MFA Financial (MFA) Q2 2021 Earnings Call Transcript

MFA Financial (MFA 1.80%)
Q2 2021 Earnings Call
Aug 05, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MFA Financial second-quarter 2021 conference call. [Operator instructions] And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Hal Schwartz. Please go ahead.

Hal Schwartz -- Senior Vice President, General Counsel, and Secretary

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

These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors, including those described in MFA's annual report on Form 10-K for the year ended December 31, 2020, and other reports that it may file from time to time with the Securities and Exchange Commission. These risks, uncertainties, and other factors could cause MFA's actual results to differ materially from those projected, expressed or implied in any forward-looking statement 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 second-quarter 2021 financial results. Thank you for your time.

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

Craig 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 second-quarter 2021 financial results webcast. Also with me today are Steve Yarad, our CFO; Gudmundur Kristjansson; and Bryan Wulfsohn, our co-chief investment officers; and other members of senior management.

The second quarter of 2021 was a difficult period for mortgage investors, particularly for those invested in agencies, strong economic data and early fed chatter about tapering, pushed mortgage spreads wider and a rally in rates, coupled with the flattening curve, caused prepayment levels to remain elevated, while never completely immune to general mortgage market trends, MFA's investment strategy intentionally mitigates many of these interest rate risks. Through asset selection that emphasizes credit versus interest rate sensitivity and shorter-duration assets that again limit interest rate risks, our portfolio performed quite well during the second quarter of 2021, and our book value was stable. On the credit side, continued very strong housing trends have bolstered the value of the underlying assets, securing the mortgages that we own, thus, lowering LTVs. Robust housing prices have also created a strong tailwind for delinquent mortgages and REO properties as these trends lead to improved resolution and outcomes.

MFA's tireless efforts to find new attractive investments were also rewarded in the second quarter as our asset acquisitions exceeded runoff for the first time since late 2019. This progress is due to continued growth from many of our origination partners as well as our ability to analyze and source new investment opportunities. With financial markets awash in liquidity, sourcing attractive investment opportunities have been very challenging this year. But we are starting to fire on all cylinders, and we feel good about our continued growth prospects.

Please turn to Page 4. We reported GAAP earnings of $0.13 per share for the second quarter, largely driven by a solid increase in net interest income. Contributions from credit loss reserve reversals were more modest this quarter versus Q1, $8.8 million versus $22.8 million as were unrealized gains on fair value loans, $6 million in Q2 versus $31 million in Q1. GAAP book value was $4.65, up $0.02 from March 31, and economic book value was $5.12, up $0.03 from March 31.

Economic return, both GAAP and economic for the second quarter, was 2.6%. And this follows economic returns in Q1 of 3.6% and 5%, respectively. Our leverage ticked up slightly over the quarter to 1.8 to one versus 1.6 to one, and we paid $0.10 dividend to shareholders on July 30, which is a 33% increase from the dividend paid in April. Please turn to Page 5.

Digging into the numbers a little more. Our efforts to lower interest expense through securitizations had a visible impact on our second-quarter earnings as interest expense declined by $4.5 million or 15% from the first quarter. And the larger of the two securitizations executed in the second quarter had limited impact on the full quarter because it priced on June 10. Net interest income for the second quarter increased by $8 million or 16% versus the prior quarter.

We continue to make excellent progress in liquidating REO properties as we capitalize on strong housing trends. And for borrowers who are still negatively impacted by COVID, we've been able to offer modifications and/or repayment plans to allow them to stay in their homes, restore their payment status to current and retain the equity in their homes. Please turn to Page 6. As previously announced, we completed the acquisition of Lima One on July 1, and we're very excited to welcome the Lima One team to the MFA family.

We expect that this transaction will significantly increase our purchase of business purpose loans and by providing a strong capital base and expertise in securitization we will also further enhance Lima One's already existing profitability and growth potential. Please turn to Page 7. Again, continuing the theme of aggressively taking advantage of available market opportunities, we executed 2 additional securitizations on over $850 million of UPB at attractive levels in the second quarter. As you can see on this page, AAA yields on bonds sold for the Non-QM1 deal was 112 basis points and 110 basis points on the RPL1 deal.

