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MFA Financial Inc  (NYSE:MFA)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial, Inc. Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) And also as a reminder, today's teleconference is being recorded.

At this time, we will turn the conference call over to your host Mr. Hal Schwartz. Please go ahead.

Harold E. Schwartz -- Senior Vice President, General Counsel and Secretary

Thank you, operator. Good morning, everyone. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc., which reflect management's beliefs, expectations and assumptions as to MFA's future performance and operations. When used statements that are not historical in nature including those containing words such as will, believe, expect, anticipate, estimate, should, could, would, or similar expressions, are intended to identify forward-looking statements.

All forward-looking statements speak only as of the date on which they are made. These types of statements are subject to various known and unknown risks, uncertainties, assumptions and other factors including those described in MFA's annual report on Form 10-K for the year ended December 31, 2017 and other reports that it may file from time-to-time with the SEC.

These risks, uncertainties and other factors could cause MFA's actual results to differ materially from those projected, expressed, or implied in any forward-looking statements it makes. For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in the press release, announcing MFA's fourth quarter 2018 financial results. Thank you for your time.

I would now like to turn the call over to MFA's CEO and President, Craig Knutson.

Craig L. Knutson -- Chief Executive Officer and President

Thank you, Hal. Good morning, everyone. I'd like to thank you for your interest in and welcome you to MFA Financial's fourth quarter 2018 financial results webcast. With me today are Steve Yarad, our CFO; Gudmundur Kristjansson, and Bryan Wulfsohn, our Co-Chief Investment Officers; and other members of senior management.

The fourth quarter of 2018 was a very challenging period for financial assets. Stocks rode a roller coaster particularly in December with daily swings in the Dow of 500 points or more for much of the last two weeks of the year, after dropping almost 2,000 points in the four trading days preceding Christmas, down 650 on Christmas Eve alone. The Dow closed up over 1,500 points in the final four trading days of the year. Bonds saw wild swings as well between November 8 and year-end with 2s, 5s and 10s rallying between 50 and 60 basis points. And finally high-yield widened by nearly 180 basis point also between November 8 and year-end.

Levered investors in both Agency mortgages and mortgage credit experienced significant value declines as these assets widened with corresponding book value reductions commensurate with the amount of leverage deployed. While not immune to these movements, MFA fared better than most of our peers with a modest book value declines of 4.2%, due largely to our asset selection and low leverage.

And while wider credit spreads negatively impacted pricing on our mortgage credit assets, this spread widening was very much a technical phenomenon and in no way a result of deteriorating credit or diminution of projected cash flows. Because some of our assets affected by this market volatility are accounted for at fair value, price declines in the corresponding unrealized losses on these assets during the quarter flow through income and drove GAAP income lower.

As we look back past the market turmoil that prevailed at the end of the year, we are extremely proud of our investment achievements in 2018. We made fantastic progress in our stated initiatives in newly originated whole loans, which we now refer to as purchased performing loans. These are Non-QM loans, fix and flip loans, single family rental and additionally a few pools of seasoned performing loans.

During 2018, we grew this portfolio by over $2 billion as we capitalized on our efforts initiated, beginning in early 2017. Our investment team spend considerable time and energy to establish relationships with originator counterparties in order to source loan volume and this hard work is now bearing fruit as we've been able to acquire meaningful size of purchased performing loans, particularly in the second half of 2018. MFA's reputation as a reliable buyer of residential whole loans and dependable capital partner has enabled us to source significant volume of whole loans including in some cases transactions with limited competition.

Please turn to page 3. MFA's GAAP earnings per share was $0.13 in the fourth quarter as unrealized losses on fair value assets flowed through our income statement. The two primary drivers of this were CRTs about $0.04 per share and Agency MBS together with swap hedges, about $0.03 per share. We acquired over $5.7 billion of assets in 2018, growing our portfolio by approximately $2.2 billion. Needless to say, we successfully deployed the proceeds from our follow-on equity offering in August. We paid a Q4 dividend of $0.20 to common shareholders on January 31, which is the 21st consecutive quarter in which we paid a $0.20 dividend.

Please turn to page 4. Fourth quarter investment activity was very strong, as we purchased approximately $1.6 billion of assets and grew our portfolio by more than $550 million in the quarter. Over $1 billion of these purchases were whole loans and split approximately 70-30 between newly originated loans and non-performing loans. Our acquisition of Non-QM, fix and flip and single family rental loans again increased over the third quarter to approximately $700 million in Q4. The process of acquiring these assets is very different from that associated with our other asset classes as we generally purchase these loans directly from originators rather than from The Street or through bulk offerings.

