MFA Financial (MFA) Q2 2020 Earnings Call Transcript

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MFA Financial (NYSE:MFA)
Q2 2020 Earnings Call
Aug 06, 2020, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial, Inc. second-quarter earnings conference call. [Operator instructions].

I would now like to turn the conference over to your host, Hal Schwartz. Please, go ahead.

Hal SchwartzSenior Vice President, General Counsel, and Secretary

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 that the 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, estimates, 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 the MFA’s Annual Report on Form 10-K for the year ended December 31, 2019, and other reports that it may file from time to time with the Securities and Exchange Commission. These risks and 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 2020 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 KnutsonChief Executive Officer and President

Thank you, Hal. Good morning, everyone. I’d like to thank you for your interest in and welcome you to the MFA Financial second-quarter 2020 financial results webcast. Also dialed in with me today are, Steve Yarad, our CFO; Gudmundur Kristjansson, and Bryan Wulfsohn, our co-chief investment officers, and other members of senior management.

Before we begin, I’d like to give a shout out to our entire MFA Team. The last five months have obviously been extremely challenging and made exponentially more so by the fact that all of our efforts have been remote as the company fully implemented our business continuity plan during the third week of March. The effort and commitment put forth by our entire team over the last five months have been extraordinary, and I have been awed by their dedication. Although the bottom-line earnings per share results for the second quarter of 2020 might at first glance appear to be a return to normal for MFA, the second quarter was anything but normal.

After a COVID-19 induced mortgage market meltdown that began in mid-March, we were in the middle of negotiating a forbearance agreement with our significant lenders as the second quarter began. These negotiations resulted in our first forbearance agreement which took effect 10 days into the quarter on April 10th. Although, our lenders who were party to this agreement had essentially been granting us forbearance since March 23rd. Forbearance agreements were extended on April 27th and again, on June 1st, then we exited forbearance on June 26th.

So we spent nearly the entire second quarter under forbearance. And while these forbearance agreements were expensive, and required a massive effort to manage, they did afford us the time necessary to de-lever our balance sheet, generate liquidity, and conduct a thorough and competitive process to source third-party capital. Please turn to Page 4. Our second-quarter financial results were overwhelmingly dominated by unusual events and transactions.

Sales of residential mortgage-backed securities in the second-quarter generated $177.5 million of net realized gains versus their March 31 marks. The sale of a large Non-QM home loan pool generated a loss of $127.2 million. However, $70.2 million of this loss was booked as an impairment in the first quarter in anticipation of this sale, so the second quarter recognized loss was $57 million. We booked a $49.9 million dollar loss related to swap hedges that were terminated during the first quarter.

High forbearance interest expense at $14.2 million of amortized swap losses generated a very high-interest expense of $82.1 million for the period that resulted in no-net interest income for the quarter. We also recorded $40 million of expenses related to forbearance and portfolio restructuring. So although we earned $0.19 per share in the second quarter, this is the result of many large and unusual items. GAAP book value was up primarily due to GAAP earnings that were not paid out in dividends.

Economics book value was up additionally, as we saw continued price improvement in our carrying value home loans. We elected the fair value option to account for all new and reinstated financing. This allows us to expense upfront fees and other costs associated with these transactions thereby, allowing us to present a more thorough economic go forward cost of these financing arrangements. Our leverage ratio at June 30 was two-point — there’s two to one, and our investment mortgage assets consisted of $5.9 billion of residential home loans and approximately $400 million of mortgage-backed securities.

Please turn to Page 5. As previously announced, we closed our capital transaction with Apollo and Athene on June 26. This transaction included a $500 million senior secured term loan, a warrant package to purchase 7.5% of them with common stock, over $2 billion of new non-mark-to-market financing. Provided by Apollo and Athene, together with Barclays and Credit Suisse.

In addition, Apollo and Athene have committed to purchase the lesser of 4.9% or $50 million of MFA common stock in the open market over the next year, and Athene has committed to purchase a portion of the MFA’s first Non-QMs securitization. I cannot stress enough that this transaction was about a lot more than a $500 million check. It is a very, is very much a holistic solution and a strategic and collaborative partnership. Please turn to Page 6.

