MFA
Mortgage Investments, Inc. (the “Company”) was incorporated in Maryland on July
24, 1997 and began operations on April 10, 1998. The Company has
elected to be treated as a real estate investment trust (“REIT”) for U.S.
federal income tax purposes. In order to maintain its qualification
as a REIT, the Company must comply with a number of requirements under federal
tax law, including that it must distribute at least 90% of its annual net
taxable ordinary net income to its stockholders, subject to certain
adjustments. (See Note 10(b).)
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2.
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Summary of Significant
Accounting Policies
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(a) Basis
of Presentation and Consolidation
The
accompanying interim unaudited financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and note disclosures normally
included in financial statements prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) have been condensed or omitted according
to such SEC rules and regulations. Management believes, however, that
these disclosures are adequate to make the information presented therein not
misleading. The accompanying financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31,
2007. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial condition of the Company
at September 30, 2008 and results of operations for all periods presented have
been made. The results of operations for the nine-month period ended
September 30, 2008 should not be construed as indicative of the results to be
expected for the full year.
The
accompanying consolidated financial statements have been prepared on the accrual
basis of accounting in accordance with GAAP. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(b) MBS/Investment
Securities
The
Company’s investment securities are comprised primarily of hybrid and
adjustable-rate MBS (collectively, “ARM-MBS”) that are issued or guaranteed as
to principal and/or interest by a federally chartered corporation, such as
Fannie Mae or Freddie Mac, or an agency of the U.S. government, such as Ginnie
Mae (collectively, “Agency MBS”), or are rated AAA by a nationally recognized
rating agency, such as Moody’s Investors Services, Inc., Standard & Poor’s
Corporation (“S&P”) or Fitch, Inc. (“Rating Agencies”). Hybrid
MBS have interest rates that are fixed for a specified period and, thereafter,
generally reset annually. To a lesser extent, the Company also holds
investments in non-Agency MBS, mortgage-related securities and other investments
that are rated below
AAA. At September 30, 2008, the Company held securities with a
carrying value of $26.0 million rated below AAA. (See Note
3.)
The
Company accounts for its investment securities in accordance with Statement of
Financial Accounting Standards (“FAS”) No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” which requires that investments in
securities be designated as either “held-to-maturity,” “available-for-sale” or
“trading” at the time of acquisition. All of the Company’s investment
securities are designated as available-for-sale and are carried at their fair
value with unrealized gains and losses excluded from earnings and reported in
other comprehensive income/(loss), a component of Stockholders’
Equity. (See Notes 2(k) and 9.) The Company determines the
fair value of its investment securities based upon prices obtained from a
third-party pricing service and broker quotes. The Company applies
the guidance prescribed in Financial Accounting Standards Board (“FASB”) Staff
Position FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments” (the “FASB Impairment
Position”). (See Note 2(e).)
Although
the Company generally intends to hold its investment securities until maturity,
it may, from time to time, sell any of its securities as part of the overall
management of its business. The available-for-sale designation
provides the Company with the flexibility to sell its investment
securities. Upon the sale of an investment security, any unrealized
gain or loss is reclassified out of accumulated other comprehensive
income/(loss) to earnings as a realized gain or loss using the specific
identification method.
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Interest
income is accrued based on the outstanding principal balance of the investment
securities and their contractual terms. Premiums and discounts
associated with the Agency MBS and MBS rated AA and higher are amortized into
interest income over the life of such securities using the effective yield
method, adjusted for actual prepayment activity in accordance with FAS No. 91,
“Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases.” Certain of the
Agency MBS owned by the Company contractually provide for negative amortization,
which occurs when the full amount of the stated coupon interest due on the
distribution date for an MBS is not received from the underlying
mortgages. The Company recognizes such interest shortfall on its
Agency MBS as interest income with a corresponding increase in the related
Agency MBS principal value (i.e., par) as the interest shortfall is guaranteed
by the issuing agency.
Interest
income on the Company’s securities rated A or lower, is recognized in accordance
with Emerging Issues Task Force (“EITF”) of the FASB Consensus No. 99-20,
“Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets” (“EITF
99-20”). Pursuant to EITF 99-20, cash flows from a security are
estimated applying assumptions used to determine the fair value of such security
and the excess of the future cash flows over the initial investment is
recognized as interest income under the effective yield method. The
Company reviews and, if appropriate, makes adjustments to its cash flow
projections at least quarterly and monitors these projections based on input and
analysis received from external sources, internal models, and its judgment about
interest rates, prepayment rates, the timing and amount of credit losses and
other factors. Changes in cash flows from those originally projected,
or from those estimated at the last evaluation, may result in a prospective
change in interest income recognized on, or the carrying value of, such
securities. For each security, the Company assesses the applicability
of EITF 99-20 at the date of acquisition and on a subsequent basis for
securities that have experienced both an other-than-temporary impairment and a
downgrade in rating to single A or lower by a Rating Agency. (See
Note 3.)
The
Company’s MBS pledged as collateral against repurchase agreements and Swaps are
included in investment securities on the Consolidated Balance Sheets and the
value of the MBS pledged are disclosed parenthetically. (See Notes 3
and 7.)
(c) Cash
and Cash Equivalents
Cash and
cash equivalents include cash on deposit with financial institutions and
investments in high quality overnight money market funds, all of which have
original maturities of three months or less. At September 30, 2008
all of the Company’s cash investments were in high quality overnight money
market funds. The carrying amount of cash equivalents is deemed to be
their fair value.
On
September 29, 2008, the U.S. Treasury Department announced that it had opened
its Temporary Guarantee Program for Money Market Funds, under which
it guarantees the share price of eligible money market funds that apply and
pay for inclusion in the program. The program covers shareholders of
participating funds as of the close of business on September 19,
2008. Each of the money market funds in which the Company is invested
has elected to participate in the program. As a result, up to $421.7
million of the Company’s money market investments was insured as of September
30, 2008. The program will be in effect for an initial three-month
period, after which the Secretary of the U.S. Treasury Department will have the
option to renew the program up to the close of business on September 18,
2009.
(d) Restricted
Cash
Restricted
cash represents cash held in interest-bearing accounts by counterparties as
collateral against the Company’s Swaps and/or repurchase
agreements. Restricted cash is not available to the Company for
general corporate purposes, but may be applied against payments due to Swap or
repurchase agreement counterparties or returned to the Company when the
collateral requirements are exceeded or, at the maturity of the Swap or
repurchase agreement. The Company did not have restricted cash at
September 30, 2008 and had restricted cash of $4.5 million pledged against its
Swaps at December 31, 2007. (See Notes 5 and 7.)
(e) Credit
Risk/Other-Than-Temporary Impairment
The
Company limits its exposure to credit losses on its investment portfolio by
requiring that at least 50% of its investment portfolio consist of hybrid and
adjustable-rate MBS that are either (i) Agency MBS or (ii) rated in one of the
two highest rating categories by at least one Rating Agency. The
remainder of the Company’s investment portfolio may consist of direct or
indirect investments in: (i) other types of MBS and residential mortgage loans;
(ii) other mortgage and real estate-related debt and equity; (iii) other yield
instruments (corporate or government); and (iv) other types of assets approved
by the Company’s Board of Directors (the “Board”) or a committee
thereof. At
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September
30, 2008, all of the Company’s MBS were secured by first lien mortgages on
one-to-four family properties. At September 30, 2008, 93.4% of the
Company’s assets consisted of Agency MBS and related receivables, 2.0% were MBS
rated AAA by a Rating Agency and related receivables and 4.1% were cash and cash
equivalents combined these assets comprised 99.5% of the Company’s total
assets. The Company’s remaining assets consisted of Swaps, an
investment in real estate, securities rated below AAA, goodwill, prepaid, and
other assets. (See Note 3.)
The
Company recognizes impairments on its investment securities in accordance with
the FASB Impairment Position, which, among other things, specifically addresses:
the determination as to when an investment is considered impaired; whether that
impairment is other-than-temporary; the measurement of an impairment loss;
accounting considerations subsequent to the recognition of an
other-than-temporary impairment; and certain required disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments.
The
Company assesses its investment securities for other-than-temporary impairment
on at least a quarterly basis. When the fair value of an investment
is less than its amortized cost at the balance sheet date of the reporting
period for which impairment is assessed, the impairment is designated as either
“temporary” or “other-than- temporary.” If it is determined that
impairment is other-than-temporary, then an impairment loss is recognized in
earnings reflecting the entire difference between the investment's cost basis
and its fair value at the balance sheet date of the reporting period for which
the assessment is made. The measurement of the impairment is not
permitted to include partial recoveries subsequent to the balance sheet
date. Following the recognition of an other-than-temporary
impairment, the fair value of the investment becomes the new cost basis of the
investment and is not adjusted for subsequent recoveries in fair value through
earnings. Because management’s assessments are based on factual
information as well as subjective information available at the time of
assessment, the determination as to whether an other-than-temporary impairment
exists and, if so, the amount considered other-than-temporarily impaired, or not
impaired, is subjective and, therefore, the timing and amount of
other-than-temporary impairments constitute material estimates that are
susceptible to significant change.
Upon a
decision to sell an impaired available-for-sale investment security on which the
Company does not expect the fair value of the investment to fully recover prior
to the expected time of sale, the investment shall be deemed
other-than-temporarily impaired in the period in which the decision to sell is
made. The Company recognizes an impairment loss when the impairment
is deemed other-than-temporary even if a decision to sell has not been
made. Even if the inability to collect is not probable, the Company
may recognize an other-than-temporary loss if, for example, the Company does not
have the intent and ability to hold a security until its fair value has
recovered. The Company did not recognize any other-than-temporary
impairment on any of its Agency MBS during the three or nine months ended
September 30, 2008 and September 30, 2007.
Certain
of the Company’s non-Agency investment securities were purchased at a discount
to par value, with a portion of such discount considered credit protection
against future credit losses. The initial credit protection (i.e.,
discount) on these MBS may be adjusted over time, based on review of the
investment or, if applicable, its underlying collateral, actual and projected
cash flow from such collateral, economic conditions and other
factors. If the performance of these securities is more favorable
than forecasted, a portion of the amount designated as credit discount may be
accreted into interest income over time. Conversely, if the
performance of these securities is less favorable than forecasted, impairment
charges and write-downs of such securities to a new cost basis could
result. During the nine months ended September 30, 2008, the Company
recognized impairment charges of $5.1 million against its non-Agency investment
securities, of which $183,000 was recognized during the three months ended
September 30, 2008 in accordance with EITF 99-20. The Company did not
have any impairment charges against any of its investment securities during the
three and nine months ended September 30, 2007. At September 30,
2008, the Company had $26.0 million, or 0.2% of its assets, invested in
investment securities rated below AAA, which had an amortized cost of $43.7
million. (See Note 3.)
(f) Goodwill
The
Company accounts for its goodwill in accordance with FAS No. 142, “Goodwill and
Other Intangible Assets” (“FAS 142”) which provides, among other things, how
entities are to account for goodwill and other intangible assets that arise from
business combinations or are otherwise acquired. FAS 142 requires
that goodwill be tested for impairment annually or more frequently under certain
circumstances. At September 30, 2008 and December 31, 2007, the
Company had goodwill of $7.2 million, which represents the unamortized portion
of the excess of the fair value of its common stock issued over the fair value
of net assets acquired in connection with its
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
formation
in 1998. Goodwill is tested for impairment at least annually at the
entity level. Through September 30, 2008, the Company had not
recognized any impairment against its goodwill.
(g) Real
Estate
At
September 30, 2008, the Company indirectly held 100% of the ownership interest
in Lealand Place, a 191-unit apartment property located in Lawrenceville,
Georgia (“Lealand”), which is consolidated with the Company. This
property was acquired through a tax-deferred exchange under Section 1031 of the
Internal Revenue Code of 1986, as amended (the “Code”). (See Note
6.)
The
property, capital improvements and other assets held in connection with this
investment are carried at cost, net of accumulated depreciation and
amortization. Maintenance, repairs and minor improvements are
expensed in the period incurred, while real estate assets, except land, and
capital improvements are depreciated over their useful life using the
straight-line method.
(h) Repurchase
Agreements
The
Company finances the acquisition of its MBS through the use of repurchase
agreements. Under these repurchase agreements, the Company sells
securities to a lender and agrees to repurchase the same securities in the
future for a price that is higher than the original sale price. The
difference between the sale price that the Company receives and the repurchase
price that the Company pays represents interest paid to the
lender. Although structured as a sale and repurchase, under
repurchase agreements, the Company pledges its securities as collateral to
secure a loan which is equal in value to a specified percentage of the fair
value of the pledged collateral, while the Company retains beneficial ownership
of the pledged collateral. At the maturity of a repurchase agreement,
the Company is required to repay the loan and concurrently receives back its
pledged collateral from the lender. With the consent of the lender,
the Company may renew a repurchase agreement at the then prevailing financing
terms. Margin calls, whereby a lender requires that the Company
pledge additional securities or cash as collateral to secure borrowings under
its repurchase agreements with such lender, are routinely experienced by the
Company as the value of the MBS pledged as collateral declines due to scheduled
monthly amortization and prepayments of principal on such MBS. In
addition, margin calls may also occur when the fair value of the MBS pledged as
collateral declines due to changes in market interest rates, spreads or other
market conditions. Through September 30, 2008, the Company had
satisfied all of its margin calls and had not sold assets in response to any
margin call. (See Note 7.)
Original
terms to maturity of the Company’s repurchase agreements generally range from
one month to 60 months. Should a counterparty decide not to renew a
repurchase agreement at maturity, the Company must either refinance elsewhere or
be in a position to satisfy the obligation. If, during the term of a
repurchase agreement, a lender should file for bankruptcy, the Company might
experience difficulty recovering its pledged assets and may have an unsecured
claim against the lender’s assets for the difference between the amount loaned
to the Company plus interest due to the counterparty and the fair value of the
collateral pledged to such lender. The Company had no outstanding
borrowings at September 30, 2008 with Lehman Brothers Holdings Inc. (“Lehman”),
who filed for bankruptcy in September 2008, or any of its subsidiaries, nor was
Lehman significant to the Company’s borrowing capacity. The Company
generally seeks to diversify its exposure by entering into repurchase agreements
with at least four separate lenders with a maximum loan from any lender of no
more than three times the Company’s stockholders’ equity. At
September 30, 2008, the Company had outstanding balances under repurchase
agreements with 16 separate lenders with a maximum net exposure (the difference
between the amount loaned to the Company, including interest payable, and the
fair value of the securities pledged by the Company as collateral, including
accrued interest on such securities) to any single lender of $95.5 million
related to repurchase agreements, or 7.3% of stockholders’
equity. (See Note 7.)
(i) Equity
Based Compensation
The
Company accounts for its stock-based compensation in accordance with FAS No.
123R, “Share-Based Payment,” (“FAS 123R”). The Company uses the
Black-Scholes-Merton option model to value its stock options. There
are limitations inherent in this model, as with all other models currently used
in the market place to value stock options. For example, the
Black-Scholes-Merton option model has not been designed to value stock options
which contain significant restrictions and forfeiture risks, such as those
contained in the stock options that are issued to certain
employees. Significant assumptions are made in order to determine the
Company’s option value, all of which are subjective. The fair value
of the Company’s stock options are expensed using the straight-line
method.
Pursuant
to FAS 123R, compensation expense for restricted stock awards, restricted stock
units (“RSUs”) and stock options is recognized over the vesting period of such
awards, based upon the fair value of such awards at the
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
grant
date. DERs attached to such awards are charged to stockholders’
equity when declared. Equity based awards for which there is no risk
of forfeiture are expensed upon grant, or at such time that there is no longer a
risk of forfeiture. A zero forfeiture rate is applied to the
Company’s equity based awards, given that such awards have been granted to a
limited number of employees, (primarily long-term executives that have
employment agreements with the Company) and that historical forfeitures have
been minimal. Should information arise indicating that forfeitures
may occur, the forfeiture rate would be revised and accounted for as a change in
estimate. To the extent that dividends or DERs are paid pursuant to
the terms of any unvested equity based awards, the grantees of such awards are
not required to return such payments to the Company. Accordingly,
payments made on any such awards that ultimately do not vest are recognized as
additional compensation expense at the time an award is
forfeited. With respect to certain restricted stock grants, however,
dividends accrue to the benefit of the grantee but are only paid to the extent
that these restricted shares vest. To the extent that these
restricted stock grants are forfeited by the grantee prior to vesting, all
accrued but unpaid dividends will be retained by the Company. There
were no forfeitures of any equity based compensation awards during the three and
nine month periods ended September 30, 2008 and September 30,
2007. (See Note 13.)
(j) Earnings
per Common Share (“EPS”)
Basic EPS
is computed by dividing net income/(loss) allocable to holders of common stock
by the weighted average number of shares of common stock outstanding during the
period. Diluted EPS is computed by dividing net income/(loss)
available to holders of common stock by the weighted average shares of common
stock and common equivalent shares outstanding during the period. For
the diluted EPS calculation, common equivalent shares outstanding includes the
weighted average number of shares of common stock outstanding adjusted for the
effect of dilutive unexercised stock options, non-vested restricted shares and
non-vested RSUs outstanding using the treasury stock method. Under
the treasury stock method, common equivalent shares are calculated assuming that
all dilutive common stock equivalents are exercised and the proceeds, along with
future compensation expenses for unvested stock options and RSUs, are used to
repurchase shares of the Company’s outstanding common stock at the average
market price during the reporting period. No dilutive common share
equivalents are included in the computation of any diluted per share amount for
a period in which a net operating loss is reported. (See Note
11.)
(k) Comprehensive
Income/(Loss)
Comprehensive
income/(loss) for the Company includes net income/(loss), the change in net
unrealized gains/(losses) on investment securities and derivative hedging
instruments, adjusted by realized net gains/(losses) included in net
income/(loss) for the period and reduced by dividends on the Company’s preferred
stock.
(l)
U.S. Federal Income Taxes
The
Company has elected to be taxed as a REIT under the provisions of the Code and
the corresponding provisions of state law. The Company expects to
operate in a manner that will enable it to continue to be taxed as a
REIT. A REIT is not subject to tax on its earnings to the extent that
it distributes its taxable ordinary net income to its
stockholders. As such, no provision for current or deferred income
taxes has been made in the accompanying consolidated financial
statements.
(m) Derivative
Financial Instruments/Hedging Activity
The
Company hedges a portion of its interest rate risk through the use of derivative
financial instruments, which, to date, have been comprised of Swaps and Caps
(collectively, “Hedging Instruments”). The Company accounts for
Hedging Instruments in accordance with FAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“FAS 133”) as amended by FAS No. 138,
“Accounting for Certain Derivative Instruments and Certain Hedging Activities,”
and FAS No. 149 “Amendment of Statement 133 on Derivative Instruments and
Hedging Activities.” The Company’s Hedging Instruments are carried on
the balance sheet at their fair value, as assets, if their fair value is
positive, or as liabilities, if their fair value is negative. Since
the Company’s Hedging Instruments are designated as “cash flow hedges,” the
change in the fair value of any such instrument is recorded in other
comprehensive income/(loss) provided that the hedge is effective. The
change in fair value of any ineffective amount of a Hedging Instrument is
recognized in earnings. To date, the Company has recognized gains and
losses realized on Swaps that have been terminated early and deemed
ineffective. The Company has not recognized any change in the value
of its Hedging Instruments in earnings as a result of any Hedging Instrument or
a portion thereof being ineffective.
Upon
entering into hedging transactions, the Company documents the relationship
between the Hedging Instruments and the hedged liability. The Company
also documents its risk-management policies, including
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
objectives
and strategies, as they relate to its hedging activities. The Company
assesses, both at inception of a hedge and on an on-going basis, whether or not
the hedge is “highly effective,” as defined by FAS 133. The Company
discontinues hedge accounting on a prospective basis and recognizes changes in
fair value reflected in earnings when: (i) it is determined that the derivative
is no longer effective in offsetting cash flows of a hedged item (including
forecasted transactions); (ii) it is no longer probable that the forecasted
transaction will occur; or (iii) it is determined that designating the
derivative as a Hedging Instrument is no longer appropriate.
The
Company utilizes Hedging Instruments to manage a portion of its interest rate
risk and does not enter into derivative transactions for speculative or trading
purposes. (See Notes 2(n) and 5.)
Interest
Rate Swaps
No cost
is incurred by the Company at the inception of a Swap. Based upon the
contractual terms of a Swap Agreement, which vary by counterparty, the Company
is required to pledge cash or securities equal to a specified percentage of the
notional amount of the Swap to the counterparty as collateral, or may be
entitled to receive collateral from a Swap counterparty. The Company
does not offset cash collateral receivables or payables against its net
derivative positions. The Company did not have restricted cash at
September 30, 2008 and had restricted cash of $4.5 million pledged against its
Swaps at December 31, 2007. If, during the term of the Swap, a
Counterparty should file for bankruptcy, the Company might experience difficulty
recovering its pledged assets and may have an unsecured claim against the
counterparty’s assets for the difference between the fair value of the Swap and
the fair value of the collateral pledged to such counterparty. When
the Company enters into a Swap, it agrees to pay a fixed rate of interest and to
receive a variable interest rate, based on the London Interbank Offered Rate
(“Libor”). The Company’s Swaps are designated as cash flow hedges
against certain of its current and forecasted borrowings under repurchase
agreements.
