May 1, 2013
Executives
Danielle Rosatelli – Accounting and Operations Assistant Stewart Zimmerman – Chairman and Chief Executive Officer William S. Gorin – President of MFA Financial, Inc Stephen D.
Yarad – Chief Financial Officer Craig L. Knutson – Executive Vice President
Analysts
Daniel Altscher – FBR Capital Markets Henry Coffey – Sterne, Agee & Leach, Inc. Steve DeLaney – JMP Securities LLC Douglas Harter – Credit Suisse Securities Joe Hudak – Wells Fargo Advisors LLC Michael Widner – KBW Christopher Donat – Sandler O'Neill & Partners LP Richard Shane – JPMorgan Securities LLC Arren Cyganovich – Evercore Partners
Operator
Ladies and gentlemen thank you for standing by and welcome to the MFA Financial, Inc. First Quarter 2013 Earnings Call.
For the conference, all participants are in a listen-only mode. (Operator Instructions) As a reminder, today’s call is being recorded.
With that being said, turning the conference now to Ms. Danielle Rosatelli, Financial Analyst and Investor Relations.
Please go ahead.
Danielle Rosatelli
Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc., which reflect management’s beliefs, expectations and assumptions as to MFA’s future performance and operation.
When used, statements that are not historical in nature, including those containing words such as will, believes, expect, anticipate, estimate, plan, continue, intend, should, could, would, may or similar expressions are intended to identify forward-looking statements. All forward-looking statements speak only as of the date on which they are made.
These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors including, but not limited to those relating to changes in interest rates and the market value of MFA’s investment securities, changes in the prepayment rates on the mortgage loans securing MFA’s investment securities, changes in the default rates and management’s assumptions regarding default rates on the mortgage loans securing MFA’s MBS, MFA’s ability to borrow to finance its assets. Implementation of or changes in government regulations or programs affecting MFA’s business.
MFA’s ability to maintain its qualification as a real estate investment trust for federal income tax purposes, MFA’s ability to maintain its exemption from registration under the Investment Company Act of 1940. MFA’s estimates regarding taxable income and the timing and amount of distributions to stockholders, and risks associated with investing in real estate related assets, including changes in business conditions and the general economy.
These and other risks, uncertainties and factors, including those described in MFA’s Annual Report on Form 10-K for the year ended December 31, 2012, and other reports that it may file from time-to-time with the Securities and Exchange Commission, could cause MFA’s actual results to differ materially from those projected, expressed or implied in any forward-looking statements it makes. For additional information regarding MFA’s use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA’s first quarter 2013 financial results.
Thank you for your time. I would now like to turn this call over to Stewart Zimmerman, MFA’s Chief Executive Officer.
Stewart Zimmerman
Good morning, and welcome to MFA’s first quarter 2013 earnings call. Joining this morning on the call are the senior officers of MFA.
Today we announced financial results for the first quarter ended March 31, 2013, reaching financial results and other significant highlights for MFA include the following. Our first quarter net income per common share of $0.21 and core earnings per common share of $0.20.
Book value per common share was $8.84 as of March 31, 2013, compared to $8.99 at December 31, 2012. Excluding the impact of the $0.50 per share special dividend declared March 4, 2013.
Book value would have increased in the quarter due primarily to continued appreciation within the non-agency MBS portfolio. Relating to that as you might notice on the front page of the Wall Street Journal today it mentions housing market accelerates, and again we believe that something that was very positive, continued positive for MFA and our non-agency portfolio.
On April 30, 2013, we paid our first quarter 2013 dividend of $0.22 per share of common stock to stockholders of record as of April 12, 2013. A combination of both home price appreciation and mortgage amortization has led to a decrease in the loan-to-value ratio for many of the mortgages underlying our non-agency portfolio.
Due to this lower LTV, we have reduced our estimate of future losses within our non-agency portfolio. As a result, in the first quarter we transferred $34.5 million to accretable discount from credit reserve, bringing the total transferred over the last nine months to of just sort of a $170 million.
This increase in accretable discount prospectively increases the yield on our non-agency mortgage back securities and will be realizing income over the life of the assets. For the first quarter ended March 31, 2013, we generated net income allocable to common stockholders of $75 million, or $0.21 per share of common stock.
Core earnings for the first quarter were $72.3 million, or $0.20 per share of common stock. We continue to provide stockholders attractive returns to what we believe to be appropriate leverage investments in both agency and non-agency residential mortgage back securities.
At quarter end, our debt to equity ratio was 3.1:1. Our agency portfolio had an average amortized cost basis of a 103.4% of par as of March 31, 2013, and generated a 2.42% yield in the first quarter.
Our non-agency portfolio had an average amortized cost of 73.2% of par as of March 31, 2013, and generated a loss adjusted yield of 6.8% in the first quarter. We believe MFA, as an internally managed REIT, continues to be a very efficient vehicle for delivering the benefits of residential mortgage back security investment to our stockholders.