With the pause afforded to us through forbearance, and with assistance from Apollo and Athene, we have also been able to profoundly restructure our liabilities to a much more durable form of financing of the $4.7 billion of borrowing that is asset-based or secured $3 billion is non-marked-to-market in the two-year term, and another $785 million is intentionally under levered by approximately $55 million, thus creating a margin cushion of approximately six points. In addition, we have $330 million of unsecured debt with our senior note and convertible bond. So all told over 80% of our borrowing is either non-mark-to-market or under levered. As you can see in the last bullet point on this page, the cost of the aggregate secured financing away from the Apollo and Athene senior loan and our existing securitized debt is approximately 3.6%.

Replacing some of this borrowing with securitization particularly for Non-QM loans at current new issue levels could lower these costs by about 100-basis-points depending on how deep in the capital stack we sell. Please turn to Page 7. As previously mentioned, we exited forbearance on June 26 with substantial liquidity, no outstanding margin calls, and all lenders repaid in full. Although an expensive and time-consuming process, we believed that we were able to protect hundreds of millions of dollars of book value by liquidating assets in an orderly and negotiated fashion rather than through a fire sale liquidation during the last two weeks of March.

in addition, we were able to conduct a robust and competitive third party capital process which again, we believe led to a much better transaction than we could have achieved in a compressed and rushed timeframe. Please turn to Page 8. While MFA is admittedly a smaller company than we were in February, we believe that we are on very solid footing during what remains a very uncertain economic environment. Not only do we have very durable financing, but we also have substantial liquidity.

The securitization market continues to improve amid the dwindling supply offering us the ability to realize considerable cost savings. Additionally, we have reinstated the payment of all accumulated but unpaid dividends on our Series B and Series C preferred stock issues, and we have declared a common stock dividend of $0.05 per share payable on October 30, 2020, to stockholders of record on September 30th. Please turn to Page 9. As most of you know as a REIT, we are required to pay 90% of our taxable income in the form of dividends, and those dividends can be quoted on preferred stock and common stock.

To the extent that we pay 90% or more but less than 100% of our taxable income, we are required to pay income taxes on the amount by which our dividend distributions fall short of 100% of our taxable income. Finally, while we generally have until October of the year following the tax year to make these distributions, we are required to pay an excise tax to the extent that we do not declare at least 85% of the required distribution during the current year. The excise tax is paid on the amount of shortfall below 85%. The preferred dividends for the year at a contractual dividend rate will total $29.8 million, or about $6.05 per common share.

So the preferred dividends will satisfy the distribution requirement on the $0.05 of 2019 taxable income with a penny and a half approximately to apply to taxable 2020 income. With an estimated $0.14 taxable income through June 30th, the 85% distribution required to avoid excess tax, the excise tax is about $0.12, or 10 and a half cents after the preferred dividends. Pages 10 and Page 11 present pie charts to illustrate how our portfolio composition, and how our secured liability structure changed during the second quarter. Our investment portfolio is lower by a third and is now comprised of 94% whole loans up from 74% at March 31, and our secured liabilities are lower by 43% and our nearly two-thirds non-mark-to-market versus nearly 1005 mark-to-market at March 31.

I will now turn the call over to Bryan Wulfsohn, to provide more details on the investment portfolio.

Bryan WulfsohnCo-Chief Investment Officers

Thank you, Craig. Turning to Page 12. The pandemic has had a material impact on the origination of Non-QM loans. Production basically ground to a halt coming into the second quarter, but it’s gradually has been gradually increasing with the stabilization of the securitization market and markets more generally.

Underwriting standards have tightened a bit on new production, but given that standards were already conservative pre-COVID, the change hasn’t been dramatic. Part of our deleveraging process to right-size the balance sheet, we executed on a scale of approximately $1 billion of loans in the second quarter. The loans in the portfolio sold at higher LTV, this result, resulted in a reduction of the remaining weighted average portfolio LTV at the end of the second quarter by two points. Through the pandemic, our relationships with our originators remain strong.

We are working with our partners to be a stable source of liquidity moving forward. Approximately half of the portfolio is now financed with non-mark-to-market leverage, and we expect to be a programmatic issuer of securitizations which will further increase the percentage of non-mark-to-market funding. In addition to lowering our cost of funds. Turning to Page 13.

A significant percentage of borrowers in our Non-QM portfolio has been impacted by the pandemic. Many of our borrowers are owners of small businesses that were affected by shutdowns across the nation. We instituted a deferral program in March with our servicers in an effort to help our borrowers manage through the crisis while maintaining value for our shareholders. Any borrower that was current leading up to the pandemic and raise their hand during the month of March, April, and May saying that they were impacted were granted a deferral until the June 1st payment and were reported as the current through that time period.

