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MFA Financial (MFA) Q3 2021 Earnings Call Transcript

By Motley Fool Transcribing – Nov 6, 2021 at 7:31AM

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MFA earnings call for the period ending September 30, 2021.

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MFA Financial (MFA 1.95%)
Q3 2021 Earnings Call
Nov 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, Inc. third quarter earnings 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 Mr.

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 third quarter 2021 financial results. Thank you for your time.

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I would now like to turn the 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 third 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 third quarter was a transformational quarter for MFA, and as we sit here today, we are excited about our company and enthusiastic about our future. We continue to execute on our strategy to grow our portfolio and reduce and term out liabilities. Our third quarter financial results featured strong earnings and book value growth. On the credit side, continued strong housing trends have bolstered the value of the underlying assets, securing the mortgages 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 third quarter as record asset acquisitions exceeded runoff and led the portfolio growth of $1.5 billion. Please turn to Page 4. We reported GAAP earnings of $0.28 per share for the third quarter, largely driven by gains of $43.9 million or $0.10 per share related to our acquisition of Lima One.

These gains resulted from the difference between the fair value of our Lima One purchase relative to our basis in our previous investments, in both common equity and preferred equity of Lima One, both of which were impaired early on in the pandemic. Our net interest income from our loan portfolio increased by 15%, over the second quarter to $55 million from $48 million. GAAP book value was $4.82, up $0.17 or 3.7% from June 30 and economic book value was $5.27, up $0.15 or 2.9% from June 30. Economic return was also strong for the quarter.

5.8% GAAP and 4.9% economic book value. Our leverage picked up slightly over the core to 2.2 to 1 versus 1.8 to 1 at June 30. And we paid a $0.10 dividend to shareholders on October 29. Please turn to Page 5.

We acquired $2 billion of loans in third quarter, the highest quarterly loan purchase volume in our history, and we grew our loan portfolio by $1.5 billion to $7 billion. These purchases included $820 million of agency eligible investor -- sorry about that. So these loan purchases included $820 million of agency eligible investor loans and $485 million of business purpose loans. In fairness, it's likely that purchases of agency eligible investor loans will taper somewhat in future quarters, given the recent removal of the cap on GSE investor loan purchases.

The business purpose loan acquisitions included approximately $170 million of loans that were on Lima One's balance sheet at July 1. But as Gudmundur will discuss shortly, Lima One's origination volume continues to grow and their October production was their highest month ever. So while $1.5 billion of portfolio growth was an extraordinary quarter, we believe that we are well positioned with our originator partners to continue to grow our portfolio. Our net interest income increased versus Q2 by 5% to $61.8 million.

We continue to make excellent progress in liquidating REO properties, as we capitalize on strong housing trends. And for borrowers still negatively impacted by COVID, we can offer modifications and/or repayment plans to allow them to stay in their homes, restore their payment status to current and retain their equity in their home. Please turn to Page 6. This slide illustrates the components of our investment portfolio and also the nature of our asset-based financings.

The increase of approximately $1 billion in mark-to-market financing versus last quarter is primarily related to our agency eligible investor loans, which are financed with traditional repo as a bridge to securitization. Please turn to Page 7. We closed the Lima One acquisition on July 1, thanks to a lot of hard work, both at MFA and at Lima One. Despite the normal challenges associated with the corporate acquisition, Lima One did not miss a beat in the third quarter as they originated over $400 million of loans during the quarter.

We have an excellent relationship with Jeff Tennyson and his team at Lima One having worked closely with them for over four years now. As many of you probably know, there have been two recent announcements of acquisitions of similarly large business purpose lenders. We are admittedly biased, but we strongly believe that we bought the best lender in the space, and we're excited to welcome the Lima One team to the MFA family. We're confident that we can provide Lima with the resources to continue to grow and excel at their business.

There are no doubt efficiencies that we can cultivate over time to lower costs. And to that point, we've already taken steps to reduce Lima's interest expenses. Steve Yarad will review some of the accounting aspects of this transaction shortly. Please turn to Page 8.

