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

FORM 10-Q

Commission File Number: 1-13991

MFA MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)

(212) 207-6400
(Registrant’s telephone number, including area code)

     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. Yesþ Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

     Indicate by check mark whether the registrant is an accelerated filera shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934)Act). Yesþo Nooþ

     81,661,34379,194,243 shares of the registrant’s common stock, $0.01 par value, were outstanding as of October 31, 2005.April 28, 2006.

TABLE OF CONTENTS

TABLE OF CONTENTS

MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONBALANCE SHEETS

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

1

MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME

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

2

MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

3

MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

4

MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)INCOME

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

5

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Organization

     MFA Mortgage Investments, 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 federal income tax purposes. In order to maintain its statusqualification 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 net taxable net income to its stockholders, subject to certain adjustments.

2. Summary of Significant Accounting Policies

     (a) Basis of Presentation

     The accompanying interim unaudited financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted according to such SEC rules and regulations. Management believes, however, that these disclosures are adequate to make the information presented therein not misleading. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's annual reportAnnual Report on Form 10-K for the year ended December 31, 2004.2005. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 2005March 31, 2006 and results of operations for all periods presented have been made. The results of operations for the nine-monththree-month period ended September 30, 2005March 31, 2006 should not be construed as indicative of the results to be expected for the full year.

     The accompanying financial statements are 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. Actual results could differ from those estimates.

(b) MBS

     (b) Mortgage-Backed Securities

The Company accounts for its MBS in accordance with Statement of Financial Accounting Standards (“FAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which requires that investments in securities be designated as either “held-to-maturity,” “available-for-sale” or “trading” at the time of acquisition. All of the Company’s MBS are designated as available-for-sale and are carried at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income, or loss, a component of stockholders’ equity.
Stockholder’s Equity. On December 31, 2005, the Company early adopted the guidance prescribed in Financial Accounting Standards Board (“FASB”) Staff Position FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“FASB Impairment Position”). The application of the FASB Impairment Position resulted in the Company recognizing an other-than-temporary impairment charge of $20.7 million on December 31, 2005. (See Note 4.)

     Although the Company generally intends to hold its MBS until maturity, it may, from time to time, sell any of its MBS as part of the overall management of its business. The available-for-sale designation provides the Company with the flexibility to sell its MBS in order to act on potential market opportunities or changes in economic conditions to ensure future liquidity and to meet other general corporate purposes as they arise. Gains orAmounts reclassified out of accumulated other comprehensive income into earnings, as realized gains and losses, onupon the sale of investment securitiesMBS are based on the specific identification method. (See Note 4.)

     The Company’s adjustable-rate assets are comprised primarily of hybrid MBS and adjustable-rate MBS (collectively, “ARM-MBS”) that are issued or guaranteed as to principal and/or interest by an agency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation, such as Fannie Mae or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). MBS that are issued, or guaranteed by an agency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae, Fannie Mae or Freddie Mac are commonly referred to herein asMae”) (collectively, “Agency MBS.”MBS”). Hybrid MBS have interest rates that are fixed for a specified period and, thereafter, generally reset annually.

     Interest income is accrued based on the outstanding principal balance of the investment securities and their contractual terms. Premiums and discounts associated with the purchase of investment securities are amortized into interest income over the life of such securities using the effective yield method, adjusted for actual prepayment activity.

6

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(c) Cash and Cash Equivalents

     Cash and cash equivalents include cash in bank accountson hand and highly liquid investments with original maturities of three months or less. The carrying amount of cash equivalents approximates their fair value.

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     (d) Other-Than-Temporary Impairment/Credit Risk

     The Company limits its exposure to credit losses on its investment portfolio by requiring that at least 50% of its investment portfolio consist of Agency MBS. Pursuant to the Company’sits operating policies, the remainder of itsthe Company’s assets may consist of investments in: (i) residential mortgage loans; (ii) residential MBS; (iii) direct or indirect investments in multi-family apartment properties; (iv) investments in limited partnerships, REITs or closed-end funds; or (v) investments in other fixed income instruments (corporate or government). At September 30, 2005, 87.2%March 31, 2006, 88.6% of the Company’s assets consisted of Agency MBS and related receivables, 10.0%8.9% were MBS rated AAA by Standard & Poor’s Corporation, a nationally recognized rating agency, and related receivables and 2.0%1.6% were cash and cash equivalents; combined these assets comprised 99.2%99.1% of the Company’s total assets. At September 30, 2005, the Company held MBS with a par value of approximately $6.3 million which were rated below AAA, of which approximately $1.5 million were rated BB and below (with $231,000 not rated). The MBS rated BB and below, including the non-rated MBS, were purchased at a discount, of which $341,000 reflects credit protection against future credit losses as of September 30, 2005.