Looking at the table on the right-hand side of the page and see the cumulative percentage of loans impacted by COVID increased to over 30%. As of June 30th, we are happy to report that over two-thirds of the borrowers that received, received COVID related deferrals have made one or more payments post deferral conclusion, and continue to be current. Turning to Page 14. Our RPL portfolio of $1.2 billion has been impacted by the pandemic but continues to perform well.

83% of our portfolio remains less than 63 days or 60 days delinquent. Although the percentage of the portfolio 60 days delinquent in status at17%, over 20% of those borrowers continue to make payments. Prepaid speeds in the second quarter slowed down a bit from elevated speeds seen previously. However, they have maintained within our expectations, and we could see the tick up a bit in the coming months, given the mortgage rate landscape.

This portfolio exhibited a similar percentage impacted by COVID as a Non-QM portfolio, we are working with our servicers to ensure positive outcomes post-forbearance. Turning into Page 15.. You’re lucky to have an exceptional asset management team to manage through our portfolio of non-performing loans. The team has worked through the pandemic 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 second quarter-ended 2019 therefore, therefore own for more than one year. 34% of loans that were delinquent at purchase are now outperforming repaid in full, 46% have either liquidated or REO to be liquidated. And we have significant in — significantly increased our activity liquidating REOproperties selling 90% more properties versus the second quarter a year ago. 20% of loans are still in non-performing status.

Our modifications have been effective as three quarters are either performing or 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 KristjanssonChief Financial Officer

Thanks, Bryan. Turn to Page 16. The COVID-19 pandemic negatively affected fixes with borrowers that’s project completion and on sales slowed down dramatically in April and May, and borrowers, in general, were negatively impacted by the severe contraction in economic activity caused by the COVID-19 pandemic. As a result, the principal paid on the slowed down and delinquencies increased in our portfolio in the month of April and May be stabilizing and or recovering slightly in June.

And the first six months’ portfolio declined $116 million to approximately $860 million in [Inaudible]at the end of the second quarter. Principal payments for about 65% of pre-COVID levels in April, May, have recovered almost fully in June for a total of 135 million of principal payments equivalent to about 45 CPR on an annualized basis. The third quarter looks on track to continue to trend with principal payments in July exceeding 50 million. We advanced above 26 million rehab costs and make no new investments in the quarter.

The average yield on a fixed-rate portfolio in the quarter was 5.73%. It’s part of our exceptional forbearance, refinance from accepting secured financing borrowed against previous ones plus loans. We also fixed in place loans of [Inaudible] finance and the two-year term non-mark-to-market that with the cost of funds of around 4%. Licenses in our portfolio increase as borrowers struggled with delays and costly transactions slow down, we have worked and impaired personal financial conditions due to this COVID-19 pandemic.

The estimates of the payments of fraud program with multiple servicers and borrowers were assessed on a case by case basis. Confess whether short term payments deferral would be beneficial to the borrower, and long outcome. Borrowers were required to document the negative income tax COVID-19 on the process of progress. Payments accruals usually up to three lines up by 1.5% of outstanding loans in the quarter.

Turning to Page 17. As previously noted, and so delinquencies increase in the quarter with 60 plus on equity loans increased by approximately $70 million or 10% or price $182 million, or 21% at the end of the second quarter. 10.5% of the increase was due to new delinquencies, or 2.5% of increases cost and lower portfolio balance due to pay downs. Under Page 18.

We have a highly experienced and talented asset management team that has for years consistently improved outcomes and loss mitigation efforts on our residential home loans in particular our non-performing loan portfolio. The team consists of people with extensive experience in defining loss mitigation strategies. The only title issue is bankruptcy filings and other common issues that can emerge from dealing with seriously delinquent loans. We are closely monitoring from services and are confident that our hard work will lead to acceptable outcomes.

Approximately two-thirds of the service with delinquent loans in our completed project, or [Inaudible] loans were eliminated or no work is expected to be done. Meaning these properties should be in decent condition. In addition, approximately one-third of a series of connected loans are already listed for sale. Loss reserves of $30 million recorded after June 30th with the expected credit losses.

This is modest modestly down to 35 million at the end of the first quarter. loss reserves are recorded in earnings and these numbers have already been reflected in our first and second-quarter earnings. As mentioned previously, we believe our active management team provides us with a huge advantage in loss mitigation. In addition, we believe that because we have secured term non-mark-to-market financing and our residential mortgage asset portfolio, we will be able to patiently work toward delinquent loans to achieve acceptable outcomes.

