to whether to record (or reverse) a credit loss allowance is subjective, as such determinations are based on factual information available at the time of assessment as well as the Company’s estimates of future performance and cash flow projections. As a result, the timing and amount of losses constitute material estimates that are susceptible to significant change (see Note 4).
Balance Sheet Presentation
The Company’s residential mortgage securities pledged as collateral against financing agreements and interest rate swap agreements (“Swaps”) are included on the consolidated balance sheets with the fair value of the securities pledged disclosed parenthetically. Purchases and sales of securities are recorded on the trade date.
(d) MSR-Related Assets
The Company has investments in financial instruments whose cash flows are considered to be largely dependent on underlying MSRs that either directly or indirectly act as collateral for the investment. These financial instruments, which are referred to as MSR-related assets, are discussed in more detail below. The Company’s MSR-related assets pledged as collateral against repurchase agreements are included in the consolidated balance sheets with the amounts pledged disclosed parenthetically. Purchases and sales of MSR-related assets are recorded on the trade date (see Notes 4, 6, 7 and 14).
Term Notes Backed by MSR-Related Collateral
The Company has invested in term notes that are issued by special purpose vehicles (“SPV”) that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. The Company considers payment of principal and interest on these term notes to be largely dependent on the cash flows generated by the underlying MSRs as this impacts the cash flows available to the SPV that issued the term notes. Credit risk borne by the holders of the term notes is also mitigated by structural credit support in the form of over-collateralization. Credit support is also provided by a corporate guarantee from the ultimate parent or sponsor of the SPV that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the underlying MSRs be insufficient.
The Company’s term notes backed by MSR-related collateral are treated as AFS securities and reported at fair value on the Company’s consolidated balance sheets with unrealized gains and losses excluded from earnings and reported in AOCI, subject to impairment and loss allowances. Interest income is recognized on an accrual basis on the Company’s consolidated statements of operations. The Company’s valuation process for such notes is similar to that used for residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral, as applicable, and the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Corporate Loans
The Company has made or participated in loans to provide financing to entities that originate residential mortgage loans and own the related MSRs. These corporate loans are generally secured by certain MSRs, as well as certain other unencumbered assets owned by the borrower.
Corporate loans are recorded on the Company’s consolidated balance sheets at the drawn amount, on which interest income is recognized on an accrual basis on the Company’s consolidated statements of operations, subject to loss allowances. Commitment fees received on the undrawn amount are deferred and recognized as interest income over the remaining loan term at the time of draw. At the end of the commitment period, any remaining deferred commitment fees are recorded as Other Income on the Company’s consolidated statements of operations. The Company evaluates the recoverability of its corporate loans on a quarterly basis considering various factors, including the current status of the loan, changes in the fair value of the MSRs that secure the loan and the recent financial performance of the borrower.
(e) Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with financial institutions and investments in money market funds, all of which have original maturities of three months or less. Cash and cash equivalents may also include cash pledged as collateral to the Company by its financing counterparties as a result of reverse margin calls (i.e., margin calls made by the Company). The Company did not hold any cash pledged by its counterparties at December 31, 2020 and 2019. At December 31, 2020 and 2019, the Company had cash and cash equivalents of $814.4 million and $70.6 million, respectively. At December 31, 2020, the Company had $752.4 million of investments in overnight money market funds, which are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or any other government agency. As of December 31, 2019, the Company had $39.6 million worth of investments in overnight money market funds. In addition, deposits in FDIC insured accounts generally exceed insured limits (see Notes 7 and 14).
(f) Restricted Cash
Restricted cash represents the Company’s cash held by its counterparties in connection with certain of the Company’s Swaps and/or financing agreements that is not available to the Company for general corporate purposes. Restricted cash may be applied against amounts due to financing agreement and/or Swap counterparties, or may be returned to the Company when the related collateral requirements are exceeded or at the maturity of the Swap and/or financing agreements. The Company had aggregate restricted cash held as collateral or otherwise in connection with its financing agreements and/or Swaps of $7.2 million and $64.0 million at December 31, 2020 and 2019, respectively (see Notes 5(c), 6, 7 and 14).
(g) Real Estate Owned (“REO”)
REO represents real estate acquired by the Company, including through foreclosure, deed in lieu of foreclosure, or purchased in connection with the acquisition of residential whole loans. REO acquired through foreclosure or deed in lieu of foreclosure is initially recorded at fair value less estimated selling costs. REO acquired in connection with the acquisition of residential whole loans is initially recorded at its purchase price. Subsequent to acquisition, REO is reported, at each reporting date, at the lower of the current carrying amount or fair value less estimated selling costs and for presentation purposes is included in Other assets on the Company’s consolidated balance sheets. Changes in fair value that result in an adjustment to the reported amount of an REO property that has a fair value at or below its carrying amount are reported in Other Income, net on the Company’s consolidated statements of operations. The Company has acquired certain properties that it holds for investment purposes, including rentals to third parties. These properties are held at their historical basis less depreciation, and are subject to impairment. Related rental income and expenses are recorded in Other Income, net (see Note 5).
(h) Depreciation
Leasehold Improvements, Real estate and Other Depreciable Assets
Depreciation is computed on the straight-line method over the estimated useful life of the related assets or, in the case of leasehold improvements, over the shorter of the useful life or the lease term. Furniture, fixtures, computers and related hardware have estimated useful lives ranging from five to eight years at the time of purchase. The building component of real estate held-for-investment is depreciated over 27.5 years.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(i) Loan Securitization and Other Debt Issuance Costs
Loan securitization related costs are costs associated with the issuance of beneficial interests by consolidated VIEs and incurred by the Company in connection with various financing transactions completed by the Company. These costs may include underwriting, rating agency, legal, accounting and other fees. Such costs, which reflect deferred charges (unless the debt is recorded at fair value, as discussed below), are included on the Company’s consolidated balance sheets as a direct deduction from the corresponding debt liability. These deferred charges are amortized as an adjustment to interest expense using the effective interest method. For certain financing agreements, such costs are amortized over the shorter of the period to the expected or stated legal maturity of the debt instruments. The Company periodically reviews the recoverability of these deferred costs and, in the event an impairment charge is required, such amount will be included in Operating and Other Expense on the Company’s consolidated statements of operations.
(j) Financing Agreements
The Company finances the majority of its residential mortgage assets with financing agreements that include repurchase agreements and other forms of collateralized financing. Under repurchase agreements, the Company sells assets to a lender and agrees to repurchase the same assets in the future for a price that is higher than the original sale price. The difference between the sale price that the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although legally structured as sale and repurchase transactions, the Company accounts for repurchase agreements as secured borrowings. Under its repurchase agreements and other forms of collateralized financing, the Company pledges its assets as collateral to secure the borrowing, in an amount which is equal to a specified percentage of the fair value of the pledged collateral, while the Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase financing, unless the repurchase financing is renewed with the same counterparty, the Company is required to repay the loan including any accrued interest and concurrently receives back its pledged collateral from the lender. With the consent of the lender, the Company may renew a repurchase financing at the then prevailing financing terms. Margin calls, whereby a lender requires that the Company pledge additional assets or cash as collateral to secure borrowings under its repurchase financing with such lender, are routinely experienced by the Company when the value of the assets pledged as collateral declines as a result of principal amortization and prepayments or due to changes in market interest rates, spreads or other market conditions. The Company also may make margin calls on counterparties when collateral values increase.
The Company’s repurchase financings collateralized by residential mortgage securities and MSR-related assets typically have terms ranging from one month to six months at inception, while the majority of our financing arrangements collateralized by residential whole loans have terms of twelve months or longer. Should a counterparty decide not to renew a financing arrangement at maturity, the Company must either refinance elsewhere or be in a position to satisfy the obligation. If, during the term of a financing, a lender should default on its obligation, the Company might experience difficulty recovering its pledged assets which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to such lender, including accrued interest receivable on such collateral (see Notes 6, 7 and 14).
The Company has elected the fair value option on certain of its financing agreements. These agreements are reported at their fair value, with changes in fair value being recorded in earnings each period (or other comprehensive income, to the extent the change results from a change in instrument specific credit risk), as further detailed in Note 6. Financing costs, including “up front” fees paid at inception related to financing agreements at fair value are expensed as incurred. Interest expense is recorded based on the current interest rate in effect for the related agreement.
(k) Equity-Based Compensation
Compensation expense for equity-based awards that are subject to vesting conditions, is recognized ratably over the vesting period of such awards, based upon the fair value of such awards at the grant date.
The Company has made annual grants of restricted stock units (“RSUs”) certain of which cliff vest after a three-year period, subject only to continued employment, and others of which cliff vest after a three-year period, subject to both continued employment and the achievement of certain performance criteria based on a formula tied to the Company’s achievement of average total shareholder return during that three-year period, as well as the total shareholder return (“TSR”) of the Company relative to the TSR of a group of peer companies (over the three-year period) selected by the Compensation Committee of the
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Company’s Board of Directors (the “Compensation Committee”) at the date of grant. The features in these awards related to the attainment of total shareholder return over a specified period constitute a “market condition”, which impacts the amount of compensation expense recognized for these awards. Specifically, the uncertainty regarding the achievement of the market condition was reflected in the grant date fair valuation of the RSUs, which is recognized as compensation expense over the relevant vesting period. The amount of compensation expense recognized is not dependent on whether the market condition was or will be achieved.
The Company makes dividend equivalent payments in connection with certain of its equity-based awards. A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock. Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., an RSU) under the Company’s Equity Compensation Plan (the “Equity Plan”), and they are paid in cash or other consideration at such times and in accordance with such rules, terms and conditions, as the Compensation Committee may determine in its discretion. Payments pursuant to dividend equivalents are generally charged to Stockholders’ Equity to the extent that the attached equity awards are expected to vest. Compensation expense is recognized for payments made for dividend equivalents to the extent that the attached equity awards (i) do not or are not expected to vest and (ii) grantees are not required to return payments of dividends or dividend equivalents to the Company (see Notes 2(l) and 13).
(l) Earnings per Common Share (“EPS”)
Basic EPS is computed using the two-class method, which includes the weighted-average number of shares of common stock outstanding during the period and an estimate of other securities that participate in dividends, such as the Company’s dividend equivalents attached to/associated with RSUs, to arrive at total common equivalent shares. In applying the two-class method, earnings are allocated to both shares of common stock and estimated securities that participate in dividends based on their respective weighted-average shares outstanding for the period. For the diluted EPS calculation, common equivalent shares are further adjusted for the effect of RSUs outstanding that are unvested and have dividends that are subject to forfeiture, and for the effect of outstanding warrants, using the treasury stock method. Under the treasury stock method, common equivalent shares are calculated assuming that all dilutive common stock equivalents are exercised and the proceeds, along with future compensation expenses associated with such instruments (if any), are used to repurchase shares of the Company’s outstanding common stock at the average market price during the reported period. In addition, the Company’s Convertible Senior Notes are included in the calculation of diluted EPS if the assumed conversion into common shares is dilutive, using the “if-converted” method. This involves adding back the periodic interest expense associated with the Convertible Senior Notes to the numerator and by adding the shares that would be issued in an assumed conversion (regardless of whether the conversion option is in or out of the money) to the denominator for the purposes of calculating diluted EPS (see Note 12).
(m) Comprehensive Income/(Loss)
The Company’s comprehensive income/(loss) available to common stock and participating securities includes net income, the change in net unrealized gains/(losses) on its AFS securities and derivative hedging instruments (to the extent that such changes are not recorded in earnings), adjusted by realized net gains/(losses) reclassified out of AOCI for sold AFS securities and terminated hedging relationships, as well as the portion of unrealized gains/(losses) on its financing agreements held at fair value related to instrument-specific credit risk, and is reduced by dividends declared on the Company’s preferred stock and issuance costs of redeemed preferred stock.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(n) U.S. Federal Income Taxes
The Company has elected to be taxed as a REIT under the provisions of the Internal Revenue Code of 1986, as amended, (the “Code”), and the corresponding provisions of state law. The Company expects to operate in a manner that will enable it to satisfy the various requirements to maintain its status as a REIT for federal income tax purposes. In order to maintain its status as a REIT, the Company must, among other things, distribute at least 90% of its REIT taxable income (excluding net long-term capital gains) to stockholders in the timeframe permitted by the Code. As long as the Company maintains its status as a REIT, the Company will not be subject to regular federal income tax to the extent that it distributes 100% of its REIT taxable income (including net long-term capital gains) to its stockholders within the permitted timeframe. Should this not occur, the Company would be subject to federal taxes at prevailing corporate tax rates on the difference between its REIT taxable income and the amounts deemed to be distributed for that tax year. As the Company’s objective is to distribute 100% of its REIT taxable income to its stockholders within the permitted timeframe, no provision for current or deferred income taxes has been made in the accompanying consolidated financial statements. Should the Company incur a liability for corporate income tax, such amounts would be recorded as REIT income tax expense on the Company’s consolidated statements of operations. Furthermore, if the Company fails to distribute during each calendar year, or by the end of January following the calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year, at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed. To the extent that the Company incurs interest, penalties or related excise taxes in connection with its tax obligations, including as a result of its assessment of uncertain tax positions, such amounts will be included in Operating and Other Expense on the Company’s consolidated statements of operations.
In addition, the Company has elected to treat certain of its subsidiaries as 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. Generally, a domestic TRS is subject to U.S. federal, state and local corporate income taxes. Since a portion of the Company’s business is conducted through one or more TRS, the net taxable income earned by its domestic TRS, if any, is subject to corporate income taxation. To maintain the Company’s REIT election, no more than 20% of the value of the Company’s assets at the end of each calendar quarter may consist of stock or securities in TRS. For purposes of the determination of U. S. federal and state income taxes, the Company’s subsidiaries that elected to be treated as TRS record current or deferred income taxes based on differences (both permanent and timing) between the determination of their taxable income and net income under GAAP. No net deferred tax benefit was recorded by the Company in 2020 or 2019, related to the net taxable losses in the TRS, since a valuation allowance for the full amount of the associated deferred tax asset of approximately $74.1 million was recognized as its recovery is not considered more likely than not. The related net operating loss carryforwards generated prior to 2018 will begin to expire in 2034; those generated in 2020, 2019, and 2018 can be carried back to each of the five taxable years preceding the taxable year of such loss and thereafter can be carried forward and do not expire.
Based on its analysis of any potentially uncertain tax positions, the Company concluded that it does not have any material uncertain tax positions that meet the relevant recognition or measurement criteria as of December 31, 2020, 2019 or 2018. As of the date of this filing, the Company’s tax returns for tax years 2017 through 2019 are open to examination.
(o) Derivative Financial Instruments
The Company may use a variety of derivative instruments to economically hedge a portion of its exposure to market risks, including interest rate risk and prepayment risk. The objective of the Company’s risk management strategy is to reduce fluctuations in net book value over a range of interest rate scenarios. In particular, the Company attempts to mitigate the risk of the cost of its variable rate liabilities increasing during a period of rising interest rates. The Company’s derivative instruments have generally been comprised of Swaps, the majority of which were designated as cash flow hedges against the interest rate risk associated with its borrowings.
Swaps
The Company documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities and the relationship between the hedging instrument and the hedged liability for all Swaps designated as hedging transactions. The Company assesses, both at the inception of a hedge and on a quarterly basis thereafter, whether or not the hedge is “highly effective.”
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
During the first quarter of 2020, the Company terminated all of its Swaps. Prior to their termination, Swaps were carried on the Company’s consolidated balance sheets at fair value, in Other assets, if their fair value was positive, or in Other liabilities, if their fair value was negative. Changes in the fair value of the Company’s Swaps previously designated in hedging transactions are recorded in OCI provided that the hedge remains effective. Periodic payments accrued in connection with Swaps designated as hedges are included in interest expense and are treated as an operating cash flow.
The Company discontinues hedge accounting on a prospective basis and recognizes changes in fair value through earnings when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including forecasted transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating the derivative as a hedge is no longer appropriate (see Notes 5(c), 7 and 14).
Changes in the fair value of the Company’s Swaps not designated in hedging transactions are recorded in Other income, net on the Company’s consolidated statements of operations.
(p) Fair Value Measurements and the Fair Value Option for Financial Assets and Financial Liabilities
The Company’s presentation of fair value for its financial assets and liabilities is determined within a framework that stipulates that the fair value of a financial asset or liability is an exchange price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. This definition of fair value focuses on exit price and prioritizes the use of market-based inputs over entity-specific inputs when determining fair value. In addition, the framework for measuring fair value establishes a three-level hierarchy for fair value measurements based upon the observability of inputs to the valuation of an asset or liability as of the measurement date.
In addition to the financial instruments that it is required to report at fair value, the Company has elected the fair value option for certain of its financial assets and liabilities at the time of acquisition or issuance. Subsequent changes in the fair value of these financial instruments are generally reported in Other income, net, in the Company’s consolidated statements of operations. A decision to elect the fair value option for an eligible financial instrument, which may be made on an instrument by instrument basis, is irrevocable (see Notes 2(b), 2(c), 3, 4, and 14).
(q) Variable Interest Entities
An entity is referred to as a VIE if it meets at least one of the following criteria: (i) the entity has equity that is insufficient to permit the entity to finance its activities without the additional subordinated financial support of other parties; or (ii) as a group, the holders of the equity investment at risk lack (a) the power to direct the activities of an entity that most significantly impact the entity’s economic performance; (b) the obligation to absorb the expected losses; or (c) the right to receive the expected residual returns; or (iii) the holders of the equity investment at risk have disproportional voting rights and the entity’s activities are conducted on behalf of the investor that has disproportionately few voting rights.
The Company consolidates a VIE when it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.
The Company has entered into several financing transactions which resulted in the Company forming entities to facilitate these transactions. In determining the accounting treatment to be applied to these transactions, the Company concluded that the entities used to facilitate these transactions are VIEs and that they should be consolidated. If the Company had determined that consolidation was not required, it would have then assessed whether the transfers of the underlying assets would qualify as sales or should be accounted for as secured financings under GAAP (see Note 15).
The Company also includes on its consolidated balance sheets certain financial assets and liabilities that are acquired/issued by trusts and/or other special purpose entities that have been evaluated as being required to be consolidated by the Company under the applicable accounting guidance.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(r) Offering Costs Related to Issuance and Redemption of Preferred Stock
Offering costs related to the issuance of preferred stock are recorded as a reduction in Additional paid-in capital, a component of Stockholders’ Equity, at the time such preferred stock is issued. On redemption of preferred stock, any excess of the fair value of the consideration transferred to the holders of the preferred stock over the carrying amount of the preferred stock in the Company’s consolidated balance sheets is included in the determination of Net Income Available to Common Stock and Participating Securities in the calculation of EPS.
(s) New Accounting Standards and Interpretations
Accounting Standards Adopted in 2020
Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which has subsequently been amended by ASUs 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, 2020-02 Financial Instruments-Credit Losses (Topic 326)-Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date (SEC Update), and 2020-03 Codification Improvements to Financial Instruments. The amendments in ASU 2016-13 require entities to measure all expected credit losses (rather than incurred losses) for financial assets held at the reporting date, based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 also requires enhanced financial statement disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The amendments in this ASU were required to be applied by recording a cumulative-effect adjustment to equity as of the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other than temporary impairment had been recognized before the effective date. The Company adopted the new ASU on January 1, 2020. The impact of adoption was that the allowance for credit losses on Purchased Performing Loans increased by approximately $8.3 million. This transition adjustment was recorded as an increase in the Company’s allowance for credit losses and an adjustment to decrease retained earnings as of the adoption date. In addition, for Purchased Credit Deteriorated Loans, the carrying value of the portfolio was adjusted on transition by $62.6 million to include an estimate of the allowance for credit losses as required by the new standard. For financial statement reporting purposes, this adjusted carrying value is presented net of the estimated allowance for credit losses. Consequently, the adjustments recorded on transition for Purchased Credit Deteriorated Loans do not result in any adjustment to retained earnings as of the adoption date. The Company does not consider these transition adjustments to be material to its financial position or previously reported GAAP or economic book value.
