MFA Financial (MFA) Q1 2022 Earnings Call Transcript

MFA Financial (MFA 1.46%)
Q1 2022 Earnings Call
May 04, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial Inc. first quarter earnings conference call. [Operator instructions] As a reminder, this conference 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, 2021, 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 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 first quarter 2022 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 would like to thank you for your interest in and welcome you to MFA Financial's first quarter 2020 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 first quarter of 2022 was a very challenging period for fixed income investors and exceptionally so for mortgage investors. Although a Fed tightening cycle has been anticipated since the fourth quarter of 2021, the expectations of the timing and magnitude of this tightening have undergone massive revisions. Short rates leaked wider in October and again in December with two-year treasury yields rising about 50 basis points during the fourth quarter. Market consensus at the end of last year was generally for 325 basis point Fed increases during 2022, but these expectations essentially blew up as we entered 2022.

With persistently bad inflationary data, a continued very strong labor market and increasingly hawkish dialogue from Fed officials and other bond market participants, the brewing consensus adjusted quickly and two-year treasuries sold off by 40 basis points in January and another 40 basis points in February before the Russian invasion into Ukraine temporarily pushed two-year yields lower in the last few days of February. The bond market route intensified in March, with two years backing up 60 basis points, and that was before the first Fed increase on March 16 and then another 52 basis points over the last half of March. The magnitude and speed of this rate sell up particularly in the short end of the yield curve was the most dramatic witnessed in over 30 years, eclipsing even the rate increases in early 1994. And in a strange way, there are some striking similarities between 1994 and 2022.

In February of 1994, the Fed began a tightening cycle in which they raised the Fed funds rate 6x during 1994 for a total of 250 basis points. The eerie similarity is that expectations today are quite similar. That is for approximately a 250-basis point increase in Fed funds during the year 2022. However, in 1994, the bond market only began to adjust to this Fed tightening expectation after the first Fed funds increased on February 4 of that year.

Today, the bond markets moved much more quickly and price in Fed expectations. Indeed, by March 16, which was the day the Fed announced its first 25 basis point increase, two-year rates were already at 1.94% or 170 basis points higher than they were in September. In addition to materially higher rates in the first quarter, the volatile rate environment also led to significant spread widening across the mortgage market. While Agency MBS were probably the most visible casualty, this spread widening also impacted loan pricing as securitization spreads widened.

Although housing fundamentals are still strong given the strained supply picture, the spread widening was much more about rate moves than credit as mortgage cash flow is extended and rate volatility is never kind to mortgages. We actively managed this rate risk adding interest rate swaps last year in the fourth quarter and again early in the first quarter to manage our duration exposure. But even with a net duration of just a little over one year and relatively low leverage, market forces had an inevitable negative impact on our fair value assets. Lima One was a continued bright spot for MFA as they turned in another record quarter with over $600 million of originations.

Because we are intimately involved in the securitization market, we have an instant feedback loop with our business purpose loan originator and can adjust rates in real time thus greatly reducing the typical drag suffered by originators in a rising rate environment as their pipelines fill with submarket coupons. Lima One's current origination pipeline has a weighted average coupon today of over 7%. Finally, mortgage credit remains solid despite higher rates and reduced affordability as the housing market remains strong with supply constraint and likely to remain so for the foreseeable future. Please turn to slide three.

We reported a GAAP loss of $91.1 million or $0.86 per share for the first quarter. These results were driven primarily by net losses on fair value loans, which Steve will discuss in more detail. Net interest income for the first quarter was $63.1 million, which is down from $70 million reported in Q4, but the Q4 interest income was bolstered by $8.2 million due to a payoff of the MSR bond that had been impaired in 2020. Our distributable earnings for the first quarter was $66 million or $0.62 per share.

Steve will also explain this earnings measure in more detail, but it is intended to eliminate various noncash and unrealized gains and losses that impact GAAP earnings, but do not necessarily influence dividend determination. We expect that distributable earnings will be one of several inputs considered by our board in the future in setting dividend policy going forward. Our GAAP book value was down $1.28 or 6.7%, and our economic book value was down $1.77 or 8.6%. Our leverage increased slightly to 3.1 times and our recourse leverage at March 31 was 1.9 times.