An additional loss mitigating factors lower level warranties made for originators at a time of nonpurchase. We currently have repurchase claims outstanding of 7 million [Inaudible] delinquent loans where we agree to the services that these loans would be purchased over time. Finally, on a massive level, we believe in the fiscal and monetary policy of supporting home prices. As the FED has lowered rates and purchased assets, mortgage rates are at an all-time low, and home sales recover from depressed levels in April and May.

Turning to Page 18. Our single-family loans folio held and recently while in a tough quarter. The size of the portfolio was relatively unchanged at $490 million of pre-prepayments meant low due to strong prepayment protection, and we made no new investments in the quarter. The portfolio uses relatively unchanged in the quarter at 5.8%.

60 plus delinquencies increased to 5% in the quarter. The primarily citing leases as an increase in the month of April, May will ba stabilize in June, and we have seen some positive delinquency transposed quarter-end. Similarly to the fixed interest portfolio, we work closely with our services to implement a payment deferral in forbearance program and borrowers were assessed on a case by case basis to assess the benefit of a deferral of advance. Progressive payments as well as forbearance usually for three months and above 3% of outstanding loans in the quarter.

As mentioned before, we believe the fiscal and monetary policy has been helpful from a credit perspective for business purpose loans. In addition, short term push for borrowers to move out of apartments in densely populated cities to single-family homes with more space, those long term trends toward increased single-family rental support to our MSR assets. And now, I will turn it over to Craig, for some final comments.

Craig KnutsonChief Executive Officer and President

Thank you, Gudmundur. The second quarter of 2020 for MFA was unprecedented in so many ways. It was through an unwavering determination and a Herculean effort on the part of all of our dedicated team that we have repositioned and restructured our company so that once again we can focus on creating value for our shareholders. While we are still somewhat cautious about the macroeconomic environment today, and the still unknown post-COVID-19 world, we believe that we are positioned to weather future storms while we evaluate investment opportunities, manage our capital structure, and look to grow earnings.

Gregg, would you please open up the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Steve Delaney from JMP Securities. Please, go ahead.

Steve DelaneyJMP Securities — Analyst

Hello everyone. And first, just congratulations on all your work over the last five months now to position MFA to be able to move forward, and it’s exciting to hear. Hi, Craig. So I’m hearing that given your financing, your package with Apollo and the thing and everything and it sounds like you guys are chomping at the bit to put some of that 600 million of cash to work.

And if I’m hearing you right, it’s, it’s probably could be the non-QM loan product and with an eye toward securitizing that. First, I guess am I hearing you correct on that. And can you just give us an update have you actually started buying any loans here in August. And is that effort well under way.

And then I guess attached to that question, you’ve, you’ve got almost 6 billion alone. Should we expect that this focus on securitization that some of which you already have that you’ll be working to structure securitizations on those existing loans as well. Thanks.

Craig KnutsonChief Executive Officer and President

Sure. Thanks for the question, Steve. So I guess the first thing I would say is, as much as we feel good about having high cash balance I wouldn’t say that it’s necessarily burning a hole in our pocket and we need to go invest it tomorrow. Yes.

As Bryan said, most of the originators if they didn’t shut down, almost shut down for several months, and they’ve, they’ve started to originate again. But I think it’ll probably be another month or so before we see any sort of volume of close loans to purchase just because the underwriting process takes some time. So it’s certainly on the agenda. But it hasn’t happened yet.

But I think we’re certainly close to that. In terms of securitization with, with securitization spreads, they’re not quite as tight as they were back in early March, but they’re pretty close. Deal with the price this week, and I think triple A’s were maybe 125 over swaps, and swaps are so low right now. So the securitization execution is really compelling.

Ironically because of your question about the existing portfolio because originators have not been active or that active over the last few months or so. If you talk to some of the dealers that are active in securitizations they’re a little worried where their volume will come from over the next month or two, while everybody ramps back up. So I think we have a great opportunity to be able to securitize the existing portfolio. And as I, as I said during my remarks, the execution with securitization is substantially more attractive than non-mark-to-market financing.

It’s probably on the order of 100-basis points or a little bit more. And it probably provides almost as much as double the amount of leverage even if only selling down through a single day. So it’s very compelling right now. There’s not a lot of supply.