And thank you for your continued interest in MFA financial. And at this time, I would like to open the call for questions.
Operator
(Operator Instructions) First one is from the line of Cheryl Tee. Please go ahead.
Cheryl, your line is open, possibly take yourself off mute.
Unidentified Analyst
Hi, good morning.
Stewart Zimmerman
Good morning.
Unidentified Analyst
Just a question, first on the – I wondering if you could give some color on weighted average coupon rate on the agency portfolio this quarter. With the CPR sort of flat, I was surprised that the yields compressed to the degree comprised to the degree it did this quarter.
And so any color there would be helpful.
Stewart Zimmerman
Hold on. As we looking up the information as we speak, probably another question will give…
Unidentified Analyst
Sure. I guess just to build on that, if you could give us a sense of sort of where the more attractive opportunities are on the agency portfolio, and what sort of yields or all-in costs you’re looking at in the current environment.
Stewart Zimmerman
The answer on the agency coupon, the coupon for the fourth quarter was $356 million, and the coupon for the first quarter was $343 million, so I think that explains the change.
Unidentified Analyst
Okay, great. And then on sort of the attractiveness of opportunities in the current market?
Stewart Zimmerman
On the agency side or the non-agency side?
Unidentified Analyst
Both actually would be great.
Stewart Zimmerman
Why don’t we start on the agency side? (Inaudible) will you.
Stephen D. Yarad
Yes, so on the agency side in the first quarter we were predominately investing in 15 years, 15 or low loan balance securities. Our view has been and continues to be that – we need to be cognizant of prepayment risk here.
And as we’ve put money to work there we’ve favored if you can call better from that securities which will have a lower prepayments and lower prepayment volatility. The majority of the dollars have been put to work and the first quarter was in those prepayment protective securities on the 15 year side.
Stewart Zimmerman
And on the non-agency side.
Stephen D. Yarad
And on the non-agency side, I think the investments that we’ve made are pretty similar to the investments that we’ve been making for the last year or more. So no will change in that strategy.
Unidentified Analyst
Okay, great. Thank you.
Stewart Zimmerman
You’re welcome.
Operator
Our next question is from Dan Altscher with FBR. Please go ahead.
Daniel Altscher – FBR Capital Markets
Thanks. Good morning everyone.
Stewart Zimmerman
Good morning.
Daniel Altscher – FBR Capital Markets
Question on the recent preferred issuance. We’re going to take out, call it the 96 or so, out of the 200 that you race, but for the remaining portion.
Can you give us a sense as to where you’re putting that to work, what you think the relative returns are versus the incremental, where that the coupon pickup on the 7.5s.
Stewart Zimmerman
It’s basically the same ratio that we’ve had in the past. Again as you know, our portfolio consists of agency and non-agency securities, and it will be a similar balance as you seen before.
Daniel Altscher – FBR Capital Markets
Okay. And then also the question on the credit release.
Was that the total the $34.5 million, was that the total that was moved out of the credit reserve or is there any that was actually earned in the quarter through the lost adjusted yield.
Stewart Zimmerman
That was release from credit reserve to incredible discount, those are assumption changes.
Daniel Altscher – FBR Capital Markets
Yes.
Stewart Zimmerman
The other things that occurred during the quarter, there were realized credit losses. So those reduced the credit reserve that was about $50 million.
We increase the credit reserve from purchases by about $23 million, and then we actually had some small sales that decreased by about $6 million.
Stephen D. Yarad
And the other thing I would say is, when you release that credit reserve, it impacts prospectively over time. So very little of that would have been actually realized during the first quarter, but the benefit of that will be realized going forward over the remaining of these assets.
Stewart Zimmerman
That’s right. Actually that’s a good point, Steve.
When we do that – we do that typically at the end of the second month of the quarter. So it shows up for this quarter in March, but it would not have shown up in January or February.
Daniel Altscher – FBR Capital Markets
Right. Okay, good point.
Yes. That explains kind of the delta like $74 million between the two cores of credit reserve.
And just a quick one if I can. Can you give us sense of where you think the book value is [murking] now that weren’t to May, on a fair value basis?
Now we’ve seen prices come back.
Stewart Zimmerman
What I’ll do is I will talk about maybe what we seen in non-agency pricing during the month of April. And there is certainly up prices have been up its more difficult to buy securities now then it was a month ago.
That being said, the volumes been somewhat light in April. So I guess I would say prices are probably up a good point or so, it’s possible that they are up more than that, but I think it will take a little bit of testing a little bit more volume to sort of confirm these market levels.
Daniel Altscher – FBR Capital Markets
Okay. That’s great.
Thanks so much.
Stewart Zimmerman
Sure.
