MFA Financial (MFA) Q2 2022 Earnings Call Transcript

MFA Financial (MFA 1.46%)
Q2 2022 Earnings Call
Aug 04, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good morning. Thank you for standing by for today's conference assembled, and welcome to the MFA Financial Incorporated 2022 second quarter earnings call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time.

[Operator instructions] And as a reminder, today's conference is being recorded. At this time, it's my pleasure to turn the conference over to our host, Mr. Hal Schwartz. Please go ahead.

[Technical difficulty] Excuse me, speakers, there was some -- an echo with the webcast link, so I just muted it.

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

OK. Let me start over. and apologies for the snafu here. 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 non-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 second 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, and thank you for joining us here today for MFA Financial's second quarter 2022 earnings call. Also with me are Steve Yarad, our CFO, Gudmundur Kristjansson, and Bryan Wulfsohn, our co-chief investment officers, and other members of senior management. As you are all, no doubt, aware, the first half of 2022 has been an exceptionally challenging investment environment across nearly all asset classes with the possible exception of commodities in the U.S.

dollar. The S&P 500 Index was down over 16% in the second quarter and posted its worst first half of the year in over 50 years. Bond markets continued to sell off after a difficult first quarter and bond indices were generally down about 10% for the first half of the year. Mortgage spreads widened materially, as did credit spreads with high yield wider by nearly 300 basis points year-to-date.

Persistently high inflation, continued geopolitical tension and an aggressive Fed tightening cycle that markets have not experienced since 1994, have combined some weak habits across financial markets. In short, there's been no place to hide thus far in 2022. Our team at MFA has taken steps to preserve capital and manage our duration beginning as early as the fourth quarter of last year when it became clear that the Fed would need to move more dramatically than previously expected. We had $900 million of interest rate swaps at year-end and as rates rose and duration extended, we increased this position to $2.4 billion at March 31 and again to $3.2 billion at June 30.

We also slowed our loan acquisition pace in the first quarter and again in the second quarter. At the same time, we continued to execute securitizations through the first half of 2022 and into July. Although wider spreads, combined with higher rates increased the cost of these deals, we have significantly reduced risk by terming out close to $2 billion of securitization financing in 2022. In fact, over 95% of our asset-based financing is now fixed via securitization or economically fixed via interest rate swap hedges.

And with last week's Fed increase, our swap book now generates positive carry of about 60 basis points as the floating rates received leg exceeds the fixed rate pay leg. Future Fed rate increases, which are widely expected, will increase this positive carry further. We slowed our acquisitions during the second quarter, particularly of non-QM loans as market volatility made pricing difficult and created additional uncertainty about the cost of securitization. Taken together, these steps mitigated our book value decline.

Although MFA was certainly not immune to book value diminution, our relative book value performance versus many in the peer group has been considerably better. It's also worth noting that a significant portion of MFA's book value decline is due to fair value marks on loans on our balance sheet that we will likely hold until payoff or maturity. As of June 30, the market discounts to unpaid principal balance on our loan portfolio is approximately $475 million. Now to be fair, we also have securitizations which are accounted for at fair value that are marked below par by approximately $233 million.

Netting these two discounts produces a potential book value increase of approximately $242 million or $2.38 per share, assuming that the loans and the liabilities pay off at par. This amount would be offset by any realized losses on loans, but expected losses are relatively low, particularly on our purchased performing loans and home price appreciation over the last 10-plus years on our legacy NPL and RPL loans has significantly affected outcomes on these loans. Indeed, we've realized gains on REO liquidations for each of the last six quarters. We also prioritized liquidity during the first and second quarters of 2022, ending both periods with close to $400 million in cash.

While holding a substantial portion of our equity in cash obviously creates a drag on overall ROE, this was not the time to swing for the fences. Having a sizable liquidity position provides a cushion in volatile markets and also gives us the ability to take advantage of opportunities that arise. Finally, I'd like to talk a little bit about housing and residential mortgage credit. We have seen dramatic home price appreciation over the last two years as demand for housing has far outstripped supply.

This was due to many factors, among them, increased household formation, post pandemic trends leading to added demand for single-family homes, lack of new and existing supply of homes and very low interest rates. Now of these influences, only the interest rate component has changed. The other factors driving housing prices still exist. And in fact, new home construction has fallen even more recently.

