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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, 20172020
 
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)
_____________________________________________ 
__________________________________________________________________ 
MarylandMaryland13-3974868
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
350 Park Avenue, 20th Floor New York, New York10022
New YorkNew York10022
(Address of principal executive offices)(Zip Code)
(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
6.50% Series C Cumulative Redeemable
Preferred Stock, par value $0.01 per share		MFA/PCNew 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.  Yes x  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).  Yes x 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 filerxAccelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Large accelerated filer x
Accelerated filer o
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

396,943,263453,333,220 shares of the registrant’s common stock, $0.01 par value, were outstanding as of October 27, 2017.
29, 2020.



Table of Contents
MFA FINANCIAL, INC.


TABLE OF CONTENTS
 
Page
PART I
FINANCIAL INFORMATION
Page
PART I
FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 20172020 (Unaudited) and December 31, 20162019
1
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 20172020 and September 30, 20162019
2
Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three and Nine Months Ended September 30, 20172020 and September 30, 20162019
3
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 20172020 and September 30, 20162019
4
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 20172020 and September 30, 20162019
56
68
5462
8990
9695
PART II
OTHER INFORMATION
9796
9796
9796
9896
9896
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

(1)
Item 5.
Includes approximately $174.4 million of Non-Agency MBS transferred to consolidated variable interest entities (“VIEs”) at December 31, 2016. Such assets can be used only to settle the obligations of each respective VIE.
Other Information
97
(2)
Item 6.
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.
Exhibits
97
Signatures
98



Table of Contents



MFA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
 (In Thousands Except Per Share Amounts)September 30,
2020		December 31,
2019
 (Unaudited) 
Assets: 
Residential whole loans:
Residential whole loans, at carrying value ($3,843,153 and $4,847,782 pledged as collateral, respectively) (1)
$4,493,805 $6,069,370 
Residential whole loans, at fair value ($705,666 and $794,684 pledged as collateral, respectively) (1)
1,229,664 1,381,583 
Allowance for credit losses on residential whole loans held at carrying value(106,246)(3,025)
Total residential whole loans, net5,617,223 7,447,928 
Residential mortgage securities, at fair value ($152,765 and $3,966,591 pledged as collateral, respectively)152,765 3,983,519 
Mortgage servicing rights (“MSR”) related assets ($252,183 and $1,217,002 pledged as collateral, respectively)252,183 1,217,002 
Cash and cash equivalents884,171 70,629 
Restricted cash5,303 64,035 
Other assets571,614 784,251 
Total Assets$7,483,259 $13,567,364 
Liabilities:  
Financing agreements ($4,080,461 and $0 held at fair value, respectively)$4,851,121 $10,031,606 
Other liabilities66,482 151,806 
Total Liabilities$4,917,603 $10,183,412 
Commitments and contingencies (See Note 10)
Stockholders’ Equity:  
Preferred stock, $0.01 par value; 7.5% Series B cumulative redeemable; 8,050 shares authorized; 8,000 shares issued and outstanding ($200,000 aggregate liquidation preference)$80 $80 
Preferred stock, $0.01 par value; 6.5% Series C fixed-to-floating rate cumulative redeemable; 12,650 shares authorized; 11,000 shares issued and outstanding ($275,000 aggregate liquidation preference)110 0 
Common stock, $0.01 par value; 874,300 and 886,950 shares authorized; 453,333 and 452,369 shares issued
  and outstanding, respectively
4,533 4,524 
Additional paid-in capital, in excess of par3,924,584 3,640,341 
Accumulated deficit(1,408,910)(631,040)
Accumulated other comprehensive income45,259 370,047 
Total Stockholders’ Equity$2,565,656 $3,383,952 
Total Liabilities and Stockholders’ Equity$7,483,259 $13,567,364 

(1)Includes approximately $568.6 million and $186.4 million of Residential whole loans, at carrying value and $521.2 million and $567.4 million of Residential whole loans, at fair value transferred to consolidated variable interest entities (“VIEs”) at September 30, 2020 and December 31, 2019, respectively. Such assets can be used only to settle the obligations of each respective VIE.



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

1
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
Table of Contents


MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30,		Nine Months Ended
September 30,
(In Thousands, Except Per Share Amounts)2020 20192020 2019
Interest Income: 
Residential whole loans held at carrying value$54,393 $64,226 $207,306 $171,725 
Residential mortgage securities2,329 60,639 51,678 211,676 
MSR-related assets6,241 15,274 30,189 38,232 
Other interest-earning assets3,017 1,679 9,089 4,272 
Cash and cash equivalent investments100 903 646 2,703 
Interest Income$66,080 $142,721 $298,908 $428,608 
Interest Expense:  
Asset-backed and other collateralized financing arrangements$50,054 $79,932 $209,998 $238,773 
Other interest expense5,910 5,891 17,716 11,120 
Interest Expense$55,964 $85,823 $227,714 $249,893 
Net Interest Income$10,116 $56,898 $71,194 $178,715 
Reversal/(Provision) for credit and valuation losses on residential whole loans and other financial instruments$27,244 $(347)$(38,090)$(1,538)
Net Interest Income after Provision for Credit and Valuation Losses$37,360 $56,551 $33,104 $177,177 
Other Income, net:
Impairment and other losses on securities available-for-sale and other assets$(221)$0 $(424,966)$0 
Net realized gain/(loss) on sales of residential mortgage securities and residential whole loans48 17,708 (188,847)50,027 
Net unrealized gain/(loss) on residential mortgage securities measured at fair value through earnings91 (695)(13,432)7,977 
Net gain on residential whole loans measured at fair value through earnings76,871 40,175 44,431 116,915 
Loss on terminated swaps previously designated as hedges for accounting purposes(7,177)0 (57,034)0 
Other, net7,498 5,241 2,370 (4,459)
Other Income/(Loss), net$77,110 $62,429 $(637,478)$170,460 
Operating and Other Expense:
Compensation and benefits$11,657 $7,920 $29,134 $24,315 
Other general and administrative expense6,611 5,022 18,656 15,601 
Loan servicing, financing and other related costs8,992 10,439 28,609 30,225 
Costs associated with restructuring/forbearance agreement0 0 44,434 $0 
Operating and Other Expense$27,260 $23,381 $120,833 $70,141 
Net Income/(Loss)$87,210 $95,599 $(725,207)$277,496 
Less Preferred Stock Dividend Requirement$8,219 $3,750 $21,578 11,250 
Net Income/(Loss) Available to Common Stock and Participating Securities$78,991 $91,849 $(746,785)$266,246 
Basic Earnings/(Loss) per Common Share$0.17 $0.20 $(1.65)$0.59 
Diluted Earnings/(Loss) per Common Share$0.17 $0.20 $(1.65)$0.58 

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

2
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(UNAUDITED)

  Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
(In Thousands) 2017 2016 2017 2016
Net income $63,805
 $83,011
 $221,799
 $240,031
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
Reclassification adjustment for MBS sales included in net income (14,935) (6,829) (30,283) (26,795)
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)
Other Comprehensive Income/(Loss) (2,156) 79,805
 56,544
 57,680
Comprehensive income before preferred stock dividends $61,649
 $162,816
 $278,343
 $297,711
Dividends declared on preferred stock (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
Table of Contents

MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(UNAUDITED)
Three Months Ended
September 30,		Nine Months Ended
September 30,
(In Thousands)2020201920202019
Net income/(loss)$87,210 $95,599 $(725,207)$277,496 
Other Comprehensive Income/(Loss):  
Unrealized gains on securities available-for-sale15,082 5,483 408,585 50,085 
Reclassification adjustment for MBS sales included in net income(60)(14,499)(389,127)(36,370)
Reclassification adjustment for impairments included in net income0 0 (344,269)0 
  Derivative hedging instrument fair value changes, net0 (233)(50,127)(30,384)
Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk(22,652)0 (22,652)0 
  Reclassification adjustment for losses/(gains) related to hedging instruments included in net income7,176 (685)72,802 (1,769)
Other Comprehensive Income/(Loss)(454)(9,934)(324,788)(18,438)
Comprehensive income before preferred stock dividends$86,756 $85,665 $(1,049,995)$259,058 
Dividends required on preferred stock(8,219)(3,750)(21,578)(11,250)
Comprehensive Income/(Loss) Available to Common Stock and Participating Securities$78,537 $81,915 $(1,071,573)$247,808 
 
The accompanying notes are an integral part of the consolidated financial statements.

3
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)

  Nine Months Ended September 30, 2017
(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, 2016 8,000
 $80
 371,854
 $3,719
 $3,029,062
 $(572,641) $573,682
 $3,033,902
Net income —
 —
 —
 —
 —
 221,799
 —
 221,799
Issuance of common stock, net of expenses (1)
 —
 —
 25,726
 250
 190,265
 —
 —
 190,515
Repurchase of shares of common stock (1)
 —
 —
 (641) —
 (5,158) —
 —
 (5,158)
Equity based compensation expense —
 —
 —
 —
 5,209
 —
 —
 5,209
Accrued dividends attributable to stock-based awards —
 —
 —
 —
 20
 —
 —
 20
Dividends declared on common stock —
 —
 —
 —
 —
 (233,244) —
 (233,244)
Dividends declared on preferred stock —
 —
 —
 —
 —
 (11,250) —
 (11,250)
Dividends attributable to dividend equivalents —
 —
 —
 —
 —
 (686) —
 (686)
Change in unrealized gains on MBS, net —
 —
 —
 —
 —
 —
 39,873
 39,873
Derivative hedging instrument fair value changes, net —
 —
 —
 —
 —
 —
 16,671
 16,671
Balance at September 30, 2017 8,000
 $80
 396,939
 $3,969
 $3,219,398
 $(596,022) $630,226
 $3,257,651

Table of Contents
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, 2020
(In Thousands,
Except Per Share Amounts)		(In Thousands,
Except Per Share Amounts)		Preferred Stock
6.50% Series C Fixed-to-Floating Rate Cumulative Redeemable - Liquidation Preference td5.00 per Share		Preferred Stock
7.50% Series B Cumulative Redeemable - Liquidation Preference td5.00 per Share		Common StockAdditional Paid-in CapitalAccumulated
Deficit		Accumulated Other Comprehensive IncomeTotal
SharesAmountSharesAmountSharesAmount
Balance at December 31, 2019Balance at December 31, 20190 $0 8,000 $80 452,369 $4,524 $3,640,341 $(631,040)$370,047 $3,383,952 
Cumulative effect adjustment on adoption of new accounting standard ASU 2016-13Cumulative effect adjustment on adoption of new accounting standard ASU 2016-13— — — — — — — (8,326)— (8,326)
Net lossNet loss— — — — — — — (908,995)— (908,995)
Issuance of Series C Preferred Stock, net of expensesIssuance of Series C Preferred Stock, net of expenses11,000 110 — — — — 265,919 — — 266,029 
Issuance of common stock, net of expensesIssuance of common stock, net of expenses— — — — 1,106 7 680 — — 687 
Repurchase of shares of common stock (1)
Repurchase of shares of common stock (1)
— — — — (337)— (2,652)— — (2,652)
Equity based compensation expenseEquity based compensation expense— — — — — — 1,266 — — 1,266 
Accrued dividends attributable to stock-based awardsAccrued dividends attributable to stock-based awards— — — — — — 1,059 — — 1,059 
 Nine Months Ended September 30, 2016
(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
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
Change in unrealized gains on MBS, netChange in unrealized gains on MBS, net— — — — — — — — (243,812)(243,812)
Derivative hedging instrument fair value changes and amortization, netDerivative hedging instrument fair value changes and amortization, net— — — — — — — — (48,533)(48,533)
Balance at March 31, 2020Balance at March 31, 202011,000 $110 8,000 $80 453,138 $4,531 $3,906,613 $(1,548,361)$77,702 $2,440,675 
Net income —
 —
 —
 —
 —
 240,031
 —
 240,031
Net income— — — — — — — 96,578 — 96,578 
Issuance of common stock, net of expenses (1)
 —
 —
 716
 5
 936
 —
 —
 941
Issuance of common stock, net of expensesIssuance of common stock, net of expenses— — — — 106 1 36 — — 37 
Equity based compensation expenseEquity based compensation expense— — — — — — 1,709 — — 1,709 
Change in unrealized gains on MBS, netChange in unrealized gains on MBS, net— — — — — — — — (96,021)(96,021)
Derivative hedging instrument fair value changes and amortization, netDerivative hedging instrument fair value changes and amortization, net— — — — — — — — 64,032 64,032 
Warrants IssuedWarrants Issued— — — — — — 14,041 — — 14,041 
Balance at June 30, 2020Balance at June 30, 202011,000 $110 8,000 $80 453,244 $4,532 $3,922,399 $(1,451,783)$45,713 $2,521,051 
Net incomeNet income— — — — — — — 87,210 — 87,210 
Issuance of common stock, net of expensesIssuance of common stock, net of expenses— — — — 89 1 — — — 1 
Repurchase of shares of common stock (1)
 —
 —
 (217) —
 (1,481) —
 —
 (1,481)
Repurchase of shares of common stock (1)
— — — — — — — — — — 
Equity based compensation expense —
 —
 —
 —
 4,140
 —
 —
 4,140
Equity based compensation expense— — — — — — 2,266 — — 2,266 
Accrued dividends attributable to stock-based awards —
 —
 —
 —
 (518) —
 —
 (518)Accrued dividends attributable to stock-based awards— — — — — — (81)— — (81)
Dividends declared on common stock —
 —
 —
 —
 —
 (222,669) —
 (222,669)
Dividends declared on preferred stock —
 —
 —
 —
 —
 (11,250) —
 (11,250)
Dividends declared on common stock ($0.05 per share)Dividends declared on common stock ($0.05 per share)— — — — — — — (22,667)— (22,667)
Dividends declared on Series B Preferred Stock ($1.40625 per share) (2)
Dividends declared on Series B Preferred Stock ($1.40625 per share) (2)
— — — — — — — (11,250)— (11,250)
Dividends declared on Series C Preferred Stock ($0.93889 per share) (2)
Dividends declared on Series C Preferred Stock ($0.93889 per share) (2)
— — — — — — — (10,328)— (10,328)
Dividends attributable to dividend equivalents —
 —
 —
 —
 —
 (697) —
 (697)Dividends attributable to dividend equivalents— — — — — — — (92)— (92)
Change in unrealized gains on MBS, net —
 —
 —
 —
 —
 —
 97,483
 97,483
Change in unrealized gains on MBS, net— — — — — — — — 15,022 15,022 
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
Derivative hedging instrument fair value changes and amortization, netDerivative hedging instrument fair value changes and amortization, net— — — — — — — — 7,176 7,176 
Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit riskChanges in fair value of financing agreements at fair value due to changes in instrument-specific credit risk— — — — — — — — (22,652)(22,652)
Balance at September 30, 2020Balance at September 30, 202011,000 $110 8,000 $80 453,333 $4,533 $3,924,584 $(1,408,910)$45,259 $2,565,656 


(1)  For the nine months ended September 30, 2017 and 2016,2020 includes approximately $5.2$2.7 million (640,748(337,026 shares) and $1.5 million (217,464 shares), respectively surrendered for tax purposes related to equity-based compensation awards.

(2) Includes reinstated dividends that were unpaid through June 30, 2020, and were paid during the three months ended September 30, 2020 (see Note11(a)).

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.


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MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
Nine Months Ended September 30, 2019
(In Thousands, 
Except Per Share Amounts)		Preferred Stock
7.50% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share		Common StockAdditional Paid-in CapitalAccumulated
Deficit		Accumulated Other Comprehensive IncomeTotal
SharesAmountSharesAmount
Balance at December 31, 20188,000 $80 449,787 $4,498 $3,623,275 $(632,040)$420,288 $3,416,101 
Net income— — — — — 88,857 — 88,857 
Issuance of common stock, net of expenses— — 1,066 7 544 — — 551 
Repurchase of shares of common stock (1)
— — (370)— (2,610)— — (2,610)
Equity based compensation expense— — — — 992 — — 992 
Accrued dividends attributable to stock-based awards— — — — 435 — — 435 
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— — — — — (256)— (256)
Change in unrealized losses on MBS, net— — — — — — 5,094 5,094 
Derivative hedging instruments fair value changes, net— — — — — — (10,786)(10,786)
Balance at March 31, 20198,000 $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 
Repurchase of shares of common stock (1)
— — — — — — — — 
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 losses on MBS, net— — — — — — 17,637 17,637 
Derivative hedging instruments fair value changes, net— — — — — — (20,449)(20,449)
Balance at June 30, 20198,000 $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 losses on MBS, net— — — — — — (9,016)(9,016)
Derivative hedging instruments fair value changes, net— — — — — — (918)(918)
Balance at September 30, 20198,000 $80 451,692 $4,517 $3,634,140 $(637,161)$401,850 $3,403,426 

(1)  For the nine months ended September 30, 2019, includes approximately $2.6 million (370,244 shares) surrendered for tax purposes related to equity-based compensation awards.

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

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MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
(In Thousands)20202019
Cash Flows From Operating Activities:  
Net (loss)/income$(725,207)$277,496 
Adjustments to reconcile net income to net cash provided by operating activities: 
Losses/(gains) on residential whole loans and real estate owned, net280,142 (61,125)
Gains on residential mortgage securities and MSR related assets, net(71,569)(58,005)
Impairment and other losses on securities available-for-sale and other assets424,966 0 
Losses on terminated swaps previously designated as hedges and other57,034 0 
Accretion of purchase discounts on residential mortgage securities, residential whole loans and MSR-related assets(27,585)(45,990)
Amortization of purchase premiums on residential mortgage securities and residential whole loans, and amortization of terminated hedging instruments40,952 32,085 
Provision for credit and valuation losses on residential whole loans and other financial instruments38,090 0 
Net valuation and other non-cash losses included in net income16,388 22,026 
Decrease/(increase) in other assets459 (24,647)
(Decrease)/increase in other liabilities(16,919)11,756 
Net cash provided by operating activities$16,751 $153,596 
Cash Flows From Investing Activities:  
Purchases of residential whole loans, loan related investments and capitalized advances$(1,345,422)$(2,988,229)
Proceeds from sales of residential whole loans1,521,060 0 
Principal payments on residential whole loans1,261,319 906,072 
Principal payments on residential mortgage securities and MSR-related assets609,758 1,555,449 
Proceeds from sales of residential mortgage securities, MSR-related assets, and other assets3,790,148 735,768 
Purchases of residential mortgage securities and MSR-related assets(163,748)(837,591)
Proceeds from sales of real estate owned203,603 81,206 
Purchases of real estate owned and capital improvements(9,334)(15,671)
Additions to leasehold improvements, furniture and fixtures(1,425)(1,351)
Net cash provided by/(used in) investing activities$5,865,959 $(564,347)
Cash Flows From Financing Activities: 
Principal payments on financing agreements with mark-to-market collateral provisions$(21,401,578)$(54,103,776)
Proceeds from borrowings under financing agreements with mark-to-market collateral provisions13,749,720 54,796,010 
Principal payments on financing agreements with non-mark-to-market collateral provisions(312,638)0 
Proceeds from borrowings under financing agreements with non-mark-to-market collateral provisions2,036,597 0 
Principal payments made on senior secured credit agreement(18,750)0 
Proceeds from issuance of senior secured credit agreement480,959 0 
Principal payments on securitized debt(133,450)(79,350)
Proceeds from issuance of securitized debt391,154 0 
Proceeds from issuance of convertible senior notes0 223,311 
Payments made for settlements and unwinds of Swaps(88,405)(47,622)
Proceeds from issuance of series C preferred stock275,000 0 
Payments made for costs related to series C preferred stock issuance(8,948)0 
Proceeds from issuances of common stock725 8,861 
Proceeds from the issuance of warrants14,041 0 
Dividends paid on preferred stock(21,578)(11,250)
Dividends paid on common stock and dividend equivalents(90,749)(270,951)
Net cash (used in)/provided by financing activities$(5,127,900)$515,233 
Net increase in cash, cash equivalents and restricted cash$754,810 $104,482 
Cash, cash equivalents and restricted cash at beginning of period$134,664 $88,709 
Cash, cash equivalents and restricted cash at end of period$889,474 $193,191 
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MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Supplemental Disclosure of Cash Flow Information 
Interest Paid$213,318 $237,644 
Non-cash Investing and Financing Activities:
Transfer from residential whole loans to real estate owned$74,891 $193,531 
Dividends and dividend equivalents declared and unpaid$22,758 $90,614 
Payable for unsettled residential whole loan purchases$0 $59,524 
The accompanying notes are an integral part of the consolidated financial statements.
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

 
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 Notes 2(pNote 2(n)) 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, 2016.2019.  In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 20172020 and results of operations for all periods presented have been made.  The results of operations for the three and nine months ended September 30, 20172020 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”)valuation allowances and loss allowances on MBS (Seeresidential whole loans (see Note 3), mortgage-backed securities (“MBS”) (see Note 4) and Other Assets (see Note 5), valuation of MBS, CRT securities and MSR relatedMSR-related assets (See(see Notes 34 and 15)14), income recognition and valuation of residential whole loans (See(see Notes 43 and 15)14), valuation of derivative instruments (See(see Notes 5(b)5(c) and 15)14) and income recognition on certain Non-Agency MBS (defined below) purchased at a discount. (Seediscount (see Note 3)4).  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. (Seeinterest (see Note 2(p2(n))).  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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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

(b)  MBSResidential Whole Loans (including Non-Agency MBSResidential Whole Loans transferred to consolidated VIEs)

Residential whole loans included in the Company’s consolidated balance sheets are primarily comprised of pools of fixed- and CRT Securitiesadjustable-rate residential mortgage loans acquired through consolidated trusts in secondary market 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 for Purchased Credit Deteriorated Loans that are held at carrying value is typically utilized by the Company for Purchased Credit Deteriorated 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 credit loss reserves (as discussed below) differ from those used for Purchased Credit Deteriorated Loans held at carrying value. The accounting model described below for residential whole loans held at 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 financing agreements are included in the consolidated balance sheets with amounts pledged disclosed parenthetically.  Purchases and sales of residential whole loans that are subject to an extended period of due diligence that crosses a reporting date are recorded in our balance sheet at amounts 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. Residential whole loans purchased under flow arrangements with loan origination partners are generally recorded at the transaction settlement date. 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 financing agreement until the closing of the purchase transaction. Interest income, credit related losses and changes in the fair value of loans held at fair value are recorded post settlement for acquired loans and until transaction settlement for sold loans (see Notes 3, 6, 7, 14 and 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 credit losses is recorded at acquisition, and maintained on an ongoing basis, for all losses expected to be incurred over the life of the respective loan. Any required credit loss allowance would reduce the net carrying value of the loan with a corresponding charge to earnings, and may increase or decrease over time. Significant judgments are required in determining any allowance for credit 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, and interest accruals are reversed against income, 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 (i.e., such loans are placed on nonaccrual status). For nonaccrual loans other than Fix and Flip loans, all payments are applied to principal under the cost recovery method. For nonaccrual Fix and Flip loans, 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. Modified loans are considered
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
“troubled debt restructurings” if the Company grants a concession to a borrower who is experiencing financial difficulty (including the interpretation of this definition set forth in OCC Bulletin 2020-35).

Charge-offs to the allowance for loan losses occur when losses are confirmed through the receipt of cash or other consideration from the completion of a sale; when a modification or restructuring takes place in which we grant a concession to a borrower or agree to a discount in full or partial satisfaction of the loan; when we take ownership and control of the underlying collateral in full satisfaction of the loan; when loans are reclassified as other investments; or when significant collection efforts have ceased and it is highly likely that a loss has been realized.

The aggregate allowance for credit losses is equal to the sum of the losses expected to be incurred over the life of each respective loan. These losses were estimated by projecting each loan’s expected cash flows based on their contractual terms, expected prepayments, and estimated default and loss severity rates. The default and severity rates were estimated based on the following steps: (i) obtained the Company’s historical experience through an entire economic cycle for each loan type or, to the extent the Company did not have sufficient historical loss experience for a given loan type, publicly available data derived from the historical loss experience of certain banks, which data the Company believes is generally representative of its portfolio, (ii) obtained historical economic data (U.S. unemployment rates and home price appreciation) over the same period, and (iii) estimated default and severity rates during three distinct future periods based on historical default and severity rates during periods when economic conditions similar to those forecasted were experienced. The three periods were as follows: (i) a one-year forecast of economic conditions based on U.S. unemployment rates and home price appreciation, followed by (ii) a two-year “reversion” period during which economic conditions (U.S. unemployment rates and home price appreciation) are projected to revert to historical averages on a straight line basis, followed by (iii) the remaining life of each loan, during which period economic conditions (U.S. unemployment rates and home price appreciation) are projected to equal historical averages. In addition, a liability is established (and recorded in Other Liabilities) each period using a similar methodology for committed but undrawn loan amounts. This methodology has not changed from the calculation of the allowance for credit losses on January 1, 2020 pursuant to the transition to ASU 2016-13 as described below under “New Accounting Standards and Interpretations,” other than a change in the reversion period from one year to two years to reflect the expected ongoing impact of current conditions (see Note 3).

Purchased Credit Deteriorated Loans

The Company has investmentselected to account for these loans as credit impaired as they have experienced a more-than-insignificant deterioration in credit quality since origination and were acquired at discounted prices that reflect, in part, the impaired credit history of the borrower. Substantially all of these loans have previously experienced payment delinquencies and the amount owed may exceed the value of the property pledged as collateral. Consequently, 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. Loans considered credit impaired are initially recorded at the purchase price on a net basis, after establishing an initial allowance for credit losses (their initial cost basis is equal to their purchase price plus the initial allowance for credit losses). Subsequent to acquisition, the gross recorded amount for these loans reflects the initial cost basis, 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 cost basis reduced by any allowance for credit losses. Interest income on such loans purchased is recorded each period based on the contractual coupon net of amortization of the difference between their cost basis and unpaid principal balance (“UPB”), subject to the Company’s nonaccrual policy.

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. For the majority of these loans, there is significant uncertainty associated with estimating the timing of and amount of cash flows that will be collected. Further, the cash flows ultimately collected may be dependent on the value of the property securing the 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 for 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 that 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 (loss)/gain on residential whole loans measured at fair value through earnings on the Company’s consolidated statements of operations.
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020

Cash received (or accrued) representing coupon interest payments on residential whole loans held at fair value is not included in Interest Income, but rather is included in Net (loss)/gain on residential whole loans measured 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 unrealized gains or losses reported each period.

(c)  Residential Mortgage Securities
Prior to the quarter ended June 30, 2020, the Company had invested 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”). The Company disposed of its investments in Agency MBS during the quarter and has substantially reduced its investments in Non-Agency MBS. In addition, the Company has investments in CRT securities that are issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by Fannie Mae and Freddie Macthe issuer 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 OTTIallowance for losses 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 had elected the fair value option for certain of its previously held Agency MBS that it did not intend to hold to maturity. These securities were 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 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.

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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.  (Seeactivity (see Note 15)14).
 
Impairments/OTTI
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
Allowance for credit losses

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, as well as securities for which a credit loss allowance had been previously recorded, on at least a quarterly basis and designates such impairments as either “temporary” or “other-than-temporary.”determines whether any changes to the allowance for credit losses are required.  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 OTTIa write-down 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 chargesa loss allowance charged 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 OTTICredit loss allowances are subject to reversal through earnings a new cost basis is established for the security and may not be adjusted for subsequent recoveriesresulting from improvements in fair value through earnings.  However, OTTIs recognized through charges to earnings may be accreted back to the amortized cost basis of the security on a prospective basis through interest income.expected cash flows. The determination as to whether an OTTI exists and, if so, the amount ofto record (or reverse) a credit impairment recognized in earningsloss allowance 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 OTTIslosses constitute material estimates that are susceptible to significant change.  (Seechange (see Note 3)4).


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 OTTIallowance 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 PresentationResidential Whole Loans at Fair Value

TheCertain of the Company’s MBS and CRT Securities pledged as collateral against repurchase agreements, Federal Home Loan Bank advances and Swapsresidential whole loans are includedpresented at fair value on theits consolidated balance sheets as a result of a fair value election made at the time of acquisition. For the majority of these loans, there is significant uncertainty associated with estimating the timing of and amount of cash flows that will be collected. Further, the cash flows ultimately collected may be dependent on the value of the property securing the 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 for 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 that specializes in providing valuations of residential mortgage loans and trading activity observed in the securities pledged disclosed parenthetically.  Purchasesmarket place. Subsequent changes in fair value are reported in current period earnings and sales of securities are recordedpresented in Net (loss)/gain on residential whole loans measured at fair value through earnings 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 salesstatements of MSR related assets are recorded on the trade date. (See Notes 3, 6, 7 and 15)

operations.
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020



Cash received (or accrued) representing coupon interest payments on residential whole loans held at fair value is not included in Interest Income, but rather is included in Net (loss)/gain on residential whole loans measured 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 unrealized gains or losses reported each period.
Term Notes Backed
(c)  Residential Mortgage Securities
Prior to the quarter ended June 30, 2020, the Company had invested in residential MBS that are issued or guaranteed as to principal and/or interest by MSR Related Collateral

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”). The Company disposed of its investments in Agency MBS during the quarter and has investedsubstantially reduced its investments in term notesNon-Agency MBS. In addition, the Company has investments in CRT securities that are issued by special purpose vehicles (“SPV”) that have acquired rights to receive cash flows representingor sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the servicing fees and/or excess servicing spread associated with certain MSRs. The Company considers payment ofissuer and the principal and interest on these term notes to be largelypayments received are dependent on the cash flows generatedperformance of loans in either a reference pool or an actual pool of loans. As the loans in the underlying 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 the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the underlying MSRsCompany.
Designation
MBS that the Company generally intends to hold until maturity, but that it may sell from time to time as this impacts the cash flows available to the SPV that issued the term notes. Credit risk borne by the holderspart of the term notes is also mitigated by structural credit support in the formoverall management 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 collateralits business, are reporteddesignated as “available-for-sale” (“AFS”). Such MBS are carried at their fair value on the Company’s consolidated balance sheets with unrealized gains and losses excluded from earnings (except when an allowance for losses is recognized, as discussed below) and reported in AOCI. Interest incomeAccumulated other comprehensive income/(loss) (“AOCI”), a component of Stockholders’ Equity.
Upon the sale of an AFS security, any unrealized gain or loss is recognized on an accrual basisreclassified out of AOCI to earnings as a realized gain or loss using the specific identification method.

The Company had elected the fair value option for certain of its previously held Agency MBS that it did not intend to hold to maturity. These securities were 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’s valuation processCompany has elected the fair value option for such notescertain of its CRT securities as it considers a numberthis method of factors, including a comparable bond analysis performed by a third-party pricing service which involves determining a pricing spread at issuance ofaccounting to more appropriately reflect 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 featuresrisk-sharing structure of these securities. Other factors taken into consideration include indicative values provided by repurchase agreement counterparties, estimatedSuch securities are carried at their fair value with changes in fair value ofincluded in earnings for the related underlying MSR collateralperiod 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 basisreported in Other Income, net on the Company’s consolidated statements of operations. Commitment fees received
Revenue Recognition, Premium Amortization and Discount Accretion
Interest income on securities is accrued based on their 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 undrawn amounttime of purchase are deferred and recognized asamortized into interest income over the remaining loan term atlife of such securities using the timeeffective yield method. Adjustments to premium amortization are made for actual prepayment activity.
Determination of draw. AtFair Value for Residential Mortgage Securities
In determining 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)  Residential Whole Loans (including Residential Whole Loans transferred to consolidated VIEs)

Residential whole loans included in the Company’s consolidated balance sheets are comprised of pools of fixed and adjustable rate residential mortgage loans acquired through consolidated trusts in secondarysecurities, management considers a number of observable market transactions generally at discounted purchase prices. The accounting model utilized by the Company is determined at the time each loan package is initially acquireddata points, including prices obtained from pricing services, brokers 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 Whole Loans at Carrying Value” is typically utilized by the Company for loans where the underlying borrower has a delinquency status of less than 60 days at the acquisition date. The accounting model described below under “Residential Whole Loans at 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 closingcounterparties, dialogue with market participants, as well as management’s observations of the purchase transaction. (See Notes 4, 6, 7, 15 and 16)market activity (see Note 14).