And the blended cost of debt for both deals is in the 130s. We expect to complete at least two additional securitizations in the third quarter. Please turn to Page 8. We illustrate our investment portfolio and summarize our after-tax financing on this slide.

Our investment portfolio grew by $300 million in the second quarter, which is a milestone of sorts as it is the first quarter in the last six quarters that our portfolio has increased. New loan acquisitions in the second quarter were $857 million, which is more than two times the last three quarters combined. The composition of our portfolio has not changed materially since March 31, other than for the addition in Q2 of agency-eligible investor loans, which Bryan will discuss shortly. On the financing side, you can see that two-thirds of our asset-backed financing is nonmark to market with over 70% of the nonmark-to-market financing in the form of securitizations as we continue to term out and reduce the cost of nonmark-to-market debt.

And I will now turn the call over to Steve Yarad to discuss additional details of our financial results.

Steve Yarad -- Chief Financial Officer

Thanks, Craig. Please turn to Slide 9 for an overview of our second-quarter 2021 financial results. As Craig has already noted, MFA delivered solid results for the second quarter, highlighted by higher net interest income on our residential whole loan investments. Before diving into the details, I want to point out two important changes that impact the way our results are presented this quarter.

Firstly, we changed the way we present interest income on residential whole loans on which we have elected the fair value option at acquisition. Prior to this quarter, we presented the coupon payments received, along with noninterest income from fair value loans in other income on our income statement. We now present interest income on loans accounted for at fair value as part of net interest income. While noninterest income, which primarily reflects market value changes, continues to be presented in other income.

Prior period comparative amounts to interest income and net interest income discussed on this call as well as in our press release issued this morning and 10-Q, which we expect to file later today are reclassified to conform to this new presentation approach. Secondly, as we noted in our last earnings call, starting this quarter, we decided to elect the fair value option for all acquisitions of the purchased performing loans. This includes acquisitions of Non-QM, fix and flip, single-family rental, and agency-eligible investor loans. Purchase performing loans acquired prior to this quarter continue to be accounted for at carrying value, so we will continue to present the economic book value metric to capture the impact of fair value changes for these loans.

We believe these changes in accounting method and presentation will serve to simplify the reporting of our results over time. Further, we can now present interest yield and net interest spread information for all loans in our portfolio, which should make our results easy to review and more comparable to our peers. In addition, we believe that using fair value accounting is the best way to properly capture the impact of Lima One's origination and servicing activities for loans originated by Lima and held on MFA's consolidated balance sheet. Turning now to the details of our Q2 2021 results.

Net income to common shareholders was $58.5 million or $0.13 per share. The key items impacting our results are as follows: net interest income of $59 million was $8 million or 16% higher sequentially. As Craig also noted interest expense again declined primarily due to the ongoing efforts to use securitization and other forms of more durable and lower-cost financing. Interest income on our loan portfolio was also approximately $5 million higher, primarily driven by higher prepayments and lower delinquency levels on purchase credit deteriorated and purchased nonperforming loans.

Similarly to the prior quarter, interest income from our securities investments included approximately $8 million of accretion on an MSR term note investment that was redeemed at par but that we have taken an impairment charge on in Q1 of 2020. Our net interest spread increased to an impressive 3.02% this quarter. And while additional securitizations will continue to meaningfully benefit funding costs, overall spread levels should moderate in future periods as prepayment speeds declined in line with seasonal factors. We reduced our overall CECL allowance on carrying value loans to $54.3 million, reflecting lower loan balances and adjustments to estimated levels of future unemployment and home price appreciation used in our credit loss modeling.

This reversal and other net adjustments to our CECL reserves positively impacted net income for the quarter by $8.9 million. After the significant increase in CECL reserves taken in Q1 2020 when uncertainty related to COVID-19 economic impacts were at their highest, we reduced our CECL reserves by approximately $90 million in the subsequent five quarters. Actual charge-off experience continues to remain very modest, with approximately $1.6 million of net charge-offs taken in the six-month period ended June 30, 2021. Pricing on loans held at fair value continues to be firm.

Net gains of $6 million were recorded, primarily reflecting the impact of market value changes. Finally, our operating and other expenses were $22.8 million for the quarter, in line with the previous quarter. And with that, I will now turn the over to Bryan Wulfsohn.