Operator
Our next question is from Henry Coffey with Sterne, Agee. Please go ahead.
Henry Coffey – Sterne, Agee & Leach, Inc.
Good morning everyone and thank you for taking my question. As you look forward obviously there are a lot of wins helping you a lot home pricing et cetera the demand from securities?
As you look forward for new reinvestment opportunities. Can you give us some comment on what’s coming out of the GSC world they’ve been told to sort of offload your liquid assets, I know they’ve put out tapes recently to get people to start looking at the potential for credit risk assets, maybe you can get a sense of what kinds of return yields could come out of that conglomeration.
William S. Gorin
Henry, I think there is still ways of on deciding how they’re going to lay off some of the credit. So, basically to say we are with the old treasury white paper.
And now we have a new secretary of the treasury, there will be a new white paper and a sort of fall back to this option three, where somehow they’re going to lay off part of the credit risk to private entities with some sort of crises insurance behind that. Really thinking there has been gone what’s beyond that.
So it’s hard to say, but we are completely prepared and we have the capabilities to analyze mortgage credit risk and to get paid for and to accept the credit as it makes sense.
Stewart Zimmerman
And I think one of the things just to add to Bill’s remarks, Henry have been in the fact that. I mean we have been immersed in credit for years.
Now we’re not new to the game, so in terms of being able to analyze credit on residentials. I think we are at the top of the list.
So I think anything that comes on in the pike there will be opportunities for us and we do continue to look.
Henry Coffey – Sterne, Agee & Leach, Inc.
But really as a waiting game given the state of affairs in D.C.
Stewart Zimmerman
Yes, that it.
Henry Coffey – Sterne, Agee & Leach, Inc.
We have also been directed to coat offload illiquid assets, which could include their non-agency holdings have using inventories coming out of Fannie or Freddie.
Stewart Zimmerman
No not the date we haven’t.
Henry Coffey – Sterne, Agee & Leach, Inc.
Great. Well, thank you very much and good quarter.
Stewart Zimmerman
Thank you.
William S. Gorin
Thanks Henry.
Operator
And we’ll go to Steve DeLaney with JMP Securities. Please go ahead.
Steve DeLaney – JMP Securities LLC
Thanks. Good morning everyone.
Guys in the past you’ve actually commented on the – you alluded to the fact, when you’re talking about book value that the non-agency portfolio gain value. I know in the past, you’ve actually kind of try to quantify that in your press release.
We get a little math this morning just based on the disclosed information your cost and your fair value and using the $73.2 million, we’ve backed in the par, but it looks like we’re getting an average fair value relative to par of about $85.4 million at March 31, versus $82.8 million. So that’s just an average fair value gain of maybe 2.5 points in first quarter.
Does that sound reasonable or realistic to what you saw?
Stewart Zimmerman
I think that’s in the ballpark.
Stephen D. Yarad
I’m just checking. I think your numbers are actually thought on Steve.
As of December 31, the weighted average mark was $82.8 million.
Steve DeLaney – JMP Securities LLC
Yes.
Stephen D. Yarad
And as you’ll see in our Q that comes out today its $85.4 million. So you hit the number right on the head.
Steve DeLaney – JMP Securities LLC
Yes. Those are exactly what we calculated.
So about 2.5 points and on 6.4 billion, 2.5 points, 160 million and you’ve got 358 million shares that would looks like $0.45 or so. So you would have had a pretty meaningful book value increase were it not for the special dividend.
Stephen D. Yarad
That is correct.
Steve DeLaney – JMP Securities LLC
Okay. And I think we can take the Craig’s comments of a point or so, and apply to say math going forward.
Why things are - I would like to just complement you guys on, we are so used to seeing yield compression and spread compression and I just that this method of being conservative on the reserve and they’re having the ability to release. I mean we don’t see many earnings reports where the non-agency yield went up from 670 in 4Q to 680 in 1Q.
It’s just not you don’t see that in mortgage REIT land these days. So congratulations on that.
And I guess the second part of that is if the $35 million relief in 1Q really didn’t benefit 1Q very much. I assume we should expect that all things are same that 680 has some room to move higher if we look out the next couple of quarters.
Stephen D. Yarad
Yes, Steve it’s a good point they’re actually there is two things that happen. So when we adjust those yields at the end of the second month of the quarter, we take into account any changes in our credit reserve and accretable discount.
We also reset the yields based on the forward curve and for the first time probably in more than two years, we actually got a small increase in the yields due to the forward curve. So I can tell you that the non-agency yield in the month of March was 692.
Steve DeLaney – JMP Securities LLC
692 for the month of – just one single month.
Stephen D. Yarad
Correct.
Steve DeLaney – JMP Securities LLC
Excellent. Okay.
I appreciate that. And one final thing, I’ll let somebody else hop on.
