MFA Financial, Inc.

Your conference will begin momentarily. Please continue to hold. Ladies and gentlemen, thank you for standing by. Your conference will be underway shortly. Please continue to hold. © transcript Emily Beynon Thank you. Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial Incorporated first quarter earnings conference call. At this time, all participant lines are in a listen only mode. Later, we will conduct a question and answer session. If you have any question, you may press one then zero on your touch tone phone. You may remove yourself from the queue at any time by pressing one then zero again. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Hal Schwartz. Please go ahead.

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 Knudson.

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 2022 financial results webcast. With me today are Steve Yarrett, our CFO, Gudmundur Christensen, and Brian Wilson, 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 three 25 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 16th, and then another 52 basis points over the last half of March. The magnitude and speed of this rate sell-off, particularly in the short end of the yield curve, was the most dramatic witness 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 six times 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 increase on February 4th of that year. Today, the bond markets move much more quickly and price in Fed expectations. Indeed, by March 16th, 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 securization spreads widened. Although housing fundamentals are still strong, given the strained supply picture, this spread widening was much more about rate moves than credit, as mortgage cash flows 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 1 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 sub-market 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 constrained and likely to remain so for the foreseeable future. Please turn to slide three. We reported a gap loss of $91.1 million or 86 cents 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 an 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 non-cash 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 gap 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 securizations in the first quarter, selling 514 million UPB of bonds, and we completed two additional securizations 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 a billion dollars of bonds. These transactions add durable non-recourse 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 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 $2.9 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 Yarrett to discuss additional details of our financial results.

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 a 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 non-performing 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 TVA 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. Gap earnings were negative $91.1 million, or negative 86 cents 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 largely 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 on 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 1, 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 their expected quarterly run rate. Other loan portfolio operating costs, meaning those not related to Lima One 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 non-cash 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 Brian Wilson. 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 of UPPs sold. Serious delinquencies continue to decrease in the 9QM portfolio as the percentage of loans 60 days delinquent or greater drop two-tenths of a percent to 3.3%. The weighted average original LTV for borrowers that are 60 days delinquent is 65%, and that does not account for any potential home price depreciation post-origination. Many loans that experience delinquencies end up being paid in full because our borrowers have equity in the property and sell the property themselves. Turning to slide 10, our RPO 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 of 60 days delinquent in status was 19%, almost 34% of those borrowers continue to make payments. Pre-pay speeds moderated in the first quarter, but remained elevated at a three-month CPR of 16%. In combination, the length of time our borrowers have remained current on their mortgage and home price appreciation has unlocked refinancing opportunities for many of our borrowers. As a reminder, the loans constituting our RPL portfolio were 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 are 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 non-performing 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.

Thanks, Brian. Turning to page 12. Despite the move higher in rates this year, LIMA 1 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 1 continues to benefit from its reputation as a leading lender for real estate investors and its diverse product offerings of short- and long-term transitional and rental 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 1 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 on secured estations 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 MFA's 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%. Turn to page 13, where we'll discuss the fix and flip portfolio. Loan acquisition activity remained robust as we added approximately 210 million UPP with over 330 million max loan amounts 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 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. This holdback is funded over time when borrowers are reimbursed for rehab work they've already completed. As these funds get dispersed, the UPB of the loan increases. From a liquidity perspective, this is a non-event. Our monthly principal 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 earned run commitment amount has a meaningful impact on our liquidity. We closed our first fix 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 98% 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 fund rehab draws within the securitization as they occur. We believe this expands, de-risks 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 yield 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 data linked with 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, and as a percentage of UPB, the 60-plus declined 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 fixed and flip holdings, and they have a 60-plus state 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 other fees that pay off. 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 fixed and flipped 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 increased 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 to 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% yield, 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 markets 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, non-recourse, and non-mark-to-market financing benefits. And with that, I will turn the call over to Craig for some final comments.

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, securizations, 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. Leila, would you please open up the line for questions?

Thank you. Ladies and gentlemen, once again, if you would like to ask a question, you may press 1 then 0 on your telephone keypad. Our first question comes from the line of Bose George with KBW. Please go ahead.

Hey guys, this is actually Mike Smith on for Bose. 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 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?

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

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

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.

Great, great. That's really helpful, Collin. And then just on the buyback, just kind of wondering how you're thinking about the balancing act between incremental investments and buying back the stock at 11% or 12% dividend yield. I'm just trying to get a sense for the go-forward cadence there.

Sure. Well, so we still have a little over $200 million of stock buyback authorization under the board's recent increase. And as, you know, as I indicated on the call, we've already bought this year nearly $100 million worth of stock back. So, you know, clearly we're, you know, we're not afraid to buy back stock. But as you correctly point out, we evaluate stock repurchases alongside other investment opportunities and also with consideration to available liquidity.

Great. That's helpful. And then just one more. Have you seen any changes here but probably so far in the second quarter?

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. Never mind 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.

Great. Thank you so much for taking the questions.

Sure, Mike.

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

Thanks. Good morning, everyone. Thanks for the questions. So Goodwinder 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 Brian may have mentioned that the SFR deal, or this, no, excuse me, that was Goodmunder 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 Brian 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?

Yeah, for new assets being purchased today, We would probably view it as a low to mid double-digit ROE execution. So, you know, we do think, you know, looking at BPLs and fixed 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, you know, that you're exposed to spread movements when you commit to buy loans and you settle and you get them into a deal, right? So, you know, just given the uncertainty, right, when we say low to mid, we're talking about, you know, 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, you know, we sort of slowed down versus in the first quarter. And we just want to 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.

Okay, and obviously I guess you could hedge some coupons a bit, but it sounds like the BPL and the Lima acquisition is paying huge dividends because 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? Yeah.

That's right, Steve. As I mentioned, we have this instant feedback loop with Lima One because we're involved in the market with securizations almost every single day. 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. you know, where they get stuck with pipelines with sub-market coupons. So we're really happy about that.

And Steve, there's also one additional component to this. You know, since we control the originator, we are acquiring the loans at cost. So Levi's originating them at 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 that's also a very important thing to keep in mind. And, you know, and Lima by itself, you know, when you look at the cost and the income they generate from fees and regeneration fees and servicing fees and other fees, Like, you know, 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.

Yeah, 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, you know, at 80% a book or something, I think it's a great use of your capital. Thanks. Thanks a lot, Steve.

And we have no other questions. You may continue.

Okay. Well, thank you to 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.

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