While the
fair value of the Company’s Swaps are reflected in the consolidated balance
sheets, the notional amounts are not. All changes in the value of
Swaps are recorded in accumulated other comprehensive income/(loss), provided
that the hedge remains effective. The Company’s Swaps are valued by a
third party pricing service, which prices are independently reviewed by the
Company for reasonableness. If it becomes probable that the
forecasted transaction (which in this case refers to interest payments to be
made under the Company’s short-term borrowing agreements) will not occur by the
end of the originally specified time period, as documented at the inception and
throughout the term of the hedging relationship, then the related gain or loss
in accumulated other comprehensive income/(loss) is recognized through
earnings.
The gain
or loss from a terminated Swap remains in accumulated other comprehensive
income/(loss) until the forecasted interest payments affect
earnings. However, if it is probable that the forecasted interest
payments will not occur, then the entire gain or loss is recognized though
earnings.
(n) Adoption
of New Accounting Standards and Interpretations
Fair
Value Measurements
On
January 1, 2008, the Company adopted FAS No. 157, “Fair Value Measurements”
(“FAS 157”), which defines fair value, establishes a framework for measuring
fair value in accordance with GAAP and expands disclosures about fair value
measurements.
The
changes to previous practice resulting from the application of FAS 157 relate to
the definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. The definition of
fair value retains the exchange price notion used in earlier definitions of fair
value. FAS 157 clarifies that the exchange price is the price in an
orderly transaction, that is not a forced liquidation or distressed sale,
between market participants to sell the asset or transfer the liability in the
market in which the reporting entity would transact for the asset or liability,
that is, the principal or most advantageous market for the asset or
liability. The transaction to sell the asset or transfer the
liability is a hypothetical transaction at the measurement date, considered from
the perspective of a market participant that holds the asset or owes the
liability. FAS 157 provides a consistent definition of fair value
which focuses on exit price and prioritizes, within a measurement of fair value,
the use of market-based inputs over entity-specific inputs in active
markets. In addition, FAS 157 provides a framework for measuring fair
value, and establishes a three-level hierarchy for fair value measurements based
upon the transparency of inputs to the valuation of an asset or liability as of
the measurement date. (See Notes 2(o) and 9.)
FAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“FAS 159”) permits entities to elect to measure many financial instruments and
certain other items at fair value. Unrealized gains and
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
losses on
items for which the fair value option has been elected will be recognized in
earnings at each subsequent reporting date. A decision to elect the
fair value option for an eligible financial instrument, which can be made on an
instrument by instrument basis, is irrevocable. The Company’s
adoption of FAS 159 on January 1, 2008 did not have a material impact on its
consolidated financial statements, as the Company did not elect the fair value
option.
FASB
Interpretation No. 39-1, “Amendment of FASB Interpretation (“FIN”) No. 39.”
(“FIN 39-1”), defines “right of setoff” and specifies what conditions must be
met for a derivative contract to qualify for this right of
setoff. FIN 39-1 also addresses the applicability of a right of
setoff to derivative instruments and clarifies the circumstances in which it is
appropriate to offset amounts recognized for those instruments in the balance
sheet. In addition, FIN 39-1 permits offsetting of fair value amounts
recognized for multiple derivative instruments executed with the same
counterparty under a master netting arrangement and fair value amounts
recognized for the right to reclaim cash collateral (a receivable) or the
obligation to return cash collateral (a payable) arising from the same master
netting arrangement as the derivative instruments. The Company does
not offset cash collateral receivables or payables against its net derivative
positions. The Company’s adoption of FIN 39-1 on January 1, 2008 did
not have any impact on its consolidated financial statements. The
Company did not have restricted cash at September 30, 2008 and had restricted
cash of $4.5 million pledged against its Swaps at December 31,
2007.
On March
20, 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS
161”). FAS 161 provides for enhanced disclosures about how and why an
entity uses derivatives and how and where those derivatives and related hedged
items are reported in the entity’s financial statements. FAS 161 also
requires certain tabular formats for disclosing such information. FAS
161 is effective for fiscal years and interim periods beginning after November
15, 2008 (i.e., calendar year 2009 for the Company) with early application
encouraged. FAS 161 applies to all entities and all derivative
instruments and related hedged items accounted for under FAS
133. Among other things, FAS 161 requires disclosures of an entity’s
objectives and strategies for using derivatives by primary underlying risk and
certain disclosures about the potential future collateral or cash requirements
(that is, the effect on the entity’s liquidity) as a result of contingent
credit-related features. The Company’s adoption of FAS 161
on June 30, 2008, resulted in additional disclosures about the
Company’s Hedging Instruments which did not have any impact on the Company’s
results of operations or financial condition.
(o) Recently
Issued Accounting Standards
In
February 2008, the FASB issued FASB Staff Position (“FSP”) 140-3, “Accounting
for Transfers of Financial Assets and Repurchase Financing Transactions,” (“FSP
140-3”), which provides guidance on accounting for transfers of financial assets
and repurchase financings. FSP 140-3 presumes that an initial
transfer of a financial asset and a repurchase financing are considered part of
the same arrangement (i.e., a linked transaction) under FAS No. 140 “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” (“FAS 140”). However, if certain criteria, as described
in FSP 140-3, are met, the initial transfer and repurchase financing shall not
be evaluated as a linked transaction and shall be evaluated separately under FAS
140. If the linked transaction does not meet the requirements for
sale accounting, the linked transaction shall generally be accounted for as a
forward contract, as opposed to the current presentation, where the purchased
asset and the repurchase liability are reflected separately on the balance
sheet.
FSP 140-3
is effective on a prospective basis for fiscal years beginning after November
15, 2008, with earlier application not permitted. The Company does
not expect that the adoption of FSP 140-3, will have a material impact on the
Company’s financial statements.
In June
2007, the American Institute of Certified Public Accountants (“AICPA”) issued
Statement of Position (“SOP”) 07-01 “Clarification of the Scope of the Audit and
Accounting Investment Companies and Accounting by Parent Companies and Equity
Method Investors for Investments in Investment Companies” (“SOP 07-1”) which
provides guidance for determining whether an entity is within the scope of the
guidance in the AICPA Audit and Accounting Guide for Investment
Companies. On February 6, 2008, the FASB indefinitely deferred the
effective date of SOP 07-1.
On
October 10, 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active” (“FSP
157-3”). FSP 157-3 clarifies the application of FAS 157 in a market
that is not active and provides an example to illustrate key consideration in
determining the fair value of a financial asset when the market for that
financial asset is not active. The issuance of FSP 157-3 did not have
any impact on the Company’s determination of fair value for its financial
assets. (See notes 2(n) and 9.)
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(p) Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
At
September 30, 2008 and December 31, 2007, the Company’s investment securities
portfolio consisted primarily of pools of ARM-MBS. The Company’s
non-Agency MBS are categorized based on the lowest rating issued by a Rating
Agency at balance sheet date. The following tables
present certain information about the Company's investment securities at
September 30, 2008 and December 31, 2007.
|
September
30, 2008
|
|
|
(In
Thousands)
|
|
Principal/
Current Face
|
|
|
Purchase
Premiums
|
|
|
Purchase
Discounts
|
|
|
Amortized
Cost
(1)
|
|
|
Carrying
Value/
Fair
Value
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Net
Unrealized Gain/(Loss)
|
|
|
Agency
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie
Mae
|
|
$ |
9,195,875 |
|
|
$ |
118,028 |
|
|
$ |
(1,424 |
) |
|
$ |
9,312,479 |
|
|
$ |
9,226,429 |
|
|
$ |
21,917 |
|
|
$ |
(107,967 |
) |
|
$ |
(86,050 |
) |
|
Ginnie
Mae
|
|
|
32,047 |
|
|
|
570 |
|
|
|
- |
|
|
|
32,617 |
|
|
|
32,290 |
|
|
|
27 |
|
|
|
(354 |
) |
|
|
(327 |
) |
|
Freddie
Mac
|
|
|
747,660 |
|
|
|
11,260 |
|
|
|
- |
|
|
|
771,692 |
|
|
|
765,110 |
|
|
|
635 |
|
|
|
(7,217 |
) |
|
|
(6,582 |
) |
|
Non-Agency
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rated
AAA (2)
|
|
|
284,709 |
|
|
|
2,036 |
|
|
|
(214 |
) |
|
|
286,531 |
|
|
|
210,853 |
|
|
|
- |
|
|
|
(75,678 |
) |
|
|
(75,678 |
) |
|
Rated
AA+
|
|
|
790 |
|
|
|
- |
|
|
|
(3 |
) |
|
|
787 |
|
|
|
474 |
|
|
|
- |
|
|
|
(313 |
) |
|
|
(313 |
) |
|
Rated
A+
|
|
|
553 |
|
|
|
- |
|
|
|
(2 |
) |
|
|
551 |
|
|
|
255 |
|
|
|
- |
|
|
|
(296 |
) |
|
|
(296 |
) |
|
Rated
BBB+
|
|
|
316 |
|
|
|
- |
|
|
|
(4 |
) |
|
|
312 |
|
|
|
89 |
|
|
|
- |
|
|
|
(223 |
) |
|
|
(223 |
) |
|
Rated
BB (3)
|
|
|
42,652 |
|
|
|
- |
|
|
|
(479 |
) |
|
|
41,990 |
|
|
|
25,120 |
|
|
|
- |
|
|
|
(16,870 |
) |
|
|
(16,870 |
) |
|
Rated
below BB
|
|
|
238 |
|
|
|
- |
|
|
|
(154 |
) |
|
|
84 |
|
|
|
28 |
|
|
|
5 |
|
|
|
(61 |
) |
|
|
(56 |
) |
|
Total
|
|
$ |
10,304,840 |
|
|
$ |
131,894 |
|
|
$ |
(2,280 |
) |
|
$ |
10,447,043 |
|
|
$ |
10,260,648 |
|
|
$ |
22,584 |
|
|
$ |
(208,979 |
) |
|
$ |
(186,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
(In
Thousands)
|
|
Principal/
Current Face
|
|
|
Purchase
Premiums
|
|
|
Purchase
Discounts
|
|
|
Amortized
Cost
(1)
|
|
|
Carrying
Value/
Fair
Value
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Net
Unrealized Gain/(Loss)
|
|
|
Agency
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie
Mae
|
|
$ |
7,157,079 |
|
|
$ |
91,610 |
|
|
$ |
(706 |
) |
|
$ |
7,247,983 |
|
|
$ |
7,287,111 |
|
|
$ |
47,486 |
|
|
$ |
(8,358 |
) |
|
$ |
39,128 |
|
|
Ginnie
Mae
|
|
|
172,340 |
|
|
|
3,173 |
|
|
|
- |
|
|
|
175,513 |
|
|
|
174,089 |
|
|
|
78 |
|
|
|
(1,502 |
) |
|
|
(1,424 |
) |
|
Freddie
Mac
|
|
|
393,441 |
|
|
|
6,221 |
|
|
|
- |
|
|
|
409,337 |
|
|
|
408,792 |
|
|
|
781 |
|
|
|
(1,326 |
) |
|
|
(545 |
) |
|
Non-Agency
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rated
AAA
|
|
|
430,025 |
|
|
|
2,341 |
|
|
|
(987 |
) |
|
|
431,379 |
|
|
|
424,954 |
|
|
|
97 |
|
|
|
(6,522 |
) |
|
|
(6,425 |
) |
|
Rated
AA+
|
|
|
1,413 |
|
|
|
- |
|
|
|
- |
|
|
|
1,413 |
|
|
|
1,392 |
|
|
|
- |
|
|
|
(21 |
) |
|
|
(21 |
) |
|
Rated
A+
|
|
|
989 |
|
|
|
- |
|
|
|
(3 |
) |
|
|
986 |
|
|
|
967 |
|
|
|
- |
|
|
|
(19 |
) |
|
|
(19 |
) |
|
Rated
BBB+
|
|
|
565 |
|
|
|
- |
|
|
|
(6 |
) |
|
|
559 |
|
|
|
543 |
|
|
|
- |
|
|
|
(16 |
) |
|
|
(16 |
) |
|
Rated
BB and below
|
|
|
1,648 |
|
|
|
- |
|
|
|
(136 |
) |
|
|
1,512 |
|
|
|
1,646 |
|
|
|
134 |
|
|
|
- |
|
|
|
134 |
|
|
Unrated
|
|
|
3,095 |
|
|
|
- |
|
|
|
(127 |
) |
|
|
2,968 |
|
|
|
1,689 |
|
|
|
35 |
|
|
|
(1,314 |
) |
|
|
(1,279 |
) |
|
Total
MBS
|
|
$ |
8,160,595 |
|
|
$ |
103,345 |
|
|
$ |
(1,965 |
) |
|
$ |
8,271,650 |
|
|
$ |
8,301,183 |
|
|
$ |
48,611 |
|
|
$ |
(19,078 |
) |
|
$ |
29,533 |
|
|
Income
notes (4)
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
1,915 |
|
|
|
1,614 |
|
|
|
- |
|
|
|
(301 |
) |
|
|
(301 |
) |
|
Total
|
|
$ |
8,160,595 |
|
|
$ |
103,345 |
|
|
$ |
(1,965 |
) |
|
$ |
8,273,565 |
|
|
$ |
8,302,797 |
|
|
$ |
48,611 |
|
|
$ |
(19,379 |
) |
|
$ |
29,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
principal payments receivable, which are not included in the
Principal/Current Face. Amortized cost is reduced by
other-than-temporary impairments recognized.
|
|
| |
|
|
(2) On
October 28, 2008, S&P downgraded one MBS to BBB. This MBS,
which remained rated AAA by Fitch, Inc, had an amortized cost of
$39.1 million and a fair value of $25.0 million.
|
|
| |
|
|
(3) Includes
one MBS with an amortized cost of $41.9 million and a fair value of $25.1
million that was rated BB by S&P and rated AAA by Fitch,
Inc.
|
|
| |
|
|
(4) Other
investments are comprised of income notes, which are unrated securities
collateralized by capital securities of a diversified pool of issuers,
consisting primarily of depository institutions and insurance
companies. In June 2008, the Company wrote-off its remaining
investment in income notes, taking a $1.0 million impairment charge
against such investment.
|
|
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Agency
MBS: Agency
MBS are guaranteed as to principal and/or interest by a federally chartered
corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S.
government, such as Ginnie Mae, and, as such, carry an implied AAA
rating. The payment of principal and/or interest on Ginnie Mae MBS is
backed by the full faith and credit of the U.S. government. During
the third quarter of 2008, Fannie Mae and Freddie Mac were placed in
conservatorship under the newly-created Federal Housing Finance Agency
(“FHFA”). By placing Fannie Mae and Freddie Mac under
conservatorship, it is believed that there is now significantly stronger backing
for these guarantors.
Non-Agency
MBS: The Company’s non-Agency MBS are certificates that are
backed by pools of single-family mortgage loans, which are not guaranteed by the
U.S. government, any federal agency or any federally chartered
corporation. Non-Agency MBS may be rated from AAA to B by one or more
of the Rating Agencies or may be unrated (i.e., not assigned a rating by any of
the Rating Agencies). The rating indicates the credit worthiness of
the investment, indicating the obligor’s ability to meet its financial
commitment on the obligation.
The
following table presents information about the Company’s investment securities
that were in an unrealized loss position at September 30, 2008.
|
|
|
Unrealized
Loss Position For:
|
|
|
|
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or more
|
|
|
Total
|
|
|
(In
Thousands)
|
|
Fair
Value
|
|
|
Unrealized
losses
|
|
|
Number
of Securities
|
|
|
Fair
Value
|
|
|
Unrealized
losses
|
|
|
Number
of Securities
|
|
|
Fair
Value
|
|
|
Unrealized
losses
|
|
|
Agency
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie
Mae
|
|
$ |
5,616,014 |
|
|
$ |
97,611 |
|
|
|
295 |
|
|
$ |
560,813 |
|
|
$ |
10,356 |
|
|
|
111 |
|
|
$ |
6,176,827 |
|
|
$ |
107,967 |
|
|
Ginnie
Mae
|
|
|
14,749 |
|
|
|
116 |
|
|
|
8 |
|
|
|
9,426 |
|
|
|
238 |
|
|
|
6 |
|
|
|
24,175 |
|
|
|
354 |
|
|
Freddie
Mac
|
|
|
594,056 |
|
|
|
6,248 |
|
|
|
44 |
|
|
|
40,948 |
|
|
|
969 |
|
|
|
28 |
|
|
|
635,004 |
|
|
|
7,217 |
|
|
Non-Agency
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rated
AAA (1)
|
|
|
104,332 |
|
|
|
46,866 |
|
|
|
2 |
|
|
|
106,521 |
|
|
|
28,812 |
|
|
|
13 |
|
|
|
210,853 |
|
|
|
75,678 |
|
|
Rated
AA+
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
474 |
|
|
|
313 |
|
|
|
1 |
|
|
|
474 |
|
|
|
313 |
|
|
Rated
A+
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
255 |
|
|
|
296 |
|
|
|
1 |
|
|
|
255 |
|
|
|
296 |
|
|
Rated
BBB+
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
88 |
|
|
|
223 |
|
|
|
1 |
|
|
|
88 |
|
|
|
223 |
|
|
Rated
BB (2)
|
|
|
25,061 |
|
|
|
16,870 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,061 |
|
|
|
16,870 |
|
|
Rated
below BB
|
|
|
22 |
|
|
|
61 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
|
|
61 |
|
|
Total
temporarily
impaired
securities
|
|
$ |
6,354,234 |
|
|
$ |
167,772 |
|
|
|
351 |
|
|
$ |
718,525 |
|
|
$ |
41,207 |
|
|
|
161 |
|
|
$ |
7,072,759 |
|
|
$ |
208,979 |
|
|
(1) On
October 28, 2008, S&P downgraded one AAA rated MBS, which had an
amortized cost of $39.1 million and a fair value of $25.0 million at
September 30, 2008, to BBB. This MBS remained rated AAA by Fitch,
Inc.
|
|
|
(2) Is
comprised of one non-Agency MBS, with an amortized cost of $41.9 million,
that was rated BB by S&P and rated AAA by Fitch, Inc.
|
|
The
Company monitors the performance and market value of its investment securities
portfolio on an ongoing basis. During the nine months ended September
30, 2008, the Company recognized aggregate other-than-temporary impairment
charges of $5.1 million against BB rated non-Agency MBS and unrated investment
securities, of which $183,000 was recognized during the three months ended
September 30, 2008.
At
September 30, 2008, the Company determined that it had the intent and ability to
hold its securities in an unrealized loss position until market recovery or
maturity. As such, the Company considers the impairment of its
securities to be temporary. The receipt of principal, at par, and
interest on Agency MBS is guaranteed by the respective Agency guarantor and the
decline in the value of the non-Agency MBS was not related to the performance of
these securities but rather an overall widening of spreads for many types of
fixed income products, due to reduced liquidity in the market. The
Company’s assessment of its ability and intent to continue to hold its
securities may change over time, given, among other things, the dynamic nature
of markets and other variables. Future sales or changes in the
Company’s assessment of its ability and/or intent to hold impaired investment
securities could result in the Company recognizing other-than-temporary
impairment charges or realizing losses on sales in the future.
In March
2008, in response to tightening of credit conditions, the Company adjusted its
balance sheet strategy decreasing its target debt-to-equity multiple range to 7x
to 9x from its historical range of 8x to 9x. In order to
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
reduce
its borrowings, the Company sold MBS with an amortized cost of $1.876 billion
and realized aggregate net losses of $24.5 million, comprised of gross losses of
$25.1 million and gross gains of $571,000. During the quarter ended
September 30, 2008, the Company continued to target a relatively low, on an
historical basis, leverage multiple. As of September 30, 2008, the
Company’s debt-to-equity multiple was 7.2x. The Company has not sold
any investment securities since it modified its leverage strategy in March
2008.
The
following table presents the impact of the Company’s investment securities on
its other comprehensive income/(loss) for the three and nine months ended
September 30, 2008 and 2007.
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
(In
Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Accumulated
other comprehensive income/(loss)
from
investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss)/gain on investment securities at
beginning
of period
|
|
$ |
(34,300 |
) |
|
$ |
(45,647 |
) |
|
$ |
29,232 |
|
|
$ |
(30,995 |
) |
|
Unrealized
(loss)/gain on investment securities, net
|
|
|
(152,191 |
) |
|
|
17,841 |
|
|
|
(208,886 |
) |
|
|
4,071 |
|
|
Reclassification
adjustment for MBS sales
included
in net income/(loss)
|
|
|
- |
|
|
|
11,757 |
|
|
|
(8,241 |
) |
|
|
10,875 |
|
|
Reclassification
adjustment for other-than-
temporary
impairment included in net income/(loss)
|
|
|
96 |
|
|
|
- |
|
|
|
1,500 |
|
|
|
- |
|
|
Balance
at the end of period
|
|
$ |
(186,395 |
) |
|
$ |
(16,049 |
) |
|
$ |
(186,395 |
) |
|
$ |
(16,049 |
) |
The
following table presents components of interest income on the Company’s
investment securities portfolio for the three and nine months ended September
30, 2008 and 2007.