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

Allowance for credit losses


Residential Whole Loans at Carrying Value

Notwithstanding thatWhen the majority of these loans are considered to be performing substantially in accordance with their current contractual terms and conditions, the 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 borrowers have previously experienced payment delinquencies and the amount owed on the mortgage loan may exceed thefair value of an AFS security is less than its amortized cost at the property pledged as collateral. Consequently,balance sheet date, the Company has assessed that these loans have a higher likelihood of default than newly originated mortgage loans with LTVs of 80% or less to creditworthy borrowers.security is considered impaired.  The Company believes that amounts paid to acquire these loans represent fair market value at the date of acquisition. Such loans are initiallyassesses its impaired securities, as well as securities for which a credit loss allowance had been previously recorded, at the purchase price with no allowance for loan losses. Subsequent to acquisition, the recorded amount 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 this accounting model 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 loans basis for loans not aggregated into pools, the Company estimates at acquisition and periodically on at least a quarterly basis and determines whether any changes to the principalallowance for credit losses are required.  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 a write-down through charges to earnings equal to the entire difference between the investment’s amortized cost and interestits fair value at the balance sheet date.  If the Company does not expect to sell an impaired security, only the portion of the impairment related to credit losses is recognized through a loss allowance charged 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.  Credit loss allowances are subject to reversal through earnings resulting from improvements in expected cash flows. The determination as to whether to record (or reverse) a credit loss allowance is subjective, as such determinations are based on factual information available at the time of assessment as well as the Company’s estimates of future performance and cash flow projections.  As a result, the timing and amount of losses constitute material estimates that are susceptible to significant change (see Note 4).

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, year of origination, loan-to-value ratios (“LTVs”), geographic concentrations 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 allowance 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. The difference betweencollected at the purchase date (or last date previously revised) against the present value of the cash flows expected to be collected andat the carrying amountcurrent 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 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 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 theremaining cash flows expected to be collected is referred to asagainst the “non-accretable difference,” and includes estimates of both the effect of prepayments and expected credit losses over the lifeamortized cost of the underlying loans.

A decrease in expected cash flows in subsequent periods may indicate impairmentsecurity at the pool and/or individual loan level, thus requiring the establishment of an allowance for loan losses by a chargeassessment date.  The discount rate used to the provision for loan losses. The allowance for loan losses representscalculate the present value of cash flowsthe 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. 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 in the amount of accretable yield. The adjustment of accretable yield due to a significant increase in expectedfuture cash flows is accounted for prospectively as a change in estimate and results in reclassification from nonaccretable difference to accretable yield.based on the instrument’s IRR.

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 (loss)/gain on residential whole loans heldmeasured at fair value through earnings on the Company’s consolidated statements of operations.

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020

Cash received reflecting(or accrued) representing coupon interest payments on residential whole loans held at fair value is not included in Interest Income, but rather is presentedincluded in Net (loss)/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 Netunrealized gains or losses reported each period.

(c)  Residential Mortgage Securities
Prior to the quarter ended June 30, 2020, the Company had invested 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”). The Company disposed of its investments in Agency MBS during the quarter and has substantially reduced its investments in Non-Agency MBS. In addition, the Company has investments in CRT securities that are issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As the loans in the underlying 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 the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company.
Designation
MBS that the Company generally intends to hold until maturity, but that it may sell from time to time as part of the overall management of its business, are designated as “available-for-sale” (“AFS”). Such MBS are carried at their fair value with unrealized gains and losses excluded from earnings (except when an allowance for losses 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 had elected the fair value option for certain of its previously held Agency MBS that it did not intend to hold to maturity. These securities were 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-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 their 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.
Determination of Fair Value for Residential Mortgage Securities
In determining the fair value of the Company’s residential whole loans held at fair value.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 14).


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

Allowance for credit losses
(e)  Securities Obtained
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, as well as securities for which a credit loss allowance had been previously recorded, on at least a quarterly basis and Pledgeddetermines whether any changes to the allowance for credit losses are required.  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 a write-down 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 impaired security, only the portion of the impairment related to credit losses is recognized through a loss allowance charged 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.  Credit loss allowances are subject to reversal through earnings resulting from improvements in expected cash flows. The determination as Collateral/Obligation to Return Securities Obtainedwhether to record (or reverse) a credit loss allowance is subjective, as Collateralsuch determinations are based on factual information available at the time of assessment as well as the Company’s estimates of future performance and cash flow projections.  As a result, the timing and amount of losses constitute material estimates that are susceptible to significant change (see Note 4).

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, year of origination, loan-to-value ratios (“LTVs”), geographic concentrations 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 allowance 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 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 residential mortgage securities pledged as collateral against financing agreements 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. 

(d) MSR-Related Assets

The Company has obtained securitiesinvestments in financial instruments whose cash flows are considered to be largely dependent on underlying MSRs that either directly or indirectly act as collateral under collateralized financing arrangementsfor the investment. These financial instruments, which are referred to as MSR-related assets, are discussed in connection with its financing strategy for Non-Agency MBS.  Securities obtainedmore detail below. The Company’s MSR-related assets pledged as collateral against repurchase agreements are included in connectionthe consolidated balance sheets with the amounts pledged disclosed parenthetically. Purchases and sales of MSR-related assets are recorded on the trade date (see Notes 4, 6, 7 and 14).

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 transactionsterm 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.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020

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, subject to impairment and loss allowances. 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 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, as applicable, 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 Loans
The Company has made or participated in loans to provide financing to entities that originate residential mortgage loans and own the related MSRs. These corporate loans are generally secured by certain MSRs, as well 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, subject to loss allowances. 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 Swapfinancing 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 2020 and December 31, 2016.  The Company’s2019. At September 30, 2020 and December 31, 2019, the Company had cash and cash equivalents of $884.2 million and $70.6 million, respectively. At September 30, 2020, the Company had $837.6 million of 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 million and $208.9 million at September 30, 2017 andagency. As of December 31, 2016, respectively.  (See2019, the Company had $39.6 million worth of investments in overnight money market funds. 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 repurchasefinancing agreements that is not available to the Company for general corporate purposes. Restricted cash may be applied against amounts due to repurchasefinancing 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.financing agreements.  The Company had aggregate restricted cash held as collateral or otherwise in connection with its financing agreements and/or Swaps and repurchase agreements of $15.4$5.3 million and $58.5$64.0 million at September 30, 20172020 and December 31, 2016, respectively.  (See2019, respectively (see Notes 5(b)5(c), 6, 7 and 15)14).

(h)  Goodwill
At September 30, 2017 and December 31, 2016, 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 is tested for impairment at least annually, or more frequently under certain circumstances, at the entity level.  Through September 30, 2017, the Company had not recognized any impairment against its goodwill. Goodwill is included in Other assets on the Company’s consolidated balance sheets.

(i)(g) 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
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
the Company’s consolidated statements of operations. (SeeThe 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)(h)  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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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017

(k)  MBS Resecuritization,(i)  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”) and certain other repurchase agreement financings.its 8% Senior Notes due 2042 (“Senior Notes”). These costs may include underwriting, rating agency, legal, accounting and other fees.  Such costs, which reflect deferred charges (unless the debt is recorded at fair value, as discussed below), 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 and other repurchase agreement financings,Senior Notes, 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)  Repurchase Agreements and Other Advances
Repurchase(j)  Financing Agreements


The Company finances the holdings of a significant portionmajority of its residential mortgage assets with financing agreements that include repurchase agreements.agreements and other forms of collateralized financing.  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 and other forms of collateralized financing, 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 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 the majority of our financing arrangements collateralized by residential whole loans have longerterms of twelve months or shorter terms.longer.  Should a counterparty decide not to renew a repurchase financing arrangement 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.  (Seecollateral (see Notes 6, 7 and 15)14).
 
In addition toThe Company has elected the repurchase agreement financing arrangements discussed above, as partfair value option on certain of its financing strategy for Non-Agency MBS, the Company has entered into contemporaneous repurchase and reverse repurchaseagreements. These agreements are reported at their fair value, 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 securitieschanges 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 resultedfair value being recorded in the Company pledging Non-Agency MBS as collateralearnings each period (or other comprehensive income, 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))

extent
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020


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. Aschange results from a result of such regulation, the Company’s wholly-owned subsidiary, MFA Insurance, Inc. (“MFA Insurance”) was requiredchange in instrument specific credit risk), as further detailed in Note 6. Financing costs, including “up front” fees paid at inception related 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 carriedagreements at their contractual amounts. Accrued interest payable on FHLB advancesfair value are expensed as incurred. Interest expense is included in Other liabilitiesrecorded based on the Company’s consolidated balance sheet at December 31, 2016. (See Notes 6, 7 and 15)current interest rate in effect for the related agreement.

(k)  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.  Starting in 2014, theThe 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”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.  (SeeCompany (see Notes 2(n)2(l) and 14)13).
 
(n)(l)  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, and for the effect of outstanding warrants, 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 (if any), are used to repurchase shares of the Company’s outstanding common stock at the average market price during the reported period.  (SeeIn 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).
 
(o)(m)  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 terminated hedging relationships, as well as the portion of unrealized gains/(losses) on its financing agreements held at fair value related to instrument-specific credit risk, and is reduced by dividends declared on the Company’s preferred stock and issuance costs of redeemed preferred stock.

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

(p)(n)  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, 20172020 and 2016, as2019, 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 $75.5 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 2020, 2019 and 2018 can be carried back to each of the five taxable years preceding the taxable year of such loss and thereafter can be carried forward and 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, 2017,2020, December 31, 2016,2019, or September 30, 2016. The Company filed its 2016 tax return prior to October 16, 2017. The2019. As of the date of this filing the Company’s tax returns for tax years 20132017 through 20162019 are open to examination.


(q)(o)  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 currentlyhave generally been comprised of Swaps, the majority of which arewere designated as cash flow hedges against the interest rate risk associated with its borrowings.

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020

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.”
 
During the first quarter of 2020, the Company terminated all of its Swaps. Prior to their termination, Swaps arewere carried on the Company’s consolidated balance sheets at fair value, in Other assets, if their fair value iswas positive, or in Other liabilities, if their fair value iswas negative.  Beginning in 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 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.  Changes in the fair value of the Company’s Swaps previously 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.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 statements of operations.


(r)(p)  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 loansfinancial assets and CRT securitiesliabilities at the time of acquisition.acquisition or issuance. Subsequent changes in the fair value of these loans and CRT securitiesfinancial instruments are generally 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. (Seeirrevocable (see Notes 2(d)2(b), 2(c), 3, 4 and 15)14).


(s)(q)  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.
 
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
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
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. (SeeGAAP (see Note 16)15).


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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)(r)  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)(s)  New Accounting Standards and Interpretations

Accounting Standards Adopted in 20172020


CompensationFinancial Instruments - Stock CompensationCredit Losses - Improvements to Employee Share-Based Payment AccountingMeasurement of Credit Losses on Financial Instruments


In MarchJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) 2016-09, , which has subsequently been amended by ASUs 2019-11, Codification Improvements to Employee Share-Based PaymentTopic 326, Financial Instruments - Credit Losses, 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, 2020-02 Financial Instruments-Credit Losses (Topic 326)-Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting (“ASU 2016-09”). Bulletin No. 119 and Update to SEC Section on Effective Date (SEC Update), and 2020-03 Codification Improvements to Financial Instruments. 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. 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. The amendments in this ASU were 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. The Company adopted the new ASU on January 1, 2020. The impact of adoption was that the allowance for credit losses on Purchased Performing Loans increased by approximately $8.3 million. This transition adjustment was recorded as an increase in the Company’s allowance for credit losses and an adjustment to decrease retained earnings as of the adoption date. In addition, for Purchased Credit Deteriorated Loans, the carrying value of the portfolio was adjusted on transition to include an estimate of the allowance for credit losses as required by the new standard. For financial statement reporting purposes, this adjusted carrying value is presented net of the estimated allowance for credit losses. Consequently, the adjustments recorded on transition for Purchased Credit Deteriorated Loans do not result in any adjustment to retained earnings as of the adoption date. The Company does not consider these transition adjustments to be material to its financial position or previously reported GAAP or economic book value.

Under ASU 2016-13, credit losses for available-for-sale debt securities are measured in a manner similar to prior GAAP. However, the amendments in this ASU require all income tax effects of awardsthat 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 income statement whenallowance on available-for-sale debt securities will be limited to the awards vest orextent that the fair value is less than the amortized cost. Under prior GAAP, credit impairment losses were generally required to be recorded as “other than temporary” impairment, which directly reduced the carrying amount of impaired securities, and was recorded in earnings and was not reversed if expected cash flows subsequently recovered. Under the new guidance, credit impairments on such securities (other than those related to expected sales) are settled. ASU 2016-09recorded as an allowance for credit losses that is also allows an employerrecorded in earnings, but the allowance can be reversed through earnings in a subsequent period if expected cash flows subsequently recover. Transition to repurchase more of an employee’s shares than it could prior to 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 2016-09new available-for-sale debt securities guidance did not haveresult in a significant impact on its financial position or financial statement disclosures.



change to our retained earnings.
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020


Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in this ASU provide temporary optional expedients to ease the financial reporting burden of the expected transition from the London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as the Secured Overnight Financing Rate (“SOFR”). The amendments in the ASU are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in ASU 2020-04 were effective for all entities as of March 12, 2020 and will generally no longer be available to apply after December 31, 2022. The Company adopted this ASU as of the effective date and will utilize the optional expedients to the extent that they apply to the Company.
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
3.            ��MBS, CRT    Residential Whole Loans

Included on the Company’s consolidated balance sheets at September 30, 2020 and December 31, 2019 are approximately $5.6 billion and $7.4 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, 2020 and December 31, 2019:
(Dollars In Thousands)September 30, 2020December 31, 2019
Purchased Performing Loans:
Non-QM loans$2,465,148 $3,707,245 
Rehabilitation loans699,868 1,026,097 
Single-family rental loans479,070 460,742 
Seasoned performing loans147,706 176,569 
Total Purchased Performing Loans3,791,792 5,370,653 
Purchased Credit Deteriorated Loans (1)
702,013 698,717 
Total Residential whole loans, at carrying value$4,493,805 $6,069,370 
Allowance for credit losses on residential whole loans held at carrying value(106,246)(3,025)
Total Residential whole loans at carrying value, net$4,387,559 $6,066,345 
Number of loans13,754 17,082 

(1) The amortized cost basis of Purchased Credit Deteriorated Loans was increased by $62.6 million on January 1, 2020 in connection with the adoption of ASU 2016-13.

The following table presents the components of interest income on the Company’s Residential whole loans, at carrying value for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended
September 30,		Nine Months Ended
September 30,
 (In Thousands)2020201920202019
Purchased Performing Loans:
Non-QM loans$25,884 $30,258 $112,212 $79,250 
Rehabilitation loans10,863 15,142 39,502 38,331 
Single-family rental loans6,917 5,025 21,528 11,652 
Seasoned performing loans1,945 3,166 6,799 9,461 
Total Purchased Performing Loans45,609 53,591 180,041 138,694 
Purchased Credit Deteriorated Loans8,784 10,635 27,265 33,031 
Total Residential whole loans, at carrying value$54,393 $64,226 $207,306 $171,725 








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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
The following table presents additional information regarding the Company’s Residential whole loans, at carrying value at September 30, 2020:
September 30, 2020
Carrying ValueAmortized Cost BasisUnpaid Principal Balance (“UPB”)
Weighted Average Coupon (1)
Weighted Average Term to Maturity (Months)
Weighted Average LTV Ratio (2)
Weighted Average Original FICO (3)
Aging by Amortized Cost Basis
Past Due Days
(Dollars In Thousands)Current30-5960-8990+
Purchased Performing Loans:
Non-QM loans (4)
$2,438,395 $2,465,148 $2,397,247 5.87 %35264 %712$2,174,935 $74,231 $52,069 $163,913 
Rehabilitation loans (4)
677,235 699,868 699,868 7.28 463 718491,343 65,166 22,995 120,364 
Single-family rental loans (4)
474,045 479,070 475,072 6.28 31970 734439,503 16,111 7,373 16,083 
Seasoned performing loans (4)
147,556 147,706 161,257 3.45 17341 723136,622 1,406 880 8,798 
Purchased Credit Deteriorated Loans (4)(5)
650,328 702,013 812,614 4.45 28979 N/AN/MN/MN/M122,478 
Residential whole loans, at carrying value, total or weighted average$4,387,559 $4,493,805 $4,546,058 5.81 %277

December 31, 2019
Carrying ValueAmortized Cost BasisUnpaid Principal Balance (“UPB”)
Weighted Average Coupon (1)
Weighted Average Term to Maturity (Months)
Weighted Average LTV Ratio (2)
Weighted Average Original FICO (3)
Aging by UPB
Past Due Days
(Dollars In Thousands)Current30-5960-8990+
Purchased
   Performing Loans:
Non-QM loans (4)
$3,706,857 $3,707,245 $3,592,701 5.96 %36867 %716$3,492,533 $59,963 $19,605 $20,600 
Rehabilitation loans (4)
1,023,766 1,026,097 1,026,097 7.30 864 717868,281 67,747 27,437 62,632 
Single-family rental loans (4)
460,679 460,741 457,146 6.29 32470 734432,936 15,948 2,047 6,215 
Seasoned performing loans176,569 176,569 192,151 4.24 18146 723187,683 2,164 430 1,874 
Purchased Credit Impaired Loans (5)
698,474 698,718 873,326 4.46 29481 N/AN/MN/MN/M108,998 
Residential whole loans, at carrying value, total or weighted average$6,066,345 $6,069,370 $6,141,421 5.96 %288

(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 $222.2 million and $269.2 million at September 30, 2020 and December 31, 2019, respectively, 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 68% and 69% at September 30, 2020 and December 31, 2019, respectively. 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)Excludes loans for which no Fair Isaac Corporation (“FICO”) score is available.
(4)At September 30, 2020 and December 31, 2019 the difference between the Carrying Value and Amortized Cost Basis represents the related allowance for credit losses.
(5)Purchased Credit Deteriorated 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.

No Residential whole loans, at carrying value were sold during the three months ended September 30, 2020. During the nine months ended September 30, 2020, $1.8 billion of Non-QM loans were sold, realizing losses of $273.0 million.
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020

Allowance for Credit Losses

The following table presents a roll-forward of the allowance for credit losses on the Company’s Residential Whole Loans, at Carrying Value:
Nine Months Ended September 30, 2020
(Dollars In Thousands)Non-QM Loans
Rehabilitation Loans (1)(2)
Single-family Rental LoansSeasoned Performing Loans
Purchased Credit Deteriorated Loans (3)
Totals
Allowance for credit losses at December 31, 2019$388 $2,331 $62 $0 $244 $3,025 
Transition adjustment on adoption of ASU 2016-13 (4)
6,904 517 754 19 62,361 70,555 
Current provision26,358 33,213 6,615 230 8,481 74,897 
Write-offs0 (428)0 0 (219)(647)
Valuation adjustment on loans held for sale70,181 0 0 0 0 70,181 
Allowance for credit and valuation losses at March 31, 2020$103,831 $35,633 $7,431 $249 $70,867 $218,011 
Current provision/(reversal)(2,297)(5,213)(500)(25)(2,579)(10,614)
Write-offs0 (420)0 0 (207)(627)
Valuation adjustment on loans held for sale(70,181)0 0 0 0 (70,181)
Allowance for credit losses at June 30, 2020$31,353 $30,000 $6,931 $224 $68,081 $136,589 
Current provision/(reversal)(4,568)(7,140)(1,906)(74)(16,374)(30,062)
Write-offs(32)(227)0 0 (22)(281)
Allowance for credit losses at September 30, 2020$26,753 $22,633 $5,025 $150 $51,685 $106,246 

Nine Months Ended September 30, 2019
(Dollars In Thousands)Non-QM LoansRehabilitation LoansSingle-family Rental LoansSeasoned Performing LoansPurchased Credit Deteriorated LoansTotals
Allowance for credit losses at December 31, 2018$0 $0 $0 $0 $968 $968 
Current provision0 500 0 0 183 683 
Write-offs0 0 0 0 0 0 
Allowance for credit losses at March 31, 2019$0 $500 $0 $0 $1,151 $1,651 
Current provision0 0 0 0 385 385 
Write-offs0 (50)0 0 0 (50)
Allowance for credit losses at June 30, 2019$0 $450 $0 $0 $1,536 $1,986 
Current provision0 0 0 0 347 347 
Write-offs0 (62)0 0 0 (62)
Allowance for credit losses at September 30, 2019$0 $388 $0 $0 $1,883 $2,271 

(1)In connection with purchased Rehabilitation loans, the Company had unfunded commitments of $73.2 million, with an allowance for credit losses of $1.6 million at September 30, 2020. Such allowance is included in “Other liabilities” in the Company’s consolidated balance sheets (see Note 9).
(2)Includes $143.4 million of loans that were assessed for credit losses based on a collateral dependent methodology.
(3)Includes $72.7 million of loans that were assessed for credit losses based on a collateral dependent methodology.
(4)Of the $70.6 million of reserves recorded on adoption of ASU 2016-13, $8.3 million was recorded as an adjustment to stockholders’ equity and $62.4 million was recorded as a “gross up” of the amortized cost basis of Purchased Credit Deteriorated Loans.

The Company adopted ASU 2016-13 (“CECL”) on January 1, 2020 (see Note 2). The anticipated impact of the COVID-19 pandemic on expected economic conditions, including forecasted unemployment, home price appreciation, and prepayment rates, for the short to medium term resulted in significantly increased estimates of credit losses recorded under CECL for the first quarter of 2020 for residential whole loans held at carrying value. As of September 30, 2020, the Company
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
adjusted its estimates related to future rates of unemployment, which resulted in a reversal of the allowance for loan loss in the third quarter. However, the Company continues to anticipate that deteriorated market conditions will continue for an extended period, resulting in increased delinquencies and defaults compared to historical periods. Estimates of credit losses under CECL are highly sensitive to changes in assumptions and current economic conditions have increased the difficulty of accurately forecasting future conditions.

The amortized cost basis of Purchased Performing Loans on nonaccrual status as of September 30, 2020 and December 31, 2019 was $345.6 million and $99.9 million, respectively. The amortized cost basis of Purchased Credit Deteriorated Loans on nonaccrual status as of September 30, 2020 was $148.7 million. Because Purchase Credit Deteriorated Loans were previously accounted for in pools, there were no such loans on nonaccrual status as of December 31, 2019. NaN interest income was recognized from loans on nonaccrual status during the nine months ended September 30, 2020. At September 30, 2020, there were approximately $134.8 million of loans on nonaccrual status that did not have an associated allowance for credit losses, because they were determined to be collateral dependent and the estimated fair value of the related collateral exceeded the carrying value of each loan.

The following table presents certain additional credit-related information regarding our residential whole loans, at carrying value:
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
Amortized Cost Basis by Origination Year and LTV Bands
(Dollars In Thousands)20202019201820172016PriorTotal
Non-QM loans
LTV < 80% (1)
$380,729 $1,196,185 $684,404 $74,862 $6,371 $0 $2,342,551 
LTV >= 80% (1)
48,082 35,468 29,784 9,111 152 0 122,597 
Total Non-QM loans$428,811 $1,231,653 $714,188 $83,973 $6,523 $0 $2,465,148 
Nine Months Ended September 30, 2020 Gross write-offs$— $— $32 $— $— $— $32 
Nine Months Ended September 30, 2020 Recoveries— — — — — — — 
Nine Months Ended September 30, 2020 Net write-offs$— $— $32 $— $— $— $32 
Rehabilitation loans
LTV < 80% (1)
$36,478 $542,865 $93,973 $7,546 $0 $0 $680,862 
LTV >= 80% (1)
1,262 15,496 548 1,700 0 0 19,006 
Total Rehabilitation loans$37,740 $558,361 $94,521 $9,246 $0 $0 $699,868 
Nine Months Ended September 30, 2020 Gross write-offs$— $13 $1,030 $32 $— $0 $1,075 
Nine Months Ended September 30, 2020 Recoveries— — — — — — — 
Nine Months Ended September 30, 2020 Net write-offs$— $13 $1,030 $32 $— $0 $1,075 
Single family rental loans
LTV < 80% (1)
$22,400 $287,103 $140,017 $13,356 $0 $0 $462,876 
LTV >= 80% (1)
1,394 14,588 212 0 0 0 16,194 
Total Single family rental loans$23,794 $301,691 $140,229 $13,356 $0 $0 $479,070 
Nine Months Ended September 30, 2020 Gross write-offs$— $— $— $— $— $— $— 
Nine Months Ended September 30, 2020 Recoveries— — — — — — — 
Nine Months Ended September 30, 2020 Net write-offs$— $— $— $— $— $— $— 
Seasoned performing loans
LTV < 80% (1)
$0 $0 $0 $0 $79 $139,538 $139,617 
LTV >= 80% (1)
0 0 0 0 0 8,089 8,089 
Total Seasoned performing loans$0 $0 $0 $0 $79 $147,627 $147,706 
Nine Months Ended September 30, 2020 Gross write-offs$— $— $— $— $— $— $— 
Nine Months Ended September 30, 2020 Recoveries— — — — — — — 
Nine Months Ended September 30, 2020 Net write-offs$— $— $— $— $— $— $— 
Purchased credit deteriorated loans
LTV < 80% (1)
$0 $0 $0 $633 $2,982 $420,265 $423,880 
LTV >= 80% (1)
0 0 0 0 3,184 274,950 278,134 
Total Purchased credit deteriorated loans$0 $0 $0 $633 $6,166 $695,215 $702,014 
Nine Months Ended September 30, 2020 Gross write-offs$— $— $— $— $— $448 $448 
Nine Months Ended September 30, 2020 Recoveries— — — — — 0 0 
Nine Months Ended September 30, 2020 Net write-offs$— $— $— $— $— $448 $448 
Total LTV < 80% (1)
$439,607 $2,026,153 $918,394 $96,397 $9,432 $559,803 $4,049,786 
Total LTV >= 80% (1)
50,738 65,552 30,544 10,811 3,336 283,039 444,020 
Total residential whole loans, at carrying value$490,345 $2,091,705 $948,938 $107,208 $12,768 $842,842 $4,493,806 
Total Gross write-offs$— $13 $1,062 $32 $— $448 $1,555 
Total Recoveries— — — — — 0 0 
Total Net write-offs$— $13 $1,062 $32 $— $448 $1,555 
(1)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 $222.2 million at September 30, 2020, 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 68% at September 30, 2020. Certain low value loans secured by vacant lots are categorized as LTV >= 80%.

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
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 measured 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, 2020 and December 31, 2019:
 (Dollars in Thousands)
September 30, 2020December 31, 2019
Less than 60 Days Past Due:
Outstanding principal balance$599,461 $666,026 
Aggregate fair value$577,761 $641,616 
Weighted Average LTV Ratio (1)
74.33 %76.69 %
Number of loans3,038 3,159 
60 Days to 89 Days Past Due:
Outstanding principal balance$55,183 $58,160 
Aggregate fair value$49,188 $53,485 
Weighted Average LTV Ratio (1)
83.62 %79.48 %
Number of loans259 313 
90 Days or More Past Due:
Outstanding principal balance$679,211 $767,320 
Aggregate fair value$602,715 $686,482 
Weighted Average LTV Ratio (1)
87.82 %89.69 %
Number of loans2,532 2,983 
    Total Residential whole loans, at fair value$1,229,664 $1,381,583 

(1)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/(loss) on residential whole loans measured at fair value through earnings for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended
September 30,		Nine Months Ended
September 30,
 (In Thousands)2020201920202019
Coupon payments, realized gains, and other income received (1)
$17,477 $22,202 $54,684 $67,966 
Net unrealized gains/(losses)58,863 13,185 (13,683)33,312 
Net gain on transfers to REO531 4,788 3,430 15,637 
    Total$76,871 $40,175 $44,431 $116,915 

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

During the nine months ended September 30, 2020, loans at fair value with an aggregate unpaid principal balance of $24.1 million were sold, realizing net losses of $0.8 million.

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
4.Residential Mortgage Securities and MSR RelatedMSR-Related Assets
 
Agency and Non-Agency MBS


The Company’s MBS are comprisedinvestments held as of September 30, 2020 or in prior periods include 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(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. The Company sold its remaining holdings of Agency MBS during the quarter ended June 30, 2020.
 
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. During the quarter ended June 30, 2020, the Company had sold substantially all of its holdings of Legacy Non-Agency MBS and substantially reduced its holdings of other Non-Agency MBS. The Company sold its remaining Legacy Non-Agency MBS during the quarter ended September 30, 2020.
 
CRT Securities


CRT securities are debt obligations issued by or sponsored by Fannie Mae and Freddie Mac. While theThe coupon payments on CRT securities are paid by Fannie Mae or Freddie Mac on a monthly basis, the payment ofissuer and the principal ispayments received 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. As principal on loans in the reference pool are paid, principal payments on the securities are made and the principal balances of the securities are reduced. Consequently, CRT securities mirror the payment and prepayment behavior of the mortgage loans in the reference pool.loans. 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 its investments in 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.  (Seeagreements (see Note 7).