Under ASU 2016-13, credit losses for available-for-sale debt securities are measured in a manner similar to prior GAAP. However, the amendments in this ASU require that credit losses be recorded through an allowance for credit losses, which will allow subsequent reversals in credit loss estimates to be recognized in current income. In addition, the allowance on available-for-sale debt securities will be limited to the extent that the fair value is less than the amortized cost. Under prior GAAP, credit impairment losses were generally required to be recorded as “other than temporary” impairment, which directly reduced the carrying amount of impaired securities, and was recorded in earnings and was not reversed if expected cash flows subsequently recovered. Under the new guidance, credit impairments on such securities (other than those related to expected sales) are recorded as an allowance for credit losses that is also recorded in earnings, but the allowance can be reversed through earnings in a subsequent period if expected cash flows subsequently recover. Transition to the new available-for-sale debt securities guidance did not result in a change to our retained earnings.
Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which has subsequently been amended by ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this ASU provide temporary optional expedients to ease the financial reporting burden of the expected transition from the London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as the Secured
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Overnight Financing Rate (“SOFR”). The amendments in the ASU are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in ASU 2020-04 were effective for all entities as of March 12, 2020 and will generally no longer be available to apply after December 31, 2022. The Company adopted this ASU as of the effective date and will utilize the optional expedients to the extent that they apply to the Company.
3. Residential Whole Loans
Included on the Company’s consolidated balance sheets as of December 31, 2020 and 2019 are approximately $5.3 billion and $7.4 billion, respectively, of residential whole loans arising from the Company’s interests in certain trusts established to acquire the loans and certain entities established in connection with its loan securitization transactions. The Company has assessed that these entities are required to be consolidated for financial reporting purposes.
Residential Whole Loans, at Carrying Value
The following table presents the components of the Company’s Residential whole loans, at carrying value at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Purchased Performing Loans:
|
|
|
|
|
Non-QM loans
|
|
$
|
2,357,185
|
|
|
$
|
3,707,245
|
|
Rehabilitation loans
|
|
581,801
|
|
|
1,026,097
|
|
Single-family rental loans
|
|
446,374
|
|
|
460,742
|
|
Seasoned performing loans
|
|
136,264
|
|
|
176,569
|
|
Total Purchased Performing Loans
|
|
3,521,624
|
|
|
5,370,653
|
|
Purchased Credit Deteriorated Loans (1)
|
|
673,708
|
|
|
698,717
|
|
Total Residential whole loans, at carrying value
|
|
$
|
4,195,332
|
|
|
$
|
6,069,370
|
|
Allowance for credit losses on residential whole loans held at carrying value
|
|
(86,833)
|
|
|
(3,025)
|
|
Total Residential whole loans at carrying value, net
|
|
$
|
4,108,499
|
|
|
$
|
6,066,345
|
|
|
|
|
|
|
Number of loans
|
|
13,112
|
|
|
17,082
|
|
(1) The amortized cost basis of Purchased Credit Deteriorated Loans was increased by $62.6 million on January 1, 2020 in connection with the adoption of ASU 2016-13.
The following table presents the components of interest income on the Company’s Residential whole loans, at carrying value for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
|
2018
|
Purchased Performing Loans:
|
|
|
|
|
|
|
Non-QM loans
|
|
$
|
136,527
|
|
|
$
|
116,282
|
|
|
$
|
31,036
|
|
Rehabilitation loans
|
|
49,484
|
|
|
54,419
|
|
|
15,975
|
|
Single-family rental loans
|
|
27,722
|
|
|
17,742
|
|
|
3,315
|
|
Seasoned performing loans
|
|
8,793
|
|
|
12,191
|
|
|
5,818
|
|
Total Purchased Performing Loans
|
|
222,526
|
|
|
200,634
|
|
|
56,144
|
|
Purchased Credit Deteriorated Loans
|
|
36,238
|
|
|
43,346
|
|
|
44,777
|
|
Total Residential whole loans, at carrying value
|
|
$
|
258,764
|
|
|
$
|
243,980
|
|
|
$
|
100,921
|
|
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table presents additional information regarding the Company’s Residential whole loans, at carrying value at December 31, 2020:
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Amortized Cost Basis
|
|
Unpaid Principal Balance (“UPB”)
|
|
Weighted Average Coupon (1)
|
|
Weighted Average Term to Maturity (Months)
|
|
Weighted Average LTV Ratio (2)
|
|
Weighted Average Original FICO (3)
|
|
Aging by Amortized Cost Basis
|
|
|
|
|
|
|
|
|
|
|
|
Past Due Days
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
Current
|
|
30-59
|
|
60-89
|
|
90+
|
Purchased Performing Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-QM loans (4)
|
|
$
|
2,336,117
|
|
|
$
|
2,357,185
|
|
|
$
|
2,294,086
|
|
|
5.84
|
%
|
|
351
|
|
64
|
%
|
|
712
|
|
$
|
2,099,134
|
|
|
$
|
73,163
|
|
|
$
|
36,501
|
|
|
$
|
148,387
|
|
Rehabilitation loans (4)
|
|
563,430
|
|
|
581,801
|
|
|
581,801
|
|
|
7.29
|
|
|
3
|
|
63
|
|
|
719
|
|
390,706
|
|
|
29,315
|
|
|
25,433
|
|
|
136,347
|
|
Single-family rental loans (4)
|
|
442,456
|
|
|
446,374
|
|
|
442,208
|
|
|
6.32
|
|
|
324
|
|
70
|
|
|
730
|
|
415,386
|
|
|
6,652
|
|
|
3,948
|
|
|
20,388
|
|
Seasoned performing loans (4)
|
|
136,157
|
|
|
136,264
|
|
|
149,004
|
|
|
3.30
|
|
|
171
|
|
40
|
|
|
723
|
|
124,877
|
|
|
2,186
|
|
|
1,170
|
|
|
8,031
|
|
Purchased Credit Deteriorated Loans (4)(5)
|
|
630,339
|
|
|
673,708
|
|
|
782,319
|
|
|
4.46
|
|
|
287
|
|
76
|
|
|
N/A
|
|
N/M
|
|
N/M
|
|
N/M
|
|
119,621
|
|
Residential whole loans, at carrying value, total or weighted average
|
|
$
|
4,108,499
|
|
|
$
|
4,195,332
|
|
|
$
|
4,249,418
|
|
|
5.77
|
%
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Amortized Cost Basis
|
|
Unpaid Principal Balance (“UPB”)
|
|
Weighted Average Coupon (1)
|
|
Weighted Average Term to Maturity (Months)
|
|
Weighted Average LTV Ratio (2)
|
|
Weighted Average Original FICO (3)
|
|
Aging by UPB
|
|
|
|
|
|
|
|
|
|
|
|
Past Due Days
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
Current
|
|
30-59
|
|
60-89
|
|
90+
|
Purchased
Performing Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-QM loans (4)
|
|
$
|
3,706,857
|
|
|
$
|
3,707,245
|
|
|
$
|
3,592,701
|
|
|
5.96
|
%
|
|
368
|
|
67
|
%
|
|
716
|
|
$
|
3,492,533
|
|
|
$
|
59,963
|
|
|
$
|
19,605
|
|
|
$
|
20,600
|
|
Rehabilitation loans (4)
|
|
1,023,766
|
|
|
1,026,097
|
|
|
1,026,097
|
|
|
7.30
|
|
|
8
|
|
64
|
|
|
717
|
|
868,281
|
|
|
67,747
|
|
|
27,437
|
|
|
62,632
|
|
Single-family rental loans (4)
|
|
460,679
|
|
|
460,741
|
|
|
457,146
|
|
|
6.29
|
|
|
324
|
|
70
|
|
|
734
|
|
432,936
|
|
|
15,948
|
|
|
2,047
|
|
|
6,215
|
|
Seasoned performing loans
|
|
176,569
|
|
|
176,569
|
|
|
192,151
|
|
|
4.24
|
|
|
181
|
|
46
|
|
|
723
|
|
187,683
|
|
|
2,164
|
|
|
430
|
|
|
1,874
|
|
Purchased Credit Impaired Loans (5)
|
|
698,474
|
|
|
698,718
|
|
|
873,326
|
|
|
4.46
|
|
|
294
|
|
81
|
|
|
N/A
|
|
N/M
|
|
N/M
|
|
N/M
|
|
108,998
|
|
Residential whole loans, at carrying value, total or weighted average
|
|
$
|
6,066,345
|
|
|
$
|
6,069,370
|
|
|
$
|
6,141,421
|
|
|
5.96
|
%
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Weighted average is calculated based on the interest bearing principal balance of each loan within the related category. For loans acquired with servicing rights released by the seller, interest rates included in the calculation do not reflect loan servicing fees. For loans acquired with servicing rights retained by the seller, interest rates included in the calculation are net of servicing fees.
(2)LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Rehabilitation loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Rehabilitation loans, totaling $189.9 million and $269.2 million at December 31, 2020 and December 31, 2019, respectively, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. The weighted average LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 68% and 69% at December 31, 2020 and December 31, 2019, respectively. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.
(3)Excludes loans for which no Fair Isaac Corporation (“FICO”) score is available.
(4)At December 31, 2020 and December 31, 2019 the difference between the Carrying Value and Amortized Cost Basis represents the related allowance for credit losses.
(5)Purchased Credit Deteriorated Loans tend to be characterized by varying performance of the underlying borrowers over time, including loans where multiple months of payments are received in a period to bring the loan to current status, followed by months where no payments are received. Accordingly, delinquency information is presented for loans that are more than 90 days past due that are considered to be seriously delinquent.
During the year-ended December 31, 2020, $1.8 billion of Non-QM loans were sold, realizing losses of $273.0 million.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Allowance for Credit Losses
The following table presents a roll-forward of the allowance for credit losses on the Company’s Residential Whole Loans, at Carrying Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
(Dollars In Thousands)
|
|
Non-QM Loans
|
|
Rehabilitation Loans (1)(2)
|
|
Single-family Rental Loans
|
|
Seasoned Performing Loans
|
|
Purchased Credit Deteriorated Loans (3)
|
|
Totals
|
Allowance for credit losses at December 31, 2019
|
|
$
|
388
|
|
|
$
|
2,331
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
244
|
|
|
$
|
3,025
|
|
Transition adjustment on adoption of ASU 2016-13 (4)
|
|
6,904
|
|
|
517
|
|
|
754
|
|
|
19
|
|
|
62,361
|
|
|
70,555
|
|
Current provision
|
|
26,358
|
|
|
33,213
|
|
|
6,615
|
|
|
230
|
|
|
8,481
|
|
|
74,897
|
|
Write-offs
|
|
—
|
|
|
(428)
|
|
|
—
|
|
|
—
|
|
|
(219)
|
|
|
(647)
|
|
Valuation adjustment on loans held for sale
|
|
70,181
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
70,181
|
|
Allowance for credit and valuation losses at March 31, 2020
|
|
$
|
103,831
|
|
|
$
|
35,633
|
|
|
$
|
7,431
|
|
|
$
|
249
|
|
|
$
|
70,867
|
|
|
$
|
218,011
|
|
Current provision/(reversal)
|
|
(2,297)
|
|
|
(5,213)
|
|
|
(500)
|
|
|
(25)
|
|
|
(2,579)
|
|
|
(10,614)
|
|
Write-offs
|
|
—
|
|
|
(420)
|
|
|
—
|
|
|
—
|
|
|
(207)
|
|
|
(627)
|
|
Valuation adjustment on loans held for sale
|
|
(70,181)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(70,181)
|
|
Allowance for credit losses at June 30, 2020
|
|
$
|
31,353
|
|
|
$
|
30,000
|
|
|
$
|
6,931
|
|
|
$
|
224
|
|
|
$
|
68,081
|
|
|
$
|
136,589
|
|
Current provision/(reversal)
|
|
(4,568)
|
|
|
(7,140)
|
|
|
(1,906)
|
|
|
(74)
|
|
|
(16,374)
|
|
|
(30,062)
|
|
Write-offs
|
|
(32)
|
|
|
(227)
|
|
|
—
|
|
|
—
|
|
|
(22)
|
|
|
(281)
|
|
Allowance for credit losses at September 30, 2020
|
|
$
|
26,753
|
|
|
$
|
22,633
|
|
|
$
|
5,025
|
|
|
$
|
150
|
|
|
$
|
51,685
|
|
|
$
|
106,246
|
|
Current provision/(reversal)
|
|
(5,599)
|
|
|
(3,837)
|
|
|
(1,107)
|
|
|
(43)
|
|
|
(7,997)
|
|
|
(18,583)
|
|
Write-offs
|
|
(86)
|
|
|
(425)
|
|
|
—
|
|
|
—
|
|
|
(319)
|
|
|
(830)
|
|
Allowance for credit losses at December 31, 2020
|
|
$
|
21,068
|
|
|
$
|
18,371
|
|
|
$
|
3,918
|
|
|
$
|
107
|
|
|
$
|
43,369
|
|
|
$
|
86,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
(Dollars In Thousands)
|
|
Non-QM Loans
|
|
Rehabilitation Loans
|
|
Single-family Rental Loans
|
|
Seasoned Performing Loans
|
|
Purchased Credit Deteriorated Loans
|
|
Totals
|
Allowance for credit losses at December 31, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
968
|
|
|
$
|
968
|
|
Current provision
|
|
—
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
183
|
|
|
683
|
|
Write-offs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Allowance for credit losses at March 31, 2019
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,151
|
|
|
$
|
1,651
|
|
Current provision
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
385
|
|
|
385
|
|
Write-offs
|
|
—
|
|
|
(50)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(50)
|
|
Allowance for credit losses at June 30, 2019
|
|
$
|
—
|
|
|
$
|
450
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,536
|
|
|
$
|
1,986
|
|
Current provision
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
347
|
|
|
347
|
|
Write-offs
|
|
—
|
|
|
(62)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(62)
|
|
Allowance for credit losses at September 30, 2019
|
|
$
|
—
|
|
|
$
|
388
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,883
|
|
|
$
|
2,271
|
|
Current provision/(reversal)
|
|
388
|
|
|
2,220
|
|
|
62
|
|
|
—
|
|
|
(1,639)
|
|
|
1,031
|
|
Write-offs
|
|
—
|
|
|
(277)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(277)
|
|
Allowance for credit losses at December 31, 2019
|
|
$
|
388
|
|
|
$
|
2,331
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
244
|
|
|
$
|
3,025
|
|
(1)In connection with purchased Rehabilitation loans, the Company had unfunded commitments of $60.6 million, with an allowance for credit losses of $1.2 million at December 31, 2020. Such allowance is included in “Other liabilities” in the Company’s consolidated balance sheets (see Note 9).
(2)Includes $161.8 million of loans that were assessed for credit losses based on a collateral dependent methodology.
(3)Includes $70.3 million of loans that were assessed for credit losses based on a collateral dependent methodology.
(4)Of the $70.6 million of reserves recorded on adoption of ASU 2016-13, $8.3 million was recorded as an adjustment to stockholders’ equity and $62.4 million was recorded as a “gross up” of the amortized cost basis of Purchased Credit Deteriorated Loans.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Company adopted ASU 2016-13 (“CECL”) on January 1, 2020 (see Note 2). The anticipated impact of the COVID-19 pandemic on expected economic conditions, including forecasted unemployment, home price appreciation, and prepayment rates, for the short to medium term resulted in significantly increased estimates of credit losses recorded under CECL for the first quarter of 2020 for residential whole loans held at carrying value. Since the end of the first quarter, primarily as a result of generally more stable markets and an ongoing economic recovery, the Company has made subsequent revisions to certain macro-economic assumptions, including its estimates related to future rates of unemployment, and has made adjustments to the quantitative model outputs for relevant qualitative factors. The net impact of these assumption revisions and qualitative adjustments has resulted in a reversal of a portion of the allowance for loan loss since the end of the first quarter. The qualitative adjustments, which have the effect of increasing expected loss estimates, were determined based on a variety of factors, including differences between the Company’s loan portfolio and the loan portfolios represented by available proxy data, and differences between current (and expected future) market conditions in comparison to market conditions that occurred in historical periods. Such differences include uncertainty with respect to the ongoing impact of the pandemic, the speed of vaccine deployment and time taken for a significant portion of society to be vaccinated, the extent and timing of government stimulus efforts and heightened political uncertainty. The Company’s estimates of credit losses reflect the Company’s expectation that full recovery to pre-pandemic economic conditions will take an extended period, resulting in increased delinquencies and defaults during this period compared to historical periods. Estimates of credit losses under CECL are highly sensitive to changes in assumptions and current economic conditions have increased the difficulty of accurately forecasting future conditions.
The amortized cost basis of Purchased Performing Loans on nonaccrual status as of December 31, 2020 and December 31, 2019 was $373.3 million and $99.9 million, respectively. The amortized cost basis of Purchased Credit Deteriorated Loans on nonaccrual status as of December 31, 2020 was $151.4 million. Because Purchase Credit Deteriorated Loans were previously accounted for in pools, there were no such loans on nonaccrual status as of December 31, 2019. No interest income was recognized from loans on nonaccrual status during the year ended December 31, 2020. At December 31, 2020, there were approximately $130.7 million of loans on nonaccrual status that did not have an associated allowance for credit losses, because they were determined to be collateral dependent and the estimated fair value of the related collateral exceeded the carrying value of each loan.
In periods prior to the adoption of CECL, an allowance for loan losses was recorded when, based on current information and events, it was probable that the Company would be unable to collect all amounts due under the existing contractual terms of the loan agreement. Any required loan loss allowance would reduce the carrying value of the loan with a corresponding charge to earnings. Significant judgments were required in determining any allowance for loan 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.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following tables present certain additional credit-related information regarding our residential whole loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost Basis by Origination Year and LTV Bands
|
(Dollars In Thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Total
|
Non-QM loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTV < 80% (1)
|
|
$
|
429,241
|
|
|
$
|
1,111,534
|
|
|
$
|
621,201
|
|
|
$
|
67,547
|
|
|
$
|
5,597
|
|
|
$
|
—
|
|
|
$
|
2,235,120
|
|
LTV >= 80% (1)
|
|
59,931
|
|
|
29,185
|
|
|
24,163
|
|
|
8,634
|
|
|
152
|
|
|
—
|
|
|
122,065
|
|
Total Non-QM loans
|
|
$
|
489,172
|
|
|
$
|
1,140,719
|
|
|
$
|
645,364
|
|
|
$
|
76,181
|
|
|
$
|
5,749
|
|
|
$
|
—
|
|
|
$
|
2,357,185
|
|
Year Ended December 31, 2020 Gross write-offs
|
|
$
|
—
|
|
|
|
|
$
|
117
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
117
|
|
Year Ended December 31, 2020 Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Year Ended December 31, 2020 Net write-offs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
117
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rehabilitation loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTV < 80% (1)
|
|
$
|
44,153
|
|
|
$
|
448,646
|
|
|
$
|
70,046
|
|
|
$
|
4,203
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
567,048
|
|
LTV >= 80% (1)
|
|
774
|
|
|
11,731
|
|
|
548
|
|
|
1,700
|
|
|
—
|
|
|
—
|
|
|
14,753
|
|
Total Rehabilitation loans
|
|
$
|
44,927
|
|
|
$
|
460,377
|
|
|
$
|
70,594
|
|
|
$
|
5,903
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
581,801
|
|
Year Ended December 31, 2020 Gross write-offs
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
1,447
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,500
|
|
Year Ended December 31, 2020 Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Year Ended December 31, 2020 Net write-offs
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
1,447
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family rental loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTV < 80% (1)
|
|
$
|
34,342
|
|
|
$
|
267,165
|
|
|
$
|
117,523
|
|
|
$
|
13,119
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
432,149
|
|
LTV >= 80% (1)
|
|
1,394
|
|
|
12,619
|
|
|
212
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,225
|
|
Total Single family rental loans
|
|
$
|
35,736
|
|
|
$
|
279,784
|
|
|
$
|
117,735
|
|
|
$
|
13,119
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
446,374
|
|
Year Ended December 31, 2020 Gross write-offs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Year Ended December 31, 2020 Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Year Ended December 31, 2020 Net write-offs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seasoned performing loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTV < 80% (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
130,316
|
|
|
$
|
130,316
|
|
LTV >= 80% (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
79
|
|
|
5,869
|
|
|
5,948
|
|
Total Seasoned performing loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
79
|
|
|
$
|
136,185
|
|
|
$
|
136,264
|
|
Year Ended December 31, 2020 Gross write-offs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Year Ended December 31, 2020 Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Year Ended December 31, 2020 Net write-offs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased credit deteriorated loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTV < 80% (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
630
|
|
|
$
|
4,872
|
|
|
$
|
427,193
|
|
|
$
|
432,695
|
|
LTV >= 80% (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,260
|
|
|
239,753
|
|
|
241,013
|
|
Total Purchased credit deteriorated loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
630
|
|
|
$
|
6,132
|
|
|
$
|
666,946
|
|
|
$
|
673,708
|
|
Year Ended December 31, 2020 Gross write-offs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
768
|
|
|
$
|
768
|
|
Year Ended December 31, 2020 Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Year Ended December 31, 2020 Net write-offs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
768
|
|
|
$
|
768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total LTV < 80% (1)
|
|
$
|
507,736
|
|
|
$
|
1,827,345
|
|
|
$
|
808,770
|
|
|
$
|
85,499
|
|
|
$
|
10,469
|
|
|
$
|
557,509
|
|
|
$
|
3,797,328
|
|
Total LTV >= 80% (1)
|
|
62,099
|
|
|
53,535
|
|
|
24,923
|
|
|
10,334
|
|
|
1,491
|
|
|
245,622
|
|
|
398,004
|
|
Total residential whole loans, at carrying value
|
|
$
|
569,835
|
|
|
$
|
1,880,880
|
|
|
$
|
833,693
|
|
|
$
|
95,833
|
|
|
$
|
11,960
|
|
|
$
|
803,131
|
|
|
$
|
4,195,332
|
|
Total Gross write-offs
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
1,564
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
768
|
|
|
$
|
2,385
|
|
Total Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Net write-offs
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
1,564
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
768
|
|
|
$
|
2,385
|
|
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(1)LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Rehabilitation loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Rehabilitation loans, totaling $189.9 million at December 31, 2020, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. The weighted average LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 68% at December 31, 2020. Certain low value loans secured by vacant lots are categorized as LTV >= 80%.