     Other-than-temporary impairment losses onrelated to changes in market interest rates or in the underlying credit of investment securities, as measured by the amount of decline in estimated fair value attributable to factors that are considered to be other-than-temporary, are charged against income resulting in an adjustment of the cost basis of such securities. The following are among, but not all of, the factors considered in determining whether and to what extent an other-than-temporary impairment related to credit exists: (i) the expected cash flow from the investment; (ii) whether there has been an other-than-temporary deterioration of the credit quality of the underlying mortgages, debtor or the company in which equity interests are held; (iii) the credit protection available to the related mortgage pool for MBS; (iv) any other market information available, including analysts assessments and statements, public statements and filings made by the debtor, counterparty or other relevant party issuing or otherwise collateralizing the particular security; (v) management’s internal analysis of the security considering all known relevant information at the time of assessment; and (vi) the historical magnitude and duration of the historical decline in market value when available. Because management’s assessments are based on factual information as well as subjective information available at the time of assessment, the determination as to whether an other-than-temporary decline exists and, if so, the amount considered impaired is also subjective and, therefore, constitutes material estimates that are susceptible to a significant change. At September 30,

     On November 3, 2005, andthe FASB Impairment Position was issued. The guidance in the FASB Impairment Position is required for reporting periods beginning after December 15, 2005, with earlier application permitted. The Company commenced the application of the FASB Impairment Position effective December 31, 2004,2005. (See Note 2(l).)

(e) Goodwill

     The Company accounts for its goodwill in accordance with FAS No. 142, "Goodwill and Other Intangible Assets" (“FAS 142”) which provides, among other things, how entities are to account for goodwill and other intangible assets that arise from business combinations or are otherwise acquired. FAS 142 requires that goodwill be tested for impairment at least annually, or more frequently under certain circumstances. At the time the Company adopted FAS 142, the Company had no assets onunamortized goodwill of approximately $7.2 million, which an impairment charge had been made.

     At September 30, 2005,represents the Company’s MBS that were rated below BBB had gross unrealized gains (the amount by whichexcess of the estimated fair value exceedsof the amortized cost)common stock issued over the fair value of $64,000 and no unrealized losses. These MBS were purchased at a deep discount, with a portion thereof recorded as credit protection against future credit losses under various economic environments. Through September 30, 2005,net assets acquired when the Company hadwas formed in 1998 through a merger transaction. On an annual basis goodwill is tested for impairment at the entity level. Through March 31, 2006, the Company has not recognized any additional impairments or credit reserves against any ofimpairment on its MBS, other than credit related discounts discussed above.
goodwill.

     (e)(f) Real Estate Investments

     At September 30, 2005,March 31, 2006, the Company indirectly held 100% ownership interests in three multi-family apartment properties known as The Greenhouse, Lealand Place (“Lealand”) and Cameron at Hickory Grove (“Cameron”), allboth of which are consolidated with the Company. Each of theseThese properties waswere acquired through tax-deferred exchanges pursuant tounder Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”). (See Note 6.)

     The properties, capital improvements and other assets held in connection with these investments are carried at cost, net of accumulated depreciation and amortization, not to exceed estimated fair value. Depreciation and amortization are computed using the straight-line method over the estimated useful life of the related asset.amortization. Maintenance, repairs and minor improvements are charged to expense in the period incurred, while capital improvements are capitalized and depreciated over their useful life. The Company intends to hold its remaining real estate investments as long-term investments.
Depreciation and amortization are computed using the straight-line method over the estimated useful life of the related asset.