Through our willingness and ability to explore various arrangements, including flow agreements, strategic alliances and minority equity investments, we've been able to partner with originators to source attractive new investments, while enabling them to grow with support from MFA as a reliable provider of capital.

Please turn to page 5. As we have stated previously, our expanding investments in newly originated loans or purchased performing loans is beginning to have a meaningful influence on our interest income. These loans are included in our loans held at carrying value on our balance sheet. Recall that we also include loans purchased as reperforming loans or purchase credit impaired loans in our loans held at carrying value on our balance sheet.

For the year 2018, all loans held at carrying value produced $101 million of interest income. This is versus $36 million in 2017. Notably more than half of the $101 million of interest income in 2018, $56 million for the year, was from purchased performing loans and $27.5 million of this $56 million for the year was in the fourth quarter alone.

Now to put these numbers in perspective, our legacy reperforming or purchased credit impaired whole loans generated a little over $11 million of interest income in each quarter of 2018 for an annual contribution of approximately $45 million. We would expect that this portfolio will continue to produce income at this approximate level in 2019.

Now if we consider that the purchased performing whole loans generated $27.5 million of interest income in the fourth quarter and we assume no net growth for these loan categories in 2019, this $27.5 million annualized is $110 million, which together with $45 million from reperforming loans is over $150 million of interest income from carrying value loans, an increase of $50 million or 50% over 2018.

As we continue to grow our balance sheet, we'll begin to add more leverage, particularly on our residential whole loan portfolio. Our debt-to-equity ratio increased slightly from 2.3 times to 2.6 times in the fourth quarter. We would expect this leverage ratio will continue to increase modestly as these whole loan assets can easily support leverage of three to 4 times whether through repo borrowing or securitizations.

For our credit-sensitive whole loans, we've committed significant resources to our asset management efforts. We recognized that by immersing ourselves in the complicated and sometimes messy details of managing credit-sensitive loans that we can achieve better outcomes and improved returns. As good as our third party services are it is a tangible benefit to direct oversight and involvement in decision-making. And finally, our Legacy Non-Agency portfolio continues to perform well and contribute materially to our financial results generating a yield in the most recent quarter of 10.65%.

Please turn to page 6. To summarize our strategy and initiatives for 2019, we expect to continue to increase our investments in purchased performing loans, specifically Non-QM, fix and flip and single family rental. When and if we're able to grow our other existing asset classes at attractive levels, we will obviously continue to do so. And as always, we're constantly evaluating new investment opportunities. Given our track record, we are usually among the first to see new opportunities as we have demonstrated the ability and willingness to help structure these deals and invest in size.

We'll likely continue to execute strategic sales of Legacy Non-Agency MBS. This is part of managing a mature portfolio and includes sales of bonds at relatively high prices with little additional upside sales of callable bonds at a premium and sales of low loan count or odd-lot position sizes at attractive round lot levels. We've managed our CRT portfolio by selling many of the seasoned securities that are trading at very tight spreads and high dollar prices in most cases over 110 in favor of newer deals with wider spreads and prices closer to par.

Notably the new REMIC structure CRTs which we expect to see more of in the future will not be accounted for at fair value but will be treated as available for sale assets. And finally, we'll look to optimize our capital structure through the use of additional leverage including securitizations. That said, our leverage will likely still be at the lowest in the peer group.

Please turn to page 7. Recent developments and communication from the Fed has significantly altered expectations of future Fed action in interest rates. For levered investors a more dovish Fed posture is obviously encouraging. Recent headline advertising a housing slump or in our opinion somewhat misleading. While transaction volume is down, this is largely attributed to affordability issues, which is caused by higher prices and lack of inventory.

So while lower transaction volume may be bad for real estate brokers, it's not necessarily bad for holders of credit-sensitive mortgage assets. There is a nationwide home supply shortage given simply the level of household formation and the persistent low supply of new homes. While affordability is down from its most affordable level seen in 2011 and 2012 it is still at pre-crisis normal levels, last observed in 2000 to 2003.

And now, I'll turn the call over to Steve Yarad who'll provide further details on the financial results for the most recent quarter.

Stephen Yarad -- Chief Financial Officer

Thanks, Craig. For the fourth quarter of 2018, MFA's net income to common shareholders was $57.1 million or $0.13 per share. As Craig noted, while we continue to make solid progress in growing our residential mortgage portfolio including through purchases of performing loans, which have meaningfully impacting our earnings, our results this quarter were impacted by market volatility that made for a difficult trading environment and a good risk off sentiment.

Despite rates rallying significantly, wider credit spreads negatively impacted fair value of our CRT securities and Legacy Non-Agency MBS. And wider mortgage basis negatively impacted the net fair value of our 30-year Agency MBS and related hedges.