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
(In
Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Coupon
interest on MBS
|
|
$ |
143,844 |
|
|
$ |
101,817 |
|
|
$ |
398,311 |
|
|
$ |
293,002 |
|
|
Interest
on income notes
|
|
|
- |
|
|
|
50 |
|
|
|
50 |
|
|
|
107 |
|
|
Premium
amortization
|
|
|
(4,486 |
) |
|
|
(6,377 |
) |
|
|
(15,549 |
) |
|
|
(22,936 |
) |
|
Discount
accretion
|
|
|
61 |
|
|
|
100 |
|
|
|
214 |
|
|
|
156 |
|
|
Interest
income on investment securities, net
|
|
$ |
139,419 |
|
|
$ |
95,590 |
|
|
$ |
383,026 |
|
|
$ |
270,329 |
|
The
following table presents certain information about the Company’s MBS that will
reprice or amortize based on contractual terms, which do not consider
prepayments assumptions, at September 30, 2008.
|
|
|
September 30,
2008
|
|
|
Months
to Coupon Reset or Contractual Payment
|
|
Fair
Value
|
|
|
%
of Total
|
|
|
WAC (1)
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Within
one month
|
|
$ |
469,996 |
|
|
|
4.6 |
% |
|
|
5.13 |
% |
|
One
to three months
|
|
|
56,592 |
|
|
|
.6 |
|
|
|
5.79 |
|
|
Three
to 12 Months
|
|
|
435,987 |
|
|
|
4.2 |
|
|
|
5.23 |
|
|
One
to two years
|
|
|
581,016 |
|
|
|
5.7 |
|
|
|
5.08 |
|
|
Two
to three years
|
|
|
2,131,780 |
|
|
|
20.7 |
|
|
|
5.95 |
|
|
Three
to five years
|
|
|
1,734,167 |
|
|
|
16.9 |
|
|
|
5.50 |
|
|
Five
to 10 years
|
|
|
4,851,110 |
|
|
|
47.3 |
|
|
|
5.58 |
|
|
Total
|
|
$ |
10,260,648 |
|
|
|
100.0 |
% |
|
|
5.58 |
% |
(1) "WAC"
is the weighted average coupon rate on the Company’s MBS, which is higher than
the net yield that will be earned on such MBS. The net yield is
primarily reduced by net premium amortization and the contractual delay in
receiving payments, which delay varies by issuer.
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table presents information about the Company's MBS pledged as
collateral under repurchase agreements and in connection with Swaps at September
30, 2008.
|
|
|
MBS
Pledged Under Repurchase Agreements
|
|
|
MBS
Pledged Against Swaps
|
|
|
|
|
|
(In
Thousands)
|
|
Fair
Value/ Carrying
Value
|
|
|
Amortized
Cost
|
|
|
Accrued
Interest
on
Pledged
MBS
|
|
|
Fair
Value/
Carrying
Value
|
|
|
Amortized
Cost
|
|
|
Accrued
Interest
on
Pledged
MBS
|
|
|
Total
Fair
Value
of MBS
Pledged
and
Accrued
Interest
|
|
|
MBS
Pledged:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie
Mae
|
|
$ |
9,069,987 |
|
|
$ |
9,152,944 |
|
|
$ |
41,910 |
|
|
$ |
44,480 |
|
|
$ |
44,829 |
|
|
$ |
198 |
|
|
$ |
9,156,575 |
|
|
Freddie
Mac
|
|
|
700,672 |
|
|
|
706,283 |
|
|
|
6,487 |
|
|
|
25,488 |
|
|
|
25,823 |
|
|
|
235 |
|
|
|
732,882 |
|
|
Ginnie
Mae
|
|
|
22,709 |
|
|
|
22,956 |
|
|
|
104 |
|
|
|
3,892 |
|
|
|
3,912 |
|
|
|
19 |
|
|
|
26,724 |
|
|
Rated
AAA
|
|
|
205,493 |
|
|
|
278,663 |
|
|
|
1,286 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
206,779 |
|
|
Rated
BB
|
|
|
25,061 |
|
|
|
41,931 |
|
|
|
209 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,270 |
|
|
|
|
$ |
10,023,922 |
|
|
$ |
10,202,777 |
|
|
$ |
49,996 |
|
|
$ |
73,860 |
|
|
$ |
74,564 |
|
|
$ |
452 |
|
|
$ |
10,148,230 |
|
4. Interest
Receivable
The
following table presents the Company’s interest receivable by investment
category at September 30, 2008 and December 31, 2007.
|
(In
Thousands)
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
|
MBS
interest receivable:
|
|
|
|
|
|
|
|
Fannie
Mae
|
|
$ |
42,635 |
|
|
$ |
36,376 |
|
|
Freddie
Mac
|
|
|
6,958 |
|
|
|
4,177 |
|
|
Ginnie
Mae
|
|
|
151 |
|
|
|
870 |
|
|
Rated
AAA
|
|
|
1,320 |
|
|
|
2,070 |
|
|
Rated
AA
|
|
|
4 |
|
|
|
7 |
|
|
Rated
A & A-
|
|
|
3 |
|
|
|
5 |
|
|
Rated
BBB and BBB-
|
|
|
1 |
|
|
|
3 |
|
|
Rated
BB
|
|
|
210 |
|
|
|
2 |
|
|
Rated
below BB
|
|
|
1 |
|
|
|
5 |
|
|
Total
MBS interest receivable
|
|
$ |
51,283 |
|
|
$ |
43,515 |
|
|
Income
notes
|
|
|
- |
|
|
|
3 |
|
|
Money
market investments
|
|
|
35 |
|
|
|
92 |
|
|
Total
interest receivable
|
|
$ |
51,318 |
|
|
$ |
43,610 |
|
5. Hedging
Instruments
As part
of the Company’s interest rate risk management process, it periodically hedges a
portion of its interest rate risk by entering into derivative financial
instrument contracts. For the nine months ended September 30, 2008,
the Company’s derivatives were entirely comprised of Swaps, which have the
effect of modifying the repricing characteristics of the Company’s repurchase
agreements and cash flows on such liabilities.
The
following table presents the fair value of derivative instruments and their
location in the Company’s Consolidated Balance Sheets at September 30, 2008 and
December 31, 2007.
|
Derivates
Designated as
Hedging
Instruments
Under
Statement 133
|
Balance
Sheet Location
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
Swap
assets
|
Assets-Swaps,
at fair value
|
|
$ |
8,172 |
|
|
$ |
103 |
|
|
Swap
liabilities
|
Liabilities-Swaps,
at fair value
|
|
|
(58,612 |
) |
|
|
(99,836 |
) |
|
|
|
|
$ |
(50,440 |
) |
|
$ |
(99,733 |
) |
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table presents the impact of the Company’s Hedging Instruments, on the
Company’s accumulated other comprehensive income/(loss) for the three and nine
months ended September 30, 2008 and 2007.
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
(In
Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Accumulated
other comprehensive
(loss)/income
from Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
(40,765 |
) |
|
$ |
15,024 |
|
|
$ |
(99,733 |
) |
|
$ |
602 |
|
|
Unrealized
(losses)/gains on Hedging
Instruments
|
|
|
(10,448 |
) |
|
|
(42,461 |
) |
|
|
321 |
|
|
|
(28,039 |
) |
|
Reclassification
adjustment for net losses
included
in net income/(loss) from
Hedging
Instruments
|
|
|
773 |
|
|
|
- |
|
|
|
48,972 |
|
|
|
- |
|
|
Balance
at the end of period
|
|
$ |
(50,440 |
) |
|
$ |
(27,437 |
) |
|
$ |
(50,440 |
) |
|
$ |
(27,437 |
) |
(a) Swaps
The
Company is required to pledge assets as collateral for certain of its Swaps,
which collateral requirements vary by counterparty and change over time based on
the market value, notional amount, and remaining term of the
Swap. Certain of the Company’s Swap agreements include financial
covenants,
which, if breached, could cause an event of default or early termination
event to occur under such agreements. If the Company were to cause an
event of default or trigger an early termination event under one of its Swap
agreements, the counterparty to such agreement may have the option to terminate
all of its outstanding Swap transactions with the Company and, if applicable,
any close-out amount due to the counterparty upon termination of such
transactions would be immediately payable by the Company pursuant to such
agreement. The Company remained in compliance with all of
such financial covenants as of September 30,
2008.
The
Company had MBS with a fair value of $73.9 million and $79.9 million pledged as
collateral against its Swaps at September 30, 2008 and December 31, 2007,
respectively. The Company had no cash pledged against its Swaps at
September 30, 2008 and $4.5 million of restricted cash pledged against Swaps at
December 31, 2007.
The use
of Hedging Instruments exposes the Company to counterparty credit
risks. In the event of a default by a Swap counterparty, the Company
may not receive payments to which it is entitled under the terms of its Swap
agreements, and may have difficulty receiving back its assets pledged as
collateral against such Swaps. On September 15, 2008, Lehman filed a
petition for bankruptcy. At that time, the Company had two Swaps
outstanding with Lehman Brothers Special Financing Inc. (“LBSF”), a subsidiary
guaranteed by Lehman, with an aggregate notional amount of $27.5
million. The bankruptcy filing of Lehman, which was LBSF’s credit
support provider, triggered an event of default under the master swap agreement
between the Company and LBSF. As a result, the Company exercised its
early termination rights with respect to these Swaps, which were in a liability
position to the Company at the time. In accordance with the terms of
the master swap agreement, the Company calculated the aggregate amount payable
to the Company by LBSF in respect of the early termination of the Swaps to be
$145,000, which represented the set off amount by which the value of the
collateral pledged by the Company to LBSF pursuant to the terms of the Swaps
exceeded the contractual settlement amount of the Company’s net liability upon
termination of the Swaps. As a result, the Company forfeited its
collateral, comprised of restricted cash and one MBS, held by LBSF and
recognized an aggregate loss of $986,000 upon early termination of the
Swaps. This loss was comprised of the contractual settlement amount
of $841,000 owed by the Company to LBSF upon early termination of the Swaps and
a $145,000 write-off against an unsecured receivable from LBSF. At
September 30, 2008, the Company was an unsecured creditor to LBSF with respect
to the $145,000 and anticipates filing a proof of claim with respect to such
amount in connection with Lehman and LBSF’s bankruptcy. At September
30, 2008, the Company had no outstanding contracts with Lehman and all of the
Company’s remaining Swap counterparties were rated “A” or better by a Rating
Agency.
Certain
of the Company’s Swap agreements include financial covenants, which, if
breached, could cause an event of default or early termination event to occur
under such agreements. If the Company were to trigger an event of
default or early termination event under one of its Swap agreements, the
counterparty to such agreement may have the option to terminate all of its
outstanding Swap transactions with the Company and, if applicable, any close-out
amount due to the counterparty upon termination of such transactions would be
immediately payable by the Company pursuant to such agreement, resulting in an
adverse change in the Company’s liquidity position. The
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company
was in compliance
with all of its financial covenants as of September 30,
2008.
The
following table presents the weighted average rate paid and received for the
Company’s Swaps and the net impact of Swaps on the Company’s interest expense
for the three and nine months ended September 30, 2008 and 2007.
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
(Dollars
In Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Weighted
average Swap rate paid
|
|
|
4.18 |
% |
|
|
5.04 |
% |
|
|
4.33 |
% |
|
|
5.00 |
% |
|
Weighted
average Swap rate received
|
|
|
2.64 |
% |
|
|
5.37 |
% |
|
|
3.15 |
% |
|
|
5.35 |
% |
|
Net
addition to (reduction of) interest
expense
from Swaps
|
|
$ |
15,879 |
|
|
$ |
(2,525 |
) |
|
$ |
39,774 |
|
|
$ |
(6,346 |
) |
In March
2008, the Company terminated 48 Swaps with an aggregate notional amount of
$1.637 billion, resulting in net realized losses of $91.5 million. In
connection with the termination of these Swaps, the Company repaid the
repurchase agreements that such Swaps hedged. To date, except for
gains and losses realized on Swaps terminated early and deemed ineffective, the
Company has not recognized any change in the value of its Hedging Instruments in
earnings as a result of the hedge or a portion thereof being
ineffective.
At
September 30, 2008, the Company had Swaps with an aggregate notional balance of
$4.206 billion, (which included $300.0 million of forward-starting swaps) which
had gross unrealized losses of $58.6 million and gross unrealized gains of $8.2
million and extended 31 months on average with a maximum term of approximately
seven years. At December 31, 2007, the Company had Swaps with an
aggregate notional balance of $4.628 billion, which had gross unrealized losses
of $99.8 million and gross unrealized gains of $103,000.
The
following table presents information about the Company’s Swaps at September 30,
2008 and December 31, 2007.
|
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
|
Maturity
(1)
|
|
Notional
Amount
|
|
|
Weighted
Average Fixed Pay Interest Rate
|
|
|
Notional
Amount
|
|
|
Weighted
Average Fixed Pay Interest Rate
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
30 days
|
|
$ |
80,941 |
|
|
|
3.94 |
% |
|
$ |
69,561 |
|
|
|
4.95 |
% |
|
Over
30 days to 3 months
|
|
|
155,499 |
|
|
|
4.13 |
|
|
|
179,207 |
|
|
|
4.79 |
|
|
Over
3 months to 6 months
|
|
|
230,044 |
|
|
|
4.05 |
|
|
|
233,753 |
|
|
|
4.83 |
|
|
Over
6 months to 12 months
|
|
|
426,309 |
|
|
|
4.05 |
|
|
|
453,949 |
|
|
|
4.83 |
|
|
Over
12 months to 24 months
|
|
|
858,582 |
|
|
|
4.14 |
|
|
|
1,107,689 |
|
|
|
4.90 |
|
|
Over
24 months to 36 months
|
|
|
786,157 |
|
|
|
4.20 |
|
|
|
941,382 |
|
|
|
4.84 |
|
|
Over
36 months to 48 months
|
|
|
618,248 |
|
|
|
4.33 |
|
|
|
552,772 |
|
|
|
4.80 |
|
|
Over
48 months to 60 months (2)
|
|
|
776,452 |
|
|
|
4.34 |
|
|
|
826,489 |
|
|
|
4.72 |
|
|
Over
60 months
|
|
|
274,263 |
|
|
|
4.19 |
|
|
|
262,758 |
|
|
|
4.95 |
|
|
Total
|
|
$ |
4,206,495 |
|
|
|
4.20 |
% |
|
$ |
4,627,560 |
|
|
|
4.83 |
% |
|
(1)
Reflects contractual amortization of notional amounts.
|
|
|
(2)
Includes $300.0 million of Swaps that will become active during the third
quarter of 2009.
|
|
(b) Interest
Rate Caps
Caps are
designated by the Company as cash flow hedges against interest rate risk
associated with the Company’s existing and forecasted repurchase
agreements. When the 30-day Libor increases above the rate specified
in the Cap Agreement during the effective term of the Cap, the Company receives
monthly payments from its Cap counterparty.
The
Company had no Caps at or during the three and nine months ended September 30,
2008. For the nine months ended September 30, 2007, the Company’s
Caps reduced its interest expense by $49,000.
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company’s investment in real estate at September 30, 2008 and December 31, 2007,
was comprised of an indirect 100% ownership interest in Lealand, a 191-unit
apartment property located in Lawrenceville, Georgia. The following
table presents the summary of assets and liabilities of Lealand at September 30,
2008 and December 31, 2007:
|
(In
Thousands)
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
|
Real
Estate Assets and Liabilities:
|
|
|
|
|
|
|
|
Land
and buildings, net of accumulated depreciation
|
|
$ |
11,410 |
|
|
$ |
11,611 |
|
|
Cash
|
|
|
18 |
|
|
|
26 |
|
|
Prepaid
and other assets
|
|
|
219 |
|
|
|
260 |
|
|
Mortgage
payable (1)
|
|
|
(9,347 |
) |
|
|
(9,462 |
) |
|
Accrued
interest and other payables
|
|
|
(214 |
) |
|
|
(256 |
) |
|
Real
estate assets, net
|
|
$ |
2,086 |
|
|
$ |
2,179 |
|
|
|
|
|
|
|
|
|
|
|
(1) The
mortgage collateralized by Lealand is non-recourse, subject to customary
non-recourse exceptions, which generally means that the lender’s final source of
repayment in the event of default is foreclosure of the property securing such
loan. This mortgage has a fixed interest rate of 6.87%, contractually
matures on February 1, 2011 and is subject to a penalty if
prepaid. The Company has a loan to Lealand, which had a balance of
$185,000 at September 30, 2008 and December 31, 2007. This loan and
the related interest accounts are eliminated in consolidation.
The
following table presents the summary results of operations for Lealand, for the
three and nine months ended September 30, 2008 and 2007:
|
|
|
Three
Months Ended September
30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
from operations of real estate
|
|
$ |
407 |
|
|
$ |
405 |
|
|
$ |
1,219 |
|
|
$ |
1,231 |
|
|
Mortgage
interest expense
|
|
|
(164 |
) |
|
|
(166 |
) |
|
|
(492 |
) |
|
|
(497 |
) |
|
Other
real estate operations expense
|
|
|
(275 |
) |
|
|
(285 |
) |
|
|
(820 |
) |
|
|
(803 |
) |
|
Loss
from real estate operations, including
depreciation
expense, net
|
|
$ |
(32 |
) |
|
$ |
(46 |
) |
|
$ |
(93 |
) |
|
$ |
(69 |
) |
The
Company’s repurchase agreements bear interest at rates that are Libor-based and
are collateralized by the Company’s MBS and cash. At September 30,
2008, the Company’s repurchase agreements had a weighted average remaining
contractual maturity of approximately three months and an effective repricing
period of 16 months, including the impact of related Swaps. At
December 31, 2007, the Company’s repurchase agreements had a weighted average
remaining contractual maturity of approximately five months and an effective
repricing period of 23 months, including the impact of related
Swaps.
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At
September 30, 2008 and December 31, 2007, the Company’s repurchase agreements
had a weighted average interest rate of 3.32% and 5.06%,
respectively. The following table presents contractual repricing
information about the Company’s repurchase agreements, which does not reflect
the impact of related Swaps that hedge existing and forecasted repurchase
agreements, at September 30, 2008.
|
|
|
September
30, 2008
|
|
|
Maturity
(1)
|
|
Balance
|
|
|
Weighted
Average
Interest
Rate
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
|
|
Within
30 days
|
|
$ |
6,173,851 |
|
|
|
3.12 |
% |
|
Over
30 days to 3 months
|
|
|
1,747,189 |
|
|
|
2.79 |
|
|
Over
3 months to 6 months
|
|
|
145,184 |
|
|
|
4.51 |
|
|
Over
6 months to 12 months
|
|
|
785,216 |
|
|
|
5.21 |
|
|
Over
12 months to 24 months
|
|
|
242,634 |
|
|
|
4.66 |
|
|
Over
24 months to 36 months
|
|
|
156,400 |
|
|
|
3.91 |
|
|
Over
36 months
|
|
|
129,000 |
|
|
|
4.07 |
|
|
|
|
$ |
9,379,474 |
|
|
|
3.32 |
% |
|
|
|
|
|
|
|
|
|
|
(1)
Swaps, which are not reflected in the table, in effect modify the repricing
period and rate paid on the Company’s repurchase agreements. (See
Note 5.)
At
September 30, 2008, the Company had $9.793 billion of Agency MBS and $230.6
million of non-Agency MBS pledged as collateral against its repurchase
agreements. At September 30, 2008, as a result of reverse margin
calls, the Company held collateral of $9.6 million comprised of securities from
two of its repurchase agreement counterparties.
8. Commitments
and Contingencies
Lease Commitments
The
Company pays monthly rent pursuant to two separate operating
leases. The Company’s lease for its corporate headquarters extends
through April 30, 2017 and provides for aggregate cash payments ranging from
approximately $1.1 million to $1.4 million per year, exclusive of escalation
charges and landlord incentives. In connection with this lease, the
Company established a $350,000 irrevocable standby letter of credit in lieu of
lease security for the benefit of the landlord through April 30,
2017. The letter of credit may be drawn upon by the landlord in the
event that the Company defaults under certain terms of the lease. In
addition, at September 30, 2008, the Company had a lease through December 2011
for its off-site back-up facility located in Rockville Centre, New York, which
provides for, among other things, rent of approximately $27,000 per
year.
9. Fair
Value of Financial Instruments
Following
is a description of the Company’s valuation methodologies for financial assets
and liabilities measured at fair value in accordance with FAS
157. Such valuation methodologies were applied to the Company’s
financial assets and liabilities carried at fair value. The Company
has established and documented processes for determining fair
values. Fair value is based upon quoted market prices, where
available. If listed prices or quotes are not available, then fair
value is based upon internally developed models that primarily use inputs that
are market-based or independently-sourced market parameters, including interest
rate yield curves.
