MFA Financial, Inc. (NYSE:MFA) Q2 2022 Earnings Conference Call August 4, 2022 11:00 AM ET
Company Participants
Hal Schwartz – Senior Vice President, General Counsel and Secretary
Craig Knutson – President and CEO
Steve Yarad – Chief Financial Officer
Bryan Wulfsohn – Co-Chief Investment Officer
Gudmundur Kristjansson – Co-Chief Investment Officer
Conference Call Participants
Bose George – KBW
Steve DeLaney – JMP Securities
Eric Hagen – BTIG
Doug Harter – Credit Suisse
Operator
Ladies and gentlemen, good morning, and thank you for standing by. Today’s conference assembled. Welcome to the MFA Financial Incorporated 2022 Second Quarter Earnings Call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions]
And as a reminder, today’s conference is being recorded. At this time, it’s my pleasure to turn the conference over to our host, Mr. Hal Schwartz. Please go ahead.
Hal Schwartz
[Technical Difficulty]
Operator
Excuse me, speakers. I — there were some an echo with the webcast link. So I just muted.
Hal Schwartz
Okay.
Operator
Webcast.
Hal Schwartz
Okay. Let me start over and apologies for the snafu here. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc., which reflect management’s beliefs, expectations and assumptions as to MFA’s future performance and operations.
When used, statements that are not historical in nature, including those containing words such as will, believe, expect, anticipate, estimate, should, could, would or similar expressions are intended to identify forward-looking statements.
All forward-looking statements speak only as of the date on which they are made. These types of statements are subject to various known and unknown risks, uncertainties, assumptions and other factors including those described in MFA’s annual report on Form 10-K for the year ended December 31, 2021, and other reports that it may file from time-to-time with the Securities and Exchange Commission.
These risks, uncertainties and other factors could cause MFA’s actual results to differ materially from those projected, expressed or implied in any forward-looking statements it makes. For additional information regarding MFA’s use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA’s second quarter 2022 financial results.
Thank you for your time. I would now like to turn this call over to MFA’s CEO and President, Craig Knutson.
Craig Knutson
Thank you, Hal. Good morning, everyone. And thank you for joining us here today for MFA Financial’s second quarter 2022 earnings call. Also with me are Steve Yarad, our CFO; Gudmundur Kristjansson and Bryan Wulfsohn, our Co-Chief Investment Officers and other members of senior management.
As you are all no doubt aware, the first half of 2022 has been an exceptionally challenging investment environment across nearly all asset classes with the possible exception of commodities in the U.S. dollar.
The S&P 500 Index was down over 16% in the second quarter and posted its worst first half of the year in over 50 years. Bond markets continue to selloff after a difficult first quarter and bond indices were generally down about 10% for the first half of the year. Mortgage spreads widened materially, as did credit spreads with high yield wider by nearly 300 basis points year-to-date.
Persistently high inflation, continued geopolitical tension and an aggressive Fed tightening cycle that markets have not experienced since 1994 have combined to wreak havoc across financial markets. In short, there has been no place to hide thus far in 2022.
Our team at MFA has taken steps to preserve capital and manage our duration beginning as early as the fourth quarter of last year when it became clear that the Fed would need to move more dramatically than previously expected.
We had $900 million of interest rate swaps at year end and as rates rose and duration extended, we increased this position $2.4 billion at March 31, and again, to $3.2 billion at June 30. We also slowed our loan acquisition pace in the first quarter and again in the second quarter.
At the same time, we continue to execute securitizations through the first half of 2022 and into July. Although, wider spreads, combined with higher rate increased the cost of these deals, we have significantly reduced risk by terming out close to $2 billion of securitization financing in 2022.
In fact, over 95% of our asset-based financing is now fixed via securitization or economically fixed via interest rate swap hedges. And with last week’s Fed increase, our swap book now generate positive carry of about 60 basis points as the floating rate receive leg exceeds the fixed rate pay leg. Future Fed rate increases, which are widely expected, will increase this positive carry further.
We slowed our acquisitions during the second quarter, particularly of non-QM loans as market volatility made pricing difficult and created additional uncertainty about the cost of securitization.