Additionally, LTVs of purchased performing loans have generally been low and underwriting standards conservative. So overall mortgage credit is generally strong. Future home price appreciation will certainly slow, but any significant home price declines are hard to envision at this point. In fact, it strikes me, it's funny that I sometimes read that some percentage of home price listings has experienced list price reductions or that some percentage of homes did not trade at a premium to the listing price as evidence of housing weakness.

It seems a more apt analogy would be a shift from a boil to a simmer. Lima One was a continued bright spot for MFA as they turned in another strong quarter with approximately $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 reducing the typical drag suffered by originators in a rising rate environment as their pipelines fill with submarket coupons. Lima One's current origination BTL pipeline of about $450 million as a weighted average coupon today of approximately 8%.

These high-quality and high-yielding assets will generate attractive returns as these loans close and are added to our balance sheet. Please turn to slide three. As previously mentioned, a difficult environment led to a book value decline of 8% for both GAAP and economic book value, $1.42 and $1.56, respectively. I would again point out that the aforementioned net discount from par of loans and securitized debt is $2.38 per share.

Some of you will remember the credit reserve that we had 10 years ago or so on our legacy non-agency RMBS portfolio that many analysts and investors believe would be accretive to book value over the long run. We reported a GAAP loss of $108.6 million in the second quarter, primarily due to unrealized losses on residential whole loans at fair value. Distributable earnings came in at $47.2 million or $0.46 per share, and we paid our common dividend of $0.44 last Friday. Leverage ticked up from 3.1 to 3.3 times, primarily due to book value decline, but I would point out that our leverage is increasingly now in the form of securitized debt.

Please turn to page four. As I stated in my introductory remarks, our acquisition pace slowed in the second quarter, with nearly 70% of our loan acquisitions coming from Lima One. Our overall loan portfolio was slightly lower at quarter end, although that is mostly due to fair value marks rather than lower balances. We also executed three securitizations in the quarter and two more in July, and we now have nearly $4 billion of financing in the form of securitized debt.

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 higher yield levels. We reduced interest rate risk during the quarter by adding interest rate swaps, and we prioritized liquidity given the volatile market environment. Finally, our asset management team has continued to take advantage of a strong housing market with limited supply by liquidating $40 million of REO properties this quarter, posting a net gain of $7 million. Please turn to slide five.

This slide illustrates the components of our investment portfolio and also the nature of our asset-based financings. While the liability pie chart shows $2.6 billion of mark-to-market borrowing, about $1.5 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 needs to occur before we receive a margin call. During the second quarter, we experienced very minimal margin calls on our loan portfolio.

And at the same time, our interest rate swap position generated cash from reverse margin calls. And I will now turn the call over to Steve Yarad to discuss additional details of our financial results.

Steve Yarad -- Chief Financial Officer

Thank you, Craig. Please turn to slide six for an overview of our second quarter 2022 financial results. Craig outlined in his opening remarks, mark-to-market adjustments on MFA's investment portfolio again drove our GAAP results this quarter as further increases in interest rates across the yield curve, combined with spread widening resulted in asset valuation declines. These were substantially mitigated by our active portfolio management, including adding to our swap hedges and further use of the securitization financing.

As a result, book value declines were relatively modest and distributable earnings continued to cover the Q2 common dividend. I will now discuss our Q2 GAAP results in more detail. GAAP earnings were negative $108.6 million or negative $1.06 per common share. Net interest income was $52.6 million.

Loan interest income increased nearly 3% to $102.4 million as coupons and recent acquisitions have increased. The sequential quarter decline in net interest income reflects the impact of higher funding costs, consistent with the prevailing interest rate environment. Our net interest spread, including the impact of swap carry decreased to 1.37% from 1.96% last quarter. However, with the recent Fed increase, our swap portfolio is now in a net receipt position, and this should benefit our cost of funds and net spreads inclusive of swap carry going forward.

Our CECL provision for credit losses was $30.4 million, primarily due to a $28.6 million reserve adjustment to write down to zero, an investment to a mortgage originator that recently ceased operations as a result of the current environment. In addition, CECL reserves increased modestly on the carrying value loan portfolio, primarily due to adjustments to prepayment speed assumptions used in our current loss model. That said, actual charge-offs remained modest and at $833,000 for the six months ended June 30, or over 40% lower than the corresponding period in 2021. As already discussed, valuation of our residential whole loan portfolio was again impacted by the volatile rate environment.