A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. The three levels of valuation hierarchy established by
FAS 157 are defined as follows:
Level 1 – inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2 – inputs to the
valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial
instrument.
Level 3 – inputs to the
valuation methodology are unobservable and significant to the fair value
measurement.
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following describes the valuation methodologies used for the Company’s financial
instruments measured at fair value, as well as the general classification of
such instruments pursuant to the valuation hierarchy.
Investment
Securities
The
Company’s investment securities, which are primarily comprised of Agency
ARM-MBS, are valued by a third-party pricing service that provides pool-specific
evaluations. The pricing service uses daily To-Be-Announced (“TBA”)
securities (TBA securities are liquid and have quoted market prices and
represent the most actively traded class of MBS) evaluations from an ARMs
trading desk and Bond Equivalent Effective Margins (“BEEMs”) of actively traded
ARMs. Based on government bond research, prepayment models are
developed for various types of ARM-MBS by the pricing service. Using
the prepayment speeds derived from the models, the pricing service calculates
the BEEMs of actively traded ARM-MBS. These BEEMs are further
adjusted by trader maintained matrix based on other ARM-MBS characteristics such
as, but not limited to, index, reset date, collateral types, life cap, periodic
cap, seasoning or age of security. The pricing service determines
prepayment speeds for a given pool. Given the specific prepayment
speed and the BEEM, the corresponding evaluation for the specific pool is
computed using a cash flow generator with current TBA settlement
day. The income approach technique is then used for the valuation of
the Company’s investment securities.
The
evaluation methodology of the Company’s third-party pricing service incorporates
commonly used market pricing methods, including a spread measurement to various
indices such as the one-year constant maturity
treasury (or CMT) and Libor, which are observable inputs. The
evaluation also considers the underlying characteristics of each security, which
are also observable inputs, including: coupon; maturity date; loan age; reset
date; collateral type; periodic and life cap; geography; and prepayment
speeds. In the case of non-Agency MBS, observable inputs also include
delinquency data and credit enhancement levels. In light of the
volatility and market illiquidity the Company’s pricing service expanded its
evaluation methodology in August 2008 with respect to non-Agency hybrid
MBS. This enhanced methodology assigns a structure to various
characteristics of the MBS and its deal structure to ensure that its structural
classification represents its behavior. Factors such as vintage,
credit enhancements and delinquencies are taken into account to assign pricing
factors such as spread and prepayment assumptions. For tranches that
are cross-collateralized, performance of all collateral groups involved in the
tranche are considered. The pricing service developed a methodology
based on matrices and rule based logic matching trader
intelligence. The pricing service collects current market
intelligence on all major markets including issuer level information, benchmark
security evaluations and bid-lists throughout the day from various sources, if
available. The Company’s MBS are valued primarily based upon readily
observable market parameters and are classified as Level 2 fair
values.
Swaps
The
Company’s Swaps are valued using a third party pricing service and such
valuations are tested with internally developed models that apply readily
observable market parameters. In valuing its Swaps,
the Company considers the credit worthiness, along with collateral provisions
contained in each Swap Agreement, from the perspective of both the Company and
its counterparties. At September 30, 2008, all of the Company’s Swap
counterparties and the Company were determined to be of high credit quality and,
five of the Company’s six Swap agreements bilaterally provide for collateral,
such that no credit related adjustment was made in determining the fair value of
the Company’s Swaps. The Company’s Swaps are classified as Level 2
fair values.
The
following table presents the Company’s financial instruments carried at fair
value as of September 30, 2008, on the consolidated balance sheet by FAS 157
valuation hierarchy, as previously described.
|
|
|
Fair
Value at September 30, 2008
|
|
|
(In
Thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
|
|
$ |
- |
|
|
$ |
10,260,648 |
|
|
$ |
- |
|
|
$ |
10,260,648 |
|
|
Swaps
|
|
|
- |
|
|
|
8,172 |
|
|
|
- |
|
|
|
8,172 |
|
|
Total
assets carried at fair value
|
|
$ |
- |
|
|
$ |
10,268,820 |
|
|
$ |
- |
|
|
$ |
10,268,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
$ |
- |
|
|
$ |
58,612 |
|
|
$ |
- |
|
|
$ |
58,612 |
|
|
Total
liabilities carried at fair value
|
|
$ |
- |
|
|
$ |
58,612 |
|
|
$ |
- |
|
|
$ |
58,612 |
|
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Changes
to the valuation methodology are reviewed by management to ensure the changes
are appropriate. As markets and products develop and the pricing for
certain products becomes more transparent, the Company continues to refine its
valuation methodologies. The methods described above may produce a
fair value calculation that may not be indicative of net realizable value or
reflective of future fair values. Furthermore, while the Company
believes its valuation methods are appropriate and consistent with other market
participants, the use of different methodologies, or assumptions, to determine
the fair value of certain financial instruments could result in a different
estimate of fair value at the reporting date. The Company uses inputs
that are current as of the measurement date, which may include periods of market
dislocation, during which price transparency may be reduced. The
Company reviews the classification of its financial instruments within the fair
value hierarchy on a quarterly basis, which could cause its financial
instruments to be reclassified to a different level.
10. Stockholders’
Equity
(a)
Dividends on Preferred Stock
The
following table presents cash dividends declared by the Company on its preferred
stock, from January 1, 2007 through September 30, 2008.
|
Year
|
Declaration
Date
|
Record
Date
|
Payment
Date
|
|
Cash
Dividend
Per
Share
|
|
|
2008
|
August
22, 2008
|
September
2, 2008
|
September
30, 2008
|
|
$ |
0.53125 |
|
|
|
May
22, 2008
|
June
2, 2008
|
June
30, 2008
|
|
|
0.53125 |
|
|
|
February
21, 2008
|
March
3, 2008
|
March
31, 2008
|
|
|
0.53125 |
|
|
|
|
|
|
|
|
|
|
|
2007
|
November
21, 2007
|
December
3, 2007
|
December
31, 2007
|
|
$ |
0.53125 |
|
|
|
August
24, 2007
|
September
4, 2007
|
September
28, 2007
|
|
|
0.53125 |
|
|
|
May
21, 2007
|
June
1, 2007
|
June
29, 2007
|
|
|
0.53125 |
|
|
|
February
16, 2007
|
March
1, 2007
|
March
30, 2007
|
|
|
0.53125 |
|
(b)
Dividends on Common Stock
The
Company typically declares quarterly dividends on its common stock in the month
following the close of each fiscal quarter, except that dividends for the fourth
quarter of each year are declared in that quarter for tax reasons.
On
October 1, 2008, the Company declared its 2008 third quarter common stock
dividend of $0.22 per share, which was paid on October 31, 2008, to stockholders
of record on October 14, 2008. (See Note 15.)
The
following table presents cash dividends declared by the Company on its common
stock from January 1, 2007 through September 30, 2008.
|
Year
|
Declaration
Date
|
Record
Date
|
Payment
Date
|
|
Cash
Dividend
Per
Share
|
|
|
2008
|
July
1, 2008
|
July
14, 2008
|
July
31, 2008
|
|
$ |
0.200 |
|
|
|
April
1, 2008
|
April
14, 2008
|
April
30, 2008
|
|
|
0.180 |
|
|
|
|
|
|
|
|
|
|
|
2007
|
December
13, 2007
|
December
31, 2007
|
January
31, 2008
|
|
$ |
0.145 |
|
|
|
October
1, 2007
|
October
12, 2007
|
October
31, 2007
|
|
|
0.100 |
|
|
|
July
2, 2007
|
July
13, 2007
|
July
31, 2007
|
|
|
0.090 |
|
|
|
April
3, 2007
|
April
13, 2007
|
April
30, 2007
|
|
|
0.080 |
|
(c)
Shelf Registrations
On
October 19, 2007, the Company filed an automatic shelf registration statement on
Form S-3 with the SEC under the Securities Act of 1933, as amended (the “1933
Act”), with respect to an indeterminate amount of common stock, preferred stock,
depositary shares representing preferred stock and/or warrants that may be sold
by the Company from time to time pursuant to Rule 415 of the 1933
Act. The number of shares of capital stock that may be issued
pursuant to this registration statement is limited by the number of shares of
capital stock authorized but unissued under the Company’s
charter. Pursuant to Rule 462(e) of the 1933 Act, this registration
statement became
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
effective
automatically upon filing with the SEC. On November 5, 2007, the
Company filed a post-effective amendment to this automatic shelf registration
statement, which became effective automatically upon filing with the
SEC.
On
December 17, 2004, the Company filed a registration statement on Form S-8 with
the SEC under the 1933 Act for the purpose of registering additional common
stock for issuance in connection with the exercise of awards under the Company’s
2004 Equity Compensation Plan (the “2004 Plan”), which amended and restated the
Company’s Second Amended and Restated 1997 Stock Option Plan (the “1997
Plan”). This registration statement became effective automatically
upon filing and, when combined with the previously registered, but unissued,
portions of the Company’s prior registration statements on Form S-8 relating to
awards under the 1997 Plan, related to an aggregate of 3.5 million shares of
common stock, of which 1.8 million shares remained available for issuance at
September 30, 2008.
On
December 17, 2004, the Company filed a shelf registration statement on Form S-3
with the SEC under the 1933 Act for the purpose of registering additional common
stock for sale through the Dividend Reinvestment and Stock Repurchase Plan
(“DRSPP”). This shelf registration statement was declared effective
by the SEC on January 4, 2005 and, when combined with the unused portion of the
Company’s previous DRSPP shelf registration statement, registered an aggregate
of 10 million shares of common stock. At September 30, 2008, 8.2
million shares of common stock remained available for issuance pursuant to the
prior DRSPP shelf registration statement.
(d)
Public Offerings of Common Stock
On June
3, 2008, the Company completed a public offering of 46,000,000 shares of common
stock, which included the exercise of the underwriters’ over-allotment option in
full, at a public offering price of $6.95 per share and received net proceeds of
approximately $304.3 million after the payment of underwriting discounts and
commissions and related expenses.
On
January 23, 2008, the Company completed a public offering of 28,750,000 shares
of common stock, which included the exercise of the underwriters’ over-allotment
option in full, at a public offering price of $9.25 per share and received net
proceeds of approximately $253.0 million after the payment of underwriting
discounts and commissions and related expenses.
(e) DRSPP
The
Company’s DRSPP is designed to provide existing stockholders and new investors
with a convenient and economical way to purchase shares of common stock through
the automatic reinvestment of dividends and/or optional monthly cash
investments. During the nine months ended September 30, 2008, the
Company issued 309,308 shares of common stock through the DRSPP, raising net
proceeds of approximately $2,034,000. From the inception of the DRSPP
in September 2003 through September 30, 2008, the Company issued 13,351,026
shares pursuant to the DRSPP raising net proceeds of $121.0
million.
(f) Controlled
Equity Offering Program
On August
20, 2004, the Company initiated a controlled equity offering program (the “CEO
Program”) through which it may, from time to time, publicly offer and sell
shares of common stock through Cantor Fitzgerald & Co. (“Cantor”) in
privately negotiated and/or at-the-market transactions. The Company issued
8,559,000 shares of common stock in at-the-market transactions through the CEO
Program during the nine months ended September 30, 2008, raising net proceeds of
$57,122,780 and, in connection with such transactions, paid Cantor fees and
commissions of $1,165,771. From inception of the CEO Program through
September 30, 2008, the Company issued 15,059,815 shares of common stock in
at-the-market transactions through such program, raising net proceeds of
$108,665,901 and, in connection with such transactions, paid Cantor fees and
commissions of $2,429,192.
(g) Stock
Repurchase Program
On August
11, 2005, the Company announced the implementation of a stock repurchase program
(the “Repurchase Program”) to repurchase up to 4.0 million shares of its
outstanding common stock. Subject to applicable securities laws,
repurchases of common stock under the Repurchase Program are made at times and
in amounts as the Company deems appropriate, using available cash
resources. Shares of common stock repurchased by the Company under
the Repurchase Program are cancelled and, until reissued by the Company, are
deemed to be the authorized but unissued shares of the Company’s common
stock.
On May 2,
2006, the Company announced an increase in the size of the Repurchase Program,
by an additional
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3,191,200
shares of common stock, resetting the number of shares of common stock that the
Company is authorized to repurchase to 4.0 million shares, all of which remained
authorized for repurchase at September 30, 2008. The Repurchase
Program may be suspended or discontinued by the Company at any time and without
prior notice. The Company has not repurchased any shares of its
common stock under the Repurchase Program since April 2006. From
inception of the Repurchase Program in April 2005 through April 2006, the
Company repurchased 3,191,200 shares of common stock at an average cost of $5.90
per share.
11.
EPS Calculation
The
following table presents a reconciliation of the earnings and shares used in
calculating basic and diluted EPS for the three and nine months ended September
30, 2008 and 2007.
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
(In
Thousands, Except Per Share Amounts)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$ |
50,053 |
|
|
$ |
(10,433 |
) |
|
$ |
(852 |
) |
|
$ |
9,595 |
|
|
Net
income from discontinued operations
|
|
|
- |
|
|
|
257 |
|
|
|
- |
|
|
|
257 |
|
|
Net
income/(loss) from continuing operations
|
|
|
50,053 |
|
|
|
(10,690 |
) |
|
|
(852 |
) |
|
|
9,338 |
|
|
Dividends
declared on preferred stock
|
|
|
(2,040 |
) |
|
|
(2,040 |
) |
|
|
(6,120 |
) |
|
|
(6,120 |
) |
|
Net
income/(loss) to common stockholders from continuing
operations
for basic and diluted earnings per share
|
|
$ |
48,013 |
|
|
|
(12,730 |
) |
|
$ |
(6,972 |
) |
|
$ |
3,218 |
|
|
Net
income from discontinued operations
|
|
|
- |
|
|
|
257 |
|
|
|
- |
|
|
|
257 |
|
|
Net
income/(loss) to common stockholders from continuing
operations
|
|
$ |
48,013 |
|
|
$ |
(12,473 |
) |
|
$ |
(6,972 |
) |
|
$ |
3,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares for basic earnings per share
|
|
|
199,406 |
|
|
|
85,986 |
|
|
|
170,111 |
|
|
|
82,893 |
|
|
Weighted
average dilutive equity instruments (1)
|
|
|
443 |
|
|
|
- |
|
|
|
- |
|
|
|
34 |
|
|
Denominator
for diluted earnings per share (1)
|
|
|
199,849 |
|
|
|
85,986 |
|
|
|
170,111 |
|
|
|
82,927 |
|
|
Basic
and diluted earnings/(loss) per share
|
|
$ |
0.24 |
|
|
$ |
(0.15 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
(1) The
impact of dilutive stock options is not included in the computation of
earnings per share for the three months ended September 30, 2007 and for
the nine months ended September 30, 2008, as their inclusion would be
anti-dilutive.
|
|
12.
Accumulated Other Comprehensive Loss
Accumulated
other comprehensive loss at September 30, 2008 and December 31, 2007 was as
follows:
|
(In
Thousands)
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
|
Available-for-sale
Investment Securities:
|
|
|
|
|
|
|
|
Unrealized
gains
|
|
$ |
22,584 |
|
|
$ |
48,611 |
|
|
Unrealized
losses
|
|
|
(208,979 |
) |
|
|
(19,379 |
) |
|
|
|
|
(186,395 |
) |
|
|
29,232 |
|
|
Hedging
Instruments:
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on Swaps
|
|
|
8,172 |
|
|
|
103 |
|
|
Unrealized
losses on Swaps
|
|
|
(58,612 |
) |
|
|
(99,836 |
) |
|
|
|
|
(50,440 |
) |
|
|
(99,733 |
) |
|
Accumulated
other comprehensive loss
|
|
$ |
(236,835 |
) |
|
$ |
(70,501 |
) |
13.
Equity Compensation, Employment Agreements and Other Benefit Plans
(a)
2004 Equity Compensation Plan
In
accordance with the terms of the 2004 Plan, directors, officers and employees of
the Company and any of its
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
subsidiaries
and other persons expected to provide significant services (of a type expressly
approved by the Compensation Committee of the Board (“Compensation Committee”)
as covered services for these purposes) for the Company and any of its
subsidiaries are eligible to receive grants of stock options (“Options”),
restricted stock, RSUs, DERs and other stock-based awards under the 2004
Plan.
In
general, subject to certain exceptions, stock-based awards relating to a maximum
of 3.5 million shares of common stock may be granted under the 2004 Plan;
forfeitures and/or awards that expire unexercised do not count towards such
limit. At September 30, 2008, approximately 1.8 million shares of
common stock remained available for grant in connection with stock-based awards
under the 2004 Plan. Subject to certain exceptions, a participant may
not receive stock-based awards in excess of 500,000 shares of common stock in
any one-year and no award may be granted to any person who, assuming exercise of
all Options and payment of all awards held by such person, would own or be
deemed to own more than 9.8% of the outstanding shares of the Company’s capital
stock. Unless previously terminated by the Board, awards may be
granted under the 2004 Plan until the tenth anniversary of the date that the
Company’s stockholders approved such plan.
A DER is
a right to receive, as specified by the Compensation Committee at the time of
grant, a distribution equal to the dividend that would be paid on a share of
common stock. DERs may be granted separately or together with other
awards and are paid in cash or other consideration at such times, and in
accordance with such rules, as the Compensation Committee shall determine in its
discretion. Distributions are made with respect to vested DERs only
to the extent of ordinary income and DERs are not entitled to distributions
representing a return of capital. Payments made on the Company’s DERs
are charged to stockholders’ equity when the common stock dividends are
declared. The Company made DER payments of approximately $167,000 and
$86,000 during the three months ended September 30, 2008 and 2007, respectively,
and approximately $504,000 and $220,000 during the nine months ended September
30, 2008 and 2007, respectively. At September 30, 2008, the Company
had 835,892 DERs outstanding, all of which were entitled to receive
dividends.
Options
Pursuant
to Section 422(b) of the Code, in order for stock options granted under the 2004
Plan and vesting in any one calendar year to qualify as an incentive stock
option (“ISO”) for tax purposes, the market value of the Company’s common stock,
as determined on the date of grant, shall not exceed $100,000 during such
calendar year. The exercise price of an ISO may not be lower than
100% (110% in the case of an ISO granted to a 10% stockholder) of the fair
market value of the Company’s common stock on the date of grant. The
exercise price for any other type of Option issued under the 2004 Plan may not
be less than the fair market value on the date of grant. Each Option
is exercisable after the period or periods specified in the award agreement,
which will generally not exceed ten years from the date of
grant. Options will be exercisable at such times and subject to such
terms set forth in the related Option award agreement, which terms are
determined by the Compensation Committee.
At
September 30, 2008, 632,000 Options were outstanding under the 2004 Plan, all of
which were vested and exercisable, with a weighted average exercise price of
$9.31. During the nine months ended September 30, 2008, no Options
were granted, 75,000 Options expired and 255,000 Options were
exercised. No Options were granted, exercised or expired during the
nine months ended September 30, 2007. As of September 30, 2008, the
aggregate intrinsic value of all Options outstanding was $163,000.
Restricted
Stock
During
the three months ended September 30, 2008 the Company issued 175,000 shares of
restricted common stock and did not issue any shares of restricted common stock
during the three months ended September 30, 2007. For the nine months
ended September 30, 2008 and 2007, the Company issued 193,311 and 28,004 shares
of restricted common stock, respectively. At September 30, 2008 and
December 31, 2007, the Company had unrecognized compensation expense of $1.1
million and $200,000, respectively, related to unvested shares of restricted
common stock.
Restricted
Stock Units
RSUs are
instruments that provide the holder with the right to receive, subject to the
satisfaction of conditions set by the Compensation Committee at the time of
grant, a payment of a specified value, which may be based upon the fair market
value of a share of the Company’s common stock, or such fair market value to the
extent in excess of an established base value, on the applicable settlement
date. On October 26, 2007, the Company granted an aggregate of
326,392 RSUs with DERs attached to certain of the Company’s employees under the
2004 Plan. At September 30, 2008 and December 31, 2007, all of the
Company’s RSUs outstanding were subject to cliff vesting
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
on
December 31, 2010, or earlier in the event of death or disability of the grantee
or termination of an employee for any reason, other than “cause,” as defined in
the related RSU award agreement. RSUs are to be settled in shares of
the Company’s common stock on the earlier of a termination of service, a change
in control or on January 1, 2013, as described in the related award
agreement. At September 30, 2008, the Company had unrecognized
compensation expense of $2.0 million related to the unvested RSUs.
The
following table presents the Company’s expenses related to its equity based
compensation instruments for the three and nine months ended September 30, 2008
and 2007.
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
(In
Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Options
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5 |
|
|
Restricted
shares of common stock
|
|
|
82 |
|
|
|
7 |
|
|
|
276 |
|
|
|
235 |
|
|
RSUs
|
|
|
223 |
|
|
|
- |
|
|
|
668 |
|
|
|
- |
|
|
Total
|
|
$ |
305 |
|
|
$ |
7 |
|
|
$ |
944 |
|
|
$ |
240 |
|
(b) Employment
Agreements
The
Company has employment agreements with five of its senior officers, with varying
terms that provide for, among other things, base salary, bonus and
change-in-control payments upon the occurrence of certain triggering
events.
