Edgar Filing: MFA MORTGAGE INVESTMENTS

Unassociated Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 1-13991

MFA MORTGAGE INVESTMENTS, INC.

(Exact name of registrant as specified in its charter)

______________

Maryland

(State or other jurisdiction of

incorporation or organization)

350 Park Avenue, 21st Floor, New York, New York

(Address of principal executive offices)

13-3974868

(I.R.S. Employer

Identification No.)

10022

(Zip Code)

(212) 207-6400

(Registrant’s telephone number, including area code)

______________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

197,782,529 shares of the registrant’s common stock, $0.01 par value, were outstanding as of July 29, 2008.

TABLE OF CONTENTS


PART I Financial Information
		Page
Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007	1

	Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2008 and June 30, 2007	2

	Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Six Months Ended June 30, 2008	3

	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2008 and June 30, 2007	4

	Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2008 and June 30, 2007	5

	Notes to the Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	40

PART II Other Information

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 4.	Submission of Matters to a Vote of Security Holders	41

Item 6.	Exhibits	41

Signatures		44

MFA MORTGAGE INVESTMENTS, INC.

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
(In Thousands, Except Per Share Amounts)	2008			2007
	(Unaudited)
Assets:
Investment securities at fair value (including pledged mortgage-backed securities (“MBS”) of $10,029,077 and $8,046,947 at June 30, 2008 and December 31, 2007, respectively) (Notes 3, 7 and 9)	$	10,492,955		$	8,302,797
Cash and cash equivalents		231,857			234,410
Restricted cash (Note 2(d))		387			4,517
Interest receivable (Note 4)		50,787			43,610
Interest rate swap agreements (“Swaps”), at fair value (Notes 2(m), 5 and 9)		12,891			103
Real estate, net (Note 6)		11,477			11,611
Goodwill (Note 2(f))		7,189			7,189
Prepaid and other assets		1,926			1,622
Total Assets	$	10,809,469		$	8,605,859

Liabilities:
Repurchase agreements (Note 7)	$	9,310,176		$	7,526,014
Accrued interest payable		20,169			20,212
Mortgage payable on real estate (Note 6)		9,385			9,462
Swaps, at fair value (Notes 2(m), 5 and 9)		53,656			99,836
Excess margin cash collateral (Note 7)		11,500			-
Dividends and dividend equivalents payable (Note 10(b))		-			18,005
Accrued expenses and other liabilities		5,716			5,067
Total Liabilities		9,410,602			7,678,596

Commitments and contingencies (Note 8)

Stockholders’ Equity:
Preferred stock, $.01 par value; series A 8.50% cumulative redeemable; 5,000 shares authorized; 3,840 shares issued and outstanding at June 30, 2008 and December 31, 2007 ($96,000 aggregate liquidation preference) (Note 10)		38			38
Common stock, $.01 par value; 370,000 shares authorized; 197,783 and 122,887 issued and outstanding at June 30, 2008 and December 31, 2007, respectively (Note 10)		1,978			1,229
Additional paid-in capital, in excess of par		1,643,614			1,085,760
Accumulated deficit		(171,698	)		(89,263	)
Accumulated other comprehensive loss (Note 12)		(75,065	)		(70,501	)
Total Stockholders’ Equity		1,398,867			927,263
Total Liabilities and Stockholders’ Equity	$	10,809,469		$	8,605,859

The accompanying notes are an integral part of the consolidated financial statements.

MFA MORTGAGE INVESTMENTS, INC.

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In Thousands, Except Per Share Amounts)	2008			2007			2008			2007
	(Unaudited)

Interest Income:
Investment securities (Note 3)	$	118,542		$	90,392		$	243,607		$	174,739
Cash and cash equivalent investments		2,151			634			5,182			1,082
Interest Income		120,693			91,026			248,789			175,821

Interest Expense (Note 7)		76,661			78,348			170,133			150,608

Net Interest Income		44,032			12,678			78,656			25,213

Other Income/(Loss):
Net loss on sale of MBS (Note 3)		-			(116	)		(24,530	)		(113	)
Other-than-temporary impairment on investment securities (Note 3)		(4,017	)		-			(4,868	)		-
Revenue from operations of real estate (Note 6)		398			413			812			826
Gain/(loss) on early termination of Swaps, net (Note 5(a))		-			176			(91,481	)		176
Miscellaneous other income, net		87			109			179			224
Other (Loss)/Income		(3,532	)		582			(119,888	)		1,113

Operating and Other Expense:
Compensation and benefits (Note 13)		2,687			1,409			5,331			3,021
Real estate operating expense and mortgage interest (Note 6)		424			429			873			849
New business initiative (Note 14)		998			-			998			-
Other general and administrative expense		1,353			1,244			2,471			2,428
Operating and Other Expense		5,462			3,082			9,673			6,298

Net Income/(Loss) Before Preferred Stock Dividends		35,038			10,178			(50,905	)		20,028
Less: Preferred Stock Dividends		2,040			2,040			4,080			4,080
Net Income/(Loss) to Common Stockholders	$	32,998		$	8,138		$	(54,985	)	$	15,948

Income/(Loss) Per Share of Common Stock – Basic and Diluted (Note 11)	$	0.20		$	0.10		$	(0.35	)	$	0.20
Dividends Declared Per Share of Common Stock (Note 10(b))	$	0.18		$	0.08		$	0.18		$	0.08

Weighted average shares outstanding:
Basic		165,896			81,874			155,303			81,321
Diluted		165,925			81,908			155,303			81,356

The accompanying notes are an integral part of the consolidated financial statements.

MFA MORTGAGE INVESTMENTS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

	Six Months Ended
(In Thousands, Except Per Share Amounts)	June 30, 2008
	(Unaudited)

Preferred Stock, Series A 8.50% Cumulative Redeemable – Liquidation Preference $25.00 per share:
Balance at June 30, 2008 and December 31, 2007 (3,840 shares)	$	38

Common Stock, Par Value $0.01:
Balance at December 31, 2007 (122,887 shares)		1,229
Issuance of common stock (74,896 shares)		749
Balance at June 30, 2008 (197,783 shares)		1,978

Additional Paid-in Capital, in Excess of Par:
Balance at December 31, 2007		1,085,760
Issuance of common stock, net of expenses		557,261
Share-based compensation expense		639
Shares withheld upon exercise of common stock options (22 shares)		(46	)
Balance at June 30, 2008		1,643,614

Accumulated Deficit:
Balance at December 31, 2007		(89,263	)
Net (loss)		(50,905	)
Dividends declared on common stock		(27,301	)
Dividends declared on preferred stock		(4,080	)
Dividends declared on dividend equivalent rights (“DERs”)		(149	)
Balance at June 30, 2008		(171,698	)

Accumulated Other Comprehensive Loss:
Balance at December 31, 2007		(70,501	)
Unrealized losses on investment securities, net		(63,532	)
Unrealized gains on Swaps		58,968
Balance at June 30, 2008		(75,065	)

Total Stockholders’ Equity at June 30, 2008	$	1,398,867

The accompanying notes are an integral part of the consolidated financial statements.

