Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

___________________________________________________________________________ 
FORM 10-Q
(Mark One) 
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172019
 
or
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                              to                         
 
Commission File Number: 1-13991
MFA FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________________________________________________________________ 
Maryland 13-3974868
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
350 Park Avenue, 20th Floor
New YorkNew York 10022
(Address of principal executive offices) (Zip Code)
(212) (212) 207-6400
(Registrant’s telephone number, including area code)


Not Applicable
(Former name, former address and former fiscal year, if changed since last period)

____________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per shareMFANew York Stock Exchange
7.50% Series B Cumulative Redeemable
Preferred Stock, par value $0.01 per share
MFA/PBNew York Stock Exchange
8.00% Senior Notes due 2042MFONew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yesx  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yesx No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x 
Accelerated filero
☐
Non-accelerated filer☐Smaller reporting company☐
   
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth companyo
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  oYes ☐ No x

396,943,263451,770,207 shares of the registrant’s common stock, $0.01 par value, were outstanding as of October 27, 2017.31, 2019.
 

MFA FINANCIAL, INC.


TABLE OF CONTENTS
 
 Page
  
PART I
FINANCIAL INFORMATION
   
Item 1.
Financial Statements
 
   
 
Consolidated Balance Sheets as of September 30, 20172019 (Unaudited) and December 31, 20162018
1
   
 
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 20172019 and September 30, 20162018
2
   
 
Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three and Nine Months Ended September 30, 20172019 and September 30, 20162018
3
   
 
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 20172019 and September 30, 20162018
4
   
 
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 20172019 and September 30, 2016
5
Notes to the Unaudited Consolidated Financial Statements2018
6
   
Item 2.Notes to the Unaudited Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
54
   
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
89
   
Item 4.
Controls and Procedures
9697
  
PART II
OTHER INFORMATION
   
Item 1.
Legal Proceedings
97
Item 1A.
Risk Factors
97
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
97
Item 3.
Defaults Upon Senior Securities
98
   
Item 4.1A.
Mine Safety DisclosuresRisk Factors
98
   
Item 5.2.
Other InformationUnregistered Sales of Equity Securities and Use of Proceeds
98
   
Item 6.3.
ExhibitsDefaults Upon Senior Securities
98
   
Item 4.
Mine Safety Disclosures
98
Item 5.
Other Information
98
Item 6.
Exhibits
98
Signatures
 
99



MFA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEET




 (In Thousands Except Per Share Amounts) September 30,
2017		 December 31,
2016
  (Unaudited)  
Assets:  
  
Mortgage-backed securities (“MBS”) and credit risk transfer (“CRT”) securities:  
  
Agency MBS, at fair value ($2,911,353 and $3,540,401 pledged as collateral, respectively) $3,019,304
 $3,738,497
Non-Agency MBS, at fair value ($2,853,891 and $4,751,419 pledged as collateral, respectively) (1)
 3,911,660
 5,684,836
CRT securities, at fair value ($530,833 and $357,488 pledged as collateral, respectively) 653,633
 404,850
Mortgage servicing rights (“MSR”) related assets ($412,674 and $226,780 pledged as collateral, respectively) 411,840
 226,780
Residential whole loans, at carrying value ($347,906 and $427,880 pledged as collateral, respectively) (2)
 639,216
 590,540
Residential whole loans, at fair value ($903,494 and $734,331 pledged as collateral, respectively) (2)
 1,103,518
 814,682
Securities obtained and pledged as collateral, at fair value 507,318
 510,767
Cash and cash equivalents 608,173
 260,112
Restricted cash 15,440
 58,463
Other assets 233,357
 194,495
Total Assets $11,103,459
 $12,484,022
     
Liabilities:    
Repurchase agreements and other advances $6,871,443
 $8,687,268
Obligation to return securities obtained as collateral, at fair value 507,318
 510,767
8% Senior Notes due 2042 (“Senior Notes”) 96,763
 96,733
Payable for unsettled MBS and residential whole loans purchases 124,006
 —
Other liabilities 246,278
 155,352
Total Liabilities $7,845,808
 $9,450,120
     
Commitments and contingencies (See Note 11) 

 

     
Stockholders’ Equity:    
Preferred stock, $.01 par value; 7.50% Series B cumulative redeemable; 8,050 shares authorized;
  8,000 shares issued and outstanding ($200,000 aggregate liquidation preference)
 $80
 $80
Common stock, $.01 par value; 886,950 shares authorized; 396,939 and 371,854 shares issued
  and outstanding, respectively
 3,969
 3,719
Additional paid-in capital, in excess of par 3,219,398
 3,029,062
Accumulated deficit (596,022) (572,641)
Accumulated other comprehensive income 630,226
 573,682
Total Stockholders’ Equity $3,257,651
 $3,033,902
Total Liabilities and Stockholders’ Equity $11,103,459
 $12,484,022
MFA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
 (In Thousands Except Per Share Amounts) September 30,
2019		 December 31,
2018
  (Unaudited)  
Assets:  
  
Residential mortgage securities:  
  
Agency MBS, at fair value ($1,809,380 and $2,575,331 pledged as collateral, respectively) $1,813,873
 $2,698,213
Non-Agency MBS, at fair value ($2,389,549 and $3,248,900 pledged as collateral, respectively) 2,397,789
 3,318,299
Credit Risk Transfer (“CRT”) securities, at fair value ($377,779 and $480,315 pledged as collateral, respectively) 377,892
 492,821
Residential whole loans, at carrying value ($3,657,830 and $1,645,372 pledged as collateral, respectively) (1)
 4,969,414
 3,016,715
Residential whole loans, at fair value ($835,762 and $738,638 pledged as collateral, respectively) (1)
 1,453,169
 1,665,978
Mortgage servicing rights (“MSR”) related assets ($1,164,284 and $611,807 pledged as collateral, respectively) 1,164,284
 611,807
Cash and cash equivalents 154,193
 51,965
Restricted cash 38,998
 36,744
Other assets 735,209
 527,785
Total Assets $13,104,821
 $12,420,327
     
Liabilities:    
Repurchase agreements $8,571,422
 $7,879,087
Other liabilities 1,129,973
 1,125,139
Total Liabilities $9,701,395
 $9,004,226
     
Commitments and contingencies (See Note 10) 


 


     
Stockholders’ Equity:    
Preferred stock, $.01 par value; 7.50% Series B cumulative redeemable; 8,050 shares authorized;
8,000 shares issued and outstanding ($200,000 aggregate liquidation preference)		 $80
 $80
Common stock, $.01 par value; 886,950 shares authorized; 451,692 and 449,787 shares issued
and outstanding, respectively		 4,517
 4,498
Additional paid-in capital, in excess of par 3,634,140
 3,623,275
Accumulated deficit (637,161) (632,040)
Accumulated other comprehensive income 401,850
 420,288
Total Stockholders’ Equity $3,403,426
 $3,416,101
Total Liabilities and Stockholders’ Equity $13,104,821
 $12,420,327


(1)Includes approximately $174.4$189.9 million and $209.4 million of Non-Agency MBSResidential whole loans, at carrying value and $593.3 million and $694.7 million of Residential whole loans, at fair value transferred to consolidated variable interest entities (“VIEs”) at September 30, 2019 and December 31, 2016.2018, respectively. Such assets can be used only to settle the obligations of each respective VIE.
(2)Includes approximately $131.3 million of Residential whole loans, at carrying value and $40.4 million of Residential whole loans, at fair value transferred to a consolidated VIE at September 30, 2017. Such assets can be used only to settle the obligations of the VIE.


The accompanying notes are an integral part of the consolidated financial statements.


MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
(In Thousands, Except Per Share Amounts) 2019 2018 2019 2018
Interest Income:        
Agency MBS $11,806
 $14,332
 $45,521
 $42,795
Non-Agency MBS 44,582
 58,667
 150,610
 169,812
CRT securities 4,251
 7,748
 15,545
 25,939
Residential whole loans held at carrying value 64,226
 29,524
 171,725
 61,788
MSR-related assets 15,274
 6,407
 38,232
 20,249
Cash and cash equivalent investments 903
 754
 2,703
 2,348
Other interest-earning assets 1,679
 —
 4,272
 —
Interest Income $142,721
 $117,432
 $428,608
 $322,931
         
Interest Expense:  
    
  
Repurchase agreements $74,240
 $50,881
 $220,939
 $142,832
Other interest expense 11,583
 7,997
 28,954
 18,410
Interest Expense $85,823
 $58,878
 $249,893
 $161,242
         
Net Interest Income $56,898
 $58,554
 $178,715
 $161,689
         
Other Income, net:        
Net gain on residential whole loans measured at fair value through earnings $40,175
 $34,942
 $116,915
 $105,883
Net realized gain on sales of residential mortgage securities 17,708
 16,415
 50,027
 32,661
Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings (571) (8,545) 8,101
 (11,776)
Net (loss)/gain on Swaps not designated as hedges for accounting purposes (929) 4,002
 (17,267) 4,355
Other, net 6,046
 1,545
 12,684
 5,902
Other Income, net $62,429
 $48,359
 $170,460
 $137,025
         
Operating and Other Expense:        
Compensation and benefits $7,920
 $6,868
 $24,315
 $20,654
Other general and administrative expense 5,022
 4,155
 15,601
 13,569
Loan servicing and other related operating expenses 10,786
 8,758
 31,763
 23,569
Operating and Other Expense $23,728
 $19,781
 $71,679
 $57,792
         
Net Income $95,599
 $87,132
 $277,496
 $240,922
Less Preferred Stock Dividends 3,750
 3,750
 11,250
 11,250
Net Income Available to Common Stock and Participating Securities $91,849
 $83,382
 $266,246
 $229,672
         
Basic Earnings per Common Share $0.20
 $0.19
 $0.59
 $0.56
Diluted Earnings per Common Share $0.20
 $0.19
 $0.58
 $0.56


The accompanying notes are an integral part of the consolidated financial statements.

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
(In Thousands, Except Per Share Amounts) 2017 2016 2017 2016
Interest Income:  
  
  
  
Agency MBS $15,533
 $18,957
 $50,014
 $64,546
Non-Agency MBS 63,252
 83,638
 212,728
 253,555
CRT securities 8,676
 3,983
 22,898
 9,897
MSR related assets 7,194
 —
 17,833
 —
Residential whole loans held at carrying value 9,026
 5,917
 26,219
 16,112
Cash and cash equivalent investments 1,452
 221
 2,854
 531
Interest Income $105,133
 $112,716
 $332,546
 $344,641
         
Interest Expense:        
Repurchase agreements and other advances $46,303
 $46,158
 $141,444
 $137,127
Senior Notes and other interest expense 2,972
 2,009
 7,202
 6,360
Interest Expense $49,275
 $48,167
 $148,646
 $143,487
         
Net Interest Income $55,858
 $64,549
 $183,900
 $201,154
         
Other-Than-Temporary Impairments:        
Total other-than-temporary impairment losses $—
 $(1,255) $(63) $(1,255)
Portion of loss recognized in/(reclassed from) other comprehensive income —
 770
 (969) 770
Net Impairment Losses Recognized in Earnings $—
 $(485) $(1,032) $(485)
         
Other Income, net:        
Net gain on residential whole loans held at fair value $18,679
 $19,639
 $48,660
 $47,729
Net gain on sales of MBS and U.S. Treasury securities 14,933
 7,083
 30,530
 26,069
Other, net (4,515) 7,179
 14,844
 9,844
Other Income, net $29,097
 $33,901
 $94,034
 $83,642
         
Operating and Other Expense:        
Compensation and benefits $10,892
 $7,078
 $26,258
 $21,507
Other general and administrative expense 4,081
 3,709
 14,060
 12,508
Loan servicing and other related operating expenses 6,177
 4,167
 14,785
 10,265
Operating and Other Expense $21,150
 $14,954
 $55,103
 $44,280
         
Net Income $63,805
 $83,011
 $221,799
 $240,031
Less Preferred Stock Dividends 3,750
 3,750
 11,250
 11,250
Net Income Available to Common Stock and Participating Securities $60,055
 $79,261
 $210,549
 $228,781
         
Earnings per Common Share - Basic and Diluted $0.15
 $0.21
 $0.54
 $0.61
         
Dividends Declared per Share of Common Stock $0.20
 $0.20
 $0.60
 $0.60

The accompanying notes are an integral part of the consolidated financial statements.

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(UNAUDITED)

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(UNAUDITED)

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(UNAUDITED)
 Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
(In Thousands) 2017 2016 2017 2016 2019 2018 2019 2018
Net income $63,805
 $83,011
 $221,799
 $240,031
 $95,599
 $87,132
 $277,496
 $240,922
Other Comprehensive Income/(Loss):                
Unrealized (loss)/gain on Agency MBS, net
 (3,032) (6,941) (22,241) 17,857
Unrealized gain on Non-Agency MBS, net 10,020
 71,291
 93,429
 106,906
Unrealized gain/(loss) on Agency MBS, net 603
 (9,177) 22,483
 (27,507)
Unrealized gain/(loss) on Non-Agency MBS, CRT securities and MSR term notes, net 4,880
 (25,101) 27,602
 (62,743)
Reclassification adjustment for MBS sales included in net income (14,935) (6,829) (30,283) (26,795) (14,499) (9,455) (36,370) (25,580)
Reclassification adjustment for other-than-temporary impairments included in net income —
 (485) (1,032) (485)
Derivative hedging instrument fair value changes, net 5,791
 22,769
 16,671
 (39,803) (233) 5,390
 (30,384) 32,974
Amortization of de-designated hedging instruments, net (685) —
 (1,769) —
Other Comprehensive Income/(Loss) (2,156) 79,805
 56,544
 57,680
 (9,934) (38,343) (18,438) (82,856)
Comprehensive income before preferred stock dividends $61,649
 $162,816
 $278,343
 $297,711
 $85,665
 $48,789
 $259,058
 $158,066
Dividends declared on preferred stock (3,750) (3,750) (11,250) (11,250) (3,750) (3,750) (11,250) (11,250)
Comprehensive Income Available to Common Stock and Participating Securities $57,899
 $159,066
 $267,093
 $286,461
 $81,915
 $45,039
 $247,808
 $146,816
 
The accompanying notes are an integral part of the consolidated financial statements.

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2019
(In Thousands,
Except Per Share Amounts)
 Preferred Stock
7.50% Series B Cumulative Redeemable - Liquidation Preference td5.00 per Share		 Common Stock Additional Paid-in Capital Accumulated
Deficit		 Accumulated Other Comprehensive Income Total Preferred Stock
7.50% Series B Cumulative Redeemable - Liquidation Preference td5.00 per Share		 Common Stock Additional Paid-in Capital Accumulated
Deficit		 Accumulated Other Comprehensive Income Total
Shares Amount Shares Amount  Shares Amount Shares Amount 
Balance at December 31, 2016 8,000
 $80
 371,854
 $3,719
 $3,029,062
 $(572,641) $573,682
 $3,033,902
Balance at December 31, 2018 8,000
 $80
 449,787
 $4,498
 $3,623,275
 $(632,040) $420,288
 $3,416,101
Net income —
 —
 —
 —
 —
 221,799
 —
 221,799
 —
 —
 —
 —
 —
 88,857
 —
 88,857
Issuance of common stock, net of expenses (1)
 —
 —
 25,726
 250
 190,265
 —
 —
 190,515
 —
 —
 1,066
 7
 544
 —
 —
 551
Repurchase of shares of common stock (1)
 —
 —
 (641) —
 (5,158) —
 —
 (5,158) —
 —
 (370) —
 (2,610) —
 —
 (2,610)
Equity based compensation expense —
 —
 —
 —
 5,209
 —
 —
 5,209
 —
 —
 —
 —
 992
 —
 —
 992
Accrued dividends attributable to stock-based awards —
 —
 —
 —
 20
 —
 —
 20
 —
 —
 —
 —
 435
 —
 —
 435
Dividends declared on common stock —
 —
 —
 —
 —
 (233,244) —
 (233,244)
Dividends declared on preferred stock —
 —
 —
 —
 —
 (11,250) —
 (11,250)
Dividends declared on common stock ($0.20 per share) —
 —
 —
 —
 —
 (90,097) —
 (90,097)
Dividends declared on preferred stock ($0.46875 per share) —
 —
 —
 —
 —
 (3,750) —
 (3,750)
Dividends attributable to dividend equivalents —
 —
 —
 —
 —
 (686) —
 (686) —
 —
 —
 —
 —
 (256) —
 (256)
Change in unrealized gains on MBS, net —
 —
 —
 —
 —
 —
 39,873
 39,873
 —
 —
 —
 —
 —
 —
 5,094
 5,094
Derivative hedging instrument fair value changes, net —
 —
 —
 —
 —
 —
 16,671
 16,671
 —
 —
 —
 —
 —
 —
 (10,786) (10,786)
Balance at September 30, 2017 8,000
 $80
 396,939
 $3,969
 $3,219,398
 $(596,022) $630,226
 $3,257,651
Balance at March 31, 2019 8,000
 $80
 450,483
 $4,505
 $3,622,636
 $(637,286) $414,596
 $3,404,531
Net income —
 —
 —
 —
 —
 93,040
 —
 93,040
Issuance of common stock, net of expenses —
 —
 139
 1
 585
 —
 —
 586
Equity based compensation expense —
 —
 —
 —
 2,438
 —
 —
 2,438
Accrued dividends attributable to stock-based awards —
 —
 —
 —
 (260) —
 —
 (260)
Dividends declared on common stock ($0.20 per share) —
 —
 —
 —
 —
 (90,124) —
 (90,124)
Dividends declared on preferred stock ($0.46875 per share) —
 —
 —
 —
 —
 (3,750) —
 (3,750)
Dividends attributable to dividend equivalents —
 —
 —
 —
 —
 (276) —
 (276)
Change in unrealized gains on MBS, net —
 —
 —
 —
 —
 —
 17,637
 17,637
Derivative hedging instrument fair value changes, net —
 —
 —
 —
 —
 —
 (20,449) (20,449)
Balance at June 30, 2019 8,000
 $80
 450,622
 $4,506
 $3,625,399
 $(638,396) $411,784
 $3,403,373
Net income —
 —
 —
 —
 —
 95,599
 —
 95,599
Issuance of common stock, net of expenses —
 —
 1,070
 11
 7,713
 —
 —
 7,724
Repurchase of shares of common stock (1)
 —
 —
 —
 —
 —
 —
 —
 —
Equity based compensation expense —
 —
 —
 —
 1,288
 —
 —
 1,288
Accrued dividends attributable to stock-based awards —
 —
 —
 —
 (260) —
 —
 (260)
Dividends declared on common stock ($0.20 per share) —
 —
 —
 —
 —
 (90,338) —
 (90,338)
Dividends declared on preferred stock ($0.46875 per share) —
 —
 —
 —
 —
 (3,750) —
 (3,750)
Dividends attributable to dividend equivalents —
 —
 —
 —
 —
 (276) —
 (276)
Change in unrealized gains on MBS, net —
 —
 —
 —
 —
 —
 (9,016) (9,016)
Derivative hedging instrument fair value changes, net —
 —
 —
 —
 —
 —
 (918) (918)
Balance at September 30, 2019 8,000
 $80
 451,692
 $4,517
 $3,634,140
 $(637,161) $401,850
 $3,403,426

  Nine Months Ended September 30, 2016
(In Thousands, 
Except Per Share Amounts)		 Preferred Stock
7.50% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share		 Common Stock Additional Paid-in Capital Accumulated
Deficit		 Accumulated Other Comprehensive Income Total
 Shares Amount Shares Amount    
Balance at December 31, 2015 8,000
 $80
 370,584
 $3,706
 $3,019,956
 $(572,332) $515,851
 $2,967,261
Net income —
 —
 —
 —
 —
 240,031
 —
 240,031
Issuance of common stock, net of expenses (1)
 —
 —
 716
 5
 936
 —
 —
 941
Repurchase of shares of common stock (1)
 —
 —
 (217) —
 (1,481) —
 —
 (1,481)
Equity based compensation expense —
 —
 —
 —
 4,140
 —
 —
 4,140
Accrued dividends attributable to stock-based awards —
 —
 —
 —
 (518) —
 —
 (518)
Dividends declared on common stock —
 —
 —
 —
 —
 (222,669) —
 (222,669)
Dividends declared on preferred stock —
 —
 —
 —
 —
 (11,250) —
 (11,250)
Dividends attributable to dividend equivalents —
 —
 —
 —
 —
 (697) —
 (697)
Change in unrealized gains on MBS, net —
 —
 —
 —
 —
 —
 97,483
 97,483
Derivative hedging instruments fair value changes, net —
 —
 —
 —
 —
 —
 (39,803) (39,803)
Balance at September 30, 2016 8,000
 $80
 371,083
 $3,711
 $3,023,033
 $(566,917) $573,531
 $3,033,438


(1)  For the nine months ended September 30, 2017 and 2016,2019 includes approximately $5.2$2.6 million (640,748(370,244 shares) and $1.5 million (217,464 shares), respectively surrendered for tax purposes related to equity-based compensation awards.


MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
  Nine Months Ended 
 September 30,
(In Thousands) 2017 2016
Cash Flows From Operating Activities:  
  
Net income $221,799
 $240,031
Adjustments to reconcile net income to net cash provided by operating activities:  
  
Gain on sales of MBS and U.S. Treasury securities (30,530) (26,069)
Gain on sales of real estate owned (2,844) (1,840)
Gain on liquidation of residential whole loans (7,178) —
Other-than-temporary impairment charges 1,032
 485
Accretion of purchase discounts on MBS and CRT securities, residential whole loans and MSR related assets (67,065) (64,093)
Amortization of purchase premiums on MBS and CRT securities 23,766
 27,748
Depreciation and amortization on real estate, fixed assets and other assets 1,199
 746
Equity-based compensation expense 5,369
 4,143
Unrealized gain on residential whole loans at fair value (12,499) (25,529)
Increase in other assets and other (3,827) (47,761)
Decrease in other liabilities (10,248) (9,025)
Net cash provided by operating activities $118,974
 $98,836
     
Cash Flows From Investing Activities:  
  
Principal payments on MBS, CRT securities and MSR related assets $3,387,673
 $2,581,507
Proceeds from sales of MBS and U.S. Treasury securities 222,143
 65,068
Purchases of MBS, CRT securities and MSR related assets (1,425,717) (1,398,606)
Purchases of residential whole loans and capitalized advances (391,613) (367,740)
Principal payments on residential whole loans 105,549
 70,729
Proceeds from sales of real estate owned 51,834
 21,833
Purchases of real estate owned and capital improvements (17,224) —
Redemption of Federal Home Loan Bank stock 10,422
 49,595
Additions to leasehold improvements, furniture and fixtures (596) (380)
Net cash provided by investing activities $1,942,471
 $1,022,006
     
Cash Flows From Financing Activities:  
  
Principal payments on repurchase agreements and other advances $(57,118,263) $(62,376,619)
Proceeds from borrowings under repurchase agreements and other advances 55,302,002
 61,685,547
Proceeds from issuance of securitized debt 147,847
 —
Principal payments on securitized debt (9,140) (22,057)
Payments made for securitization related costs
 (1,520) —
Payments made for margin calls and settlements on repurchase agreements and interest rate swap agreements (“Swaps”) (51,111) (179,028)
Proceeds from reverse margin calls and settlements on repurchase agreements and Swaps 66,517
 128,700
Proceeds from issuances of common stock 190,516
 941
Dividends paid on preferred stock (11,250) (11,250)
Dividends paid on common stock and dividend equivalents (228,982) (223,385)
Net cash used in financing activities $(1,713,384) $(997,151)
Net increase in cash and cash equivalents $348,061
 $123,691
Cash and cash equivalents at beginning of period $260,112
 $165,007
Cash and cash equivalents at end of period $608,173
 $288,698
     
Non-cash Investing and Financing Activities:    
Net increase/(decrease) in securities obtained as collateral/obligation to return securities obtained as collateral $131,930
 $(13,450)
Transfer from residential whole loans to real estate owned $97,388
 $69,803
Dividends and dividend equivalents declared and unpaid $79,605
 $74,556

The accompanying notes are an integral part of the consolidated financial statements.



5
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
  Nine Months Ended September 30, 2018
(In Thousands, 
Except Per Share Amounts)		 Preferred Stock
7.50% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share		 Common Stock Additional Paid-in Capital Accumulated
Deficit		 Accumulated Other Comprehensive Income Total
 Shares Amount Shares Amount    
Balance at December 31, 2017 8,000
 $80
 397,831
 $3,978
 $3,227,304
 $(578,950) $609,224
 $3,261,636
Cumulative effect adjustment on adoption of new accounting standard for revenue recognition —
 —
 —
 —
   295
 —
 295
Net income —
 —
 —
 —
 —
 83,395
 —
 83,395
Issuance of common stock, net of expenses —
 —
 849
 6
 1,224
 —
 —
 1,230
Repurchase of shares of common stock (1)
 —
 —
 (251) —
 (1,957) —
 —
 (1,957)
Equity based compensation expense —
 —
 —
 —
 549
 —
 —
 549
Accrued dividends attributable to stock-based awards —
 —
 —
 —
 430
 —
 —
 430
Dividends declared on common stock ($0.20 per share) —
 —
 —
 —
 —
 (79,686) —
 (79,686)
Dividends declared on preferred stock ($0.46875 per share) —
 —
 —
 —
 —
 (3,750) —
 (3,750)
Dividends attributable to dividend equivalents —
 —
 —
 —
 —
 (217) —
 (217)
Change in unrealized losses on MBS, net —
 —
 —
 —
 —
 —
 (46,163) (46,163)
Derivative hedging instruments fair value changes, net —
 —
 —
 —
 —
 —
 19,669
 19,669
Balance at March 31, 2018 8,000
 $80
 398,429
 $3,984
 $3,227,550
 $(578,913) $582,730
 $3,235,431
Net income —
 —
 —
 —
 —
 70,395
 —
 70,395
Issuance of common stock, net of expenses —
 —
 104
 1
 480
 —
 —
 481
Equity based compensation expense —
 —
 —
 —
 2,255
 —
 —
 2,255
Accrued dividends attributable to stock-based awards —
 —
 —
 —
 (230) —
 —
 (230)
Dividends declared on common stock ($0.20 per share) —
 —
 —
 —
 —
 (79,706) —
 (79,706)
Dividends declared on preferred stock ($0.46875 per share) —
 —
 —
 —
 —
 (3,750) —
 (3,750)
Dividends attributable to dividend equivalents —
 —
 —
 —
 —
 (244) —
 (244)
Change in unrealized losses on MBS, net —
 —
 —
 —
 —
 —
 (25,934) (25,934)
Derivative hedging instruments fair value changes, net —
 —
 —
 —
 $—
 $—
 $7,915
 $7,915
Balance at June 30, 2018 8,000
 $80
 398,533
 $3,985
 $3,230,055
 $(592,218) $564,711
 $3,206,613
Net income —
 —
 —
 —
 —
 87,132
 —
 87,132
Issuance of common stock, net of expenses —
 —
 50,939
 510
 389,361
 —
 —
 389,871
Equity based compensation expense —
 —
 —
 —
 1,082
 —
 —
 1,082
Accrued dividends attributable to stock-based awards —
 —
 —
 —
 (230) —
 —
 (230)
Dividends declared on common stock ($0.20 per share) —
 —
 —
 —
 —
 (89,894) —
 (89,894)
Dividends declared on preferred stock ($0.46875 per share) —
 —
 —
 —
 —
 (3,750) —
 (3,750)
Dividends attributable to dividend equivalents —
 —
 —
 —
 —
 (241) —
 (241)
Change in unrealized losses on MBS, net —
 —
 —
 —
 —
 —
 (43,733) (43,733)
Derivative hedging instruments fair value changes, net —
 —
 —
 —
 —
 —
 5,390
 5,390
Balance at September 30, 2018 8,000
 $80
 449,472
 $4,495
 $3,620,268
 $(598,971) $526,368
 $3,552,240

(1)  For the nine months ended September 30, 2018, includes approximately $2.0 million (250,946 shares) surrendered for tax purposes related to equity-based compensation awards.

The accompanying notes are an integral part of the consolidated financial statements.


MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
  Nine Months Ended
September 30,
(In Thousands) 2019 2018
Cash Flows From Operating Activities:  
  
Net income $277,496
 $240,922
Adjustments to reconcile net income to net cash provided by operating activities:  
  
Gain on sales of residential mortgage securities (50,027) (32,661)
Gain on sales of real estate owned (5,785) (6,582)
Gain on liquidation of residential whole loans (14,538) (18,598)
Accretion of purchase discounts on residential mortgage securities, residential whole loans and MSR-related assets (45,990) (64,211)
Amortization of purchase premiums on residential mortgage securities and residential whole loans 32,085
 21,141
Depreciation and amortization on real estate, fixed assets and other assets 1,957
 1,354
Equity-based compensation expense 4,724
 3,891
Unrealized gains on residential whole loans at fair value (33,313) (26,788)
Unrealized (gains)/losses on residential mortgage securities and interest rate swap agreements (“Swaps”) and other (122) 2,767
Increase in other assets (24,647) (31,018)
Increase in other liabilities 11,756
 33
Net cash provided by operating activities $153,596
 $90,250
     
Cash Flows From Investing Activities:  
  
Principal payments on residential mortgage securities and MSR-related assets $1,555,449
 $1,797,012
Proceeds from sales of residential mortgage securities 735,768
 341,589
Purchases of residential mortgage securities and MSR-related assets (837,591) (2,021,914)
Purchases of residential whole loans, loan related investments and capitalized advances (2,988,229) (2,158,105)
Principal payments on residential whole loans 906,072
 345,917
Proceeds from sales of real estate owned 81,206
 93,635
Purchases of real estate owned and capital improvements (15,671) (10,179)
Additions to leasehold improvements, furniture and fixtures (1,351) (1,009)
Net cash used in investing activities $(564,347) $(1,613,054)
     
Cash Flows From Financing Activities:  
  
Principal payments on repurchase agreements $(54,103,776) $(48,988,034)
Proceeds from borrowings under repurchase agreements 54,796,010
 49,651,416
Proceeds from issuance of securitized debt —
 419,970
Principal payments on securitized debt (79,350) (67,945)
Payments made for securitization related costs —
 (2,472)
Proceeds from issuance of Convertible Senior Notes 223,311
 —
Payments made for settlements on Swaps (47,622) (40,885)
Proceeds from settlements on Swaps —
 57,656
Proceeds from issuances of common stock 8,861
 391,932
Payments made for costs related to common stock issuances —
 (350)
Dividends paid on preferred stock (11,250) (11,250)
Dividends paid on common stock and dividend equivalents (270,951) (239,623)
Net cash provided by financing activities $515,233
 $1,170,415
Net increase/(decrease) in cash, cash equivalents and restricted cash $104,482
 $(352,389)
Cash, cash equivalents and restricted cash at beginning of period $88,709
 $463,743
Cash, cash equivalents and restricted cash at end of period $193,191
 $111,354
     
Supplemental Disclosure of Cash Flow Information    
Interest Paid $237,644
 $161,028
     
Non-cash Investing and Financing Activities:    
Net decrease in securities obtained as collateral/obligation to return securities obtained as collateral $—
 $(505,850)
Transfer from residential whole loans to real estate owned $193,531
 $161,572
Dividends and dividend equivalents declared and unpaid $90,614
 $90,136
Payable for unsettled residential whole loans purchases $59,524
 $10,888

The accompanying notes are an integral part of the consolidated financial statements.

6
Table of Contents
MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


 
1.   Organization
 
MFA Financial, 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 REIT taxable income to its stockholders.  The Company has elected to treat certain of its subsidiaries as a taxable REIT subsidiarysubsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. (See NotesNote 2(po) and 12))
 
2.   Summary of Significant Accounting Policies
 
(a)  Basis of Presentation and Consolidation
 
The interim unaudited consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “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 toin accordance with these SEC rules and regulations.  Management believes that the disclosures included in these interim unaudited consolidated financial statements are adequate to make the information presented not misleading.  The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.  In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 20172019 and results of operations for all periods presented have been made.  The results of operations for the three and nine months ended September 30, 20172019 should not be construed as indicative of the results to be expected for the full year.
 
The accompanying consolidated financial statements of the Company 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.  Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could differ from those estimates, which could materially impact the Company’s results of operations and its financial condition.  Management has made significant estimates in several areas, including other-than-temporary impairment (“OTTI”) on MBSmortgage-backed securities (“MBS”) (See Note 3), valuation of MBS, CRT securities and MSR relatedMSR-related assets (See Notes 3 and 15)14), income recognition and valuation of residential whole loans (See Notes 4 and 15)14), valuation of derivative instruments (See Notes 5(b)5(c) and 15)14) and income recognition on certain Non-Agency MBS (defined below) purchased at a discount. (See Note 3)  In addition, estimates are used in the determination of taxable income used in the assessment of REIT compliance and contingent liabilities for related taxes, penalties and interest. (See Note 2(po))  Actual results could differ from those estimates.


The Company has one1 reportable segment assince it manages its business and analyzes and reports its results of operations on the basis of one1 operating segment;segment: investing, on a leveraged basis, in residential mortgage assets.
 
The consolidated financial statements of the Company include the accounts of all subsidiaries; allsubsidiaries. All intercompany accounts and transactions have been eliminated. In addition, the Company consolidates entities established to facilitate its loan securitization transaction as well astransactions related to the acquisition and securitization of residential whole loans.loans completed in prior years. Certain prior period amounts have been reclassified to conform to the current period presentation.



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Table of Contents
MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


(b)  MBS (including Non-Agency MBS transferred to consolidated VIEs) and CRTResidential Mortgage Securities
 
The Company has investments in residential MBS that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae”) (collectively, “Agency MBS”), and residential MBS that are not guaranteed by any agency of the U.S. Government or any federally chartered corporation (“Non-Agency MBS”). In addition, the Company has investments in CRT securities that are issued or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by Fannie Mae and Freddie Mac and the principal payments received are baseddependent on the performance of loans in either a reference pool or an actual pool of previously securitized MBS.loans. As the loans in the underlying reference pool are paid, the principal balance of the CRT securities is paid. As an investor in a CRT security, the Company may incur a principal loss if certain defined credit events occur, including, for certain CRT securities, if the loans inperformance of the actual or reference pool experience delinquencies exceeding specified thresholds.loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company.
 
Designation
 
TheMBS that the Company generally intends to hold its MBS until maturity; however,maturity, but that it may sell from time to time it may sell any of its securities as part of the overall management of its business.  As a result, all of the Company’s MBSbusiness, are designated as “available-for-sale” (“AFS”) and, accordingly,. Such MBS are carried at their fair value with unrealized gains and losses excluded from earnings (except when an OTTI is recognized, as discussed below) and reported in Accumulated other comprehensive income/(loss) (“AOCI”), a component of Stockholders’ Equity.
 
Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of AOCI to earnings as a realized gain or loss using the specific identification method.


The Company has elected the fair value option for certain of its Agency MBS that it does not intend to hold to maturity. These securities are carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations.

The Company has elected the fair value option for certain of its CRT securities as it considers this method of accounting to more appropriately reflect the risk sharingrisk-sharing structure of these securities. Such securities are carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations.
 
Revenue Recognition, Premium Amortization and Discount Accretion
 
Interest income on securities is accrued based on thetheir outstanding principal balance and their contractual terms. Premiums and discounts associated with Agency MBS and Non-Agency MBS assessed as high credit quality at the time of purchase are amortized into interest income over the life of such securities using the effective yield method. Adjustments to premium amortization are made for actual prepayment activity.
 
Interest income on the Non-Agency MBS that were purchased at a discount to par value and/or are considered to be of less than high credit quality is recognized based on the security’s effective interest rate which is the security’s internal rate of return (“IRR”). The IRR is determined using management’s estimate of the projected cash flows for each security, which are based on the Company’s observation of current information and events and include assumptions related to fluctuations in interest rates, prepayment speeds and the timing and amount of credit losses. On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow 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 the IRR/ interest income recognized on these securities or in the recognition of OTTIs.  (See Note 3)
 
Based on the projected cash flows from the Company’s Non-Agency MBS purchased at a discount to par value, a portion of the purchase discount may be designated as non-accretable purchase discount (“Credit Reserve”), which effectively mitigates the Company’s risk of loss on the mortgages collateralizing such MBS, and is not expected to be accreted into interest income.  The amount designated as Credit Reserve may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors.  If the performance of a security with a Credit Reserve is more favorable than forecasted, a portion of the amount designated as Credit Reserve may be reallocated to accretable discount and recognized into interest income over time.  Conversely, if the performance of a security with

8
Table of Contents
MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

a Credit Reserve is less favorable than forecasted, the amount designated as Credit Reserve may be increased, or impairment charges and write-downs of such securities to a new cost basis could result.
 

7
Table of Contents
MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

Determination of Fair Value for MBS and CRTResidential Mortgage Securities
 
In determining the fair value of the Company’s MBS and CRTresidential mortgage securities, management considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity.  (See Note 15)14)
 
Impairments/OTTI


When the fair value of an AFS security is less than its amortized cost at the balance sheet date, the security is considered impaired.  The Company assesses its impaired securities on at least a quarterly basis and designates such impairments as either “temporary” or “other-than-temporary.”  If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then the Company must recognize an OTTI through charges to earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date.  If the Company does not expect to sell an other-than-temporarily impaired security, only the portion of the OTTIimpairment related to credit losses is recognized through charges to earnings with the remainder recognized through AOCI on the Company’s consolidated balance sheets.  Impairments recognized through other comprehensive income/(loss) (“OCI”) do not impact earnings.  Following the recognition of an OTTI through earnings, a new cost basis is established for the security, andwhich may not be adjusted for subsequent recoveries in fair value through earnings.  However, OTTIs recognized through charges to earnings may, upon recovery, be accreted back to the amortized cost basis of the security on a prospective basis through interest income.  The determination as to whether an OTTI exists and, if so, the amount of credit impairment recognized in earnings is subjective, as such determinations are based on factual information available at the time of assessment as well as the Company’s estimates of the future performance and cash flow projections.  As a result, the timing and amount of OTTIs constitute material estimates that are susceptible to significant change.  (See Note 3)


Non-Agency MBS that are assessed to be of less than high credit quality and on which impairments are recognized have experienced, or are expected to experience, credit-related adverse cash flow changes.  The Company’s estimate of cash flows for its Non-Agency MBS is based on its review of the underlying mortgage loans securing the MBS.  The Company considers information available about the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, Fair Isaac Corporation (“FICO”) scores at loan origination, year of origination, loan-to-value ratios (“LTVs”), geographic concentrations as well as reports by credit rating agencies, such as Moody’s Investors Services, Inc. (“Moody’s”), Standard & Poor’s Corporation (“S&P”) or Fitch, Inc. (collectively with Moody’s and S&P, “Rating Agencies”), general market assessments, and dialogue with market participants.  As a result, significant judgment is used in the Company’s analysis to determine the expected cash flows for its Non-Agency MBS.  In determining the OTTI related to credit losses for securities that were purchased at significant discounts to par and/or are considered to be of less than high credit quality, the Company compares the present value of the remaining cash flows expected to be collected at the purchase date (or last date previously revised) against the present value of the cash flows expected to be collected at the current financial reporting date.  The discount rate used to calculate the present value of expected future cash flows is the current yield used for income recognition purposes.  Impairment assessment for Non-Agency MBS and CRT Securities that were purchased at prices close to par and/or are otherwise considered to be of high credit quality involves comparing the present value of the remaining cash flows expected to be collected against the amortized cost of the security at the assessment date.  The discount rate used to calculate the present value of the expected future cash flows is based on the instrument’s IRR.
 
Balance Sheet Presentation
 
The Company’s MBS and CRT Securitiesresidential mortgage securities pledged as collateral against repurchase agreements Federal Home Loan Bank advances and Swaps are included on the consolidated balance sheets with the fair value of the securities pledged disclosed parenthetically.  Purchases and sales of securities are recorded on the trade date. 


(c) MSR Related Assets

The Company has investments in financial instruments whose cash flows are considered to be largely dependent on underlying MSRs that either directly or indirectly act as collateral for the investment. These financial instruments, which are referred to as MSR related assets are discussed in more detail below. The Company’s MSR related assets pledged as collateral against repurchase agreements are included in the consolidated balance sheets with the amounts pledged disclosed parenthetically. Purchases and sales of MSR related assets are recorded on the trade date. (See Notes 3, 6, 7 and 15)


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019



Term Notes Backed by MSR Related Collateral

The Company has invested in term notes that are issued by special purpose vehicles (“SPV”) that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. The Company considers payment of principal and interest on these term notes to be largely dependent on the cash flows generated by the underlying MSRs as this impacts the cash flows available to the SPV that issued the term notes. Credit risk borne by the holders of the term notes is also mitigated by structural credit support in the form of over-collateralization. Credit support is also provided by a corporate guarantee from the ultimate parent or sponsor of the SPV that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the underlying MSRs be insufficient.

The Company’s term notes backed by MSR related collateral are reported at fair value on the Company’s consolidated balance sheets with unrealized gains and losses excluded from earnings and reported in AOCI. Interest income is recognized on an accrual basis on the Company’s consolidated statements of operations. The Company’s valuation process for such notes considers a number of factors, including a comparable bond analysis performed by a third-party pricing service which involves determining a pricing spread at issuance of the term note. The pricing spread is used at each subsequent valuation date to determine an implied yield to maturity of the term note, which is then used to derive an indicative market value for the security. This indicative market value is further reviewed by the Company and may be adjusted to ensure it reflects a realistic exit price at the valuation date given the structural features of these securities. Other factors taken into consideration include indicative values provided by repurchase agreement counterparties, estimated changes in fair value of the related underlying MSR collateral and the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient.

Corporate Loan

The Company has entered into a loan agreement with an entity that originates loans and owns the related MSRs. Under the terms of loan agreement, the Company has committed to lend $130.0 million of which approximately $101.1 million was drawn at September 30, 2017. The loan is secured by certain U.S. Government, Agency and private-label MSRs, as well as other unencumbered assets owned by the borrower. The term loan is recorded on the Company’s consolidated balance sheets at the drawn amount, on which interest income is recognized on an accrual basis on the Company’s consolidated statements of operations. Commitment fees received on the undrawn amount are deferred and recognized as interest income over the remaining loan term at the time of draw. At the end of the commitment period, any remaining deferred commitment fees will be recorded as Other Income on the Company’s consolidated statements of operations. The Company evaluates the recoverability of the loan on a quarterly basis by considering various factors, including the current status of the loan, changes in fair value of the MSRs that secure the loan and the recent financial performance of the borrower.

(d)(c)  Residential Whole Loans (including Residential Whole Loans transferred to consolidated VIEs)


Residential whole loans included in the Company’s consolidated balance sheets are primarily comprised of pools of fixedfixed- and adjustable rateadjustable-rate residential mortgage loans acquired through consolidated trusts in secondary market transactions generally at discounted purchase prices.transactions. The accounting model utilized by the Company is determined at the time each loan package is initially acquired and is generally based on the delinquency status of the majority of the underlying borrowers in the package at acquisition. The accounting model described below under “Residential Wholefor Purchased Credit Impaired Loans that are held at Carrying Value”carrying value is typically utilized by the Company for loansPurchased Credit Impaired Loans where the underlying borrower has a delinquency status of less than 60 days at the acquisition date. The Company also acquires Purchased Performing Loans that are typically held at carrying value, but the accounting methods for income recognition and determination and measurement of any required loan loss reserves (as discussed below) differ from those used for Purchased Credit Impaired Loans held at carrying value. The accounting model described below under “Residential Whole Loansfor residential whole loans held at Fair Value”fair value is typically utilized by the Company for loans where the underlying borrower has a delinquency status of 60 days or more at the acquisition date. The accounting model initially applied is not subsequently changed.


The Company’s residential whole loans pledged as collateral against repurchase agreements are included in the consolidated balance sheets with amounts pledged disclosed parenthetically.  Purchases and sales of residential whole loans are recorded on the trade date, with amounts recorded reflecting management’s current estimate of assets that will be acquired or disposed at the closing of the transaction. This estimate is subject to revision at the closing of the transaction, pending the outcome of due diligence performed prior to closing. Recorded amounts of residential whole loans for which the closing of the purchase transaction is yet to occur are not eligible to be pledged as collateral against any repurchase agreement financing until the closing of the purchase transaction. (See Notes 4, 6, 7, 1514 and 16)15)


Residential Whole Loans at Carrying Value

Purchased Performing Loans

Acquisitions of Purchased Performing Loans to date have been primarily comprised of: (i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (“Non-QM loans”), (ii) short-term business purpose loans collateralized by residential properties made to non-occupant borrowers who intend to rehabilitate and sell the property for a profit (“Rehabilitation loans” or “Fix and Flip loans”), (iii) loans to finance (or refinance) non-owner occupied one-to four-family residential properties that are rented to one or more tenants (“Single-family rental loans”), and (iv) previously originated loans secured by residential real estate that is generally owner occupied (“Seasoned performing loans”). Purchased Performing Loans are initially recorded at their purchase price. Interest income on Purchased Performing Loans acquired at par is accrued based on each loan’s current interest bearing balance and current interest rate, net of related servicing costs. Interest income on such loans purchased at a premium/discount to par is recorded each period based on the contractual coupon net of any amortization of premium or accretion of discount, adjusted for actual prepayment activity. For loans acquired with related servicing rights retained by the seller, interest income is reported net of related serving costs.

An allowance for loan losses is recorded when, based on current information and events, it is probable that the Company will be unable to collect all amounts due under the existing contractual terms of the loan agreement. Any required loan loss allowance would typically be measured based on the fair value of the collateral securing the loan and would reduce the carrying value of the loan with a corresponding charge to earnings. Significant judgments are required in determining any allowance for loan loss, including assumptions regarding the loan cash flows expected to be collected, the value of the underlying collateral and the ability of the Company to collect on any other forms of security, such as a personal guaranty provided either by the borrower or an affiliate of the borrower. Income recognition is suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, interest income is recorded under the cash basis method as interest payments are received. Interest accruals are resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or it is legally discharged.


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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019



Purchased Credit Impaired Loans
Residential Whole Loans at Carrying Value

Notwithstanding that the majority of these loans are considered to be performing substantially in accordance with their current contractual terms and conditions, theThe Company has elected to account for these loans as credit impaired as they were acquired at discounted prices that reflect, in part, the impaired credit history of the borrower. Substantially all of the borrowersthese loans have previously experienced payment delinquencies and the amount owed on the mortgage loan may exceed the value of the property pledged as collateral. Consequently, the Company has assessed that these loans generally have a higher likelihood of default than newly originated mortgage loans with LTVs of 80% or less to creditworthy borrowers. The Company believes that amounts paid to acquire these loans represent fair market value at the date of acquisition. Such loansLoans considered credit impaired are initially recorded at the purchase price with no allowance for loan losses. Subsequent to acquisition, the recorded amount for these loans reflects the original investment amount, plus accretion of interest income, less principal and interest cash flows received. These loans are presented on the Company’s consolidated balance sheets at carrying value, which reflects the recorded amount reduced by any allowance for loan losses established subsequent to acquisition.


Under the application of thisthe accounting model for Purchased Credit Impaired Loans, the Company may aggregate into pools loans acquired in the same fiscal quarter that are assessed as having similar risk characteristics. For each pool established, or on an individual loansloan basis for loans not aggregated into pools, the Company estimates at acquisition, and periodically on at least a quarterly basis, the principal and interest cash flows expected to be collected. The difference between the cash flows expected to be collected and the carrying amount of the loans is referred to as the “accretable yield.” This amount is accreted as interest income over the life of the loans using an effective interest rate (level yield) methodology. Interest income recorded each period reflects the amount of accretable yield recognized and not the coupon interest payments received on the underlying loans. The difference between contractually required principal and interest payments and the cash flows expected to be collected is referred to as the “non-accretable difference,” and includes estimates of both the effect of prepayments and expected credit losses over the life of the underlying loans.


A decrease in expected cash flows in subsequent periods may indicate impairment at the pool and/or individual loan level, thus requiring the establishment of an allowance for loan losses by a charge to the provision for loan losses. The allowance for loan losses generally represents the present value of cash flows expected at acquisition, adjusted for any increases due to changes in estimated cash flows, that are subsequently no longer expected to be received at the relevant measurement date. AUnder the accounting model applied to Purchased Credit Impaired Loans, a significant increase in expected cash flows in subsequent periods first reduces any previously recognized allowance for loan losses and then will result in a recalculation inof the amount of accretable yield. The adjustment of accretable yield due to a significant increase in expected cash flows is accounted for prospectively as a change in estimate and results in reclassification from nonaccretable difference to accretable yield.


Residential Whole Loans at Fair Value


Certain of the Company’s residential whole loans are presented at fair value on its consolidated balance sheets as a result of a fair value election made at the time of acquisition. GivenFor the majority of these loans, there is significant uncertainty associated with estimating the timing of and amount of cash flows associated with these loans that will be collected, and thatcollected. Further, the cash flows ultimately collected may be dependent on the value of the property securing the loan,loan. Consequently, the Company considers that accounting for these loans at fair value should result in a better reflection over time of the economic returns fromfor the majority of these loans. The Company determines the fair value of its residential whole loans held at fair value after considering portfolio valuations obtained from a third-party whothat specializes in providing valuations of residential mortgage loans and trading activity observed in the market place. Subsequent changes in fair value are reported in current period earnings and presented in Net gain on residential whole loans heldmeasured at fair value through earnings on the Company’s consolidated statements of operations.


Cash received reflectingrepresenting coupon interest payments on residential whole loans held at fair value is not included in Interest Income, but rather is presentedincluded in Net gain on residential whole loans heldmeasured at fair value through earnings on the Company’s consolidated statements of operations. Cash outflows associated with loan-related advances made by the Company on behalf of the borrower are included in the basis of the loan and are reflected in Net gainunrealized gains or losses reported each period.

(d) MSR-Related Assets

The Company has investments in financial instruments whose cash flows are considered to be largely dependent on residential whole loans held at fair value.underlying MSRs that either directly or indirectly act as collateral for the investment. These financial instruments, which are referred to as MSR-related assets, are discussed in more detail below. The Company’s MSR-related assets pledged as collateral against repurchase agreements are included in the consolidated balance sheets with the amounts pledged disclosed parenthetically. Purchases and sales of MSR-related assets are recorded on the trade date. (See Notes 3, 6, 7 and 14)



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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


(e)  Securities Obtained and Pledged as Collateral/Obligation to Return Securities Obtained as
Term Notes Backed by MSR-Related Collateral
 
The Company has invested in term notes that are issued by special purpose vehicles (“SPV”) that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. The Company considers payment of principal and interest on these term notes to be largely dependent on the cash flows generated by the underlying MSRs as this impacts the cash flows available to the SPV that issued the term notes. Credit risk borne by the holders of the term notes is also mitigated by structural credit support in the form of over-collateralization. Credit support is also provided by a corporate guarantee from the ultimate parent or sponsor of the SPV that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the underlying MSRs be insufficient.

The Company’s term notes backed by MSR-related collateral are treated as AFS securities and reported at fair value on the Company’s consolidated balance sheets with unrealized gains and losses excluded from earnings and reported in AOCI. Interest income is recognized on an accrual basis on the Company’s consolidated statements of operations. The Company’s valuation process for such notes is similar to that used for residential mortgage securities and considers a number of observable market data points, including prices obtained securitiesfrom pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral under collateralizedand the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient.

Corporate Loans
The Company has made or participated in loans to provide financing arrangements in connection with its financing strategy for Non-Agency MBS.  Securities obtainedto entities that originate residential mortgage loans and own the related MSRs. These corporate loans are generally secured by certain MSRs, as collateral in connection with these transactionswell as certain other unencumbered assets owned by the borrower.

Corporate loans are recorded on the Company’s consolidated balance sheets at the drawn amount, on which interest income is recognized on an accrual basis on the Company’s consolidated statements of operations. Commitment fees received on the undrawn amount are deferred and recognized as an asset along withinterest income over the remaining loan term at the time of draw. At the end of the commitment period, any remaining deferred commitment fees are recorded as Other Income on the Company’s consolidated statements of operations. The Company evaluates the recoverability of its corporate loans on a liability representingquarterly basis considering various factors, including the obligation to returncurrent status of the collateral obtained, atloan, changes in the fair value.  While beneficial ownershipvalue of securities obtained remains with the counterparty,MSRs that secure the Company hasloan and the right to transferrecent financial performance of the collateral obtained or to pledge it as part of a subsequent collateralized financing transaction.  (See Note 2(l) for Repurchase Agreements and Reverse Repurchase Agreements)borrower.


(f)(e)  Cash and Cash Equivalents
 
Cash and cash equivalents include cash on deposit with financial institutions and investments in money market funds, all of which have original maturities of three months or less.  Cash and cash equivalents may also include cash pledged as collateral to the Company by its repurchase agreement and/or Swap counterparties as a result of reverse margin calls (i.e., margin calls made by the Company).  The Company did not hold any cash pledged by its counterparties at September 30, 2017 or 2019 and December 31, 2016.2018. At September 30, 2019 and December 31, 2018, the Company had cash and cash equivalents of $154.2 million and $52.0 million, respectively. The Company’s investments in overnight money market funds, which are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or any other government agency, were $568.3$130.4 million and $208.9$30.0 million at September 30, 20172019 and December 31, 2016,2018, respectively.  In addition, deposits in FDIC insured accounts generally exceed insured limits. (See Notes 7 and 15)14)
 
(g) (f) Restricted Cash
 
Restricted cash represents the Company’s cash held by its counterparties in connection with certain of the Company’s Swaps and/or repurchase agreements that is not available to the Company for general corporate purposes. Restricted cash may be applied against amounts due to repurchase agreement and/or Swap counterparties, or may be returned to the Company when the related collateral requirements are exceeded or at the maturity of the Swap and/or repurchase agreement.agreements.  The Company had aggregate restricted cash held as collateral or otherwise in connection with its Swaps and repurchase agreements and/or Swaps of $15.4$39.0 million and $58.5$36.7 million at September 30, 20172019 and December 31, 20162018, respectively.  (See Notes 5(b)5(c), 6, 7 and 15)14)
 
(h)
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

(g)  Goodwill
 
At September 30, 20172019 and December 31, 20162018, 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 formation in 1998.  Goodwill, which is no longer subject to amortization, is tested for impairment at least annually, or more frequently under certain circumstances, at the entity level.  Through September 30, 20172019, the Company had not recognized any impairment against its goodwill. Goodwill is included in Other assets on the Company’s consolidated balance sheets.


