Ellington Credit Co (EARN) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2017 Fourth Quarter Financial Results Conference Call. Today's call is being recorded. (Operator Instructions) It is now my pleasure to turn the floor over to Maria Cozine, Vice President of Investor Relations. You may begin.

Thank you, Lori, and good morning. Before we start, I would like to remind everyone that business statements made during this conference call may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature.

As described under Item 1A of our Annual Report on Form 10-K, filed on March 13, 2017, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I have on the call with me today, Larry Penn, Chief Executive Officer of Ellington Residential; Mark Tecotzky, our Co-Chief Investment Officer; and Chris Smernoff, who will be replacing Lisa Mumford as our Chief Financial Officer.

As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website, earnreit.com. Management's prepared remarks will track the presentation. Please turn to Slide 3 to follow along.

As a reminder, during this call, we'll sometimes refer to Ellington Residential by its New York Stock Exchange ticker E-A-R-N or EARN for short.

With that, I will now turn the call over to Larry.

Thanks, Maria. It's our pleasure to speak with our shareholders this morning as we release our fourth quarter results. As always, we appreciate your taking the time to participate on the call today.

As announced this past December, our CFO, Lisa Mumford, plans to retire around the end of next month. Lisa has been an integral part of EARN since our inception, and her talent and leadership have contributed greatly to our success. We thank Lisa for her service and wish her the best.

Upon Lisa's retirement, Chris Smernoff, the company's Controller and Lisa's second-in-command, will assume the role of CFO. And JR Herlihy, the company's Treasurer, will become Chief Operating Officer. Chris will make an excellent CFO. You'll hear from Chris in a few minutes.

2017 proves to be one of the least volatile years for interest rates on record, despite 3 fed rate hikes, a new administration in Washington, several significant geopolitical headlines, and the first pullback in quantitative easing in a decade.

Over the course of the year, the 10-year traded in an extraordinarily tight 59 basis point range, and finished the year only 4 basis points lower than where it started. That 59 basis point range for the year was the tightest in over 50 years so since the 1960s. As long-term interest rates remained range-bound, the yield curve consistently flattened each quarter throughout the year. Coming into 2017, the spread between 2- and 10-year U.S. Treasuries was 126 basis points. But by year end, that difference had collapsed to just 52 basis points.

Agency RMBS spreads finished the year tighter as well, with much of the tightening occurring in September after the Fed provided clarity on its tapering agenda. However, given the intense market volatility we've seen in the last couple of weeks, these themes from 2017 seem almost like a distant memory now. Over the past week, the 10-year yield closed as high as 2.84%, the highest level in more than 4 years, and 43 basis points higher than the level just a few weeks ago coming into the year. Overall, the 10-year yield has now increased over 80 basis points since reaching its 2017 lows in early September of last year. Meanwhile, equities have been gyrating violently, and the S&P 500 technically reached correction territory yesterday.

But let's get back to the fourth quarter of 2017 and, specifically, EARN's performance. Although current coupon 30-year Agency RMBS barely budged during the quarter, many of the shorter-duration assets that we hold in EARN, such as higher coupon pools and 15-year pools, had mark-to-market losses even after taking into account hedging gains. These losses were almost all unrealized losses, and as Mark will discuss later, much of the unfavorable price action reversed after year-end. Payups on our specified pools actually performed just fine with only slight declines, in line with expectations on payoffs, given the slight rise in mortgage rates.

Finally, the low volatility environment generated few trading opportunities for us, and our portfolio turnover was unusually low at 13% for the quarter. Overall, we produced a modest 1.6% economic return on an annualized basis.

We'll follow the same format on the call today as we have in the past. First, Chris will run through our financial results. Then, Mark will discuss how the residential mortgage-backed securities market performed over the course of the quarter, how we positioned our portfolio and what our market outlook is. And finally, I'll follow with closing remarks and then we'll open the floor to questions. So over to you, Chris.

Thank you, Larry, and good morning, everyone. I've worked alongside Lisa on EARN since before the company's initial public offering, and I look forward to taking over as the company's Chief Financial Officer upon Lisa's retirement.