MFA MORTGAGE INVESTMENTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended
	June 30,
(In Thousands)	2008			2007
	(Unaudited)
Cash Flows From Operating Activities:
Net (loss)/income	$	(50,905	)	$	20,028
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
Losses on sale of MBS		25,101			116
Gains on sales of MBS		(571	)		(3	)
Losses/(gain) on early termination of Swaps		91,481			(176	)
Amortization of purchase premiums on MBS, net of accretion of discounts		10,910			16,504
Amortization of premium cost for interest rate cap agreements (“Caps”)		-			278
Increase in interest receivable		(7,177	)		(3,170	)
Depreciation and amortization on real estate		236			205
Increase in other assets and other		(406	)		(313	)
Increase/(decrease) in accrued expenses and other liabilities		649			(676	)
(Decrease)/increase in accrued interest payable		(43	)		3,147
Other-than-temporary impairment charge		4,868			-
Equity-based compensation expense		639			226
Negative amortization and principal accretion on investment securities		(339	)		(176	)
Net cash provided by operating activities		74,443			35,990

Cash Flows From Investing Activities:
Principal payments on MBS and other investment securities		809,416			976,331
Proceeds from sale of MBS		1,851,019			55,296
Purchases of MBS and other investment securities		(4,954,094	)		(1,718,186	)
Net cash used by investing activities		(2,293,659	)		(686,559	)

Cash Flows From Financing Activities:
Decrease in restricted cash		4,130			-
Principal payments on repurchase agreements		(27,731,494	)		(18,275,825	)
Proceeds from borrowings under repurchase agreements		29,515,656			18,932,599
Increase in excess margin cash collateral		11,500			-
(Payments)/proceeds from termination of Swaps		(91,481	)		176
Proceeds from issuances of common stock		557,964			16,361
Dividends paid on preferred stock		(4,080	)		(4,080	)
Dividends paid on common stock and DERs		(45,455	)		(11,459	)
Principal payments on mortgage		(77	)		(74	)
Net cash provided by financing activities		2,216,663			657,698

Net (decrease)/increase in cash and cash equivalents		(2,553	)		7,129
Cash and cash equivalents at beginning of period		234,410			47,200
Cash and cash equivalents at end of period	$	231,857		$	54,329

The accompanying notes are an integral part of the consolidated financial statements.

MFA MORTGAGE INVESTMENTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In Thousands)	2008			2007			2008			2007
	(Unaudited)

Net income/(loss) before preferred stock dividends	$	35,038		$	10,178		$	(50,905	)	$	20,028
Other Comprehensive Income/(Loss):
Unrealized loss on investment securities, net		(66,545	)		(27,152	)		(56,797	)		(14,652	)
Reclassification adjustment for MBS sales		-			-			(8,241	)		-
Reclassification adjustment for net losses included in net income/(loss) for other-than-temporary impairments		2,117			-			1,506			-
Unrealized loss on Caps arising during period, net		-			(32	)		-			(83	)
Unrealized gain on Swaps arising during period, net		100,819			19,205			10,806			14,505
Reclassification adjustment for net losses included in net income/(loss) from Swaps		-			-			48,162			-
Comprehensive income/(loss) before preferred stock dividends	$	71,429		$	2,199		$	(55,469	)	$	19,798
Dividends on preferred stock		(2,040	)		(2,040	)		(4,080	)		(4,080	)
Comprehensive Income/(Loss) to Common Stockholders	$	69,389		$	159		$	(59,549	)	$	15,718

The accompanying notes are an integral part of the consolidated financial statements.

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Organization

MFA Mortgage Investments, Inc. (the “Company”) was incorporated in Maryland on July 24, 1997 and began operations on April 10, 1998. The Company has elected to be treated as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. In order to maintain its qualification as a REIT, the Company must comply with a number of requirements under federal tax law, including that it must distribute at least 90% of its annual net taxable ordinary net income to its stockholders, subject to certain adjustments. (See Note 10(b).)

Summary of Significant Accounting Policies

(a) Basis of Presentation and Consolidation

The accompanying interim unaudited financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted according to such SEC rules and regulations. Management believes, however, that these disclosures are adequate to make the information presented therein not misleading. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at June 30, 2008 and results of operations for all periods presented have been made. The results of operations for the six-month period ended June 30, 2008 should not be construed as indicative of the results to be expected for the full year.

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(b) MBS/Investment Securities

The Company’s investment securities are comprised primarily of hybrid and adjustable-rate MBS (collectively, “ARM-MBS”) that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. government, such as Ginnie Mae (collectively, “Agency MBS”), or are rated AAA by at least one nationally recognized rating agency, such as Moody’s Investors Services, Inc., Standard & Poor’s Corporation or Fitch, Inc. (“Rating Agencies”). Hybrid MBS have interest rates that are fixed for a specified period and, thereafter, generally reset annually. To a lesser extent, the Company also holds investments in non-Agency MBS, mortgage-related securities and other investments that are rated below AAA. At June 30, 2008, the Company held securities with a carrying value of $1.8 million rated below AAA. (See Note 3.)

The Company accounts for its investment securities in accordance with Statement of Financial Accounting Standards (“FAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which requires that investments in securities be designated as either “held-to-maturity,” “available-for-sale” or “trading” at the time of acquisition. All of the Company’s investment securities are designated as available-for-sale and are carried at their fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income/(loss), a component of Stockholders’ Equity. (See Notes 2(k) and 9.) The Company determines the fair value of its investment securities based upon prices obtained from a third-party pricing service and broker quotes. The Company applies the guidance prescribed in Financial Accounting Standards Board (“FASB”) Staff Position FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (the “FASB Impairment Position”). (See Note 2(e).)

Although the Company generally intends to hold its investment securities until maturity, it may, from time to time, sell any of its securities as part of the overall management of its business. The available-for-sale designation provides the Company with the flexibility to sell its investment securities. Upon the sale of an investment security, any unrealized gain and loss is reclassified out of accumulated other comprehensive (loss)/income to earnings as a realized gain or loss using the specific identification method.

Interest income is accrued based on the outstanding principal balance of the investment securities and their contractual terms. Premiums and discounts associated with the Agency MBS and MBS rated AA and higher are

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

amortized into interest income over the life of such securities using the effective yield method, adjusted for actual prepayment activity in accordance with FAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Certain of the Agency MBS owned by the Company contractually provide for negative amortization, which occurs when the full amount of the stated coupon interest due on the distribution date for an MBS is not received from the underlying mortgages. The Company recognizes such interest shortfall on its Agency MBS as interest income with a corresponding increase in the related Agency MBS principal value (i.e., par) as the interest shortfall is guaranteed by the issuing agency.