(i)(h) Real Estate Owned (“REO”)
 
REO represents real estate acquired by the Company, including through foreclosure, deed in lieu of foreclosure, or purchased in connection with the acquisition of residential whole loans. REO acquired through foreclosure or deed in lieu of foreclosure is initially recorded at fair value less estimated selling costs. REO acquired in connection with the acquisition of residential whole loans is initially recorded at its purchase price. Subsequent to acquisition, REO is reported, at each reporting date, at the lower of the current carrying amount or fair value less estimated selling costs and for presentation purposes is included in Other assets on the Company’s consolidated balance sheets. Changes in fair value that result in an adjustment to the reported amount of an REO property that has a fair value at or below its carrying amount are reported in Other Income, net on the Company’s consolidated statements of operations. The Company has acquired certain properties that it holds for investment purposes, including rentals to third parties. These properties are held at their historical basis less depreciation, and are subject to impairment. Related rental income and expenses are recorded in Other Income, net. (See Note 5(a))5)


(j)(i)  Depreciation
 
Leasehold Improvements, Real estate and Other Depreciable Assets
 
Depreciation is computed on the straight-line method over the estimated useful life of the related assets or, in the case of leasehold improvements, over the shorter of the useful life or the lease term.  Furniture, fixtures, computers and related hardware have estimated useful lives ranging from five to eight years at the time of purchase. The building component of real estate held-for-investment is depreciated over 27.5 years.
 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

(k)  MBS Resecuritization,(j)  Loan Securitization and Other Debt Issuance Costs
 
MBS resecuritization and loanLoan securitization related costs are costs associated with the issuance of beneficial interests by consolidated VIEs and incurred by the Company in connection with various MBS resecuritization and loan securitizationfinancing transactions completed by the Company.  Other debt issuance and related costs include costs incurred by the Company in connection with issuing its 6.25% Convertible Senior Notes due 2024 (“Convertible Senior Notes”), 8% Senior Notes due 2042 (“Senior Notes”) and certain other repurchase agreement financings. These costs may include underwriting, rating agency, legal, accounting and other fees.  Such costs, which reflect deferred charges, are included on the Company’s consolidated balance sheets as a direct deduction from the corresponding debt liability. These deferred charges are amortized as an adjustment to interest expense using the effective interest method. For the Convertible Senior Notes, Senior Notes and other repurchase agreement financings, such costs are amortized over the shorter of the period to the expected or stated legal maturity of the debt instruments. The Company periodically reviews the recoverability of these deferred costs and, in the event an impairment charge is required, such amount will be included in Operating and Other Expense on the Company’s consolidated statements of operations.


(l)(k)  Repurchase Agreements and Other Advances
Repurchase Agreements


The Company finances the holdings of a significant portion of its residential mortgage assets with repurchase agreements.  Under repurchase agreements, the Company sells securitiesassets to a lender and agrees to repurchase the same securitiesassets 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 legally structured as sale and repurchase transactions, the Company accounts for repurchase agreements as secured borrowings. Under its repurchase agreements, the Company pledges its securitiesassets as collateral to secure the borrowing, in an amount 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 financing, unless the repurchase financing is renewed with the same counterparty, the Company is required to repay the loan including any accrued interest and concurrently receives back its pledged collateral from the lender.  With the consent of the lender, the Company may renew a repurchase financing at the then prevailing financing terms.  Margin calls, whereby a lender requires that the Company

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

pledge additional securitiesassets or cash as collateral to secure borrowings under its repurchase financing with such lender, are routinely experienced by the Company when the value of the MBSassets pledged as collateral declines as a result of principal amortization and prepayments or due to changes in market interest rates, spreads or other market conditions.  The Company also may make margin calls on counterparties when collateral values increase.
 
The Company’s repurchase financings collateralized by residential mortgage securities and MSR-related assets typically have terms ranging from one month to six months at inception, but may alsowhile a significant amount of our repurchase financings collateralized by residential whole loans have longerterms ranging from three months to twelve months or shorter terms.longer.  Should a counterparty decide not to renew a repurchase financing at maturity, the Company must either refinance elsewhere or be in a position to satisfy the obligation.  If, during the term of a repurchase financing, a lender should default on its obligation, the Company might experience difficulty recovering its pledged assets which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to such lender, including accrued interest receivable oron such collateral.  (See Notes 6, 7 and 15)14)
 
In addition to the repurchase agreement financing arrangements discussed above, as part of its financing strategy for Non-Agency MBS, the Company has entered into contemporaneous repurchase and reverse repurchase agreements with a single counterparty.  Under a typical reverse repurchase agreement, the Company buys securities from a borrower for cash and agrees to sell the same securities in the future for a price that is higher than the original purchase price.  The difference between the purchase price the Company originally paid and the sale price represents interest received from the borrower.  In contrast, the contemporaneous repurchase and reverse repurchase transactions effectively resulted in the Company pledging Non-Agency MBS as collateral to the counterparty in connection with the repurchase agreement financing and obtaining U.S. Treasury securities as collateral from the same counterparty in connection with the reverse repurchase agreement.  No net cash was exchanged between the Company and counterparty at the inception of the transactions.  Securities obtained and pledged as collateral are recorded as an asset on the Company’s consolidated balance sheets.  Interest income is recorded on the reverse repurchase agreement and interest expense is recorded on the repurchase agreement on an accrual basis.  Both the Company and the counterparty have the right to make daily margin calls based on changes in the value of the collateral obtained and/or pledged.  The Company’s liability to the counterparty in connection with this financing arrangement is recorded on the Company’s consolidated balance sheets and disclosed as “Obligation to return securities obtained as collateral, at fair value.”  (See Note 2(e))

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017


Federal Home Loan Bank (“FHLB”) Advances

In January 2016, the Federal Housing Finance Agency (the “FHFA”) released its final rule amending its regulation on FHLB membership, which, among other things, provided termination rules for then current captive insurance members. As a result of such regulation, the Company’s wholly-owned subsidiary, MFA Insurance, Inc. (“MFA Insurance”) was required to repay all of its outstanding FHLB advances by February 19, 2017 and its FHLB membership was terminated on such date. FHLB advances were secured financing transactions and were carried at their contractual amounts. Accrued interest payable on FHLB advances is included in Other liabilities on the Company’s consolidated balance sheet at December 31, 2016. (See Notes 6, 7 and 15)(l)  Equity-Based Compensation
 
(m)  Equity-Based Compensation
Compensation expense for equity-based awards that are subject to vesting conditions, is recognized ratably over the vesting period of such awards, based upon the fair value of such awards at the grant date. For certain awards granted prior to January 1, 2017, compensation expense recognized included the impact of estimated forfeitures, with any changes in estimated forfeiture rates accounted for as a change in estimate. Upon adoption of new accounting guidance that was effective for the Company on January 1, 2017, the Company made a policy election to account for forfeitures as they occur. (See Note 2(u))
 
From 2011 through 2013, the Company granted certain restricted stock units (“RSUs”) that vested annually over a one or three-year period, provided that certain criteria were met, which were based on a formula tied to the Company’s achievement of average total stockholder return during that three-year period.  StartingBeginning in 2014, the Company has made annual grants of RSUsrestricted stock units (“RSUs”) certain of which cliff vest after a three-year period, subject only to continued employment, and others of which cliff vest after a three-year period, subject to both continued employment and the achievement of certain performance criteria based on a formula tied to the Company’s achievement of average total stockholdershareholder return during that three-year period.period, as well as the total shareholder return (“TSR”) of the Company relative to the TSR of a group of peer companies (over the three-year period) selected by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) at the date of grant. The features in these awards related to the attainment of total stockholdershareholder return over a specified period constitute a “market condition” which impacts the amount of compensation expense recognized for these awards.  Specifically, the uncertainty regarding the achievement of the market condition was reflected in the grant date fair valuation of the RSUs, which is recognized as compensation expense over the relevant vesting period.  The amount of compensation expense recognized is not dependent on whether the market condition was or will be achieved.
 
The Company has awardedmakes dividend equivalentsequivalent payments in connection with certain of its equity-based awards.   A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock.  Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., an RSU) under the Company’s Equity Compensation Plan (the “Equity Plan”), and they are paid in cash or other consideration at such times and in accordance with such rules, terms and conditions, as the Compensation Committee may determine in its discretion.  Payments pursuant to dividend equivalents are generally charged to Stockholders’ Equity to the extent that the attached equity awards are expected to vest.  Compensation expense is recognized for payments made for dividend equivalents to the extent that the attached equity awards (i) do not or are not expected to vest and (ii) grantees are not required to return payments of dividends or dividend equivalents to the Company.  (See Notes 2(nm) and 14)13)
 
(n)(m)  Earnings per Common Share (“EPS”)
 
Basic EPS is computed using the two-class method, which includes the weighted-average number of shares of common stock outstanding during the period and an estimate of other securities that participate in dividends, such as the Company’s unvested restricted stock and RSUs that have non-forfeitable rights to dividends and dividend equivalents attached to/associated with RSUs and vested stock options to arrive at total common equivalent shares.  In applying the two-class method, earnings are allocated to both shares of common stock and estimated securities that participate in dividends based on their respective weighted-average shares outstanding for the period.  For the diluted EPS calculation, common equivalent shares are further adjusted for the effect of dilutive unexercised stock options and RSUs outstanding that are unvested and have dividends that are subject to forfeiture 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 associated with such instruments, are used to repurchase shares of the Company’s outstanding common stock at the average market price during the reported period.  In addition, the Company’s Convertible Senior Notes are included in the calculation of diluted EPS if the assumed conversion into common shares is dilutive, using the “if-converted” method. This involves adding back the periodic interest expense associated with the Convertible Senior Notes to the numerator and by adding the shares that would be issued in an assumed conversion (regardless of whether the conversion option is in or out of the money) to the denominator for the purposes of calculating diluted EPS. (See Note 13)12)

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

 
(o)(n)  Comprehensive Income/(Loss)
 
The Company’s comprehensive income/(loss) available to common stock and participating securities includes net income, the change in net unrealized gains/(losses) on its AFS securities and derivative hedging instruments (to the extent that such changes are not recorded in earnings), adjusted by realized net gains/(losses) reclassified out of AOCI for sold AFS securities and is reduced by dividends declared on the Company’s preferred stock and issuance costs of redeemed preferred stock.
 

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

(p)(o)  U.S. Federal Income Taxes


The Company has elected to be taxed as a REIT under the provisions of the Internal Revenue Code of 1986, as amended, (the “Code”), and the corresponding provisions of state law.  The Company expects to operate in a manner that will enable it to satisfy the various requirements to maintain its status as a REIT for federal income tax purposes. In order to maintain its status as a REIT, the Company must, among other things, distribute at least 90% of its REIT taxable income (excluding net long-term capital gains) to stockholders in the timeframe permitted by the Code.  As long as the Company maintains its status as a REIT, the Company will not be subject to regular federal income tax to the extent that it distributes 100% of its REIT taxable income (including net long-term capital gains) to its stockholders within the permitted timeframe.  Should this not occur, the Company would be subject to federal taxes at prevailing corporate tax rates on the difference between its REIT taxable income and the amounts deemed to be distributed for that tax year.  As the Company’s objective is to distribute 100% of its REIT taxable income to its stockholders within the permitted timeframe, no0 provision for current or deferred income taxes has been made in the accompanying consolidated financial statements.  Should the Company incur a liability for corporate income tax, such amounts would be recorded as REIT income tax expense on the Company’s consolidated statements of operations. Furthermore, if the Company fails to distribute during each calendar year, or by the end of January following the calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year, at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed. To the extent that the Company incurs interest, penalties or related excise taxes in connection with its tax obligations, including as a result of its assessment of uncertain tax positions, such amounts will be included in Operating and Other Expense on the Company’s consolidated statements of operations.


In addition, the Company has elected to treat certain of its subsidiaries as a TRS. In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. Generally, a domestic TRS is subject to U.S. federal, state and local corporate income taxes. Since a portion of the Company’s business may beis conducted through one or more TRS, itsthe net taxable income earned by its domestic TRS, may beif any, is subject to corporate income taxation. To maintain the Company’s REIT election, no more than 25% (or, for 2018 and subsequent taxable years, 20%) of the value of a REIT’sthe Company’s assets at the end of each calendar quarter may consist of stock or securities in TRS. For purposes of the determination of U.S. federal and state income taxes, the Company’s subsidiaries that elected to be treated as a TRS record current or deferred income taxes based on differences (both permanent and timing) between the determination of their taxable income and net income under GAAP. NoNaN net deferred tax benefit was recorded by the Company for the nine months ended September 30, 20172019 and 2016, as2018, related to the net taxable losses in the TRS, since a valuation allowance for the full amount of the associated deferred tax asset of approximately $26.0 million was recognized as its recovery is not considered more likely than not. The related net operating loss carryforwards generated prior to 2018 will begin to expire in 2034; those generated in 2019 do not expire.


 Based on its analysis of any potentialpotentially uncertain tax positions, the Company concluded that it does not have any material uncertain tax positions that meet the relevant recognition or measurement criteria as of September 30, 2017,2019, December 31, 2016,2018, or September 30, 2016. The Company filed its 2016 tax return prior to October 16, 2017. The2018. As of the date of this filing the Company’s tax returns for tax years 20132016 through 20162018 are open to examination.


(q)(p)  Derivative Financial Instruments
 
The Company may use a variety of derivative instruments to economically hedge a portion of its exposure to market risks, including interest rate risk and prepayment risk. The objective of the Company’s risk management strategy is to reduce fluctuations in net book value over a range of interest rate scenarios. In particular, the Company attempts to mitigate the risk of the cost of its variable rate liabilities increasing during a period of rising interest rates. The Company’s derivative instruments are currently comprised of Swaps, the majority of which are designated as cash flow hedges against the interest rate risk associated with its borrowings.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019


Swaps
 
The Company documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities and the relationship between the hedging instrument and the hedged liability for all Swaps designated as hedging transactions.  The Company assesses, both at the inception of a hedge and on a quarterly basis thereafter, whether or not the hedge is “highly effective.”
 
Swaps are carried on the Company’s consolidated balance sheets at fair value, in Other assets, if their fair value is positive, or in Other liabilities, if their fair value is negative.  Beginning inSince January 2017, variation margin payments on the Company’s

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

Swaps that have been novated to a clearing house arehave been treated as a legal settlement of the exposure under the Swap contract. Previously such payments were treated as collateral pledged against the exposure under the related Swap contract. The effect of this change is to reduce what would have otherwise been reported as the fair value of the Swap. All of the Company’s Swaps have been novated to a central clearing house. Changes in the fair value of the Company’s Swaps designated in hedging transactions are recorded in OCI provided that the hedge remains effective.  ChangesPeriodic payments accrued in fair value for any ineffective amount of a Swap are recognized in earnings.  The Company has not recognized any change in the value of its existingconnection with Swaps designated as hedges through earningsare included in interest expense and are treated as a result of hedge ineffectiveness.an operating cash flow.


The Company discontinues hedge accounting on a prospective basis and recognizes changes in fair value through 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 hedge is no longer appropriate. (See Notes 5(c), 7 and 14)


As of September 30, 2017, allChanges in the fair value of the Company’s Swaps have been novated to a central clearing house. (See Notes 5(b), 7 and 15)not designated in hedging transactions are recorded in Other income, net on the Company’s consolidated statement of operations.


(r)(q)  Fair Value Measurements and the Fair Value Option for Financial Assets and Financial Liabilities
 
The Company’s presentation of fair value for its financial assets and liabilities is determined within a framework that stipulates that the fair value of a financial asset or liability is an exchange price in an orderly transaction 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.  This definition of fair value focuses on exit price and prioritizes the use of market-based inputs over entity-specific inputs when determining fair value.  In addition, the framework for measuring fair value establishes a three-level hierarchy for fair value measurements based upon the observability of inputs to the valuation of an asset or liability as of the measurement date. 


In addition to the financial instruments that it is required to report at fair value, the Company has elected the fair value option for certain of its residential whole loans, Agency MBS and CRT securities at the time of acquisition. Subsequent changes in the fair value of these loans and CRT securitiesfinancial instruments are reported in Net gain on residential whole loans held at fair value and Other income, net, respectively onin the Company’s consolidated statements of operations. A decision to elect the fair value option for an eligible financial instrument, which may be made on an instrument by instrument basis, is irrevocable. (See Notes 2(db), 2(c), 3, 4 and 15)14)


(s)(r)  Variable Interest Entities
 
An entity is referred to as a VIE if it meets at least one of the following criteria:  (i) the entity has equity that is insufficient to permit the entity to finance its activities without the additional subordinated financial support of other parties; or (ii) as a group, the holders of the equity investment at risk lack (a) the power to direct the activities of an entity that most significantly impact the entity’s economic performance; (b) the obligation to absorb the expected losses; or (c) the right to receive the expected residual returns; or (iii) the holders of the equity investment at risk have disproportional voting rights and the entity’s activities are conducted on behalf of the investor that has disproportionately few voting rights.
 
The Company consolidates a VIE when it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.   The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

 
The Company has in prior years entered into several MBS resecuritizationfinancing transactions and during the second quarter of 2017, completed a loan securitization transaction which resulted in the Company consolidating the VIEs that were createdforming entities to facilitate these transactions.  In determining the accounting treatment to be applied to these transactions, the Company concluded that the entities used to facilitate these transactions wereare VIEs and that they should be consolidated.  If the Company had determined that consolidation was not required, it would have then assessed whether the transfers of the underlying assets would qualify as sales or should be accounted for as secured financings under GAAP. (See Note 16)15)


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017


The Company also includes on its consolidated balance sheets certain financial assets and liabilities that are acquired/issued by trusts and/or other special purpose entities that have been evaluated as being required to be consolidated by the Company under the applicable accounting guidance.


(t)(s)  Offering Costs Related to Issuance and Redemption of Preferred Stock


Offering costs related to the issuance of preferred stock are recorded as a reduction in Additional paid-in capital, a component of Stockholders’ Equity, at the time such preferred stock is issued. On redemption of preferred stock, any excess of the fair value of the consideration transferred to the holders of the preferred stock over the carrying amount of the preferred stock in the Company’s consolidated balance sheets is included in the determination of Net Income Available to Common Stock and Participating Securities in the calculation of EPS.

(u)(t)  New Accounting Standards and Interpretations

Accounting Standards Adopted in 20172019


CompensationDisclosure Framework - Stock Compensation - ImprovementsChanges to Employee Share-Based Payment Accountingthe Disclosure Requirements for Fair Value Measurement


In March 2016,August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Improvements2018-13, Disclosure Framework - Changes to Employee Share-Based Payment Accounting (“the Disclosure Requirements for Fair Value Measurements (“ASU 2016-09”2018-13”). The amendments in ASU 2018-13 eliminate, add and modify certain disclosure requirements for fair value measurements as part of this ASU require all income tax effectsthe FASB’s disclosure framework project, which aims to improve the effectiveness of awards to be recognizeddisclosures in the income statement whennotes to financial statements by focusing on requirements that are the awards vest or are settled.most important to the users. The Company adopted ASU 2016-09 also allows an employer to repurchase more of an employee’s shares than it could prior to2018-13 effective on January 1, 2019 and its adoption of this ASU for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 was effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company’s adoption of ASU 2016-09 did not have a significant impact on its financial position or financial statement disclosures.



Compensation - Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting


In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The amendments in this ASU simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The amendments in ASU 2018-07 do not change existing guidance on accounting for share-based payment transactions for employees. The Company adopted ASU 2018-07 effective on January 1, 2019 and its adoption did not have a significant impact on its financial position or financial statement disclosures.

Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). The amendments in this ASU expand an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. ASU 2017-12 also simplifies certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The Company adopted ASU 2017-12 effective on January 1, 2019 and its adoption did not have a significant impact on its financial statements or financial statement disclosures.

Receivables - Nonrefundable Fees and Other Costs

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). The amendments in this ASU shorten the amortization period for certain purchased callable debt securities held at a

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


premium to the earliest call date. The Company adopted ASU 2017-08 effective on January 1, 2019 and its adoption did not have a significant impact on its financial statements or financial statement disclosures.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The amendments in this ASU establish a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company’s significant lease contracts are discussed in Note 10(a) of the consolidated financial statements. The Company adopted ASU 2016-02 effective on January 1, 2019 and, given the relatively limited nature and extent of lease financing transactions that the Company has entered into, its adoption did not have a material impact on its financial position or financial statement disclosures.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

3.            ��MBS, CRTResidential Mortgage Securities and MSR RelatedMSR-Related Assets
 
Agency and Non-Agency MBS


The Company’s MBS are comprised of Agency MBS and Non-Agency MBS which include MBS issued prior to 2008 (“Legacy Non-Agency MBS”). These MBS are secured by:  (i) hybrid mortgages (“Hybrids”), which 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; (ii) adjustable-rate mortgages (“ARMs”); (iii) mortgages that, which have interest rates that reset annually or more frequently (collectively, “ARM-MBS”); and (iv)(iii) 15 and 30 year fixed-rate mortgages for Agency MBS and, for Non-Agency MBS, 30-year and longer-term fixed rate mortgages. In addition, the Company’s MBS are also comprised of MBS backed by securitized re-performing/non-performing loans (“RPL/NPL MBS”), where the cash flows of the bond may not reflect the contractual cash flows of the underlying collateral. The Company’s RPL/NPL MBS are generally structured with a contractual coupon step-up feature where the coupon increases up tofrom 300 - 400 basis points at 36 - 48 months from issuance or sooner. The Company pledges a significant portion of its MBS as collateral against its borrowings under repurchase agreements and Swaps.  (See Note 7)
 
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.  The payment of principal and/or interest on Ginnie Mae MBS is explicitly backed by the full faith and credit of the U.S. Government.  Since the third quarter of 2008, Fannie Mae and Freddie Mac have been under the conservatorship of the Federal Housing Finance Agency, which significantly strengthened the backing for these government-sponsored entities.
 
Non-Agency MBS (including Non-Agency MBS transferred to consolidated VIEs):MBS:  The Company’s Non-Agency MBS are primarily secured by pools of residential mortgages, which are not guaranteed by an agency of the U.S. Government or any federally chartered corporation.  Credit risk associated with Non-Agency MBS is regularly assessed as new information regarding the underlying collateral becomes available and based on updated estimates of cash flows generated by the underlying collateral.
 
CRT Securities


CRT securities are debt obligations issued or sponsored by Fannie Mae and Freddie Mac. WhileThe payments of principal and interest on the coupon paymentsCRT securities are paid by Fannie Mae or Freddie Mac, as the case may be, on a monthly basis, the payment of principal isand are dependent on the performance of loans in either a reference pool or an actual pool of MBS securitized by Fannie Mae or Freddie Mac.loans. As principal onthe loans in the referenceunderlying pool are paid, principal payments on the securities are made and the principal balancesbalance of the securities are reduced. Consequently, CRT securities mirror the payment and prepayment behavior of the mortgage loans in the reference pool.is paid. As an investor in a CRT security, the Company may incur a principal loss if certain defined credit events occur, including, for certain CRT securities, if the loans inperformance of the actual or reference pool experience delinquencies exceeding specified thresholds.loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company. The Company assesses the credit risk associated with CRT securities by assessing the current and expected future performance of the associated referenceloan pool. The Company pledges a significant portion of its CRT securities as collateral against its borrowings under repurchase agreements.  (See Note 7)






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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


The following tables present certain information about the Company’s MBS and CRTresidential mortgage securities at September 30, 20172019 and December 31, 20162018:
 
September 30, 20172019
(In Thousands) 
Principal/ Current
Face
 
Purchase
Premiums
 
Accretable
Purchase
Discounts
 
Discount
Designated
as Credit Reserve and 
OTTI (1)
 
Amortized
Cost (2)
 Fair Value 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gain/(Loss)
 
Principal/ Current
Face
 
Purchase
Premiums
 
Accretable
Purchase
Discounts
 
Discount
Designated
as Credit Reserve and 
OTTI (1)
 
Amortized
Cost (2)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gain/(Loss)
 Fair Value
Agency MBS:(3)  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Fannie Mae $2,310,368
 $87,658
 $(41) $—
 $2,397,985
 $2,404,220
 $27,518
 $(21,283) $6,235
 $1,217,508
 $46,917
 $(23) $—
 $1,264,402
 $10,896
 $(15,282) $(4,386) $1,260,016
Freddie Mac 593,502
 22,884
 —
 —
 617,450
 608,349
 2,510
 (11,611) (9,101) 526,173
 21,303
 —
 —
 548,441
 5,159
 (3,990) 1,169
 549,610
Ginnie Mae 6,532
 118
 —
 —
 6,650
 6,735
 85
 —
 85
 4,118
 76
 —
 —
 4,194
 53
 —
 53
 4,247
Total Agency MBS 2,910,402
 110,660
 (41) —
 3,022,085
 3,019,304
 30,113
 (32,894) (2,781) 1,747,799
 68,296
 (23) —
 1,817,037
 16,108
 (19,272) (3,164) 1,813,873
Non-Agency MBS:                    
  
  
  
    
  
  
  
Expected to Recover Par (4)(5)
 1,390,412
 51
 (24,594) —
 1,365,869
 1,393,982
 28,352
 (239) 28,113
 917,981
 —
 (14,176) —
 903,805
 17,905
 (5) 17,900
 921,705
Expected to Recover Less than Par (3)(4)
 2,710,690
 —
 (220,199) (593,134) 1,897,357
 2,517,678
 620,472
 (151) 620,321
 1,611,768
 —
 (88,121) (462,095) 1,061,552
 414,788
 (256) 414,532
 1,476,084
Total Non-Agency MBS (5)(6)
 4,101,102
 51
 (244,793) (593,134) 3,263,226
 3,911,660
 648,824
 (390) 648,434
 2,529,749
 —
 (102,297) (462,095) 1,965,357
 432,693
 (261) 432,432
 2,397,789
Total MBS 7,011,504
 110,711
 (244,834) (593,134) 6,285,311
 6,930,964
 678,937
 (33,284) 645,653
 4,277,548
 68,296
 (102,320) (462,095) 3,782,394
 448,801
 (19,533) 429,268
 4,211,662
CRT securities (6)(7)
 608,146
 8,474
 (3,961) —
 612,659
 653,633
 42,919
 (1,945) 40,974
 364,284
 5,882
 (117) —
 370,049
 8,084
 (241) 7,843
 377,892
Total MBS and CRT securities $7,619,650
 $119,185
 $(248,795) $(593,134) $6,897,970
 $7,584,597
 $721,856
 $(35,229) $686,627
 $4,641,832
 $74,178
 $(102,437) $(462,095) $4,152,443
 $456,885
 $(19,774) $437,111
 $4,589,554


December 31, 20162018
(In Thousands) 
Principal/ Current
Face
 
Purchase
Premiums
 
Accretable
Purchase
Discounts
 
Discount
Designated
as Credit Reserve and 
OTTI (1)
 
Amortized
Cost (2)
 Fair Value 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gain/(Loss)
 
Principal/ Current
Face
 
Purchase
Premiums
 
Accretable
Purchase
Discounts
 
Discount
Designated
as Credit Reserve and 
OTTI (1)
 
Amortized
Cost (2)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gain/(Loss)
 Fair Value
Agency MBS:(3)  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Fannie Mae $2,879,807
 $108,310
 $(51) $—
 $2,988,066
 $3,014,464
 $45,706
 $(19,308) $26,398
 $1,716,340
 $65,930
 $(24) $—
 $1,782,246
 $12,107
 $(32,321) $(20,214) $1,762,032
Freddie Mac 693,945
 26,736
 —
 —
 723,285
 716,209
 4,809
 (11,885) (7,076) 909,561
 36,991
 —
 —
 947,588
 907
 (17,177) (16,270) 931,318
Ginnie Mae 7,550
 136
 —
 —
 7,686
 7,824
 138
 —
 138
 4,729
 87
 —
 —
 4,816
 47
 —
 47
 4,863
Total Agency MBS 3,581,302
 135,182
 (51) —
 3,719,037
 3,738,497
 50,653
 (31,193) 19,460
 2,630,630
 103,008
 (24) —
 2,734,650
 13,061
 (49,498) (36,437) 2,698,213
Non-Agency MBS:                                    
Expected to Recover Par (4)(5)
 2,706,418
 57
 (24,273) —
 2,682,202
 2,706,311
 26,477
 (2,368) 24,109
 1,536,485
 40
 (21,725) —
 1,514,800
 20,520
 (7,620) 12,900
 1,527,700
Expected to Recover Less than Par (3)(4)
 3,359,200
 —
 (253,918) (694,241) 2,411,041
 2,978,525
 570,318
 (2,834) 567,484
 2,002,319
 —
 (133,300) (516,116) 1,352,903
 438,465
 (769) 437,696
 1,790,599
Total Non-Agency MBS (5)(6)
 6,065,618
 57
 (278,191) (694,241) 5,093,243
 5,684,836
 596,795
 (5,202) 591,593
 3,538,804
 40
 (155,025) (516,116) 2,867,703
 458,985
 (8,389) 450,596
 3,318,299
Total MBS 9,646,920
 135,239
 (278,242) (694,241) 8,812,280
 9,423,333
 647,448
 (36,395) 611,053
 6,169,434
 103,048
 (155,049) (516,116) 5,602,353
 472,046
 (57,887) 414,159
 6,016,512
CRT securities (6)(7)
 384,993
 3,312
 (5,557) —
 382,748
 404,850
 22,105
 (3) 22,102
 476,744
 9,321
 107
 —
 486,172
 12,545
 (5,896) 6,649
 492,821
Total MBS and CRT securities $10,031,913
 $138,551
 $(283,799) $(694,241) $9,195,028
 $9,828,183
 $669,553
 $(36,398) $633,155
 $6,646,178
 $112,369
 $(154,942) $(516,116) $6,088,525
 $484,591
 $(63,783) $420,808
 $6,509,333
 
(1)Discount designated as Credit Reserve and amounts related to OTTI are generally not expected to be accreted into interest income.  Amounts disclosed at September 30, 20172019 reflect Credit Reserve of $578.3$451.1 million and OTTI of $14.8$11.0 million.  Amounts disclosed at December 31, 20162018 reflect Credit Reserve of $675.6$503.3 million and OTTI of $18.6$12.8 million.
(2)Includes principal payments receivable of $1.1 million$965,000 and $2.6$1.0 million at September 30, 20172019 and December 31, 2016,2018, respectively, which are not included in the Principal/Current Face.
(3)
Amounts disclosed at September 30, 2019 and December 31, 2018 include Agency MBS with a fair value of $312.5 millionand $736.5 million, respectively, for which the fair value option has been elected. Such securities had gross unrealized gains of $4.1 million and 0 unrealized losses at September 30, 2019, and 0 unrealized gains and gross unrealized losses of approximately $3.3 millionat December 31, 2018, respectively.
(4)
Based on managementmanagement’s current estimates of future principal cash flows expected to be received.
(4)
Includes RPL/NPL MBS, which at September 30, 2017 had a $1.2 billion Principal/Current face, $1.2 billion amortized cost and $1.2 billion fair value. At December 31, 2016, RPL/NPL MBS had a $2.5 billion Principal/Current face, $2.5 billion amortized cost and $2.5 billionfair value.
(5)
Includes RPL/NPL MBS, which at September 30, 2019 had an $824.8 millionPrincipal/Current face, $824.3 millionamortized cost and $828.1 millionfair value. At December 31, 2018, RPL/NPL MBS had a $1.4 billion Principal/Current face, $1.4 billion amortized cost and $1.4 billionfair value.
(6)At September 30, 20172019 and December 31, 2016,2018, the Company expected to recover approximately 86%82% and 89%, respectively,85% of the then-current face amount of Non-Agency MBS.MBS, respectively.
(6)(7)Amounts disclosed at September 30, 20172019 includes CRT securities with a fair value of $518.1$351.4 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $28.9$7.8 million and gross unrealized losses of approximately $1.9$0.2 million at September 30, 2017.2019. Amounts disclosed at December 31, 20162018 includes CRT securities with a fair value of $271.2$477.4 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $12.7$12.5 million and gross unrealized losses of approximately $3,000$5.6 million at December 31, 2016.2018.
 




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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019




Sales of Residential Mortgage Securities
The following tables present information about the Company’s sales of its residential mortgage securities for the three and nine months ended September 30, 2019 and 2018. The Company has no continuing involvement with any of the sold MBS.

  Three Months Ended
September 30, 2019		 Three Months Ended
September 30, 2018
(In Thousands) Sales Proceeds Gains/(Losses) Sales Proceeds Gains/(Losses)
Agency MBS $257,289
 $2,771
 $—
 $—
Non-Agency MBS 47,867
 14,444
 24,341
 3,391
CRT Securities 28,969
 493
 118,855
 13,024
Total $334,125
 $17,708
 $143,196
 $16,415

  Nine Months Ended
September 30, 2019		 Nine Months Ended
September 30, 2018
(In Thousands) Sales Proceeds Gains/(Losses) Sales Proceeds Gains/(Losses)
Agency MBS $360,634
 $499
 $75,306
 $(3,787)
Non-Agency MBS 244,778
 41,420
 43,703
 12,208
CRT Securities 133,507
 8,108
 222,877
 24,240
Total $738,919
 $50,027
 $341,886
 $32,661



Unrealized Losses on MBS and CRTResidential Mortgage Securities


The following table presents information about the Company’s MBS and CRTresidential mortgage securities that were in an unrealized loss position at September 30, 2017:2019:
 
Unrealized Loss Position For:
  Less than 12 Months 12 Months or more Total
 Fair Value Unrealized Losses Number of SecuritiesFair Value Unrealized Losses Number of SecuritiesFair Value Unrealized Losses
(Dollars in Thousands)
Agency MBS: 
  
  
  
  
  
  
  
  
Fannie Mae $36,775
 $104
 25
 $660,757
 $15,178
 280
 $697,532
 $15,282
Freddie Mac —
 —
 —
 163,863
 3,990
 101
 163,863
 3,990
Ginnie Mae —
 —
 —
 172
 —
 1
 172
 —
Total Agency MBS 36,775
 104
 25
 824,792
 19,168
 382
 861,567
 19,272
Non-Agency MBS:  
  
  
  
  
  
  
  
Expected to Recover Par (1)
 —
 —
 —
 7,495
 5
 1
 7,495
 5
Expected to Recover Less than Par (1)
 2,009
 11
 1
 1,894
 245
 2
 3,903
 256
Total Non-Agency MBS 2,009
 11
 1
 9,389
 250
 3
 11,398
 261
Total MBS 38,784
 115
 26
 834,181
 19,418
 385
 872,965
 19,533
CRT securities (2)
 7,189
 41
 2
 24,966
 200
 7
 32,155
 241
Total MBS and CRT securities $45,973
 $156
 28
 $859,147
 $19,618
 392
 $905,120
 $19,774

  Less than 12 Months 12 Months or more Total
 Fair Value Unrealized Losses Number of SecuritiesFair Value Unrealized Losses Number of SecuritiesFair Value Unrealized Losses
(Dollars in Thousands)
Agency MBS:  
  
  
  
  
  
  
  
Fannie Mae $349,961
 $2,420
 92
 $859,887
 $18,863
 180
 $1,209,848
 $21,283
Freddie Mac 62,110
 519
 16
 399,874
 11,092
 98
 461,984
 11,611
Total Agency MBS 412,071
 2,939
 108
 1,259,761
 29,955
 278
 1,671,832
 32,894
Non-Agency MBS:  
  
  
  
  
  
  
  
Expected to Recover Par (1)
 —
 —
 —
 13,013
 239
 9
 13,013
 239
Expected to Recover Less than Par (1)
 6,412
 48
 3
 7,329
 103
 1
 13,741
 151
Total Non-Agency MBS 6,412
 48
 3
 20,342
 342
 10
 26,754
 390
Total MBS 418,483
 2,987
 111
 1,280,103
 30,297
 288
 1,698,586
 33,284
CRT securities 27,179
 1,945
 9
 —
 —
 —
 27,179
 1,945
Total MBS and CRT securities $445,662
 $4,932
 120
 $1,280,103
 $30,297
 288
 $1,725,765
 $35,229


(1)Based on management’s current estimates of future principal cash flows expected to be received.
(2)Amounts disclosed at September 30, 2019 include CRT securities with a fair value of $32.2 million for which the fair value option has been elected. Such securities had unrealized losses of $241,000 at September 30, 2019.



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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

At September 30, 20172019, the Company did not intend to sell any of its investments that were in an unrealized loss position, and it is “more likely than not” that the Company will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. 
 
Gross unrealized losses on the Company’s Agency MBS were $32.9$19.3 million at September 30, 20172019.  Agency MBS are issued by Government Sponsored Entities (“GSEs”) and enjoy either the implicit or explicit backing of the full faith and credit of the U.S. Government. While the Company’s Agency MBS are not rated by any rating agency, they are currently perceived by market participants to be of high credit quality, with risk of default limited to the unlikely event that the U.S. Government would not continue to support the GSEs. Given the credit quality inherent in Agency MBS, the Company does not consider any of the current impairments on its Agency MBS to be credit related. In assessing whether it is more likely than not that it will be required to sell any impaired security before its anticipated recovery, which may be at its maturity, the Company considers for each impaired security, the significance of each investment, the amount of impairment, the projected future performance of such impaired securities, as well as the Company’s current and anticipated leverage capacity and liquidity position. Based on these analyses, the Company determined that at September 30, 20172019 any unrealized losses on its Agency MBS were temporary.


Gross unrealized losses on the Company’s Non-Agency MBS were $390,000$261,000 at September 30, 20172019. Based upon the most recent evaluation, the Company does not consider these unrealized losses to be indicative of OTTI and does not believe that these unrealized losses are credit related, but are rather a reflection of current market yields and/or marketplace bid-ask spreads.  The Company has reviewed its Non-Agency MBS that are in an unrealized loss position to identify those securities with losses that are other-than-temporary based on an assessment of changes in expected cash flows for such securities, which considers recent bond performance and, where possible, expected future performance of the underlying collateral.
  
The Company did not0t recognize any credit-related OTTI losses through earnings related to its Non-Agency MBS during the three months ended September 30, 2017. The Company recognized credit-related OTTI losses through earnings related to its Non-Agency MBS of $1.0 million during the nine months ended September 30, 2017 and $485,000 during the three and nine months ended September 30, 2016.

2019 and 2018. Non-Agency MBS on which OTTI is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes.  The Company’s estimate of cash flows for these Non-Agency MBS is based on its review of the underlying mortgage loans securing these MBS.  The Company considers information available about the structure of the securitization, including

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

structural credit enhancement, if any, and the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, LTVs, geographic concentrations, as well as Rating Agency reports, general market assessments, and dialogue with market participants.  Changes in the Company’s evaluation of each of these factors impacts the cash flows expected to be collected at the OTTI assessment date. For Non-Agency MBS purchased at a discount to par that were assessed for and had no OTTI recorded this period, such cash flow estimates indicated that the amount of expected losses decreased compared to the previous OTTI assessment date. These positive cash flow changes are primarily driven by recent improvements in LTVs due to loan amortization and home price appreciation, which, in turn, positively impacts the Company’s estimates of default rates and loss severities for the underlying collateral. In addition, voluntary prepayments (i.e., loans that prepay in full with no loss) have generally trended higher relative to the Company’s assumptions for these MBS which also positively impacts the Company’s estimate of expected loss. Overall, the combination of higher voluntary prepayments and lower LTVs supports the Company’s assessment that such MBS are not other-than-temporarily impaired.

The following table presents the composition of OTTI charges recorded by the Company for the three and nine months ended September 30, 2017 and 2016:
  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
(In Thousands) 2017 2016 2017 2016
Total OTTI losses $—
 $(1,255) $(63) $(1,255)
OTTI reclassified from OCI —
 770
 (969) 770
OTTI recognized in earnings $—
 $(485) $(1,032) $(485)


The following table presents a roll-forward of the credit loss component of OTTI on the Company’s Non-Agency MBS for which a non-credit component of OTTI was previously recognized in OCI.  Changes in the credit loss component of OTTI are presented based upon whether the current period is the first time OTTI was recorded on a security or a subsequent OTTI charge was recorded.
 
  Three Months Ended
September 30, 2019		 Nine months ended September 30, 2019
(In Thousands)  
Credit loss component of OTTI at beginning of period $39,596
 $39,596
Additions for credit related OTTI not previously recognized —
 —
Subsequent additional credit related OTTI recorded —
 —
Credit loss component of OTTI at end of period $39,596
 $39,596

  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
(In Thousands) 2017 2017
Credit loss component of OTTI at beginning of period $38,337
 $37,305
Additions for credit related OTTI not previously recognized —
 63
Subsequent additional credit related OTTI recorded —
 969
Credit loss component of OTTI at end of period $38,337
 $38,337




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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


Purchase Discounts on Non-Agency MBS
 
The following tables present the changes in the components of the Company’s purchase discount on its Non-Agency MBS between purchase discount designated as Credit Reserve and OTTI and accretable purchase discount for the three and nine months ended September 30, 20172019 and 20162018:


 Three Months Ended 
 September 30, 2017		 Three Months Ended 
 September 30, 2016		 Three Months Ended
September 30, 2019		 Three Months Ended
September 30, 2018
(In Thousands) 
Discount
Designated as
Credit Reserve and OTTI
 
Accretable
Discount (1) 
Discount
Designated as
Credit Reserve and OTTI
 
 Accretable Discount (1)
 Discount
Designated as
Credit Reserve and OTTI		 
Accretable
Discount (1) 
Discount
Designated as
Credit Reserve and OTTI		 
 Accretable Discount (1)
Balance at beginning of period $(626,498) $(257,967) $(724,198) $(325,548) $(479,566) $(117,753) $(553,596) $(202,248)
Impact of RMBS Issuer Settlement (2)
 —
 —
 —
 (2,734)
Accretion of discount —
 18,621
 —
 20,236
 —
 10,357
 —
 20,115
Realized credit losses 13,982
 —
 15,629
 —
 4,062
 —
 12,042
 —
Purchases —
 (1,929) (15,124) 9,830
 —
 —
 (1,975) 1,368
Sales 4,620
 11,244
 2,398
 6,523
 12,479
 6,029
 1,552
 1,974
Net impairment losses recognized in earnings —
 —
 (485) —
Transfers/release of credit reserve 14,762
 (14,762) 6,822
 (6,822) 930
 (930) 10,220
 (10,220)
Balance at end of period $(593,134) $(244,793) $(714,958) $(295,781) $(462,095) $(102,297) $(531,757) $(191,745)



  Nine Months Ended
September 30, 2019		 Nine Months Ended
September 30, 2018
(In Thousands) 
Discount
Designated as
Credit Reserve and OTTI
 
Accretable
Discount (1) 
Discount
Designated as
Credit Reserve and OTTI
 
 Accretable Discount (1)
Balance at beginning of period $(516,116) $(155,025) $(593,227) $(215,325)
Impact of RMBS Issuer Settlement (2)(3)
 —
 (1,688) —
 (14,822)
Accretion of discount —
 38,215
 —
 54,860
Realized credit losses 21,482
 —
 31,443
 —
Purchases (624) 291
 (2,510) 1,856
Sales 23,842
 25,231
 7,144
 7,079
Transfers/release of credit reserve 9,321
 (9,321) 25,393
 (25,393)
Balance at end of period $(462,095) $(102,297) $(531,757) $(191,745)

  Nine Months Ended 
 September 30, 2017		 Nine Months Ended 
 September 30, 2016
(In Thousands) Discount
Designated as
Credit Reserve and OTTI		 
Accretable
Discount (1) 
Discount
Designated as
Credit Reserve and OTTI		 
 Accretable Discount (1)
Balance at beginning of period $(694,241) $(278,191) $(787,541) $(312,182)
Impact of RMBS Issuer Settlement (2)
 —
 —
 —
 (52,881)
Accretion of discount —
 60,461
 —
 61,153
Realized credit losses 39,445
 —
 49,408
 —
Purchases (484) (3,449) (25,999) 13,210
Sales 29,398
 10,166
 16,281
 28,297
Net impairment losses recognized in earnings (1,032) —
 (485) —
Transfers/release of credit reserve 33,780
 (33,780) 33,378
 (33,378)
Balance at end of period $(593,134) $(244,793) $(714,958) $(295,781)

(1)Together with coupon interest, accretable purchase discount is recognized as interest income over the life of the security.
(2)Includes the impact of approximately $2.7 million of cash proceeds (a one-time payment) received by the Company during the three and nine months ended September 30, 2018 in connection with the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by Lehman Brothers Holdings Inc.
(3)Includes the impact of cash proceeds (a one-time payment) received by the Company in connection with the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by JP Morgan Chase & Co. and affiliated entities of approximately $1.7 million during the nine months ended September 30, 2019 and approximately $12.1 million during the nine months ended September 30, 2018.


(1)  Together with coupon interest, accretable purchase discount is recognized as interest income over the life of the security.
(2) Includes the impact of approximately $61.8 million of cash proceeds (a one-time payment) received by the Company during the nine months ended September 30, 2016 in connection with the settlement of litigation related to certain Countrywide-sponsored residential mortgage backed securitization trusts.

Sales of MBS
During the three and nine months ended September 30, 2017, the Company sold certain Non-Agency MBS for $44.5 million and $83.1 million, realizing gross gains of $14.9 million and $30.8 million, respectively.  During the three and nine months ended September 30, 2016, the Company sold certain Non-Agency MBS for $13.2 million and $65.1 million, realizing gross gains of $7.1 million and $26.1 million, respectively. The Company has no continuing involvement with any of the sold MBS.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

MSR RelatedMSR-Related Assets


(a)Term Notes Backed by MSR RelatedMSR-Related Collateral


At September 30, 20172019 and December 31, 2016,2018, the Company had $311.6 million$1.1 billion and $141.0$538.5 million, respectively, of term notes issued by SPVs that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. Payment of principal and interest on these term notes is considered to be largely dependent on cash flows generated by the underlying MSRs, as this impacts the cash flows available to the SPV that issued the term notes.



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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

At September 30, 2017,2019, these term notes had an amortized cost of $311.0 million,$1.1 billion, gross unrealized gains of $563,000,approximately $5.4 million, a weighted average yield of 5.62%4.99% and a weighted average term to maturity of 3.75.7 years. At December 31, 2016,2018, the term notes had an amortized cost of $141.0$538.5 million, no gross unrealized gains,losses of $7,000, a weighted average yield of 5.50%5.32% and a weighted average term to maturity of 4.64.7 years.


(b) Corporate LoanLoans


The Company has entered into a loan agreement with an entitymade or participated in loans to provide financing to entities that originatesoriginate residential mortgage loans and ownsown the related MSRs. The loan isThese corporate loans are secured by certain U.S. Government, Agency and private-label MSRs, as well as certain other unencumbered assets owned by the borrower. Under

During the terms of the loan agreement,year ended December 31, 2018, the Company hasparticipated in a loan where the Company committed to lend $130.0$100.0 million of which approximately $101.1$60.2 million was drawn at September 30, 2017.2019. At September 30, 2017,2019, the coupon paid by the borrower on the drawn amount is 7.74%5.39%, the remaining term associated with the loan is 2.8 years11 months and the remaining commitment period on any undrawn amount is nine11 months. During the remaining commitment period, the Company receives a commitment fee of 1% ofbetween 0.25% and 1.0% based on the undrawn amount forof the first three months,loan.

In December 2016, the Company entered into a loan agreement under the terms of which then increasesit had committed to 1.5% for the subsequent six month period. Forlend $130.0 million, of which approximately $124.2 million was drawn at March 31, 2018. This loan was paid in full during the three months ended SeptemberJune 30, 2017, the Company recognized interest income of $2.1 million, including discount accretion and2018, at which time any remaining commitment fee income of $76,000. For the nine months ended September 30, 2017, the Company recognized interest income of $5.7 million including discount accretion and commitment fee income of $212,000.was extinguished.


Impact of AFS Securities on AOCI
 
The following table presents the impact of the Company’s AFS securities on its AOCI for the three and nine months ended September 30, 20172019 and 20162018:
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands)2019 2018 2019 2018
AOCI from AFS securities:  
  
  
  
Unrealized gain on AFS securities at beginning of period $439,898
 $548,551
 $417,167
 $620,648
Unrealized gain/(loss) on Agency MBS, net 603
 (9,177) 22,483
 (27,507)
Unrealized gain/(loss) on Non-Agency MBS, net 2,856
 (25,101) 22,211
 (62,979)
Unrealized gain on MSR term notes, net 2,024
 —
 5,391
 236
Reclassification adjustment for MBS sales included in net income (14,499) (9,455) (36,370) (25,580)
Change in AOCI from AFS securities (9,016) (43,733) 13,715
 (115,830)
Balance at end of period $430,882
 $504,818
 $430,882
 $504,818
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands)2017 2016 2017 2016
AOCI from AFS securities:  
  
  
  
Unrealized gain on AFS securities at beginning of period $668,223
 $625,697
 $620,403
 $585,250
Unrealized (loss)/gain on Agency MBS, net (3,032) (6,941) (22,241) 17,857
Unrealized gain on Non-Agency MBS, net 10,020
 71,291
 93,429
 106,906
Reclassification adjustment for MBS sales included in net income (14,935) (6,829) (30,283) (26,795)
Reclassification adjustment for OTTI included in net income —
 (485) (1,032) (485)
Change in AOCI from AFS securities (7,947) 57,036
 39,873
 97,483
Balance at end of period $660,276
 $682,733
 $660,276
 $682,733

 



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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


Interest Income on MBS, CRTResidential Mortgage Securities and MSR RelatedMSR-Related Assets
 
The following table presents the components of interest income on the Company’s MBS, CRTresidential mortgage securities and MSRMSR- related assets for the three and nine months ended September 30, 20172019 and 20162018: 
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016 2019 2018 2019 2018
Agency MBS                
Coupon interest $23,473
 $29,283
 $74,589
 $92,263
 $18,994
 $21,549
 $66,560
 $62,546
Effective yield adjustment (1)
 (7,940) (10,326) (24,575) (27,717) (7,188) (7,217) (21,039) (19,751)
Interest income $15,533
 $18,957
 $50,014
 $64,546
 $11,806
 $14,332
 $45,521
 $42,795
                
Legacy Non-Agency MBS                
Coupon interest $30,688
 $37,763
 $97,796
 $117,620
 $21,011
 $27,026
 $68,144
 $83,791
Effective yield adjustment (2)
 18,005
 20,055
 59,033
 59,270
Effective yield adjustment (2)(3)
 10,336
 18,984
 38,003
 53,648
Interest income $48,693
 $57,818
 $156,829
 $176,890
 $31,347
 $46,010
 $106,147
 $137,439
                
RPL/NPL MBS                
Coupon interest $13,947
 $25,630
 $54,475
 $74,773
 $13,227
 $11,526
 $44,305
 $31,167
Effective yield adjustment (1)(4)
 612
 190
 1,424
 1,892
 8
 1,131
 158
 1,206
Interest income $14,559
 $25,820
 $55,899
 $76,665
 $13,235
 $12,657
 $44,463
 $32,373
                
CRT securities                
Coupon interest $7,868
 $3,562
 $19,712
 $8,725
 $5,174
 $7,257
 $16,769
 $23,484
Effective yield adjustment (2)
 808
 421
 3,186
 1,172
 (923) 491
 (1,224) 2,455
Interest income $8,676
 $3,983
 $22,898
 $9,897
 $4,251
 $7,748
 $15,545
 $25,939
                
MSR related assets        
MSR-related assets        
Coupon interest $7,117
 $—
 $17,621
 $—
 $15,222
 $6,387
 $38,107
 $18,985
Effective yield adjustment (1)
 77
 —
 212
 —
 52
 20
 125
 1,264
Interest income $7,194
 $—
 $17,833
 $—
 $15,274
 $6,407
 $38,232
 $20,249
 
(1)  Includes amortization of premium paid net of accretion of purchase discount.  For Agency MBS, RPL/NPL MBS and the corporate loan secured by MSRs, interest income is recorded at an effective yield, which reflects net premium amortization/accretion based on actual prepayment activity.
(2) The effective yield adjustment is the difference between the net income calculated using the net yield, which is based on management’s estimates of the amount and timing of future cash flows, less the current coupon yield.

4.    Residential Whole Loans

Included on(3) Includes accretion income recognized due to the Company’s consolidated balance sheetsimpact of redemptions of certain securities that had been previously purchased at a discount of approximately $2.3 million during the three months ended September 30, 20172018, and December 31, 2016 are approximately $1.7 billion and $1.4 billion, respectively, of residential whole loans arising from the Company’s interests in certain entities established to acquire the loans and an entity in connection with its loan securitization transaction. The Company has assessed that these entities are required to be consolidated.

Residential Whole Loans, at Carrying Value

Residential whole loans, at carrying value totaled approximately $639.2$3.1 million and $590.5$2.3 million at September 30, 2017 and December 31, 2016, respectively. The carrying value reflectsduring the original investment amount, plus accretion of interest income, less principal and interest cash flows received. The carrying value is reduced by any allowance for loan losses established subsequent to acquisition. The Company had approximately 3,700 and 3,200 Residential whole loans held at carrying value at September 30, 2017 and December 31, 2016, respectively.

As of September 30, 2017 the Company had established an allowance for loan losses of approximately $318,000 on its residential whole loan pools held at carrying value. For the three and nine months ended September 30, 2017,2019 and 2018, respectively.
(4) Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously purchased at a net reversaldiscount of approximately $4,000 and $1.1 million during the three months ended September 30, 2019 and 2018, respectively, and $152,000 and $1.2 million during the nine months ended September 30, 2019 and 2018, respectively.



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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


4.    Residential Whole Loans

Included on the Company’s consolidated balance sheets at September 30, 2019 and December 31, 2018 are approximately $6.4 billion and $4.7 billion, respectively, of residential whole loans arising from the Company’s interests in certain trusts established to acquire the loans and certain entities established in connection with its loan securitization transactions. The Company has assessed that these entities are required to be consolidated for financial reporting purposes.

