MFA Financial(MFA) - 2018 Q4 - Annual Report

Financial Risks - The company is exposed to risks from changes in interest rates, which may adversely affect profitability due to increased borrowing costs relative to interest income [96]. - Changes in LIBOR and other benchmark rates may impact the company's profitability, especially with ongoing regulatory reforms affecting these rates [98][99]. - A flat or inverted yield curve could negatively impact prepayment rates and the supply of ARM-MBS, potentially decreasing net income [98]. - The company’s profitability may be adversely affected by mismatches between interest rate adjustments on borrowings and those on ARM-MBS [98]. - The company faces risks related to the potential manipulation of LIBOR, which could affect the profitability of its investments tied to this benchmark [99]. - An increase in borrowing costs relative to interest income may adversely affect profitability, especially if interest expenses rise faster than income from investments [96]. - The company’s ability to renew borrowings at acceptable interest rates is critical for maintaining liquidity and profitability [94]. - The company’s reliance on short-term repurchase agreements exposes it to interest rate risk, which could lead to decreased net income during periods of rising rates [96]. Counterparty and Financing Risks - As of December 31, 2018, the company had over 5% stockholders' equity at risk with major counterparties: Goldman Sachs (9.4%), RBC (7.4%), Wells Fargo (5.5%), and Barclays Bank (5.1%) [95]. - The company relies on repurchase agreements for financing, which may lead to margin calls if the market value of residential mortgage investments declines [95]. - The company faces risks from restrictive covenants in financing agreements, which could lead to defaults and immediate repayment demands if not met [101][102]. - Rating agency delays may hinder the company's ability to obtain timely ratings on new notes, impacting borrowing availability and financing terms [106]. - The company must comply with extensive federal and state regulations, incurring significant ongoing costs to adhere to these requirements [114]. Market and Operational Risks - The company’s operations are significantly impacted by adverse conditions in the mortgage and mortgage-related asset markets, which could lead to substantial volatility and potential losses [107]. - A lack of liquidity in the company’s investment portfolio may hinder its ability to sell assets when needed, potentially realizing less than previously recorded values [108]. - The company may incur losses if it cannot secure sufficient eligible assets for securitization financing, leading to reliance on less attractive financing options [103]. - The company is subject to risks associated with inaccurate representations and warranties regarding the assets that collateralize its borrowings, which could adversely affect operations and liquidity [104][105]. - The company may experience increased volatility in GAAP results due to a growing proportion of assets accounted for under the fair value option, which has led to fluctuations in reported financial results [61]. Regulatory and Compliance Risks - Regulatory changes from the Dodd-Frank Act impose significant restrictions on proprietary trading and capital requirements, which could adversely affect the company’s business operations [109]. - The final Basel FRTB ruling, effective January 2019, raises capital charges for bank holders of ABS, CMBS, and Non-Agency MBS, potentially reducing liquidity in the securitized products market [113]. - The company must comply with extensive regulations, which can change frequently and may increase operational costs [114]. - The company may face challenges in maintaining REIT qualification if assets subject to repurchase agreements are not treated as real estate assets [148]. - Changes in laws and regulations governing the Investment Company Act status of REITs could adversely affect the company's operations [124]. Taxation and Dividend Distribution Risks - The company must distribute at least 90% of its REIT taxable income to maintain REIT status, which limits cash available for other business purposes [136]. - If the company fails to distribute at least 85% of REIT ordinary income or 95% of REIT capital gain net income, it may incur a non-deductible 4% excise tax on the excess [136]. - The company may face tax liabilities that could reduce cash flow, even if it qualifies as a REIT, including taxes on undistributed income and excise taxes [138]. - The company may incur a 100% tax on net income from prohibited transactions, which could limit its ability to engage in certain securitization methods [143]. - Differences between GAAP net income and REIT taxable income could lead to significant variances in dividend distribution requirements [146]. Investment and Asset Management Risks - The company has significant exposure to specific counterparties, with over 5% stockholders' equity at risk to Goldman Sachs (9.4%), RBC (7.4%), Wells Fargo (5.5%), and Barclays Bank (5.1%) [95]. - The company has investments in Non-Agency MBS collateralized by Alt A and subprime mortgage loans, which are subject to increased risk of losses due to lower underwriting standards [58]. - The concentration of investments in specific geographic areas increases the risk of loss due to adverse developments in those regions [69]. - The company relies on third-party servicers for managing residential whole loans, which exposes it to servicing-related risks, including potential defaults and increased losses from non-performing mortgages [71]. - The foreclosure process in states like New York, Florida, and New Jersey can be lengthy and costly, potentially leading to significant losses in the residential whole loan portfolio [72]. Strategic and Competitive Risks - The company is dependent on key personnel, and their loss could materially affect operations and performance [170]. - Competition for investment opportunities may limit the company's ability to acquire desirable assets, adversely affecting profitability [173]. - The company may need to adjust its strategy based on new or different guidance from the SEC regarding qualifying real estate assets and real estate-related assets [123]. - Future offerings of debt or equity securities may dilute existing stockholders and adversely affect the market price of common stock [167]. - The company’s charter restricts ownership to prevent any person from owning more than 9.8% of outstanding shares, which may limit business combination opportunities [163].