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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

The following tables present certain information about the Company’s MBS and CRTresidential mortgage securities at September 30, 20172020 and December 31, 2016:2019:
 
September 30, 20172020
(In Thousands)Principal/ Current
Face		Purchase
Premiums		Accretable
Purchase
Discounts
Discount
Designated
as Credit Reserve (1)
Gross Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Net
Unrealized
Gain/(Loss)		Fair 
Value
Non-Agency MBS (2)(3)(4)
$60,295 $0 $(8,246)$(669)$51,380 $8,015 $(2,965)$5,050 $56,430 
CRT securities (5)
104,163 2,414 (69)(20,768)85,740 13,722 (3,127)10,595 96,335 
Total residential mortgage securities$164,458 $2,414 $(8,315)$(21,437)$137,120 $21,737 $(6,092)$15,645 $152,765 
(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)
Agency MBS:  
  
  
  
  
  
  
  
  
Fannie Mae $2,310,368
 $87,658
 $(41) $—
 $2,397,985
 $2,404,220
 $27,518
 $(21,283) $6,235
Freddie Mac 593,502
 22,884
 —
 —
 617,450
 608,349
 2,510
 (11,611) (9,101)
Ginnie Mae 6,532
 118
 —
 —
 6,650
 6,735
 85
 —
 85
Total Agency MBS 2,910,402
 110,660
 (41) —
 3,022,085
 3,019,304
 30,113
 (32,894) (2,781)
Non-Agency MBS:                  
Expected to Recover Par (3)(4)
 1,390,412
 51
 (24,594) —
 1,365,869
 1,393,982
 28,352
 (239) 28,113
Expected to Recover Less than Par (3)
 2,710,690
 —
 (220,199) (593,134) 1,897,357
 2,517,678
 620,472
 (151) 620,321
Total Non-Agency MBS (5)
 4,101,102
 51
 (244,793) (593,134) 3,263,226
 3,911,660
 648,824
 (390) 648,434
Total MBS 7,011,504
 110,711
 (244,834) (593,134) 6,285,311
 6,930,964
 678,937
 (33,284) 645,653
CRT securities (6)
 608,146
 8,474
 (3,961) —
 612,659
 653,633
 42,919
 (1,945) 40,974
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


December 31, 2016
2019
(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)
(In Thousands)Principal/ Current
Face		Purchase
Premiums		Accretable
Purchase
Discounts
Discount
Designated
as Credit Reserve (1)
Gross Amortized
Cost (6)
Gross
Unrealized
Gains		Gross
Unrealized
Losses		Net
Unrealized
Gain/(Loss)		Fair Value
Agency MBS:  
  
  
  
  
  
  
  
  
Agency MBS: (7)
Agency MBS: (7)
         
Fannie Mae $2,879,807
 $108,310
 $(51) $—
 $2,988,066
 $3,014,464
 $45,706
 $(19,308) $26,398
Fannie Mae$1,119,708 $43,249 $(22)$0 $1,162,935 $9,799 $(14,741)$(4,942)$1,157,993 
Freddie Mac 693,945
 26,736
 —
 —
 723,285
 716,209
 4,809
 (11,885) (7,076)Freddie Mac480,879 19,468 0 0 500,961 5,475 (3,968)1,507 502,468 
Ginnie Mae 7,550
 136
 —
 —
 7,686
 7,824
 138
 —
 138
Ginnie Mae3,996 73 0 0 4,069 52 0 52 4,121 
Total Agency MBS 3,581,302
 135,182
 (51) —
 3,719,037
 3,738,497
 50,653
 (31,193) 19,460
Total Agency MBS1,604,583 62,790 (22)0 1,667,965 15,326 (18,709)(3,383)1,664,582 
Non-Agency MBS:                  Non-Agency MBS:         
Expected to Recover Par (3)(4)
 2,706,418
 57
 (24,273) —
 2,682,202
 2,706,311
 26,477
 (2,368) 24,109
Expected to Recover Less than Par (3)
 3,359,200
 —
 (253,918) (694,241) 2,411,041
 2,978,525
 570,318
 (2,834) 567,484
Total Non-Agency MBS (5)
 6,065,618
 57
 (278,191) (694,241) 5,093,243
 5,684,836
 596,795
 (5,202) 591,593
Expected to Recover Par (2)(3)
Expected to Recover Par (2)(3)
722,477 0 (16,661)0 705,816 19,861 (9)19,852 725,668 
Expected to Recover Less than Par (2)
Expected to Recover Less than Par (2)
1,472,826 0 (73,956)(436,598)962,272 375,598 (9)375,589 1,337,861 
Total Non-Agency MBS (4)
Total Non-Agency MBS (4)
2,195,303 0 (90,617)(436,598)1,668,088 395,459 (18)395,441 2,063,529 
Total MBS 9,646,920
 135,239
 (278,242) (694,241) 8,812,280
 9,423,333
 647,448
 (36,395) 611,053
Total MBS3,799,886 62,790 (90,639)(436,598)3,336,053 410,785 (18,727)392,058 3,728,111 
CRT securities (6)
 384,993
 3,312
 (5,557) —
 382,748
 404,850
 22,105
 (3) 22,102
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
CRT securities (5)
CRT securities (5)
244,932 4,318 (55)0 249,195 6,304 (91)6,213 255,408 
Total residential mortgage securitiesTotal residential mortgage securities$4,044,818 $67,108 $(90,694)$(436,598)$3,585,248 $417,089 $(18,818)$398,271 $3,983,519 
 
(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, 2017 reflect Credit Reserve of $578.3 million and OTTI of $14.8 million.  Amounts disclosed at December 31, 2016 reflect Credit Reserve of $675.6 million and OTTI of $18.6 million.
(2)Includes principal payments receivable of $1.1 million and $2.6 million at September 30, 2017 and December 31, 2016, respectively, which are not included in the Principal/Current Face.
(3)
Based on management’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)At September 30, 2017 and December 31, 2016, the Company expected to recover approximately 86% and 89%, respectively, of the then-current face amount of Non-Agency MBS.
(6)Amounts disclosed at September 30, 2017 includes CRT securities with a fair value of $518.1 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $28.9 million and gross unrealized losses of approximately $1.9 million at September 30, 2017. Amounts disclosed at December 31, 2016 includes CRT securities with a fair value of $271.2 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $12.7 million and gross unrealized losses of approximately $3,000 at December 31, 2016.
(1)Discount designated as Credit Reserve is generally not expected to be accreted into interest income.

(2)Based on management’s current estimates of future principal cash flows expected to be received.

(3)Includes RPL/NPL MBS, which at September 30, 2020 had an $57.4 millionPrincipal/Current face, $49.2 millionamortized cost and $53.8 millionfair value. At December 31, 2019, RPL/NPL MBS had a $632.3 million Principal/Current face, $631.8 million amortized cost and $635.0 millionfair value.
(4)At September 30, 2020 and December 31, 2019, the Company expected to recover approximately 99% and 80% of the then-current face amount of Non-Agency MBS, respectively.
(5)Amounts disclosed at September 30, 2020 includes CRT securities with a fair value of $63.3 million for which the fair value option has been elected. Such securities had $410,000 gross unrealized gains and gross unrealized losses of approximately $3.1 million at September 30, 2020. Amounts disclosed at December 31, 2019 includes CRT securities with a fair value of $255.4 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $6.3 million and gross unrealized losses of approximately $91,000 at December 31, 2019.
(6)Includes principal payments receivable of $614,000 at December 31, 2019, which is not included in the Principal/Current Face.
(7)Amounts disclosed at December 31, 2019 include Agency MBS with a fair value of $280.3 million, for which the fair value option has been elected. Such securities had $4.5 million unrealized gains and 0gross unrealized losses at December 31, 2019, respectively.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020


Unrealized Losses on MBS and CRTSales of Residential Mortgage Securities

The following table presents information about the Company’s MBSsales of its residential mortgage securities for the three and CRTnine months ended September 30, 2020 and 2019. The Company has no continuing involvement with any of the sold securities.

Three Months Ended
September 30, 2020		Three Months Ended
September 30, 2019
(In Thousands)Sales ProceedsGains/(Losses)Sales ProceedsGains/(Losses)
Agency MBS$0 $0 $257,289 $2,771 
Non-Agency MBS116 48 47,867 14,444 
CRT Securities0 0 28,969 493 
Total$116 $48 $334,125 $17,708 

Nine Months Ended
September 30, 2020		Nine Months Ended
September 30, 2019
(In Thousands)Sales ProceedsGains/(Losses)Sales ProceedsGains/(Losses)
Agency MBS$1,500,875 $(19,291)$360,634 $499 
Non-Agency MBS1,318,958 107,999 244,778 41,420 
CRT Securities243,025 (27,011)133,507 8,108 
Total$3,062,858 $61,697 $738,919 $50,027 

Unrealized Losses on Residential Mortgage Securities

The following table presents information about the Company’s residential mortgage securities that were in an unrealized loss position at September 30, 2017:2020, with respect to which no allowance for credit losses has been recorded:
 
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 $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
 Less than 12 Months12 Months or moreTotal
 Fair ValueUnrealized LossesNumber of SecuritiesFair ValueUnrealized LossesNumber of SecuritiesFair ValueUnrealized Losses
(Dollars in Thousands)
Non-Agency MBS (1)
$44,927 $2,965 5 $0 $0 0 $44,927 $2,965 
CRT securities (2)
59,553 3,127 8 0 0 0 59,553 3,127 
Total residential mortgage securities$104,480 $6,092 13 $0 $0 0 $104,480 $6,092 

(1)Based on management’s current estimates of future principal cash flows expected to be received.  


At (1)Based on management’s current estimates of future principal cash flows expected to be received.
(2)Amounts disclosed at September 30, 2017,2020 include CRT securities with a fair value of $59.6 million for which the fair value option has been elected. Such securities had unrealized losses of $3.1 million at September 30, 2020.

During the three months ended March 31, 2020, the Company did not intendrecognized an impairment loss related to its Non-Agency MBS of $63.5 million based on its intent to sell, any of its investments that were in an unrealized loss position, and it is “more likely than not” thator 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 million at September 30, 2017.  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 thatlikelihood 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, 2017 any unrealized losses on its Agency MBS were temporary.remaining securities.

Gross unrealized losses on the Company’s Non-Agency MBS were $390,000$3.0 million at September 30, 2017.2020. Based upon the most recent evaluation, the Company does not consider these unrealized losses to be indicative of OTTIrequire an allowance for credit losses 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 withthat require an allowance for credit 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 not recognize any credit-related OTTIan allowance for credit losses (or other than temporary impairment in prior year periods) 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, 2016.2020 and 2019.

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, 20172020

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 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 allowance for credit loss component of OTTIlosses 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.Residential mortgage securities and MSR-related assets:

Three Months Ended September 30,Nine Months Ended September 30,
(Dollars In Thousands)2020201920202019
Allowance for credit losses at beginning of period$0 $0 $0 $0 
Current provision:— — — — 
Securities with no prior loss allowance0 0 344,269 0 
Securities with a prior loss allowance0 0 0 0 
Write-offs, including allowance related to securities the Company intends to sell0 0 (344,269)0 
Allowance for credit losses at end of period$0 $0 $0 $0 


29
  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, 20172020

Purchase Discounts on Non-Agency MBS
 
The following tables presenttable presents 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, 20172020 and 2016:2019:


Three Months Ended
September 30, 2020		Three Months Ended
September 30, 2019
(In Thousands)Discount
Designated as
Credit Reserve
Accretable
Discount (1) 
Discount
Designated as
Credit Reserve
 Accretable Discount (1)
Balance at beginning of period$(669)$(8,430)$(479,566)$(117,753)
Accretion of discount0 7 0 10,357 
Realized credit losses0 0 4,062 0 
Sales/Redemptions0 177 12,479 6,029 
Transfers/release of credit reserve0 0 930 (930)
Balance at end of period$(669)$(8,246)$(462,095)$(102,297)
  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, 2020		Nine Months Ended
September 30, 2019
(In Thousands)Discount
Designated as
Credit Reserve
Accretable
Discount (1) 
Discount
Designated as
Credit Reserve
 Accretable Discount (1)
Balance at beginning of period$(436,598)$(90,617)$(516,116)$(155,025)
Impact of RMBS Issuer Settlement (2)
0 0 0 (1,688)
Accretion of discount0 10,827 0 38,215 
Realized credit losses5,868 0 21,482 0 
Purchases0 0 (624)291 
Sales/Redemptions436,885 76,233 23,842 25,231 
Net impairment losses recognized in earnings(11,513)0 0 — 
Transfers/release of credit reserve4,689 (4,689)9,321 (9,321)
Balance at end of period$(669)$(8,246)$(462,095)$(102,297)


  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$1.7 million of cash proceeds (a one-time payment) received by the Company during the nine months ended September 30, 20162019 in connection with the settlement of litigation related to certain Countrywide-sponsored residential mortgage backed securitization trusts.trusts that were sponsored by JP Morgan Chase & Co. and affiliated entities.


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, 20172020 and December 31, 2016,2019, the Company had $311.6$234.1 million and $141.0 million,$1.2 billion, 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, 2020
At September 30, 2017,2020, these term notes had an amortized cost of $311.0$184.5 million, gross unrealized gains of $563,000,$49.5 million, a weighted average yield of 5.62%12.1% and a weighted average term to maturity of 3.79.5 years. During the nine months ended September 30, 2020, the Company sold certain term notes for $711.7 million, realizing gains of $28.7 million, respectively. During the three months ended March 31, 2020, the Company recognized an impairment loss related to its term notes of $280.8 million based on its intent to sell, or the likelihood it will be required to sell, such notes. At December 31, 2016,2019, the term notes had an amortized cost of $141.0 million, no$1.2 billion, gross unrealized gains of $5.2 million, a weighted average yield of 5.50%4.75% and a weighted average term to maturity of 4.65.3 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

The Company has participated in a loan where the terms of the loan agreement, the Company has committed to lend $130.0$32.6 million of which approximately $101.1$18.1 million was drawn at September 30, 2017.2020. At September 30, 2017,2020, the coupon paid by the borrower on the drawn amount is 7.74%, the remaining term associated with the loan is 2.8 years and remaining commitment period on any undrawn amount is nine5.52%. The facility expires in 11 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, which then increases to 1.5% for the subsequent six month period. For the three months ended September 30, 2017, the Company recognized interest income of $2.1 million, including discount accretion and 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.loan.


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, 20172020 and 2016:2019:
 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(In Thousands)2020201920202019
AOCI from AFS securities:  
  
  
  
AOCI from AFS securities:    
Unrealized gain on AFS securities at beginning of period $668,223
 $625,697
 $620,403
 $585,250
Unrealized gain on AFS securities at beginning of period$52,889 $439,898 $392,722 $417,167 
Unrealized (loss)/gain on Agency MBS, net (3,032) (6,941) (22,241) 17,857
Unrealized gain/(loss) on Agency MBS, netUnrealized gain/(loss) on Agency MBS, net0 603 (161)22,483 
Unrealized gain on Non-Agency MBS, net 10,020
 71,291
 93,429
 106,906
Unrealized gain on Non-Agency MBS, net5,998 2,856 360,315 22,211 
Unrealized gain on MSR term notes, netUnrealized gain on MSR term notes, net9,084 2,024 48,431 5,391 
Reclassification adjustment for MBS sales included in net income (14,935) (6,829) (30,283) (26,795)Reclassification adjustment for MBS sales included in net income(60)(14,499)(389,127)(36,370)
Reclassification adjustment for OTTI included in net income —
 (485) (1,032) (485)
Reclassification adjustment for impairment included in net incomeReclassification adjustment for impairment included in net income0 0 (344,269)0 
Change in AOCI from AFS securities (7,947) 57,036
 39,873
 97,483
Change in AOCI from AFS securities15,022 (9,016)(324,811)13,715 
Balance at end of period $660,276
 $682,733
 $660,276
 $682,733
Balance at end of period$67,911 $430,882 $67,911 $430,882 
 


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

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, 20172020 and 2016: 2019: 
 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(In Thousands)2020201920202019
Agency MBS        Agency MBS
Coupon interest $23,473
 $29,283
 $74,589
 $92,263
Coupon interest$0 $18,994 $14,038 $66,560 
Effective yield adjustment (1)
 (7,940) (10,326) (24,575) (27,717)
Effective yield adjustment (1)
0 (7,188)(5,186)(21,039)
Interest income $15,533
 $18,957
 $50,014
 $64,546
Interest income$0 $11,806 $8,852 $45,521 
        
Legacy Non-Agency MBS        Legacy Non-Agency MBS
Coupon interest $30,688
 $37,763
 $97,796
 $117,620
Coupon interest$42 $21,011 $18,222 $68,144 
Effective yield adjustment (2)
 18,005
 20,055
 59,033
 59,270
Effective yield adjustment (2)(3)
Effective yield adjustment (2)(3)
6 10,336 10,564 38,003 
Interest income $48,693
 $57,818
 $156,829
 $176,890
Interest income$48 $31,347 $28,786 $106,147 
        
RPL/NPL MBS        RPL/NPL MBS
Coupon interest $13,947
 $25,630
 $54,475
 $74,773
Coupon interest$811 $13,227 $7,622 $44,305 
Effective yield adjustment (1)
 612
 190
 1,424
 1,892
Effective yield adjustment (1)(4)
Effective yield adjustment (1)(4)
94 8 449 158 
Interest income $14,559
 $25,820
 $55,899
 $76,665
Interest income$905 $13,235 $8,071 $44,463 
        
CRT securities        CRT securities
Coupon interest $7,868
 $3,562
 $19,712
 $8,725
Coupon interest$956 $5,174 $6,063 $16,769 
Effective yield adjustment (2)
 808
 421
 3,186
 1,172
Effective yield adjustment (2)
420 (923)(94)(1,224)
Interest income $8,676
 $3,983
 $22,898
 $9,897
Interest income$1,376 $4,251 $5,969 $15,545 
        
MSR related assets        
MSR-related assetsMSR-related assets
Coupon interest $7,117
 $—
 $17,621
 $—
Coupon interest$2,991 $15,273 $23,332 $38,230 
Effective yield adjustment (1)
 77
 —
 212
 —
Effective yield adjustment (1)(2)
Effective yield adjustment (1)(2)
3,250 1 6,857 2 
Interest income $7,194
 $—
 $17,833
 $—
Interest income$6,241 $15,274 $30,189 $38,232 
 
(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 isless the current coupon yield. The net yield may be based on management’s estimates of the amount and timing of future cash flows less the current coupon yield.

4.    Residential Whole Loans

Includedor on the Company’s consolidated balance sheets at September 30, 2017 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 million and $590.5 million at September 30, 2017 and December 31, 2016, respectively. The carrying value reflects the original investment amount, plus accretion of interest income, less principal and interestinstrument’s contractual cash flows, received. The carrying value is reduced by any allowance for loan losses established subsequentdepending on the relevant accounting standard.
(3) Includes accretion income recognized due to acquisition. The Companythe impact of redemptions of certain securities that had approximately 3,700 and 3,200 Residential whole loans heldbeen previously purchased 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 lossesa discount of approximately $318,000 on its residential whole loan pools held at carrying value. For$3.1 million during the three and nine months ended September 30, 2017,2019.
(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 during the three months ended September 30, 2019 and $277,000 and $152,000 during the nine months ended September 30, 2020 and 2019, respectively.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020


provision for loan losses of approximately $57,000 and $672,000 was recorded, respectively, which is included in Operating and Other Expense 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 the nine months ended September 30, 2016, a net reversal of provision for loan losses of approximately $142,000 was recorded.

The following table presents the activity in the Company’s allowance for loan losses on its residential whole loan pools held at carrying 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
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 following table presents information regarding estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the residential whole loans held at carrying value acquired by the Company 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 (1)
 
2016 (2)
 
2017 (1)
 
2016 (2)
Contractually required principal and interest $185,234
 $121,818
 $185,234
 $363,144
Contractual cash flows not expected to be collected (non-accretable yield) (33,448) (31,648) (33,448) (66,685)
Expected cash flows to be collected 151,786
 90,170
 151,786
 296,459
Interest component of expected cash flows (accretable yield) (53,916) (28,801) (53,916) (98,550)
Fair value at the date of acquisition $97,870
 $61,369
 $97,870
 $197,909

(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 loans held at carrying 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 (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, 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 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 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, 2017 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 time of acquisition. Subsequent changes in fair value are reported in current period earnings and presented in Net gain on residential whole loans held at fair value 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, 2017 and December 31, 2016:
 (Dollars in Thousands)
 
September 30, 2017 (1)
 December 31, 2016
Outstanding principal balance $1,178,866
 $966,174
Aggregate fair value $983,150
 $814,682
Number of loans 4,834
 3,812

(1) Excluded from the table above are 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.

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 million 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.

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

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, 20172020 and December 31, 2016:2019:


(In Thousands)September 30, 2020December 31, 2019
REO (1)
$298,866 $411,659 
Capital contributions made to loan origination partners108,887 147,992 
Other interest-earning assets45,442 70,468 
Interest receivable42,723 70,986 
Other MBS and loan related receivables36,342 43,842 
Other39,354 39,304 
Total Other Assets$571,614 $784,251 

(1)    Includes $59.3 million and $27.3 million of REO that is held-for-investment at September 30, 2020 and December 31, 2019, respectively.

(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

(a) Real Estate Owned


At September 30, 2017,2020, the Company had 6711,131 REO properties with an aggregate carrying value of $138.0$298.9 million. At December 31, 2016,2019, the Company had 4471,652 REO properties with an aggregate carrying value of $80.5$411.7 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, $125.22020, $295.7 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, formal foreclosure proceedings were in process with respect to $31.4$132.5 million of residential whole loans held at carrying value and $538.5$487.3 million of residential whole loans held at fair value at September 30, 2017.2020.


The following table presents the activity in the Company’s REO for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2020201920202019
Balance at beginning of period$348,516 $334,069 $411,659 $249,413 
Adjustments to record at lower of cost or fair value93 (3,875)(11,796)(9,264)
Transfer from residential whole loans (1)
15,672 61,888 74,891 193,531 
Purchases and capital improvements, net536 5,108 9,334 16,307 
Disposals (2)
(65,951)(20,990)(185,222)(73,787)
Balance at end of period$298,866 $376,200 $298,866 $376,200 
Number of properties1,131 1,508 1,131 1,508 

(1)Includes net gain recorded on transfer of approximately $834,000 and $5.0 million for the three months ended September 30, 2020 and 2019, respectively; and approximately $4.1 million and $16.1 million for nine months ended September 30, 2020 and 2019, respectively.
(2)During the three and nine months ended September 30, 2017,2020, the Company sold 139267 and 368812 REO properties for consideration of $18.4$69.9 million and $53.0$195.2 million, realizing net gains of approximately $805,000$3.9 million and $2.8$10.0 million, respectively. During the three and nine months ended September 30, 2016,2019, the Company sold 57142 and 179431 REO properties for consideration of $7.9$23.0 million and $24.0$80.0 million, realizing net gains of approximately $733,000$2.1 million and $1.8$5.8 million, respectively. These amounts are included in Other Income, net on the Company’s consolidated statements of operations. In addition, following an updated assessment of liquidation amounts expected to be realized that was performed on all REO held at the end of the third quarters of 2017 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.




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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

(b) Capital Contributions Made to Loan Origination Partners

The Company has made investments in several loan originators as part of its strategy to be a reliable source of capital to select partners from whom it sources residential mortgage loans through both flow arrangements and bulk purchases. To date, such contributions of capital include the following table presentsinvestments (based on their carrying value prior to any impairments): $31.0 million of common equity, $68.0 million of preferred equity and $75.0 million of convertible notes. In addition, for certain partners, options or warrants may have also been acquired that provide the activityCompany 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 warrants) in loan originators initially at cost. The carrying value of these investments is 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. Following an evaluation of the anticipated impact of the COVID-19 pandemic on economic conditions for the short to medium term, the Company recorded impairment charges of $65.2 million on investments in certain loan origination partners during the nine months ended September 30, 20172020, respectively, which was included in “Impairment and 2016:
(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 recordedother losses on transfersecurities available-for-sale and other assets” on the consolidated statements of approximately $2.8 million and $845,000 foroperations. The Company did 0t record any impairment charges on investments in certain loan origination partners during the three months ended September 30, 2017 and 2016, respectively; and approximately $5.3 million and $2.5 million for the nine months ended2020. At September 30, 2017 and 2016, respectively.2020, approximately $840.5 million of the Company’s Residential whole loans, at carrying value were serviced by entities in which the Company has an investment.



(b)
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(c)Derivative Instruments
 
The Company’s derivative instruments are currentlyhave generally been comprised of Swaps, the majority of which arewere designated as cash flow hedges against the interest rate risk associated with certain 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.

In response to the turmoil in the financial markets resulting from the COVID-19 pandemic experienced during the three months ended March 31, 2020, the Company unwound all of its borrowings. approximately $4.1 billion of Swap hedging transactions late in the first quarter in order to recover previously posted margin. Gains or losses associated with these Swap hedging transactions are required to be transferred from AOCI to earnings over the original term of the Swap, if the underlying hedged item or transactions are assessed as probable of occurring. After the closing of several new financing transactions late in the quarter ended June 30, 2020, the Company evaluated its anticipated future financing requirements. The Company concluded that it was no longer probable that certain previously used financing strategies, including those that primarily utilized repurchase agreements with funding costs that reset on a monthly basis, would be used by the Company on an ongoing basis, as this financing strategy had been essentially replaced by the new financing transactions. Consequently, the Company concluded that it was appropriate to transfer from AOCI to earnings approximately $49.9 million of losses on Swaps that had previously been designated as hedges for accounting purposes, because the hedged transactions were no longer considered probable to occur. In addition, during the quarter ended September 30, 2020, the Company transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as the Company had assessed that the underlying transactions were no longer probable of occurring. These amounts are included in Other income, net on the Company’s consolidated statements of operations. At September 30, 2020, there are 0 remaining losses included in AOCI on Swaps previously 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, 20172020 and December 31, 2016:2019:
 
      September 30, 2017 December 31, 2016
Derivative Instrument Designation  Balance Sheet Location 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)
September 30, 2020December 31, 2019
Derivative Instrument (1)
Designation Notional AmountFair ValueNotional AmountFair Value
(In Thousands)  
SwapsHedging$0 $0 $2,942,000 $0 
SwapsNon-Hedging$0 $0 $230,000 $0 
 
(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, 20172020 and December 31, 2016:2019:
 
(In Thousands) September 30, 2017 December 31, 2016(In Thousands)September 30, 2020December 31, 2019
Agency MBS, at fair value $23,197
 $32,468
Agency MBS, at fair value$0 $2,241 
Restricted cash 6,524
 53,849
Restricted cash0 16,777 
Total assets pledged against Swaps $29,721
 $86,317
Total assets pledged against Swaps$0 $19,018 
 
The Company’s derivative hedging instruments, or a portion thereof, could become ineffective in the future if the associated repurchase agreements that such derivatives hedge fail to exist or fail to have terms that match those of the derivatives that hedge such borrowings.  At September 30, 2017, all of the Company’s derivatives were deemed effective for hedging purposes and no derivatives were terminated during the three and nine months ended September 30, 2017 and 2016.
 


27
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

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 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. The Company did not recognize any change in the value of its existing Swaps designated as hedges through earnings as a result of hedge ineffectiveness during the three and nine months ended September 30, 2017 and 2016.
At September 30, 2017, the Company had Swaps designated in hedging relationships with an aggregate notional amount of $2.6 billion and extended 30 months on average with a maximum term of approximately 71 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, 20172020 and December 31, 2016:2019:
 
September 30, 2020December 31, 2019
 Notional AmountWeighted 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)
Over 3 months to 6 months$0 0 %0 %$200,000 2.05 %1.70 %
Over 6 months to 12 months0 0 0 1,430,000 2.30 1.77 
Over 12 months to 24 months0 0 0 1,300,000 2.11 1.86 
Over 24 months to 36 months0 0 0 20,000 1.38 1.90 
Over 36 months to 48 months0 0 0 222,000 2.88 1.84 
Total Swaps$0 0 %0 %$3,172,000 2.24 %1.81 %
   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%


(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, 20172020 and 2016:2019:
 
 Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,		Three Months Ended
September 30,		Nine Months Ended
September 30,
(Dollars in Thousands) 2017 2016 2017 2016(Dollars in Thousands)2020201920202019
Interest expense attributable to Swaps $5,310
 $10,170
 $19,606
 $31,279
Interest (expense)/income attributable to SwapsInterest (expense)/income attributable to Swaps$0 $(322)$(3,359)$1,561 
Weighted average Swap rate paid 2.04% 1.82% 1.96% 1.82%Weighted average Swap rate paid0 %2.29 %2.06 %2.32 %
Weighted average Swap rate received 1.23% 0.49% 1.00% 0.45%Weighted average Swap rate received0 %2.24 %1.63 %2.40 %
 
During the nine months ended September 30, 2020, the Company recorded net losses on Swaps not designated in hedging relationships of approximately $4.3 million, which included $9.4 million of losses realized on the unwind of certain Swaps. 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. These amounts are included in Other income, net on the Company’s consolidated statements of operations.

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, 20172020 and 2016:2019:
 
  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) and 7)  At September 30, 2017, the Company’s borrowings under repurchase agreements had a weighted average remaining term-to-interest rate reset of 19 days and an effective repricing period of eleven months, including the impact of related Swaps.  At December 31, 2016, the Company’s borrowings under repurchase agreements had a weighted average remaining term-to-interest rate reset of 19 days and an effective repricing period of 12 months, including the impact of related Swaps.

Three Months Ended
September 30,		Nine Months Ended
September 30,
(In Thousands)2020201920202019
AOCI from derivative hedging instruments:
Balance at beginning of period$(7,176)$(28,114)$(22,675)$3,121 
Net loss on Swaps0 (233)(50,127)(30,384)
Reclassification adjustment for losses/gains related to hedging instruments included in net income7,176 (685)72,802 (1,769)
Balance at end of period$0 $(29,032)$0 $(29,032)
29
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020



6.      Financing Agreements

The following table presents information with respect totables present the components of the Company’s borrowings under repurchaseFinancing agreements and associated assets pledged as collateral at September 30, 2017 and December 31, 2016:
(Dollars in Thousands) September 30,
2017		 December 31,
2016
Repurchase agreement borrowings secured by Agency MBS $2,671,245
 $3,095,020
Fair value of Agency MBS pledged as collateral under repurchase agreements $2,888,156
 $3,280,689
Weighted average haircut on Agency MBS (1)
 4.62% 4.67%
Repurchase agreement borrowings secured by Legacy Non-Agency MBS $1,361,866
 $1,690,937
Fair value of Legacy Non-Agency MBS pledged as collateral under repurchase agreements (2)
 $1,848,134
 $2,317,708
Weighted average haircut on Legacy Non-Agency MBS (1)
 22.40% 24.01%
Repurchase agreement borrowings secured by RPL/NPL MBS $798,508
 $1,943,572
Fair value of RPL/NPL MBS pledged as collateral under repurchase agreements $1,005,757
 $2,433,711
Weighted average haircut on RPL/NPL MBS (1)
 21.58% 20.98%
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
Fair value of CRT securities pledged as collateral under repurchase agreements $530,833
 $357,488
Weighted average haircut on CRT securities (1)
 22.05% 23.22%
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
Weighted average haircut on residential whole loans (1)
 28.35% 25.03%
(1)Haircut represents the percentage amount by which the collateral value is contractually required to exceed the loan amount.
(2) Includes $172.4 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 of unamortized debt issuance costs at September 30, 20172020 and December 31, 2016, respectively.2019:


The following table presents repricing
September 30, 2020
(In Thousands)Unpaid Principal BalanceAmortized Cost Balance
Fair Value/Carrying Value(1)
Financing agreements, at fair value
Agreements with non-mark-to-market collateral provisions$1,723,959 $1,723,959 $1,727,407 
Agreements with mark-to-market collateral provisions1,489,097 1,489,097 1,490,271 
Senior secured credit agreement481,250 462,923 473,993 
Securitized debt389,051 380,407 388,790 
Total Financing agreements, at fair value$4,083,357 $4,056,386 $4,080,461 
Other financing agreements
Securitized debt$451,197 $448,893 
Convertible senior notes230,000 224,867 
Senior notes100,000 96,900 
Total Financing agreements at carrying value$781,197 $770,660 
Total Financing agreements$4,864,554 $4,851,121 

(1)    Financing agreements at fair value are reported at estimated fair value each period as a result of the Company’s fair value option election. Other financing arrangements are reported at their carrying value (amortized cost basis) as the fair value option was not elected on these liabilities. Consequently, Total Financing agreements as presented reflects a summation of balances reported at fair value and carrying value.

Set out below is information about the Company’s borrowingsFinancing agreements that existed as of December 31, 2019. During the second quarter of 2020, outstanding repurchase agreement transactions at that time were renegotiated as part of a reinstatement agreement that was entered into by the Company. The Company elected to account for these reinstated transactions under the fair value option from the time these repurchase agreements which does not reflect the impactwere reinstated. Accordingly, as of associated derivative hedging instruments, at September 30, 20172020, such liabilities are reported as Financing agreements at fair value.
December 31, 2019
(In Thousands)Unpaid Principal BalanceCarrying Value
Repurchase agreements$9,140,944 $9,139,821 
Securitized debt573,900 570,952 
Convertible senior notes230,000 223,971 
Senior notes100,000 96,862 
Total Financing agreements at carrying value$10,044,844 $10,031,606 


(a) Financing Agreements, at Fair Value

During the second quarter of 2020, the Company entered into a $500 million senior secured credit agreement. In addition, in conjunction with its exit from forbearance arrangements, the Company entered into several new asset backed financing arrangements and December 31, 2016:

renegotiated financing arrangements for certain assets with existing lenders, that resulted in the Company essentially refinancing the majority of its investment portfolio. The Company elected the fair value option on these financing
37
  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, 20172020

arrangements, primarily to simplify the accounting associated with costs incurred to establish the new facilities or renegotiate existing facilities.