Please turn to slide four. We acquired $1.2 billion of loans in the first quarter and grew our loan portfolio by $330 million to $8.4 billion after portfolio runoff. These purchases included about $600 million of non-QM loans and $590 million of business purpose loans. We completed two non-QM securitizations in the first quarter, selling $514 million UPB of bonds and we completed two additional securitizations of business purpose loans in early April, selling $463 million UPB of bonds.

Our team did a fabulous job in a very difficult securitization market, selling nearly $1 billion of bonds. These transactions add durable nonrecourse financing, create additional liquidity and provide more balance sheet capacity that we can deploy in the future to acquire new loans that are now priced at significantly higher yield levels. Our asset management team has continued to take advantage of a strong housing market with limited supply by liquidating REO properties, posting a net gain of $8.7 million in the first quarter. And finally, we have repurchased stock below book value, 3.2 million shares in the first quarter at an average price of $17.15 and an additional 2.8 million shares in April at an average price of $14.48.

Please turn to Slide 5. This slide illustrates the components of our investment portfolio and also the nature of our asset-based financings. While the liability pie chart shows $2.9 billion of mark-to-market borrowing, about $1.8 billion of this borrowing is at a significant discount to our available borrowing amount. This underlevering creates a cushion that increases the amount of asset price decline that would need to occur before we receive a margin call.

Using rough numbers, loan prices would need to drop by more than 10 points from today's pricing before we would receive a margin call. Or said another way, we could also borrow more than $200 million more against this existing pledged collateral. So while this borrowing is technically mark-to-market, our conservative borrowing practice renders this borrowing functionally much more like non-mark-to-market borrowing. And I would now like to 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 six for an overview of our first quarter 2022 financial results. As Craig outlined in his opening remarks, MFA's results for the quarter were impacted by the prevailing interest rate environment, as the dramatic increase in interest rates across the yield curve combined with spread widening resulted in net valuation declines in our investment portfolio despite significant additions to our swap hedges that we proactively made early in the first quarter. As a reminder, we elected the fair value option for all loans that we have acquired since the second quarter of 2021.

Consequently, valuation changes on these loan acquisitions in addition to loans that were purchased previously as nonperforming loans flow directly through our income statement. We have also elected the fair value option on liabilities issued in connection with loan securitizations where we also use fair value accounting on the underlying loan collateral in order to provide symmetric accounting on the financing. Valuation changes for these liabilities in addition to swaps and short TPA positions, which are also subject to fair value accounting, provided a partial offset to the decline in loan values. These valuation changes created significant volatility in our Q1 earnings.

As Craig also noted, we are introducing distributable earnings this quarter, which is a non-GAAP measure that adjusts GAAP earnings to exclude fair value changes and certain expense items. I will discuss distributable earnings in more detail shortly, but first, I'll discuss the more significant drivers of our Q1 GAAP results. GAAP earnings were negative $91.1 million or negative $0.86 per common share. Net interest income of $63.1 million was $6.8 million lower than the prior quarter, primarily because the prior quarter included $8.2 million of income from an MSR bond redemption.

Residential whole loan net interest income marginally increased. Loan interest income increased $9.2 million, but this was largely offset by higher financing costs. Our net interest spread in the first quarter, including the impact of 35 basis points of net swap expense, came in at 1.96%. The overall CECL allowance in our carrying value loans decreased for the eighth quarter in a row and at March 31, was $35.5 million, down from $39.5 million at December 31, 2021.

This reversal and other net adjustments to our CECL reserves positively impacted net income for the quarter by $3.5 million. Actual charge-offs remained modest and were $523,000 for the quarter. Pricing across our residential whole loan portfolio was impacted by the volatile rate environment. For loans held at fair value, net losses, primarily valuation-driven, were $288.4 million.

And as discussed earlier, these were partially offset by net gains on economic hedging derivatives and securitized debt held at fair value of $158.2 million. Also included in other income is $14.5 million of origination, servicing and other fee income from Lima One, which continues to perform strongly. Gudmundur will discuss Lima's performance for the quarter in more detail shortly. Finally, our operating and other expenses, excluding amortization of Lima One intangible assets, were $38.7 million for the quarter, a $2.3 million decline from the fourth quarter.

This includes approximately $12.2 million of expenses, primarily compensation related at Lima One, down from $13.7 million last quarter. As discussed in our last earnings call, Lima utilizes a sales commission structure where incentives increase as cumulative production targets are achieved. This will typically result in higher incentive compensation in Q3 and Q4 each year. MFA-only G&A expenses were approximately $16 million for the quarter, which is in line with our expected quarterly run rate.

