Ladies and gentlemen, thank you for standing by and Welcome To The MFA Financial, Inc. Third Quarter Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we'll conduct a question and answer session. If you have a question at any time, you may queue up by pressing one and then zero. Once again, if you have a question or comment, you may queue up by pressing one and then zero. If you need assistance during the call, you may press Star and then zero, and an operator will assist you offline. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Hal Schwartz. Please go ahead.
Thank you, operator, and 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, 2020, 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 third quarter 2021 financial results. Thank you for your time. I would now like to turn the call over to MFA's CEO and President, Craig Knutsen.
Thank you, Hal. Good morning, everyone. I'd like to thank you for your interest in and welcome you to MFA Financial's third quarter 2021 financial results webcast. Also with me today are Steve Yarad, our CFO, Gudmundur Kristjansson and Bryan Wulfsohn, our Co-Chief Investment Officers and other members of senior management. The third quarter was a transformational quarter for MFA, and as we sit here today, we are excited about our company and enthusiastic about our future. We continue to execute on our strategy to grow our portfolio and reduce and term out liabilities. Our third quarter financial results featured strong earnings and book value growth. On the credit side, continued strong housing trends have bolstered the value of the underlying assets, securing the mortgages we own, thus lowering LTVs.
Robust housing prices have also created a strong tailwind for delinquent mortgages and REO properties as these trends lead to improved resolutions and outcomes. MFA's tireless efforts to find attractive new investments were also rewarded in the third quarter as record asset acquisitions exceeded runoff and led to portfolio growth of $1.5 billion. Please turn to page 4. We reported GAAP earnings of $0.28 per share for the third quarter, largely driven by gains of $43.9 million or $0.10 per share related to our acquisition of Lima One. These gains resulted from the difference between the fair value of our Lima One purchase relative to our basis in our previous investments in both common equity and preferred equity of Lima One, both of which were impaired early on in the pandemic.
Our net interest income from our loan portfolio increased by 15% over the second quarter to $55 million from $48 million. GAAP book value was $4.82, up $0.17, or 3.7% from June 30, and economic book value was $5.27, up $0.15, or 2.9% from June 30. Economic return was also strong for the quarter, 5.8% GAAP and 4.9% economic book value. Our leverage ticked up slightly over the quarter to 2.2-to-1 versus 1.8-to-1 at June 30, and we paid a $0.10 dividend to shareholders on October 29. Please turn to page 5. We acquired $2 billion of loans in the third quarter, the highest quarterly loan purchase volume in our history.
We grew our loan portfolio by $1.5 billion to $7 billion. These purchases included $820 million of agency-eligible investor loans. Sorry about that. These loan purchases included $820 million of agency-eligible investor loans and $485 million of business purpose loans. In fairness, it's likely that purchases of agency-eligible investor loans will taper somewhat in future quarters, given the recent removal of the cap on GSE investor loan purchases. The business purpose loan acquisitions included approximately $170 million of loans that were on Lima One's balance sheet at July first.
As Gudmundur will discuss shortly, Lima One's origination volume continues to grow, and their October production was their highest month ever. While $1.5 billion of portfolio growth was an extraordinary quarter, we believe that we are well positioned with our originator partners to continue to grow our portfolio. Our net interest income increased versus Q2 by 5% to $61.8 million. We continue to make excellent progress in liquidating REO properties as we capitalize on strong housing trends. For borrowers still negatively impacted by COVID, we can offer modifications and or repayment plans to allow them to stay in their homes, restore their payment status to current, and retain their equity in their home. Please turn to page 6. This slide illustrates the components of our investment portfolio and also the nature of our asset-based financings.
The increase of approximately $1 billion in mark-to-market financing versus last quarter is primarily related to our agency eligible investor loans, which are financed with traditional repo as a bridge to securitization. Please turn to page 7. We closed the Lima One acquisition on July 1, thanks to a lot of hard work both at MFA and at Lima One. Despite the normal challenges associated with the corporate acquisition, Lima One did not miss a beat in the third quarter as they originated over $400 million of loans during the quarter. We have an excellent relationship with Jeff Tennyson and his team at Lima One, having worked closely with them for over 4 years now. As many of you probably know, there have been 2 recent announcements of acquisitions of similarly large business purpose lenders.