Due to our election of the fair value option on CRT securities and 30-year Agency MBS and because we are not applying hedge accounting to the swaps of economically hedged agencies, the valuation changes on those positions are recorded in earnings each quarter.

The unrealized losses arising on these positions in Q4 drove the $0.06 sequential quarter decline in net income. However, it should also be noted that trading conditions have largely stabilized since year end. And while our January 2019 results are still subject to final management reviews, we have seen a partial recovery in the values of these positions, particularly on CRT securities. As a result, we estimate that January book value increased over December by approximately 1.5% excluding any adjustment to first quarter 2019 dividends.

Please turn to page 8, where we present additional detail on the key drivers of net income for this quarter, which were as follows. Net interest income this quarter was approximately $3.2 million higher than the prior quarter, reflecting continued growth in purchased performing loans. This increase is even more significant when considering the prior quarter net interest income includes approximately $3.4 million of accretion on the early payoffs of Non-Agency MBS that had been purchased for a discount while the current quarter includes approximately only $0.6 million of accretion on early bond payoffs.

As discussed, credit spread widening resulted in lower year-end valuations on our CRT securities, which led to a reduction in unrealized gains on the portfolio. The losses on CRTs contributed roughly $0.04 to the Q4 results. In addition, despite a rally in rates in the fourth quarter, widening mortgage basis resulted in net unrealized losses on 30-year Agency MBS and related hedges contributing negative $0.03 to the Q4 results.

Results this quarter also reflects high net gains from sales of residential mortgage securities as we continue to selectively take advantage of market opportunities to manage our mature Legacy Non-Agency -- and rebalance our CRT portfolio. In addition, we also disposed of certain lower coupon Agency MBS.

Further, the results continue to reflect the strong contribution from residential whole loans measured at fair value through earnings. Approximately 60% of income on these loans for the quarter reflects cash income from coupon receipts and related to loan liquidations.

Finally -- prior quarter due primarily to the higher loan servicing and acquisition costs associated with loan portfolio growth.

And now I'd like to turn the call over to Gudmundur Kristjansson to provide more details of our investment activity and portfolio performance for the fourth quarter.

Gudmundur Kristjansson -- Co-Chief Investment Officers

Thank you, Steve. Turn to page 9. The fourth quarter was another successful quarter for our investments team as we acquired approximately $1.6 billion in the quarter and grew our portfolio by $565 million in the quarter. This is the fifth consecutive quarter of portfolio growth. Most of the acquisitions were focused on the whole loans portfolio, which continues to benefit from our multi-year effort to expand our investment universe to include non-QM fix and flip and SFR loans.

We opportunistically sold $77 million of older CRT securities, which had benefited from strong credit performance as well as $47 million of lower-yielding, lower coupon 15-year fixed rate Agency MBS as rates declined at the end of the quarter.

Turn to page 10. 2018 was a strong year for portfolio growth and a year when we saw the full benefits of our strategic push into newly originated loans that we began back in 2017. We purchased approximately $5.7 billion of assets in 2018 and grew our investments portfolio by approximately 22% in the year. We doubled our holdings of residential whole loans and REO to approximately $5 billion, which now accounts for about 41% of our assets, up from approximately 24% at the end of 2017.

The large growth in whole loans was largely attributable to our strategic push into non-QM fix and flip and SFR loans began in 2017 and really took off in 2018 when we acquired in excess of $2 billion across these loan products compared to approximately $100 million in 2017. We're glad to see our efforts to introduce new loan products bear fruit and expect that they will continue to add meaningfully to our portfolio going forward.

Turn to page 11. Despite over three years of rising rate and nine Fed Fund increases MFA's net interest rate spread on interest-earning assets has remained steady and attractive. This is the result of our thoughtful and adaptive investment strategy, which is focused on acquiring credit-sensitive assets and benefit from positive credit fundamentals as well as emphasizing assets in short duration with either through a floating rate coupon or rapid repayment of principal have supported our portfolio performance in a rising rate environment.

Also importantly, the rise in funding costs has been mitigated with strategic uses of interest rate swaps and the terming out of fixed rate whole loan financings through securitizations of which we currently have about $660 million outstanding.

Turning to page 12, where we share the yield, cost of funds and spreads for our holdings as well as the equity allocated to each asset class. As we can see our largest equity allocation is toward whole loans of carrying value with yield at 5.67% in the quarter. The leverage on our whole loans increased modestly to 1.2 times in the quarter and we expect to continue to utilize more leverage there as the flow of newly originated loans expense.

Turn to page 12 -- sorry, turn to page 13. Here we review MFA's interest rate sensitivity. Our asset duration changed little in the quarter and remained relatively low at 164 basis points at the end of the quarter. We added $580 million of interest rate swaps in the quarter to hedge some of the growth we've experienced in the newly originated loans.