Other loan portfolio operating costs, meaning those not related to Lima One's loan origination and servicing were $10.4 million, a $1.9 million decrease from the prior quarter. The decrease is primarily due to lower securitization-related expenses in the current quarter. Because we have elected the fair value option on recently completed securitization deals, GAAP does not permit us to capitalize these costs. Turning now to slide seven, where we provide a reconciliation of GAAP earnings to distributable earnings, a new measure of MFA's financial performance.

As I discussed earlier, the increased use of fair value accounting has resulted in additional volatility in our GAAP earnings, primarily due to unrealized valuation changes in our investments. In addition, our GAAP results over the past several quarters have included various episodic events related to items such as the acquisition accounting for Lima One and capital transactions at certain of our loan origination partners that have resulted in significant unrealized gains in GAAP earnings. Distributable earnings adjust GAAP reported earnings to generally remove unrealized gains and losses related to our investments, associated financing liabilities and economic hedges that are accounted for at fair value through earnings. In addition, GAAP earnings is also adjusted to remove certain expense items, including noncash expenses for amortization of intangibles and stock compensation-related expense.

Securitization-related transaction costs are also added back. While these expenses are cash-based, they are excluded as they would typically be capitalized and amortized interest expense as the liabilities are paid down. But in this case, GAAP requires expensing upfront due to our election of the fair value option on the associated securitization. We believe that distributable earnings will provide stakeholders with a more consistent measure of our performance over time.

On slide seven, we show distributable earnings for the current and immediately prior quarter. As you can see, distributable earnings increased on a sequential quarter basis. Also on slide 18, we show our distributable earnings for each quarter back to Q1 2021. Distributable earnings has increased each quarter during this period, primarily reflecting the impact of loan portfolio growth on our net interest income, the contribution of Lima One since the third quarter of 2021 and the impact of reductions in CECL reserves over this period.

And with that, I will now turn the call over to Bryan Wulfsohn.

Bryan Wulfsohn -- Co-Chief Investment Officer

Thank you, Steve. Turning to slide eight. Home prices continued their upward trend in the first quarter with year-over-year home price growth hitting over 20% in March. The lack of housing inventory continues to be a major driver of these increases as we are at historic lows in supply.

The unemployment picture or the employment picture remains strong and delinquencies remain low. That said, Mortgage rates have repriced rapidly since the beginning of the year and are now 200 basis points higher. The increase in mortgage rates, combined with HPA, has significantly impacted the affordability of housing. The typical principal and interest payment for a prospective purchase money borrower is almost 40% higher than the beginning of the year.

Overall, we are comfortable with the credit in our portfolio, but given the dramatic rise in interest rates, we believe it is prudent to be cautious over the intermediate term as economic prospects become increasingly uncertain. Turning to slide nine. The first quarter brought volatility to the non-QM market. We saw spreads widen approximately 100 basis points on the AAA rated part of the capital structure, in addition to the move higher in rates.

Due to the increased uncertainty, we slowed purchases of non-QM loans in the first quarter by approximately one-third, or $300 million less than the previous quarter. We successfully executed two securitizations over the quarter in a challenging market, totaling over $500 million UPB sold. Serious delinquencies continue to decrease in the non-QM portfolio. As a percentage of loans, 60 days delinquent or greater dropped 0.2% to 3.3%.

The weighted average original LTV for borrowers that are six days delinquent is 65% and that does not account for any potential home price appreciation post origination. Many loans that experience delinquencies end up being paid in full as our borrowers have equity in the property and sell the property themselves. Turning to Slide 10. Our RPL portfolio of approximately $875 million continues to perform well.

81% of our portfolio remains less than 60 days delinquent. Although the percentage of the portfolio 60 days delinquent in status is 19%, almost 34% of those borrowers continue to make payments. Prepay speed moderated in the first quarter but remained elevated a three-month CPR of 16%. The combination of the length of time our borrowers have remained current on their mortgage and home price appreciation and unlocked refinancing opportunities for many of our borrowers.

As a reminder, the loans constituting our RPL portfolio or purchased at discounts to par and prepays are beneficial to returns. Turning to Slide 11. Our asset management team continues to drive strong performance of our NPL portfolio. The team has worked in concert with our servicing partners to maximize outcomes on our portfolio.