We are admittedly biased, but we strongly believe that we bought the best lender in the space, and we're excited to welcome the Lima One team to the MFA family. We're confident that we can provide Lima with the resources to continue to grow and excel at their business. There are no doubt efficiencies that we can cultivate over time to lower costs, and to that point, we've already taken steps to reduce Lima's interest expenses. Steve Yarad will review some of the accounting aspects of this transaction shortly. Please turn to page 8. We continued to execute on our securitization strategy in the third quarter, pricing our fifth non-QM deal in August. As luck would have it, we priced this deal when yields were at their lowest levels in the quarter. Subsequent to quarter end, we priced our first agency eligible investor securitization in October.
We structured $312 million bonds, and we retained a 5% vertical slice of the deal. Please turn to page 9. Finally, you may have noticed that we've added a corporate responsibility section to our website. Environmental, social, and governance issues have never been as prevalent as they are today, and the focus on ESG in investment decisions is real and growing. MFA has been committed to these principles for years, but we have been remiss in communicating our endeavors and policies to support these principles publicly. We will always continue to improve our efforts, but we are proud to finally communicate our substantial progress to date. I'll now turn the call over to Steve Yarad to talk about additional details of our financial results.
Thank you, Craig. Please turn to slide 10 for an overview of our Q3 2021 financial results. As Craig has already noted, MFA delivered strong results for the quarter that were driven by record quarterly loan portfolio growth and certain purchase accounting adjustments related to the Lima One acquisition, as well as the inclusion of Lima One earnings in MFA's consolidated results. Before discussing the core portfolio results in more detail, I'd like to take a minute to discuss the impact of Lima One purchase accounting on our income statement for the third quarter, as well as on our quarter end balance sheet. First, earnings include gains totaling $43.9 million that relate to the Lima One purchase transaction. This includes the following, a $38.9 million gain arising from revaluing our previously held investment of approximately 43% of Lima One's common equity.
GAAP purchase accounting requires that the previously held interest is adjusted at closing to the fair value implied by the current transaction. We impaired the value of our prior investment by $21 million back in March 2020 when valuations of mortgage originators were highly uncertain. Consequently, the $38.9 million gain includes the reversal of this prior impairment charge, while the remaining $18 million represents the incremental adjustment to reflect the prior investment at the fair value implied by the current transaction. An additional gain was recorded as Lima repaid its outstanding preferred equity in full, of which MFA held roughly half. The gain recorded reflects a $5 million impairment reversal. That impairment was also initially recorded in March 2020.
Secondly, under the required GAAP purchase accounting to consolidate Lima One onto MFA's balance sheet, we recorded $28 million of intangible assets and $61.6 million of residual goodwill. Intangible assets include the value allocated to customer relationships, the Lima One brand name, and internally developed technology. These assets are amortized over their estimated useful lives, with $3.3 million of amortization expense recorded this quarter. The residual goodwill asset represents the difference between the purchase price paid to acquire Lima One and the fair value of the net assets acquired, including the intangible assets. Goodwill is not amortized under current GAAP, but is subject to periodic impairment testing. Further detail on the purchase accounting for Lima One is provided in our 10-Q, which we expect to file later today. Turning now to the core components of our Q3 2021 results.
The key items to highlight are as follows: net interest income of $61.8 million, with $2.8 million higher or 5% higher sequentially. As Craig noted, residential whole loan net interest income again increased this quarter by 15%, primarily due to impressive portfolio growth and the ongoing impact of securitizations to lower the cost of financing. Our net interest spread was essentially flat to last quarter at 2.98%. The CECL allowance on our carrying value loans decreased for the sixth quarter in a row and at September 30 is $44.1 million, down from $54.3 million at June 30. The decrease reflects continued runoff of the carrying value loan portfolio and adjustments to macroeconomic and loan prepayment speed assumptions used in our credit loss modeling.