Taken together, these steps mitigated our book value decline. Although, MFA was certainly not immune to book value diminution, our relative book value performance versus many in the peer group has been considerably better.
It’s also worth noting that a significant portion of MFA’s book value decline is due to fair value marks on loans on our balance sheet that we will likely hold until payoff or mature — maturity. As of June 30th, the market discount to unpaid principal balance on our loan portfolio is approximately $475 million.
Now to be fair, we also have securitizations, which are accounted for at fair value that are marked below par by approximately $233 million. Netting these two discounts produces a potential book value increase of approximately $242 million or $2.38 per share, assuming that the loans and the liabilities payoff at par.
This amount would be offset by any realized losses on loans, but expected losses are relatively low, particularly on our purchase performing loans, and home price appreciation over the last 10 plus years on our legacy NPL and RPO loans has significantly affected outcomes on these loans. Indeed, we have realized gains on REO liquidations for each of the last six quarters.
We also prioritized liquidity during the first and second quarters of 2022, ending both periods with close to $400 million in cash. While holding a substantial portion of our equity in cash obviously creates a drag on overall ROE, this is not the time to swing for the fences. Having a sizable liquidity position provide a cushion in volatile markets, it also gives us the ability to take advantage of opportunities that arise.
Finally, I’d like to talk a little bit about housing and residential mortgage credit. We have seen dramatic home price appreciation over the last two years as demand for housing has far outstripped supply. This is due to many factors, among them increased household formation, post-pandemic trends leading to added demand for single-family homes, lack of new and existing supply of homes and very low interest rates.
Now, of these influences, only the interest rate component has changed. The other factors driving housing prices still exist, and in fact, new home construction has fallen even more recently. Additionally, LTVs of purchased performing loans have generally been low and underwriting standards conservative. So overall mortgage credit is generally strong.
Future home price appreciation will certainly slow, but any significant home price declines are hard to envision at this point. In fact, it strikes me as funny that I sometimes see that some percentage of home price listings has experienced list price reductions or there is some percentage of homes did not trade at a premium to the listing price as evidence of housing weakness, it seems a more apt analogy would be a shift from a boil to a simmer.
Lima One was a continued bright spot for MFA, as they turned in another strong quarter with approximately $600 million of originations. Because we are intimately involved in the securitization market, we have an instant feedback loop with our business purpose loan originator and can adjust rates in real time, thus reducing the typical drag suffered by originators in a rising rate environment as their pipeline still with some market coupons.
Lima One’s current origination BPL pipeline of about $450 million has a weighted average coupon today of approximately 8%. These high-quality and high-yielding assets will generate attractive returns as these loans close and are added to our balance sheet.
Please turn to slide three. As previously mentioned, a difficult environment led to a book value decline of 8% for both GAAP and economic book value, $1.42 and $1.56, respectively. I would again point out that the aforementioned net discount from par of loans and securitized debt is $2.38 per share.
Some of you will remember the credit reserve that we had 10 years ago or so on our legacy non-agency RMBS portfolio that many analysts and investors believed would be accretive to book value over the long run.
We reported a GAAP loss of $108.6 million in the second quarter, primarily due to unrealized losses on residential whole loans at fair value. Distributable earnings came in at $47.2 million or $0.46 per share and we paid our common dividend of $0.44 last Friday. Leverage ticked up from 3.1 times to 3.3 times, primarily due to book value decline, but I would point out that our leverage is increasingly now in the form of securitized debt.
Please turn to page four. As I stated in my introductory remarks, our acquisition pace slowed in the second quarter, with nearly 70% of our loan acquisitions coming from Lima One. Our overall loan portfolio was slightly lower at quarter end, although that is mostly due to fair value marks rather than lower balances.
We also executed three securitizations in the quarter and two more in July, and we now have nearly $4 billion of financing in the form of securitized debt. These transactions at durable non-recourse financing create additional liquidity and provide more balance sheet capacity that we can deploy in the future to acquire new loans that are now priced at higher yield levels. We reduced interest rate risk during the quarter by adding interest rate swaps and we prioritized liquidity given the volatile market environment.