In the fourth quarter, we had net income of $793,000, or $0.06 per share broken down as follows: core earnings of $4.9 million or $0.37 per share, net realized and unrealized losses from our residential mortgage-backed securities portfolio of $10.7 million or $0.81 per share as prices of securities in our portfolio decreased and net realized and unrealized gains from our derivatives of $5.8 million or $0.44 per share. By this measure, net realized and unrealized gains from our derivatives exclude the net periodic costs associated with our interest rate swaps since they are included as a component of core earnings.

Our net income of $793,000 for the quarter ended December 31, 2017 was significantly lower than our net income of $6.3 million for the quarter ended September 30, 2017. The primary driver of this decrease in net income was unrealized losses on our Agency RMBS investments that were only partially offset by net gains from our interest rate hedges.

Our core earnings includes the impact of the catch-up premium amortization adjustment, which, in the fourth quarter, decreased our core earnings by approximately $400,000 or $0.03 per share. After backing out the catch-up premium amortization adjustment from interest income in both the fourth and third quarters of 2017, we arrived at our adjusted core earnings of $0.40 per share and $0.43 per share, respectively.

Further modest compression of our net interest margin this quarter led to a modest decrease in our quarter-over-quarter adjusted core earnings per share. In the fourth quarter, our net interest margin, adjusted to exclude the impact of the catch-up premium amortization adjustment, was 1.41% as compared to 1.45% in the third quarter. While the average yield on our portfolio also adjusted to exclude the impact of the catch-up premium amortization adjustment ticked up from 3.01% in the third quarter to 3.04% in the fourth quarter, our cost of funds increased by a greater magnitude from 1.56% to 1.63%.

Our repo borrowing rates rose as LIBOR increased during the quarter, and that increase was only partially offset by a slight decrease in our cost of interest rate swaps, which is also included in our cost of funds.

On a per-share basis, the quarter-over-quarter increase in our cost of funds impacted earnings by approximately [$0.06] per share.

Our annualized expense ratio for the quarter was 3.06% or 2 basis points higher than last quarter, but still meaningfully below the 3.6% level incurred in the first half of the year, which were calculated before we were able to fully benefit from our larger capital base as a result of our secondary offering and ATM program activity in the second and third quarters.

As Larry mentioned, with unusual -- unusually low volatility of the fourth quarter, this resulted in reduced trading opportunities. And as a result, our Agency RMBS turnover was only 13%.

Our overall RMBS portfolio decreased by 3.3% to $1.686 billion as of December 31, 2017, as compared to $1.743 billion as of September 30, 2017. The decrease relates to a small drop in our leverage as our overall debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased to 8.2:1 at year end from 8.3:1 as of September 30, 2017.

For the fourth quarter, carry from our Agency portfolio, along with gains from our hedges, outweighed the net realized and unrealized losses on our loan holding. And the strategy generated gross income of $1.7 million or $0.13 per share.

Meanwhile, on our non-agency portfolio -- meanwhile -- sorry, meanwhile, our non-Agency RMBS portfolio performed well, driven by strong carry in net realized and unrealized gains, generating growth income of approximately $550,000 or $0.04 per share. Our interest rate hedging portfolio continues to be predominantly made up of interest rate swaps and short positions in TBAs and, to a lesser extent, short positions in U.S. Treasury securities.

For the quarter, we had strong total net realized and unrealized gains of $6.1 million or $0.45 per share on our interest rate hedging portfolio. Our interest rate swaps generate net gains for the quarter as interest rates rose and our short positions and TBAs also generated gains as prices declined during the quarter.

In our hedging portfolio, the relative proportion based on 10-year equivalent of short positions and TBAs increased slightly quarter-over-quarter, relative to interest rate swaps.

At the end of the fourth quarter, we had total equity of $192.7 million or book value per share of $14.45 as compared to $196.8 million or $14.76 per share at the end of the third quarter. Our economic return for the quarter was 40 basis points or 1.6% annualized.