This reversal to our CECL reserves positively impacted net income for the quarter by $9.7 million. Actual charge-off experience continues to remain very modest, with approximately $2.1 million of net charge-offs taken in the nine-month period ended September 30, 2021. Pricing on loans held at fair value was higher than the end of the second quarter, particularly on purchased non-performing loans and business purpose loans. This primarily drove the net gains recorded of $21.8 million. Approximately $11.3 million of this amount relates to business purpose loans originated at par by Lima One during the third quarter. Because we elect the fair value option on these loans, at quarter end, they are marked to market based on estimated third-party sale prices.
In addition to the fair value gains on originated loans, Lima One also contributed $9.6 million of origination, servicing and other fee income during the quarter, reflecting strong origination volumes. Gudmundur will discuss this in more detail shortly. Finally, our operating and other expenses, excluding the amortization of Lima One intangible assets, was $30.1 million for the quarter. This includes approximately $10.3 million of expenses, primarily compensation related at Lima One. MFA only G&A expenses this quarter were approximately $14.5 million, which is in line with our normal run rate. Moving forward, we would expect our consolidated G&A expense to run at around $25 million per quarter, absent significant changes in Lima One origination volumes.
Other loan portfolio related costs, meaning those not related to Lima One loan origination and servicing, are expected to run at around $5 million-$7 million a quarter, but will fluctuate based on the level of loan acquisition activity, REO portfolio management expenses, and costs incurred to the extent we continue to favor securitization over warehouse financing. With that, I will turn the call over to Bryan Wulfsohn.
Thank you, Steve. Turning to page 11. Home prices showed continued strength over the quarter. We saw prices increase at a year-over-year rate of 18%. We have, however, seen the pace of month-over-month increases moderate a bit as the dramatic increase in home prices have had a slight impact on affordability. All the same fundamental factors remain at play, such as low inventory, demographic trends, and historically low rates. The unemployment rate is now down below 5% as economic activity continues to increase. All of these factors, combined with monetary and fiscal support, continue to keep mortgage credit performance strong and should bode well for continued credit performance in the near term. Turning to page 12. Non-QM origination volume remained elevated over the quarter, and we were able to purchase almost $700 million of loans, which represents another significant quarter-over-quarter increase.
Prepayment speeds remained elevated over the quarter as the 3-month average CPR for the portfolio was 39%. We executed on our 5th securitization in the third quarter, bringing the total amount of collateral securitized to over $2 billion. We expect to bring another securitization of non-QM loans in the fourth quarter. These securitizations continue to lower our financing costs and at the same time have provided additional stability to our borrowings. Securitizations, combined with a non-mark-to-market term facility, have resulted in approximately 50% of our non-QM portfolio funded with non-mark-to-market leverage at the end of the quarter. We expect to continue to be a programmatic issuer of securitizations as it is currently the most efficient form of financing for our portfolio. Turning to page 13. The non-QM portfolio has exhibited strong performance coming back from the uncertainty created by the onset of the pandemic.
We've seen steady improvement in delinquency percentages as our loss mitigation tactics employed have been effective. We instituted a deferral program at the onset of the pandemic in an effort to help our borrowers manage through the crisis. We currently have a very small handful of non-QM borrowers in forbearance or deferral plans. For borrowers that did receive forbearance, many of them are either current today or on a repayment plan to be current within 1-2 years' time. In the third quarter, we saw 60+ day delinquency rates improved by 2.5% and 30-day delinquencies dropped by 0.3%. In addition, approximately 30% of those delinquent loans made a payment in the most recent month. As the economic recovery continues, we expect the portfolio's credit performance to improve. Our strategy of targeting lower LTV loans should mitigate losses under a scenario with elevated delinquencies.
In many cases, borrowers which no longer have the ability to afford their debt service will sell their home in order to get the return of their equity. Turn to page 14. In September, the FHFA and Treasury suspended the 7% cap on investor loan purchases for Fannie Mae and Freddie Mac for at least one year. We took advantage of the opportunity over the quarter, acquiring over $1 billion in loans since we started purchasing these loans in the second quarter from our existing originator relationships at attractive prices. This new announcement limits the opportunity size for the time being, but could arise again in the future. We executed on our first securitization of this collateral subsequent to quarter end and expect to execute another before the end of the year.