Finally, our asset management team has continued to take advantage of a strong housing market with limited supply by liquidating $40 million of REO properties this quarter, posting a net gain of $7 million.
Please turn to slide five. This slide illustrates the components of our investment portfolio and also the nature of our asset-based financing. While the liability pie chart shows $2.6 billion of mark-to-market borrowing, about $1.5 billion of this borrowing is at a significant discount to our available borrowing amount.
This under levering creates a cushion that increases the amount of asset price decline that needs to occur before we receive a margin call. During the second quarter, we experienced very minimal margin calls on our loan portfolio and at the same time, our interest rate swap position generated cash from reverse margin calls.
And I will now turn the call over to Steve Yarad to discuss additional details of our financial results.
Steve Yarad
Thank you, Craig. Please turn to slide six for an overview of our second quarter 2022 financial results. Craig outlined in his opening remarks, mark-to-market adjustments on MFA’s investment portfolio again drove our GAAP results this quarter as further increases in interest rates across the yield curve, combined with spread widening resulted in asset valuation declines. This was substantially mitigated by our active portfolio management, including adding to our swap hedges and further use of the securitization financing. As a result, book value declines were relatively modest and distributable earnings continue to cover the Q2 common dividend.
I will now discuss our Q2 GAAP results in more detail. GAAP earnings were negative $109.6 million or negative $1.06 per common share. Net interest income was $52.6 million. Loan interest income increased nearly 3% to $102.4 million as coupons and recent acquisitions have increased. The sequential quarter decline in net interest income reflects the impact of higher funding costs, consistent with the prevailing interest rate environment.
Our net interest spread including the impact of swap carry decreased to 1.37% from 1.96% last quarter. However, with the recent Fed increase, our swap portfolio is now in a net revive position and this should benefit our cost of fund the net spread inclusive of swap carry going forward.
Our CECL provision for credit losses was $30.4 million, primarily due to a $28.6 million reserve adjustment to write-down to zero and investment in a mortgage originator that recently ceased operations as a result of the current environment.
In addition, CECL reserves increased modestly on the carrying value loan portfolio, primarily due to adjustments to prepayment speed assumptions using our credit loss model. That said, actual charge-offs remain modest and at $833,000 for the six months ended June 30 or over 40% loss in the corresponding period in 2021.
As already discussed, valuation of our residential whole loan portfolio was again impacted by the volatile rate environment. For loans held at fair value, net losses were $216.4 million. This is partially offset by net gains on economic hedging derivatives and securitized debt held at fair value of $132.4 million.
In addition to the CECL reserve that I discussed earlier, we recorded a $10.6 million mark-to-market adjustment on an equity investment in another mortgage origination partner. This valuation adjustment equates to approximately 50% of the equity investment and is based on valuation obtained from the third-party. The entity is still in its development stages and we believe that its financial position will be strong enough to navigate the current challenging environment.
It should be noted that excluding this valuation adjustment and the $28.6 million CECL reserve, GAAP and economic book value would have declined approximately 6.5%. Further, following these adjustments, the carrying value of remaining minority investments in mortgage origination partners is approximately $32 million at June 30, 2022.
Also included in other income is $10.7 million of origination, servicing and other fee income from Lima One, which continues to perform strongly. Gudmundur will discuss Lima’s performance for the quarter in more detail shortly.
Finally, our G&A expenses were $29.6 million for the quarter, a $1.3 million increase over the first quarter, primarily due to higher personnel costs of Lima One.
Other loan portfolio operating costs, meaning that is not related to Lima One loan origination and servicing was $13.2 million, $2.8 million increase from the prior quarter. This increase is primarily due to higher securitization-related expenses in the current quarter. Because we have elected the fair value option on recently completed securitization deals, GAAP is not committed to capital on these costs.
Distributable earnings, a non-GAAP financial measure that adjusts GAAP net income, primarily to exclude the impact of unrealized gains and losses, and certain realized gains and losses from our investment activities, was $0.46 for the second quarter and exceeded the second quarter dividend to common shareholders $0.44.
On slide 16, we provide further information including a reconciliation of all adjustments to GAAP net income to arrive and distributable earnings, both of the current quarter and for the previous four quarters.