We continued to execute on our securitization strategy in the third quarter, pricing our fifth non-QM deal in August. As luck would have it, we priced this deal when yields were at their lowest levels in the quarter. Subsequent to quarter end, we priced our first agency eligible investor securitization in October. We structured $312 million bonds and we retained a 5% vertical slice of the deal.

Please turn to Page 9. Finally, you may have noticed that we've added a corporate responsibility section to our website. Environmental, social and governance issues have never been as prevalent as they are today. And the focus on ESG in investment decisions is real and growing.

MFA has been committed to these principles for years, but we have been remiss in communicating our endeavors and policies to support these principles publicly. We will always continue to improve our efforts, but we are proud to finally communicate our substantial progress to date. And I'll now turn the call over to Steve Yarad to talk about additional details of our financial results.

Steve Yarad -- Chief Financial Officer

Thank you, Craig. Please turn to Slide 10 for an overview of our third quarter 2021 financial results. Craig has already noted, MFA delivered strong results for the quarter that were driven by record quarterly loan portfolio growth and certain purchase accounting adjustments related to the Lima One acquisition, as well as the inclusion of Lima One earnings in MFA's consolidated results. Before discussing the core portfolio results in more detail, I'd like to take a minute to discuss the impact of Lima One purchase accounting on our income statement for the third quarter, as well as on their quarter end balance sheet.

Firstly, earnings include gains totaling $43.9 million that relate to the Lima One purchase transaction. This includes the following: $38.9 million gain arising from revealing our previously held investment of approximately 43% of Lima One's common equity. GAAP purchase accounting requires at the previously held interest is adjusted at closing to the fair value implied by the current transaction. We impaired the value of our prior investment by $21 million back in March of 2020, when valuations of mortgage originators were highly uncertain.

Consequently, the $38.9 million gain includes a reversal of its prior impairment charge, while the remaining $18 million represents the incremental adjustment to reflect the prior investment at the fair value implied by the current transaction. An additional gain was recorded as Lima repaid its outstanding preferred equity in full, of which MFA held roughly half. The gain recorded reflects $5 million impairment reversal. That impairment was also initially recorded in March of 2020.

Secondly, under the required GAAP purchase accounting to consolidate Lima One onto MFA's balance sheet, we recorded $28 million of intangible assets and $61.6 million of residual goodwill. Intangible assets include the value allocated to customer relationships, the Lima One brand name and internally developed technology. These assets are amortized over their estimated useful lives with $3.3 million of amortization expense recorded this quarter. The residual goodwill asset represents the difference between the purchase price paid to acquire Lima One.

And the fair value of the net assets acquired including the intangible assets. Goodwill is not amortized under current GAAP, but is subject to periodic impairment testing. Further detail on the purchase accounting for Lima One is provided in our 10-Q, which we expect to file later today. Turning now to the core components of our Q3 2021 results, the key items to highlight are as follows.

Net interest income of $61.8 million was $2.8 million higher or 5% higher sequentially. As Craig noted residential whole loan net interest income again increased, this quarter by 15%, primarily due to impressive portfolio growth and the ongoing impact of securitizations to lower the cost of financing. Now, net interest spread was essentially flat to last quarter at 2.98%. The CECL allowance in our carrying value loans decreased for the six quarter in a row, and at September 30, this $44.1 million down from $54.3 million at June 30.

The decrease reflects continued runoff of the carrying value loan portfolio and adjustments to macroeconomic and loan prepayment speed assumptions used in our credit loss modeling. This reversal to our CECL reserves positively impacted net income for the quarter by $9.7 million. Actual charge-off experience continues to remain very modest with approximately $2.1 million of net charge-offs taken in the nine-month period ended September 30, 2021. Pricing on loans held at fair value was higher than the end of the second quarter, particularly on purchased non-performing loans and business purpose loans.