In addition, we also show our securitized debt as part of our hedging instrument as these fixed rate non-recourse borrowings essentially term out and lock in our funding cost similar to what interest rate swaps and term repos would do. Our net duration remains relatively low and measured 96 basis points at the end of the quarter.

On this slide, we've also added the table to the right showing our portfolio sensitivity to parallel changes in interest rates. For 100 basis points parallel increase in rates, we will expect our portfolio to decline by approximately 1.2% or about 4.3% of MFA's equity. As we can see due to our low asset duration, low leverage and preference for credit-sensitive assets MFA's interest rate sensitivity remains low both as measured by net duration, as well as estimated change in portfolio value for parallel shift in interest rates.

Turning to page 14, MFA's investment and risk management strategy continue to limit quarterly book value fluctuations through various market conditions. In one of the most volatile quarters in recent memories where rates declined significantly and credit and mortgage spreads widened substantially MFA's book value held reasonably well and declined by a modest 4% in the quarter.

As we can see on the graph on this page, since 2014 MFA's quarterly book value changes have been modest with an average quarterly book value change of less than 2% and a largest book value decline of 4%. As before, we continue to believe that by consistently protecting book value MFA will have the same power to take advantage of new opportunities as they arise.

With that, I'll turn the call over to Bryan who will discuss our credit investments in more detail.

Bryan Wulfsohn -- Co-Chief Investment Officers

Thank you, Gudmundur. Although we saw market volatility in the fourth quarter the economy and housing fundamentals continue to benefit mortgage credits. The CoreLogic National Home Price Index is up 4.7% in December from the year ago. Home Price growth has been normalizing after an extended period of significantly outpacing CPI. While we benefit from outsized Home Price growth our investment strategy does not depend on it.

The unemployment rate was 3.9% in December and 4% in January. The increase in recent months was a result of people reentering the labor force. In addition, we continue to see a steady March hire in the number of people employed as a percentage of the working age population.

We continue to see slight increases in housing inventory. Overall levels are still historically low on a nationwide basis. We believe these low levels of supply will support further Home Price growth. According to the latest release from the New York Fed the reported 90-plus day mortgage delinquencies are down to pre-crisis level of around 1%.

Turning to page 16. We are pleased to report that our investment team has sourced over $1 billion residential whole loans in the fourth quarter and over $3 billion for the year. Majority of the growth in 2018 came from our investment in newly originated loans. This loan supply was robust last year with almost $80 billion in supply and we expect volumes in that space to moderate in 2019.

And the performance of our seasoned portfolio continues to outperform our expectations at the time of the purchase. Again as a reminder, our whole loans appear on our balance sheet on two lines: loans held at carrying value $3 billion; and loans held at fair value $1.7 billion. This election is permanent and is made at the time of acquisition. Typically we elect carrying value for our purchased performing loans and reperforming loans and fair value for nonperforming loans.

Turning to page 17. Our RPL portfolio continues to perform well. 86% of our portfolio is less than 60 days delinquent. In addition although 14% of the portfolio is 60 days delinquent or greater almost 30% of those loans have been making payments over the last 12 months.

We are happy to see prepayment speeds coming faster than our expectation as the portfolio was purchased at a substantial discount to par. We could see speeds remaining in this range as our borrowers gain access to new financing options as a result of improving credit.

Turning to Page 18. We believe our asset management team's oversight of servicing decision and active management of the portfolio produces better economic outcomes. The team has worked in concert with our servicing partners to more quickly get loans to reperform as well as limit and reduce timeline to resolution.

This slide shows the outcomes for loans that were purchased prior to December month-end 2017 therefore owned for more than one year. 32% of loans that were delinquent at purchase are now either performing or paid in full and 38% are either liquidated or REO to be liquidated, and 30% are still in non-performing status.

We are very pleased with our performance since modification is over 76%, our modifications are either performing or are paid in full. These results continue to outperform our initial expectations.

Turning to Page 19, we have been successful in adding to our portfolio of newly originated loans that do not meet the qualified mortgage definition as defined by the CFPB.

A variety of different loan types can be considered non-QM ranging from structural features such as interest-only period or a term greater than 30 years to the way income is documented such as the use of bank statements for self-employed borrowers or loans of higher debt to income ratios and so on.

We believe the underwriting of these loans is prudent. The portfolio has a weighted average loan to value of 65% and a cycle of over 700. To-date we have acquired over $1.8 billion of UPB including approximately $400 million so far in 2019 and continue to work with our origination partners on strategic relationships.