7

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(f)(g) Repurchase Agreements

     The Company finances the acquisition of its MBS through the use of repurchase agreements. Under these repurchase agreements, under which the Company sells securities to a lender and agrees to repurchase the same securities in the future for a price that is higher than the original sales 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 structured as a sale and repurchase obligation, aA repurchase agreement operates asis a financing under which the Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

the pledged collateral, while the Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew such agreement at the then prevailing financing rate. Margin calls, whereby a lender requires that the Company pledge additional collateral to secure borrowings under its repurchase agreements with such lender, are routinely experienced by the Company as the current face value (i.e., par value) of its MBS declinedeclines due to scheduled monthly amortization and prepayments of principal on such MBS. In addition, margin calls may also occur when the fair value of the MBS pledged as collateral declines due to increases in market interest rates or other market conditions. Through September 30, 2005,March 31, 2006, the Company did not have anyhad satisfied all of its margin calls on itscalls.

     Original terms to maturity of the Company’s repurchase agreements that it was not ablegenerally range from one month to satisfy with either cash or additional pledged collateral.

     In the event that36 months. Should a counterparty were to decide not to renew a repurchase agreement at maturity, the Company must either refinance elsewhere or be in a position to satisfy this obligation. If, during the term of a repurchase agreement, a lender should file for bankruptcy, the Company might experience difficulty recovering its pledged assets and may have an unsecured claim against the lender’s assets for the difference between the amount loaned to the Company (plus interest due to the counterparty) and the estimated fair value of the collateral pledged to such lender. In order to mitigate its exposure to any counterparty-relatedTo reduce this risk, associated with its repurchase agreements, the Company’s policy is to enterCompany enters into repurchase agreements only with financial institutions that have awhose long-term debt rating of,is single A or to the extentbetter, or if applicable have a holding orwhose parent company with a long-term debt rating of,was rated single A or better, as determined by at least one nationally recognized rating agency, such as Moody’s Investors Service,Services, Inc., Standard & Poor’s Corporation or Fitch, Inc. (collectively, the “Rating Agencies”), where applicable. If the minimum criterion is not met, the Company will not enter into repurchase agreements with a lender without the specific approval of the Company’s Board of Directors (the “Board”). In the event an existing lender is downgraded below single A, the Company will seek the approval of the Board before entering into additional repurchase agreements with that lender. The Company generally seeks to diversify its exposure by entering into repurchase agreements with at least four separate lenders with a maximum loan from any lender of no more than three times the Company’s Stockholders’ Equity. At September 30, 2005,March 31, 2006, the Company had outstanding balances under repurchase agreements with 1512 separate lenders with a maximum net exposure (the difference between the amount loaned to the Company plus accruedincluding interest due to the counterpartypayable and the fair value of the security pledged by the Company as collateral) to a single lender of $33.7$38.2 million. (See Note 7.)

     In certain instances, the Company has purchased MBS from a counterparty and subsequently financed the acquisition of these MBS through repurchase agreements, which are also collateralized by these MBS, with the same counterparty (a “Same Party Transaction”). The Company records the acquisition of these MBS as assets and the related financings under repurchase agreements as liabilities gross on its consolidated balance sheets, with changes in the fair value of these MBS being recorded in other comprehensive income, a component of stockholders’ equity. The corresponding interest income earned on these MBS and interest expense incurred on the related repurchase agreements are reported gross on the Company’s consolidated statements of income. As of March 31, 2006, the Company had no Same Party Transactions and, at December 31, 2005, the Company had 25 Same Party Transactions aggregating approximately $474.5 million in MBS and $471.5 million in financings under repurchase agreements.

     Based upon the Company’s understanding of a technical interpretation of the provisions of FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”), Same Party Transactions may not qualify as a purchase by the Company because the MBS purchased by the Company in Same Party Transactions may not be determined to be legally isolated from the counterparty in such transactions. The result of this technical interpretation would be to preclude the Company from presenting (i) these MBS and the related financings under repurchase agreements on a gross basis on its balance sheet and (ii) the related interest income earned and interest expense incurred on a gross basis on its income statement. Instead, the Company would be required to present Same Party Transactions on a net basis, reporting derivatives on its balance sheet and the corresponding change in fair value of such derivatives on its income statement. The value of the derivatives

8

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

created by these types of transactions would reflect the changes in the value of the underlying MBS and the changes in the value of the underlying credit provided by the applicable counterparty.

     If the Company were to determine it was required to apply this technical interpretation of FAS 140, the potential change in its accounting treatment would not affect the economics of the Same Party Transactions, but would affect how these transactions were reported on its consolidated financial statements. This issue has been brought to the FASB for guidance, and the Company is awaiting further action by the FASB regarding Same Party Transactions.