The Company considers that the most relevant feature that distinguishes between the various asset backed financing arrangements is how the financing arrangement is collateralized, including the ability of the lender to make margin calls on the Company based on changes in value of the underlying collateral securing the financing. Accordingly, further details are provided below regarding assets that are financed with agreements that have non-mark-to-market collateral provisions and assets that are financed with agreements that have mark-to-market collateral provisions.

Agreements with non-mark-to-market collateral provisions

The Company and certain of its subsidiaries entered into a non-mark-to-market term loan facility with certain lenders to finance an aggregate amount of up to $1.65 billion. The Company’s borrowing subsidiaries have pledged, as collateral security for the facility, certain of their residential whole loans (excluding Rehabilitation loans), as well as the equity in subsidiaries that own the loans. The facility has an initial term of two years, which may be extended for up to an additional three years, subject to certain conditions, including the payment of an extension fee and provided that no events of default have occurred. For the initial two year term, the financing cost for the facility will be calculated at a spread over the lender’s financing cost, which, depending on the lender, is expected to be based either on three-month LIBOR, or an index that it expected over time to be closely correlated to changes in three-month LIBOR. At September 30, 2020, the amount financed under this facility was approximately $1.4 billion.

In addition, the Company also entered into non-mark-to-market financing facilities on Rehabilitation loans. Under these facilities, Rehabilitation loans, as well as the equity in subsidiaries that own the loans, are pledged as collateral. The facilities have a two year term and the financing cost is calculated at a spread over three-month LIBOR. At September 30, 2020, the amount financed under these facilities was approximately $359.0 million.

The following table presents contractualinformation with respect to the Company’s financing agreements with non-mark-to-market collateral provisions and associated assets pledged as collateral at September 30, 2020 and December 31, 2019:
(Dollars in Thousands)September 30,
2020		December 31,
2019
Non-mark-to-market financing secured by residential whole loans at carrying value$1,471,269 $0 
Fair value of residential whole loans at carrying value pledged as collateral under financing agreements$2,323,085 $0 
Weighted average haircut on residential whole loans at carrying value41.91 %0 %
Non-mark-to-market financing secured by residential whole loans at fair value$256,138 $0 
Fair value of residential whole loans at fair value pledged as collateral under financing agreements$435,081 $0 
Weighted average haircut on residential whole loans at fair value41.25 %0 %

Agreements with mark-to-market collateral provisions

In addition to entering into the financing arrangements discussed above, the Company also entered into a reinstatement agreement with certain lending counterparties that facilitated its exit from the forbearance arrangements that the Company had previously entered into. In connection with the reinstatement agreement, terms of its prior financing arrangements on certain residential whole loans, residential mortgage securities, and MSR-related assets were renegotiated and those arrangements were reinstated on a go-forward basis. These financing arrangements continue to contain mark-to-market provisions that permit the lending counterparties to make margin calls on the Company should the value of the pledged collateral decline. The Company is also permitted to recover previously posted margin payments, should values of the pledged collateral subsequently increase. These facilities generally have a maturity ranging from one to three months and can be renewed at the discretion of the lending counterparty at financing costs reflecting prevailing market pricing. At September 30, 2020, the amount financed under these agreements was approximately $1.5 billion.
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020

The following table presents information with respect to the Company’s financing agreements with mark-to-market collateral provisions and associated assets pledged as collateral at September 30, 2020 and December 31, 2019:
(Dollars in Thousands)September 30,
2020		December 31,
2019
Mark-to-market financing agreements secured by residential whole loans (1)
$1,231,734 $4,743,094 
Fair value of residential whole loans pledged as collateral under financing agreements (2)
$2,002,903 $5,986,267 
Weighted average haircut on residential whole loans (3)
30.88 %20.07 %
Mark-to-market financing agreement borrowings secured by Agency MBS$0 $1,557,675 
Fair value of Agency MBS pledged as collateral under financing agreements$0 $1,656,373 
Weighted average haircut on Agency MBS (3)
0 %4.46 %
Mark-to-market financing agreement borrowings secured by Legacy Non-Agency MBS$1,282 $1,121,802 
Fair value of Legacy Non-Agency MBS pledged as collateral under financing agreements$2,621 $1,420,797 
Weighted average haircut on Legacy Non-Agency MBS (3)
50.00 %20.27 %
Mark-to-market financing agreement borrowings secured by RPL/NPL MBS$32,950 $495,091 
Fair value of RPL/NPL MBS pledged as collateral under financing agreements$53,809 $635,005 
Weighted average haircut on RPL/NPL MBS (3)
38.75 %21.52 %
Mark-to-market financing agreements secured by CRT securities
$54,883 $203,569 
Fair value of CRT securities pledged as collateral under financing agreements$96,336 $252,175 
Weighted average haircut on CRT securities (3)
42.47 %18.84 %
Mark-to-market financing agreements secured by MSR-related assets$135,340 $962,515 
Fair value of MSR-related assets pledged as collateral under financing agreements$252,183 $1,217,002 
Weighted average haircut on MSR-related assets (3)
39.87 %21.18 %
Mark-to-market financing agreements secured by other interest-earning assets$34,082 $57,198 
Fair value of other interest-earning assets pledged as collateral under financing agreements$44,079 $61,708 
Weighted average haircut on other interest-earning assets (3)
25.00 %22.01 %
(1)Excludes $0 and $1.1 million of unamortized debt issuance costs at September 30, 2020 and December 31, 2019, respectively.
(2)At September 30, 2020 and December 31, 2019, includes RPL/NPL MBS with an aggregate fair value of $192.7 million and $238.8 million, respectively, obtained in connection with the Company’s loan securitization transactions that are eliminated in consolidation.
(3) Haircut represents the percentage amount by which the collateral value is contractually required to exceed the loan amount.

In addition, the Company had cash pledged as collateral in connection with its financing agreements of $5.3 million and $25.2 million at September 30, 2020 and December 31, 2019, respectively.

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
The following table presents repricing information (excluding the impact of associated derivative hedging instruments, if any) about the Company’s borrowings under repurchasefinancing agreements all of which are accounted forthat have non-mark-to-market collateral provisions as secured borrowings,well as those that have mark-to-market collateral provisions, at September 30, 2017,2020 and does not reflect the impactDecember 31, 2019:

 September 30, 2020December 31, 2019
Amortized Cost BasisWeighted Average Interest RateAmortized Cost BasisWeighted Average Interest Rate
Time Until Interest Rate Reset
(Dollars in Thousands)    
Within 30 days$2,932,213 3.36 %$4,472,120 2.55 %
Over 30 days to 3 months0 0 2,746,384 3.43 
Over 3 months to 12 months280,843 3.02 1,014,441 3.36 
Over 12 months0 0 907,999 3.44 
Total financing agreements$3,213,056 3.33 %$9,140,944 2.99 %
Less debt issuance costs0 1,123 
Total financing agreements less debt
issuance costs		$3,213,056 $9,139,821 


40
Table of derivative contracts that hedge such repurchase agreements:Contents

MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
  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)Excludes $259,000 of unamortized debt issuance costs at September 30, 2017.


The Company had financing agreements, including repurchase agreements and other forms of secured financing with 318 and 28 counterparties at both September 30, 20172020 and December 31, 2016.2019, respectively. The following table presents information with respect to each counterparty under repurchasefinancing agreements for which the Company had greater than 5% of stockholders’ equity at risk in the aggregate at September 30, 2017:2020:
 
September 30, 2020
Counterparty
Rating (1)
Amount 
at Risk (2)
Weighted 
Average Months 
to Repricing for
Repurchase Agreements		Percent of
Stockholders’ Equity
Counterparty
(Dollars in Thousands)
Barclays BankBBB/Aa3/A$750,922 129.3 %
Credit SuisseBBB+/Baa2/A-574,835 122.4 
Wells FargoA+/Aa2/AA-349,825 113.6 
Goldman Sachs (3)
BBB+/A3/A173,266 36.8 
Athene (4)
BBB+/N/A/BBB+144,245 15.6 
  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


(1)As rated at September 30, 2020 by S&P, Moody’s and Fitch, Inc., respectively.  The counterparty rating presented is the lowest published for these entities.
(1)As rated at September 30, 2017 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
(2)The amount at risk reflects the difference between (a) the amount loaned to the Company through financing 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 million at risk with Wells Fargo Bank, NA and $11.2 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, including accrued interest receivable on such securities.
(3)Includes $20.6 million at risk with contemporaneous repurchaseGoldman Sachs and reverse repurchase agreements.$152.7 million at risk with Goldman Sachs Bank USA.

(4)Includes amounts at risk with various Athene affiliates that collectively exceed 5% of stockholders’ equity.



Senior Secured Term Loan Facility

The Company entered into a $500 million senior secured term loan facility (the “Term Loan Facility”) with certain funds, accounts and/or clients managed by affiliates of Apollo Global Management, Inc. and affiliates of Athene Holding Ltd.

The term loans were issued with original issue discount of 1%. Interest on the outstanding principal amount of the term loans will accrue at a rate of 11% per annum until the third anniversary of the original funding date. Prior to the third anniversary of the funding date, a portion of such interest, in an amount equal to up to 3% per annum, may be capitalized, compounded and added to the unpaid principal amount of the term loans. The interest rate on the term loans will increase by 1% per annum on the third anniversary of the funding date and by an additional 1% per annum on each subsequent anniversary of the funding date. Upon the occurrence and during the continuance of an event of default under the Term Loan Facility, the principal amount of all loans outstanding and, to the extent permitted by applicable law, any interest payments on such term loans or any fees or other amounts owing under the Term Loan Facility that, in either case, are then overdue, would thereafter bear interest at a rate that is 2% per annum in excess of the interest rate otherwise payable on the term loans.

The Company is permitted to voluntarily prepay the amount borrowed under the Term Loan Facility in full at any time without penalty. In addition, the Company may partially prepay the amount borrowed on only one occasion without penalty, provided such partial prepayment be in an amount of not less than $250 million. Installment payments of principal equal to 3.75% of the initial principal amount for the first three years of the Term Loan Facility and 4.50% of the initial principal amount thereafter, together with accrued and unpaid interest on such principal amount, will be required to be made on the last business day of each March, June, September and December beginning on September 30, 2020. Mandatory prepayments of the term loans are required to be made from net cash proceeds received in connection with certain events, that are set out in the credit agreement. Upon the event of a change in control as defined in the credit agreement, the Company is also required to make an offer to repay the loan at par, plus unpaid accrued interest, plus a specified redemption premium. In addition, the Company is required to comply with certain affirmative and negative covenants as specified in the Term Loan Facility that, among other things, impose certain limitations on the Company to incur liens or indebtedness, to make certain investments or enter into new businesses, to modify or waive terms on certain of the Company’s existing debt or to prepay such debt, or to pay dividends in certain circumstances. The Company must also maintain a minimum level of liquidity as defined in the Term Loan Facility. Subsequent to the end of the third quarter, the outstanding balance of the Term Loan Facility was repaid and the Term Loan Facility was terminated. Refer to note 16 for further discussion.
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020


FHLB Advances

(b) Other Financing Agreements
In January 2016,
These arrangements were either entered into prior to 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 resultCompany experiencing financial difficulties related to the COVID-19 pandemic, or, in the case 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 collateralmost recent securitization, after the Company’s exit from forbearance, and were not subject 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, eitherforbearance arrangements that were entered into by the Company or its counterparty may be requiredany negotiations related to pledge cash or securities as collateral.  When the Company’s pledged collateral exceedsexit from those arrangements.

Additional information regarding the required margin,Company’s Other financing arrangements as of September 30, 2020, is included below:

Securitized Debt

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. The weighted average fixed rate on the securitized debt was 2.93% at September 30, 2020 (see Notes 10 and 15 for further discussion).

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 initiateredeem the Convertible Senior Notes, in whole or in part, at a reverse margin call, at which time the counterparty may either return the excess collateral or provide collateralredemption price equal to the Company inprincipal amount redeemed plus accrued and unpaid interest.

The Convertible Senior Notes are the form of cash or equivalent securities.


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

The following table summarizes the fair valueCompany’s senior unsecured obligations and are effectively junior to all of the Company’s collateral positions,secured indebtedness, 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 billionfinancing arrangements, to the extent of the value of the collateral securing such indebtedness and $10.5 billion at September 30, 2017 and December 31, 2016, respectively.
(4) Excludes $259,000 and $210,000equal in right 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
Inpayment to the Company’s consolidated balance sheets, all balances associated withexisting and future senior unsecured obligations, including the repurchase agreement and Swap transactions that are not centrally cleared are presented on a gross basis.Senior Notes.

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 one repurchase agreement counterparty, the underlying agreements provide for an unconditional right of setoff.  

9.     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.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
7. Collateral Positions
 
The Company pledges securities or cash as collateral to its counterparties in relation to certain of its financing arrangements. 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 financing arrangements 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.
10
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 its financing arrangements and/or derivative hedging instruments was $5.2 billion and $11.3 billion at September 30, 2020 and December 31, 2019, respectively. An aggregate of $35.8 million and $57.2 million of accrued interest on those assets had also been pledged as of September 30, 2020 and December 31, 2019, respectively.

8.    Offsetting Assets and Liabilities

Certain of the Company’s financing arrangements 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. In the Company’s consolidated balance sheets, all balances associated with repurchase agreements are presented on a gross basis.

The fair value of financial instruments pledged against the Company’s financing arrangements was $5.2 billion and $11.2 billion at September 30, 2020 and December 31, 2019, respectively. The fair value of financial instruments pledged against the Company’s Swaps was $0 and $2.2 million at September 30, 2020 and December 31, 2019, respectively. In addition, cash that has been pledged as collateral against financing arrangements and Swaps is reported as Restricted cash on the Company’s consolidated balance sheets (see Notes 2(f), 5(c) and 6).


9. Other Liabilities


The following table presents the components of the Company’s Other liabilities at September 30, 20172020 and December 31, 2016:2019:


(In Thousands)September 30, 2020December 31, 2019
Dividends and dividend equivalents payable$22,758 $90,749 
Accrued interest payable14,588 18,238 
Accrued expenses and other29,136 42,819 
Total Other Liabilities$66,482 $151,806 



(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.  The lease provides for aggregate cash payments ranging over time2021, with a mutual option to terminate in February 2021.  For the three and nine months ended September 30, 2020, the Company recorded expense of approximately $2.5$739,000 and $2.1 million per year, paid on a monthly basis, exclusive of escalation charges.  In addition, as part of thisin connection with the lease agreement, the Company has provided the landlord a $785,000 irrevocable standby letter of credit fully collateralized by cash.  The letter of credit may be drawn upon by the landlord in the event that the Company defaults under certain terms of the lease.  In addition, thefor its current corporate headquarters.


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

In addition, in November 2018, the Company hasexecuted a lease through December 31, 2021 for its off-site back-up facility locatedagreement on new office space in Rockville Centre, New York, which provides for, among other things, lease payments totaling $32,000, annually.

(b) Corporate Loan

New York. The Company has entered into a loanplans to relocate its corporate headquarters to this new office space upon the substantial completion of the building. The lease term specified in the agreement is fifteen years with an entity that originates loans and ownsoption to renew for an additional five years. The Company’s current estimate of annual lease rental expense under the related MSRs.new lease, excluding escalation charges which at this point are unknown, is approximately $4.6 million. The loan is secured by certain U.S. Government, Agency and private-label MSRs,Company currently expects to relocate to the space in the first quarter of 2021, but this timing, as well as when it is required to begin making payments and recognize rental and other unencumbered assets owned byexpenses under the borrower. Undernew lease, is dependent on when 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.space is actually available for use.


(c)(b)Representations and Warranties in Connection with Loan Securitization TransactionTransactions


In connection with the loan securitization transactiontransactions 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 vehiclevehicles upon breach of certain representations and warranties. As of September 30, 2017,2020, the Company had no0 reserve established for repurchases of loans and was not aware of any material unsettled repurchase claims that would require the establishment of such a reserve. reserve (see Note 15).


(d)MBS Purchase Commitments(c) Corporate Loans


The Company 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 borrower. At September 30, 2020, Company’s commitment to lend is $32.6 million, of which $14.5 million was undrawn. (see Note 4).

(d)Rehabilitation Loan Commitments

At September 30, 2017,2020, the Company had unfunded commitments to purchase Non-Agency MBS at an estimated price of $3.6 million. The expected settlement amounts are included$73.2 million in the Non-Agency MBS balances presented at fair value on the Company’s consolidated balance sheets,connection with a corresponding liability included in Payable for unsettled MBS and residential whole loan purchases.its purchased Rehabilitation loans (see Note 3).


(e)Residential Whole Loan Purchase Commitments

At September 30, 2017, the Company has agreed, subject to the completion of due diligence, and customary closing conditions, to purchase residential whole loans at fair value at 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, with a corresponding liability 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 Series B Preferred Stock 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.


As a result of the turmoil in the financial markets resulting from the spread of the novel coronavirus and the global COVID-19 pandemic, and in order to preserve liquidity, on March 25, 2020, the Company revoked the previously announced first quarter 2020 quarterly cash dividends on each of the Company's common stock and Series B Preferred Stock. The Series B Preferred Stock dividend of $0.46875 per share had been declared on February 14, 2020, and was to be paid on March 31, 2020, to stockholders of record as of the close of business March 2, 2020. Unpaid dividends on the Company's Series B Preferred Stock accrue without interest. No dividends may be paid or set apart on shares of the Company's common stock unless full cumulative dividends on the Series B Preferred Stock for all past dividend periods that have ended have been or contemporaneously are paid in cash, or a sum sufficient for such payment is set apart for payment. In addition, pursuant to the
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

The following table presents cash dividends declared bynow-terminated forbearance agreements that the Company entered into subsequent to the end of the first quarter, the Company was prohibited from paying dividends on its Series B Preferred Stock from Januaryduring the forbearance period, and therefore suspended the payment of dividends on the Series B Preferred Stock for the quarter ended June 30, 2020.

On July 1, 2017 through 2020, the Company announced that it had reinstated the payment of dividends on its Series B Preferred Stock and declared a preferred stock dividend of $0.9375 per share, payable on July 31, 2020 to Series B Preferred stockholders of record as of July 15, 2020. Upon payment of this dividend, the Company paid in full all accumulated but previously unpaid dividends on its Series B Preferred Stock.
On August 12, 2020, the Company declared a dividend on its Series B preferred stock of $0.46875 per share. This dividend was paid on September 30, 2017:2020, to Series B preferred stockholders of record as of September 8, 2020.


Issuance of 6.50% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”)

On February 28, 2020, the Company amended its charter through the filing of articles supplementary to reclassify 12,650,000 shares of the Company’s authorized but unissued common stock as shares of the Company’s Series C Preferred Stock. On March 2, 2020, the Company completed the issuance of 11.0 million shares of its Series C Preferred Stock 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 total net proceeds the Company received from the offering were approximately $266.0 million, after deducting offering expenses and the underwriting discount.

The Company’s Series C Preferred Stock is entitled to receive dividends (i) from and including the original issue date to, but excluding, March 31, 2025, at a fixed rate of 6.50% per year on the $25.00 liquidation preference and (ii) from and including March 31, 2025, at a floating rate equal to three-month LIBOR plus a spread of 5.345% per year of the $25.00 per share 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 C Preferred Stock are payable quarterly in arrears on or about March 31, June 30, September 30 and December 31 of each year. The Series C Preferred Stock is not redeemable by the Company prior to March 31, 2025, except under circumstances where it is necessary to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and upon the occurrence of certain specified change in control transactions. On or after March 31, 2025, the Company may, at its option, subject to certain procedural requirements, redeem any or all of the shares of the Series C Preferred Stock for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends thereon (whether or not authorized or declared) to, but excluding, the redemption date.

The Series C 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 6 or more quarterly periods (whether or not consecutive).  Under such circumstances, the Series Preferred Stock will be entitled to vote to elect 2 additional directors to the Company’s 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 C Preferred Stock cannot be made without the affirmative vote of holders of at least 66 2/3 of the outstanding shares of Series C Preferred Stock.

Pursuant to the now-terminated forbearance agreements that the Company had previously entered into, the Company was prohibited from paying dividends on its Series C Preferred Stock during the forbearance period. On July 1, 2020, the Company announced that it had reinstated the payment of dividends on its Series C Preferred Stock and declared a preferred stock dividend of $0.53264 per share, payable on July 31, 2020 to the Series C Preferred stockholders of record as of July 15, 2020. Upon payment of this dividend, the Company paid in full all accumulated but previously unpaid dividends on its Series C Preferred Stock.

On August 12, 2020, the Company declared a dividend on its Series C preferred stock of $0.40625 per share. This dividend was paid on September 30, 2020, to Series C preferred stockholders of record as of September 8, 2020.
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
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 byOn August 6, 2020, the Company declared a regular cash dividend of $0.05 per share of common stock.  The dividend will be paid on its common stock from January 1, 2017 through October 30, 2020, to stockholders of record on September 30, 2017:2020.
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
 
(1)  At September 30, 2017, the Company had accrued dividends and dividend equivalents payable of $79.6 million related to the common stock dividend declared on September 14, 2017.

(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 months ended September 30, 2017. The Company did not issue any common stock through public offerings during the nine months ended September 30, 2016.

Share Issue Date Shares Issued Gross Proceeds Per Share Gross Proceeds
(In Thousands, Except Per Share Amounts)       
May 10, 2017 23,000
 $7.85
 $180,550
(1)

(1) The Company incurred approximately $412,000 of expenses in connection with this equity offering.

(d) Discount Waiver, Direct Stock Purchase and Dividend Reinvestment Plan (“DRSPP”)
 
On September 16, 2016,October 15, 2019, 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 159.0 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, 2017, 13.02020, approximately 8.8 million shares of common stock remained available for issuance pursuant to the DRSPP shelf registration statement.
 
During the three and nine months ended September 30, 2017,2020, the Company issued 513,5094,374 and 1,516,307137,740 shares of common stock through the DRSPP, raising net proceeds of approximately $4.3 million$11,688 and $12.2 million,$752,095, respectively.  FromSince the inception of the DRSPP in September 2003 through September 30, 2017,2020, the Company issued 32,899,09234,516,508 shares pursuant to the DRSPP, raising net proceeds of $275.1$287.3 million.


(d) At-the-Market Offering Program

38
TableOn August 16, 2019 the Company entered into a distribution agreement under the terms of Contentswhich 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 2 percent of the gross sales price per share for any shares of common stock sold under the distribution agreement.
MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSDuring the nine months ended September 30, 2020, the Company did 0t sell any shares of common stock through the ATM Program. At September 30, 2020, approximately $390.0 million remained outstanding for future offerings under this program.
SEPTEMBER 30, 2017


(e)  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, 2017.2020.  At September 30, 2017,2020, 6,616,355 shares remained authorized for repurchase under the Repurchase Program. Please refer to note 16 for further discussion.


(f) Warrants

On June 15, 2020, the Company entered into an Investment Agreement with Apollo and Athene (together the “Purchasers”), under which the Company agreed to issue to the Purchasers warrants (the “Warrants”) to purchase, in the
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
aggregate, 37,039,106 shares (subject to adjustment in accordance with their terms) of the Company’s common stock. The Warrants are exercisable at the holder’s option at any time until the date that is the later of (i) June 15, 2025 and (ii) the first anniversary of the repayment of the Term Loan Facility (See Note 6). One half of the Warrants have an exercise price of $1.66 per share and the other half have an exercise price of $2.08 per share. The Investment Agreement and the Term Loan Facility (See Note 6) were entered into simultaneously and the $495.0 million of proceeds received were allocated between the debt ($481.0 million) and the warrants ($14.0 million). The amount allocated to the warrants was recorded in Additional paid-in capital on the Company’s consolidated balance sheets.

(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, 2017:2020:
Three Months Ended
September 30, 2020		Nine Months Ended
September 30, 2020
(In Thousands)Net Unrealized
Gain/(Loss) on
AFS Securities		Net 
Gain/(Loss)
on Swaps
Net Unrealized Gain/(Loss) on Financing Agreements (3)
Total 
AOCI		Net Unrealized
Gain/(Loss) on
AFS Securities		Net 
Gain/(Loss)
on Swaps
Net Unrealized Gain/(Loss) on Financing Agreements (3)
Total 
AOCI
Balance at beginning of period$52,889 $(7,176)$0 $45,713 $392,722 $(22,675)$0 $370,047 
OCI before reclassifications15,082 0 (22,652)(7,570)408,585 (50,127)(22,652)335,806 
Amounts reclassified from AOCI (1)
(60)7,176 0 7,116 (733,396)72,802 0 (660,594)
Net OCI during the period (2)
15,022 7,176 (22,652)(454)(324,811)22,675 (22,652)(324,788)
Balance at end of period$67,911 $0 $(22,652)$45,259 $67,911 $0 $(22,652)$45,259 
  Three Months Ended 
 September 30, 2017		 Nine Months Ended 
 September 30, 2017
(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
Balance at beginning of period $668,223
 $(35,841) $632,382
 $620,403
 $(46,721) $573,682
OCI before reclassifications 6,988
 5,791
 12,779
 71,188
 16,671
 87,859
Amounts reclassified from AOCI (1)
 (14,935) —
 (14,935) (31,315) —
 (31,315)
Net OCI during the period (2)
 (7,947) 5,791
 (2,156) 39,873
 16,671
 56,544
Balance at end of period $660,276
 $(30,050) $630,226
 $660,276
 $(30,050) $630,226


(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).
(3) Net Unrealized Gain/(Loss) on Financing Agreements at Fair Value due to changes in instrument-specific credit risk.

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, 2019:
Three Months Ended
September 30, 2019		Nine Months Ended
September 30, 2019
(In Thousands)Net Unrealized
Gain/(Loss) on
AFS Securities		Net Gain/(Loss) on SwapsTotal AOCINet Unrealized
Gain/(Loss) on
AFS Securities		Net 
Gain/(Loss) on Swaps		Total AOCI
Balance at beginning of period$439,898 $(28,114)$411,784 $417,167 $3,121 $420,288 
OCI before reclassifications5,483 (233)5,250 50,085 (30,384)19,701 
Amounts reclassified from AOCI (1)
(14,499)(685)(15,184)(36,370)(1,769)(38,139)
Net OCI during the period (2)
(9,016)(918)(9,934)13,715 (32,153)(18,438)
Balance at end of period$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, 2016:
47
  Three Months Ended 
 September 30, 2016		 Nine Months Ended 
 September 30, 2016
(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
Balance at beginning of period $625,697
 $(131,971) $493,726
 $585,250
 $(69,399) $515,851
OCI before reclassifications 64,350
 22,769
 87,119
 124,763
 (39,803) 84,960
Amounts reclassified from AOCI (1)
 (7,314) —
 (7,314) (27,280) —
 (27,280)
Net OCI during the period (2)
 57,036
 22,769
 79,805
 97,483
 (39,803) 57,680
Balance at end of period $682,733
 $(109,202) $573,531
 $682,733
 $(109,202) $573,531

(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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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

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, 2017:2020:
 Three Months Ended 
 September 30, 2017		 Nine Months Ended 
 September 30, 2017		 Three Months Ended
September 30, 2020		Nine Months Ended
September 30, 2020
Details about AOCI Components Amounts Reclassified from AOCI Affected Line Item in the Statement
Where Net Income is Presented		Details about AOCI ComponentsAmounts Reclassified from AOCIAffected Line Item in the Statement
Where Net Income is Presented
(In Thousands)      (In Thousands)
AFS Securities:     AFS Securities:
Realized gain on sale of securities $(14,935) $(30,283) Net gain on sales of MBS and U.S. Treasury securitiesRealized gain on sale of securities$(60)$(389,127)Net realized (loss)/gain on sales of residential mortgage securities and residential whole loans
OTTI recognized in earnings —
 (1,032) Net impairment losses recognized in earnings
Impairment recognized in earningsImpairment recognized in earnings0 (344,269)Other, net
Total AFS Securities $(14,935) $(31,315) Total AFS Securities$(60)$(733,396)
Swaps designated as cash flow hedges:Swaps designated as cash flow hedges:
Reclassification adjustment for losses related to hedging instruments included in net incomeReclassification adjustment for losses related to hedging instruments included in net income7,176 72,802 Other, net
Total Swaps designated as cash flow hedgesTotal Swaps designated as cash flow hedges7,176 72,802 
Total reclassifications for period $(14,935) $(31,315) Total reclassifications for period$7,116 $(660,594)
 

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, 2016:2019:
Three Months Ended
September 30, 2019		Nine Months Ended
September 30, 2019
Details about AOCI ComponentsAmounts Reclassified from AOCIAffected Line Item in the Statement
Where Net Income is Presented
(In Thousands)
AFS Securities:
Realized gain on sale of securities$(14,499)$(36,370)Net realized (loss)/gain on sales of residential mortgage securities and residential whole loans
Total AFS Securities$(14,499)$(36,370)
Amortization of de-designated hedging instruments(685)(1,769)
Total reclassifications for period$(15,184)$(38,139)

48
  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, on securities for which OTTI had been recognized in earnings in prior periods.

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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020



13.12.    EPS Calculation
 
The following table presents a reconciliation of the earningsearnings/(loss) and shares used in calculating basic and diluted earnings/(loss) per share for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended
September 30,		Nine Months Ended
September 30,
(In Thousands, Except Per Share Amounts)2020201920202019
Basic Earnings/(Loss) per Share:
Net income/(loss) to common stockholders$87,210 $95,599 $(725,207)$277,496 
Dividends declared on preferred stock(8,219)(3,750)(21,578)(11,250)
Dividends, dividend equivalents and undistributed earnings allocated to participating securities(325)(280)(91)(808)
Net income/(loss) to common stockholders - basic$78,666 $91,569 $(746,876)$265,438 
Basic weighted average common shares outstanding453,323 451,020 453,170 450,641 
Basic Earnings/(Loss) per Share$0.17 $0.20 $(1.65)$0.59 
Diluted Earnings/(Loss) per Share:
Net income/(loss) to common stockholders - basic$78,666 $91,569 (746,876)265,438 
Interest expense on Convertible Senior Notes3,898 3,879 0 5,085 
Net income/(loss) to common stockholders - diluted$82,564 $95,448 $(746,876)$270,523 
Basic weighted average common shares outstanding453,323 451,020 453,170 450,641 
Effect of assumed conversion of Convertible Senior Notes to common shares28,920 28,920 0 12,712 
Effect of incremental shares issued on assumed conversion of Warrants11,297 0 0 0 
Diluted weighted average common shares outstanding (1)
493,540 479,940 453,170 463,353 
Diluted Earnings/(Loss) per Share$0.17 $0.20 $(1.65)$0.58 

(1)At September 30, 2020, the Company had approximately 39.0 million equity instruments outstanding that were not included in the calculation of diluted EPS for the three and nine months ended September 30, 20172020, as their inclusion would have been anti-dilutive.  These equity instruments reflect RSUs (based on current estimate of expected share settlement amount) with a weighted average grant date fair value of $6.29 and 2016:approximately 37.0 million warrants with a weighted average exercise price of $1.87 per share. These equity instruments may have a dilutive impact on future EPS.

During the nine months ended September 30, 2020, the Convertible Senior Notes were determined to be anti-dilutive and were not 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. The Convertible Senior Notes may have a dilutive impact on future EPS.

  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, the Company had an aggregate of 2.5 million equity instruments outstanding that were not included in the calculation of diluted EPS for the three and nine months ended September 30, 2017, 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 million RSUs (based on current estimate of expected share settlement amount) with a weighted average grant date fair value of $6.49. These equity instruments may have a dilutive impact on future 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, 2015June 10, 2020 (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 12.018.0 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
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
September 30, 2017,2020, approximately 6.914.3 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 1.52.0 million shares of common stock in any one year and no award may be granted to any person who, assuming exercise of all Options and payment of all awards held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of the Company’s common stock.  Unless previously terminated by the Board, awards may be granted under the Equity Plan until May 20, 2025.June 10, 2030.
 
