While the coronavirus crisis has been hard on the mortgage real estate investment trust (mREIT) sector, some companies operating within it have had a harder time than others.

MFA Financial (NYSE:MFA) was definitely one such company that really struggled to navigate the crisis. Like most mREITs, MFA experienced a wave of margin calls, and since its assets were less liquid than agency mortgage-backed securities, it suffered through bigger mark-to-market losses (mark to market is a way to measure the fair value of accounts that can fluctuate over time).

Unable to meet margin calls, MFA was forced to enter into forbearance agreements with its creditors. 

Margin Call

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Q2 in forbearance and a shrunken balance sheet

MFA Financial spent most of the second quarter in forbearance with its creditors. This gave the company some breathing room while it auctioned off assets and negotiated a capital raise. MFA reached an agreement with investment manager Apollo Global Management and guarantee company Athene which consisted of a $500 million loan, $2 billion in non-mark-to-market financing, a warrant issue, and a commitment to buy 4.9% of MFA Financial stock in the market. On June 26, the company exited forbearance. 

MFA Financial entered the quarter with just over $13.6 billion in assets. It exited the quarter with $7.6 billion. The investment portfolio is now comprised of $5.9 billion in residential whole loans and $400 million of securities and mortgage servicing rights. The company also holds $666 million in cash. Financing liabilities fell from $10 billion to $5 billion. 

The composition of the loan portfolio

The $2.5 billion non-qualified-mortgage (non-QM) portfolio is comprised of loans that have an average loan-to-value of 64%, leveraged with two-year non-mark-to-market financing. That said, about 32% of the non-QM portfolio is in active forbearance, which means MFA might have difficulty trying to sell more assets if it chooses to.

Despite these issues, the financing gives the company the breathing room to work through any issues. For what it's worth, non-QM loans are often easier to work out foreclosure since many of these are business-purpose loans where there is no owner to evict. If delinquencies turn into foreclosures, most of these loans will end up being "money-good" (i.e. the company shouldn't see any losses on the investment). 

For the near term, non-QM mortgage issuance has ground to a halt. In the aftermath of the COVID-19 crisis, mortgage originators and banks have tightened underwriting standards, and many banks are refusing to fund them, even for a short period. 

The rest of the portfolio includes fix-and-flip rehabilitation loans, single-family rental loans, and distressed credit. The fix-and-flip loans are basically business-purpose loans that are meant to be refinanced in under two years. The single-family rental loans are loans to landlords. The distressed credit loans consist of loans purchased after the borrower had gone delinquent, which means MFA purchased them at a big discount to face value. 

A big discount to book value, and a respectable dividend

MFA has a book value of $4.51 per share, which means at current levels the stock is trading at a 31% discount to book value. This is much larger than the single-digit discounts we are seeing for the bigger agency REITs. This indicates the market still thinks there is downside to the portfolio.

MFA has reinstated all of its suspended preferred-stock dividends and has instituted a $0.05 dividend on the common stock. This works out to a 7% dividend yield. MFA is certainly out of the woods with its bankers, and it has acquired long-term sustainable financing. The stock also has a vote of confidence from Athene and Apollo, which are going to buy 4.9% of the company in the open market.

MFA will certainly have some workout issues with its borrowers, however, the real estate market remains so strong that the collateral underlying these loans should be sufficient to make the company whole if borrowers default en masse. 

Mortgage REITs are definitely tougher stocks to understand than the more traditional REITs, which invest in property and earn a spread between rental income and their cost to finance the property. Mortgage REITs generally don't own assets, they own debt. As such, they are subject to financial contagions like we saw in late March. That said, when one is trading at a big discount to book value, with a respectable dividend yield and a vote of confidence from other professional investors, it pays to take notice.