Residential Whole Loans, at Carrying Value

The following table presents the components of the Company’s Residential whole loans, at carrying value at September 30, 2019 and December 31, 2018:
(Dollars In Thousands) September 30, 2019 December 31, 2018
Purchased Performing Loans:    
Non-QM loans $2,727,006
 $1,354,774
Rehabilitation loans 968,867
 494,576
Single-family rental loans 366,362
 145,327
Seasoned performing loans 188,982
 224,051
Total Purchased Performing Loans 4,251,217
 2,218,728
Purchased Credit Impaired Loans 718,197
 797,987
Total Residential whole loans, at carrying value $4,969,414
 $3,016,715
     
Number of loans 14,968
 11,149


The following table presents components of interest income on the Company’s Residential whole loans, at carrying value for the three and nine months ended September 30, 2019 and 2018:
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
 (In Thousands) 2019 2018 2019 2018
Purchased Performing Loans:        
Non-QM loans $30,258
 $10,284
 $79,250
 $16,177
Rehabilitation loans 15,142
 4,708
 38,331
 8,323
Single-family rental loans 5,025
 918
 11,652
 1,733
Seasoned performing loans 3,166
 2,416
 9,461
 2,416
Total Purchased Performing Loans 53,591
 18,326
 138,694
 28,649
Purchased Credit Impaired Loans 10,635
 11,198
 33,031
 33,139
Total Residential whole loans, at carrying value $64,226
 $29,524
 $171,725
 $61,788




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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

The following table presents additional information regarding the Company’s Residential whole loans, at carrying value at September 30, 2019:

September 30, 2019
  Carrying Value Unpaid Principal Balance (“UPB”) 
Weighted Average Coupon (1)
 Weighted Average Term to Maturity (Months) 
Weighted Average LTV Ratio (2)
 Aging by UPB
         Past Due Days
(Dollars In Thousands)      Current 30-59 60-89 90+
Purchased Performing Loans: (3)
                  
Non-QM loans $2,667,482
 $2,582,746
 6.15% 365 66% $2,527,231
 $29,208
 $14,349
 $11,958
Rehabilitation loans (4)
 969,255
 969,255
 7.32
 8 65
 843,034
 70,130
 16,801
 39,290
Single-family rental loans 366,362
 364,350
 6.27
 325 69
 349,967
 10,974
 2,256
 1,153
Seasoned performing loans 188,982
 205,243
 4.40
 183 47
 200,643
 2,223
 1,048
 1,329
Purchased Credit Impaired Loans (5)
 718,197
 900,183
 4.44
 297 83
 N/M
 N/M
 N/M
 104,008
Residential whole loans, at carrying value, total or weighted average $4,910,278
 $5,021,777
 6.03% 274          

(1)Weighted average is calculated based on the interest bearing principal balance of each loan within the related category. For loans acquired with servicing rights released by the seller, interest rates included in the calculation do not reflect loan servicing fees. For loans acquired with servicing rights retained by the seller, interest rates included in the calculation are net of servicing fees.
(2)LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Rehabilitation loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Rehabilitation loans, totaling $250.0 million, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. The weighted average LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 69%. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.
(3)Excluded from the table above are approximately $59.5 million of Purchased Performing Loans for which the closing of the purchase transaction had not occurred as of September 30, 2019.
(4)Carrying value of Rehabilitation loans excludes an allowance for loan losses of $388,000 at September 30, 2019.
(5)Purchased Credit Impaired Loans tend to be characterized by varying performance of the underlying borrowers over time, including loans where multiple months of payments are received in a period to bring the loan to current status, followed by months where no payments are received. Accordingly, delinquency information is presented for loans that are more than 90 days past due that are considered to be seriously delinquent.

Purchased Performing Loans

As of September 30, 2019, there were 166 Purchased Performing Loans held at carrying value that have been placed on non-accrual status because they are 90 or more days delinquent or otherwise had not met the necessary criteria to be returned to accrual status. Such loans have an unpaid balance of approximately $66.4 million. These non-accrual loans represent approximately 1.6% of the total outstanding principal balance of all of the Company’s Purchased Performing Loans and have a weighted average LTV of 68%. As of September 30, 2019, the Company had established an allowance for loan losses of $388,000. For the three months ended September 30, 2019, 0 provision for loan losses was recorded. For the nine months ended September 30, 2019, a provision for loan losses of $622,000 was recorded, which is included in Operating and Other expense on the Company’s consolidated statements of operations. NaN provision for loan losses was recorded in the prior year periods.

In connection with purchased Rehabilitation loans, the Company had unfunded commitments of $126.0 million at September 30, 2019.

Purchased Credit Impaired Loans

As of September 30, 2019 and 2018, the Company had established an allowance for loan losses of approximately $1.9 million and $461,000, respectively, on its Purchased Credit Impaired Loans held at carrying value. For the three and nine months ended September 30, 2019, a net provision for loan losses of approximately $57,000$347,000 and $672,000$915,000 was recorded, respectively, which is included in Operating and Other Expenseexpense on the Company’s consolidated statements of operations. For the three months ended September 30, 2016, there was no provision for loan losses recorded. For theand nine months ended September 30, 2016,2018, a net reversal of provision for loan losses of approximately $142,000$164,000 and $131,000 was recorded.recorded, respectively.



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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

The following table presents the activity in the Company’s allowance for loan losses on its residential whole loan poolsPurchased Credit Impaired Loans held at carrying value for the three and nine months ended September 30, 20172019 and 2016:2018:


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
 (In Thousands) 2019
2018 2019 2018
Balance at the beginning of period $1,536
 $297
 $968
 $330
Provisions for loan losses 347
 164
 915
 131
Balance at the end of period $1,883
 $461
 $1,883
 $461

 (In Thousands) Three Months Ended September 30, Nine Months Ended September 30,
  2017
2016 2017 2016
Balance at the beginning of period $375
 $1,023
 $990
 $1,165
Reversal of provisions for loan losses (57) —
 (672) (142)
Balance at the end of period $318
 $1,023
 $318
 $1,023


The Company did not acquire any Purchased Credit Impaired Loans held at carrying value during the three and nine months ended September 30, 2019. The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the residential whole loansPurchased Credit Impaired Loans held at carrying value acquired by the Company for the three and nine months ended September 30, 2017 and 2016:2018:


 Three Months Ended
September 30,		 Nine Months Ended
September 30,
(In Thousands) Three Months Ended September 30, Nine Months Ended September 30, 2019 
2018 (1)
 2019 
2018 (1)
 
2017 (1)
 
2016 (2)
 
2017 (1)
 
2016 (2)
Contractually required principal and interest $185,234
 $121,818
 $185,234
 $363,144
 $—
 $154,911
 $—
 $154,911
Contractual cash flows not expected to be collected (non-accretable yield) (33,448) (31,648) (33,448) (66,685) —
 (15,378) —
 (15,378)
Expected cash flows to be collected 151,786
 90,170
 151,786
 296,459
 —
 139,533
 —
 139,533
Interest component of expected cash flows (accretable yield) (53,916) (28,801) (53,916) (98,550) —
 (41,947) —
 (41,947)
Fair value at the date of acquisition $97,870
 $61,369
 $97,870
 $197,909
 $—
 $97,586
 $—
 $97,586


(1)Included in the activity presented for the three and nine months ended September 30, 2018 is approximately $54.9 million of Purchase Credit Impaired Loans held at carrying value the Company committed to purchase during the three months ended June 30, 2018, but for which the closing of the purchase transaction occurred during the three months ended September 30, 2018.
(1) Included in the activity presented for the three and nine months ended September 30, 2017 are approximately $97.9 million of loans the Company committed to purchase during the three months ended June 30, 2017, but for which the closing of the purchase transaction occurred during the three months ended September 30, 2017.
(2) Excluded from the table above are approximately $111.2 million of residential whole loans held at carrying value for which the closing of the purchase transaction had not occurred as of September 30, 2016.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017


The following table presents accretable yield activity for the Company’s residential whole loansPurchased Credit Impaired Loans held at carrying value for the three and nine months ended September 30, 20172019 and 2016:2018:


  Three Months Ended
September 30,		 Nine Months Ended
September 30,
 (In Thousands) 2019 
2018 (1)
 2019 
2018 (1)
Balance at beginning of period $376,264
 $401,075
 $415,330
 $421,872
  Additions —
 41,947
 —
 41,947
  Accretion (10,635) (11,198) (33,031) (33,139)
Liquidations and other (11,399) (8,378) (33,695) (23,388)
  Reclassifications from non-accretable difference, net 3,892
 9,694
 9,518
 25,848
Balance at end of period $358,122
 $433,140
 $358,122
 $433,140

 (In Thousands) Three Months Ended September 30, Nine Months Ended September 30,
  
2017 (1)
 
2016 (2)
 
2017 (1)
 
2016 (2)
Balance at beginning of period $318,125
 $234,527
 $334,379
 $175,271
  Additions 53,916
 28,801
 53,916
 98,550
  Accretion (9,026) (5,917) (26,219) (16,112)
  Reclassifications from/(to) non-accretable difference, net 303
 218
 1,242
 (80)
Balance at end of period $363,318
 $257,629
 $363,318
 $257,629

(1)Included in the activity presented for the three and nine months ended September 30, 2018 is approximately $54.9 million of Purchase Credit Impaired Loans held at carrying value the Company committed to purchase during the three months ended June 30, 2018, but for which the closing of the purchase transaction occurred during the three months ended September 30, 2018.

(1) Included in the activity presented for the three and nine months ended September 30, 2017 are approximately $97.9 million of loans the Company committed to purchase during the three months ended June 30, 2017, but for which the closing of the purchase transaction occurred during the three months ended September 30, 2017.
(2) Excluded from the table above are approximately $111.2 million of residential whole loans held at carrying value for which the closing of the purchase transaction had not occurred as of September 30, 2016.


Accretable yield for Purchased Credit Impaired residential whole loans is the excess of loan cash flows expected to be collected over the purchase price. The cash flows expected to be collected represent the Company’s estimate of the amount and timing of undiscounted principal and interest cash flows. Additions include accretable yield estimates for purchases made during the period and reclassification to accretable yield from non-accretable yield. Accretable yield is reduced by accretion during the period. The reclassifications between accretable and non-accretable yield and the accretion of interest income are based on changes in estimates regarding loan performance and the value of the underlying real estate securing the loans. In future periods, as the Company

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

updates estimates of cash flows expected to be collected from the loans and the underlying collateral, the accretable yield may change. Therefore, the amount of accretable income recorded during the three and nine months ended September 30, 20172019 is not necessarily indicative of future results.


Residential Whole Loans, at Fair Value


Certain of the Company’s residential whole loans are presented at fair value on its consolidated balance sheets as a result of a fair value election made at the time of acquisition. Subsequent changes in fair value are reported in current period earnings and presented in Net gain on residential whole loans heldmeasured at fair value through earnings on the Company’s consolidated statements of operations.


The following table presents information regarding the Company’s residential whole loans held at fair value at September 30, 20172019 and December 31, 2016:2018:

(Dollars in Thousands)
 
September 30, 2017 (1)
 December 31, 2016 September 30, 2019 
December 31, 2018 (1)
Less than 60 Days Past Due:    
Outstanding principal balance $1,178,866
 $966,174
 $654,542
 $610,290
Aggregate fair value $983,150
 $814,682
 $617,172
 $561,770
Weighted Average LTV Ratio (2)
 77.08% 76.18%
Number of loans 4,834
 3,812
 3,140
 2,898
    
60 Days to 89 Days Past Due:    
Outstanding principal balance $66,657
 $63,938
Aggregate fair value $60,262
 $54,947
Weighted Average LTV Ratio (2)
 77.02% 82.86%
Number of loans 340
 285
    
90 Days or More Past Due:    
Outstanding principal balance $871,647
 $970,758
Aggregate fair value $775,735
 $854,545
Weighted Average LTV Ratio (2)
 78.26% 90.24%
Number of loans 3,397
 3,531
Total Residential whole loans, at fair value $1,453,169
 $1,471,262


(1) Excluded from the table above are approximately $120.4
(1)Excluded from the table above are approximately $194.7 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of December 31, 2018.
(2)LTV represents the ratio of the total unpaid principal balance of the loan, to the estimated value of the collateral securing the related loan. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.

The following table presents the components of Net gain on residential whole loans heldmeasured at fair value through earnings for which the closing of the purchase transaction had not occurred as of September 30, 2017.

During the three and nine months ended September 30, 2017, the Company recorded net gains on residential whole loans held at fair value of $18.7 million2019 and $48.7 million, respectively. During the three and nine months ended September 30, 2016, the Company recorded net gains on residential whole loans held at fair value of $19.6 million and $47.7 million, respectively.

2018:
25
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
 (In Thousands) 2019 2018 2019 2018
Coupon payments and other income received (1)
 $20,176
 $17,634
 $61,060
 $52,034
Net unrealized gains 13,185
 8,442
 33,312
 26,788
Net gain on payoff/liquidation of loans 2,026
 3,251
 6,906
 10,203
Net gain on transfers to REO 4,788
 5,615
 15,637
 16,858
    Total $40,175
 $34,942
 $116,915
 $105,883


(1)Primarily includes recovery of delinquent interest upon the liquidation of non-performing loans, recurring coupon interest payments received on mortgage loans that are contractually current, and cash payments received from private mortgage insurance on liquidated loans.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


The following table presents the components of Net gain on residential whole loans held at fair value for the three and nine months ended September 30, 2017 and 2016:
 (In Thousands) Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Coupon payments and other income received $9,824
 $6,253
 $27,971
 $15,987
Net unrealized gains 5,289
 10,913
 12,499
 25,529
Net gain on payoff/liquidation of loans 1,456
 1,535
 3,076
 3,536
Net gain on transfer to REO 2,110
 938
 5,114
 2,677
    Total $18,679
 $19,639
 $48,660
 $47,729


5.    Other Assets


The following table presents the components of the Company’s Other assets at September 30, 20172019 and December 31, 2016:2018:


(In Thousands) September 30, 2019 December 31, 2018
REO (1)
 $376,200
 $249,413
Capital contributions made to loan origination partners 122,903
 23,210
Other interest-earning assets 87,896
 92,022
MBS and loan related receivables 102,715
 130,964
Other 45,495
 32,176
Total Other Assets $735,209
 $527,785

(In Thousands) September 30, 2017 December 31, 2016
REO $137,979
 $80,503
Interest receivable 25,319
 27,795
Swaps, at fair value —
 233
Goodwill 7,189
 7,189
Prepaid and other assets 62,870
 78,775
Total Other Assets $233,357
 $194,495

(1)Includes $19.6 million of REO that is held-for-investment at September 30, 2019.


(a) Real Estate Owned


At September 30, 2017,2019, the Company had 6711,508 REO properties with an aggregate carrying value of $138.0$376.2 million. At December 31, 2016,2018, the Company had 4471,093 REO properties with an aggregate carrying value of $80.5$249.4 million.
 
During the three and nine months ended September 30, 2017, the Company reclassified 174 and 521 mortgage loans to REO at an aggregate estimated fair value less estimated selling costs of $38.9 million and $97.4 million, respectively, at the time of transfer. During the three and nine months ended September 30, 2016, the Company reclassified 122 and 385 mortgage loans to REO at an aggregate estimated fair value less estimated selling costs of $24.8 million and $69.8 million, respectively, at the time of transfer. Such transfers occur when the Company takes possession of the property by foreclosing on the borrower or completes a “deed-in-lieu of foreclosure” transaction. From time to time, the Company also acquires REO in connection with transactions to acquire residential whole loans.

At September 30, 2017, $125.22019, $370.9 million of residential real estate property was held by the Company that was acquired either through a completed foreclosure proceeding or from completion of a deed-in-lieu of foreclosure or similar legal agreement. In addition, excluding unsettled residential whole loans, formal foreclosure proceedings were in process with respect to $31.4$41.2 million of residential whole loans held at carrying value and $538.5$656.4 million of residential whole loans held at fair value at September 30, 2017.2019.


DuringThe following table presents the activity in the Company’s REO for the three and nine months ended September 30, 2017,2019 and 2018:
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Balance at beginning of period $334,069
 $192,162
 $249,413
 $152,356
Adjustments to record at lower of cost or fair value (3,875) (4,056) (9,264) (11,592)
Transfer from residential whole loans (1)
 61,888
 58,051
 193,531
 161,572
Purchases and capital improvements, net 5,108
 4,897
 16,307
 10,179
Disposals (2)
 (20,990) (27,949) (73,787) (89,410)
Balance at end of period $376,200
 $223,105
 $376,200
 $223,105
         
Number of properties 1,508
 979
 1,508
 979

(1)Includes net gain recorded on transfer of approximately $5.0 million and $5.8 million, for the three months ended September 30, 2019 and 2018, respectively; and approximately $16.1 million and $17.0 million for the nine months ended September 30, 2019 and 2018, respectively.
(2)During the three and nine months ended September 30, 2019, the Company sold 142 and 431 REO properties for consideration of $23.0 million and $80.0 million, realizing net gains of approximately $2.1 million and $5.8 million, respectively. During the three and nine months ended September 30, 2018, the Company sold 157 and 537 REO properties for consideration of $29.9 million and $96.0 million, realizing net gains of approximately $2.0 million and $6.6 million, respectively. These amounts are included in Other Income, net on the Company’s consolidated statements of operations.


(b) Capital Contributions Made to Loan Origination Partners

The Company sold 139 and 368 REO properties for considerationhas made investments in several loan originators as part of $18.4 million and $53.0 million, realizing net gains of approximately $805,000 and $2.8 million, respectively. During the three and nine months ended September 30, 2016, the Company sold 57 and 179 REO properties for consideration of $7.9 million and $24.0 million, realizing net gains of approximately $733,000 and $1.8 million, respectively. These amounts are included in Other, net on the Company’s consolidated statements of operations. In addition, following an updated assessment of liquidation amounts expectedits strategy to be realized that was performed on all REO held at the enda reliable source of the third quarters of 2017capital to select partners from whom it sources residential mortgage loans through both flow arrangements and 2016, downward adjustments of approximately $3.1 million and $1.7 million were recorded to reflect certain REO properties at the lower of cost or estimated fair value as of September 30, 2017 and 2016, respectively.bulk purchases. To date, such



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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


The following table presentscontributions of capital have included the activityacquisition of approximately $28.5 million of common equity, $69.4 million of preferred equity and $25.0 million of convertible notes. In addition, for certain partners, options or warrants may have also been acquired that provide the Company the ability to increase the level of its investment if certain conditions are met. At the end of each reporting period, or earlier if circumstances warrant, the Company evaluates whether the nature of its interests and other involvement with the investee entity requires the Company to apply equity method accounting or consolidate the results of the investee entity with the Company’s financial results. To date, the nature of the Company’s interests and/or involvement with investee companies has not resulted in consolidation. Further, to the extent that the nature of the Company’s interests has resulted in the Company’s REOneed for the threeCompany to apply equity method accounting, the impact of such accounting on the Company’s results for periods subsequent to that in which the Company was determined to have significant influence over the investee company was not material for any period. As the interests acquired to date by the Company generally do not have a readily determinable fair value, the Company accounts for its non-equity method interests (including any acquired options and nine months ended warrants) in loan originators initially at cost. The carrying value of these investments will be adjusted if it is determined that an impairment has occurred or if there has been a subsequent observable transaction in either the investee company’s equity securities or a similar security that provides evidence to support an adjustment to the carrying value. At September 30, 2017 and 2016:2019, approximately $1.1 billion of the Company’s Residential whole loans, at carrying value are serviced by entities in which the Company has an investment.

(In Thousands) Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Balance at beginning of period $104,443
 $56,784
 $80,503
 $28,026
Adjustments to record at lower of cost or fair value (3,129) (1,659) (7,306) (4,655)
Transfer from residential whole loans (1)
 38,944
 24,812
 97,388
 69,803
Purchases and capital improvements 15,342
 415
 17,224
 2,204
Disposals (17,621) (7,163) (49,830) (22,189)
Balance at end of period $137,979
 $73,189
 $137,979
 $73,189

(1)  Includes net gain recorded on transfer of approximately $2.8 million and $845,000 for the three months ended September 30, 2017 and 2016, respectively; and approximately $5.3 million and $2.5 million for the nine months ended September 30, 2017 and 2016, respectively.


(b)(c)Derivative Instruments
 
The Company’s derivative instruments are currently comprised of Swaps, the majority of which are designated as cash flow hedges against the interest rate risk associated with its borrowings. In addition, in connection with managing risks associated with purchases of longer duration Agency MBS, the Company has also entered into Swaps that are not designated as hedges for accounting purposes.

The following table presents the fair value of the Company’s derivative instruments and their balance sheet location at September 30, 20172019 and December 31, 20162018:
 
 September 30, 2017 December 31, 2016 September 30, 2019 December 31, 2018
Derivative Instrument(1) Designation  Balance Sheet Location Notional Amount Fair Value Notional Amount Fair Value Designation  Notional Amount Fair Value Notional Amount Fair Value
(In Thousands)                      
Non-cleared legacy Swaps (1)
 Hedging Assets $—
 $—
 $350,000
 $233
Cleared Swaps (2)
 Hedging Liabilities $2,550,000
 $—
 $2,550,000
 $(46,954)
Swaps Hedging $2,922,000
 $—
 $2,622,000
 $—
Swaps Non-Hedging $230,000
 $—
 $595,000
 $—
 
(1) Non-cleared legacy Swaps include Swaps executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. The Company’s final non-cleared legacy Swaps expired during the three months ended June 30, 2017.
(2) Cleared Swaps includeRepresents Swaps executed bilaterally with a counterparty in the over-the-counter market but then novated to a central clearing house, whereby the central clearing house becomes the counterparty to both of the original counterparties. As of September 30, 2017, all of the Company’s Swaps have been novated to and are cleared by a central clearing house are subject to initial margin requirements. Beginning in January 2017, variation margin payments on the Company’s cleared Swaps are treated as a legal settlement of the exposure under the Swap contract. Previously such payments were treated as collateral pledged against the exposure under the Swap contract. The effect of this change is to reduce what would have otherwise been reported as fair value of the Swap.

Swaps
 
The following table presents the assets pledged as collateral against the Company’s Swap contracts at September 30, 20172019 and December 31, 20162018:
 
(In Thousands) September 30, 2019 December 31, 2018
Agency MBS, at fair value $2,333
 $2,735
Restricted cash 23,395
 30,068
Total assets pledged against Swaps $25,728
 $32,803
(In Thousands) September 30, 2017 December 31, 2016
Agency MBS, at fair value $23,197
 $32,468
Restricted cash 6,524
 53,849
Total assets pledged against Swaps $29,721
 $86,317

 
The Company’s derivative hedging instruments,Swaps designated as hedges, or a portion thereof, could become ineffective in the future if the associated repurchase agreements that such derivatives hedge fail to exist or if expected payments under the Swaps fail to have terms that match those ofadequately offset expected payments under the derivatives that hedge such borrowings.repurchase agreements.  At September 30, 2017,2019, all of the Company’s derivatives that were designated in a hedging relationship were deemed effective for hedging purposes and no derivatives were terminated during the three and nine months ended September 30, 2017 and 2016.purposes.
 

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

The Company’s Swaps designated as hedging transactions have the effect of modifying the repricing characteristics of the Company’s repurchase agreements and cash flows for such liabilities.  To date, no cost has been incurred at the inception of a

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

Swap (except for certain transaction fees related to entering into Swaps cleared though a central clearing house), pursuant to which the Company agrees to pay a fixed rate of interest and receive a variable interest rate, generally based on one-month or three-month London Interbank Offered Rate (“LIBOR”), on the notional amount of the Swap. TheDuring the nine months ended September 30, 2019, the Company did not recognizede-designated and re-designated any change in the value of its existing Swaps previously designated as hedges through earnings as a resulthedge in order to benefit from the simplified assessment requirements under ASU 2017-12. This de-designation and re-designation had no net impact on the Company’s financial condition or results of hedge ineffectiveness during the three and nine months ended September 30, 2017 and 2016.operations.
 
At September 30, 2017,2019, the Company had Swaps designated in hedging relationships with an aggregate notional amount of $2.6$3.2 billion and extended 3018 months on average with a maximum term of approximately 7150 months. 


The following table presents certain information with respect to the Company’s Swap activity during the three and nine months ended September 30, 2017:

(Dollars in Thousands) Three Months Ended 
 September 30, 2017		 Nine Months Ended 
 September 30, 2017
New Swaps:    
Number of new Swaps —
 —
Aggregate notional amount $—
 $—
Swaps amortized/expired:    
Aggregate notional amount $—
 $350,000
Weighted average fixed-pay rate —% 0.58%

The following table presents information about the Company’s Swaps at September 30, 20172019 and December 31, 20162018:
 
   September 30, 2017 December 31, 2016
  Notional Amount 
Weighted Average Fixed-Pay
Interest Rate
 
Weighted Average Variable
Interest Rate (2) 
Notional Amount  
Weighted Average Fixed-Pay
Interest Rate
 
 Weighted Average Variable
Interest Rate (2)
 
 
Maturity (1)
 (Dollars in Thousands)            
 Within 30 days $—
 —% —% $—
 —% —%
 Over 30 days to 3 months —
 —
 —
 50,000
 0.67
 0.64
 Over 3 months to 6 months —
 —
 —
 300,000
 0.57
 0.66
 Over 6 months to 12 months 550,000
 1.49
 1.23
 —
 —
 —
 Over 12 months to 24 months 200,000
 1.71
 1.24
 550,000
 1.49
 0.71
 Over 24 months to 36 months 1,500,000
 2.22
 1.24
 200,000
 1.71
 0.76
 Over 36 months to 48 months 200,000
 2.20
 1.23
 1,500,000
 2.22
 0.74
 Over 48 months to 60 months —
 —
 —
 200,000
 2.20
 0.75
 Over 60 months to 72 months 100,000
 2.75
 1.24
 —
 —
 —
 
Over 72 months to 84 months (3)
 —
 —
 —
 100,000
 2.75
 0.74
 Total Swaps $2,550,000
 2.04% 1.24% $2,900,000
 1.87% 0.72%
   September 30, 2019 December 31, 2018
  Notional Amount 
Weighted Average Fixed-Pay
Interest Rate
 
Weighted Average Variable
Interest Rate (2) 
Notional Amount  
Weighted Average Fixed-Pay
Interest Rate
 
 Weighted Average Variable
Interest Rate (2)
 
 
Maturity (1)
 (Dollars in Thousands)        
 Within 30 days $—
 —% —% $—
 —% —%
 Over 30 days to 3 months —
 —
 —
 100,000
 1.71
 2.50
 Over 3 months to 6 months —
 —
 —
 100,000
 1.71
 2.50
 Over 6 months to 12 months 1,630,000
 2.27
 2.06
 —
 —
 —
 Over 12 months to 24 months 800,000
 1.73
 2.12
 1,630,000
 2.27
 2.50
 Over 24 months to 36 months 500,000
 2.73
 2.13
 800,000
 2.57
 2.64
 Over 36 months to 48 months 182,000
 2.83
 2.09
 —
 —
 —
 Over 48 months to 60 months 40,000
 3.11
 2.27
 417,000
 2.88
 2.63
 Over 84 months —
 —
 —
 170,000
 3.00
 2.66
 Total Swaps $3,152,000
 2.25% 2.09% $3,217,000
 2.42% 2.56%


(1)  Each maturity category reflects contractual amortization and/or maturity of notional amounts.
(2)  Reflects the benchmark variable rate due from the counterparty at the date presented, which rate adjusts monthly or quarterly based on one-month or three-month LIBOR, respectively.
(3) Reflects one Swap with a maturity date of July 2023.
 

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

The following table presents the net impact of the Company’s derivative hedging instruments on its net interest expense and the weighted average interest rate paid and received for such Swaps for the three and nine months ended September 30, 20172019 and 20162018:
 
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
(Dollars in Thousands) 2019 2018 2019 2018
Interest (expense)/income attributable to Swaps $(322) $(547) $1,561
 $(4,187)
Weighted average Swap rate paid 2.29% 2.19% 2.32% 2.09%
Weighted average Swap rate received 2.24% 2.09% 2.40% 1.86%

During the three and nine months ended September 30, 2019, the Company recorded net losses on Swaps not designated in hedging relationships of approximately $929,000 and $17.3 million, respectively, which included $3.7 million and $17.7 million of losses realized on the unwind of certain Swaps. During the three and nine months ended September 30, 2018, the Company recorded net gains on Swaps not designated in hedging relationships of $4.0 million and $4.4 million, respectively. These amounts are included in Other income, net on the Company’s consolidated statements of operations.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
(Dollars in Thousands) 2017 2016 2017 2016
Interest expense attributable to Swaps $5,310
 $10,170
 $19,606
 $31,279
Weighted average Swap rate paid 2.04% 1.82% 1.96% 1.82%
Weighted average Swap rate received 1.23% 0.49% 1.00% 0.45%

Impact of Derivative Hedging Instruments on AOCI
 
The following table presents the impact of the Company’s derivative hedging instruments on its AOCI for the three and nine months ended September 30, 20172019 and 20162018:
 
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
(In Thousands) 2019 2018 2019 2018
AOCI from derivative hedging instruments:        
Balance at beginning of period $(28,114) $16,160
 $3,121
 $(11,424)
Net (loss)/gain on Swaps (233) 5,390
 (30,384) 32,974
Amortization of de-designated hedging instruments, net (685) —
 (1,769) —
Balance at end of period $(29,032) $21,550
 $(29,032) $21,550

  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
(In Thousands) 2017 2016 2017 2016
AOCI from derivative hedging instruments:        
Balance at beginning of period $(35,841)—
$(131,971) $(46,721) $(69,399)
Net gain/(loss) on Swaps 5,791
 22,769
 16,671
 (39,803)
Balance at end of period $(30,050) $(109,202) $(30,050) $(109,202)





6.      Repurchase Agreements and Other Advances
 
Repurchase Agreements

The Company’s repurchase agreements are accounted for as secured borrowings and bear interest that is generally LIBOR-based.  (See Notes 2(l)2(k) and 7)  At September 30, 2017,2019, the Company’s borrowings under repurchase agreements had a weighted average remaining term-to-interest rate reset of 1933 days and an effective repricing period of eleven10 months, including the impact of related Swaps.  At December 31, 2016,2018, the Company’s borrowings under repurchase agreements had a weighted average remaining term-to-interest rate reset of 1931 days and an effective repricing period of 128 months, including the impact of related Swaps.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


 
The following table presents information with respect to the Company’s borrowings under repurchase agreements and associated assets pledged as collateral at September 30, 20172019 and December 31, 20162018:
(Dollars in Thousands) September 30,
2017		 December 31,
2016		 September 30,
2019		 December 31,
2018
Repurchase agreement borrowings secured by Agency MBS $2,671,245
 $3,095,020
 $1,675,861
 $2,384,357
Fair value of Agency MBS pledged as collateral under repurchase agreements $2,888,156
 $3,280,689
 $1,807,047
 $2,572,597
Weighted average haircut on Agency MBS (1)
 4.62% 4.67% 4.42% 4.60%
Repurchase agreement borrowings secured by Legacy Non-Agency MBS $1,361,866
 $1,690,937
 $1,231,908
 $1,447,585
Fair value of Legacy Non-Agency MBS pledged as collateral under repurchase agreements (2)
 $1,848,134
 $2,317,708
 $1,561,501
 $1,871,650
Weighted average haircut on Legacy Non-Agency MBS (1)
 22.40% 24.01% 20.57% 21.38%
Repurchase agreement borrowings secured by RPL/NPL MBS $798,508
 $1,943,572
 $642,740
 $1,084,532
Fair value of RPL/NPL MBS pledged as collateral under repurchase agreements $1,005,757
 $2,433,711
 $828,048
 $1,377,250
Weighted average haircut on RPL/NPL MBS (1)
 21.58% 20.98% 21.89% 21.31%
Repurchase agreements secured by U.S. Treasuries $474,726
 $504,572
Fair value of U.S. Treasuries pledged as collateral under repurchase agreements $475,688
 $510,767
Weighted average haircut on U.S. Treasuries (1)
 1.39% 1.60%
Repurchase agreements secured by CRT securities
 $413,172
 $271,205
 $303,544
 $391,586
Fair value of CRT securities pledged as collateral under repurchase agreements $530,833
 $357,488
 $377,779
 $480,315
Weighted average haircut on CRT securities (1)
 22.05% 23.22% 19.25% 20.01%
Repurchase agreements secured by MSR related assets $268,819
 $135,112
Fair value of MSR related assets pledged as collateral under repurchase agreements $412,674
 $226,780
Weighted average haircut on MSR related assets (1)
 33.76% 41.40%
Repurchase agreements secured by residential whole loans (3)
 $883,366
 $832,060
Fair value of residential whole loans pledged as collateral under repurchase agreements $1,273,955
 $1,175,088
Repurchase agreements secured by residential whole loans (2)
 $3,727,526
 $2,020,508
Fair value of residential whole loans pledged as collateral under repurchase agreements (3)(4)
 $4,810,078
 $2,441,931
Weighted average haircut on residential whole loans (1)
 28.35% 25.03% 14.85% 16.55%
Repurchase agreements secured by MSR-related assets $918,055
 $474,127
Fair value of MSR-related assets pledged as collateral under repurchase agreements $1,164,284
 $611,807
Weighted average haircut on MSR-related assets (1)
 21.00% 21.88%
Repurchase agreements secured by other interest-earning assets $72,911
 $76,419
Fair value of other interest-earning assets pledged as collateral under repurchase agreements $73,925
 $81,494
Weighted average haircut on other interest-earning assets (1)
 21.20% 21.15%
 
(1)Haircut represents the percentage amount by which the collateral value is contractually required to exceed the loan amount.
(2) Includes $172.4Excludes $1.1 million of Legacy Non-Agency MBS acquired from consolidated VIEs that are eliminated from the Company’s consolidated balance sheets at December 31, 2016.
(3) Excludes $259,000 and $210,000$27,000 of unamortized debt issuance costs at September 30, 20172019 and December 31, 2016,2018, respectively.

(3) At September 30, 2019 and December 31, 2018, includes RPL/NPL MBS with an aggregate fair value of $238.4 million and $27.0 million, respectively, obtained in connection with the Company’s loan securitization transactions that are eliminated in consolidation.
(4) At September 30, 2019 and December 31, 2018, includes residential whole loans held at carrying value with an aggregate fair value of $3.7 billion and $1.7 billion and aggregate amortized cost of $3.7 billion and $1.6 billion, respectively and residential whole loans held at fair value with an aggregate fair value and amortized cost of $835.8 million and $738.6 million, respectively.
In addition, the Company had cash pledged as collateral in connection with its repurchase agreements of $15.6 million and $6.7 million at September 30, 2019 and December 31, 2018, respectively.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

The following table presents repricing information about the Company’s borrowings under repurchase agreements, which does not reflect the impact of associated derivative hedging instruments, at September 30, 20172019 and December 31, 2016:2018:


  September 30, 2019 December 31, 2018
 Balance 
 Weighted Average Interest RateBalance Weighted Average Interest Rate
Time Until Interest Rate Reset
(Dollars in Thousands)        
Within 30 days $6,487,134
 3.18% $6,747,166
 3.35%
Over 30 days to 3 months 660,954
 2.46
 368,857
 3.10
Over 3 months to 12 months 1,312,280
 3.72
 763,091
 4.18
Over 12 months 112,177
 3.87
 —
 —
Total repurchase agreements 8,572,545
 3.22% 7,879,114
 3.42%
Less debt issuance costs 1,123
   27
  
Total repurchase agreements less debt
  issuance costs
 $8,571,422
   $7,879,087
  

  September 30, 2017 December 31, 2016
 Balance 
 Weighted Average Interest RateBalance Weighted Average Interest Rate
Time Until Interest Rate Reset
(Dollars in Thousands)        
Within 30 days $6,378,566
 2.15% $7,284,062
 1.77%
Over 30 days to 3 months 493,136
 2.42
 1,188,416
 1.91
Total repurchase agreements 6,871,702
 2.17% 8,472,478
 1.79%
Less debt issuance costs 259
   210
  
Total repurchase agreements less debt
  issuance costs
 $6,871,443
   $8,472,268
  


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017


The following table presents contractual maturity information about the Company’s borrowings under repurchase agreements, all of which are accounted for as secured borrowings, at September 30, 2017,2019, and does not reflect the impact of derivative contracts that hedge such repurchase agreements:


  September 30, 2019
Contractual Maturity Overnight Within 30 Days Over 30 Days to 3 Months Over 3 Months to 12 Months Over 12 months Total
(Dollars in Thousands)            
Agency MBS $—
 $1,067,633
 $608,228
 $—
 $—
 $1,675,861
Legacy Non-Agency MBS —
 1,017,253
 —
 214,655
 —
 1,231,908
RPL/NPL MBS —
 642,740
 —
 —
 —
 642,740
CRT securities —
 303,544
 —
 —
 —
 303,544
Residential whole loans (1)
 —
 300,767
 1,365,757
 1,251,974
 809,028
 3,727,526
MSR-related assets —
 744,876
 —
 128,064
 45,115
 918,055
Other —
 5,850
 —
 —
 67,061
 72,911
Total (2)
 $—
 $4,082,663
 $1,973,985
 $1,594,693
 $921,204
 $8,572,545
             
Weighted Average Interest Rate —% 2.88% 3.36% 3.59% 3.77% 3.22%

  September 30, 2017
Contractual Maturity Overnight Within 30 Days Over 30 Days to 3 Months Over 3 Months to 12 Months Over 12 months Total
(Dollars in Thousands)            
Agency MBS $—
 $2,590,020
 $81,225
 $—
 $—
 $2,671,245
Legacy Non-Agency MBS —
 746,798
 478,331
 136,737
 —
 1,361,866
RPL/NPL MBS —
 359,471
 316,638
 122,399
 —
 798,508
U.S. Treasuries —
 474,726
 —
 —
 —
 474,726
CRT securities —
 409,123
 4,049
 —
 —
 413,172
MSR related assets —
 268,819
 —
 —
 —
 268,819
Residential whole loans —
 —
 —
 821,770
 61,596
 883,366
Total (1)
 $—
 $4,848,957
 $880,243
 $1,080,906
 $61,596
 $6,871,702
             
Weighted Average Interest Rate —% 1.83% 2.56% 3.31% 3.68% 2.17%
             
Gross amount of recognized liabilities for repurchase agreements in Note 8 $6,871,702
Amounts related to repurchase agreements not included in offsetting disclosure in Note 8 $—


(1)Repurchase agreement financings secured by residential whole loan collateral are disclosed based on the contractual maturity agreed with the respective counterparty. At September 30, 2019, $1.7 billion of repurchase agreement financings are subject to termination, at the option of the lender, prior to the otherwise agreed contractual maturity following the conclusion of a properly advised notice period. Such notice periods currently range from one month to six months. In addition, such repurchase agreements are subject to periodic repricing during their terms.
(2)Excludes $259,000$1.1 million of unamortized debt issuance costs at September 30, 2017.2019.


Undrawn Financing Commitment

In connection with the financing of MSR-related assets, the Company has obtained a financing commitment of up to $75.0 million, of which $45.1 million was utilized and was outstanding as of September 30, 2019. The Company pays a commitment fee ranging from 0.125% to 0.5% of the undrawn amount, depending on the amount of financing utilized.

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019


The Company had repurchase agreementsagreement borrowings with 3128 and 26 counterparties at both September 30, 20172019 and December 31, 2016.2018, respectively. The following table presents information with respect to each counterparty under repurchase agreements for which the Company had greater than 5% of stockholders’ equity at risk in the aggregate at September 30, 2017:2019:
 
  September 30, 2017
  
Counterparty
Rating (1)
 
Amount 
at Risk (2)
 
Weighted 
Average Months 
to Maturity for
Repurchase Agreements
 
Percent of
Stockholders’ Equity
Counterparty    
(Dollars in Thousands)        
Wells Fargo (3)
 AA-/Aa2/AA- $325,023
 6 10.0%
Credit Suisse (4)
 BBB+/Aa2/A- 235,579
 2 7.2
UBS (5)
 A+/A1/A+ 167,329
 8 5.1
  September 30, 2019
  
Counterparty
Rating (1)
 
Amount 
at Risk (2)
 
Weighted 
Average Months 
to Maturity for
Repurchase Agreements
 
Percent of
Stockholders’ Equity
Counterparty    
(Dollars in Thousands)        
Credit Suisse (3)
 BBB+/Baa2/A- $305,139
 1 9.0%
Goldman Sachs (4)
 BBB+/A3/A 232,421
 2 6.8
RBC (5)
 AA-/Aa2/AA 218,036
 1 6.4
Wells Fargo (6)
 A+/Aa2/AA- 211,949
 0 6.2
Barclays Bank BBB/Aa3/A 176,188
 4 5.2


(1)As rated at September 30, 20172019 by S&P, Moody’s and Fitch, Inc., respectively.  The counterparty rating presented is the lowest published for these entities.
(2)The amount at risk reflects the difference between (a) the amount loaned to the Company through repurchase agreements, including interest payable, and (b) the cash and the fair value of the securities pledged by the Company as collateral, including accrued interest receivable on such securities.
(3)Includes $313.8$284.2 million at risk with Credit Suisse and $20.9 million at risk with Credit Suisse Cayman.
(4)Includes $125.2 million at risk with Goldman Sachs Lending Partners and $107.2 million at risk with Goldman Sachs Bank USA.
(5)Includes $215.2 million at risk with RBC Barbados and $2.8 million at risk with RBC New York. Counterparty ratings are not published for RBC Barbados and RBC Capital Markets LLC.
(6)Includes $205.0 million at risk with Wells Fargo Bank, NA and $11.2approximately $7.0 million at risk with Wells Fargo Securities LLC.
(4)Includes $9.7 million at risk with Credit Suisse AG, Cayman Islands and $225.9 million at risk with Credit Suisse. Counterparty ratings are not published for Credit Suisse AG, Cayman Islands.
(5) Includes Non-Agency MBS pledged as collateral with contemporaneous repurchase and reverse repurchase agreements.




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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

FHLB Advances

In January 2016, the FHFA released its final rule amending its regulation on FHLB membership, which, among other things, provided termination rules for then current captive insurance members. As a result of such regulation, MFA Insurance was required to repay all of its outstanding FHLB advances by February 19, 2017 and its FHLB membership was terminated on such date. At December 31, 2016, MFA Insurance had $215.0 million in outstanding long-term secured FHLB advances with a weighted average borrowing rate of 0.78%. Interest payable on outstanding FHLB advances at December 31, 2016 totaled approximately $42,000 and was included in Other liabilities on the Company’s consolidated balance sheets.


7. Collateral Positions
 
The Company pledges securities or cash as collateral to its counterparties pursuant to its borrowings under repurchase agreements and for initial margin payments on centrally cleared Swaps. In addition, the Company receives securities or cash as collateral pursuant to financing provided under reverse repurchase agreements.  The Company exchanges collateral with its counterparties based on changes in the fair value, notional amount and term of the associated repurchase agreements and Swap contracts, as applicable.  In connection with these margining practices, either the Company or its counterparty may be required to pledge cash or securities as collateral.  When the Company’s pledged collateral exceeds the required margin, the Company may initiate a reverse margin call, at which time the counterparty may either return the excess collateral or provide collateral to the Company in the form of cash or equivalent securities.



The Company’s assets pledged as collateral are described in Notes 2(f) - Restricted Cash, 5(c) - Derivative Instruments and 6 - Repurchase Agreements. The total fair value of assets pledged as collateral with respect to the Company’s borrowings under repurchase agreements and derivative hedging instruments was $10.7 billion and $9.5 billion at September 30, 2019 and December 31, 2018, respectively. An aggregate of $48.5 million and $33.1 million of accrued interest on those assets had also been pledged as of September 30, 2019 and December 31, 2018, respectively.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


The following table summarizes the fair value of the Company’s collateral positions, which includes collateral pledged and collateral held, with respect to its borrowings under repurchase agreements, reverse repurchase agreements, derivative hedging instruments and FHLB advances at September 30, 2017 and December 31, 2016: 
  September 30, 2017 December 31, 2016
(In Thousands) Assets Pledged Collateral Held Assets Pledged Collateral Held
Derivative Hedging Instruments:  
  
  
  
Agency MBS $23,197
 $—
 $32,468
 $—
Cash (1)
 6,524
 —
 53,849
 —
  29,721
 —
 86,317
 —
Repurchase Agreement Borrowings:        
Agency MBS 2,888,156
 —
 3,280,689
 —
Legacy Non-Agency MBS (2)(3)
 1,848,134
 —
 2,317,708
 —
RPL/NPL MBS 1,005,757
 —
 2,433,711
 —
U.S. Treasury securities 475,688
 —
 510,767
 —
CRT securities 530,833
 —
 357,488
 —
MSR related assets 412,674
 —
 226,780
 —
Residential whole loans 1,273,955
 —
 1,175,088
 —
Cash (1)
 8,916
 —
 4,614
 —
  8,444,113
 —
 10,306,845
 —
         
FHLB Advances:        
Agency MBS —
 —
 227,244
 —
  —
 —
 227,244
 —
         
Reverse Repurchase Agreements:        
U.S. Treasury securities —
 507,318
 —
 510,767
  —
 507,318
 —
 510,767
Total $8,473,834
 $507,318
 $10,620,406
 $510,767
(1)  Cash pledged as collateral is reported as “Restricted cash” on the Company’s consolidated balance sheets.
(2)  Includes $172.4 million of Legacy Non-Agency MBS acquired in connection with resecuritization transactions from consolidated VIEs that are eliminated from the Company’s consolidated balance sheets at December 31, 2016.
(3)  In addition, at September 30, 2017 and December 31, 2016, $689.3 million and $688.2 million of Legacy Non-Agency MBS, respectively, are pledged as collateral in connection with contemporaneous repurchase and reverse repurchase agreements entered into with a single counterparty.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

The following table presents detailed information about the Company’s assets pledged as collateral pursuant to its borrowings under repurchase agreements and derivative hedging instruments at September 30, 2017:
  September 30, 2017
  
Assets Pledged Under Repurchase 
Agreements
 
Assets Pledged Against Derivative
Hedging Instruments
 
Total Fair
Value of Assets Pledged and Accrued Interest
(In Thousands) Fair Value 
Amortized
Cost
 
Accrued 
Interest on
Pledged 
Assets
 
Fair Value/ 
Carrying 
Value
 
Amortized
Cost
 
Accrued Interest on 
Pledged 
Assets
 
Agency MBS $2,888,156
 $2,890,386
 $7,461
 $23,197
 $23,763
 $48
 $2,918,862
Legacy Non-Agency MBS (1)
 1,848,134
 1,432,145
 6,711
 —
 —
 —
 1,854,845
RPL/NPL MBS 1,005,757
 1,001,548
 757
 —
 —
 —
 1,006,514
U.S. Treasuries 475,688
 475,342
 —
 —
 —
 —
 475,688
CRT securities 530,833
 491,490
 418
 —
 —
 —
 531,251
MSR related assets 412,674
 411,277
 942
 —
 —
 —
 413,616
Residential whole loans (2)
 1,273,955
 1,251,400
 2,974
 —
 —
 —
 1,276,929
Cash (3)
 8,916
 8,916
 —
 6,524
 6,524
 —
 15,440
Total $8,444,113
 $7,962,504
 $19,263
 $29,721
 $30,287
 $48
 $8,493,145

(1)In addition, at September 30, 2017, $689.3 million of Legacy Non-Agency MBS are pledged as collateral in connection with contemporaneous repurchase and reverse repurchase agreements entered into with a single counterparty.
(2)Includes residential whole loans held at carrying value with an aggregate fair value of $370.5 million and aggregate amortized cost of $347.9 million and residential whole loans held at fair value with an aggregate fair value and amortized cost of $903.5 million.
(3)Cash pledged as collateral is reported as “Restricted cash” on the Company’s consolidated balance sheets.

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

8.    Offsetting Assets and Liabilities
The following tables present information about certain assets and liabilities that are subject to master netting arrangements (or similar agreements) and may potentially be offset on the Company’s consolidated balance sheets at September 30, 2017 and December 31, 2016:
Offsetting of Financial Assets and Derivative Assets
  Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets Presented in the Consolidated Balance Sheets 
Gross Amounts Not Offset in 
the Consolidated Balance Sheets
  Net Amount
(In Thousands) 
Financial
Instruments
 
Cash 
Collateral 
Received
September 30, 2017            
Swaps, at fair value $—
 $—
 $—
 $—
 $—
 $—
Total $—
 $—
 $—
 $—
 $—
 $—
             
December 31, 2016            
Swaps, at fair value $233
 $—
 $233
 $(233) $—
 $—
Total $233
 $—
 $233
 $(233) $—
 $—
Offsetting of Financial Liabilities and Derivative Liabilities
  Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities Presented in the Consolidated Balance Sheets 
Gross Amounts Not Offset in the 
Consolidated Balance Sheets
 Net Amount 
(In Thousands)
Financial 
Instruments (1)
 
Cash 
Collateral 
Pledged (1)
September 30, 2017            
Swaps, at fair value (2)
 $—
 $—
 $—
 $—
 $—
 $—
Repurchase agreements and other advances (3)(4)
 6,871,702
 —
 6,871,702
 (6,862,786) (8,916) —
Total $6,871,702
 $—
 $6,871,702
 $(6,862,786) $(8,916) $—
             
December 31, 2016            
Swaps, at fair value (2)
 $46,954
 $—
 $46,954
 $—
 $(46,954) $—
Repurchase agreements and other advances (3)(4)
 8,687,478
 —
 8,687,478
 (8,682,864) (4,614) —
Total $8,734,432
 $—
 $8,734,432
 $(8,682,864) $(51,568) $—
(1) Amounts disclosed in the Financial Instruments column of the table above represent collateral pledged that is available to be offset against liability balances associated with repurchase agreements and other advances, and derivative transactions.  Amounts disclosed in the Cash Collateral Pledged column of the table above represent amounts pledged as collateral against derivative transactions and repurchase agreements, and exclude excess collateral of $6.5 million and $6.9 million at September 30, 2017 and December 31, 2016, respectively.
(2) The fair value of securities pledged against the Company’s Swaps was $23.2 million and $32.5 million at September 30, 2017 and December 31, 2016, respectively. Beginning in January 2017, variation margin payments on the Company’s cleared Swaps are treated as a legal settlement of the exposure under the Swap contract. Previously such payments were treated as collateral pledged against the exposure under the Swap contract. The effect of this change is to reduce what would have otherwise been reported as fair value of the Swap.
(3) The fair value of financial instruments pledged against the Company’s repurchase agreements and other advances was $8.4 billion and $10.5 billion at September 30, 2017 and December 31, 2016, respectively.
(4) Excludes $259,000 and $210,000 of unamortized debt issuance costs at September 30, 2017 and December 31, 2016, respectively.

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

Nature of Setoff Rights
In the Company’s consolidated balance sheets, all balances associated with the repurchase agreement and Swap transactions that are not centrally cleared are presented on a gross basis.

Certain of the Company’s repurchase agreement and derivative transactions are governed by underlying agreements that generally provide for a right of setoff in the event of default or in the event of a bankruptcy of either party to the transaction. For oneIn the Company’s consolidated balance sheets, all balances associated with repurchase agreement counterparty,agreements are presented on a gross basis.

The fair value of financial instruments pledged against the underlyingCompany’s repurchase agreements provide for an unconditional rightwas $10.6 billion and $9.4 billion at September 30, 2019 and December 31, 2018, respectively. Since January 2017, variation margin payments on the Company’s cleared Swaps have been treated as a legal settlement of setoff.  the exposure under the Swap contract. Previously such payments were treated as collateral pledged against the exposure under the related Swap contract. The effect of this change is to reduce what would have otherwise been reported as fair value of the Swap. The fair value of financial instruments pledged against the Company’s Swaps was $2.3 million and $2.7 million at September 30, 2019 and December 31, 2018, respectively. In addition, cash that has been pledged as collateral against repurchase agreements and Swaps is reported as Restricted cash on the Company’s consolidated balance sheets. (See Notes 2(f), 5(c) and 6)


9.
9. Other Liabilities

The following table presents the components of the Company’s Other liabilities at September 30, 2019 and December 31, 2018:

(In Thousands) September 30, 2019 December 31, 2018
Securitized debt (1)
 $605,712
 $684,420
Convertible Senior Notes 223,684
 —
Senior Notes 96,850
 96,816
Dividends and dividend equivalents payable 90,614
 90,198
Accrued interest payable 20,463
 16,280
Payable for unsettled residential whole loans purchases 59,524
 211,129
Accrued expenses and other 33,126
 26,296
Total Other Liabilities $1,129,973
 $1,125,139

(1)Securitized debt represents third-party liabilities of consolidated VIEs and excludes liabilities of the VIEs acquired by the Company that are eliminated in consolidation. The third-party beneficial interest holders in the VIEs have no recourse to the general credit of the Company. (See Notes 10 and 15 for further discussion.)

(a) Convertible Senior Notes

On June 3, 2019, the Company issued $230.0 million in aggregate principal amount of its Convertible Senior Notes in an underwritten public offering, including an additional $30.0 million issued pursuant to the exercise of the underwriters’ option to purchase additional Convertible Senior Notes. The total net proceeds the Company received from the offering were approximately $223.3 million, after deducting offering expenses and the underwriting discount.  The Convertible Senior Notes bear interest at a fixed rate of 6.25% per year, paid semiannually on June 15 and December 15 of each year commencing December 15, 2019 and will mature on June 15, 2024, unless earlier converted, redeemed or repurchased in accordance with their terms. The Convertible Senior Notes are convertible at the option of the holders at any time until the close of business on the business day immediately preceding the maturity date into shares of the Company’s common stock based on an initial conversion rate of 125.7387 shares of the Company’s common stock for each $1,000 principal amount of the Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $7.95 per share of common stock. The Convertible Senior Notes have an effective interest rate, including the impact of amortization to interest expense of debt issuance costs, of 6.94%. The Company does not have the right to redeem the Convertible Senior Notes prior to maturity, except to the extent necessary to preserve its status as a REIT, in which case the Company may redeem the Convertible Senior Notes, in whole or in part, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

The Convertible Senior Notes are the Company’s senior unsecured obligations and are effectively junior to all of the Company’s secured indebtedness, which includes the Company’s repurchase agreements and other financing arrangements, to the extent of the value of the collateral securing such indebtedness and equal in right of payment to the Company’s existing and future senior unsecured obligations, including the Senior Notes.