39% of loans that were delinquent at purchase are now either performing or paid in full and 49% either liquidated or REO to be liquidated. Our sales of REO properties have continued at an accelerated pace at advantageous prices. Over the last 12 months, we sold $179 million of properties for a net gain of $30 million and 12% are still in nonperforming status. Our modifications have been effective as over three-quarters are either performing or have paid in full, and 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 12. Despite the move higher in rates this year, Lima One has continued to see strong demand for its BPL products, and the first quarter was the third consecutive record quarter for originations with over $660 million originated. Lima One continues to benefit from its reputation as a leading lender for real estate investors that its diverse proffers of short and long-term transitional and rest of loans backed by single and multifamily properties, both of which contribute to approximately 50% of loan volume coming from repeat borrowers.

Loan demand has remained strong in the second quarter with originations exceeding $200 million in April. We had high hopes for Lima when we acquired them in July of 2021, but the results have exceeded our expectations as Lima has originated over $1.6 billion of high-yielding, high-quality BPL loans for MFA's balance sheet over the last three quarters. We expect origination volumes to continue to benefit from strong loan demand in the BPL space and expect Lima One to originate in excess of $2 billion in 2022. The first quarter was a challenging quarter for most originators as rates rose rapidly and spreads and securitizations widened in the quarter.

During 2022, we have appreciated the benefits of a fully integrated origination platform as we have been able to raise origination rates quickly in response to changing market conditions, raising the average coupon of Lima's origination pipeline by over 100 basis points to over 7% currently. In addition, our strong balance sheet allowed Lima to operate smoothly in the quarter where many originators struggled with managing their loan sales and warehouse lines and puts Lima in an excellent position to take advantage of higher rates going forward. We completed two business purpose loan securitizations in the month of April, our third single-family rental loan securitization and our first fix and flip securitization, both consisting 100% of Lima One originated loans. We are pleased with our ability to execute securitizations across various products during a very challenging time in the marketplace and believe it is a testament to the quality of our loans and MFAs and Lima's reputation in the marketplace.

Importantly, we have now established securitization programs from both short- and long-term BPL loans, which we believe will continue to support and strengthen Lima One going forward. In addition to the benefit of adding assets to our balance sheet, Lima is a well-run and profitable business. In a challenging quarter for originators, Lima generated $4 million of net income from origination and servicing activities in the quarter, representing an annualized return on allocated equity of approximately 10%. Turning to page 13.

We will discuss the fix and flip portfolio. Loan acquisition activity remained robust as we added approximately $210 million in UPB with over 330 million max loan amount in the quarter, all of which were originated by Lima One and grew the portfolio by over 20% in the quarter. As a reminder, fix and flip launch 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 projects.

This holdback is funded over time when borrowers are reimbursed for rehab work they've already completed. As these funds get disbursed, the UPB of the loan increases. From a liquidity perspective, this is a nonevent. First, our multiprincipal paydowns have historically been around 50 CPR, while our rehab funding amounts have been equivalent to around 25 CPR, meaning our portfolio organically generates a lot of cash every month that significantly exceeds rehab funding needs.

Second, rehab fundings are financeable in the normal course of business on our warehouse lines and in our new securitization as they occur. Therefore, we don't believe the undrawn commitment amount has a meaningful impact on our liquidity. We closed our first fixed and flip securitization in April as we securitized approximately $265 million of assets, all of which were originated by Lima One. We sold bonds representing 90% of assets securitized.

The securitization has a five-year maturity and has a revolving structure, which allows us to replace loans and pay down with new ones over a two-year reinvestment period, as well as funds we have brought within the securitizations as they occur. We believe this expands, derisks and diversifies our BPL funding sources and completes another important goal in our strategic plan of developing and growing Lima's efficient origination platform. The yields on the loans securitized, as well as the loans we are currently acquiring is in the low to mid-7% range. The return on equity on the securitization is therefore in excess of 20%.

We continue to see a steady decline in 60-plus day liquid loans as the strong housing market, low initial LTVs and the diligent work of our BPL team has led to good outcomes. The UPB of 60-plus day delinquent loans declined by $19 million as a percentage of UPB, the 60-plus decline from 15% to 10% in the first quarter. Almost all of the loans that are 60-plus day delinquent were originated prior to April 2020, and over 75% of them were originated by lenders other than Lima One. Lima One originated loans are currently about 90% of our fix and flip holdings, and they have a 60-plus day delinquency rate of approximately 3%, speaking to the quality of Lima's origination and servicing activities.

