# DEAR FELLOW SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_MFA_2017/NYSE_MFA_2017.mmd` · pages 3-9_

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DEAR FELLOW SHAREHOLDERS,

DURING 2017, MFA FURTHER EXECUTED ITS STRATEGY OF SELECTIVE INVESTMENT WITHIN THE RESIDENTIAL MORTGAGE CREDIT UNIVERSE. OUR MANY YEARS OF EXPERIENCE IN ANALYZING AND INVESTING IN SUCH ASSETS COUPLED WITH OUR DILIGENT OVERSIGHT AND PORTFOLIO MANAGEMENT CONTINUE TO PRODUCE STRONG INVESTMENT RETURNS THAT ARE MORE DEPENDENT ON CREDIT PERFORMANCE THAN ON INTEREST RATES. OUR PERMANENT CAPITAL REIT STRUCTURE PROVIDES US WITH THE STAYING POWER TO HOLD THESE ASSETS THROUGHOUT MARKET CYCLES.

During 2017, the Federal Reserve increased the target Federal Funds rate three times (compared to only one such increase in each of 2015 and 2016). While higher short-term interest rates increase the cost of MFA's borrowing, our strategy of shifting our investment focus from interest rate sensitive assets to credit sensitive assets has moderated this effect, as our credit sensitive assets require less leverage to produce our target returns. As a result, MFA's net income available to common shareholders has remained consistent over the last three years despite five Federal Funds rate increases since December 2015. MFA shareholders earned a total return (including reinvestment of dividends) of 14.3% for calendar year 2017.

2017 was an eventful year beginning with the U.S. presidential inauguration in January. While the political landscape has monopolized headlines, the financial markets featured strong stock market gains, generally benign interest rate movements and a continuous grind tighter on nearly all asset classes. Investment activity was at times challenging, as higher prices adversely affected risk and return relationships. Further exacerbating this challenge was the fact that MFA experienced unprecedented portfolio run-off in 2017 (\(4.3 billion vs. \)3.5 billion in 2016), which generated additional pressure to make new investments. We are extremely proud of our investment team, which was able to maintain pricing discipline in this environment and worked tirelessly to source assets both within our existing asset classes as well as through new opportunities. We believe that we were able to identify and take advantage of attractive investments that will provide meaningful returns for our shareholders over time.

Despite this challenging investment environment, we significantly grew our investments in re-performing and non-performing whole loans, increasing our holdings of credit sensitive residential whole loans by approximately \(1 billion to approximately \)2.4 billion. This loan portfolio provides exposure to residential mortgage credit, while offering us the opportunity to improve outcomes through our oversight of sensible and effective servicing decisions. In addition, we added and expanded investments in assets related to mortgage servicing rights (MSR) to nearly $500 million which provide attractive current returns on equity. We also grew our portfolio of GSE credit risk transfer (CRT) securities by over 50% to $664 million at year end. Both MSR-related assets and CRT securities are structured as floating rate coupons, so our realized ROE on these investments actually increases as the Federal Reserve acts to raise interest rates.
Our credit sensitive residential assets benefited from improved housing fundamentals. Home price appreciation and underlying mortgage loan amortization have decreased the loan-to-value ratio ("LTV") of many of the mortgages underlying MFA's Non-Agency MBS issued prior to 2008 (Legacy Non-Agency MBS). In addition, delinquencies continue to decline. Due to these important credit indicators and other factors, we again reduced our estimate of future defaults and losses during the year. This decrease in estimated future losses is expected to increase the interest income realized over the remaining life of MFA's Legacy Non-Agency MBS.

We also took advantage of market opportunities to lock in attractive financing through two securitizations in 2017. We sponsored a rated securitization in the second quarter backed by re-performing whole loans, and we sponsored a non-rated securitization in the fourth quarter backed by non-performing whole loans. These transactions provide attractive term financing at a fixed rate that does not increase as interest rates increase.

## 2018 AND BEYOND

With significant liquidity, a short duration portfolio and a low level of leverage, MFA has considerable capacity to take advantage of market opportunities. Global economic growth appears to be accelerating and recent U.S. tax reform seems to be bolstering domestic growth. These are good omens for MFA's substantial residential mortgage credit investments, as are continued robust home sales and declining housing inventory, which augment home prices. We expect that economic growth will likely keep the Federal Reserve on its path of increasing the target Fed Funds rate, and together with the Federal Reserve's announced normalization of its balance sheet, there exists a possibility of some market disruption that could foster attractive investment prospects. We believe we are well positioned to continue to take advantage of investment opportunities within the residential mortgage universe as they arise. On behalf of the Board of Directors and all of MFA's dedicated and talented employees, we thank you for your continued ownership and support.

## CRAIG L. KNOTSON

Chief Executive Officer, President and Director