For loans held at fair value, net losses were $216.4 million. This is partially offset by net gains on economic hedging derivatives and securitized debt held at fair value of $132.4 million. In addition to the CECL reserve that I discussed earlier, we recorded a $10.6 million mark-to-market adjustment on an equity investment in another mortgage origination partner. This valuation adjustment equates to approximately 50% of the equity investment and is based on a valuation obtained from a third party.

The entity is still in its development stages, and we believe that its financial position will be strong enough to navigate the current challenging environment. It should be noted that excluding this valuation adjustment and the $28.6 million CECL reserve, GAAP and economic book value would have declined approximately 6.5%. Further, following these adjustments, the carrying value of remaining minority investments in mortgage origination partners is approximately $32 million at June 30, 2022. Also included in other income is $10.7 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 G&A expenses were $29.6 million for the quarter, a $1.3 million increase over the first quarter, primarily due to higher personnel costs at Lima One. Other loan portfolio operating costs, meaning those not related to Lima One loan origination and servicing, were $13.2 million, a $2.8 million increase from the prior quarter. This increase is primarily due to higher securitization-related expenses in the current quarter.

Because we have elected the fair value option on recently completed securitization deals, GAAP is not committed to capitalize these costs. Distributable earnings, a non-GAAP financial measure that adjusts GAAP net income primarily to exclude the impact of unrealized gains and losses and certain realized gains and losses from our investment activities, was $0.46 for the second quarter and exceeded the second quarter dividend to common shareholders of $0.44. On slide 16, we provide further information, including a reconciliation of all adjustments to GAAP net income to arrive at distributable earnings, both for the current quarter and for the previous four quarters. Also, this quarter, following changes to the way we structure our internal management reporting, we are presenting certain information on the results of our operating segments.

This information is set out on slides 19 and 20. And with that, I will turn the call over to Bryan Wulfsohn.

Bryan Wulfsohn -- Co-Chief Investment Officer

Thank you, Steve. Turning to slide seven. Home prices increased again in the second quarter with year-over-year growth hovering around 20% in June. With the increase in mortgage rates and higher home prices, affordability has become an issue for many would-be homeowners.

These factors led to a slight increase in the supply of homes on market over the quarter. However, supply levels still haven't reached pre-pandemic levels. The fundamental lack of housing inventory should continue to be a factor for the stability and growth to home prices. The employment backdrop remained strong and delinquencies remained muted.

The credits in our portfolio continues to perform well. And given all the volatility and uncertainty, we continue to be cautious over the intermediate term as economic prospects become increasingly uncertain. Turning to slide eight. We reduced our purchases of non-QM loans again in the second quarter to $220 million, down from over $600 million in the first quarter as volatility in rates and spreads remain elevated.

We successfully executed another securitization over the quarter totaling over $400 million of UPB sold. Recently, we have been purchasing loans with coupons between mid- to high 7% range at moderate premium to par. We believe these new loan investments can generate low to mid-double-digit ROEs through securitization. Serious delinquencies decreased further in the non-QM portfolio as a percentage of loans 60 days delinquent or greater dropped 0.7% to 2.6%.

The weighted average original LTV for borrowers that are 60 days delinquent was 66%, and that does not account for any potential home price appreciation post origination. Many loans that experienced delinquencies and are being paid in full as our borrowers have equity in the property and sell their property in turn. Turning to slide nine. Our RPL portfolio of approximately $835 million continues to perform well.

81% of our portfolio remains less than 60 days delinquent. And although the percentage of the portfolio, 60-day delinquent and status was 19%, almost 35% of those borrowers continue to make payments. Prepaid fees slowed in the second quarter to a three-month CPR of 12% with increases in mortgage rates. A combination of the length of time our borrowers have a main trend on their mortgage and home price appreciation has unlocked refinancing opportunities for many of our borrowers as the LTV on these loans have now dropped below 60%.