Bryan Wulfsohn -- Chief Investment Officer

Thank you, Steve. Turning to Page 10. Housing has continued to push higher over the quarter. The pace of annual home price increases have reached levels not seen in over 40 years.

Historically low rates, demographic trends, and a severe lack of supply have all contributed to the rise in prices. Unemployment rate has broken through 6% and is expected to continue to move lower with the economy reopening. All of these factors, combined with monetary and fiscal support have played a part in keeping mortgage credit performance strong and bode well for the continued credit performance in the near term. Turning to Page 11.

Non-QM origination volume increased over the quarter as rates offer to borrowers have been dropping. We purchased over $370 million over the second quarter, which is an increase of 85% over the previous quarter. Prepayment speeds increased over the quarter with the drop in rates to Non-QM borrowers. The 3-month average CPR for the portfolio was 40.

We executed on the securitization in the second quarter, bringing the total amount of collateral securitized to approximately $1.75 billion. We expect to bring another securitization of Non-QM loans in the third quarter. These securitizations have lowered our financing costs, and at the same time, have provided additional stability to our borrowings. Securitization, combined with nonmark-to-market term facility has resulted in over 70% of our Non-QM portfolio to be financed with nonmark-to-market leverage.

We expect to continue to be a programmatic issuer of securitization as it is currently efficient form of financing for our portfolio. Turning to Page 12. COVID impacted our borrowers significantly as many of our borrowers are owners of small businesses that were affected by shutdowns across the country. We instituted a deferral program at the onset of the pandemic in an effort to help our borrowers manage through the crisis.

Through our servicers, we granted almost 32% of the portfolio temporary payment relief, which we believe help put our borrowers in a better position for long-term payment performance. Subsequent to June of 2020, we reverted to a forbearance program instead of a deferral as the economy opened up. The forbearance program instituted is largely now determined by state guidelines. In the second quarter, we saw serious delinquency rates improved by 0.1% and 30-day delinquencies drop by 1.4%.

In addition, almost 40% of those delinquent loans made a payment in June. Many delinquent borrowers are on repayment plans, which will cause them to cure their delinquency status over the next six to 12 months. As the economic recovery continues, the portfolio's credit performance should continue to improve. Our strategy of targeting lower LTV loans should mitigate losses under a scenario with elevated delinquencies.

In many cases, borrowers which no longer have the ability to afford their debt service will sell their home in order to get the return on their equity. Turning to Page 13. Updated letter agreements between the treasury and the GSEs relating to the 2008 senior preferred stock purchase agreement restricted the percentage of loans purchased by the GSEs backed by investor properties and second homes to 7%. This change created a dislocation in the marketplace, acquiring originators to look for alternative outlets for their loans backed by investor properties.

We were able to source over $300 million of this product in the second quarter from our existing originator relationships at attractive prices. We expect to execute on our first securitization of this collateral in the third quarter with more to follow should the opportunity persist. This is another example of our ability to adapt to an ever-changing environment and a testament to our strong originator relationships in a competitive market environment. Turning to Page 14.

Our RPL portfolio of $1 billion has been impacted by the pandemic but continues to perform well. Eighty-one percent of our portfolio remains less than 60 days delinquent. And although the percentage of 60 -- the portfolio 60 days delinquent in status was 26%, a quarter of those borrowers continue to make payments. Prepayment speeds in the second quarter moderated a bit, but continue to be elevated at a three-month CPR of 15 as mortgage rates continue to be historically low and more borrowers gained equity with the increase of home prices.

While 30% of our RPL borrowers were impacted by COVID, we have worked with our servicers to provide assistance to borrowers and have seen improvement in delinquency levels over the quarter. Turn to Page 15. Our asset management team continues to push performance of our NPL portfolio. The team has worked in concert with our servicing partners to maximize outcomes on our portfolio.

This page shows the outcomes for loans that were purchased prior to the year ended 2019. Thirty-eight percent of loans that were delinquent at purchase are now either performing or paid in full. Forty-seven percent are either liquidated or REO to be liquidated. Our sales of REO properties have continued at an accelerated pace at advantageous prices.

We have been able to cut the REO portfolio in half since the pandemic began. Fifteen percent are still in nonperforming status. Our modifications have been effective as almost three-quarters are either performing or paid in full. We are pleased with these results as they continue to outperform our assumptions at the time of purchase.

