Q3 2025: Contradictions Emerge on Agency MBS Allocation, Non-QM Growth, ROE Strategy, and Hedging Leverage

Date of Call: November 6, 2025

Financials Results

• EPS: $0.36 per basic common share (GAAP), effectively unchanged from prior quarter; distributable earnings $0.20 per share (down from $0.24 in Q2); distributable earnings excluding credit losses $0.32 (down from $0.35 in prior quarter); credit losses $0.11 per share for the quarter.

Guidance:

• Expect distributable earnings (DE) to reconverge with the common dividend by mid-2026.
• Resume multifamily lending at Lima One in early 2026 and launch a wholesale origination channel to scale originations.
• Deploy excess cash (~$100M) into target assets, including incremental Agency MBS exposure.
• Target G&A run-rate reduction of 7%–10% vs 2024 with additional savings realized through 2026.
• Continue issuing preferred shares and repurchasing common to enhance returns without shrinking equity base.

Business Commentary:

* Capital Deployment and Earnings Increase: - MFA Financial plans to invest $100 million of excess cash into target assets, which will significantly boost earnings and ROE. - This initiative is driven by increased clarity on interest rates, lower market volatility, and the liquidity provided by the agency portfolio.

• Expense Reduction and Efficiency:
• MFA Financial has reduced run-rate G&A expenses by approximately 11% year-to-date, with a goal to reduce expenses by 7% to 10% versus 2024 levels.

• These reductions are part of a broader strategy to improve operational efficiency and reduce costs across the organization.

• Lima One Origination Growth:

• Lima One originated $260 million in business purpose loans during Q3, a 20% increase from Q2.

• This growth is attributed to new hires, technology improvements, and expansion into new origination channels, enhancing Lima One's product offerings.

• Distributable Earnings and Strategic Initiatives:

• Distributable earnings for Q3 were approximately $21 million or $0.20 per share, with expectations for growth in the quarters ahead.
• The anticipated growth is due to the progress made on highly accretive strategic initiatives aimed at recovering DE levels to the common dividend by mid-2026.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted a 2.6% total economic return, multiple initiatives to materially increase earnings/ROE, expectation that DE will reconverge with the dividend by mid-2026, YTD G&A down ~11%, and $223M of nonperforming loans resolved during the quarter freeing capital.

Q&A:

• Question from Bose George (Keefe, Bruyette, & Woods, Inc., Research Division): For run-rate DE, should the starting point be $0.32 excluding this quarter's loss provision, and is that loss provision already reflected in marks so there's no book value impact?
  Response: Yes — $0.32 strips out losses; losses were largely reflected in prior marks/book value and ongoing run-rate losses should be modest (~$0.01–$0.02).

• Question from Bose George (Keefe, Bruyette, & Woods, Inc., Research Division): How much capital is tied up in delinquent loans (i.e., incremental investment potential)?
  Response: Approximately $40–$60 million of equity is tied up in delinquent loans; recent resolutions generated about a $15M gain this quarter and can be accretive to book value.

• Question from Bose George (Keefe, Bruyette, & Woods, Inc., Research Division): Confirm the incremental capital math — deploying excess cash ($100M net) into mid-teens ROE assets is the right way to model incremental contribution?
  Response: Confirmed — deploying the excess cash into mid‑teens ROE assets produces the expected incremental earnings uplift.

• Question from Mikhail Goberman (Citizens JMP Securities, LLC, Research Division): What margins is Lima One seeing and do you need higher margins to raise mortgage banking income above the ~$5.6M this quarter?
  Response: Margins are healthy — roughly 1–2 points on origination plus servicing strips; loan sales can capture ~2–3.5 point premiums; higher origination volumes will drive mortgage banking income growth.

• Question from Mikhail Goberman (Citizens JMP Securities, LLC, Research Division): Is reentering multifamily the key driver to increase Lima One origination volume?
  Response: Yes — reentering multifamily lending and launching a wholesale channel are intended to boost origination volume and mortgage banking income.

• Question from Mikhail Goberman (Citizens JMP Securities, LLC, Research Division): How do you view the Agency MBS allocation going forward — what might it grow to?
  Response: Agency allocation may grow modestly beyond current levels, but management does not expect a dramatic change after the ~$900M post-quarter purchase.

• Question from Eric Hagen (BTIG, LLC, Research Division): What levered returns are you targeting for multifamily at Lima One and have you changed the credit box?
  Response: Targeting mid‑teens levered ROEs; moving upmarket (more bridge vs value-add), tightened underwriting, and willing to use third‑party capital partners to limit balance‑sheet take.

