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Published on October 7, 2008
October
7, 2008
VIA EDGAR AND BY
HAND
Mr.
Robert Telewicz
Division
of Corporation Finance
Securities
and Exchange Commission
100 F
Street, N.E.
Washington,
D.C. 20549
Re:
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MFA
Mortgage Investments, Inc.
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Form
10-K for the fiscal year ended December 31,
2007
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Filed
February 14, 2008
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File
No. 001-13991
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Dear Mr.
Telewicz:
On behalf
of MFA Mortgage Investments, Inc., a Maryland corporation (the “Company”), set forth
below is the Company’s response to the comment of the staff (the “Staff”) of the
Division of Corporation Finance of the Securities and Exchange Commission (the
“SEC”),
received by letter dated September 24, 2008 (the “September 24th Letter”), with respect to
the Company’s Form 10-K for the fiscal year ended December 31, 2007 (the “Form
10-K”). The response to the Staff’s comment is set out and
numbered below.
Form 10-K for the fiscal
year ended December 31, 2007
Item 8. Financial Statements
and Supplementary Data
Notes to Consolidated
Financial Statements
Note 3. Investment
Securities, page 49
1.
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We
have considered your response to our prior comment six from our letter
dated August 12, 2008. We are still unclear how you have
determined that you have the ability and intent to hold available-for-sale
securities until recovery or maturity. Please tell us how you
identified the securities to be sold during the third quarter of 2007 and
the first quarter of 2008. Additionally, please tell us how you
factored continued negative market conditions in 2008, projections of
future results, and minimum capital requirements in your determination
that you have the intent and ability to hold the remaining
available-for-sale securities in an unrealized loss position for a period
of time sufficient to recover all unrealized
losses.
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In
response to the Staff’s comment, as previously noted in our letter of August 19,
2008 (the “August
19th Letter”),
management’s assessment of the Company’s intent and ability to continue to hold
its available-for-sale securities in an unrealized loss position until recovery
or maturity is based on management’s reasonable judgment of the specific facts
and circumstances impacting each such security at the time such assessment is
made. In making its assessment, management reviews and considers
factual information relating to the Company and such securities, including
expected cash flows from such securities, the nature of such securities, the
contractual collateral requirements impacting the Company and the Company’s
investment and leverage strategies, as well as subjective information, including
the Company’s current and targeted liquidity position, the credit quality of the
underlying assets collateralizing such securities and current and anticipated
market conditions.
As
disclosed in the Form 10-K, it is the stated intent of the Company to hold its
available-for-sale securities in an unrealized loss position until recovery of
unrealized losses or until maturity. In order to support this intent,
it is the Company’s objective to maintain its ability to hold such securities
through the management of its balance sheet and the execution of its financing
strategy. As part of its balance sheet management and financing
strategy, the Company maintains a cushion, consisting of (i) excess pledged
collateral held at its repo counterparties, (ii) unpledged collateral held by
the Company and (iii) available cash held by the Company, in order to meet
anticipated margin calls associated with lower valuations on mortgage-backed
securities (“MBS”) and/or
increased haircut levels (i.e., additional collateral required by repo
counterparties). By maintaining this cushion, the Company’s intention
is to be able to meet potential margin calls under various market conditions
without being required to sell its securities.
The table
below shows the Company’s cushion at the end of each of the most recent five
fiscal quarters.
