EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “ Agreement ”) is entered into as of the 1st day of July, 2009 by and between MFA FINANCIAL, INC., a Maryland corporation (“ MFA ”), and CRAIG L. KNUTSON (the “ Executive ”).

WHEREAS, MFA wishes to offer employment to, and secure the exclusive services of, the Executive, and the Executive wishes to accept such offer, under the terms and conditions described below.

NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows:

1.            Term of Employment .

(a)           MFA hereby employs the Executive, and the Executive hereby accepts employment with MFA, in the positions and with the duties and responsibilities as set forth in Paragraph 2 below for the Term of Employment, subject to the terms and conditions of this Agreement.

(b)           The term of employment (the “ Term of Employment ”) under this Agreement shall include the Initial Term and each Renewal Term.  The Initial Term shall commence as of July 1, 2009, shall continue until December 31, 2011.  The Term of Employment shall automatically renew for a one-year period (each such renewal, a “ Renewal Term ”) at the end of the Initial Term and each Renewal Term, unless either party shall give notice to the other not less than six months prior to the end of the Initial Term or any Renewal Term, as the case may be, of his or its intent not to renew such Initial Term or Renewal Term, as the case may be.  Notwithstanding the foregoing sentences of this Paragraph 1(b), the Term of Employment may be terminated before the expiration of the Initial Term or any Renewal Term in accordance with Paragraph 5 hereof.

2.            Position; Duties and Responsibilities .

(a)           During the Term of Employment, the Executive shall be employed as Executive Vice President of MFA, reporting to the Chief Executive Officer of MFA (the “ CEO ”), with such duties and day-to-day management responsibilities as are customarily performed by persons holding such offices at similarly situated mortgage REITs and such other duties as may be mutually agreed upon between the Executive and the CEO.

(b)           During the Term of Employment, the Executive shall, without additional compensation, also (i) serve on the board of directors of, (ii) serve as an officer of, and/or (iii) perform such executive and consulting services for, or on behalf of, such subsidiaries or affiliates of MFA as the CEO and/or the Board of Directors of MFA (the “ Board of Directors ”) may, from time to time, request.  MFA and such subsidiaries and affiliates are hereinafter referred to, collectively, as the “ Company .”  For purposes of this Agreement, the term “affiliate” shall have the meaning ascribed thereto in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “ Act ”).

(c)           During the Term of Employment, the Executive shall serve MFA faithfully, diligently and to the best of his ability and shall devote substantially all of his time and efforts to his employment and the performance of his duties under this Agreement.  Nothing herein shall preclude the Executive from engaging in charitable and community affairs and managing his personal, financial and legal affairs, so long as such activities do not materially interfere with his carrying out his duties and responsibilities under this Agreement.

3.            Compensation .

(a)            Base Salary .  During the Term of Employment, unless otherwise agreed to by the Executive, MFA shall pay to the Executive a base salary (the “Base Salary”) equal to four hundred twenty-five thousand dollars ($425,000) per annum.  The Base Salary shall be paid in accordance with MFA’s normal payroll practices.

(b)            Restricted Stock Award .  In connection with the Executive’s new duties and responsibilities, the Executive shall receive an award of 75,000 shares of restricted stock on the date hereof.  The period of restriction with respect to such award shall begin on the date hereof and shall lapse with respect to 4,687 shares on the last business day of each quarter ending after the date hereof (with 4,695 shares vesting on the final vesting date, June 30, 2013).  Under the terms of the definitive award agreement, the Executive shall be entitled to receive any dividends payable with respect to any shares subject to restriction at such time as such shares are no longer subject to restrictions.  Vested shares of such restricted stock cannot be transferred or sold during the Executive’s employment by MFA until the value of the Executive’s stock holdings in MFA (including shares of restricted stock) exceeds three times the Executive’s Base Salary; and, following the termination of Executive’s employment with the Company, vested shares of such restricted stock may not be sold or transferred to the extent the value of the Executive’s stock holdings does not exceed three times the Executive’s Base Salary as of the date of the Executive’s termination of employment ( provided , however , that this sentence shall no longer apply following the six-month anniversary of the Executive’s termination of employment).