The FHFA, there’s news reports this morning that Obama is going to nominate Mel Watt, and we’ll see where that process goes. But there has been a lot of chatter and I’ve talked to people who’ve been in the West Wing in the last two weeks, and they are still focused on reside, but it seems like there is beside you figuring out a way the GFEs could help with reside and product label.
ARM-MBS loans and private label securities is definitely on the table. I don’t actually know how that we can transfer that risk for the GFEs, but do you have any concern looking at your ARM-MBS portfolio, your non-agency portfolio that there could be some program put in place where those private label loans could be reside, but you as the bondholder would be asked to receive something less than par when the loan is reside.
I guess what I’m referring to is something that would be like a short reside as it can to a short sale. Appreciate it if you have any, if you all are talking to anybody about those various proposals and have any views.
Thanks.
Stephen D. Yarad
The only chance that we’ve seen if anyone forcing us to take less than the pace amount has been eminent domain discussions, which really haven’t gotten for some no Steve. To the extent that Fannie and Freddie wanted to make available to people with high LTVs government guarantee mortgage its probably only be a positive to us and sort of HARP for people who are underwater on private labels.
We’ve heard no discussion up the people forcing us to take any haircut.
Steve DeLaney – JMP Securities LLC
All right, great. I appreciate that.
Stephen D. Yarad
And one other thing I want to add Steve. You’ve made a very good point when you calculated our mark-to-market, which is out 85% of par.
So that’s important when you look at how much book value does change to know that these are assets that trade in mid-80s not assets that trade in the mid-60s.
Steve DeLaney – JMP Securities LLC
Yes, got it, because we do see big price difference obviously between the more subprime stuff and the more near prime stuff. So we’ll try to be [attentive] to that going forward on our book value estimates.
Stephen D. Yarad
Thank you.
Steve DeLaney – JMP Securities LLC
Thanks.
Operator
Our next question is from Douglas Harter with Credit Suisse. Please go ahead.
Douglas Harter – Credit Suisse Securities
Thanks. I was hoping you could talk about how you see kind of the opportunities between sort of still investing in legacy non-agency versus kind of new jumbo securitization.
How you be the return profile of those two assets?
William S. Gorin
Sure. So when you talk about investing in the new securitizations of new clean originations.
There is two sides to it. You can buy the loans and securitize it on the bottom fees or by the top AAA pieces, which have lower yields.
Doug, which part are you asking about?
Douglas Harter – Credit Suisse Securities
Thinking more of owning the credit fees.
William S. Gorin
So when we solve the ROEs on the credit piece depending on the execution of the last securitization deal that’s happened. We see the ROEs comparable, but with a lot more implicit interest rate risk, if you’re along to the fixed rate and you have the bottom piece and you walked out.
Could be a very long asset where the underline mortgages to might only yield [U33] in the quarter. So we still see comparable ROEs, but we still like the seasoned non-agency trade better.
Stewart Zimmerman
Doug the other thing I would add is terms of upside from our base case yield, the upside on that bottom piece on the new securitization there really is going an upside, because most of those are pretty much prices no credit losses. So you assume that you get back part and as Bill pointed out it’s a very long asset.
On the non-agency side, there is certainly a lot more room for credit improvement home price depreciation loans are amortizing there could be various settlements from various banks that pull through these trusts. We like the potential upside on the legacy non-agency as well.
Douglas Harter – Credit Suisse Securities
That makes sense. And I was just wondering on the dividend, could you tell us what portion of the current dividend was related to kind of prior access taxable income?
Stephen D. Yarad
So Doug this is Steve Yarad. The $0.20 dividend that we declared for the first quarter.
We think that’s all added back to 2012, and you’ll see some disclosure in this in our 10-Q, which will be filed later today, but we still think that’s based on the dividends we’ve declared to-date. We think that our estimate of taxable income, which might be finalized now until September, but we still think that taxable income will exceed the dividend is declared to-date.
Douglas Harter – Credit Suisse Securities
So that would imply that there could be a further special dividend coming.
Stephen D. Yarad
You can make that implication. You would say that we have to distribute, yet our 2013 taxable income by September 2014.
Douglas Harter – Credit Suisse Securities
Got it. Thank you.
Operator
Our next question is from Joe Hudak with Wells Fargo. Please go ahead.
Joe Hudak – Wells Fargo Advisors LLC
Thanks and good morning. It’s a question regarding your comment about projected defaults approximately twice the amount of the underlying I guess 60 days delinquent, where is that run historically, I mean I guess the implication here is obviously as home price.
Can you appreciate there is more accretion into earnings. And I’m just trying to get a sense for the dynamic between that ratio over time and how that impacts the not necessarily reserve releases, but I guess accretion of that the reserve back into the yield.
William S. Gorin
It’s hard to say, it’s hard to answer that because remember that our liquidations if we’re liquidating approximately twice our 60 plus day delinquency bucket that those are liquidations over the life of the security. So it’s over the next 28 years or so.