And now I'd like to turn the call over to Gudmundur to walk you through our business purpose loans.

Gudmundur Kristjansson -- Chief Financial Officer

Thanks, Bryan. Turning to Page 16. We closed the previously announced acquisition of Lima One on July 1. We're very excited about this transaction, and I would like to give a shout-out to the entire MSA and Lima One teams that work diligently and collaboratively toward closing this transaction quickly.

Lima One is a leading nationwide originator of business purpose loans, or BPLs, with a strong brand recognition in the BPL borrower community. They serve the needs of short- and long-term borrowing strategies in the BPL space by offering a diverse set of products, including fix and flip and new construction loans, longer-term rental loans, and small balance multifamily value-add and bridge loans. Lima's originated over $3 billion since inception and has shown that they can reliably originate over $1 billion annually with a clear path to grow significantly beyond that. The acquisition enhances our position as a significant capital provider to the BPL space, which we believe offers some of the most attractive opportunities to deploy capital in the residential mortgage space.

This acquisition will provide MFA with reliable access to high-quality high-yielding assets that are difficult to source in the marketplace. At closing of the acquisition, we added $152 million of business purpose loans to our balance sheet. The integration of Lima One into the MFA family has been smooth and efficient. The working relationship we've built over the last four years across our organizations has been a tremendous asset in the integration and allowed Lima One to continue to originate high-quality loans and service customers without any issues.

One of the key initiatives has been to quickly use MFA's balance sheet and reputation to substantially improve the financing of Lima's assets and origination going forward. We've already refinanced expensive financial, a BPL securitization, and subordinated debt that Lima needed to put in place during 2020, which will save over 500 basis points in financing costs over time. And we are in the process of adding additional financing lines to meet the expected growth of business going forward. Turning to Page 17, where we will discuss the fix and flip portfolio.

Our portfolio declined modestly by about $32 million in the second quarter as principal paydowns continue to exceed loan acquisitions. Limited acquisitions last year led to our current seasoned loan portfolio where we see completed projects getting sold quickly into a strong housing market, leading to high repayment rates. We expect this trend to change going forward as purchase activity has picked up meaningfully. Second-quarter loan acquisitions more than doubled from the first quarter as we acquired $68 million in UPB and $118 million in max loan amount in the quarter.

As a reminder, fix and flip loans financed the acquisition, rehabilitation, and construction of homes. Typically, a certain amount of the loan is held back in the form of a construction holdback, which explains the difference between UPB on day one and the max loan amount, which represents the fully funded loan at the completion of project. Third-quarter acquisitions are on track to increase even further as we've already added in excess of $150 million max loan amount of fix and flip loans and fuel others. With the acquisition of Lima as well as other seller relationships, we expect purchase activity to be strong going forward and expect the fix and flip portfolio to grow again in the third quarter.

The fix and flip portfolio delivered strong income in the second quarter with average portfolio yield of approximately 6.4% in the quarter. The housing market continues to be extremely strong with record-low mortgage rates and low levels of inventory supporting annual home price depreciation in excess of 15%. In addition, we continue to see unemployment declining and overall economic activity improving across the country. The combination of these positive economic fundamentals, low initial LTVs on our loans, and the efforts of our experienced asset management team continues to lead to acceptable outcomes on our delinquent loans.

Sixty-plus day delinquent loans continue to decline and dropped $29 million to $120 million at the end of the second quarter. And what is really encouraging is that we continue to see a solid amount of loans pay off in full out of 60-plus. The loans paid off in full from serious delinquency we often collect default interest, extension fees, and other fees of payout. For loans where there is meaningful equity in the property, these can add up.

Since inception, we have collected approximately $4.8 million in these types of fees across our fix and flip portfolio. Sixty-plus day delinquency as a percentage of UPB declined 4% to 28% and remains elevated. But keep in mind that we have purchased over $2.1 billion of fix and flip loans and had over $1.5 billion pay off in full. Due to the short-term nature of fix and flip loans with expected payoff in about six to 12 months, delinquent loans can be outstanding for longer than performing loans due to the time it takes to complete foreclosure.