The following table presents certain information regarding the LTVs of the Company’s Residential whole loans that are 90 days or more delinquent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars In Thousands)
|
|
Carrying Value / Fair Value
|
|
UPB
|
|
LTV (1)
|
Purchased Credit Deteriorated Loans
|
|
$
|
119,621
|
|
|
$
|
145,028
|
|
|
86.7
|
%
|
Non-QM loans
|
|
$
|
148,387
|
|
|
$
|
144,681
|
|
|
65.9
|
%
|
Rehabilitation loans
|
|
$
|
136,347
|
|
|
$
|
136,347
|
|
|
65.8
|
%
|
Single-family rental loans
|
|
$
|
20,388
|
|
|
$
|
20,233
|
|
|
72.7
|
%
|
Seasoned performing loans
|
|
$
|
8,031
|
|
|
$
|
8,823
|
|
|
55.1
|
%
|
Residential whole loans, at fair value
|
|
$
|
571,729
|
|
|
$
|
625,621
|
|
|
86.8
|
%
|
(1)LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Rehabilitation loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Rehabilitation loans, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.
Residential Whole Loans at Fair Value
Certain of the Company’s residential whole loans are presented at fair value on its consolidated balance sheets as a result of a fair value election made at the time of acquisition. Subsequent changes in fair value are reported in current period earnings and presented in Net gain on residential whole loans measured at fair value through earnings on the Company’s consolidated statements of operations.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table presents information regarding the Company’s residential whole loans held at fair value at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Less than 60 Days Past Due:
|
|
|
|
|
Outstanding principal balance
|
|
$
|
602,292
|
|
|
$
|
666,026
|
|
Aggregate fair value
|
|
$
|
595,521
|
|
|
$
|
641,616
|
|
Weighted Average LTV Ratio (1)
|
|
72.57
|
%
|
|
76.69
|
%
|
Number of loans
|
|
3,033
|
|
|
3,159
|
|
|
|
|
|
|
60 Days to 89 Days Past Due:
|
|
|
|
|
Outstanding principal balance
|
|
$
|
54,180
|
|
|
$
|
58,160
|
|
Aggregate fair value
|
|
$
|
49,652
|
|
|
$
|
53,485
|
|
Weighted Average LTV Ratio (1)
|
|
82.11
|
%
|
|
79.48
|
%
|
Number of loans
|
|
263
|
|
|
313
|
|
|
|
|
|
|
90 Days or More Past Due:
|
|
|
|
|
Outstanding principal balance
|
|
$
|
625,621
|
|
|
$
|
767,320
|
|
Aggregate fair value
|
|
$
|
571,729
|
|
|
$
|
686,482
|
|
Weighted Average LTV Ratio (1)
|
|
86.78
|
%
|
|
89.69
|
%
|
Number of loans
|
|
2,326
|
|
|
2,983
|
|
Total Residential whole loans, at fair value
|
|
$
|
1,216,902
|
|
|
$
|
1,381,583
|
|
(1)LTV represents the ratio of the total unpaid principal balance of the loan, to the estimated value of the collateral securing the related loan. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.
The following table presents the components of Net gain on residential whole loans measured at fair value through earnings for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
|
2018
|
Coupon payments, realized gains, and other income received (1)
|
|
$
|
72,700
|
|
|
$
|
91,438
|
|
|
$
|
81,602
|
|
Net unrealized gains
|
|
17,204
|
|
|
47,849
|
|
|
36,725
|
|
Net gain on transfers to REO
|
|
4,309
|
|
|
19,043
|
|
|
19,292
|
|
Total
|
|
$
|
94,213
|
|
|
$
|
158,330
|
|
|
$
|
137,619
|
|
(1)Primarily includes gains on liquidation of non-performing loans, including the recovery of delinquent interest payments, recurring coupon interest payments received on mortgage loans that are contractually current, and cash payments received from private mortgage insurance on liquidated loans.
During the year ended December 31, 2020, loans at fair value with an aggregate unpaid principal balance of $24.1 million were sold, realizing net losses of $0.8 million.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
4. Residential Mortgage Securities and MSR-Related Assets
Agency and Non-Agency MBS
MBS investments held during the year ended December 31, 2020 or in prior periods included Agency MBS and Non-Agency MBS which include MBS issued prior to 2008 (“Legacy Non-Agency MBS”). These MBS are secured by: (i) hybrid mortgages (“Hybrids”), which have interest rates that are fixed for a specified period of time and, thereafter, generally adjust annually to an increment over a specified interest rate index; (ii) adjustable-rate mortgages (“ARMs”), which have interest rates that reset annually or more frequently (collectively, “ARM-MBS”); and (iii) 15 and 30 year fixed-rate mortgages for Agency MBS and, for Non-Agency MBS, 30-year and longer-term fixed-rate mortgages. In addition, the Company’s MBS are also comprised of MBS backed by securitized re-performing/non-performing loans (“RPL/NPL MBS”), where the cash flows of the bond may not reflect the contractual cash flows of the underlying collateral. The Company’s RPL/NPL MBS are generally structured with a contractual coupon step-up feature where the coupon increases from 300 - 400 basis points at 36 - 48 months from issuance or sooner. The Company pledges a significant portion of its MBS as collateral against its borrowings under repurchase agreements (see Note 7).
Agency MBS: Agency MBS are guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae. The payment of principal and/or interest on Ginnie Mae MBS is explicitly backed by the full faith and credit of the U.S. Government. Since the third quarter of 2008, Fannie Mae and Freddie Mac have been under the conservatorship of the Federal Housing Finance Agency, which significantly strengthened the backing for these government-sponsored entities. The Company sold its remaining holdings of Agency MBS during the quarter ended June 30, 2020.
Non-Agency MBS: The Company’s Non-Agency MBS are primarily secured by pools of residential mortgages, which are not guaranteed by an agency of the U.S. Government or any federally chartered corporation. Credit risk associated with Non-Agency MBS is regularly assessed as new information regarding the underlying collateral becomes available and based on updated estimates of cash flows generated by the underlying collateral. During the quarter ended June 30, 2020, the Company had sold substantially all of its holdings of Legacy Non-Agency MBS and substantially reduced its holdings of other Non-Agency MBS. The Company sold its remaining Legacy Non-Agency MBS during the quarter ended September 30, 2020.
CRT Securities
CRT securities are debt obligations issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company. The Company assesses the credit risk associated with its investments in CRT securities by assessing the current and expected future performance of the associated loan pool. The Company pledges a portion of its CRT securities as collateral against its borrowings under repurchase agreements (see Note 7).
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following tables present certain information about the Company’s residential mortgage securities at December 31, 2020 and 2019:
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Principal/ Current
Face
|
|
Purchase
Premiums
|
|
Accretable
Purchase
Discounts
|
|
Discount
Designated
as Credit Reserve (1)
|
|
Gross Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Net
Unrealized
Gain/(Loss)
|
|
Fair Value
|
Non-Agency MBS (2)(3)(4)
|
|
$
|
57,847
|
|
|
$
|
—
|
|
|
$
|
(8,136)
|
|
|
$
|
(669)
|
|
|
$
|
49,042
|
|
|
$
|
8,585
|
|
|
$
|
(861)
|
|
|
$
|
7,724
|
|
|
$
|
56,766
|
|
CRT securities (5)
|
|
104,031
|
|
|
3,022
|
|
|
(70)
|
|
|
(20,768)
|
|
|
86,215
|
|
|
18,341
|
|
|
(322)
|
|
|
18,019
|
|
|
104,234
|
|
Total residential mortgage securities
|
|
$
|
161,878
|
|
|
$
|
3,022
|
|
|
$
|
(8,206)
|
|
|
$
|
(21,437)
|
|
|
$
|
135,257
|
|
|
$
|
26,926
|
|
|
$
|
(1,183)
|
|
|
$
|
25,743
|
|
|
$
|
161,000
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Principal/ Current
Face
|
|
Purchase
Premiums
|
|
Accretable
Purchase
Discounts
|
|
Discount
Designated
as Credit Reserve (1)
|
|
Gross Amortized
Cost (6)
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Net
Unrealized
Gain/(Loss)
|
|
Fair Value
|
Agency MBS: (7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
1,119,708
|
|
|
$
|
43,249
|
|
|
$
|
(22)
|
|
|
$
|
—
|
|
|
$
|
1,162,935
|
|
|
$
|
9,799
|
|
|
$
|
(14,741)
|
|
|
$
|
(4,942)
|
|
|
$
|
1,157,993
|
|
Freddie Mac
|
|
480,879
|
|
|
19,468
|
|
|
—
|
|
|
—
|
|
|
500,961
|
|
|
5,475
|
|
|
(3,968)
|
|
|
1,507
|
|
|
502,468
|
|
Ginnie Mae
|
|
3,996
|
|
|
73
|
|
|
—
|
|
|
—
|
|
|
4,069
|
|
|
52
|
|
|
—
|
|
|
52
|
|
|
4,121
|
|
Total Agency MBS
|
|
1,604,583
|
|
|
62,790
|
|
|
(22)
|
|
|
—
|
|
|
1,667,965
|
|
|
15,326
|
|
|
(18,709)
|
|
|
(3,383)
|
|
|
1,664,582
|
|
Non-Agency MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to Recover Par (2)(3)
|
|
722,477
|
|
|
—
|
|
|
(16,661)
|
|
|
—
|
|
|
705,816
|
|
|
19,861
|
|
|
(9)
|
|
|
19,852
|
|
|
725,668
|
|
Expected to Recover Less than Par (2)
|
|
1,472,826
|
|
|
—
|
|
|
(73,956)
|
|
|
(436,598)
|
|
|
962,272
|
|
|
375,598
|
|
|
(9)
|
|
|
375,589
|
|
|
1,337,861
|
|
Total Non-Agency MBS (4)
|
|
2,195,303
|
|
|
—
|
|
|
(90,617)
|
|
|
(436,598)
|
|
|
1,668,088
|
|
|
395,459
|
|
|
(18)
|
|
|
395,441
|
|
|
2,063,529
|
|
Total MBS
|
|
3,799,886
|
|
|
62,790
|
|
|
(90,639)
|
|
|
(436,598)
|
|
|
3,336,053
|
|
|
410,785
|
|
|
(18,727)
|
|
|
392,058
|
|
|
3,728,111
|
|
CRT securities (5)
|
|
244,932
|
|
|
4,318
|
|
|
(55)
|
|
|
—
|
|
|
249,195
|
|
|
6,304
|
|
|
(91)
|
|
|
6,213
|
|
|
255,408
|
|
Total residential mortgage securities
|
|
$
|
4,044,818
|
|
|
$
|
67,108
|
|
|
$
|
(90,694)
|
|
|
$
|
(436,598)
|
|
|
$
|
3,585,248
|
|
|
$
|
417,089
|
|
|
$
|
(18,818)
|
|
|
$
|
398,271
|
|
|
$
|
3,983,519
|
|
(1)Discount designated as Credit Reserve is generally not expected to be accreted into interest income.
(2)Based on management’s current estimates of future principal cash flows expected to be received.
(3)Includes RPL/NPL MBS, which at December 31, 2020 had a $55.0 million Principal/Current face, $46.9 million amortized cost and $53.9 million fair value. At December 31, 2019, RPL/NPL MBS had a $632.3 million Principal/Current face, $631.8 million amortized cost and $635.0 million fair value.
(4)At December 31, 2020 and 2019, the Company expected to recover approximately 99% and 80% of the then-current face amount of Non-Agency MBS, respectively.
(5)Amounts disclosed at December 31, 2020 includes CRT securities with a fair value of $66.2 million for which the fair value option has been elected. Such securities had $551,000 gross unrealized gains and gross unrealized losses of approximately $322,000 at December 31, 2020. Amounts disclosed at December 31, 2019 includes CRT securities with a fair value of $255.4 million for which the fair value option had been elected. Such securities had gross unrealized gains of approximately $6.3 million and gross unrealized losses of approximately $91,000 at December 31, 2019.
(6)Includes principal payments receivable of $614,000 at December 31, 2019, which is not included in the Principal/Current Face.
(7)Amounts disclosed at December 31, 2019 include Agency MBS with a fair value of $280.3 million, for which the fair value option has been elected. Such securities had $4.5 million unrealized gains and no gross unrealized losses at December 31, 2019, respectively.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Sales of Residential Mortgage Securities
The following table presents information about the Company’s sales of its residential mortgage securities for the years ended December 31, 2020, 2019 and 2018. The Company has no continuing involvement with any of the sold securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
(In Thousands)
|
|
Sales Proceeds
|
|
Gains/(Losses)
|
|
Sales Proceeds
|
|
Gains/(Losses)
|
|
Sales Proceeds
|
|
Gains/(Losses)
|
Agency MBS
|
|
$
|
1,500,875
|
|
|
$
|
(19,291)
|
|
|
$
|
360,634
|
|
|
$
|
499
|
|
|
$
|
122,027
|
|
|
$
|
(6,810)
|
|
Non-Agency MBS
|
|
1,318,958
|
|
|
107,999
|
|
|
291,391
|
|
|
50,360
|
|
|
117,060
|
|
|
36,744
|
|
CRT Securities
|
|
243,025
|
|
|
(27,011)
|
|
|
256,671
|
|
|
11,143
|
|
|
299,878
|
|
|
31,373
|
|
Total
|
|
$
|
3,062,858
|
|
|
$
|
61,697
|
|
|
$
|
908,696
|
|
|
$
|
62,002
|
|
|
$
|
538,965
|
|
|
$
|
61,307
|
|
Unrealized Losses on Residential Mortgage Securities
The following table presents information about the Company’s residential mortgage securities that were in an unrealized loss position at December 31, 2020, with respect to which no allowance for credit losses has been recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss Position For:
|
|
|
|
|
Less than 12 Months
|
|
12 Months or more
|
|
Total
|
(Dollars in Thousands)
|
|
Fair
Value
|
|
Unrealized Losses
|
|
Number of
Securities
|
|
Fair
Value
|
|
Unrealized Losses
|
|
Number of
Securities
|
|
Fair
Value
|
|
Unrealized Losses
|
Non-Agency MBS (1)
|
|
$
|
41,139
|
|
|
$
|
861
|
|
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
41,139
|
|
|
$
|
861
|
|
CRT securities (2)
|
|
62,252
|
|
|
322
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
62,252
|
|
|
322
|
|
Total residential mortgage securities
|
|
$
|
103,391
|
|
|
$
|
1,183
|
|
|
12
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
103,391
|
|
|
$
|
1,183
|
|
(1) Based on management’s current estimates of future principal cash flows expected to be received.
(2) Amounts disclosed at December 31, 2020 include CRT securities with a fair value of $62.2 million for which the fair value option has been elected. Such securities had unrealized losses of $322,000 at December 31, 2020.
Gross unrealized losses on the Company’s Non-Agency MBS were $861,000 at December 31, 2020. Based upon the most recent evaluation, the Company does not consider these unrealized losses to require an allowance for credit losses and does not believe that these unrealized losses are credit related, but are rather a reflection of current market yields and/or marketplace bid-ask spreads. The Company has reviewed its Non-Agency MBS that are in an unrealized loss position to identify those securities that require an allowance for credit losses based on an assessment of changes in expected cash flows for such securities, which considers recent bond performance and, where possible, expected future performance of the underlying collateral.
The Company did not recognize an allowance for credit losses (or other than temporary impairment in prior year periods) through earnings related to its MBS for the years ended December 31, 2020 and 2019. However, during the three months ended March 31, 2020, the Company recognized an aggregate impairment loss related to its MBS of $63.5 million based on its intent to sell, or the likelihood it will be required to sell, certain securities at such time.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
MSR-Related Assets
(a) Term Notes Backed by MSR-Related Collateral
At December 31, 2020 and 2019, the Company had $239.0 million and $1.2 billion, respectively, of term notes issued by SPVs that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. Payment of principal and interest on these term notes is considered to be largely dependent on cash flows generated by the underlying MSRs, as this impacts the cash flows available to the SPV that issued the term notes.
At December 31, 2020, these term notes had an amortized cost of $184.9 million, gross unrealized gains of approximately $54.0 million, a weighted average yield of 12.3% and a weighted average term to maturity of 9.2 years. During the year ended December 31, 2020, the Company sold certain term notes for $711.7 million, realizing gains of $28.7 million, respectively. During the three months ended March 31, 2020, the Company recognized an impairment loss related to its term notes of $280.8 million based on its intent to sell, or the likelihood it will be required to sell, such notes. At December 31, 2019, these term notes had an amortized cost of $1.2 billion, gross unrealized gains of $5.2 million, a weighted average yield of 4.75% and a weighted average term to maturity of 5.3 years.
(b) Corporate Loans
The Company has made or participated in loans to provide financing to entities that originate residential mortgage loans and own the related MSRs. These corporate loans are secured by MSRs, as well as certain other unencumbered assets owned by the borrower.
The Company has participated in a loan where it committed to lend $32.6 million of which no amount was drawn at December 31, 2020. The facility expires in August 2021. During the remaining commitment period, the Company receives a commitment fee between 0.25% and 1.0% based on the undrawn amount of the loan.