Also this quarter, following changes to the way we structure our internal management reporting, we are presenting certain information on the results of our operating segments. This information is set out on slide 19 and 20.
And with that, I will turn the call over to Bryan Wulfsohn.
Bryan Wulfsohn
Thank you, Steve. Turn to slide seven, home prices increased again in the second quarter with year-over-year growth hovering around 20% in June. But the increase in mortgage rates and higher home prices, affordability has become an issue for many would-be homeowners. These factors led to a slight increase in the supply of homes on market over the quarter. However, supply levels still haven’t reached pre-pandemic levels.
The fundamental lack of housing inventory should continue to be a factor for the stability and growth to home prices. Unemployment — employment backdrop remains strong and delinquencies remained normal [ph]. The credit in our portfolio continues to perform well and given all the volatility and uncertainty, we continue to be cautious over the intermediate term as economic prospects become increasingly uncertain.
Turn to slide eight, we reduced our purchases non-QM loans again in the second quarter to $220 million, down from over $600 million in the first quarter, as volatility in rates and spreads remain elevated.
We successfully executed on another securitization over the quarter totaling over $400 million of UPB sold. Recently, we have been purchasing loans with coupon between mid-to-high 7% range at moderate premium to par. We believe these new loan investments can generate low-to-mid double-digit ROEs through securitization.
Serious delinquencies decreased further in the non-QM portfolio as a percentage of loan 60 days delinquent or greater dropped seven-tenths of a percent to 2.6%. The weighted average of original LTV for borrowers that are 60 days delinquent was 66% and that does not account for any potential home price appreciation post-origination. Many loans that experienced delinquencies and that being paid in full as our borrowers have equity in the property and sell the property themselves.
Turn to slide nine, our RPL portfolio was approximately $835 million continue to perform well. 81% of our portfolio remains less than 60 days delinquent. And although the percentage of the portfolio 60 days delinquent status was 19%, almost 35% of those borrowers continue to make payment.
Prepay speeds slowed in the second quarter to three-month CPR of 12 with increases in mortgage rates. Combination of the length of time, our borrowers have remained current on their mortgage and home price appreciation has unlocked refinancing opportunities for many of our borrowers as the LTV on these loans have now dropped below 60. As a reminder, the loans constituting our RPL portfolio were purchased at discount to par and prepaids are beneficial to returns.
Turning to slide 10, our asset management team continues to drive strong performance of our NPL portfolio. The team has worked in concert with our servicing partners to maximize outcomes on our portfolio. 39% of loans that were delinquent at purchase are now either performing or paid in full. 50% have either liquidated or REO to be liquidated.
We continue to aggressively sell properties in our REO portfolio. Over the last 12 months, we sold $180 million of properties for a net gain of $33 million, 11% are still in nonperforming status.
Our modifications have been effective three quarters are either performing or have paid in full. We are pleased with these results as they continue to outperform our assumptions at the time of purchase.
And now, I’d like to turn the call over to Gudmundur to walk you through our business purpose loans.
Gudmundur Kristjansson
Thanks, Bryan. Turning to page 11, July 1st marked the one-year anniversary of our acquisition of Lima One. The integration of Lima One into the MFA family couldn’t have gone better and the strategic vision we have implemented coupled with MFA’s capital markets expertise, strong balance sheet has allowed Lima to continue to grow and attract business from the best real estate investors in the BPL space. None of this would have been possible if it weren’t for the skilled and dedicated team at Lima One, which was executed exceptionally well on our strategic goals over the last 12 months.
At the time of the acquisition, Lima’s trailing 12-month origination volume was approximately $900 million. Now 12 months later that stands at $2.2 billion, more than double what it was a year earlier.
A key part of our strategy was and remains to improve the financing of the BPL loans that Lima One originates. To that end, over the last nine months, we have securitized approximately $1 billion of BPL loans originated by Lima One and have established securitization programs for all of the various loan products.
Despite challenging market conditions for loan originators, Lima One continues to see strong demand for its BPL products and had another strong quarter with approximately $600 million originated in the second quarter.