(b) Senior Notes
 
On April 11, 2012, the Company issued $100.0 million in aggregate principal amount of its Senior Notes in an underwritten public offering.  The total net proceeds to the Company received from the offering of the Senior Notes were approximately $96.6 million, after deducting offering expenses and the underwriting discount.  The Senior Notes bear interest at a fixed rate of 8.00% per year, paid quarterly in arrears on January 15, April 15, July 15 and October 15 of each year and will mature on April 15, 2042.  The Senior Notes have an effective interest rate, including the impact of amortization to interest expense of debt issuance costs, of 8.31%. The Company may redeem the Senior Notes, in whole or in part, at any time, on or after April 15, 2017, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to, but not excluding, the redemption date.interest.


The Senior Notes are the Company’s senior unsecured obligations and are subordinateeffectively junior to all of the Company’s secured indebtedness, which includes the Company’s repurchase agreements obligation to return securities obtained as collateral and other financing arrangements, to the extent of the value of the collateral securing such indebtedness.indebtedness and equal in right of payment to the Company’s existing and future senior unsecured obligations, including the Convertible Senior Notes.

 
10. Other Liabilities

The following table presents the components of the Company’s Other liabilities at September 30, 2017 and December 31, 2016:

(In Thousands) September 30, 2017 December 31, 2016
Securitized debt (1)
 $137,327
 $—
Dividends and dividend equivalents payable 79,605
 74,657
Accrued interest payable 11,223
 14,129
Swaps, at fair value (2)
 —
 46,954
Accrued expenses and other liabilities 18,123
 19,612
Total Other Liabilities $246,278
 $155,352
(1)Securitized debt represents third-party liabilities of consolidated VIEs and excludes liabilities of the VIEs acquired by the Company that are eliminated in consolidation. The third-party beneficial interest holders in the VIEs have no recourse to the general credit of the Company. (See Notes 11 and 16 for further discussion.)
(2)Beginning in January 2017, variation margin payments on the Company’s cleared Swaps are treated as a legal settlement of the exposure under the Swap contract. Previously such payments were treated as collateral pledged against the exposure under the Swap contract. The effect of this change is to reduce what would have otherwise been reported as fair value of the Swap.


11.10.    Commitments and Contingencies
 
(a) Lease Commitments
 
The Company pays monthly rent pursuant to two operating3 office leases.  TheIn November 2018, the Company amended the lease term for the Company’sits corporate headquarters in New York, New York, extendsunder the same terms and conditions, to extend the expiration date for the lease by up to one year, through June 30, 2020.2021, with a mutual option to terminate in February 2021.  For the three and nine months ended September 30, 2019, the Company recorded expense of approximately $638,000 and $1.9 million, respectively, in connection with the lease for its current corporate headquarters.

In addition, in November 2018, the Company executed a lease agreement on new office space in New York, New York. The Company plans to relocate its corporate headquarters to this new office space upon the substantial completion of the building. The lease providesterm specified in the agreement is fifteen years with an option to renew for aggregate cashan additional five years. The Company’s current estimate of annual lease rental expense under the new lease, excluding escalation charges which at this point are unknown, is approximately $4.6 million. The Company currently expects to relocate to the space in the fourth quarter of 2020, but this timing, as well as when it is required to begin making payments ranging over time of approximately $2.5 million per year, paidand recognize rental and other expenses under the new lease, is dependent on a monthly basis, exclusive of escalation charges.  when the space is actually available for use.

(b)Representations and Warranties in Connection with Loan Securitization Transactions

In addition, as part of this lease agreement,connection with the loan securitization transactions entered into by the Company, the Company has provided the landlordobligation under certain circumstances to repurchase assets previously transferred to securitization vehicles upon breach of certain representations and warranties. As of September 30, 2019, the Company had 0 reserve established for repurchases of loans and was not aware of any material unsettled repurchase claims that would require the establishment of such a $785,000 irrevocable standby letter of credit fully collateralized by cash.  reserve.  (See Note 15)

(c) Corporate Loans

The letter of credit may be drawn uponCompany has participated in loans to provide financing to entities that originate loans and own MSRs, as well as certain other unencumbered assets owned by the landlord inborrower. Under the event that the Company defaults under certain terms of the lease.  In addition,respective lending agreements, the Company has committed to lend $150.0 million of which approximately $85.2 million was drawn at September 30, 2019. (See Note 3)


(d)Rehabilitation Loan Commitments

At September 30, 2019, the Company had unfunded commitments of $126.0 million in connection with its purchased Rehabilitation loans. (See Note 4)

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


Company has a lease through December 31, 2021 for its off-site back-up facility located in Rockville Centre, New York, which provides for, among other things, lease payments totaling $32,000, annually.

(b) Corporate Loan

The Company has entered into a loan agreement with an entity that originates loans and owns the related MSRs. The loan is secured by certain U.S. Government, Agency and private-label MSRs, as well as other unencumbered assets owned by the borrower. Under the terms of the loan agreement, the Company has committed to lend $130.0 million of which approximately $101.1 million was drawn at September 30, 2017.

(c)Representations and Warranties in Connection with Loan Securitization Transaction

In connection with the loan securitization transaction entered into by the Company in June 2017 (See Note 16 for further discussion), the Company has the obligation under certain circumstances to repurchase assets previously transferred to a securitization vehicle upon breach of certain representations and warranties. As of September 30, 2017, the Company had no reserve established for repurchases of loans and was not aware of any repurchase claims that would require the establishment of such a reserve. 

(d)MBS Purchase Commitments

At September 30, 2017, the Company had commitments to purchase Non-Agency MBS at an estimated price of $3.6 million. The expected settlement amounts are included in the Non-Agency MBS balances presented at fair value on the Company’s consolidated balance sheets, with a corresponding liability included in Payable for unsettled MBS and residential whole loan purchases.

(e)Residential Whole Loan Purchase Commitments


At September 30, 2017,2019, the Company has agreed, subject to the completion of due diligence and customary closing conditions, to purchase residential whole loans held at faircarrying value atwith an aggregate estimated purchase price of $120.4 million. The expected settlement amounts are included in the Company’s consolidated balance sheets in Residential whole loans, at fair value,$59.5 million with a corresponding liability recorded in Other Liabilities and included in Payable for unsettled MBS and residential whole loan purchases.




12.11.    Stockholders’ Equity
 
(a) Preferred Stock
 
Issuance of 7.50% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”)

On April 15, 2013, the Company completed the issuance of 8.0 million shares of its 7.50% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred StockStock”) with a par value of $0.01 per share, and a liquidation preference of $25.00 per share plus accrued and unpaid dividends, in an underwritten public offering. The Company’s Series B Preferred Stock is entitled to receive a dividend at a rate of 7.50% per year on the $25.00 liquidation preference before the Company’s common stock is paid any dividends and is senior to the Company’s common stock with respect to distributions upon liquidation, dissolution or winding up. Dividends on the Series B Preferred Stock are payable quarterly in arrears on or about March 31, June 30, September 30 and December 31 of each year. The Series B Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not authorized or declared) exclusively at the Company’s option commencing on April 15, 2018 (subject to the Company’s right, under limited circumstances, to redeem the Series B Preferred Stock prior to that date in order to preserve its qualification as a REIT) and upon certain specified change in control transactions in which the Company’s common stock and the acquiring or surviving entity common securities would not be listed on the New York Stock Exchange (the “NYSE”), the NYSE American LLC or NASDAQ, or any successor exchange.option.
The Series B Preferred Stock generally does not have any voting rights, subject to an exception in the event the Company fails to pay dividends on such stock for six6 or more quarterly periods (whether or not consecutive).  Under such circumstances, the Series B Preferred Stock will be entitled to vote to elect two2 additional directors to the Company’s Board of Directors (the “Board”), until all unpaid dividends have been paid or declared and set apart for payment.  In addition, certain material and adverse changes to the terms of the Series B Preferred Stock cannot be made without the affirmative vote of holders of at least 66 2/3% of the outstanding shares of Series B Preferred Stock.

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

The following table presents cash dividends declared by the Company on its Series B Preferred Stock from January 1, 20172019 through September 30, 20172019:


Declaration Date Record Date Payment Date Dividend Per Share
August 9, 2019 August 30, 2019 September 30, 2019 $0.46875
May 20, 2019 June 3, 2019 June 28, 2019 0.46875
February 15, 2019 March 4, 2019 March 29, 2019 0.46875

Declaration Date Record Date Payment Date Dividend Per Share
August 10, 2017 September 1, 2017 September 29, 2017 $0.46875
May 16, 2017 June 2, 2017 June 30, 2017 0.46875
February 17, 2017 March 6, 2017 March 31, 2017 0.46875


(b)  Dividends on Common Stock
 
The following table presents cash dividends declared by the Company on its common stock from January 1, 20172019 through September 30, 20172019:
 
Declaration Date (1)
 Record Date Payment Date Dividend Per Share
September 14, 2017 September 28, 2017 October 31, 2017 $0.20
(1)
June 12, 2017 June 29, 2017 July 28, 2017 0.20
 
March 8, 2017 March 29, 2017 April 28, 2017 0.20
 
Declaration Date (1)
 Record Date Payment Date Dividend Per Share 
September 12, 2019 September 30, 2019 October 31, 2019 $0.20
(1)
June 12, 2019 July 1, 2019 July 31, 2019 0.20
 
March 6, 2019 March 29, 2019 April 30, 2019 0.20
 
 
(1)  At September 30, 2017,2019, the Company had accrued dividends and dividend equivalents payable of $79.6$90.6 million related to the common stock dividend declared on September 14, 2017.12, 2019.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

(c) Public Offering of Common Stock


The table below presents information with respect to shares of the Company’s common stock issued through public offerings during the nine monthsyear ended September 30, 2017. The Company did not issue any common stock through public offerings during the nine months ended September 30, 2016.December 31, 2018:


Share Issue Date Shares Issued Gross Proceeds Per Share Gross Proceeds Shares Issued Gross Proceeds Per Share Gross Proceeds
(In Thousands, Except Per Share Amounts)          
May 10, 2017 23,000
 $7.85
 $180,550
(1)
August 7, 2018 50,875
(1)$7.78 $395,807(1)


(1) Includes approximately 875,000 shares issued on September 5, 2018 pursuant to the exercise of the underwriters’ option to purchase additional shares. The Company incurred approximately $412,000$6.4 million of underwriting discounts and related expenses in connection with this equity offering.



(d) Discount Waiver, Direct Stock Purchase and Dividend Reinvestment Plan (“DRSPP”)
 
On September 16, 2016, the Company filed a shelf registration statement on Form S-3 with the SEC under the Securities Act of 1933, as amended (the “1933 Act”), for the purpose of registering additional common stock for sale through its DRSPP.  Pursuant to Rule 462(e) ofunder the 1933 Act, this shelf registration statement became effective automatically upon filing with the SEC and, when combined with the unused portion of the Company’s previous DRSPP shelf registration statements, registered an aggregate of 1515.0 million shares of common stock.  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 cash investments.  At September 30, 20172019, 13.0approximately 11.6 million shares of common stock remained available for issuance pursuant to the DRSPP shelf registration statement. In October 2019, the Company filed a new shelf registration statement to replace the 2016 shelf registration statement.
 
During the three and nine months ended September 30, 2017,2019, the Company issued 513,50987,886 and 1,516,307240,741, respectively, shares of common stock through the DRSPP, raising net proceeds of approximately $4.3 million$634,000 and $12.2$1.8 million, respectively.  From the inception of the DRSPP in September 2003 through September 30, 2017,2019, the Company issued 32,899,09234,296,621 shares pursuant to the DRSPP, raising net proceeds of $275.1$286.0 million.

(e) At-the-Market Offering Program

On August 16, 2019 the Company entered into a distribution agreement under the terms of which the Company may offer and sell shares of its common stock having an aggregate gross sales price of up to $400.0 million (the “ATM Shares”), from time to time, through various sales agents, pursuant to an at-the-market equity offering program (the “ATM Program”). Sales of the ATM Shares, if any, may be made in negotiated transactions or by transactions that are deemed to be “at-the-market” offerings, as defined in Rule 415 under the 1933 Act, including sales made directly on the New York Stock Exchange (“NYSE”) or sales made to or through a market maker other than an exchange. The sales agents are entitled to compensation of up to two percent of the gross sales price per share for any shares of common stock sold under the distribution agreement.

During the three months ended September 30, 2019, the Company sold 982,350 shares of common stock through the ATM Program at a weighted average price of $7.29, raising proceeds of approximately $7.1 million, net of fees and commissions paid to sales agents of approximately $72,000. At September 30, 2019, approximately $392.8 million remained outstanding for future offerings under this program. Shares for the ATM Program are issued through the automatic shelf registration statement on Form S-3 that was filed with the SEC on August 16, 2019.

 


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(e)(f)  Stock Repurchase Program
 
As previously disclosed, in August 2005, the Company’s Board authorized a stock repurchase program (the “Repurchase Program”) to repurchase up to 4.0 million shares of its outstanding common stock.  The Board reaffirmed such authorization in May 2010.  In December 2013, the Board increased the number of shares authorized under the Repurchase Program to an aggregate of 10.0 million. Such authorization does not have an expiration date and, at present, there is no intention to modify or otherwise rescind such authorization.  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 (including, in our discretion, through the use of one or more plans adopted under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended (the “1934 Act”)) 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 authorized but unissued shares of the Company’s common stock.  The Repurchase Program may be suspended or discontinued by the Company at any time and without prior notice. The Company did not repurchase any shares of its common stock during the nine months ended September 30, 2017.2019.  At September 30, 2017,2019, 6,616,355 shares remained authorized for repurchase under the Repurchase Program.


(f) (g) Accumulated Other Comprehensive Income/(Loss)


The following table presents changes in the balances of each component of the Company’s AOCI for the three and nine months ended September 30, 2017:2019:
 Three Months Ended 
 September 30, 2017		 Nine Months Ended 
 September 30, 2017		 Three Months Ended
September 30, 2019		 Nine Months Ended
September 30, 2019
(In Thousands) 
Net Unrealized
Gain/(Loss) on
AFS Securities
 
Net 
(Loss)/Gain
on Swaps
 Total AOCI Net Unrealized
Gain/(Loss) on
AFS Securities		 
Net 
(Loss)/Gain
on Swaps
 Total AOCI 
Net Unrealized
Gain/(Loss) on
AFS Securities
 
Net 
(Loss)
on Swaps
 Total AOCI Net Unrealized
Gain/(Loss) on
AFS Securities		 
Net 
Gain/(Loss)
on Swaps
 Total AOCI
Balance at beginning of period $668,223
 $(35,841) $632,382
 $620,403
 $(46,721) $573,682
 $439,898
 $(28,114) $411,784
 $417,167
 $3,121
 $420,288
OCI before reclassifications 6,988
 5,791
 12,779
 71,188
 16,671
 87,859
 5,483
 (233) 5,250
 50,085
 (30,384) 19,701
Amounts reclassified from AOCI (1)
 (14,935) —
 (14,935) (31,315) —
 (31,315) (14,499) (685) (15,184) (36,370) (1,769) (38,139)
Net OCI during the period (2)
 (7,947) 5,791
 (2,156) 39,873
 16,671
 56,544
 (9,016) (918) (9,934) 13,715
 (32,153) (18,438)
Balance at end of period $660,276
 $(30,050) $630,226
 $660,276
 $(30,050) $630,226
 $430,882
 $(29,032) $401,850
 $430,882
 $(29,032) $401,850


(1)  See separate table below for details about these reclassifications.
(2)  For further information regarding changes in OCI, see the Company’s consolidated statements of comprehensive income/(loss).
 


The following table presents changes in the balances of each component of the Company’s AOCI for the three and nine months ended September 30, 20162018:
 Three Months Ended 
 September 30, 2016		 Nine Months Ended 
 September 30, 2016		 Three Months Ended
September 30, 2018		 Nine Months Ended
September 30, 2018
(In Thousands) 
Net Unrealized
Gain/(Loss) on
AFS Securities
 
Net 
(Loss)/Gain
on Swaps
 Total AOCI Net Unrealized
Gain/(Loss) on
AFS Securities		 
Net 
(Loss)/Gain
on Swaps
 Total AOCI 
Net Unrealized
Gain/(Loss) on
AFS Securities
 
Net 
Gain
on Swaps
 Total AOCI 
Net Unrealized
Gain/(Loss) on
AFS Securities
 
Net 
(Loss)/Gain
on Swaps
 Total AOCI
Balance at beginning of period $625,697
 $(131,971) $493,726
 $585,250
 $(69,399) $515,851
 $548,551
 $16,160
 $564,711
 $620,648
 $(11,424) $609,224
OCI before reclassifications 64,350
 22,769
 87,119
 124,763
 (39,803) 84,960
 (34,278) 5,390
 (28,888) (90,250) 32,974
 (57,276)
Amounts reclassified from AOCI (1)
 (7,314) —
 (7,314) (27,280) —
 (27,280) (9,455) —
 (9,455) (25,580) —
 (25,580)
Net OCI during the period (2)
 57,036
 22,769
 79,805
 97,483
 (39,803) 57,680
 (43,733) 5,390
 (38,343) (115,830) 32,974
 (82,856)
Balance at end of period $682,733
 $(109,202) $573,531
 $682,733
 $(109,202) $573,531
 $504,818
 $21,550
 $526,368
 $504,818
 $21,550
 $526,368


(1)  See separate table below for details about these reclassifications.
(2)  For further information regarding changes in OCI, see the Company’s consolidated statements of comprehensive income/(loss).
 


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SEPTEMBER 30, 20172019


The following table presents information about the significant amounts reclassified out of the Company’s AOCI for the three and nine months ended September 30, 20172019:
 Three Months Ended 
 September 30, 2017		 Nine Months Ended 
 September 30, 2017		  Three Months Ended
September 30, 2019		 Nine Months Ended
September 30, 2019		 
Details about AOCI Components Amounts Reclassified from AOCI Affected Line Item in the Statement
Where Net Income is Presented		 Amounts Reclassified from AOCI Affected Line Item in the Statement
Where Net Income is Presented
(In Thousands)            
AFS Securities:          
Realized gain on sale of securities $(14,935) $(30,283) Net gain on sales of MBS and U.S. Treasury securities $(14,499) $(36,370) Net realized gain on sales of residential mortgage securities
OTTI recognized in earnings —
 (1,032) Net impairment losses recognized in earnings
Total AFS Securities $(14,935) $(31,315)  $(14,499) $(36,370) 
Swaps designated as cash flow hedges:     
Amortization of de-designated hedging instruments (685) (1,769) Other, net
Total Swaps designated as cash flow hedges $(685) $(1,769) 
Total reclassifications for period $(14,935) $(31,315)  $(15,184) $(38,139) 
 
The following table presents information about the significant amounts reclassified out of the Company’s AOCI for the three and nine months ended September 30, 20162018:
  Three Months Ended
September 30, 2018		 Nine Months Ended
September 30, 2018		  
Details about AOCI Components Amounts Reclassified from AOCI Affected Line Item in the Statement
Where Net Income is Presented
(In Thousands)      
AFS Securities:      
Realized gain on sale of securities $(9,455) $(25,580) Net realized gain on sales of residential mortgage securities
Total AFS Securities $(9,455) $(25,580)  
Total reclassifications for period $(9,455) $(25,580)  

  Three Months Ended 
 September 30, 2016		 Nine Months Ended 
 September 30, 2016		  
Details about AOCI Components Amounts Reclassified from AOCI Affected Line Item in the Statement
Where Net Income is Presented
(In Thousands)      
AFS Securities:      
Realized gain on sale of securities $(6,829) $(26,795) Net gain on sales of MBS and U.S. Treasury securities
OTTI recognized in earnings (485) (485) Net impairment losses recognized in earnings
Total AFS Securities $(7,314) $(27,280)  
Total reclassifications for period $(7,314) $(27,280)  


At September 30, 2017 and December 31, 2016, the Company had unrealized losses recorded in AOCI of approximately $103,000 and $1.7 million, respectively, onOn securities for which OTTI had been recognized in earningsprior periods, the Company did 0t have any unrealized losses recorded in prior periods.AOCI at September 30, 2019 and had $224,000 unrealized losses recorded in AOCI at December 31, 2018.


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SEPTEMBER 30, 20172019




13.12.    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, 20172019 and 20162018:
 
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
(In Thousands, Except Per Share Amounts) 2019 2018 2019 2018
Basic EPS:        
Net income to common stockholders $95,599
 $87,132
 $277,496
 $240,922
Dividends declared on preferred stock (3,750) (3,750) (11,250) (11,250)
Dividends, dividend equivalents and undistributed earnings allocated to participating securities (280) (241) (808) (702)
Net income to common stockholders - basic $91,569
 $83,141
 $265,438
 $228,970
Basic weighted average common shares outstanding 451,020
 428,713
 450,641
 408,614
Basic EPS $0.20
 $0.19
 $0.59
 $0.56
         
Diluted EPS:        
Net income to common stockholders - basic 91,569
 83,141
 265,438
 228,970
Interest expense on Convertible Senior Notes 3,879
 —
 5,085
 —
Net income to common stockholders - diluted $95,448
 $83,141
 $270,523
 $228,970
Basic weighted average common shares outstanding 451,020
 428,713
 450,641
 408,614
Effect of assumed Convertible Senior Notes conversion to common shares 28,920
 —
 12,712
 —
Diluted weighted average common shares outstanding (1)
 479,940
 428,713
 463,353
 408,614
Diluted EPS $0.20
 $0.19
 $0.58
 $0.56

  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
(In Thousands, Except Per Share Amounts) 2017 2016 2017 2016
Numerator:        
Net income $63,805
 $83,011
 $221,799
 $240,031
Dividends declared on preferred stock (3,750) (3,750) (11,250) (11,250)
Dividends, dividend equivalents and undistributed earnings allocated to participating securities (409) (442) (1,299) (1,255)
Net income to common stockholders - basic and diluted $59,646
 $78,819
 $209,250
 $227,526
         
Denominator:        
Weighted average common shares for basic and diluted earnings per share (1)
 396,698
 373,141
 385,282
 373,011
Basic and diluted earnings per share $0.15
 $0.21
 $0.54
 $0.61


(1)
At September 30, 2017,2019, the Company had an aggregate of 2.5approximately 3.0 million equity instruments outstanding that were not included in the calculation of diluted EPS for the three and nine months ended September 30, 2017,2019, as their inclusion would have been anti-dilutive.  These equity instruments were comprised of approximately 4,000 shares of restricted common stock with a weighted average grant date fair value of $7.12 and approximately 2.5 millionreflect RSUs (based on current estimate of expected share settlement amount) with a weighted average grant date fair value of $6.49.$7.37. These equity instruments may have a dilutive impact on future EPS.


During the three and nine months ended September 30, 2019, the Convertible Senior Notes were determined to be dilutive and were included in the calculation of diluted EPS under the “if-converted” method. Under this method, the periodic interest expense for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether the conversion option is in or out of the money) is included in the denominator for the purpose of calculating diluted EPS.

14.13.    Equity Compensation, Employment Agreements and Other Benefit Plans
 
(a)  Equity Compensation Plan
 
In accordance with the terms of the Company’s Equity Compensation Plan, (the “Equity Plan”), which was adopted by the Company’s stockholders on May 21, 2015 (and which amended and restated the Company’s 2010 Equity Compensation Plan), directors, officers and employees of the Company and any of its subsidiaries and other persons expected to provide significant services for the Company and any of its subsidiaries are eligible to receive grants of stock options (“Options”), restricted stock, RSUs, dividend equivalent rights and other stock-based awards under the Equity Plan.
 
Subject to certain exceptions, stock-based awards relating to a maximum of 12.0 million shares of common stock may be granted under the Equity Plan; forfeitures and/or awards that expire unexercised do not count towardstoward this limit.  At September 30, 2017,2019, approximately 6.93.9 million shares of common stock remained available for grant in connection with stock-based awards under the Equity Plan.  A participant may generally not receive stock-based awards in excess of 1.5 million shares of common

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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 common stock.  Unless previously terminated by the Board, awards may be granted under the Equity Plan until May 20, 2025.
 
Restricted Stock Units


Under the terms of the Equity Plan, RSUs are instruments that provide the holder with the right to receive, subject to the satisfaction of conditions set by the Compensation Committee of the Board (the “Compensation Committee”) at the time of grant, a payment of a specified value, which may be a share of the Company’s common stock, 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.  Although the Equity Plan permits the Company to issue RSUs that can settle in cash, all of the Company’s outstanding RSUs as of September 30, 20172019 are designated to be settled in shares of the Company’s common stock.  The Company did not0t grant any RSUs during the three months ended September 30, 20172019 and 20162018 and granted 898,945912,525 and 728,195843,802 RSUs during the nine months ended September 30, 20172019 and 2016,2018, respectively. There were no20,000 RSUs forfeited during each of the nine months ended September 30,

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2017. During the nine months ended September 30, 2016 an aggregate of 10,000 RSUs were forfeited. 2019 and 2018, respectively. All RSUs outstanding at September 30, 20172019 may be entitled to receive dividend equivalent payments depending on the terms and conditions of the award either in cash at the time dividends are paid by the Company, or for certain performance-based RSU awards, as a grant of stock at the time such awards are settled.  At September 30, 20172019 and December 31, 2016,2018, the Company had unrecognized compensation expense of $5.0$6.7 million and $3.6$5.2 million, respectively, related to RSUs.  The unrecognized compensation expense at September 30, 20172019 is expected to be recognized over a weighted average period of 1.91.8 years.


Restricted Stock
 
The Company did not0t award any shares of restricted common stock during the nine months ended September 30, 20172019 and 2016.2018. At September 30, 2017 and December 31, 2016,2019, the Company had unrecognized compensation expense of approximately $28,000 and $203,000, respectively, related to thedid 0t have any unvested shares of restricted common stock.  The Company had accrued dividends payable of approximately $13,000 and $55,000 on unvested shares of restricted stock at September 30, 2017 and December 31, 2016, respectively.  The unrecognized compensation expense at September 30, 2017 is expected to be recognized over a weighted average period of three months.outstanding.


Dividend Equivalents
 
A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock.  Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., an RSU) under the Equity Plan, and they are paid in cash or other consideration at such times and in accordance with such rules as the Compensation Committee of the Board shall determine in its discretion.  Payments made on the Company’s outstanding dividend equivalent rights that have been granted as a separate instrument are generally charged to Stockholders’ Equity when common stock dividends are declared to the extent that such equivalents are expected to vest.  The Company did not0t make any payments in respect of such instruments during the nine months ended September 30, 20172019 and made payments of approximately $2,000 and $5,000 in respect of such separate instruments during the three and nine months ended September 30, 2016, respectively. At September 30, 2017, there were no dividend equivalent rights outstanding, which had been awarded separately from, but in connection with, grants of RSUs made in prior years.2018.
 
Options
The Company did not grant any stock options during the nine months ended September 30, 2017 and 2016. At September 30, 2017, the Company had no stock options outstanding.
Expense Recognized for Equity-Based Compensation Instruments
 
The following table presents the Company’s expenses related to its equity-based compensation instruments for the three and nine months ended September 30, 20172019 and 20162018:
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
(In Thousands) 2019 2018 2019 2018
RSUs $1,288
 $1,082
 $4,724
 $3,891
Total $1,288
 $1,082
 $4,724
 $3,891

  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
(In Thousands) 
2017 (1)
 2016 
2017 (1)
 2016
RSUs $1,836
 $948
 $5,194
 $3,642
Restricted shares of common stock 74
 153
 175
 457
Dividend equivalent rights —
 —
 —
 44
Total $1,910
 $1,101
 $5,369
 $4,143



(1) Equity-based compensation expense for the three and nine months ended September 30, 2017 includes a one-time expense of approximately $900,000 for the accelerated vesting of certain time-based equity awards arising from the death of the Company’s former Chief Executive Officer.

(b)  Employment Agreements
 
At September 30, 2017,2019, the Company had employment agreements with three4 of its 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.




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(c)  Deferred Compensation Plans
 
The Company administers deferred compensation plans for its senior officers and non-employee directors (collectively, the “Deferred Plans”), pursuant to which participants may elect to defer up to 100% of certain cash compensation.  The Deferred Plans are designed to align participants’ interests with those of the Company’s stockholders.
 
Amounts deferred under the Deferred Plans are considered to be converted into “stock units” of the Company.  Stock units do not represent stock of the Company, but rather are 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 of 1974 and, as such, are not funded.  Prior to the time that the deferred accounts are settled, participants are unsecured creditors of the Company.
 
The Company’s liability for stock units in the Deferred Plans is based on the market price of the Company’s common stock at the measurement date.  The following table presents the Company’s expenses related to its Deferred Plans for its non-employee directors and senior officers for the three and nine months ended September 30, 20172019 and 20162018:
 
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
(In Thousands) 2019 2018 2019 2018
Non-employee directors $134
 $(22) $459
 $—
Total $134
 $(22) $459
 $—
  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
(In Thousands) 2017 2016 2017 2016
Non-employee directors $125
 $52
 $339
 $173
Total $125
 $52
 $339
 $173

 
The following table presents the aggregate amount of income deferred by participants of the Deferred Plans through September 30, 20172019 and December 31, 20162018 that had not been distributed and the Company’s associated liability for such deferrals at September 30, 20172019 and December 31, 20162018:
 
 September 30, 2017 December 31, 2016 September 30, 2019 December 31, 2018
(In Thousands)
Undistributed Income Deferred (1)
  Liability Under Deferred Plans
Undistributed Income Deferred (1)
  Liability Under Deferred Plans
Undistributed Income Deferred (1)
  Liability Under Deferred Plans
Undistributed Income Deferred (1)
  Liability Under Deferred Plans
Non-employee directors $1,525
 $2,061
 $1,066
 $1,263
 $2,216
 $2,734
 $2,263
 $2,417
Total $1,525
 $2,061
 $1,066
 $1,263
 $2,216
 $2,734
 $2,263
 $2,417


(1)  Represents the cumulative amounts that were deferred by participants through September 30, 20172019 and December 31, 20162018, which had not been distributed through such respective date.
 
(d)  Savings Plan
 
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, 20172019 and 2016,2018, the Company recognized expenses for matching contributions of $87,500$94,000 and $86,000,$89,000, respectively, and $262,500$323,000 and $259,000 and$282,000 for the nine months ended September 30, 20172019 and 2016,2018, respectively.



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15.14.  Fair Value of Financial Instruments
 
GAAP requires the categorization of fair value measurements into three broad levels that form a hierarchy. 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 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.
 
The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
 
Securities Obtained and Pledged as Collateral/Obligation to Return Securities Obtained as Collateral
The fair value of U.S. Treasury securities obtained as collateral and the associated obligation to return securities obtained as collateral are based upon prices obtained from a third-party pricing service, which are indicative of market activity.  Securities obtained as collateral are classified as Level 1 in the fair value hierarchy.
MBS and CRTResidential Mortgage Securities
 
The Company determines the fair value of its Agency MBS based upon prices obtained from third-party pricing services, which are indicative of market activity, and repurchase agreement counterparties.
 
For Agency MBS, the valuation methodology of the Company’s third-party pricing services incorporate commonly used market pricing methods, trading activity observed in the marketplace and other data inputs.  The methodology also considers the underlying characteristics of each security, which are also observable inputs, including: collateral vintage, coupon, maturity date, loan age, reset date, collateral type, periodic and life cap, geography, and prepayment speeds.  Management analyzes pricing data received from third-party pricing services and compares it to other indications of fair value including data received from repurchase agreement counterparties and its own observations of trading activity observed in the marketplace.
 
In determining the fair value of itsthe Company’s Non-Agency MBS and CRT securities, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants.  In valuing Non-Agency MBS, the Company understands that pricing services use observable inputs that include, in addition to trading activity observed in the marketplace, loan delinquency data, credit enhancement levels and vintage, which are taken into account to assign pricing factors such as spread and prepayment assumptions.  For tranches of Legacy Non-Agency MBS that are cross-collateralized, performance of all collateral groups involved in the tranche are considered.  The Company collects and considers current market intelligence on all major markets, including benchmark security evaluations and bid-lists from various sources, when available.
 
The Company’s Legacy Non-Agency MBS, RPL/NPL MBS and CRT securities are valued using various market data points as described above, which management considers directly or indirectly observable parameters.  Accordingly, these securities are classified as Level 2 in the fair value hierarchy.

Term Notes Backed by MSR Related Collateral

The Company’s valuation process for term notes backed by MSR related collateral considers a number of factors, including indicative valuations obtained from a third-party pricing service that are reviewed by the Company and may be adjusted to ensure they reflect a realistic exit price at the valuation date given the structural features of these securities. As this process includes significant unobservable inputs, these securities are classified as Level 3 in the fair value hierarchy.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017


Residential Whole Loans, at Fair Value
 
The Company determines the fair value of its residential whole loans held at fair value after considering valuations obtained from a third-party whothat specializes in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, trading activity observedestimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, expected costs and home price appreciation. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the marketplace.appropriate discount yield. The Company’s residential whole loans held at fair value are classified as Level 3 in the fair value hierarchy.



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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019

Term Notes Backed by MSR-Related Collateral

The Company’s valuation process for term notes backed by MSR-related collateral is similar to that used for residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral and, as applicable, the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient. Following a re-evaluation during the quarter of the observability of the data used in its fair value estimation process, the Company determined that it was appropriate to reclassify these assets to Level 2 in the fair value hierarchy as of the end of the quarter.

Swaps
 
As of September 30, 2017, allAll of the Company’s Swaps are cleared by a central clearing house. Valuations provided by the clearing house are used for purposes of determining the fair value of the Company’s Swaps. Such valuations obtained are tested with internally developed models that apply readily observable market parameters.  As the Company’s Swaps are subject to the clearing house’s margin requirements, no0 credit valuation adjustment was considered necessary in determining the fair value of such instruments.  Beginning inSince January 2017, variation margin payments on the Company’s cleared Swaps arehave been treated as a legal settlement of the exposure under the Swap contract. Previously such payments were treated as collateral pledged against the exposure under the related Swap contract. The effect of this change is to reduce what would have otherwise been reported as the fair value of the Swap. Swaps are classified as Level 2 in the fair value hierarchy.

Changes to the valuation methodologies used with respect to the Company’s financial instruments are reviewed by management to ensure any such changes result in appropriate exit price valuations.  The Company will refine its valuation methodologies as markets and products develop and pricing methodologies evolve.  The methods described above may produce fair value estimates 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 those used by 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, and management may conclude that its financial instruments should be reclassified to a different level in the future.
 


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of September 30, 20172019 and December 31, 2016,2018, on the consolidated balance sheets by the valuation hierarchy, as previously described:


Fair Value at September 30, 20172019
 
(In Thousands) Level 1 Level 2 Level 3 Total
Assets:        
Agency MBS $—
 $1,813,873
 $—
 $1,813,873
Non-Agency MBS —
 2,397,789
 —
 2,397,789
CRT securities —
 377,892
 —
 377,892
Residential whole loans, at fair value —
 —
 1,453,169
 1,453,169
Term notes backed by MSR-related collateral —
 1,104,130
 —
 1,104,130
Total assets carried at fair value $—
 $5,693,684
 $1,453,169
 $7,146,853

(In Thousands) Level 1 Level 2 Level 3 Total
Assets:        
Agency MBS $—
 $3,019,304
 $—
 $3,019,304
Non-Agency MBS —
 3,911,660
 —
 3,911,660
CRT securities —
 653,633
 —
 653,633
Term notes backed by MSR related collateral —
 —
 311,563
 311,563
Residential whole loans, at fair value —
 —
 1,103,518
 1,103,518
Securities obtained and pledged as collateral 507,318
 —
 —
 507,318
Total assets carried at fair value $507,318
 $7,584,597
 $1,415,081
 $9,506,996
Liabilities:        
Swaps $—
 $—
 $—
 $—
Obligation to return securities obtained as collateral 507,318
 —
 —
 507,318
Total liabilities carried at fair value $507,318
 $—
 $—
 $507,318


Fair Value at December 31, 20162018
 
(In Thousands) Level 1 Level 2 Level 3 Total
Assets:  
  
  
  
Agency MBS $—
 $2,698,213
 $—
 $2,698,213
Non-Agency MBS —
 3,318,299
 —
 3,318,299
CRT securities —
 492,821
 —
 492,821
Residential whole loans, at fair value —
 —
 1,665,978
 1,665,978
Term notes backed by MSR-related collateral —
 —
 538,499
 538,499
Total assets carried at fair value $—
 $6,509,333
 $2,204,477
 $8,713,810
(In Thousands) Level 1 Level 2 Level 3 Total
Assets:  
  
  
  
Agency MBS $—
 $3,738,497
 $—
 $3,738,497
Non-Agency MBS, including MBS transferred to consolidated VIEs —
 5,684,836
 —
 5,684,836
CRT securities —
 404,850
 —
 404,850
Term notes backed by MSR related collateral —
 140,980
 —
 140,980
Residential whole loans, at fair value —
 —
 814,682
 814,682
Securities obtained and pledged as collateral 510,767
 —
 —
 510,767
Swaps —
 233
 —
 233
Total assets carried at fair value $510,767
 $9,969,396
 $814,682
 $11,294,845
Liabilities:        
Swaps $—
 $46,954
 $—
 $46,954
Obligation to return securities obtained as collateral 510,767
 —
 —
 510,767
Total liabilities carried at fair value $510,767
 $46,954
 $—
 $557,721

 


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis


The following table presents additional information for the three and nine months ended September 30, 20172019 and 20162018 about the Company’s Residential whole loans, at fair value, which are classified as Level 3 and measured at fair value on a recurring basis:


  Residential Whole Loans, at Fair Value
  
Three Months Ended September 30, (1)
 
Nine Months Ended September 30, (1)(2)
(In Thousands) 2019 2018 2019 2018
Balance at beginning of period $1,438,827
 $1,468,540
 $1,471,263
 $1,325,115
Purchases and capitalized advances (3)
 92,208
 76,566
 227,595
 393,867
Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings 13,185
 8,442
 33,312
 26,788
Collection of principal, net of liquidation gains/(losses) (37,565) (54,331) (112,386) (155,199)
  Repurchases —
 (561) (1,216) (1,623)
  Transfer to REO (53,486) (51,089) (165,399) (141,381)
Balance at end of period $1,453,169
 $1,447,567
 $1,453,169
 $1,447,567

  
Residential Whole Loans, at Fair Value (1)
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 
2017 (2)
 2016 
2017 (2)
 2016
Balance at beginning of period $744,072
 $684,582
 $814,682
 $623,276
Purchases and capitalized advances 284,930
 50,071
 295,094
 169,830
Changes in fair value recorded in Net gain on residential whole loans held at fair value 5,289
 10,913
 12,499
 25,529
Collection of principal, net of liquidation gains/losses (17,670) (18,119) (53,366) (48,909)
  Repurchases (257) —
 (1,013) —
  Transfer to REO (33,214) (22,985) (84,746) (65,264)
Balance at end of period $983,150
 $704,462
 $983,150
 $704,462

(1)Included in the activity presented for the three months ended September 30, 2019 and 2018 are approximately $87.0 million and $34.4 million of loans the Company committed to purchase during the three months ended June 30, 2019 and 2018, but for which the closing of the purchase transaction occurred during the three and nine months ended September 30, 2019 and 2018, respectively.
(2)Excludes approximately $1.8 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of September 30, 2018.
(3)Included in the activity presented for the nine months ended September 30, 2019 is an adjustment of $70.6 million for loans the Company committed to purchase during the three months ended December 31, 2018, but for which the closing of the purchase transaction occurred during the three months ended March 31, 2019. The adjustment was required following the finalization of due diligence performed prior to the closing of the purchase transaction and resulted in a downward revision to the prior estimate of the loan purchase amount.

(1) Excluded from the table above are approximately $120.4 million and $92.8 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of September 30, 2017 and 2016, respectively.
(2) Included in the activity presented for the three and nine months ended September 30, 2017 are approximately $92.7 million of loans the Company committed to purchase during the three months ended June 30, 2017, but for which the closing of the purchase transaction occurred during the three months ended September 30, 2017.


The following table presents additional information for the three and nine months ended September 30, 20172019 and 20162018 about the Company’s investments in term notes backed by MSR relatedMSR-related collateral, held at fair value, which arewere classified as Level 3 prior to September 30, 2019 and measured at fair value on a recurring basis:


  Term Notes Backed by MSR Related Collateral
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Balance at beginning of period $1,106,026
 $381,390
 $538,499
 $381,804
Purchases —
 290,042
 573,137
 439,392
  Collection of principal (3,920) (166,120) (12,897) (316,120)
Changes in unrealized gain/(losses) 2,024
 (117) 5,391
 119
Transfer to Level 2 (1,104,130) —
 (1,104,130) —
Balance at end of period $—
 $505,195
 $—
 $505,195

  Term Notes Backed by MSR Related Collateral
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 
2017 (1)
 2016
Balance at beginning of period $273,961
 $—
 $—
 $—
Purchases 161,000
 —
 311,000
 —
  Collection of principal (123,961) —
 (140,980) —
Changes in unrealized gain/losses 563
 —
 563
 —
  Transfers from Level 2 to Level 3 (1)
 —
 —
 140,980
 —
Balance at end of period $311,563
 $—
 $311,563
 $—

(1) Investments in term notes backed by MSR related collateral were transferred from Level 2 to Level 3 during the nine months ended September 30, 2017 as there has been very limited secondary market trading in these securities since issuance. Transfers between levels are deemed to take place on the first day of the reporting period in which the transfer has taken place.


The Company did not transfer any assets or liabilities from one level to another during the three months ended September 30, 2017 and three and nine months ended September 30, 2016.2018.



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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


Fair Value Methodology for Level 3 Financial Instruments


Residential Whole Loans, at Fair Value


The following table presentstables present a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s residential whole loans held at fair value for which it has utilized Level 3 inputs to determine fair value as of September 30, 20172019 and December 31, 2016:2018:


  September 30, 2019
(Dollars in Thousands) 
Fair Value (1)
 Valuation Technique Unobservable Input 
Weighted Average (2)
 Range
           
Residential whole loans, at fair value $797,467
 Discounted cash flow Discount rate 4.6% 4.0-8.0%
      Prepayment rate 4.8% 0.2-17.8%
      Default rate 4.2% 0.0-24.5%
      Loss severity 12.9% 0.0-100.0%
           
  $655,069
 Liquidation model Discount rate 8.0% 6.0-50.0%
      Annual change in home prices 3.7% 2.5-7.3%
      
Liquidation timeline
(in years)
 1.8
 0.1-4.5
      
Current value of underlying properties (3)
 $688
 $4-$4,500
Total $1,452,536
        


 September 30, 2017 December 31, 2018
(Dollars in Thousands) 
Fair Value (1)
 Valuation Technique Unobservable Input 
Weighted Average (2)
 Range 
Fair Value (1)
 Valuation Technique Unobservable Input 
Weighted Average (2)
 Range
          
Residential whole loans, at fair value $304,166
 Discounted cash flow Discount rate 6.1% 5.0-8.0% $700,250
 Discounted cash flow Discount rate 5.2% 4.5-8.0%
   Prepayment rate 7.7% 0.0-13.0%   Prepayment rate 4.8% 0.9-15.9%
   Default rate 4.1% 0.0-9.8%   Default rate 4.1% 0.0-24.1%
   Loss severity 12.6% 0.0-100.0%   Loss severity 12.9% 0.0-100.0%
          
 $488,654
 Liquidation model Discount rate 8.4% 6.7-50.0% $683,252
 Liquidation model Discount rate 8.0% 6.1-50.0%
   Annual change in home prices 2.7% (4.5)-9.7%   Annual change in home prices 3.5% (0.5)-12.2%
   
Liquidation timeline
(in years)
 1.6
 0.1-4.5   
Liquidation timeline
(in years)
 1.8
 0.1-4.5
   
Current value of underlying properties (3)
 $669
 $15-$4,900   
Current value of underlying properties (3)
 $802
 $2-$7,950
Total $792,820
    $1,383,502
   

  December 31, 2016
(Dollars in Thousands) 
Fair Value (1)
 Valuation Technique Unobservable Input 
Weighted Average (2)
 Range
           
Residential whole loans, at fair value $253,287
 Discounted cash flow Discount rate 6.6% 5.0-7.7%
      Prepayment rate 7.6% 0.0-12.0%
      Default rate 2.9% 0.0-9.7%
      Loss severity 13.0% 0.0-77.5%
           
  $516,014
 Liquidation model Discount rate 7.7% 6.8-26.9%
      Annual change in home prices 1.7% (9.2)-7.7%
      
Liquidation timeline
(in years)
 1.6
 0.1-4.4
      
Current value of underlying properties (3)
 $634
 $5-$4,900
Total $769,301
        


(1) Excludes approximately $310.7 million$633,000 and $45.4$282.5 million of loans for which management considers the purchase price continues to reflect the fair value of such loans at September 30, 20172019 and December 31, 2016,2018, respectively.
(2) Amounts are weighted based on the fair value of the underlying loan.
(3) The simple average value of the properties underlying residential whole loans held at fair value valued via a liquidation model was approximately $353,000$357,000 and $320,000$400,000 as of September 30, 20172019 and December 31, 2016,2018, respectively.



Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the fair value of residential whole loans.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172019


The following table presents the difference between the fair value and the aggregate unpaid principal balance of the Company’s residential whole loans for which the fair value option was elected, at September 30, 2017 and December 31, 2016:


  
September 30, 2017 (1)
 December 31, 2016
(In Thousands) Fair Value Unpaid Principal Balance Difference Fair Value Unpaid Principal Balance Difference
Residential whole loans, at fair value            
Total loans $983,150
 $1,178,866
 $(195,716) $814,682
 $966,174
 $(151,492)
Loans 90 days or more past due $690,924
 $853,655
 $(162,731) $570,025
 $695,282
 $(125,257)

(1) Excludes approximately $120.4 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of September 30, 2017.


Term Notes Backed by MSR Related Collateral

The Company’s valuation process for term notes backed by MSR related collateral considers a number of factors, including a comparable bond analysis performed by a third-party pricing service which involves determining a pricing spread at issuance of the term note. The pricing spread is used at each subsequent valuation date to determine an implied yield to maturity of the term note, which is used to derive an indicative market value for the security. This indicative market value is further reviewed by the Company and may be adjusted to ensure it reflects a realistic exit price at the valuation date given the structural features of these securities. At September 30, 2017, the indicative implied yields used in the valuation of these securities ranged from 5.6% to 6.1%. The weighted average indicative yield to maturity was 5.72%. Other factors taken into consideration include indicative values provided by repurchase agreement counterparties, estimated changes in fair value of the related underlying MSR collateral and the financial performance of the ultimate parent or sponsoring entity of the issuer, who has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient.

Changes to the valuation methodologies used with respect to the Company’s financial instruments are reviewed by management to ensure any such changes result in appropriate exit price valuations.  The Company will refine its valuation methodologies as markets and products develop and pricing methodologies evolve.  The methods described above may produce fair value estimates 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 those used by 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, and management may conclude that its financial instruments should be reclassified to a different level in the future.

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Table of Contents
MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at September 30, 20172019 and December 31, 20162018:
 
  Level in Fair Value Hierarchy September 30, 2019 December 31, 2018
Carrying
Value
 Estimated Fair Value
Carrying
Value
 Estimated Fair Value
(In Thousands)
Financial Assets:          
Agency MBS 2 $1,813,873
 $1,813,873
 $2,698,213
 $2,698,213
Non-Agency MBS 2 2,397,789
 2,397,789
 3,318,299
 3,318,299
CRT securities 2 377,892
 377,892
 492,821
 492,821
Residential whole loans, at carrying value 3 4,969,414
 5,115,221
 3,016,715
 3,104,401
Residential whole loans, at fair value 3 1,453,169
 1,453,169
 1,665,978
 1,665,978
MSR-related assets 2 1,164,284
 1,164,284
 611,807
 611,807
Cash and cash equivalents 1 154,193
 154,193
 51,965
 51,965
Restricted cash 1 38,998
 38,998
 36,744
 36,744
Financial Liabilities (1):
          
Repurchase agreements 2 8,571,422
 8,590,674
 7,879,087
 7,896,672
Securitized debt 2 605,712
 609,899
 684,420
 680,209
Convertible Senior Notes 2 223,684
 238,050
 —
 —
Senior Notes 1 96,850
 104,311
 96,816
 99,951

  September 30, 2017 December 31, 2016
Carrying
Value
 Estimated Fair Value
Carrying
Value
 Estimated Fair Value
(In Thousands)
Financial Assets:        
Agency MBS $3,019,304
 $3,019,304
 $3,738,497
 $3,738,497
Non-Agency MBS, including MBS transferred to consolidated VIEs 3,911,660
 3,911,660
 5,684,836
 5,684,836
CRT securities 653,633
 653,633
 404,850
 404,850
MSR related assets 411,840
 412,674
 226,780
 226,780
Residential whole loans, at carrying value 639,216
 693,795
 590,540
 621,548
Residential whole loans, at fair value 1,103,518
 1,103,518
 814,682
 814,682
Securities obtained and pledged as collateral 507,318
 507,318
 510,767
 510,767
Cash and cash equivalents 608,173
 608,173
 260,112
 260,112
Restricted cash 15,440
 15,440
 58,463
 58,463
Swaps —
 —
 233
 233
Financial Liabilities (1):
        
Repurchase agreements 6,871,443
 6,871,553
 8,472,268
 8,472,078
FHLB advances —
 —
 215,000
 215,000
Obligation to return securities obtained as collateral 507,318
 507,318
 510,767
 510,767
Securitized debt 137,327
 139,064
 —
 —
Senior Notes 96,763
 102,231
 96,733
 101,111
Swaps —
 —
 46,954
 46,954
(1)Carrying value of securitized debt, Convertible Senior Notes, Senior Notes and certain repurchase agreements is net of associated debt issuance costs.


(1) Carrying value of securitized debt, Senior Notes and certain repurchase agreements is net of associated debt issuance costs.

In addition to the methodologies used to determine the fair value of the Company’s financial assets and liabilities reportedAssets Measured at fair valueFair Value on a recurring basis discussed on pages 44-49, the following methods and assumptions were used by the Company in arriving at the fair value of the Company’s other financial instruments presented in the above table that are not reported at fair value on a recurring basis:Nonrecurring Basis

Residential Whole Loans, at Carrying Value:  The Company determines the fair value of its residential whole loans held at carrying value after considering portfolio valuations obtained from a third-party who specializes in providing valuations of residential mortgage loans and trading activity observed in the market place. The Company’s residential whole loans held at carrying value are classified as Level 3 in the fair value hierarchy.
Cash and Cash Equivalents and Restricted Cash:  Cash and cash equivalents and restricted cash are comprised of cash held in overnight money market investments and demand deposit accounts.  At September 30, 2017 and December 31, 2016, the Company’s money market funds were invested in securities issued by the U.S. Government, or its agencies, instrumentalities, and sponsored entities, and repurchase agreements involving the securities described above.  Given the overnight term and assessed credit risk, the Company’s investments in money market funds are determined to have a fair value equal to their carrying value.

Corporate Loan: The Company determines the fair value of this loan after considering recent past and expected future loan performance, recent financial performance of the borrower and estimates of the current value of the underlying collateral, which includes certain MSRs and other assets of the borrower that are pledged to secure the borrowing. The Company’s investment in this term loan is classified as Level 3 in the fair value hierarchy.

Repurchase Agreements:  The fair value of repurchase agreements reflects the present value of the contractual cash flows discounted at market interest rates at the valuation date for repurchase agreements with a term equivalent to the remaining term

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to interest rate repricing, which may be at maturity.  Such interest rates are estimated based on LIBOR rates observed in the market.  The Company’s repurchase agreements are classified as Level 2 in the fair value hierarchy.

FHLB Advances: As previously discussed, the Company did not have any FHLB advances as of September 30, 2017. FHLB advances at December 31, 2016 reflected collateralized borrowings at variable market interest rates that reset on a monthly basis. Accordingly, the carrying amount of FHLB advances were considered to approximate fair value. The Company’s FHLB advances at December 31, 2016 were classified as Level 2 in the fair value hierarchy.
Securitized Debt:  In determining the fair value of securitized debt, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants. Accordingly, the Company’s securitized debt is classified as Level 2 in the fair value hierarchy.

Senior Notes:  The fair value of the Senior Notes is determined using the end of day market price quoted on the NYSE at the reporting date.  The Company’s Senior Notes are classified as Level 1 in the fair value hierarchy.

The Company holds REO at the lower of the current carrying amount or fair value less estimated selling costs. At During the nine months ended September 30, 2017 and December 31, 2016,2019, the Company’sCompany recorded REO had an aggregate carrying value of $138.0 million and $80.5 million, andwith an aggregate estimated fair value, less estimated cost to sell, of $159.3$193.5 million and $91.1 million, respectively.at the time of foreclosure. The Company classifies fair value measurements of REO as Level 3 in the fair value hierarchy.


16.15.  Use of Special Purpose Entities and Variable Interest Entities
 
A Special Purpose Entity (“SPE”) is an entity designed to fulfill a specific limited need of the company that organized it.  SPEs are often used to facilitate transactions that involve securitizing financial assets or resecuritizing previously securitized financial assets.  The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying financial assets on improved terms.  Securitization involves transferring assets to a SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business, through the SPE’s issuance of debt or equity instruments.  Investors in ana SPE usually have recourse only to the assets in the SPE and, depending on the overall structure of the transaction, may benefit from various forms of credit enhancement such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement. 


The Company has in prior years entered into several MBS resecuritizationfinancing transactions and during the second quarter of 2017, a loan securitization transaction that resulted in the Company consolidating as VIEs the SPEs that were created to facilitate these transactions. See Note 2(sr) for a discussion of the accounting policies applied to the consolidation of VIEs and transfers of financial assets in connection with securitization and resecuritizationfinancing transactions.
 
The Company has engaged in loan securitization and MBS resecuritization transactionssecuritizations primarily for the purpose of obtaining improved overall financing terms as well as non-recourse financing on a portion of its residential whole loan and Non-Agency MBS portfolios.portfolio. Notwithstanding the Company’s participation

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in these transactions, the risks facing the Company are largely unchanged as the Company remains economically exposed to the first loss position on the underlying assets transferred to the VIEs.
 