I would now like to turn the presentation over to Mark.

Thank you, Chris. 2017 finished with many of the macro themes that dominated the year still in place. Risk assets continued to tighten, the yield curve continued to flatten, and levels of implied volatility continued to decline.

Rate tended -- trended higher during the quarter. Yields on the 10-year swap rates ended the year up 10 basis points, finishing at the upper end of the quarter's range. The stock market made new highs, the Agency mortgage basis was slightly tighter in Q4 after a stellar performance in Q3.

If you look a little more closely, the answer to the question, "What happened in Q4?", depends on what part of the yield curve you look at. In Q4, you had a remarkable, almost eerie stability in the 10-year note yield, but you had a big selloff in the front end of the curve, alongside a rally in the very long end of the curve. This yield curve flattening was expressed in the mortgage market and the change in prices of high coupons relative to lower coupons. Higher coupons were down in price a lot, intermediates did okay, and lower coupons, like 3s, did very well.

Take a look at Slide 6. Here how we show the change in the yield difference of 2-year notes and 10-year notes in Q4 and continued the graph into 2018. You can see the tremendous yield curve flattening in the 2-year to 10-year spread in Q4, but also, a chunk of that flattening had been reversed so far in 2018. This is essentially the market trying to price in the actions of the Fed, which drive the short end and expectations of future inflation, which drive the long end.

On the next slide, Slide 7, when you look at the changes in the price of Fannie 3s and Fannie 4.5s, it's even more interesting. These bonds both have positive durations. And in fact, Fannie 4.5s have generally been viewed recently as having less than half the duration of Fannie 3s. So in a normal quarter, whatever price change of Fannie 3s is, we expect the price change of Fannie 4.5s to be about 40% as large.

But looking at the left-hand portion of the slide, you can see that, in Q4, far from moving down only 40% as much, Fannie 4.5s moved down 3x as much. That's really bad performance. However, on the right-hand portion of the slide, you can see how the relationship has normalized since year-end. Price action, like what we saw in Q4, is very unusual, and it can create book value volatility in either direction. You can see that the relative performance of Fannie 3s and Fannie 4.5s has done 180-degree turn since the start of the year.

Against this backdrops, EARN's portfolio performed only modestly well in the fourth quarter, with gross income before G&A expense of $2.3 million, equating to an annualized return on equity before G&A of approximately 4.7%.

While Q4 continued many of the themes in the earlier part of 2017, 2018 has been a completely different story. Rate volatility has been much higher, mortgages have widened in spread, and the market now trades with the skittishness and risk aversion that we haven't seen since the early days of 2016. So with 2018 market trends reversing so many of the trends that we saw in Q4, some of our portfolio positioning techniques that muted performance in Q4, such as our substantial interest rate hedges in the long end of the yield curve, our substantial TBA hedges have really helped our 2018 performance.

EARN was defensively positioned at the end of 2017. While we viewed mortgages as attractive for much of Q3 and to the start of Q4, by the end of the fourth quarter, the combination of very tight spreads, very low realized and implied volatility, and low realized and expected prepayments collectively seemed like a recipe for a lot of risk and limited reward. We thought that the first quarter of Fed balance sheet tapering would be easily absorbed by the market that was, but we also thought the real test for MBS would come later in 2018, especially in Q2 when the balance sheet reduction reaches $36 billion a quarter. As a result of this positioning, our returns for the fourth quarter were modest. We have taken advantage of some of the MBS widening so far in 2018 to add to our mortgage exposure, and we still have a lot more dry powder to have a lot more mortgage exposure, should we see additional spread widening and market stability.

If you turn to Slide 8, you can see the underperformance of MBS so far in 2018 has undone much of the Q4 2017 outperformance.