Throughout the year, we have proactively managed origination pipelines, by raising origination rates and making loan level pricing adjustments to ensure that we continue to create attractive investment for MFA’s balance sheet in any rate environment.
As rates have risen, we have seen our production mix shift more towards shorter term transitional loans as the more rate sensitive longer term rental loans feel the impact of higher rates more acutely.
Despite this shift in product mix, overall volume in our origination pipeline has remained relatively stable. This is primarily due to Lima’s broad product offerings across short- and long-term business purpose loans, which allows us to shift focus seamlessly between products as market conditions change. We believe Lima’s product mix represents a key strength and differentiator that allows us to continue to create high quality loans to changing market conditions.
Lima’s origination pipeline remains strong, with some of the highest coupons we have seen in a long time, with a weighted average coupon of approximately 8%. We expect the loan we originate going forward to generate return on equity of mid- to high-teens.
We see great short- and long-term opportunities from Lima One. The significant interest rate and mortgage spread increases we have experienced in 2022 has put pressure on similarly capitalized BPL originators that are dependent on whole loan sales to manage the liquidity and balance sheet, as many whole loan buyers has stepped away as securitization and financing costs have increased throughout 2022.
With Lima as an on-balance sheet lender, MFA’s able to acquired BPL assets at substantially lower cost than other loan aggregators, which coupled with our strong liquidity, has allowed Lima to gain market share, while maintaining credit quality. We expect Lima to originate between $2 billion and $2.5 billion in 2022 and see Lima as well positioned to continue being a leader in the BPL space for years to come.
Finally, we completed our fourth single-family rental loan securitization in July. The deal consists of 100% of Lima One originated loans. Again, we showed our ability to execute securitizations in a challenging market.
Turning to page 12, where we will discuss the Fix and Flip portfolio. We added of approximately $230 million UPB and $400 million max loan amount in the quarter. All loans originated by Lima One and we grew the portfolio by 18% in the quarter. This is the fourth consecutive quarter of portfolio growth and the portfolio has grown by 140% since we acquired Lima One 12 months ago. We continue to find the Fix and Flip being highly attractive and are currently deploying capital at over 8% yields with mid-to-high double-digit return on equity.
We closed our first Fix and Flip securitization in April when we securitized approximately $265 million of assets, all of which were originated by Lima One. The securitization has a five-year maturity, has a revolving structure, which allows us to replace loans that paid down with new ones over a two-year reinvestment period, as well as funds rehab draws within the securitization as they occur.
In this transaction, we sold bonds representing 90% of asset securitized. We believe this transaction expands, derisks and diversifies our BPO funding sources and completes another important goal in our strategic plan of developing and growing Lima sufficient origination platform. Our RPL securitization was a source of liquidity throughout the quarter as loans that paid off replaced the new origination and rehab draws were funded within the securitization.
We continue to see a steady decline in 80-plus-day delinquent loans as a strong housing market, low initial LTVs and the diligent work of our team have left a good outcomes. The 60-plus-day delinquency ratio declined 2% to 8% at the end of the quarter. Almost all of the loans that are 60-plus-day delinquent were originated prior to April 2020 and approximately 80% of them were originated by lenders other than Lima One.
Lima One ne originated loans are currently about 90% of our Fix and Flip holdings and they have a 60 plus day delinquency rate from approximately 2%, speaking to the quality of Lima’s origination and servicing activities.
Finally, with loans payoff in full from serious delinquency, we often collect default interest expense fees and other fees at payouts. For loans, where there’s meaningful equity in the property, these can add up. Since inception, we have collected approximately $8.5 million in these types of fees across our Fix and Flip portfolio.
Turning to page 13, our single-family rental loan portfolio continues to exhibit strong performance with attractive yields and low delinquencies. Second quarter yield was 5.19% and the 60-plus-day delinquency rate remained low at 24%.
We acquired over $190 million of SFR loans in the quarter, all the which originated by Lima One and grew the portfolio by 13% to approximately $1.3 billion at the end of the quarter. This is the fifth consecutive quarter of portfolio growth and we have grown our SFR portfolio by over 150% since the acquisition of Lima One.