Loan Securitization TransactionTransactions


In June 2017, as partThe following table summarizes the key details of athe Company’s loan securitization transaction, the Company sold residential whole loans with an aggregate unpaid principal balancetransactions as of approximately $219.8 million, comprised of approximately $137.0 million Residential whole loans, at carrying value (with unpaid principal balance of $176.6 million)September 30, 2019 and approximately $44.4 million of Residential whole loans, at fair value (with unpaid principal balance of $43.2 million) to MFA 2017-RPL1 Trust, which the Company consolidates as a VIE. In connection with this transaction, third-party investors purchased $147.8 million face amount of fixed-rate, sequential senior and mezzanine bonds (“Sold Bonds”) issued by the VIE at a weighted average fixed-rate of 2.753% and the Company acquired $72.0 million face amount of four classes of rated and non-rated certificates issued by this trust, which together provide credit support to the Sold Bonds, and received $147.8 million in cash, excluding expenses, accrued interest and underwriting fees. The Company also acquired two non-rated, variable-rate interest-only certificates issued by the trust, each with a notional amount of $219.8 million in connection with the transaction.

December 31, 2018:
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(Dollars in Thousands) September 30, 2019 December 31, 2018 
Aggregate unpaid principal balance of residential whole loans sold $1,290,029
 $1,290,029
 
Face amount of Senior Bonds issued by the VIE and purchased by third-party investors $802,817
 $802,817
 
Outstanding amount of Senior Bonds $605,712
(1)$684,420
(1)
Weighted average fixed rate for Senior Bonds issued 3.67%(2)3.66%(2)
Weighted average contractual maturity of Senior Bonds 30 years
(2)31 years
(2)
Face amount of Senior Support Certificates received by the Company (3)
 $275,174
 $275,174
 
Cash received $802,815
 $802,815
 

(1)Net of $3.2 million and $3.8 million of deferred financing costs at September 30, 2019 and December 31, 2018, respectively.
(2)At September 30, 2019 and December 31, 2018, $521.8 million and $582.8 million, respectively, of Senior Bonds sold in securitization transactions contained a contractual coupon step-up feature whereby the coupon increases by 300 basis points at 36 months from issuance if the bond is not redeemed before such date.
(3)Provides credit support to the Senior Bonds sold to third-party investors in the securitization transactions.

As of September 30, 2017,2019 and December 31, 2018, as a result of the transactiontransactions described above, securitized loans with a carrying value of approximately $131.3$189.9 million and $209.4 million are included in “Residential whole loans, at carrying value” andvalue,” securitized loans with a fair value of approximately $40.4$593.3 million and $694.7 million are included in “Residential whole loans, at fair value,” and REO with a carrying value approximately $134.8 million and $79.0 million are included in “Other assets” on the Company’s consolidated balance sheets.sheets, respectively. As of September 30, 2017,2019 and December 31, 2018, the aggregate carrying value of SoldSenior Bonds issued by consolidated VIEs was $137.3 million.$605.7 million and $684.4 million, respectively.  These SoldSenior Bonds are disclosed as “Securitized debt” and are included in Other liabilities on the Company’s consolidated balance sheets.  The holders of the Sold Bondssecuritized debt have no recourse to the general credit of the Company, but the Company does have the obligation, under certain circumstances to repurchase assets from the VIE upon the breach of certain representations and warranties in relationwith respect to the residential whole loans sold to the VIE.  In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE.

Resecuritization Transactions

During the first quarter of 2017, the Company entered into a transaction to exchange the remaining beneficial interests issued by the WFMLT 2012-RR1 (the “Trust”) and held by the Company for the underlying securities that had previously been transferred to and held by the Trust.  Following the completion of this transaction, the remaining beneficial interests were cancelled and the Trust was terminated.

For financial reporting purposes, the exchange transaction and termination of this financing structure did not result in any gain or loss to the Company as this resecuritization was accounted for as a financing transaction.  However, for purposes of determining REIT taxable income, this resecuritization transaction was originally accounted for as a sale of the underlying securities to the Trust and acquisition of beneficial interests issued by the Trust.  Because the fair value of the underlying securities received exceeded the Company’s tax basis in the remaining beneficial interests at the exchange date, the unwind of this resecuritization structure resulted in the Company recognizing taxable income currently estimated to be approximately $47.1 million, or $0.12 per common share. In addition, the underlying securities originally transferred as part of this resecuritization are reported as Non-Agency MBS in the Company’s consolidated balance sheets at September 30, 2017 and interest income from the underlying securities from the date of exchange transaction through September 30, 2017 is reported as Interest income from Non-Agency MBS in the Company’s consolidated statements of operations.

As of September 30, 2017 the Company did not have any Non-Agency MBS that were resecuritized as described above. At December 31, 2016, the aggregate fair value of the Non-Agency MBS that were resecuritized as described above was $174.4 million.  These assets were included in the Company’s consolidated balance sheets and disclosed as “Non-Agency MBS transferred to consolidated VIEs, at fair value.”


The Company concluded that the entities created to facilitate these MBS resecuritization andthe loan securitization transactions are VIEs.  The Company then completed an analysis of whether each VIE created to facilitate the securitization and resecuritization transactions should be consolidated by the Company, based on consideration of its involvement in each VIE, including the design and purpose of the SPE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of each VIE.  In determining whether the Company would be considered the primary beneficiary, the following factors were assessed:
 
whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE;  and
whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.
 
Based on its evaluation of the factors discussed above, including its involvement in the purpose and design of the entity, the Company determined that it was required to consolidate each VIE created to facilitate thesethe loan securitization and MBS resecuritization transactions.


Prior to the completion of the Company’s first MBS resecuritization transaction in October 2010, the Company had not transferred assets to VIEs or QSPEs and other than acquiring MBS issued by such entities, had no other involvement with VIEs or QSPEs.



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SEPTEMBER 30, 20172019


Residential Whole Loans and REO (including Residential Whole Loans and REO transferred to consolidated VIEs)


Included on the Company’s consolidated balance sheets as of September 30, 20172019 and December 31, 20162018 are a total of $1.7$6.4 billion and $1.4$4.7 billion, respectively, of residential whole loans, of which approximately $639.2 million$5.0 billion and $590.5 million$3.0 billion, respectively, are reported at carrying value and $1.1$1.5 billion and $814.7 million$1.7 billion, respectively, are reported at fair value, respectively. The inclusionvalue. These assets, and certain of these assets arises from the Company’s interests inREO assets, are directly owned by certain entitiestrusts established by the Company to acquire the loans and an entityentities established in connection with itsthe Company’s loan securitization transaction.transactions. The Company has assessed that these entities are required to be consolidated. During the three(See Notes 4 and nine months ended September 30, 2017, the Company recognized interest income from residential whole loans reported at carrying value of approximately $9.0 million and $26.2 million, respectively. During the three and nine months ended September 30, 2016, the Company recognized interest income from residential whole loans reported at carrying value of approximately $5.9 million and $16.1 million, respectively. These amounts are included in Interest Income on the Company’s consolidated statements of operations. In addition, the Company recognized net gains on residential whole loans held at fair value during the three and nine months ended September 30, 2017 of approximately $18.7 million and $48.7 million, respectively. During the three and nine months ended September 30, 2016, the Company recognized net gains on residential whole loans held at fair value of $19.6 million and $47.7 million, respectively. These amounts are included in Other Income, net on the Company’s consolidated statements of operations. (See Note 4)5(a))





Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
In this Quarterly Report on Form 10-Q, we refer to MFA Financial, Inc. and its subsidiaries as “the Company,” “MFA,” “we,” “us,” or “our,” unless we specifically state otherwise or the context otherwise indicates.
 
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, 2016.2018.


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 “will,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “could,” “would,” “may”“may,” the negative of these words 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 1934 Act and, as such, may involve known and unknown risks, uncertainties and assumptions.


These forward-looking statements include information about possible or assumed future results with respect to our business, financial condition, liquidity, results of operations, plans and objectives.  Statements regarding the following subjects, among others, may be forward-looking: changes in interest rates and the market (i.e., fair) value of our MBS;MBS, residential whole loans, CRT securities and other assets; changes in the prepayment rates on theresidential mortgage loans securing our MBS,assets, an increase of which could result in a reduction of the yield on MBScertain investments in ourits portfolio and an increase of which could require usMFA to reinvest the proceeds received by usit as a result of such prepayments in MBSinvestments with lower coupons;coupons, while a decrease in which could result in an increase in the interest rate duration of certain investments in MFA’s portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash flows or, in certain circumstances, other-than-temporary impairment on certain Legacy Non-Agency MBS purchased at a discount; credit risks underlying our assets, including changes in the default rates and management’s assumptions regarding default rates on the mortgage loans securing our Non-Agency MBS and relating to our residential whole loan portfolio; our ability to borrow to finance our assets and the terms, including the cost, maturity and other terms, of any such borrowings; implementation of or changes in government regulations or programs affecting our business; our estimates regarding taxable income the actual amount of which is dependent on a number of factors, including, but not limited to, changes in the amount of interest income and financing costs, the method elected by us to accrete the market discount on Non-Agency MBS and residential whole loans and the extent of prepayments, realized losses and changes in the composition of our Agency MBS, Non-Agency MBS and residential whole loan portfolios that may occur during the applicable tax period, including gain or loss on any MBS disposals and whole loan modification foreclosuremodifications, foreclosures and liquidation;liquidations; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of our Board and will depend on, among other things, our taxable income, our financial results and overall financial condition and liquidity, maintenance of our REIT qualification and such other factors as the Board deems relevant; 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 the Investment Company Act), including statements regarding the concept release issued by the SEC relating to interpretive issues under the Investment Company Act with respect to the status under the Investment Company Act of certain companies that are engaged in the business of acquiring mortgages and mortgage-related interests; our ability to successfully implement our strategy to growcontinue growing our residential whole loan portfolio, which is dependent on, among other things, the supply of loans offered for sale in the market; expected returns on ourMFA’s investments in nonperforming residential whole loans (or NPLs), which are affected by, among other things, the length of time required to foreclose upon, sell, liquidate or otherwise reach a resolution of the property underlying the NPL, home price values, amounts advanced to carry the asset (e.g., taxes, insurance, maintenance expenses, etc. on the underlying property) and the amount ultimately realized upon resolution of the asset; targeted or expected returns on our investments in recently-originated loans, the performance of which is, similar to our other mortgage loan investments, subject to, among other things, differences in prepayment risk, credit risk and financing cost associated with such investments; risks associated with MFA’s investments in MSR-related assets, including servicing, regulatory and economic risks, 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 are based on beliefs, assumptions and expectations of our future performance, taking into account all information currently available.  Readers are cautioned not to place undue reliance on these forward-looking statements, which 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.


 
Business/General
 
We are aan internally-managed REIT primarily engaged in the business of investing, on a leveraged basis, in residential mortgage assets, including Agency MBS, Non-Agency MBS, residential whole loans, CRTresidential mortgage securities and MSR relatedMSR-related assets.  Our principal business objective is to deliver shareholder value through the generation of distributable income and through asset performance linked to residential

mortgage credit fundamentals. We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return.
 
At September 30, 2017,2019, we had total assets of approximately $11.1$13.1 billion, of which $6.9$6.4 billion, or 62.4%approximately 49%, represent residential whole loans acquired through interests in certain trusts established to acquire the loans. During the third quarter of 2019, our residential whole loan portfolio continued to grow due to acquisitions of Purchased Performing Loans. Our Purchased Performing Loans, which as of September 30, 2019 comprised approximately 66% of our residential whole loans, include: (i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (or Non-QM loans), (ii) short-term business purpose loans collateralized by residential properties made to non-occupant borrowers who intend to rehabilitate and sell the property for a profit (or Rehabilitation loans or Fix and Flip loans), (iii) loans to finance (or refinance) non-owner occupied one-to-four family residential properties that are rented to one or more tenants (or Single-family rental loans), and (iv) previously originated loans secured by residential real estate that is generally owner occupied (or Seasoned performing loans). In addition, at September 30, 2019, we had approximately $4.6 billion in investments in residential mortgage securities, which represented approximately 35% of our MBS portfolio.total assets.  At such date, our MBS portfolio was comprised of $3.0includes $1.8 billion of Agency MBS, and $3.9$2.4 billion of Non-Agency MBS which includes $2.7and $377.9 million of CRT securities. Non-Agency MBS is comprised of $1.6 billion of Legacy Non-Agency MBS and $1.2 billion$828.0 million of RPL/NPL MBS. These RPL/NPL MBS that are primarilybacked by securitized re-performing and non-performing loans and are generally structured with a contractual coupon step-up feature where the coupon increases up tofrom 300 - 400 basis points at 36 - 48 months from issuance or sooner. These securities are primarily backed by securitized re-performing and non-performing loans. In addition, atAt September 30, 2017, we had approximately $1.72019, our investments in MSR-related assets were $1.2 billion, in residential whole loans acquired through our consolidated trusts, which represented approximately 15.7%or 9% of our total assets. Our MSR-related assets include term notes whose cash flows are considered to be largely dependent on MSR collateral and loan participations to provide financing to mortgage originators that own MSRs. Our remaining investment-related assets, which represent approximately 4% of our total assets at September 30, 2019, were primarily comprised of collateral obtained in connection with reverse repurchase agreements, cash and cash equivalents (including restricted cash), CRT securities, MSR related assets, REO and MBS relatedand loan-related receivables.


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 and the market value of our assets, which is driven by numerous factors, including the supply and demand for residential mortgage assets in the marketplace, the terms and availability of adequate financing, general economic and real estate conditions (both on a national and local level), the impact of government actions in the real estate and mortgage sector, and the credit performance of our credit sensitive residential mortgage assets.  In recent periods, the impact on our GAAP results from market volatility, resulting in changes in market values of certain financial instruments for which changes in fair value are recorded in net income each period, such as CRT securities, certain residential whole loans, Agency MBS, and Swaps not designated as hedges, has increased. 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, the behavior of which involves various risks and uncertainties.  Interest rates and conditional prepayment rates (or CPRs) (which measure the amount of unscheduled principal prepayment on a bondan asset as a percentage of the bondasset balance), 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 borrowings to increase; (ii) the value of certain of our MBS portfolioresidential mortgage assets and, correspondingly, our stockholders’ equity to decline; (iii) coupons on our ARM-MBSadjustable-rate assets to reset, on a delayed basis, to higher interest rates; (iv) prepayments on our MBSassets to decline, thereby slowing the amortization of our MBS purchase premiums and the accretion of our purchase discounts;discounts, and slowing our ability to redeploy capital to generally higher yielding investments; and (v) the value of our derivative hedging instruments and, correspondingly, our stockholders’ equity to increase.  Conversely, decreases in interest rates, in general, may over time cause:  (i) the interest expense associated with our borrowings to decrease; (ii) the value of certain of our MBS portfolioresidential mortgage assets and, correspondingly, our stockholders’ equity to increase; (iii) coupons on our ARM-MBS to reset,adjustable-rate assets, on a delayed basis, to lower interest rates; (iv) prepayments on our MBSassets to increase, thereby accelerating the amortization of our MBS purchase premiums and the accretion of our purchase discounts;discounts, and accelerating the redeployment of our capital to generally lower yielding investments; and (v) the value of our derivative hedging instruments and, correspondingly, our stockholders’ equity to decrease.  In addition, our borrowing costs and credit lines are further affected by the type of collateral we pledge and general conditions in the credit market.
 

Our investments in residential mortgage assets, particularly investments in residential mortgage loans and Non-Agency MBS, expose us to credit risk, generally meaning that we are generally subject to credit losses due to the risk of delinquency, default and foreclosure on the underlying real estate collateral. We believe the discounted purchase prices paid on certain of these investments mitigate our risk of loss in the event that, as we expect on most such investments, we receive less than 100% of the par value of these investments.  With respect to investments in Purchased Performing Loans, we believe that sound underwriting standards, including low LTVs at origination, significantly mitigate our risk of loss. Our investment process for credit sensitive assets focuses primarily on quantifying and pricing credit risk. 

As of September 30, 2017, approximately $3.9 billion, or 56.8%, of our MBS portfolio was in its contractual fixed-rate period or were fixed-rate MBS and approximately $3.0 billion, or 43.2%, was in its contractual adjustable-rate period, or were floating rate MBS with interest rates that reset monthly.  Our ARM-MBS in their contractual adjustable-rate period primarily include MBS collateralized by Hybrids for which the initial fixed-rate period has elapsed, such that the interest rate will typically adjust on an annual or semiannual basis. 

Premiums arise when we acquire an MBS or loan at a price in excess of the aggregate principal balance of the mortgages securing the MBS (i.e., par value). or when we acquire residential whole loans at a price in excess of their aggregate principal balance.  Conversely, discounts arise when we acquire an MBS at a price below the aggregate principal balance of the mortgages securing the MBS or when we acquire residential whole loans at a price below their aggregate principal balance.  Premiums paid on our MBS are amortized against interest income and accretableAccretable purchase discounts on these investments are accreted to interest income.  Purchase premiums, which are primarily carried on our Agency MBS, and certain CRT securities and Non-QM loans, are amortized against interest income over the life of each securitythe investment 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 IRR/interest income earned on these assets. 
 

CPR levels are impacted by, among other things, conditions in the housing market, new regulations, government and private sector initiatives, interest rates, availability of credit to home borrowers, underwriting standards and the economy in general.  In particular, CPR reflects the conditional repayment rate (or CRR), which measures voluntary prepayments of mortgages collateralizing a particular MBS,loan, and the conditional default rate (or CDR), which measures involuntary prepayments resulting from defaults.  CPRs on Agency MBSour residential mortgage securities and Legacy Non-Agency MBSwhole loans may differ significantly.  For the three months ended September 30, 2017,2019, our Agency MBS portfolio experienced a weighted average CPR of 16.2%18.6%, and our Legacy Non-Agency MBS portfolio experienced a weighted average CPR of 18.7%14.9%. Over the last consecutive eight quarters, ending with September 30, 2017,2019, the monthly weighted average CPR on our Agency and Legacy Non-Agency MBS portfolios ranged from a high of 18.4%18.6% experienced during the month ended July 31, 2017September 30, 2019 to a low of 11.3%12.2%, experienced during the month ended February 29, 2016,January 31, 2019, with an average CPR over such quarters of 15.3%15.2%. In addition, for the three months ended September 30, 2019, the weighted average CPR on our Non-QM loan portfolio was 22.8%.
 
Our method of accounting for Non-Agency MBS purchased at significant discounts to par value requires us to make assumptions with respect to each security.  These assumptions include, but are not limited to, future interest rates, voluntary prepayment rates, default rates, mortgage modifications and loss severities.  As part of our Non-Agency MBS surveillance process, we track and compare each security’s actual performance over time to the performance expected at the time of purchase or, if we have modified our original purchase assumptions, to our revised performance expectations.  To the extent that actual performance or our expectation of future performance of our Non-Agency MBS deviates materially from our expected performance parameters, we may revise our performance expectations, suchso that the amount of purchase discount designated as credit discount may be increased or decreased over time.  Nevertheless, credit losses greater than those anticipated or in excess of the recorded purchase discount could occur, which could materially adversely impact our operating results.
 
It is generally our business strategy to hold our residential mortgage assets as long-term investments.  On at least a quarterly basis, excluding investments for which the fair value option has been elected or for which specialized loan accounting is otherwise applied, we assess our ability and intent to continue to hold each asset and, as part of this process, we monitor our MBS, CRT securities and MSR relatedMSR-related assets that are designated as AFS for other-than-temporary impairment.OTTI. A change in our ability and/or intent to continue to hold any of these securities that are in an unrealized loss position, or a deterioration in the underlying characteristics of these securities, could result in our recognizing future impairment charges or a loss upon the sale of any such security.  At September 30, 2017,2019, we had net unrealized gains on our Non-Agency MBS of $648.4$432.4 million, comprised of gross unrealized gains of $648.8$432.7 million and gross unrealized losses of $390,000$261,000, and net unrealized losses of $2.8$3.2 million on our Agency MBS, comprised of gross unrealized losses of $32.9$19.3 million and gross unrealized gains of $30.1$16.1 million. At September 30, 2017,2019, we did not intend to sell any ofsecurities in our MBS or CRT securitiesportfolio that are designated as AFS and that were in an unrealized loss position, and we believe it is more likely than not that we will not be required to sell those securities before recovery of their amortized cost basis, which may be at their maturity.
 
We rely primarily on borrowings under repurchase agreements to finance our residential mortgage assets.  Our residential mortgage investments have longer-term contractual maturities than our borrowings under repurchase agreements.  Even though the majority of our investments have interest rates that adjust over time based on short-term changes in corresponding interest rate indices (typically following an initial fixed-rate period for our Hybrids), the interest rates we pay on our borrowings will typically change at a faster pace than the interest rates we earn on our investments.  In order to reduce this interest rate risk exposure, we may enter into derivative instruments, which at September 30, 20172019 were comprised of Swaps.

Our
The majority of our Swap derivative instruments are designated as cash-flow hedges against a portion of our current and forecasted LIBOR-based repurchase agreements.  OurWhile these Swaps do not extend the maturities of ourthe associated repurchase agreements;agreements being hedged; they do, however, lock in a fixed rate of interest over their term for the notional amount of the Swap corresponding to the hedged item.  During the nine months ended September 30, 2017, we did not enter into any new Swaps and had Swaps with an aggregate notional amount of $350.0 million and a weighted average fixed-pay rate of 0.58% amortize and/or expire. At September 30, 2017, we had Swaps designated in hedging relationships with an aggregate notional amount of $2.6 billion with a weighted average fixed-pay rate of 2.04% and a weighted average variable interest rate received of 1.24%.



Recent Market Conditions and Our Strategy
 
Sadly, during the third quarter of 2017 we lost our former chief executive officer, William S. Gorin, who passed away in August 2017 following a two-year battle with cancer. Shortly prior to Mr. Gorin’s passing, our Board of Directors appointed our President and Chief Operating Officer, Craig L. Knutson, as co-CEO, and Mr. Knutson was appointed as our sole CEO following Mr. Gorin’s death. In connection with Mr. Gorin’s death, we recorded a one-time expense of approximately $5.1 million, which related to our contractual obligations to accelerate the vesting of certain share-based awards previously made to Mr. Gorin and a death benefit payment made to his estate.

At September 30, 2017,2019, our residential mortgage asset portfolio, which includes MBS, residential whole loans CRTand REO, residential mortgage securities and MSR relatedMSR-related assets, was approximately $9.7$12.6 billion compared to $11.5$12.8 billion at December 31, 2016. DuringJune 30, 2019. While portfolio run-off and sales during the three months

ended September 30, 2017,quarter resulted in a modest portfolio reduction, we purchased or committedcontinued to purchase, through consolidated trusts, forsuccessfully expand our new loan initiatives, adding $918 million of Purchased Performing Loans. In addition, consistent with our residential whole loan investment strategy, we made approximately $187.7$100 million of capital contributions to select loan origination partners. For the remainder of 2019, we expect to continue to seek investment opportunities primarily focused on residential whole loans with an unpaid principal balance of approximately $245.2 million. In addition, we acquired approximately $183.7 million of RPL/NPL MBS, $161.0 million of MSR relatedand selectively in residential mortgage securities and MSR-related assets and $29.1 million of CRT securities.as market opportunities arise.


At September 30, 2017, $3.9 billion, or 40.2% ofThe following table presents the activity for our residential mortgage asset portfolio was invested in Non-Agency MBS.  Duringfor the three months ended September 30, 2017, the fair value of our Non-Agency MBS holdings decreased by $406.7 million. The primary components of the change during the quarter in these Non-Agency MBS include $582.0 million of principal repayments and other principal reductions and the sale of Non-Agency MBS with a fair value of $44.5 million partially offset by $187.4 million of purchases (at a weighted average purchase price of 99% of par), and an increase reflecting Non-Agency MBS price changes of $32.4 million.2019:

(In Millions) June 30, 2019 
Runoff (1)
 
Acquisitions (2)
 
Other (3)
 September 30, 2019 Change
Residential whole loans and REO $6,251
 $(396) $918
 $26
 $6,799
 $548
RPL/NPL MBS 1,037
 (342) 133
 —
 828
 (209)
MSR-related assets 1,170
 (15) 7
 2
 1,164
 (6)
CRT securities 407
 —
 —
 (29) 378
 (29)
Legacy Non-Agency MBS 1,691
 (91) —
 (30) 1,570
 (121)
Agency MBS 2,257
 (182) —
 (261) 1,814
 (443)
Totals $12,813
 $(1,026) $1,058
 $(292) $12,553
 $(260)

(1)
Primarily includes principal repayments, cash collections on Purchased Credit Impaired Loans and sales of REO.
(2)Amounts presented exclude capital contributions made to select loan origination partners, which at September 30, 2019 totaled $122.9 million. During the third quarter, we made approximately $100 million in capital contributions to select loan origination partners.
(3)
Primarily includes sales, changes in fair value, net premium amortization/discount accretion and adjustments to record lower of cost or estimated fair value adjustments on REO. During the three months ended September 30, 2019, we sold CRT securities for $29.0 million, realizing gains of $493,000, sold certain Non-Agency MBS for $47.9 million, realizing gains of $14.4 million and sold certain Agency MBS for $257.3 million, realizing gains of $2.8 million.

At September 30, 2017, $3.0 billion, or 31.0% of our residential mortgage asset portfolio, was invested in Agency MBS.  During the three months ended September 30, 2017, the fair value of our Agency MBS decreased by $228.7 million. This was due to $217.8 million of principal repayments, $7.9 million of premium amortization, and $3.0 million in net unrealized losses.

At September 30, 2017,2019, our total recorded investment in residential whole loans and REO was $1.7$6.8 billion, or 17.9%54.2% of our residential mortgage asset portfolio. Of this amount, $639.2 million(i) $5.0 billion is presented as Residential whole loans, at carrying value (of which $4.3 billion were Purchased Performing Loans and $1.1$718.2 million were Purchased Credit Impaired Loans), and (ii) $1.5 billion as Residential whole loans, at fair value, in our consolidated balance sheets. For the three months ended September 30, 2017,2019, we recognized approximately $9.0$64.2 million of income on residentialResidential whole loans, held at carrying value in Interest Income on our consolidated statements of operations, representing an effective yield of 5.92%5.58% (excluding servicing costs). In addition, we recorded a net gain on residential whole loans heldmeasured at fair value through earnings of $18.7$40.2 million in Other Income, net in our consolidated statements of operations for the three months ended September 30, 2017.

2019. At September 30, 2017 our total investment in MSR related assets was $411.8 million. During the three months ended September 30, 2017 we acquired $161.0 million of2019 and had $124.0 million of principal repayments on term notes backed by MSR related collateral. We also acquired $29.1 million of CRT securities, bringing our total investment in these securities to $653.6 million. During the quarter, our CRT portfolio experienced significant price volatility, as markets reacted to concerns related to seasonal hurricanes and other factors. While unrealized losses recognized in net income on this portfolio for the quarter were $5.2 million, our CRT portfolio at September 30, 2017 was in an overall unrealized gain position of $41.0 million.

We will continue to seek investments in residential mortgage assets during the remainder of 2017. The investment landscape is challenging, as market pricing for all asset classes remains high, thereby making it difficult to purchase assets at attractive risk/reward levels. In addition, unlike Agency MBS, certain of our other asset classes are not always available for purchase, as sellers offer these investments from time to time as opposed to more liquid markets which feature active buyers and sellers at nearly all times. We expect that our purchase focus will be primarily on additional credit sensitive residential whole loans, RPL/NPL MBS and MSR related assets. While the third quarter runoff of RPL/NPL MBS slowed considerably from the runoff we experienced in the second quarter (approximately $400 million versus $1.3 billion), we could experience further reduction in this portfolio if issuers continue to call these securities.

Our book value per common share was $7.70 as of September 30, 2017, a decline from book value per common share of $7.76 as of June 30, 2017. This decrease was primarily due to dividends declared during the quarter that exceeded2019, we had REO with an aggregate carrying value of $376.2 million and $334.1 million, respectively, which is included in Other assets on our net income.consolidated balance sheets.

At the end of the third quarter of 2017,2019, the average coupon on mortgages underlying our Agency MBS was higher compared to the end of the third quarter of 2016,2018, due to upward resets on Hybrid and ARM-MBSsecurities within the portfolio.portfolio, purchases of higher coupon Agency MBS in 2018 and the impact of sales of lower coupon Agency MBS during 2019 and 2018.  As a result, the coupon yield on our Agency MBS portfolio increased to 2.98%3.73% for the three months ended September 30, 2017,2019, from 2.83%3.32% for the three months ended September 30, 20162018, and the net Agency MBS yield increased to 1.97%2.32% for the three months ended September 30, 20172019 from 1.83%2.21% for the three months ended September 30, 2016.2018. The net yield foron our Legacy Non-Agency MBS portfolio was 8.93%10.32% for the three months ended September 30, 20172019 compared to 8.09%10.76% for the three months ended September 30, 2016.2018.  The increasedecrease in the net yield on our Legacy Non-Agency MBS portfolio reflects the impact of the cash proceeds received during 2016 in connection with the settlement of litigation related to certain Countrywide and Citigroup sponsored residential mortgage backed securitization trusts and the improved performance of loans underlying the Legacy Non-Agency MBS portfolio, which have resulted in credit reserve releases. The net yield for our RPL/NPL MBS portfolio was 4.43% for the three months ended September 30, 2017 compared to 3.86% for the three months ended September 30, 2016.  The increase in the net yield reflects an increase in the average coupon yield to 4.24% for the three months ended September 30, 2017 from 3.83% for the three months ended September 30, 2016 and higher accretion income recognized in the currentprior year quarter due to the impact of redemptions of certain securities that had been previously purchased at a discount.discount, changes in interest rates since the third quarter of the prior year, the improved performance of loans underlying the Legacy Non-Agency MBS portfolio, which has resulted in credit reserve releases, as well as the impact of the cash proceeds received during 2018 in connection with

the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by JP Morgan Chase & Co. and affiliated entities and Lehman Brothers Holdings Inc. The net yield on our RPL/NPL MBS portfolio was 5.18% for the three months ended September 30, 2019 compared to 5.01% for the three months ended September 30, 2018.  The increase in the net yield reflects an increase in the average coupon yield to 5.18% for the three months ended September 30, 2019 from 4.56% for the three months ended September 30, 2018.
 
We believe that our $593.1$462.1 million Credit Reserve and OTTI appropriately factors in remaining uncertainties regarding underlying mortgage performance and the potential impact on future cash flows forof our existing Legacy Non-Agency MBS

portfolio.  In addition, while the majority of our Legacy Non-Agency MBS will not return their full face value due to loan defaults, we believe that they will deliver attractive loss adjusted yields due to our discounted weighted average amortized cost basis of 71%67% of face value at September 30, 2017.2019. Home price appreciation and underlying mortgage loan amortization have decreased the LTV for many of the mortgages underlying our Legacy Non-Agency portfolio. Home price appreciation during the past few years has generally been driven by a combination of limited housing supply due partly to low levels of new home construction, low mortgage rates and demographic-driven U.S. household formation. Lower LTVs lessen the likelihood of defaults and simultaneously decrease loss severities. Further, during 20162018 and the nine months ended September 30, 2017,2019, we have also observed faster voluntary prepayment (i.e., prepayment of loans in full with no loss) speeds than originally projected. The yields on our Legacy Non-Agency MBS that were purchased at a discount are generally positively impacted if prepayment rates on these securities exceed our prepayment assumptions. Based on these current conditions, we have reduced estimated future losses within our Legacy Non-Agency portfolio. As a result, during the three months ended
Our GAAP book value per common share was $7.09 as of September 30, 2017, $14.8 million was transferred2019, essentially unchanged from Credit Reservebook value per common share of $7.11 as of June 30, 2019 as our portfolio continued to accretable discount.  This increase in accretable discount is expected to increase the interest income realized over the remaining lifedeliver stable book value. Economic book value per common share, a non-GAAP financial measure of our Legacy Non-Agency MBS. The remaining average contractual lifefinancial position that adjusts GAAP book value by the amount of such assets is approximately 19 years, but basedunrealized mark to market gains on scheduled loan amortization and prepayments (both voluntary and involuntary), loan balances will decline substantially over time. Consequently, we believe that the majority of the impact on interest income from the reduction in Credit Reserve will occur over the next ten years.
Atour residential whole loans held at carrying value, was $7.41 at September 30, 2017, we have access2019. For additional information regarding the calculation of Economic book value per share, refer to various sources of liquidity which we estimate to be in excess of $1.2 billion. This amount includes (i) $608.2 million of cash and cash equivalents; (ii) $186.0 million in estimated financing available from unpledged Agency MBS and from other Agency MBS collateral that is currently pledged in excess of contractual requirements; and (iii) $363.4 million in estimated financing available from unpledged Non-Agency MBS. Our sources of liquidity do not include restricted cash. We believe that we are positioned to continue to take advantage of investment opportunities withinpage 83 under the residential mortgage marketplace. heading “Economic Book Value”.

Repurchase agreement funding for our residential mortgage investments continued to be available to us from multiple counterparties during the third quarter of 2017.2019.  Typically, repurchase agreement funding involving credit-sensitive investments is available at terms requiring higher collateralization and higher interest rates than for repurchase agreement funding involving Agency MBS.  At September 30, 2017,2019, our debt consisted of borrowings under repurchase agreements with 3128 counterparties, securitized debt, Convertible Senior Notes, Senior Notes outstanding obligation to return securities obtained as collateral and payable for unsettled purchases, resulting in a debt-to-equity multiple of 2.42.8 times.  (See table on page 7576 under Results of Operations that presents our quarterly leverage multiples since September 30, 2016.2018.)

At September 30, 2019, we have access to various sources of liquidity which we estimate to be in excess of $234.7 million. This amount includes (i) $154.2 million of cash and cash equivalents; (ii) $56.6 million in estimated financing available from unpledged Agency MBS and from other Agency MBS collateral that is currently pledged in excess of contractual requirements; and (iii) $23.9 million in estimated financing available from unpledged Non-Agency MBS and from other Non-Agency MBS and CRT collateral that is currently pledged in excess of contractual requirements. Our sources of liquidity do not include restricted cash. In addition, we have $1.1 billion of unencumbered residential whole loans. We continue to evaluate potential opportunities to finance these assets including loan securitization. With access to multiple sources of liquidity and potential financing opportunities for unencumbered residential whole loans, we believe that we are positioned to continue to take advantage of investment opportunities within the residential mortgage marketplace. 

The net interest spread of our investment portfolio was 1.82% and 2.41% for the three months ended September 30, 2019 and 2018, respectively. The change in our net interest spread was primarily driven by increased funding costs, reflecting an increase in our average borrowings to finance our residential whole loan portfolio, Federal Reserve rate increases during 2018, as well as the impact of changes in funding spreads during this period.

Our estimated net effective duration remained relatively low at 1.14 as of September 30, 2019, and is unchanged from September 30, 2018. We manage our net duration through our investment selection, as well as through the use of interest rate swaps. In addition, our low leverage limits our sensitivity to changes in interest rates.



Information About Our Assets


The tablestable below presentpresents certain information about our asset allocation at September 30, 20172019:
 
ASSET ALLOCATION
  Agency MBS 
Legacy
Non-Agency MBS
 
RPL/NPL MBS (1)
 Credit Risk Transfer Securities MSR Related Assets 
Residential Whole Loans, at Carrying Value (2)
 Residential Whole Loans, at Fair Value 
Other,
net (3)
 Total
(Dollars in Millions)  
  
          
  
  
Fair Value/Carrying Value $3,019
 $2,717
 $1,195
 $654
 $412
 $639
 $1,103
 $748
 $10,487
Less Payable for Unsettled Purchases —
 (4) —
 —
 —
 —
 (120) —
 (124)
Less Repurchase Agreements (2,671) (1,837) (798) (413) (269) (273) (610) —
 (6,871)
Less Senior Notes —
 —
 —
 —
 —
 —
 —
 (97) (97)
Less Securitized Debt —
 —
 —
 —
 —
 (111) (26) —
 (137)
Net Equity Allocated $348
 $876
 $397
 $241
 $143
 $255
 $347
 $651
 $3,258
Debt/Net Equity Ratio (4)
 7.7x 2.1x 2.0x 1.7x 1.9x 1.5x 2.2x   2.4x

(1)RPL/NPL MBS are backed primarily by securitized re-performing and non-performing loans. The securities are structured such that the coupon increases up to 300 basis points at 36 months from issuance or sooner. Included with the balance of Non-Agency MBS reported on our consolidated balance sheets.
(2)The carrying value of such loans reflects the purchase price, accretion of income, cash received and provision for loan losses since acquisition. At September 30, 2017, the fair value of such loans is estimated to be approximately $693.8 million.
(3)Includes cash and cash equivalents and restricted cash, securities obtained and pledged as collateral, other assets, obligation to return securities obtained as collateral and other liabilities.     
(4)Represents the sum of borrowings under repurchase agreements, securitized debt and payable for unsettled purchases as a multiple of net equity allocated.  The numerator of our Total Debt/Net Equity Ratio also includes the obligation to return securities obtained as collateral of $507.3 million and Senior Notes.


Agency MBS
The following table presents certain information regarding the composition of our Agency MBS portfolio as of September 30, 2017 and December 31, 2016:
September 30, 2017
(Dollars in Thousands) 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Coupon (2)
 
3 Month
Average
CPR
15-Year Fixed Rate:  
  
  
  
  
  
  
Low Loan Balance (3)
 $1,000,583
 104.3% 102.5% $1,025,730
 64
 2.95% 11.1%
HARP (4)
 95,571
 104.7
 102.6
 98,095
 63
 2.95
 14.7
Other (Post June 2009) (5)
 87,314
 104.0
 105.2
 91,890
 84
 4.14
 11.9
Other (Pre June 2009) (6)
 315
 104.9
 105.2
 332
 100
 4.50
 28.8
Total 15-Year Fixed Rate $1,183,783
 104.3% 102.7% $1,216,047
 65
 3.04% 11.4%
               
Hybrid:  
  
  
  
  
  
  
Other (Post June 2009) (5)
 $1,092,102
 104.4% 104.2% $1,137,631
 76
 3.16% 20.1%
Other (Pre June 2009) (6)
 553,753
 101.7
 105.0
 581,390
 129
 3.35
 18.8
Total Hybrid $1,645,855
 103.5% 104.4% $1,719,021
 94
 3.23% 19.7%
CMO/Other $80,764
 102.5% 103.0% $83,172
 196
 3.04% 16.1%
Total Portfolio $2,910,402
 103.8% 103.7% $3,018,240
 85
 3.15% 16.2%

December 31, 2016

(Dollars in Thousands) 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Coupon (2)
 3 Month
Average
CPR
15-Year Fixed Rate:  
  
  
  
  
  
  
Low Loan Balance (3)
 $1,170,788
 104.3% 103.0% $1,206,174
 55
 2.97% 11.2%
HARP (4)
 116,790
 104.7
 103.0
 120,290
 54
 2.96
 12.1
Other (Post June 2009) (5)
 106,343
 104.0
 105.7
 112,400
 75
 4.14
 14.3
Other (Pre June 2009) (6)
 564
 104.9
 105.9
 597
 91
 4.50
 28.8
Total 15-Year Fixed Rate $1,394,485
 104.3% 103.2% $1,439,461
 57
 3.06% 11.5%
               
Hybrid:  
  
  
  
  
  
  
Other (Post June 2009) (5)
 $1,370,019
 104.4% 104.8% $1,436,184
 67
 2.99% 19.9%
Other (Pre June 2009) (6)
 720,419
 101.7
 105.6
 761,052
 120
 3.03
 17.0
Total Hybrid $2,090,438
 103.5% 105.1% $2,197,236
 86
 3.01% 18.9%
CMO/Other $96,379
 102.5% 102.9% $99,196
 187
 2.81% 14.7%
Total Portfolio $3,581,302
 103.8% 104.3% $3,735,893
 77
 3.02% 15.9%

(1)  Does not include principal payments receivable of $1.1 million and $2.6 million at September 30, 2017 and December 31, 2016, respectively.
(2)  Weighted average is based on MBS current face at September 30, 2017 and December 31, 2016, respectively.
(3)  Low loan balance represents MBS collateralized by mortgages with an original loan balance of less than or equal to $175,000.
(4)  Home Affordable Refinance Program (or HARP) MBS are backed by refinanced loans with LTVs greater than or equal to 80% at origination.
(5)  MBS issued in June 2009 or later. Majority of underlying loans are ineligible to refinance through the HARP program.
(6)  MBS issued before June 2009.

The following table presents certain information regarding our 15-year fixed-rate Agency MBS as of September 30, 2017 and December 31, 2016:
September 30, 2017

Coupon 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Loan Rate
 
Low Loan
Balance
and/or
HARP (3)
 3 Month
Average
CPR
(Dollars in Thousands)                
15-Year Fixed Rate:  
  
  
  
    
  
  
2.5% $608,076
 104.0% 101.3% $616,008
 57 3.04% 100% 10.6%
3.0% 243,604
 105.9
 103.0
 250,902
 63 3.49
 100
 11.5
3.5% 5,944
 103.5
 104.5
 6,211
 83 4.18
 100
 6.2
4.0% 281,506
 103.5
 105.0
 295,672
 82 4.40
 80
 13.3
4.5% 44,653
 105.2
 105.8
 47,254
 86 4.88
 34
 11.8
Total 15-Year Fixed Rate $1,183,783
 104.3% 102.7% $1,216,047
 65 3.53% 93% 11.4%

December 31, 2016

Coupon 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Loan Rate
 
Low Loan
Balance
and/or
HARP (3)
 3 Month
Average
CPR
(Dollars in Thousands)                
15-Year Fixed Rate:  
  
  
  
    
  
  
2.5% $700,388
 104.0% 101.6% $711,696
 48 3.04% 100% 9.9%
3.0% 288,648
 105.9
 103.3
 298,311
 54 3.49
 100
 11.3
3.5% 7,244
 103.5
 104.6
 7,576
 74 4.18
 100
 15.7
4.0% 343,105
 103.5
 105.9
 363,258
 73 4.40
 80
 14.2
4.5% 55,100
 105.2
 106.4
 58,620
 77 4.88
 34
 14.5
Total 15-Year Fixed Rate $1,394,485
 104.3% 103.2% $1,439,461
 57 3.54% 92% 11.5%

(1)  Does not include principal payments receivable of $1.1 million and $2.6 million at September 30, 2017 and December 31, 2016, respectively.
(2)  Weighted average is based on MBS current face at September 30, 2017 and December 31, 2016, respectively.
(3)  Low Loan Balance represents MBS collateralized by mortgages with an original loan balance less than or equal to $175,000.  HARP MBS are backed by refinanced loans with LTVs greater than or equal to 80% at origination.


The following table presents certain information regarding our Hybrid Agency MBS as of September 30, 2017 and December 31, 2016:
September 30, 2017
(Dollars in Thousands) 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Coupon (2)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Months to
Reset (3)
 
Interest
Only (4)
 3 Month
Average
CPR
Hybrid Post June 2009:                  
Agency 5/1 $425,236
 104.3% 104.7% $445,304
 3.44% 86 6 27% 23.3%
Agency 7/1 486,038
 104.4
 103.8
 504,745
 2.95
 71 14 25
 20.2
Agency 10/1 180,828
 104.6
 103.7
 187,582
 3.08
 65 54 64
 12.0
Total Hybrids Post June 2009 $1,092,102
 104.4% 104.2% $1,137,631
 3.16% 76 17 32% 20.1%
                   
Hybrid Pre June 2009:                  
Coupon < 4.5% (5)
 $545,851
 101.7% 105.0% $573,132
 3.32% 130 6 24% 18.9%
Coupon >= 4.5% (6)
 7,902
 101.8
 104.5
 8,258
 5.50
 118 6 44
 12.0
Total Hybrids Pre June 2009 $553,753
 101.7% 105.0% $581,390
 3.35% 129 6 24% 18.8%
Total Hybrids $1,645,855
 103.5% 104.4% $1,719,021
 3.23% 94 14 29% 19.7%

December 31, 2016

(Dollars in Thousands) 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Coupon (2)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Months to
Reset (3)
 
Interest
Only (4)
 3 Month
Average
CPR
Hybrid Post June 2009:                  
Agency 5/1 $551,736
 104.3% 105.7% $583,318
 2.93% 76 6 25% 17.7%
Agency 7/1 618,414
 104.5
 104.3
 645,200
 3.00
 62 21 24
 22.8
Agency 10/1 199,869
 104.7
 103.9
 207,666
 3.13
 58 61 64
 17.1
Total Hybrids Post June 2009 $1,370,019
 104.4% 104.8% $1,436,184
 2.99% 67 21 30% 19.9%
                   
Hybrid Pre June 2009:  
  
  
  
  
      
  
Coupon < 4.5% (5)
 $691,572
 101.7% 105.6% $730,626
 2.92% 121 6 33% 16.9%
Coupon >= 4.5% (6)
 28,847
 101.4
 105.5
 30,426
 5.71
 112 7 69
 18.1
Total Hybrids Pre June 2009 $720,419
 101.7% 105.6% $761,052
 3.03% 120 6 34% 17.0%
Total Hybrids $2,090,438
 103.5% 105.1% $2,197,236
 3.01% 86 15 32% 18.9%

(1)  Does not include principal payments receivable of $1.1 million and $2.6 million at September 30, 2017 and December 31, 2016, respectively.
(2)  Weighted average is based on MBS current face at September 30, 2017 and December 31, 2016, respectively.
(3)  Weighted average months to reset is the number of months remaining before the coupon interest rate resets.  At reset, the MBS coupon will adjust based upon the underlying benchmark interest rate index, margin and periodic or lifetime caps.  The months to reset do not reflect scheduled amortization or prepayments.
(4)  Interest only represents MBS backed by mortgages currently in their interest-only period.  Percentage is based on MBS current face at September 30, 2017 and December 31, 2016, respectively.
(5)  Agency 3/1, 5/1, 7/1 and 10/1 Hybrid ARM-MBS with coupon less than 4.5%.
(6)  Agency 3/1, 5/1, 7/1 and 10/1 Hybrid ARM-MBS with coupon greater than or equal to 4.5%.


(Dollars in Millions) Agency MBS 
Legacy
Non-Agency MBS
RPL/NPL MBS (1)
Credit Risk Transfer Securities
Residential Whole Loans, at Carrying Value (2)
Residential Whole Loans, at Fair ValueMSR-Related Assets
Other,
net (3)
Total
Fair Value/Carrying Value$1,814
$1,570
$828
$378
$4,969
$1,453
$1,164
$785
$12,961
Less Payable for Unsettled Purchases—
—
—
—
(60)—
—
—
(60)
Less Repurchase Agreements(1,676)(1,232)(643)(304)(3,046)(679)(918)(73)(8,571)
Less Securitized Debt—
—
—
—
(139)(467)—
—
(606)
Less Convertible Senior Notes—
—
—
—
—
—
—
(224)(224)
Less Senior Notes—
—
—
—
—
—
—
(97)(97)
Net Equity Allocated$138
$338
$185
$74
$1,724
$307
$246
$391
$3,403
Debt/Net Equity Ratio (4)
12.1x3.6x3.5x4.1x1.9x3.7x3.7x2.8x

(1)RPL/NPL MBS are backed primarily by securitized re-performing and non-performing loans. The following table presents informationsecurities are generally structured such that the coupon increases from 300 - 400 basis points at 36 - 48 months from issuance or sooner. Included with respect to ourthe balance of Non-Agency MBS reported on our consolidated balance sheets.
(2)Includes $2.7 billion of Non-QM loans, $968.9 million of Rehabilitation loans, $366.4 million of Single-family rental loans, $189.0 million of Seasoned performing loans and $718.2 million of Purchased Credit Impaired Loans. At September 30, 2019, the total fair value of these loans is estimated to be approximately $5.1 billion.
(3)Includes cash and cash equivalents and restricted cash, other assets and other liabilities.     
(4)Represents the sum of borrowings under repurchase agreements, securitized debt and payable for unsettled purchases as a multiple of net equity allocated.  The numerator of our Total Debt/Net Equity Ratio also includes Convertible Senior Notes and Senior Notes.


Agency MBS
The following tables present certain information regarding the composition of our Agency MBS portfolio as of September 30, 2019 and December 31, 2018:
September 30, 2019
(Dollars in Thousands) 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Coupon (2)
 
3 Month
Average
CPR
15-Year Fixed Rate:  
  
  
  
  
  
  
Low Loan Balance (3)
 $490,402
 104.5% 102.5% $502,631
 90
 3.04% 11.5%
Generic 108,221
 104.4
 103.1
 111,597
 96
 3.46
 11.1
Total 15-Year Fixed Rate $598,623
 104.5% 102.6% $614,228
 91
 3.12% 11.4%
               
30-Year Fixed Rate:              
Generic $296,065
 104.2% 105.5% $312,491
 15
 4.50% 24.8%
Total 30-Year Fixed Rate $296,065
 104.2% 105.5% $312,491
 15
 4.50% 24.8%
               
Hybrid $804,449
 103.5% 103.9% $836,014
 118
 4.26% 20.8%
CMO/Other $48,662
 102.6% 103.1% $50,175
 208
 4.37% 13.5%
Total Portfolio $1,747,799
 103.9% 103.7% $1,812,908
 94
 3.91% 18.6%

December 31, 2018

(Dollars in Thousands) 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Coupon (2)
 3 Month
Average
CPR
15-Year Fixed Rate:  
  
  
  
  
  
  
Low Loan Balance (3)
 $647,482
 104.4% 100.0% $647,405
 80
 3.01% 8.2%
Generic 132,713
 104.4
 101.1
 134,220
 88
 3.50
 10.1
Total 15-Year Fixed Rate $780,195
 104.4% 100.2% $781,625
 81
 3.09% 8.5%
               
30-Year Fixed Rate:              
Generic $711,158
 104.0% 103.6% $736,498
 6
 4.50% 4.7%
Total 30-Year Fixed Rate $711,158
 104.0% 103.6% $736,498
 6
 4.50% 4.7%
               
Hybrid $1,080,569
 103.5% 103.5% $1,118,638
 108
 3.90% 20.0%
CMO/Other $58,708
 102.6% 102.9% $60,415
 206
 4.05% 18.7%
Total Portfolio $2,630,630
 103.9% 102.5% $2,697,176
 74
 3.82% 12.5%

(1)Does not include principal payments receivable of $965,000 and $1.0 million at September 30, 20172019 and December 31, 2016:2018, respectively.
(2)Weighted average is based on MBS current face at September 30, 2019 and December 31, 2018, respectively.
(3)Low loan balance represents MBS collateralized by mortgages with an original loan balance of less than or equal to $175,000.


The following tables present certain information regarding our fixed-rate Agency MBS as of September 30, 2019 and December 31, 2018:
September 30, 2019

Coupon 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Loan Rate
 
Low Loan
Balance
and/or
HARP (3)
 3 Month
Average
CPR
(Dollars in Thousands)                
15-Year Fixed Rate:  
  
  
  
    
  
  
2.5% $255,293
 104.1% 101.4% $258,823
 82 3.06% 100% 9.9%
3.0% 156,958
 105.9
 102.5
 160,917
 86 3.49
 100
 11.4
3.5% 2,935
 103.5
 103.5
 3,036
 107 4.19
 100
 10.5
4.0% 157,918
 103.5
 104.4
 164,822
 106 4.40
 81
 14.2
4.5% 25,519
 105.3
 104.4
 26,630
 110 4.89
 35
 8.9
Total 15-Year Fixed Rate $598,623
 104.5% 102.6% $614,228
 91 3.61% 92% 11.4%
                 
30-Year Fixed Rate:                
4.5% $296,065
 104.2% 105.5% $312,491
 15 5.16% —% 24.8%
Total 30-Year Fixed Rate $296,065
 104.2% 105.5% $312,491
 15 5.16% —% 24.8%
Total Fixed Rate Portfolio $894,688
 104.4% 103.6% $926,719
 66 4.12% 62% 17.1%

December 31, 2018

Coupon 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Loan Rate
 
Low Loan
Balance
and/or
HARP (3)
 3 Month
Average
CPR
(Dollars in Thousands)                
15-Year Fixed Rate:  
  
  
  
    
  
  
2.5% $359,252
 104.1% 98.6% $354,252
 73 3.03% 100% 6.4%
3.0% 185,912
 105.9
 100.3
 186,548
 77 3.49
 100
 8.4
3.5% 3,798
 103.5
 101.4
 3,853
 98 4.18
 100
 12.8
4.0% 199,352
 103.5
 102.4
 204,055
 97 4.40
 81
 11.9
4.5% 31,881
 105.3
 103.3
 32,917
 101 4.88
 34
 12.7
Total 15-Year Fixed Rate $780,195
 104.4% 100.2% $781,625
 81 3.57% 92% 8.5%
                 
30-Year Fixed Rate:                
4.5% $711,158
 104.0% 103.6% $736,498
 6 5.17% —% 4.7%
Total 30-Year Fixed Rate $711,158
 104.0% 103.6% $736,498
 6 5.17% —% 4.7%
Total Fixed Rate Portfolio $1,491,353
 104.2% 101.8% $1,518,123
 45 4.33% 48% 6.8%

(1)Does not include principal payments receivable of $965,000 and $1.0 million at September 30, 2019 and December 31, 2018, respectively.
(2)Weighted average is based on MBS current face at September 30, 2019 and December 31, 2018, respectively.
(3)Low Loan Balance represents MBS collateralized by mortgages with an original loan balance less than or equal to $175,000.  Home Affordable Refinance Program (or HARP) MBS are backed by refinanced loans with LTVs greater than or equal to 80% at origination.