As a reminder, the loans constituting our RPL portfolio were purchased at discounts to par and prepaids are beneficial to returns. Turning to slide 10. 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 50% have either liquidated or REO to be liquidated. We continue to aggressively sell properties in our REO portfolio. Over the last 12 months, we sold $180 million of the properties for a net gain of $33 million, 11% are still in nonperforming status. Our modifications have been effective, three quarters 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 -- Co-Chief Investment Officer

Thanks, Bryan. Turning to page 11. July 1 marked the one year anniversary of our acquisition of Lima One. The integration of Lima One into the MFA family couldn't have gone better, and the strategic vision we have implemented, coupled with MFA's capital markets expertise and strong balance sheet has allowed Lima to continue to grow and attract business from the best real estate investors in the BPL space.

None of this would have been possible if it weren't for the skilled and dedicated team at Lima One, which has executed exceptionally well on our strategic goals over the last 12 months. At the time of acquisition, Lima's trailing 12-month origination volume was approximately $900 million. Now 12 months later, that stands at $2.2 billion, more than double what it was a year earlier. A key part of our strategy was and remains to improve the financing of the BPL loans that Lima One originates.

To that end, over the last nine months we have securitized approximately $1 billion of BPL loans originated by Lima One and have established securitization programs for all of the various loan products. Despite challenging market conditions for loan originators, Lima One continues to see strong demand for its BPL products and had another strong quarter with approximately $600 million originated in the second quarter. Throughout the year we have proactively managed our origination pipeline by raising origination rates and making loan level pricing adjustments to ensure that we continue to create attractive investments for MFA's balance sheet in any rate environment. As rates have risen, we have seen our production mix shift more toward shorter-term transitional loans as the more rate-sensitive longer-term rental loans feel the impact of higher rates more acutely.

Despite the shift in product mix, overall volume in our origination pipeline has remained relatively stable. This is primarily due to Lima's broad product offering across short- and long-term business purpose loans, which allows us to shift focus seamlessly between products as market conditions change. We believe Lima's product mix represents a key strength and differentiator that allows us to continue to create high-quality loans through changing market conditions. Lima's origination pipeline remains strong with some of the highest coupons we have seen in a long time, with a weighted average coupon of approximately 8%.

We expect the loans to be originated going forward to generate return on equity of mid- to high teens. We see great short- and long-term opportunities for Lima One. The significant interest rate and mortgage spread increases we have experienced in 2022 has put pressure on thinly capitalized BPL originators that are dependent on whole loan sales to manage their liquidity and balance sheet as many whole loan buyers have stepped away of securitization and financing costs have increased throughout 2022. With Lima as an on-balance sheet lender, MFA is able to acquire BPL assets at substantially lower cost than other loan aggregators, which, coupled with our strong liquidity, has allowed Lima to gain market share while maintaining credit quality.

We expect Lima to originate between $2 billion and $2.5 billion in 2022 and see Lima as well positioned to continue being a leader in the BPL space for years to come. Finally, we completed our fourth single-family rental securitization in July. The deal consisted of 100% of Lima One originated loans. Again, we showed our ability to execute securitizations in a challenging market.

Turning to page 12, where we will discuss the Fix and Flip portfolio. We added loans to approximately $230 million UPB and $400 million max loan amount in the quarter. All loans were originated by Lima One, and we grew the portfolio by 18% in the quarter. This is the fourth consecutive quarter of portfolio growth and the portfolio has grown by 140% since we acquired Lima One 12 months ago.

We continue to find the fix and flip space highly attractive and are currently deploying capital at over 8% yield with mid- to high double-digit return on equity. We closed our first fix and flip securitization in April, when we securitized approximately $265 million of assets, all of which were originated by Lima One. The securitization has a five-year maturity and a revolving structure which allows us to replace loans and pay down with new ones over a two-year reinvestment period, as well as fund rehab draws within the securitization as they occur. In this transaction, we sold bonds representing 90% of assets securitized.

We believe this transaction expands, derisks and diversifies our BPL funding sources and complete another important goal in our strategic plan of developing and growing Lima's efficient origination platform. Our RPL securitization was a source of liquidity throughout the quarter as loans have paid off, replaced the new origination and rehab draws were funded within the securitization. We continue to see a steady decline in 60-plus day delinquent loans as the strong housing market, low initial LTVs and the diligent work of our team has led to good outcomes. The 60-plus day delinquency ratio declined 2% to 8% at the end of the quarter.