The following table presents a roll-forward of the allowance for credit losses on the Company’s Residential mortgage securities and MSR-related assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(Dollars In Thousands)
|
|
2020
|
|
2019
|
Allowance for credit losses at beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Current provision:
|
|
—
|
|
|
—
|
|
Securities with no prior loss allowance
|
|
344,269
|
|
|
—
|
|
Securities with a prior loss allowance
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Write-offs, including allowance related to securities the Company intended to sell
|
|
(344,269)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses at end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Impact of AFS Securities on AOCI
The following table presents the impact of the Company’s AFS securities on its AOCI for the years ended December 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
|
2018
|
AOCI from AFS securities:
|
|
|
|
|
|
|
Unrealized gain on AFS securities at beginning of period
|
|
$
|
392,722
|
|
|
$
|
417,167
|
|
|
$
|
620,648
|
|
Unrealized (loss)/gain on Agency MBS, net
|
|
(161)
|
|
|
21,844
|
|
|
(17,891)
|
|
Unrealized gain/(loss) on Non-Agency MBS, net
|
|
367,469
|
|
|
(6,682)
|
|
|
(131,939)
|
|
Unrealized gain/(loss) on MSR term notes, net
|
|
52,973
|
|
|
5,173
|
|
|
(812)
|
|
Reclassification adjustment for MBS sales included in net income
|
|
(389,127)
|
|
|
(44,600)
|
|
|
(51,580)
|
|
Reclassification adjustment for impairment included in net income
|
|
(344,269)
|
|
|
(180)
|
|
|
(1,259)
|
|
Change in AOCI from AFS securities
|
|
(313,115)
|
|
|
(24,445)
|
|
|
(203,481)
|
|
Balance at end of period
|
|
$
|
79,607
|
|
|
$
|
392,722
|
|
|
$
|
417,167
|
|
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Interest Income on Residential Mortgage Securities and MSR-Related Assets
The following table presents the components of interest income on the Company’s residential mortgage securities and MSR-related assets for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
|
2018
|
Agency MBS
|
|
|
|
|
|
|
Coupon interest
|
|
$
|
14,038
|
|
|
$
|
82,446
|
|
|
$
|
88,233
|
|
Effective yield adjustment (1)
|
|
(5,186)
|
|
|
(26,545)
|
|
|
(25,930)
|
|
Interest income
|
|
$
|
8,852
|
|
|
$
|
55,901
|
|
|
$
|
62,303
|
|
|
|
|
|
|
|
|
Legacy Non-Agency MBS
|
|
|
|
|
|
|
Coupon interest
|
|
$
|
18,263
|
|
|
$
|
87,024
|
|
|
$
|
109,714
|
|
Effective yield adjustment (2)(3)
|
|
10,565
|
|
|
59,622
|
|
|
69,309
|
|
Interest income
|
|
$
|
28,828
|
|
|
$
|
146,646
|
|
|
$
|
179,023
|
|
|
|
|
|
|
|
|
RPL/NPL MBS
|
|
|
|
|
|
|
Coupon interest
|
|
$
|
8,376
|
|
|
$
|
53,086
|
|
|
$
|
46,339
|
|
Effective yield adjustment (1)(4)
|
|
560
|
|
|
338
|
|
|
1,434
|
|
Interest income
|
|
$
|
8,936
|
|
|
$
|
53,424
|
|
|
$
|
47,773
|
|
|
|
|
|
|
|
|
CRT securities
|
|
|
|
|
|
|
Coupon interest
|
|
$
|
7,010
|
|
|
$
|
20,532
|
|
|
$
|
30,628
|
|
Effective yield adjustment (2)
|
|
511
|
|
|
(1,949)
|
|
|
2,748
|
|
Interest income
|
|
$
|
7,521
|
|
|
$
|
18,583
|
|
|
$
|
33,376
|
|
|
|
|
|
|
|
|
MSR-related assets
|
|
|
|
|
|
|
Coupon interest
|
|
$
|
25,970
|
|
|
$
|
52,644
|
|
|
$
|
27,174
|
|
Effective yield adjustment (1)(2)
|
|
9,987
|
|
|
3
|
|
|
1,246
|
|
Interest income
|
|
$
|
35,957
|
|
|
$
|
52,647
|
|
|
$
|
28,420
|
|
(1)Includes amortization of premium paid net of accretion of purchase discount. For Agency MBS, RPL/NPL MBS and the corporate loan secured by MSRs, interest income is recorded at an effective yield, which reflects net premium amortization/accretion based on actual prepayment activity.
(2)The effective yield adjustment is the difference between the net income calculated using the net yield less the current coupon yield. The net yield may be based on management’s estimates of the amount and timing of future cash flows or in the instrument’s contractual cash flows, depending on the relevant accounting standards.
(3)Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously been purchased at a discount of $14.5 million and $2.7 million during the years ended December 31, 2019 and 2018, respectively.
(4)Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously been purchased at a discount of $329,000 and $1.4 million during the years ended December 31, 2019 and 2018, respectively.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
5. Other Assets
The following table presents the components of the Company’s Other assets at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
REO (1)
|
|
$
|
249,699
|
|
|
$
|
411,659
|
|
Capital contributions made to loan origination partners
|
|
47,148
|
|
|
147,992
|
|
Other interest-earning assets
|
|
—
|
|
|
70,468
|
|
Interest receivable
|
|
38,850
|
|
|
70,986
|
|
Other MBS and loan related receivables
|
|
16,682
|
|
|
44,648
|
|
Other
|
|
33,002
|
|
|
39,304
|
|
Total Other Assets
|
|
$
|
385,381
|
|
|
$
|
785,057
|
|
(1) Includes $61.8 million and $27.3 million of REO that is held-for-investment at December 31, 2020 and 2019.
(a) Real Estate Owned
At December 31, 2020, the Company had 946 REO properties with an aggregate carrying value of $249.7 million. At December 31, 2019, the Company had 1,652 REO properties with an aggregate carrying value of $411.7 million.
At December 31, 2020, $247.2 million of residential real estate property was held by the Company that was acquired either through a completed foreclosure proceeding or from completion of a deed-in-lieu of foreclosure or similar legal agreement. In addition, formal foreclosure proceedings were in process with respect to $116.3 million of residential whole loans held at carrying value and $448.5 million of residential whole loans held at fair value at December 31, 2020.
The following table presents the activity in the Company’s REO for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(Dollars In Thousands)
|
|
2020
|
|
2019
|
Balance at beginning of period
|
|
$
|
411,659
|
|
|
$
|
249,413
|
|
Adjustments to record at lower of cost or fair value
|
|
(12,570)
|
|
|
(14,884)
|
|
Transfer from residential whole loans (1)
|
|
96,766
|
|
|
257,701
|
|
Purchases and capital improvements, net
|
|
10,198
|
|
|
20,746
|
|
Disposals (2)
|
|
(256,354)
|
|
|
(101,317)
|
|
Balance at end of period
|
|
$
|
249,699
|
|
|
$
|
411,659
|
|
|
|
|
|
|
Number of properties
|
|
946
|
|
|
1,652
|
|
(1)Includes net gain recorded on transfer of approximately $5.1 million and $19.8 million, respectively, for the years ended December 31, 2020 and 2019.
(2)During the year ended December 31, 2020, the company sold 1,086 REO properties for consideration of $271.4 million, realizing net gains of approximately $15.1 million. During the year ended December 31, 2019, the Company sold 571 REO properties for consideration of $109.2 million, realizing net gains of approximately $7.4 million. These amounts are included in Other Income, net on the Company’s consolidated statements of operations.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(b) Capital Contributions Made to Loan Origination Partners
The Company has made investments in several loan originators as part of its strategy to be a reliable source of capital to select partners from whom it sources residential mortgage loans through both flow arrangements and bulk purchases. To date, such contributions of capital include the following investments (based on their carrying value prior to any impairments): $30.4 million of common equity and $82.1 million of preferred equity. In addition, for certain partners, options or warrants may have also been acquired that provide the Company the ability to increase the level of its investment if certain conditions are met. At the end of each reporting period, or earlier if circumstances warrant, the Company evaluates whether the nature of its interests and other involvement with the investee entity requires the Company to apply equity method accounting or consolidate the results of the investee entity with the Company’s financial results. To date, the nature of the Company’s interests and/or involvement with investee companies has not resulted in consolidation. Further, to the extent that the nature of the Company’s interests has resulted in the need for the Company to apply equity method accounting, the impact of such accounting on the Company’s results for periods subsequent to that in which the Company was determined to have significant influence over the investee company was not material for any period. As the interests acquired to date by the Company generally do not have a readily determinable fair value, the Company accounts for its non-equity method interests (including any acquired options and warrants) in loan originators initially at cost. The carrying value of these investments will be adjusted if it is determined that an impairment has occurred or if there has been a subsequent observable transaction in either the investee company’s equity securities or a similar security that provides evidence to support an adjustment to the carrying value. Following an evaluation of the anticipated impact of the COVID-19 pandemic on economic conditions for the short to medium term, the Company recorded impairment charges of $65.3 million on investments in certain loan origination partners during the year ended December 31, 2020, which was included in “Impairment and other losses on securities available-for-sale and other assets” on the consolidated statements of operations. At December 31, 2020, approximately $738.4 million of the Company’s Residential whole loans, at carrying value were serviced by entities in which the Company has an investment.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(c) Derivative Instruments
The Company’s derivative instruments have been generally comprised of Swaps, the majority of which were designated as cash flow hedges against the interest rate risk associated with certain borrowings. In addition, in connection with managing risks associated with purchases of longer duration Agency MBS, the Company has also entered into Swaps that are not designated as hedges for accounting purposes.
In response to the turmoil in the financial markets resulting from the COVID-19 pandemic experienced during the three months ended March 31, 2020, the Company unwound all of its approximately $4.1 billion of Swap hedging transactions late in the first quarter in order to recover previously posted margin. Gains or losses associated with these Swap hedging transactions are required to be transferred from AOCI to earnings over the original term of the Swap, if the underlying hedged item or transactions are assessed as probable of occurring. After the closing of several new financing transactions late in the quarter ended June 30, 2020, the Company evaluated its anticipated future financing requirements. The Company concluded that it was no longer probable that certain previously used financing strategies, including those that primarily utilized repurchase agreements with funding costs that reset on a monthly basis, would be used by the Company on an ongoing basis, as this financing strategy had been essentially replaced by the new financing transactions. Consequently, during the year ended December 31, 2020, the Company concluded that it was appropriate to transfer from AOCI to earnings approximately $57.0 million of losses on Swaps that had previously been designated as hedges for accounting purposes, because the hedged transactions were no longer considered probable to occur. This amount is included in Other income, net on the Company’s consolidated statements of operations. At December 31, 2020, there are no remaining losses included in AOCI on Swaps previously designated as hedges for accounting purposes.
The following table presents the fair value of the Company’s derivative instruments at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2020
|
|
2019
|
Derivative Instrument (1)
|
|
Designation
|
|
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
Hedging
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,942,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
Non-Hedging
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
230,000
|
|
|
$
|
—
|
|
(1) Represents Swaps executed bilaterally with a counterparty in the over-the-counter market but then novated to a central clearing house, whereby the central clearing house becomes the counterparty to both of the original counterparties.
Swaps
The following table presents the assets pledged as collateral against the Company’s Swap contracts at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
Agency MBS, at fair value
|
|
$
|
—
|
|
|
$
|
2,241
|
|
Restricted cash
|
|
—
|
|
|
16,777
|
|
Total assets pledged against Swaps
|
|
$
|
—
|
|
|
$
|
19,018
|
|
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table presents information about the Company’s Swaps at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Maturity (1)
|
|
Notional
Amount
|
|
Weighted
Average
Fixed-Pay
Interest Rate
|
|
Weighted
Average Variable
Interest Rate (2)
|
|
Notional
Amount
|
|
Weighted
Average
Fixed-Pay
Interest Rate
|
|
Weighted
Average Variable
Interest Rate (2)
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 3 months to 6 months
|
|
—
|
|
|
—
|
|
|
—
|
|
|
200,000
|
|
|
2.05
|
|
|
1.70
|
|
Over 6 months to 12 months
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,430,000
|
|
|
2.30
|
|
|
1.77
|
|
Over 12 months to 24 months
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,300,000
|
|
|
2.11
|
|
|
1.86
|
|
Over 24 months to 36 months
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,000
|
|
|
1.38
|
|
|
1.90
|
|
Over 36 months to 48 months
|
|
—
|
|
|
—
|
|
|
—
|
|
|
222,000
|
|
|
2.88
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Swaps
|
|
$
|
—
|
|
|
—
|
%
|
|
—
|
%
|
|
$
|
3,172,000
|
|
|
2.24
|
%
|
|
1.81
|
%
|
(1) Each maturity category reflects contractual amortization and/or maturity of notional amounts.
(2) Reflects the benchmark variable rate due from the counterparty at the date presented, which rate adjusts monthly or quarterly based on one-month or three-month LIBOR, respectively.
The following table presents the net impact of the Company’s derivative hedging instruments on its net interest expense and the weighted average interest rate paid and received for such Swaps for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(Dollars in Thousands)
|
|
2020
|
|
2019
|
|
2018
|
Interest expense attributable to Swaps
|
|
$
|
(3,359)
|
|
|
$
|
927
|
|
|
$
|
3,780
|
|
Weighted average Swap rate paid
|
|
2.06
|
%
|
|
2.28
|
%
|
|
2.12
|
%
|
Weighted average Swap rate received
|
|
1.63
|
%
|
|
2.24
|
%
|
|
1.96
|
%
|
During the year ended December 31, 2020, the Company recorded net losses on Swaps not designated in hedging relationships of approximately $4.3 million, which included $9.4 million of losses realized on the unwind of certain Swaps. During the year ended December 31, 2019, the Company recorded net losses on Swaps not designated in hedging relationships of $16.5 million, which included $17.7 million of losses realized on the unwind of certain Swaps. During the year ended December 31, 2018, the Company recorded net losses on Swaps not designated in hedging relationships of $9.6 million. These amounts are included in Other income, net on the Company’s consolidated statements of operations.
Impact of Derivative Hedging Instruments on AOCI
The following table presents the impact of the Company’s derivative hedging instruments on its AOCI for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
|
2018
|
AOCI from derivative hedging instruments:
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(22,675)
|
|
|
$
|
3,121
|
|
|
$
|
(11,424)
|
|
Net (loss)/gain on Swaps
|
|
(50,127)
|
|
|
(23,342)
|
|
|
14,545
|
|
Reclassification adjustment for losses/gains related to hedging instruments included in net income
|
|
72,802
|
|
|
(2,454)
|
|
|
—
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
(22,675)
|
|
|
$
|
3,121
|
|
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
6. Financing Agreements
The following tables present the components of the Company’s Financing agreements at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(In Thousands)
|
|
Unpaid Principal Balance
|
|
Amortized Cost Balance
|
|
Fair Value/Carrying Value(1)
|
Financing agreements, at fair value
|
|
|
|
|
|
|
Agreements with non-mark-to-market collateral provisions
|
|
$
|
1,156,899
|
|
|
$
|
1,156,899
|
|
|
$
|
1,159,213
|
|
Agreements with mark-to-market collateral provisions
|
|
1,338,077
|
|
|
1,338,077
|
|
|
1,338,077
|
|
Securitized debt
|
|
866,203
|
|
|
857,553
|
|
|
869,482
|
|
Total Financing agreements, at fair value
|
|
$
|
3,361,179
|
|
|
$
|
3,352,529
|
|
|
$
|
3,366,772
|
|
|
|
|
|
|
|
|
Other financing agreements
|
|
|
|
|
|
|
Securitized debt
|
|
$
|
648,300
|
|
|
|
|
$
|
645,027
|
|
Convertible senior notes
|
|
230,000
|
|
|
|
|
225,177
|
|
Senior notes
|
|
100,000
|
|
|
|
|
100,000
|
|
Total Financing agreements at carrying value
|
|
$
|
978,300
|
|
|
|
|
$
|
970,204
|
|
Total Financing agreements
|
|
$
|
4,339,479
|
|
|
|
|
$
|
4,336,976
|
|
(1) Financing agreements at fair value are reported at estimated fair value each period as a result of the Company’s fair value option election. Other financing arrangements are reported at their carrying value (amortized cost basis) as the fair value option was not elected on these liabilities. Consequently, Total Financing agreements as presented reflects a summation of balances reported at fair value and carrying value.
Set out below is information about the Company’s Financing agreements that existed as of December 31, 2019. During the second quarter of 2020, outstanding repurchase agreement transactions at that time were renegotiated as part of a reinstatement agreement that was entered into by the Company. The Company elected to account for these reinstated transactions under the fair value option from the time these repurchase agreements were reinstated. Accordingly, as of December 31, 2020, such liabilities are reported as Financing agreements at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(In Thousands)
|
|
Unpaid Principal Balance
|
|
Carrying Value
|
Repurchase agreements
|
|
$
|
9,140,944
|
|
|
$
|
9,139,821
|
|
Securitized debt
|
|
573,900
|
|
|
570,952
|
|
Convertible senior notes
|
|
230,000
|
|
|
223,971
|
|
Senior notes
|
|
100,000
|
|
|
96,862
|
|
Total Financing agreements at carrying value
|
|
$
|
10,044,844
|
|
|
$
|
10,031,606
|
|
(a) Financing Agreements, at Fair Value
During the second quarter of 2020, the Company entered into a $500 million senior secured credit agreement. In addition, in conjunction with its exit from forbearance arrangements, the Company entered into several new asset backed financing arrangements and renegotiated financing arrangements for certain assets with existing lenders, which together resulted in the Company essentially refinancing the majority of its investment portfolio. The Company elected the fair value option on these financing arrangements, primarily to simplify the accounting associated with costs incurred to establish the new facilities or renegotiate existing facilities.
The Company considers that the most relevant feature that distinguishes between the various asset backed financing arrangements is how the financing arrangement is collateralized, including the ability of the lender to make margin calls on the
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Company based on changes in value of the underlying collateral securing the financing. Accordingly, further details are provided below regarding assets that are financed with agreements that have non-mark-to-market collateral provisions and assets that are financed with agreements that have mark-to-market collateral provisions.
Agreements with non-mark-to-market collateral provisions
The Company and certain of its subsidiaries entered into a non-mark-to-market term loan facility with certain lenders with an initial borrowing capacity of $1.65 billion. The Company’s borrowing subsidiaries have pledged, as collateral security for the facility, certain of their residential whole loans (excluding Rehabilitation loans), as well as the equity in subsidiaries that own the loans. The facility has an initial term of two years, which may be extended for up to an additional three years, subject to certain conditions, including the payment of an extension fee and provided that no events of default have occurred. For the initial two year term, the financing cost for the facility will be calculated at a spread over the lender’s financing cost, which, depending on the lender, is expected to be based either on three-month LIBOR, or an index that it expected over time to be closely correlated to changes in three-month LIBOR. At December 31, 2020, the amount financed under this facility was approximately $886.1 million.
In addition, the Company also entered into non-mark-to-market financing facilities on Rehabilitation loans. Under these facilities, Rehabilitation loans, as well as the equity in subsidiaries that own the loans, are pledged as collateral. The facilities have a two year term and the financing cost is calculated at a spread over three-month LIBOR. At December 31, 2020, the amount financed under these facilities was approximately $273.1 million.