This is another example of our ability to adapt to an ever-changing environment and a testament to our strong originator relationships in a competitive environment. Turn to page 15. Our RPL portfolio of approximately $700 million continues to perform well. 81% of our portfolio remains less than 60 days delinquent. Although the percentage of the portfolio 60 days delinquent in status was 19%, almost 30% of those borrowers continue to make payments. Prepay speeds in the third quarter continue to be elevated at a three-month CPR of 17.
More and more of our borrowers are gaining equity with the increase in home prices and are taking advantage of the low interest rate environment. We have a small amount of borrowers still receiving COVID assistance and believe the impact from COVID will be de minimis on our RPL portfolio going forward. Turn to page 16.
Our asset management team continues to push performance of our NPL portfolio. The team has worked in concert with our servicing partners to maximize outcomes on our portfolio. This slide shows the outcomes for loans that were purchased prior to the year ended 2020. 38% of loans that were delinquent at purchase are now either performing or have paid in full. 48% have either liquidated or are REO to be liquidated. Our sales of REO properties have continued at an accelerated pace at advantageous prices.
Over the quarter, we sold almost 3 times as many properties as the number of loans we converted to REO. 14% are still in non-performing status. Our modifications have been effective as almost 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. Now I'd like to turn the call over to Gudmundur to walk you through our business purpose loans.
Thanks, Brian. Turn to page 17. We closed our acquisition of Lima One, a leading nationwide business purpose originator, at the beginning of the quarter. This acquisition solidifies MFA's position as a leading capital provider to the BPL space, which we believe offers some of the most attractive opportunities to deploy capital in the residential mortgage space. Our teams wasted no time utilizing our collective strengths to take the business to new heights. Lima One originated over $400 million of business purpose loans in the third quarter, a record quarter for the company, and a 34% increase over second quarter origination levels. We saw strong demand for all of Lima's products and continued to experience the benefits of Lima's diversified product offerings, which offer financing solution to residential real estate investors with short and long-term investment strategies in the single-family and small balance multifamily markets.
September origination of over $150 million was a record month for the company, but that record was short-lived as the fourth quarter is off to a strong start with October volume setting a new record with origination of over $170 million. One of the key benefits of this transaction is Lima's ability to provide MFA with a reliable flow of high quality, high yielding assets that are difficult to source in the marketplace. When we announced the transaction in May, we also mentioned that we believed that Lima had the potential to grow substantially beyond the run rate at the time of $1.2 billion annual origination. We are already seeing that play out as we now expect full 2021 origination volume of between $1.4 billion-$1.5 billion.
The third and fourth quarter volumes suggest continued growth into 2022. In addition to the benefit of adding assets to our balance sheet, Lima is a profitable company. Lima generated $10.6 million of net income from origination and servicing activities in the quarter, representing an annualized return on allocated equity of approximately 30%. We have been very impressed by Lima's operational efficiency as they have consistently closed over 450 loan units in the last few months, up from about 300 units per month in the first quarter. We believe the team's experience with closing large volume of loans and scaling up operational capacity quickly sets us up nicely for future growth. We added $600 million of BPL financing capacity in the third quarter as we closed on two new financing facilities.
These facilities allow for financing of a broad range of BPL assets and will support the continued growth of our BPL strategy. Finally, the increased rent to loan acquisition volume from the Lima One acquisition has accelerated our timeline for our next business purpose rent to loan securitization, which we now expect to close in the fourth quarter. Turn to page 18. Here we will discuss the fix and flip portfolio. The portfolio grew by over $160 million or 37% in the quarter. Purchase activity picked up significantly as we closed on the Lima acquisition, including loans on their balance sheet, and benefited from very strong origination activity. In total, we purchased approximately 230 million UPB with $350 million max loan amount in the quarter and have added over $95 million maximum loan amount so far in the fourth quarter.