This primarily drove the net gains recorded of $21.8 million. Approximately $11.3 million of this amount relates to business purpose loans originated at par by Lima One during the third quarter, because we elect the fair value option on these loans. At quarter end, they're mark-to-market based on estimated third-party sale process. In addition to the fair value gains on originated loans, Lima One also contributed $9.6 million of origination, servicing and other fee income during the quarter, reflecting strong origination volumes.

Gudmundur will discuss this in more detail shortly. Finally, our operating and other expense, excluding the amortization of Lima One intangible assets was $30.1 million for the quarter. This includes approximately $10.3 million of expenses, primarily compensation related at Lima One. MFA's G&A expenses this quarter were approximately $14.5 million, which is in line with our normal run rate.

Moving forward, we would expect our consolidated G&A expense to run at around $25 million per quarter, up since significant changes in Lima One origination volumes. Other loan portfolio related costs meaning those not related to Lima One loan origination servicing are expected to run at around $5 million to $7 million a quarter, but will fluctuate based on the level of loan at acquisition activity, REO portfolio management expenses and costs incurred to the extent we continue to favor securitization over warehouse financing. And with that, I will turn the call over to Bryan Wulfsohn.

Bryan Wulfsohn -- Co-Chief Investment Officer

Thank you, Steve. Turning to Page 11, home prices showed continued strength over the quarter. We saw prices increased at year-over-year rate of 18%. We have however seen the pace of month-over-month increases moderate a bit, as of the dramatic increase in home prices have had a slight impact on affordability.

All of the same fundamental factors remain at play, such as low inventory, demographic trends and historically low rates. The unemployment rate is now down below 5% as economic activity continues to increase. All of these factors combined with monetary and fiscal support, continue to keep mortgage credit performance strong and should bode well for continued credit performance in the near term. Turning to Page 12, non-QM origination volume remained elevated over the quarter and we were able to purchase almost $700 million of loans, which represents another significant quarter-over-quarter increase.

Prepayment speeds remain elevated over the quarter as the three month average CPR for the portfolio was 39%. We executed on our fifth securitization in the third quarter, bringing the total amount of collateral securitized to over $2 billion. And we expect to bring another securitization of non-QM loans in the fourth quarter. These securitizations continue to lower our financing cost and at the same time, have provided additional stability to our borrowings.

Securitizations combined with non-mark-to-market term facility have resulted in approximately 50% of our non-QM portfolio funded with non-mark-to-market leverage at the end of the quarter. We expect to continue to be a programmatic issuer of securitizations as it's currently the most efficient form of financing for our portfolio. Turning to Page 13. The non-QM portfolio has exhibited strong performance coming back from the uncertainty created by the onset of the pandemic.

We've seen steady improvement and delinquency percentages as our loss mitigation tactics employed have been effective. We instituted a deferral program at the onset of the pandemic in an effort to help our borrowers manage through the crisis. Currently, have a very small handful of non-QM borrowers in forbearance or deferral plans. For borrowers that did receive forbearances, many of them are either current today or on a repayment plan to be current within one to two years' time.

In the third quarter, we saw 60-plus-day delinquency rates improved by two anda half percent and 30 day delinquencies dropped by 0.3%. In addition, approximately 30% of those delinquent loans made a payment in the most recent months. As the economic recovery continues, we expect the portfolio's credit performance to improve. Our strategy of targeting lower LTV loans should mitigate losses under a scenario with elevated delinquencies, in many cases, borrowers, which no longer have the ability to afford their debt service will sell their home in order to get the return of their equity.

Turning to Page 14. In September, the FHFA and treasury suspended the 7% cap on investor loan purchases for Fannie Mae and Freddie Mac for at least one year. We took advantage of the opportunity over the quarter acquiring over $2 billion or acquiring over $1 billion in loans since we started purchasing these loans in the second quarter, from our existing originator relationships at attractive prices. This new announcement limits the opportunity size for the time being, but could arise again in the future.

We executed on our first securitization of this collateral subsequent to quarter end and expect to execute another before the end of the year. 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 environment. Turning to Page 15. Our RPL portfolio of approximately $700 million continues to perform well.