But what I would tell you is, when we make adjustments to our credit reserve, we’re really focused primarily on those loans that I would categorize as high risk of loans. The current loans that are high LTV loans and as we continue to see those loans amortized and the home price appreciations so LTVs decreased the bucket of those loans get smaller and as each quarter and each year goes by we have another year of pay history.
And we added a table, we added a couple of lines to the table, what we call our cycle table in the queue, which show you the percentage of loans that have always been current. So life time never missed the payment and then the percentage of loans that have not missed the payment over the last year.
So those are things that we obviously be taken into consideration. So it’s a somewhat slow process.
I realize that, but we’re looking for evidence that we’ve really can’t reduce these future loss assumptions.
Joe Hudak – Wells Fargo Advisors LLC
Okay.
Stephen D. Yarad
So Joe, just that we are clear, it’s not that we double the delinquent loans to come up with our assumption of what’s going to default. We calculate them separately, and then we for the illustration purposes, we compare them and wanted to replace the other, but they’re calculated separately and the calculation of what’s going to default is based on loan to values, characteristics of the home borrower.
So it’s just a coincidence of two to one and there for illustration that ratio will change over time.
Joe Hudak – Wells Fargo Advisors LLC
That’s a good point. I guess maybe another question, maybe a better question is of the projected default you guys in your queue breakout, that total how much is current versus delinquent, because I guess, then we could get a sense for where directionally you think that as you said a lot of these loans are paying, but they have high LTVs and as they come down that’s what triggers the lot of the reserve accretion.
Stephen D. Yarad
Well we show you in that cycle table. We show you the percentage of loans that are 60 plus days delinquent and that number has come down pretty smoothly over the last year, year and a half or so, I’m sure it was probably up around 21%, a year ago it was 19.3% at December 31, and it’s currently at 18.5%.
Joe Hudak – Wells Fargo Advisors LLC
Okay, but if I look at your total projected default. Can I – am I able to tell how much of the – what bucket is comes from the delinquent bucket versus currently paying bucket.
Stephen D. Yarad
Well, we actually, we don’t. I don’t believe we publicize our total projected default.
There is a table in the investor deck that we filed periodically before equity conferences, where we show our 20 top holdings and we do show the projected defaults for the 20 largest holdings. And again it’s probably safe to assume that it’s roughly similar for the entire portfolio.
So I think that will get updated the next time we update that slide, but I think for the most part loans that are 60 plus days delinquent, we don’t assume that any of those loans get saved.
Joe Hudak – Wells Fargo Advisors LLC
This new data that will represent (inaudible) always current.
William S. Gorin
It’s been in the last I think two.
Stephen D. Yarad
Yes, so if you and we’ll be filing the 10-Q later today, but if you look to the prior filings, we do bucket it, we show you the credit reserves by vintage and FICO score. We show you the always current.
I think you could interpolate into it. And if it’s not clear we could change the scores going forward, but hopefully 10-Q table will help with this question.
Joe Hudak – Wells Fargo Advisors LLC
Okay. Now we’ll look at the Q later today and see if we can interpolate that.
I guess just a clarification of previous question regarding the comparative opportunity between seasoned non-agency and the jumbo securitization, I think where I heard you guys say is the risk-adjusted returns is that you find more attractive in the seasoned non-agency.
Stephen D. Yarad
Absolutely, yes that’s correct.
William S. Gorin
Joe, think about at this way. So the collateral would be considered pristine.
Correct, so it’s low LTV, high FICO.
Joe Hudak – Wells Fargo Advisors LLC
Yes.
William S. Gorin
Therefore when you buy the loans, you’re not getting paid a lot to accept credit risk. You’re getting paid to accept interest rate risk in our mind, because theoretically there is almost no credit risk there that’s how people looking at the market.
Joe Hudak – Wells Fargo Advisors LLC
Where we talking about the same thing. I’m talking about the discount, the subordinated piece in the jumbo.
William S. Gorin
The subordinate fees, yes, it’s we still prefer the seasoned non-agency, yes.
Joe Hudak – Wells Fargo Advisors LLC
Okay, yes I think that’s more apples-to-apples comparison relative to on the credit piece. I agree that the AAA portion is all interest rate risk.
William S. Gorin
Well, no, I’m also saying the bottom pieces are too, because it extent all the collateral it doesn’t have much credit risk. It is very low loss assumptions.
Otherwise you wouldn’t be buying these mortgage loans.
Joe Hudak – Wells Fargo Advisors LLC
Right.
William S. Gorin
You’re selling the AAA, you own the – them so you’ve magnified the loss assumptions, but you had very low assumptions. I still think you are getting paid for interest rate risk.
That’s our view.
Unidentified Company Representative
And most of those are third year fixed rate, most of those deals.