As a reminder, fix and flip loans finance the acquisition, rehabilitation and construction of homes. Typically, a certain amount of the loan is held back in the form of a construction holdback, which explains the difference between UPB on day one and the max loan amount, which represents the fully funded loan at the completion of projects. The fix and flip portfolio delivered strong income in the third quarter, with an average portfolio yield of 7.11% in the quarter, a 67 basis points increase from the second quarter. The housing market remains extremely strong, with record low mortgage rates and low levels of inventory supporting annual home price appreciation in excess of 15%. In addition, we continue to see unemployment declining and overall economic activity improving across the country.
The combination of these positive economic fundamentals, low initial LTVs on our loans, and the efforts of our experienced asset management team continues to lead to acceptable outcomes on our delinquent loans. 60-plus day delinquent loans continue to decline and dropped $13 million or about 10% to $107 million at the end of the third quarter. We continue to see a solid amount of loans pay off in full out of 60-plus. When loans pay off in full from serious delinquency, we often collect default interest, extension fees, and other fees at payoff. For loans where there's meaningful equity in the property, these can add up. Since inception, we have collected approximately $5.6 million in these types of fees across our fix and flip portfolio. 60-plus day delinquency as a percentage of UPB declined 10% to 18% and remains somewhat elevated.
One thing to note here is that Lima originated fix and flip loans held by MFA have approximately 5% 60-day delinquency, speaking to the quality of origination and servicing. Almost all of the 60+ day delinquent loans were originated prior to March 2020 and are simply working their way through the appropriate loss mitigation activities. Due to the short-term nature of fix and flip loans, with expected payoff in about 6-12 months, delinquent loans can be outstanding for longer than performing loans due to the time it takes to complete foreclosure. Keep in mind that we acquired over $2.2 billion of fix and flip loans and have had over $1.6 billion pay off in full. As our purchase activity was limited last year and performing loans paid off, the delinquency percentage increased as one would naturally expect as our portfolios shrank.
As we now grow our portfolio again and continue to have positive outcomes from seriously delinquent loans, we expect both the dollar amount as well as percentage delinquency to continue to decline going forward. Turning to page 19. Our single-family rental loan portfolio continues to deliver attractive yields and strong credit performance. The portfolio yield has remained steady in the mid- to high-5% range post-COVID and was 5.76% in the second quarter. Underlying credit trends remain solid and 60+ day delinquency declined 140 basis points to 3.5% at the end of the third quarter. Purchase activity more than doubled from the second quarter as we acquired over $250 million of single-family rental loans in the quarter, a record quarterly acquisition volume.
The SFR portfolio grew by 39% to $717 million at the end of the third quarter. Acquisition activities have remained robust in the fourth quarter as we've already added over $70 million in the month of October. The acquisition of Lima One has significantly boosted our ability to source single-family rental loans, and we believe that we will be able to continue to grow our single-family rental portfolio in the near future. Approximately 50% of our single-family rental portfolio is financed in non-mark-to-market financing and slightly over one-third through securitizations. We priced our first single-family rental securitization in the first quarter of 2021 and expect to close another one in the fourth quarter. We expect to programmatically execute single-family rental securitizations to efficiently finance our portfolio. With that, I will turn the call over to Craig for some final comments.
Thank you, Gudmundur. We are pleased with the results of the third quarter of 2021 and even more excited about the future at MFA. Our investment initiatives are picking up steam and contributing to portfolio growth. We're continuing to execute our strategic plan to securitize our assets and term out durable financing. Lima One is firing on all cylinders, and the strength of the housing industry has obvious positive implications for our mortgage credit investments. Cynthia, please open up the line for questions.
Certainly. Ladies and gentlemen, if you wish to ask a question, once again, press one and then zero. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue if your question is answered by pressing the same one-zero command. Once again, one and then zero for your questions or comments. Our first question will come from the line of Steve DeLaney with JMP Securities. Your line is open. Steve, check your mute button. Your line is open.
