Ladies and gentlemen, thank you for standing by, welcome to the MFA first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. Should you require assistance during today's call, please press star then zero, and an operator will assist you offline. As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Hal Schwartz. Please go ahead.
Thank you, operator. Good morning, everyone. 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, 2022, 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 first quarter 2023 financial results. Thank you for your time. I would now like to turn this call over to MFA's CEO and President, Craig L. Knutson.
Thank you, Hal. Good morning, everyone, thank you for joining us here today for MFA Financial's first quarter 2023 earnings call. Also with me today are Stephen D. Yarad, our CFO, Gudmundur Kristjansson and Bryan Wulfsohn, our Co-Chief Investment Officers, and other members of senior management. The first quarter of 2023 started on a promising note with Treasuries rallying modestly and credit spreads becoming progressively more constructive through the month of January. This utopia was short-lived, however, when a blowout payroll number on February third shot yields sharply higher. Two-year Treasuries sold off nearly 100 basis points through the month of February as the bond market priced in additional expected Fed tightening. Cue up the banking crisis of 2023 in early March as Silicon Valley Bank and Signature Bank were shut down over the weekend of March 11th and 12th.
2-year Treasuries rallied over 100 basis points between March 8th and March 13th. Any notion that bond market volatility was just a 2022 phenomenon was quickly dispelled. As if we did not have enough to worry about with persistently high inflation numbers, a Fed that is still very focused on inflation, and a geopolitical environment that has not improved in the last year, we now add concerns of banking sector liquidity and possible asset sales to the mix. It's difficult to know in what inning the banking crisis is, but it's very clear that banks will be less willing to extend credit for at least the short term and quite possibly longer. As Fed Chair Powell has acknowledged in press conferences, reduced bank lending will tighten financial conditions, which could do some of the work for the Fed in its effort to curb inflation.
The magnitude of these impacts is unknowable at this time. Long story short, the market volatility we experienced last year is not over. While we certainly could not have anticipated many of the specific events that have occurred over the last year, we did take steps to protect MFA from a higher rate environment beginning over a year ago. Our results in the first quarter of 2023 are a testament to our risk management, positioning, and preparation. Our economic book value was up 3% in the first quarter, and we generated an economic return of 5.3% in what was a very challenging period for mortgage rates. We took advantage of a brief constructive period in the securitization market early in the first quarter and executed 3 securitizations collateralized by $668 million of loans.
Together with the 9 securitizations we did in 2022 and our $3 billion interest rate swap book, we continue to have effectively fixed our cost of funds. In the face of 10 Fed funds hikes in an aggregate amount of 500 basis points since March of 2022, our cost of funds has increased by less than 60 basis points over the last 3 quarters. As rates have trended up, the yield on our purchase performing loan portfolio has increased by almost 120 basis points over the same period. New purchases today and for the foreseeable future are at substantially higher yields that should continue to increase our interest rate spread.
Our interest rate swap position, which we assembled early in 2022 before and in the very early stages of Fed tightening, generated $22 million of positive carry in the first quarter. The positive carry is now in excess of 350 basis points. Admittedly, this swap position and the securitizations that we executed over at least the first half of 2022 increased our effective cost of funds and reduced our interest rate spread at the time, particularly in the second quarter of 2022. This early pain positioned MFA to avoid much more material spread compression in the last half of 2022 and thus far in 2023. Our loan portfolio does expose MFA to credit risk and that these loans are not guaranteed by the U.S. government.
The credit fundamentals of our loan portfolio are strong, with a weighted average current LTV at quarter end of 59%. Importantly, not only is the overall LTV low, but the tail of higher LTV loans is very small and almost entirely comprised of loans we purchased years ago at substantial discounts to par. Our LTV to purchase price is considerably lower than the LTV to UPB. Page 9 of our earnings deck illustrates these credit metrics. Portfolio delinquencies are also quite low and actually decreased modestly in the 1st quarter. On page 10 of our earnings deck, we provide the components of potential upside in MFA's economic book value as our loan portfolio is marked substantially below par. This mark is overwhelmingly due to rising interest rates rather than to weakening credit fundamentals.
As borrowers repay principal, either through scheduled amortization, curtailments, or payoffs, we recoup these discounts to par. Netting the loan portfolio discount to par with the securitized debt discount to par, we have over $2.50 per share of potential economic book value upside. It seems clear to us that the Fed is neither certain about the need of further rate increases nor clear on how long they'll need to hold rates at restrictive levels in order to break inflation. Our rate strategy remains in place as it has been since the second quarter of last year. We'll continue to prioritize liquidity. Our cash position was over $360 million at quarter end. We'll continue to securitize loans, and we'll adjust market pricing and yields on our asset purchases to reflect current market rates and funding costs.
I'd now like to turn the call over to Gudmundur to discuss our portfolio activity and Lima One.