We are encouraged by the growth of the asset class as our origination partners saw significant volume growth last year. Leverage is attainable through warehouse lines and securitization. The securitization market for these assets is still in nascent stages as volumes more than tripled last year from $4 billion in 2017 and could experience significant growth again in 2019. We target asset yields of approximately 5% and an ROE of low double-digits utilizing appropriate leverage.

And now, I'd like to turn the call back over to Gudmundur to walk you through our fix and flip and SFR loans.

Gudmundur Kristjansson -- Co-Chief Investment Officers

Thanks Bryan. Turning to Page 20, our acquisitions of business purpose loans continue to expand in the fourth quarter as we added new relationships and work to expand existing ones.

Since we started acquiring business purpose loans at the end of 2017, we have acquired approximately 4,400 loans with over $900 million in UPB and undrawn commitments. We are excited about our progress and we'll continue to work toward expanding our acquisitions of business purpose loans in 2019.

During the fourth quarter, our holdings of fix and flip loans grew by approximately $170 million to $495 million UPB with additional undrawn commitments of $50 million at the end of the quarter.

Credit metrics and performance continues to be strong and our target yield for this asset class is around 7%. Our holdings of SFR loans grew by $65 million in the quarter to $145 million at the end of the fourth quarter. Similar to the fix and flip loans, credit metrics, and loan performance continues to be strong. Our target yield for SFR loans is around 6%.

With that, I will turn the call over to Craig for some final comments.

Craig L. Knutson -- Chief Executive Officer and President

Thank you, Gudmundur. So, in summary, we remain very active in the investment market. We purchased over $5.7 billion of assets in 2018 and grew our portfolio by over $2.2 billion. This growth in our portfolio has resulted in materially higher net interest income in the second half of 2018 and we expect further such increases in 2019. While we've made excellent progress in growing our asset base, we still have substantial capacity to continue to increase our investments by adding leverage to our balance sheet.

This concludes our prepared remarks. Tony, would you please open up the call for questions?

Questions and Answers:

Operator

Certainly thank you very much. (Operator Instructions) Our first question will come from Doug Harter with Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks. I was hoping you could talk a little bit about the relationships you have on the business purpose loans and the Non-QM side. Any color as to kind of the volume expectations you expect or anything. Are these exclusive relationships just some more color about these relationships you've built?

Craig L. Knutson -- Chief Executive Officer and President

Sure. Thanks for the question Doug. So as we've said before we have multiple relationships. They're typically not exclusive relationships. And for competitive reasons, we've declined to discuss the specific partners that we've -- that we partnered with. But it's multiple partners across multiple products. It's typically not exclusive. But I think we're -- in many cases, we're a significant, if not majority purchaser of the production.

Doug Harter -- Credit Suisse -- Analyst

Understood. And then you guys talked about the ROE you expect to get on Non-QM. Can you just sort of compare that? You have the -- the target yields look higher on the business purpose loans. Can you just talk about kind of what the leverage opportunity there is and how the ROEs would compare on those?

Bryan Wulfsohn -- Co-Chief Investment Officers

Yes. I mean the leverage you can obtain through Non-QM loans is probably a bit higher versus business purpose loans. And therefore the ROEs can be comparable. The ROEs are probably -- are higher on the business purpose side. It's just a question of how much production can you source. We're very happy with what we've gotten and would like to grow that portfolio. And we think we're doing so appropriately.

Doug Harter -- Credit Suisse -- Analyst

And I guess just one last. I guess how would you compare kind of the duration of those assets? How long you expect them to sort of remain on your book if you compare a Non-QM versus the business purpose loans?

Bryan Wulfsohn -- Co-Chief Investment Officers

Sure. So Non-QM given where speed expectations are today you're probably around like a three-year asset and business purpose loans are plus or minus a year asset maybe even shorter. So Non-QM is a bit longer than the business purpose side.

Gudmundur Kristjansson -- Co-Chief Investment Officers

And so on the business purpose I mean, so the fix and flip we expect them to have an average life of anywhere -- probably around nine months from the like so turnover quickly as Bryan said. But the SFR loans are going to be similar to the Non-QM loans in terms of average life of duration.

Doug Harter -- Credit Suisse -- Analyst

I appreciate all your answers. Thank you.

Craig L. Knutson -- Chief Executive Officer and President

Thanks, Doug.

Operator

Thank you. The next question in queue that will come from Eric Hagen with KBW. Please go ahead.

Eric Hagen -- KBW -- Analyst

Thanks. Good morning guys. I guess maybe I was a little surprised to see such a strong quarter for realized gains on the loan sales. Just given the widening credit spreads that we saw weaker asset prices during the quarter, can you just maybe shed some light on what drove the sales and maybe even just the timing of when you completed those?