(c)            Performance Bonus .  The Executive shall be eligible to receive an annual performance bonus (the “Performance Bonus”) in such amount as shall be recommended by the CEO and approved by the Compensation Committee of the Board of Directors (the " Compensation Committee ") or the Board of Directors, as the case may be.  The Performance Bonus shall be paid as soon as practicable  after it is vested and nonforfeitable, but in no event later than January 16th of the next following calendar year.

(d)            Equity Compensation .  The Executive shall be eligible to receive such stock option, restricted stock, phantom share or dividend equivalent rights grants or other equity awards as the Compensation Committee or the Board of Directors, as the case may be, shall deem appropriate.

4.            Employee Benefit Programs and Fringe Benefits .  During the Term of Employment, the Executive shall be entitled to four weeks of vacation each calendar year and to participate in all executive incentive and employee benefit programs of MFA now or hereafter made available to MFA’s senior executives or salaried employees generally, as such programs may be in effect from time to time.  MFA shall reimburse the Executive for any and all necessary, customary and usual business expenses, properly receipted in accordance with MFA’s policies, incurred by Executive in connection with his employment.

5.            Termination of Employment .

(a)            Termination Due to Death or Disability .  If the Executive’s employment is terminated during the Term of Employment by reason of the Executive’s death or Disability, the Executive’s Term of Employment shall terminate automatically without further obligations to the Executive, his legal representative or his estate, as the case may be, under this Agreement except for (i) any compensation earned but not yet paid, including and without limitation, any amount of Base Salary accrued or earned but unpaid (the “ Accrued Obligations ”), and any other payments payable to the Executive pursuant to Paragraph 5(e) below, which amounts shall be promptly paid in a lump sum to the Executive, his legal representative or his estate, as the case may be, and (ii) a lump sum payment in an amount equal to the sum of (A) the Executive’s Base Salary, and (B) the Average Performance Bonus, which shall be paid to the Executive, his legal representative or his estate, as the case may be, as soon as possible (without undue delay), but in no event later than March 15th  following the calendar year in which such termination occurs.

(b)            Termination Without Cause or for Good Reason .  In the event the Executive’s employment is terminated by MFA without Cause (which shall not include any non renewal of this Agreement by MFA including by notice of MFA’s determination not to renew the Initial Term or any Renewal Term pursuant to Paragraph 1(b)) or by the Executive for Good Reason, unless any such termination is preceded by the Executive’s giving notice of his determination not to renew the Initial Term or any Renewal Term pursuant to Paragraph 1(b), then (i) the Executive shall be entitled to (A) the Accrued Obligations and any other payments payable to the Executive pursuant to Paragraph 5(e) below, which amounts shall be promptly paid in a lump sum to the Executive, and (B) a payment (referred to below as the “ Severance Amount ”) equal to the sum of (1) the Executive’s Base Salary, and (2) the Average Performance Bonus, and (ii) the Executive shall have no further rights to any other compensation or benefits hereunder on or after termination of employment.  Fifty percent of the Severance Amount shall be paid within five (5) days after the date the Executive’s employment is terminated as described above, and the remaining 50% of the Severance Amount shall be paid in three equal monthly installments beginning on the first business day of the month following the month of such termination; provided, however, in no event shall any portion of the Severance Amount be payable after March 15th of the year following the year in which such termination occurs.

(c)            Termination by MFA for Cause or Voluntary Termination by the Executive .  In the event the Executive’s employment is terminated by MFA for Cause, or is terminated by the Executive on his own initiative for other than a Good Reason (including pursuant to Paragraph 1(b)), then (i) the Executive shall be entitled to the Accrued Obligations and any other payments payable to the Executive pursuant to Paragraph 5(e) below, which amounts shall be promptly paid in a lump sum to the Executive, and (ii) the Executive shall have no further rights to any other compensation or benefits hereunder on or after termination of employment.