Interest income on the Company’s securities rated below AA, is recognized in accordance with Emerging Issues Task Force (“EITF”) of the FASB Consensus No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). Pursuant to EITF 99-20, cash flows from a security are estimated applying assumptions used to determine the fair value of such security and the excess of the future cash flows over the initial investment is recognized as interest income under the effective yield method. The Company reviews and, if appropriate, makes adjustments to its cash flow projections at least quarterly and monitors these projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in interest income recognized on, or the carrying value of, such securities. (See Note 3.)

The Company’s securities pledged as collateral against repurchase agreements and Swaps are disclosed parenthetically in investment securities on the Consolidated Balance Sheets. (See Notes 3 and 7.)

Cash and cash equivalents include cash on deposit with financial institutions and investments in high quality overnight money market funds, all of which have original maturities of three months or less. The carrying amount of cash equivalents approximates their fair value.

(d) Restricted Cash

Restricted cash represents cash held in interest-bearing accounts by counterparties as collateral against the Company’s Swaps and/or repurchase agreements, the amount of which varies by counterparty. Restricted cash is not available to the Company for general corporate purposes, but may be applied to payments due to Swap or repurchase agreement counterparties or returned to the Company in the event that the collateral is in excess of the collateral requirements and/or at expiration of the Swap or repurchase agreement. At June 30, 2008 and December 31, 2007, the Company had restricted cash held as collateral against its Swap and repurchase agreements of $387,000 and $4.5 million, respectively. (See Notes 5 and 7.)

(e) Credit Risk/Other-Than-Temporary Impairment

The Company limits its exposure to credit losses on its investment portfolio by requiring that at least 50% of its investment portfolio consist of hybrid and adjustable-rate MBS that are either (i) Agency MBS or (ii) rated in one of the two highest rating categories by at least one Rating Agency. The remainder of the Company’s investment portfolio may consist of direct or indirect investments in: (i) other types of MBS and residential mortgage loans; (ii) other mortgage and real estate-related debt and equity; (iii) other yield instruments (corporate or government); and (iv) other types of assets approved by the Company’s Board of Directors (the “Board”) or a committee thereof. At June 30, 2008, all of the Company’s Agency and AAA rated MBS were secured by first lien mortgage loans on one to four family properties. At June 30, 2008, 94.7% of the Company’s assets consisted of Agency MBS and related receivables, 2.8% were MBS rated AAA by one or more of the Rating Agencies and related receivables and 2.1% were cash, cash equivalents and restricted cash; combined these assets comprised 99.6% of the Company’s total assets. The Company’s remaining assets consisted of Swaps, an investment in real estate, securities rated below AAA and other assets. (See Note 3.)

The Company recognizes impairments on its investment securities in accordance with the FASB Impairment Position, which, among other things, specifically addresses: the determination as to when an investment is considered impaired; whether that impairment is other-than-temporary; the measurement of an impairment loss; accounting considerations subsequent to the recognition of an other-than-temporary impairment; and certain required disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.

The Company assesses its investment securities for other-than-temporary impairment on at least a quarterly

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

basis. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either “temporary” or “other-than- temporary.” If it is determined that impairment is other-than-temporary, then an impairment loss is recognized in earnings reflecting the entire difference between the investment's cost basis and its fair value at the balance sheet date of the reporting period for which the assessment is made. The measurement of the impairment is not permitted to include partial recoveries subsequent to the balance sheet date. Following the recognition of an other-than-temporary impairment, the fair value of the investment becomes the new cost basis of the investment and is not adjusted for subsequent recoveries in fair value through earnings. Because management’s assessments are based on factual information as well as subjective information available at the time of assessment, the determination as to whether an other-than-temporary impairment exists and, if so, the amount considered other-than-temporarily impaired, or not impaired, is subjective and, therefore, the timing and amount of other-than-temporary impairments constitute material estimates that are susceptible to significant change.

Upon a decision to sell an impaired available-for-sale investment security on which the Company does not expect the fair value of the investment to fully recover prior to the expected time of sale, the investment shall be deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other-than-temporary even if a decision to sell has not been made. The Company did not recognize any other-than-temporary impairment on any of its Agency MBS during the three or six months ended June 30, 2008 and June 30, 2007.

Certain of the Company’s investment securities rated below AAA were purchased at a discount to par value, with a portion of such discount considered credit protection against future credit losses. The initial credit protection (i.e., discount) on these MBS may be adjusted over time, based on review of the investment or, if applicable, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of these securities is more favorable than forecasted, a portion of the amount designated as credit discount may be accreted into interest income over time. Conversely, if the performance of these securities is less favorable than forecasted, impairment charges and write-downs of such securities to a new cost basis could result. During the six months ended June 30, 2008, the Company recognized impairment charges of $4.9 million against its unrated investment securities, of which $4.0 million was recognized during the three months ended June 30, 2008. The Company did not have any impairment charges against any of its securities rated below AAA during the three and six months ended June 30, 2007. At June 30, 2008, the Company had $1.8 million, or less than 0.1% of its assets, invested in investment securities rated below AAA with an amortized cost of $2.3 million. (See Note 3.)

(f) Goodwill

The Company accounts for its goodwill in accordance with FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”) which provides, among other things, how entities are to account for goodwill and other intangible assets that arise from business combinations or are otherwise acquired. FAS 142 requires that goodwill be tested for impairment annually or more frequently under certain circumstances. At June 30, 2008 and December 31, 2007, the Company had goodwill of $7.2 million, which represents the unamortized portion of the excess of the fair value of its common stock issued over the fair value of net assets acquired in connection with its formation in 1998. Goodwill is tested for impairment at least annually at the entity level. Through June 30, 2008, the Company had not recognized any impairment against its goodwill.

(g) Real Estate

At June 30, 2008, the Company indirectly held 100% of the ownership interest in Lealand Place, a 191-unit apartment property located in Lawrenceville, Georgia (“Lealand”), which is consolidated with the Company. This property was acquired through a tax-deferred exchange under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”). (See Note 6.)

The property, capital improvements and other assets held in connection with this investment are carried at cost, net of accumulated depreciation and amortization. Maintenance, repairs and minor improvements are expensed in the period incurred, while real estate assets, except land, and capital improvements are depreciated over their useful life using the straight-line method.

(h) Repurchase Agreements

The Company finances the acquisition of its MBS through the use of repurchase agreements. Under these repurchase agreements, the Company sells securities to a lender and agrees to repurchase the same securities in the future for a price that is higher than the original sale price. The difference between the sale price that the Company

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

receives and the repurchase price that the Company pays represents interest paid to the lender. Although structured as a sale and repurchase, under repurchase agreements, the Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the fair value of the pledged collateral, while the Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender. With the consent of the lender, the Company may renew a repurchase agreement at the then prevailing financing terms. Margin calls, whereby a lender requires that the Company pledge additional securities or cash as collateral to secure borrowings under its repurchase agreements with such lender, are routinely experienced by the Company as the value of the MBS pledged as collateral declines due to scheduled monthly amortization and prepayments of principal on such MBS. In addition, margin calls may also occur when the fair value of the MBS pledged as collateral declines due to changes in market interest rates, spreads or other market conditions. Through June 30, 2008, the Company had satisfied all of its margin calls. (See Note 7.)