(g)(h) Earnings per Common Share (“EPS”)

     Basic EPS is computed by dividing net income available to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net income available to holders of common stock by the weighted averageweighted-average shares of common stock and common equivalent shares outstanding during the period. For the diluted EPS calculation, common equivalent shares outstanding includes the weighted average number of shares of common stock outstanding adjusted for the effect of dilutive unexercised stock options outstanding 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 are used to repurchase shares of the Company’s outstanding common stock at the average market price during the reported period. No common share equivalents are included in the computation of any diluted per share amount for a period in which a net operating loss is reported. (See Note 10.)

     (h)(i) Comprehensive Income

     Comprehensive income for the Company includes net income, the change in net unrealized gains and losses on investments and certain derivative instruments reduced by dividends on preferred stock.
(See Note 11.)

     (i)(j) U.S. Federal Income Taxes

     The Company has elected to be taxed as a REIT under the provisions of the Code and the corresponding provisions of state law. The Company expects to operate in a manner that will enable it to continue to be taxed as a REIT. As such, no provision for current or deferred income taxes has been made in the accompanying Consolidated Financial Statements.
consolidated financial statements.

     Under the “Built-in Gain Rules” of the Code, a REIT is subject to a corporate tax if it disposes of any assets acquired from a C Corporation during the ten-year period following the initial acquisition of such assets. Such built-in gain tax is imposed at the highest regular corporate tax rate on the lesser of (i) the amount of gain recognized by the REIT at the time of the sale or disposition of such asset or (ii) the amount of such asset’s built-in gain at the time the asset was acquired from the non-REIT C corporation. On January 31, 2006, the Company was subject to a built-in gains tax of $1.8 million in connection with the sale of real estate, which, net of such tax and selling expenses, resulted in a gain of $4.7 million. (See Note 6.)

(j)(k) Derivative Financial Instruments/Hedging Activity

     The Company hedges a portion of its interest rate risk through the use of derivative financial instruments, comprised of Caps and Swaps (collectively, “Hedging Instruments”). The Company accounts for Hedging Instruments in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“FAS 133”) as amended by FAS No.

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, and FAS No. 149 “Amendment of Statement 133 on Derivative Instrument and Hedging Activities.” The Company carries allCompany’s Hedging Instruments are carried on the balance sheet at their fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative. Since the Company’s derivatives are designated as “cash flow hedges,” the change in the fair value of any such derivative is recorded in other comprehensive income or loss for hedges that qualify as effective and is transferred from other comprehensive income or loss to earnings as the hedged liability affects earnings. The ineffective amount of all Hedging Instruments, if any, is recognized in earnings each quarter. To date, the Company has not recognized any change in the value of its Hedging Instruments in earnings as a result of the hedge or a portion thereof being ineffective.

     Upon entering into hedging transactions, the Company documents the relationship between the Hedging Instruments and the hedged liability. The Company also documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities. The Company assesses, both at inception of a hedge and on an on-going basis, whether or not the hedge is “highly effective,” as defined by FAS 133. The Company discontinueswould discontinue hedge accounting on a prospective basis with changes in the estimated fair value reflected in earnings when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including hedged items such as 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 Hedging Instrument is no longer appropriate. Through September 30, 2005,

9

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

To date, the Company hadhas not discontinued hedge accounting for any of its Hedging Instruments.
Instruments, as such instruments have remained highly effective.

     The Company utilizes Hedging Instruments to manage a portion of its interest rate risk and does not anticipate entering into derivative transactions for speculative or trading purposes. (See Note 5.) In order to limit credit risk associated with the counterparties to derivative instruments, the Company’s policy is to enter into derivative contracts with financial institutions rated single A or better, or if applicable whose parent was rated singe A or better, by at least one of the Rating Agencies at the time of purchase. (See Note 5.)

     Interest Rate CapsCap Agreements

     In order for the Company’s Caps to qualify for hedge accounting, upon entering into the Cap, the Company must anticipate that the hedge will be “highly effective,” as defined by FAS 133, in limiting the Company’s cost beyond the Cap threshold on its matching (on an aggregate basis) anticipated repurchase agreements during the active period of the Cap. As long asProvided that the hedge remains effective, changes in the estimated fair value of the Caps are included in other comprehensive income or loss.income. Upon commencement of the Cap active period, the premium paid to enter into the Cap is amortized and reflected in interest expense. The periodic amortization of the premium expense is based on an estimated allocation of the premium, determined at inception of the hedge, for the monthly components on an estimated fair value basis. Payments received in connection with the Cap,Caps, if any, are reported as a reduction to interest expense. If it is determined that a Cap is not effective, the premium would be reduced and a corresponding charge made to interest expense, for the ineffective portion of the Cap. The maximum cost related to the Company’s Caps is limited to the original price paid to enter into the Cap.