6/30/2007
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9/30/2007
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12/31/2007
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3/31/2008
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6/30/2008
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(Dollars
In Millions)
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Outstanding
borrowings
under
repurchase
agreements
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$ | 6,379.5 | $ | 6,313.9 | $ | 7,526.0 | $ | 7,311.8 | $ | 9,310.2 | ||||||||||
Available
cash
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$ | 54.3 | $ | 206.4 | $ | 234.4 | $ | 339.8 | $ | 231.9 | ||||||||||
Unpledged
MBS collateral
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$ | 280.6 | $ | 205.5 | $ | 254.2 | $ | 81.0 | $ | 463.9 | ||||||||||
Collateral
in excess of
haircuts
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$ | 98.8 | $ | 67.1 | $ | 112.7 | $ | 214.9 | $ | 113.7 | ||||||||||
Additional
assets available
for
potential margin calls
due
to increases in haircuts
and/or
declines in MBS
valuations
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$ | 433.7 | $ | 479.0 | $ | 601.3 | $ | 635.7 | $ | 809.5 | ||||||||||
Cushion
as a percentage of
repurchase
borrowings
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6.80 | % | 7.59 | % | 7.99 | % | 8.69 | % | 8.69 | % | ||||||||||
Leverage
multiple
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9.1 | x | 8.3 | x | 8.1 | x | 7.0 | x | 6.7 | x |
With
respect to the cash component of the cushion, the Company generally has three
methods available to it to increase this component: (1) retain mortgage
principal prepayments received on its investment securities (rather than
reinvest these cash proceeds in additional securities); (2) raise additional
equity capital; or (3) sell assets.
-2-
In
addition to maintaining what the Company believes to be an adequate cushion of
unpledged collateral, excess pledged collateral and available cash, the Company
also generally maintains outstanding repo borrowings below its maximum stated
repo credit lines with its counterparties. This excess repo capacity
serves as an additional cushion should the Company experience any disruption
among its repo counterparties or a reduction in repo credit lines.
These
liquidity measures, which are designed and tested to withstand expected
potential increased market price and haircut volatility, reasonably demonstrate
and reinforce management’s assessment with respect to the Company’s ability to
hold its available-for-sale securities in an unrealized loss position until
recovery or maturity under normal market conditions.
Sale
of securities during the third quarter of 2007
The
Company’s sale of MBS during the third quarter of 2007 was in reaction to
unanticipated and significant adverse changes in overall financial market
conditions, rather than due to any specific attributes of the securities
sold. These sales represented a considered and proactive action by
the Company to strengthen its liquidity position given perceived and observed
stress in the U.S. financing and repo markets at that
time. Well-publicized forced deleverings from market participants,
such as New Century Mortgage, Thornburg Mortgage, Carlyle Capital and Peloton
Partners, reduced market prices on MBS (as their collateral was sold in forced
sales), which in turn exerted unanticipated pressure on repurchase agreement
haircut levels for other market participants, including the
Company. In order to affect a significant delevering (i.e., raise the
cash component of the cushion described above) in a short period of time, asset
sales by the Company represented the only viable method at that time of
increasing its liquidity position in anticipation of further potential
significant disruptions in the repo market.
These
significant market events and dislocation caused the Company to modify its
leverage strategy. This modification of the Company’s leverage
strategy could only be rapidly achieved by selling assets. As noted
in the Form 10-K (as well as subsequent filings with the SEC), the Company has
never sold securities in order to meet margin calls.
Sale
of securities during the first quarter of 2008
The
Company reported its 2007 year financial results on February 14, 2008 and, in
connection therewith, filed its Form 10-K on February 14, 2008. In
March of 2008, due to significant events that were unforeseen at the time the
Form 10-K was filed, the Company entered into additional asset sales in order to
effect its publicly announced adjustment in balance sheet
strategy. As publicly stated, the Company determined that because of
the significant financial industry stress and the rapid and indiscriminate
tightening of credit conditions the proper strategy for the Company was to
generally lower its target debt-to-equity multiple to 7x to 9x (from 8x to 9x)
on a going-forward basis. Specifically, these sales were undertaken in reaction
to significant extraordinary market events and public disclosures by financial
institutions, including Bear Stearns, late in the first quarter of 2008 that
suggested a higher probability of increased margin requirements and haircut
levels in the future for all repurchase agreement borrowers. Accordingly, in
reaction to these developments, management determined to sell assets late in the
first quarter.
It should
be noted that following the first quarter 2008 asset sales, the Company did not
sell any additional assets in the second or third quarters of
2008. These two quarters have witnessed significant further
deterioration of the financial markets, including the conservatorship of Fannie
Mae and Freddie Mac, the acquisition of Merrill Lynch, the failure of Lehman
Brothers, the takeover of AIG, the failure of IndyMac, the failure of Washington
Mutual and the announced acquisition of Wachovia. The Company
believes that its performance serves as a posteriori affirmation of both its
intent and ability to hold its remaining available-for-sale securities in the
current environment.