The following tables present certain information regarding our Hybrid Agency MBS as of September 30, 2019 and December 31, 2018:
September 30, 2019
(Dollars in Thousands) 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Coupon (2)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Months to
Reset (3)
 
Interest
Only (4)
 3 Month
Average
CPR
Hybrid                  
Agency 3/1 $51,361
 102.6% 104.6% $53,733
 4.58% 161 5 —% 13.5%
Agency 5/1 351,788
 103.3
 104.4
 367,196
 4.53
 128 6 16
 21.4
Agency 7/1 258,132
 103.5
 104.1
 268,617
 4.43
 108 7 19
 24.4
Agency 10/1 143,168
 104.3
 102.3
 146,468
 3.18
 95 28 60
 15.1
Total Hybrids $804,449
 103.5% 103.9% $836,014
 4.26% 118 10 24% 20.8%

December 31, 2018

(Dollars in Thousands) 
Current
Face
 
Weighted
Average
Purchase
Price
 
Weighted
Average
Market
Price
 
Fair
Value (1)
 
Weighted
Average
Coupon (2)
 
Weighted
Average
Loan Age
(Months) (2)
 
Weighted
Average
Months to
Reset (3)
 
Interest
Only (4)
 3 Month
Average
CPR
Hybrid                  
Agency 3/1 $66,369
 102.6% 104.7% $69,478
 4.42% 151 6 —% 14.7%
Agency 5/1 462,833
 103.3
 104.2
 482,466
 4.30
 118 5 15
 20.6
Agency 7/1 389,734
 103.7
 103.5
 403,471
 3.62
 96 6 20
 23.7
Agency 10/1 161,633
 104.3
 101.0
 163,223
 3.20
 86 36 59
 11.2
Total Hybrids $1,080,569
 103.5% 103.5% $1,118,638
 3.90% 108 10 22% 20.0%

(1)Does not include principal payments receivable of $965,000 and $1.0 million at September 30, 2019 and December 31, 2018, respectively.
(2)Weighted average is based on MBS current face at September 30, 2019 and December 31, 2018, respectively.
(3)Weighted average months to reset is the number of months remaining before the coupon interest rate resets.  At reset, the MBS coupon will adjust based upon the underlying benchmark interest rate index, margin and periodic or lifetime caps.  The months to reset do not reflect scheduled amortization or prepayments.
(4)Interest only represents MBS backed by mortgages currently in their interest-only period.  Percentage is based on MBS current face at September 30, 2019 and December 31, 2018, respectively.



Non-Agency MBS
The following table presents information with respect to our Non-Agency MBS at September 30, 2019 and December 31, 2018:
(In Thousands) September 30, 2019 December 31, 2018 
Non-Agency MBS  
  
 
Face/Par $2,529,749
 $3,538,804
 
Fair Value 2,397,789
 3,318,299
 
Amortized Cost 1,965,357
 2,867,703
 
Purchase Discount Designated as Credit Reserve and OTTI (462,095)(1)(516,116)(2)
Purchase Discount Designated as Accretable (102,297) (155,025) 
Purchase Premiums —
 40
 

(In Thousands) September 30, 2017 December 31, 2016 
 Non-Agency MBS  
  
 
Face/Par $4,101,102
 $6,065,618
 
Fair Value 3,911,660
 5,684,836
 
Amortized Cost 3,263,226
 5,093,243
 
Purchase Discount Designated as Credit Reserve and OTTI (593,134)(1)(694,241)(2)
Purchase Discount Designated as Accretable (244,793) (278,191) 
Purchase Premiums 51
 57
 

(1)Includes discount designated as Credit Reserve of $578.3$451.1 million and OTTI of $14.8$11.0 million.
(2)Includes discount designated as Credit Reserve of $675.6$503.3 million and OTTI of $18.6$12.8 million.

Purchase Discounts on Non-Agency MBS
The following table presents the changes in the components of purchase discount on Non-Agency MBS with respect to purchase discount designated as Credit Reserve and OTTI, and accretable purchase discount, for the three and nine months ended September 30, 2019 and 2018:
  Three Months Ended
September 30, 2019		 Three Months Ended
September 30, 2018
(In Thousands) Discount
Designated as
Credit Reserve and OTTI		 
Accretable
Discount (1) 
 Discount
Designated as
Credit Reserve and OTTI		 
 Accretable Discount (1)
Balance at beginning of period $(479,566) $(117,753) $(553,596) $(202,248)
Impact of RMBS Issuer Settlement (2)
 —
 —
 —
 (2,734)
Accretion of discount —
 10,357
 —
 20,115
Realized credit losses 4,062
 —
 12,042
 —
Purchases —
 —
 (1,975) 1,368
Sales 12,479
 6,029
 1,552
 1,974
Transfers/release of credit reserve 930
 (930) 10,220
 (10,220)
Balance at end of period $(462,095) $(102,297) $(531,757) $(191,745)

  Nine Months Ended
September 30, 2019		 Nine Months Ended
September 30, 2018
(In Thousands) Discount
Designated as
Credit Reserve and OTTI		 
Accretable
Discount (1) 
 Discount
Designated as
Credit Reserve and OTTI		 
 Accretable Discount (1)
Balance at beginning of period $(516,116) $(155,025) $(593,227) $(215,325)
Impact of RMBS Issuer Settlement (2)(3)
 —
 (1,688) —
 (14,822)
Accretion of discount —
 38,215
 —
 54,860
Realized credit losses 21,482
 —
 31,443
 —
Purchases (624) 291
 (2,510) 1,856
Sales 23,842
 25,231
 7,144
 7,079
Transfers/release of credit reserve 9,321
 (9,321) 25,393
 (25,393)
Balance at end of period $(462,095) $(102,297) $(531,757) $(191,745)


Purchase Discounts on Non-Agency MBS
The following table presents the changes in the components of purchase discount on Non-Agency MBS with respect to purchase discount designated as Credit Reserve and OTTI, and accretable purchase discount, for the three and nine months ended September 30, 2017 and 2016:
  Three Months Ended 
 September 30, 2017		 Three Months Ended 
 September 30, 2016
(In Thousands) Discount
Designated as
Credit Reserve and OTTI		 
Accretable
Discount (1) 
 Discount
Designated as
Credit Reserve and OTTI		 
 Accretable Discount (1)
Balance at beginning of period $(626,498) $(257,967) $(724,198) $(325,548)
Accretion of discount —
 18,621
 —
 20,236
Realized credit losses 13,982
 —
 15,629
 —
Purchases —
 (1,929) (15,124) 9,830
Sales 4,620
 11,244
 2,398
 6,523
Net impairment losses recognized in earnings —
 —
 (485) —
Transfers/release of credit reserve 14,762
 (14,762) 6,822
 (6,822)
Balance at end of period $(593,134) $(244,793) $(714,958) $(295,781)

  Nine Months Ended 
 September 30, 2017		 Nine Months Ended 
 September 30, 2016
(In Thousands) Discount
Designated as
Credit Reserve and OTTI		 
Accretable
Discount (1) 
Discount
Designated as
Credit Reserve and OTTI		 
 Accretable Discount (1)
Balance at beginning of period $(694,241) $(278,191) $(787,541) $(312,182)
Impact of RMBS Issuer Settlement (2)
 —
 —
 —
 (52,881)
Accretion of discount —
 60,461
 —
 61,153
Realized credit losses 39,445
 —
 49,408
 —
Purchases (484) (3,449) (25,999) 13,210
Sales 29,398
 10,166
 16,281
 28,297
Net impairment losses recognized in earnings (1,032) —
 (485) —
Transfers/release of credit reserve 33,780
 (33,780) 33,378
 (33,378)
Balance at end of period $(593,134) $(244,793) $(714,958) $(295,781)

(1)Together with coupon interest, accretable purchase discount is recognized as interest income over the life of the security.
(2)Includes the impact of approximately $61.8$2.7 million of cash proceeds (a one-time payment) received by the Company during the three and nine months ended September 30, 20162018 in connection with the settlement of litigation related to certain Countrywide sponsored residential mortgage backed securitization trusts.


The following table presents informationtrusts that were sponsored by Lehman Brothers Holdings Inc.
(3)Includes the impact of cash proceeds (a one-time payment) received by the Company in connection with respectthe settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by JP Morgan Chase & Co. and affiliated entities of approximately $1.7 million during the yield components of our Non-Agency MBS for the threenine months ended September 30, 20172019 and 2016:approximately $12.1 million during the nine months ended September 30, 2018.


The following table presents information with respect to the yield components of our Non-Agency MBS for the three months ended September 30, 2019 and 2018:
  Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
  
Legacy
Non-Agency MBS
 RPL/NPL MBS 
Legacy
Non-Agency MBS
 RPL/NPL MBS
Non-Agency MBS        
Coupon Yield (1)
 6.92% 5.18% 6.32% 4.56%
Effective Yield Adjustment (2)
 3.40
 —
 4.44
 0.45
Net Yield 10.32% 5.18% 10.76% 5.01%

  Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
  
Legacy
Non-Agency MBS
 RPL/NPL MBS 
Legacy
Non-Agency MBS
 RPL/NPL MBS
Non-Agency MBS        
Coupon Yield (1)
 5.63% 4.24% 5.28% 3.83%
Effective Yield Adjustment (2)
 3.30
 0.19
 2.81
 0.03
Net Yield 8.93% 4.43% 8.09% 3.86%

(1)Reflects the annualized coupon interest income divided by the average amortized cost.  The discounted purchase price on Legacy Non-Agency MBS causes the coupon yield to be higher than the pass-through coupon interest rate.
(2)The effective yield adjustment is the difference between the net yield, calculated utilizing management’s estimates of timing and amount of future cash flows for Legacy Non-Agency MBS and RPL/NPL MBS, less the current coupon yield.

Actual maturities of MBS are generally shorter than stated contractual maturities because actual maturities of MBS are affected by the contractual lives of the underlying mortgage loans, periodic payments of principal and prepayments of principal.  The following table presents certain information regarding the amortized costs, weighted average yields and contractual maturities of our MBS at September 30, 2019 and does not reflect the effect of prepayments or scheduled principal amortization on our MBS:
  Within One Year One to Five Years Five to Ten Years Over Ten Years Total MBS
(Dollars in Thousands) 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Total
Amortized
Cost
 
Total Fair
Value
 
Weighted
Average
Yield
Agency MBS:      
  
  
  
  
  
  
  
  
Fannie Mae $—
 —% $663
 2.80% $417,660
 1.72% $846,079
 2.39% $1,264,402
 $1,260,016
 2.17%
Freddie Mac —
 —
 —
 —
 211,475
 1.71
 336,966
 1.78
 548,441
 549,610
 1.75
Ginnie Mae —
 —
 —
 —
 70
 3.70
 4,124
 3.49
 4,194
 4,247
 3.49
Total Agency MBS $—
 —% $663
 2.80% $629,205
 1.72% $1,187,169
 2.22% $1,817,037
 $1,813,873
 2.05%
Non-Agency MBS $26,937
 5.85% $103,165
 4.39% $1,982
 4.12% $1,833,273
 8.58% $1,965,357
 $2,397,789
 8.31%
Total MBS $26,937
 5.85% $103,828
 4.38% $631,187
 1.73% $3,020,442
 6.08% $3,782,394
 $4,211,662
 5.30%


CRT Securities

At September 30, 2019, our total investment in CRT securities was $377.9 million, with a net unrealized gain of $7.8 million, a weighted average yield of 3.95% and a weighted average time to maturity of 10.9 years. At December 31, 2018, our total investment in CRT securities was $492.8 million, with a net unrealized gain of $6.6 million, a weighted average yield of 5.85% and weighted average time to maturity of 11.1 years.

During three months ended September 30, 2019, we sold certain CRT securities for $29.0 million, realizing gains of $493,000. The net income impact of these sales, after reversal of previously unrealized gains on CRT securities on which we had elected the fair value option, was a loss of approximately $15,000.



Actual maturities of MBS are generally shorter than stated contractual maturities because actual maturities of MBS are affected by the contractual lives of the underlying mortgage loans, periodic payments of principal and prepayments of principal.  The following table presents certain information regarding the amortized costs, weighted average yields and contractual maturities of our MBS at September 30, 2017 and does not reflect the effect of prepayments or scheduled principal amortization on our MBS:
  Within One Year One to Five Years Five to Ten Years Over Ten Years Total MBS
(Dollars in Thousands) 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
 
Total
Amortized
Cost
 
Total Fair
Value
 
Weighted
Average
Yield
Agency MBS:      
  
  
  
  
  
  
  
  
Fannie Mae $—
 —% $173
 2.05% $563,126
 2.00% $1,834,686
 1.99% $2,397,985
 $2,404,220
 1.99%
Freddie Mac —
 —
 —
 —
 143,086
 2.29
 474,364
 1.82
 617,450
 608,349
 1.93
Ginnie Mae —
 —
 —
 —
 100
 2.32
 6,550
 2.13
 6,650
 6,735
 2.13
Total Agency MBS $—
 —% $173
 2.05% $706,312
 2.06% $2,315,600
 1.95% $3,022,085
 $3,019,304
 1.98%
Non-Agency MBS $—
 —
 $306,082
 3.98% $53
 1.16% $2,957,091
 7.74% $3,263,226
 $3,911,660
 7.39%
Total MBS $—
 —% $306,255
 3.98% $706,365
 2.06% $5,272,691
 5.20% $6,285,311
 $6,930,964
 4.79%


CRT Securities

At September 30, 2017, our CRT securities had an amortized cost of $612.7 million, a fair value of $653.6 million, a weighted average yield of 5.67% and a weighted average time to maturity of 9.4 years. At December 31, 2016, our CRT securities had an amortized cost of $382.7 million, a fair value of $404.9 million, a weighted average yield of 5.86% and weighted average time to maturity of 9.0 years.



Residential Whole Loans


The following table presents the contractual maturities of our residential whole loans held by consolidated trusts and certain entities established in connection with our loan securitization transactions at September 30, 20172019 and does not reflect estimates of prepayments or scheduled amortization. For residential whole loansPurchased Credit Impaired Loans held at carrying value, amounts presented are estimated based on the underlying loan contractual amounts.


(In Thousands) 
Residential Whole Loans,
at Carrying Value
 
Residential Whole Loans,
at Fair Value (1)
 
Purchased
Performing Loans (1)(2)
 Purchased Credit
Impaired Loans		 Residential Whole Loans, at Fair Value
Amount due:    
      
Within one year $1,471
 $7,981
 $725,252
 $863
 $7,388
After one year:          
Over one to five years 4,002
 12,577
 273,977
 4,210
 7,060
Over five years 633,743
 962,592
 3,192,852
 713,124
 1,438,721
Total due after one year $637,745
 $975,169
 $3,466,829
 $717,334
 $1,445,781
Total residential whole loans $639,216
 $983,150
 $4,192,081
 $718,197
 $1,453,169


(1)Excludes an allowance for loan losses of $388,000 at September 30, 2019.
(2)Excludes approximately $59.5 million of Purchased Performing Loans for which the closing of the purchase transaction had not occurred as of September 30, 2019.

(1) Excludes approximately $120.4 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of September 30, 2017.


The following table presents, at September 30, 2017,2019, the dollar amount of certain of our residential whole loans, held at fair value, contractually maturing after one year, and indicates whether the loans have fixed interest rates or adjustable interest rates:


(In Thousands) 
Residential Whole Loans,
at Fair Value (1)(2)
 
Purchased
Performing Loans (1)(2)(3)
 
Residential Whole Loans, at Fair Value (1)
Interest rates:  
    
Fixed $561,122
 $1,042,617
 $992,373
Adjustable 414,047
 2,424,212
 453,408
Total $975,169
 $3,466,829
 $1,445,781


(1)Includes loans on which borrowers have defaulted and are not making payments of principal and/or interest as of September 30, 2019.
(2)Excludes an allowance for loan losses of $388,000 at September 30, 2019.
(3)Excludes approximately $59.5 million of Purchased Performing Loans for which the closing of the purchase transaction had not occurred as of September 30, 2019.
(1)  Includes loans on which borrowers have defaulted and are not making payments of principal and/or interest as of September 30, 2017.
(2) Excludes approximately $120.4 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of September 30, 2017.


Information is not presented for residential whole loansPurchased Credit Impaired Loans held at carrying value as income is recognized based on pools of assets with similar risk characteristics using an estimated yield based on cash flows expected to be collected over the lives of the loans in such pools rather than on the contractual coupons of the underlying loans.


The following table presents additional information regarding our residential whole loans held at fair value at
MSR-Related Assets

At September 30, 20172019 and December 31, 2016:
  
Residential Whole Loans,
at Fair Value
(Dollars in Thousands) September 30, 2017 December 31, 2016
Loans 90 days or more past due (1):
    
Number of Loans 3,276
 2,560
Aggregate Amount Outstanding $690,924
 $570,025

(1) Excludes loans which are 90 2018, we had $1.1 billion and $538.5 million, respectively, of term notes issued by SPVs that have acquired the rights to receive cash flows representing the servicing fees and/or more days past due at excess servicing spread associated with certain MSRs. At September 30, 2017 from2019, these term notes had an amortized cost of $1.1 billion, gross unrealized gains of approximately $5.4 million, a weighted average yield of 4.99% and a weighted average term to maturity of 5.7 years. At December 31, 2018, these term notes had an amortized cost of $538.5 million, gross unrealized losses of approximately $7,000, a weighted average yield of 5.32% and a weighted average term to maturity of 4.7 years.

During the $120.4year ended December 31, 2018, we participated in a loan where we committed to lend $100.0 million of residential whole loans heldwhich approximately $60.2 million was drawn at fair value for which the closing of the purchase transaction had not occurred as of September 30, 2017.

Income2019. At September 30, 2019, the coupon paid by the borrower on residential whole loans held at carrying valuethe drawn amount is recognized based5.39%, the remaining term associated with the loan is 11 months and the remaining commitment period on pools of assets with similar credit risk characteristics using an estimated yield based on cash flows expected to be collected over the lives of the loans in such pools rather than the contractual coupons of the underlying loans. As the unit of accountany undrawn amount is at the pool level rather than the individual loan level, none of our residential whole loans held at carrying value are currently considered 90 days or more past due.

11 months.

Exposure to Financial Counterparties
 
We finance a significant portion of our residential mortgage assets with repurchase agreements and other advances.agreements. In connection with these financing arrangements, we pledge our assets as collateral to secure the borrowing. The amount of collateral pledged will typically exceed the amount of the financing with the extent of over-collateralization ranging from 1% -3% to 5% of the amount borrowed (U.S. Treasury andfor Agency MBS collateral) tocollateral, up to 35% (Non-Agencyfor Non-Agency MBS, collateral).CRT securities, MSR-related asset and other interest-earning asset collateral, and up to 50% for residential whole loan collateral. Consequently, while repurchase agreement financing results in usour recording a liability to the counterparty in our consolidated balance sheets, we are exposed to the counterparty, if during the term of the repurchase agreement financing, a lender should default on its obligation and we are not able to recover our pledged assets. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral.
 



The table below summarizes our exposure to our counterparties at September 30, 20172019, by country:
Country 
Number of
Counterparties
 
Repurchase
Agreement
Financing
 
Exposure (1)
 
Exposure as a
Percentage of
MFA Total
Assets
(Dollars in Thousands)         
Number of
Counterparties
 
Repurchase
Agreement
Financing
 
Exposure (1)
 
Exposure as a
Percentage of
MFA Total
Assets
European Countries: (2)
    
  
  
    
  
  
Switzerland (3)
 3 $1,216,558
 $451,176
 4.06% 3 $1,784,463
 $533,756
 4.07%
United Kingdom 2 1,366,569
 304,171
 2.32
France 2 633,669
 164,412
 1.48
 2 307,106
 81,288
 0.62
United Kingdom 2 389,142
 118,615
 1.07
Holland 1 128,838
 10,898
 0.10
 1 63,480
 6,237
 0.05
Total European 8 2,368,207
 745,101
 6.71% 8 $3,521,618
 $925,452
 7.06%
Other Countries:    
  
  
    
  
  
United States 14 $3,393,888
 $822,352
 7.41% 14 $3,829,800
 $909,930
 6.94%
Canada (4)
 3 546,052
 138,114
 1.24
 2 839,212
 216,941
 1.66
Japan (5)
 3 458,915
 39,246
 0.35
 3 223,428
 24,777
 0.19
China (5)
 1 412,410
 13,115
 0.12
South Korea 1 192,229
 12,931
 0.12
 1 158,487
 16,746
 0.13
Total Other 22 5,003,494
 1,025,758
 9.24% 20 $5,050,927
 $1,168,394
 8.92%
Total 30 $7,371,701
(6)$1,770,859
 15.95% 28 $8,572,545
 $2,093,846
 15.98%


(1)Represents for each counterparty the amount of cash and/or securities pledged as collateral less the aggregate of repurchase agreement financing and net interest receivable/payable on all such instruments.
(2)Includes European-based counterparties as well as U.S.-domiciled subsidiaries of the European parent entity.
(3)Includes London branch of one counterparty and Cayman Islands branch of the other counterparty.
(4)Includes Canada-based counterparties as well as U.S.-domiciled subsidiaries of Canadian parent entities. In the case of one counterparty, also includes exposure of $411.4$212.4 million to a Barbados-based affiliate of the Canadian parent entity.
(5)Exposure is to U.S.-domiciled subsidiary of the Japanese or Chinese parent entity, as the case may be.entity.
(6)Includes $500.0 million of repurchase agreements entered into in connection with contemporaneous repurchase and reverse repurchase agreements with a single counterparty.

 
At September 30, 2017,2019, we did not use credit default swaps or other forms of credit protection to hedge the exposures summarized in the table above.
 
Uncertainty in the global financial market and weak economic conditions in Europe, including as a result of the United Kingdom’s recent vote to leave the European Union (commonly known as “Brexit”), could potentially impact our major European financial counterparties, with the possibility that this would also impact the operations of their U.S. domiciled subsidiaries. This could adversely affect our financing and operations as well as those of the entire mortgage sector in general. Management monitors our exposure to our repurchase agreement counterparties on a regular basis, using various methods, including review of recent rating agency actions or other developments and by monitoring the amount of cash and securities collateral pledged and the associated loan amount under repurchase agreements with our counterparties. We intend to make reverse margin calls on our counterparties to recover excess collateral as permitted by the agreements governing our financing arrangements, or take other necessary actions to reduce the amount of our exposure to a counterparty when such actions are considered necessary. 


Tax Considerations
 
Current period estimated taxable income and items expected to impact future taxable income


We estimate that for the nine months ended September 30, 2017,2019, our taxable income was approximately $250.9$263.6 million. Based on dividends paid or declared during the nine months ended September 30, 2017,2019, we have undistributed taxable income of approximately $60.7$17.9 million, or $0.15$0.04 per share. We have until the filing of our 20172019 tax return (due not later than October 15, 2018)2020) to declare the distribution of any 20172019 REIT taxable income not previously distributed.

During the first quarter of 2017 we unwound our remaining MBS resecuritization transaction. We currently estimate that the unwind will generate taxable income (but not GAAP income) of an amount in excess of $0.12 per share. During the second

quarter of 2017 we entered into our first securitization of residential whole loans. As part of this transaction, loans deemed to be sold for tax purposes are estimated to generate 2017 taxable income in excess of $0.01 per share.


Key differences between GAAP net income and REIT Taxable Income for Non-Agency MBSResidential Mortgage Securities and Residential Whole Loans
 
Our total Non-Agency MBS portfolio for tax differs from our portfolio reported for GAAP primarily due to the fact that for tax purposes;purposes: (i) certain of the MBS contributed to the VIEs used to facilitate MBS resecuritization transactions were deemed to be sold; and (ii) the tax basis of underlying MBS considered to be re-acquiredreacquired in connection with the unwind of such transactions becomesbecame the fair market value of such securities at the time of the unwind. For GAAP reporting purposes the underlying MBS that were included in these MBS resecuritization transactions were not considered to be sold. Similarly, for tax purposes the residential whole loans contributed to the VIEsVIE used to facilitate our second quarter 2017 loan securitization transaction were deemed to be sold for tax purposes, but not for GAAP reporting purposes. In addition, for our Non-Agency MBS and residential whole loan tax portfolios, potential timing differences arise with respect to the accretion of market discount and amortization of premium into income andas well as the recognition of realized losses for tax purposes as compared to GAAP.  Further, use of fair value accounting for certain residential mortgage securities and residential whole loans for GAAP, but not for tax, also gives rise to potential timing differences. Consequently, our REIT taxable income calculated in a given period may differ significantly from our GAAP net income.
 
The determination of taxable income attributable to Non-Agency MBS and residential whole loans is dependent on a number of factors, including principal payments, defaults, loss mitigation efforts and loss severities.  In estimating taxable income for Non-Agency MBS and residential whole loans during the year, management considers estimates of the amount of discount expected to be accreted.  Such estimates require significant judgment and actual results may differ from these estimates.  Moreover, the deductibility of realized losses from Non-Agency MBS and residential whole loans and their effect on market discount accretion isand premium amortization are analyzed on an asset-by-asset basis and, while they will result in a reduction of taxable income, this reduction tends to occur gradually and, primarily for Non-Agency MBS, in periods after the realized losses are reported. In addition, for MBSsecuritization and resecuritization transactions that were treated as a sale of the underlying MBS or residential whole loans for tax purposes, taxable gain or loss, if any, resulting from the unwind of such transactions is not recognized in GAAP net income.
 
Securitization transactions result in differences between GAAP net income and REIT Taxable Income
 
For tax purposes, depending on the transaction structure, a securitization and/or resecuritization transaction may be treated either as a sale or a financing of the underlying collateral.  Income recognized from securitization and resecuritization transactions will differ for tax and GAAP purposes.  For tax purposes, we own and may in the future acquire interests in securitization and/or resecuritization trusts, in which several of the classes of securities are or will be issued with Original Issue Discountoriginal issue discount (or OID).  As the holder of the retained interests in the trust, we generally will be required to include OID in our current gross interest income over the term of the applicable securities as the OID accrues.  The rate at which the OID is recognized into taxable income is calculated using a constant rate of yield to maturity, with realized losses impacting the amount of OID recognized in REIT taxable income once they are actually incurred.  Under the Tax Cuts and Jobs Act of 2017 (or TCJA), the timing of REIT taxable income may be affected by when we include such income for financial accounting purposes. For tax purposes, REIT taxable income may be recognized in excess of economic income (i.e., OID) or in advance of the corresponding cash flow from these assets, thereby effectingaffecting our dividend distribution requirement to stockholders. In addition, for securitization and/or resecuritization transactions that were treated as a sale of the underlying collateral for tax purposes, the unwindunwinding of any such transaction will likely result in a taxable gain or loss that is likely not recognized in GAAP net income since securitization and resecuritization transactions are typically accounted for as financing transactions for GAAP purposes. The tax basis of underlying residential whole loans or MBS re-acquired in connection with the unwind of such transactions becomes the fair market value of such assets at the time of the unwind.

Taxable income of consolidated TRS subsidiaries is included in GAAP income, but may not be included in REIT Taxable Income
Net income generated by our TRS subsidiaries is included in consolidated GAAP net income, but may not be included in REIT taxable income in the same period. Net income of U.S. domiciled TRS subsidiaries is included in REIT taxable income

when distributed by the TRS. Net income of foreign domiciled TRS subsidiaries is included in REIT taxable income as if distributed to the REIT in the taxable year it is earned by the foreign domiciled TRS.

Regulatory Developments
 
The U.S. Congress, Board of Governors of the Federal Reserve, System, U.S. Treasury, Federal Deposit Insurance Corporation, SEC and other governmental and regulatory bodies have taken and continue to consider additional actions in response to the 2007-2008 financial crisis.  In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (or the Dodd-Frank Act) created a new regulator, an independent bureau housed within the Federal Reserve System and known as the Consumer Financial Protection Bureau (or the CFPB). The CFPB has broad authority over a wide range of consumer financial products and services, including mortgage lending.lending and servicing.  One portion of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act (or Mortgage Reform Act), contains underwriting and servicing standards for the mortgage industry, restrictions on compensation for mortgage loan originators, and various other requirements related to mortgage origination.origination and servicing.  In addition, the Dodd-Frank Act grants enforcement authority and broad discretionary regulatory authority to the CFPB to prohibit or condition terms, acts or practices relating to residential mortgage loans that the CFPB finds abusive, unfair, deceptive or predatory, as well as to take other actions that the CFPB finds are necessary or proper to ensure responsible affordable mortgage credit remains available to consumers.  The Dodd-Frank Act also affects the securitization of mortgages (and other assets) with requirements for risk retention by securitizers and requirements for regulating Rating Agencies.rating agencies.



The Dodd-Frank Act requires that numerous regulations be issued, many of which (including those mentioned above regarding servicing, underwriting and mortgage loan originator compensation) have only recently been implemented and operationalized. As a result, we are unable to fully predict at this time how the Dodd-Frank Act, as well as other laws or regulations that may be adopted in the future, will affect our business, results of operations and financial condition, or the environment for repurchase financing and other forms of borrowing, the investing environment for Agency MBS, Non-Agency MBS and/or residential mortgage loans, the securitization industry, Swaps and other derivatives.  However, at a minimum, we believe that the Dodd-Frank Act and the regulations promulgated thereunder are likely to continue to increase the economic and compliance costs for participants in the mortgage and securitization industries, including us.


In addition to the regulatory actions being implemented under the Dodd-Frank Act, on August 31, 2011, the SEC issued a concept release under which it is reviewing interpretive issues related to Section 3(c)(5)(C) of the Investment Company Act.  Section 3(c)(5)(C) excludes from the definition of “investment company” entities that are primarily engaged in, among other things, “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.”  Many companies that engage in the business of acquiring mortgages and mortgage-related instruments seek to rely on existing interpretations of the SEC Staff with respect to Section 3(c)(5)(C) so as not to be deemed an investment company for the purpose of regulation under the Investment Company Act.  In connection with the concept release, the SEC requested comments on, among other things, whether it should reconsider its existing interpretation of Section 3(c)(5)(C). To date the SEC has not taken or otherwise announced any further action in connection with the concept release.


The FHFAFederal Housing Finance Agency (or FHFA) and both houses of Congress have discussed and considered separate measures intended to restructure the U.S. housing finance system and the operations of Fannie Mae and Freddie Mac. Congress may continue to consider legislation that would significantly reform the country’s mortgage finance system, including, among other things, eliminating Freddie Mac and Fannie Mae and replacing them with a single new MBS insurance agency. Many details remain unsettled, including the scope and costs of the agencies’ guarantee and their affordable housing mission, some of which could be addressed even in the absence of large-scale reform. On March 27, 2019, President Trump issued a memorandum on federal housing finance reform that directed the Secretary of the Treasury to develop a plan for administrative and legislative reforms as soon as practicable to achieve the following housing reform goals: 1) ending the conservatorships of the Government-sponsored enterprises (or GSEs) upon the completion of specified reforms; 2) facilitating competition in the housing finance market; 3) establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States; and 4) providing that the federal government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market. On September 5, 2019, in response to President Trump’s memorandum, the U.S. Department of the Treasury released a plan, developed in conjunction with the FHFA, the Department of Housing and Urban Development, and other government agencies, which includes legislative and administrative reforms to achieve each of these reform goals. At this point, it remains unclear whether any of these legislative or regulatory reforms will be enacted or implemented. The prospects for passage of any of these plans are uncertain, but the proposals underscore the potential for change to Fannie Mae and Freddie Mac. On September 30, 2019, the Treasury Department and FHFA jointly announced an agreement to permit the GSEs to retain capital of up to a combined $45 billion. In conjunction with this agreement on capital retention, FHFA is also expected to continue work on a proposed rule for GSE capital requirements that would take effect once the GSEs have been released from government conservatorship.


While the likelihood of enactment of major mortgage finance system reform in the short term remains uncertain, it is possible that the adoption of any such reforms could adversely affect the types of assets we can buy, the costs of these assets and our business operations.  As the FHFA and both houses of Congress continue to consider various measures intended to dramatically restructure the U.S. housing finance system and the operations of Fannie Mae and Freddie Mac, we expect debate and discussion on the topic to continue throughout 2017. However,2019, and we cannot be certain whether alternative plans may be proposed by the Trump Administration or if any housing and/or mortgage-related legislation will emerge from committee, or be approved by Congress, and if so, what the effect willwould be on our business.






Results of Operations


Quarter Ended September 30, 20172019 Compared to the Quarter Ended September 30, 20162018
 
General
 
For the third quarter of 2017,2019, we had net income available to our common stock and participating securities of $60.1$91.8 million, or $0.15$0.20 per basic and diluted common share, compared to net income available to common stock and participating securities of $79.3$83.4 million, or $0.19 per basic and diluted common share, for the third quarter of 2018. The increase in net income available to common stock and participating securities primarily reflects lower unrealized losses on residential mortgage securities measured at fair value through earnings, higher net gains on our residential whole loans measured at fair value through earnings, higher net Other income, partially offset by losses realized on the unwind of certain Swaps not designated as hedges for accounting purposes. In addition, operating and other expenses were higher for the third quarter of 2019, primarily due to higher costs in connection with managing our residential whole loan and REO portfolios, which have grown significantly compared to the prior year period, and higher compensation related expenses, reflecting higher headcount.

For the third quarter of 2019, Core earnings was $0.20 per common share, compared to $0.21 per basic and diluted common share for the third quarter of 2016. The decrease in2018. Core earnings is a non-GAAP measure of our financial performance and is computed by adjusting GAAP net income available to common and participating securities by excluding the impact of unrealized gains and losses on certain of our investments. For additional information regarding the calculation of Core earnings, including to reconcile to GAAP net income available to common stock and participating securities, andrefer to page 83 under the decrease of this item on a per share basis primarily reflects a decrease in our net interest income, primarily on our Agency and Non-Agency MBS portfolios and lower other income, driven primarily by unrealized losses on CRT securities accounted for at fair value, partially offset by gains on liquidation of certain residential whole loans accounted for at carrying value. In addition, operating and other expenses were higher primarily due to non-recurring expenses in relation to our contractual obligation to accelerate the vesting of certain share based awards and to make a death benefit payment to the estate of our former Chief Executive Officer.heading “Core Earnings”.


Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.  Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid.  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.investments.  Interest rates and CPRs (which measure the amount of unscheduled principal prepayment on a bond or loan as a percentage of the bondits unpaid balance) vary according to the type of investment, conditions in the financial markets and other factors, none of which can be predicted with any certainty.
 
The changes in average interest-earning assets and average interest-bearing liabilities and their related yields and costs are discussed in greater detail below under “Interest Income” and “Interest Expense.”
 
For the third quarter of 2017,2019, our net interest spread and margin were 2.02%1.82% and 2.54%2.19%, respectively, compared to a net interest spread and margin of 2.13%2.41% and 2.46%2.82%, respectively, for the third quarter of 2016.2018. Our net interest income decreased by $8.7$1.7 million, or 13.5%2.8%, to $55.9 million from $64.5$56.9 million for the third quarter of 2016.2019, from $58.6 million for the third quarter of 2018. Current quarter net interest income from Agency MBS and Legacy Non-Agency MBS, CRT securities and Agency MBS declined by approximately $15.9 million compared to the third quarter of 2016 by approximately $11.0 million,2018, primarily due to lower average amounts invested in these securities, lower yields earned on our CRT securities and Legacy Non-Agency MBS, and higher funding costs for our Agency MBS, partially offset by higher yields earned on these investments. In addition,our Agency MBS portfolio. These decreases were primarily offset by higher net interest income on RPL/NPL MBS was $6.8 million lowerfrom residential whole loans held at carrying value and MSR-related assets compared to the third quarter of 2016 primarily due to lower average amounts invested in these securities and higher funding costs partially offset by higher yields earned on these securities. These decreases were partially offset by higher net interest income on MSR related assets, CRT securities and residential whole loans at carrying value2018 of approximately $9.2$18.3 million, compared to the third quarter of 2016, primarily due to higher average balancesamounts invested in these assets. In addition, net interest income also includes $4.6$11.7 million of interest expense associated with residential whole loans held at fair value, reflecting a $1.3 million increase in borrowing costs related to these investments compared to the third quarter of 2016.2018. Coupon interest income received from residential whole loans at fair value is presented as a component of the total income earned on these investments and therefore is included in Other Income, net rather than net interest income.






Analysis of Net Interest Income
 
The following table sets forth certain information about the average balances of our assets and liabilities and their related yields and costs for the three months ended September 30, 20172019 and 20162018. Average yields are derived by dividing annualized interest income by the average amortized cost of the related assets, and average costs are derived by dividing annualized interest expense by the daily average balance of the related liabilities, for the periods shown.  The yields and costs include premium amortization and purchase discount accretion which are considered adjustments to interest rates.
 Three Months Ended September 30, Three Months Ended September 30,
 2017 2016 2019 2018
(Dollars in Thousands) Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost
Assets:  
  
  
  
  
  
  
  
  
  
  
  
Interest-earning assets:  
  
  
  
  
  
  
  
  
  
  
  
Agency MBS (1)
 $3,154,112
 $15,533
 1.97% $4,143,523
 $18,957
 1.83% $2,037,817
 $11,806
 2.32% $2,595,896
 $14,332
 2.21%
Legacy Non-Agency MBS (1)
 2,182,148
 48,693
 8.93
 2,858,731
 57,818
 8.09
 1,214,589
 31,347
 10.32
 1,709,704
 46,010
 10.76
RPL/NPL MBS (1)
 1,315,737
 14,559
 4.43
 2,673,527
 25,820
 3.86
 1,021,398
 13,235
 5.18
 1,010,910
 12,657
 5.01
Total MBS 6,651,997
 78,785
 4.74
 9,675,781
 102,595
 4.24
 4,273,804
 56,388
 5.28
 5,316,510
 72,999
 5.49
CRT securities (1)
 604,322
 8,676
 5.74
 294,704
 3,983
 5.41
 390,051
 4,251
 4.36
 500,649
 7,748
 6.19
MSR related assets (1)
 454,354
 7,194
 6.33
 —
 —
 —
Residential whole loans, at carrying value (2)
 609,538
 9,026
 5.92
 388,601
 5,917
 6.09
 4,602,337
 64,226
 5.58
 2,003,913
 29,524
 5.89
MSR-related assets (1)
 1,160,627
 15,274
 5.26
 482,100
 6,407
 5.32
Cash and cash equivalents (3)
 657,331
 1,452
 0.88
 307,147
 221
 0.29
 199,070
 903
 1.81
 181,242
 754
 1.66
Other interest-earning assets 105,867
 1,679
 6.34
 —
 —
 —
Total interest-earning assets 8,977,542
 105,133
 4.68
 10,666,233
 112,716
 4.23
 10,731,756
 142,721
 5.32
 8,484,414
 117,432
 5.54
Total non-interest-earning assets (2)
 2,487,953
     2,146,677
    
Total non-interest-earning assets 2,449,468
  
   2,838,746
    
Total assets $11,465,495
     $12,812,910
     $13,181,224
  
   $11,323,160
    
                        
Liabilities and stockholders’ equity:                        
Interest-bearing liabilities:                        
Total repurchase agreements and other advances (4)
 $7,022,913
 $46,303
 2.58% $8,868,173
 $46,158
 2.04%
Total repurchase agreements (4)
 $8,654,350
 $74,240
 3.36% $6,594,050
 $50,881
 3.02%
Securitized debt 139,276
 962
 2.70
 —
 —
 —
 617,689
 5,692
 3.61
 665,572
 5,986
 3.52
Convertible Senior Notes 223,496
 3,879
 6.94
 —
 —
 —
Senior Notes 96,756
 2,010
 8.31
 96,718
 2,009
 8.31
 96,842
 2,012
 8.31
 96,797
 2,011
 8.31
Total interest-bearing liabilities 7,258,945
 49,275
 2.66
 8,964,891
 48,167
 2.10
 9,592,377
 85,823
 3.50
 7,356,419
 58,878
 3.13
Total non-interest-bearing liabilities 927,877
     842,227
     188,175
    
 551,749
    
Total liabilities 8,186,822
     9,807,118
     9,780,552
    
 7,908,168
    
Stockholders’ equity 3,278,673
     3,005,792
     3,400,672
    
 3,414,992
    
Total liabilities and stockholders’ equity $11,465,495
     $12,812,910
     $13,181,224
    
 $11,323,160
    
                        
Net interest income/net interest rate spread (5)
   $55,858
 2.02%   $64,549
 2.13%   $56,898
 1.82%   $58,554
 2.41%
Net interest-earning assets/net interest margin (6)
 $1,718,597
   2.54% $1,701,342
   2.46% $1,139,379
   2.19% $1,127,995
   2.82%
Ratio of interest-earning assets to
interest-bearing liabilities		 1.24x     1.19x    


(1)Yields presented throughout this Quarterly Report on Form 10-Q are calculated using average amortized cost data for securities which excludes unrealized gains and losses and includes principal payments receivable on securities.  For GAAP reporting purposes, purchases and sales are reported on the trade date. Average amortized cost data used to determine yields is calculated based on the settlement date of the associated purchase or sale as interest income is not earned on purchased assets and continues to be earned on sold assets until settlement date.  Includes Non-Agency MBS transferred to consolidated VIEs.
(2)Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.
(3)Includes average interest-earning cash, cash equivalents and restricted cash.
(4)Average cost of repurchase agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.
(5)Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.
(6)Net interest margin reflects annualized net interest income divided by average interest-earning assets.

Rate/Volume Analysis


The following table presents the extent to which changes in interest rates (yield/cost) and changes in the volume (average balance) of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated.  Information is provided in each category with respect to: (i) the changes attributable to changes in volume (changes in average balance multiplied by prior rate); (ii) the changes attributable to changes in rate (changes in rate multiplied by prior average balance); and (iii) the net change.  The changes attributable to the combined impact of volume and rate have been allocated proportionately, based on absolute values, to the changes due to rate and volume.
 Three Months Ended September 30, 2017 Three Months Ended September 30, 2019
 Compared to Compared to
 Three Months Ended September 30, 2016 Three Months Ended September 30, 2018
 Increase/(Decrease) due to 
Total Net
Change in
Interest Income/Expense
 Increase/(Decrease) due to 
Total Net
Change in
Interest Income/Expense
(In Thousands) Volume Rate  Volume Rate 
Interest-earning assets:  
  
  
  
  
  
Agency MBS (4,790) 1,366
 (3,424) $(3,218) $692
 $(2,526)
Legacy Non-Agency MBS (14,688) 5,563
 (9,125) (12,833) (1,830) (14,663)
RPL/NPL MBS (14,616) 3,355
 (11,261) 135
 443
 578
CRT securities 4,430
 263
 4,693
 (1,495) (2,002) (3,497)
MSR related assets 7,194
 —
 7,194
Residential whole loans, at carrying value (1)
 3,276
 (167) 3,109
 36,341
 (1,639) 34,702
MSR-related assets 8,930
 (63) 8,867
Cash and cash equivalents 437
 794
 1,231
 78
 71
 149
Other interest-earning assets 1,679
 —
 1,679
Total net change in income from interest-earning assets $(18,757) $11,174
 $(7,583) $29,617
 $(4,328) $25,289
            
Interest-bearing liabilities:            
Agency repurchase agreements and FHLB advances (3,498) 3,767
 269
Agency repurchase agreements $(2,422) $1,380
 $(1,042)
Legacy Non-Agency repurchase agreements (3,396) 1,541
 (1,855) (2,767) (215) (2,982)
RPL/NPL MBS repurchase agreements (7,199) 2,760
 (4,439) 303
 154
 457
CRT securities repurchase agreements 1,242
 316
 1,558
 (741) (15) (756)
MSR related assets repurchase agreements 2,408
 —
 2,408
Residential whole loan at carrying value repurchase agreements 605
 457
 1,062
Residential whole loan at fair value repurchase agreements 690
 452
 1,142
MSR-related assets repurchase agreements 4,440
 154
 4,594
Residential whole loans at carrying value repurchase agreements 20,904
 (19) 20,885
Residential whole loans at fair value repurchase agreements 1,632
 (265) 1,367
Other repurchase agreements 836
 —
 836
Securitized debt 962
 —
 962
 (437) 143
 (294)
Convertible Senior Notes 3,879
 —
 3,879
Senior Notes 1
 —
 1
 1
 —
 1
Total net change in expense of interest-bearing liabilities $(8,185) $9,293
 $1,108
 $25,628
 $1,317
 $26,945
Net change in net interest income $(10,572) $1,881
 $(8,691) $3,989
 $(5,645) $(1,656)
 
(1)Excludes residential whole loans held at fair value which are reported as a component of non-interest-earning assets.



The following table presents certain quarterly information regarding our net interest spread and net interest margin for the quarterly periods presented:
  
Total Interest-Earning Assets and Interest-
Bearing Liabilities
 
Net Interest
Spread (1)
 
Net Interest
Margin (2)
Quarter Ended  
September 30, 2017 2.02% 2.54%
June 30, 2017 2.10
 2.58
March 31, 2017 2.27
 2.63
December 31, 2016 2.12
 2.46
September 30, 2016 2.13
 2.46
  
Total Interest-Earning Assets and Interest-
Bearing Liabilities
 
Net Interest
Spread (1)
 
Net Interest
Margin (2)
Quarter Ended  
September 30, 2019 1.82% 2.19%
June 30, 2019 1.90
 2.29
March 31, 2019 1.98
 2.41
December 31, 2018 2.17
 2.60
September 30, 2018 2.41
 2.82
 
(1)Reflects the difference between the yield on average interest-earning assets and average cost of funds.
(2)Reflects annualized net interest income divided by average interest-earning assets.
(1)  Reflects the difference between the yield on average interest-earning assets and average cost of funds.
(2)  Reflects annualized net interest income divided by average interest-earning assets.


The following table presents the components of the net interest spread earned on our Agency MBS, Legacy Non-Agency MBS and Non-AgencyRPL/NPL MBS for the quarterly periods presented:
 
  Agency MBS Legacy Non-Agency MBS RPL/NPL MBS Total MBS
Quarter Ended 
Net
Yield 
(1)
 
Cost of
Funding (2)
 
Net Interest
Rate
Spread (3)
 
Net
Yield 
(1)
 
Cost of
Funding (2)
 
Net Interest
Rate
Spread (3)
 
Net
Yield 
(1)
 
Cost of
Funding (2)
 
Net Interest
Rate
Spread (3)
 
Net
Yield 
(1)
 
Cost of
Funding (2)
 
Net Interest
Rate
Spread (3)
September 30, 2017 1.97% 1.75% 0.22% 8.93% 3.26% 5.67% 4.43% 2.69% 1.74% 4.74% 2.41% 2.33%
June 30, 2017 1.96
 1.57
 0.39
 8.85
 3.28
 5.57
 4.18
 2.46
 1.72
 4.68
 2.29
 2.39
March 31, 2017 1.98
 1.49
 0.49
 8.90
 3.05
 5.85
 3.87
 2.27
 1.60
 4.58
 2.15
 2.43
December 31, 2016 1.92
 1.41
 0.51
 8.24
 3.01
 5.23
 3.86
 2.14
 1.72
 4.35
 2.07
 2.28
September 30, 2016 1.83
 1.28
 0.55
 8.09
 2.98
 5.11
 3.86
 2.05
 1.81
 4.24
 1.96
 2.28
  Agency MBS Legacy Non-Agency MBS RPL/NPL MBS Total MBS
Quarter Ended 
Net
Yield 
(1)
 
Cost of
Funding (2)
 
Net Interest
Rate
Spread (3)
 
Net
Yield 
(1)
 
Cost of
Funding (2)
 
Net Interest
Rate
Spread (3)
 
Net
Yield 
(1)
 
Cost of
Funding (2)
 
Net Interest
Rate
Spread (3)
 
Net
Yield 
(1)
 
Cost of
Funding (2)
 
Net Interest
Rate
Spread (3)
September 30, 2019 2.32% 2.47% (0.15)% 10.32% 3.24% 7.08% 5.18% 3.18% 2.00% 5.28% 2.86% 2.42%
June 30, 2019 2.50
 2.56
 (0.06) 11.30
 3.30
 8.00
 4.98
 3.39
 1.59
 5.45
 2.95
 2.50
March 31, 2019 2.77
 2.53
 0.24
 10.45
 3.30
 7.15
 4.90
 3.43
 1.47
 5.31
 2.95
 2.36
December 31, 2018 2.72
 2.36
 0.36
 10.65
 3.30
 7.35
 4.82
 3.27
 1.55
 5.36
 2.82
 2.54
September 30, 2018 2.21
 2.22
 (0.01) 10.76
 3.29
 7.47
 5.01
 3.10
 1.91
 5.49
 2.73
 2.76
 
(1)Reflects annualized interest income on MBS divided by average amortized cost of MBS.
(2)Reflects annualized interest expense divided by average balance of repurchase agreements, and other advances, including the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration and securitized debt. Agency MBS cost of funding includes 44, 49, 60, 651, (9), (13), (5), and 626 basis points and Legacy Non-Agency MBS cost of funding includes 45, 58, 58, 69,1, (14), (20), (4), and 745 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended September 30, 2017,2019, June 30, 2017,2019, March 31, 2017,2019, December 31, 20162018 and September 30, 2016,2018, respectively.
(3)Reflects the difference between the net yield on average MBS and average cost of funds on MBS.
 
Interest Income
 
Interest income on our Agency MBS for the third quarter of 20172019 decreased by $3.4$2.5 million, or 18.1%17.6%, to $15.5$11.8 million from $19.0$14.3 million for the third quarter of 2016.2018.  This decrease primarily reflects a $989.4$558.1 million decrease in the average amortized cost of our Agency MBS portfolio, due primarily to $3.2portfolio run-off and sales, to $2.0 billion for the third quarter of 20172019 from $4.1$2.6 billion for the third quarter of 20162018 partially offset by an increase in the net yield on our Agency MBS to 1.97%2.32% for the third quarter of 20172019 from 1.83%2.21% for the third quarter of 2016.2018. At the end of the third quarter of 2017,2019, the average coupon on mortgages underlying our Agency MBS was higher compared to the end of the third quarter of 2016.2018.  In addition, duringfor the third quarter of 2017,2019, our Agency MBS portfolio experienced a 16.2%an 18.6% CPR and we recognized $7.9$7.2 million of net premium amortization compared to a CPR of 16.7%16.8% and $10.3$7.2 million of net premium amortization for the third quarter of 2016.2018. At September 30, 2017,2019, we had net purchase premiums on our Agency MBS of $110.6$68.3 million, or 3.8%3.9% of current par value, compared to net purchase premiums of $135.1$103.0 million, or 3.8%3.9% of par value, at December 31, 2016.2018.
 
Interest income on our Non-Agency MBS decreased $20.4$14.1 million, or 24.4%24.0%, for the third quarter of 20172019 to $63.3$44.6 million compared to $83.6$58.7 million for the third quarter of 2016.2018. This decrease is primarily due to theportfolio run-off and sales of Legacy Non-Agency MBS and resulted in a decrease in the average amortized cost of our Non-Agency MBS portfolio of $2.0 billion$484.6 million, or 36.8%17.8%, to $3.5 billion from $5.5$2.2 billion for the third quarter of 2016. This decrease more than offset2019 from $2.7 billion for the impactthird quarter of the higher yields generated2018.


Interest income on our Legacy Non-Agency MBS portfolio, which were 8.93% for the third quarter of 2017 compared2019 decreased $14.7 million to 8.09%$31.3 million from $46.0 million for the third quarter of 2016.2018. This decrease primarily reflects a $495.1 million decrease in the average amortized cost of our Legacy Non-Agency MBS portfolio to $1.2 billion for the third quarter of 2019 from $1.7 billion for the third quarter of 2018 and a decrease in the net yield on this portfolio to 10.32% for the third quarter of 2019 compared to 10.76% for the third quarter of 2018. The increasedecrease in the net yield on our Legacy Non-Agency MBS portfolio primarily reflects the impact of the cash proceeds received during 2016 in connection with the settlement of litigation related to certain Countrywide and Citigroup sponsored residential mortgage backed securitization trusts and the improved

performance of loans underlying the Legacy Non-Agency MBS portfolio, which has resulted in credit reserve releases. Our RPL/NPL MBS portfolio yielded 4.43% for the third quarter of 2017 compared to 3.86% for the third quarter of 2016. The increase in the net yield reflects an increase in the average coupon yield to 4.24% for the third quarter of 2017 from 3.83% for the third quarter of 2016 and higher accretion income recognized in the currentprior year quarter due to the impact of redemptions of certain securities that had been previously purchased at a discount.discount, and changes in interest rates since the third quarter of the prior year.


Interest income on our RPL/NPL MBS portfolio increased $578,000 to $13.2 million for the third quarter of 2019 from $12.7 million for the third quarter of 2018. This increase primarily reflects an increase in the net yield on our RPL/NPL MBS portfolio to 5.18% for the third quarter of 2019 compared to 5.01% for the third quarter of 2018 and a $10.5 million increase in the average amortized cost of this portfolio for the third quarter of 2019 from the third quarter of 2018. The increase in the net yield primarily reflects an increase in the average coupon yield to 5.18% for the third quarter of 2019 from 4.56% for the third quarter of 2018.

During the third quarter of 2017,2019, we recognized net purchase discount accretion of $18.6$10.3 million on our Non-Agency MBS, compared to $20.2$20.1 million for the third quarter of 2016.2018.  At September 30, 2017,2019, we had net purchase discounts of $835.8$563.9 million, including Credit Reserve and previously recognized OTTI of $593.1$462.1 million, on our Legacy Non-Agency MBS, or 28.7%33.1% of par value.  During the third quarter of 20172019 we reallocated $14.8 million$930,000 of purchase discount designated as Credit Reserve to accretable purchase discount.


The following table presents the coupon yield and net yields earned on our Agency MBS, Legacy Non-Agency MBS and Non-AgencyRPL/NPL MBS and weighted average CPRs experienced for such MBS for the quarterly periods presented:
 
  Agency MBS Legacy Non-Agency MBS RPL/NPL MBS
Quarter Ended 
Coupon Yield (1)
 
Net Yield (2)
 
3 Month Average CPR (3)
 
Coupon Yield (1)
 
Net Yield (2)
 
3 Month Average CPR (3)
 
Coupon Yield (1)
 
Net Yield (2)
 
3 Month Average Bond CPR (4)
September 30, 2017 2.98% 1.97% 16.2% 5.63% 8.93% 18.7% 4.24% 4.43% 26.2%
June 30, 2017 2.94
 1.96
 16.3
 5.52
 8.85
 18.2
 4.03
 4.18
 36.2
March 31, 2017 2.90
 1.98
 15.1
 5.50
 8.90
 16.8
 3.84
 3.87
 27.1
December 31, 2016 2.86
 1.92
 15.9
 5.40
 8.24
 17.3
 3.82
 3.86
 25.8
September 30, 2016 2.83
 1.83
 16.7
 5.28
 8.09
 15.9
 3.83
 3.86
 32.2
  Agency MBS Legacy Non-Agency MBS RPL/NPL MBS
Quarter Ended 
Coupon Yield (1)
 
Net Yield (2)
 
3 Month Average CPR (3)
 
Coupon Yield (1)
 
Net Yield (2)
 
3 Month Average CPR (3)
 
Coupon Yield (1)
 
Net Yield (2)
 
3 Month Average Bond CPR (4)
September 30, 2019 3.73% 2.32% 18.6% 6.92% 10.32% 14.9% 5.18% 5.18% 18.2%
June 30, 2019 3.76
 2.50
 18.3
 6.91
 11.30
 15.7
 4.98
 4.98
 16.1
March 31, 2019 3.69
 2.77
 13.6
 6.78
 10.45
 12.7
 4.86
 4.90
 11.6
December 31, 2018 3.58
 2.72
 12.5
 6.64
 10.65
 14.7
 4.75
 4.82
 12.9
September 30, 2018 3.32
 2.21
 16.8
 6.32
 10.76
 16.8
 4.56
 5.01
 19.6
 
(1)Reflects the annualized coupon interest income divided by the average amortized cost. The discounted purchase price on Legacy Non-Agency MBS causes the coupon yield to be higher than the pass-through coupon interest rate.
(2)Reflects annualized interest income on MBS divided by average amortized cost of MBS.
(3)3 month average CPR weighted by positions as of the beginning of each month in the quarter.
(4)All principal payments are considered to be prepayments for CPR purposes.