Craig L. Knutson -- Chief Executive Officer and President

Sure, Eric. Thanks for the question. Suffice to say we weren't selling those assets in the last few weeks of the year because the market was in somewhat disarray. So had we not made some of those sales the book value number could possibly have been a little bit lower. I wouldn't say it was a targeted or a premeditated strategy. I think our approach in both the legacy book and the CRT book has been consistent for -- not for quarters, but almost for years.

I think in the legacy book in particular, it's a very mature portfolio, right? The -- it's '05 '06 '07 production. So the youngest bonds there are 12 years old. And so part of it is just -- it's just sort of a rigorous portfolio trading strategy where we're selling bonds that get up to high dollar prices in the mid high-90s where there's really no further room for credit improvement and price depreciation. So that's one.

Two is we're selling bonds in some cases at a premium, they're callable which obviously is a smart strategy. And then the third is, while these were mostly round lot positions initially as they pay down and factor down, many of them become odd-lot in nature or the bonds are of very low loan count. And a low loan count bond is subject to monthly fluctuation, if he get a bad print, right. If you one loan that's been in foreclosure for two years and it liquidates at a really high loss severity, it could have a profound impact on the price of that bond.

So it's really just a constant strategy of calling the portfolio. If a bond trades in the marketplace in a round lot and we have an odd-lot, we can may be tack that on and get a round lot execution. So it's a variety of things, but it's -- the numbers that come out the realized gains are really -- are a function of the fact that, we bought them all at low dollar prices. So any time we sell anything, we typically have a big gain.

Eric Hagen -- KBW -- Analyst

That's really helpful color. Thank you for that. Maybe I can just press you guys a little bit for your assumptions or just some color around the Non-QM strategy. I mean what's the cumulative default rate that you expect on some of those -- the pipeline of originations there?

Bryan Wulfsohn -- Co-Chief Investment Officers

So again QM defaults, we're looking at somewhere in the order of 100 to 200 basis points and the losses are really low. I mean, if you look at the portfolio the weighted average LTV is 65%. So we're talking about a lot of protection again to any movement in home prices, if loans were to go back.

Eric Hagen -- KBW -- Analyst

Yes, that makes sense. Okay great. Then an accounting question just kind of bigger picture stuff. How was CECL -- how should we think about CECL and the impact that that could have on some of the accounting behind the loans that I guess you would hold at carrying value would be maybe the ones that are affected there? Can you just give us some color as to how you're thinking about CECL and the impact there? When it takes effect I guess about a year?

Stephen Yarad -- Chief Financial Officer

Yes. Sure Doug. Thanks. This is Steve. We are currently looking at CECL and implementing for that new standard. As you noted it becomes live in 2020. And you're right. The impact that it will likely have on our portfolio is with some of our loan product because really on those carrying value loans, as Bryan mentioned way those loans that we really have acquired them now, low LTVs we don't -- we see some default risk, but severity to protect will be low and those loans are very well protected.

So right now we don't really have much in the way of loan loss reserves on those loans. Under CECL you have to look at those on a life of loan basis rather than what's incurred today under the current accounting. So we're looking at that. We're looking at implementing a methodology to cancel loan losses for those loans under CECL.

Still going through that in the early stages. But we would expect possibly some additional loan loss reserves under CECL than what we would cancel today under the current accounting standards but it's little too early to quantify that because we're just not far enough into it at this stage.

Eric Hagen -- KBW -- Analyst

Got it. But I think it's fair to say that the LTV in your portfolio is still low. That provision that you're talking about taking would really be fairly modest at the end...

Stephen Yarad -- Chief Financial Officer

That's right. That's what we would expect at this stage.

Eric Hagen -- KBW -- Analyst

Got it. Thank you. That's really helpful color.

Craig L. Knutson -- Chief Executive Officer and President

Thanks, Eric.

Operator

Thank you. (Operator Instructions) Our next question will come from Steve Delaney with JMP Securities. Please go ahead.

Steve Delaney -- JMP Securities -- Analyst

Good morning, everyone. Thanks for taking the question. Craig, you talked about the relationships that you've developed with strategic partners primarily on the origination side, but I know on the special servicing side a little bit too. I'm just curious if you've made any equity investments, small investments but try to help solidify those relationships or support the growth of any of those platforms? And if you haven't, is that something that you would consider doing in the future? Thanks.

Craig L. Knutson -- Chief Executive Officer and President

Sure, Steve. Thanks for the question. The short answer is, yes. We have made minority equity and/or preferred stock investments. However, I think as you point out investment amounts are not material to our financial statements. So we've not provided specific detail about them. And also for competitive reasons we prefer to discuss, our origination partners in general rather than specifically.