-3-
How
securities sold during the third quarter of 2007 and the first quarter of 2008
were identified
The
Company’s determination to reduce leverage by selling securities was made
independently of and prior to any consideration of specific securities to be
sold. The selection of the securities to be sold was largely
influenced by the general market conditions existing at the time of the
sale.
In the
third quarter of 2007, the Company’s asset sales were made during a period of
relative market stability and orderly demand (albeit at lower market prices) for
mortgage-related assets. Given these market conditions, the Company
selected assets for sale based on various characteristics including, but not
limited to, age, yield, pool size and months to scheduled coupon
reset. The Company’s selection process was also intended to
strengthen its core portfolio fundamentals, by increasing the concentration of
Agency MBS held by the Company, in light of the financing market at the
time.
In the
first quarter of 2008, extraordinary market events led to a contraction in
market liquidity for mortgage-related assets and the selection of securities to
be sold was largely influenced by the general market conditions existing at the
time of the sale. The Company transacts with all major MBS trading
desks on a regular basis and maintains an active dialogue with market
participants. These relationships enable the Company to stay apprised
of supply and demand flows in the MBS markets. In a market
environment characterized by illiquidity and lack of demand for MBS, the Company
considered which particular types of MBS had market demand at the time of the
contemplated sale and selected securities that met these demand parameters (to
the extent that the Company owned such securities). This strategy
typically garners the best price while minimizing the market
disruption. In some cases, these sales were negotiated private sales
to end buyers (through a Wall Street intermediary).
Consideration
of continued negative market conditions in 2008, projections of future results,
and minimum capital requirements in your determination that you have the intent
and ability to hold the remaining available-for-sale securities in an unrealized
loss position for a period of time sufficient to recover all unrealized
losses
The
Company believes that it has responded to continued negative market conditions
by increasing its cushion as described above. The Company notes that
it did not sell securities in the second and third quarters of 2008, even as
market conditions further deteriorated. This is a testament to the
Company’s balance sheet position at March 31, 2008.
While the
Company is not subject to minimum (regulatory) capital requirements, the terms
of the Company’s repo financing do require a minimum haircut (or equity
(capital) level). In general, the Company maintains a significant
cushion over these minimum equity requirements. As previously noted,
the Company publicly disclosed that it expects to utilize leverage of only 7x to
9x, thus further supporting the Company’s ability to hold its securities until
recovery or maturity.
With
respect to the Company’s available-for-sale securities currently held in an
unrealized loss position, the Company believes that it has both the intent and
ability to hold these securities for a period of time sufficient to recover
unrealized losses. The Company notes that the conservatorship of
Fannie Mae and Freddie Mac has strengthened the guarantee on its Agency
securities. The Company believes that the decline in market prices
has been due to general market dislocation in the Agency MBS and, in particular,
the non-Agency MBS sector, and is not attributable to fundamentals underlying
its specific securities. The Company believes that the expected cash
flows from these securities will return all or substantially all of the
previously anticipated interest and principal payments. Since this market price
decline does not affect the Company’s likelihood of collecting the future
anticipated cash flows from these securities, the Company considers these
impairments to be temporary. With the Company’s current leverage
strategy, the Company believes that it maintains the ability to continue to hold
these investments until market recovery or maturity. On this note, management
believes that the Company’s position is in concurrence with the SEC’s
Clarifications on Fair Value Accounting released on September 30,
2008.
-4-
Furthermore,
as noted in the August 19th Letter,
the Company continually analyzes its investment securities, the composition and
underlying characteristics of its securities, and key statistics that support
the Company’s investment and leverage strategy in relation to current market
conditions. Future significant changes in market conditions could
change the Company’s ability and/or intent to continue to hold such securities,
at which time the Company could recognize an impairment charge and/or realize
losses upon the sale of securities.
Please
direct any questions or additional comments regarding this response to the
September 24th Letter
to the undersigned or Tim Korth, the Company’s general counsel, at (212)
207-6400.
Very
truly yours,
/s/William
S. Gorin
William
S. Gorin
President
and Chief Financial Officer
cc: Tim
Korth
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