81% of our portfolio remains less than 60 days delinquent. And although the percentage of the portfolio of 60 days delinquent in status was 19%, almost 30% of those borrowers continue to make payments. Prepaid speeds in the third quarter continue to be elevated at a three month CPR of 17. More and more of our borrowers are gaining equity with the increase in home prices and are taking advantage of the low interest rate environment.

We have a small amount of borrowers still receiving COVID assistance and believe the impact from COVID will be de minimis on our RPL portfolio going forward. Turning to Page 16. 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 slide shows the outcomes for loans that were purchased prior to the year ended 2020. 38% of loans that were delinquent at purchase are not either performing or have paid in full. 48% have either liquidated or REO to be liquidated. Our sales of REO properties have continued at an accelerated pace at advantageous prices.

Over the quarter, we sold almost three times as many properties as a number of loans we converted to REO. 14% are still a non-performing status. Our modifications have been effective as almost three quarters are either performing or have 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 -- Co-Chief Investment Officer

Thanks, Bryan. Turning to Page 17. We closed our acquisition of Lima One, a leading nationwide business purpose originator at the beginning of the quarter. This acquisition solidifies MFA's position as a leading capital provider to the BPL space, which we believe offers some of the most attractive opportunities to deploy capital in the residential mortgage space.

Our teams wasted no time utilizing our collective strengths to take the business to new heights. Lima One originated over $400 million of business purpose loans in the third quarter, a record quarter for the company and a 34% increase over second quarter origination levels. We saw strong demand for all of Lima's products and continue to experience the benefits of Lima's diversified product offerings, which offer financing solution to residential real estate investors with short and long-term investment strategies in the single family and small balance multi-family markets. September origination of over $150 million was a record month for the company, but that record was short-lived as the fourth quarters off to a strong start with October volume setting a new record with origination of over $170 million.

One of the key benefits of this transaction is Lima's ability to provide MFA with a reliable flow of high quality, high yielding assets that are difficult to source in the marketplace. When we announce the transaction in May, we also mentioned that we believe that Lima had the potential to grow substantially beyond the run rate at the time of $1.2 billion annual origination. We are already seeing that play out as we now expect full 2021 origination volume of between $1.4 billion to $1.5 billion. And the third and fourth quarter volume suggests continued growth in 2022.

In addition to the benefit of adding assets to our balance sheet Lima as profitable company. Lima generated $10.6 million of net income from origination servicing activities in the quarter, representing an annualized return on allocated equity of approximately 30%. We have been very impressed by Lima's operational efficiency as they've consistently closed over 450 loan units in the last few months, up from about 300 units per month in the first quarter. We believe the team's experience with closing large volume of loans and scaling up operational capacity quickly sets us up nicely for future growth.

We added $600 million of BPL financing capacity in the quarter – in the third quarter, as we close on two new financing facilities. These facilities allow for financing of a broad range of BPL assets, it will support the continued growth of our BPL strategy. And finally, the increased rent to loan acquisition volume from the Lima One acquisition has accelerated our timeline for our next business purpose rent to loan securitization, which we now expect to close in the fourth quarter. Turning to Page 18.

Here we will discuss the fix and flip portfolio. The portfolio grew by over $160 million or 37% in the quarter. Purchase activity picked up significantly as we closed on the Lima acquisition, including loans on their balance sheet and benefited from very strong origination activity. In total, we purchased approximately $230 million UPB with $350 million max loan amount in the quarter and have added over $95 million maximum loan amounts so far in the fourth quarter.

As a reminder, flix and flip loans finance the acquisition, rehabilitation and construction of homes. Typically, a certain amount of the loan is held back in the form of a construction 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 projects. The flix and flip portfolio delivered strong income in the third quarter with an average portfolio yield of 7.11% in the quarter, a 67-basis-point increase from the second quarter. The housing market remains extremely strong with record low mortgage rates and low levels of inventory supporting annual home price appreciation in excess of 15%.