In Q4, 5-year rates moved up 24 basis points and Fannie 3.5s moved down only about 1/3 of a point. This year, 5-year rates have moved up 40 basis points so about a 50% bigger move than Q4. But Fannie 3.5s have moved down 2.5 points. While it takes more work to manage through increased interest rate volatility, like what we've seen in the past weeks, the market is presenting us with more opportunities than it did in Q4 as MBS underperformed. This can make it a good time for us to add some additional net mortgage exposure to the company, whether by replacing some of our TBA hedges with swaps or just adding MBS outright. On a net interest margin basis or otherwise, incremental Agency MBS purchases now look a lot more attractive than they looked at the end of Q4.

With our stock trading well below book value and with our ample liquidity, we plan on using accretive stock buybacks to enhance book value per share. We can't control the stock market volatility, but we can use this a driver of book value per share accretion when it presents us with the opportunity we now see.

So we have 2 important tools to drive performance going forward: one, a wider net interest margin on new MBS purchases, and we have already added some; and two, accretive buybacks to increase book value per share. We have already been buying back some of our TBA shorts, which have helped our 2018 performance. And once we are in the open trading window, we can start the share buybacks.

The Agency mortgage market is unique in stability to generate attractive returns without taking credit risk or excessive interest rate risk. Our job at EARN is to deliver returns in that fashion and in that way, be an all-weather investment vehicle. We get a lot of questions about how the Fed rate hikes and the overall level of interest rates affect our ability to pay a dividend. They shouldn't have a big effect. Why? Because we hedge most of our interest rate exposure. Higher repo costs, which come from fed rate hike activity, are offset by a higher floating rate payment that we receive on our swaps and lower TBA roll levels on our short TBA positions.

The same thing goes for prepayments. If we are doing our job well, using our research and selecting our pools wisely, we should be able to predict how changes in interest rates change prepayments, and we should be able to help inflate ourselves in that risk. What we can't control is the number of opportunities created by market volatility and pricing dislocations. Last year, there weren't a lot of dislocations, and our gross income before G&A expenses in 2017 equated to a gross return on equity of almost 9%.

Looking forward, we don't have a crystal ball, so we don't know when this heightened volatility will abate. The big daily and even intraday swings we have seen recently in stocks and interest rates are extraordinary. But last year's eerie stability in interest rates and stability in stock indices was also aberrational. What we do know is that EARN's capital for Agency MBS should become more valuable as the Fed reduces its balance sheet, urges more MBS for private investors to observe -- absorb, so they expect the return of owning MBS should go up, and it has. That big picture trend should leave us with a rich opportunity set to drive earnings this year versus last. We remain clearly focused on capturing that opportunity, trimming excess risk from the portfolio and delivering results.

With that, I'll turn the call back to Larry.

Thanks, Mark. Lower net mortgage exposure and significant hedging in the long end of the yield curve muted our results for the fourth quarter. We positioned ourselves this way with book value protection and preservation of capital in mind, recognizing that mortgage spreads had moved to the tight side, prepayment expectations were low, expectations for volatility were at all-time lows, and also recognizing as usual that we don't think we have an edge in forecasting the future direction of long-term interest rates.

We're okay spending a little portfolio insurance in complacent markets, but it means that we can outperform in more hostile environments. I once again remind you that at this time 12 months ago, we had just come off a sudden spike in interest rates following the election, and EARN was the only company in the peer group with a positive economic return for the fourth quarter of 2016.

As we've discussed in the past, part of our interest rate hedging portfolio includes a substantial TBA short. And as a result, we carry lower effective mortgage exposure that our headline leverage would suggest. Slide 17 illustrates this point well. Although we finished the fourth quarter with overall Agency pool assets of $1.66 billion and equity of $193 million or a ratio of 8.6:1, we also held a net TBA short position of $596 million. Deducting the amount of the TBA short from our long Agency pool portfolio, our net exposure to Agency pools is around $1.06 billion, resulting in a 5.5:1 net Agency pool assets to equity ratio.

During times of heightened volatility, such as January of this year and the fourth quarter of 2016, this lower net mortgage exposure helps mitigate widening of the mortgage basis. Additionally, because the Fed purchases Agency pools via TBAs, as the Fed tapers its purchases, it withdraws a large source of support for TBA valuations.