(c) Deferred
Compensation Plans
The
Company administers the “MFA Mortgage Investments, Inc. 2003 Non-employee
Directors’ Deferred Compensation Plan” and the “MFA Mortgage Investments, Inc.
Senior Officers Deferred Bonus Plan” (collectively, the “Deferred
Plans”). Pursuant to the Deferred Plans, participants may elect to
defer a certain percentage of their compensation. The Deferred Plans
are intended to provide participants with an opportunity to defer up to 100% of
certain compensation, as defined in the Deferred Plans, while at the same time
aligning their interests with the interests of the Company’s
stockholders.
Amounts
deferred are considered to be converted into “stock units” of the
Company. Stock units do not represent stock of the Company, but
rather represent a liability of the Company that changes in value as would
equivalent shares of the Company’s common stock. Deferred
compensation liabilities are settled in cash at the termination of the deferral
period, based on the value of the stock units at that time. The
Deferred Plans are non-qualified plans under the Employee Retirement Income
Security Act and, as such, are not funded. Prior to the time that the
deferred accounts are settled, participants are unsecured creditors of the
Company. Effective January 1, 2007, the Board suspended indefinitely
the non-employee directors’ ability to defer additional compensation under the
MFA Mortgage Investments, Inc. 2003 Non-employee Directors’ Deferred
Compensation Plan.
The
Company’s liability under the Deferred Plans is based on the market price of the
Company’s common stock at the measurement date. For the nine months
ended September 30, 2008, the Deferred Plans reduced total operating and other
expenses by $442,000 reflecting the decrease in the market price of the
Company’s common stock at September 30, 2008 from December 31,
2007. During the quarter ended September 30, 2008, the Company
distributed $241,000 from the Deferred Plans.
The
following table presents the aggregate amount of income deferred by participants
of the Deferred Plans through September 30, 2008 and December 31, 2007 and the
Company’s associated liability under such plans based on the market value of the
Company’s liability for its obligations under Deferred Plans at such
dates.
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
(In
Thousands)
|
|
Undistributed
Income
Deferred
|
|
|
Liability
Under
Deferred
Plans
|
|
|
Undistributed
Income Deferred
|
|
|
Liability
Under
Deferred
Plans
|
|
|
Directors’
deferred
|
|
$ |
484 |
|
|
$ |
505 |
|
|
$ |
551 |
|
|
$ |
745 |
|
|
Officers’
deferred
|
|
|
153 |
|
|
|
146 |
|
|
|
282 |
|
|
|
348 |
|
|
|
|
$ |
637 |
|
|
$ |
651 |
|
|
$ |
833 |
|
|
$ |
1,093 |
|
MFA
MORTGAGE INVESTMENTS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company sponsors a tax-qualified employee savings plan (the “Savings Plan”), in
accordance with Section 401(k) of the Code. Subject to certain
restrictions, all of the Company’s employees are eligible to make tax deferred
contributions to the Savings Plan subject to limitations under applicable
law. Participant’s accounts are self-directed and the Company bears
the costs of administering the Savings Plan. The Company matches 100%
of the first 3% of eligible compensation deferred by employees and 50% of the
next 2%, subject to a maximum as provided by the Code. The Company
has elected to operate the Savings Plan under the applicable safe harbor
provisions of the Code, whereby among other things, the Company must make
contributions for all participating employees and all matches contributed by the
Company immediately vest 100%. For the three months ended September
30, 2008 and 2007, the Company recognized expenses for matching contributions of
$28,500 and $25,000, respectively, and $85,500 and $75,000 for the nine months
ended September 30, 2008 and 2007, respectively.
14.
Other Events
In May
2008, in response to equity market conditions, the Company postponed the initial
public offering of MFResidential Investments, Inc. (“MFR”), a wholly-owned
subsidiary. As a result, during the quarter ended June 30, 2008, the
Company expensed $998,000 of costs incurred in connection with MFR.
15. Subsequent
Event
Common
Stock Dividend Declared
On
October 1, 2008, the Company declared a dividend of $0.22 per share on its
common stock for the third quarter of 2008. Total dividends and DERs
of $45.6 million were paid on October 31, 2008 to stockholders of record on
October 14, 2008.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In
this quarterly report on Form 10-Q, references to “we,” “us,” or “our” refer to
MFA Mortgage Investments, Inc. and its subsidiaries unless specifically stated
otherwise or the context indicates otherwise. The following defines
certain of the commonly used terms in this quarterly report on Form
10-Q: MBS refers to the mortgage-backed securities in our portfolio;
Agency MBS refers to our MBS that are issued or guaranteed by a federally
chartered corporation, such as Fannie Mae, or Freddie Mac, or an agency of the
U.S. government, such as Ginnie Mae; hybrids refer to hybrid mortgage loans that
have interest rates that are fixed for a specified period of time and,
thereafter, generally adjust annually to an increment over a specified interest
rate index; ARMs refer to hybrids and adjustable-rate mortgage loans which
typically have interest rates that adjust annually to an increment over a
specified interest rate index; and ARM-MBS refers to MBS that are secured by
ARMs.
The
following discussion should be read in conjunction with our financial statements
and accompanying notes included in Item 1 of this quarterly report on Form 10-Q
as well as our annual report on Form 10-K for the year ended December 31,
2007.
Forward
Looking Statements
When used
in this quarterly report on Form 10-Q, in future filings with the SEC or in
press releases or other written or oral communications, statements which are not
historical in nature, including those containing words such as “believe,”
“expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,”
“may” or similar expressions, are intended to identify “forward-looking
statements” within the meaning of Section 27A of the 1933 Act and Section 21E of
the Securities Exchange Act of 1934, as amended (or 1934 Act), and, as such, may
involve known and unknown risks, uncertainties and assumptions.
Statements
regarding the following subjects, among others, may be forward-looking: changes
in interest rates and the market value of our MBS; changes in the prepayment
rates on the mortgage loans securing our MBS; our ability to borrow to finance
our assets; changes in government regulations affecting our business; our
ability to maintain our qualification as a REIT for federal income tax purposes;
our ability to maintain our exemption from registration under the Investment
Company Act of 1940, as amended (or Investment Company Act); and risks
associated with investing in real estate assets, including changes in business
conditions and the general economy. These and other risks, uncertainties and
factors, including those described in the annual, quarterly and current reports
that we file with the SEC, could cause our actual results to differ materially
from those projected in any forward-looking statements we make. All
forward-looking statements speak only as of the date on which they are
made. New risks and uncertainties arise over time and it is not
possible to predict those events or how they may affect us. Except as
required by law, we are not obligated to, and do not intend to, update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
General
We are a
REIT primarily engaged in the business of investing, on a leveraged basis, in
ARM-MBS, which are primarily secured by pools of mortgages on single family
residences. Our ARM-MBS portfolio consists primarily of Agency MBS
and AAA rated MBS. Our principal business objective is to generate
net income for distribution to our stockholders resulting from the spread
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 investments
and our operating costs.
We have
elected to be taxed 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 taxable ordinary
net income to our stockholders, subject to certain adjustments.
At
September 30, 2008, we had total assets of approximately $10.779 billion, of
which $10.261 billion, or 95.2%, represented our MBS portfolio. At
September 30, 2008, $10.024 billion, or 97.7%, of our MBS portfolio was
comprised of Agency MBS, $210.9 million, or 2.1%, was comprised of AAA rated MBS
and $26.0 million, or 0.2%, was comprised of non-Agency MBS rated below
AAA. At September 30, 2008, we also had an indirect investment of
$11.4 million in a 191-unit multi-family apartment property. In
addition, through a wholly-owned subsidiary, we provide investment advisory
services to a third-party institution with respect to its MBS portfolio
investments that totaled $179.4 million at September 30, 2008.
At
September 30, 2008, our MBS portfolio was comprised entirely of
ARM-MBS. The ARMs collateralizing
our MBS
include hybrids, with fixed-rate periods generally ranging from three to ten
years and, to a lesser extent, adjustable-rate mortgages. We expect
that over time ARM-MBS will prepay faster than fixed-rate MBS, as we believe
that homeowners with hybrids and adjustable-rate mortgages exhibit more rapid
housing turnover levels or refinancing activity compared to fixed-rate
borrowers. In addition, we anticipate that prepayments on ARM-MBS
accelerate significantly as the coupon reset date approaches. At
September 30, 2008, approximately $9.457 billion, or 92.2%, of the Company’s MBS
portfolio was in its contractual fixed-rate period and approximately $803.7
million, or 7.8%, was in its contractual adjustable-rate period. Our
MBS in their contractual adjustable-rate period include MBS collateralized by
hybrids for which the contractual fixed-rate period has elapsed and the current
interest rate on such MBS is generally adjusted on an annual basis.
Our
repurchase agreements and Swaps are generally priced off of
Libor. Once in the adjustable-rate period, our ARM-MBS reprice based
primarily on Libor and, to a lesser extent, based on CMT or other
indices. The following table presents the repricing components of our
ARM-MBS at September 30, 2008.
|
MBS
Repricing Index
|
|
Percent
of MBS Portfolio
|
|
|
Six-Month
Libor
|
|
|
6.6 |
% |
|
12-Month
Libor
|
|
|
75.9 |
|
|
Total
Libor
|
|
|
82.5 |
|
|
CMT
|
|
|
13.4 |
|
|
Federal
Reserve U.S. 12-month cumulative
average
one-year CMT (or MTA)
|
|
|
3.7 |
|
|
11th District Cost of Funds Index (or
COFI)
|
|
|
.4 |
|
|
Total
|
|
|
100.0 |
% |
The
following table presents the average of certain of these interest rates during
the quarterly periods indicated.
|
For
the Quarter
Ended
|
|
30-Day
Libor
|
|
|
6-Month
Libor
|
|
|
12-Month
Libor
|
|
|
1-Year
CMT
|
|
|
September
30, 2008
|
|
|
2.62 |
% |
|
|
3.19 |
% |
|
|
3.30 |
% |
|
|
2.13 |
% |
|
June
30, 2008
|
|
|
2.59 |
|
|
|
2.93 |
|
|
|
3.09 |
|
|
|
2.07 |
|
|
March
31, 2008
|
|
|
3.31 |
|
|
|
3.18 |
|
|
|
2.94 |
|
|
|
2.11 |
|
As of
September 30, 2008, applying a 15% constant prepayment rate (or CPR),
approximately 22.9% of our MBS assets were expected to reset or prepay during
the next 12 months and a total of 79.0% of our MBS were expected to reset or
prepay during the next 60 months, with an average time period until our assets
prepay or reset of approximately 37 months. Our repurchase agreements
extended on average approximately 16 months, reflecting the impact of Swaps,
resulting in an asset/liability mismatch of approximately 21 months at September
30, 2008. (See Interest Rate Risk, included under Item
3.)
The
results of our business operations are affected by a number of factors, many of
which are beyond our control, and primarily depend on, among other things, the
level of our net interest income, the market value of our assets, the supply of,
and demand for, MBS in the market place and the terms and availability of
financing. Our net interest income varies primarily as a result of
changes in interest rates, the slope of the yield curve (i.e., the differential
between long-term and short-term interest rates), borrowing costs (i.e., our
interest expense) and prepayment speeds on our MBS portfolio, the behavior of
which involves various risks and uncertainties. Interest rates and
prepayment speeds, as measured by the CPR, vary according to the type of
investment, conditions in the financial markets, competition and other factors,
none of which can be predicted with any certainty. With respect to
our business operations, increases in interest rates, in general, may over time
cause: (i) the interest expense associated with our repurchase agreements to
increase; (ii) the value of our MBS portfolio and, correspondingly, our
stockholders’ equity to decline; (iii) coupons on our MBS to reset, although on
a delayed basis, to higher interest rates; (iv) prepayments on our MBS portfolio
to slow, thereby slowing the amortization of our MBS purchase premiums; and (v)
the value of our Swaps and, correspondingly, our stockholders’ equity to
increase. Conversely, decreases in interest rates, in general, may
over time cause: (i) prepayments on our MBS portfolio to increase, thereby
accelerating the amortization of our MBS purchase premiums; (ii) the interest
expense associated with our repurchase agreements to decrease; (iii) the value
of our MBS portfolio and, correspondingly, our stockholders’
equity to
increase; (iv) the value of our Swaps and, correspondingly, our stockholders’
equity to decrease, and (v) coupons on our MBS assets to reset, although on a
delayed basis, to lower interest rates. In addition, our borrowing
costs and credit lines are further affected by the type of collateral pledged
and general conditions in the credit market.
It is our
business strategy to hold our investment securities, primarily comprised of MBS,
as long-term investments. We assess our ability and intent to
continue to hold each of our investment securities and the nature of unrealized
losses on at least a quarterly basis. As part of this process, we
review such assets for other-than-temporary impairment. A change in
our ability and/or intent to continue to hold any of our investment securities
that are in an unrealized loss position, or deterioration in the underlying
characteristics of these securities, could result in our recognizing future
impairment charges.
During
the first quarter of 2008, we modified our leverage strategy and reduced risk,
in light of the significant disruptions in the credit markets by decreasing our
target debt-to-equity multiple range to 7x to 9x from our historical range of 8x
to 9x. To execute this strategy change, in March 2008, we sold $1.851
billion of MBS, consisting of $1.800 billion of Agency MBS and $50.6 million of
AAA rated MBS realizing aggregate losses of $24.5 million. In
conjunction with these asset sales, we repaid associated repurchase agreements
and terminated $1.637 billion of related Swaps realizing losses of $91.5
million. Since the first quarter of 2008, we have not sold any
additional assets and continued to maintain a leverage multiple ranging from 7x
to 9x. At September 30, 2008, our debt-to-equity multiple was
7.2x.
We rely
primarily on borrowings under repurchase agreements to finance the acquisition
of our investments in MBS, which have longer-term contractual maturities than do
our borrowings. Even though most of our MBS have interest rates that
adjust over time based on short-term changes in corresponding interest rate
indices, typically following an initial fixed-rate period, the interest we pay
on our borrowings may increase at a faster pace than the interest we earn on our
MBS. In order to reduce this interest rate risk exposure, we enter
into derivative financial instruments, which were comprised entirely of Swaps
during the nine months ended September 30, 2008. Our Swaps, which are
an integral component of our financing strategy, are designated as cash-flow
hedges against a portion of our current and anticipated Libor-based repurchase
agreements. Our Swaps are expected to result in interest savings in a
rising Libor interest rate environment and, conversely, in a declining Libor
interest rate environment, result in us paying the stated fixed rate on each of
our Swaps, which could be higher than the market rate. At September
30, 2008, we had Swaps with an aggregate notional balance of $4.206 billion,
which included $300.0 million of forward-starting Swaps. At September
30, 2008, our Swaps had a weighted average fixed pay rate of 4.20%, a weighted
average maturity of 31 months and extended a maximum of seven
years.
We expect
to continue to explore alternative business strategies, investments and
financing sources and other strategic initiatives, including, but not limited
to, the expansion of our third-party advisory services, the creation of new
investment vehicles to manage MBS and/or other real estate-related assets, and
the creation and/or acquisition of a third-party asset management business to
complement our core business strategy of investing, on a leveraged basis, in
high quality ARM-MBS. However, no assurance can be provided that any
such strategic initiatives will or will not be implemented in the future or, if
undertaken, that any such strategic initiatives will favorably impact
us.
Market
Conditions
Unprecedented
disruptions in the financial markets have escalated in the second half of
2008. Investment and commercial bank liquidity and capital have
remained highly stressed. In September 2008, Lehman experienced a
major liquidity crisis and filed for bankruptcy. This contributed to
liquidity issues for many financial institutions. Merrill Lynch &
Co., Inc. agreed to be acquired by Bank of America Corporation; the U.S.
government intervened to prevent of the failure of American International Group,
Inc.; Washington Mutual, Inc. is being folded into JP Morgan Chase & Co.;
and Wachovia Corporation is being acquired by Wells Fargo &
Company. Leading investment banks are becoming chartered as
commercial banks and are raising preferred equity from private
sources. In response, among other things, on October 14, 2008, the
U.S. Treasury announced its plan to purchase $250 billion of senior preferred
shares from qualifying U.S. institutions. Nine major institutions
have already committed to the program for an amount totaling $125
billion.
During
this continued period of market dislocation, various government actions have
been attempted to address credit and liquidity issues. The one
government action, which we believe will eventually have the largest positive
impact on us and our assets, occurred on September 7, 2008, when Fannie Mae and
Freddie Mac were placed under conservatorship by the FHFA. At this
time the U.S. Treasury agreed to purchase senior preferred stock in
Fannie
Mae or Freddie Mac, if needed, to a maximum of $100 billion per company to
maintain positive net worth. In return, Treasury received warrants to
purchase 79.9% of each company. As a result, we believe there is now
significantly stronger backing for these guarantors of MFA’s Agency MBS
holdings.
We remain
focused on high-quality Agency MBS and our portfolio spread has now trended up
for seven consecutive quarters. This upward trend in spreads is due
primarily to declines in borrowing costs as both the Fed Funds rate and Libor
have generally trended down over this period. Libor, however, spiked
upward beginning mid-September 2008 due to well publicized asset and liquidity
issues affecting interbank lending transactions. We currently
anticipate that this sharp increase in Libor will increase our borrowing costs
in the fourth quarter of 2008, resulting in some reduction in
spread. We presently expect our borrowing costs to decrease in 2009,
as coordinated global actions have greatly restored the capital base and reduced
funding risks for many of the world’s largest financial
institutions.
We
continue to maintain relatively low leverage multiples, with our debt-to-equity
multiple at 7.2x at September 30, 2008. The following table presents
our leverage multiples, as measured by debt-to-equity, at the dates
presented:
|
At
the Period Ended
|
|
Leverage
Multiple
|
|
September
30, 2008
|
|
|
7.2 |
x |
|
June
30, 2008
|
|
|
6.7 |
|
|
March
31, 2008
|
|
|
7.0 |
|
|
December
31, 2007
|
|
|
8.1 |
|
|
September
30, 2007
|
|
|
8.3 |
|
Results
of Operations
Quarter
Ended September 30, 2008 Compared to the Quarter Ended September 30,
2007
For the
third quarter of 2008, we had net income of $48.0 million, or $0.24 per common
share, compared to a net loss of $12.5 million, or $(0.15) per share, for the
third quarter of 2007.
Interest
income on our investment securities portfolio for the third quarter of 2008
increased by $43.8 million, or 45.9%, to $139.4 million compared to $95.6
million earned during the third quarter of 2007. This increase
primarily reflects the growth in our MBS portfolio. Excluding changes
in market values, our average investment in MBS increased by $3.678 billion, or
53.7%, to $10.531 billion for third quarter of 2008 from $6.853 billion for the
third quarter of 2007. The net yield on our MBS portfolio decreased
to 5.30% for the third quarter of 2008 from 5.58% for the third quarter of 2007,
reflecting a decline in the average stated coupon rate on our MBS due primarily
to the acquisition of lower coupon MBS in a lower interest rate
environment. We experienced a 21 basis point reduction in the cost of
net premium amortization to 17 basis points for the third quarter of 2008 from
38 basis points for the third quarter of 2007, reflecting a decrease in the
average CPR experienced on our portfolio. Our CPR for the quarter
ended September 30, 2008 was 10.3% compared to 18.1% for the quarter ended
September 30, 2007. The average purchase premium on our MBS portfolio
was 1.3% for each of the quarters ended September 30, 2008 and September 30,
2007.
The
following table presents the components of the net yield earned on our MBS
portfolio for the quarterly periods presented:
|
Quarter
Ended
|
|
Gross
Yield/Stated
Coupon
|
|
Net
Premium Amortization
|
|
Cost
of Delay
for
Principal
Receivable
|
|
Net
Yield
|
|
September
30, 2008
|
|
|
5.58 |
% |
|
|
(0.17 |
)% |
|
|
(0.11 |
)% |
|
|
5.30 |
% |
|
June
30, 2008
|
|
|
5.77 |
|
|
|
(0.26 |
) |
|
|
(0.15 |
) |
|
|
5.36 |
|
|
March
31, 2008
|
|
|
6.01 |
|
|
|
(0.24 |
) |
|
|
(0.15 |
) |
|
|
5.62 |
|
|
December
31, 2007
|
|
|
6.12 |
|
|
|
(0.25 |
) |
|
|
(0.14 |
) |
|
|
5.73 |
|
|
September
30, 2007
|
|
|
6.12 |
|
|
|
(0.38 |
) |
|
|
(0.16 |
) |
|
|
5.58 |
|
CPR
levels are impacted by conditions in the housing market, new regulations,
government and private sector initiatives, interest rates, availability of
credit to home borrowers and the economy in general. The following
table presents the quarterly average CPR experienced on our MBS portfolio, on an
annualized basis:
|
Quarter
Ended
|
|
CPR
|
|
|
September
30, 2008
|
|
|
10.3 |
% |
|
June
30, 2008
|
|
|
15.8 |
|
|
March
31, 2008
|
|
|
14.3 |
|
|
December
31, 2007
|
|
|
13.4 |
|
|
September
30, 2007
|
|
|
18.1 |
|
Interest
income from our cash investments increased to $1.5 million for the third quarter
of 2008 from $1.1 million for the third quarter of 2007. Our average
cash investments, comprised of investments in high quality money market funds,
increased to $281.4 million and yielded 2.16% for the third quarter of 2008
compared to average cash investments of $90.0 million for the third quarter of
2007 that yielded 4.96%. In general, we manage our cash investments
relative to our investing, financing and operating requirements, investment
opportunities and
current and anticipated market conditions. Our increase in cash
investments reflects our preference for larger cash balances in a period of
financial uncertainty. The yield on our cash investments is based on
the yields available on high quality money market investments available in the
market.