Finally, when loans pay off in full from serious delinquency, we often collect default interest, extension fees and all the fees at payoff. For loans where there is meaningful equity in the property, these can add up. Since inception, we have collected approximately $7.6 million in these types of fees across our fix and flip portfolio. Turning to page 14.

Our single-family rental loan portfolio continues to deliver attractive yields and exhibit strong credit performance with 60-plus day delinquency declining 80 basis points in the quarter to 1.8% in the first quarter, and the first quarter portfolio yield of 5.2%. We acquired over $290 million of SFR loans in the quarter, all of which were originated by Lima One, and grew the portfolio by 27% to approximately $1.2 billion at the end of the quarter. As we have said before, the acquisition of Lima One has boosted our ability to source single-family rental loans, but also increase our ability to control pricing and absorb changes in yields and loan prices since we are acquiring these loans at cost and generating fee income in the origination process. We adjusted the rising rates and higher cost of funds in the securitization market in the quarter by frequently adjusting origination rates and fees to reflect an attractive return profile going forward.

Currently, we are adding SFR loans at low to mid-6% yields, implying a mid-double-digit return on equity on these loans going forward. We issued our third rental loan securitization after the quarter end in early April. The deal was backed by approximately $260 million of loans and in a very challenging market environment, demonstrated our ability to consistently execute on securitization for this asset class. The deal consisted 100% of Lima One originated loans and continues to demonstrate the benefit of combining strong balance sheet and capital market expertise with an elite BPL originator.

After completing the April securitization, the percentage of SFR financing that is non-mark-to-market is approximately 70%. We expect to continue to programmatically execute securitizations to efficiently finance our single-family rental loans as they provide long-term, nonrecourse and non-mark-to-market financing benefits. 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. So the first quarter of 2022 was obviously a challenging period in the fixed income and mortgage markets. But our active risk management practice lessened the impact on MFA through interest rate swaps, securitizations and relatively low leverage. In addition, we increased liquidity and freed up balance sheet capacity that we can now deploy as market opportunities arise.

Lima One continues to achieve excellent results despite raising rates to adjust to market conditions, and a continued strong housing market benefits our mortgage credit exposure despite developing affordability issues for homebuyers due to higher rates. Layla, would you please open up the line for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Bose George with KBW. Please go ahead.

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

Hey, guys. This is actually Mike Smyth on for Bose.

Craig Knutson -- Chief Executive Officer and President

Hey, Mike.

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

I'm just wondering if you could provide some more color on -- Hey, Craig. How's it going? Just wondering if you could provide some color on the volatility in the securitization markets. Just kind of wondering if some of the older inventory has cleared or -- and if the worst is behind you? Or do you expect some of the volatility to persist? And then as a follow-up, have you seen any changes to loan prices to reflect some of the wider spreads in the securitization market?

Craig Knutson -- Chief Executive Officer and President

I'm sorry, the last part of the question?

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

Have you seen any changes to loan prices to reflect the wider spreads in the market?

Bryan Wulfsohn -- Co-Chief Investment Officer

Sure. So looking at the securitization market, we definitely saw major volatility in the first quarter. AAA spreads were wider by 100 basis points. Since the end of the quarter, we've seen some retracement levels.

So spreads are probably 30-ish basis points inside of the wide. Now it's still a very uncertain time, but it seems like the market has found its footing. So it is more beneficial than it was to securitize. As it relates to loan prices, we have seen pricing adjust.

There is still an overhang of loans that were originated at lower coupons that originators weren't able to move as quickly as they would otherwise like. So those still need to work their way through the market. But we have seen coupons adjust to the new prevailing rates and spreads. And we do think the current pricing does make sense.

But as we mentioned previously, there's still a lot of uncertainty around rates and where spreads will go from here.

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

Great. Great. That's really helpful color. And then, just one on the buyback.

Just kind of wondering how you're thinking about the balancing act between incremental investments and buying back the stock at a 11% or 12% dividend yield. I'm just trying to get a sense for the go-forward cadence there?

Craig Knutson -- Chief Executive Officer and President

Sure. Well, so we still have a little over $200 million of stock buyback authorization under the Board's recent increase. And as I indicated on the call, we've already bought this year nearly $100 million worth of stock back. So clearly, we're not afraid to buy back stock.

But as you correctly pointed out, we evaluate stock repurchases alongside other investment opportunities and also with consideration to available liquidity.