As our purchase activity was limited last year and performing loans paid off, the delinquency percentage increase as one would naturally expect as our portfolio shrank. As we now grow our portfolio again and continue to have positive outcomes on seriously delinquent loans, we expect those in dollar amount as well as the percentage delinquency to continue to decline going forward. And so far in the third quarter, we continue to see positive delinquency trends. Finally, the fix and flip loan reserves continued to trend down in the second quarter, declining by $2.1 million, primarily due to improved economic expectations and a strong housing market.

Turning to Page 18. Our single-family rental loan portfolio continues to deliver attractive yields and strong credit performance. The portfolio yield has remained steady in a mid- to high 5% range post-COVID and was 5.76% in the second quarter. Underlying credit trends remained solid and 60-plus day delinquency declined 90 basis points to 4.9% at the end of the second quarter.

Purchase activity increased significantly from the first quarter as we purchased $102 million of single-family rental loans in the second quarter and grew the single-family rental portfolio for the second quarter in a row. The pace of acquisitions has continued to accelerate into the third quarter, and we have already added approximately $100 million in the month of July. The acquisition of Lima One will significantly bolster our ability to source single-family rental loans. And we believe that we will be able to continue to grow our acquisition volume as well as our single-family rental portfolio in the near future.

Over two-thirds of our single-family rental portfolio is financed with nonmark-to-market financing and over 15% through securitizations. We priced our first single-family rental securitization in the first quarter of 2021, where the weighted average coupon of bond sold was only 106 basis points. Going forward, we expect to programmatically execute single-family rental securitizations to finance our rental loans with the next deal expected in the fourth quarter. With that, I will turn the call over to Craig for some final comments.

Craig Knutson -- Chief Executive Officer and President

Thank you, Gudmundur. We are pleased with the results of the second quarter of 2021 and even more excited about the future at MFA. Our investment initiatives are picking up steam as our asset acquisitions outpace runoff for the first time since late 2019. We're continuing to execute our strategic plan to lower and term out borrowing costs, and we're beginning to see the results of this activity in our income statement.

The strength of the housing industry has obvious positive implications for our mortgage credit investments. And our acquisition of Lima One is an important initiative that will enhance our ability to deploy future capital in the BPL sector and grow our future earnings power. Operator, please open up the line for questions.

Questions & Answers:

Operator

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

Unknown speaker

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

Steve Yarad -- Chief Financial Officer

Hi, Mike. This is Steve Yarad. So the transaction didn't close until July 1st. So there will be some goodwill with the transaction.

We're still working through the purchase price allocations and some other items of that nature. So we'll discuss that more fully on our next earnings call. Lima One's results aren't consolidated into MFA's results until third quarter and not consolidated as of June 30.

Unknown speaker

OK. Great. That's helpful. And then last quarter you guided to, I think, it was $0.08 to $0.12 of accretion from the transaction in 2021.

I was just wondering if that's still the case for 2021. And then how are you thinking about accretion into 2022?

Craig Knutson -- Chief Executive Officer and President

So I think that accretion number that we talked about was an estimate for a 12-month period, not for the calendar-year 2021. And again, it's very early to tell and a lot of things are changing, but I have no reason to think that that's inaccurate or that's changed materially since we talked on the last call.

Unknown speaker

OK. Great. That's helpful. And then one thing we've heard a lot is just the competition returning to the BPL space.

I was just wondering if you could talk through some of the economics on the loans that you purchased from Lima One versus other originators and just how that looks.

Gudmundur Kristjansson -- Chief Financial Officer

Yes. It's a great question. It's a good one. I'll take that.

So, yes, I mean, the space has gotten more attention, certainly because rates are low and there's a decent amount of competition to acquire assets in general. And that's why we believe it is important and was what was the thought the reason was going into the acquisitions to have solid control over the sourcing of the assets. And so by acquiring Lima One, we have acquired one of the leading originator in the space, one that has an established relationship with various fix and flip investors as well as showing the track record to originate in excess of $1 billion of loans a year. So from that perspective, we feel that we've taken full position in the ability to source the assets relative to some of the people will have to go out and identify various sellers and find multiple sellers to acquire loans.

So I think that is an important distinction that we have now achieved through the acquisition of Lima One. In terms of the economics, look, I mean, the loans that Lima originates, we put them on our balance sheet as cost. And so the question is, what does it mean? Look, so usually on the BPL side, the fix and flip side, you're acquiring loans at a net coupon. And the originator retains anywhere from 100 basis points to up to 200 basis points of servicing spread.