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, 20172020 are designated to be settled in shares of the Company’s common stock.  The Company granted 497,507 and 1,702,220 RSUs during the three and nine months ended September 30, 2020, respectively. The Company did not0t grant any RSUs during the three months ended September 30, 2017 and 20162019 and granted 898,945 and 728,195912,525 RSUs during the nine months ended September 30, 2017 and 2016, respectively.2019. There were no0 RSUs forfeited during the nine months ended September 30,

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

2017. During 2020 and 20,000 RSUs forfeited during the nine months ended September 30, 2016 an aggregate of 10,000 RSUs were forfeited.2019. All RSUs outstanding at September 30, 20172020 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, 20172020 and December 31, 2016,2019, the Company had unrecognized compensation expense of $5.0$8.3 million and $3.6$5.5 million, respectively, related to RSUs.  The unrecognized compensation expense at September 30, 20172020 is expected to be recognized over a weighted average period of 1.9 years.


Restricted Stock
 
The Company granted 79,545 shares of restricted common stock during the nine months ended September 30, 2020, and the Company did not award0t grant any shares of restricted common stock during the nine months ended September 30, 2017 and 2016.2019. At September 30, 2017 and December 31, 2016,2020, 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 not make anymade dividend equivalent payments in respect of such instruments of approximately $276,000 during the nine months ended September 30, 20172020 and made payments of approximately $2,000$276,000 and $5,000 in respect of such separate instruments$773,000 during the three and nine months ended September 30, 2016,2019, 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.
 
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, 2017 and 2016:
  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 expense2020 and 2019:
Three Months Ended
September 30,		Nine Months Ended
September 30,
(In Thousands)2020201920202019
RSUs$2,267 $1,288 $5,094 $4,724 
Total$2,267 $1,288 $5,094 $4,724 
50
Table 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.Contents

MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020

(b)  Employment Agreements
 
At September 30, 2017,2020, the Company had employment agreements with three3 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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SEPTEMBER 30, 2017

(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, 20172020 and 2016:2019:
 
 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(In Thousands)2020201920202019
Non-employee directors $125
 $52
 $339
 $173
Non-employee directors$75 $134 $(1,483)$459 
Total $125
 $52
 $339
 $173
Total$75 $134 $(1,483)$459 
 
The following table presents the aggregate amount of income deferred by participants of the Deferred Plans through September 30, 20172020 and December 31, 20162019 that had not been distributed and the Company’s associated liability for such deferrals at September 30, 20172020 and December 31, 2016:2019:
 
September 30, 2020December 31, 2019
(In Thousands)
Undistributed Income Deferred (1)
 Liability Under Deferred Plans
Undistributed Income Deferred (1)
 Liability Under Deferred Plans
Non-employee directors$2,074 $1,114 $2,349 $3,071 
Total$2,074 $1,114 $2,349 $3,071 
  September 30, 2017 December 31, 2016
(In Thousands)
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
Total $1,525
 $2,061
 $1,066
 $1,263


(1)  Represents the cumulative amounts that were deferred by participants through September 30, 20172020 and December 31, 2016,2019, 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, 20172020 and 2016,2019, the Company recognized expenses for matching contributions of $87,500$120,000 and $86,000,$94,000, respectively, and $262,500$360,000 and $259,000 and$323,000 for the nine months ended September 30, 20172020 and 2016,2019, respectively.
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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

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 CollateralResidential Whole Loans, at Fair Value
 
The Company determines the fair value of U.S. Treasury securities obtained as collateral and the associated obligation to return securities obtained as collateral are based upon pricesits residential whole loans held at fair value after considering valuations obtained from a third-party pricing service, whichthat 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, estimates of fair value are indicativederived 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, the estimated value of the collateral, expected costs and estimated 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 activity.  Securities obtained as collateralcolor may be used in determining the appropriate discount yield. The Company’s residential whole loans held at fair value are classified as Level 13 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. The Company’s Agency MBS are classified as Level 2 in the fair value hierarchy. During the quarter ended June 30, 2020, the Company sold its remaining holdings of Agency MBS.
 
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.
 
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
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. As of September 30, 2020, the Company has sold substantially all of its holdings of Legacy Non-Agency MBS and substantially reduced its holdings of other Non-Agency MBS and CRT securities.


Term Notes Backed by MSR RelatedMSR-Related Collateral


The Company’s valuation process for term notes backed by MSR relatedMSR-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 including indicativetaken 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. Based on its evaluation of the observability of the data used in its fair value estimation process, these assets are classified as Level 2 in the fair value hierarchy.

Swaps
As previously disclosed, in response to the turmoil in the financial markets resulting from the COVID-19 pandemic experienced during the three months ended March 31, 2020, the Company unwound all of its Swap hedging transactions late in the first quarter in order to recover previously posted margin. Prior to their termination, valuations provided by the central clearing house were used for purposes of determining the fair value of the Company’s Swaps. Such valuations obtained fromwere tested with internally developed models that applied readily observable market parameters.  Swaps were classified as Level 2 in the fair value hierarchy.

Financing Agreements, at Fair Value

Agreements with mark-to-market collateral provisions

These agreements are secured and subject to margin calls and their base interest rates reset frequently to market based rates. As a third-party pricing serviceresult, no credit valuation adjustment is required, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with mark-to-market collateral provisions held at fair value are classified as Level 2 in the fair value hierarchy if the credit spreads used to price the instrument reset frequently, which is typically the case with shorter term repurchase agreement contracts collateralized by securities. Financing agreements with mark-to-market collateral provisions that are reviewedtypically longer term and are collateralized by residential whole loans where the Company and may be adjusted to ensure they reflect a realistic exit price atcredit spread paid over the valuation date givenbase rate on the structural features of these securities. As this process includes significant unobservable inputs, these securitiesinstrument is not reset frequently are classified as Level 3 in the fair value hierarchy.



Agreements with non-mark-to-market collateral provisions
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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 determinesThese agreements are secured, but not subject to margin calls, and their base interest rates reset frequently to market based rates. As a result, a credit valuation adjustment would only be required if there were a significant decrease in collateral value, and the primary factor in determining their fair value of its residential whole loans held at fair value after considering valuations obtained fromis the credit spread paid over the base rate, which is a third-party who specializes in providing valuations of residential mortgage loans trading activity observed innon observable input as it is determined based on negotiations with the marketplace.counterparty. The Company’s residential whole loansfinancing agreements with non-mark-to-market collateral provisions held at fair value are classified as Level 3 in the fair value hierarchy.


SwapsSenior Secured Credit Agreement (Term Loan Facility)

As of September 30, 2017, all of the Company’s Swaps are cleared by a central clearing house. Valuations provided by the clearing house are used for purposes of determining theThe estimated fair value of the Company’s Swaps. SuchTerm Loan Facility was determined by management based on a valuation received from a third party that specializes in providing valuations obtained are tested with internally developed models that apply readily observableon financial instruments. The most significant inputs to such valuation, market parameters.   Asinterest rates and the Company’s Swaps are subject to the clearing house’s margin requirements, no credit valuation adjustment was considered necessary in determining the fair value of such instruments.  Beginning in January 2017, variation margin paymentsyield on the Company’s cleared Swapspublicly traded financial instruments, 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.observable. The effect of this change is to reduce what would have otherwise been reported asCompany’s Term Loan Facility held at fair value of the Swap. Swaps areis classified as Level 2 in the fair value hierarchy.

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020


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.

The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of September 30, 20172020 and December 31, 2016,2019, on the consolidated balance sheets by the valuation hierarchy, as previously described:


Fair Value at September 30, 20172020
 
(In Thousands)Level 1Level 2Level 3Total
Assets:
Residential whole loans, at fair value$0 $0 $1,229,664 $1,229,664 
Non-Agency MBS0 56,430 0 56,430 
CRT securities0 96,335 0 96,335 
Term notes backed by MSR-related collateral0 234,091 0 234,091 
Total assets carried at fair value$0 $386,856 $1,229,664 $1,616,520 
Liabilities:
Agreements with non-mark-to-market collateral provisions$0 $0 $1,727,407 $1,727,407 
Agreements with mark-to-market collateral provisions0 258,537 1,231,734 1,490,271 
Senior secured credit agreement0 473,993 0 473,993 
Securitized debt0 388,790 0 388,790 
Total liabilities carried at fair value$0 $1,121,320 $2,959,141 $4,080,461 
(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, 20162019
(In Thousands)Level 1Level 2Level 3Total
Assets:    
Residential whole loans, at fair value$0 $0 $1,381,583 $1,381,583 
Non-Agency MBS0 2,063,529 0 2,063,529 
Agency MBS0 1,664,582 0 1,664,582 
CRT securities0 255,408 0 255,408 
Term notes backed by MSR-related collateral0 1,157,463 0 1,157,463 
Total assets carried at fair value$0 $5,140,982 $1,381,583 $6,522,565 
 
54
(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, 20172020

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


The following table presents additional information for the three and nine months ended September 30, 20172020 and 20162019 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,Nine Months Ended September 30,
(In Thousands)2020
2019 (1)
2020
2019 (1)(2)
Balance at beginning of period$1,200,981 $1,438,827 $1,381,583 $1,471,263 
Purchases (2)
0 85,855 0 210,030 
Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings58,863 13,185 (13,683)33,312 
Cash collections, net of liquidation gains/(losses)(21,721)(31,212)(65,934)(94,821)
  Sales and repurchases(929)0 (19,460)(1,216)
  Transfer to REO(7,530)(53,486)(52,842)(165,399)
Balance at end of period$1,229,664 $1,453,169 $1,229,664 $1,453,169 
  
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) Excluded fromIncluded in the table aboveactivity presented for the three months ended September 30, 2019 are approximately $120.4 million and $92.8$87.0 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, 2017,2019, but for which the closing of the purchase transaction occurred during the three months ended September 30, 2017.2019.

(2)Included in the activity presented for the nine months ended September 30, 2019is 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.

The following table presents additional information for the three and nine months ended September 30, 2017 and 20162019 about the Company’s investments in term notes backed by MSR relatedMSR-related collateral, heldwhich were 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)20192019
Balance at beginning of period$1,106,026 $538,499 
Purchases0 573,137 
  Collection of principal(3,920)(12,897)
Changes in unrealized gains2,024 5,391 
Transfer to Level 2(1,104,130)(1,104,130)
Balance at end of period$0 $0 


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MFA FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
The following table presents additional information for the three and nine months ended September 30, 2020 about the Company’s financing agreements with non-mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:

Agreements with Non-mark-to-market Collateral Provisions
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)20202020
Balance at beginning of period$0 $0 
Transfer from Level 22,036,597 2,036,597 
Payment of principal(312,638)(312,638)
Changes in unrealized losses3,448 3,448 
Balance at end of period$1,727,407 $1,727,407 
  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 duringfollowing table presents additional information for the three months ended September 30, 2017 and three and nine months ended September 30, 2016.2020 about the Company’s financing agreements with mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:

Agreements with Mark-to-market Collateral Provisions
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)20202020
Balance at beginning of period$0 $0 
Transfer from Level 21,386,592 1,386,592 
Payment of principal(156,032)(156,032)
Changes in unrealized losses1,174 1,174 
Balance at end of period$1,231,734 $1,231,734 


At June 30, 2020, the Company’s financing agreements with non-mark-to-market collateral provisions and the Company’s financing agreements with mark-to-market collateral provisions had just been issued and were therefore classified as Level 2 since their values were based on market transactions. However, market information for similar financings was not available at September 30, 2020 and the Company valued these financing instruments based on unobservable inputs.
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SEPTEMBER 30, 20172020

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, 20172020 and December 31, 2016:2019:


September 30, 2020
(Dollars in Thousands)
Fair Value (1)
Valuation TechniqueUnobservable Input
Weighted Average (2)
Range
Residential whole loans, at fair value$774,427 Discounted cash flowDiscount rate3.9 %3.2-8.0%
Prepayment rate3.9 %0.0-9.3%
Default rate6.2 %0.0-30.3%
Loss severity12.7 %0.0-100.0%
$454,760 Liquidation modelDiscount rate8.1 %6.7-50.0%
Annual change in home prices1.9 %(0.3)-5.5%
Liquidation timeline
(in years)
1.80.1-4.8
Current value of underlying properties (3)
$734 $12-$4,500
Total$1,229,187 
  September 30, 2017
(Dollars in Thousands) 
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%
      Prepayment rate 7.7% 0.0-13.0%
      Default rate 4.1% 0.0-9.8%
      Loss severity 12.6% 0.0-100.0%
           
  $488,654
 Liquidation model Discount rate 8.4% 6.7-50.0%
      Annual change in home prices 2.7% (4.5)-9.7%
      
Liquidation timeline
(in years)
 1.6
 0.1-4.5
      
Current value of underlying properties (3)
 $669
 $15-$4,900
Total $792,820
        


December 31, 2019
(Dollars in Thousands)
Fair Value (1)
Valuation TechniqueUnobservable Input
Weighted Average (2)
Range
Residential whole loans, at fair value$829,842 Discounted cash flowDiscount rate4.2 %3.8-8.0%
Prepayment rate4.5 %0.7-18.0%
Default rate4.0 %0.0-23.0%
Loss severity12.9 %0.0-100.0%
$551,271 Liquidation modelDiscount rate8.0 %6.2-50.0%
Annual change in home prices3.7 %2.4-8.0%
Liquidation timeline
(in years)
1.80.1-4.5
Current value of underlying properties (3)
$684 $10-$4,500
Total$1,381,113 
  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$477,000 and $45.4 million$470,000 of loans for which management considers the purchase price continues to reflect the fair value of such loans at September 30, 20172020 and December 31, 2016,2019, 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$383,000 and $320,000$365,000 as of September 30, 20172020 and December 31, 2016,2019, respectively.




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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020

The following table presentsChanges in market conditions, as well as changes in the difference between theassumptions or methodology used to determine 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 changescould 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 valuea significant increase 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 determinedecrease in the fair value of certain financial instruments couldresidential whole loans. Loans valued using a discounted cash flow model are most sensitive to changes in the discount rate assumption, while loans valued using the liquidation model technique are most sensitive to changes in the current value of the underlying properties and the liquidation timeline. Increases in discount rates, default rates, loss severities, or liquidation timelines, either in isolation or collectively, would generally result in a different estimate oflower fair value atmeasurement, whereas increases in the reporting date.  The Company uses inputs that are current asor expected value 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 theunderlying properties, in isolation, would result in a higher fair value hierarchymeasurement. In practice, changes in valuation assumptions may not occur in isolation and the changes in any particular assumption may result in changes in other assumptions, which could offset or amplify the impact on a quarterly basis, and management may conclude that its financial instruments should be reclassified to a different level in the future.overall valuation.


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SEPTEMBER 30, 2017

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at September 30, 20172020 and December 31, 2016:2019:
 
September 30, 2020September 30, 2020December 31, 2019
Level in Fair Value HierarchyCarrying
Value		Estimated Fair ValueCarrying
Value		Estimated Fair Value
(In Thousands)
Financial Assets:
Residential whole loans, at carrying value3$4,387,559 $4,528,630 $6,069,370 $6,248,745 
Residential whole loans, at fair value31,229,664 1,229,664 1,381,583 1,381,583 
Non-Agency MBS256,430 56,430 2,063,529 2,063,529 
Agency MBS20 0 1,664,582 1,664,582 
CRT securities296,335 96,335 255,408 255,408 
MSR-related assets (1)
2 and 3252,183 252,183 1,217,002 1,217,002 
Cash and cash equivalents1884,171 884,171 70,629 70,629 
Restricted cash15,303 5,303 64,035 64,035 
Financial Liabilities (2):
Financing agreements with non-mark-to-market collateral provisions31,727,407 1,727,407 0 0 
Financing agreements with mark-to-market collateral provisions31,231,734 1,231,734 4,741,971 4,753,070 
Financing agreements with mark-to-market collateral provisions2258,537 258,537 4,397,850 4,403,139 
Senior secured credit agreement2473,993 473,993 0 0 
Securitized debt (3)
2837,683 839,914 570,952 575,353 
Convertible senior notes2224,867 216,919 223,971 244,088 
Senior notes196,900 94,311 96,862 103,231 
  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)Includes $18.1 million and $59.5 million of MSR-related assets that are measured at fair value on a non-recurring basis that are classified as Level 3 in the fair value hierarchy at September 30, 2020 and December 31, 2019, respectively.
(1) (2)Carrying value of securitized debt, Convertible Senior Notes, Senior Notes and certain repurchase agreements is net of associated debt issuance costs.

(3)Includes Securitized debt that is carried at amortized cost basis and fair value.
In addition to the methodologies used to determine the fair value of the Company’s financial assets and liabilities reported
Other Assets 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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SEPTEMBER 30, 2017

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, 20172020 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$74.9 million and $91.1$193.5 million, respectively.respectively, at the time of foreclosure. The Company classifies fair value measurements of REO as Level 3 in the fair value hierarchy.



16.
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SEPTEMBER 30, 2020
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(s)2(q) 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 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,The following table summarizes the key details of the Company’s loan securitization transactions as partof September 30, 2020 and December 31, 2019:
(Dollars in Thousands)September 30, 2020December 31, 2019
Aggregate unpaid principal balance of residential whole loans sold$1,681,500 $1,290,029 
Face amount of Senior Bonds issued by the VIE and purchased by third-party investors$1,202,616 $802,817 
Outstanding amount of Senior Bonds, at carrying value$448,893 (1)$570,952 (1)
Outstanding amount of Senior Bonds, at fair value$388,790 $0 
Outstanding amount of Senior Bonds, total$837,683 $570,952 
Weighted average fixed rate for Senior Bonds issued2.93 %(2)3.68 %(2)
Weighted average contractual maturity of Senior Bonds36 years(2)30 years(2)
Face amount of Senior Support Certificates received by the Company (3)
$266,355 $275,174 
Cash received$1,193,969 $802,815 
(1)Net of $2.2 million and $2.9 million of deferred financing costs at September 30, 2020 and December 31, 2019, respectively.
(2)At September 30, 2020 and December 31, 2019, $743.9 million and $493.2 million, respectively, of Senior Bonds sold in securitization transactions contained a contractual coupon step-up feature whereby the coupon increases by either 100 or 300 basis points or more 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.

During the three and nine months ended September 30, 2020, the Company issued Senior Bonds with a current face of $372.8 million and $399.8 million to third-party investors for proceeds of $372.8 million and $391.2 million, respectively, before offering costs and accrued interest. The Senior Bonds issued by the Company during the nine months ended September 30, 2020 are presented at fair value on its consolidated balance sheets as a result of a loan securitization transaction,fair value election made at the Company sold residential wholetime of issuance.

As of September 30, 2020 and December 31, 2019, as a result of the transactions described above, securitized loans with an aggregate unpaid principal balancea carrying value of approximately $219.8$568.6 million comprised of approximately $137.0and $186.4 million Residentialare included in “Residential whole loans, at carrying value, (with unpaid principal balance of $176.6 million) and approximately $44.4 million of Residential whole” securitized loans atwith a 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 $147.8approximately $521.2 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$567.4 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 millionare included 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.

“Residential whole loans,
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172020


As of September 30, 2017, as a result of the transaction described above, securitized loansat fair value,” and REO with a carrying value of approximately $131.3$80.3 million and $137.8 million are included in “Residential whole loans, at carrying value” and securitized loans with a fair value of approximately $40.4 million are included in “Residential whole loans, at fair value,”“Other assets” on the Company’s consolidated balance sheets.sheets, respectively. As of September 30, 2017,2020 and December 31, 2019, the aggregate carrying value of SoldSenior Bonds issued by consolidated VIEs was $137.3 million.$837.7 million and $571.0 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.


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

Included on the completionCompany’s consolidated balance sheets as of September 30, 2020 and December 31, 2019 are a total of $5.6 billion and $7.4 billion, respectively, of residential whole loans, of which approximately $4.4 billion and $6.1 billion, respectively, are reported at carrying value and $1.2 billion and $1.4 billion, respectively, are reported at fair value. These assets, and certain of the Company’s first MBS resecuritization transaction in October 2010,REO assets, are directly owned by certain trusts established by the Company had not transferred assets to VIEs or QSPEsacquire the loans and other than acquiring MBS issued by such entities had no other involvementestablished in connection with VIEs or QSPEs.the Company’s loan securitization transactions. The Company has assessed that these entities are required to be consolidated (see Notes 3 and 5(a)).



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SEPTEMBER 30, 20172020

16. Subsequent Events
Residential Whole Loans (including Residential Whole Loans transferred to consolidated VIEs)

Payoff of remaining balance of Term Loan Facility
Included
On October 9, 2020, the Company repaid $400 million of the principal outstanding on the Term Loan Facility (see note 6) and the remaining principal balance of this facility of $81,250,000 was repaid on October 30, 2020. The repayments were made without penalty or yield maintenance. Upon the full repayment, the Term Loan Facility was terminated.


Securitization of Non-QM loans

Subsequent to the end of the third quarter the Company closed on a $570 million Non-QM securitization that generated $125.1 million of additional liquidity.


Share Repurchase Authorization

On November 2, 2020, the Company’s consolidated balance sheets asBoard of September 30, 2017Directors authorized a share repurchase program under which the Company may repurchase up to $250 million of its common stock through the end of 2022. The Board’s authorization replaces the authorization under the Company’s existing stock repurchase program that was adopted in December 2013, which authorized the Company to repurchase up to 10 million shares of common stock and December 31, 2016 are a total of $1.7 billion and $1.4 billion of residential whole loans, ofunder which approximately $639.26.6 million shares remained available for repurchase

The stock repurchase program does not require the purchase of any minimum number of shares. The timing and $590.5 million are reportedextent to which the Company repurchases its shares will depend upon, among other things, market conditions, share price, liquidity, regulatory requirements and other factors, and repurchases may be commenced or suspended at carrying value and $1.1 billion and $814.7 million are reported at fair value, respectively. The inclusion of these assets arises fromany time without prior notice. Acquisitions under the Company’s interestsshare repurchase program may be made in certain entities established to acquire the loans and an entityopen market, through privately negotiated transactions or block trades or other means, in connectionaccordance with its loan securitization transaction. applicable securities laws.

The Company expects to fund the share repurchases from cash balances and future investment portfolio run-off. The Company currently has assessed that these entities are required to be consolidated. During the three and nine months ended September 30, 2017, the Company recognized interest income from residential whole loans reported at carrying valueapproximately 453.3 million shares 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 valuecommon stock outstanding.
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Table 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)Contents




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, 2016.2019.


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: risks related to the ongoing spread of the novel coronavirus and the COVID-19 pandemic, including its effects on the general economy and our business, financial position and results of operations (including, among other potential effects, increased delinquencies and greater than expected losses in our whole loan portfolio); changes in interest rates and the market (i.e., fair) value of our MBS;residential whole loans, MBS 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 us 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 our portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash flows; 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 toin 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 our 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 our investments in MSR-related assets, including servicing, regulatory and economic risks, risks associated with our investments in loan originators, 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,
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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.

As previously disclosed, related to the impact of the unprecedented conditions created by the COVID-19 pandemic, during the first and second quarters we engaged in asset sales and took other actions that significantly changed our asset composition. In particular, we sold our remaining Agency MBS and substantially all of our Legacy Non-Agency MBS portfolio, and substantially reduced our investments in MSR-related assets and CRT securities. During the third quarter we sold our remaining Legacy Non-Agency MBS. As a result of these actions, our primary investment asset as of September 30, 2020 is our residential whole loan portfolio. During the second quarter, to further help stabilize our financial position and liquidity, we entered into a $500 million senior secured credit agreement. In addition, during the second quarter, in conjunction with our previously disclosed exit from forbearance arrangements with lenders, we entered into several new asset-backed financing arrangements and renegotiated financing arrangements for certain assets with existing lenders, that resulted in us essentially refinancing the majority of our investment portfolio.

During the third quarter, we continued to make significant progress on initiatives to lower the cost of financing our investments with more durable forms of borrowing. For example, we completed a $390 million securitization transaction of Non-QM assets in early September, which generated $92.7 million of additional liquidity and lowered the funding costs for the associated assets by approximately 165 basis points. In addition, following the end of the third quarter we completed a $570 million Non-QM securitization transaction in late October, which generated $125.1 millionof additional liquidity and lowered the funding costs for the associated assets by approximately 179 basis points.

Additionally, subsequent to the end of the third quarter we undertook steps to reduce our exposure to higher cost forms of financing that we had obtained in connection with our exit from forbearance in the second quarter. On October 9, 2020, we repaid $400 million of the principal outstanding on the senior secured loan, and the remaining balance of this facility of $81.25 million was repaid on October 30, 2020. The repayments were made without penalty or yield maintenance. These actions will reduce our costs of financing by approximately $9.4 million in the fourth quarter and approximately $53.0 million annually. Following the completion of the second Non-QM securitization described above, the repayment of the senior secured loan and the payment of the dividend to common stockholders on October 30, 2020, our cash totaled approximately $641.1 million.
 
At September 30, 2017,2020, we had total assets of approximately $11.1$7.5 billion, of which $6.9$5.6 billion, or 62.4%75%, represented residential whole loans acquired through interests in certain trusts established to acquire the loans. Our Purchased Performing Loans, which as of September 30, 2020 comprised approximately 67% of our MBS portfolio.  At such date, our MBS portfolio was comprised of $3.0 billion of Agency MBS and $3.9 billion of Non-Agency MBS which includes $2.7 billion of Legacy Non-Agency MBS and $1.2 billion of RPL/NPL MBSresidential whole loans, include: (i) loans to finance (or refinance) one-to-four family residential properties that are primarily structurednot 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 contractual coupon step-up feature where the coupon increases upprofit (or Rehabilitation loans or Fix and Flip loans), (iii) loans to 300 basis points at 36 months from issuancefinance (or refinance) non-owner occupied one-to-four family residential properties that are rented to one or sooner. These securities are primarily backedmore tenants (or Single-family rental loans), and (iv) previously originated loans secured by securitized re-performing and non-performing loans.residential real estate that is generally owner occupied (or Seasoned performing loans). In addition, at September 30, 2017,2020, we had approximately $1.7 billion$152.8 million in investments in residential whole loans acquired through our consolidated trusts,mortgage securities, which represented approximately 15.7%2% of our total assets.  At such date, this portfolio included $96.3 million of CRT securities and $56.4 million of Non-Agency MBS which were primarily comprised of RPL/NPL MBS. At September 30, 2020, our investments in MSR-related assets were $252.2 million, or 3% 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 7% of our total assets at September 30, 2020, were primarily comprised of collateral obtained in connection with reverse repurchase agreements, cash and cash equivalents (including restricted cash), CRT securities, MSR relatedREO, capital contributions made to loan origination partners, other interest-earning 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
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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. Changes in these factors, or uncertainty in the market regarding the potential for changes in these factors, can result in significant changes in the value and/or performance of our investment portfolio. Further, our GAAP results may be impacted by 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 and certain residential whole loans. 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 the adoption in January 2020 of new accounting standards for the measurement and recognition of credit losses, and given the extent of current and anticipated future investments in residential whole loans, our financial results are impacted by estimates of credit losses that are required to be recorded when loans that are not accounted for at fair value through net income are acquired or originated, as well as changes in these credit loss estimates that will be required to be made periodically.
 
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, if any, 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, if any, 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 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. WeOur investment process for credit sensitive assets focuses primarily on quantifying and pricing credit risk. 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. Further, we believe the discounted purchase prices paid on certain of these investmentsnon-performing and Purchased Credit Deteriorated Loans 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.  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 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 certain of 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, our Agency MBS portfolio experienced a weighted average CPR of 16.2%, and our Legacy Non-Agency MBS portfolio experienced a weighted average CPR of 18.7%. Over2020, the last consecutive eight quarters, ending with September 30, 2017, the monthly weighted average CPR on our Agency and Legacy Non-Agency MBS portfolios ranged from a high of 18.4% experienced during the month ended July 31, 2017 to a low of 11.3%, experienced during the month ended February 29, 2016, with an average CPR over such quarters of 15.3%Non-QM loan portfolio was 21.8%.
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, such 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
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residential mortgage securities and MSR relatedMSR-related assets that are designated as AFS for other-than-temporary impairment. 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, we had net unrealized gains on our Non-Agency MBS of $648.4 million, comprised of gross unrealized gains of $648.8 million and gross unrealized losses of $390,000 and net unrealized losses of $2.8 million on our Agency MBS, comprised of gross unrealized losses of $32.9 million and gross unrealized gains of $30.1 million. At September 30, 2017, we did not intend to sell any of our MBS or CRT securities 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.financing liabilities. 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, 2017 werein the past have generally been comprised of Swaps.
Our The majority of our Swap derivative instruments arehave generally been designated as cash-flow hedges against a portion of our then current and forecasted LIBOR-based repurchase agreements. Our Swaps do not extendFollowing the maturitiessignificant interest rate decreases that occurred late in the first quarter of 2020, we unwound all of our repurchase agreements; they do, however, lock in a fixed rate of interest over their term forSwap transactions at the notional amountend 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%.first quarter.



Recent Market Conditions and Our Strategy
 
Sadly, during the thirdThird 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 President2020 Portfolio Activity 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.impact on financial results:


At September 30, 2017,2020, 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$6.3 billion compared to $11.5$6.6 billion at December 31, 2016. DuringJune 30, 2020.

The following table presents the three months

ended September 30, 2017, we purchased or committed to purchase, through consolidated trusts,activity for approximately $187.7 million, 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 related assets and $29.1 million of CRT securities.

At September 30, 2017, $3.9 billion, or 40.2% of our residential mortgage asset portfolio was invested in Non-Agency MBS.  Duringfor the three months ended September 30, 2017, the2020:
(In Millions)June 30, 2020
Runoff (1)
Acquisitions
Other (2)
September 30, 2020Change
Residential whole loans and REO$6,226 $(455)$40 $105 $5,916 $(310)
MSR-related assets254 (17)— 15 252 (2)
Residential mortgage securities149 (2)— 6 153 4 
Totals$6,629 $(474)$40 $126 $6,321 $(308)

(1)    Primarily includes principal repayments, cash collections on Purchased Credit Deteriorated Loans and sales of REO.
(2)    Primarily includes changes in fair value and adjustments to record lower 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 acost or estimated 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.adjustments on REO.


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, 2017,2020, our total recorded investment in residential whole loans and REO was $1.7$5.9 billion, or 17.9%93.6% of our residential mortgage asset portfolio. Of this amount, $639.2 million(i) $4.4 billion is presented as Residential whole loans, at carrying value (of which $3.7 billion were Purchased Performing Loans and $1.1$650.3 million were Purchased Credit Deteriorated Loans, and (ii) $1.2 billion is presented as Residential whole loans, at fair value, in our consolidated balance sheets. For the three months ended September 30, 2017,2020, we recognized approximately $9.0$54.4 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%4.63% (excluding servicing costs), with Purchased Performing Loans generating an effective yield of 4.58% and Purchased Credit Deteriorated Loans generating an effective yield of 4.89%. In addition, we recorded a net gain on residential whole loans heldmeasured at fair value through earnings of $18.7$76.9 million in Other Income, net in our consolidated statements of operations for the three months ended September 30, 2017.

2020. At September 30, 20172020 and June 30, 2020, we had REO with an aggregate carrying value of $298.9 million and $348.5 million, respectively, which is included in Other assets on our total investment in MSR related assets was $411.8 million. consolidated balance sheets.