Interest income on our residential whole loans held at carrying value increased by $34.7 million, or 117.5%, for the third quarter of 2019, to $64.2 million compared to $29.5 million for the third quarter of 2018. This increase primarily reflects a $2.6 billion increase in the average balance of this portfolio to $4.6 billion for the third quarter of 2019 from $2.0 billion for the third quarter of 2018 partially offset by a decrease in the yield (excluding servicing costs) to 5.58% for the third quarter of 2019 from 5.89% for the third quarter of 2018.

Interest income on our MSR-related assets increased by $8.9 million to $15.3 million for the third quarter of 2019 compared to $6.4 million for the third quarter of 2018. This increase primarily reflects a $678.5 million increase in the average balance of these investments for the third quarter of 2019 to $1.2 billion compared to $482.1 million for the third quarter of 2018 partially offset by a decrease in the yield to 5.26% for the third quarter of 2019 from 5.32% for the third quarter of 2018.

Interest Expense
 
Our interest expense for the third quarter of 20172019 increased by $1.1$26.9 million, or 2.3%45.8%, to $49.3$85.8 million from $48.2$58.9 million for the third quarter of 2016.2018.  This increase primarily reflects an increase in financing rates on our repurchase agreement financings, an increase in our average borrowings to finance our residential whole loans, MSR relatedloan portfolio and MSR-related assets, and CRT securities, whichan increase in financing rates on our Agency MBS repurchase agreement financings. In addition we incurred interest expense on our Convertible Senior Notes issued during the third quarter of 2019. The impact of these items on our interest expense was partially offset by a decrease in our average repurchase agreement borrowings and other advances

to finance our Legacy Non-Agency MBS and Agency MBS portfolios and Non-Agency MBS.CRT securities. The effective interest rate paid on our borrowings increased to 2.66%3.50% for the quarter ended September 30, 20172019 from 2.10%3.13% for the quarter ended September 30, 2016. 
At September 30, 2017, we had repurchase agreement borrowings of $6.9 billion, of which $2.6 billion was hedged with Swaps.  At September 30, 2017, our Swaps designated in hedging relationships had a weighted average fixed-pay rate of 2.04% and extended 30 months on average with a maximum remaining term of approximately 71 months.2018. 
 
Payments made and/or received on our Swaps designated as hedges for accounting purposes are a component of our borrowing costs and accounted forresulted in interest expense of $5.3 million,$322,000, or 291 basis points, for the third quarter of 2017,2019, as compared to interest expense of $10.2 million,$547,000, or 443 basis points, for the third quarter of 2016.2018.  The weighted average fixed-pay rate on our Swaps designated as hedges increased to 2.04%2.29% for the quarter ended September 30, 20172019 from 1.82%2.19% for the quarter ended and September 30, 2016.2018.  The weighted average variable interest rate received on our Swaps designated as hedges increased to 1.23%2.24% for the quarter ended September 30, 20172019 from 0.49%2.09% for the quarter ended September 30, 2016.  During the quarter ended September 30, 2017, we did not enter into any new Swaps and had no Swaps amortize and/or expire.2018. 

We expect that our interest expense and funding costs for the remainder of 2017 will be impacted by market interest rates, the amount of our borrowings and incremental hedging activity, existing and future interest rates on our hedging instruments and the extent to which we execute additional longer-term structured financing transactions.  As a result of these variables, our borrowing costs cannot be predicted with any certainty.  (See Notes 5(b), 6 and 15 to the accompanying consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q.)
OTTI
We did not recognize any OTTI charges through earnings during the third quarter of 2017. During the third quarter of 2016, we recognized OTTI charges through earnings against certain of our Non-Agency MBS of $485,000. These impairment charges reflected changes in our estimated cash flows for such securities based on an updated assessment of the estimated future performance of the underlying collateral, including the expected principal loss over the term of the securities and changes in the expected timing of receipt of cash flows. At September 30, 2017, we had 386 Agency MBS with a gross unrealized loss of $32.9 million and 13 Non-Agency MBS with a gross unrealized loss of $390,000.  Impairments on Agency MBS in an unrealized loss position at September 30, 2017 are considered temporary and not credit related.  Unrealized losses on Non-Agency MBS for which no OTTI was recorded during the quarter are considered temporary based on an assessment of changes in the expected cash flows for such securities, which considers recent bond performance and expected future performance of the underlying collateral.  Significant judgment is used both in our analysis of expected cash flows for our Legacy Non-Agency MBS and any determination of the credit component of OTTI.


Other Income, net


For the third quarter of 2017,2019, Other Income, net decreasedincreased by $4.8$14.1 million, or 14.2%29.1%, to $29.1$62.4 million compared to $33.9$48.4 million for the third quarter of 2016.2018.  The components of Other Income, net for the third quarter of 2017 primarily reflects a $18.7 million net gain recorded on residential whole loans held at fair value, $14.9 million of net gains realized on2019 and 2018 are summarized in the sale of $44.5 million of Non-Agency MBS and U.S. Treasury securities primarily offset by $5.2 million of unrealized losses on CRT securities accounted for at fair value. Other Income, net for the third quarter of 2016 primarily reflects a $19.6 million net gain recorded on residential whole loans held at fair value, $7.7 million of unrealized gains on CRT securities accounted for at fair value and $7.1 million of gross gains realized on the sale of $13.2 million Non-Agency MBS.table below:

  Quarter Ended September 30,
(In Thousands) 2019 2018
Net gain on residential whole loans measured at fair value through earnings $40,175
 $34,942
Net realized gain on sales of residential mortgage securities 17,708
 16,415
Net unrealized loss on residential mortgage securities measured at fair value through earnings (571) (8,545)
Liquidation gains on Purchased Credit Impaired Loans and other loan related income 4,189
 3,172
Net (loss)/gain on Swaps not designated as hedges for accounting purposes (929) 4,002
Net loss on REO properties (1,993) (2,125)
Other 3,850
 498
Total Other Income, net $62,429
 $48,359

Operating and Other Expense


For the third quarter of 2017,2019, we had compensation and benefits and other general and administrative expenses of $15.0$12.9 million, or 1.83%1.52% of average equity, compared to $10.8$11.0 million, or 1.44%1.29% of average equity, for the third quarter of 2016.2018.  Compensation and benefits expense increased $3.8by approximately $1.1 million to $10.9$7.9 million for the third quarter of 2017,2019, compared to $7.1$6.9 million for the third quarter of 2016, which2018, primarily reflects non-recurring expenses recordedreflecting higher headcount and additional expense recognized in relation to our contractual obligation to accelerateconnection with long term incentive awards in the vesting of certain share based awards and to make a death benefit payment to the estate of our former Chief Executive Officer.current year period. Our other general and administrative expenses increased by $372,000$867,000 to $4.1$5.0 million for the quarter ended September 30, 20172019 compared to $3.7$4.2 million for the quarter ended September 30, 20162018, primarily due to higher professional servicestransaction costs related costs. to our investments in loan origination partners.


Operating and Other Expense for the third quarter of 20172019 also includes $6.2$10.8 million of loan servicing and other related operating expenses related to our residential whole loan activities. These expenses increased compared to the prior year period by approximately $2.0 million, or 23.2%, primarily due to increases in non-recoverable advances on REO increasedand an increase in the allowance for loan losses on Purchased Credit Impaired residential whole loans, partially offset by lower servicing and modification fees and higher loan acquisition related expenses.



Selected Financial Ratios
 
The following table presents information regarding certain of our financial ratios at or for the dates presented:
 
At or for the Quarter Ended 
Return on
Average Total
Assets (1)
 
Return on
Average Total
Stockholders’
Equity (2)
 
Total Average
Stockholders’
Equity to Total
Average Assets (3)
 
Dividend Payout
Ratio (4)
 
Leverage Multiple (5)
 
Book Value
per Share
of Common
Stock (6)
September 30, 2017 2.10% 7.78% 28.60% 1.33 2.4 $7.70
June 30, 2017 2.63
 10.01
 27.59
 1.00 2.5 7.76
March 31, 2017 2.42
 10.19
 24.95
 1.00 2.9 7.66
December 31, 2016 2.18
 9.52
 24.19
 1.11 3.1 7.62
September 30, 2016 2.47
 11.05
 23.46
 0.95 3.1 7.64
At or for the Quarter Ended 
Return on
Average Total
Assets (1)
 
Return on
Average Total
Stockholders’
Equity (2)
 
Total Average
Stockholders’
Equity to Total
Average Assets (3)
 
Dividend Payout
Ratio (4)
 
Leverage Multiple (5)
 
Book Value
per Share
of Common
Stock (6)
September 30, 2019 2.79% 11.24% 25.80% 1.00 2.8 $7.09
June 30, 2019 2.74
 10.91
 26.13
 1.00 2.8 7.11
March 31, 2019 2.66
 10.40
 26.71
 1.05 2.7 7.11
December 31, 2018 1.87
 6.96
 28.65
 1.54 2.6 7.15
September 30, 2018 2.94
 10.21
 30.15
 1.05 2.3 7.46


(1)Reflects annualized net income available to common stock and participating securities divided by average total assets.
(2)Reflects annualized net income divided by average total stockholders’ equity.
(3)Reflects total average stockholders’ equity divided by total average assets.
(4)Reflects dividends declared per share of common stock divided by earnings per share.
(5)Represents the sum of borrowings under repurchase agreements, FHLB advances, securitized debt, payable for unsettled purchases, and obligations to return securities obtained as collateral, Convertible Senior Notes and Senior Notes divided by stockholders’ equity.
(6)Reflects total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.





Nine Month Period Ended September 30, 20172019 Compared to the Nine Month Period Ended September 30, 20162018
 
General
 
For the nine months ended September 30, 2017,2019, we had net income available to our common stock and participating securities of $210.5$266.2 million, or $0.54$0.59 per basic and diluted common share, compared to net income available to common stock and participating securities of $228.8$229.7 million, or $0.61$0.56 per basic and diluted common share, for the nine months ended September 30, 2016.2018. The decreaseincrease in net income available to common stock and participating securities and the decrease of this item on a per share basis primarily reflects a decrease in ourhigher net interest income primarily driven by increased investment in residential whole loans held at carrying value and higher net Other income, primarily due to higher unrealized gains on our Agency and Non-Agency MBS portfolios. This decrease was partially offset byresidential mortgage securities measured at fair value through earnings, higher other income, driven primarily by highernet realized gains on sales of Legacy Non-Agency MBS, unrealizedresidential mortgage securities, and additional net gains on CRT securities accounted forour residential whole loans measured at fair value and gainsthrough earnings, partially offset by losses realized on the liquidationunwind of certain residential whole loans accountedSwaps not designated as hedges for at carrying value.accounting purposes. In addition, operating and other expenses wherewere higher for the nine months ended September 30, 2019, primarily due to non-recurring expenseshigher costs in relation toconnection with managing our contractual obligation to accelerate the vesting of certain share based awardsresidential whole loan and to make a death benefit paymentREO portfolios, which have grown significantly compared to the estateprior year period, and higher compensation related expenses, reflecting higher headcount.
For the nine months ended September 30, 2019, Core earnings was $0.57 per common share, compared to $0.58 per common share for the nine months ended September 30, 2018. Core earnings is a non-GAAP measure of our former Chief Executive Officer.financial performance and is computed by adjusting GAAP net income available to common and participating securities by excluding the impact of unrealized gains and losses on certain of our investments. For additional information regarding the calculation of Core earnings, including to reconcile to GAAP net income available to common stock and participating securities, refer to page 83 under the heading “Core Earnings”.

Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.  Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid.  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 investments.  Interest rates and CPRs (which measure the amount of unscheduled principal prepayment on a bond or loan as a percentage of its unpaid balance) vary according to the type of investment, conditions in the financial markets and other factors, none of which can be predicted with any certainty.
The changes in average interest-earning assets and average interest-bearing liabilities and their related yields and costs are discussed in greater detail below under “Interest Income” and “Interest Expense.”

For the nine months ended September 30, 2017,2019, our net interest spread and margin were 2.15%1.90% and 2.59%2.29%, respectively, compared to a net interest spread and margin of 2.16%2.32% and 2.49%2.71%, respectively, for the nine months ended September 30, 2016.2018. Our net interest income decreasedincreased by $17.3$17.0 million, or 8.6%10.5%, to $183.9 million from $201.2$178.7 million for the nine months ended September 30, 2016.2019, from $161.7 million for the nine months ended September 30, 2018.  For the nine months ended September 30, 2017,2019, net interest income from Agencyresidential whole loans held at carrying value, MSR-related assets and RPL/NPL MBS and Legacy Non-Agency MBS declinedincreased by approximately $59.5 million compared to the nine months ended September 30, 2016,2018, primarily due to higher average amounts invested in these assets. These increases were offset by lower net interest income from Legacy Non-Agency MBS, CRT securities and Agency MBS compared to the nine months ended September 30, 2018 by approximately $27.3$35.0 million, primarily due to lower average amounts invested in these securities and higher funding costs on Agency MBS and CRT securities, partially offset by higher yields earned on our Legacy Non-Agency MBS. In addition, net interest income on RPL/NPL MBS was approximately $14.8 million lower compared to the nine months ended September 30, 2016 primarily due to lower average amounts invested in these securities and higher funding costs partially offset by higher yields earned on these securities. These decreases were partially offset by higher net interest income on MSR related assets, CRT securities, and residential whole loans at carrying value of approximately $25.4 million compared to the nine months ended September 30, 2016, primarily due to higher average amounts invested in these assets and higher yields earned on CRT securities.Agency MBS portfolios. In addition, net interest income for the nine months ended September 30, 20172019 also includes $13.2$34.2 million of interest expense associated with residential whole loans held at fair value, reflecting a $2.9$4.6 million increase in borrowing costs related to these investments compared to the nine months ended September 30, 2016.2018. Coupon interest income received from residential whole loans held at fair value is presented as a component of the total income earned on these investments and therefore is included in Other Income, net rather than net interest income.





Analysis of Net Interest Income
 
The following table sets forth certain information about the average balances of our assets and liabilities and their related yields and costs for the nine months ended September 30, 20172019 and 20162018. Average yields are derived by dividing annualized interest income by the average amortized cost of the related assets, and average costs are derived by dividing annualized interest expense by the daily average balance of the related liabilities, for the periods shown.  The yields and costs include premium amortization and purchase discount accretion which are considered adjustments to interest rates.
 Nine Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2019 2018
 Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost
(Dollars in Thousands)          
Assets:  
  
  
  
  
  
  
  
  
  
  
  
Interest-earning assets:  
  
  
  
  
  
  
  
  
  
  
  
Agency MBS (1)
 $3,383,373
 $50,014
 1.97% $4,389,672
 $64,546
 1.96% $2,379,289
 $45,521
 2.55% $2,654,925
 $42,795
 2.15%
Legacy Non-Agency MBS (1)
 2,350,975
 156,829
 8.89
 3,023,239
 176,890
 7.80
 1,322,559
 106,147
 10.70
 1,831,292
 137,439
 10.01
RPL/NPL MBS (1)
 1,813,557
 55,899
 4.11
 2,630,475
 76,665
 3.89
 1,182,484
 44,463
 5.01
 929,835
 32,373
 4.64
Total MBS 7,547,905
 262,742
 4.64
 10,043,386
 318,101
 4.22
 4,884,332
 196,131
 5.35
 5,416,052
 212,607
 5.23
CRT securities (1)
 520,585
 22,898
 5.86
 243,776
 9,897
 5.41
 411,273
 15,545
 5.04
 556,258
 25,939
 6.22
MSR related assets (1)
 376,811
 17,833
 6.31
 —
 —
 —
Residential whole loans, at carrying value (2)
 587,511
 26,219
 5.95
 346,013
 16,112
 6.21
 4,010,395
 171,725
 5.71
 1,410,100
 61,788
 5.84
MSR-related assets (1)
 959,145
 38,232
 5.31
 440,979
 20,249
 6.12
Cash and cash equivalents (3)
 531,722
 2,854
 0.72
 270,297
 531
 0.26
 186,919
 2,703
 1.93
 230,945
 2,348
 1.36
Other interest-earning assets 94,708
 4,272
 6.01
 —
 —
 —
Total interest-earning assets 9,564,534
 332,546
 4.64
 10,903,472
 344,641
 4.21
 10,546,772
 428,608
 5.42
 8,054,334
 322,931
 5.35
Total non-interest-earning assets (2)
 2,207,939
  
  
 2,007,033
  
  
 2,465,777
  
  
 2,785,653
  
  
Total assets $11,772,473
  
  
 $12,910,505
  
  
 $13,012,549
  
  
 $10,839,987
  
  
                        
Liabilities and stockholders’ equity:  
  
  
  
  
  
  
  
  
  
  
  
Interest-bearing liabilities:  
  
  
  
  
  
  
  
  
  
  
  
Total repurchase agreements and other advances (4)
 7,704,662
 141,444
 2.42
 9,069,065
 137,127
 1.99
Securitized debt (5)
 57,073
 1,173
 2.71
 8,949
 333
 4.89
Total repurchase agreements (4)
 $8,520,981
 $220,939
 3.42% $6,434,725
 $142,832
 2.93%
Securitized debt 646,234
 17,834
 3.64
 486,352
 12,378
 3.36
Convertible Senior Notes 98,243
 5,085
 6.90
 —
 —
 —
Senior Notes 96,746
 6,029
 8.31
 96,709
 6,027
 8.31
 96,831
 6,035
 8.31
 96,787
 6,032
 8.31
Total interest-bearing liabilities 7,858,481
 148,646
 2.49
 9,174,723
 143,487
 2.05
 9,362,289
 249,893
 3.52
 7,017,864
 161,242
 3.03
Total non-interest-bearing liabilities 734,181
  
  
 799,438
  
  
 241,080
  
  
 526,766
  
  
Total liabilities 8,592,662
  
  
 9,974,161
  
  
 9,603,369
  
  
 7,544,630
  
  
Stockholders’ equity 3,179,811
  
  
 2,936,344
  
  
 3,409,180
  
  
 3,295,357
  
  
Total liabilities and stockholders’ equity $11,772,473
  
  
 $12,910,505
  
  
 $13,012,549
  
  
 $10,839,987
  
  
                        
Net interest income/ net interest rate spread (6)
  
 $183,900
 2.15%  
 $201,154
 2.16%
Net interest-earning assets/ net interest margin (7)
 $1,706,053
  
 2.59% $1,728,749
  
 2.49%
Ratio of interest-earning assets to
interest-bearing liabilities
 1.22x  
  
 1.19x  
  
Net interest income/ net interest rate spread (5)
  
 $178,715
 1.90%  
 $161,689
 2.32%
Net interest-earning assets/ net interest margin (6)
 $1,184,483
  
 2.29% $1,036,470
  
 2.71%


(1)Yields presented throughout this Quarterly Report on Form 10-Q are calculated using average amortized cost data for securities which excludes unrealized gains and losses and includes principal payments receivable on securities.  For GAAP reporting purposes, purchases and sales are reported on the trade date. Average amortized cost data used to determine yields is calculated based on the settlement date of the associated purchase or sale as interest income is not earned on purchased assets and continues to be earned on sold assets until settlement date.  Includes Non-Agency MBS transferred to consolidated VIEs.
(2)Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.
(3)Includes average interest-earning cash, cash equivalents and restricted cash.
(4)Average cost of repurchase agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.
(5)Securitized debt for the nine months ended September 30, 2017 reflects securitized debt from our loan securitization transaction in June 2017. Securitized debt for the nine months ended September 30, 2016 reflects securitized debt from our MBS resecuritization transaction in February 2012.
(6)Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.
(7)(6)Net interest margin reflects annualized net interest income divided by average interest-earning assets.



Rate/Volume Analysis
 
The following table presents the extent to which changes in interest rates (yield/cost) and changes in the volume (average balance) of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated.  Information is provided in each category with respect to: (i) the changes attributable to changes in volume (changes in average balance multiplied by prior rate); (ii) the changes attributable to changes in rate (changes in rate multiplied by prior average balance); and (iii) the net change.  The changes attributable to the combined impact of volume and rate have been allocated proportionately, based on absolute values, to the changes due to rate and volume.
 
 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2019
 Compared to Compared to
 Nine Months Ended September 30, 2016 Nine Months Ended September 30, 2018
 Increase/(Decrease) due to 
Total Net
Change in
Interest Income/Expense
 Increase/(Decrease) due to 
Total Net
Change in
Interest Income/Expense
(In Thousands) Volume Rate  Volume Rate 
Interest-earning assets:  
  
  
  
  
  
Agency MBS $(14,842) $310
 $(14,532) $(4,734) $7,460
 $2,726
Legacy Non-Agency MBS (42,659) 22,598
 (20,061) (40,287) 8,995
 (31,292)
RPL/NPL MBS (24,970) 4,204
 (20,766) 9,360
 2,730
 12,090
CRT securities 12,111
 890
 13,001
 (6,019) (4,375) (10,394)
MSR related assets 17,833
 —
 17,833
Residential whole loans, at carrying value (1)
 10,804
 (697) 10,107
 111,377
 (1,440) 109,937
MSR-related assets 20,970
 (2,987) 17,983
Cash and cash equivalents 833
 1,490
 2,323
 (506) 861
 355
Other interest-earning assets 4,272
 —
 4,272
Total net change in income from interest-earning assets $(40,890) $28,795
 $(12,095) $94,433
 $11,244
 $105,677
            
Interest-bearing liabilities:  
  
  
  
  
  
Agency repurchase agreements and FHLB advances $(10,361) $8,616
 $(1,745)
Agency repurchase agreements $(2,590) $7,881
 $5,291
Legacy Non-Agency repurchase agreements (10,192) 4,965
 (5,227) (7,828) (138) (7,966)
RPL/NPL MBS repurchase agreements (11,447) 5,434
 (6,013) 7,858
 1,355
 9,213
CRT securities repurchase agreements 3,452
 579
 4,031
 (2,276) 1,010
 (1,266)
MSR related assets repurchase agreements 5,773
 —
 5,773
MSR-related assets repurchase agreements 11,155
 607
 11,762
Residential whole loan at carrying value repurchase agreements 3,998
 747
 4,745
 59,108
 515
 59,623
Residential whole loan at fair value repurchase agreements 2,071
 682
 2,753
 (1,849) 927
 (922)
Other repurchase agreements 2,372
 —
 2,372
Securitized debt 1,049
 (209) 840
 4,342
 1,114
 5,456
Convertible Senior Notes 5,085
 —
 5,085
Senior Notes 2
 —
 2
 3
 —
 3
Total net change in expense of interest-bearing liabilities $(15,655) $20,814
 $5,159
 $75,380
 $13,271
 $88,651
Net change in net interest income $(25,235) $7,981
 $(17,254) $19,053
 $(2,027) $17,026


(1)Excludes residential whole loans held at fair value which are reported as a component of non-interest-earning assets.


The following table presents the components of the net interest spread earned on our Agency MBS, Legacy Non-Agency MBS and Non-AgencyRPL/NPL MBS for the periods presented:
  Agency MBS Legacy Non-Agency MBS RPL/NPL MBS Total MBS
Nine Months Ended 
Net Yield 
(1)
 
Cost of Funding 
(2)
 
Net Interest Spread 
(3)
 
Net Yield 
(1)
 
Cost of Funding 
(2)
 
Net Interest Spread 
(3)
 
Net Yield 
(1)
 
Cost of Funding 
(2)
 
Net Interest Spread 
(3)
 
Net Yield 
(1)
 
Cost of Funding 
(2)
 
Net Interest Spread 
(3)
September 30, 2017 1.97% 1.60% 0.37% 8.89% 3.19% 5.70% 4.11% 2.43% 1.68% 4.64% 2.27% 2.37%
September 30, 2016 1.96% 1.26% 0.70% 7.80% 2.89% 4.91% 3.89% 2.03% 1.86% 4.22% 1.91% 2.31%
  Agency MBS Legacy Non-Agency MBS RPL/NPL MBS Total MBS
Nine Months Ended 
Net Yield 
(1)
 
Cost of Funding 
(2)
 
Net Interest Spread 
(3)
 
Net Yield 
(1)
 
Cost of Funding 
(2)
 
Net Interest Spread 
(3)
 
Net Yield 
(1)
 
Cost of Funding 
(2)
 
Net Interest Spread 
(3)
 
Net Yield 
(1)
 
Cost of Funding 
(2)
 
Net Interest Spread 
(3)
September 30, 2019 2.55% 2.53% 0.02% 10.70% 3.28% 7.42% 5.01% 3.34% 1.67% 5.35% 2.93% 2.42%
September 30, 2018 2.15% 2.05% 0.10% 10.01% 3.29% 6.72% 4.64% 3.08% 1.56% 5.23% 2.63% 2.60%
 
(1) Reflects annualized interest income on MBS divided by average amortized cost of MBS.
(2) Reflects annualized interest expense divided by average balance of repurchase agreements, and other advances, including the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration, and securitized debt. Agency MBS cost of funding includes 518 and 6314 basis points and Legacy Non-Agency MBS cost of funding includes 5411 and 6914 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the nine months ended September 30, 20172019 and 2016,2018, respectively.
(3) Reflects the difference between the net yield on average MBS and average cost of funds on MBS.

 
Interest Income
 
Interest income on our Agency MBS for the nine months ended September 30, 2017 decreased2019 increased by $14.5$2.7 million, or 22.5%6.4%, to $50.0$45.5 million from $64.5$42.8 million for the nine months ended September 30, 2016.2018.  This changeincrease primarily reflects an increase in the net yield on our Agency MBS to 2.55% for the nine months ended September 30, 2019 from 2.15% for the nine months ended September 30, 2018, partially offset by a $1.0 billion$275.6 million decrease in the average amortized cost of our Agency MBS portfolio due primarily to $3.4portfolio run-off and sales, to $2.4 billion for the nine months ended September 30, 20172019 from $4.4$2.7 billion for the nine months ended September 30, 2016 partially offset by a slight increase in the net yield on our Agency MBS to 1.97% for the nine months ended September 30, 2017 from 1.96% for the nine months ended September 30, 2016.2018.  At the end of the third quarter of 2017,2019, the average coupon on mortgages underlying our Agency MBS was higher compared to the end of the third quarter of 2016.  However,2018.  In addition, during the nine months ended September 30, 2017,2019, our Agency MBS portfolio experienced a 14.4%16.7% CPR and we recognized $24.6$21.0 million of net premium amortization compared to a CPR of 12.7%13.5% and $27.7$19.8 million of net premium amortization for the nine months ended September 30, 2016.2018.  At September 30, 2017,2019, we had net purchase premiums on our Agency MBS of $110.6$68.3 million, or 3.8%3.9% of current par value, compared to net purchase premiums of $135.1$103.0 million, or 3.8%3.9% of par value, at December 31, 2016.2018.
 
Interest income on our Non-Agency MBS (which includes Non-Agency MBS transferred to consolidated VIEs) decreased by $40.8$19.2 million, or 16.1%11.3%, for the nine months ended September 30, 20172019 to $212.7$150.6 million compared to $253.6$169.8 million for the nine months ended September 30, 2016.2018. This decrease is primarily due to portfolio run-off and sales of Legacy Non-Agency MBS, which more than offset the impact of higher amounts invested in RPL/NPL MBS and resulted in a decrease in the average amortized cost of our Non-Agency MBS portfolio of $1.5 billion$256.1 million or 26.3%9.27%, to $4.2$2.5 billion from $5.7$2.8 billion for the nine months ended September 30, 2016.2018.

Interest income on our Legacy Non-Agency MBS for the nine months ended September 30, 2019 decreased $31.3 million to $106.1 million from $137.4 million for the nine months ended September 30, 2018. This decrease primarily reflects a $508.7 million decrease in the average amortized cost of our Legacy Non-Agency MBS portfolio to $1.3 billion for the nine months ended September 30, 2019 from $1.8 billion for the nine months ended September 30, 2018. This decrease more than offset the impact of the higher yields generated on our Legacy Non-Agency MBS portfolio, which were 8.89%10.70% for the nine months ended September 30, 20172019 compared to 7.80%10.01% for the nine months ended September 30, 2016.2018.  The increase in the net yield on our Legacy Non-Agency MBS portfolio reflects changes in interest rates since the impactthird quarter of the cash proceeds received during 2016 in connection with the settlement of litigation related to certain Countrywide and Citigroup sponsored residential mortgage backed securitization trusts,prior year, the improved performance of loans underlying the Legacy Non-Agency MBS portfolio, which has resulted in credit reserve releases, and the impact of redemptions during 2017 of certain securities that had been previously purchased at a discount. Our RPL/NPL MBS portfolio yielded 4.11% for the nine months ended September 30, 2017 compared to 3.89% for the nine months ended September 30, 2016. The increase in the net yield reflects an increase in the average coupon yield to 4.01% for the nine months ended September 30, 2017 from 3.79% for the nine months ended September 30, 2016 and higher accretion income recognized in the current nine month period due to the impact of redemptions of certain securities that had been previously purchased at a discount.discount as well as the impact of the cash proceeds received during 2018 in connection with the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by JP Morgan Chase & Co. and affiliated entities and Lehman Brothers Holding Inc.

Interest income on our RPL/NPL MBS portfolio increased $12.1 million to $44.5 million for the nine months ended September 30, 2019 from $32.4 million for the nine months ended September 30, 2018. This is primarily due to a $252.6 million increase in the average amortized cost of our RPL/NPLMBS portfolio to $1.2 billion for the nine months ended September 30, 2019 from $929.8 million for the nine months ended September 30, 2018. In addition, our RPL/NPL MBS portfolio yielded 5.01% for the nine months ended September 30, 2019 compared to 4.64% for the nine months ended September 30, 2018. The increase in the net yield primarily reflects an increase in the average coupon yield to 5.00% for the nine months ended September 30, 2019 from 4.47% for the nine months ended September 30, 2018.


During the nine months ended September 30, 2017,2019, we recognized net purchase discount accretion of $60.5$38.2 million on our Non-Agency MBS, compared to $61.2$54.9 million for the nine months ended September 30, 2016.2018.  At September 30, 2017,2019, we had net purchase discounts of $835.8$563.9 million, including Credit Reserve and previously recognized OTTI of $593.1$462.1 million, on our Legacy Non-Agency MBS, or 28.7%33.1% of par value.  During the nine months ended September 30, 20172019 we reallocated $33.8$9.3 million of purchase discount designated as Credit Reserve to accretable purchase discount.


The following table presents the coupon yield and net yields earned on our Agency MBS, Legacy Non-Agency MBS and Non-AgencyRPL/NPL MBS and weighted average CPRs experienced for such MBS for the periods presented:
 
  Agency MBS Legacy Non-Agency MBS RPL/NPL MBS
Nine Months Ended 
Coupon Yield (1)
 
Net Yield (2)
 
9 Month Average CPR (3)
 
Coupon Yield (1)
 
Net Yield (2)
 
9 Month Average CPR (3)
 
Coupon Yield (1)
 
Net Yield (2)
 
9 Month Average Bond CPR (4)
September 30, 2017 2.94% 1.97% 14.4% 5.55% 8.89% 16.3% 4.01% 4.11% 32.2%
September 30, 2016 2.80
 1.96
 12.7
 5.19
 7.80
 13.7
 3.79
 3.89
 26.9
  Agency MBS Legacy Non-Agency MBS RPL/NPL MBS
Nine Months Ended 
Coupon Yield (1)
 
Net Yield (2)
 
9 Month Average CPR (3)
 
Coupon Yield (1)
 
Net Yield (2)
 
9 Month Average CPR (3)
 
Coupon Yield (1)
 
Net Yield (2)
 
9 Month Average Bond CPR (4)
September 30, 2019 3.73% 2.55% 16.7% 6.87% 10.70% 14.4% 5.00% 5.01% 15.0%
September 30, 2018 3.14
 2.15
 13.5
 6.10
 10.01
 14.3
 4.47
 4.64
 18.0
 
(1)Reflects the annualized coupon interest income divided by the average amortized cost. The discounted purchase price on Legacy Non-Agency MBS causes the coupon yield to be higher than the pass-through coupon interest rate.
(2)Reflects annualized interest income on MBS divided by average amortized cost of MBS.
(3)96 month average CPR weighted by positions as of the beginning of each month in the quarter.
(4)All principal payments are considered to be prepayments for CPR purposes.


Interest income on our residential whole loans held at carrying value increased by $109.9 million, or 177.9%, for the nine months ended September 30, 2019 to $171.7 million compared to $61.8 million for the nine months ended September 30, 2018. This increase primarily reflects a $2.6 billion increase in the average balance of this portfolio to $4.0 billion for the nine months ended September 30, 2019 from $1.4 billion for the nine months ended September 30, 2018, partially offset by a decrease in the yield (excluding servicing costs) to 5.71% for the nine months ended September 30, 2019 from 5.84% for the nine months ended September 30, 2018.

Interest income on our MSR-related assets increased by $18.0 million, or 88.8%, to $38.2 million for the nine months ended September 30, 2019 compared to $20.2 million for the nine months ended September 30, 2018. This increase primarily reflects a $518.2 million increase in the average balance of these investments for the nine months ended September 30, 2019 to $959.1 million compared to $441.0 million for the nine months ended September 30, 2018, partially offset by a decrease in the yield to 5.31% for the nine months ended September 30, 2019 from 6.12% for the nine months ended September 30, 2018.

Interest Expense
 
Our interest expense for the nine months ended September 30, 20172019 increased by $5.2$88.7 million, or 3.6%55.0%, to $148.6$249.9 million, from $143.5$161.2 million for the nine months ended September 30, 2016.2018.  This increase primarily reflects an increase in financing rates on our repurchase agreement financings, an increase in our average borrowings to finance residential whole loans MSR relatedheld at carrying value, MSR-related assets, RPL/NPL MBS and CRT securities, whichother interest-earning assets, an increase in securitized debt to finance residential whole loans held at fair value and an increase in financing rates on our repurchase agreement financings. In addition we incurred interest expense on our Convertible Senior Notes issued during the nine months ended September 30, 2019. The impact of these items on our interest expense was partially offset by a decrease in our average repurchase agreement borrowings and other advances to finance our Legacy Non-Agency MBS and Agency MBS portfolios and Non-Agency MBS.CRT securities. The effective interest rate paid on our borrowings increased to 2.49%3.52% for the nine months ended September 30, 2017,2019, from 2.05%3.03% for the nine months ended September 30, 2016.2018. 


Payments made and/or received on our Swaps designated as hedges for accounting purposes are a component of our borrowing costs and accounted forresulted in a reduction in interest expense of $19.6$1.6 million, or 333 basis points, for the nine months ended September 30, 2017,2019, compared to an increase in interest expense of $31.3$4.2 million, or 458 basis points, for the nine months ended September 30, 2016.2018.  The weighted average fixed-pay rate on our Swaps designated as hedges increased to 1.96%2.32% for the nine months ended September 30, 20172019 from 1.82%2.09% for the nine months ended September 30, 2016.2018.  The weighted average variable interest rate received on our Swaps designated as hedges increased to 1.00%2.40% for the nine months ended September 30, 20172019 from 0.45%1.86% for the nine months ended September 30, 2016.  During the nine months ended September 30, 2017, we did not enter into any new Swaps and had Swaps with an aggregate notional amount of $350.0 million and a weighted average fixed-pay rate of 0.58% amortize and/or expire.2018.
We expect that our interest expense and funding costs for the remainder of 2017 will be impacted by market interest rates, the amount of our borrowings and incremental hedging activity, existing and future interest rates on our hedging instruments and the extent to which we execute additional longer-term structured financing transactions.  As a result of these variables, our borrowing costs cannot be predicted with any certainty.  (See Notes 5(b), 6 and 15 to the accompanying consolidated financial statements, included under Item 1 of this Quarterly Report on Form 10-Q.)
OTTI
During the nine months ended September 30, 2017 and 2016, we recognized OTTI charges through earnings against certain of our Non-Agency MBS of $1.0 million and $485,000, respectively. These impairment charges reflected changes in our estimated cash flows for such securities based on an updated assessment of the estimated future performance of the underlying collateral, including the expected principal loss over the term of the securities and changes in the expected timing of receipt of cash flows.

Other Income, net
 
For the nine months ended September 30, 2017,2019, Other Income, net increased by $10.4$33.4 million, or 12.4%24.4%, to $94.0$170.5 million, compared to $83.6$137.0 million for the nine months ended September 30, 2016.2018.  The components of Other Income, net for the nine months ended September 30, 2017 primarily reflects a $48.7 million net gain recorded on residential whole loans held at fair value, $30.5 million of net gains realized on2019 and 2018 are summarized in the sale of $222.1 million Non-Agency MBS and U.S. Treasury securities and $14.2 million of unrealized gains on CRT securities accounted for at fair value. Other Income, net for the nine months ended September 30, 2016 primarily reflects a net gain of $47.7 million on residential whole loans held at fair value, $26.1 million of gains realized on the sale of $65.1 million of Non-Agency MBS and $11.1 million of unrealized gains on CRT securities accounted for at fair value.table below:


  Nine Months Ended
September 30,
(In Thousands) 2019 2018
Net gain on residential whole loans measured at fair value through earnings $116,915
 $105,883
Net realized gain on sales of residential mortgage securities 50,027
 32,661
Net unrealized gain/(loss) on residential mortgage securities measured at fair value through earnings 8,101
 (11,776)
Liquidation gains on Purchased Credit Impaired Loans and other loan related income 11,234
 10,018
Net (loss)/gain on Swaps not designated as hedges for accounting purposes (17,267) 4,355
Net loss on REO properties (3,566) (4,899)
Other 5,016
 783
Total Other Income, net $170,460
 $137,025

Operating and Other Expense


During the nine months ended September 30, 2017,2019, we had compensation and benefits and other general and administrative expenses of $40.3$39.9 million, or 1.69%1.56% of average equity, compared to $34.0$34.2 million, or 1.54%1.38% of average equity, for the nine months ended September 30, 2016.2018.  Compensation and benefits expense increased $4.8$3.7 million to $26.3$24.3 million for the nine months ended September 30, 2017,2019, compared to $21.5$20.7 million for the nine months ended September 30, 2016, which2018, primarily reflects non-recurring expenses recordeddue to higher headcount and additional expense recognized in relation to our contractual obligation to accelerate the vesting of certain share based awards and to make a death benefit payment to the estate of our former Chief Executive Officer.connection with long term incentive awards. Our other general and administrative expenses increased by $1.6$2.0 million to $14.1$15.6 million for the nine months ended September 30, 20172019 compared to $12.5$13.6 million for the nine months ended September 30, 2016,2018, primarily due to transaction costs related to our investments in loan origination partners and higher costs associated with the loan securitization transaction completed during the second quarter of 2017 and other structured financing transactions, higher costs related to stock-baseddeferred compensation awards to Directors in the current year period, which were impacted by the changes in the Company’s stock price and higher professional servicesinformation technology related costs.expenses.


Operating and Other Expense during the nine months ended September 30, 20172019 also includes $14.8$31.8 million of loan servicing and other related operating expenses related to our residential whole loan activities. These expenses increased compared to the prior year period by approximately $4.5$8.2 million, or 34.8%, primarily due to increases in non-recoverable advances on REO increased loanas well higher servicing and modificationrelated fees and higher loan acquisition related expenses, which were partially offset byassociated with this portfolio. In addition, the current year-to-date period included a decrease in the provision for loan losses recognizedrecorded against Purchased Performing Loans and an increase in the allowance for the nine month period.loan losses on Purchased Credit Impaired residential whole loans.


Selected Financial Ratios
 
The following table presents information regarding certain of our financial ratios at or for the dates presented:
At or for the Nine Months Ended 
Return on
Average Total
Assets (1)
 
Return on
Average Total
Stockholders’
Equity (2)
 
Total Average
Stockholders’
Equity to Total
Average Assets (3)
 
Dividend Payout
Ratio (4)
 
Leverage Multiple (5)
 
Book Value
per Share
of Common
Stock (6)
September 30, 2017 2.38% 9.30% 27.01% 1.11 2.4
 $7.70
September 30, 2016 2.36
 10.90
 22.74
 0.98 3.1
 7.64
At or for the Nine Months Ended 
Return on
Average Total
Assets (1)
 
Return on
Average Total
Stockholders’
Equity (2)
 
Total Average
Stockholders’
Equity to Total
Average Assets (3)
 
Dividend Payout
Ratio (4)
 
Leverage Multiple (5)
 
Book Value
per Share
of Common
Stock (6)
September 30, 2019 2.73% 10.85% 26.20% 1.02 2.8
 $7.09
September 30, 2018 2.82
 9.75
 30.40
 1.07 2.3
 7.46


(1)Reflects annualized net income available to common stock and participating securities divided by average total assets.
(2)Reflects annualized net income divided by average total stockholders’ equity.
(3)Reflects total average stockholders’ equity divided by total average assets.
(4)Reflects dividends declared per share of common stock divided by earnings per share.
(5)Represents the sum of borrowings under repurchase agreements, FHLB advances, securitized debt, payable for unsettled purchases, and obligations to return securities obtained as collateral, Convertible Senior Notes and Senior Notes divided by stockholders’ equity.
(6)Reflects total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.


Reconciliation of GAAP and Non-GAAP Financial Measures

Core Earnings

“Core earnings” is a non-GAAP financial measure of our operating performance, within the meaning of Regulation G and Item 10(e) of Regulation S-K, as promulgated by the Securities and Exchange Commission. Core earnings excludes certain unrealized gains and losses on investments in residential mortgage securities and related hedges that we are required to include in GAAP Net Income each period because management believes that these items, which to date have typically resulted from short-term market volatility or other market technical factors and not due to changes in fundamental asset cash flows, are not reflective of the economic income generated by our investment portfolio. Accordingly, we believe that the adjustments to compute Core earnings specified below better allow investors and analysts to evaluate our financial results, including by analyzing changes in our Core earnings between periods. In addition to using Core earnings in the evaluation of investment portfolio performance over time, Management considers estimates of periodic Core earnings as an input to the determination of the level of quarterly dividends to common shareholders that are recommended to the Board of Directors for approval and in its forecasting and decision-making processes relating to the allocation of capital between different asset classes.

We believe that Core earnings provides useful supplemental information to both management and investors in evaluating our financial results. Core earnings should be used in conjunction with results presented in accordance with GAAP. Core earnings does not represent and should not be considered as a substitute for Net Income or Cash Flows from Operating Activities, each as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The following table provides a reconciliation of our GAAP net income available to common stock and participating securities to our non-GAAP Core earnings for the three and nine months ended September 30, 2019 and 2018:

  Three Months Ended
September 30,		 Nine Months Ended
September 30,
(In Thousands, Except Per Share Amounts) 2019 2018 2019 2018
GAAP Net income to common stockholders - basic $91,569
 $83,141
 $265,438
 $228,970
Adjustments:        
Unrealized (gain)/loss on CRT securities measured at fair value through earnings (83) 3,049
 (733) 6,280
Unrealized net (gain)/loss on Agency MBS measured at fair value through earnings and related swaps that are not accounted for as hedging transactions (2,074) 1,494
 (7,832) 1,494
  Total adjustments $(2,157) $4,543
 $(8,565) $7,774
Core earnings $89,412
 $87,684
 $256,873
 $236,744
         
GAAP earnings per common share $0.20
 $0.19
 $0.59
 $0.56
Core earnings per common share $0.20
 $0.21
 $0.57
 $0.58
Weighted average common shares for basic earnings per share 451,020
 428,713
 450,641
 408,614


Economic Book Value

“Economic book value” is a non-GAAP financial measure of our financial position. To calculate our Economic book value, our portfolios of Residential whole loans at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these loans. This adjustment is also reflected in the table below in the Company’s end of period stockholders’ equity. Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for all of our residential mortgage investments, irrespective of the accounting model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders’ Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The following table provides a reconciliation of our GAAP book value per common share to our non-GAAP Economic book value per common share as of September 30, 2019 and December 31, 2018:

(In Thousands, Except Per Share Amounts) September 30, 2019 December 31, 2018
GAAP Total Stockholders’ Equity $3,403,426
 $3,416,101
Preferred Stock, liquidation preference (200,000) (200,000)
GAAP Stockholders’ Equity for book value per common share 3,203,426
 3,216,101
Adjustments:    
Fair value adjustment to Residential whole loans, at carrying value 145,807
 87,686
     
Stockholders’ Equity including fair value adjustment to Residential whole loans, at carrying value $3,349,233
 $3,303,787
     
GAAP book value per common share $7.09
 $7.15
Economic book value per common share $7.41
 $7.35
Number of shares of common stock outstanding 451,692
 449,787

Recent Accounting Standards to beBe Adopted in Future Periods

Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (or ASU 2017-12). The amendments in this ASU expand an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. ASU 2017-12 also simplifies certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. ASU 2017-12 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted in any interim period or fiscal year before the effective date. An entity should apply the amendments of this ASU to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements of ASU 2017-12 should be applied prospectively. In addition, certain transition elections may be made by an entity upon adoption to allow for existing hedging relationships to transition to the newly allowable alternatives within this ASU. We are currently evaluating our adoption timing and the effect that ASU 2017-12 will have on our consolidated financial statements and related disclosures.

Compensation - Stock Compensation - Scope of Modification Accounting

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting (or ASU 2017-09). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity

to apply modification accounting. Pursuant to this ASU, an entity should account for the effects of a modification unless all of the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award date is modified. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued or made available for issuance. The amendments of this ASU should be applied prospectively to an award modified on or after the adoption date. We do not expect the adoption of ASU 2017-09 to have a significant impact on our financial position or financial statement disclosures.

Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment (or ASU 2017-04). The amendments in ASU 2017-04 eliminate the requirement to calculate the implied fair value of goodwill (Step 2 from today’s goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on today’s Step 1). Public business entities should adopt the amendments in ASU 2017-04 for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The amendments of this ASU should be applied in a prospective basis. We do not expect the adoption of ASU 2017-04 to have a significant impact on our financial position or financial statement disclosures.

Statement of Cash Flows - Restricted Cash

In November 2016, the FASB issued ASU 2016-18, Restricted Cash (or ASU 2016-18). ASU 2016-18 clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows with the objective of reducing the existing diversity in practice. The amendments in ASU 2016-18 require restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted, provided that all of the amendments are adopted in the same period. The amendments of this ASU should generally be applied using a retrospective transition method to each period presented. We do not expect the adoption of ASU 2016-18 to have a significant impact on our financial position or financial statement disclosures.

Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (or ASU 2016-15). The amendments in ASU 2016-15 provide guidance for eight specific cash flow classification issues, certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted, provided that all of the amendments are adopted in the same period. The amendments of this ASU should generally be applied using a retrospective transition method to each period presented. We do not expect the adoption of ASU 2016-15 to have a significant impact on our financial position or financial statement disclosures.


Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments


In June 2016, the FASB issued ASU 2016-13, MeasurementsMeasurement of Credit Losses on Financial Instruments (or ASU 2016-13), which has subsequently been amended by ASUs 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Relief,2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The amendments in ASU 2016-13 require entities to measure all expected credit losses (rather than incurred losses) for financial assets held at the reporting date, based on historical experience, current conditions and reasonable and supportable forecasts. Entities will now use forward-looking information to better inform their credit loss estimates. ASU 2016-13 also requires enhanced financial statement disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. Under ASU 2016-13 credit losses for available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments in this ASU require that credit losses be recorded through an allowance for credit losses, which will allow subsequent reversals in credit loss estimates to be recognized in current income. In addition, the allowance on available-for-sale debt securities will be limited to the extent that the fair value is less than the amortized cost.


ASU 2016-13 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The amendments in this ASU are required to be applied by recording a cumulative-effect adjustment to equity as of the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an OTTI had been recognized before the effective date. We are currently in the process of updating our systems and processes to meet the new requirements of this ASU, including working with certain of our vendors to implement new systems and/or make changes to existing systems that will be needed to perform the necessary accounting entries to comply with the new standard. In addition, we are reviewing historical performance data for our portfolios of both residential mortgage securities and residential whole loans, as well as other economic input data, in order to develop and validate modeling and forecasting methodologies that will be used to estimate credit losses and produce the financial statement disclosures required by ASU 2016-13. We will continue to monitor and evaluate the potential effects that ASU 2016-13 will have on our consolidated financial statements and related disclosures.

Under ASU 2016-13, credit losses for available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments in this ASU require that credit losses be recorded through an allowance for credit losses, which will allow subsequent reversals in credit loss estimates to be recognized in current income. In addition, the allowance on available-for-sale debt securities will be limited to the extent that the fair value is less than the amortized cost. Based on our initial evaluation of the amendments in this ASU, we anticipate being required to make changes to the way we account for credit impairment losses on our available-for-sale debt securities. Under our current accounting, credit impairment losses are generally required to be recorded as OTTI, which directly reduce the carrying amount of impaired securities, and are recorded in earnings and are not reversed if expected cash flows subsequently recover. Under the new guidance, credit impairments on such securities will be recorded as an allowance for credit losses that are also recorded in earnings, but the allowance can be reversed through earnings in a subsequent period if expected cash flows subsequently recover. We do not expect that transition to the new available-for-sale debt securities guidance will result in a material change to our retained earnings.


In addition, we expect that the new guidance will also result in changes to the accounting and presentation of our residentialResidential whole loans held at carrying value. We are currently considering whether to avail ourselves of transition relief which would allow us to adopt the fair value option on certain or potentially all of our Purchase Credit Impaired whole loans that we currently account for at carrying value. If we were to make this election on transition to the new standard, the loans on which this election was made would be recorded at fair value and the difference between the loan fair value and carrying value at the date of adoption would be recorded as an adjustment, currently expected to be positive, to retained earnings. Thereafter, such loans would be accounted for in the same manner as our Residential whole loans at fair value, which would result in a number of presentation and income recognition differences to the accounting currently applied. To the extent we do not elect this transition relief, we anticipate that, upon adoption, the guidance will result in an increase in the gross carrying amount of our residential whole loansPurchased Credit Impaired Loans held at carrying value by the amount of the allowance for loan losses calculated under the new guidance. Thereafter, changes in the expected cash flows of such assets are expected to result in the recognition (or reversal) of an allowance for loan losses that will impact earnings. We will continue to monitor and evaluateIn addition, we expect that on adoption of the potential effects that ASU 2016-13 will have on our consolidated financial statements and related disclosures.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (or ASU 2016-02). The amendments in this ASU establish a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leasesguidance there will be classified as either finance or operating, with classification affecting the pattern of expense recognitionan increase in the income statement. ASU 2016-02 is effectiveallowance for public business entitiescredit losses for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. A modified retrospective transition approach is requiredour Purchased Performing Loans held at carrying value, with a resulting negative adjustment to retained earnings. Thereafter, changes in the estimated credit losses for lessees for capital and operating leases existing at,such assets will result in additions to, or entered into after, the beginningreversals of, the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company’s significant lease contracts are discussed in Note 11(a) of the accompanying consolidated financial statements. While we continue to evaluate the potentialallowance for loan losses that will impact that adoption of ASU 2016-02 will have on our financial reporting, given the relatively limited nature and extent of lease financing transactions that we have entered into, we do not expect that the adoption of ASU 2016-02 will have a significant impact on our financial position or financial statement disclosures.earnings.


Financial Instruments - Overall - Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (or ASU 2016-01). The amendments in this ASU affect all entities that hold financial assets or owe financial liabilities, and address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  The classification and measurement guidance of investments in debt securities and loans are not affected by the amendments in this ASU. ASU 2016-01 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.  Early adoption is not permitted for public business entities, except for a provision related to financial statements of fiscal years or interim periods that have not yet been issued, to recognize in other comprehensive income, the change in fair value of a liability resulting from a change in the instrument-specific credit risk measured using the fair value option. The amendments in this ASU are required to be applied by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. We do not expect that adoption of ASU 2016-01 will have a significant impact on our financial position or financial statement disclosures.


Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (or ASU 2014-09).  The ASU requires an entity to recognize revenue in an amount that reflects the consideration to which it expects to be entitled for the transfer of promised goods or services to customers.  ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 originally would have been effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2016.  Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. On April 29, 2015, the FASB proposed a one-year deferral of the effective date for ASU 2014-09. On July 9, 2015 the FASB affirmed its proposal to defer the effective date of the new revenue standard for all entities by one year. As a result, public entities would apply the new revenue standard to annual reporting periods beginning after December 15, 2017 and interim periods therein. The FASB would also permit entities to adopt the standard early, but not before the original public entity effective date. Based on our initial evaluation of this ASU, we do not expect its adoption will have a material impact on our financial position or financial statement disclosures as the majority of the Company’s revenues are generated by financial instruments that are explicitly scoped out of this ASU. We will continue to monitor overall industry efforts to implement this ASU, including evaluating recent implementation questions and practice issues that may impact our business. As this monitoring effort continues, we will continue to assess potential impacts to our financial reporting procedures and controls (if any) as well as any impact on our financial position or financial statement disclosures.




Liquidity and Capital Resources
 
General
 
Our principal sources of cash generally consist of borrowings under repurchase agreements and other collateralized financings, payments of principal and interest we receive on our investment portfolio, cash generated from our operating results and, to the extent such transactions are entered into, proceeds from capital market and structured financing transactions.  Our most significant uses of cash are generally to pay principal and interest on our financing transactions, to purchase residential mortgage assets, to make dividend payments on our capital stock, to fund our operations and to make other investments that we consider appropriate.