Different originators have diverse needs and objectives and we think we've been able to consider various arrangements that address these unique desires. Our objective is not really to develop a conduit here, but to -- rather to form meaningful partnerships with a finite group of originators that we can assist in growing their franchise volume and profitability.

Steve Delaney -- JMP Securities -- Analyst

That's helpful. And I certainly understand the need for confidentiality there and the fact that you have something to offer them in terms of a much lower cost of capital than they would have stand-alone.

So my second point, obviously, a quarter that had noise in it for everyone. I guess, what I'm thinking when I hear your comments about the more straightforward accounting for interest income on the various whole loan portfolios and thinking about where we might be in a year or so versus where we've come from and there was a lot of more complex accounting with respect to discounts and credit on the legacy RMBS.

What I'm really getting at is as that mix changes, would you consider adding some new disclosure in terms of your earnings, which would lead us to something akin to a core EPS disclosure and so you'd be able to take the fair value noise out of your reported earnings?

Stephen Yarad -- Chief Financial Officer

Steve, thanks for the question. It's Steve Yarad. I think you should bring that up because it is something that we do talk about here internally regularly. We're probably one of the few mortgage REITs who don't have a core income concept in their reporting.

And it's true that our GAAP earnings, which we've used and exclusively reported on that for a number of years, does suffer a little bit from quarter-to-quarter with some noise on some of the accounting elections we've made in the past. So that's something that we have thought about and potentially would think about making some changes depending on how our portfolio continues to evolve in the future.

Craig L. Knutson -- Chief Executive Officer and President

Steve, it's a timely question. As Steve said. We have started to talk about that. You probably remember, we actually did have a core concept many years ago around linked transactions on legacy non-agencies.

Steve Delaney -- JMP Securities -- Analyst

Yes.

Craig L. Knutson -- Chief Executive Officer and President

But, yes, it's -- suffice to say, it's under consideration.

Steve Delaney -- JMP Securities -- Analyst

Okay, great. And then, Craig, I can't not ask this, just because of the amount of activity. I think, through this week we've had 12 follow-on offerings from mortgage REITs and all but one was from a residential-focused company. Just curious on your view of the capital markets. And what we hear from these companies is almost all this new equity is being targeted to agency MBS. That clearly isn't your focus.

So I guess I'm thinking, as you look at the market opportunities, is that agency opportunity attractive enough that it would -- you guys -- lead you guys to consider another capital markets transaction following up on your offering last summer? Thanks. That's my last one.

Craig L. Knutson -- Chief Executive Officer and President

Sure, Steve. So, obviously, we've seen the many follow-on equity issuances since the beginning of the year. I think because MFA is internally managed, our rationale for issuing additional equity is perhaps more simple than for externally managed entities.

Future capital structure decisions are motivated by what's in the best interest of the company, the shareholders and we're all shareholders. I would just say, in general, we would consider issuing additional equity if we felt that we could do so at attractive levels and if we felt that we had compelling investment opportunities in which to deploy the new capital.

As we stated a few times during our prepared remarks, we expect we'll be able to fund near-term expected portfolio growth through modestly increased leverage, whether in the form of repo or securitization. But, obviously, to the extent that circumstances change, we'll reevaluate our options at that time.

I think, yes, agencies are wider and you saw that reflected in book value numbers. I'm not sure they're so pound-the-table cheap that we would, sort of, alter our strategy and issue equity just to buy agencies at this time.

Steve Delaney -- JMP Securities -- Analyst

That's great. Great color. Appreciate all the comments. Thank you.

Craig L. Knutson -- Chief Executive Officer and President

Thanks, Steve.

Operator

Thank you. Our next question will come from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws -- Raymond James -- Analyst

Hi. Good morning. Really like to...

Craig L. Knutson -- Chief Executive Officer and President

Hi, Stephen.

Stephen Laws -- Raymond James -- Analyst

Hi. Good morning. Like follow-up on Doug and Steve's questions on the non-QM and business purpose. And I understand the competitive reasons for not disclosing your partners. But can you provide a little color on the competition?

There's a lot of your peers that are targeting these assets as well. How do you see the competition framing up for this? Is it pricing driven? Is it really more you guys are willing to provide underwriting standards and take down significant volume? But can you maybe talk about how you're protecting your pipeline versus others that are looking to become more active in this asset class?

Bryan Wulfsohn -- Co-Chief Investment Officers

Yes, Steve. While we do see there are more market participants evaluating the asset class and would like to get involved. What we are also seeing is significant growth to the amount of loan origination volume relating to non-QM.

So there's really a lot of room for people to get involved where it won't be so competitive, at least we believe, to push pricing to uneconomic levels. So that's sort of how we feel about that. I mean in terms of our existing relationships they -- we had them for a period of time now.