My apologies. Thanks, everyone. I was on mute. Congratulations on not only a great quarter, but the integration of Lima One. It's just an exciting future for you guys, the way you're set up now. My question on that and to Craig and I guess Steve Yarad, you know, obviously with an acquisition, okay, you've got accounting, purchase accounting adjustments, so it makes things a little complex. Then on an ongoing basis, of course, you're always gonna have fair value. I was just curious if you're gonna consolidate Lima One, okay, half, obviously. I assume it's structured as a separate TRS.
Should we expect you to try to take a lot of loans, but do they have the ability to sell loans to third parties, you know, beyond originate and sell beyond your balance sheet capability so that standalone, you could see them as a profit center, somewhat on a standalone basis in terms of gain on sale, origination, and servicing fees? Thanks.
Thanks. Thanks, Steve. It's Steve Yarad. I'll start, and maybe Craig can add comments as well. Just in terms of the accounting, yes, Lima One's fully consolidated on our balance sheet now. You'll note in our 10-Q that we released later today, we're not sort of showing it as a separate segment. It's fully integrated into MFA's-
Yeah.
Operations at the time. You're right. There's some potential in the future for us to show it as a separate segment, depending on how we get through this initial period of integration, and we optimize the financing arrangements and the capital that we allocate to Lima. There's some potential for that, for sure. I think, you know, initially, in this quarter, we've taken in, you know, almost all of the production of Lima in this quarter.
Right.
That's, you know, that's been to our benefit, obviously, as you've seen the portfolio growth that we've been able to enjoy. You know, I'll let Gudmundur and Craig speak to the future more specifically, but it doesn't have to be that way in the future going forward.
Interesting. Okay. Thanks.
Yeah.
Steve, in answer to your question, you know, yes, Lima certainly has the ability to sell loans. I think at this point, you know, I think we're happy taking the production on our balance sheet. But, you know, that could change in the future. In terms of how we present it, right, because they're consolidated, the loans and the best example is the rental loans. The rental loans, we used to pay a significant premium for. We probably pay, you know, as much as 104 or even 105 for the rental loans.
Sure.
Lima would book a gain on sale. Because they're consolidated, we actually buy those loans at par now.
Okay.
because we elected fair value, we then mark the value of those loans to the market value. So, you know, if they're worth 105, they get marked back to 105. So we preserve that origination economics, if you will, that Lima used to have. It used to be in the form of gain on sale. Now it comes in through other income for a fair value mark. But we do try to preserve those economics. As you know, as Gudmundur said, Lima made a significant contribution to our net income of over $10 million in the third quarter. So it's, you know, it's a profitable operation. Yes, some of the geography changes a little bit. But you know, suffice to say, it's not just a source of loans, it's a source of income as well.
Steve
That's great.
Just to reiterate.
Yes.
Steve, just to reiterate Craig Knutson's comment there. In my comments, I noted that of the $21.8 million of fair value gains that we had in the third quarter, about $11.3 million of that was these fair value marks on originated loans at Lima One, where we've marked them from their par origination to the fair value at quarter end.
Right. Steve, I know, tax is an entire different animal. But is it possible that as we go forward, just in terms of REIT taxable income and TRS income, is it possible that over the, you know, as we move forward, that there may be some residual retained, after-tax income that at the, Lima One TRS level that could help boost book value rather than, you know, all earnings having to be paid out as dividends to shareholders?
Yeah. Steve, that's a great point. I mean, certainly with the TRS structure, there's the ability to retain earnings in a TRS, which could potentially grow book value. It's very complicated, though. It depends a lot.
Yeah.
On the way you structure your TRS, the way it's capitalized, and the like. One of the things you have to manage in terms of managing a TRS is there are certain REIT tax tests that limit the amount of capital you can have in a TRS, and sometimes you have to make these distributions out of your TRS to manage the asset test at the REIT level. As you do that, those distributions cause income to be generated at the REIT level. It is certainly possible to grow book value through retaining earnings in a TRS, but I would just say subject to managing the overall REIT tax test.
Understood. Helpful. Thank you for the comments.