During the three months ended September 30, 20172020, economic conditions continued to be negatively impacted by the unprecedented conditions resulting from the COVID-19 pandemic. In response to the financial impact of the COVID-19 pandemic on borrowers, and in compliance with various federal and state guidelines, during the first and second quarters of 2020 we acquired $161.0offered short-term relief to borrowers who were contractually current at the time the pandemic started to impact the economy. Under the terms of such plans, for certain borrowers a deferral plan was entered into where missed payments were deferred to the maturity of the related loan, with a corresponding change to the loan’s next payment due date. In addition, certain borrowers were granted up to a three-month payment holiday, with payments required to resume at the conclusion of the plan. For these borrowers, all delinquent payments were contractually due at the conclusion of the payment holiday. While the majority of the borrowers granted relief have resumed making payments at the conclusion of such plans, certain borrowers, particularly in our Non-QM loan portfolio, continue to be impacted financially by the COVID-19 pandemic and have not yet
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resumed payments. Where these borrowers became more than 90 days delinquent on payments during the quarter, interest income receivable related to the associated loans was reversed in accordance with our non-accrual policies. At September 30, 2020, Non-QM loans with an amortized cost of $163.9 million, or 6.7% of the portfolio, were more than 90 days delinquent. For these and had $124.0 million of principal repayments on term notes backedother borrowers that have been impacted by MSR related collateral. We also acquired $29.1 million of CRT securities, bringing our total investment inthe COVID-19 pandemic, we are continuing to evaluate loss mitigation options with respect to these securities to $653.6 million. loans, including forbearance, repayment plans, loan modification and foreclosure.

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 atthree months ended September 30, 2017 was in an overall unrealized gain position of $41.0 million.

We will continue to seek2020, we sold our remaining investments in residential mortgage assets during the remainderLegacy Non-Agency MBS for $116,000, realizing net gains 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$48,000. As of September 30, 2020, 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 ofportfolio totaled $53.8 million. The net yield on our 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 exceeded our net income.
At the end of the third quarter of 2017, the average coupon on mortgages underlying our Agency MBS was higher compared to the end of the third quarter of 2016, due to upward resets on Hybrid and ARM-MBS within the portfolio.  As a result, the coupon yield on our Agency MBS portfolio increased to 2.98%7.20% for the three months ended September 30, 2017, from 2.83%2020, compared to 5.18% for the three months ended September 30, 2016 and the2019. In addition, our investments in MSR-related assets at September 30, 2020 totaled $252.2 million. The net Agency MBS yield increased to 1.97%on our MSR-related assets was 11.79% for the three months ended September 30, 2017 from 1.83%2020, compared to 5.26% for the three months ended September 30, 2016. The net yield for our Legacy Non-Agency MBS portfolio was 8.93% for the three months ended2019. Our investments in CRT securities totaled $96.3 million at September 30, 2017 compared2020.

As previously disclosed, we adopted the new accounting standard addressing the measurement of credit losses on financial instruments (CECL) on January 1, 2020. With respect to 8.09%our residential whole loans held at carrying value, CECL requires that reserves for credit losses be estimated at the three months ended September 30, 2016.  The increase inreporting date based on life of loan expected cash flows, including anticipated prepayments and reasonable and supportable forecasts of future economic conditions. For the net yield on our Legacy Non-Agency MBS portfolio reflects the impactthird quarter, a reversal of the cash proceeds received during 2016 in connection with the settlementprovision for credit and valuation losses of litigation related to certain Countrywide and Citigroup sponsored$30.1 million was recorded on residential mortgage backed securitization trusts and the improved performance ofwhole loans underlying the Legacy Non-Agency MBS portfolio, which have resulted inheld at carrying value. The total allowance for 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 current quarter due to the impact of redemptions of certain securities that had been previously purchasedlosses recorded on residential whole loans held at a discount.
We believe that our $593.1 million Credit Reserve and OTTI appropriately factors in remaining uncertainties regarding underlying mortgage performance and the potential impact on future cash flows for 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 amortized cost of 71% of facecarrying value at September 30, 2017. Home price appreciation and underlying mortgage loan amortization have decreased the LTV for many2020 was $106.2 million. In addition, as 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, low mortgage rates and demographic-driven U.S. household formation. Lower LTVs lessen the likelihood of defaults and simultaneously decrease loss severities. Further, during 2016 and the nine months ended September 30, 2017, we have also observed faster voluntary prepayment (i.e., prepayment2020, CECL reserves for credit losses totaling approximately $1.6 million were recorded related to undrawn commitments on loans held at carrying value.

Our GAAP book value per common share increased to $4.61 as of loans in full with no loss) speeds than originally projected. The yieldsSeptember 30, 2020 from $4.51 as of June 30, 2020. Economic book value per common share, a non-GAAP financial measure of our financial position that adjusts GAAP book value by the amount of unrealized mark to market gains on our Legacy Non-Agency MBS that were purchasedresidential whole loans held 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 endedcarrying value, was $4.92 as of September 30, 2017, $14.8 million was transferred2020, an increase from Credit Reserve to accretable discount.  This increase$4.46 as of June 30, 2020. Increases in accretable discount is expected to increase the interest income realized over the remaining life of our Legacy Non-Agency MBS. The remaining average contractual life of such assets is approximately 19 years, but based on scheduled loan amortizationGAAP 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.
At September 30, 2017, we have access 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 within the residential mortgage marketplace. 
Repurchase agreement funding for our residential mortgage investments continued to be available to us from multiple counterpartiesEconomic book value during the third quarter reflect the broad recovery of 2017.  Typically, repurchase agreement funding involving credit-sensitive investments is available at terms requiring higher collateralization and higher interest rates, thanasset prices for repurchase agreement funding involving Agency MBS.  At September 30, 2017, our debt consistedresidential mortgage assets. For additional information regarding the calculation of borrowingsEconomic book value per share including a reconciliation to GAAP book value per share, refer to page 85 under repurchase agreements with 31 counterparties, securitized debt, Senior Notes outstanding, obligation to return securities obtained as collateral and payable for unsettled purchases, resulting in a debt-to-equity multiplethe heading “Economic Book Value”.


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Table of 2.4 times.  (See table on page 75 under Results of Operations that presents our quarterly leverage multiples since September 30, 2016.)Contents

Information About Our Assets


The tablestable below presentpresents certain information about our asset allocation at September 30, 2017:2020:
 
ASSET ALLOCATION
(Dollars in Millions)
Residential Whole Loans, at Carrying Value (1)
Residential Whole Loans, at Fair ValueResidential Mortgage SecuritiesMSR-Related Assets
Other,
net (2)
Total
Fair Value/Carrying Value$4,388 $1,230 $153 $252 $1,395 $7,418 
Financing Agreements with non-mark-to-market collateral provisions(1,471)(256)— — — (1,727)
Financing Agreements with mark-to-market collateral provisions(1,038)(193)(89)(135)(35)(1,490)
Less Senior secured credit agreement— — — — (474)(474)
Less Securitized Debt(470)(369)— — — (839)
Less Convertible Senior Notes— — — — (225)(225)
Less Senior Notes— — — — (97)(97)
Net Equity Allocated$1,409 $412 $64 $117 $564 $2,566 
Debt/Net Equity Ratio (3)
2.1 x2.0 x1.4 x1.2 x1.9 x

(1)Includes $2.4 billion of Non-QM loans, $677.2 million of Rehabilitation loans, $474.0 million of Single-family rental loans, $147.6 million of Seasoned performing loans, and $650.3 million of Purchased Credit Deteriorated Loans. At September 30, 2020, the total fair value of these loans is estimated to be approximately $4.5 billion.
(2)Includes $884.2 million of cash and cash equivalents, $5.3 million of restricted cash, $298.9 million of real estate owned, and $108.9 million of capital contributions made to loan origination partners, as well as other assets and other liabilities.    
(3)Total Debt/Net Equity ratio represents the sum of borrowings under our financing agreements noted above as a multiple of net equity allocated. 
67
  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
Table of Contents

(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.



Residential Whole Loans
Agency MBS
The following table presents certain information regarding the compositioncontractual maturities 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 millionresidential whole loan portfolios at September 30, 2017 and December 31, 2016, respectively.2020. Amounts presented do not reflect estimates of prepayments or scheduled amortization.
(2)  Weighted average is based on MBS current face
(In Thousands)
Purchased
Performing Loans (1)
Purchased Credit
Deteriorated Loans (2)
Residential Whole Loans, at Fair Value
Amount due: 
Within one year$648,713 $707 $4,614 
After one year:
Over one to five years86,090 4,383 5,452 
Over five years3,056,989 696,923 1,219,598 
Total due after one year$3,143,079 $701,306 $1,225,050 
Total residential whole loans$3,791,792 $702,013 $1,229,664 

(1)Excludes an allowance for credit losses of $54.6 million at September 30, 2017 and December 31, 2016, respectively.2020.
(3)  Low loan balance represents MBS collateralized by mortgages with(2)Excludes an original loan balanceallowance for credit losses of less than or equal to $175,000.$51.7 million at September 30, 2020.
(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 millionat September 30, 20172020, the dollar amount of certain of our residential whole loans, contractually maturing after one year, and December 31, 2016, respectively.indicates whether the loans have fixed interest rates or adjustable interest rates:
(2)  Weighted average is based
(In Thousands)
Purchased
Performing Loans (1)(2)
Purchased Credit
 Deteriorated Loans (1)(3)
Residential Whole Loans, at Fair Value (1)
Interest rates: 
Fixed$1,027,710 $483,308 $889,006 
Adjustable2,115,369 217,998 336,044 
Total$3,143,079 $701,306 $1,225,050 

(1)Includes loans on MBS current facewhich borrowers have defaulted and are not making payments of principal and/or interest as of September 30, 2020.
(2)Excludes an allowance for credit losses of $54.6 million at September 30, 2017 and December 31, 2016, respectively.2020.
(3)  Low Loan Balance represents MBS collateralized by mortgages withExcludes 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 asallowance for credit losses 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$51.7 million and $2.6 million at September 30, 2017 and December 31, 2016, respectively.2020.
(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%.

Residential Mortgage Securities


Non-Agency MBSResidential Whole Loans

The following table presents information with respect tothe contractual maturities of our Non-Agency MBSresidential whole loan portfolios at September 30, 2017 and December 31, 2016:2020. Amounts presented do not reflect estimates of prepayments or scheduled amortization.

(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
 
(In Thousands)
Purchased
Performing Loans (1)
Purchased Credit
Deteriorated Loans (2)
Residential Whole Loans, at Fair Value
Amount due: 
Within one year$648,713 $707 $4,614 
After one year:
Over one to five years86,090 4,383 5,452 
Over five years3,056,989 696,923 1,219,598 
Total due after one year$3,143,079 $701,306 $1,225,050 
Total residential whole loans$3,791,792 $702,013 $1,229,664 


(1)  Includes discount designated as Credit ReserveExcludes an allowance for credit losses of $578.3$54.6 million and OTTIat September 30, 2020.
(2)Excludes an allowance for credit losses of $14.8 million.$51.7 million at September 30, 2020.
(2)  Includes discount designated as Credit Reserve of $675.6 million and OTTI of $18.6 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 endedat 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 over2020, the lifedollar amount 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.


The following table presents information with respect to the yield components of our Non-Agency MBS forresidential whole loans, contractually maturing after one year, and indicates whether the three months ended September 30, 2017loans have fixed interest rates or adjustable interest rates:

(In Thousands)
Purchased
Performing Loans (1)(2)
Purchased Credit
 Deteriorated Loans (1)(3)
Residential Whole Loans, at Fair Value (1)
Interest rates: 
Fixed$1,027,710 $483,308 $889,006 
Adjustable2,115,369 217,998 336,044 
Total$3,143,079 $701,306 $1,225,050 

(1)Includes loans on which borrowers have defaulted and 2016:
  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, periodicnot making payments of principal and prepaymentsand/or interest as of principal.  The following table presents certain information regarding the amortized costs, weighted average yields and contractual maturitiesSeptember 30, 2020.
(2)Excludes an allowance for credit losses of our MBS$54.6 million at September 30, 2017 and does not reflect the effect2020.
(3)Excludes an allowance for credit losses 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 $51.7 million 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. 2020.







Residential Mortgage Securities

Residential Whole Loans


The following table presents the contractual maturities of our residential whole loans held by consolidated trustsloan portfolios at September 30, 2017 and does2020. Amounts presented do not reflect estimates of prepayments or scheduled amortization. For residential whole loans held

(In Thousands)
Purchased
Performing Loans (1)
Purchased Credit
Deteriorated Loans (2)
Residential Whole Loans, at Fair Value
Amount due: 
Within one year$648,713 $707 $4,614 
After one year:
Over one to five years86,090 4,383 5,452 
Over five years3,056,989 696,923 1,219,598 
Total due after one year$3,143,079 $701,306 $1,225,050 
Total residential whole loans$3,791,792 $702,013 $1,229,664 

(1)Excludes an allowance for credit losses of $54.6 million 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)
Amount due:    
Within one year $1,471
 $7,981
After one year:    
Over one to five years 4,002
 12,577
Over five years 633,743
 962,592
Total due after one year $637,745
 $975,169
Total residential whole loans $639,216
 $983,150

(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, 2017.2020.

(2)Excludes an allowance for credit losses of $51.7 million at September 30, 2020.


The following table presents, at September 30, 2017,2020, 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)
Purchased
Performing Loans (1)(2)
Purchased Credit
 Deteriorated Loans (1)(3)
Residential Whole Loans, at Fair Value (1)
Interest rates: 
Fixed$1,027,710 $483,308 $889,006 
Adjustable2,115,369 217,998 336,044 
Total$3,143,079 $701,306 $1,225,050 
(In Thousands) 
Residential Whole Loans,
at Fair Value (1)(2)
Interest rates:  
Fixed $561,122
Adjustable 414,047
Total $975,169


(1)Includes loans on which borrowers have defaulted and are not making payments of principal and/or interest as of September 30, 2017.2020.
(2)Excludes approximately $120.4an allowance for credit losses of $54.6 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of September 30, 2017.2020.

(3)Excludes an allowance for credit losses of $51.7 million at September 30, 2020.
Information is not presented for residential whole 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.




Residential Mortgage Securities

Non-Agency MBS
The following table presents additional information regardingwith respect to our residential whole loans held at fair valueNon-Agency MBS at September 30, 20172020 and December 31, 2016:2019. During the three months ended June 30, 2020, we disposed of substantially all of our investments in Legacy Non-Agency MBS:
(In Thousands)September 30, 2020 December 31, 2019
Non-Agency MBS   
Face/Par$60,295  $2,195,303 
Fair Value56,430  2,063,529 
Amortized Cost51,380  1,668,088 
Purchase Discount Designated as Credit Reserve(669)(436,598)
Purchase Discount Designated as Accretable(8,246)(90,617)


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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
CRT Securities


(1) Excludes loans which are 90 or more days past due atAt September 30, 2017 from2020, our total investment in CRT securities was $96.3 million, with a net unrealized gain of $10.6 million, a weighted average yield of 7.11% and a weighted average time to maturity of 18.7 years. At December 31, 2019, our total investment in CRT securities was $255.4 million, with a net unrealized gain of $6.2 million, a weighted average yield of 4.18% and weighted average time to maturity of 10.3 years.

Agency MBS
During the $120.4 millionsix months ended June 30, 2020, we disposed of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of September 30, 2017.

Income on residential whole loans held at carrying value is recognized based 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 account is at the pool level rather than the individual loan level, noneall of our residential whole loans held at carrying value are currently considered 90 days or more past due.


Exposure to Financial Counterparties
We finance a significant portion ofAgency MBS. At December 31, 2019, our residential mortgage assets with repurchase agreements and other advances. 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% - 5% of the amount borrowed (U.S. Treasury andtotal investment in Agency MBS collateral) to up to 35% (Non-Agency MBS collateral). Consequently, while repurchase agreement financing results in us recordingwas $1.7 billion, with a liability to the counterparty in our consolidated balance sheets, we are exposed to the counterparty, if during the termnet unrealized loss of the repurchase agreement financing,$3.4 million, a lender should default on its obligation and we are not able to recover our pledged assets. The amountweighted average coupon 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.3.83%.



MSR-Related Assets

The table below summarizes our exposure to our counterparties at September 30, 2017, by country:
Country 
Number of
Counterparties
 
Repurchase
Agreement
Financing
 
Exposure (1)
 
Exposure as a
Percentage of
MFA Total
Assets
(Dollars in Thousands)        
European Countries:  (2)
    
  
  
Switzerland (3)
 3 $1,216,558
 $451,176
 4.06%
France 2 633,669
 164,412
 1.48
United Kingdom 2 389,142
 118,615
 1.07
Holland 1 128,838
 10,898
 0.10
Total European 8 2,368,207
 745,101
 6.71%
Other Countries:    
  
  
United States 14 $3,393,888
 $822,352
 7.41%
Canada (4)
 3 546,052
 138,114
 1.24
Japan (5)
 3 458,915
 39,246
 0.35
China (5)
 1 412,410
 13,115
 0.12
South Korea 1 192,229
 12,931
 0.12
Total Other 22 5,003,494
 1,025,758
 9.24%
Total 30 $7,371,701
(6)$1,770,859
 15.95%

(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 million to 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.
(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, 2017,2020 and December 31, 2019, we did not use credit default swaps had $234.1 million and $1.2 billion, respectively, of term notes issued by SPVs that have acquired the rights to receive cash flows representing the servicing fees and/or other formsexcess servicing spread associated with certain MSRs. At September 30, 2020, these term notes had an amortized cost of credit protection$184.5 million, net unrealized gains of $49.5 million, a weighted average yield of 12.10% and a weighted average term to hedgematurity of 9.5 years. At December 31, 2019, these term notes had an amortized cost of $1.2 billion, gross unrealized losses of approximately $5.2 million, a weighted average yield of 4.75% and a weighted average term to maturity of 5.3 years.

We have participated in a loan where we committed to lend $32.6 million of which approximately $18.1 million was drawn at September 30, 2020. At September 30, 2020, 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 permittedcoupon paid by the agreements governing our financing arrangements, or take other necessary actions to reduceborrower on the drawn amount of our exposure to a counterparty when such actions are considered necessary. is 5.52%. The facility expires in 11 months.


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, 2017,2020, our taxable income was approximately $250.9$56.6 million. Based on dividends paid or declared during the nine months ended September 30, 2017, we have undistributed taxable income of approximately $60.7 million, or $0.15 per share. We have until the filing of our 20172020 tax return (due not later than October 15, 2018)2021) to declare the distribution of any 20172020 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
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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. 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.



TheNumerous regulations have been issued pursuant to the Dodd-Frank Act, requires that numerousincluding regulations be issued, many of which (including those mentioned above regarding mortgage loan servicing, underwriting and mortgage loan originator compensation) have only recently been implementedcompensation and operationalized.others could be issued in the future. 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, weWe 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.


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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 May 20, 2020, in connection with its stated intention to responsibly end the conservatorship of the GSEs, the FHFA issued a notice of proposed rulemaking and request for comments (“Proposed Rule”) on a new regulatory capital framework for Fannie Mae and Freddie Mac. The Proposed Rule is a re-proposal of the regulatory capital framework originally proposed in 2018 that would have established new risk-based capital requirements for the GSEs and updated the minimum leverage requirements. The re-proposal contains enhancements to establish a post-conservatorship regulatory capital framework that ensures that each Enterprise operates in a safe and sound manner and is positioned to fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market across the economic cycle, in particular during periods of financial stress. Comments on the Proposed Rule are due 60 days after publication in in the Federal Register.

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,2020, and we cannot be certain whether alternative plans may be proposed by the Trump Administration, if any housing and/or mortgage-related legislation will emerge from committee or be approved by Congress, or the extent to which administrative reforms may be implemented, and if so, what the effect willwould be on our business.


On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. Among the provisions in this wide-ranging law are protections for homeowners experiencing financial difficulties due to the COVID-19 pandemic, including forbearance provisions and procedures. Borrowers with federally backed mortgage loans, regardless of delinquency status, may request loan forbearance for a six-month period, which could be extended for another six-month period if necessary. Federally backed mortgage loans are loans secured by first- or subordinate-liens on 1-4 family residential real property, including individual units of condominiums and cooperatives, which are insured or guaranteed pursuant to certain government housing programs, such as by the Federal Housing Administration, Federal Housing Administration, or U.S. Department of Agriculture, or are purchased or securitized by Fannie Mae or Freddie Mac. The CARES Act also includes a temporary 60 day foreclosure moratorium that applies to federally backed mortgage loans, which lasted until July 24, 2020. However, the moratorium has been extended to December 31, 2020 by Fannie Mae, Federal Housing Administration and the U.S. Department of Agriculture. Some states and local jurisdictions have also implemented moratoriums on foreclosures.





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Results of Operations


Quarter Ended September 30, 20172020 Compared to the Quarter Ended September 30, 20162019
��
General
 
For the third quarter of 2017,2020, we had net income available to our common stock and participating securities of $60.1$79.0 million, or $0.15$0.17 per basic and diluted common share, compared to net income available to common stock and participating securities of $79.3$91.8 million, or $0.21$0.20 per basic and diluted common share, for the third quarter of 2016.2019. Following the unprecedented disruption in residential mortgage markets due to concerns related to the COVID-19 pandemic that was experienced late in first quarter and into the second quarter of 2020, management focused on taking actions to bolster and stabilize our balance sheet including significant sales of assets to improve our liquidity position and renegotiated the financing associated with our remaining investments. The decreasecombination of the impact of assets sales as well as higher interest expense incurred related to these new financing transactions that we entered into late in net income available to common stock and participating securities, and the decrease of this item on a per share basis primarily reflects a decreasesecond quarter resulted in ourthe significant reduction in net interest income primarilyfrom our investments in the current quarter compared to the prior year period. In addition, in the current period, we recorded lower net realized gains on sales of residential mortgage assets. These decreases were partially offset by higher gains on our Agency and Non-Agency MBS portfolios and lower other income, driven primarily by unrealized losses on CRT securities accounted forresidential whole loans measured at fair value partially offset by gainsthrough earnings and a reversal of a portion of our provision for credit losses on liquidation of certain residential whole loans accounted forheld 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.values.


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 2017,2020, our net interest spread and margin were 2.02%0.03% and 2.54%0.76%, respectively, compared to a net interest spread and margin of 2.13%1.82% and 2.46%2.19%, respectively, for the third quarter of 2016.2019. Our net interest income decreased by $8.7$46.8 million, or 13.5%82.22%, to $55.9 million from $64.5$10.1 million for the third quarter of 2016.  Current quarter2020 compared to net interest income from Agency MBSof $56.9 million for the third quarter of 2019. For the third quarter of 2020, net interest income for our residential mortgage securities and Legacy Non-Agency MBS declinedMSR-related asset portfolios decreased by approximately $30.4 million compared to the third quarter of 2016 by approximately $11.0 million,2019, primarily due to lower average amounts invested in these securities due to portfolio sales in the first and higher funding costs, partially offset by higher yields earned on these investments.second quarters of 2020. In addition, net interest income on RPL/NPL MBS was $6.8 millionincludes lower 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 andfrom residential whole loans held at carrying value of approximately $9.2$7.6 million compared to the third quarter of 2016,2019 primarily due to lower yields earned on these assets, an increase in our average borrowings to finance our residential whole loans at carrying value portfolio, which was partially offset by lower funding costs for and higher average balancesamounts invested in these assets. In addition, netWe also incurred approximately $13.8 million in interest expense related to the senior secured credit agreement we entered into during the second quarter of 2020. Net interest income for the third quarter of 2020 also includes $4.6$8.1 million of interest expense associated with residential whole loans held at fair value, reflecting a $1.3$3.6 million increasedecrease in borrowing costs related to these investments compared to the third quarter of 2016.2019, as a result of a decrease in our average balance to finance these assets. 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.














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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, 20172020 and 20162019. 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,
 20202019
(Dollars in Thousands)Average Balance InterestAverage Yield/CostAverage Balance InterestAverage Yield/Cost
Assets:        
Interest-earning assets:        
Residential whole loans, at carrying value (1)
$4,699,124 $54,393 4.63 %$4,604,305 $64,226 5.58 %
Agency MBS (2)
—  — — 2,037,817 11,806 2.32 
Legacy Non-Agency MBS (2)
2,253  48 8.52 1,214,589 31,347 10.32 
RPL/NPL MBS (2)
50,293  905 7.20 1,021,398 13,235 5.18 
Total MBS52,546  953 7.25 4,273,804 56,388 5.28 
CRT securities (2)
85,529 1,376 6.44 390,051 4,251 4.36 
MSR-related assets (2)
211,791 6,241 11.79 1,160,627 15,274 5.26 
Cash and cash equivalents (3)
754,493 100 0.05 199,070 903 1.81 
Other interest-earning assets123,073 3,017 9.81 105,867 1,679 6.34 
Total interest-earning assets5,926,556  66,080 4.46 10,733,724  142,721 5.32 
Total non-interest-earning assets1,650,120    2,448,754    
Total assets$7,576,676    $13,182,478    
Liabilities and stockholders’ equity:        
Interest-bearing liabilities:       
Collateralized financing agreements (4)(5)
$3,511,403  $30,929 3.45 %$8,654,350  $74,240 3.36 %
Securitized debt (6)
607,893 5,318 3.42 617,689 5,692 3.61 
Convertible Senior Notes224,666 3,898 6.94 223,496 3,879 6.94 
Senior Notes96,891  2,012 8.31 96,842  2,012 8.31 
Senior secured credit agreement499,796 13,807 11.00 — — — 
Total interest-bearing liabilities4,940,649  55,964 4.43 9,592,377  85,823 3.50 
Total non-interest-bearing liabilities118,145    189,429   
Total liabilities5,058,794    9,781,806   
Stockholders’ equity2,517,882    3,400,672   
Total liabilities and stockholders’ equity$7,576,676    $13,182,478   
Net interest income/net interest rate spread (7)
  $10,116 0.03 %  $56,898 1.82 %
Net interest-earning assets/net interest margin (8)
$985,907   0.76 %$1,141,347   2.19 %
(1)Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.
(2)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.
(3)Includes average interest-earning cash, cash equivalents and restricted cash.
(4)Collateralized financing agreements include the following: Secured term notes, Non-mark-to-market term-asset based financing and repurchase agreements. For additional information, see Note 6, included under Item 1 of this Quarterly Report on Form 10-Q.
(5)Average cost of financing agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.
(6)Includes both Securitized debt, at carrying value and Securitized debt, at fair value.
(7)Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.
(8)Net interest margin reflects annualized net interest income divided by average interest-earning assets.
  Three Months Ended September 30,
  2017 2016
(Dollars in Thousands) 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%
Legacy Non-Agency MBS (1)
 2,182,148
 48,693
 8.93
 2,858,731
 57,818
 8.09
RPL/NPL MBS (1)
 1,315,737
 14,559
 4.43
 2,673,527
 25,820
 3.86
Total MBS 6,651,997
 78,785
 4.74
 9,675,781
 102,595
 4.24
CRT securities (1)
 604,322
 8,676
 5.74
 294,704
 3,983
 5.41
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
Cash and cash equivalents (3)
 657,331
 1,452
 0.88
 307,147
 221
 0.29
Total interest-earning assets 8,977,542
 105,133
 4.68
 10,666,233
 112,716
 4.23
Total non-interest-earning assets (2)
 2,487,953
     2,146,677
    
Total assets $11,465,495
     $12,812,910
    
             
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%
Securitized debt 139,276
 962
 2.70
 —
 —
 —
Senior Notes 96,756
 2,010
 8.31
 96,718
 2,009
 8.31
Total interest-bearing liabilities 7,258,945
 49,275
 2.66
 8,964,891
 48,167
 2.10
Total non-interest-bearing liabilities 927,877
     842,227
    
Total liabilities 8,186,822
     9,807,118
    
Stockholders’ equity 3,278,673
     3,005,792
    
Total liabilities and stockholders’ equity $11,465,495
     $12,812,910
    
             
Net interest income/net interest rate spread (5)
   $55,858
 2.02%   $64,549
 2.13%
Net interest-earning assets/net interest margin (6)
 $1,718,597
   2.54% $1,701,342
   2.46%
Ratio of interest-earning assets to
interest-bearing liabilities		 1.24x     1.19x    
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(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
  Compared to
  Three Months Ended September 30, 2016
  Increase/(Decrease) due to 
Total Net
Change in
Interest Income/Expense
(In Thousands) Volume Rate 
Interest-earning assets:  
  
  
Agency MBS (4,790) 1,366
 (3,424)
Legacy Non-Agency MBS (14,688) 5,563
 (9,125)
RPL/NPL MBS (14,616) 3,355
 (11,261)
CRT securities 4,430
 263
 4,693
MSR related assets 7,194
 —
 7,194
Residential whole loans, at carrying value (1)
 3,276
 (167) 3,109
Cash and cash equivalents 437
 794
 1,231
Total net change in income from interest-earning assets $(18,757) $11,174
 $(7,583)
       
Interest-bearing liabilities:      
Agency repurchase agreements and FHLB advances (3,498) 3,767
 269
Legacy Non-Agency repurchase agreements (3,396) 1,541
 (1,855)
RPL/NPL MBS repurchase agreements (7,199) 2,760
 (4,439)
CRT securities repurchase agreements 1,242
 316
 1,558
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
Securitized debt 962
 —
 962
Senior Notes 1
 —
 1
Total net change in expense of interest-bearing liabilities $(8,185) $9,293
 $1,108
Net change in net interest income $(10,572) $1,881
 $(8,691)
Three Months Ended September 30, 2020
Compared to
 Three Months Ended September 30, 2019
 Increase/(Decrease) due toTotal Net
Change in
Interest Income/Expense
(In Thousands)VolumeRate
Interest-earning assets:   
Residential whole loans, at carrying value (1)
$1,299 $(11,132)$(9,833)
Residential mortgage securities(72,235)13,925 (58,310)
MSR-related assets(18,637)9,604 (9,033)
Cash and cash equivalents705 (1,508)(803)
Other interest-earning assets307 1,031 1,338 
Total net change in income from interest-earning assets$(88,561)$11,920 $(76,641)
Interest-bearing liabilities:   
Residential whole loan at carrying value financing agreements$855 $(3,369)$(2,514)
Residential whole loan at fair value financing agreements(2,216)(787)(3,003)
Residential mortgage securities repurchase agreements(36,909)6,260 (30,649)
MSR-related assets repurchase agreements(6,754)450 (6,304)
Other repurchase agreements(302)(539)(841)
Securitized debt(89)(285)(374)
Convertible Senior Notes and Senior Notes23 (4)19 
Senior secured credit agreement13,807 — 13,807 
Total net change in expense from interest-bearing liabilities$(31,585)$1,726 $(29,859)
Net change in net interest income$(56,976)$10,194 $(46,782)
 
(1)Excludes residential whole loans held at fair value which are reported as a component of non-interest-earning assets.