The following table presents information with respect to the Company’s financing agreements with non-mark-to-market collateral provisions and associated assets pledged as collateral at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
December 31,
2020
|
|
December 31,
2019
|
Non-mark-to-market financing secured by residential whole loans at carrying value
|
|
$
|
906,466
|
|
|
$
|
—
|
|
Fair value of residential whole loans at carrying value pledged as collateral under financing agreements
|
|
$
|
1,500,100
|
|
|
$
|
—
|
|
Weighted average haircut on residential whole loans at carrying value
|
|
38.62
|
%
|
|
—
|
%
|
Non-mark-to-market financing secured by residential whole loans at fair value
|
|
$
|
252,747
|
|
|
$
|
—
|
|
Fair value of residential whole loans at fair value pledged as collateral under financing agreements
|
|
$
|
430,183
|
|
|
$
|
—
|
|
Weighted average haircut on residential whole loans at fair value
|
|
42.26
|
%
|
|
—
|
%
|
Agreements with mark-to-market collateral provisions
In addition to entering into the financing arrangements discussed above, the Company also entered into a reinstatement agreement with certain lending counterparties that facilitated its exit from the forbearance arrangements that the Company had previously entered into. In connection with the reinstatement agreement, terms of its prior financing arrangements on certain residential whole loans, residential mortgage securities, and MSR-related assets were renegotiated and those arrangements were reinstated on a go-forward basis. These financing arrangements continue to contain mark-to-market provisions that permit the lending counterparties to make margin calls on the Company should the value of the pledged collateral decline. The Company is also permitted to recover previously posted margin payments, should values of the pledged collateral subsequently increase. These facilities generally have a maturity ranging from one to three months and can be renewed at the discretion of the lending counterparty at financing costs reflecting prevailing market pricing. At December 31, 2020, the amount financed under these agreements was approximately $1.3 billion.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table presents information with respect to the Company’s financing agreements with mark-to-market collateral provisions and associated assets pledged as collateral at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
December 31,
2020
|
|
December 31,
2019
|
Mark-to-market financing agreements secured by residential whole loans (1)
|
|
$
|
1,124,162
|
|
|
$
|
4,743,094
|
|
Fair value of residential whole loans pledged as collateral under financing agreements (2)
|
|
$
|
1,798,813
|
|
|
$
|
5,986,267
|
|
Weighted average haircut on residential whole loans (3)
|
|
33.53
|
%
|
|
20.07
|
%
|
Mark-to-market financing agreement borrowings secured by Agency MBS
|
|
$
|
—
|
|
|
$
|
1,557,675
|
|
Fair value of Agency MBS pledged as collateral under financing agreements
|
|
$
|
—
|
|
|
$
|
1,656,373
|
|
Weighted average haircut on Agency MBS (3)
|
|
—
|
%
|
|
4.46
|
%
|
Mark-to-market financing agreement borrowings secured by Legacy Non-Agency MBS
|
|
$
|
1,282
|
|
|
$
|
1,121,802
|
|
Fair value of Legacy Non-Agency MBS pledged as collateral under financing agreements
|
|
$
|
2,821
|
|
|
$
|
1,420,797
|
|
Weighted average haircut on Legacy Non-Agency MBS (3)
|
|
50.00
|
%
|
|
20.27
|
%
|
Mark-to-market financing agreement borrowings secured by RPL/NPL MBS
|
|
$
|
32,950
|
|
|
$
|
495,091
|
|
Fair value of RPL/NPL MBS pledged as collateral under financing agreements
|
|
$
|
53,946
|
|
|
$
|
635,005
|
|
Weighted average haircut on RPL/NPL MBS (3)
|
|
38.75
|
%
|
|
21.52
|
%
|
Mark-to-market financing agreements secured by CRT securities
|
|
$
|
54,883
|
|
|
$
|
203,569
|
|
Fair value of CRT securities pledged as collateral under financing agreements
|
|
$
|
104,234
|
|
|
$
|
252,175
|
|
Weighted average haircut on CRT securities (3)
|
|
42.47
|
%
|
|
18.84
|
%
|
Mark-to-market financing agreements secured by MSR-related assets
|
|
$
|
124,800
|
|
|
$
|
962,515
|
|
Fair value of MSR-related assets pledged as collateral under financing agreements
|
|
$
|
238,999
|
|
|
$
|
1,217,002
|
|
Weighted average haircut on MSR-related assets (3)
|
|
41.12
|
%
|
|
21.18
|
%
|
Mark-to-market financing agreements secured by other interest-earning assets
|
|
$
|
—
|
|
|
$
|
57,198
|
|
Fair value of other interest-earning assets pledged as collateral under financing agreements
|
|
$
|
—
|
|
|
$
|
61,708
|
|
Weighted average haircut on other interest-earning assets (3)
|
|
—
|
%
|
|
22.01
|
%
|
(1)Excludes $0 and $1.1 million of unamortized debt issuance costs at December 31, 2020 and December 31, 2019, respectively.
(2)At December 31, 2020 and December 31, 2019, includes RPL/NPL MBS with an aggregate fair value of $141.9 million and $238.8 million, respectively, obtained in connection with the Company’s loan securitization transactions that are eliminated in consolidation.
(3) Haircut represents the percentage amount by which the collateral value is contractually required to exceed the loan amount.
In addition, the Company had cash pledged as collateral in connection with its financing agreements of $7.2 million and $25.2 million at December 31, 2020 and December 31, 2019, respectively.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table presents repricing information (excluding the impact of associated derivative hedging instruments, if any) about the Company’s financing agreements that have non-mark-to-market collateral provisions as well as those that have mark-to-market collateral provisions, at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Amortized Cost Basis
|
|
Weighted Average Interest Rate
|
Amortized Cost Basis
|
|
Weighted Average Interest Rate
|
Time Until Interest Rate Reset
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
Within 30 days
|
|
$
|
2,494,976
|
|
|
3.16
|
%
|
|
$
|
4,472,120
|
|
|
2.55
|
%
|
Over 30 days to 3 months
|
|
—
|
|
|
—
|
|
|
2,746,384
|
|
|
3.43
|
|
Over 3 months to 12 months
|
|
—
|
|
|
—
|
|
|
1,014,441
|
|
|
3.36
|
|
Over 12 months
|
|
—
|
|
|
—
|
|
|
907,999
|
|
|
3.44
|
|
Total financing agreements
|
|
$
|
2,494,976
|
|
|
3.16
|
%
|
|
$
|
9,140,944
|
|
|
2.99
|
%
|
Less debt issuance costs
|
|
—
|
|
|
|
|
1,123
|
|
|
|
Total financing agreements less debt
issuance costs
|
|
$
|
2,494,976
|
|
|
|
|
$
|
9,139,821
|
|
|
|
The Company had financing agreements, including repurchase agreements and other forms of secured financing with 7 and 28 counterparties at December 31, 2020 and December 31, 2019, respectively. The following table presents information with respect to each counterparty under financing agreements for which the Company had greater than 5% of stockholders’ equity at risk in the aggregate at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Counterparty
Rating (1)
|
|
Amount
at Risk (2)
|
|
Weighted
Average Months
to Repricing for
Repurchase Agreements
|
|
Percent of
Stockholders’ Equity
|
Counterparty
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
Barclays Bank
|
|
BBB/Aa3/A
|
|
$
|
505,580
|
|
|
1
|
|
20.0
|
%
|
Credit Suisse
|
|
BBB+/Baa1/A-
|
|
438,336
|
|
|
1
|
|
17.4
|
|
Wells Fargo
|
|
A+/Aa2/AA-
|
|
337,769
|
|
|
1
|
|
13.4
|
|
Goldman Sachs (3)
|
|
BBB+/A2/A
|
|
187,122
|
|
|
0
|
|
7.4
|
|
Athene (4)
|
|
BBB+/N/A/BBB+
|
|
133,286
|
|
|
1
|
|
5.3
|
|
(1)As rated at December 31, 2020 by S&P, Moody’s and Fitch, Inc., respectively. The counterparty rating presented is the lowest published for these entities.
(2)The amount at risk reflects the difference between (a) the amount loaned to the Company through financing agreements, including interest payable, and (b) the cash and the fair value of the securities pledged by the Company as collateral, including accrued interest receivable on such securities.
(3)Includes $25.4 million at risk with Goldman Sachs and $161.7 million at risk with Goldman Sachs Bank USA.
(4)Includes amounts at risk with various Athene affiliates that collectively exceed 5% of stockholders’ equity.
Senior Secured Term Loan Facility
On June 26,2020, the Company entered into a $500 million senior secured term loan facility (the “Term Loan Facility”) with certain funds, accounts and/or clients managed by affiliates of Apollo Global Management, Inc. and affiliates of Athene Holding Ltd. The outstanding balance of the Term Loan Facility was repaid and the Term Loan Facility was terminated prior to December 31, 2020.
(b) Other Financing Agreements
These arrangements were either entered into prior to the Company experiencing financial difficulties related to the COVID-19 pandemic, or, in the case of the Company’s recent securitizations, after the Company’s exit from forbearance, and
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
were not subject to the forbearance arrangements that were entered into by the Company or any negotiations related to the Company’s exit from those arrangements.
Additional information regarding the Company’s Other financing arrangements as of December 31, 2020, is included below:
Securitized Debt
Securitized debt represents third-party liabilities of consolidated VIEs and excludes liabilities of the VIEs acquired by the Company that are eliminated in consolidation. The third-party beneficial interest holders in the VIEs have no recourse to the general credit of the Company. The weighted average fixed rate on the securitized debt was 2.11% at December 31, 2020 (see Notes 10 and 15 for further discussion).
Convertible Senior Notes
On June 3, 2019, the Company issued $230.0 million in aggregate principal amount of its Convertible Senior Notes in an underwritten public offering, including an additional $30.0 million issued pursuant to the exercise of the underwriters’ option to purchase additional Convertible Senior Notes. The total net proceeds the Company received from the offering were approximately $223.3 million, after deducting offering expenses and the underwriting discount. The Convertible Senior Notes bear interest at a fixed rate of 6.25% per year, paid semiannually on June 15 and December 15 of each year commencing December 15, 2019 and will mature on June 15, 2024, unless earlier converted, redeemed or repurchased in accordance with their terms. The Convertible Senior Notes are convertible at the option of the holders at any time until the close of business on the business day immediately preceding the maturity date into shares of the Company’s common stock based on an initial conversion rate of 125.7387 shares of the Company’s common stock for each $1,000 principal amount of the Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $7.95 per share of common stock. The Convertible Senior Notes have an effective interest rate, including the impact of amortization to interest expense of debt issuance costs, of 6.94%. The Company does not have the right to redeem the Convertible Senior Notes prior to maturity, except to the extent necessary to preserve its status as a REIT, in which case the Company may redeem the Convertible Senior Notes, in whole or in part, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest.
The Convertible Senior Notes are the Company’s senior unsecured obligations and are effectively junior to all of the Company’s secured indebtedness, which includes the Company’s repurchase agreements and other financing arrangements, to the extent of the value of the collateral securing such indebtedness and equal in right of payment to the Company’s existing and future senior unsecured obligations, including the Senior Notes.
Senior Notes
On April 11, 2012, the Company issued $100.0 million in aggregate principal amount of its Senior Notes in an underwritten public offering. The Senior Notes bear interest at a fixed rate of 8.00% per year. The Senior Notes have an effective interest rate, including the impact of amortization to interest expense of debt issuance costs, of 8.31%. On January 6, 2021, the Company redeemed all of its outstanding Senior Notes (see Note 17).
7. Collateral Positions
The Company pledges securities or cash as collateral to its counterparties in relation to certain of its financing arrangements. In addition, the Company receives securities or cash as collateral pursuant to financing provided under reverse repurchase agreements. The Company exchanges collateral with its counterparties based on changes in the fair value, notional amount and term of the associated financing arrangements and Swap contracts, as applicable. In connection with these margining practices, either the Company or its counterparty may be required to pledge cash or securities as collateral. When the Company’s pledged collateral exceeds the required margin, the Company may initiate a reverse margin call, at which time the counterparty may either return the excess collateral or provide collateral to the Company in the form of cash or equivalent securities.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Company’s assets pledged as collateral are described in Notes 2(f) - Restricted Cash, 5(c) - Derivative Instruments and 6 - Financing Agreements. The total fair value of assets pledged as collateral with respect to the Company’s borrowings under its financing arrangements and/or derivative hedging instruments was $4.1 billion and $11.3 billion at December 31, 2020 and December 31, 2019, respectively. An aggregate of $24.6 million and $57.2 million of accrued interest on those assets had also been pledged as of December 31, 2020 and December 31, 2019, respectively.
8. Offsetting Assets and Liabilities
Certain of the Company’s financing arrangements and derivative transactions are governed by underlying agreements that generally provide for a right of setoff in the event of default or in the event of a bankruptcy of either party to the transaction. In the Company’s consolidated balance sheets, all balances associated with repurchase agreements are presented on a gross basis.
The fair value of financial instruments pledged against the Company’s financing arrangements was $4.1 billion and $11.2 billion at December 31, 2020 and December 31, 2019, respectively. The fair value of financial instruments pledged against the Company’s Swaps was $0 and $2.2 million at December 31, 2020 and December 31, 2019, respectively. In addition, cash that has been pledged as collateral against financing arrangements and Swaps is reported as Restricted cash on the Company’s consolidated balance sheets (see Notes 2(f), 5(c) and 6).
9. Other Liabilities
The following table presents the components of the Company’s Other liabilities at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Dividends and dividend equivalents payable
|
|
$
|
34,016
|
|
|
$
|
90,749
|
|
Accrued interest payable
|
|
11,116
|
|
|
18,238
|
|
Accrued expenses and other
|
|
25,390
|
|
|
43,625
|
|
Total Other Liabilities
|
|
$
|
70,522
|
|
|
$
|
152,612
|
|
10. Commitments and Contingencies
(a) Lease Commitments
The Company pays monthly rent pursuant to three office leases. In November 2018, the Company amended the lease for its corporate headquarters in New York, New York, under the same terms and conditions, to extend the expiration date for the lease by up to one year, through June 30, 2021, with a mutual option to terminate on or after February 15, 2021. For the year ended December 31, 2020, the Company recorded an expense of approximately $2.9 million in connection with the lease for its current corporate headquarters.
In addition, in November 2018, the Company executed a lease agreement on new office space in New York, New York. The Company plans to relocate its corporate headquarters to this new office space upon the substantial completion of the building. The lease term specified in the agreement is fifteen years with an option to renew for an additional five years. The Company’s current estimate of annual lease rental expense under the new lease, excluding escalation charges which at this point are unknown, is approximately $4.6 million. The Company currently expects to relocate to the space in the first fiscal quarter of 2021, but this timing, as well as when it is required to begin making payments and recognize rental and other expenses under the new lease, is dependent on when the space is actually available for use.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Company recognized lease expense of $3.0 million, $2.7 million and $2.7 million for the years ended December 31, 2020, 2019 and 2018, respectively, which is included in Other general and administrative expense within the consolidated statements of operations. At December 31, 2020, the contractual minimum rental payments (exclusive of possible rent escalation charges and normal recurring charges for maintenance, insurance and taxes) were as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Minimum Rental Payments (1)
|
(In Thousands)
|
|
|
2021
|
|
$
|
434
|
|
2022
|
|
85
|
|
2023
|
|
86
|
|
2024
|
|
65
|
|
2025
|
|
—
|
|
Thereafter
|
|
—
|
|
Total
|
|
$
|
670
|
|
(1) Table excludes amounts related to the lease agreement for new office space discussed above as the Company is not contractually obligated to make rental payments until fourteen months after a temporary certificate of occupancy is delivered to the landlord, which is currently expected to occur on or before March 2021.
(b) Representations and Warranties in Connection with Loan Securitization Transactions
In connection with the loan securitization transactions entered into by the Company, the Company has the obligation under certain circumstances to repurchase assets previously transferred to securitization vehicles upon breach of certain representations and warranties. As of December 31, 2020, the Company had no reserve established for repurchases of loans and was not aware of any material unsettled repurchase claims that would require the establishment of such a reserve (see Note 15).
(c) Corporate Loans
The Company has participated in loans to provide financing to entities that originate loans and own MSRs, as well as certain other unencumbered assets owned by the borrower. At December 31, 2020, the Company’s commitment to lend is $32.6 million of which no amount was drawn at December 31, 2020 (see Note 4).
(d) Rehabilitation Loan Commitments
At December 31, 2020, the Company had unfunded commitments of $60.6 million in connection with its purchased Rehabilitation loans (see Note 3).
11. Stockholders’ Equity
(a) Preferred Stock
7.50% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”)
On April 15, 2013, the Company completed the issuance of 8.0 million shares of its Series B Preferred Stock with a par value of $0.01 per share, and a liquidation preference of $25.00 per share plus accrued and unpaid dividends, in an underwritten public offering. The Company’s Series B Preferred Stock is entitled to receive a dividend at a rate of 7.50% per year on the $25.00 liquidation preference before the Company’s common stock is paid any dividends and is senior to the Company’s common stock with respect to distributions upon liquidation, dissolution or winding up. Dividends on the Series B Preferred Stock are payable quarterly in arrears on or about March 31, June 30, September 30 and December 31 of each year. The Series B Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not authorized or declared) exclusively at the Company’s option.
The Series B Preferred Stock generally does not have any voting rights, subject to an exception in the event the Company
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
fails to pay dividends on such stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series B Preferred Stock will be entitled to vote to elect two additional directors to the Company’s Board of Directors (the “Board”), until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series B Preferred Stock cannot be made without the affirmative vote of holders of at least 66 2/3% of the outstanding shares of Series B Preferred Stock.
As a result of the turmoil in the financial markets resulting from the global COVID-19 pandemic, and in order to preserve liquidity, on March 25, 2020, the Company revoked the previously announced first quarter 2020 quarterly cash dividends on each of the Company's common stock and Series B Preferred Stock. On July 1, 2020, the Company announced that it had reinstated the payment of dividends on its Series B Preferred Stock and declared a preferred stock dividend of $0.9375 per share, payable on July 31, 2020 to Series B Preferred stockholders of record as of July 15, 2020.
The following table presents cash dividends declared by the Company on its Series B Preferred Stock from January 1, 2018 through December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend Per Share
|
2020
|
|
November 18, 2020
|
|
December 4, 2020
|
|
December 31, 2020
|
|
$0.46875
|
|
|
August 12, 2020
|
|
September 8, 2020
|
|
September 30, 2020
|
|
0.46875
|
|
|
July 1, 2020
|
|
July 15, 2020
|
|
July 31, 2020
|
|
0.93750
|
|
|
|
|
|
|
|
|
|
2019
|
|
November 15, 2019
|
|
December 2, 2019
|
|
December 31, 2019
|
|
$0.46875
|
|
|
August 9, 2019
|
|
August 30, 2019
|
|
September 30, 2019
|
|
0.46875
|
|
|
May 20, 2019
|
|
June 3, 2019
|
|
June 28, 2019
|
|
0.46875
|
|
|
February 15, 2019
|
|
March 4, 2019
|
|
March 29, 2019
|
|
0.46875
|
|
|
|
|
|
|
|
|
|
2018
|
|
November 26, 2018
|
|
December 7, 2018
|
|
December 28, 2018
|
|
$0.46875
|
|
|
August 20, 2018
|
|
September 7, 2018
|
|
September 28, 2018
|
|
0.46875
|
|
|
May 17, 2018
|
|
June 4, 2018
|
|
June 29, 2018
|
|
0.46875
|
|
|
February 20, 2018
|
|
March 2, 2018
|
|
March 30, 2018
|
|
0.46875
|
Issuance of 6.50% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”)
On February 28, 2020, the Company amended its charter through the filing of articles supplementary to reclassify 12,650,000 shares of the Company’s authorized but unissued common stock as shares of the Company’s Series C Preferred Stock. On March 2, 2020, the Company completed the issuance of 11.0 million shares of its Series C Preferred Stock with a par value of $0.01 per share, and a liquidation preference of $25.00 per share plus accrued and unpaid dividends, in an underwritten public offering. The total net proceeds the Company received from the offering were approximately $266.0 million, after deducting offering expenses and the underwriting discount.
The Company’s Series C Preferred Stock is entitled to receive dividends (i) from and including the original issue date to, but excluding, March 31, 2025, at a fixed rate of 6.50% per year on the $25.00 liquidation preference and (ii) from and including March 31, 2025, at a floating rate equal to three-month LIBOR plus a spread of 5.345% per year of the $25.00 per share liquidation preference before the Company’s common stock is paid any dividends, and is senior to the Company’s common stock with respect to distributions upon liquidation, dissolution or winding up. Dividends on the Series C Preferred Stock are payable quarterly in arrears on or about March 31, June 30, September 30 and December 31 of each year. The Series C Preferred Stock is not redeemable by the Company prior to March 31, 2025, except under circumstances where it is necessary to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and upon the occurrence of certain specified change in control transactions. On or after March 31, 2025, the Company may, at its option, subject to certain procedural requirements, redeem any or all of the shares of the Series C Preferred Stock for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends thereon (whether or not authorized or declared) to, but excluding, the redemption date.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Series C Preferred Stock generally does not have any voting rights, subject to an exception in the event the Company fails to pay dividends on such stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series C Preferred Stock will be entitled to vote to elect two additional directors to the Company’s Board, until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series C Preferred Stock cannot be made without the affirmative vote of holders of at least 66 2/3% of the outstanding shares of Series C Preferred Stock.
Pursuant to the now-terminated forbearance agreements that the Company had previously entered into, the Company was prohibited from paying dividends on its Series C Preferred Stock during the forbearance period. On July 1, 2020, the Company announced that it had reinstated the payment of dividends on its Series C Preferred Stock and declared a preferred stock dividend of $0.53264 per share, payable on July 31, 2020 to the Series C Preferred stockholders of record as of July 15, 2020. Upon payment of this dividend, the Company paid in full all accumulated but previously unpaid dividends on its Series C Preferred Stock.