In addition, we continue to see unemployment declining and overall economic activity improving across the country. The combination of these positive economic fundamentals, low initial LTVs in our loans and the efforts of our experienced asset management team continues to lead to acceptable outcomes on our delinquent loans. 60-plus-day delinquent loans continue to decline and drop $13 million or about 10% to $107 million at the end of the third quarter. And we continue to see a solid amount of loans payoff in full out of 60 plus.

When loans payoff in full from serious delinquency, we often collect default interest, extension fees and other fees of payoff. For loans where there's meaningful equity in the property, these can add up. Since inception, we have collected approximately $5.6 million and these types of fees across our fix and flip portfolio. 60-plus-day delinquency as a percentage of UPB declined 10% to 18% and remain somewhat elevated.

One thing to note here is that Lima originated fix and flip loans held by MFA have approximately 5% 60 day delinquency, speaking to the quality of origination and servicing. Almost all of the 60-plus-day delinquent loans were originated prior to March of 2020 and are simply working the way through the appropriate loss mitigation activities. 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. Keep in mind that we acquired over $2.2 billion of fix and flip loans and have had over $1.6 billion payoff in full.

As our purchase activity was limited last year and performing loans paid off, the delinquency percentage increased as one would naturally expect as our portfolio's rank. As we now grow our portfolio again and continue to have positive outcomes on seriously delinquent loans, we expect both dollar amount as well as percentage delinquency to continue to decline going forward. Turning to Page 19. Our single family rent to 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 remain solid and 60-plus-day delinquency declined 140 basis points to 3.5% at the end of the third quarter. Purchase activity more than doubled from the second quarter, as we acquired over $250 million of single family rental loans in the quarter, a record quarterly acquisition volume. The SFR portfolio group by 39% to $717 million at the end of the third quarter.

Acquisition activities have remained robust in the fourth quarter, as we've already added over $70 million in the month of October. The acquisition of Lima One has significantly boosted our ability to source single family rent to loans, and we believe, and we will be able to continue to grow our single family rental portfolio in the near future. Approximately, 50% of our single family rental portfolio is financed in non-mark-to-market financing and slightly over one-thirds of securitizations. We price our first single family rental securitization in the first quarter of 2021 and expect to close another one in the fourth quarter.

We expect to programmatically execute single family rental securitizations to efficiently finance our portfolio. And 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 third quarter of 2021 and even more excited about the future at MFA. Our investment initiatives are picking up steam and contributing to portfolio growth. We're continuing to execute our strategic plan to securitize our assets and term out durable financing.

Lima One is firing on all cylinders and the strength of the housing industry has obvious positive implications for our mortgage credit investments. Cynthia, please open up the line for questions.

Questions & Answers:


Operator

[Operator instructions] And our first question will come from the line of Steve DeLaney with JMP Securities. And your line is open. And Steve check your mute button, your line is open.

Steve DeLaney -- JMP Securities -- Analyst

My apologies. Thanks for everyone. I was on mute. Congratulations on not only a great quarter, but the integration of Lima.

It's just an exciting future for you guys the way you're set up now. My question on that, and to Craig and I guess Steve Yarad, obviously with an acquisition, OK? You've got accounting – purchase accounting adjustment, so it makes things a little complex and then on an ongoing basis, of course, you're always going to have fair value. I was just curious, if you're going to consolidate Lima One, OK? Obviously, but I assume it's structured as a separate TRS and should we expect – you're going try to take a lot of loans, but do they have the ability to sell loans to third-parties beyond – originate and sell beyond your balance sheet capability, so that stand-alone you could see them as a profit center, somewhat on a stand-alone basis in terms of gain on sale, origination and servicing fees? Thanks.

Steve Yarad -- Chief Financial Officer

Thanks, David. Steve Yarad. I'd start and maybe Craig can add comment as well. Just in terms of the accounting, yes, with Lima One's fully consolidated on our balance sheet now.

And you'll note in our 10-Q that we released later today, we're not sort of showing it as a separate segment. It's fully integrated into MFA's operations as everyone. But you're right. There's some potential in the future for us to show it as a separate segment, depending on how we – when we get through this initial period of integration and we optimize the financing arrangements in the capital that we allocate to Lima.

