Early spring was a brutal time for mortgage real estate investment trusts. Unlike typical REITs, which invest in property and charge rent, mortgage REITs invest in debt securities secured by real estate. This can create problems because these assets are usually leveraged with short-term loans, which are hard to refinance during turbulent times.

The financial markets seized up early during the pandemic, and mortgage REITs were hit harder than most. MFA Financial (MFA -0.41%) was beset by margin calls and forced to enter forbearance with its creditors. This gave the company enough breathing room to sell some of its assets in an orderly manner. Eventually MFA was able to secure a rescue package and satisfy all outstanding margin calls. The worst is over and MFA is going forward as a smaller company. But is it a buy?

A black keyboard with a red button that says "Margin Call."

Image source: Getty Images.

MFA entered 2020 with $13.6 billion in assets and finished the second quarter with $7.6 billion. Book value fell from $3.4 billion to $2.5 billion. Its portfolio consists of $5.9 billion in residential whole loans and another $750 million of mortgage servicing rights, real estate owned, and residential mortgage-backed securities.

MFA's portfolio of non-residential whole loans is not guaranteed by government agencies, which separates the company from agency REITs like AGNC Investment Corp. and Annaly Capital Management, which didn't plunge as far in March. MFA's non-agency loans consist primarily of mortgages that don't meet the Consumer Financial Protection Bureau's (CFPB) definition of a qualified mortgage (non-QM). In addition to non-QM loans, MFA has business-purpose loans like fix-and-flip and multifamily rental loans.

The loan portfolio has a lot of equity, which gives borrowers an incentive to make their payments

The non-QM loans have an average loan-to-value ratio of 64%, which means the value of the underlying property more than covers the amount the borrower owes. This means if the borrower defaults, the loan should be covered by selling the property. These loans also pay a rate of 5.9%, which is a decent yield. That said, almost 7% of the mortgages outstanding are in forbearance as of Sept. 28, according to the Mortgage Bankers Association. The private label and portfolio bucket, which includes non-QM loans, is around 10.5%.

Investors should keep in mind that forbearance and delinquency are not the same. Many borrowers in forbearance are still paying their mortgage. Also, be careful making comparisons to the Great Recession since the credit quality of today's loans is much, much better than the loans originated during the bubble years, and real estate prices are rising, not falling.  

Some savvy investors see value here

During MFA's forbearance period, the company was able to negotiate a capital raise with Apollo Global Management, its related party Athene, and Credit Suisse. The consortium gave MFA a $500 million loan, $2 billion in non mark-to-market financing, and a commitment to buy 4.9% of the company's outstanding stock in the market. These are obviously savvy investors who took a close look at MFA and were comfortable making a substantial investment.

It makes the most sense to wait for earnings

MFA reported a book value per share of $4.51 as of June 30, which means that as of Wednesday's close, the stock is trading at a whopping 38% discount to book value. Here is the issue with that: MFA is valuing these loans at close to par. Given that they are so overcollateralized, that is probably fair. But the non-QM loan market is a shadow of its former self, and it is difficult to get a read on where these loans would trade if MFA had to sell them. It is hard to recommend the stock until we get a better handle on how these loans are performing, and what percentage of the book is in forbearance.

The stock has reinstated its dividend, which currently yields 7.1%. Competitor Invesco Mortgage Capital recently upped its dividend, and things are looking up for the sector overall. That said, while the 38% discount seems enticing, I want to get more data on the portfolio before getting involved.