So if an originator is creating a loan with an 8% coupon, an investor would acquire it at a pass-through rate of 6%. For us, we put the full 8% coupon on our balance sheet. So from that perspective, we reap the benefit from the full coupon of the loan, which is obviously beneficial. On the single-family rental side, those loans trade at a premium in the marketplace.

Again, we'll put those loans on at cost, which probably is a benefit of up to 100 to 150 basis points in terms of difference in terms of yield to our balance sheet. So I hope that answers some of your questions. And I guess if I missed one, just feel free to follow up.

Unknown speaker

No. That's very helpful. Thanks. And then just one more for me.

I have -- can you provide an update on how book value has trended since quarter end?

Craig Knutson -- Chief Executive Officer and President

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

Unknown speaker

Great. Thanks for taking the questions.

Craig Knutson -- Chief Executive Officer and President

Thanks, Mike.

Operator

Thank you. Next, we will go to the line of Doug Harter with Credit Suisse. And your line is open.

Unknown speaker

Excuse me. I was on mute there. This is [Inaudible] on for Doug Harter. Just a few questions.

So first, you discussed the securitizations in the quarter. And I believe you mentioned that you foresee two and 3Q. And I believe the blended cost was somewhere in the range. What was it 130 bps, I think, on the two that you did this quarter.

Is that correct?

Craig Knutson -- Chief Executive Officer and President

It was in the 130s. Yes.

Unknown speaker

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

Bryan Wulfsohn -- Chief Investment Officer

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

Unknown speaker

OK. Great. And now you just see that for, I guess, maybe the next few quarters? And at some point, it's going to start to floor out here? Or do you see it going on 12 months or further than that?

Craig Knutson -- Chief Executive Officer and President

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

Unknown speaker

OK. OK. Great. And second question is exciting with the additions surpassing runoff this quarter.

What do you think your capacity for growth as sort of going forward here? Do you see that being the trend kind of on a go-forward basis? And sort of could you size that?

Craig Knutson -- Chief Executive Officer and President

I mean, at this point, it's too early to try to size that. I think I said in my prepared remarks that we feel pretty good about our future growth prospects. So it's been a difficult year to source attractive investments because nothing is really cheap, and there's a lot of money chasing everything out there. But I think we've worked really hard this year on existing originated relationships, on establishing some new ones.

And it takes time, but I think we saw pretty significant impact in the second quarter, and that won't go away. In terms of absolute numbers, it's impossible to predict what they'll be. But like I said, we feel pretty good.

Unknown speaker

OK. Great. Thank you so much.

Operator

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

Eric Hagen -- BTIG -- Analyst

Great. Thanks. Good morning. Hope you guys are well.

I want to hear about how you're thinking about risk management in the Non-QM portfolio and the outlook for credit losses maybe more generally. I mean, obviously, the paydowns have been fastest since rates are low and HPA is strong. And so I'm curious what it says about the borrowers that haven't been able to refi, including the portion which are still classified as seriously delinquent and what the resolution looks like for those folks?

Bryan Wulfsohn -- Chief Investment Officer

Sure. Thanks, Eric. So when we looked at the portfolio and you said 60 plus is around seven-and-change percent. But 40% of those borrowers are making payments.

So when we offer it up either forbearance or deferrals and borrowers are sort of still struggling coming out of the pandemic, instead of bringing themselves current by making one month some payment, we put them on repayment plan. So what that does is those borrowers really will become current over the next six to 12 months as they make their -- as they follow through on their repayment plan because it takes some time. Their delinquency status doesn't really catch up until the end of that plan. So we're showing a higher level of delinquency now.

But in actuality, when you think about what's paying versus what's not paying, it's something like 3% to 4% that's not paying.

Craig Knutson -- Chief Executive Officer and President

And, Eric, I would also point out on Page 11, we show that the weighted average LTV of that Non-QM portfolio is 63.6%. And that's based on originations. So given what housing prices have done, obviously, the mark-to-market LTV is probably considerably lower at this point. So I think that's probably the best risk mitigate right there is the LTV.

But as Bryan said, if we put borrowers on repayment plans, and it takes 12 months for them to catch up, they're going to show as delinquent until they've completely caught up.