(d)            Termination Related to Change in Control.   In the event of (1) the termination of the Executive’s employment by MFA without Cause (which shall include any non renewal of this Agreement by MFA pursuant to Paragraph 1(b)) that occurs both within two months before a Change in Control and following the occurrence of a Pre-Change-in-Control Event, (2) the resignation of his employment by the Executive for any reason within two and one half months following a Change in Control, or (3) the termination of the Executive’s employment by MFA other than for Cause (which shall include any non renewal of this Agreement by MFA pursuant to Paragraph 1(b)) or the Executive’s resignation of his employment for Good Reason within twelve months following a Change in Control,

(i)           MFA shall immediately pay to the Executive in a lump sum, any Accrued Obligations and any other payments payable to the Executive pursuant to Paragraph 5(e) below;

(ii)          MFA shall immediately pay to the Executive in a lump sum, but in all events within two and one half months following the calendar year in which such termination of employment occurs, an amount equal to one times the sum of (A) the Executive’s then current Base Salary and (B) the Average Performance Bonus; and

(iii)         the Executive shall have no further rights to any other compensation or benefits hereunder on or after termination of employment.

To the extent necessary to avoid imposition of the excise tax under Section 4999 of the Code in connection with a Change in Control, the amounts payable or benefits to be provided to the Executive shall be reduced such that the reduction of compensation to be provided to the Executive is minimized.  In applying this principle, the reduction shall be made in a manner consistent with the requirements of Section 409A of the Code, and where two economically equivalent amounts are subject to reduction but payable at different times, such amounts shall be reduced on a pro rata basis (but not below zero).

(e)            Other Payments .  Upon the termination of the Executive’s employment, in addition to the amounts payable under any Paragraph above, the Executive shall be entitled to receive the following:

(i)           any annual bonus earned during one or more preceding years but not paid;

(ii)          any vested deferred compensation (including any interest accrued on or appreciation in value of such deferred amounts) in accordance with the applicable plan documents;

(iii)          reimbursement for reasonable business expenses incurred but not yet reimbursed by MFA;

(iv)         any other benefits to which the Executive or his legal representative may be entitled under the 2004 Equity Compensation Plan and under all other applicable plans and programs of MFA, as provided in Paragraph 4 above; and

(v)          upon the termination of the Executive’s employment pursuant to Paragraphs 5(a), 5(b) or 5(d) above, all of the Executive’s outstanding restricted stock, phantom shares and stock options shall immediately vest in full and such options shall remain exercisable, and any dividend equivalents associated therewith shall continue to be payable until the earlier of (A) 90 days following the date of such termination and (B) the date on which each such option would have expired had the Executive’s employment not terminated.

(f)            No Mitigation; No Offset .  In the event of any termination of the Executive’s employment under this Agreement, he shall be under no obligation to seek other employment or otherwise in any way to mitigate the amount of any payment provided for in this Paragraph 5, and there shall be no offset against amounts due him under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain.

(g)            Payments Subject to Section 409A .  Notwithstanding anything herein to the contrary, the Executive shall not be entitled to any payment pursuant to this Paragraph 5 prior to the earliest date permitted under Section 409A of the Code, and applicable Treasury regulations thereunder.  To the extent any payment pursuant to this Paragraph 5 is required to be delayed six months pursuant to the special rules of Section 409A of the Code related to “specified employees,” each affected payment shall be delayed until six months after the Executive’s termination of employment, and, unless provided otherwise, with the first such payment being a lump sum equal to the aggregate payments the Executive would have received during such six-month period if no payment delay had been imposed.  Any payments or distributions delayed in accordance with the prior sentence shall be paid to the Executive on the first day of the seventh month following the Executive’s termination of employment.  Notwithstanding any other provision contained herein, to the extent any payments or distributions due to the Executive upon termination of his employment under this Agreement are subject to Section 409A of the Code (i) a termination of the Executive’s employment shall be interpreted in a manner that is consistent with the definition of a “separation from service” under Section 409A of the Code and the applicable Treasury regulations thereunder and (ii) as applicable, such payments shall be treated as a series of separate payments for purposes of Section 409A of the Code.