Almost all of the loans that are 60-plus day delinquent were originated prior to April 2020, and approximately 80% 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 2%, speaking to the quality of Lima's origination and servicing activities. Finally, with loans pay off in full from serious delinquency, we often collect the bulk interest extension seasonalities and payouts. For loans where there is meaningful exiting the property, these can add up.

Same conception, we've collected approximately $8.5 million in these types of fees across our fix and flip portfolio. Turning to page 13. Our single-family rental loan portfolio continues to exhibit strong performance with attractive yields and low delinquency. Second quarter yield was 5.19%, and the 60-plus day delinquency rate remained low at 2.4%.

We acquired over $190 million of SFR loans in the quarter, all of which were originated by Lima One and grew the portfolio by 13% to approximately $1.3 billion at the end of the quarter. This is the fifth consecutive quarter of portfolio growth and we have grown our SFR portfolio by over 150% since the acquisition of Lima One. We continued to adjust 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're adding SFR loans at low to mid-7% yield, implying a mid-double-digit return on equity on these loans going forward.

We issued our third rental loan securitization in April and priced our fourth rental loan securitization in the middle of July. Approximately $475 million of loans were securitized between the two deals and both deals consisted 100% of Lima One originated loans. MFA's capital markets team did a phenomenal job of marketing these transactions in a very challenging market environment, and we believe this demonstrated our ability to consistently execute on securitizations for this asset class. After completing the July securitization, the percentage of SFR financing at non-mark-to-market is approximately 73%.

We expect to continue to programmatically execute securitization 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. Please turn to page 14. So the second quarter of 2022 was obviously a challenging period in the fixed income and mortgage markets. But MFA's active risk management practice lessened the impact on the company through interest rate swaps, securitizations and relatively low leverage.

We generated distributable earnings of $0.46 during the quarter, prioritized liquidity and freed up balance sheet capacity that we can deploy as market opportunities arise. Lima One continues to achieve excellent results despite raising rates to adjusted market conditions and a continued strong housing market benefits our mortgage credit exposure despite developing affordability issues for homebuyers due to higher rates. Tom, would you please open the call to questions?

Questions & Answers:

Operator

Thank you very much. [Operator instructions] And we are going to begin with a question from Bose George, representing KBW. Please go ahead.

Bose George -- KBW

Hey, guys. This is actually Mike Smyth on for Bose. Just a quick one on capital deployment. What's the normalized level for leverage? And then what are you looking for in the market to take up leverage and put some of that excess cash to work?

Craig Knutson -- Chief Executive Officer and President

So thanks for the question, Mike. I mean we've said this before, we don't necessarily target a leverage number. I think the leverage sort of falls out of two things. One is asset purchases because we do lever assets when we buy them.

And then, the second is how we finance them. So as we execute securitizations, typically that will raise the leverage a little bit because we get a higher effective advance rate through securitization. But if you look, it went from 3.1% to 3.3%. I mean, I don't see it really differing materially from somewhere in the low to mid-3s at least quarter-by-quarter.

Now that could change if we go out a few quarters and we buy a lot of really cheap assets. But at this point, I don't see that changing all that materially.

Bose George -- KBW

And then can you provide a quarter-to-date book value update?

Craig Knutson -- Chief Executive Officer and President

Sure. So it's very preliminary. We don't really have a lot of numbers, but I think our best estimate would be that book value is probably up about 1% since June 30.

Bose George -- KBW

 Great. Thanks for taking the questions.

Operator

Next, we're going to go to the line of Steve Delaney, representing JMP Securities. Please go ahead.

Steven Delaney -- JMP Securities -- Analyst

Good morning, everyone. Thanks for the question. And congrats on the progress you've made with Lima One on both sides of the rental and the fix and flip. Craig, I think you mentioned in your comments that you might have done two securitizations in July.

We saw the one, the INV2, which was the rental loans. Was there another one done post quarter end, another product?

Bryan Wulfsohn -- Co-Chief Investment Officer

Yeah. Steve, this is Bryan. We completed the securitization of RPL loans. So the legacy loans --yes, that's the other one.

Steven Delaney -- JMP Securities -- Analyst

That was the other one. OK. Good. So I think the -- Gudmundur, you mentioned, so the total securitization so far on the rental loans is two total, including the one in July?