So I think that the supply demand dynamics are good. And so I think that’s, that’s where we stand on securitization. Also in terms of the cash balance, I think there are a variety of investment considerations that we can make. But one of those is obviously the obvious one to look at is we have that note from Apollo and Athene at a fairly high-interest rate.

So it’s pretty easy to figure out what the ROE is if you pay down a portion of that note. Unlike most of our other investments where the ultimate return depends on things that we don’t really control like prepayments and interest rates and so on so forth, it’s pretty simple to calculate the ROE on that. So I think we have an array of things that we’ll consider deploying cash on. But it’s across the spectrum.

Steve DelaneyJMP Securities — Analyst

Great. And that pay down, It’s interesting you would say that some of them I mean use the term rescue financing that we’ve seen. The facilities have had a minimum required interest payment over one or two years. It sounds like you might have more flexibility where you’re not locked into having a certain amount outstanding for a period.

Am I, Am I hearing you right on that.

Craig KnutsonChief Executive Officer and President

You’re correct. It’s callable, it’s called right away. I’d like to take that but there was actually someone else that broke the ground on that and getting callable debt. So we were able to take advantage of that as well.

Steve DelaneyJMP Securities — Analyst

Ok, great. Well, thank you so much for the comments.

Craig KnutsonChief Executive Officer and President

Thanks, Steve.

Operator

Your next question comes from the line of Henry Coffey from Wedbush. Please, go ahead.

Henry CoffeyWedbush Securities — Analyst

Yes, good morning. And let me add my congratulations. An enormous amount of work has been done, and a lot of value preserved. If you look through your existing assets to home values which are actually holding up fairly well.

I don’t know if on a zip code by zip code basis but on a national basis there. What is the — what would the outcome be if you had to go to foreclosure on a lot of these properties. Would you be able to recover par. Would it create a manageable loss.

Maybe that’s obviously not the solution you want to pursue, but what would it look like if you did pursue that avenue.

Craig KnutsonChief Executive Officer and President

Sure. So I’ll give an overview and let Bryan and Gudmundur talk about some of the specifics. But obviously, we did make some allowances for credit losses in the — at the end of the first quarter. And I guess we reversed some of those slightly at the end of the second quarter.

So it’s hard for me to say we’re going to get back par everything because we’ve taken allowances for loss reserves. But you’re right. Home prices have held in there pretty well. Mortgage rates are at all-time historic lows.

And then, also consider what the LTV was of the relevance. So that Non-QM portfolio, those LTV’s are typically in the mid or high 60s. And on the fixed and put portfolio, those LTV again, are in the mid-high 60s generally. So we think we’ve got a pretty good cushion.

It takes some time to work through those more time probably on Non-QM fix and flip only because those are business purpose loans, so they’re not owner-occupied. But that’s part of what this, this solidified financing is about as well. Gudmundur said, virtually our entire fixed and put portfolio is financed with two years of non-marked-to-market financing. So, we have the time to work through those to get good outcomes.

And as Gudmundur also pointed out, we have a very experienced asset management team that’s been doing this for five or six years. So I think we have that — we have the ability, we have the flexibility given the financing to get the best outcomes that we can.

Bryan WulfsohnCo-Chief Investment Officers

Right. As it relates to the Non-QM portfolio, when you’re talking about a weighted average LTV of sixty-three point five right. The most likely outcome of a borrower who really gets into distress is going to be just a borrower sale of the property on their own right. We really won’t even have to necessarily go through the foreclosure process.

And if unfortunately, we had to do that when you get to that auction, most likely it would go to a third party resulting in no loss. And if you look at the three years which held, I think we’ve taken two loans or one loan so far as really gone to REO, and that property is not expected to take a loss. So, so far, so good. Obviously, when you look at the projects things out, you have to think about downside scenarios as well.

But, so far, so good.

Henry CoffeyWedbush Securities — Analyst

Merely, it sounds like the issue is time, and you have time.

Bryan WulfsohnCo-Chief Investment Officers

That’s right.

Craig KnutsonChief Executive Officer and President

Right.

Gudmundur KristjanssonChief Financial Officer

And I would just add. Look I mean you’re right. Home pricing helps as well. Probably better people expected and certainly better than we expect to probably late March or early April.

But it has to do with fiscal and monetary stimulus where it’s a very low, and you’ll see they haven’t been mortgage rates right that better world supports home prices. So, foreclosure is still expensive as foreclosure costs basically throughout the entire process. You make a deal with delinquent taxes insurance all the things. At the end of the day also we take over the property and sell it.