The
following table presents certain benchmark interest rates at the dates
indicated:
|
Quarter
Ended
|
|
30-Day
Libor
|
|
6-Month
Libor
|
|
12-Month
Libor
|
|
Target
Federal
Funds
(1)
|
|
1-Year
CMT
|
|
2-Year
Treasury
|
|
10-Year
Treasury
|
|
September
30, 2008
|
|
|
3.93 |
% |
|
|
3.98 |
% |
|
|
3.96 |
% |
|
|
2.00 |
% |
|
|
1.78 |
% |
|
|
1.99 |
% |
|
|
3.83 |
% |
|
June
30, 2008
|
|
|
2.46 |
|
|
|
3.11 |
|
|
|
3.31 |
|
|
|
2.00 |
|
|
|
2.36 |
|
|
|
2.62 |
|
|
|
3.98 |
|
|
March
31, 2008
|
|
|
2.70 |
|
|
|
2.61 |
|
|
|
2.49 |
|
|
|
2.25 |
|
|
|
1.55 |
|
|
|
1.63 |
|
|
|
3.43 |
|
|
December
31, 2007
|
|
|
4.60 |
|
|
|
4.60 |
|
|
|
4.22 |
|
|
|
4.25 |
|
|
|
3.34 |
|
|
|
3.05 |
|
|
|
4.03 |
|
|
September
30, 2007
|
|
|
5.12 |
|
|
|
5.13 |
|
|
|
4.90 |
|
|
|
4.75 |
|
|
|
4.05 |
|
|
|
3.96 |
|
|
|
4.58 |
|
| |
|
|
(1) The
target federal funds rate was reduced to 1.50% on October 8, 2008 and
again reduced to 1.0% on October 29,
2008.
|
Our
interest expense for the third quarter of 2008 increased to $85.0 million from
$81.8 million for the third quarter of 2007, reflecting a significant increase
in the amount of our borrowings, partially offset by a significant decrease in
the rate paid on our borrowings. Our average repurchase agreements
outstanding for the third quarter of 2008 increased by $3.148 billion, or 50.6%
to $9.374 billion from $6.226 billion for the third quarter of
2007. The increase in our borrowings reflects our leveraging of new
equity capital raised from September 2007 through September 2008. We
experienced a 161 basis point decrease in our effective cost of borrowing to
3.60% for the three months ended September 30, 2008 from 5.21% for the three
months ended September 30, 2007. Our Hedging
Instruments accounted for $15.9 million, or 67 basis points, of our interest
expense during the third quarter of 2008, while such instruments reduced our
interest expense by $2.5 million, or 16 basis points, for the third quarter of
2007. (See Notes 2(m) and 5 to the accompanying consolidated
financial statements, included under Item 1.)
At
September 30, 2008, we had repurchase agreements of $9.379 billion partially
hedged with active Swaps with an aggregate notional amount of $3.906
billion. Including the impact of Swaps, our repurchase agreements had
a weighted average rate of 3.82% and a weighted average maturity of 16 months at
September 30, 2008.
Our cost
of funding on the hedged portion of our repurchase agreements is in effect
fixed, over the term of the related Swap. As a result, the interest
rates on our hedged repurchase agreements do not change in connection with the
changes in market interest rates, but rather remain at the fixed rate stated in
the Swap agreements over the term of such instruments. During the
three months ended September 30, 2008, we entered into three Swaps with an
aggregate notional amount of $310.0 million, including two forward-starting
swaps totaling $300.0 million, which had a weighted average fixed pay rate of
4.37%. During the three months ended September 30, 2008, we had Swaps
of $235.6 million amortize, which had a weighted average interest fixed pay rate
of 4.03%. The remainder of our repurchase agreements, which were not
hedged, had a weighted average fixed rate of 3.62% at September 30,
2008. (See Notes 2(m) and 5 to the accompanying consolidated
financial statements, included under Item 1.)
For the
quarter ended September 30, 2008, our net interest income increased to $55.9
million from $14.9 million for the quarter ended September 30,
2007. This increase reflects the significant growth in our
interest-earning assets and a 161 basis point decrease in our cost of funding,
slightly offset by a decrease in the net yield on our MBS and a decrease in the
yield earned on our cash investments. As MBS yields relative to our
cost of funding have widened, our third quarter 2008 net interest spread and
margin improved to 1.61% and 2.09%, respectively, compared to a net interest
spread and margin of 0.36% and 0.90%, respectively, for the third quarter of
2007.
The
following table presents certain quarterly information regarding our net
interest spreads and net interest margin for the quarterly periods
presented:
|
|
|
Total
Interest Earning
Assets/Interest
Bearing
Liabilities
|
|
MBS
Net Spread
|
|
Quarter
Ended
|
|
Net
Interest
Spread
|
|
Net
Interest
Margin
(1)
|
|
Net
Yield on
MBS
|
|
Cost
of
Funding
MBS
|
|
Net
MBS
Spread
|
|
September
30, 2008
|
|
|
1.61 |
% |
|
|
2.09 |
% |
|
|
5.30 |
% |
|
|
3.60 |
% |
|
|
1.70 |
% |
|
June
30, 2008
|
|
|
1.38 |
|
|
|
1.89 |
|
|
|
5.36 |
|
|
|
3.85 |
|
|
|
1.51 |
|
|
March
31, 2008
|
|
|
0.90 |
|
|
|
1.47 |
|
|
|
5.62 |
|
|
|
4.64 |
|
|
|
0.98 |
|
|
December
31, 2007
|
|
|
0.65 |
|
|
|
1.22 |
|
|
|
5.73 |
|
|
|
5.05 |
|
|
|
0.68 |
|
|
September
30, 2007
|
|
|
0.36 |
|
|
|
0.90 |
|
|
|
5.58 |
|
|
|
5.21 |
|
|
|
0.37 |
|
| |
|
|
(1) Net
interest income divided by average interest-earning
assets.
|
The
following table presents information regarding our average balances, interest
income and expense, yields on interest-earning assets, cost of funds and net
interest income for the quarters presented:
|
Quarter
Ended
|
|
Average
Amortized
Cost
of
MBS (1)
|
|
|
Interest
Income
on Investment Securities
|
|
|
Average
Interest
Earning
Cash
and
Restricted
Cash
|
|
|
Total
Interest
Income
|
|
|
Yield
on
Average
Interest-
Earning
Assets
|
|
|
Average
Balance
of
Repurchase
Agreements
|
|
|
Interest
Expense
|
|
|
Average
Cost
of
Funds
|
|
|
Net
Interest
Income
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
$ |
10,530,924 |
|
|
$ |
139,419 |
|
|
$ |
281,376 |
|
|
$ |
140,948 |
|
|
|
5.21 |
% |
|
$ |
9,373,968 |
|
|
$ |
85,033 |
|
|
|
3.60 |
% |
|
$ |
55,915 |
|
|
June
30, 2008
|
|
|
8,844,406 |
|
|
|
118,542 |
|
|
|
375,326 |
|
|
|
120,693 |
|
|
|
5.23 |
|
|
|
8,001,835 |
|
|
|
76,661 |
|
|
|
3.85 |
|
|
|
44,032 |
|
|
March
31, 2008
|
|
|
8,902,340 |
|
|
|
125,065 |
|
|
|
347,970 |
|
|
|
128,096 |
|
|
|
5.54 |
|
|
|
8,100,961 |
|
|
|
93,472 |
|
|
|
4.64 |
|
|
|
34,624 |
|
|
December
31, 2007
|
|
|
7,681,065 |
|
|
|
109,999 |
|
|
|
196,344 |
|
|
|
112,284 |
|
|
|
5.70 |
|
|
|
6,975,521 |
|
|
|
88,881 |
|
|
|
5.05 |
|
|
|
23,403 |
|
|
September
30, 2007
|
|
|
6,852,994 |
|
|
|
95,590 |
|
|
|
90,006 |
|
|
|
96,716 |
|
|
|
5.57 |
|
|
|
6,225,695 |
|
|
|
81,816 |
|
|
|
5.21 |
|
|
|
14,900 |
|
| |
|
|
(1)
Unrealized gains and losses are not reflected in the average amortized
cost of MBS.
|
|
For the
quarter ended September 30, 2008, we had net other operating losses of $694,000
compared to net other operating losses of $22.1 million for the quarter ended
September 30, 2007. For the quarter ended September 30, 2008, our
other operating losses were primarily comprised of a loss of $986,000 realized
in connection with the termination of two Swaps with Lehman (See Note 5(a) to
the accompanying consolidated financial statements, included under Item 1.), an
other-than-temporary impairment of $183,000 in connection with one of our BB
rated MBS that we continue to hold in our portfolio and revenue from operations
of real estate of $407,000. Our real estate operations are not
expected to be material to our future results of operations. For the
third quarter of 2007, our other operating losses of $22.1 million was almost
entirely comprised of losses of $22.0 million realized on the sale of $650.4
million of Agency and AAA rated MBS which were primarily sold in response to
significant adverse changes in overall financial market conditions during the
third quarter of 2007.
For the
third quarter of 2008, we had operating and other expenses of $5.2 million,
including real estate operating expenses and mortgage interest totaling $439,000
attributable to our one remaining real estate investment. For the
third quarter of 2008, our compensation and benefits and other general and
administrative expense was $4.7 million, compared to $3.1 million, for the third
quarter of 2007. The $1.4 million increase in our compensation and
benefits expense primarily reflects an increase to our bonus accrual and higher
salary expense reflecting additional hires and salary increases. At
September 30, 2008, we had 22 full time employees, compared to 17 at September
30,
2007. Other
general and administrative expenses were $1.5 million for the third quarter of
2008 compared to $1.2 million for the third quarter of 2007. These
expenses are primarily comprised of the cost of professional services, including
auditing and legal fees, costs of complying with the provisions of the
Sarbanes-Oxley Act of 2002, office rent, corporate insurance, Board fees and
miscellaneous other operating costs. Our compensation and benefits
and other general and administrative expense as a percentage of average assets
was 0.18% for each of the quarters ended September 30, 2008 and September 30,
2007.
Nine-Month
Period Ended September 30, 2008 Compared to the Nine-Month Period Ended
September 30, 2007
For the
nine months ended September 30, 2008, we had a net loss of $7.0 million, or
$(0.04) per common share, compared to net income of $3.5 million, or $0.04 per
common share for the nine months ended September 30, 2007.
Interest
income on our investment securities portfolio for the nine months ended
September 30, 2008 increased by $112.7 million, or 41.7% to $383.0 million
compared to $270.3 million during the first nine months of 2007. This
increase reflects the growth in our MBS portfolio. Excluding changes
in market values, our average investment in MBS increased by $2.811 billion, or
42.5%, to $9.430 billion for the first nine months of 2008 from $6.619 billion
for the first nine months of 2007. The net yield on our MBS portfolio
was essentially flat, decreasing by 2 basis points, to 5.42% for the first nine
months of 2008 compared to 5.44% for the first nine months of
2007. This slight decrease in the net yield on our MBS portfolio
primarily reflects a 34 basis point decrease in the gross yield on our MBS
portfolio partially offset by a 25 basis point reduction in the cost of net
premium amortization. The decrease in the gross yield on the MBS
portfolio to 5.77% for the nine months ended September 30, 2008 from 6.11% for
the first nine months of 2007, reflects the general decline in market interest
rates preceding the third quarter of 2008. The decrease in the cost
of our premium amortization to 22 basis points for the first nine months of 2008
from 47 basis points for the nine months of 2007 reflects a decrease in the
average CPR experienced on our portfolio as well as a decrease in the average
premium on our MBS portfolio. Our CPR for the nine months ended
September 30, 2008 was 13.2% compared to 21.4% for the first nine months of
2007, while the average purchase premium on our MBS portfolio was 1.3% for the
nine months ended September 30, 2008 compared to 1.4% for the nine months ended
September 30, 2007. At September 30, 2008, our purchase premium was
1.3% of current face value of our MBS portfolio.
Interest
income from our cash investments increased to $6.7 million for the first nine
months of 2008 from $2.2 million for the first nine months of
2007. This primarily reflects the increase in our average cash
investments to $334.7 million for the first nine months of 2008 compared to
$58.7 million for the first nine months of 2007. Our cash
investments, which are comprised of high quality money market investments,
yielded 2.68% for the first nine months of 2008, compared to 5.03% for first
nine months of 2007. In response to adverse market conditions that
emerged in March 2008, we modified our leverage strategy, reducing our target
leverage ratio. As a result, our cash investments
increased. In general, we manage our cash investments relative to our
investing, financing and operating requirements, investment opportunities and
current and anticipated market conditions.
Our
interest expense for the first nine months of 2008 increased to $255.2 million
from $232.4 million for the first nine months of 2007, reflecting an increase in
our borrowings, partially offset by the decrease in the overall interest rate we
paid on such borrowings. We experienced a 119 basis point decrease in
the cost of our borrowings to 4.01% for the first nine months of 2008, from
5.20% for the first nine months of 2007. The average amount
outstanding under our repurchase agreements for the first nine months of 2008
increased by $2.518 billion, or 42.1%, to $8.495 billion from $5.977 billion for
the first nine months of 2007. The increase in our borrowing under
repurchase agreements reflects our leveraging of equity capital we raised from
September 2007 through September 30, 2008. Payments made/received on
our Swaps, which comprise our Hedging Instruments, are reflected in our
borrowing costs. Our Swaps increased the cost of our borrowings by
$39.8 million, or 63 basis points, during the first nine months of 2008 and
decreased the cost of our borrowings by $6.3 million, or 14 basis points, during
the first nine months of 2007. (See Notes 2(m) and 5 to the
accompanying consolidated financial statements, included under Item
1.)
For the
nine months ended September 30, 2008, our net interest income increased to
$134.6 million from $40.1 million for the first nine months of
2007. This increase reflects the growth in our interest-earning
assets and an improvement in our net interest spread, as MBS yields relative to
our cost of funding widened. Our net interest
spread
and margin were 1.31% and 1.83%, respectively, for the nine months ended
September 30, 2008, compared to 0.24% and 0.79%, respectively, for the first
nine months of 2007.
For the
first nine months of 2008, we had net other operating losses of $120.6 million
compared to net other operating losses of $21.0 million for the first nine
months of 2007. In March 2008, we modified our leverage strategy to
reduce risk in light of the significant disruptions in the credit markets, by
decreasing our target debt-to-equity multiple range to 7x to 9x, from an
historical range of 8x to 9x. To effect this change, during the first
quarter of 2008, we sold 84 MBS for $1.851 billion, resulting in net losses of
$24.5 million and terminated 48 Swaps with an aggregate notional amount of
$1.637 billion, realizing losses of $91.5 million. During the quarter
ended September 30, 2008, we recognized losses of $986,000 in connection with
two Swaps terminated in response to the Lehman bankruptcy in September
2008. At September 30, 2008, we were not a party to any other
contracts with Lehman. Lastly, during the nine months ended September
30, 2008, we recognized other-than-temporary impairment charges of $5.1 million,
comprised of a $4.9 million impairment charge against our unrated investment
securities through June 2008 and an $183,000 impairment charge against a BB
rated MBS in September 2008. During the first nine months of 2007, we
realized losses of $22.1 million on the sale of MBS, of which $22.0 million were
incurred during the third quarter of 2007 primarily as a result of sales of
Agency and AAA rated MBS.
During
the first nine months of 2008, we had operating and other expenses of $14.8
million, including real estate operating expenses and mortgage interest totaling
$1.3 million attributable to our one remaining real estate
investment. In May 2008, as a result of equity market conditions, we
postponed the initial public offering of MFR and expensed $998,000 of costs
incurred in connection with such business initiative. For the first
nine months of 2008, our compensation and benefits and other general and
administrative expense were $12.5 million, compared to $8.5 million for the
first nine months of 2007. Our compensation and benefits and other
general and administrative expense as a percentage of average assets was 0.17%
for each of the nine months ended September 30, 2008 and September 30,
2007. The $3.8 million increase in our compensation and benefits
expense for the first nine months of 2008 compared to the first nine months of
2007, primarily reflects an increase to our bonus accrual and higher salary
expense reflecting additional hires and salary increases. Other
general and administrative expenses, which were $3.9 million for the first nine
months of 2008 compared to $3.7 million for the first nine months of 2007, were
comprised primarily of the cost of professional services, including auditing and
legal fees, costs of complying with the provisions of the Sarbanes-Oxley Act of
2002, office rent, corporate insurance, Board fees and miscellaneous other
operating costs.
Critical
Accounting Policies
On
January 1, 2008, we adopted FAS 157, which defines fair value, provides a
framework for measuring fair value and expands disclosures about fair value
measurements.
FAS 157
clarifies that the fair value is the exchange price in an orderly transaction,
that is not a forced liquidation or distressed sale, between market participants
to sell an asset or transfer a liability in the market in which the reporting
entity would transact for the asset or liability, that is, the principal or most
advantageous market for the asset/liability. The transaction to sell
the asset or transfer the liability is a hypothetical transaction at the
measurement date, considered from the perspective of a market participant that
holds the asset/liability. FAS 157 provides a consistent definition
of fair value which focuses on exit price and prioritizes, within a measurement
of fair value, the use of market-based inputs over entity-specific
inputs. In addition, FAS 157 provides a framework for measuring fair
value and establishes a three-level hierarchy for fair value measurements based
upon the transparency of inputs to the valuation of an asset or liability as of
the measurement date.
On
September 30, 2008, in response to the significant illiquidity in the credit
markets, the FASB and SEC issued interpretive clarifications to FAS 157, with a
final FSP issued by the FASB on October 10, 2008. Our valuation
methodology has not changed as a result of these clarifications. We
continue to use prices received from an independent pricing service to determine
the fair value of our financial instruments.
The three
levels of valuation hierarchy established by FAS 157 are as
follows:
Level 1 – inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2 – inputs to the
valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the
full term
of the financial instrument.
Level 3 – inputs to the
valuation methodology are unobservable and significant to the fair value
measurement.
A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. Our investment securities, which are primarily comprised
of Agency MBS and our Swaps, are valued by a third-party pricing service
primarily based upon readily observable market parameters and are classified as
Level 2 financial instruments.
The
evaluation methodology of our third-party pricing service incorporates commonly
used market pricing methods, including a spread measurement to various indices
such as the CMT and Libor, which are observable inputs. The
evaluation also considers the underlying characteristics of each security, which
are also observable inputs, including: coupon; maturity date; loan age; reset
date; collateral type; periodic and life cap; geography; and prepayment
speeds. In the case of non-Agency MBS, observable inputs also include
delinquency data and credit enhancement levels. In light of the
volatility and market illiquidity our pricing service expanded its evaluation
methodology in August 2008 with respect to non-Agency hybrid
MBS. This enhanced methodology assigns a structure to various
characteristics of the MBS and its deal structure to ensure that its structural
classification represents its behavior. Factors such as vintage,
credit enhancements and delinquencies are taken into account to assign pricing
factors such as spread and prepayment assumptions. For tranches that
are cross-collateralized, performance of all collateral groups involved in the
tranche are considered. The pricing service developed a methodology
based on matrices and rule based logic matching trader
intelligence. The pricing service collects current market
intelligence on all major markets including issuer level information, benchmark
security evaluations and bid-lists throughout the day from various sources, if
available.
Our Swaps
are valued using a third party pricing service. We review the
valuations provided by our pricing service for reasonableness using internally
developed models that apply readily observable market inputs. We
consider our credit worthiness and that of our counterparties and collateral
provisions contained in our Swap agreements in determining our Swap
valuations. No credit related adjustment was made in determining the
value of our Swaps, given that at September 30, 2008, we determined that both us
and our Swap counterparties were considered to be of high credit quality, and
five of our six Swap agreements bilaterally provide for collateral.
Changes
to the valuation methodology on our financial instruments are reviewed by
management to ensure that such changes are appropriate. The methods
used to produce a fair value calculation may not be indicative of net realizable
value or reflective of future fair values. Furthermore, while we
believe our valuation methods are appropriate and consistent with other market
participants, the use of different methodologies, or assumptions, to determine
the fair value of certain financial instruments could result in a different
estimate of fair value at the reporting date. We use inputs that are
current as of the measurement date, which may include periods of market
dislocation, during which price transparency may be reduced. We
review the appropriateness of our classification of assets/liabilities within
the fair value hierarchy on a quarterly basis, which could cause such
assets/liabilities to be reclassified among the three hierarchy
levels.