Joe Hudak – Wells Fargo Advisors LLC
Yes, correct, I mean I guess my collaboration is that, based on deals currently getting done in the marketplace, if you look at A large issuer that’s in the marketplace for example, as you are getting with some loss assumptions, you are getting an IRR somewhere between 15% to 20% with a 15 CPR assumption. But again that’s their production, what’s available you guys to buy, you are still more – it’s little more attractive in the season Non-Agency portion, non-jumbos, what you are saying.
Unidentified Company Representative
Yes. That’s correct.
Unidentified Company Representative
Yes. And in our analysis with that sale yet, give you the same answer you proved.
We don’t necessarily sell 15% to 20%.
Joe Hudak – Wells Fargo Advisors LLC
Okay. No, I was telling people have different loss assumptions and things like that.
Okay, thank you very much.
Unidentified Company Representative
Thank you.
Operator
Our next question is from Mike Widner with KBW. Please go ahead.
Michael Widner – KBW
Hey, good morning guys, I’m going to follow-up on some of the questions they’ve already asked both from John, Steve and some others. Can you talk a little bit about the agency side and what you see there today as far as the most attractive opportunities, whether it’s continuing to buy season collateral or season bonds or new issue markets getting tight, but the season market is pretty tight too?
So just what do you like today on that side?
Unidentified Company Representative
Well, you are asking about the agency side, right.
Michael Widner – KBW
Yes, I mean, specifically on the agency side
Unidentified Company Representative
Okay.
Michael Widner – KBW
Not come back to the non-agency side, and again I mean it’s I think you guys like your existing portfolio very much, but it’s very difficult to replicate that. So for incremental capital or for putting capital back to work when stuff pays down, what do you specifically like buying tomorrow?
Unidentified Company Representative
Right, so this is (inaudible) so on the agency side, and I guess, I alluded to this earlier. So in the first quarter, predominately where we put money to work was on the 15-year side and in prepayment projected collateral predominately lower loan balance, but also some higher LTV paper.
And this will also be there as the same as it has been over the last couple of years is that, we feel that on the agency side, there is a significant amount of prepayment risk and it makes sense to try to minimize that by our client securities that we’ll prepay at a lower rate than from generic or generic securities. So that’s kind of what philosophy has been and I don’t think that would change a lot going forward.
I mean we had a little bit of backup in the first quarter. So that type of paper fell out of favor, but we value right back, and I think it’s probably even prudent to kind of stick to that strategy and try to minimize the volatility on the prepayment side.
But you also mentioned some of the seasons that we had. I mean, we are happy with some of the seasoned hybrids that we own.
We own them close to par and yields on them are obviously higher than the current yield to the marketplace. And what that allows us as well to do is basically, we have a very short portfolio in terms of duration.
So on the agency side, our interest rate risk is very limited and we think the mix that we have in terms of some of the prepayment projected securities on the 15-year side and the short duration on the hybrid is a very powerful mix.
Michael Widner – KBW
And, so I guess specifically on those 15 year prepay protective, that stuff is not cheap anymore either and I guess what we see some other guys in this space, some of your peers doing, or things like focusing on dollar role markets, whether it’s 15 years or 30 years and then there are some others that are continuing to press forward in the ARM market 71s mostly, but it’s going to be a tough market. So I mean I don’t know maybe give us a quick comment, you really feel like that’s the best place to be for your strategy right now on the – like you said 15 year prepay protected?
I mean, how do you feel about the other options?
Unidentified Company Representative
Well, what I will say is things changed pretty quickly and it really depends on price at any given time and whatever the market is offering to you at any given time. I mean, the prepayment protected securities they are not by any means always the best vehicle of choice.
Sometimes the hybrid will be a better choice and sometimes even just generic security if the payoff for the prepayment protected securities goes too high. So it really depends on the pricing in terms of way we allocate capital, but I do believe though kind of fundamentally that – the aggregate, if you think about the big picture that the government, the fed, they are all kind of leaning towards increasing refinancing.
So over time, it is going to be the best strategy to try to minimize your exposure to that and kind of minimize prepayment risk.
Michael Widner – KBW
And Mike, we’re just replacing runoff; we’re certainly not growing that portfolio at the moment.
Unidentified Company Representative
I understand. So let me ask you a related question going back to what you said about jumbos, I mean, if you are buying the residuals on the jumbos, you’re still effectively buying an interest rate risk security, and so have you contemplated how you view the attractiveness of that as an interest rate security versus a new issue 15 year or whatever you want to look at on the Agency side?
So I mean, if we intellectually split your portfolio between interest rate risk and credit risk, agencies are no longer the only thing that you can do on the interest rate risk, so I mean, why not some of the jumbo subordinates instead of agencies to replace runoff on the Agency side?