This is in the real to cost and so on so forth. So I think, you’re right. Home prices and household wealth that’s positive, but it still costs money to take place of foreclosure. And so our, our preferred outcome is to get to a solution before that.

But, we’re confident in our ability to get to acceptable solutions in most of these cases.

Henry CoffeyWedbush Securities — Analyst

Great. Thank you very much for answering my question.

Craig KnutsonChief Executive Officer and President

Thanks, Henry.

Operator

Your next question comes from the line of Doug Harter from Credit Suisse. Please, go ahead.

Doug HarterCredit Suisse — Analyst

Thanks. You talked about how is forbearance financing was — what it was more expensive and drag in the second quarter. Could you just talk about the new financing levels where they are relative to what you were paying in forbearance. And then, just help us also understand what the pacing could be of securitization to achieve that call safe that you talked about.

Craig KnutsonChief Executive Officer and President

Sure. So, forbearance is just sufficed to say was very extensive. I would say LIBOR plus five hundred maybe even a little bit more, so it’s not really indicative going forward. We do, and we actually have a couple of places in the press release where we lay this out by product type.

But I mentioned in my comments Doug that the secured financing away from the Apollo, Athene large loan and securitizations the average cost is about 3.6%, and it’ll vary a little bit by product type. But I would say, generally speaking, it’s probably in the vicinity of LIBOR plus 300 to in some cases maybe LIBOR plus 400. Yes, about securitization, so not many people probably remember this, but we were one day away from pricing a Non-QM securitization on March 16th. So, suffice to say that’s probably our single biggest priority right now is to move forward on securitization.

And as I said before, I think the timing is very good because there aren’t a lot of deals in the market, and in the executions have continued to improve.

Doug HarterCredit Suisse — Analyst

I guess how can we think about the sizing. I mean the size that you were looking to do before the right size. Obviously, you have a lot of, a lot of loans. Could you do a bigger, just how should we think about that potential for sizing.

Craig KnutsonChief Executive Officer and President

Sure. So it’s a good question. Obviously, we’re not a first time securitized but for Non-QM loans, it will be our first securitization. And so I think at least the first deal that we do, we probably don’t want to bite off too much.

You want to make sure that the deal is an orderly deal, and get some good execution. But I think over time, we can look to grow those So I think when we look at the deal that we were close to doing back in March, I think was 400 million or so. I think it’s probably safe to assume that a good place to start. But depending on demand, we could grow that.

I think that the existing 91 portfolio is about $3 billion. So there’s a lot of securitization to do. very helpful.

Doug HarterCredit Suisse — Analyst

Very helpful. Thank you, Craig.

Craig KnutsonChief Executive Officer and President

Sure. Thanks, Doug.

Operator

Your next question comes from the line of Rick Shane from JP Morgan. Please go ahead.

Rick ShaneJ.P. Morgan — Analyst

Hey, guys. Good morning. Can you hear me.

Craig KnutsonChief Executive Officer and President

We can hear from you, Rick. How are you.

Rick ShaneJ.P. Morgan — Analyst

I’m doing well, thanks. How are you guys.

Craig KnutsonChief Executive Officer and President

We’re good. Good.

Rick ShaneJ.P. Morgan — Analyst

Ok. Good to hear. I wanted to talk a little bit about the allowance on the Non-QM portfolio, and I realized that there was a significant reduction related to the sales which makes sense. But when we look at the characteristics, and understandably there was sort of the normal slides when we look at them for the first quarter.

But if we compare the December 31 metrics on the Non-QM portfolio versus the 630, there’s not a huge change. It doesn’t look like there’s a big change in terms of portfolio quality, terms like LTV coupon. Yet the reduction of the portfolio is about 30%, and the net reduction of the reserve was close to 70%. I’m curious about what drives that discrepancy.

I know there’s a comment in the footnotes related to the economic outlook. I’m also curious about what timeframe you’re comparing economic outlook for March 30th to June 30th reserves.

Craig KnutsonChief Executive Officer and President

I don’t want to talk about that Rick. I would point out that we implemented CECL in 2020. So anything that you compared to December 31, it was, it was a different accounting standard back then. But still, you want to talk about.

Rick ShaneJ.P. Morgan — Analyst

I understand. I’m looking at allowance, March 30th to June 30th. I was just trying to figure out if — by looking back to December if the portfolio characteristics would have changed, since I don’t have the March data. But it doesn’t look like you sold something lower quality in the second quarter to explain the decline in the reserve.