Original terms to maturity of the Company’s repurchase agreements generally range from one month to 60 months. Should a counterparty decide not to renew a repurchase agreement at maturity, the Company must either refinance elsewhere or be in a position to satisfy this obligation. If, during the term of a repurchase agreement, a lender should file for bankruptcy, the Company might experience difficulty recovering its pledged assets and may have an unsecured claim against the lender’s assets for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged to such lender. The Company generally seeks to diversify its exposure by entering into repurchase agreements with at least four separate lenders with a maximum loan from any lender of no more than three times the Company’s stockholders’ equity. At June 30, 2008, the Company had outstanding balances under repurchase agreements with 18 separate lenders with a maximum net exposure (the difference between the amount loaned to the Company, including interest payable, and the fair value of the securities pledged by the Company as collateral, including accrued interest on such securities) to any single lender of $98.7 million related to repurchase agreements, or 7.1% of stockholders’ equity. (See Note 7.)

(i) Equity Based Compensation

The Company accounts for its stock-based compensation in accordance with FAS No. 123R, “Share-Based Payment,” (“FAS 123R”). The Company uses the Black-Scholes-Merton option model to value its stock options. There are limitations inherent in this model, as with all other models currently used in the market place to value stock options. For example, the Black-Scholes-Merton option model has not been designed to value stock options which contain significant restrictions and forfeiture risks, such as those contained in the stock options that are issued to certain employees. Significant assumptions are made in order to determine the Company’s option value, all of which are subjective. The fair value of the Company’s stock options are expensed using the straight-line method.

Pursuant to FAS 123R, compensation expense for restricted stock awards, restricted stock units (“RSUs”) and stock options is recognized over the vesting period of such awards, based upon the fair value of such awards at the grant date. DERs attached to such awards are charged to stockholders’ equity when declared. Equity based awards for which there is no risk of forfeiture are expensed upon grant, or at such time that there is no longer a risk of forfeiture. A zero forfeiture rate is applied to the Company’s equity based awards, given that such awards have been granted to a limited number of employees, (primarily long-term executives that have employment agreements with the Company) and that historical forfeitures have been minimal. Should information arise indicating that forfeitures may occur, the forfeiture rate would be revised and accounted for as a change in estimate. Grantees are not required to return the dividends or DERs if their awards do not vest. Accordingly, payments made on instruments that ultimately do not vest are recognized as additional compensation expense at the time an award is forfeited. There were no forfeitures of any equity based compensation awards during the three and six month periods ended June 30, 2008 and June 30, 2007. (See Note 13.)

(j) Earnings per Common Share (“EPS”)

Basic EPS is computed by dividing net income/(loss) available to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net income/(loss) available to holders of common stock by the weighted average shares of common stock and common equivalent shares outstanding during the period. For the diluted EPS calculation, common equivalent shares outstanding includes the weighted average number of shares of common stock outstanding adjusted for the effect of dilutive unexercised stock options and RSUs outstanding using the treasury stock method. Under the treasury stock method, common equivalent shares are calculated assuming that all dilutive common stock equivalents are exercised and the proceeds, along with future compensation expenses for unvested stock options and RSUs, are used to

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

repurchase shares of the Company’s outstanding common stock at the average market price during the reported period. No common share equivalents are included in the computation of any diluted per share amount for a period in which a net operating loss is reported. (See Note 11.)

(k) Comprehensive Income/(Loss)

Comprehensive income/(loss) for the Company includes net income/(loss), the change in net unrealized gains/(losses) on investment securities and derivative hedging instruments, adjusted by realized net gains/(losses) included in net income/(loss) for the period and reduced by dividends on the Company’s preferred stock.

(l) U.S. Federal Income Taxes

The Company has elected to be taxed as a REIT under the provisions of the Code and the corresponding provisions of state law. The Company expects to operate in a manner that will enable it to continue to be taxed as a REIT. A REIT is not subject to tax on its earnings to the extent that it distributes its taxable ordinary net income to its stockholders. As such, no provision for current or deferred income taxes has been made in the accompanying consolidated financial statements.

(m) Derivative Financial Instruments/Hedging Activity

The Company hedges a portion of its interest rate risk through the use of derivative financial instruments, which, to date, have been comprised of Swaps and Caps (collectively, “Hedging Instruments”). The Company accounts for Hedging Instruments in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”) as amended by FAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and FAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The Company’s Hedging Instruments are carried on the balance sheet at their fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative. Since the Company’s Hedging Instruments are designated as “cash flow hedges,” the change in the fair value of any such instrument is recorded in other comprehensive income/(loss) provided that the hedge is effective. The change in fair value of any ineffective amount of a Hedging Instrument is recognized in earnings. To date, except for gains and losses realized on Swaps that have been terminated early and deemed ineffective, the Company has not recognized any change in the value of its Hedging Instruments in earnings as a result of any Hedging Instrument or a portion thereof being ineffective.

Upon entering into hedging transactions, the Company documents the relationship between the Hedging Instruments and the hedged liability. The Company also documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities. The Company assesses, both at inception of a hedge and on an on-going basis, whether or not the hedge is “highly effective,” as defined by FAS 133. The Company discontinues hedge accounting on a prospective basis and recognizes changes in fair value reflected in earnings when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including forecasted transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating the derivative as a Hedging Instrument is no longer appropriate.

The Company utilizes Hedging Instruments to manage a portion of its interest rate risk and does not enter into derivative transactions for speculative or trading purposes. (See Note 5.)

Interest Rate Swaps

No cost is incurred by the Company at the inception of a Swap; however, in certain cases, the Company is required to pledge cash or securities equal to a specified percentage of the notional amount of the Swap to the counterparty as collateral. When the Company enters into a Swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, based on the London Interbank Offered Rate (“LIBOR”). The Company’s Swaps are designated as cash flow hedges against certain of its current and forecasted borrowings under repurchase agreements.

While the fair value of the Company’s Swaps are reflected in the consolidated balance sheets, the notional amounts are not. All changes in the value of Swaps are recorded in accumulated other comprehensive income/(loss), provided that the hedge remains effective. Interest rate swap values are typically based upon their terms relative to the forward curve at the valuation date. The Company independently reviews the valuations it receives from a pricing service and Swap counterparties for reasonableness relative to the forward curve to assure that the amount at which the Swap could be settled is fair value. If it becomes probable that the forecasted transaction (which in this case refers to interest payments to be made under the Company’s short-term borrowing agreements) will not occur by the end of the originally specified time period, as documented at the inception and

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

throughout the term of the hedging relationship, then the related gain or loss in accumulated other comprehensive income/(loss) is recognized through earnings.