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

Great. That's helpful. And then, just one more. Have you seen any changes to your book price so far in the second quarter?

Craig Knutson -- Chief Executive Officer and President

So just to caution you, it's an estimate because we don't even have all the remittance reports from loans for the month of April. And nevermind loan marks, we don't have those either. But, I guess, just looking at rate moves in twos, threes, and fives, we would estimate that book value is probably down approximately 3%, plus or minus, for the month of April.

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

Great. Thank you so much for taking the question.

Craig Knutson -- Chief Executive Officer and President

Sure, Mike.

Operator

And our next question is from Steven Delaney with JMP Securities. Please go ahead.

Steven Delaney -- JMP Securities -- Analyst

Thanks. Hi. Good morning, everyone.

Craig Knutson -- Chief Executive Officer and President

Hey, Steve.

Steven Delaney -- JMP Securities -- Analyst

Thanks for the question. So Gudmundur made some comments about on your initial -- I guess, it was your fix and flip securitization that it kind of modeled out to a 20% ROE. And then, I think Bryan may have mentioned that the SFR deal or this -- no, excuse me, that was Gudmundur as well, but he mentioned a 15% ROE. I'm just curious about -- so it sounds like the Lima products, the BPLs are kind of have adjusted enough to where they're not just a source of financing but also an effective structure for earnings at a very attractive ROE.

How about the NQM market? It sounds like -- maybe that's just been a little slower to catch up to the repricing and recalibration. I'm just curious if NQM rates now, I think Bryan may have mentioned over 6% coupons. How do you view the efficiency of an NQM securitization today? And is it viable in today's market?

Bryan Wulfsohn -- Co-Chief Investment Officer

Yes. For new assets being purchased today, we would probably view it as a low to mid-double-digit ROE execution. So we do think looking at BPL and fix and flip, it's a little bit more attractive for us, but it's still viable. Now the question is, right, there's still time that it takes -- that you're exposed to spread movements when you commit to buy loans and you settle and you get them into a deal.

So just given the uncertainty, right, when we say low to mid, we're talking about if you bought a loan today and you did a securitization today. Now you are somewhat exposed to that spread risk over time, which is why we sort of slowed down purchases in the first quarter, and we just want to be -- make sure we're prudent going forward in terms of additional assets and that lag time to get to the market to securitize the assets.

Steven Delaney -- JMP Securities -- Analyst

OK. And obviously, I guess you can hedge some coupons a bit. But it sounds like the BPL and the Lima acquisition is paying huge dividends because that -- as we sit today, that market is a little more transparent to you and a little more approachable than the NQMs, where you're out there in a very competitive market having to bid for those loans. Is that a fair statement that you sort of control your destiny?

Craig Knutson -- Chief Executive Officer and President

That's right, Steve. As I mentioned, right, we have this instant feedback loop with Lima One because we're involved in the market with securitizations almost every single day. And so, it's just -- I can't emphasize enough how important that is to be able to adjust coupons on the origination side in real time because that's how you avoid the age-old problem that originators always have in a rising rate environment where they get stuck with pipelines with submarket coupons. So we're really happy about that.

Gudmundur Kristjansson -- Co-Chief Investment Officer

And Steve, there's also one additional component to this. Since we control the originator, we are acquiring loans at cost. So Lima is originating them at a cost to us. We're not going out in the secondary market and paying premiums for them.

So in a volatile market, that does give us a little bit of additional kind of spread or yield to play with to absorb some of the volatility as opposed to if you're paying premiums and competing for those assets, your room for error, so to speak, is less. So I think it's also a very important thing to keep in mind. And Lima by itself, when they look at the cost and the income they generate from fees, origination fees and servicing fees and other fees, like we almost think about them as breaking even from a cost perspective. And so, we're creating then these assets essentially at cost, which is very powerful.

Steven Delaney -- JMP Securities -- Analyst

Yes. Great. And thank you for the comments all of you and props to management and the board on the buybacks. That's greatly appreciated in these challenging times and at 80% of book I think it's a great use of your capital.

Thanks.

Craig Knutson -- Chief Executive Officer and President

Thanks a lot, Steve.

Operator

And we have no other questions. You may continue.

Craig Knutson -- Chief Executive Officer and President

OK. Well, thank you, everyone, for your interest in MFA Financial. And we'll look forward to our next update when we announce second quarter results in early August.

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

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

Steven Delaney -- JMP Securities -- Analyst

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