Steve YaradChief Financial Officer

So, Rick, it’s Steve. I think I’m not entirely sure which numbers you’re looking at whether it’s in the press release in the back. But maybe if you have a look at Slide 23 of the deck, you can see a bit of a roll forward by product. Right.

And backing out the reversal of the adjustment that we made on March 3, on the loans that were being sold at $70.2 million adjustments, the reduction in the Non-QM reserve was about $2.3 million for the three-month period. And you’re right. If you look at the statistics, we have, we have a table in the press release Table 6 on Page 8. If you look at the statistics and even on the delinquency levels that certainly the FICO and the LTV simplistically on Non-QM portfolio aren’t that different.

So what’s, what’s driving the CECL between March and June is primarily some assumptions that we made back in April around unemployment and teacher unemployment. And we’ve modified those slightly, and that’s really driving that reduction in the CECL reserve. So, when we did our CECL back at the end of the first quarter, we had a little bit more time to think about the economic outlook, than say some of the bigger banks who were doing their reserves and announcing earnings before we did. And so we, we had what I thought was appropriate, but fairly conservative assumptions for unemployment for example.

And we’ve dissolved those back a little bit the end of the second quarter. Obviously, there’s still uncertainty around what might happen if there’s a double-dip in the slowdown, with the state’s closing and whatnot. But we still feel that our unemployment assumptions are appropriate in the second quarter. but that did drive some of that reduction in the Non-QM or reserve.

Craig KnutsonChief Executive Officer and President

And just to be clear. I think it’s a little bit, maybe a little bit confusing just with the presentation. We had a $70.2 million valuation adjustment on our Non-QM loans at 331. That was that — that large pool that we sold that I referenced in my comments that we had a total loss of about a $127 million.

That’s $70 million was not a credit adjustment. It was it –it was a valuation adjustment on loans held for sale. We knew on March 31st that we would be selling those. So basically that $70 million writedowns were to take that down to where the mark was on March 31.

And then the sale occurred, so it gets reversed out. So it was never really part of a credit loss allowance if you will.

Rick ShaneJ.P. Morgan — Analyst

Got it. Ok. So that makes sense. What you’re basically saying, and we understand all the geography on this that the fair value mark was, in fact, greater than the CECL reserved for the remaining portfolio.

So that’s real. That’s really what’s driving the differential. The what — the follow-up question to this is that with a relatively large as you look at the migration into July, and we appreciate those metrics. When you look at the migration of a high number of 30-day delinquencies as loans come off forbearance and a relatively low 60-day delinquency.

Should we expect CECL reserve to continue to build as a relative — is a percentage of those loans cascade from 30 to 60. Or actually by the time, we have this next conversation 90 or 120 days.

Craig KnutsonChief Executive Officer and President

Sure. So Steve, you want to talk about that because we have a separate process for delinquent loans than we do for just CECL reserves in general.

Steve YaradChief Financial Officer

Yes. So when we look when loans go 60 plus delinquent, we — our process looks at those loans and looks at them somewhat separate, depending on how certain we are going into foreclosure. So when we — if we think they’re going into foreclosure, we’ll look at them more on an individualized basis and we’ll be more of our analysis of where we are from a security position. The value of the underlying collateral versus the loan balance.

But as loans are inside that level, the CECL reserve will look at macroeconomic assumptions. And we look at peer data, or at historical loss estimates and peer data to drive that CECL reserve. So that process flips over as loans get more seriously delinquent.

Rick ShaneJ.P. Morgan — Analyst

Look, I realize there. I just realize my questions are a little bit pointed, but — and let’s all acknowledge that the normal probabilities of the loan going from 30 to 60, or 60-day loan defaulting is very different, and it’s going to be challenging going forward. I need to recognize that as well.

Bryan WulfsohnCo-Chief Investment Officers

Right. And just to be — just to try to provide some additional color. So we’re now in August. So the 30-day population for that Non-QM portfolio was somewhere between 3% and 4% delinquent in July.

Right. So. So a piece of it rolls to 60. So you’re like 7% 60 in July.

So you had basically half the guys that or a third of the guy stayed where they were half of them went to 60. It is from those 30 buckets. And then another piece of them went to current. So you’re not seeing that 30-day bucket continue to build.

A onetime item the guys who had experience at the COVID impacts, so the concern was that 30%, that’s impacted by COVID. It is 30% of your portfolio going to be 30 that’s 60. But you know really that’s not the case. It’s a much lower number and that’s what we’re trying to explain here.