Thanks, Steve.
Thanks, Steve.
Our next question will come from the line of Steven Laws with Raymond James. One moment. Your line is open.
Good morning. Congrats on a very nice quarter and a lot of progress you guys have made here this quarter. You know, can you talk about?
Thanks, Steven.
Hey. Can you talk about where you're seeing the best opportunities kind of across these business segments? I mean, it seems like a lot of strength. I know you did mention that the agency eligible, you know, with the change in caps or caps being lifted will taper off some. You know, where are you seeing the best, most attractive ROEs as you look to, you know, put money out the door here in the coming quarters?
Sure. Thanks for the question, Steven. You know, clearly on the business purpose side, you know, Gudmundur went through some of the yields there and, you know, we see fantastic ROEs on really the entire business purpose sector. You know, non-QM as well. I mean, that's also been a big source for us. We've done five securitizations now of non-QM loans, so, you know, we're a known securitizer, known name in the marketplace. So I think, you know, we've got a good machine set up there as well. As you said on the agency eligible investor loans, you know, with the cap being lifted again, you know, it remains to be seen, you know, where that opportunity is.
I will say that, you know, that opportunity existed before that cap went into place as well. It really depends on where the loans trade, where the securitization execution gets done. You know, that could be an opportunity going forward. You know, we don't necessarily expect that that's maybe our highest opportunity right now.
There. You know, touch on the REO, you know, $7 million of gains, I think, through the 151 sales there, and I think the remaining REO balance just shy of $200 million. Can you know, talk about timing or, you know, how you think about the ability or opportunity to continue to sell down those REO assets?
Well, you know, the housing market has certainly been a big tailwind for REO. I mean, as you know, as Ed Fay, who runs Fay Servicing will always tell you, right, your REO properties are generally not your winners. But I think, you know, our team has done a fantastic job of taking advantage of strong real estate prices to continue to liquidate those.
You know, one of the places that REO holdings end up becoming losses is through unreimbursable expenses, right? It's the taxes and insurance that you pay on the property while you're trying to maybe get it fixed up to sell. I think given what's happened with home prices, you know, most of those advances or many of those advances are now recoverable. I think that's part of how you see, you know, some of the profit there is, it's just taking advantage of strong housing prices. You know, we'll continue to try to move those out, you know, as best we can, and take advantage of this market.
Right. Switching to financing costs, you know, the press release really lays it out pretty clearly across the segments, but you've really reduced it without a dramatic shift in yield from saving costs. How much work is there or how much more opportunity to continue to reduce the financing cost in different segments or, you know, any additional legacy transactions you can collapse? If so, how much opportunity is there to do that?
I don't know that we have all that much of legacy, you know, resecuritization. We did a couple of those in 2021. I think, you know, certainly on the business purpose side, you know, as Gudmundur talked about and on the non-QM side, you know, there's still an opportunity to securitize. Now, you know, we've seen short rates tick up a little bit since the end of September. You know, the two-year went from basically 25 basis points to 50 basis points. That, you know, that does cut into the savings. The securitization market ebbs and flows as well. You know, I think right now there's a lot of securitization activity, and so spreads widen a little bit. You know, spreads widen, spreads tighten.
I think we view it as, yes, it's been a significant savings for much of this year. You know, you can remember we've sold AAAs at 1% or less than 1% yields. We knew that was great at the time. You know, that's not necessarily the case today. I think the securitization still makes a lot of sense, even if the savings aren't as significant as they used to be, because it does term out that financing. Again, it's non-recourse, non-mark to market. It's that durable financing that we're looking for. I think we'll continue to do it. The savings may not be as significant as they were on some of the earlier transactions this year.
Right. Well, as you mentioned, a lot of positive characteristics of that type of financing. Thanks for the comments this morning, Craig. Have a good weekend.
Thank you, Steven. You too.
Thank you. Next, we'll go to the line of Bose George with KBW. Your line is open.
Hey, guys. This is actually Mike Smyth on for Bose. Congrats on a really strong quarter. Just another question around Lima One.
Thanks, Mike.