Thanks, Craig. We continue to take advantage of the attractive investment landscape and acquired approximately $630 million of loans and securities in the first quarter, growing our portfolio by 6% to about $8.4 billion at the end of the quarter. We believe the current environment of rapid monetary policy tightening where market participants have had to grapple with high volatility, lack of liquidity, and reduced access to leverage benefits experienced market participants like MFA that have managed leveraged mortgage assets through various cycles and have the ability to source their own high-quality credit assets and size. The combination of high interest rates, wide spreads, and our unique ability to source loans continues to provide us with great opportunities to add high-yielding loans to our balance sheet.
This is especially apparent with our originator Lima One, where we remain one of the few companies that can create our own high-quality business purpose loans and size. We added over $450 million of loans in the quarter with an average coupon of approximately 10% and excellent credit characteristics with average LTV of 66% and average FICO score of 744. $364 million, or about 80% of our loan additions, were business purpose loans originated by Lima One, which is where we continue to find the best opportunities to deploy capital. With current warehouse and securitization levels, we see return on equity around mid-teens for the first quarter additions. That continues to be the case for loans that we're currently adding in the second quarter.
We also opportunistically added about $174 million of agency MBS in the latter part of the quarter when spreads had widened substantially from earlier in the quarter, bringing our total holdings of agency MBS to about $300 million at the end of the quarter. Our holdings are concentrated in 30-years 5s and five and a halves, which offer a combination of high liquidity and attractive spreads, and we see the expected return on equity of agency MBS around low to mid-teens at current levels. Agency MBS currently yields over 5%, and you have to go back to 2008 to find yields as high.
While the nominal spread over the 10-year Treasury is currently about 165 basis points and has only been wider during two periods in the last 20 years: during the Great Financial Crisis in 2008 and in October and November of last year. We believe that agency MBS yields and spreads are attractive here, but also that agency MBS provide risk management benefits to our credit-focused portfolio by improving portfolio liquidity and having the potential to perform well during periods of economic softness and offsetting potential challenges in our credit portfolio during such periods. Turning to Lima One and our business purpose loan origination activities. Lima One continued to perform well and show its importance to our asset acquisition strategy.
They originated approximately $380 million in the first quarter and accounted for about 80% of our loan additions in the quarter. Origination volumes were only modestly down from the fourth quarter and probably a little better than expected, considering the lagged effects of higher rates and tighter underwriting standards that we implemented in 2022 and the fact that the first quarter is usually the slowest quarter for BPL lending. Importantly, origination trends in the quarter were encouraging, with March volumes being strong at around $170 million, and that momentum has carried into April and May, setting us up for higher origination volumes in the second quarter. Continued market volatility and reduced access to capital and leverage for many BPL originators has allowed Lima to continue to increase market share and attract talent.
We believe this, combined with MFA's balancing strength, will allow Lima to continue to grow origination volume throughout this year. Focus on credit quality remains fundamental to our BPL strategy. The credit statistics on Lima's first quarter origination remain strong, with average LTV of 65% and average FICO score of 747 on loans originated. The combination of strong credit characteristics and Lima's servicing expertise continues to deliver excellent results, with the 60-plus day delinquency rate on MFA's BPL loans originated by Lima at around 2%. As the outlook for the economy continues to shift and the odds of an economic decline cannot be ignored, we believe it is important for owners of credit-sensitive loans to understand their servicing capability and capacity in a potential economic downturn. With Lima One, we have a highly experienced BPL servicer that has all servicing and construction and asset management in-house.
We believe this, combined with MFA's own extensive credit and asset management experience, allows us to respond quickly to changing circumstances and gives us a unique ability to manage a potential increase in borrower delinquencies more effectively than most other players in the BPL space. We continue to be focused on liquidity and availability of financing to support our BPL origination. To that end, expanded our RTL financing capacity by $400 million in the quarter by issuing our second revolving transitional loan securitization, as well as increasing non-market-to-market warehouse capacity by $250 million. We also issued our sixth rental loan securitization in February, where we securitized over $200 million of Lima One originated loans.
Our BPL securitizations continue to be well-received in the marketplace, and we believe we have created a unique BPL securitization program where origination, servicing, asset management, and risk retention are all under one roof. We think this will be a competitive advantage for us in the future, especially on the transitional loan securitizations, where a clear alignment of interest and superior credit performance will lead to better access to the securitization markets. I will now turn the call over to Bryan Wulfsohn, who will discuss MFA's securitization activities and portfolio credit performance in more detail.
Thanks, Gudmundur. The securitization market, like all markets, continued to exhibit volatility in the first quarter. A rally in spreads and rates in January offered an opportunity to execute at attractive borrowing costs relative to the fourth quarter of 2022. We were able to issue over $500 million in bonds through three securitizations, one each backed by non-QM, SFR, transitional loans in the first two months of the quarter prior to the bank turmoil in March, which resulted in spread widening. On a positive note, securitization execution levels have the tailwind of a technical supply picture, which continues to be an important force in helping spread narrow this year. Expected annual supply of non-agency residential bond issuance is forecasted to be less than half of the volume from the prior year.
