About the Business
We are a self-advised real estate investment trust (REIT) primarily engaged in the business of investing, on a leveraged basis, in residential mortgage-backed securities (MBS). Our principal business objective is to generate net income for distribution to our stockholders resulting from the difference between the interest and other income we earn on our investments and the interest expense we pay on the borrowings that we use to finance our leveraged investments and our operating costs. We were incorporated in Maryland on July 24, 1997, began operations on April 10, 1998 and have elected to be treated as a REIT for U.S. federal income tax purposes. One of the requirements of maintaining our qualification as a REIT is that we must distribute at least 90% of our annual REIT taxable income to our stockholders. Our common stock and preferred stock are listed on the New York Stock Exchange under the symbols "MFA" and "MFA-B," respectively. Our senior notes due 2042 are listed on the NYSE under the symbol "MFO."
We are primarily engaged in the real estate finance business. We engage in our business through subsidiaries that invest, on a leveraged basis, in residential mortgage assets, including Non-Agency MBS, Agency MBS, residential whole loans and CRT securities. Our principal business objective is to deliver shareholder value through the generation of distributable income and through asset performance linked to residential mortgage credit fundamentals. We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return.
Our Non-Agency MBS portfolio primarily consists of (i) Legacy Non-Agency MBS and (ii) 3 Year Step-up securities. In addition to Non-Agency MBS investments, we invest in re-performing and non-performing residential whole loans through our interests in certain consolidated trusts. Our strategy of combining investments in Agency MBS, Non-Agency MBS and residential whole loans is designed to generate attractive returns with less overall sensitivity to changes in the yield curve, the general level of interest rates and prepayments.
Our Legacy Non-Agency MBS have been acquired primarily at discounts to face/par value, which we believe serves to mitigate our exposure to credit risk. The mortgages collateralizing our Legacy Non-Agency MBS consist primarily of ARMs, 30-year fixed-rate mortgages and Hybrids. Legacy Non-Agency ARMs and Hybrids typically exhibit reduced interest rate sensitivity (as compared to fixed-rate Legacy Non-Agency MBS) due to their interest rate adjustments (similar to Agency ARMs and Hybrids). However, yields on Legacy Non-Agency MBS, unlike Agency MBS, also exhibit sensitivity to changes in credit performance. To the extent that higher interest rates in the future are indicative of an improving economy, better employment data and/or higher home prices, it is possible that these factors will improve the credit performance of Legacy Non-Agency MBS and therefore mitigate the interest rate sensitivity of these securities.
Our 3 Year Step-up securities were purchased primarily as new issuances at prices at or around par and represent the senior tranches of the related securitizations. These 3 Year Step-up securities are structured with significant credit enhancement (typically approximately 50%) and the subordinate tranches absorb all credit losses (until those tranches are extinguished) and typically receive no cash flow (interest or principal) until the senior tranche is paid off.
The mortgages collateralizing our Agency MBS portfolio are predominantly Hybrids, 15-year fixed-rate mortgages and ARMs. Our Agency MBS were selected to generate attractive returns relative to interest rate and prepayment risks. The Hybrid loans collateralizing our MBS typically have initial fixed-rate periods at origination of three, five, seven or ten years. At the end of this fixed-rate period, these mortgages become adjustable and their interest rates adjust based on the London Interbank Offered Rate (or LIBOR) or in some cases the one-year constant maturity treasury rate (or CMT). As coupons earned on Agency Hybrids and ARMs adjust over time as interest rates change, these assets are generally less sensitive to changes in interest rates than are fixed-rate MBS.
Our investments in credit sensitive whole loans, which we acquire through certain trusts, are comprised of both re-performing and non-performing whole loans. Re-performing loans are typically characterized by borrowers who have experienced payment delinquencies in the past and the amount owed on the mortgage may exceed the value of the property pledged as collateral. These loans are purchased at purchase prices that are discounted (often substantially so) to the contractual loan balance to reflect the impaired credit history of the borrower, the loan-to-value (or LTV) of the loan and the coupon. Non-performing loans are typically characterized by borrowers who have defaulted on their obligations and/or have payment delinquencies of 60 days or more at the time we acquire the loan. These loans are also purchased at purchase prices that are discounted (often substantially so) to the contractual loan balance that reflects primarily the non-performing nature of the loan. Typically, this purchase price is a discount to the expected value of the collateral securing the loan, such value to be realized after foreclosure and liquidation of the property.
Our financing strategy is designed to increase the size of our portfolio by borrowing against a substantial portion of the market value of the residential mortgage assets in our portfolio. We primarily use repurchase agreements to finance the acquisition of our mortgage-related assets. In addition, we have also used securitized debt to finance some of our Non-Agency MBS and our credit sensitive loans. We enter into interest rate swap agreements and other hedging instruments to hedge the interest rate risk associated with a portion of our repurchase agreement borrowings and securitized debt.
Stockholders interested in participating in our Discount Waiver, Direct Stock Purchase and Dividend Reinvestment Plan or receiving a plan prospectus may do so by contacting Computershare, (the plan) administrator, at 1-866-249-2610 (toll free). For more information about the plan, interested stockholders may also go to the website established for the plan at http://www.computershare.com/investor. This website and the information contained herein (including any links to other websites or web pages) shall not constitute an offer to sell or the solicitation of an offer to buy any securities pursuant to the plan, and any offer and/or sale of such securities will be made only pursuant to a plan prospectus described above.