MFO MFA Financial, Inc.

Risks

• We may change our investment strategy, operating policies and/or asset allocations without stockholder consent, which could materially adversely affect our results of operations.
• Credit and Other Risks Related to Our Investments
• Our investments in residential whole loans, residential mortgage securities and MSR-related assets involve credit risk, which could materially adversely affect our results of operations.
• Our investments in residential whole loans involve credit risks, some of which are different from those of our Non-Agency MBS, which could materially adversely affect our results of operations.
• Our investments are subject to changes in credit spreads and other risks.
• A significant portion of our residential whole loans and residential mortgage securities are secured by properties in a small number of geographic areas and may be disproportionately affected by economic or housing downturns, our competition, natural disasters, terrorist events, regulatory changes, adverse climate changes or other adverse events specific to those markets.
• We have investments in Non-Agency MBS collateralized by Alt A loans and may also have investments collateralized by subprime mortgage loans, which, due to lower underwriting standards, are subject to increased risk of losses.
• We are subject to counterparty risk and may be unable to seek indemnity or require counterparties to repurchase residential whole loans if they breach representations and warranties, which could cause us to suffer losses.
• The due diligence we undertake on potential investments may be limited and/or not reveal all of the risks associated with such investments and may not reveal other weaknesses in such assets, which could lead to losses.
• We have experienced and may experience in the future increased volatility in our GAAP results of operations due in part to the increasing contribution to financial results of assets accounted for under the fair value option.
• We have experienced, and may in the future experience, declines in the market value of certain of our investment securities resulting in our recording impairments, which have had, and may in the future have, an adverse effect on our results of operations and financial condition.
• The use of models in connection with the valuation of our assets subjects us to potential risks in the event that such models are incorrect, misleading or based on incomplete information.
• Valuations of some of our assets are subject to inherent uncertainty, may be based on estimates, may fluctuate over short periods of time and may differ from the values that would have been used if a ready market for these assets existed.
• Our investments in residential whole loans are difficult to value and are dependent upon the borrower’s ability to service or refinance their debt. The inability of the borrower to do so could materially and adversely affect our liquidity and results of operations.
• Mortgage loan modification and refinancing programs and future legislative action may materially adversely affect the value of, and the returns on, our MBS and residential whole loan investments.
• We may be adversely affected by risks affecting borrowers or the asset or property types in which certain of our investments may be concentrated at any given time, as well as from unfavorable changes in the related geographic regions.
• Our investments in residential whole loans subject us to servicing-related risks, including those associated with foreclosure and liquidation.
• The expanding body of federal, state and local regulations and investigations of originators and servicers may increase costs of compliance and the risks of noncompliance, and may adversely affect servicers’ ability to perform their servicing obligations.
• The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. Government, may materially adversely affect our business.
• Rapid changes in the values of our residential mortgage investments and other assets may make it more difficult for us to maintain our qualification as a REIT or exemption from registration under the Investment Company Act.
• Our ability to sell REO on terms acceptable to us or at all may be limited.
• Our investments in MSR-related assets expose us to additional risks.
• Our investments in mortgage loan originators expose us to additional risks.
• Prepayment and Reinvestment Risk
• Prepayment rates on the mortgage loans underlying certain of our residential mortgage assets may materially adversely affect our profitability or result in liquidity shortfalls that could require us to sell assets in unfavorable market conditions.
• Risks Related to Our Use of Leverage
• Our business strategy involves the use of leverage, and we may not achieve what we believe to be optimal levels of leverage or we may become overleveraged, which may materially adversely affect our liquidity, results of operations or financial condition.
• An increase in our borrowing costs relative to the interest we receive on our investments may materially adversely affect our profitability.
• Changes in inter-bank lending rate reporting practices, the method pursuant to which LIBOR is determined or the establishment of alternative reference rates may adversely affect our profitability.
• Certain of our current lenders require, and future lenders may require, that we enter into restrictive covenants relating to our operations.