The gain or loss from a terminated Swap remains in accumulated other comprehensive income/(loss) until the forecasted interest payments affect earnings. However, if it is probable that the forecasted interest payments will not occur, then the entire gain or loss is recognized though earnings.

(n) Adoption of New Accounting Standards and Interpretations

Fair Value Measurements

On January 1, 2008, the Company adopted FAS No. 157, “Fair Value Measurements” (“FAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements.

The changes to previous practice resulting from the application of FAS 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The definition of fair value retains the exchange price notion used in earlier definitions of fair value. FAS 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. FAS 157 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. In addition, FAS 157 provides a framework for measuring fair value, and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. (See Note 9.)

FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”) permits entities to elect to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. A decision to elect the fair value option for an eligible financial instrument, which can be made on an instrument by instrument basis, is irrevocable. The Company’s adoption of FAS 159 on January 1, 2008 did not have a material impact on its consolidated financial statements, as the Company did not elect the fair value option.

FASB Interpretation No. 39-1, “Amendment of FASB Interpretation (“FIN”) No. 39.” (“FIN 39-1”), defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. FIN 39-1 also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the balance sheet. In addition, FIN 39-1 permits offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. The Company’s adoption of FIN 39-1 on January 1, 2008 did not have any impact on its consolidated financial statements.

On March 20, 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 provides for enhanced disclosures about how and why an entity uses derivatives and how and where those derivatives and related hedged items are reported in the entity’s financial statements. FAS 161 also requires certain tabular formats for disclosing such information. FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 (i.e., calendar year 2009 for the Company) with early application encouraged. FAS 161 applies to all entities and all derivative instruments and related hedged items accounted for under FAS 133. Among other things, FAS 161 requires disclosures of an entity’s objectives and strategies for using derivatives by primary underlying risk and certain disclosures about the potential future collateral or cash requirements (that is, the effect on the entity’s liquidity) as a result of contingent credit-related features. The Company’s adoption of FAS 161 on June 30, 2008, resulted in additional disclosures about the Company’s Hedging Instruments which did not have any impact on the Company’s results of operations or financial condition.

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(o) Recently Issued Accounting Standards

In February 2008, the FASB issued FASB Staff Position (“FSP”) 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions,” (“FSP 140-3”), which provides guidance on accounting for transfers of financial assets and repurchase financings. FSP 140-3 presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (i.e., a linked transaction) under FAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). However, if certain criteria, as described in FSP 140-3, are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under FAS 140. If the linked transaction does not meet the requirements for sale accounting, the linked transaction shall generally be accounted for as a forward contract, as opposed to the current presentation, where the purchased asset and the repurchase liability are reflected separately on the balance sheet.

FSP 140-3 is effective on a prospective basis for fiscal years beginning after November 15, 2008, with earlier application not permitted. The Company does not expect that the adoption of FSP 140-3, will have a material impact on the Company’s financial statements.

In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 07-01 “Clarification of the Scope of the Audit and Accounting Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”) which provides guidance for determining whether an entity is within the scope of the guidance in the AICPA Audit and Accounting Guide for Investment Companies. On February 6, 2008, the FASB indefinitely deferred the effective date of SOP 07-1.

(p) Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

3. Investment Securities

At June 30, 2008 and December 31, 2007, the Company’s investment securities portfolio consisted primarily of pools of ARM-MBS, which were primarily comprised of Agency MBS and non-Agency MBS that were rated AAA by one or more of the Rating Agencies. The following tables present certain information about the Company's investment securities at June 30, 2008 and December 31, 2007.

June 30, 2008
(In Thousands)	Principal/ Current Face		Purchase Premiums		Purchase Discounts			Amortized Cost (1)		Carrying Value/ Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)
Agency MBS:
Fannie Mae	$	9,262,787	$	119,576	$	(1,447	)	$	9,380,916	$	9,385,378	$	53,176	$	(48,714	)	$	4,462
Ginnie Mae		34,514		611		-			35,125		34,866		33		(292	)		(259	)
Freddie Mac		751,870		11,367		-			769,105		767,754		2,141		(3,492	)		(1,351	)
Non-Agency MBS: (2)
Rated AAA		338,373		2,102		(696	)		339,779		303,135		-		(36,644	)		(36,644	)
Rated AA+		919		-		(3	)		916		768		-		(148	)		(148	)
Rated A+		644		-		(2	)		642		508		-		(134	)		(134	)
Rated BBB+		368		-		(5	)		363		242		-		(121	)		(121	)
Rated BB and below		598		-		(189	)		409		304		25		(130	)		(105	)
Total	$	10,390,073	$	133,656	$	(2,342	)	$	10,527,255	$	10,492,955	$	55,375	$	(89,675	)	$	(34,300	)

December 31, 2007
(In Thousands)	Principal/ Current Face		Purchase Premiums		Purchase Discounts			Amortized Cost (1)		Carrying Value/ Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)
Agency MBS:
Fannie Mae	$	7,157,079	$	91,610	$	(706	)	$	7,247,983	$	7,287,111	$	47,486	$	(8,358	)	$	39,128
Ginnie Mae		172,340		3,173		-			175,513		174,089		78		(1,502	)		(1,424	)
Freddie Mac		393,441		6,221		-			409,337		408,792		781		(1,326	)		(545	)
Non-Agency MBS: (2)
Rated AAA		430,025		2,341		(987	)		431,379		424,954		97		(6,522	)		(6,425	)
Rated AA+		1,413		-		-			1,413		1,392		-		(21	)		(21	)
Rated A+		989		-		(3	)		986		967		-		(19	)		(19	)
Rated BBB+		565		-		(6	)		559		543		-		(16	)		(16	)
Rated BB and below		1,648		-		(136	)		1,512		1,646		134		-			134
Unrated		3,095		-		(127	)		2,968		1,689		35		(1,314	)		(1,279	)
Total MBS	$	8,160,595	$	103,345	$	(1,965	)	$	8,271,650	$	8,301,183	$	48,611	$	(19,078	)	$	29,533
Income notes (3)				-					1,915		1,614		-		(301	)		(301	)
Total	$	8,160,595	$	103,345	$	(1,965	)	$	8,273,565	$	8,302,797	$	48,611	$	(19,379	)	$	29,232

(1) Includes principal payments receivable, which is not included in the Principal/Current Face.

(2) Based upon ratings by Standard & Poor's Corporation.

(3) Other investments are comprised of income notes, which are unrated securities collateralized by capital securities of a diversified pool of issuers, consisting primarily of depository institutions and insurance companies. During the quarter ended June 30, 2008, the Company wrote-off its remaining investment in income notes, taking a $1.0 million impairment charge against such investment.