We continue to adjust just a rising rate and higher cost of funds in the securitization market in the quarter, but frequently adjusting origination rate, the fees to reflect an attractive return profile going forward. Currently, we are adding SFR loans at low-to-mid 7% yield and playing a mid double-digit return on equity on these loans going forward.
We issued our third rental loan securitization in April and priced our first fourth rental loan securitization in the middle of July. Approximately $475 million of loans were securitized between the two deals and both deals consistent 100% of Lima One originated loans.
MFA’s Capital Markets team did a phenomenal job of marketing these transactions in a very challenging market environment and we believe that demonstrated our ability to consistently execute on securitizations for this asset class.
After completing the July securitization, the percentage of SFR financing at non-mark-to-market is approximately 73%. We expect to continue to programmatically executed securitization to efficiently finance our single-family rental loans as they provide long-term, non-recourse and non-mark-to-market financing benefits.
And with that, I will turn the call over to Craig for some final comments.
Craig Knutson
Thank you, Gudmundur. Please turn to page 14. So the second quarter of 2022 was obviously a challenging period in the fixed income and mortgage markets, but MFA’s active risk management practice lessened the impact on the company through interest rate swaps, securitizations and relatively low leverage.
We generated distributable earnings of $0.46 during the quarter, prioritized liquidity and freed up balance sheet capacity that we can deploy as market opportunities arise. Lima One continues to achieve excellent results, despite raising rates to adjust the market conditions and a continued strong housing market benefits our mortgage credit exposure, despite developing affordability issues for homebuyers due to higher rates.
Tom, would you please open the call for questions?
Question-and-Answer Session
Operator
Thank you very much. [Operator Instructions] And we are going to begin with the question from Bose George representing KBW. Please go ahead.
Mike Smyth
Hey, guys. This is actually Mike Smyth on for Bose. Just a quick one on capital deployment, what’s the normalized level for leverage and then what are you looking for in the market to take up leverage and put some of that excess cash to work?
Craig Knutson
So thanks for the question, Mike. I mean, we have said this before we don’t necessarily target a leverage number. I think the leverage sort of falls out of two things, one is asset purchases, because we do lever assets when we buy them, and then the second is, how we finance them. So as we execute securitizations, typically that will raise the leverage a little bit because we get a higher effective advance rate through securitization.
But if you look, it went from 3.1 to 3.3., I mean, I don’t see it really differing materially from somewhere in the low-to-mid-3s at least quarter-by-quarter, now that could change if we go out a few quarters and we buy a lot of really cheap assets. But at this point, I don’t see that changing all that materially.
Mike Smyth
Great. Thanks. That’s helpful color. And then, can you provide a quarter-to-date book value update?
Craig Knutson
Sure. So it’s very preliminary. We don’t really have a lot of numbers. But I think our best estimate would be the book value is probably up about 1% since June 30.
Mike Smyth
Great. Thanks a lot for taking the questions.
Craig Knutson
Sure, Mike.
Operator
Next we are going to the line of Steve DeLaney representing JMP Securities. Please go ahead.
Steve DeLaney
Good morning, everyone. Thanks for the question and congrats on the progress made to Lima One on both sides of the rental and the Fix and Flip. Craig, I think you mentioned in your comments that you might have done two securitizations in July. We saw the one, the INV2, which was the rental loans. Was there another one done post quarter end, another product?
Bryan Wulfsohn
Yeah. Hey, Steve. This is Bryan. Yeah. We completed…
Steve DeLaney
Hi, Bryan.
Bryan Wulfsohn
We completed a securitization of RPL loans. So if you like RPL loans. Yeah. That was the other one.
Steve DeLaney
That was the other one. Okay. Good. So I think the — Gudmundur, you mentioned, so the total securitization so far on the rental loans is two total including the one in July?
Gudmundur Kristjansson
So we — so, yeah, for the rental loans, we did one in April and then…
Steve DeLaney
Yeah.
Gudmundur Kristjansson
… we did another in July. That’s correct.