And the way that we're able to source loans, either through flow or sometimes limited, very limited comp, we think that -- we'll have the ability to continue that and we're really -- we're happy to see more people interested in the asset class.

Craig L. Knutson -- Chief Executive Officer and President

And Stephen I think one other point is whole loan trades are different than securities trades, right? Securities trades, it's a CUSIP. It's pretty easy to figure out what the highest number is and you sell it to that guy with the highest bid. When you trade whole loans, it's really a different thing, because there's underwriting, and there's sometimes kick-outs or repricings.

And so I think with a lot of our origination partners, what they've discovered is that we're good counterparty. We work really well together with them. There have been cases where we haven't been the high bid and we win the trade anyway, because they know they have that certainty of closing with us.

So there's a lot that goes into it, and it's not all about money. A lot of it's about relationship and just this sort of true partnership of working together with them. But it's a lot of work. It's a lot more work to do that than to buy CUSIPs for sure.

Stephen Laws -- Raymond James -- Analyst

Right. And on the financing side again. This is a follow-up question. Can you talk about -- I think one of -- at least one of your competitors is in non-QM securitization in Q4. Can you talk about what the opportunities are in the securitization market now kind of given the dislocation? Have things normalized? Or that's something you think you could look at as the market is not stabilized enough yet?

And then on the -- similarly on the fix and flip given the short duration, do you think there's securitization options of CLO or some type of option where there is a manageable period or a replenishment period where do you can do the short duration assets into a longer duration financing? Can you maybe talk about the options and opportunities you see there?

Bryan Wulfsohn -- Co-Chief Investment Officers

Sure. As it relates to non-QM, the market for the sale of senior bonds had -- did widen out going into the end of the year and sort of had stabilized and we're seeing some momentum. Part of that is just adoption of the asset class knowing that there's going to be enough supply to get the attention of the larger money managers to participate. When there's only a few billion of bonds for sale and people get called upon to take a look at new investment, they may get the reaction, oh, is it worth my time?

Now that we're seeing the increase in issuance, right, the money managers are finding, OK, it is going to be worth my time. And we do see the potential for -- at least we see stability in spreads and the potential for the spreads to narrow over time.

Gudmundur Kristjansson -- Co-Chief Investment Officers

And so as it relates to the fix and flip loans there has been a few public and private securitization or securitization-like structures that have been put together. But there's also a viable weaker financing market. And so from our point of view, our intention is to utilize leverage on that asset class over time. And we would simply look at the best option or the best execution from our point of view.

Some of the issue with the business purpose loan securitization is the fact that you have to assemble enough size and there's fixed cost involved. And the structure can become somewhat complicated because you have a lot of nuance in the underlying collateral.

So, in some sense, it can be more efficient to simply work with a bank or a repo provider and do that without the noise of having to basically show the market what's going on and convince people of the quality of the underlying collateral even though it's quite solid. So, we evaluate both options and our intention is to use leverage over time.

Craig L. Knutson -- Chief Executive Officer and President

And Stephen I'd just add one thing on the fix and flip side. There have been a few deals not many just a handful of deals. And most recently there were one or two deals that had this collateral concept where you could top up the collateral.

But they're pretty new and the spreads are pretty wide and I think probably the best indication of what we felt about that is -- leverage is we were actually a buyer of the senior bond in size of one of those deals. So, I think we view that at least the current pricing we'd probably rather buy that assets and use that as a liability. But as Gudmundur said, obviously, the expectation is over time that will probably change.

Stephen Laws -- Raymond James -- Analyst

Great. That commentary is helpful. I appreciate it. Thanks for taking my questions.

Craig L. Knutson -- Chief Executive Officer and President

Thanks Stephen.

Operator

Thank you. At this time, there are no additional questions in the queue. Please continue.

Craig L. Knutson -- Chief Executive Officer and President

All right. Thanks everyone. We look forward to speaking with you next quarter.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 12 noon Eastern Time today running through May 21st at midnight. You may access the AT&T Executive replay at any time by dialing 800-475-6701 and entering the access code of 464138. International parties may dial 320-365-3844.

Once again those phone numbers are 800-475-6701 and 320-365-3844 using the access code of 464138. That does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Duration: 50 minutes

Call participants:

Harold E. Schwartz -- Senior Vice President, General Counsel and Secretary

Craig L. Knutson -- Chief Executive Officer and President

Stephen Yarad -- Chief Financial Officer

Gudmundur Kristjansson -- Co-Chief Investment Officers

Bryan Wulfsohn -- Co-Chief Investment Officers

Doug Harter -- Credit Suisse -- Analyst

Eric Hagen -- KBW -- Analyst

Steve Delaney -- JMP Securities -- Analyst

Stephen Laws -- Raymond James -- Analyst

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