Unresolved
Staff Comments
On August
12, 2008, we received a comment letter from the Staff of the SEC’s Division of
Corporate Finance with respect to our Annual Report on Form 10-K for the fiscal
year ended December 31, 2007, our Proxy Statement for our 2008 annual
stockholders meeting and our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2008. In the August 12, 2008 comment letter, the Staff noted
that approximately $14 million and $30 million of our gross unrealized loss
position on our MBS as of December 31, 2007 and June 30, 2008, respectively,
have been held in an unrealized loss position in excess of one
year. The Staff also noted that we had determined that there is no
other-than-temporary impairment related to these MBS due to our ability and
intent to hold these securities until their recovery or
maturity. The Staff asked us to explain how we reached this
determination. We responded to this letter on August 19, 2008 and
received follow-up comments in a letter dated September 24,
2008. We responded to this follow-up comment letter on October
7, 2008 and received a second follow-up comment letter from the Staff on October
23, 2008. In this last comment letter, the Staff requested additional
information asking us to (1) compare the characteristics of the MBS we sold and
the MBS we retained during the third quarter of 2007 and the first quarter of
2008, (2) estimate the time horizon for us to recover the value of our
available-for-sale MBS held in a continuous unrealized loss position for 12
months or longer, and (3) provide further details relating to our outstanding
reverse repurchase borrowings and other funds available to us for the purpose of
funding near-term liquidity during these periods. The
Staff
also asked us to provide similar information relating to our MBS as of September
30, 2008. We replied to this last comment letter on October 31, 2008
in which we provided all of the requested additional information, further
supporting both our ability and intent to hold these MBS until their recovery or
maturity.
Liquidity
and Capital Resources
Our
principal sources of cash typically consist of borrowings under repurchase
agreements, payments of principal and interest we receive on our MBS portfolio,
cash generated from our operating results and, depending on market conditions,
proceeds from capital market transactions. We typically use
significant cash to repay principal and interest on our repurchase agreements,
purchase MBS, make dividend payments on our capital stock, fund our operations
and make other investments that we consider appropriate.
We employ
a diverse capital raising strategy under which we may issue capital
stock. During the nine months ended September 30, 2008, we raised
$616.4 million of capital through the issuances of our common
stock. On June 3, 2008, we completed a public offering of 46,000,000
shares of our common stock, raising net cash proceeds of $304.3
million. On January 23, 2008, we completed a public offering of
28,750,000 shares of our common stock, raising net cash proceeds of $253.0
million. We used the net proceeds from these offerings to acquire
additional Agency MBS, on a leveraged basis, and for working capital
purposes. In addition, during the nine months ended September 30,
2008, we issued approximately 309,308 shares of common stock pursuant to our
DRSPP, raising net proceeds of approximately $2,034,000 and issued 8,559,000
shares of common stock pursuant to our CEO Program, raising net proceeds of
$57,122,780. At September 30, 2008, we had the ability to issue an
unlimited amount of common stock, preferred stock, depositary shares
representing preferred stock and/or warrants pursuant to our automatic shelf
registration statement on Form S-3. We had 8.2 million shares of
common stock available for issuance pursuant to our DRSPP shelf registration
statement on Form S-3.
To the
extent that we raise additional equity capital through capital market
transactions, we currently anticipate using cash proceeds from such transactions
to purchase additional Agency MBS, to make scheduled payments of principal and
interest on our repurchase agreements, and for other general corporate
purposes. We may also acquire additional interests in residential
ARMs and/or other investments consistent with our investment strategies and
operating policies. There can be no assurance, however, that we will
be able to raise additional equity capital at any particular time or on any
particular terms.
During
the nine months ended September 30, 2008, we purchased $5.189 billion of
investment securities, comprised of Agency MBS, using proceeds from repurchase
agreements and cash. During the nine months ended September 30, 2008,
we received cash of $1.119 billion from prepayments and scheduled amortization
on our investment securities.
While we
generally intend to hold our MBS as long-term investments, certain MBS may be
sold in order to manage our interest rate risk and liquidity needs, meet other
operating objectives and adapt to market conditions. In response to
market conditions, as previously disclosed, in March 2008, we sold MBS,
generating net proceeds of $1.851 billion, which were primarily used to reduce
our borrowings under our repurchase agreements, thereby lowering our leverage
multiple. At September 30, 2008, our debt-to-equity multiple was
7.2x, compared to 6.7x at June 30, 2008, and 8.1x at December 31,
2007.
Borrowings
under repurchase agreements were $9.379 billion at September 30, 2008, compared
to $9.310 billion at June 30, 2008 and $7.526 billion at December 31,
2007. As a result of recent market events, certain repurchase
agreement lenders have been, or are being, acquired. We had no
outstanding borrowings at September 30, 2008 with Lehman, who filed for
bankruptcy in September 2008, or any of its subsidiaries, nor was Lehman
significant to our borrowing capacity. In addition, lenders acting to
decrease their own leverage ratios have decreased the amount of repurchase
funding available, which has impacted us. In the normal course of our
business, we seek to obtain new repurchase agreement
counterparties. At September 30, 2008, we had amounts
outstanding under repurchase agreements with 16 counterparties and continued to
have available capacity under our repurchase agreements.
During
the first nine months of 2008, we paid cash distributions of $85.2 million on
our common stock and DERs and $6.1 million on our preferred stock. On
October 1, 2008, we declared our third quarter 2008 dividend on our common stock
of $0.22 per share, or a total of $45.6 million payable on common stock and
DERs, which was paid on October 31, 2008 to stockholders of record on October
14, 2008.
Under our
repurchase agreements we pledge additional assets as collateral to our
repurchase agreement counterparties (i.e., lenders) when the fair value of the
existing pledged collateral under such agreements declines and such lenders
demand additional collateral (i.e., initiate a margin call). Margin
calls result from a decline in the value of the MBS collateralizing our
repurchase agreements, generally following the monthly principal reduction of
such MBS due to scheduled amortization and prepayments on the underlying
mortgages, changes in market interest rates, a decline in market prices
affecting our MBS and other market factors. To cover a margin call,
we may pledge additional securities or cash. At the time one of our
repurchase agreement matures, cash on deposit as collateral (i.e., restricted
cash), if any, is generally applied against the repurchase agreement balance,
thereby reducing the amount borrowed. We are also required to pledge
MBS or cash as collateral against our Swaps, which collateral varies by
counterparty and over time based on the market value, notional amount, and
remaining term of the Swap.
At
September 30, 2008, we had a total of $10.098 billion of MBS pledged against our
repurchase agreements and Swaps. In a declining interest rate
environment, the value of our Swaps generally decreases, resulting in margin
calls. Cash collateral on Swaps and/or repurchase agreements is held
in interest-bearing deposit accounts with lenders/counterparties, and is
reported on our balance sheet as restricted cash. Collateral pledged
against Swaps is returned to us when margin requirements are exceeded or when a
Swap is terminated or expires. We had no restricted cash at September
30, 2008.
As a
result of reduced market liquidity over the past several months, spreads for
many types of fixed income products, including our MBS, widened, thereby
increasing margin calls. Through September 30, 2008, we had satisfied
all of our margin calls and had not sold assets in response to any margin
call. At September 30, 2008, we had $601.4 million available to meet
margin calls, comprised of unpledged MBS with a fair value of $162.9 million and
cash of $438.5 million. At June 30, 2008, we had $695.7 million
available to meet margin calls. We believe the change in our leverage
strategy, implemented in March 2008, has positioned us well in light of the
current tight credit environment and market illiquidity in
general. We have not sold any of our assets since implementing our
reduced leverage strategy in March 2008. We believe we have adequate
financial resources to meet our obligations, including margin calls, as they
come due, to fund dividends we declare and to actively pursue our investment
strategies. However, should the value of our MBS suddenly decrease,
significant margin calls on our repurchase agreements could result, or should
the market intervention by the U.S. Government fail to prevent further
significant deterioration in the credit markets, our liquidity position could be
adversely affected.
Inflation
Substantially
all of our assets and liabilities are financial in nature. As a
result, changes in interest rates and other factors impact our performance far
more than does inflation. Our financial statements are prepared in
accordance with GAAP and dividends are based upon net ordinary income as
calculated for tax purposes; in each case, our results of operations and
reported assets, liabilities and equity are measured with reference to
historical cost or fair market value without considering inflation.
Other
Matters
We intend
to conduct our business so as to maintain our exempt status under, and not to
become regulated as an investment company for purposes of, the Investment
Company Act. If we failed to maintain our exempt status under the
Investment Company Act and became regulated as an investment company, our
ability to, among other things, use leverage would be substantially reduced and,
as a result, we would be unable to conduct our business as described in our
annual report on Form 10-K for the year ended December 31, 2007 and this
quarterly report on Form 10-Q for the quarter ended September 30,
2008. The Investment Company Act exempts entities that are “primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate” (or Qualifying
Interests). Under the current interpretation of the staff of the SEC,
in order to qualify for this exemption, we must maintain (i) at least 55% of our
assets in Qualifying Interests (or the 55% Test) and (ii) at least 80% of our
assets in real estate related assets (including Qualifying Interests) (or the
80% Test). MBS that do not represent all of the certificates issued
(i.e., an undivided interest) with respect to the entire pool of
mortgages
(i.e., a
whole pool) underlying such MBS may be treated as securities separate from such
underlying mortgage loans and, thus, may not be considered Qualifying Interests
for purposes of the 55% Test; however, such MBS would be considered real
estate related assets for purposes of the 80% Test. Therefore,
for purposes of the 55% Test, our ownership of these types of MBS is limited by
the provisions of the Investment Company Act. In meeting the 55%
Test, we treat as Qualifying Interests those MBS issued with respect to an
underlying pool as to which we own all of the issued certificates. If
the SEC or its staff were to adopt a contrary interpretation, we could be
required to sell a substantial amount of our MBS under potentially adverse
market conditions. Further, in order to insure that at all times we
qualify for this exemption from the Investment Company Act, we may be precluded
from acquiring MBS whose yield is higher than the yield on MBS that could be
otherwise purchased in a manner consistent with this
exemption. Accordingly, we monitor our compliance with both of the
55% Test and the 80% Test in order to maintain our exempt status under the
Investment Company Act. As of September 30, 2008, we determined that
we were in and had maintained compliance with both the 55% Test and the 80%
Test.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
We seek
to manage our risks related to interest rates, liquidity, prepayment speeds,
market value and the credit quality of our assets while, at the same time,
seeking to provide an opportunity to stockholders to realize attractive total
returns through ownership of our capital stock. While we do not seek
to avoid risk, we seek to: assume risk that can be quantified from historical
experience, and actively manage such risk; earn sufficient returns to justify
the taking of such risks; and, maintain capital levels consistent with the risks
that we undertake.
Interest
Rate Risk
We
primarily invest in ARM-MBS on a leveraged basis. We take into
account both anticipated coupon resets and expected prepayments when measuring
the sensitivity of our ARM-MBS portfolio to changes in interest
rates. In measuring our repricing gap (i.e., the weighted average
time period until our ARM-MBS are expected to prepay or reprice less the
weighted average time period for liabilities to reprice (or Repricing Gap)), we
measure the difference between: (a) the weighted average months until the next
coupon adjustment or projected prepayment on the ARM-MBS portfolio; and (b) the
months remaining until our repurchase agreements mature, applying the same
projected prepayment rate and including the impact of Swaps. A CPR is
applied in order to reflect, to a certain extent, the prepayment characteristics
inherent in our interest-earning assets and interest-bearing
liabilities.
The
following table presents information at September 30, 2008 about our Repricing
Gap based on contractual maturities (i.e., 0 CPR), and applying a 15% CPR, 20%
CPR and 25% CPR.
|
CPR
|
Estimated
Months
toAsset
Reset
or
Expected
Prepayment
|
Estimated Months
to
Liabilities
Reset (1)
|
Repricing
Gap
in
Months
|
|
0%
(2)
|
58
|
16
|
42
|
|
15%
|
37
|
16
|
21
|
|
20%
|
32
|
16
|
16
|
|
25%
|
28
|
16
|
12
|
|
|
|
|
|
|
(1) Reflects
the effect of our Swaps.
|
|
(2) Reflects
contractual maturities, which does not consider any
prepayments.
|
At
September 30, 2008, our financing obligations under repurchase agreements had
remaining contractual terms of five years or less. Upon contractual
maturity or an interest reset date, these borrowings are refinanced at then
prevailing market rates. However, our Swaps in effect lock in a fixed
rate of interest over the term of each of our Swaps on a corresponding portion
of our repurchase agreements. At September 30, 2008, we had
repurchase agreements of $9.379 billion, of which $3.906 billion were hedged
with active Swaps. At September 30, 2008, our Swaps had a weighted
average fixed-pay rate of 4.20% and extended 31 months on average with a maximum
term of approximately seven years.
We use
Swaps as part of our overall interest rate risk management
strategy. Our Swaps are intended to serve as a hedge against future
interest rate increases on our repurchase agreements, which rates are typically
Libor based. Our Swaps result in interest savings in a rising
interest rate environment, while in a declining interest rate environment result
in us paying the stated fixed rate on the notional amount for each of our Swaps,
which could be higher than the market rate. Our Swaps increased our
borrowing costs by $15.9 million, or 67 basis points and $39.8 million, or 63
basis points, for the three and nine months ended September 30, 2008,
respectively.
The
interest rates for most of our adjustable-rate assets primarily reprice based on
Libor, and, to a lesser extent, based on CMT, or MTA, while our debt
obligations, in the form of repurchase agreements, are generally priced off of
Libor. While Libor, CMT and MTA generally move together, at times
during the quarter ended September 30, 2008, Libor moved inversely to the CMT,
which was not significant to us. At September 30, 2008, when in the
adjustable period, 82.5% of our ARM-MBS were Libor based (of which 75.9% were
based on 12-month Libor and 6.6% were based on six-month Libor), 13.4% were
based on CMT, 3.7% were based on MTA and 0.4% were based on COFI.
Our
adjustable-rate assets reset on various dates that are not matched to the reset
dates on our repurchase agreements. In general, the repricing of our
repurchase agreements occurs more quickly than the repricing of our
assets. Therefore,
on average, our cost of borrowings may rise or fall more quickly in response to
changes in market interest rates than would the yield on our interest-earning
assets.
The
mismatch between repricings or maturities within a time period is commonly
referred to as the “gap” for that period. A positive gap, where
repricing of interest-rate sensitive assets exceeds the repricing of
interest-rate sensitive liabilities, generally will result in the net interest
margin increasing in a rising interest rate environment and decreasing in a
falling interest rate environment; conversely, a negative gap, where the
repricing of interest rate sensitive liabilities exceeds the repricing of
interest-rate sensitive assets will generate opposite results. As
presented in the following table, at September 30, 2008, we had a negative gap
of $2.662 billion in our less than three month category. The
following gap analysis is prepared assuming a 15% CPR; however, actual future
prepayment speeds could vary significantly. The gap analysis does not
reflect the constraints on the repricing of ARM-MBS in a given period resulting
from interim and lifetime cap features on these securities, nor the behavior of
various indices applicable to our assets and liabilities. The gap
methodology does not assess the relative sensitivity of assets and liabilities
to changes in interest rates and also fails to account for interest rate caps
and floors imbedded in our MBS or include assets and liabilities that are not
interest rate sensitive. The notional amount of our Swaps is
presented in the following table, as they fix the cost and repricing
characteristics of a portion of our repurchase agreements. While the
fair value of our Swaps are reflected in our consolidated balance sheets, the
notional amounts, presented in the table below, are not.
|
|
|
At
September 30, 2008
|
|
|
(In
Thousands)
|
|
Less
than Three
Months
|
|
|
Three
Months to
One
Year
|
|
|
One
Year to
Two
Years
|
|
|
Two
Years to
Three
Years
|
|
|
Beyond
Three
Years
|
|
|
Total
|
|
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$ |
914,154 |
|
|
$ |
1,443,132 |
|
|
$ |
1,605,286 |
|
|
$ |
2,253,891 |
|
|
$ |
4,044,185 |
|
|
$ |
10,260,648 |
|
|
Cash
and restricted cash
|
|
|
438,530 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
438,530 |
|
|
Total
interest-earning assets
|
|
$ |
1,352,684 |
|
|
$ |
1,443,132 |
|
|
$ |
1,605,286 |
|
|
$ |
2,253,891 |
|
|
$ |
4,044,185 |
|
|
$ |
10,699,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
$ |
7,921,040 |
|
|
$ |
930,400 |
|
|
$ |
242,634 |
|
|
$ |
156,400 |
|
|
$ |
129,000 |
|
|
$ |
9,379,474 |
|
|
Mortgage
payable on real estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,347 |
|
|
|
9,347 |
|
|
Total
interest-bearing liabilities
|
|
$ |
7,921,040 |
|
|
$ |
930,400 |
|
|
$ |
242,634 |
|
|
$ |
156,400 |
|
|
$ |
138,347 |
|
|
$ |
9,388,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap
before Hedging Instruments
|
|
$ |
(6,568,356 |
) |
|
$ |
512,732 |
|
|
$ |
1,362,652 |
|
|
$ |
2,097,491 |
|
|
$ |
3,905,838 |
|
|
$ |
1,310,357 |
|
|
Swaps,
notional amount (1)
|
|
$ |
3,906,495 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,906,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
Difference Between
Interest-Earnings
Assets and
Interest-Bearing
Liabilities after
Hedging
Instruments
|
|
$ |
(2,661,861 |
) |
|
$ |
(2,149,129 |
) |
|
$ |
(786,477 |
) |
|
$ |
1,311,014 |
|
|
$ |
5,216,852 |
|
|
|
|
|
| |
|
|
(1) Does not include
$300.0 million of forward-starting Swaps.
|
|
Market
Value Risk
All of
our investment securities are designated as “available-for-sale” and, as such,
are reflected at fair value, with the difference between amortized cost and fair
value reflected in accumulated other comprehensive income/(loss), a component of
Stockholders’ Equity. (See Note 10 to the accompanying consolidated
financial statements, included under Item 1.) The fair value of our
MBS fluctuates primarily due to changes in interest rates and other
factors. At September 30, 2008, our investments were primarily
comprised of Agency MBS or the most senior tranche non-Agency
MBS. While changes in the fair value of our MBS are generally not
believed to be credit-related, the illiquidity in the markets has had a
significant negative impact on the market value of our non-Agency MBS in
particular. We expect to continue to hold our non-Agency MBS, which
comprised only $330.3 million of the $10.447 billion of the amortized cost of
our portfolio, until market recovery or maturity. At September 30,
2008, our investment securities that were rated below AAA had a fair value of
$26.0 million and an amortized cost of $43.7 million.