Agency MBS: Agency MBS are guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. government, such as Ginnie Mae, and, as such, carry an implied AAA rating. The payment of principal and/or interest on Fannie Mae and Freddie Mac MBS is guaranteed by those respective agencies and the payment of principal and/or interest on Ginnie Mae MBS is backed by the full faith and credit of the U.S. government.

Non-Agency MBS: The Company’s non-Agency MBS are certificates that are backed by pools of single-family mortgage loans, which are not guaranteed by the U.S. government, any federal agency or any federally

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

chartered corporation. Non-Agency MBS may be rated from AAA to B by one or more of the Rating Agencies or may be unrated (i.e., not assigned a rating by any of the Rating Agencies). The rating indicates the credit worthiness of the investment, indicating the obligor’s ability to meet its financial commitment on the obligation.

The following table presents information about the Company’s investment securities that were in an unrealized loss position at June 30, 2008.

	Unrealized Loss Position For:
	Less than 12 Months						12 Months or more						Total
(In Thousands)	Fair Value		Unrealized losses		Number of Securities		Fair Value		Unrealized losses		Number of Securities		Fair Value		Unrealized losses
Agency MBS:
Fannie Mae	$	3,847,802	$	39,745		219	$	583,678	$	8,969		110	$	4,431,480	$	48,714
Ginnie Mae		16,127		100		8		9,990		192		6		26,117		292
Freddie Mac		368,578		2,460		34		44,914		1,032		29		413,492		3,492
Non-Agency MBS:
Rated AAA		181,548		16,993		3		121,587		19,651		13		303,135		36,644
Rated AA+		768		148		1		-		-		-		768		148
Rated A+		508		134		1		-		-		-		508		134
Rated BBB+		242		121		1		-		-		-		242		121
Rated BB and below		279		130		2		-		-		-		279		130
Total temporarily impaired securities	$	4,415,852	$	59,831		269	$	760,169	$	29,844		158	$	5,176,021	$	89,675

The Company monitors the performance and market value of its investment securities portfolio on an ongoing basis. During the quarter ended June 30, 2008, the Company wrote-off an unrated non-Agency MBS and its investment in income notes, resulting in aggregate impairment charges of $4.0 million. For the six months ended June 30, 2008, the Company recognized aggregate other-than-temporary impairment charges of $4.9 million against these unrated investments. As a result, these unrated securities were carried at zero at June 30, 2008.

At June 30, 2008, the Company determined that it had the intent and ability to continue to hold all of its MBS on which it had unrealized losses until recovery of such unrealized losses or until maturity. In addition, the receipt of par on Agency MBS is guaranteed by the respective Agency guarantor and the decline in the value of the non-Agency MBS was not related to the performance of these securities. As such, the Company considers the impairment of these securities to be temporary. All of the non-Agency MBS in an unrealized loss position at June 30, 2008 had maintained their rating during the second quarter ended June 30, 2008. The Company’s assessment of its ability and intent to continue to hold its securities may change over time given, among other things, the dynamic nature of markets and other variables. Future sales or changes in the Company’s assessment of its ability and/or intent to hold impaired investment securities could result in the Company recognizing other-than-temporary impairment charges or realizing losses on sales in the future. The Company did not sell any of its investment securities during the three months ended June 30, 2008.

In March 2008, in response to tightening of credit conditions, the Company adjusted its balance sheet strategy decreasing its target debt-to-equity multiple range to 7x to 9x from an historical range of 8x to 9x. In order to reduce its borrowings, the Company sold MBS with an amortized cost of $1.876 billion and realized aggregate net losses of $24.5 million, comprised of gross losses of $25.1 million and gross gains of $571,000. During the quarter ended June 30, 2008, the Company continued to target a relatively low, on an historical basis, leverage multiple. As of June 30, 2008, the Company’s debt-to-equity multiple was 6.7x.

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents the impact of the Company’s investment securities on its other comprehensive income/(loss) for the three and six months ended June 30, 2008 and 2007.

	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2008			2007			2008			2007
Accumulated other comprehensive income/(loss) from investment securities:
Unrealized gain/(loss) on investment securities at beginning of period	$	30,128		$	(18,495	)	$	29,232		$	(30,995	)
Unrealized loss on investment securities, net		(66,545	)		(27,152	)		(56,797	)		(14,652	)
Reclassification adjustment for MBS sales included in net income/(loss)		-			-			(8,241	)		-
Reclassification adjustment for other-than-temporary impairment included in net income/(loss)		2,117			-			1,506			-
Balance at the end of period	$	(34,300	)	$	(45,647	)	$	(34,300	)	$	(45,647	)

The following table presents components of interest income on the Company’s MBS portfolio for the three and six months ended June 30, 2008 and 2007.

	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2008			2007			2008			2007
Coupon interest on MBS	$	124,185		$	98,501		$	254,467		$	191,186
Premium amortization		(5,705	)		(8,215	)		(11,063	)		(16,560	)
Discount accretion		62			55			153			56
Interest income on MBS, net	$	118,542		$	90,341		$	243,557		$	174,682

In addition, the Company recognized interest income on income notes of $0 and $51,000 for the three months ended June 30, 2008 and 2007, respectively, and $50,000 and $57,000 for the six months ended June 30, 2008 and 2007, respectively.

The following table presents certain information about the Company’s MBS that will reprice or amortize based on contractual terms, which do not consider prepayments assumptions, at June 30, 2008.

	June 30, 2008
Months to Coupon Reset or Contractual Payment	Fair Value		% of Total			WAC (1)
(Dollars in Thousands)
Within one month	$	478,746		4.6	%		5.77	%
One to three months		108,553		1.0			6.33
Three to 12 Months		359,616		3.4			5.52
One to two years		408,886		3.9			4.92
Two to three years		1,275,897		12.2			5.82
Three to five years		2,374,292		22.6			5.66
Five to 10 years		5,486,965		52.3			5.62
Total	$	10,492,955		100.0	%		5.64	%

(1) "WAC" is the weighted average coupon rate on the Company’s MBS, which is higher than the net yield that will be earned on such MBS. The net yield is primarily reduced by net premium amortization and the contractual delay in receiving payments, which delay varies by issuer.

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents information about the Company's MBS pledged as collateral under repurchase agreements and in connection with Swaps at June 30, 2008.

	MBS Pledged Under Repurchase Agreements						MBS Pledged Against Swaps
(In Thousands)	Fair Value/ Carrying Value		Amortized Cost		Accrued Interest on Pledged MBS		Fair Value/ Carrying Value		Amortized Cost		Accrued Interest on Pledged MBS		Total Fair Value of MBS Pledged and Accrued Interest
MBS Pledged:
Fannie Mae	$	8,981,863	$	8,973,186	$	41,543	$	21,822	$	22,109	$	103	$	9,045,331
Freddie Mac		689,664		690,374		5,089		12,613		12,834		139		707,505
Ginnie Mae		26,882		27,105		135		6,199		6,222		32		33,248
Rated AAA		290,034		324,199		1,523		-		-		-		291,557
	$	9,988,443	$	10,014,864	$	48,290	$	40,634	$	41,165	$	274	$	10,077,641

4. Interest Receivable

The following table presents the Company’s interest receivable by investment category at June 30, 2008 and December 31, 2007.