There's some potential for that for sure. I think, initially in this quarter, we've taken in almost all of the production of Lima in this quarter. And that's – it's been benefit obviously, as you've seen the portfolio growth that we've been able to enjoy. I'll let Gudmundur and Craig speak to the future more specifically, but it doesn't have to be that way in the future going forward.

So...

Steve DeLaney -- JMP Securities -- Analyst

Interesting. OK. Thanks.

Craig Knutson -- Chief Executive Officer and President

So Steve, answer to your question, yes. Lima certainly has the ability to sell loans. I think at this point, I think, we're happy taking the production on our balance sheet. But that could change in the future.

In terms of how we present it, right, because they're consolidated the loans and the best example is the rental loans. So the rental loans we used to pay a significant premium for. So we'd probably pay as much as $104 million, or even $105 million for the rental loans. And Lima would book a gain on scale, because they're consolidated.

We actually buy those loans at par now, but because we elected fair value, we then mark the value of those loans to the market value. So if they're worth $105 million, they get marked back to $105 million. So we preserve that origination economics, if you will, that Lima used to have. It used to be in the form of gain on sale.

Now it comes in through other income for a fair value mark, but we do try to preserve those economics. And as Gudmundur said, Lima made a significant contribution to our net income of over $10 million in the third quarter. So it's a profitable. Yes, the – some of the geography changes a little bit.

But suffice to say, it's not just a source of loans. It's a source of income as well.

Steve Yarad -- Chief Financial Officer

Steve, just to reiterate Craig's comment there, in my comments, I noted that of the $21.8 million of fair value gains that we had in the third quarter about $11.3 million of that was these fair value marks on originated lines of Lima One, where we've marked them from their power origination to the fair value at quarter end.

Steve DeLaney -- JMP Securities -- Analyst

Great. And Steve, I know taxes is an entire different animal. But is it possible that as we go forward, just in terms of retaxable income and TRS income, is it possible that over the – as we move forward, that there may be some residual retained after tax income that at the Lima One TRS level that could help boost book value rather than all earnings having to be paid out as dividends to shareholders.

Steve Yarad -- Chief Financial Officer

Yes, Steve. That's a great point. I mean, certainly with the TRS structure, the ability to retain earnings in TRS, which could potentially grow book value. You have to it's very complicated though.

It depends a lot on the way you structure your TRS the way it's capitalized. And the like, and one of the things you have to manage in terms of managing a TRS is there are certain retax tests that limit the amount of capital you can have in TRS. And sometimes you have to make the distributions out of your TRS to manage the asset test at the rate level, and as you do that, that those distributions cause income to be generated at the rate level. So it is certainly possible to grow book value through retaining only to TRS, but I would just say subject to managing the overall retax test.

Steve DeLaney -- JMP Securities -- Analyst

Understood, helpful. Thank you for the comments.

Operator

Our next question will come from the line of Stephen Laws with Raymond James. One moment, and your line is open.

Stephen Laws -- Raymond James -- Analyst

Good morning. Congrats on a very nice quarter and a lot of progress you guys have made here this quarter. Can you talk about -- Hey, can you talk about where you're seeing the best opportunities kind of across these business segments? I mean, it seems like a lot of strength. I know you did mention that the agency eligible with the changing caps or caps being lifted or taper off some, but where are you seeing the best most attractive ROEs as you look to put money out the door here in the coming quarters?

Craig Knutson -- Chief Executive Officer and President

Sure. Thanks for the question, Stephen. Clearly on the business purpose side, Gudmundur went through some of the yields there and we see fantastic ROEs on really the entire business purpose sector. non-QM as well, I mean, that's also been a big horse for us.

We've done five securitizations now of non-QM loans. So we're a known securitize or known name in the marketplace. So I think, we've got a good machine set up there as well. As you said on the agency eligible investor loans with the cap being lifted again, it remains to be seen, where that, where that opportunity is.