We combine the TBA hedges with various interest rate swaps, and to a lesser extent, short positions in U.S. Treasuries to hedge our interest rate exposure along the entire yield curve. Please turn to Slide 18, which outlines our portfolio sensitivity to interest rates.

You can see that we estimate that we are roughly indifferent to an instantaneous 50 basis-point upward shock or downward shock in interest rates. We think that this is unique among the peer group.

Looking at the Agency MBS sector overall, while we see some short-term opportunities with some of the spread widening we've seen recently, we see a few possible areas of vulnerability for the remainder of the year. It starts with the Federal Reserve's balance sheet normalization plan. In January, the monthly amount of tapering of MBS purchases went from $4 billion to $8 billion, and the tapering will increase an additional $4 billion at the beginning of each subsequent quarter this year. Provided they stick to their schedule, the aggregate amount of tapering by the Fed will be $168 billion this year. That's $168 billion of reduced MBS buying by the Federal Reserve in 2018. And when you add that to the estimated new MBS issue and supply of $250 billion in 2018, that's over $400 billion of supply for the private markets to absorb, which is a lot. And Agency spreads could widen in response.

Second, market expectations are for around 3 more interest rate hikes from the Fed in 2018. And third, many central banks are expected to withdraw stimulus for the first time in a decade. So we see many reasons for caution, and our portfolio management and hedging strategies become even more critical.

Some have drawn parallels between the recent volatility and the 2013 taper tantrum. We do not expect the same extreme spread and rate movements that we saw during the taper tantrum as demand for Agency MBS is much more diversified than it was in 2013. Still, we do believe that our all-weather portfolio is well positioned to withstand or is shaping up to be a more challenging investment environment.

Finally, in light of the significant discount of our current share price to book value, we see an extremely attractive opportunity to repurchase shares aggressively at these prices. We requested, and our Board of Directors has authorized, repurchase of up to 1.2 million common shares. At current price-to-book levels, we intend to use this authorization aggressively as it is an excellent use of capital, despite slightly wider mortgage spreads. And with that, our prepared remarks are concluded. I will now turn the call back to the operator for questions. Operator, go ahead please.

(Operator Instructions) Our first question comes from the line of Doug Harter of Credit Suisse.

I was wondering if you could put anymore context -- kind of around your commentary about your risk positioning and kind of how January actually unfolded for you guys.

Yes. We would rather not be too specific on that. I think you can see that the TBA short -- given that it spreads have widened so far this year has obviously helped us. And Mark, do you want to -- we can comment, I think, a little bit on just to add that -- TB short, how it's maybe evolved a little bit so far this year versus where we came into the year.

Sure, yes. So we bought some of that TBA short back. We still have some TBA shorts. We've sort of -- we view the initial legs of this spread widening as sort of necessary to get mortgages back to a price -- a pricing spread to treasuries, where they were going to have to be attractive enough to get money managers and other pools of capital to absorb the Fed's supply. So I mean, they came into the year at very tight levels, so it took some correcting to get them to the point where they're attractive. There has been certainly more intraday opportunities. And having the TBA short was very supportive of protecting book value in -- so far this year.

Got it. And then I guess, how do you view -- kind of now that we've kind of had the initial move, how do you view, kind of, your risk positioning? Is this a time where you would continue to take off some of that TBA short? Or do you kind of want to keep that risk positioning as we could see more of it -- just how are you thinking about how you've changed the portfolio over the course of January -- first week of February to position yourselves going forward?

Some of that is a function of how the market trades, we have some sort of proprietary metrics that we look at. I think if you continue to see the sort of volatility we've seen, then I think there's a good chance mortgages continue to underperform. It's though expensive to control the interest rate risk on mortgages when you see the kind of interest rate volatility we've seen, like you compare Monday versus now, it's already a 15-beat move. If you get some stability, then I think it's a more attractive entry point for mortgages, but we also pay attention to what's going on in other markets. High yield has been cheapening up. So I think we've paired down the size of our shorts, but until we see either a reduction in volatility or wider spreads, we'll keep some of those short positions in place.

Your next question comes from the line of Steve Delaney of JMP Securities.