(In Thousands)	June 30, 2008		December 31, 2007
Interest Receivable on:
Fannie Mae MBS	$	43,347	$	36,376
Ginnie Mae MBS		177		870
Freddie Mac MBS		5,617		4,177
MBS rated AAA		1,594		2,070
MBS rated AA		5		7
MBS rated A & A-		3		5
MBS rated BBB and BBB-		2		3
MBS rated BB and below		3		7
MBS interest receivable	$	50,748	$	43,515
Income notes		-		3
Cash investments		39		92
Total interest receivable	$	50,787	$	43,610

5. Hedging Instruments

As part of the Company’s interest rate risk management process, it periodically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts. For the six months ended June 30, 2008, the Company’s derivatives were entirely comprised of Swaps, which have the effect of modifying the repricing characteristics of the Company’s repurchase agreements and cash flows on such liabilities.

The following table presents the fair value of derivative instruments and their location in the Company’s Consolidated Balance Sheets at June 30, 2008 and December 31, 2007.

Derivates Designated as Hedging Instruments Under Statement 133	Balance Sheet Location	June 30, 2008			December 31, 2007
(In Thousands)
Swap assets	Assets-Swaps, at fair value	$	12,891		$	103
Swap liabilities	Liabilities-Swaps, at fair value		(53,656	)		(99,836	)
		$	(40,765	)	$	(99,733	)

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents the impact of the Company’s Hedging Instruments, which consist only of interest rate contracts (i.e., Swap and Caps), on the Company’s accumulated other comprehensive income/(loss) for the three and six months ended June 30, 2008 and 2007.

	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2008			2007			2008			2007
Accumulated other comprehensive (loss)/income from Hedging Instruments:
Balance at beginning of period	$	(141,584	)	$	(4,149	)	$	(99,733	)	$	602
Unrealized gains on Hedging Instruments		100,819			19,173			10,806			14,422
Reclassification adjustment for net losses included in net income/(loss) from Hedging Instruments		-			-			48,162			-
Balance at the end of period	$	(40,765	)	$	15,024		$	(40,765	)	$	15,024

(a) Swaps

The Company is required to pledge assets as collateral for certain of its Swaps, which collateral varies by counterparty and over time based on the market value, notional amount, and remaining term of the Swap. Certain of the Company’s Swap agreements include financial covenants, which, if breached, could cause an event of default or early termination event to occur under such agreements. If an event of default or early termination event were to occur under one of the Company’s Swap agreements, the counterparty to such agreement may have the option to terminate all of its outstanding Swap transactions with the Company and, if applicable, any close-out amount due to the counterparty upon termination of such transactions would be immediately payable by the Company pursuant to such agreement. The Company was in compliance with all of such financial covenants as of June 30, 2008.

The Company had MBS with a fair value of $40.6 million and $79.9 million pledged as collateral against its Swaps at June 30, 2008 and December 31, 2007, respectively. In addition, the Company had $387,000 and $4.5 million of cash (i.e., restricted cash) pledged against Swaps at June 30, 2008 and December 31, 2007, respectively. The use of Hedging Instruments exposes the Company to counterparty credit risks. In the event of a default by a Swap counterparty, the Company may not receive payments to which it is entitled under the terms of its Swap agreements, and may have difficulty receiving back its assets pledged as collateral against such Swaps. At June 30, 2008, all of the Company’s Swap counterparties were rated “A” or better by a Rating Agency.

The following table presents the weighted average rate paid and received for the Company’s Swaps and the net impact of Swaps on the Company’s interest expense for the three and six months ended June 30, 2008 and 2007.

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars In Thousands)	2008			2007			2008			2007
Weighted average Swap rate paid		4.18	%		4.98	%		4.40	%		4.98	%
Weighted average Swap rate received		2.80	%		5.32	%		3.37	%		5.33	%
Net addition to/(reduction of) interest expense from Swaps	$	14,563		$	(2,159	)	$	23,894		$	(3,821	)

In March 2008, the Company terminated 48 Swaps with an aggregate notional amount of $1.637 billion, resulting in net realized losses of $91.5 million. In connection with the termination of these Swaps, the Company repaid the repurchase agreements that such Swaps hedged. To date, except for gains and losses realized on Swaps terminated early and deemed ineffective, the Company has not recognized any change in the value of its Hedging Instruments in earnings as a result of the hedge or a portion thereof being ineffective.

At June 30, 2008, the Company had Swaps with an aggregate notional balance of $4.160 billion, which had gross unrealized losses of $53.7 million and gross unrealized gains of $12.9 million and extended 30 months on average with a maximum term of approximately seven years. At December 31, 2007, the Company had Swaps with an aggregate notional balance of $4.628 billion, which had gross unrealized losses of $99.8 million and gross unrealized gains of $103,000.

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents information about the Company’s Swaps at June 30, 2008 and December 31, 2007.

	June 30, 2008					December 31, 2007
Maturity (1)	Notional Amount		Weighted Average Fixed Pay Interest Rate			Notional Amount		Weighted Average Fixed Pay Interest Rate
(Dollars In Thousands)
Within 30 days	$	77,960		3.93	%	$	69,561		4.95	%
Over 30 days to 3 months		158,145		4.08			179,207		4.79
Over 3 months to 6 months		238,025		4.07			233,753		4.83
Over 6 months to 12 months		453,258		4.05			453,949		4.83
Over 12 months to 24 months		898,867		4.14			1,107,689		4.90
Over 24 months to 36 months		829,113		4.19			941,382		4.84
Over 36 months to 48 months		565,728		4.26			552,772		4.80
Over 48 months to 60 months		627,182		4.35			826,489		4.72
Over 60 months		311,276		4.18			262,758		4.95
Total	$	4,159,554		4.18	%	$	4,627,560		4.83	%
(1) Reflects contractual amortization of notional amounts.

(b) Interest Rate Caps

Caps are designated by the Company as cash flow hedges against interest rate risk associated with the Company’s existing and forecasted repurchase agreements. When the 30-day LIBOR increases above the rate specified in the Cap Agreement during the effective term of the Cap, the Company receives monthly payments from its Cap counterparty.

The following table presents the impact of Caps on the Company’s interest expense for the three and six months ended June 30, 2008 and 2007.

	Three Months Ended June 30,					Six Months Ended June 30,
(In Thousands)	2008 (1)		2007			2008 (1)		2007
Premium amortization on Caps	$	-	$	97		$	-	$	278
Payments earned on Caps		-		(131	)		-		(327	)
Net decrease to interest expense related to Caps	$	-	$	(34	)	$	-	$	(49	)
(1) The Company had no Caps at or during the three and six months ended June 30, 2008.