We seek to employ a diverse capital raising strategy under which we may issue capital stock and other types of securities. To the extent we raise additional funds through capital market transactions, we currently anticipate using the net proceeds from such transactions to acquire additional residential mortgage-related assets, consistent with our investment policy, and for working capital, which may include, among other things, the repayment of our financing transactions.  There can be no assurance, however, that we will be able to access the capital markets at any particular time or on any particular terms.  We have available for issuance an unlimited amount (subject to the terms and limitations of our charter) of common stock, preferred stock, depositary shares representing preferred stock, warrants, debt securities, rights and/or units pursuant to our automatic shelf registration statement and, at September 30, 20172019, we had 13.0approximately 11.6 million shares of common stock available for issuance pursuant to our DRSPP shelf registration statement.  During the nine months ended September 30, 2017,2019, we issued 1,516,307240,741 shares of common stock through our DRSPP, raising net proceeds of approximately $12.2$1.8 million and 982,350 shares of common stock through our ATM Program, raising net proceeds of approximately $7.1 million.


Our borrowings under repurchase agreements are uncommitted and renewable at the discretion of our lenders and, as such, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time.  The terms of the repurchase transaction borrowings under our master repurchase agreements, as such terms relate to repayment, margin requirements and the segregation of all securities that are the subject of repurchase transactions, generally conform to the terms contained in the standard master repurchase agreement published by the Securities Industry and Financial Markets Association (or SIFMA) or the global master repurchase agreement published by SIFMA and the International Capital Market Association.  In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement.  Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts (as defined below), purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default and setoff provisions.
 
With respect to margin maintenance requirements for repurchase agreements secured by harder to value assets, such as Non-Agency MBS, and residential whole loans and MSR-related assets, margin calls are typically determined by our counterparties based on their assessment of changes in the fair value of the underlying collateral and in accordance with the agreed upon haircuts specified in the transaction confirmation with the counterparty.  We address margin call requests in accordance with the required terms specified in the applicable repurchase agreement and such requests are typically satisfied by posting additional cash or collateral on the same business day.  We review margin calls made by counterparties and assess them for reasonableness by comparing the counterparty valuation against our valuation determination.  When we believe that a margin call is unnecessary because our assessment of collateral value differs from the counterparty valuation, we typically hold discussions with the counterparty and are able to resolve the matter.  In the unlikely event that resolution cannot be reached, we will look to resolve the dispute based on the remedies available to us under the terms of the repurchase agreement, which in some instances may include

the engagement of a third-party to review collateral valuations.  For certain other agreements that do not include such provisions, we could resolve the matter by substituting collateral as permitted in accordance with the agreement or otherwise request the counterparty to return the collateral in exchange for cash to unwind the financing.
 

The following table presentstables present information regarding the margin requirements, or the percentage amount by which the collateral value is contractually required to exceed the loan amount (this difference is referred to as the “haircut”), on our repurchase agreements at September 30, 20172019 and December 31, 20162018:
 
At September 30, 2017
Weighted
Average
Haircut
Low
High
At September 30, 2019
Weighted
Average
Haircut
Low
High
Repurchase agreement borrowings secured by:
 

 

 

 

 

 
Agency MBS
4.62% 3.00% 5.00%
4.42% 3.00% 5.00%
Legacy Non-Agency MBS
22.40
 15.00
 35.00

20.57
 15.00
 35.00
RPL/NPL MBS 21.58
 20.00
 27.50
 21.89
 15.00
 30.00
U.S. Treasury securities
1.39
 1.00
 2.00
CRT securities 22.05
 15.00
 25.00
 19.25
 15.00
 25.00
MSR related assets 33.76
 30.00
 50.00
Residential whole loans 28.35
 20.00
 35.00
 14.85
 8.00
 50.00
MSR-related assets 21.00
 20.00
 30.00
Other 21.20
 20.00
 35.00
            
At December 31, 2016
Weighted
Average
Haircut		 Low High
At December 31, 2018
Weighted
Average
Haircut		 Low High
Repurchase agreement borrowings secured by:
 
  
  
 
  
  
Agency MBS
4.67% 3.00% 6.00%
4.60% 3.00% 5.00%
Legacy Non-Agency MBS
24.01
 15.00
 60.00

21.38
 15.00
 35.00
RPL/NPL MBS 20.98
 15.00
 30.00
 21.31
 15.00
 30.00
U.S. Treasury securities
1.60
 1.00
 2.00
CRT securities 23.22
 20.00
 25.00
 20.01
 17.00
 25.00
MSR related assets 41.40
 35.00
 50.00
Residential whole loans 25.03
 20.00
 35.00
 16.55
 8.00
 33.00
MSR-related assets 21.88
 20.00
 30.00
Other 21.15
 20.00
 35.00
 
During the first nine months of 2017,2019, the weighted average haircut requirements for the respective underlying collateral types for our repurchase agreements have remained fairly consistent compared to the end of 2016. Weighted average haircuts have decreased on MSR related assets, Legacy Non-Agency MBS and CRT securities and have increased on Residential whole loans and RPL/NPL MBS.2018.
 
Repurchase agreement funding for our residential mortgage investments has been available to us at generally attractive market terms from multiple counterparties.  Typically, due to the risks inherent in credit sensitive residential mortgage investments, repurchase agreement funding involving such investments is available at terms requiring higher collateralization and higher interest rates than repurchase agreement funding secured by Agency MBS and U.S. Treasury securities.MBS.  Therefore, we generally expect to be able to finance our acquisitions of Agency MBS on more favorable terms than financing for credit sensitive investments.


We maintain cash and cash equivalents, unpledged Agency and Non-Agency MBS and collateral in excess of margin requirements held by our counterparties (or collectively, “cash and other unpledged collateral”) to meet routine margin calls and protect against unforeseen reductions in our borrowing capabilities.  Our ability to meet future margin calls will be impactedaffected by our ability to use cash or obtain financing from unpledged collateral, the amount of which can vary based on the market value of such collateral, our cash position and margin requirements.  Our cash position fluctuates based on the timing of our operating, investing and financing activities and is managed based on our anticipated cash needs.  (See our Consolidated Statements of Cash Flows, included under Item 1 of this Quarterly Report on Form 10-Q and “Interest Rate Risk” included under Item 3 of this Quarterly Report on Form 10-Q.)
 
At September 30, 2017,2019, we had a total of $8.5$10.6 billion of MBS, U.S. Treasury securities, CRT securities, residential whole loans, and MSR relatedMSR-related assets and $15.4other interest-earning assets and $39.0 million of restricted cash pledged against our repurchase agreements and Swaps. At September 30, 2017,2019, we have access to various sources of liquidity which we estimate exceeds $1.2 billion.$234.7 million. This includes (i) $608.2$154.2 million of cash and cash equivalents; (ii) $186.0$56.6 million in estimated financing available from unpledged Agency MBS and other Agency MBS collateral that is currently pledged in excess of contractual requirements; and (iii) $363.4$23.9 million in estimated

financing available from unpledged Non-Agency MBS.MBS and from other Non-Agency MBS and CRT collateral that is currently pledged in excess of contractual requirements. Our sources of liquidity do not include restricted cash. In addition, we have $1.1 billion of unencumbered residential whole loans. We are evaluating potential opportunities to finance these assets, including loan securitization.



The table below presents certain information about our borrowings under repurchase agreements and other advances, and securitized debt:
  Repurchase Agreements and Other Advances 
Securitized Debt (1)
Quarter Ended (2)
 Quarterly
Average
Balance		 End of Period
Balance		 Maximum
Balance at Any
Month-End		 Quarterly
Average
Balance		 End of Period
Balance		 Maximum
Balance at Any
Month-End
(In Thousands)            
September 30, 2017 $7,022,913
 $6,871,443
 $7,023,702
 $139,276
 $137,327
 $141,088
June 30, 2017 7,612,393
 7,040,844
 7,763,860
 30,414
 143,698
 143,698
March 31, 2017 8,494,853
 8,137,102
 8,564,493
 —
 —
 —
December 31, 2016 8,684,803
 8,687,268
 8,815,846
 —
 —
 —
September 30, 2016 8,868,173
 8,697,756
 8,917,550
 —
 —
 —
  Repurchase Agreements Securitized Debt
Quarter Ended (1)
 Quarterly
Average
Balance		 End of Period
Balance		 Maximum
Balance at Any
Month-End		 Quarterly
Average
Balance		 End of Period
Balance		 Maximum
Balance at Any
Month-End
(In Thousands)            
September 30, 2019 $8,654,350
 $8,571,422
 $8,833,159
 $617,689
 $605,712
 $621,071
June 30, 2019 8,621,895
 8,630,642
 8,639,311
 645,972
 627,487
 649,405
March 31, 2019 8,282,621
 8,509,713
 8,509,713
 675,678
 659,184
 679,269
December 31, 2018 7,672,309
 7,879,087
 7,879,087
 699,207
 684,420
 702,377
September 30, 2018 6,594,050
 7,278,270
 7,278,270
 665,572
 714,203
 744,521


(1)The information presented in the table above excludes $230.0 million of Convertible Senior Notes issued in June 2019 and $100.0 million of Senior Notes issued in April 2012. The outstanding balance of both the Convertible Senior Notes and Senior Notes have been unchanged since issuance.

(1) Reflects securitized debt from our loan securitization transaction in June 2017
(2)  The information presented in the table above excludes Senior Notes issued in April 2012. The outstanding balance of Senior Notes has been unchanged at $100.0 million since issuance.


Cash Flows and Liquidity for the Nine Months Ended September 30, 20172019
 
Our cash, and cash equivalents and restricted cash increased by $348.1$104.5 million during the nine months ended September 30, 2017,2019, reflecting: $1.9 billion provided by$564.3 million used in our investing activities, primarily from payments on our MBS; $119.0$515.2 million provided by our operating activities;financing activities and $1.7 billion used in$153.6 million provided by our financingoperating activities.
 
At September 30, 2017,2019, our debt-to-equity multiple was 2.42.8 times compared to 3.12.6 times at December 31, 2016.2018. At September 30, 2017,2019, we had borrowings under repurchase agreements of $6.9$8.6 billion with 3128 counterparties, of which $2.7$1.7 billion were secured by Agency MBS, $1.4$1.2 billion were secured by Legacy Non-Agency MBS, $798.5$642.7 million were secured by RPL/NPL MBS, $474.7 million were secured by U.S. Treasuries, $413.2$303.5 million were secured by CRT securities, $268.8 million were secured by MSR related assets and $883.4 million$3.7 billion were secured by residential whole loans.loans, $918.1 million were secured by MSR-related assets and $72.9 million were secured by other interest-earning assets.  We continue to have available capacity under our repurchase agreement credit lines.  In addition, at September 30, 2017,2019, we had securitized debt of $137.3$605.7 million in connection with our loan securitization transaction in June 2017.transactions. At December 31, 2016,2018, we had borrowings under repurchase agreements of $8.5$7.9 billion with 3126 counterparties, of which $3.1$2.4 billion were secured by Agency MBS, $1.7$1.4 billion were secured by Legacy Non-Agency MBS, $1.9$1.1 billion were secured by RPL/NPL MBS, $504.6 million were secured by U.S. Treasuries, $271.2$391.6 million were secured by CRT securities, $135.1 million were secured by MSR related assets and $832.1 million$2.0 billion were secured by residential whole loans.loans, $474.1 million were secured by MSR-related assets and $76.4 million were secured by other interest-earning assets. In addition, at December 31, 2016,2018, we had $215.0securitized debt of $684.4 million in outstanding FHLB advances, secured by Agency MBS, all of which were repaid in January 2017.connection with our loan securitization transactions.


During the nine months ended September 30, 2017, $1.9 billion2019, $564.3 million was provided throughused in our investing activities.  We paid $3.0 billion for purchases of residential whole loans, loan related investments and capitalized advances, and purchased $580.8 million of MSR-related assets, $246.3 million of Non-Agency MBS and $10.5 million of CRT securities funded with cash and repurchase agreement borrowings.  In addition, during the nine months ended September 30, 2019, we received cash of $3.4$1.6 billion from prepayments and scheduled amortization on our MBS, CRT securities and MSR relatedMSR-related assets, of which $675.6$536.4 million was attributable to Agency MBS, $2.6 billion$985.3 million was from Non-Agency MBS and $12.1 million was from CRT securities and $140.1$33.7 million was attributable to MSR related assets.  We purchased $718.9 million of Non-Agency MBS, $238.8 million of CRT securities, $325.4 million of MSR relatedMSR-related assets, and $3.2we sold certain of our investment securities for $735.8 million, realizing net gains of Agency MBS funded with cash and repurchase agreement borrowings.$50.0 million. While we generally intend to hold our MBS and CRT securities as long-term investments, we may sell certain of our securities in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions. In addition, duringDuring the nine months ended September 30, 20172019 we sold certainreceived $906.1 million of our Non-Agency MBSprincipal payments on residential whole loans and U.S. Treasury securities for $222.1$81.2 million realizing net gains of $30.5 million.proceeds on sales of REO. 
 
In connection with our repurchase agreement borrowings and Swaps, we routinely receive margin calls/reverse margin calls from our counterparties and make margin calls to our counterparties.  Margin calls and reverse margin calls, which requirements vary over time, may occur daily between us and any of our counterparties when the value of collateral pledged changes from the amount contractually required.  The value of securities pledged as collateral fluctuates reflecting changes in: (i) the face (or par)

value of our MBS;assets; (ii) market interest rates and/or other market conditions; and (iii) the market value of our Swaps.  Margin calls/reverse margin calls are satisfied when we pledge/receive additional collateral in the form of additional securitiesassets and/or cash.
 

The table below summarizes our margin activity with respect to our repurchase agreement financings and derivative hedging instruments for the quarterly periods presented.presented:
 
  Collateral Pledged to Meet Margin Calls 
Cash and
Securities Received for
Reverse Margin Calls
 Net Assets
Received/(Pledged) for Margin Activity
For the Quarter Ended Fair Value of
Securities
Pledged		 Cash Pledged Aggregate Assets
Pledged For
Margin Calls		  
(In Thousands)          
September 30, 2017 $83,513
 $—
 $83,513
 $53,499
 $(30,014)
June 30, 2017 106,432
 500
 106,932
 75,996
 (30,936)
March 31, 2017 150,264
 1,500
 151,764
 246,168
 94,404
December 31, 2016 337,694
 8,000
 345,694
 357,163
 11,469
September 30, 2016 343,351
 28,700
 372,051
 343,139
 (28,912)
  Collateral Pledged to Meet Margin Calls 
Cash and
Securities Received for
Reverse Margin Calls
 Net Assets
Received/(Pledged) for Margin Activity
For the Quarter Ended (1)
 Fair Value of
Securities
Pledged		 Cash Pledged Aggregate Assets
Pledged For
Margin Calls		  
(In Thousands)          
September 30, 2019 $77,214
 $—
 $77,214
 $98,710
 $21,496
June 30, 2019 26,037
 —
 26,037
 6,287
 (19,750)
March 31, 2019 49,139
 —
 49,139
 65,461
 16,322
December 31, 2018 14,452
 —
 14,452
 23,760
 9,308
September 30, 2018 61,492
 3,005
 64,497
 8,294
 (56,203)
 
(1) Excludes variation margin payments on the Company’s cleared Swaps which are treated as a legal settlement of the exposure under the Swap contract.

We are subject to various financial covenants under our repurchase agreements and derivative contracts, which include minimum net worth and/or profitability requirements, maximum debt-to-equity ratios and minimum market capitalization requirements.  We have maintained compliance with all of our financial covenants through September 30, 2017.2019.
 
During the nine months ended September 30, 2017,2019, we paid $229.0$271.0 million for cash dividends on our common stock and dividend equivalents and paid cash dividends of $11.3 million on our preferred stock. On September 14, 2017,12, 2019, we declared our third quarter 20172019 dividend on our common stock of $0.20 per share; on October 31, 2017,2019, we paid this dividend, which totaled approximately $79.6$90.6 million, including dividend equivalents of approximately $205,000.$276,000. 
 
We believe that we have adequate financial resources to meet our current 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 agreement borrowings could result and our liquidity position could be materially and adversely affected.  Further, should market liquidity tighten, our repurchase agreement counterparties maymight increase our margin requirements on new financings, reducing our ability to use leverage.  Access to financing may also be negatively impacted by the ongoing volatility in the world financial markets, potentially adversely impacting our current or potential lenders’ ability or willingness to provide us with financing. In addition, there is no assurance that favorable market conditions will continue to permit us to consummate additional securitization transactions if we determine to seek that form of financing.
 
Off-Balance Sheet Arrangements
 
We dohave not participated in transactions that create relationships with unconsolidated entities or financial partnerships which would have any materialbeen established for the purpose of facilitating off-balance sheet arrangements.arrangements or other contractually narrow or limited purposes.


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 results of operations and reported assets, liabilities and equity are measured with reference to historical cost or fair value without considering inflation.



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, consistent with our investment policies, to:  assume risk that can be quantified based on management’s judgment and 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 generally acquire interest-rate sensitive assets and fund them with interest-rate sensitive liabilities, a portion of which are hedged with Swaps. We are exposed to interest rate risk on our residential mortgage assets, as well as on our liabilities. Changes in interest rates can affect our net interest income and the fair value of our assets and liabilities.
We finance the majority of our investments in residential mortgage assets with short-term repurchase agreements. In general, when interest rates change, the borrowing costs of our repurchase agreements (net of the impact of Swaps) change more quickly than the yield on our assets. In a rising interest rate environment, the borrowing costs of our repurchase agreements may increase faster than the interest income on our assets, thereby reducing our net income. In order to mitigate compression in net income based on such interest rate movements, we use Swaps to lock in a portion of the net interest spread between assets and liabilities.


When interest rates change, the fair value of our residential mortgage assets could change at a different rate than the fair value of our liabilities. We measure the sensitivity of our portfolio to changes in interest rates by estimating the duration of our assets and liabilities. Duration is the approximate percentage change in fair value for a 100 basis point parallel shift in the yield curve. In general, our assets have higher duration than our liabilities and in order to reduce this exposure we use Swaps to reduce the gap in duration between our assets and liabilities.


In calculating the duration of our Agency MBS we take into account the characteristics of the underlying mortgage loans including whether the underlying loans are fixed rate, adjustable or hybrid; coupon, expected prepayment rates and lifetime and periodic caps. We use third-party financial models, combined with management’s assumptions and observed empirical data when estimating the duration of our Agency MBS.


In analyzing the interest rate sensitivity of our Legacy Non-Agency MBS we take into account the characteristics of the underlying mortgage loans, including credit quality and whether the underlying loans are fixed-rate, adjustable or hybrid. We estimate the duration of our Legacy Non-Agency MBS using management’s assumptions.


The majority of our RPL/NPL MBS deal structures contain a contractual coupon step-up feature where the coupon increases up tofrom 300 - 400 basis points if the bond is not redeemed by the issuer at 36 - 48 months from issuance or sooner. Therefore, we believe their fair value exhibits little sensitivity to changes in interest rates. We estimate the duration of these securities using management’s assumptions.


The fair value of our re-performing residential whole loans is dependent on the value of the underlying real estate collateral, past and expected delinquency status of the borrower as well as the level of interest rates. Because the borrower is not delinquent on their mortgage payments but is less likely to prepay the loan due to weak credit history and/or high LTV, we believe our re-performing residential whole loans exhibit positive duration. We estimate the duration of our re-performing residential whole loans using management’s assumptions.


The fair value of our Non-QM loans and Single-family rental loans are dependent on the value of the underlying real estate collateral, as well as the level of interest rates. Because these loans are primarily newly or recently originated performing loans, we believe these investments exhibit positive duration. Given the short duration of the Company’s Rehabilitation loans, we believe the fair value of these loans exhibits little sensitivity to changes in interest rates. We estimate the duration of these Purchased Performing Loans held at carrying value using management’s assumptions.
The fair value of our non-performing residential whole loans is primarily dependent on the value of the underlying real estate collateral and the time required for collateral liquidation. Since neither the value of the collateral nor the liquidation timeline is generally sensitive to interest rates, we believe their fair value exhibits little sensitivity to interest rates. We estimate the duration of our non-performing residential whole loans using management’s assumptions.


We use Swaps as part of our overall interest rate risk management strategy. Such derivative financial instruments are intended to act as a hedge against future interest rate increases on our repurchase agreement financings, which rates are typically highly

correlated with LIBOR. While our derivatives do not extend the maturities of our borrowings under repurchase agreements, they do, in effect, lock in a fixed rate of interest over their term for a corresponding amount of our repurchase agreement financings that are hedged. 



At September 30, 2017,2019, MFA’s $5.7$3.4 billion of Agency MBS and Legacy Non-Agency MBS were backed by Hybrid, adjustable and fixed-rate mortgages.  Additional information about these MBS, including average months to reset and three-month average CPR, is presented below:
 
 Agency MBS 
Legacy Non-Agency MBS (1)
 
Total (1)
 Agency MBS 
Legacy Non-Agency MBS (1)
 
Total (1)
Time to Reset 
 Fair
Value (2)
 
Average Months to Reset (3)
 
3 Month 
Average CPR (4)
  Fair Value 
Average Months to Reset (3)
 
3 Month 
Average CPR (4)
 
 Fair
Value (2)
 
Average Months to Reset (3)
 
3 Month 
Average CPR (4)
 
 Fair
Value (2)
 
Average Months to Reset (3)
 
3 Month 
Average CPR (4)
  Fair Value 
Average Months to Reset (3)
 
3 Month 
Average CPR (4)
 
 Fair
Value (2)
 
Average Months to Reset (3)
 
3 Month 
Average CPR (4)
(Dollars in Thousands)  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
< 2 years (5)
 $1,597,666
 8
 20.4% $1,845,110
 5
 19.0% $3,442,776
 6
 19.6% $790,932
 6
 20.8% $948,067
 5
 16.3% $1,738,999
 6
 18.2%
2-5 years 144,494
 46
 12.0
 —
 —
 —
 144,494
 46
 12.0
 87,180
 36
 15.5
 —
 —
 —
 87,180
 36
 15.5
> 5 years 60,033
 67
 12.8
 —
 —
 —
 60,033
 67
 12.8
 8,077
 68
 39.6
 —
 —
 —
 8,077
 68
 39.6
ARM-MBS Total $1,802,193
 13
 19.5% $1,845,110
 5
 19.0% $3,647,303
 9
 19.2% $886,189
 10
 20.4% $948,067
 5
 16.3% $1,834,256
 7
 18.2%
15-year fixed (6)
 $1,216,047
  
 11.4% $3,250
  
 12.9% $1,219,297
  
 11.4% $614,228
  
 10.5% $813
  
 15.0% $615,041
  
 10.6%
30-year fixed (6)
 —
  
 —
 830,457
  
 18.3
 830,457
  
 18.3
 312,491
  
 32.9
 573,813
  
 12.6
 886,304
  
 19.2
40-year fixed (6)
 —
  
 —
 37,910
  
 15.1
 37,910
  
 15.1
 —
  
 —
 44,191
  
 15.1
 44,191
  
 15.1
Fixed-Rate Total $1,216,047
  
 11.4% $871,617
  
 18.1% $2,087,664
  
 14.4% $926,719
  
 17.1% $618,817
  
 12.8% $1,545,536
  
 15.4%
MBS Total $3,018,240
  
 16.2% $2,716,727
  
 18.7% $5,734,967
  
 17.5% $1,812,908
  
 18.6% $1,566,884
   14.9% $3,379,792
   16.9%
 
(1)Excludes $1.2 billion$828.0 million of RPL/NPL MBS. Refer to table below for further information.
(2)Does not include principal payments receivable of $1.1 million.$965,000.
(3)Months to reset is the number of months remaining before the coupon interest rate resets.  At reset, the MBS coupon will adjust based upon the underlying benchmark interest rate index, margin and periodic and/or lifetime caps.  The months to reset do not reflect scheduled amortization or prepayments.
(4)3 month average CPR weighted by positions as of the beginning of each month in the quarter.
(5)Amounts presented are based on origination data. Includes floating-rate MBS that may be collateralized by fixed-rate mortgages. In addition, underlying loans may have been modified to be fixed or step rate.
(6)Information presented based on data available at time of loan origination.




The following table presents certain information about our RPL/NPL MBS portfolio at September 30, 20172019:
 Fair Value Net Coupon 
Months to
Step-Up (1)
 
3 Month Average
Bond CPR (2)
(Dollars in Thousands)         Fair Value Net Coupon 
Months to
Step-Up (1)
 
3 Month Average
Bond CPR (2)
Re-Performing loans $84,012
 3.65% 32
 43.0% $114,594
 4.45% 21
 —%
Non-Performing loans 1,110,920
 4.25
 21
 22.6
 713,455
 5.24
 23
 20.1
Total RPL/NPL MBS $1,194,932
 4.21% 22
 26.2% $828,049
 5.13% 23
 18.2%


(1)Months to step-up is the weighted average number of months remaining before the coupon interest rate increases pursuant to the first coupon reset. We anticipate that the securities will be redeemed prior to the step-up date.
(2)All principal payments are considered to be prepayments for CPR purposes.


At September 30, 2017,2019, our CRT securities and MSR relatedMSR-related assets had a fair value of $653.6$377.9 million and $411.8 million,$1.2 billion, respectively, and their coupons reset monthly based on one-month LIBOR.


The interest rates for the vast majority of our investments, financings and hedging transactions are either explicitly or indirectly based on LIBOR. On July 27, 2017, the United Kingdom Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. At this time, it is not possible to predict the effect of such change, including the establishment of potential alternative reference rates, on the economy or markets we are active in either currently or in the future, or on any of our assets or liabilities whose interest rates are based on LIBOR. We are in the process of evaluating the potential impact of a discontinuation of LIBOR after 2021 on our portfolio, as well as the related accounting impact. However, we expect that during the remainder of 2019 and throughout 2020, we will work closely with the Trustee companies and/or other entities that are involved in calculating the interest rates for our residential mortgage securities and securitized debt, our loan servicers for our hybrid and floating rate loans, and with the various counterparties to our financing and hedging transactions in order to determine what changes, if any, are required to made to existing agreements for these transactions.

Shock Table


The information presented in the following “Shock Table” projects the potential impact of sudden parallel changes in interest rates on our net interest income and portfolio value, including the impact of Swaps, over the next 12 months based on the assets in our investment portfolio at September 30, 20172019.  All changes in income and value are measured as the percentage change from the projected net interest income and portfolio value under the base interest rate scenario at September 30, 20172019.


Change in Interest Rates 
Estimated
Value
of Assets (1)
 Estimated
Value of
Swaps		 Estimated
Value of
Financial
Instruments		 
Change in
Estimated
Value
 Percentage
Change in Net
Interest
Income		 Percentage
Change in
Portfolio
Value		 
Estimated
Value
of Assets (1)
 Estimated
Value of
Swaps		 Estimated
Value of
Financial
Instruments		 
Change in
Estimated
Value
 Percentage
Change in Net
Interest
Income		 Percentage
Change in
Portfolio
Value
(Dollars in Thousands)                        
+100 Basis Point Increase $10,411,914
 $27,911
 $10,439,825
 $(85,728) (3.08)% (0.81)% $12,819,461
 $26,137
 $12,845,598
 $(180,069) (4.90)% (1.38)%
+ 50 Basis Point Increase $10,485,268
 $(1,070) $10,484,198
 $(41,355) (1.80)% (0.39)% $12,948,352
 $(4,438) $12,943,914
 $(81,753) (2.65)% (0.63)%
Actual at September 30, 2017 $10,555,603
 $(30,050) $10,525,553
 $—
 —
 —
Actual at September 30, 2019 $13,060,681
 $(35,014) $13,025,667
 $—
 — % — %
- 50 Basis Point Decrease $10,622,921
 $(59,030) $10,563,891
 $38,338
 (1.41)% 0.36 % $13,156,451
 $(65,589) $13,090,862
 $65,195
 0.36 % 0.50 %
-100 Basis Point Decrease $10,687,220
 $(88,011) $10,599,209
 $73,656
 (1.68)% 0.70 % $13,235,660
 $(96,164) $13,139,496
 $113,829
 1.05 % 0.87 %


(1)  Such assets include MBS and CRT securities, residential whole loans and REO, MSR relatedMSR-related assets, cash and cash equivalents and restricted cash.


Certain assumptions have been made in connection with the calculation of the information set forth in the Shock 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, 2017.2019.  The analysis presented utilizes assumptions and estimates based on management’s judgment and experience.  Furthermore, while we generally expect to retain the majority of our 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 constitute 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 Shock Table above.
 
The Shock Table quantifies the potential changes in net interest income and portfolio value, which includes the value of our Swaps (which are carried at fair value), should interest rates immediately change (i.e., are shocked).  The Shock 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 our portfolio of MBS for each rate shock are calculated based on assumptions, including, but not limited to, prepayment speeds, yield on replacement assets, the slope of the yield curve and composition of our portfolio.  Assumptions made with respect to the interest rate sensitive liabilities include anticipated interest rates, collateral requirements as a percent of repurchase agreement financings, and the amounts and terms of borrowing.  At September 30, 2017,2019, we applied a floor of 0% for all anticipated interest rates included in our assumptions.  Due to this floor, it is anticipated that any hypothetical interest rate shock decrease would have a limited positive impact on our funding costs; however, because prepayments speeds are unaffected by this floor, it is expected that any increase in our prepayment speeds (occurring as a result of any interest rate shock decrease or otherwise) could result in an acceleration of premium amortization on our Agency MBS and discount accretion on our Non-Agency MBS and in the reinvestment of principal repayments in lower yielding assets.  As a result, because the presence of this floor limits the positive impact of interest rate decrease on our funding costs, hypothetical interest rate shock decreases could cause a decline in the fair value of our financial instruments and our net interest income.
 
At September 30, 2017,2019, the impact on portfolio value was approximated using estimated net effective duration (i.e., the price sensitivity to changes in interest rates), including the effect of Swaps and securitized and other fixed rate debt, of 0.761.14 which is the weighted average of 1.681.45 for our Agency MBS, 1.280.91 for our Non-Agency investments, (2.30)2.24 for our Residential whole loans, (1.51) for our Swaps, securitized debt, and 0.05other fixed rate debt, and 0.17 for our Other assets and cash and cash equivalents. Estimated convexity (i.e., the approximate change in duration relative to the change in interest rates) of the portfolio was (0.11)(0.51), which is the weighted average of (0.40)(0.56) for our Agency MBS, zero for our Swaps zeroand securitized and other fixed rate debt, (0.12) for our Non-Agency MBS, (0.79) for our Residential whole loans and zero for our Other assets and cash and cash equivalents. The impact on our 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.  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 borrowings are generally shorter in 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.



Credit Risk
 
Although we do not believe that we are exposed to credit risk in our Agency MBS portfolio, we are exposed to credit risk through our credit-sensitivecredit sensitive residential mortgage investments, in particular Legacy Non-Agency MBS, CRT securities and residential whole loans and to a lesser extent our investments in RPL/NPL MBS CRT securities and MSR relatedMSR-related assets. Our exposure to credit risk from our credit sensitive investments is discussed in more detail below:


Legacy Non-Agency MBS


In the event of the return of less than 100% of par on our Legacy Non-Agency MBS, credit support contained in the MBS deal structures and the discounted purchase prices we paid mitigate our risk of loss on these investments.  Over time, we expect the level of credit support remaining in certain MBS deal structures to decrease, which will result in an increase in the amount of realized credit loss experienced by our Legacy Non-Agency MBS portfolio.  Our investment process for Legacy Non-Agency MBS involves analysis focused primarily on quantifying and pricing credit risk.  When we purchase Legacy Non-Agency MBS, we assign certain assumptions to each of the MBS, including but not limited to, future interest rates, voluntary prepayment rates, mortgage modifications, default rates and loss severities, and generally allocate a portion of the purchase discount as a Credit Reserve which provides credit protection for such securities.  As part of our surveillance process, we review our Legacy Non-Agency MBS by tracking their actual performance compared to the securities’ expected performance at purchase or, if we have modified our original purchase assumptions, compared to our revised performance expectations.  To the extent that actual performance of a Legacy Non-Agency MBS is less favorable than its expected performance, we may revise our performance expectations.  As a result, we could reduce the accretable discount on the security and/or recognize an other-than-temporary impairment through earnings, either of which could have a material adverse impact on our operating results. 


In evaluating our asset/liability management and Legacy Non-Agency MBS credit performance, we consider the credit characteristics of the mortgage loans underlying our Legacy Non-Agency MBS.  The following table presents certain information about our Legacy Non-Agency MBS portfolio at September 30, 20172019.  Information presented with respect to the weighted average FICOFair Isaac Corporation (or FICO) scores and other information aggregated based on information reported at the time of mortgage origination are historical and, as such, do not reflect the impact of the general changes in home prices or changes in borrowers’ credit scores or the current use of the mortgaged properties.
 

The information in the table below is presented as of September 30, 20172019:
 
  
Securities with Average Loan FICO
of 715 or Higher (1)
 
Securities with Average Loan FICO
Below 715 (1)
  
Year of Securitization (2)
 2007 2006 2005
and Prior		 2007 2006 2005
and Prior		 Total
(Dollars in Thousands)  
  
  
  
  
  
  
Number of securities 84
 65
 90
 29
 57
 61
 386
MBS current face (3)
 $776,217
 $505,156
 $580,846
 $171,088
 $446,942
 $428,426
 $2,908,675
Total purchase discounts, net (3)
 $(229,043) $(143,950) $(107,878) $(56,606) $(169,151) $(129,206) $(835,834)
Purchase discount designated as Credit Reserve and OTTI (3)(4)
 $(145,118) $(74,508) $(57,820) $(46,116) $(165,468) $(104,104) $(593,134)
Purchase discount designated as Credit Reserve and OTTI as percentage of current face 18.7% 14.7% 10.0% 27.0% 37.0% 24.3% 20.4%
MBS amortized cost (3)
 $547,174
 $361,206
 $472,968
 $114,482
 $277,791
 $299,220
 $2,072,841
MBS fair value (3)
 $729,689
 $472,395
 $562,202
 $157,543
 $393,568
 $401,330
 $2,716,727
Weighted average fair value to current face 94.0% 93.5% 96.8% 92.1% 88.1% 93.7% 93.4%
Weighted average coupon (5)
 3.97% 3.45% 3.69% 4.93% 4.97% 4.74% 4.15%
Weighted average loan age (months) (5)(6)
 126
 135
 149
 131
 137
 148
 137
Weighted average current loan size (5)(6)
 $503
 $491
 $300
 $345
 $249
 $236
 $373
Percentage amortizing (7)
 99% 100% 100% 99% 99% 100% 100%
Weighted average FICO score at origination (5)(8)
 729
 729
 726
 705
 702
 703
 719
Owner-occupied loans 90.7% 90.9% 86.5% 84.8% 86.3% 84.4% 88.0%
Rate-term refinancings 29.8% 21.8% 14.9% 22.3% 15.7% 14.4% 20.5%
Cash-out refinancings 35.2% 35.2% 27.7% 44.5% 44.4% 39.5% 36.3%
3 Month CPR (6)
 23.0% 17.8% 20.2% 16.5% 16.7% 17.6% 19.4%
3 Month CRR (6)(9)
 19.5% 15.1% 17.3% 13.9% 12.6% 14.5% 16.2%
3 Month CDR (6)(9)
 4.5% 3.3% 3.5% 3.3% 5.5% 4.0% 4.1%
3 Month loss severity 61.5% 41.6% 45.8% 51.9% 55.8% 54.2% 53.4%
60+ days delinquent (8)
 11.5% 11.4% 8.5% 15.1% 15.1% 12.8% 11.8%
Percentage of always current borrowers (Lifetime) (10)
 32.6% 32.3% 39.8% 27.2% 23.4% 28.2% 31.6%
Percentage of always current borrowers (12M) (11)
 76.4% 76.9% 79.3% 69.2% 68.2% 70.4% 74.5%
Weighted average credit enhancement (8)(12)
 0.2% 0.2% 4.7% 0.0% 1.3% 2.8% 1.6%
(Dollars in Thousands) 
Securities with
 Average Loan FICO
of 715 or Higher (1)
 
Securities with 
Average Loan FICO
Below 715 (1)
 Total
   
  
  
Number of securities 164
 137
 301
MBS current face (2)
 $922,828
 $779,275
 $1,702,103
Total purchase discounts, net (2)
 $(274,433) $(289,493) $(563,926)
Purchase discount designated as Credit Reserve and OTTI (2)(3)
 $(198,692) $(263,403) $(462,095)
Purchase discount designated as Credit Reserve and OTTI as percentage
    of current face
 21.5% 33.8% 27.2%
MBS amortized cost (2)
 $648,395
 $489,782
 $1,138,177
MBS fair value (2)
 $864,931
 $701,953
 $1,566,884
Weighted average fair value to current face 93.7% 90.1% 92.1%
Weighted average coupon (4)
 4.58% 5.08% 4.81%
Weighted average loan age (months) (4)(5)
 157
 163
 160
Weighted average current loan size (4)(5)
 $422
 $266
 $351
Percentage amortizing (6)
 100% 99% 100%
Weighted average FICO score at origination (4)(7)
 728
 702
 716
Owner-occupied loans 90.5% 87.5% 89.1%
Rate-term refinancings 24.6% 17.4% 21.3%
Cash-out refinancings 34.8% 45.0% 39.5%
3 Month CPR (5)
 16.2% 15.5% 15.9%
3 Month CRR (5)(8)
 14.2% 13.2% 13.8%
3 Month CDR (5)(8)
 2.4% 2.8% 2.6%
3 Month loss severity 40.7% 57.8% 49.2%
60+ days delinquent (7)
 9.7% 12.4% 10.9%
Percentage of always current borrowers (Lifetime) (9)
 25.0% 20.2% 22.8%
Percentage of always current borrowers (12M) (10)
 77.4% 70.8% 74.4%




(1)FICO score is used by major credit bureaus to indicate a borrower’s creditworthiness at time of loan origination.
(2)Information presented based on the initial year of securitization of the underlying collateral. Certain of our Non-Agency MBS have been resecuritized.  The historical information presented in the table is based on the initial securitization date and data available at the time of original securitization (and not the date of resecuritization). No information has been updated with respect to any MBS that have been resecuritized.
(3)Excludes Non-Agency MBS issued since 2012 in which the underlying collateral consists of RPL/NPL MBS. These Non-Agency MBS have a current face of $1.2 billion,$824.8 million, amortized cost of $1.2 billion,$824.3 million, fair value of $1.2 billion$828.1 million and purchase discounts of $2.0 million$475,000 at September 30, 2017.2019.
(4)(3)Purchase discounts designated as Credit Reserve and OTTI are not expected to be accreted into interest income.
(5)(4)Weighted average is based on MBS current face at September 30, 2017.2019.
(6)(5)Information provided is based on loans for individual groups owned by us.
(7)(6)Percentage of face amount for which the original mortgage note contractually calls for principal amortization in the current period.
(8)(7)Information provided is based on loans for all groups that provide credit enhancement for MBS with credit enhancement.
(9)(8)CRR represents voluntary prepayments and CDR represents involuntary prepayments.
(10)(9)Percentage of face amount of loans for which the borrower has not been delinquent since origination.
(11)(10)Percentage of face amount of loans for which the borrower has not been delinquent in the last twelve months.
(12)Credit enhancement for a particular security is expressed as a percentage of all outstanding mortgage loan collateral.  A particular security will not be subject to principal loss as long as its credit enhancement is greater than zero. 




The mortgages securing our Legacy Non-Agency MBS are located in many geographic regions across the United States.  The following table presents the five largest geographic concentrations by state of the mortgages collateralizing our Legacy Non-Agency MBS at September 30, 20172019:
Property LocationPercent of Unpaid Principal Balance
California42.942.7%
Florida7.88.1%
New York6.58.1%
Maryland4.0%
New Jersey4.0%
Virginia3.93.8%

RPL/NPL MBS


These securities are backed by re-performing and non-performing loans, were purchased primarily through new issue at prices at or around par and represent the senior and mezzanine tranches of the related securitizations. The majority of these securities are structured with significant credit enhancement (typically approximately 50%) and the subordinate tranches absorb all credit losses (until those tranches are extinguished) and typically receive no cash flow (interest or principal) until the senior tranche is paid off. Prior to purchase, we analyze the deal structure in order to assess the associated credit risk. Subsequent to purchase, the ongoing credit risk associated with the deal is evaluated by analyzing the extent to which actual credit losses occur that result in a reduction in the amount of subordination enjoyed by our bond.


CRT Securities


We are exposed to potential credit losses from our investments in CRT securities issued by or sponsored by Fannie Mae and Freddie Mac. While CRT securities are debt obligations ofissued by or sponsored by these GSEs, payment of principal on these securities is not guaranteed. As an investor in a CRT security, we may incur a loss if losses on the mortgage loans in the associated reference pool exceed the credit enhancement on the underlying CRT security owned by us or if an actual pool of loans experience delinquencies exceeding specified thresholds or other specified credit events occur.losses. We assess the credit risk associated with our investments in CRT securities by assessing the current and expected future performance of the associated loan pool.

Residential Whole Loans

We are also exposed to credit risk from our investments in residential whole loans. Our investment process for non-performing and Purchased Credit Impaired Loans is generally similar to that used for Legacy Non-Agency MBS and is likewise focused on quantifying and pricing credit risk. Non-Performing and Purchased Credit Impaired Loans are acquired at purchase prices that are generally discounted to the contractual loan balances based on a number of factors, including the impaired credit history of the borrower and the value of the collateral securing the loan. In addition, as we generally own the mortgage-servicing rights associated with these loans, inour process is also focused on selecting a sub-servicer with the associated reference pool.appropriate expertise to mitigate losses and maximize our overall return. This involves, among other things, performing due diligence on the sub-servicer prior to their engagement as well as ongoing oversight and surveillance. To the extent that delinquencies and defaults on these loans are higher than our expectation at the time the loans were purchased, the discounted purchase price at which the asset is acquired is intended to provide a level of protection against financial loss.

Credit risk on Purchased Performing Loans is mitigated through our process to underwrite the loan before it is purchased and includes an assessment of the borrower’s financial condition and ability to repay the loan, nature of the collateral and relatively low LTV, including after-repair LTV for the majority of our Rehabilitation loans.


MSR RelatedThe following table presents certain information about our Residential whole loans, at carrying value at September 30, 2019:

  Purchased Performing Loans Purchased Credit Impaired Loans  
  Loans with an LTV: Loans with an LTV:  
(Dollars in Thousands) 80% or Below Above 80% 80% or Below Above 80% Total
Carrying value $4,000,299
 $191,782
 $400,921
 $317,276
 $4,910,278
Unpaid principal balance (UPB) $3,931,041
 $190,553
 $463,080
 $437,103
 $5,021,777
Weighted average coupon (1)
 6.3% 6.7% 4.5% 4.4% 6.0%
Weighted average term to maturity (months) 266
 327
 272
 323
 274
Weighted average LTV (2)
 63.9% 90.8% 58.1% 110.1% 68.3%
Loans 90+ days delinquent (UPB) $51,222
 $2,508
 $33,230
 $70,778
 $157,738

(1)
Weighted average is calculated based on the interest bearing principal balance of each loan within the related category. For loans acquired with servicing rights released by the seller, interest rates included in the calculation do not reflect loan servicing fees. For loans acquired with servicing rights retained by the seller, interest rates included in the calculation are net of servicing fees.
(2)LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Rehabilitation loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Rehabilitation loans, totaling $250.0 million, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. The LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 69%. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.

The following table presents the five largest geographic concentrations by state of our residential whole loan portfolio at September 30, 2019:
Property LocationPercent of Interest-Bearing Unpaid Principal Balance
California37.0%
Florida11.7%
New York7.7%
New Jersey5.3%
Illinois3.2%


MSR-Related Assets


Term Notes


We have invested in certain term notes that are issued by SPVs that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. Payment of principal and interest on these term notes is considered by us to be largely dependent on the cash flows generated by the underlying MSRs as this impacts the cash flows available to the SPV that issued the term notes. Credit risk borne by the holders of the term notes is also mitigated by structural credit support in the form of over-collateralization. In addition, credit support is also provided by a corporate guarantee from the ultimate parent or sponsor of the SPV that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the underlying MSRs be insufficient.
Corporate Loan


We have entered intoparticipated in a loan agreement withto provide financing to an entity that originates residential whole loans and owns the related MSRs. We assess the credit risk associated with this loan participation by considering various factors, including the current status of the loan, changes in fair value of the MSRs that secure the loan and the recent financial performance of the borrower.

Residential Whole Loans

We are also exposed toCredit Spread Risk

Credit spreads measure the additional yield demanded by investors in financial instruments based on the credit risk from our investments in residential whole loans. Our investment processassociated with an instrument relative to benchmark interest rates. They are impacted by the available supply and demand for residential whole loans is generally similar to that used for Legacy Non-Agency MBS and is likewise focused on quantifying and pricinginstruments with various levels of credit risk. Consequently, these loans are acquired at purchase prices that areWidening credit spreads would result in higher yields being required by investors in financial instruments. Credit spread widening generally discounted (often substantially) to the contractual loan balances based on a number of factors, including the impaired credit historyresults in lower values of the borrowerfinancial instruments we hold at that time, but will generally result in a higher yield on future investments with similar credit risk. It is possible that the credit spreads on our assets and the value of the collateral securing the loan. In addition, as the owner of the servicing rights,liabilities, including hedges, will not always move in tandem. Consequently, changes in credit spreads can result in volatility in our process is also focused on selecting a sub-servicer with the appropriate expertise to mitigate lossesfinancial results and maximize our overall return. This involves, among other things, performing due diligence on the sub-servicer prior to their engagement as well as ongoing oversight and surveillance. To the extent that loanreported book value.

delinquencies and defaults are higher than our expectation at the time the loans were purchased, the discounted purchase price at which the asset is acquired is intended to provide a level of protection against financial loss.

The following table presents the five largest geographic concentrations by state of our credit sensitive residential whole loan portfolio at September 30, 2017:
Property Location
Percent of Interest-Bearing Unpaid Principal Balance (1)
California20.7%
New York15.0%
Florida8.6%
New Jersey7.1%
Maryland5.0%

(1) Excludes approximately $120.4 million of residential whole loans for which the closing of the purchase transaction had not occurred as of September 30, 2017.



Liquidity Risk


The primary liquidity risk we face arises from financing long-maturity assets with shorter-term borrowings primarily in the form of repurchase agreement financings.  We pledge residential mortgage assets and cash to secure our repurchase agreements and Swaps.  At September 30, 2017,2019, we had access to various sources of liquidity which we estimate to be in excess of $1.2 billion,$234.7 million, an amount which includes: (i) $608.2$154.2 million of cash and cash equivalents, (ii) $186.0$56.6 million in estimated financing available from unpledged Agency MBS and other Agency MBS collateral that are currently pledged in excess of contractual requirements, and (iii) $363.4$23.9 million in estimated financing available from currently unpledged Non-Agency MBS.MBS and from other Non-Agency MBS and CRT collateral that is currently pledged in excess of contractual requirements.  Our sources of liquidity do not include restricted cash. In addition, we have $1.1 billion of unencumbered residential whole loans. We are evaluating potential opportunities to finance these assets including loan securitization. Should the value of our residential mortgage assets pledged as collateral suddenly decrease, margin calls under our repurchase agreements would likely increase, causing an adverse change in our liquidity position.  Additionally, if one or more of our financing counterparties chose not to provide ongoing funding, our ability to finance our long-maturity assets would decline or be available on possibly less advantageous terms. As such, we cannot assure you that we will always be able to roll over our repurchase agreement financings and other advances.financings.  Further, should market liquidity tighten, our repurchase agreement counterparties may increase our margin requirements on new financings, including repurchase agreement borrowings that we roll with the same counterparty, reducing our ability to use leverage.


Prepayment Risk


Premiums arise when we acquire an MBS or loan at a price in excess of the aggregate principal balance of the mortgages securing the MBS (i.e., par value). or when we acquire residential whole loans at a price in excess of their aggregate principal balance.  Conversely, discounts arise when we acquire an MBS or loan at a price below the aggregate principal balance of the mortgages securing the MBS or when we acquire residential whole loans at a price below their aggregate principal balance.  Premiums paid on our MBS are amortized against interest income and accretable purchase discounts on these investments are accreted to interest income.  Purchase premiums, which are primarily carried on our Agency MBS, and certain CRT securities and Non-QM loans, are amortized against interest income over the life of each securitythe investment 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 IRR/interest income earned on these assets.  Generally, if prepayments on Non-Agency MBS and residential whole loans purchased at significant discounts and not accounted for at fair value are less than anticipated, we expect that the income recognized on these assets will be reduced and impairments and/or loan loss reserves may result.


In addition, increased prepayments are generally associated with decreasing market interest rates as borrowers are able to refinance their mortgages at lower rates. Therefore, increased prepayments on our investments may accelerate the redeployment of our capital to generally lower yielding investments. Similarly, decreased prepayments are generally associated with increasing market interest rates and may slow our ability to redeploy capital to generally higher yielding investments.



Item 4.  Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures
 
Management, under the direction of its Chief Executive Officer and Chief Financial Officer, is responsible for maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 1934 Act) that are designed to ensure that information required to be disclosed in reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
 
In connection with the preparation of this Quarterly Report on Form 10-Q, management reviewed and evaluated the Company’s disclosure controls and procedures.  The evaluation was performed under the direction of the Company’s Chief Executive Officer and Chief Financial Officer to determine the effectiveness, as of September 30, 20172019, of the design and operation of the Company’s disclosure controls and procedures.  Based on that review and evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective as of September 30, 20172019. Notwithstanding the foregoing, a control system, no matter how well designed, implemented 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 the Company’s current periodic reports.
  
(b) Changes in Internal Control over Financial Reporting


There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 20172019 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II. OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
There are no material pending legal proceedings to which we are a party or any of our assets are subject.


Item 1A. Risk Factors
 
For a discussion of the Company’s risk factors, see Part 1, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. There are no material changes from the risk factors set forth in such Annual Report on Form 10-K. However, the risks and uncertainties that the Company faces are not limited to those set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. Additional risks and uncertainties not currently known to the Company (or that it currently believes to be immaterial) may also adversely affect the Company’s business and the trading price of our securities.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
Purchases of Equity Securities
 
As previously disclosed, in August 2005, the Company’s Board authorized a Repurchase Program, to repurchase up to 4.0 million shares of the Company’s outstanding common stock under the Repurchase Program.  The Board reaffirmed such authorization in May 2010.  In December, 2013, the Company’s Board increased the number of shares authorized for repurchase to an aggregate of 10.0 million shares (under which approximately 6.6 million shares remain available for repurchase). Such authorization does not have an expiration date and, at present, there is no intention to modify or otherwise rescind such authorization.  Subject to applicable securities laws, repurchases of common stock under the Repurchase Program are made at times and in amounts as we deemthe Company deems appropriate (including, in ourits discretion, through the use of one or more plans adopted under Rule 10b-5-1 promulgated under the 1934 Act), 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 authorized but unissued shares of the Company’s common stock.  The Repurchase Program may be suspended or discontinued by the Company at any time and without prior notice.


The Company engaged in no share repurchase activity during the third quarter of 20172019 pursuant to the Repurchase Program.  The CompanyProgram nor did however,it withhold any restricted shares (under the terms of grants under ourits Equity Plan) to offset tax withholding obligations that occur upon the vesting and release of restricted stock awards and/or RSUs.  The following table presents information with respect to (i) such withheld restricted shares and (ii) eligible shares remaining for repurchase under the Repurchase Program:

Month  Total
Number of
Shares
Purchased		 
Weighted
Average Price
Paid Per
Share (1)
 Total Number of
Shares Repurchased as
Part of Publicly
Announced
Repurchase Program
or Employee Plan		 Maximum Number of
Shares that May Yet be
Purchased Under the
Repurchase Program or
Employee Plan
July 1-31, 2017:  
  
  
  
Repurchase Program(2)—
 $—
 —
 6,616,355
Employee Transactions(3)552
 8.53
 N/A
 N/A
August 1-31, 2017:  
  
  
  
Repurchase Program(2)—
 —
 —
 6,616,355
Employee Transactions(3)3,676
 8.79
 N/A
 N/A
September 1-30, 2017:  
  
  
  
Repurchase Program(2)—
 —
 —
 6,616,355
Employee Transactions(3)140,195
 $8.77
 N/A
 N/A
Total Repurchase Program(2)—
 $—
 —
 6,616,355
Total Employee Transactions(3)144,423
 $8.77
 N/A
 N/A
(1)  Includes brokerage commissions.
(2)  As of September 30, 2017, the Company had repurchased an aggregate of 3,383,645 shares under the Repurchase Program.
(3)  The Company’s Equity Plan provides that the value of the shares delivered or withheld be based on the price of its common stock on the date the relevant transaction occurs.

Item 3.  Defaults Upon Senior Securities
 
None.


Item 4.  Mine Safety Disclosures
 
None.


Item 5.  Other Information
 
None.


Item 6. Exhibits
 
The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under “Exhibit Index,” which is incorporated herein by reference.

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: November 2, 20176, 2019MFA FINANCIAL, INC.
 (Registrant)
   
   
 By:/s/ Stephen D. Yarad
  Stephen D. Yarad
  Chief Financial Officer
  (Principal Financial Officer)

EXHIBIT INDEX


The following exhibits are filed as part of this Quarterly Report:


Exhibit Description
   
   
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.
   
101.INS*101 XBRL Instance Document
Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in iXBRL (Inline Extensible Business Reporting Language): (i) our Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018; (ii) our Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2019 and 2018; (iii) our Consolidated Statements of Comprehensive Income / (Loss) (Unaudited) for the three and nine months ended September 30, 2019 and 2018 (iv) Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2019 and 2018; (v) our Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2019 and 2018; and (vi) the notes to our Unaudited Consolidated Financial Statements.
   
101.SCH*104 Cover Page Interactive Data File (formatted as Inline XBRL Taxonomy Extension Schema Documentand contained in Exhibit 101).
   
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document
 
*These interactive data files are furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of  the Securities Act of 1933, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


E-1