Rick ShaneJ.P. Morgan — Analyst

Got it. And thank you for the update in July. I misspoke when I said, I’m looking at so many slides. So thank you, guys.

Craig KnutsonChief Executive Officer and President

Thanks, Rick.

Operator

[Operator instructions] You have a question from the line of Eric Hagen from KBW. Please, go ahead.

Eric HagenKBW — Analyst

Hey, guys. It’s good to hear from you. The a — I had a similar question as Rick. You guys give me a good answer.

But the net earnings reported through as it was through the non-performing loan portfolio, I think it was $20 million last quarter. What’s the outlook for returns there. I know you don’t typically ascribe a yield to that portfolio but actually think about the earnings potential there. And then as a tack on to that, is your portfolio of REO pledged as any as collateral for any funding loans essentially just held with equity.

Craig KnutsonChief Executive Officer and President

Hey, Eric. Good to hear from you too. So, I’ll let Bryan talk a little bit about the QM loans. Of course, the REO portfolio is not encumbered at the present time.

So we own all those with equity. I think we have said over time that our expected over time returns on our fair value loans are non-performing loans. We’ve generally said we see a range of 5% to 7%. As you know, I don’t know that, that’s really changed at this point.

Obviously, it varies quarter by quarter. As you know the income that we show on those fair-value loans is not just the change in the fair value mark, but it’s also cash that we receive because many of those loans that we purchased as non-performing loans and elected fair value accounting on. We’ve been able to modify, and they’re non-performing loans. But once we designate them as fair value, the value forever.

I will say that the marked change, the fair value mark change on the non-performing loan portfolio for the second quarter was only about $2 million. So I think of that $20 million about each year that was cash. So there was very little change in that mark. So, again, not to speculate what happens in the future, but there’s probably some room in the valuation side of the market.

June 30 was not really that much higher than it was in March.

Eric HagenKBW — Analyst

Great. Thanks. And then I think maybe Steve you an asset kind of similar question. But I feel like just to clarify around any runoff that might be reinvested or short up to potentially reinvest later.

What’s the current status in the third quarter. Have you guys been able to reinvest any pay downs there. Are you really just retaining that liquidity. Then I guess in the near future.

Craig KnutsonChief Executive Officer and President

Sure. So, we’re in conversations with originators, so I would say we’re close to starting putting out some money again. But I think we’re proceeding somewhat cautiously. We don’t, I mean, we don’t know what the world looks like in a post-COVID world.

We don’t know for certain that we won’t see another downturn. So I think, we feel really good about where we are from a liability standpoint, from a balance sheet standpoint, and from a liquidity standpoint. And I think, you heard a similar theme on pretty much every other mortgage recall that I don’t think anybody says, “well I have a lot of cash I have too much cash”. Obviously, it’s a drag to have that much cash.

But I think, given what we’ve all lived through over the last five months or so it’s probably understandable that we’re going to deploy cash maybe somewhat conservatively at least for the short term.

Eric HagenKBW — Analyst

And how about long, long sales. I mean Craig, could you — as the market continues covering a fair value mark. It’s back to where you guys think it should be. Could you entertain selling a portion of the Non-QM portfolio here.

Craig KnutsonChief Executive Officer and President

I suppose we could. I think it’s certainly not our intention. We did sell some in April. I guess it closed in May.

But at this point I don’t really think — I don’t really think that’s on our– I’ll never say that we’ll never do it. But I really don’t think that we’re thinking that loan sales make all that much sense. I think securitization makes a lot of sense. Particularly right now, given where rates are, and where spreads are.

So I think that’s probably the more likely route to go.

Eric HagenKBW — Analyst

Got it. Thank you guys so much.

Operator

Thanks. And at this time there are no further questions.

Craig KnutsonChief Executive Officer and President

All right. Well, thanks everyone for your interest in MFA Financial. We look forward to our next update after the third quarter in early November.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Hal SchwartzSenior Vice President, General Counsel, and Secretary

Craig KnutsonChief Executive Officer and President

Bryan WulfsohnCo-Chief Investment Officers

Gudmundur KristjanssonChief Financial Officer

Steve DelaneyJMP Securities — Analyst

Henry CoffeyWedbush Securities — Analyst

Doug HarterCredit Suisse — Analyst

Rick ShaneJ.P. Morgan — Analyst

Steve YaradChief Financial Officer

Eric HagenKBW — Analyst

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