     The Company purchases Caps by incurring a one-time fee or premium. Pursuant to the terms of the Caps, the Company will receive cash payments if the interest rate index specified in any such Cap increases above contractually specified levels. Therefore, such Caps have the effect of capping the interest rate on a portion of the Company’s borrowings above a level specified by the Cap.
(See Note 5.)

     Interest Rate Swaps

     When the Company enters into a Swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on the London Interbank Offered Rate (“LIBOR”). The Company’s Swaps are designated as cash flow hedges against the benchmark interest rate risk associated with the Company’s borrowings.

     All changes in the unrealized gains/losses on any Swapvalue of Swaps are recorded in accumulated other comprehensive income or loss and are reclassified to earnings as interest expense is recognized on the Company’s hedged borrowings.income. If it becomes probable that the forecasted transaction which(which in this case refers to interest payments to be made under the Company’s short-term borrowing agreements,agreements) will not occur by the end of the originally specified time period, as documented at the inception of the hedging relationship, then the related gain or loss in accumulated other comprehensive income or loss would be reclassified to income.
recognized through earnings.

     Realized gains and losses resulting from the termination of a Swap are initially recorded in accumulated other comprehensive income or loss as a separate component of stockholders’ equity. The gain or loss from a terminated

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Swap remains in accumulated other comprehensive income or loss until the forecasted interest payments affect earnings. If it becomes probable that the forecasted interest payments will not occur, then the entire gain or loss would be recognized though earnings.
(See Note 5.)

(l) Discontinued Operations

     On January 31, 2006, the Company sold a real estate property resulting in a gain of $4.7 million, net of a built-in gains tax of $1.8 million and selling expenses. In accordance with the provisions of FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” (“FAS 144”), the gain on the sale of such property and, the operating results of such property are classified as discontinued operations for all periods presented net of tax, on the Company’s consolidated statements of income. (See Note 6.)

(k) (m) Adoption of New Accounting Standards

Equity Based Compensation

     TheOn January 1, 2006, the Company accountsadopted FAS 123(R) applying the modified prospective method. FAS 123(R), among other things, eliminated the alternative to use the intrinsic value method of accounting for stock based compensation and requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). Prior to the adoption of FAS 123(R), the Company accounted for its stock based compensation in accordance with the fair value method under FAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”Disclosure”, which was adopted on January 1,

10

MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2003. Based on the Company’s analysis of its outstanding options under the provisions of FAS 123(R), the adoption of FAS 123(R) had no impact on the Company. The Company values stock options based oncontinues to value its stock-based compensation using the Black-Scholes model.method.

FASB Impairment Position

     On December 31, 2005, the Company early adopted the FASB Impairment Position. Among other things, the FASB Impairment Position specifically addresses: the determination as to when an investment is considered impaired; whether that impairment is other-than-temporary; the measurement of an impairment loss; accounting considerations subsequent to the recognition of an other-than-temporary impairment; and certain required disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.

     The FASB Impairment Position specifically provides that when the fair value of an investment is less than its cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either “temporary” or “other-than-temporary” - which does not mean permanent. If it is determined that impairment is other-than-temporary, then an impairment loss is recognized in earnings reflecting the entire difference between the investment's cost basis and its fair value at the balance sheet date of the reporting period for which the assessment is made. The measurement of the impairment is not permitted to include partial recoveries subsequent to the balance sheet date. Following the recognition of impairment as other-than-temporary, the fair value of the investment becomes the new cost basis of the investment and is not adjusted for subsequent recoveries in fair value.

     Upon a decision to sell an impaired available-for-sale security on which the Company does not expect the fair value of the security to fully recover prior to the expected time of sale, the security shall be deemed other-than-temporarily impaired in the period in which the decision to sell is made, in addition, the Company recognizes an impairment loss when the impairment is deemed other-than-temporary even if a decision to sell has not been made. Upon the implementation of the FASB Impairment Position, the Company recorded an impairment charge of $20.7 million related to impairments on MBS, such impairment related to changes in interest rates on MBS that the Company did not expect to hold until recovery of such impairment. At December 31, 2005 the Company had MBS of $821.5 million on which an impairment charge had been made. During the three months ended March 31, 2006, the Company had sold each of the MBS on which it had recorded an impairment at December 31, 2005 and had no other MBS in the portfolio that were considered other-than-temporarily impaired. (See Note 12a.4.)