It sounds like the economics on the loans you're purchasing from Lima One are a bit better. I'm just wondering if there's any appetite for another strategic transaction, you know, maybe in a non-QM or a different area just to continue to shore up some of your loan sourcing channels.
Sure. Thanks for the question, Mike. I guess the short answer is, you know, we always take the phone calls. I think, you know, we're really happy with our Lima One transaction. You know that in the past we've taken minority equity stake interests in originators. That was sort of the strategic approach that we had to originators. In the case of Lima One, that turned into a corporate acquisition. The possibility certainly exists. But, you know, these transactions are, you know, they're pretty complicated. I think in the case of Lima One, that was a really compelling transaction for us. But like I say, we take all the phone calls.
Great. Thanks a lot for taking the question.
Sure.
Thank you. At this time, I'm showing no further questions in queue. Actually, we do have a question now from the line of Eric Hagen with BTIG. Your line is open.
Hey, thanks. Good morning. I have a couple questions.
Sure.
Hey, good morning. A couple questions here. Can you borrow against the unrealized fair value mark that you have in the loans that are held at carrying value? Typically, MFA is managed in agency portfolio as a liquidity offset to the credit risk that you're taking. Is there an intention to do that going forward?
On the loans that are at carrying value, you know, depending on whether they're on a mark-to-market loan or a non-mark-to-market loan, you know, there's certainly capacity to have additional borrowing capacity as value of those assets appreciate.
Right. Any sort of traditional financing that we do, right, away from securitization is based on the value of the asset.
Right.
You know, the lender doesn't care what the carrying value is. They care what the market value is.
Right.
That's really the only relevant number. In terms of agencies, yes, we've owned agencies in the past. At some point in the future, we may own agencies again. I think at least as we look at it right now, we see better opportunities in credit, and most of the investments that we're making are probably shorter in terms of duration than what we see in the agency market. Just because we don't own agencies doesn't mean that we're allergic to them.
Also just keep in mind, Eric, from a liquidity perspective, as you alluded to that, I mean, you know, our leverage is very low, around 2x, and we have tremendous amount of cash still on our balance sheet. If you think about from a liquidity perspective, that's really not why we don't own agencies at this time. As Craig pointed out, you know, because we're finding a lot better opportunities away from that, it doesn't seem to be a lot of point owning them.
Thanks. Yeah. The latter half of what you said, I think, addressed really what I was getting at, which is the liquidity rather than the investment opportunity per se. But it feels like the risk-adjusted opportunity you're getting in the stock, where which is taking credit risk, at least ties back to some form of liquidity, other than, you know, just borrowing against the value of a somewhat illiquid credit asset. And maybe two on the fix and flip. You guys noted a couple of other transactions in the space recently. I think those originators typically focus on higher balance fix and flips like high-end style homes in the, you know, on the East and West Coast. Can you guys sort of classify the types of loans that, Lima One is doing and how you guys see yourself as competitive in that kind of zone of the market? Thanks.
Yeah. No, that's a great point. Yeah. Lima has historically been fairly diversified in their approach to originating in the BPL space. They really are all across the country, but they don't really have a heavy presence in California where you have larger loan balances. On average, you know, the loan sizes for, you know, Lima's fix and flip are probably around, you know, $300,000, as opposed to some of these other companies that you referred to, which are substantially higher. One of the benefits we see from Lima is that they have incredibly high operational capacity to produce a large number of loans in a very diversified borrowing base.
What that means is that, you know, at least from our perspective, the way we see it's a lot easier to scale up Lima by either increasing number of units or go after higher loan balances to get more volume. As opposed to on the opposite side, if you're targeting, you know, high loan balances and a small number of clients, it feels harder to scale up from there. We feel pretty good about Lima and where they sit. And it provides tremendous amount of opportunities to scale it up in various ways.
Got it. Thank you very much.
Thanks, Eric.
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All right. Thank you everyone for your interest in MFA Financial. I'd like to wish everyone happy holidays, and we'll look forward to our next update when we announce fourth quarter results in February.
Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.