(h)            Mutual Release .  MFA’s obligation to make any payment or provide any benefit pursuant to this Paragraph 5 shall be contingent upon, and is the consideration for, the Executive executing and delivering to MFA a general release (the “ Release ”), substantially in the form annexed hereto as Exhibit A, releasing MFA, and all current and former members, officers and employees of MFA, from any claims relating to the Executive’s employment hereunder, other than claims relating to continuing obligations under, or preserved by, (A) this Agreement or (B) any compensation or benefit plan, program or arrangement in which the Executive was participating as of the date of termination of his employment, and no such amounts shall be provided until the Executive executes and delivers to MFA a letter which provides that the Executive had not revoked such Release after seven days following the date of the Release.  In all events, the Release shall be executed by the Executive within 60 days of termination of employment in order for the Executive to receive any severance benefits hereunder.  The Release shall also be executed by MFA and delivered to the Executive as part of the consideration for the Executive’s execution and delivery of the Release, and, except as otherwise provided under the terms of the Release, shall release the Executive from any and all claims MFA may have against the Executive.

6.            Definitions .  For purposes of this Agreement, the following terms shall be defined as set forth below:

(a)            Average Performance Bonus .  “ Average Performance Bonus ” shall mean the average Performance Bonus (or, for years prior to 2009, the annual bonus) payable to the Executive with respect to the three years preceding the year in which the Executive's termination of employment occurs; provided that, if the Executive was not an employee of MFA during one or more of such three preceding years, such year(s) shall not be taken into account in calculating the Average Performance Bonus.  For purposes of determining the Average Performance Bonus, if any portion of the Performance Bonus (or annual bonus for years prior to 2009) was paid in the form of equity, the full amount of such Performance Bonus (or annual bonus) shall be taken into account as if paid entirely in cash.

(b)            Cause .  “ Cause ” shall mean the Executive’s (i) conviction, or entry of a guilty plea or a plea of nolo contendre with respect to, a felony, a crime of moral turpitude or any crime committed against MFA, other than traffic violations; (ii) engagement in willful misconduct, willful or gross negligence, or fraud, embezzlement or misappropriation relating to significant amounts, in each case in connection with the performance of his duties under this Agreement; (iii) failure to adhere to the lawful directions of the CEO and/or the Board of Directors that are reasonably consistent with his duties and position provided for herein; (iv) breach in any material respect of any of the provisions of Paragraph 7 of this Agreement resulting in material and demonstrable economic injury to MFA; (v) chronic or persistent substance abuse that materially and adversely affects his performance of his duties under this Agreement or (vi) breach in any material respect of the terms and provisions of this Agreement resulting in material and demonstrable economic injury to MFA.  Notwithstanding the foregoing, (i) the Executive shall be given written notice of any action or failure to act that is alleged to constitute Cause (a “ Default ”), and an opportunity for 20 business days from the date of such notice in which to cure such Default, such period to be subject to extension in the discretion of the CEO or, in his absence, the Board of Directors and (ii) regardless of whether the Executive is able to cure any Default, the Executive shall not be deemed to have been terminated for Cause without (A) reasonable prior written notice to the Executive setting forth the reasons for the decision to terminate the Executive for Cause, (B) an opportunity for the Executive, together with his counsel, to be heard by the CEO or, in his absence, the Board of Directors and (C) delivery to the Executive of a notice of termination approved by said CEO or, in his absence, the Board of Directors, stating his or its good faith opinion that the Executive has engaged in actions or conduct described in the preceding sentence, which notice specifies the particulars of such action or conduct in reasonable detail; provided , however , MFA may suspend the Executive with pay until such time as his right to appear before the CEO or the Board of Directors, as the case may be, has been exercised, so long as such appearance is within two (2) weeks of the date of suspension.

(c)            Change in Control .  A “ Change in Control ” shall mean the occurrence of any one of the following events:

(i)           any “person,” as such term is used in Sections 13(d) and 14(d) of the Act (other than MFA, any of its affiliates or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of MFA or any of its affiliates) together with all affiliates and “associates” (as such term is defined in Rule 12b-2 under the Act) of such person, shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of MFA representing 30% or more of either (A) the combined voting power of MFA’s then outstanding securities having the right to vote in an election of the Board of Directors (“ voting securities ”), or (B) the then outstanding shares of common stock of MFA (“ Shares ”) (in either such case other than as a result of an acquisition of securities directly from MFA); or

(ii)    &