Mortgage REITs’ investors have witnessed a bloodbath since Ben Bernanke sent confusing signals of a possible Fed tapering before the end of this year. While the entire sector is down since the start of the second quarter, I have reasons to believe MFA Financial, Inc. (NYSE:MFA) has a better shot than its peers. Let’s see why?
MFA Financial operates as a hybrid mortgage REIT with investments in both Agency and non-Agency backed mortgage backed securities. While the company is structured like its peers Invesco Mortgage Capital Inc (NYSE:IVR) and Javelin Mortgage Investment Corp (NYSE:JMI), MFA Financial has a competitive edge.
The competitive edge is the company’s non-Agency MBS strategy. The company has allocated a larger chunk to the non-Agency paper. Around 67% of its equity is allotted to to high yielding non-Agency MBS, while the remainder is Agency paper and cash. This large concentration in the non-Agency paper brings a competitive edge to the company as they are high-yielding assets usually bought on a discount to their par values.
Non-Agency MBS are not backed by the government, which is why they are not part of the Fed’s bond buying program. If the Fed decides to cool down its Agency MBS purchases, MFA Financial’s non-Agency could provide support to its book value.
The California effect
The housing fundamental trends have given mixed signals over the past few months. However, the situation in California is better. A combination of low mortgage rates, rising multifamily rents, limited housing supply, and capital flows into the own-to-rent purchases have led to price appreciation in the California region.
MFA Financial, Inc. (NYSE:MFA)’s largest chunk of residential MBS lies in this region. Around 46% of the company’s non-Agency holdings are from this region, followed by 8% in Florida. Home prices have appreciated as much as 17% over the past few months in Alameda, within the California region. Stabilized or increased home prices provide higher MBS yields. Therefore, you can expect the company’s non-Agency MBS to provide major support to the second quarter’s bottom line.
During the first quarter, the company’s non-Agency MBS produced an unlevered loss adjusted yield of 6.8%. Going forward, you can expect this loss adjusted unlevered yield to go up as the company expects fewer losses due to home price appreciation coupled with mortgage amortization.