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MFA Financial, Inc. Message Board

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  • reitsbyziggy reitsbyziggy Feb 16, 2010 8:42 PM Flag

    GSE Prepayment Effects

    "would you say this calculation is correct according to your numbers"

    No you can't add up these numbers to come up with this. Book value is a function of:

    (1) the market value of the mortgages
    (2) interest income (-) expenses and dividend payments.
    (3) gains or losses from the sale of mortgages

    After the GSE announcement last week the market value of all GSE mortgages dropped on the open market due to the expected early prepayment to par or 100 for the percentage of those loans(my estimate of 7.5%) that were 120 days past due. So if those mortgages had a value of 105 they dropped to say 104.5(uncalculated number) to account for ON AVERAGE the early repayment of those to be prepaid at par. MFA's book value dropped right then and there because now their mortgages on average are not worth as much in the open market. MFA lost market value equal to the difference between the 105 and the 100 they will receive on those mortgages(estimated at 7.5%) that will be repurchased early...this is the $.10 per share number I referred to. MFA still paid 101.3 for these mortgages regardless of this prepayment announcement.

    When MFA gets paid at 100 for the loans that are past due they will have to writeoff 1.3% of those prepaid loans which is the $.025(not $.25) per share that I referred to. This is a taxable event and their dividend will be adjusted accordingly either in the second quarter or spread throughout the rest of the year so as to not payout more than REIT taxable income for the year 2010. Now we may not see the effect of the entire $.025 in 2010 because they projected some prepay at some point in time either in the remainder of 2010 or later years. So in the end its a timing issue when do I get prepaid for my past due or in the next few quarters. If its later than now I get to earn my spread after hedging expenses during those quarters. If its now then I loose my spread and I still have my hedging expenses. This is my estimate in LOST INCOME of $.02 per quarter if the funds can't be immediately reinvested.

    So in this example MFA lost $.10 per share in book value...$.075 was a loss of unrealized capital gain that went away(105 down to 101.3) and $.025 was a realized taxable loss (101.3 down to 100).

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    • Prepayment on the non-agency side should compensate for the 2.5 cent loss on the government side. The short term loss in book value doesn't affect my dividend payment anyhow.

      There is no way the share price should drop 50 cents because the 2010 dividend might be 2 or 3 cents less.

      We witnessed panic selling, short selling, and momentum trading. The market doesn't like uncertainty so the baby got thrown out with the bath water. These guys are returning about 14% on equity in an uncertain market. Anybody moving to the safety of cash paying less than 1% is a fool.

    • thanks for explaining it... makes much more sense now...

8.34+0.05(+0.60%)Nov 25 4:05 PMEST

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