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


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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, 20200.03 %0.76 %
June 30, 2020(0.90)0.02 
March 31, 20201.82 2.20 
December 31, 20192.33 2.68 
September 30, 20191.82 2.19 
 
(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 MBSResidential whole loans, at carrying value for the quarterly periods presented:

 Purchased Performing LoansPurchased Credit Deteriorated LoansTotal Residential Whole Loans, at Carrying Value
Quarter 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)
September 30, 20204.58 %3.42 %1.16 %4.89 %3.22 %1.67 %4.63 %3.39 %1.24 %
June 30, 20205.17 6.34 (1.17)5.07 6.03 (0.96)5.15 6.30 (1.15)
March 31, 20205.10 3.44 1.66 4.84 3.39 1.45 5.07 3.43 1.64 
December 31, 20195.24 3.61 1.63 5.79 3.51 2.28 5.31 3.59 1.72 
September 30, 20195.55 3.92 1.63 5.76 3.79 1.97 5.58 3.90 1.68 

(1)Reflects annualized interest income on Residential whole loans, at carrying value divided by average amortized cost of Residential whole loans, at carrying value. Excludes servicing costs.
(2)Reflects annualized interest expense divided by average balance of repurchase agreements and Non-Agency MBSsecuritized debt. Total Residential whole loans, at carrying value cost of funding include, 3, 5 and 3 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended March 31, 2020, December 31, 2019 and September 30, 2019, respectively. Cost of funding for the quarter ended June 30, 2020 includes the impact of amortization of $10.7 million of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes. The amortization of these losses increased the funding cost by 116 basis points for Purchased Performing Loans, 107 basis points for Purchased Credit Deteriorated Loans, and 115 basis points for total Residential whole loans, at carrying value during the quarter ended June 30, 2020. At June 30, 2020, following the closing of certain financing transactions and our exit from forbearance arrangements, and an evaluation of our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring. In addition, cost of funding for the quarter ended June 30, 2020 is significantly higher than prior periods as it reflects default interest and/or higher rates charged by lenders while we were under a forbearance agreement. In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.
(3)Reflects the difference between the net yield on average Residential whole loans, at carrying value and average cost of funds on Residential whole loans, at carrying value.
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The following table presents the components of the net interest spread earned on our residential mortgage securities and MSR-related assets 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
Residential Mortgage SecuritiesMSR-Related Assets
Quarter Ended
Net
Yield (1)
Cost of
Funding (2)
Net Interest
Rate
Spread (3)
Net
Yield (1)
Cost of
Funding
Net Interest
Rate
Spread (3)
September 30, 20206.75 %3.60 %3.15 %11.79 %3.43 %8.36 %
June 30, 20206.09 5.23 0.86 9.96 6.21 3.75 
March 31, 20205.40 2.72 2.68 4.74 2.56 2.18 
December 31, 20196.54 3.26 3.28 4.88 2.82 2.06 
September 30, 20197.44 3.21 4.23 5.26 3.23 2.03 
 
(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 cost of funding includes 44, 49, 60, 65 and 62 basis points and Legacy Non-Agency cost of funding includes 45, 58, 58, 69, and 74 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016 and September 30, 2016, respectively.
(3)Reflects the difference between the net yield on average MBS and average cost of funds on MBS.
(1)Reflects annualized interest income on divided by average amortized cost.
(2)Reflects annualized interest expense divided by average balance of repurchase agreements, 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 78, 36 and 1 basis points and Legacy Non-Agency MBS cost of funding includes 52, 24, and 1 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended March 31, 2020, December 31, 2019 and September 30, 2019, respectively. Cost of funding for the quarter ended June 30, 2020 includes the impact of amortization of $278,000 of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes. The amortization of these losses increased the funding cost by 174 basis points for total RPL/NPL MBS during the quarter ended June 30, 2020. At June 30, 2020, following the closing of certain financing transactions and our exit from forbearance arrangements, and an evaluation of our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring. In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.
(3)Reflects the difference between the net yield on average and average cost of funds.

Interest Income
 
Interest income on our Agency MBSresidential whole loans held at carrying value decreased by $9.8 million, or 15.3%, for the third quarter of 2017 decreased by $3.42020, to $54.4 million or 18.1%compared to $15.5 million from $19.0$64.2 million for the third quarter of 2016.2019. This decrease primarily reflects a $989.4decrease in the yield (excluding servicing costs) to 4.63% for the third quarter of 2020 from 5.58% for the third quarter of 2019 partially offset by a $94.8 million increase in the average balance of this portfolio to $4.7 billion for the third quarter of 2020 from $4.6 billion for the third quarter of 2019.

Due to previously discussed asset sales, the average amortized cost of our residential mortgage securities portfolio decreased $4.5 billion to $138.1 million for the third quarter of 2020 from $4.7 billion for the third quarter of 2019 and interest income on our residential mortgage securities portfolio decreased $58.3 million to $2.3 million for the third quarter of 2020 from $60.6 million for the third quarter of 2019. In addition, interest income on our MSR-related assets decreased $9.0 million to $6.2 million for the third quarter of 2020 from $15.3 million for the third quarter of 2019 primarily reflecting a $948.8 million decrease in the average amortized cost of our Agency MBSthis portfolio to $3.2$211.8 million for the third quarter of 2020 from $1.2 billion for the third quarter of 2017 from $4.1 billion for the third quarter of 20162019, partially offset by an increase in the net yield on our Agency MBSthis portfolio to 1.97%11.79% for the third quarter of 20172020 from 1.83%5.26% for the third quarter of 2016. At the end of2019. The increase in yield noted in the third quarter was as a result of 2017, the average coupon on mortgages underlying our Agency MBS was higher comparedimpairment charges taken in the first quarter of 2020 that resulted in an adjustment to the end of the third quarter of 2016.  In addition, during the third quarter of 2017, our Agency MBS portfolio experienced a 16.2% CPR and we recognized $7.9 million of net premium amortization compared to a CPR of 16.7% and $10.3 million of net premium amortization for the third quarter of 2016. At September 30, 2017, we had net purchase premiums on our Agency MBS of $110.6 million, or 3.8% of current par value, compared to net purchase premiums of $135.1 million, or 3.8% of par value at December 31, 2016.
Interest income on our Non-Agency MBS decreased $20.4 million, or 24.4%, for the third quarter of 2017 to $63.3 million compared to $83.6 million for the third quarter of 2016. This decrease is primarily due to the decrease in the average amortized cost of our Non-Agency MBS portfolio of $2.0 billion or 36.8%, to $3.5 billion from $5.5 billion for the third quarter of 2016. This decrease more than offset the impact of the higher yields generated on our Legacy Non-Agency MBS portfolio, which were 8.93% for the third quarter of 2017 compared to 8.09% for the third quarter of 2016. The increase 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 improvedthese assets.

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 current quarter due to the impact of redemptions of certain securities that had been previously purchased at a discount.

During the third quarter of 2017, we recognized net purchase discount accretion of $18.6 million on our Non-Agency MBS, compared to $20.2 million for the third quarter of 2016.  At September 30, 2017, we had net purchase discounts of $835.8 million, including Credit Reserve and previously recognized OTTI of $593.1 million, on our Legacy Non-Agency MBS, or 28.7% of par value.  During the third quarter of 2017 we reallocated $14.8 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 and Non-Agency 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
(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 Expense
 
Our interest expense for the third quarter of 2017 increased2020 decreased by $1.1$29.9 million, or 2.3%34.8%, to $49.3$56.0 million from $48.2$85.8 million for the third quarter of 2016.2019.  This increasedecrease primarily reflects an increase in financing rates on our repurchase agreement financings, an increase in our average borrowings to finance residential whole loans, MSR related assets and CRT securities, which was partially offset by a decrease in our average repurchase agreement borrowings and other advances to finance Agency MBSour residential mortgage securities portfolio and Non-Agency MBS.MSR-related assets partially offset by approximately $13.8 million in interest expense incurred in the current period related to the senior secured credit agreement we entered into during the second quarter of 2020. The effective interest rate paid on our borrowings increased to 2.66%4.43% for the quarter ended September 30, 20172020 from 2.10%3.50% for the quarter ended September 30, 2016.2019. 

At September 30, 2017, we had repurchase agreement borrowings
76
Table 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%Contents

Provision for Credit and extended 30 monthsValuation Losses on average with a maximum remaining term of approximately 71 months.Residential Whole Loans Held at Carrying Value and Held-for-Sale
Payments made and/or received on our Swaps are a component of our borrowing costs and accounted for interest expense of $5.3 million, or 29 basis points, for the third quarter of 2017, as compared to interest expense of $10.2 million, or 44 basis points, for the third quarter of 2016.  The weighted average fixed-pay rate on our Swaps designated as hedges increased to 2.04% for the quarter ended September 30, 2017 from 1.82% for the quarter ended and September 30, 2016.  The weighted average variable interest rate received on our Swaps increased to 1.23% for the quarter ended September 30, 2017 from 0.49% 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.

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 2017,2020, we recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $30.5 million (which includes a reversal of our provision for credit losses on undrawn commitments of $478,000). The reversal for the period reflects an adjustment to certain macro-economic inputs to our loan loss estimates and lower loan balances. For the third quarter of 2019, we recorded a provision of $347,000.

Other Income, net

For the third quarter of 2020, Other Income, net decreased by $4.8increased $14.7 million, or 14.2%23.5%, to $29.1$77.1 million compared to $33.9$62.4 million for the third quarter of 2016.2019.  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 on2020 and 2019 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)2020 2019
Net gain on residential whole loans measured at fair value through earnings$76,871 $40,175 
Transfer from OCI of loss on swaps previously designated as hedges for accounting purposes(7,177)— 
Liquidation gains on Purchased Credit Deteriorated Loans and other loan related income1,694 4,189 
Impairment and other losses on securities available-for-sale and other assets(221)— 
Net unrealized gain/(loss) on residential mortgage securities measured at fair value through earnings91 (695)
Net realized gain on sales of residential mortgage securities48 17,708 
Other5,804 1,052 
Total Other Income, net$77,110 $62,429 

Operating and Other Expense


For the third quarter of 2017,2020, we had compensation and benefits and other general and administrative expenses of $15.0$18.3 million, or 1.83%2.90% of average equity, compared to $10.8$12.9 million, or 1.44%1.52% of average equity, for the third quarter of 2016.2019. Compensation and benefits expense increased $3.8by approximately $3.7 million to $10.9$11.7 million for the third quarter of 2017,2020, compared to $7.1$7.9 million for the third quarter of 2016, which2019, primarily reflects non-recurring expenses recordedreflecting a provision for estimated severance costs in relation to our contractual obligation to accelerateconnection with a reduction in workforce that occurred in the vestingthird quarter of certain share based awards and to make a death benefit payment to the estate of our former Chief Executive Officer.2020. Our other general and administrative expenses increased by $372,000$1.6 million to $4.1$6.6 million for the quarter ended September 30, 20172020, compared to $3.7$5.0 million for the third quarter ended September 30, 2016of 2019, primarily due to higher Directors compensation costs as the annual grant of equity awards to non-employee Directors pursuant to the director compensation program occurred in the third quarter of 2020 rather than in the second quarter as was the case in the prior year period. In addition, higher costs for professional services, corporate insurance and administrative costs associated with financing arrangements were partially offset by lower data analytic and other IT related costs.


Operating and Other Expense for the third quarter of 20172020 also includes $6.2$9.0 million of loan servicing and other related operating expenses related to our residential whole loan activities. These expenses increaseddecreased compared to the prior year period by approximately $2.0$1.4 million, or 13.9%, primarily due to increases in non-recoverablelower non recoverable advances and servicing fees on our residential whole loan and REO increased loan servicingportfolios and modification fees and higherlower loan acquisition related expenses.expenses than the prior year period, largely offset by costs related to loan securitization activities.



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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)(3)
Total Average
Stockholders’
Equity to Total
Average Assets (4)
Dividend Payout
Ratio (5)
Leverage Multiple (6)
Book Value
per Share
of Common
Stock (7)
Economic Book Value per Share of Common Stock (8)
September 30, 20204.17 %13.85 %33.23 %0.291.9$4.61 $4.92 
June 30, 20204.33 15.70 30.08 —2.04.51 4.46 
March 31, 2020(26.72)(26.58)24.99 —3.44.34 4.09 
December 31, 20192.92 11.90 25.48 0.953.07.04 7.44 
September 30, 20192.79 11.24 25.80 1.002.87.09 7.41 

(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)For the quarter ended March 31, 2020, the amount calculated reflects the quarterly net income divided by average total stockholders’ equity.
(4)Reflects total average stockholders’ equity divided by total average assets.
(5)Reflects dividends declared per share of common stock divided by earnings per share.
(6)Represents the sum of our borrowings under financing agreements and payable for unsettled purchases divided by stockholders’ equity.
(7)Reflects total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.
(8)“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. For additional information please refer to page 85 under the heading “Economic Book Value”.

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

(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 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, 20172020 Compared to the Nine Month Period Ended September 30, 20162019
 
General
 
For the nine months ended September 30, 2017,2020, we had a net incomeloss available to our common stock and participating securities of $210.5$746.8 million, or $0.54$1.65 per basic and diluted common share, compared to net income available to common stock and participating securities of $228.8$266.2 million, or $0.61$0.59 per basic common share and $0.58 per diluted common share, for the nine months ended September 30, 2016.2019. Following the unprecedented disruption in residential mortgage markets due to concerns related to the COVID-19 pandemic that was experienced late in first quarter and into the second quarter of 2020, management was focused on taking actions to bolster and stabilize our balance sheet, improve our liquidity position and renegotiate the financing associated with our remaining investments. During the second quarter, we sold our remaining Agency MBS and substantially all of our Legacy Non-Agency MBS portfolio and substantially reduced our investments in MSR-related assets and CRT securities. During the third quarter, we sold our remaining Legacy Non-Agency MBS. In addition, as we had entered into forbearance agreements with the majority of our remaining lenders that were in place for most of the second quarter, our financing costs were dramatically increased during this period. The decreasecombination of the impact of asset sales and higher financing costs during the forbearance period resulted in net income available to common stock and participating securities, and the decrease of this item on a per share basis primarily reflects a decreasesignificant reduction in our net interest income primarilyfrom our investments. During the nine months ended September 30, 2020, we also incurred unusually high professional services and other costs in connection with negotiating forbearance arrangements with our lenders, entering into new financing arrangements and reinstating prior financing arrangements on our Agencythe exit from forbearance. In addition, during the nine months ended September 30, 2020, we recorded impairment losses on securities available-for-sale, net realized losses on sales of residential mortgage securities and Non-Agency MBS portfolios. This decrease wasresidential whole loans, losses on terminated Swaps that had previously been designated as hedges for accounting purposes were transferred from OCI to earnings, and unrealized losses on residential mortgage securities measured at fair value through earnings. These decreases were partially offset by higher other income, driven primarily by highernet gains on sales of Legacy Non-Agency MBS, unrealized gains on CRT securities accounted forour residential whole loans measured at fair value and gainsthrough earnings. Further, we recorded a provision for credit losses on the liquidation of certain residential whole loans accounted forheld at carrying value. In addition, operating and other expenses where higher primarily due to non-recurring expenses in relation to our contractual obligation to acceleratevalue of $32.4 million, which includes a provision for credit losses on undrawn commitments of $1.6 million, during the vesting of certain share based awards and to make a death benefit payment to the estate of our former Chief Executive Officer.nine months ended September 30, 2020.




Net Interest Income

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Table of Contents

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, 2017,2020, our net interest spread and margin were 2.15%0.65% and 2.59%1.25%, respectively, compared to a net interest spread and margin of 2.16%1.90% and 2.49%2.29%, respectively, for the nine months ended September 30, 2016.2019. Our net interest income decreased by $17.3$107.5 million, or 8.6%60.2%, to $183.9 million from $201.2$71.2 million for the nine months ended September 30, 2016.2020, from $178.7 million for the nine months ended September 30, 2019.  For the nine months ended September 30, 2017,2020, net interest income from Agency MBSfor our residential mortgage securities and Legacy Non-Agency MBS declinedMSR-related asset portfolios decreased by approximately $79.5 million compared to the nine months ended September 30, 2016, by approximately $27.3 million,2019, primarily due to lower average amounts invested in these securities and higher funding costs, partially offset by higher yields earned on Legacy Non-Agency MBS.due to portfolio sales in the current period. In addition, we also incurred approximately $14.6 million in interest expense related to the senior secured credit agreement we entered into during the second quarter of 2020 and approximately $6.6 million higher interest expense on our Convertible Senior Notes issued in June 2019. Net interest income also includes lower net interest income on RPL/NPL MBS wasfrom residential whole loans held at carrying value of approximately $14.8$14.2 million lowerfor the nine months ended September 30, 2020 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, 2016,2019 primarily due to higher average amounts invested in these assets partially offset by higher funding costs as a result of entering into forbearance agreements and higherlower yields earned on CRT securities.our residential whole loans at carrying value portfolio. In addition, net interest income for the nine months ended September 30, 20172020 also includes $13.2$30.8 million of interest expense associated with residential whole loans held at fair value, reflecting a $2.9$3.4 million increasedecrease in borrowing costs related to these investments compared to the nine months ended September 30, 2016.2019. 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.



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Table of Contents
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, 20172020 and 20162019. 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,
 20202019
 Average Balance InterestAverage Yield/CostAverage Balance InterestAverage Yield/Cost
(Dollars in Thousands)  
Assets:        
Interest-earning assets:        
Residential whole loans, at carrying value (1)
$5,554,592 $207,306 4.98 %$4,011,929 $171,725 5.71 %
Agency MBS (2)
522,119  8,852 2.26 2,379,289  45,521 2.55 
Legacy Non-Agency MBS (2)
356,471  28,786 10.77 1,322,559  106,147 10.70 
RPL/NPL MBS (2)
195,495 8,071 5.50 1,182,484 44,463 5.01 
Total MBS1,074,085  45,709 5.67 4,884,332  196,131 5.35 
CRT securities (2)
173,033 5,969 4.60 411,273 15,545 5.04 
MSR-related assets (2)
598,838 30,189 6.72 959,145 38,232 5.31 
Cash and cash equivalents (3)
443,034  646 0.19 186,587  2,703 1.93 
Other interest-earning assets128,565 9,089 9.43 94,708 4,272 6.01 
Total interest-earning assets7,972,147  298,908 5.00 10,547,974  428,608 5.42 
Total non-interest-earning assets1,834,040    2,465,917    
Total assets$9,806,187    $13,013,891    
Liabilities and stockholders’ equity:        
Interest-bearing liabilities:        
Collateralized financing agreements (4)(5)
$5,818,826  $179,754 4.06 %$8,520,981  $220,939 3.42 %
Securitized debt (6)
568,186  15,673 3.62 646,234  17,834 3.64 
Convertible Senior Notes224,291 11,678 6.94 98,243 5,085 6.94 
Senior Notes96,879  6,038 8.31 96,831  6,035 8.31 
Senior secured credit agreement176,939 14,571 11.00 — — — 
Total interest-bearing liabilities6,885,121  227,714 4.35 9,362,289  249,893 3.52 
Total non-interest-bearing liabilities122,635    242,414    
Total liabilities7,007,756    9,604,703    
Stockholders’ equity2,798,431    3,409,188    
Total liabilities and stockholders’ equity$9,806,187    $13,013,891   
Net interest income/net interest rate spread (7)
  $71,194 0.65 %  $178,715 1.90 %
Net interest-earning assets/net interest margin (8)
$1,087,026   1.25 %$1,185,685   2.29 %

(1)Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.
(2)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.  
(3)Includes average interest-earning cash, cash equivalents and restricted cash.
(4)Collateralized financing agreements include the following: Secured term notes, Non-mark-to-market term-asset based financing, and repurchase agreements. For additional information, see Note 6, included under Item 1 of this Quarterly Report on Form 10-Q.
(5)Average cost of repurchase agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.
(6)Includes both Securitized debt, at carrying value and Securitized debt, at fair value.
(7)Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.
(8)Net interest margin reflects annualized net interest income divided by average interest-earning assets.
  Nine Months Ended September 30,
  2017 2016
  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%
Legacy Non-Agency MBS (1)
 2,350,975
 156,829
 8.89
 3,023,239
 176,890
 7.80
RPL/NPL MBS (1)
 1,813,557
 55,899
 4.11
 2,630,475
 76,665
 3.89
Total MBS 7,547,905
 262,742
 4.64
 10,043,386
 318,101
 4.22
CRT securities (1)
 520,585
 22,898
 5.86
 243,776
 9,897
 5.41
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
Cash and cash equivalents (3)
 531,722
 2,854
 0.72
 270,297
 531
 0.26
Total interest-earning assets 9,564,534
 332,546
 4.64
 10,903,472
 344,641
 4.21
Total non-interest-earning assets (2)
 2,207,939
  
  
 2,007,033
  
  
Total assets $11,772,473
  
  
 $12,910,505
  
  
             
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
Senior Notes 96,746
 6,029
 8.31
 96,709
 6,027
 8.31
Total interest-bearing liabilities 7,858,481
 148,646
 2.49
 9,174,723
 143,487
 2.05
Total non-interest-bearing liabilities 734,181
  
  
 799,438
  
  
Total liabilities 8,592,662
  
  
 9,974,161
  
  
Stockholders’ equity 3,179,811
  
  
 2,936,344
  
  
Total liabilities and stockholders’ equity $11,772,473
  
  
 $12,910,505
  
  
             
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  
  
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Table of Contents

(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)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, 2020
Compared to
 Nine Months Ended September 30, 2019
 Increase/(Decrease) due toTotal Net
Change in
Interest Income/Expense
(In Thousands)VolumeRate
Interest-earning assets:   
Residential whole loans, at carrying value (1)
$59,688 $(24,107)$35,581 
Residential mortgage securities(167,490)7,492 (159,998)
MSR-related assets(16,592)8,549 (8,043)
Cash and cash equivalents1,695 (3,752)(2,057)
Other interest-earning assets1,862 2,955 4,817 
Total net change in income from interest-earning assets$(120,837)$(8,863)$(129,700)
Interest-bearing liabilities:   
Residential whole loan at carrying value financing agreements$43,522 $6,512 $50,034 
Residential whole loan at fair value financing agreements(2,852)1,381 (1,471)
Residential mortgage securities repurchase agreements(75,707)(6,622)(82,329)
MSR-related assets repurchase agreements(7,166)919 (6,247)
Other repurchase agreements(790)(382)(1,172)
Securitized debt(2,090)(71)(2,161)
Convertible Senior Notes and Senior Notes6,966 (370)6,596 
Senior secured credit agreement14,571 — 14,571 
Total net change in expense of interest-bearing liabilities$(23,546)$1,367 $(22,179)
Net change in net interest income$(97,291)$(10,230)$(107,521)

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

81
  Nine Months Ended September 30, 2017
  Compared to
  Nine Months Ended September 30, 2016
  Increase/(Decrease) due to 
Total Net
Change in
Interest Income/Expense
(In Thousands) Volume Rate 
Interest-earning assets:  
  
  
Agency MBS $(14,842) $310
 $(14,532)
Legacy Non-Agency MBS (42,659) 22,598
 (20,061)
RPL/NPL MBS (24,970) 4,204
 (20,766)
CRT securities 12,111
 890
 13,001
MSR related assets 17,833
 —
 17,833
Residential whole loans, at carrying value (1)
 10,804
 (697) 10,107
Cash and cash equivalents 833
 1,490
 2,323
Total net change in income from interest-earning assets $(40,890) $28,795
 $(12,095)
       
Interest-bearing liabilities:  
  
  
Agency repurchase agreements and FHLB advances $(10,361) $8,616
 $(1,745)
Legacy Non-Agency repurchase agreements (10,192) 4,965
 (5,227)
RPL/NPL MBS repurchase agreements (11,447) 5,434
 (6,013)
CRT securities repurchase agreements 3,452
 579
 4,031
MSR related assets repurchase agreements 5,773
 —
 5,773
Residential whole loan at carrying value repurchase agreements 3,998
 747
 4,745
Residential whole loan at fair value repurchase agreements 2,071
 682
 2,753
Securitized debt 1,049
 (209) 840
Senior Notes 2
 —
 2
Total net change in expense of interest-bearing liabilities $(15,655) $20,814
 $5,159
Net change in net interest income $(25,235) $7,981
 $(17,254)
Table of Contents

(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 and Non-Agency MBSResidential whole loans, at carrying value for the periods presented:
 Purchased Performing LoansPurchased Credit Deteriorated LoansTotal Residential Whole Loans, at Carrying Value
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)
September 30, 20204.98 %4.43 %0.55 %4.93 %4.23 %0.70 %4.98 %4.41 %0.57 %
September 30, 20195.69 4.11 1.58 5.76 3.05 2.71 5.71 3.88 1.83 
  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%

(1)Reflects annualized interest income on Residential whole loans, at carrying value divided by average amortized cost of Residential whole loans, at carrying value. Excludes servicing costs.
(2)Reflects annualized interest expense divided by average balance of repurchase agreements and securitized debt. Total Residential whole loans, at carrying value cost of funding includes 12 and 5 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the nine months ended September 30, 2020 and 2019, respectively. Cost of funding for the nine months ended September 30, 2020 includes the impact of amortization of $12.3 million of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes. The amortization of these losses increased the funding cost by 45 basis points for Purchased Performing Loans, 36 basis points for Purchased Credit Deteriorated Loans, and 44 basis points for total Residential whole loans, at carrying value. At June 30, 2020, following the closing of certain financing transactions and our exit from forbearance arrangements, and an evaluation of our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring. In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.
(3)Reflects the difference between the net yield on average Residential whole loans, at carrying value and average cost of funds on Residential whole loans, at carrying value.

The following table presents the components of the net interest spread earned on our residential mortgage securities and MSR-related assets for the periods presented:
Residential Mortgage SecuritiesMSR-Related Assets
Nine Months Ended
Net Yield (1)
Cost of Funding (2)
Net Interest Spread (3)
Net Yield (1)
Cost of Funding
Net Interest Spread (3)
September 30, 20205.53 %2.74 %2.79 %6.72 %3.56 %3.16 %
September 30, 20195.33 2.95 2.38 5.31 3.40 1.91 
 
(1) Reflects annualized interest income on MBS divided by average amortized cost of MBS.cost.
(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 5133 and 638 basis points and Legacy Non-Agency MBS cost of funding includes 5449 and 6911 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the nine months ended September 30, 20172020 and 2016,2019, respectively. Cost of funding for the nine months ended September 30, 2020 includes the impact of amortization of $278,000 of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes. The amortization of these losses increased the funding cost by 37 basis points for RPL/NPL MBS. At June 30, 2020, following the closing of certain financing transactions and the Company’s exit from forbearance arrangements, and an evaluation of the our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring. In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.
(3) Reflects the difference between the net yield on average MBS and average cost of funds on MBS.

funds.
 
Interest Income
 
Interest income on our Agency MBSresidential whole loans held at carrying value increased by $35.6 million, or 20.7%, for the nine months ended September 30, 2017 decreased by $14.52020 to $207.3 million or 22.5%,compared to $50.0 million from $64.5$171.7 million for the nine months ended September 30, 2016.2019. This changeincrease primarily reflects a $1.0$1.5 billion decreaseincrease in the average amortized costbalance of our Agency MBSthis portfolio to $3.4$5.6 billion for the nine months ended September 30, 20172020 from $4.4$4.0 billion for the nine months ended September 30, 20162019, partially offset by a slight increasedecrease in the net yield on our Agency MBS(excluding servicing costs) to 1.97%4.98% for the nine months ended September 30, 20172020 from 1.96%5.71% for the nine months ended September 30, 2016.  At the end2019.

82
Table of the third quarter of 2017,Contents
Due to previously discussed asset sales, the average coupon on mortgages underlyingamortized cost of our Agency MBS was higher comparedresidential mortgage securities portfolio decreased $4.0 billion to the end of the third quarter of 2016.  However, during the nine months ended September 30, 2017, our Agency MBS portfolio experienced a 14.4% CPR and we recognized $24.6 million of net premium amortization compared to a CPR of 12.7% and $27.7 million of net premium amortization$1.2 billion for the nine months ended September 30, 2016.  At September 30, 2017, we had net purchase premiums on our Agency MBS of $110.6 million, or 3.8% of current par value, compared to net purchase premiums of $135.1 million, or 3.8% of par value at December 31, 2016.
Interest income on our Non-Agency MBS (which includes Non-Agency MBS transferred to consolidated VIEs) decreased by $40.8 million, or 16.1%,2020 from $5.3 billion for the nine months ended September 30, 20172019 and interest income on our residential mortgage securities portfolio decreased $160.0 million to $212.7 million compared to $253.6$51.7 million for the nine months ended September 30, 2016. This decrease is primarily due to the decrease in the average amortized cost of our Non-Agency MBS portfolio of $1.5 billion or 26.3%, to $4.2 billion2020 from $5.7 billion for the nine months ended September 30, 2016.  This decrease more than offset the impact of the higher yields generated on our Legacy Non-Agency MBS portfolio, which were 8.89% for the nine months ended September 30, 2017 compared to 7.80% for the nine months ended September 30, 2016.  The increase 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, 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.

During the nine months ended September 30, 2017, we recognized net purchase discount accretion of $60.5 million on our Non-Agency MBS, compared to $61.2$211.7 million for the nine months ended September 30, 2016.  At September 30, 2017, we had net purchase discounts of $835.8 million, including Credit Reserve and previously recognized OTTI of $593.1 million,2019. Interest income on our Legacy Non-Agency MBS, or 28.7% of par value.  DuringMSR-related assets decreased by $8.0 million to $30.2 million for the nine months ended September 30, 2017 we reallocated $33.82020 compared to $38.2 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 and Non-Agency MBS and weighted average CPRs experienced for such MBS for the periods presented:nine months ended September 30, 2019. This decrease primarily reflects a $360.3 million decrease in the average balance of these investments for the nine months ended September 30, 2020 to $598.8 million compared to $959.1 million for the nine months ended September 30, 2019, partially offset by an increase in the yield to 6.72% for the nine months ended September 30, 2020 from 5.31% for the nine months ended September 30, 2019,.
  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
(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)9 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 Expense
 
Our interest expense for the nine months ended September 30, 2017 increased2020 decreased by $5.2$22.2 million, or 3.6%8.9%, to $148.6$227.7 million, from $143.5$249.9 million for the nine months ended September 30, 2016.2019.  This increasedecrease primarily reflects an increasea decrease in financing rates on our average repurchase agreement financings,borrowings to finance our residential mortgage securities portfolio and MSR-related assets partially offset by an increase in our average borrowings to finance residential whole loans MSRheld at carrying value and an increase in financing rates on our financing agreements. In addition in the current period we incurred interest expense of approximately $14.6 million related assetsto the senior secured credit agreement we entered into during the second quarter of 2020 and CRT securities, which was partially offset by a decreasehigher interest expense of $6.6 million on our Convertible Senior Notes issued in our average repurchase agreement borrowings and other advances to finance Agency MBS and Non-Agency MBS.June 2019. The effective interest rate paid on our borrowings increased to 2.49%4.35% for the nine months ended September 30, 2017,2020, from 2.05%3.52% for the nine months ended September 30, 2016.2019. 


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 an increase in interest expense of $19.6$3.4 million, or 335 basis points, for the nine months ended September 30, 2017,2020, compared to a reduction in interest expense of $31.3$1.6 million, or 453 basis points, for the nine months ended September 30, 2016.2019.  The weighted average fixed-pay rate on our Swaps designated as hedges increaseddecreased to 1.96%2.06% for the nine months ended September 30, 20172020 from 1.82%2.32% for the nine months ended September 30, 2016.2019.  The weighted average variable interest rate received on our Swaps designated as hedges increaseddecreased to 1.00%1.63% for the nine months ended September 30, 20172020 from 0.45%2.40% for the nine months ended September 30, 2016.  During2019.

Provision for Credit Losses on Residential Whole Loans Held at Carrying Value

For the nine months ended September 30, 2017,2020, we did not enter into any new Swaps and had Swaps with an aggregate notional amountrecorded a provision for credit losses on residential whole loans held at carrying value of $350.0$32.4 million and(which includes a weighted average fixed-pay rateprovision for credit losses on undrawn commitments of 0.58% amortize and/or expire.
We expect that our interest expense and funding costs$1.6 million) compared to a provision of $1.5 million 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 2016,2019. As previously discussed, on January 1, 2020, we recognized OTTI charges through earnings against certainadopted the new accounting standard addressing the measurement of credit losses on financial instruments (CECL). With respect to our Non-Agency MBSresidential whole loans held at carrying value, CECL requires that reserves for credit losses are estimated at the reporting date based on life of $1.0 million and $485,000, respectively. These impairment charges reflected changes in our estimatedloan expected cash flows, for such securities based on an updated assessmentincluding anticipated prepayments and reasonable and supportable forecasts of the estimated future performanceeconomic conditions.