• The use of non-recourse long-term financing structures expose us to risks, which could result in losses to us.
• Risks Associated with Adverse Developments in the Mortgage Finance and Credit Markets and Financial Markets Generally
• Market conditions for mortgages and mortgage-related assets as well as the broader financial markets may materially adversely affect the value of the assets in which we invest.
• A lack of liquidity in our investments may materially adversely affect our business.
• Actions by the U.S. Government designed to stabilize or reform the financial markets may not achieve their intended effect or otherwise benefit our business, and could materially adversely affect our business.
• Regulatory Risk and Risks Related to the Investment Company Act of 1940
• Our business is subject to extensive regulation.
• Maintaining our exemption from registration under the Investment Company Act imposes significant limits on our operations.
• Risks Related to Our Use of Hedging Strategies
• We may enter into hedging instruments that could expose us to contingent liabilities in the future, which could materially adversely affect our results of operations.
• The characteristics of hedging instruments present various concerns, including illiquidity, enforceability, and counterparty risks, which could adversely affect our business and results of operations.
• Clearing facilities or exchanges upon which our hedging instruments are traded may increase margin requirements on our hedging instruments in the event of adverse economic developments.
• We may fail to qualify for hedge accounting treatment, which could materially adversely affect our results of operations.
• Risks Related to Our Taxation as a REIT and the Taxation of Our Assets
• If we fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.
• Our failure to maintain our qualification as a REIT would cause our stock to be delisted from the NYSE.
• REIT distribution requirements could adversely affect our ability to execute our business plan.
• Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
• If our foreign TRS is subject to U.S. federal income tax at the entity level, it would greatly reduce the amounts those entities would have available to pay its creditors and distribute to us.
• Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
• Our use of TRSs may cause us to fail to qualify as a REIT
• We may generate taxable income that differs from our GAAP income on our Non-Agency MBS and residential whole loan investments purchased at a discount to par value, which may result in significant timing variances in the recognition of income and losses.
• The tax on prohibited transactions may limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for U.S. federal income tax purposes.
• The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur and may limit the manner in which we effect future securitizations.
• We have not established a minimum dividend payment level, and there is no guarantee that we will maintain current dividend payment levels or pay dividends in the future.
• Our reported GAAP net income may differ from the amount of REIT taxable income and dividend distribution requirements and, therefore, our GAAP results may not be an accurate indicator of future taxable income and dividend distributions.
• Over time, accounting principles, conventions, rules, and interpretations may change, which could affect our reported GAAP and taxable earnings, and stockholders’ equity.
• The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to remain qualified as a REIT.
• Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
• We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them.
• The interest apportionment rules may affect our ability to comply with the REIT asset and gross income tests.
• Dividends paid by REITs do not qualify for the reduced tax rates available for “qualified dividend income.”
• We may in the future choose to make distributions in our own stock, in which case you could be required to pay income taxes in excess of any cash distributions you receive.
• New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to remain qualified as a REIT.
• Risks Related to Our Corporate Structure
• Our ownership limitations may restrict business combination opportunities.
• Provisions of Maryland law and other provisions of our organizational documents may limit the ability of a third party to acquire control of the Company.
• Future offerings of debt securities, which would rank senior to our common stock upon liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.
• Our Board may approve the issuance of capital stock with terms that may discourage a third party from acquiring the Company.
• Future issuances or sales of shares could cause our share price to decline.
• We are dependent on our executive officers and other key personnel for our success, the loss of any of whom may materially adversely affect our business.
• We are dependent on information systems and their failure (including in connection with cyber attacks) could significantly disrupt our business.
• We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire desirable investments, which could materially adversely affect our results of operations.
• Deterioration in the condition of European banks and financial institutions could have a material adverse effect on our business.
• Any downgrade, or perceived potential of a downgrade, of U.S. sovereign credit ratings or the credit ratings of the GSEs by the various credit rating agencies may materially adversely affect our the value of our Agency MBS and our business more generally.