"If I remember right MFA bought the AAA tranches, which means there are four or so subordinate trances providing credit enhancement to the AAA. Think of cascading waterfalls of principal and cascading waterfalls of interest."
I read the PP presentation as you sugessted. MFA indicated at year end they had 10% in credit enhancements. That could be 10% of par or 10% of their basis(which would equate to approx 6.3% of par). Either way that isn't much cushion to bring them up to a AAA tranche. Of course I don't know anything about the relative sizes of the various tranches.
"...I don't know anything about the relative sizes of the various tranches." Neither do I, but their guidance is that they don't expect to experience any credit losses from these, they expect the credit enhancements to hold up. Could they be wrong? Of course they could, but my impression of management is that they are cautious and prudent. MFA's management is very different from that of CIM, CIMS's managers are the perpetual optimists who destroyed almost all of their IPO capital doing distressed margin call sales all the way to the bottom. Now CIM is acquiring lower tranches again when I believe that we are still in the grips of deflation. In contrast MFA bought at the bottom, not the top, they didn't delude themselves about credit risk or overpay when everyone was saying "housing will go up forever!" I tend to trust their opinion now when they say they don't anticipate credit losses on these. Could be wrong, we'll see, I have placed my investment bet that they are right. With the banksters borrowing at 0% FFR and UST's yielding so low the banksters will chase AAA yield elsewhere and I think there is a lot of upside left to the private label MBS.