But I will say that that opportunity existed before that cap went into place as well. So it really depends on, it really depends on where the loans trade, where the securitization execution gets done. But that could be an opportunity going forward, but we don't necessarily expect that that's maybe our highest opportunity right now

Stephen Laws -- Raymond James -- Analyst

I appreciate the color there. I'll touch on the REO, $7 million of gain, I think through the 151 sales there and I think the remaining REO balance just shy of $200 million. Can you talk about timing or how you think about the ability or opportunity to continue to sell down those REO assets?

Craig Knutson -- Chief Executive Officer and President

Well, the housing market has certainly been a big tailwind for REO. I mean, as Ed Fay who runs Fay Servicing will always tell you, right, your REO properties are generally not your winners. But I think, our team has done a fantastic job of taking advantage of strong real estate prices to continue to liquidate those. And one of the places that REO holdings eat into -- become losses is through un-reimbursable expenses, right? So it's the taxes and insurance that you pay on the property while you're trying to maybe get it fixed up to sell.

And I think given what's happened with home prices, most of those advances or many of those advances are now recoverable. So I think that's part of how you see some of the profit there is, it's just taking advantage of strong housing prices. So we'll continue to try to move those out as best we can and take advantage of this market.

Stephen Laws -- Raymond James -- Analyst

Right. And switching to financing costs. Yeah, big blue in the press release really lays it out pretty clearly across the segments, but you've made a really reduced it without a dramatic shift and yield leaving you up at. So how much work is there, or how much more opportunity to continue to reduce the financing cost and in different segments or any additional legacy transactions you can collapse and if so.

How much opportunity is there to do that?

Craig Knutson -- Chief Executive Officer and President

So I don't know that we have all that much of legacy resecuritization. We did a couple of those in 2021. But I think certainly on the business purpose side, as Gudmundur talked about and on the non-QM side, there's still an opportunity to securitize now. We've seen short rates pick up a little bit since the end of September, the two year gut went from basically 25 basis points to 50 basis points.

So that does cut into the savings and the securitization market ebbs and flows as well. I think, right now, there's a lot of securitization activity. And so spreads widen a little bit, but spreads wide and spreads tighten. I think we view it as – yes, it's been a significant savings for much of this year.

Because you can remember we've sold AAAs at 1% or less than 1% yield and we knew that was great at the time. That's not necessarily the case today, but I think the securitization still makes a lot of sense, even if the savings aren't as significant as they used to be, because it does term out that financing. Again, it's non-recourse non-mark-to-market, so it's that durable financing that we're looking for. So I think, we'll continue to do it, but the savings may not be as significant as they were on some of the earlier transactions this year.

Stephen Laws -- Raymond James -- Analyst

Right. Well, as you mentioned, a lot of positive characteristics of that type of financing. So thanks for the comments this morning, Craig. Have a good weekend.

Craig Knutson -- Chief Executive Officer and President

Thank you, Stephen. You too.

Operator

Thank you. Next, we'll go to the line of Bose George with KBW. And your line is open.

Mike Smyth -- KBW -- Analyst

Hey guys, this is actually Mike Smyth on for Bose. Congrats on a really strong quarter. Just another question, it sounds like the economics on the loans are purchasing from Lima One, are a bit better. So I'm just wondering if there's any appetite for another strategic transaction, maybe in the non-QM or a different area just to continue to shore up some of your loan sourcing channel.

Craig Knutson -- Chief Executive Officer and President

Sure. Thanks for the question, Mike. I guess the short answer is we always take the phone calls. I think, we're really happy with our Lima One transaction.

You know that in the past, we've taken minority equity, stake interests in, originators that was sort of the strategic approach that we had to originators. And in the case of Lima One that turned into a corporate acquisition. So the possibility certainly exists. But these transactions are – they're pretty complicated.

I think in the case of Lima One, that was a really compelling transaction for us. But like I say, we take all the phone calls.

Mike Smyth -- KBW -- Analyst

Great, great. Thanks a lot for taking the question.