The following table presents cash dividends declared by the Company on its Series C Preferred Stock from January 1, 2020 through December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend Per Share
|
2020
|
|
November 18, 2020
|
|
December 4, 2020
|
|
December 31, 2020
|
|
$0.40625
|
|
|
August 12, 2020
|
|
September 8, 2020
|
|
September 30, 2020
|
|
0.40625
|
|
|
July 1, 2020
|
|
July 15, 2020
|
|
July 31, 2020
|
|
0.53264
|
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(b) Dividends on Common Stock
As discussed above, on March 25, 2020, the Company revoked its previously announced first quarter 2020 quarterly cash dividends on each of the Company's common stock and Series B Preferred Stock. The quarterly cash dividend of $0.20 per share on the Company's common stock had been declared on March 11, 2020, and was to be paid on April 30, 2020, to all stockholders of record as of the close of business March 31, 2020.
On August 6, 2020, the Company declared a regular cash dividend of $0.05 per share of common stock. This dividend was paid on October 30, 2020, to stockholders of record on September 30, 2020.
On December 17, 2020, the Company declared a regular cash dividend of $0.075 per share of common stock. This dividend was paid on January 29, 2021, to stockholders of record on December 30, 2020. At December 31, 2020, the Company had accrued dividends and dividend equivalents payable of $34.0 million related to the common stock dividend declared on December 17, 2020.
The following table presents cash dividends declared by the Company on its common stock from January 1, 2018 through December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend Per Share
|
|
2020
|
|
December 17, 2020
|
|
December 30, 2020
|
|
January 29, 2021
|
|
$0.075
|
(1)
|
|
|
August 6, 2020
|
|
September 30, 2020
|
|
October 30, 2020
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
December 12, 2019
|
|
December 30, 2019
|
|
January 31, 2020
|
|
$0.20
|
|
|
|
September 12, 2019
|
|
September 30, 2019
|
|
October 31, 2019
|
|
0.20
|
|
|
|
June 12, 2019
|
|
July 1, 2019
|
|
July 31, 2019
|
|
0.20
|
|
|
|
March 6, 2019
|
|
March 29, 2019
|
|
April 30, 2019
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
December 12, 2018
|
|
December 28, 2018
|
|
January 31, 2019
|
|
$0.20
|
|
|
|
September 13, 2018
|
|
October 1, 2018
|
|
October 31, 2018
|
|
0.20
|
|
|
|
June 7, 2018
|
|
June 29, 2018
|
|
July 31, 2018
|
|
0.20
|
|
|
|
March 7, 2018
|
|
March 29, 2018
|
|
April 30, 2018
|
|
0.20
|
|
(1) At December 31, 2020, we had accrued dividends and dividend equivalents payable of $34.0 million related to the common stock dividend declared on December 17, 2020. This dividend will be considered taxable income to the recipient in 2021. For more information see the Company’s 2020 Dividend Tax Information on its website.
In general, the Company’s common stock dividends have been characterized as ordinary income to its stockholders for income tax purposes. However, a portion of the Company’s common stock dividends may, from time to time, be characterized as capital gains or return of capital. For the year ended December 31, 2020, the portion of the Company’s common stock dividends that was deemed to be a return of capital was $0.05 per share of common stock. For the years ended December 31, 2019 and 2018, the portions of the Company’s common stock dividends that were deemed to be capital gains were $0.1672 and $0.1290 per share of common stock, respectively.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(c) Public Offering of Common Stock
The Company did not issue any common stock through public offerings during the years ended December 31, 2020 and 2019. The table below presents information with respect to shares of the Company’s common stock issued through public offerings during the year ended December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Issue Date
|
|
Shares Issued
|
|
Gross Proceeds Per Share
|
|
Gross Proceeds
|
|
(In Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
August 7, 2018
|
|
50,875
|
|
(1)
|
|
$
|
7.78
|
|
|
$
|
395,807
|
|
(1)
|
(1)Includes approximately 875,000 shares issued on September 5, 2018 pursuant to the exercise of the underwriters’ option to purchase additional shares. The Company incurred approximately $6.4 million of underwriting discounts and related expenses in connection with this equity offering.
(d) Discount Waiver, Direct Stock Purchase and Dividend Reinvestment Plan (“DRSPP”)
On October 15, 2019, the Company filed a shelf registration statement on Form S-3 with the SEC under the Securities Act of 1933, as amended (the “1933 Act”), for the purpose of registering additional common stock for sale through its DRSPP. Pursuant to Rule 462(e) under the 1933 Act, this shelf registration statement became effective automatically upon filing with the SEC and, when combined with the unused portion of the Company’s previous DRSPP shelf registration statements, registered an aggregate of 9.0 million shares of common stock. The Company’s DRSPP is designed to provide existing stockholders and new investors with a convenient and economical way to purchase shares of common stock through the automatic reinvestment of dividends and/or optional cash investments. At December 31, 2020, approximately 8.7 million shares of common stock remained available for issuance pursuant to the DRSPP shelf registration statement.
During the years ended December 31, 2020, 2019 and 2018, the Company issued 235,635, 322,888 and 379,903 shares of common stock through the DRSPP, raising net proceeds of approximately $1.0 million, $2.4 million and $2.8 million, respectively. From the inception of the DRSPP in September 2003 through December 31, 2020, the Company issued 34,614,403 shares pursuant to the DRSPP, raising net proceeds of $287.6 million.
(e) At-the-Market Offering Program
On August 16, 2019 the Company entered into a distribution agreement under the terms of which the Company may offer and sell shares of its common stock having an aggregate gross sales price of up to $400.0 million (the “ATM Shares”), from time to time, through various sales agents, pursuant to an at-the-market equity offering program (the “ATM Program”). Sales of the ATM Shares, if any, may be made in negotiated transactions or by transactions that are deemed to be “at-the-market” offerings, as defined in Rule 415 under the 1933 Act, including sales made directly on the New York Stock Exchange (“NYSE”) or sales made to or through a market maker other than an exchange. The sales agents are entitled to compensation of up to two percent of the gross sales price per share for any shares of common stock sold under the distribution agreement.
During the year ended December 31, 2020, the Company did not sell any shares of common stock through the ATM Program. At December 31, 2020, approximately $390.0 million remained outstanding for future offerings under this program. During the year ended December 31, 2019, the Company sold 1,357,526 shares of common stock through the ATM Program at a weighted average price of $7.40, raising proceeds of approximately $9.9 million, net of fees and commissions paid to sales agents of approximately $100,000.
(f) Stock Repurchase Program
On November 2, 2020, the Company’s Board of Directors authorized a share repurchase program under which the Company may repurchase up to $250 million of its common stock through the end of 2022. The Board’s authorization replaces the authorization under the Company’s existing stock repurchase program that was adopted in December 2013, which authorized the Company to repurchase up to 10 million shares of common stock and under which approximately 6.6 million shares remained available for repurchase.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The stock repurchase program does not require the purchase of any minimum number of shares. The timing and extent to which the Company repurchases its shares will depend upon, among other things, market conditions, share price, liquidity, regulatory requirements and other factors, and repurchases may be commenced or suspended at any time without prior notice. Acquisitions under the share repurchase program may be made in the open market, through privately negotiated transactions or block trades or other means, in accordance with applicable securities laws.
During the year ended December 31, 2020, the Company repurchased 14,085,678 shares of its common stock through the stock repurchase program at an average cost of $3.61 per share and a total cost of approximately $50.8 million, net of fees and commissions paid to the sales agent of approximately $141,000. In addition, as discussed further below, during the year ended December 31, 2020 the Company repurchased 17,593,576, warrants for $33.7 million that were included in the stock repurchase program. At December 31, 2020, approximately $165.7 million remained outstanding for future repurchases under the repurchase program. The Company did not repurchase any shares of its common stock during the years ended December 31, 2019 and 2018.
(g) Warrants
On June 15, 2020, the Company entered into an Investment Agreement with Apollo and Athene (together the “Purchasers”), under which the Company agreed to issue to the Purchasers warrants (the “Warrants”) to purchase, in the aggregate, 37,039,106 shares (subject to adjustment in accordance with their terms) of the Company’s common stock. One half of the Warrants had an exercise price of $1.66 per share and the other half had an exercise price of $2.08 per share. The Investment Agreement and the Term Loan Facility (see Note 6) were entered into simultaneously, and the $495.0 million of proceeds received were allocated between the debt ($481.0 million) and the warrants ($14.0 million). The amount allocated to the warrants was recorded in Additional paid-in capital on the Company’s consolidated balance sheets.
During the fourth quarter, the Company repurchased, for $33.7 million, approximately 48% of the Warrants that were issued to the Purchasers. The remaining Warrants were exercised by the Purchasers later in the fourth quarter, resulting in the Company issuing approximately 12.3 million shares of common stock and receiving $6.5 million in cash.
(h) Accumulated Other Comprehensive Income/(Loss)
The following table presents changes in the balances of each component of the Company’s AOCI for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
(In Thousands)
|
|
Net Unrealized
Gain/(Loss) on
AFS Securities
|
|
Net
Gain/(Loss)
on Swaps
|
|
Net Unrealized Gain/(Loss) on Financing Agreements (3)
|
|
Total
AOCI
|
|
Net
Unrealized
Gain/(Loss) on
AFS Securities
|
|
Net
Gain/(Loss)
on Swaps
|
|
Total
AOCI
|
|
Net
Unrealized
Gain/(Loss) on
AFS Securities
|
|
Net
Gain/(Loss)
on Swaps
|
|
Total
AOCI
|
Balance at beginning of period
|
|
$
|
392,722
|
|
|
$
|
(22,675)
|
|
|
$
|
—
|
|
|
$
|
370,047
|
|
|
$
|
417,167
|
|
|
$
|
3,121
|
|
|
$
|
420,288
|
|
|
$
|
620,648
|
|
|
$
|
(11,424)
|
|
|
$
|
609,224
|
|
OCI before reclassifications
|
|
420,281
|
|
|
(50,127)
|
|
|
(2,314)
|
|
|
367,840
|
|
|
20,335
|
|
|
(23,342)
|
|
|
(3,007)
|
|
|
(150,642)
|
|
|
14,545
|
|
|
(136,097)
|
|
Amounts reclassified from
AOCI (1)
|
|
(733,396)
|
|
|
72,802
|
|
|
—
|
|
|
(660,594)
|
|
|
(44,780)
|
|
|
(2,454)
|
|
|
(47,234)
|
|
|
(52,839)
|
|
|
—
|
|
|
(52,839)
|
|
Net OCI during period (2)
|
|
(313,115)
|
|
|
22,675
|
|
|
(2,314)
|
|
|
(292,754)
|
|
|
(24,445)
|
|
|
(25,796)
|
|
|
(50,241)
|
|
|
(203,481)
|
|
|
14,545
|
|
|
(188,936)
|
|
Balance at end of period
|
|
$
|
79,607
|
|
|
$
|
—
|
|
|
$
|
(2,314)
|
|
|
$
|
77,293
|
|
|
$
|
392,722
|
|
|
$
|
(22,675)
|
|
|
$
|
370,047
|
|
|
$
|
417,167
|
|
|
$
|
3,121
|
|
|
$
|
420,288
|
|
(1) See separate table below for details about these reclassifications.
(2) For further information regarding changes in OCI, see the Company’s consolidated statements of comprehensive income/(loss).
(3) Net Unrealized Gain/(Loss) on Financing Agreements at Fair Value due to changes in instrument-specific credit risk.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table presents information about the significant amounts reclassified out of the Company’s AOCI for the years ended December 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
Details about AOCI Components
|
|
Amounts Reclassified from AOCI
|
|
Affected Line Item in the Statement
Where Net Income is Presented
|
(In Thousands)
|
|
|
|
|
|
|
|
|
AFS Securities:
|
|
|
|
|
|
|
|
|
Realized gain on sale of securities
|
|
$
|
(389,127)
|
|
|
$
|
(44,600)
|
|
|
$
|
(51,580)
|
|
|
Net realized (loss)/gain on sales of residential mortgage securities and residential whole loans
|
Impairment recognized in earnings
|
|
(344,269)
|
|
|
(180)
|
|
|
(1,259)
|
|
|
Other, net
|
Total AFS Securities
|
|
$
|
(733,396)
|
|
|
$
|
(44,780)
|
|
|
$
|
(52,839)
|
|
|
|
Swaps designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Reclassification adjustment for losses related to hedging instruments included in net income
|
|
72,802
|
|
|
(2,454)
|
|
|
—
|
|
|
Other, net
|
Total Swaps designated as cash flow hedges
|
|
$
|
72,802
|
|
|
$
|
(2,454)
|
|
|
$
|
—
|
|
|
|
Total reclassifications for period
|
|
$
|
(660,594)
|
|
|
$
|
(47,234)
|
|
|
$
|
(52,839)
|
|
|
|
12. EPS Calculation
The following table presents a reconciliation of the (loss)/earnings and shares used in calculating basic and diluted (loss)/EPS for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands, Except Per Share Amounts)
|
|
2020
|
|
2019
|
|
2018
|
Basic (Loss)/Earnings per Share:
|
|
|
|
|
|
|
Net (loss)/income to common stockholders
|
|
$
|
(679,390)
|
|
|
$
|
378,117
|
|
|
$
|
301,801
|
|
Dividends declared on preferred stock
|
|
(29,796)
|
|
|
(15,000)
|
|
|
(15,000)
|
|
Dividends, dividend equivalents and undistributed earnings allocated to participating securities
|
|
(229)
|
|
|
(1,087)
|
|
|
(943)
|
|
Net (loss)/income to common stockholders - basic
|
|
$
|
(709,415)
|
|
|
$
|
362,030
|
|
|
$
|
285,858
|
|
Basic weighted average common shares outstanding
|
|
452,033
|
|
|
450,972
|
|
|
418,934
|
|
Basic (Loss)/Earnings per Share
|
|
$
|
(1.57)
|
|
|
$
|
0.80
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
Diluted (Loss)/Earnings per Share:
|
|
|
|
|
|
|
Net (loss)/income to common stockholders - basic
|
|
$
|
(709,415)
|
|
|
$
|
362,030
|
|
|
$
|
285,858
|
|
Interest expense on Convertible Senior Notes
|
|
—
|
|
|
8,965
|
|
|
—
|
|
Net (loss)/income to common stockholders - diluted
|
|
$
|
(709,415)
|
|
|
$
|
370,995
|
|
|
$
|
285,858
|
|
Basic weighted average common shares outstanding
|
|
452,033
|
|
|
450,972
|
|
|
418,934
|
|
Effect of assumed conversion of Convertible Senior Notes to common shares
|
|
—
|
|
|
16,797
|
|
|
—
|
|
Diluted weighted average common shares outstanding (1)
|
|
452,033
|
|
|
467,769
|
|
|
418,934
|
|
Diluted (Loss)/Earnings per Share
|
|
$
|
(1.57)
|
|
|
$
|
0.79
|
|
|
$
|
0.68
|
|
(1) At December 31, 2020, the Company had approximately 2.3 million equity instruments outstanding that were not included in the calculation of diluted EPS for the year ended December 31, 2020, as their inclusion would have been anti-dilutive. These equity instruments reflect RSUs (based on current estimate of expected share settlement amount) with a weighted average grant date fair value of $6.56 and may have a dilutive impact on future EPS.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
During the year ended December 31, 2020, the Convertible Senior Notes were determined to be anti-dilutive and were not included in the calculation of diluted EPS under the “if-converted” method. Under this method, the periodic interest expense for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether the conversion option is in or out of the money) is included in the denominator for the purpose of calculating diluted EPS. The Convertible Senior Notes may have a dilutive impact on future EPS.
13. Equity Compensation and Other Benefit Plans
(a) Equity Compensation Plan
In accordance with the terms of the Company’s Equity Plan, which was adopted by the Company’s stockholders on June 10, 2020 (and which amended and restated the Company’s 2010 Equity Compensation Plan), directors, officers and employees of the Company and any of its subsidiaries and other persons expected to provide significant services for the Company and any of its subsidiaries are eligible to receive grants of stock options (“Options”), restricted stock, RSUs, dividend equivalent rights and other stock-based awards under the Equity Plan.
Subject to certain exceptions, stock-based awards relating to a maximum of 18.0 million shares of common stock may be granted under the Equity Plan; forfeitures and/or awards that expire unexercised do not count toward this limit. At December 31, 2020, approximately 14.3 million shares of common stock remained available for grant in connection with stock-based awards under the Equity Plan. A participant may generally not receive stock-based awards in excess of 2.0 million shares of common stock in any one year and no award may be granted to any person who, assuming exercise of all Options and payment of all awards held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of the Company’s common stock. Unless previously terminated by the Board, awards may be granted under the Equity Plan until June 10, 2030.
Restricted Stock Units
Under the terms of the Equity Plan, RSUs are instruments that provide the holder with the right to receive, subject to the satisfaction of conditions set by the Compensation Committee at the time of grant, a payment of a specified value, which may be a share of the Company’s common stock, the fair market value of a share of the Company’s common stock, or such fair market value to the extent in excess of an established base value, on the applicable settlement date. Although the Equity Plan permits the Company to issue RSUs that can settle in cash, all of the Company’s outstanding RSUs as of December 31, 2020 are designated to be settled in shares of the Company’s common stock. All RSUs outstanding at December 31, 2020 may be entitled to receive dividend equivalent payments depending on the terms and conditions of the award either in cash at the time dividends are paid by the Company, or for certain performance-based RSU awards, as a grant of stock at the time such awards are settled. At December 31, 2020 and 2019, the Company had unrecognized compensation expense of $6.8 million and $5.5 million, respectively, related to RSUs. The unrecognized compensation expense at December 31, 2020 is expected to be recognized over a weighted average period of 1.7 years.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table presents information with respect to the Company’s RSUs during the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
|
RSUs With
Service
Condition
|
|
Weighted
Average
Grant Date
Fair Value
|
|
RSUs With
Market and
Service
Conditions
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Total
RSUs
|
|
Total
Weighted
Average
Grant Date
Fair Value
|
Outstanding at beginning of year:
|
1,379,681
|
|
|
$
|
7.62
|
|
|
1,301,250
|
|
|
$
|
6.78
|
|
|
2,680,931
|
|
|
$
|
7.21
|
|
Granted (1)
|
939,046
|
|
|
4.88
|
|
|
763,174
|
|
|
5.50
|
|
|
1,702,220
|
|
|
5.16
|
|
Settled
|
(379,272)
|
|
|
7.75
|
|
|
(441,250)
|
|
|
6.48
|
|
|
(820,522)
|
|
|
7.07
|
|
Cancelled/forfeited
|
(110,000)
|
|
|
7.59
|
|
|
—
|
|
|
—
|
|
|
(110,000)
|
|
|
7.59
|
|
Outstanding at end of year
|
1,829,455
|
|
|
$
|
6.19
|
|
|
1,623,174
|
|
|
$
|
6.26
|
|
|
3,452,629
|
|
|
$
|
6.22
|
|
RSUs vested but not settled at end of year
|
1,160,416
|
|
|
$
|
5.37
|
|
|
409,000
|
|
|
$
|
6.91
|
|
|
1,569,416
|
|
|
$
|
5.77
|
|
RSUs unvested at end of year
|
669,039
|
|
|
$
|
7.61
|
|
|
1,214,174
|
|
|
$
|
6.04
|
|
|
1,883,213
|
|
|
$
|
6.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
RSUs With
Service
Condition
|
|
Weighted
Average
Grant Date
Fair Value
|
|
RSUs With
Market and
Service
Conditions
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Total
RSUs
|
|
Total
Weighted
Average
Grant Date
Fair Value
|
Outstanding at beginning of year:
|
1,206,446
|
|
|
$
|
7.57
|
|
|
1,151,250
|
|
|
$
|
6.21
|
|
|
2,357,696
|
|
|
$
|
6.90
|
|
Granted (2)
|
461,525
|
|
|
7.35
|
|
|
451,000
|
|
|
6.97
|
|
|
912,525
|
|
|
7.16
|
|
Settled
|
(269,290)
|
|
|
6.93
|
|
|
(290,000)
|
|
|
4.81
|
|
|
(559,290)
|
|
|
5.83
|
|
Cancelled/forfeited
|
(19,000)
|
|
|
7.72
|
|
|
(11,000)
|
|
|
6.71
|
|
|
(30,000)
|
|
|
7.35
|
|
Outstanding at end of year
|
1,379,681
|
|
|
$
|
7.62
|
|
|
1,301,250
|
|
|
$
|
6.78
|
|
|
2,680,931
|
|
|
$
|
7.21
|
|
RSUs vested but not settled at end of year
|
809,681
|
|
|
$
|
7.70
|
|
|
441,250
|
|
|
$
|
6.48
|
|
|
1,250,931
|
|
|
$
|
7.27
|
|
RSUs unvested at end of year
|
570,000
|
|
|
$
|
7.50
|
|
|
860,000
|
|
|
$
|
6.94
|
|
|
1,430,000
|
|
|
$
|
7.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
RSUs With
Service
Condition
|
|
Weighted
Average
Grant Date
Fair Value
|
|
RSUs With
Market and
Service
Conditions
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Total
RSUs
|
|
Total
Weighted
Average
Grant Date
Fair Value
|
Outstanding at beginning of year:
|
1,025,028
|
|
|
$
|
7.67
|
|
|
1,021,250
|
|
|
$
|
5.80
|
|
|
2,046,278
|
|
|
$
|
6.73
|
|
Granted (3)
|
428,802
|
|
|
7.65
|
|
|
415,000
|
|
|
6.91
|
|
|
843,802
|
|
|
7.29
|
|
Settled
|
(237,384)
|
|
|
8.17
|
|
|
(275,000)
|
|
|
5.73
|
|
|
(512,384)
|
|
|
6.86
|
|
Cancelled/forfeited
|
(10,000)
|
|
|
7.23
|
|
|
(10,000)
|
|
|
5.64
|
|
|
(20,000)
|
|
|
6.44
|
|
Outstanding at end of year
|
1,206,446
|
|
|
$
|
7.57
|
|
|
1,151,250
|
|
|
$
|
6.21
|
|
|
2,357,696
|
|
|
$
|
6.90
|
|
RSUs vested but not settled at end of year
|
708,946
|
|
|
$
|
7.47
|
|
|
290,000
|
|
|
$
|
4.81
|
|
|
998,946
|
|
|
$
|
6.70
|
|
RSUs unvested at end of year
|
497,500
|
|
|
$
|
7.71
|
|
|
861,250
|
|
|
$
|
6.69
|
|
|
1,358,750
|
|
|
$
|
7.06
|
|
(1)The weighted average grant date fair value of these awards require the Company to estimate certain valuation inputs. In determining the fair value for 1,204,713 of these awards granted in 2020, the Company applied: (i) a weighted average volatility estimate of approximately 14%, which was determined considering historic volatility in the price of the Company’s and its peer group companies’ common stock over the three-year period prior to the grant date and the implied volatility of certain exchange-traded options on the Company’s and peer group companies’ common stock at the grant date; and (ii) a weighted average risk-free rate of 1.36% based on the continuously compounded constant maturity treasury rate corresponding to a maturity commensurate with the expected vesting term of the awards. The weighted average grant date fair value for the remaining 452,585 and 44,922 awards with a service condition only was estimated based on the closing price of the Company’s common stock at the grant date of $2.32 and $2.56, respectively. There are no post vesting conditions on these awards.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(2)The weighted average grant date fair value of these awards require the Company to estimate certain valuation inputs. In determining the fair value for 752,500 of these awards granted in 2019, the Company applied: (i) a weighted average volatility estimate of approximately 15%, which was determined considering historic volatility in the price of the Company’s and its peer group companies’ common stock over the three-year period prior to the grant date and the implied volatility of certain exchange-traded options on the Company’s and peer group companies’ common stock at the grant date; and (ii) a weighted average risk-free rate of 2.47% based on the continuously compounded constant maturity treasury rate corresponding to a maturity commensurate with the expected vesting term of the awards. The weighted average grant date fair value for the remaining 160,025 awards with a service condition only was estimated based on the closing price of the Company’s common stock at the grant date of $7.28. There are no post vesting conditions on these awards.