Eric Hagen -- BTIG -- Analyst

That's helpful. And then a follow-up on Lima One. I think you guys said last quarter, and maybe you reiterated it today, you expect around $1 billion in -- to be onboarded over the next year. And you'd maybe look to capitalize that with around $200 million to $300 million.

I'm curious if your expectations there have changed. And then I think you also noted that there's some new financing lines that you're looking into, so curious what the structure and cost of that funding is expected to look like?

Gudmundur Kristjansson -- Chief Financial Officer

So, yes, that's the right expectation. That hasn't changed. I mean, I think Lima, as Craig said in his comments, they're on track to do $1.3 billion this year. So as you think of an annual run rate, they certainly have the cash and capacity to do $1.3 billion.

And we think they're very well set up to grow beyond that. So we're kind of excited about that. And so that expectation has not changed. And look, I mean, yes, I think we're working on various financing initiatives.

And as you also know, we have securitized the single-family rental loans earlier this year. So that type of origination that comes out of Lima is right to roll into a securitization. And we expect to do another one of those in the fourth quarter of this year. As it relates to the fix and flip loans, I think what will happen over time is that we'll have a combination of warehouse financing, which we already have in place as well as look into and look to issue our own revolving securitization structure to finance some of those assets.

And that's where some of the synergies comes in where MFA can use our expertise in the capital markets to more efficiently finance the fix and flip loans over time. As it relates to costs, I mean financing costs, you can broadly say on fix and flip loans are probably anywhere from mid- to high 2% to low 3% depending on if you're on a warehouse line or any kind of securitization that kind of seems to be what we're seeing.

Eric Hagen -- BTIG -- Analyst

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

Gudmundur Kristjansson -- Chief Financial Officer

Sure. Yes. As I said in my prepared remarks, some of these things relate to the imbalance or difference between the fact that delinquent loans, opposite to 30-year mortgages, is outstanding longer in the fix and flip space as opposed to performing loans because performing loans on average have a life span of six to 12 months. And delinquent loans that you are carrying today, they may actually be from 2018 or 2019 businesses as opposed to most of the performing loans have already paid off.

And so as our purchase activity was somewhat limited last year, we had a sizable prepayment in the portfolio over the last nine to 12 months, the percentage has increased simply because our portfolio is small. But more importantly, over the last six to nine months, we have seen in each quarter the delinquency decline. In fact, the 60-plus day, UPB has come down by over $60 million over the last three quarters. And so what we're really seeing is that there's some delays in getting to properties because of the closure moratorium and delays last year.

But on the resolutions that we've had, both payoffs out of 60-plus and I remember correctly, I think $25 million paid off in full out of 60-plus in the last quarter. So those would be owners that said, "Oh, OK, I have someone's equity in the property. I need to figure out how to get it." And so the other is the REO that we have closed on and the liquidated our losses on principal have been de minimis. So from that perspective, we feel pretty positive on our progress.

And we continue to reduce that population over time with really positive outcomes. And again, the key is home prices, as Craig pointed out, are rising at over 15% annually. And so from that perspective, it supports obviously all collateral in terms of the base value.

Eric Hagen -- BTIG -- Analyst

[Inaudible]

Operator

And does that conclude our conference, Eric -- your questions, Eric?

Eric Hagen -- BTIG -- Analyst

Yes. Thank you very much.

Operator

OK. Thank you very much.

Craig Knutson -- Chief Executive Officer and President

I'd like to thank everyone -- questions, operator?

Operator

I'm sorry. [Operator instructions] And at this time, I'm showing no further questions in queue. Please continue.

Craig Knutson -- Chief Executive Officer and President

OK. Thank you. So I want to thank everyone for your interest in MFA Financial, and we look forward to our next update when we announce third-quarter results in November.

Operator

[Operator signoff]

Duration: 44 minutes

Call participants:

Hal Schwartz -- Senior Vice President, General Counsel, and Secretary

Craig Knutson -- Chief Executive Officer and President

Steve Yarad -- Chief Financial Officer

Bryan Wulfsohn -- Chief Investment Officer

Gudmundur Kristjansson -- Chief Financial Officer

Unknown speaker

Eric Hagen -- BTIG -- Analyst

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