Unidentified Company Representative
Good out-of-the-box question, but for us, they are not at all substitutes because that would not – for the 40 Act, we think it’s cleanest to own the whole (inaudible). But we are and also the bottom piece is much, much longer because you’re locked out and it’s a 30-year collateral, very, very little coupon with new origination to high borrowers.
So, we do look at that, but right now we prefer agencies.
Michael Widner – KBW
Yes, really tough to put 7.5 times whoever done those anyway, but it’s been interesting share of thought. One final one, I guess, I’d ask you is, as you look at that prepayments on your non-agencies so far – across different parts of the country we’ve seen pretty different home price appreciation trends.
And if I look at your portfolio, it looks like on the non-agency piece we actually saw CPRs step down this quarter, but just wondering if you’ve seen any market differences across different geographies if that has any implications for both the yields and the CPRs on your non-agencies as we go forward given that home prices seem to keep moving higher.
Stephen D. Yarad
So, here I think they ticked down slightly. Again, the CPR on non-agencies is a combination of the voluntary prepay rates, and then the default rates times one minus the loss severity.
I think as far as refinancing on non-agencies, the thing you’ve to keep in mind is for people to refinance, they need to be able to get the new mortgage. So, we might see that their LTV has come down from 110% to high-90s or so, but it’s unlikely that those jumbo borrowers can refinance that 97% LTV unless they pay it down to an 80% LTV.
So, I think we probably need to see a little bit more LTV improvement before we look to revise our prepayment assumptions on non-agencies, but the trend has certainly been helpful so far.
Michael Widner – KBW
Great. I appreciate all the comments and color, guys and big quarter and good performance.
Stewart Zimmerman
Thank you.
Stephen D. Yarad
Thank you.
Operator
The next question from Chris Donat Sandler O'Neill. Please go ahead.
Christopher Donat – Sandler O'Neill & Partners LP
Hi. Good morning.
Thanks for taking my question. It’s a small question relative to a lot of other things, but just within the scope of the $34.5 million that moved from the credit reserve to the accretable discount, I thought you mentioned that $6 million of that was related to sales and I’d just been curious, what you sold in and why in your Non-Agency portfolio?
Unidentified Company Representative
That wasn’t related to $34.5 million. That was related to all the changes in the total federal reserve.
Christopher Donat – Sandler O'Neill & Partners LP
Got it.
Unidentified Company Representative
(inaudible) realized losses, new purchases versus…
Christopher Donat – Sandler O'Neill & Partners LP
Yes.
Unidentified Company Representative
So I don’t recall. I feel it wasn’t a lot.
There were maybe two securities that we sold early in the quarter. Again, it’s just looking at market pricing and our assumptions versus market assumptions implied by market prices.
So when we see an opportunity where it looks like that our credit assumptions, for instance, show us a 3% yield and the market’s trading at 4%, we reexamine those credit assumptions. And if we standby our assumptions and really do believe that at that market price the security yield is 3%, then we are inclined to sell that and buy one that we believe yields 4%.
Unidentified Company Representative
But that’s – it’s usually exception rather than the rule. Again, we’ve tried to build the portfolio and we feel very comfortable with it, but it doesn’t mean we don’t take advantage of opportunities when we see them.
Christopher Donat – Sandler O'Neill & Partners LP
Got it. Yes, I’m just trying to get at sort of the level of discipline you are using with the price signals you get versus your strategy.
So that helps me understand it.
Unidentified Company Representative
I would say it’s very disciplined.
Christopher Donat – Sandler O'Neill & Partners LP
Yes, it surely looks that way. Got it.
Thank you.
Operator
And we’ll go to Rick Shane with JPMorgan. Please go ahead.
Richard Shane – JPMorgan Securities LLC
Hey, guys. Thanks for taking my question this morning.
I just wanted to follow-up on the comments about speeds on the Non-Agencies. What are the other elements of your portfolio, is it’s pretty concentrated in or not concentrated, but it's skewed towards hybrid securities, is there any sense that one of the reasons that speeds haven’t picked up there is that those customers have just in plan rates down, and as you see any back up in rates, some of those customers will come back in or some of those borrowers will come back in to having tried to bottom tick the rate cycle?
Unidentified Company Representative
It’s a good point, Rick, it is certainly possible, again I think – I think the LTV is really the biggest consideration, and while we may believe that they’re much less likely to default if they have some equity in the home, some equity doesn’t necessarily translate to an easy refinance. The other thing to keep in mind relative to that is, you write those hybrid coupons have reset down.
So those hybrid coupons are probably three-ish on post reset hybrids, at some point, and that most of them are now amortizing, so they had a five year – another amortizing. So at some point, they actually could refinance to a similar coupon, 30-year fixed and lower the payment, because a 30-year fixed will have a 30-year amortization, and they might have stay a 22 year amortization at the same rate and that will lower the payment.