Gudmundur Kristjansson -- Co-Chief Investment Officer

For the rest of loans, we did one in April and then we did another one in July. That's correct.

Steven Delaney -- JMP Securities -- Analyst

And Craig, back when we had the first quarter call, obviously, that was in the midst of all the volatility. And I think everyone was worried about liquidity, margin calls, etc., etc. Can you comment just generally on -- and I believe on that call, you spoke quite a bit about warehouse lenders and your relationship with your warehouse lenders. Could you just give us an update on that in terms of sort of the willingness of the warehouse lending community to support your building up of inventory ahead of securitizations?

Craig Knutson -- Chief Executive Officer and President

I would say that we have very strong relationships with our lenders. They don't just lend us money. They're the ones that do the securitizations and sell the securities. So it's really a soup to nuts relationship.

We've certainly seen no reticence at all from any lenders. And in fact, there are various parties that would like to lend us money on our loan portfolio, and we'd love to be able to do that, but we just don't have enough borrowing to go around. So I think if you think about what happened in the conventional space, all these lenders has probably masked the balances out to agency originators. And so, if anything, there's probably balance sheet despair.

But like I say, we've had no issues whatsoever. I talked about margin calls, because we underlever a significant portion, over half of that mark-to-market financing, we got very few margin calls. I think our low margin calls in the second quarter might have been $10 million for the whole quarter. And we probably netted $50 million of cash in from our swap position.

So it's been not that difficult to manage that liquidity. Also, our recourse leverage has also ticked down. So our recourse leverage is now just 1.8 times. So this -- I think this policy of securitizing frequently and often in all the various product types is going to serve us well over time.

Steven Delaney -- JMP Securities -- Analyst

OK. That's great. Really, really appreciate the comments. Thank you.

Operator

And our next question comes from the line of Eric Hagen, representing BTIG. Please go ahead.

Eric Hagen -- BTIG -- Analyst

Hey. Thanks. Good morning. Hope you guys are doing well.

Maybe a few from me. How do we think about the value in the NPL portfolio at this point? Like what would you say is the duration of the spread over benchmark assets that you might look to describe the value that you're getting there? And then can you also say how much liquidity you have beyond the $400 million in cash, whether there's a minimum level of liquidity that you target over the near and kind of medium to longer term?

Bryan Wulfsohn -- Co-Chief Investment Officer

So when we think about the value of the NPL portfolio and the duration of it, it's really -- the value is -- all those loans are considered to be at fair value, but half of that book now is actually performing, right? So it's going to have plus or minus 5% coupon at purchase at a big significant discount to par. And then, the other half of the portfolio, they're just waiting to be liquidated. And given what we've seen in HPA and given what the prospects are for HPA going forward, you don't need to see too much growth to continue to see that sort of expected yield somewhere between 7% and 8% on those assets.

Steve Yarad -- Chief Financial Officer

And Eric, this is Steve Yarad. Just addressing your question on additional sources of liquidity. As Craig referred to, we do have a significant under borrowing on some of our warehouse -- mark-to-market warehouse lines. And that's as much as $125 million to $150 million at the end of June.

Craig Knutson -- Chief Executive Officer and President

So said another way, Eric, we could borrow another $125 million to $150 million of those assets that we've pledged. We just don't because it's a sort of self-imposed discipline in creating that cushion.

Eric Hagen -- BTIG -- Analyst

And can you say whether any of the retained tranches from securitization get pledged as collateral for financing?

Craig Knutson -- Chief Executive Officer and President

So up until very recently, the answer would be no. There have been a couple of deals that we've done since June -- I'm sorry, since March 31, where some of the pricing on, say, for instance, some of the IT, the investment-grade rated bonds was pretty wide. And so, we did retain a couple of those. They're typically fairly small tranches.

And again, because we have a strong balance sheet, we can sort of impose that discipline on the market that if the pricing is really too wide, we can just retain those securities. And so, particularly those investment-grade rated tranches, we will borrow on those because those are actually pretty easy to borrow -- to lever. And we could sell those in the future, should should the levels become attractive. But for the time being, if the bonds -- if the tranche is going to price at 7.5% or 8%, we'd rather own that.

Eric Hagen -- BTIG -- Analyst

And then on the non-QM, can you remind us, is there a call option on the securitized debt and how you might look to exercise that call option even if the market is relatively wide because the debt itself has delevered a little bit.