• Question from Eric Hagen (BTIG, LLC, Research Division): What leverage range will you tolerate in the Agency portfolio and are you changing hedges to better manage liquidity?
  Response: Agency leverage remains around +/-8 (no material increase targeted); using cleared swaps and SOFR futures (ERIS) to materially lower initial margin (saving ~$16–17M) and free capital for higher‑ROE deployment.

Contradiction Point 1

Capital Allocation Strategy for Agency MBS

It involves changes in the company's strategic approach to allocating capital for its Agency MBS portfolio, which can impact earnings and investment decisions.

Can you discuss the Agency MBS capital allocation strategy? - Mikhail Goberman (Citizens JMP Securities, LLC, Research Division)

2025Q3: The equity allocation for Agency MBS is stable, with some marginal growth expected post-purchase. The current allocation is not anticipated to change dramatically. - Bryan Wulfsohn(President & Chief Investment Officer)

How do you expect capital allocation to shift across businesses as the economy enters an easing cycle? - Jason Price Weaver (JonesTrading Institutional Services, LLC, Research Division)

2025Q2: Lima One originates assets with high coupons, benefiting from securitization funding even with curve steepening. Non-QM benefits the existing portfolio, but competition may compress yields. Agency MBS is an opportunistic deployment, which could be redeployed into other credit assets if spreads tighten. - Bryan Wulfsohn (President & Chief Investment Officer)

Contradiction Point 2

Non-QM Program Growth and Participation

It involves the company's plans for growth and participation in the Non-QM (Non-Qualified Mortgage) sector, which is a significant part of their investment strategy.

What are the current margins for Lima One originations, and are higher margins needed to increase mortgage banking income? - Mikhail Goberman(Citizens JMP Securities, LLC, Research Division)

2025Q3: There is opportunity to grow NQM, limited by capital and competing opportunities in other asset classes. - Bryan Wulfsohn(President & Chief Investment Officer)

What are the levered returns and credit box changes for multifamily loans at Lima One? - Eric Hagen(BTIG, LLC, Research Division)

2025Q1: The number of counterparties varies quarterly but tends to be between four and eight. - Bryan Wulfsohn(President & Chief Investment Officer)

Contradiction Point 3

Economic Return on Equity (ROE) and Dividend Strategy

This contradiction involves the company's expectations for economic return on equity and how it aligns with dividend strategy, which is crucial for investor understanding and decision-making.

Is the starting point for run rate EAD $0.32, and are losses reflected in book value? - Bose George (KBW)

2025Q3: Michael Roper explains that the $0.32 figure strips out losses, indicating that the business is not loss-free. The company expects to find significant ROE potential in its strategic initiatives. - Michael Roper(CFO)

What is the current economic return of the portfolio? Does this align with the EAD this quarter? - Bose George (KBW)

2024Q4: We like to think about the economic return, meaning if you were effectively to restrike the assets, restrike the liabilities and the hedges and sort of measure what that ROE is sort of right in that 10-ish percent range. And I think when we think about the dividend, it sort of aligns really nicely with that economic earnings power. - Harold Schwartz(GC)

Contradiction Point 4

Hedging Strategy and Leverage Range for Agency MBS Portfolio

It involves the company's hedging strategy and leverage range for their Agency MBS portfolio, which impacts their capital deployment and risk management.

What is the leverage range for the Agency MBS portfolio, and are there new hedging strategies? - Eric Hagen(BTIG, LLC, Research Division)

2025Q3: Our Agency MBS portfolio leverage is about 8x right now, so we don't see that materially changing. - Bryan Wulfsohn(President & Chief Investment Officer)

Does convexity risk stem from the Agency MBS or non-QM portfolio? - Eric Hagen(BTIG, LLC, Research Division)

2025Q1: Our leverage in Agency securities is about 8.0x. - Bryan Wulfsohn(President & Chief Investment Officer)

Contradiction Point 5

Agency MBS Capital Allocation Strategy

This contradiction involves the company's strategy for capital allocation in Agency MBS, which impacts investment decisions and potential returns.

What margins are in Lima One originations, and does higher mortgage banking income require higher margins? - Mikhail Goberman (Citizens)

2025Q3: Bryan Wulfsohn states that the equity allocation for Agency MBS is stable, with some marginal growth expected post-purchase. The current allocation is not anticipated to change dramatically. - Bryan Wulfsohn(CIO)

What product types are you currently focused on? - Mikhail Goberman (Citizens)

2024Q4: Our view on the future of Agency MBS and the future of housing finance generally is really to focus on a stable equity allocation for the long term, and we think that that fits with the long-term needs of the business. - Craig Knutson(CEO)