But again it’s really going to be driven by LTV.
Richard Shane – JPMorgan Securities LLC
Got it. So – and it’s clear, at this point you guys really thinks it’s structural, and I didn’t understand that coming in, it’s more of a structural issue at this point than it is a rate issue
Unidentified Company Representative
I think so, yes.
Richard Shane – JPMorgan Securities LLC
Okay, great. Thank you for the clarification.
Unidentified Company Representative
One other thing to point out when you look at this CPR for non-agencies, a portion of that is default. So not all these – so the fact that CPR goes up or down, it’s not necessarily a good or bad thing.
Voluntary pre-pays are very good, but a large portion of this 15%, just little less than half are default. So the CPR could be dropping, that could be very good thing.
Richard Shane – JPMorgan Securities LLC
Got it. Yes I started to pick up on that when Craig went through the map on the default impact on CPRs as well.
Unidentified Company Representative
But then you’ll see this in the queue, the three-month voluntary prepaid rate on the Non-Agency portfolio in December was 7.9% and it’s 8.3% in the first quarter. Actually the voluntary actually did pick up slightly.
Richard Shane – JPMorgan Securities LLC
Okay. Thank you, guys.
Stewart Zimmerman
Thank you.
Operator
The next question is from Arren Cyganovich with Evercore. Please go ahead.
Arren Cyganovich – Evercore Partners
Thanks. Could you tell us what the current LTV is at the Non-Agency portfolio?
Stewart Zimmerman
I think we disclose the original LTV. I can’t really give you our current estimated LTV because it’s somewhat subjective number.
We make assumptions about real estate prices. We make assumptions about original appraisals that may or may not have been inflated.
But I think I’m just looking at the [cycle tier]. Well, I think we do show what the original LTV was.
Stephen D. Yarad
That’s about 70, but we’ve…
Arren Cyganovich – Evercore Partners
Yes, I guess I was just thinking about in terms of, if you had a current LTV would make it easier for us to look at your projections of defaults and loss severity relative to the changes in HPI. So if you don’t have it, that’s fine.
Stewart Zimmerman
I think we’ve had in the past that we believe with amortization that’s occurring in home price appreciation that the weighted average portfolio LTV is probably a little bit below 100 right now. And I’m not sure that really helps you with those loss assumptions before really what you need to know for loss assumptions is what percentage of the loans are still above 100 or above 120, right, because those are your more at-risk securities.
So those are loans that are current today, but still have very high LTVs.
Arren Cyganovich – Evercore Partners
Got you.
William S. Gorin
You can almost use the headline numbers and get close, because basically the LTVs had origination in 2006 and 2007, was 70% LTV. So you assume home prices went down 35% and now they are up 9%, basically you are going to solve for the LTV number for the whole portfolio, but as Craig points out, it's the outliers that drive the defaults
Arren Cyganovich – Evercore Partners
Right. Okay.
Thank you.
Unidentified Company Representative
Welcome.
Operator
(Operator Instructions) And we do have a follow-up from Douglas Harter of Credit Suisse. Please go ahead.
Douglas Harter – Credit Suisse Securities
Hey, Craig, I just wanted to follow-up on your comments about the yields for Non-Agency going forward. So if it was 692, I think was the number you gave, should we assume that that falls just given the interest rates have fallen sort of in the second quarter to date?
Craig L. Knutson
Not necessarily. 692 was our one-month yield for the month of March.
Douglas Harter – Credit Suisse Securities
Okay.
Craig L. Knutson
Okay and that number changed from the prior numbers because the credit reserve release occurs at the end of February beginning of March, and we also reset all those yields based on the forward and we did actually gain a few basis points from the forward, which is the first time in several years. So I think the way to look at it is it’s 692 in March, you start off April around 692, what changes, it’s not so much what interest rates are today that change that because we’re using the forward curve.
But we won’t reset those yields based on any forward curve until the end of May, and so the first month that you’d see those new yields would be the month of June.
Douglas Harter – Credit Suisse Securities
Got it. So if rates sort of were where they are today, June could be reset lower because of the forward curve but for May and – April and May, it’s based on the March.
Craig L. Knutson
That’s right. And obviously to the extent we have new purchases that could lower the yield somewhat.
Douglas Harter – Credit Suisse Securities
Right.
Craig L. Knutson
You don’t know how loans – which loans payoff. So if 9% yielding loans have big prepayments that could lower it, if lower yielding bonds prepay it could raise it.
So there are a lot of moving pieces.
Douglas Harter – Credit Suisse Securities
Right that makes sense. Thank you.
Craig L. Knutson
Sure.
Operator
And to the presenters, there are no additional questions in queue.
Stewart Zimmerman
Well, we thank you for your continued interest in MFA Financial. We look forward to speaking with you next quarter.
Operator
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation.
You may now disconnect.