The
following table presents additional information about the underlying loan
characteristics of our non-Agency MBS with an amortized cost in excess of $1.0
million, detailed by year of MBS securitization, held at September 30,
2008.
|
(Dollars
in Thousands)
|
|
Securities
with Average Loan FICO
of
715 or Higher (1)(2)
|
|
|
Securities
with
Average
Loan
FICO
Below
715 (1)(2)
|
|
|
|
|
|
Year
of Securitization
|
|
2007
|
|
|
2006
|
|
|
2005
and Prior
|
|
|
2005
and Prior
|
|
|
Total
|
|
|
Number
of Securities
|
|
|
2 |
|
|
|
1 |
|
|
|
5 |
|
|
|
6 |
|
|
|
14 |
|
|
MBS
Current Face
|
|
$ |
154,443 |
|
|
$ |
39,345 |
|
|
$ |
59,845 |
|
|
$ |
71,895 |
|
|
$ |
325,528 |
|
|
MBS
Amortized Cost
|
|
$ |
153,981 |
|
|
$ |
39,148 |
|
|
$ |
60,327 |
|
|
$ |
73,417 |
|
|
$ |
326,873 |
|
|
MBS
Fair Value
|
|
$ |
104,355 |
|
|
$ |
25,038 |
|
|
$ |
47,294 |
|
|
$ |
58,164 |
|
|
$ |
234,851 |
|
|
Weighted
Average Price
|
|
|
67.6 |
% |
|
|
63.6 |
% |
|
|
79.0 |
% |
|
|
80.9 |
% |
|
|
72.1 |
% |
|
Weighted
Average Coupon (3)
|
|
|
5.97 |
% |
|
|
5.58 |
% |
|
|
4.87 |
% |
|
|
5.45 |
% |
|
|
5.61 |
% |
|
Weighted
Average Loan Age
(Months)
(3)
(4)
|
|
|
17 |
|
|
|
33 |
|
|
|
50 |
|
|
|
58 |
|
|
|
34 |
|
|
Weighted
Average Loan to
Value
at Origination (3)
(5)
|
|
|
73 |
% |
|
|
65 |
% |
|
|
70 |
% |
|
|
79 |
% |
|
|
72 |
% |
|
Weighted
Average FICO at
Origination
(3)
(5)
|
|
|
742 |
|
|
|
742 |
|
|
|
733 |
|
|
|
692 |
|
|
|
729 |
|
|
3
Month CPR (4)
|
|
|
7.3 |
% |
|
|
18.2 |
% |
|
|
17.4 |
% |
|
|
10.4 |
% |
|
|
11.2 |
% |
|
60+
days delinquent (5)
|
|
|
4.2 |
% |
|
|
4.4 |
% |
|
|
6.4 |
% |
|
|
16.9 |
% |
|
|
7.4 |
% |
|
Credit
Enhancement (5)
(6)
|
|
|
6.5 |
% |
|
|
4.9 |
% |
|
|
10.3 |
% |
|
|
34.1 |
% |
|
|
13.1 |
% |
| |
|
|
(1) FICO,
named after Fair Isaac Corp., is a credit score used by major credit
bureaus to indicate a borrower’s credit worthiness. FICO scores are
reported borrower FICO scores at origination for each loan.
|
|
|
(2) Of
the 14 non-agency MBS shown in this table, ten were rated by Moody’s, all
of which was assigned a Aaa rating; six were rated by Fitch, all of which
was assigned a AAA rating; and 13 were rated by S&P, 11 of which were
assigned a AAA rating. One of the MBS securitized in 2007 with
an amortized cost of $41.9 million and a fair value of $25.1 million as of
September 30, 2008 was downgraded by S&P from AAA to BB on August 12,
2008. This MBS was rated AAA by Fitch as of September 30,
2008. The MBS securitized in 2006 with an amortized cost of
$39.1 million and a fair value of $25.0 million as of September 30, 2008
was downgraded by S&P from AAA to BBB on October 28,
2008. This MBS was rated AAA by Fitch as of October 28,
2008.
|
|
|
(3) Weighted
average is based on MBS current face at September 30, 2008.
|
|
|
(4) Information
provided is based on loans from individual group owned by us.
|
|
|
(5) Information
provided is based on loans from all groups that provide credit support for
our MBS.
|
|
|
(6)
Credit enhancement for a particular security consists of all securities
and/or other credit support that absorb initial credit losses generated by
a pool of securitized loans before such losses affect the particular
senior security. All of the above non-Agency MBS are the most senior
tranches in their respective deal structures and therefore carry less
credit risk than the junior securities that provide their credit
enhancement.
|
|
Generally,
in a rising interest rate environment, the fair value of our MBS would be
expected to decrease; conversely, in a decreasing interest rate environment, the
fair value of such MBS would be expected to increase. If the fair
value of our MBS collateralizing our repurchase agreements decreases, we may
receive margin calls from our repurchase agreement counterparties for additional
MBS collateral or cash due to such decline. If such margin calls were
not met, our lender could liquidate the securities collateralizing our
repurchase agreements with such lender, resulting in a loss to us. In
such a scenario, we could apply a strategy of reducing borrowings and assets, by
selling assets or not replacing securities as they amortize and/or prepay,
thereby “shrinking the balance sheet.” Such an action would likely
reduce our interest income, interest expense and net income, the extent of which
would be dependent on the level of reduction in assets and liabilities as well
as the sale price of the assets sold. Such a decrease in our net
interest income could negatively impact cash available for distributions, which
in turn could reduce the market price of our issued and outstanding common stock
and preferred stock. Further, if we were unable to meet margin calls,
lenders could sell the securities collateralizing such repurchase agreements,
which sales could result in a loss to us. To date, we have met all of
our margin calls.
Liquidity
Risk
The
primary liquidity risk for us arises from financing long-maturity assets, which
have interim and lifetime interest rate adjustment caps, with shorter-term
borrowings in the form of repurchase agreements. Although the
interest rate adjustments of these assets and liabilities fall within the
guidelines established by our operating policies, maturities are not required to
be, nor are they, matched.
We
typically pledge high-quality MBS to secure our repurchase agreements and
Swaps. At September 30, 2008, we had cash and cash equivalents of
$438.5 million and unpledged MBS of $162.9 million available to meet margin
calls on our repurchase agreements and Swaps and for other corporate
purposes. Should the value of our investment securities pledged as
collateral suddenly decrease, margin calls relating to our repurchase agreements
could increase, causing an adverse change in our liquidity
position. As such, we cannot assure that we will always be able to
roll over our repurchase agreements.
Prepayment
and Reinvestment Risk
Premiums
paid on our investment securities are amortized against interest income and
discounts are accreted to interest income as we receive principal payments
(i.e., prepayments and scheduled amortization) on such
securities. Premiums arise when we acquire MBS at a price in excess
of the principal balance of the mortgages securing such MBS (i.e., par
value). Conversely, discounts arise when we acquire MBS at a price
below the principal balance of the mortgages securing such MBS. For
financial accounting purposes, interest income is accrued based on the
outstanding principal balance of the investment securities and their contractual
terms. In general, purchase premiums on our investment securities,
currently comprised of MBS, are amortized against interest income over the lives
of the securities using the effective yield method, adjusted for actual
prepayment activity. An increase in the prepayment rate, as measured
by the CPR, will typically accelerate the amortization of purchase premiums,
thereby reducing the yield/interest income earned on such assets.
For tax
accounting purposes, the purchase premiums and discounts are amortized based on
the constant effective yield calculated at the purchase
date. Therefore, on a tax basis, amortization of premiums and
discounts will differ from those reported for financial purposes under
GAAP. At September 30, 2008, the net premium on our investment
securities portfolio for financial accounting purposes was $129.6 million (1.3%
of the principal balance of MBS); while the net premium for income tax purposes
was estimated at $127.6 million.
In
general, we believe that we will be able to reinvest proceeds from scheduled
principal payments and prepayments at acceptable yields; however, no assurances
can be given that, should significant prepayments occur, market conditions would
be such that acceptable investments could be identified and the proceeds timely
reinvested.
The
information presented in the following table projects the potential impact of
sudden parallel changes in interest rates on net interest income and portfolio
value, including the impact of Swaps, over the next 12 months based on the
assets in our investment portfolio on September 30, 2008. We acquire
interest-rate sensitive assets and fund them with interest-rate sensitive
liabilities. All changes in income and value are measured as
percentage change from the projected net interest income and portfolio value at
the base interest rate scenario.
|
Basis
Point Change in
Interest
Rates
|
|
Change
in
Net
Interest Income
|
|
Change
In
Portfolio
Value
|
|
+ 100
|
|
(25.60%)
|
|
(2.23%)
|
|
+ 50
|
|
(12.00%)
|
|
(0.98%)
|
|
- 50
|
|
10.77%
|
|
0.71%
|
|
- 100
|
|
20.16%
|
|
1.15%
|
Certain
assumptions have been made in connection with the calculation of the information
set forth in the above table and, as such, there can be no assurance that
assumed events will occur or that other events will not occur that would affect
the outcomes. The base interest rate scenario assumes interest rates
at September 30, 2008. The analysis presented utilizes assumptions
and estimates based on management’s judgment and
experience. Furthermore, while we generally expect to retain such
assets and the associated interest rate risk to maturity, future purchases and
sales of assets could materially change our interest rate risk
profile. It should be specifically noted that the information set
forth in the above table and all related disclosure constitutes forward-looking
statements within the meaning of Section 27A of the 1933 Act and Section 21E of
the 1934 Act. Actual results could differ
significantly
from those estimated in the above table.
The above
table quantifies the potential changes in net interest income and portfolio
value should interest rates immediately change (or Shock). The table
presents the estimated impact of interest rates instantaneously rising 50 and
100 basis points, and falling 50 and 100 basis points. The cash flows
associated with the portfolio of MBS for each rate Shock are calculated based on
assumptions, including, but not limited to, prepayment speeds, yield on future
acquisitions, slope of the yield curve and size of the
portfolio. Assumptions made on the interest rate sensitive
liabilities, which are assumed to be repurchase agreements, include anticipated
interest rates, collateral requirements as a percent of the repurchase
agreement, amount and term of borrowing.
The
impact on portfolio value is approximated using the calculated effective
duration (i.e., the price sensitivity to changes in interest rates) of 1.69 and
expected convexity (i.e., the approximate change in duration relative to the
change in interest rates) of (1.08). The impact on net interest
income is driven mainly by the difference between portfolio yield and cost of
funding of our repurchase agreements, which includes the cost and/or benefit
from Swaps that hedge certain of our repurchase agreements. Our
asset/liability structure is generally such that an increase in interest rates
would be expected to result in a decrease in net interest income, as our
repurchase agreements are generally shorter term than our interest-earning
assets. When interest rates are Shocked, prepayment assumptions are
adjusted based on management’s expectations along with the results from the
prepayment model.
Item
4. Controls and Procedures
A review
and evaluation was performed by our management, including our Chief Executive
Officer (or CEO) and Chief Financial Officer (or CFO), of the effectiveness of
the design and operation of our disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the 1934 Act) as of the end of
the period covered by this quarterly report. Based on that review and
evaluation, the CEO and CFO have concluded that our current disclosure controls
and procedures, as designed and implemented, were
effective. Notwithstanding the foregoing, a control system, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance that it will detect or uncover failures within the Company to disclose
material information otherwise required to be set forth in our periodic
reports.
There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
There are
no materials pending legal proceedings to which we are a party or any of our
assets are subject.
Item
1A. Risk Factors
Readers
should carefully consider, in connection with the other information disclosed in
this quarterly report on Form 10-Q, the risk factors disclosed in Item 1A – Risk
Factors of our annual report on Form 10-K for the year ended December 31, 2007
(or the 2007 Form 10-K) and the risk factors set forth below. These
factors could cause our actual results to differ materially from those stated in
forward-looking statements contained in this quarterly report and
elsewhere. The materialization of any risks and uncertainties
identified in this quarterly report together with those previously disclosed in
the 2007 Form 10-K or those that are presently unforeseen could result in
significant adverse effects on our financial condition, results of operations
and cash flows. See Item 2. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Forward Looking Statements” in
this quarterly report.
Risks
Associated With Recent Adverse Developments in the Mortgage Finance and Credit
Markets
Turbulent
market conditions for mortgages and mortgage-related assets as well as the
broader financial markets have resulted in a significant contraction in
liquidity for mortgages and mortgage-related assets, which may adversely affect
the value of the assets in which we invest.
Our
results of operations are materially affected by conditions in the markets for
mortgages and mortgage-related assets, including MBS, as well as the broader
financial markets and the economy generally. Beginning in the summer
of 2007, significant adverse changes in financial market conditions have
resulted in a deleveraging of the entire global financial system and the forced
sale of large quantities of mortgage-related and other financial
assets. As a result of these conditions, many traditional mortgage
investors have suffered severe losses in their residential mortgage portfolios
and several major market participants have failed or been impaired, resulting in
a significant contraction in market liquidity for mortgage-related
assets. This illiquidity has negatively affected both the terms and
availability of financing for all mortgage-related assets and has resulted in
these assets trading at significantly lower prices compared to recent
periods. Further increased volatility and deterioration in the
markets for mortgages and mortgage-related assets as well as the broader
financial markets may adversely affect the performance and market value of our
investment securities. If these conditions persist, institutions from
which we seek financing for our investments may become insolvent or continue to
tighten their lending standards, which could make it more difficult for us to
obtain financing on favorable terms or at all. Our profitability may
be adversely affected if we are unable to obtain cost-effective financing for
our investments.
A
decrease or lack of liquidity in our investments may adversely affect our
business, including our ability to value and sell our assets.
We invest
in certain MBS or other investment securities that are not publicly traded in
liquid markets. Moreover, turbulent market conditions, such as those
currently in effect, could significantly and negatively impact the liquidity of
our assets. In some cases, it may be difficult to obtain third-party
pricing on certain of our investment securities. Illiquid investments
typically experience greater price volatility, as a ready market does not exist,
and can be more difficult to value. In addition, third-party pricing
for illiquid investments may be more subjective than for more liquid
investments. The illiquidity of certain investment securities may
make it difficult for us to sell such investments if the need or desire
arises. In addition, if we are required to liquidate all or a portion
of our portfolio quickly, we may realize significantly less than the value at
which we have previously recorded certain of our investment
securities. As a result, our ability to vary our portfolio in
response to changes in economic and other conditions may be relatively limited,
which could adversely affect our results of operations and financial
condition.
There
can be no assurance that the actions of the U.S. government, U.S. Federal
Reserve, U.S. Treasury and other governmental and regulatory bodies for the
purpose of stabilizing the financial markets, or market response to those
actions, will achieve the intended effect, our business may not benefit from
these actions and further government or market developments could adversely
impact us.
In
response to the financial issues affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, the Emergency Economic Stabilization Act of 2008, or EESA, was
recently enacted. The EESA provides the U.S. Treasury Secretary with
the authority to use up to $700 billion to, among other things, inject capital
into financial institutions and establish the Troubled Asset Relief Program, or
TARP, to purchase from financial institutions residential or commercial
mortgages and any securities, obligations or other instruments that are based on
or related to such mortgages, that were originated or issued on or before March
14, 2008, as well as any other financial instrument that the U.S. Treasury
Secretary, after consultation with the Chairman of the Federal Reserve,
determines necessary to promote financial stability. In addition, the
U.S. Treasury Secretary has the authority to establish a program to guarantee,
upon request of a financial institution, the timely payment of principal and
interest on these financial assets. On October 14, 2008, the U.S.
Treasury Secretary announced a plan to use up to $250 billion of the $700
billion approved under the EESA to purchase senior preferred shares in financial
institutions, including nine of the nation’s largest banks. The
President of the United States also granted authority for the U.S. Treasury
Secretary to get access to an additional $100 billion of the $700 billion
approved under the EESA to buy difficult-to-price assets from financial
institutions, bringing the total commitment thus far under the EESA to $350
billion. Another $350 billion remains available to the U.S. Treasury
Secretary, although Congress can vote to deny release of the funds.
There can
be no assurance that the EESA will have a beneficial impact on the financial
markets, including current extreme levels of volatility. To the
extent the market does not respond favorably to the TARP or the TARP does not
function as intended, our business may not receive the anticipated positive
impact from the legislation. In addition, the U.S. government, U.S.
Federal Reserve, U.S. Treasury and other governmental and regulatory bodies have
taken or are considering taking other actions to address the financial
crisis. We cannot predict whether or when such actions may occur or
what impact, if any, such actions could have on our business, results of
operations and financial condition.
We
have experienced declines in the market value of our assets.
A decline
in the market value of our MBS or other assets may require us to recognize an
“other-than-temporary” impairment against such assets under GAAP if we were to
determine that, with respect to any assets in unrealized loss positions, we do
not have the ability and intent to hold such assets to maturity or for a period
of time sufficient to allow for recovery to the amortized cost of such
assets. If such a determination were made, we would recognize unrealized
losses through earnings and write down the amortized cost of such assets to a
new cost basis, based on the fair market value of such assets on the date they
are considered to be other-than-temporarily impaired. Such impairment
charges reflect non-cash losses at the time of recognition; subsequent
disposition or sale of such assets could further affect our future losses or
gains, as they are based on the difference between the sale price received and
adjusted amortized cost of such assets at the time of sale. In the
past, we have experienced declines in the market value of our MBS and other
assets which were determined to be other than temporary. As a result,
we recognized other-than-temporary impairments against such assets under GAAP,
which were recognized through earnings, reflecting the write down of the cost
basis of such assets to their fair market value at the point the determination
was made.
Item
6. Exhibits
(a)
Exhibits
3.1 Amended
and Restated Articles of Incorporation of the Registrant (incorporated herein by
reference to Exhibit 3.1 of the Form 8-K, dated April 10, 1998, filed by the
Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
3.2 Articles
of Amendment to the Amended and Restated Articles of Incorporation of the
Registrant, dated August 5, 2002 (incorporated herein by reference to Exhibit
3.1 of the Form 8-K, dated August 13, 2002, filed by the Registrant pursuant to
the 1934 Act (Commission File No. 1-13991)).
3.3 Articles
of Amendment to the Amended and Restated Articles of Incorporation of the
Registrant, dated August 13, 2002 (incorporated herein by reference to Exhibit
3.3 of the Form 10-Q for the quarter ended September 30, 2002 filed by the
Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
3.4 Articles
Supplementary of the Registrant, dated April 22, 2004, designating the
Registrant’s 8.50% Series A Cumulative Redeemable Preferred Stock (incorporated
herein by reference to Exhibit 3.4 of the Form 8-A, dated April 23, 2004, filed
by the Registrant pursuant to the 1934 Act (Commission File No.
1-13991)).
3.5 Amended
and Restated Bylaws of the Registrant (incorporated herein by reference to
Exhibit 3.2 of the Form 8-K, dated August 13, 2002, filed by the Registrant
pursuant to the 1934 Act (Commission File No. 1-13991)).
4.1 Specimen
of Common Stock Certificate of the Registrant (incorporated herein by reference
to Exhibit 4.1 of the Registration Statement on Form S-4, dated February 12,
1998, filed by the Registrant pursuant to the 1933 Act (Commission File No.
333-46179)).
4.2 Specimen
of Stock Certificate representing the 8.50% Series A Cumulative Redeemable
Preferred Stock of the Registrant (incorporated herein by reference to Exhibit 4
of the Form 8-A, dated April 23, 2004, filed by the Registrant pursuant to the
1934 Act (Commission File No. 1-13991)).
10.1 Amended
and Restated Employment Agreement of Stewart Zimmerman, dated as of April 16,
2006 (incorporated herein by reference to Exhibit 10.1 of the Form 8-K, dated
April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission
File No. 1-13991)).
10.2 Amended
and Restated Employment Agreement of William S. Gorin, dated as of July 1, 2008
(incorporated herein by reference to Exhibit 10.1 of the Form 8-K, dated August
14, 2008, filed by the Registrant pursuant to the 1934 Act (Commission File No.
1-13991)).
10.3 Amended
and Restated Employment Agreement of Ronald A. Freydberg, dated as of July 1,
2008 (incorporated herein by reference to Exhibit 10.2 of the Form 8-K, dated
August 14, 2008, filed by the Registrant pursuant to the 1934 Act (Commission
File No. 1-13991)).
10.4 Amended
and Restated Employment Agreement of Teresa D. Covello, dated as of January 1,
2008 (incorporated herein by reference to Exhibit 10.2 of the Form 8-K, dated
January 2, 2008, filed by the Registrant pursuant to the 1934 Act (Commission
File No. 1-13991)).
10.5 Amended
and Restated Employment Agreement of Timothy W. Korth II, dated as of January 1,
2008 (incorporated herein by reference to Exhibit 10.1 of the Form 8-K, dated
January 2, 2008, filed by the Registrant pursuant to the 1934 Act (Commission
File No. 1-13991)).
10.6 2004
Equity Compensation Plan of the Registrant (incorporated herein by reference to
Exhibit 10.1 of the Post-Effective Amendment No. 1 to the Registration Statement
on Form S-3, dated July 21, 2004, filed by the Registrant pursuant to the 1933
Act (Commission File No. 333-106606)).
10.7 MFA
Mortgage Investments, Inc. Senior Officers Deferred Compensation Plan, adopted
December 19, 2002 (incorporated herein by reference to Exhibit 10.7 of the Form
10-K, dated December 31, 2002, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.8 MFA
Mortgage Investments, Inc. 2003 Non-Employee Directors Deferred Compensation
Plan, adopted December 19, 2002 (incorporated herein by reference to Exhibit
10.8 of the Form 10-K, dated December 31, 2002, filed by the Registrant pursuant
to the 1934 Act (Commission File No. 1-13991)).
10.9 Form
of Incentive Stock Option Award Agreement relating to the Registrant’s 2004
Equity Compensation Plan (incorporated herein by reference to Exhibit 10.9 of
the Form 10-Q, dated September 30, 2004, filed by the Registrant pursuant to the
1934 Act (Commission File No. 1-13991)).
10.10 Form
of Non-Qualified Stock Option Award Agreement relating to the Registrant’s 2004
Equity Compensation Plan (incorporated herein by reference to Exhibit 10.10 of
the Form 10-Q, dated September 30, 2004, filed by the Registrant pursuant to the
1934 Act (Commission File No. 1-13991)).
10.11 Form
of Restricted Stock Award Agreement relating to the Registrant’s 2004 Equity
Compensation Plan (incorporated herein by reference to Exhibit 10.11 of the Form
10-Q, dated September 30, 2004, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.12 Form
of Phantom Share Award Agreement relating to the Registrant’s 2004 Equity
Compensation Plan (incorporated herein by reference to Exhibit 99.1 of the Form
8-K, dated October 23, 2007, filed by
the
Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
31.1 Certification
of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification
of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification
of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
Date: October
31, 2008
|
MFA
Mortgage Investments, Inc.
|
|
| |
|
|
|
|
|
By:
|
/s/ Stewart
Zimmerman |
|
| |
|
Stewart
Zimmerman
|
|
| |
|
Chief
Executive Officer
|
|
| |
|
|
|
| |
By:
|
/s/
William S. Gorin
|
|
| |
|
William
S. Gorin
|
|
| |
|
President
Chief Financial Officer
|
|
| |
|
(Principal
Financial Officer)
|
|
| |
|
|
|
| |
By:
|
/s/
Teresa D. Covello
|
|
| |
|
Teresa
D. Covello |
|
| |
|
Senior
Vice President
Chief
Accounting Officer and Treasurer
|
|
| |
|
(Principal
Accounting Officer)
|
|
49