We're pleased to report that over the quarter, 23 bonds issued from our securitization program were upgraded by rating agencies. These upgrades were across our non-QM and SFR platforms and are another positive illustration of our continued focus on credit. Looking ahead, we believe that mortgage securitization will continue to be an important part of our business strategy as it provides for non-recourse, non-market-to-market financing, which will further insulate the portfolio from volatile markets. Moving to our credit performance. Our strategy of targeting high FICO borrowers and an emphasis on lower LTVs in our loan originations and acquisitions have created a resilient portfolio to weather uncertain economic environments. Our credit quality remained strong through the first quarter. 60-plus day delinquencies in our purchase performing portfolio were unchanged from the prior quarter at 3%. The components of that portfolio being non-QM, transitional loan, and SFR portfolios all remained unchanged.
60-plus day delinquencies in our legacy RPL NPL portfolio improved slightly from the prior quarter, down to 30.6%. Prepayment speeds on our portfolio is relatively unchanged from the prior quarter. The non-QM and SFR portfolios exhibited a three-month CPR of 8% and 5% respectively, and a three-month CPR for our legacy RPL portfolio was unchanged. Transitional loan portfolio three-month repayment rate increased to 40%. With the spring selling season upon us, we wouldn't be surprised to see prepayment rates increase modestly in Q2. Lastly, we continue to have success with our R-REO portfolio. It continues to shrink as fewer properties are entering REO status than are being sold out of the portfolio. Over the quarter, we sold 93 properties for $34 million, resulting in $5 million in gains.
Overall, we believe the credit in our portfolio is well-positioned for the current economic environment. With that, we'll turn the call over to the operator for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press 1 then 0 on your touchtone phone. You will hear an acknowledgment tone that you've been placed in the queue, and you may remove yourself from queue at any time by repeating the 1-0 command. If you're on a speakerphone, please pick up your handset before pressing the number. Again, if you have a question, it's 1-0 at this time. Our first question is from Steve Delaney from JMP Securities. Please go ahead..
Thank you. Good morning, everyone, congrats on the strong start to 2023.
Thanks, Steve.
Sounds like Lima is just, you know, kind of on fire down there. You were talking about quarter-over-quarter, year-over-year for 1Q. Are you at a point at this point in May where you can give us some sense of what your estimated range for origination volume from Lima might be for 2023 and how that would compare to 2022 on a full year basis? Thanks.
Thanks, Steve. It's a great question. We're very happy with how Lima is performing and, you know, some of the things that are creating challenges in the marketplace currently, you know, the volatility, you know, the reduced access to leverage and some of the banking turmoil. We think that continues to create good opportunities for Lima One as they lend in the business purpose space. As we think about the volume, yes, we think volume will continue to increase throughout the year. You know, based on what we're seeing March, April, May, you know, probably Q2 is gonna be, you know, let's say around $500 million, probably a little shy of $500 million.
You know, we would expect as we go into the second half of the year, we kinda get back to a run rate of perhaps, you know, $600 million a quarter. You know, if you add that up, $500 million for Q2 and $600 million each quarter in the second half of the year, we're probably looking at, like, you know, around $2 billion for full-
Yeah.
-full 2023. I think that's kind of a modest expectation. I think there's room for upside too, depending on how the market evolves. We think that's a really good performance in the context of kind of the challenging backdrop in the overall market.
Great. Remind me, Gudmundur, what 2022 was. I'm sure it's in my model. I don't have that open.
Yeah, it was $2.3 billion.
2.3. Down just a touch.
Sure.
obviously
That's right.
higher rate market for sure. Okay. Thank you very much. We were pleasantly surprised to be beaten on your book value number, you know, up 3% to $16. Can you comment? Craig, you mentioned $2.50, you know, of per share discount accretion. When we think about 1Q, obviously you had discount accretion, but were you observing any secondary trades, market price indications that, you know? Was there any positive price adjustment on which you own in addition to your discount?
Yeah. Steve, thanks for the question. The answer is yes. There was some price appreciation during the quarter. you know, the loan book overall, I would say, you know, is probably up a point and a half or so. obviously we, you know, we gave some of that back on the, on the hedges that we had-
Sure.
On the securitized debt. That's, you know, that's really how the book value shook out. I mean, you know, overall I think it was, it was primarily due to rates. You know, I think we showed at the end of the fourth quarter that, you know, we had a positive duration, so you know, it wasn't necessarily a big surprise. Those are sort of the key components.
Great. Well, thank you for the comments. Appreciate it.
Thanks, Steve.
Thank you. Once again, if you have a question, please press 1 then 0. At this time, no one is queuing up for a question.
All right. Well, thank you, operator. Thanks everyone for listening today. We'll look forward to our next update in August.
Thank you. Ladies and gentlemen, this conference is available for replay beginning at 12 Eastern today, running through August 5th at midnight. You may access the AT&T replay system by dialing 866-207-1041 and entering the access code 6223657. International callers can