Operator

Thank you. And at this time, I'm showing no further questions in queue. And actually we do have a question now from the line of Eric Hagen with BTIG. And your line is open.

Eric Hagen -- BTIG -- Analyst

Hey, thanks. Good morning. I have a couple of questions. First one is -- a couple of questions here.

Can you borrow against the unrealized fair value market that you have in the loans that are held at carrying value? And then typically, MFA has managed in agency portfolio as a liquidity offset to the credit risk that you're taking. Is there an intention to do that going forward?

Craig Knutson -- Chief Executive Officer and President

So on the loans that are carrying value that depending on whether they're on a mark-to-market line or a non-mark-to-market line, there's certainly a capacity to have additional borrowing capacity of value of those assets appreciate.

Steve Yarad -- Chief Financial Officer

Right. So any sort of traditional financing that we do, right away from securitization is based on the value of the asset. So the lender doesn't care what the carrying value is. They care what the market value is.

So that's really the only relevant number. And in terms of agencies, yes, we've owned agencies in the past. And at some point in the future, we may own agencies again. I think, at least as we look at it right now, we see better opportunities in credit.

And most of the investments that we're making or we're probably shorter in terms of duration than what we see in the agency market, but just because we don't own agencies, doesn't mean we're not. Doesn't mean that we're allergic to them.

Craig Knutson -- Chief Executive Officer and President

And also just Steve, it better from a liquidity perspective, as you alluded to that. I mean, our leverage is very low around two times and we have tremendous amount of cash to our balance sheet. So if you think about from a liquidity perspective, that's really not why we would – we don't agencies at this time. And so as Craig pointed out, because we're finding a lot better opportunities away from that, it doesn't seem to be a lot of point owning on.

Eric Hagen -- BTIG -- Analyst

Thanks. The other –- the latter half of what you said, I think addressed really what I was getting at, which is the liquidity rather than the investment opportunity per se. But it feels like the risk-adjusted opportunity are getting in a stock where – which is taking credit risk at least ties back to some form of liquidity other than just borrowing against the value of a somewhat, a liquid credit asset. Maybe two on the fix and flip, you guys noted that a couple of other transactions in the space recently, I think those originators typically focused on higher balance fix and flips, like high-end style homes and on the east and west coast, can you guys sort of classify the types of loans that Lima One is doing and how you guys see yourself as competitive in that, what kind of zone are the markets? Thanks.

Steve Yarad -- Chief Financial Officer

Yes. No, that's a great point. Yes, so Lima has historically been fairly diversified in their approach to originate the BPL space. And they really are all across the country, but they don't really have a heavy presence in California where you have larger loan balances.

And so on average, the loan sizes for Lima's fix and flip are probably around $300,000, as opposed to some of these other companies that refer to are substantially higher. And so one of the benefits that we see from Lima is that they have incredibly high operational capacity to produce a large number of loans in a very diversified forearm phase. And so what that means is that, at least from our perspective, the way we see it, it's a lot easier to scale up Lima by either increasing a number of units or go after higher loan balances to get more volume, as opposed to on the opposite side, if you're targeting high loan balances in a small number of clients, it feels harder to scale up from there. So we feel pretty good about Lima and where they sit.

And it provides tremendous amount of opportunity to scale it up in various ways.

Eric Hagen -- BTIG -- Analyst

Got it. Thank you very much.

Craig Knutson -- Chief Executive Officer and President

Thanks, Eric.

Operator

And at this time, I'm showing no further questions in queue. Please continue.

Craig Knutson -- Chief Executive Officer and President

All right. Thank you everyone for your interest in MFA Financial, we like to wish everyone happy holidays, and we'll look forward to our next update when we announced fourth quarter results in February.

Operator

[Operator signoff]

Duration: 49 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 -- Co-Chief Investment Officer

Gudmundur Kristjansson -- Co-Chief Investment Officer

Steve DeLaney -- JMP Securities -- Analyst

Stephen Laws -- Raymond James -- Analyst

Mike Smyth -- KBW -- Analyst

Eric Hagen -- BTIG -- Analyst

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