     (l)(n) Reclassifications

     Certain prior period amounts have been reclassified to conform to the current period presentation.

3. Related Parties

     (a) Advisory Services

     During the fourth quarterOn January 31, 2006, pursuant to a purchase and sale agreement, dated January 19, 2006, between Retirement Centers Corporation (“RCC”), a wholly owned subsidiary of 2003, the Company, formed and became the sole stockholder of MFA Spartan, Inc., a Delaware corporation (“Spartan Inc.”). Spartan Inc. then formed and, pursuant to an operating agreement dated November 6, 2003, became the sole member of MFA Spartan I, LLC, a Delaware limited liability company (“Spartan I”). On November 7, 2003, Spartan I entered into a sub-advisory agreement, which was subsequently amended and restated on October 1, 2004, with America First Apartment Advisory Corporation (“AFAAC”), a Maryland corporation and the external advisor of America First Apartment Investors, Inc. (“AFAI”), pursuantRCC sold its 100% membership interest (the “Greenhouse Interest”) in Greenhouse Holdings, LLC, which owns The Greenhouse, a 128-unit multi-family apartment property located in Omaha, Nebraska (“Greenhouse”), to whichAFAI for $15.2 million. The terms of the purchase and sale agreement were determined through arms-length negotiations between the parties. Spartan I, agreed, among other things, to provide sub-advisoryLLC an indirect wholly-owned subsidiary of the Company, currently provides investment advisory services to AFAAC with respectAFAI for a negotiated fee and AFAI, through a wholly-owned subsidiary, currently provides property management services for a negotiated fee to and to assist AFAACthe remaining multi-family properties in connection with, AFAI’s acquisition and disposition of MBS and the maintenance of AFAI’s MBS portfolio. During the three and nine months ended September 30, 2005,which the Company earned fees of $13,000 and $37,000, respectively, related to the sub-advisory services rendered by Spartan I to AFAAC.indirectly holds investment interests. George H. Krauss, who is one of the Company’s directors isas well as a member of the board of directors of AFAI, and beneficially owns 17% of America First Companies L.L.C. (“AFC”), which owns 100%did not participate, on behalf of the voting stock of AFAAC.

(b) Property Management

     America First PM Group, Inc. (the “Property Manager”),Company or RCC, in the determination to enter into, or the negotiations relating to, the transaction. As a wholly-owned subsidiary of AFAI, provides property management services for eachresult of the multi-family properties in whichtransaction, the Company holds investment interests. Inrealized a gain on the fourth quarter of 2004, the Property Manager acquired certain property management rights and other assets, including the contractual right to manage the Company’s multi-family property interests, from America First Properties Management Companies L.L.C., a wholly-owned subsidiary of AFC. The Property Manager receives a management fee equal to a stated percentagesale of the gross receipts generated by these properties equal to 3%Greenhouse Interest of gross receipts, increasing to a maximum of 4% of gross receipts upon attaining certain performance goals. The Company paid fees for property management services of approximately $37,000 and $106,000, respectively, for the three and nine month periods ended September 30, 2005 and approximately $32,000 and $94,000, respectively, for the three and nine month periods ended September 30, 2004. George H. Krauss, one of the Company’s directors,$4.7 million, which is a member of the board of directors of AFAI and beneficially owns 17% of AFC.
reported as discontinued operations.

4. Mortgage-Backed Securities

     At September 30, 2005March 31, 2006 and December 31, 2004,2005, all of the Company’s MBS were classified as available-for-sale and, as such, were carried at their estimated fair value, based on prices obtained from a third-party pricing service or, if pricing was not available for an MBS from such pricing service, the average of broker quotes wasreceived for such MBS is used to
determine the estimated fair value of such MBS. At March 31, 2006 and December 31, 2005, the Company’s portfolio of MBS consisted of pools of ARM-MBS with carrying values of approximately $4.540 billion

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MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

determine the estimated fair value of such MBS. The following table presents certain information about the Company's MBS as of September 30, 2005 and December 31, 2004.