(3)The weighted average grant date fair value of these awards require the Company to estimate certain valuation inputs. In determining the fair value for 692,500 of these awards granted in 2018, the Company applied: (i) a weighted average volatility estimate of approximately 17%, which was determined considering historic volatility in the price of the Company’s and its peer group companies’ common stock over the three-year period prior to the grant date and the implied volatility of certain exchange-traded options on the Company’s and peer group companies’ common stock at the grant date; and (ii) a weighted average risk-free rate of 2.36% based on the continuously compounded constant maturity treasury rate corresponding to a maturity commensurate with the expected vesting term of the awards. The weighted average grant date fair value for the remaining 151,302 awards with a service condition only was estimated based on the closing price of the Company’s common stock at the grant date of $7.70. There are no post vesting conditions on these awards.
Restricted Stock
At December 31, 2020 and 2019, the Company did not have any unvested shares of restricted common stock outstanding. The total fair value of restricted shares vested during the years ended December 31, 2020, 2019 and 2018 was approximately $131,000, $3.2 million and $3.0 million, respectively.
The following table presents information with respect to the Company’s restricted stock for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Shares of
Restricted
Stock
|
|
Weighted
Average
Grant Date
Fair Value (1)
|
|
Shares of
Restricted
Stock
|
|
Weighted
Average
Grant Date
Fair Value (1)
|
|
Shares of
Restricted
Stock
|
|
Weighted
Average
Grant Date
Fair Value (1)
|
Outstanding at beginning of year:
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
79,545
|
|
|
1.65
|
|
|
412,185
|
|
|
7.83
|
|
|
450,193
|
|
|
6.74
|
|
Vested (2)
|
(79,545)
|
|
|
1.65
|
|
|
(412,185)
|
|
|
7.83
|
|
|
(450,193)
|
|
|
6.74
|
|
Cancelled/forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at end of year
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
(1) The grant date fair value of restricted stock awards is based on the closing market price of the Company’s common stock at the grant date.
(2) All restrictions associated with restricted stock are removed on vesting.
Dividend Equivalents
A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock. Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., an RSU) under the Equity Plan, and they are paid in cash or other consideration at such times and in accordance with such rules, as the Compensation Committee of the Board shall determine in its discretion. Payments made on the Company’s outstanding dividend equivalent rights are generally charged to Stockholders’ Equity when common stock dividends are declared to the extent that such equivalents are expected to vest. The Company made dividend equivalent payments associated with RSU awards of approximately $367,000, $1,049,000, and $907,000 during the years ended December 31, 2020, 2019 and 2018, respectively. In addition, no dividend equivalents rights awarded as separate instruments were granted during the years ended December 31, 2020, 2019 and 2018.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Expense Recognized for Equity-Based Compensation Instruments
The following table presents the Company’s expenses related to its equity-based compensation instruments for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
|
2018
|
RSUs
|
|
$
|
6,592
|
|
|
$
|
6,012
|
|
|
$
|
4,974
|
|
Restricted shares of common stock
|
|
131
|
|
|
3,227
|
|
|
3,033
|
|
Total
|
|
$
|
6,723
|
|
|
$
|
9,239
|
|
|
$
|
8,007
|
|
(b) Deferred Compensation Plans
The Company administers deferred compensation plans for its senior officers and non-employee directors (collectively, the “Deferred Plans”), pursuant to which participants may elect to defer up to 100% of certain cash compensation. The Deferred Plans are designed to align participants’ interests with those of the Company’s stockholders.
Amounts deferred under the Deferred Plans are considered to be converted into “stock units” of the Company. Stock units do not represent stock of the Company, but rather are a liability of the Company that changes in value as would equivalent shares of the Company’s common stock. Deferred compensation liabilities are settled in cash at the termination of the deferral period, based on the value of the stock units at that time. The Deferred Plans are non-qualified plans under the Employee Retirement Income Security Act of 1974 and, as such, are not funded. Prior to the time that the deferred accounts are settled, participants are unsecured creditors of the Company.
The Company’s liability for stock units in the Deferred Plans is based on the market price of the Company’s common stock at the measurement date. The following table presents the Company’s expenses related to its Deferred Plans for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
|
2018
|
Non-employee directors
|
|
$
|
(911)
|
|
|
$
|
663
|
|
|
$
|
(165)
|
|
Total
|
|
$
|
(911)
|
|
|
$
|
663
|
|
|
$
|
(165)
|
|
The Company distributed cash of $769,400, $568,900, and $123,700 to the participants of the Deferred Plans during the years ended December 31, 2020 and 2019, respectively. The following table presents the aggregate amount of income deferred by participants of the Deferred Plans through December 31, 2020 and 2019 that had not been distributed and the Company’s associated liability for such deferrals at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(In Thousands)
|
|
Undistributed
Income
Deferred (1)
|
|
Liability Under
Deferred Plans
|
|
Undistributed
Income
Deferred (1)
|
|
Liability Under
Deferred Plans
|
Non-employee directors
|
|
$
|
2,197
|
|
|
$
|
1,809
|
|
|
$
|
2,349
|
|
|
$
|
3,071
|
|
Total
|
|
$
|
2,197
|
|
|
$
|
1,809
|
|
|
$
|
2,349
|
|
|
$
|
3,071
|
|
(1)Represents the cumulative amounts that were deferred by participants through December 31, 2020 and 2019, which had not been distributed through such respective date.
(c) Savings Plan
The Company sponsors a tax-qualified employee savings plan (the “Savings Plan”) in accordance with Section 401(k) of the Code. Subject to certain restrictions, all of the Company’s employees are eligible to make tax-deferred contributions to the
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Savings Plan subject to limitations under applicable law. Participant’s accounts are self-directed and the Company bears the costs of administering the Savings Plan. The Company matches 100% of the first 3% of eligible compensation deferred by employees and 50% of the next 2%, subject to a maximum as provided by the Code. The Company has elected to operate the Savings Plan under the applicable safe harbor provisions of the Code, whereby among other things, the Company must make contributions for all participating employees and all matches contributed by the Company immediately vest 100%. For the years ended December 31, 2020, 2019 and 2018, the Company recognized expenses for matching contributions of $480,000, $503,500 and $371,000, respectively.
14. Fair Value of Financial Instruments
GAAP requires the categorization of fair value measurements into three broad levels that form a hierarchy. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:
Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Residential Whole Loans, at Fair Value
The Company determines the fair value of its residential whole loans held at fair value after considering valuations obtained from a third-party that specializes in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price appreciation. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield. The Company’s residential whole loans held at fair value are classified as Level 3 in the fair value hierarchy.
Residential Mortgage Securities
The Company determined the fair value of its Agency MBS based upon prices obtained from third-party pricing services, which are indicative of market activity, and repurchase agreement counterparties.
For Agency MBS, the valuation methodology of the Company’s third-party pricing services incorporate commonly used market pricing methods, trading activity observed in the marketplace and other data inputs. The methodology also considers the underlying characteristics of each security, which are also observable inputs, including: collateral vintage, coupon, maturity date, loan age, reset date, collateral type, periodic and life cap, geography, and prepayment speeds. Management analyzes pricing data received from third-party pricing services and compares it to other indications of fair value including data received from repurchase agreement counterparties and its own observations of trading activity observed in the marketplace. The Company’s Agency MBS were classified as Level 2 in the fair value hierarchy. During the quarter ended June 30, 2020, the Company sold its remaining holdings of Agency MBS.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
In determining the fair value of the Company’s Non-Agency MBS and CRT securities, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants. In valuing Non-Agency MBS, the Company understands that pricing services use observable inputs that include, in addition to trading activity observed in the marketplace, loan delinquency data, credit enhancement levels and vintage, which are taken into account to assign pricing factors such as spread and prepayment assumptions. For tranches of Legacy Non-Agency MBS that are cross-collateralized, performance of all collateral groups involved in the tranche are considered. The Company collects and considers current market intelligence on all major markets, including benchmark security evaluations and bid-lists from various sources, when available.
The Company’s Legacy Non-Agency MBS, RPL/NPL MBS and CRT securities are valued using various market data points as described above, which management considers directly or indirectly observable parameters. Accordingly, these securities are classified as Level 2 in the fair value hierarchy. As of December 31, 2020, the Company has sold substantially all of its holdings of Legacy Non-Agency MBS and substantially reduced its holdings of other Non-Agency MBS and CRT securities.
Term Notes Backed by MSR-Related Collateral
The Company’s valuation process for term notes backed by MSR-related collateral is similar to that used for residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral and, as applicable, the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient. Based on its evaluation of the observability of the data used in its fair value estimation process, these assets are classified as Level 2 in the fair value hierarchy.
Swaps
As previously disclosed, in response to the turmoil in the financial markets resulting from the COVID-19 pandemic experienced during the three months ended March 31, 2020, the Company unwound all of its Swap hedging transactions late in the first quarter in order to recover previously posted margin. Prior to their termination, valuations provided by the central clearing house were used for purposes of determining the fair value of the Company’s Swaps. Such valuations obtained were tested with internally developed models that applied readily observable market parameters. Swaps were classified as Level 2 in the fair value hierarchy.
Financing Agreements, at Fair Value
Agreements with mark-to-market collateral provisions
These agreements are secured and subject to margin calls and their base interest rates reset frequently to market based rates. As a result, no credit valuation adjustment is required, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with mark-to-market collateral provisions held at fair value are classified as Level 2 in the fair value hierarchy if the credit spreads used to price the instrument reset frequently, which is typically the case with shorter term repurchase agreement contracts collateralized by securities. Financing agreements with mark-to-market collateral provisions that are typically longer term and are collateralized by residential whole loans where the credit spread paid over the base rate on the instrument is not reset frequently are classified as Level 3 in the fair value hierarchy.
Agreements with non-mark-to-market collateral provisions
These agreements are secured, but not subject to margin calls, and their base interest rates reset frequently to market based rates. As a result, a credit valuation adjustment would only be required if there were a significant decrease in collateral value, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with non-mark-to-market collateral provisions held at fair value are classified as Level 3 in the fair value hierarchy.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Securitized Debt
In determining the fair value of securitized debt, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants. Accordingly, the Company’s securitized debt is classified as Level 2 in the fair value hierarchy.
Changes to the valuation methodologies used with respect to the Company’s financial instruments are reviewed by management to ensure any such changes result in appropriate exit price valuations. The Company will refine its valuation methodologies as markets and products develop and pricing methodologies evolve. The methods described above may produce fair value estimates that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those used by market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced. The Company reviews the classification of its financial instruments within the fair value hierarchy on a quarterly basis, and management may conclude that its financial instruments should be reclassified to a different level in the future.
The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of December 31, 2020 and 2019, on the consolidated balance sheets by the valuation hierarchy, as previously described:
Fair Value at December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Residential whole loans, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,216,902
|
|
|
$
|
1,216,902
|
|
Non-Agency MBS
|
|
—
|
|
|
56,766
|
|
|
—
|
|
|
56,766
|
|
CRT securities
|
|
—
|
|
|
104,234
|
|
|
—
|
|
|
104,234
|
|
Term notes backed by MSR-related collateral
|
|
—
|
|
|
238,999
|
|
|
—
|
|
|
238,999
|
|
Total assets carried at fair value
|
|
$
|
—
|
|
|
$
|
399,999
|
|
|
$
|
1,216,902
|
|
|
$
|
1,616,901
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Agreements with non-mark-to-market collateral provisions
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,159,213
|
|
|
$
|
1,159,213
|
|
Agreements with mark-to-market collateral provisions
|
|
—
|
|
|
213,915
|
|
|
1,124,162
|
|
|
1,338,077
|
|
Securitized debt
|
|
—
|
|
|
869,482
|
|
|
—
|
|
|
869,482
|
|
Total liabilities carried at fair value
|
|
$
|
—
|
|
|
$
|
1,083,397
|
|
|
$
|
2,283,375
|
|
|
$
|
3,366,772
|
|
Fair Value at December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Residential whole loans, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,381,583
|
|
|
$
|
1,381,583
|
|
Non-Agency MBS
|
|
—
|
|
|
2,063,529
|
|
|
—
|
|
|
2,063,529
|
|
Agency MBS
|
|
—
|
|
|
1,664,582
|
|
|
—
|
|
|
1,664,582
|
|
CRT securities
|
|
—
|
|
|
255,408
|
|
|
—
|
|
|
255,408
|
|
Term notes backed by MSR-related collateral
|
|
—
|
|
|
1,157,463
|
|
|
—
|
|
|
1,157,463
|
|
Total assets carried at fair value
|
|
$
|
—
|
|
|
$
|
5,140,982
|
|
|
$
|
1,381,583
|
|
|
$
|
6,522,565
|
|
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents additional information for the years ended December 31, 2020 and 2019 about the Company’s Residential whole loans, at fair value, which are classified as Level 3 and measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Whole Loans, at Fair Value
|
|
|
For the Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
Balance at beginning of period
|
|
$
|
1,381,583
|
|
|
$
|
1,471,263
|
|
Purchases (1)
|
|
—
|
|
|
210,031
|
|
|
|
|
|
|
Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings
|
|
17,204
|
|
|
47,849
|
|
Repayments
|
|
(92,733)
|
|
|
(127,063)
|
|
Sales and repurchases
|
|
(18,530)
|
|
|
(1,338)
|
|
Transfer to REO
|
|
(70,622)
|
|
|
(219,159)
|
|
Balance at end of period
|
|
$
|
1,216,902
|
|
|
$
|
1,381,583
|
|
(1)Included in the activity presented for the year ended December 31, 2019 is an adjustment of $70.6 million for loans the Company committed to purchase during the year ended December 31, 2018, but for which the closing of the purchase transaction occurred during the three months ended March 31, 2019. The adjustment was required following the finalization of due diligence performed prior to the closing of the purchase transaction and resulted in a downward revision to the prior estimate of the loan purchase amount.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table presents additional information for the years ended December 31, 2020 and 2019 about the Company’s investments in term notes backed by MSR-related collateral, which were classified as Level 3 prior to September 30, 2019 and measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Notes Backed by MSR-Related Collateral
|
|
|
Year Ended December 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
Balance at beginning of period
|
|
$
|
—
|
|
|
$
|
538,499
|
|
Purchases
|
|
—
|
|
|
573,137
|
|
Collection of principal
|
|
—
|
|
|
(12,897)
|
|
Changes in unrealized gains
|
|
—
|
|
|
5,391
|
|
Transfer to Level 2
|
|
—
|
|
|
(1,104,130)
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table presents additional information for the year ended December 31, 2020 about the Company’s financing agreements with non-mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
Agreements with Non-mark-to-market Collateral Provisions
|
|
|
Year Ended December 31,
|
(In Thousands)
|
|
2020
|
Balance at beginning of period
|
|
$
|
—
|
|
Transfer from Level 2
|
|
2,036,597
|
|
Issuances
|
|
—
|
|
Payment of principal
|
|
(879,698)
|
|
Changes in unrealized losses
|
|
2,314
|
|
Balance at end of period
|
|
$
|
1,159,213
|
|
The following table presents additional information for the year ended December 31, 2020 about the Company’s financing agreements with mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
Agreements with Mark-to-market Collateral Provisions
|
|
|
Year Ended December 31,
|
(In Thousands)
|
|
2020
|
Balance at beginning of period
|
|
$
|
—
|
|
Transfer from Level 2
|
|
1,386,592
|
|
Issuances
|
|
258,322
|
|
Payment of principal
|
|
(520,752)
|
|
Changes in unrealized losses
|
|
—
|
|
Balance at end of period
|
|
$
|
1,124,162
|
|
At June 30, 2020, the Company’s financing agreements with non-mark-to-market collateral provisions and the Company’s financing agreements with mark-to-market collateral provisions had just been issued and were therefore classified as Level 2 since their values were based on market transactions. However, market information for similar financings was not available at December 31, 2020 and the Company valued these financing instruments based on unobservable inputs.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Fair Value Methodology for Level 3 Financial Instruments
Residential Whole Loans, at Fair Value
The following tables present a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s residential whole loans held at fair value for which it has utilized Level 3 inputs to determine fair value as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
(Dollars in Thousands)
|
|
Fair Value (1)
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Weighted Average (2)
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
|
Residential whole loans, at fair value
|
|
$
|
789,576
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
3.9
|
%
|
|
3.3-8.0%
|
|
|
|
|
|
|
Prepayment rate
|
|
4.8
|
%
|
|
0.0-9.9%
|
|
|
|
|
|
|
Default rate
|
|
3.8
|
%
|
|
0.0-18.9%
|
|
|
|
|
|
|
Loss severity
|
|
12.7
|
%
|
|
0.0-100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
427,061
|
|
|
Liquidation model
|
|
Discount rate
|
|
8.1
|
%
|
|
6.7-50.0%
|
|
|
|
|
|
|
Annual change in home prices
|
|
3.6
|
%
|
|
0.0-6.5%
|
|
|
|
|
|
|
Liquidation timeline (in years)
|
|
1.8
|
|
0.8-4.8
|
|
|
|
|
|
|
Current value of underlying properties (3)
|
|
$
|
729
|
|
|
$12-$4,500
|
Total
|
|
$
|
1,216,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
(Dollars in Thousands)
|
|
Fair Value (1)
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Weighted Average (2)
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
|
Residential whole loans, at fair value
|
|
$
|
829,842
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
4.2
|
%
|
|
3.8-8.0%
|
|
|
|
|
|
|
Prepayment rate
|
|
4.5
|
%
|
|
0.7-18.0%
|
|
|
|
|
|
|
Default rate
|
|
4
|
%
|
|
0.0-23.0%
|
|
|
|
|
|
|
Loss severity
|
|
12.9
|
%
|
|
0.0-100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
551,271
|
|
|
Liquidation model
|
|
Discount rate
|
|
8.0
|
%
|
|
6.2-50.0%
|
|
|
|
|
|
|
Annual change in home prices
|
|
3.7
|
%
|
|
2.4-8.0%
|
|
|
|
|
|
|
Liquidation timeline (in years)
|
|
1.8
|
|
0.1-4.5
|
|
|
|
|
|
|
Current value of underlying properties (3)
|
|
$
|
684
|
|
|
$10-$4,500
|
Total
|
|
$
|
1,381,113
|
|
|
|
|
|
|
|
|
|
(1)Excludes approximately $265,000 and $470,000 of loans for which management considers the purchase price continues to reflect the fair value of such loans at December 31, 2020 and 2019, respectively.