Steve DeLaney
Got it. Okay. All right. Thanks. And Craig, back when we had the first quarter call, obviously that was in the midst of all the volatility and I think everyone was worried about liquidity, margin calls, et cetera, et cetera. Comment just generally on — and I believe on that call, you spoke quite a bit about warehouse lenders and your relationship with your warehouse lenders. Could you just give us an update on that in terms of the willingness the warehouse lending community to support you are building up of inventory ahead of securitizations? I’d appreciate that. Thanks.
Craig Knutson
Sure, Steve. Thanks for the question. I would say that, we have very strong relationships with our lenders. They don’t just lend us money. They are the ones that do the securitizations and sell the securities. So it’s really a soup to nuts relationship.
We have certainly seen no reticence at all from any lenders, and in fact, there are various parties that would like to lend us money on our loan portfolio and we would love to be able to do that, but we just don’t have enough borrowing to go around.
So, I think, if you think about what happened in the conventional space, right, all these lenders have probably massive balances out to just the agency originators and so if anything there is probably balance sheet to spare.
But like I said, we have had no issues whatsoever. I talked about margin calls, because we under-lever a significant portion over half of that mark-to-market financing, we got very few margin calls. I think our loan margin calls in the second quarter, might have been $10 million for the whole quarter and we probably netted $50 million of cash in from our swap position.
So it’s been not that difficult to manage that liquidity. Also our recourse leverage is also ticked down. Our recourse leverage is now just 1.8 times. So this — I think this policy of securitizing frequently and often and all the various product, it was going to serve us well over time.
Steve DeLaney
Okay. That’s great. Really appreciate the comments. Thank you.
Craig Knutson
Thanks, Steve.
Operator
And our next question comes from the line of Eric Hagen representing BTIG. Please go ahead.
Eric Hagen
Hi. Thanks. Good morning. Hope you guys have doing well.
Craig Knutson
Good morning.
Eric Hagen
Maybe a few from me. Hey. Good morning. Maybe a few for me. How do we think about the value and the NPL portfolio at this point, like, what would you say is the duration of the spread over benchmark assets that you might look to describe the value that you are getting there? And then can you also say how much liquidity you have beyond the $400 million in cash, whether there is a minimum level of liquidity that you target over the near and kind of medium to longer term?
Gudmundur Kristjansson
So, probably, thinking about the value of the NPL portfolio and the duration of it, it’s really — the value is up. All of those loans are to continue to be fair value, but half of that book now is actually performing, right?
So it’s going to have plus or minus 5% coupon purchase that is big significant discount to par and then the other half of the portfolio, they are just waiting to be liquidated. And given what we have seen in HPA and given what the prospects are for HPA going forward, you don’t need to see too much growth to continue to see that sort of expected yield somewhere between 7% and 8% on those assets.
Eric Hagen
Got it. That’s helpful.
Steve Yarad
And Eric, this is Steve Yarad. Just addressing your question on additional sources of liquidity and it’s quite referred to, we do have a significant under borrowing on some of our warehouse — mark-to-market warehouse loans and that’s as much as $120 million to $150 million at the end of June.
Eric Hagen
Got it.
Craig Knutson
So said another way, Eric, when we could borrow another $125 million or $150 million on those assets that we have pledged, we just don’t, because it’s a sort of self-imposed discipline in creating that question.
Eric Hagen
Got it. Okay. That’s helpful. And can you say whether, sorry, any of the retain tranches from securitization get pledged as collateral for financing?
Craig Knutson
So up until very recently, the answer would be no. There have been a couple of deals that we have done since June, I am sorry, since March 31st, where some of the pricing on, say, for instance, some of the IG, the investment grade rated bonds was pretty wide and so we did retain a couple of those. They are typically fairly small tranches.
And again because we have a strong balance sheet, we can sort of impose that discipline on the market that if the pricing is really to wide, we can just retain those securities. And so, particularly those investment grade-rated tranches, we will borrow on those, because those are actually pretty easy to borrow — to lever. And we could sell those in the future, right, should the levels become attractive. But for the time being, if the bonds is going to — if the tranche is going to priced at 7.5% or 8%, we would rather own that.
Eric Hagen
Great. That’s helpful. And then on the non-QM, can you remind us, is there a call option on the securitized debt and how you might look to exercise the call option and even if the market is relatively wide because the debt itself has de-levered a little bit?