83
Table 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.Contents

Other Income, net
 
For the nine months ended September 30, 2017,2020, Other (Loss)/Income, net increaseddecreased by $10.4$807.9 million, or 12.4%, to $94.0a $637.5 million loss, compared to $83.6$170.5 million of income for the nine months ended September 30, 2016.2019.  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 on2020 and 2019 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)2020 2019
Impairment and other losses on securities available-for-sale and other assets$(424,966)$— 
Net realized (loss)/ gain on sales of residential mortgage securities and residential whole loans(188,847)50,027 
Transfer from OCI of loss on swaps previously designated as hedges for accounting purposes(57,034)— 
Net gain on residential whole loans measured at fair value through earnings44,431 116,915 
Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings(13,432)7,977 
Liquidation gains on Purchased Credit Deteriorated Loans and other loan related income4,427 11,234 
Other(2,057)(15,693)
Total Other (Loss)/Income, net$(637,478)$170,460 

Operating and Other Expense


During the nine months ended September 30, 2017,2020, we had compensation and benefits and other general and administrative expenses of $40.3$47.8 million, or 1.69%2.28% of average equity, compared to $34.0$39.9 million, or 1.54%1.56% of average equity, for the nine months ended September 30, 2016.2019.  Compensation and benefits expense increased $4.8 million to $26.3$29.1 million for the nine months ended September 30, 2017,2020, compared to $21.5$24.3 million for the nine months ended September 30, 2016, which2019, primarily reflects non-recurring expenses recordedreflecting a provision for estimated severance costs in relation to our contractual obligation to accelerateconnection with a reduction in workforce that occurred in the vestingthird quarter of certain share based awards and to make a death benefit payment to the estate of our former Chief Executive Officer.2020. Our other general and administrative expenses increased by $1.6$3.1 million to $14.1$18.7 million for the nine months ended September 30, 20172020 compared to $12.5$15.6 million for the nine months ended September 30, 2016,2019, primarily due to higher costs for professional services, corporate insurance, administrative expenses associated with financing arrangements, corporate income tax and the loan securitization transaction completedwrite-off of certain internally developed software and deferred financing costs, partially offset by lower costs associated with deferred compensation to Directors in the current year period, which were impacted by the changes in our stock price. In addition, during the second quarter of 2017current year we also incurred professional service and other structured financing transactions, higher costs of $44.4 million related to stock-based compensation awards to Directorsnegotiating forbearance arrangements with our lenders entering into new financing arrangements and higher professional services related costs.reinstating prior financing arrangements on the exit from forbearance.


Operating and Other Expense during the nine months ended September 30, 20172020 also includes $14.8$28.6 million of loan servicing and other related operating expenses related to our residential whole loan activities. These expenses increaseddecreased compared to the prior year period by approximately $4.5$1.6 million, primarily due to increases inlower servicing fees and non-recoverable advances on our residential whole loan and REO increased loan servicing and modification fees and higher loan acquisition related expenses, which wereportfolios, partially offset by a decrease in the provision forcosts related to loan losses recognized for the nine month period.securitization activities.


84
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, 2020(10.15)%(34.55)%28.54 %(0.03)1.9 $4.61 
September 30, 20192.73 10.85 26.20 1.022.8 7.09 

(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 our financing agreements, and payable for unsettled purchases 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

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 our 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 the quarterly periods below:

(In Thousands, Except Per Share Amounts)September 30, 2020June 30, 2020March 31, 2020December 31, 2019September 30, 2019June 30, 2019March 31, 2019
GAAP Total Stockholders’ Equity$2,565.7 $2,521.1 $2,440.7 $3,384.0 $3,403.4 $3,403.4 $3,404.5 
Preferred Stock, liquidation preference(475.0)(475.0)(475.0)(200.0)(200.0)(200.0)(200.0)
GAAP Stockholders’ Equity for book value per common share2,090.7 2,046.1 1,965.7 3,184.0 3,203.4 3,203.4 3,204.5 
Adjustments:
Fair value adjustment to Residential whole loans, at carrying value141.1 (25.3)(113.5)182.4 145.8 131.2 92.1 
Stockholders’ Equity including fair value adjustment to Residential whole loans, at carrying value (Economic book value)$2,231.8 $2,020.8 $1,852.2 $3,366.4 $3,349.2 $3,334.6 $3,296.6 
GAAP book value per common share$4.61 $4.51 $4.34 $7.04 $7.09 $7.11 $7.11 
Economic book value per common share$4.92 $4.46 $4.09 $7.44 $7.41 $7.40 $7.32 
Number of shares of common stock outstanding453.3 453.2 453.1 452.4 451.7 450.6 450.5 

85
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

(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 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.

Recent Accounting Standards to beBe Adopted in Future Periods


In August 2020, the Financial Accounting Standards Board (or FASB) issued accounting standards update (or ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Targeted Improvements toHedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Hedging Activities

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities Convertible Instruments and Contracts in an Entity’s Own Equity (or ASU 2017-12)2020-06). The amendmentsASU 2020-06 was issued in thisorder to reduce the complexity associated with recording financial instruments with characteristics of both liabilities and equity by eliminating certain accounting models associated with such instruments and enhancing disclosure requirements. 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 2017-122020-06 is effective for public business entitiesus 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, 2017.2021. 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 testsbut no earlier than 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, and2020, including 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.years. We do not expect the adoption of ASU 2016-182020-06 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, Measurements of Credit Losses on Financial Instruments (or ASU 2016-13). The amendments in ASU 2016-13 require entities to measure all expected credit 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. 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. In addition, we expect that the new guidance will also result in changes to the accounting and presentation of our residential whole loans held at carrying value. We currently anticipate that upon adoption, the guidance will result in an increase in the gross carrying amount of our residential whole loans 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 evaluate 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. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning 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 potential 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.

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 positionaccounting 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, to meet margin calls 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, depositarydepository shares representing preferred stock, warrants, debt securities, rights and/or units pursuant to our automatic shelf registration statement and, at September 30, 2017,2020, we had 13.0approximately 8.8 million shares of common stock available for issuance pursuant to our DRSPP shelf registration statement. During the nine months ended September 30, 2017,2020, we issued 1,516,307137,740 shares of common stock through our DRSPP, raising net proceeds of approximately $12.2 million.$752,095. During the nine months ended September 30, 2020, we did not sell any shares of common stock through the ATM Program.


On March 2, 2020, we completed the issuance of 11.0 million shares of our Series C Preferred Stock 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 total net proceeds we received from the offering were approximately $266.0 million, after deducting offering expenses and the underwriting discount.

Financing agreements

Our borrowings under repurchasefinancing agreements include a combination of shorter term and longer arrangements. Certain of these arrangements are uncommittedcollateralized directly by our residential mortgage investments or otherwise have recourse to the Company, while securitized debt financing is non-recourse financing. Further, certain of our financing agreements contain terms that allow the lender to make margin calls on the Company based on changes in the value of the underlying collateral securing the borrowing. Repurchase agreements and other forms of collateralized financing are 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.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)(or the percentage amount by which the collateral value is contractually required to exceed the loan amount), 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. Other non-repurchase agreement financing arrangements also contain provisions governing collateral maintenance.
 
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With respect to margin maintenance requirements for repurchase agreements secured by harder to value assets, such as residential whole loans, Non-Agency MBS and residential whole loans,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 presents For additional information regarding the margin requirements, orCompany’s various types of financing arrangements, including those of with non mark-to-market terms and the percentage amount by which thehaircuts for those agreements with mark-to-market collateral value is contractually required to exceed the loan amount (this difference is referred to as the “haircut”),provisions, see Note 6, included under Item 1 of this Quarterly Report on our repurchase agreements at September 30, 2017 and December 31, 2016:Form 10-Q.
 
At September 30, 2017
Weighted
Average
Haircut
Low
High
Repurchase agreement borrowings secured by:
 

 

 
Agency MBS
4.62% 3.00% 5.00%
Legacy Non-Agency MBS
22.40
 15.00
 35.00
RPL/NPL MBS 21.58
 20.00
 27.50
U.S. Treasury securities
1.39
 1.00
 2.00
CRT securities 22.05
 15.00
 25.00
MSR related assets 33.76
 30.00
 50.00
Residential whole loans 28.35
 20.00
 35.00
       
At December 31, 2016
Weighted
Average
Haircut		 Low High
Repurchase agreement borrowings secured by:
 
  
  
Agency MBS
4.67% 3.00% 6.00%
Legacy Non-Agency MBS
24.01
 15.00
 60.00
RPL/NPL MBS 20.98
 15.00
 30.00
U.S. Treasury securities
1.60
 1.00
 2.00
CRT securities 23.22
 20.00
 25.00
MSR related assets 41.40
 35.00
 50.00
Residential whole loans 25.03
 20.00
 35.00
DuringWe expect that we will continue to pledge residential mortgage assets as part of certain of our ongoing financing arrangements. As we experienced in the first nine monthsquarter of 2017,2020, when the weighted average haircut requirements for the respective underlying collateral types for our repurchase agreements have remained fairly consistent compared to the endvalue 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.
Repurchase agreement funding for our residential mortgage investments has been availableassets pledged as collateral experienced rapid decreases, margin calls under our financing arrangements could materially increase, causing an adverse change in our liquidity position. Additionally, if one or more of our financing counterparties chose not to us at generally attractive market terms from multiple counterparties.  Typically, due to the risks inherent in credit sensitive residential mortgage investments, repurchase agreementprovide ongoing 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.  Therefore, we generally expect to be ableour ability to finance our acquisitions of Agency MBSlong-maturity assets would decline or otherwise become available 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 bypossibly less advantageous terms. Further, when liquidity tightens, our counterparties to our short term arrangements with mark-to-market collateral provisions may increase their required collateral cushion (or collectively, “cash and other unpledged collateral”)margin) requirements on new financings, including financings that we roll with the same counterparty, thereby reducing our ability to meet routine margin calls and protect against unforeseen reductionsuse leverage. Access to financing may also be negatively impacted by ongoing volatility in financial markets, thereby potentially adversely impacting our borrowing capabilities.  current or future lenders’ ability or willingness to provide us with financing. In addition, there is no assurance that favorable market conditions will exist to permit us to consummate additional securitization transactions if we determine to seek that form of financing.

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, 2017,2020, we had a total of $8.5$5.2 billion of MBS, U.S. Treasury securities, CRT securities, residential whole loans, and MSR relatedresidential mortgage securities, MSR-related assets and $15.4other interest-earning assets and $5.3 million of restricted cash pledged againstto our repurchase agreements and Swaps.financing counterparties. At September 30, 2017,2020, we havehad access to various sources of liquidity which we estimate exceeds $1.2 billion.estimated exceeded $940.2 million. This amount includes (i) $608.2$884.2 million of cash and cash equivalents;equivalents and (ii) $186.0$56.0 million in estimatedunused capacity under our financing available from unpledged Agency MBS and 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.arrangements. Our sources of liquidity do not include restricted cash. In addition, we have $65.5 million of unencumbered residential whole loans. We are evaluating potential opportunities to finance our residential whole loans, including loan securitization.

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The table below presents certain information about our borrowings under repurchaseasset-backed financing agreements and other advances, and securitized debt:
 Asset-backed Financing AgreementsSecuritized 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, 2020$3,511,453 $3,217,678 $3,613,968 $610,120 $837,683 $837,683 
June 30, 20204,736,610 3,692,845 5,024,926 538,245 516,102 541,698 
March 31, 20209,233,808 7,768,180 9,486,555 558,007 533,733 594,458 
December 31, 20198,781,646 9,139,821 9,139,821 590,813 570,952 621,071 
September 30, 20198,654,350 8,571,422 8,833,159 617,689 605,712 649,405 
  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
 —
 —
 —


(1) Reflects securitized debt from our loan securitization transaction in June 2017
(2)  The information presented in the table above excludes $230.0 million of Convertible Senior Notes issued in June 2019, $100.0 million of Senior Notes issued in April 2012.2012, and $481.3 million of a senior secured term loan facility. The outstanding balance of both the Convertible Senior Notes hasand Senior Notes have been unchanged at $100.0 million since issuance. Subsequent to the end of the third quarter of 2020, we repaid in full the outstanding principal balance of the senior secured term loan facility.



Cash Flows and Liquidity for the Nine Months Ended September 30, 20172020
 
Our cash, and cash equivalents and restricted cash increased by $348.1$754.8 million during the nine months ended September 30, 2017,2020, reflecting: $1.9$5.9 billion provided by our investing activities, primarily from payments on$5.1 billion used in our MBS; $119.0financing activities and $16.8 million provided by our operating activities; and $1.7 billion used in our financing activities.
 
At September 30, 2017,2020, our debt-to-equity multiple was 2.41.9 times compared to 3.13.0 times at December 31, 2016.2019. At September 30, 2017,2020, we had borrowings under repurchaseasset-backed financing agreements of $6.9$3.2 billion, with 31 counterparties, of which $2.7$3.0 billion were secured by residential whole loans and $258.5 million were secured by residential mortgage securities, MSR-related assets, and other interest-earning assets. In addition, at September 30, 2020, we had securitized debt of $837.7 million in connection with our loan securitization transactions. At December 31, 2019, we had borrowings under asset-backed financing agreements of $9.1 billion, of which $4.7 billion were secured by residential whole loans, $1.6 billion were secured by Agency MBS, $1.4$1.1 billion were secured by Legacy Non-Agency MBS, $798.5$495.1 million were secured by RPL/NPL MBS, $474.7 million were secured by U.S. Treasuries, $413.2$203.6 million were secured by CRT securities, $268.8$962.5 million were secured by MSR relatedMSR-related assets and $883.4$57.2 million were secured by residential whole loans.  We continue to have available capacity under our repurchase agreement credit lines.other interest-earning assets. In addition, at September 30, 2017,December 31, 2019, we had securitized debt of $137.3$571.0 million in connection with our loan securitization transaction in June 2017. At December 31, 2016, we had borrowings under repurchase agreements of $8.5 billion with 31 counterparties, of which $3.1 billion were secured by Agency MBS, $1.7 billion were secured by Legacy Non-Agency MBS, $1.9 billion were secured by RPL/NPL MBS, $504.6 million were secured by U.S. Treasuries, $271.2 million were secured by CRT securities, $135.1 million were secured by MSR related assets and $832.1 million were secured by residential whole loans. In addition, at December 31, 2016, we had $215.0 million in outstanding FHLB advances, secured by Agency MBS, all of which were repaid in January 2017.transactions.


During the nine months ended September 30, 2017, $1.92020, $5.9 billion was provided throughby our investing activities.  We paid $1.3 billion for purchases of residential whole loans, loan related investments and capitalized advances, and purchased $163.7 million of MSR-related assets and CRT securities funded with cash and repurchase agreement borrowings. In addition, during the nine months ended September 30, 2020, we received cash of $3.4 billion$609.8 million from prepayments and scheduled amortization on our MBS, CRT securities and MSR relatedMSR-related assets, of which $675.6$137.7 million was attributable to Agency MBS, $2.6 billion$410.9 million was from Non-Agency MBS, and $12.1 million was from CRT securities and $140.1$56.2 million was attributable to MSR related assets.  We purchased $718.9MSR-related assets, and approximately $4.9 million of Non-Agency MBS, $238.8 million ofwas attributable to CRT securities, $325.4 millionand we sold certain of MSR relatedour investment securities, MSR-related assets, and $3.2 millionother assets for $3.8 billion, realizing net losses of Agency MBS funded with cash and repurchase agreement borrowings.$71.6 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, duringparticular, subsequent to the end of the first quarter, we sold our remaining Agency MBS, substantially all of our Legacy Non-Agency MBS portfolio and substantially reduced our investments in MSR-related assets and CRT securities. During the three months ended September 30, 2020, we sold our remaining Legacy Non-Agency MBS. During the nine months ended September 30, 20172020, we sold certainreceived $1.3 billion of our Non-Agency MBSprincipal payments on residential whole loans and U.S. Treasury securities for $222.1$203.6 million realizing net gains of $30.5 million.proceeds on sales of REO. 
 
In connection with our repurchase agreement borrowingsfinancings 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
88
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 CallsCash 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 PledgedAggregate Assets
Pledged For
Margin Calls
(In Thousands)     
September 30, 2020$— $2,526 $2,526 $2,199 $(327)
June 30, 2020— 108,999 108,999 322,682 213,683 
March 31, 202030,187 213,392 243,579 67,343 (176,236)
December 31, 2019— 26,972 26,972 18,311 (8,661)
September 30, 201977,214 35,271 112,485 129,132 16,647 
 
(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.
  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)

We are subject to various financial covenants under our repurchasefinancing agreements, and derivative contracts, which include minimum liquidity and net worth and/or profitability requirements, net worth decline limitations and maximum debt-to-equity ratios and minimum market capitalization requirements.ratios. We have maintainedwere in compliance with all of our financial covenants throughas of September 30, 2017.2020.

During the nine months ended September 30, 2017, we paid $229.0 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, we declared our third quarter 2017 dividend on our common stock of $0.20 per share; on October 31, 2017, we paid this dividend, which totaled approximately $79.6 million, including dividend equivalents of approximately $205,000. 
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 may 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.

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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 typically 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 ofon our repurchasefinancing agreements (net of the impact of Swaps)will 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 may 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 to 300 basis points if the bond is not redeemed by the issuer at 36 months 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. BecauseFor certain residential whole loans that were purchased as re-performing loans, 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 wholethese 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 typically 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 our 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 typically 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 typically 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.financing transactions. While ouruse of such derivatives dodoes 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. 



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 September 30, 2017, MFA’s $5.7 billionthis time, it is not possible to predict the effect of Agency MBS and Legacy Non-Agency MBS were backed by Hybrid, adjustable and fixed-rate mortgages.  Additional information about these MBS,such change, including average months to reset and three-month average CPR, is presented below:
  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)
(Dollars in Thousands)  
  
  
  
  
  
  
  
  
< 2 years (5)
 $1,597,666
 8
 20.4% $1,845,110
 5
 19.0% $3,442,776
 6
 19.6%
2-5 years 144,494
 46
 12.0
 —
 —
 —
 144,494
 46
 12.0
> 5 years 60,033
 67
 12.8
 —
 —
 —
 60,033
 67
 12.8
ARM-MBS Total $1,802,193
 13
 19.5% $1,845,110
 5
 19.0% $3,647,303
 9
 19.2%
15-year fixed (6)
 $1,216,047
  
 11.4% $3,250
  
 12.9% $1,219,297
  
 11.4%
30-year fixed (6)
 —
  
 —
 830,457
  
 18.3
 830,457
  
 18.3
40-year fixed (6)
 —
  
 —
 37,910
  
 15.1
 37,910
  
 15.1
Fixed-Rate Total $1,216,047
  
 11.4% $871,617
  
 18.1% $2,087,664
  
 14.4%
MBS Total $3,018,240
  
 16.2% $2,716,727
  
 18.7% $5,734,967
  
 17.5%
(1)Excludes $1.2 billionthe 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 RPL/NPL MBS. Refer to table below for further information.
(2)Does not include principal payments receivable of $1.1 million.
(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)Includes floating-rate MBS that may be collateralized by fixed-rate mortgages.
(6)Information presented based on data available at time of loan origination.


The following table presents certain information about our RPL/NPL MBSassets 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, at September 30, 2017:
  Fair Value Net Coupon 
Months to
Step-Up (1)
 
3 Month Average
Bond CPR (2)
(Dollars in Thousands)        
Re-Performing loans $84,012
 3.65% 32
 43.0%
Non-Performing loans 1,110,920
 4.25
 21
 22.6
Total RPL/NPL MBS $1,194,932
 4.21% 22
 26.2%

(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 prepaymentsas well as the related accounting impact. However, we expect that in the near term, we will work closely with the Trustee companies and/or other entities that are involved in calculating the interest rates for CPR purposes.

At September 30, 2017, our CRTresidential mortgage securities and MSR related assets had a fair valuesecuritized 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 be made to existing agreements for these transactions.
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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, 2017.2020. 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, 2017.2020.

Change in Interest Rates
Estimated
Value
of Assets (1)
Estimated
Value of Securitized and Other Fixed Rate Debt		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$7,338,936 $9,758 $7,348,694 $(143,322)8.38 %(1.91)%
 + 50 Basis Point Increase$7,428,701 $(2,068)$7,426,633 $(65,383)4.60 %(0.87)%
Actual at September 30, 2020$7,505,910 $(13,894)$7,492,016 $— — %— %
 - 50 Basis Point Decrease$7,570,563 $(25,719)$7,544,844 $52,828 (5.08)%0.71 %
 -100 Basis Point Decrease$7,622,661 $(37,545)$7,585,116 $93,100 (9.39)%1.24 %

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
(Dollars in Thousands)            
 +100 Basis Point Increase $10,411,914
 $27,911
 $10,439,825
 $(85,728) (3.08)% (0.81)%
 + 50 Basis Point Increase $10,485,268
 $(1,070) $10,484,198
 $(41,355) (1.80)% (0.39)%
Actual at September 30, 2017 $10,555,603
 $(30,050) $10,525,553
 $—
 —
 —
 - 50 Basis Point Decrease $10,622,921
 $(59,030) $10,563,891
 $38,338
 (1.41)% 0.36 %
 -100 Basis Point Decrease $10,687,220
 $(88,011) $10,599,209
 $73,656
 (1.68)% 0.70 %
(1)Such assets include residential whole loans and REO, MBS and CRT securities, MSR-related assets, cash and cash equivalents and restricted cash.

(1)  Such assets include MBS and CRT securities, residential whole loans and REO, MSR 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, 2017.2020. 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 Swapssecuritized and other fixed rate date (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, 2017,2020, 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, 2017,2020, 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,securitized and other fixed rate debt, of 0.761.57 which is the weighted average of 1.682.39 for our Agency MBS, 1.28Residential whole loans, 0.61 for our Non-Agency investments, (2.30)(1.46) for our Swaps,securitized debt, and 0.05other fixed rate debt, and 0.11 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)(0.65), which is the weighted average of (0.40)(0.84) for our Agency MBS,Residential whole loans, zero for our Swaps,securitized and other fixed rate debt, zero for our Non-Agency MBS 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.agreements.  Our asset/liability structure is generally such that an increase in interest rates would be expected to result in a decrease in net interest income, as our 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.



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Credit Risk
 
Although we do not believe that we are exposed to credit risk in our Agency MBS portfolio, weWe are exposed to credit risk through our credit-sensitivecredit sensitive residential mortgage investments, in particular Legacy Non-Agency MBS and residential whole loans and CRT securities and to a lesser extent our investments in RPL/NPL MBS CRT securities and MSR relatedMSR-related assets. As discussed above, since the end of the first quarter we have engaged in asset sales and taken other actions that significantly changed our asset composition subsequent to March 31, 2020. During the third quarter of 2020, we sold the remainder of our Legacy Non-Agency MBS. As a result, our primary credit risk currently relates to our residential whole loans.

Our exposure to credit risk from our credit sensitive investments is discussed in more detail below:


Legacy Non-Agency MBSResidential Whole Loans


In the event of the return of less than 100% of par onWe are exposed to credit risk from our Legacy Non-Agency MBS, credit support containedinvestments 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.residential whole loans. Our investment process for Legacy Non-Agency MBS involves analysisnon-performing and Purchased Credit Deteriorated Loans is focused primarily on quantifying and pricing credit risk. When weNon-Performing and Purchased Credit Deteriorated Loans are acquired at purchase Legacy Non-Agency MBS, we assign certain assumptionsprices that are generally discounted to eachthe contractual loan balances based on a number of factors, including the impaired credit history of the MBS, including but not limited to, future interest rates, voluntary prepayment rates, mortgage modifications, default ratesborrower and loss severities, and generally allocate a portionthe value of the purchase discountcollateral securing the loan. In addition, as we generally own the mortgage-servicing rights associated with these loans, our process is also focused on selecting a Credit Reserve which provides credit protection for such securities.  As part ofsub-servicer with the appropriate expertise to mitigate losses and maximize our surveillance process, we review our Legacy Non-Agency MBS by trackingoverall return. This involves, among other things, performing due diligence on the sub-servicer prior to 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.engagement as well as ongoing oversight and surveillance. To the extent that actual performancedelinquencies 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 a Legacy Non-Agency MBSprotection against financial loss.

Credit risk on Purchased Performing Loans is less favorable than its expected performance, we may revisemitigated through our performance expectations.  As a result, we could reduceprocess to underwrite the accretable discount on the security and/or recognizeloan before it is purchased and includes 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 characteristicsassessment of the mortgage loans underlyingborrower’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 Legacy Non-Agency MBS.  Rehabilitation loans.

The following table presents certain information about our Legacy Non-Agency MBS portfolioResidential whole loans, at carrying value at September 30, 2017.  Information presented with respect to the weighted2020:

Purchased Performing LoansPurchased Credit Deteriorated Loans
 Loans with an LTV:Loans with an LTV:
(Dollars in Thousands)80% or BelowAbove 80%80% or BelowAbove 80%Total
Amortized cost$3,659,498 $132,294 $423,880 $278,134 $4,493,806 
Unpaid principal balance (UPB)$3,601,206 $132,238 $467,432 $345,182 $4,546,058 
Weighted average coupon (1)
6.1 %6.5 %4.5 %4.4 %5.8 %
Weighted average term to maturity (months)273 335 267 319 277 
Weighted average LTV (2)
62.8 %86.3 %56.8 %108.7 %66.3 %
Loans 90+ days delinquent (UPB)$293,277 $12,326 $63,682 $83,842 $453,127 

(1)Weighted average FICO scores and other information aggregatedis calculated based on information reported at the timeinterest bearing principal balance of mortgage origination are historical and, as such,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 impactseller, interest rates included in the calculation are net of servicing fees.
(2)LTV represents the ratio of the general changes in home prices or changes in borrowers’ credit scores ortotal 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 $222.2 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 useunpaid principal balance and the valuation obtained during underwriting, is 68%. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the mortgaged properties.LTV ratio is not meaningful.

The information in the table below is presented as of September 30, 2017:

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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%


(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, amortized cost of $1.2 billion, fair value of $1.2 billion and purchase discounts of $2.0 million at September 30, 2017.
(4)Purchase discounts designated as Credit Reserve and OTTI are not expected to be accreted into interest income.
(5)Weighted average is based on MBS current face at September 30, 2017.
(6)Information provided is based on loans for individual groups owned by us.
(7)Percentage of face amount for which the original mortgage note contractually calls for principal amortization in the current period.
(8)Information provided is based on loans for all groups that provide credit enhancement for MBS with credit enhancement.
(9)CRR represents voluntary prepayments and CDR represents involuntary prepayments.
(10)Percentage of face amount of loans for which the borrower has not been delinquent since origination.
(11)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 MBSresidential whole loan portfolio at September 30, 2017:
2020:
Property LocationPercent of Interest-Bearing Unpaid Principal Balance
California42.935.0 %
Florida7.813.2 %
New York6.57.7 %
New Jersey4.05.4 %
VirginiaGeorgia3.93.3 %


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 loans in the associated referenceloan pool.


MSR RelatedMSR-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.

Credit Spread Risk
Residential Whole Loans

We are also exposed toCredit 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 valueliabilities, including hedges, will not always move in tandem. Consequently, changes in credit spreads can result in volatility in our financial results and reported book value.
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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:
Contents
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. This risk was particularly pronounced during the first quarter of 2020, as conditions created by the COVID-19 pandemic resulted in us receiving an usually high number of margin calls, negatively impacting our overall liquidity and ultimately leading us to enter into the Forbearance Agreements.

We pledge residential mortgage assets and cash to secure our repurchasefinancing agreements. Our financing agreements with mark-to-market collateral provisions require us to pledge additional collateral in the event the market value of the assets pledged decreases, in order maintain the lenders contractually specified collateral cushion, which is measured as the difference between the loan amount and Swaps.  At September 30, 2017, we had access to various sourcesthe market value of liquidity which we estimate to be in excess of $1.2 billion, an amount which includes: (i) $608.2 million of cash and cash equivalents, (ii) $186.0 million in estimated financing available from unpledged Agency MBS and other Agency MBS collateral that are currentlythe asset pledged in excess of contractual requirements, and (iii) $363.4 million in estimated financing available from currently unpledged Non-Agency MBS.  Our sources of liquidity do not include restricted cash.as collateral. 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.  Further, should marketwhen liquidity tighten,tightens, our repurchase agreement counterparties may increase our margincollateral cushion (or margin) requirements on new financings, including repurchase agreement borrowings that we roll with the same counterparty, reducing our ability to use leverage.


At September 30, 2020, we had access to various sources of liquidity which we estimate to be in excess of $940.2 million, an amount which includes: (i) $884.2 million of cash and cash equivalents and (ii) $56.0 million in unused capacity under our financing arrangements. Our sources of liquidity do not include restricted cash. In addition, at September 30, 2020 we had $65.5 million of unencumbered residential whole loans.

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 MBSNon-QM loans and certain CRT securities, 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 loancredit 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.


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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, 2017,2020, 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, 2017.2020. 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, 20172020 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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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, 2016.2019 (the “2019 Form 10-K”), as supplemented by the risk factors described under “Item 1.A. Risk Factors” in the Company’s Quarterly Reports on Form 10-Q for the three months ended March 31, 2020 (the “2020 Q1 Form 10-Q”) and six months ended June 30,2020 (the “2020 Q2 Form 10-Q”). There are no material changes from the risk factors set forth in such Annual Report onthe 2019 10-K, the 2020 Q1 Form 10-K.10-Q and the 2020 Q2 Form 10-Q. However, the risks and uncertainties that the Company faces are not limited to those set forth in the Company’s Annual Report on2019 Form 10-K forand the year ended December 31, 2016.2020 Q1 Form 10-Q and the 2020 Q2 Form 10-Q. 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,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 remainremained available for repurchase)repurchase at September 30, 2020).  Such

The Company engaged in no share repurchase activity during the third quarter of 2020 pursuant to the repurchase program nor did it withhold any restricted shares (under the terms of grants under its Equity Plan) to offset tax withholding obligations that occur upon the vesting and release of restricted stock awards and/or RSUs.

In November 2020, the Company’s Board authorized a new share repurchase program under which the Company may repurchase up to $250 million of its outstanding common stock. The authorization under this repurchase program expires at the end of 2022. The Board’s authorization replaces and supersedes the authorization under the repurchase program that was adopted in December 2013.

The stock repurchase program does not have an expiration date and, at present, there is no intention to modify or otherwise rescind such authorization.  require the purchase of any minimum number of shares. Subject to applicable securities laws, repurchases of common stock under the Repurchase Program arerepurchase program may be made at times and in amounts as we deemthe Company deems appropriate, (including,using available cash resources. The timing and extent to which the Company repurchases its shares will depend upon, among other things, market conditions, share price, liquidity, regulatory requirements and other factors, and repurchases may be commenced or suspended at any time without prior notice. Acquisitions under the share repurchase program may be made in ourthe open market, through privately negotiated transactions or block trades or other means, in accordance with applicable securities laws (including, in the Company’s 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 Programrepurchase 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 Programrepurchase 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 2017 pursuant to the Repurchase Program.  The Company did, however, withhold restricted shares (under the terms of grants under our 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.


96
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.

97
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 5, 2020MFA FINANCIAL, INC.
(Registrant)
Date: November 2, 2017MFA FINANCIAL, INC.
By:(Registrant)
By:/s/ Stephen D. Yarad
Stephen D. Yarad
Chief Financial Officer
 and Chief Accounting Officer
(Principal Financial Officer)

98
Table of Contents
EXHIBIT INDEX


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


ExhibitDescription
ExhibitDescription
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.
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.
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.
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*101XBRL Instance DocumentInteractive 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, 2020 (Unaudited) and December 31, 2019; (ii) our Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2020 and 2019; (iii) our Consolidated Statements of Comprehensive Income / (Loss) (Unaudited) for the three and nine months ended September 30, 2020 and 2019; (iv) Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2020 and 2019; (v) our Consolidated Statements of Cash Flows (Unaudited) for the three months ended September 30, 2020 and 2019; and (vi) the notes to our Unaudited Consolidated Financial Statements.
101.SCH*104Cover 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