(2)Amounts are weighted based on the fair value of the underlying loan.
(3)The simple average value of the properties underlying residential whole loans held at fair value valued via a liquidation model was approximately $380,000 and $365,000 as of December 31, 2020 and 2019, respectively.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the fair value of residential whole loans. Loans valued using a discounted cash flow model are most sensitive to changes in the discount rate assumption, while loans valued using the liquidation model technique are most sensitive to changes in the current value of the underlying properties and the liquidation timeline. Increases in discount rates, default rates, loss severities, or liquidation timelines, either in isolation or collectively, would generally result in a lower fair value measurement, whereas increases in the current or expected value of the underlying properties, in isolation, would result in a higher fair value measurement. In practice, changes in valuation assumptions may not occur in isolation and the changes in any particular assumption may result in changes in other assumptions, which could offset or amplify the impact on the overall valuation.
The following table presents the carrying values and estimated fair values of the Company’s financial instruments at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2020
|
|
December 31, 2019
|
Level in Fair Value Hierarchy
|
Carrying
Value
|
|
Estimated Fair Value
|
Carrying
Value
|
|
Estimated Fair Value
|
(In Thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
Residential whole loans, at carrying value
|
|
3
|
|
$
|
4,108,499
|
|
|
$
|
4,282,401
|
|
|
$
|
6,069,370
|
|
|
$
|
6,248,745
|
|
Residential whole loans, at fair value
|
|
3
|
|
1,216,902
|
|
|
1,216,902
|
|
|
1,381,583
|
|
|
1,381,583
|
|
Non-Agency MBS
|
|
2
|
|
56,766
|
|
|
56,766
|
|
|
2,063,529
|
|
|
2,063,529
|
|
Agency MBS
|
|
2
|
|
—
|
|
|
—
|
|
|
1,664,582
|
|
|
1,664,582
|
|
CRT securities
|
|
2
|
|
104,234
|
|
|
104,234
|
|
|
255,408
|
|
|
255,408
|
|
MSR-related assets (1)
|
|
2 and 3
|
|
238,999
|
|
|
238,999
|
|
|
1,217,002
|
|
|
1,217,002
|
|
Cash and cash equivalents
|
|
1
|
|
814,354
|
|
|
814,354
|
|
|
70,629
|
|
|
70,629
|
|
Restricted cash
|
|
1
|
|
7,165
|
|
|
7,165
|
|
|
64,035
|
|
|
64,035
|
|
Financial Liabilities (2):
|
|
|
|
|
|
|
|
|
|
|
Financing agreements with non-mark-to-market collateral provisions
|
|
3
|
|
1,159,213
|
|
|
1,159,213
|
|
|
—
|
|
|
—
|
|
Financing agreements with mark-to-market collateral provisions
|
|
3
|
|
1,124,162
|
|
|
1,124,162
|
|
|
4,741,971
|
|
|
4,753,070
|
|
Financing agreements with mark-to-market collateral provisions
|
|
2
|
|
213,915
|
|
|
213,915
|
|
|
4,397,850
|
|
|
4,403,139
|
|
Securitized debt (3)
|
|
2
|
|
1,514,509
|
|
|
1,519,567
|
|
|
570,952
|
|
|
575,353
|
|
Convertible senior notes
|
|
2
|
|
225,177
|
|
|
228,287
|
|
|
223,971
|
|
|
244,088
|
|
Senior notes (4)
|
|
1
|
|
100,000
|
|
|
100,031
|
|
|
96,862
|
|
|
103,231
|
|
(1)Includes $59.5 million of MSR-related assets that are measured at fair value on a non-recurring basis that were classified as Level 3 in the fair value hierarchy at December 31, 2019.
(2)Carrying value of securitized debt, Convertible Senior Notes, Senior Notes and certain repurchase agreements is net of associated debt issuance costs.
(3)Includes Securitized debt that is carried at amortized cost basis and fair value.
(4)On January 6, 2021, the Company redeemed all of its outstanding Senior Notes (see Note 17).
Other Assets Measured at Fair Value on a Nonrecurring Basis
The Company holds REO at the lower of the current carrying amount or fair value less estimated selling costs. During the years ended December 31, 2020 and 2019, the Company recorded REO with an aggregate estimated fair value, less estimated cost to sell, of $96.8 million and $257.7 million, respectively, at the time of foreclosure. The Company classifies fair value measurements of REO as Level 3 in the fair value hierarchy.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
15. Use of Special Purpose Entities and Variable Interest Entities
A Special Purpose Entity (“SPE”) is an entity designed to fulfill a specific limited need of the company that organized it. SPEs are often used to facilitate transactions that involve securitizing financial assets or resecuritizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying financial assets on improved terms. Securitization involves transferring assets to a SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business, through the SPE’s issuance of debt or equity instruments. Investors in a SPE usually have recourse only to the assets in the SPE and, depending on the overall structure of the transaction, may benefit from various forms of credit enhancement such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.
The Company has entered into several financing transactions that resulted in the Company consolidating as VIEs the SPEs that were created to facilitate these transactions. See Note 2(q) for a discussion of the accounting policies applied to the consolidation of VIEs and transfers of financial assets in connection with financing transactions.
The Company has engaged in loan securitizations primarily for the purpose of obtaining improved overall financing terms as well as non-recourse financing on a portion of its residential whole loan portfolio. Notwithstanding the Company’s participation in these transactions, the risks facing the Company are largely unchanged as the Company remains economically exposed to the first loss position on the underlying assets transferred to the VIEs.
Loan Securitization Transactions
The following table summarizes the key details of the Company’s loan securitization transactions currently outstanding as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Aggregate unpaid principal balance of residential whole loans sold
|
|
$
|
2,232,561
|
|
|
$
|
1,290,029
|
|
|
Face amount of Senior Bonds issued by the VIE and purchased by third-party investors
|
|
$
|
1,862,068
|
|
|
$
|
802,817
|
|
|
Outstanding amount of Senior Bonds, at carrying value
|
|
$
|
645,027
|
|
(1)
|
$
|
570,952
|
|
(1)
|
Outstanding amount of Senior Bonds, at fair value
|
|
$
|
869,482
|
|
|
$
|
—
|
|
|
Outstanding amount of Senior Bonds, total
|
|
$
|
1,514,509
|
|
|
$
|
570,952
|
|
|
Weighted average fixed rate for Senior Bonds issued
|
|
2.11
|
%
|
(2)
|
3.68
|
%
|
(2)
|
Weighted average contractual maturity of Senior Bonds
|
|
41 years
|
(2)
|
30 years
|
(2)
|
Face amount of Senior Support Certificates received by the Company (3)
|
|
$
|
268,548
|
|
|
$
|
275,174
|
|
|
Cash received
|
|
$
|
1,853,408
|
|
|
$
|
802,815
|
|
|
(1)Net of $3.2 million and $2.9 million of deferred financing costs at December 31, 2020 and December 31, 2019, respectively.
(2)At December 31, 2020 and December 31, 2019, $568.7 million and $493.2 million, respectively, of Senior Bonds sold in securitization transactions contained a contractual coupon step-up feature whereby the coupon increases by either 100 or 300 basis points or more at 36 months from issuance if the bond is not redeemed before such date.
(3)Provides credit support to the Senior Bonds sold to third-party investors in the securitization transactions.
During the year ended December 31, 2020, the Company issued Senior Bonds with a current face of $1.3 billion to third-party investors for proceeds of $1.3 billion before offering costs and accrued interest. A portion of the Senior Bonds issued by the Company during the year ended December 31, 2020 are presented at fair value on its consolidated balance sheets as a result of a fair value election made at the time of issuance.
As of December 31, 2020 and 2019, as a result of the transactions described above, securitized loans with a carrying value of approximately $1.4 billion and $186.4 million are included in “Residential whole loans, at carrying value,” securitized loans with a fair value of approximately $382.3 million and $567.4 million are included in “Residential whole loans, at fair value,” and REO with a carrying value of approximately $49.5 million and $137.8 million are included in “Other assets” on the
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Company’s consolidated balance sheets, respectively. As of December 31, 2020 and 2019, the aggregate carrying value of Senior Bonds issued by consolidated VIEs was $1.5 billion and $571.0 million, respectively. These Senior Bonds are disclosed as “Securitized debt” and are included in Other liabilities on the Company’s consolidated balance sheets. The holders of the securitized debt have no recourse to the general credit of the Company, but the Company does have the obligation, under certain circumstances to repurchase assets from the VIE upon the breach of certain representations and warranties with respect to the residential whole loans sold to the VIE. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE.
The Company concluded that the entities created to facilitate the loan securitization transactions are VIEs. The Company then completed an analysis of whether each VIE created to facilitate the securitization transactions should be consolidated by the Company, based on consideration of its involvement in each VIE, including the design and purpose of the SPE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of each VIE. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed:
•whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and
•whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.
Based on its evaluation of the factors discussed above, including its involvement in the purpose and design of the entity, the Company determined that it was required to consolidate each VIE created to facilitate the loan securitization transactions.
Residential Whole Loans and REO (including Residential Whole Loans and REO transferred to consolidated VIEs)
Included on the Company’s consolidated balance sheets as of December 31, 2020 and 2019 are a total of $5.3 billion and $7.4 billion, respectively, of residential whole loans, of which approximately $4.1 billion and $6.1 billion, respectively, are reported at carrying value and $1.2 billion and $1.4 billion, respectively, are reported at fair value. These assets, and certain of the Company’s REO assets, are directly owned by certain trusts established by the Company to acquire the loans and entities established in connection with the Company’s loan securitization transactions. The Company has assessed that these entities are required to be consolidated (see Notes 3 and 5(a)).
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
16. Summary of Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Quarter Ended
|
(In Thousands, Except per Share Amounts)
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Interest income
|
|
$
|
145,460
|
|
|
$
|
87,368
|
|
|
$
|
66,080
|
|
|
$
|
60,476
|
|
Interest expense
|
|
(83,759)
|
|
|
(87,991)
|
|
|
(55,964)
|
|
|
(41,044)
|
|
Net interest income
|
|
61,701
|
|
|
(623)
|
|
|
10,116
|
|
|
19,432
|
|
(Provision)/Reversal for credit and valuation losses on residential whole loans and other financial instruments
|
|
(150,711)
|
|
|
85,377
|
|
|
27,244
|
|
|
15,709
|
|
Net Interest Income after Provision for Credit and Valuation Losses
|
|
(89,010)
|
|
|
84,754
|
|
|
37,360
|
|
|
35,141
|
|
Net gain on residential whole loans measured at fair value through earnings
|
|
(52,760)
|
|
|
20,320
|
|
|
76,871
|
|
|
49,782
|
|
Net realized gain on sales of residential mortgage securities and residential whole loans
|
|
(238,380)
|
|
|
49,485
|
|
|
48
|
|
|
—
|
|
Other income
|
|
(499,623)
|
|
|
6,552
|
|
|
292
|
|
|
(18,708)
|
|
Operating and other expense
|
|
(29,222)
|
|
|
(64,533)
|
|
|
(27,361)
|
|
|
(20,398)
|
|
Net income
|
|
(908,995)
|
|
|
96,578
|
|
|
87,210
|
|
|
45,817
|
|
Preferred stock dividends
|
|
(5,215)
|
|
|
(8,144)
|
|
|
(8,219)
|
|
|
(8,218)
|
|
Net (loss)/ income available to common stock and participating securities
|
|
$
|
(914,210)
|
|
|
$
|
88,434
|
|
|
$
|
78,991
|
|
|
$
|
37,599
|
|
(Loss)/Earnings per Common Share - Basic
|
|
$
|
(2.02)
|
|
|
$
|
0.19
|
|
|
$
|
0.17
|
|
|
$
|
0.08
|
|
(Loss)/Earnings per Common Share - Diluted
|
|
$
|
(2.02)
|
|
|
$
|
0.19
|
|
|
$
|
0.17
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarter Ended
|
(In Thousands, Except per Share Amounts)
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Interest income
|
|
$
|
140,952
|
|
|
$
|
144,935
|
|
|
$
|
142,721
|
|
|
$
|
153,118
|
|
Interest expense
|
|
(79,026)
|
|
|
(85,044)
|
|
|
(85,823)
|
|
|
(82,463)
|
|
Net interest income
|
|
61,926
|
|
|
59,891
|
|
|
56,898
|
|
|
70,655
|
|
Provision for credit and valuation losses on residential whole loans and other financial instruments
|
|
(805)
|
|
|
(385)
|
|
|
(347)
|
|
|
(1,032)
|
|
Net Interest Income after Provision for Credit and Valuation Losses
|
|
61,121
|
|
|
59,506
|
|
|
56,551
|
|
|
69,623
|
|
Net gain on residential whole loans measured at fair value through earnings
|
|
25,267
|
|
|
51,473
|
|
|
40,175
|
|
|
41,415
|
|
Net realized gain on sales of residential mortgage securities and residential whole loans
|
|
24,609
|
|
|
7,710
|
|
|
17,708
|
|
|
11,975
|
|
Other income
|
|
1,293
|
|
|
(2,321)
|
|
|
4,546
|
|
|
2,007
|
|
Operating and other expense
|
|
(23,433)
|
|
|
(23,328)
|
|
|
(23,381)
|
|
|
(24,399)
|
|
Net income
|
|
88,857
|
|
|
93,040
|
|
|
95,599
|
|
|
100,621
|
|
Preferred stock dividends
|
|
(3,750)
|
|
|
(3,750)
|
|
|
(3,750)
|
|
|
(3,750)
|
|
Net income available to common stock and participating securities
|
|
$
|
85,107
|
|
|
$
|
89,290
|
|
|
$
|
91,849
|
|
|
$
|
96,871
|
|
Earnings per Common Share - Basic and Diluted
|
|
$
|
0.19
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
17. Subsequent Events
Redemption of Senior Notes
On January 6, 2021, the Company redeemed all of the outstanding $100 million aggregate principal amount of 8.00% Senior Notes Due 2042. The Senior Notes were redeemed at a price equal to 100% of the principal amount of the Senior Notes, or $25 per $25 principal amount of Senior Notes, plus unpaid interest, if any, accrued thereon to, but excluding, the redemption date. In connection with this redemption, the Company recorded in its fourth quarter interest expense a non-cash charge of approximately $3.1 million representing remaining unamortized deferred expenses incurred when the Senior Notes were originally issued in 2012.
Securitization of Business Purpose Rental Loans
Subsequent to the end of the fourth quarter, the Company completed a securitization solely consisting of $217.5 million of Business Purpose Rental Loans, generating approximately $48.4 million of additional liquidity. As the weighted average coupon of the bonds sold was approximately 1.06%, this transaction is expected to lower the funding rate of the underlying assets by more than 150 basis points.
Schedule IV - Mortgage Loans on Real Estate
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Type
|
|
Number
|
|
Interest
Rate
|
|
Maturity
Date Range
|
|
Balance Sheet Reported Amount
|
|
Principal Amount of Loans Subject to Delinquent Principal or Interest
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Residential Whole Loans, at Carrying Value
|
|
|
|
|
|
|
|
|
|
|
Original loan balance $0 - $149,999
|
|
3,947
|
|
|
0.00% - 16.00%
|
|
9/1/2016-8/25/2058
|
|
$
|
347,041
|
|
|
$
|
29,614
|
|
Original loan balance $150,000 - $299,999
|
|
4,341
|
|
|
0.00% - 13.49%
|
|
11/1/2018-1/1/2060
|
|
832,365
|
|
|
73,749
|
|
Original loan balance $300,000 - $449,999
|
|
2,064
|
|
|
1.50% - 9.63%
|
|
12/1/2018-5/1/2062
|
|
667,272
|
|
|
65,629
|
|
Original loan balance greater than $449,999
|
|
2,760
|
|
|
0.88% - 11.25%
|
|
12/1/2018-1/1/2061
|
|
2,348,654
|
|
|
286,120
|
|
|
|
13,112
|
|
|
|
|
|
|
$
|
4,195,332
|
|
(1)
|
$
|
455,112
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Whole Loans, at Fair Value
|
|
|
|
|
|
|
|
|
|
|
Original loan balance $0 - $149,999
|
|
2,044
|
|
|
0.00% - 14.13%
|
|
7/26/2016-1/1/2060
|
|
$
|
167,671
|
|
|
$
|
70,748
|
|
Original loan balance $150,000 - $299,999
|
|
1,909
|
|
|
1.95% - 11.53%
|
|
3/10/2013-7/1/2060
|
|
355,854
|
|
|
167,303
|
|
Original loan balance $300,000 - $449,999
|
|
1,000
|
|
|
0.00% - 10.75%
|
|
5/1/2020-2/1/2060
|
|
313,588
|
|
|
165,901
|
|
Original loan balance greater than $449,999
|
|
669
|
|
|
1.70% - 10.20%
|
|
7/1/2017-11/1/2059
|
|
379,789
|
|
|
221,669
|
|
|
|
5,622
|
|
|
|
|
|
|
$
|
1,216,902
|
|
|
$
|
625,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,734
|
|
|
|
|
|
|
$
|
5,412,234
|
|
(2)
|
$
|
1,080,733
|
|
(1)Excludes an allowance for loan losses of $86.8 million at December 31, 2020.
(2)The federal income tax basis is approximately $3.9 billion.
Reconciliation of Balance Sheet Reported Amounts of Mortgage Loans on Real Estate
The following table summarizes the changes in the carrying amounts of residential whole loans during the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
(In Thousands)
|
|
Residential Whole Loans, at Carrying Value
|
|
Residential Whole Loans, at Fair Value
|
Beginning Balance
|
|
$
|
6,066,345
|
|
|
$
|
1,381,583
|
|
Additions during period:
|
|
|
|
|
Purchases
|
|
1,431,673
|
|
|
—
|
|
Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings
|
|
N/A
|
|
17,204
|
|
|
|
|
|
|
Deductions during period:
|
|
|
|
|
Repayments
|
|
(1,565,553)
|
|
|
(92,733)
|
|
Premium amortization/discount accretion, net
|
|
(11,590)
|
|
|
N/A
|
Provision for loan loss
|
|
(21,447)
|
|
|
N/A
|
Loan sales and repurchases
|
|
(1,766,220)
|
|
|
(18,530)
|
|
Transfer to REO
|
|
(24,709)
|
|
|
(70,622)
|
|
Ending Balance
|
|
$
|
4,108,499
|
|
|
$
|
1,216,902
|
|