Steve Yarad
Yeah. So generally we will have a call option, say, two years to three years time for 30% of the UPB — of the original UPB, whichever comes sooner. And really it’s deal by deal kind of exercise that we will look at to determine how far down it’s delevered where our spreads and in the market today and that will determine whether we call back the loans to reissue.
Eric Hagen
Right. Thank you. I appreciate the comments.
Craig Knutson
Thanks, Eric.
Steve Yarad
Thanks.
Operator
We have a question from Doug Harter with Credit Suisse. You are open.
Doug Harter
Thanks. Can you talk about the relative return differential versus — as you do securitization versus holding it on the warehouse lines?
Bryan Wulfsohn
Yeah. I mean, I think, so it’s — securitization I think widened during the year. I think if you are securitizing non-QM collateral in general with — right, non-QM will — SFR loans we have, the all-in cost of funds is probably between 5.5% to 6%. It can range from collateral and type of yield.
On the warehouse, we are probably close to LIBOR plus 200 to 250, something like that. So with LIBOR at 275 to 300, the cost of funds on warehouse is still lower, probably, by the tune of anywhere from 75 basis points to 100 basis points.
But for us, it’s not necessarily all about just the cost of funds. The securitization provides tremendous benefits from a risk management perspective to think about liquidity, as well as the fact that it’s non-mark-to-market non-recourse.
We think by moving more into securitization, it’s definitely the path we want to do and that’s what we have done obviously over the last 18 months to 20 months. And so, you should expect us to continue to securitize in the future, but for now there is a benefit on warehouse versus securitizations.
Doug Harter
Got it. And then, I guess switching to Lima One, I guess, how do you view the level of profitability that you able to generate in the second quarter and the sustainability of that and what’s clearly become a more challenging market?
Gudmundur Kristjansson
No. Thank you for the question. I think the way we think about Lima One, is really — it’s not one quarter to the next, but it’s a business that we believe in terms of the long-term ability to generate attractive assets for us on our balance sheet.
And as you have seen over the last 12 months, we have taken that business to a whole new level and the way we think about it is, we will continue to nurture them, give them all the tools that they need to improve their efficiencies and grow.
And I guess, more importantly, as you have seen, we have raised rates dramatically there with the market and as we said in our prepared remarks, the pipeline now has coupons of approximately 8% and they are rising every day.
And the way we think about that is that we are creating our own credits, which is going to perform really well going forward. And that’s really how we think about as opposed to whether they generated ROE each quarter and we see instead portfolio growth for us over time.
Craig Knutson
Yeah. Doug, one thing I would add is, I think, the strategic benefit of Lima One is, it’s a captive source of really high-quality, high-yielding assets. And if we had to go buy those assets out in the marketplace and compete for those assets, we would be paying a lot more for those assets, the yields that we buy them, that would be significantly lower and it would just be more difficult to acquire size of those assets. So it’s a little hard to quantify the strategic important to that, but I think it’s a real thing.
And the other thing I would just add from a — as we think about the business. We effectively think about the Lima creating these assets roughly at costs for us. So over cycles and over time, we would expect that their origination fees, servicing fees and that asset fees that they generate in normal course of business will kind of roughly offset the G&A and that’s kind of how we would think about it over the long-term.
Doug Harter
Got it. And maybe just then the portfolio would be more profitable to Craig’s point, that you would have to pay more to acquire those in the open market?
Craig Knutson
Exactly.
Gudmundur Kristjansson
Exactly. And that can be a huge difference, I mean, for example, on the Fix and Flip side, people are usually buying loans with stripped down coupons with anywhere from 200 basis points to 300 basis points. So that’s obviously a huge benefit to us to retain all in our balance sheet.
Doug Harter
Okay. Thank you, guys.
Craig Knutson
Thanks, Doug.
Operator
And our speakers, there is no other participants queued up at this time.
Craig Knutson
All right. Thanks, Tom. I’d like to thank everyone for your interest in MFA Financial and we look forward to our next update when we announce third quarter results in November. Thanks, Tom.
Operator
Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using the AT&T Event Services. You may now disconnect.
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