6.	Real Estate

The Company’s investment in real estate at June 30, 2008 and December 31, 2007, which is consolidated with the Company, was comprised of an indirect 100% ownership interest in Lealand, a 191-unit apartment property located in Lawrenceville, Georgia. The following table presents the summary of assets and liabilities of Lealand at June 30, 2008 and December 31, 2007:

(In Thousands)	June 30, 2008			December 31, 2007
Real Estate Assets and Liabilities:
Land and buildings, net of accumulated depreciation	$	11,477		$	11,611
Cash		29			26
Prepaid and other assets		172			260
Mortgage payable (1)		(9,385	)		(9,462	)
Accrued interest and other payables		(174	)		(256	)
Real estate assets, net	$	2,119		$	2,179

(1) The mortgage collateralized by Lealand is non-recourse, subject to customary non-recourse exceptions, which generally means that the lender’s final source of repayment in the event of default is foreclosure of the property securing such loan. This mortgage has a fixed interest rate of 6.87%, contractually matures on February 1, 2011 and is subject to a penalty if prepaid. The Company has a loan to Lealand which had a balance of $185,000 at June 30, 2008 and December 31, 2007. This loan and the related interest accounts are eliminated in consolidation.

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents the summary results of operations for Lealand, for the three and six months ended June 30, 2008 and 2007:

(In Thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenue from operations of real estate	$	398		$	413		$	812		$	826
Mortgage interest expense		(165	)		(164	)		(328	)		(331	)
Other real estate operations expense		(259	)		(265	)		(545	)		(518	)
Loss from real estate operations, including depreciation expense, net	$	(26	)	$	(16	)	$	(61	)	$	(23	)

7.	Repurchase Agreements

The Company’s repurchase agreements are collateralized by the Company’s MBS and cash and bear interest at rates that are LIBOR-based. At June 30, 2008, the Company’s repurchase agreements had a weighted average remaining contractual maturity of approximately four months and an effective repricing period of 17 months, including the impact of related Swaps. At December 31, 2007, the Company’s repurchase agreements had a weighted average remaining contractual maturity of approximately five months and an effective repricing period of 23 months, including the impact of related Swaps.

At June 30, 2008 and December 31, 2007, the Company’s repurchase agreements had a weighted average interest rate of 2.80% and 5.06%, respectively. The following table presents contractual repricing information about the Company’s repurchase agreements, which does not reflect the impact of related Swaps that hedge existing and forecasted repurchase agreements, at June 30, 2008.

	June 30, 2008
			Weighted Average
Maturity (1)	Balance		Interest Rate
(Dollars In Thousands)
Within 30 days	$	4,468,460		2.45	%
Over 30 days to 3 months		3,259,788		2.37
Over 3 months to 6 months		190,910		3.56
Over 6 months to 12 months		171,000		4.88
Over 12 months to 24 months		891,348		5.12
Over 24 months to 36 months		185,770		4.06
Over 36 months		142,900		4.05
	$	9,310,176		2.80	%

(1) Swaps, which are not reflected in the table, in effect modify the repricing period and rate paid on the Company’s repurchase agreements. (See Note 5.)

At June 30, 2008, the Company held excess collateral of $11.5 million in cash from one of its counterparties, which was returned to such counterparty subsequent to June 30, 2008. At June 30, 2008, the Company had $9.698 billion of Agency MBS and $290.0 million of AAA-rated MBS pledged as collateral against its repurchase agreements.

8. Commitments and Contingencies

(a) Repurchase Agreements

On June 30, 2008, the Company had commitments to borrow $27.6 million through two repurchase agreements. These repurchase agreements settled on July 1, 2008, with a weighted average term of 84 days and a weighted average interest rate of 2.54%.

(b) Lease Commitments

The Company pays monthly rent pursuant to two separate operating leases. The Company’s lease for its corporate headquarters extends through April 30, 2017 and provides for aggregate cash payments ranging from

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

approximately $1.1 million to $1.4 million per year, exclusive of escalation charges and landlord incentives. In connection with this lease, the Company established a $350,000 irrevocable standby letter of credit in lieu of lease security for the benefit of the landlord through April 30, 2017. The letter of credit may be drawn upon by the landlord in the event that the Company defaults under certain terms of the lease. In addition, at June 30, 2008, the Company had a lease through December 2011 for its off-site back-up facility located in Rockville Centre, New York, which provides for, among other things, rent of approximately $27,000 per year.

9. Fair Value of Financial Instruments

Following is a description of the Company’s valuation methodologies for financial assets and liabilities measured at fair value in accordance with FAS 157. Such valuation methodologies were applied to the Company’s financial assets and liabilities carried at fair value. The Company has established and documented processes for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based or independently-sourced market parameters, including interest rate yield curves.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy established by FAS 157 are defined as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities

The Company’s investment securities, which are primarily comprised of Agency ARM-MBS, are valued by a third-party pricing service that provides pool-specific evaluations. The pricing service uses daily To-Be-Announced (“TBA”) securities (TBA securities are liquid and have quoted market prices and represent the most actively traded class of MBS) evaluations from an ARMs trading desk and Bond Equivalent Effective Margins (“BEEMs”) of actively traded ARMs. Based on government bond research, prepayment models are developed for various types of ARM-MBS by the pricing service. Using the prepayment speeds derived from the models, the pricing service calculates the BEEMs of actively traded ARM-MBS. These BEEMs are further adjusted by trader maintained matrix based on other ARM-MBS characteristics such as, but not limited to, index, reset date, collateral types, life cap, periodic cap, seasoning or age of security. The pricing service determines prepayment speeds for a given pool. Given the specific prepayment speed and the BEEM, the corresponding evaluation for the specific pool is computed using a cash flow generator with current TBA settlement day. The income approach technique is then used for the valuation of the Company’s investment securities. The Company’s MBS are valued primarily based upon readily observable market parameters, and are classified as Level 2 fair values.

Swaps

The Company’s Swaps are valued using external third-party bid quotes tested with internally developed models that apply readily observable market parameters. The Company’s Swaps are classified as Level 2 fair values. The Company considers the credit worthiness of both the Company and its counterparties in its Swap valuations. At June 30, 2008, all of the Company’s Swap counterparties and the Company were considered to be of high credit quality, such that no credit related adjustment was made in determining the value of the Company’s Swaps.

MFA MORTGAGE INVESTMENTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents the Company’s financial instruments carried at fair value as of June 30, 2008, on the consolidated balance sheet by FAS 157 valuation hierarchy, as previously described.

	Fair Value at June 30, 2008
(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
MBS	$	-	$	10,492,955	$	-	$	10,492,955
Swaps		-		12,891		-		12,891
Total assets carried at fair value	$	-	$	10,505,846	$	-	$	10,505,846

Liabilities:
Swaps	$	-	$	53,656	$	-	$	53,656