Steve Yarad -- Chief Financial Officer

Yeah. So generally, we will have a call option of, say, two to three years' time or 30% of the UPB of the original UVB, whichever comes sooner. And really, it's a deal-by-deal kind of exercise that we'll look at to determine how far down it's delevered, where are spreads in the market today, and that will determine whether we call back the loans to reissue.

Eric Hagen -- BTIG -- Analyst

Great. Thank you. Appreciate the comments.

Operator

We have a question from Doug Harter with Credit Suisse. Your line is open.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Can you talk about the relative return differential versus -- as you do securitization versus holding it on the warehouse lines?

Steve Yarad -- Chief Financial Officer

Yeah. I mean, I think -- so it's securitization -- widened during the year. I think if you're securitizing non-QM collateral in general, where non-QM [Inaudible] loans we have, the all-in cost of funds is probably between 5.5% to 6%. You can bring some collateral and types of deals.

On the warehouse, we are probably closer to LIBOR plus 200 to 250, something like that. So with LIBOR at 275, 300, the cost of funds in warehouse is still lower, probably by two -- anywhere from 75 to 100 basis points. But for us, it's not all about the cost of funds, the securitization provides tremendous benefit from a risk management perspective. So you think about both liquidity, as well as the fact that it's non-mark-to-market, nonrecourse.

We think by moving more into securitization is definitely the path we want to do, and that's what we've done, obviously, over the last 18 to 20 months. And so, you should expect us to continue to securitize in the future. But for now, there's a benefit on warehouse versus securitizations.

Doug Harter -- Credit Suisse -- Analyst

And then, I guess switching to Lima One, I guess, how do you view the level of profitability that you were able to benefit in the second quarter and the sustainability of that in what's clearly become a more challenging market.

Gudmundur Kristjansson -- Co-Chief Investment Officer

I think the way we think about Lima One is really -- it's not one quarter to the next, but it's a business that we believe in, in terms of the long-term value that this generate attractive assets for us on our balance sheet. And as you've seen over the last 12 months, we've taken that business to a whole new level. And the way we think about it is we'll continue to nurture them, give them all the tools that they need to improve their efficiencies and grow. And I guess, more importantly, as you've seen, we've raised dramatically there with the market.

And as we said in our prepared remarks, the pipeline now has coupons of approximately 8% and they're rising every day. And the way we think about that is that we're creating our own credits, which is going to perform really well going forward. And that's really how we think about as opposed to whether they generate an X ROE each quarter, and we see this -- that portfolio grow for us over time.

Craig Knutson -- Chief Executive Officer and President

Doug, the one thing I would add is, I think the strategic benefit of Lima One is it's a captive source of really high-quality, high-yielding assets. And if we had to go buy those assets out in the marketplace and compete for those assets, we'd be paying a lot more for those assets. The yields that we buy on that would be significantly lower. And it would just be more difficult to acquire size of those assets.

So it's a little hard to quantify the strategic importance of that, but I think it's a real thing. And the other thing I would just add from a -- as we think about the business, we effectively think about Lima creating these assets roughly at cost for us. So over cycles and over time, we would expect that their origination fees, servicing fees and the fees that they generate in a normal course of business will kind of roughly offset the G&A. And that's kind of how we would think about it over the long term.

Doug Harter -- Credit Suisse -- Analyst

Just deconstruct then the portfolio would be more profitable to Craig's point that you would have to pay more to acquire those in the open market.

Craig Knutson -- Chief Executive Officer and President

Exactly.

Steve Yarad -- Chief Financial Officer

Exactly. And that could be a huge difference. I mean, for example, on the fix and flip side, people are usually buying loans with strip down coupons of anywhere from 200 to 300 basis points. So that's always a huge benefit of us to retain all in our balance sheet.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you, guys.

Operator

And speakers, there's no other participants queued up at this time.

Craig Knutson -- Chief Executive Officer and President

All right. Thanks, Tom. I'd like 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. Thanks, Tom.

Operator

[Operator signoff]

Duration: 0 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

Bose George -- KBW

Steven Delaney -- JMP Securities -- Analyst

Eric Hagen -- BTIG -- Analyst

Doug Harter -- Credit Suisse -- Analyst

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