All the best to Lisa for a happy retirement. I'd like to start with the buyback, but in the context of leverage. So as you buy back your shares, obviously, it's going to be accretive to book, but it would seem to me that it does have the potential to reduce your earnings power unless you see that you have the flexibility to let your leverage go slightly higher. Could you comment on that thought process in terms of benefiting book, but maybe putting stress on earnings?

Yes. So, sure, in total dollars for the whole company, I agree, right. As we lower the capital base, that would naturally lead to lower earnings. But on a per-share basis, you basically -- especially the type of discount that we're trading at right now, I think that book value accretion is going to more than offset. On a per-share basis, the only drag, really, that we see is that as our capital base shrinks, our G&A is going to creep up, right? But at these levels, that balance is very much in favor of buying back shares. So yes -- so just like -- Yes. So we issued stock in the middle of last year. Average next to company was at 14 handle, let's just call it. So obviously, now, we're trading much, much cheaper than that. So the same math that we did that showed back then, it made sense to issue shares we're overall slightly dilutive. But G&A savings and all the other ancillary benefits of being bigger outweighed that. Now, the -- that balance is in the other direction. So I think, certainly, -- and the reason that we chose 1.2 million shares. We think that's a good start. Let's see where that goes, and let's see what our stock price is after that. But certainly at these levels, that amount of shares and the effect that would have on our G&A would be modest enough, we can buy back shares at these prices that makes a lot of sense.

Okay, that's helpful. And I do want to say that this ratio you're using of net assets to equity, I find it very helpful. And I think maybe that's something that the industry as a group should adopt.

Yes. And one of the reasons I think the industry or group really hasn't so far is that from -- you would know better than me, since you follow closely all the peers. But my understanding is that we -- that no other company really comes even close to us in terms of the volume of TBA shorts. So other companies -- for other companies, it's probably not going to be all that different from just a straight gross assets to equity calculation.

Yes, good point. So I guess the second thing I'd like to talk about, credit. You have some flexibility, I think, in your charter. Credit is currently only about 1% of assets. In a flatter curve, an improving economy, would that be a backdrop that would cause you to increase your equity allocation to credit? And in that, I guess, how closely are you watching the CRT market? And given this volatility, have you seen any spread widening there that would make CRT bonds more attractive?

Steve, it's Mark. That's a great question. So we had a bigger credit exposure, I think, coming into Q3. And as -- and it was primarily in non-Agency mortgages. As that sector performed extremely well throughout the first 3 quarters of 2017, we pruned some of those positions, and we just reduced those holdings. We haven't yet increased them. And you're exactly right. So CRT has been a bit of a bumpy ride. It pretty substantially underperformed in Q3 when the terrible flooding in Houston and in Florida sort of made people realize that those credit risk transfer bonds aren't only just exposure, broadly speaking, to U.S. home prices, but they have almost like a cat bond -- catastrophe bond quality to them, that they're so thinly enhanced that localized weather events like a hurricane, flooding, an earthquake, fires can be enough of a stress on a small part of the country that it can materially impact your credit enhancements. So like in that flooding you saw in Houston, Houston was between like 1.5% and 3% exposure in most of the CRT bonds, but that was enough to appreciably reduce the credit enhancement. So the market share widened in that Q3. And then in Q4, that became a distant memory that sort of tightened like everything else. Now this year, it has underperformed. I think in part -- in sympathy with all credit spreads, like high yields down a few points. So it's widened back. It's not even back to where it was in Q3. So when we look at the return on equity potential of the agencies versus something like CRT, right now, I think we'd be more focused on adding our Agency exposure. But one of the motivations for having the ability to have some credit exposure in EARN at the outset of the company was -- is kind of exactly what you're referring to. If you do get a real stress in credit, to be able to opportunistically take advantage of that because we're -- within the firm, we have so much expertise there. So I would say, while we've seen a little bit of widening there, in my mind, it's not enough yet to justify swinging some of the capital back to the -- back to credit. But it's something we watch, and it's another thing where 2018 looks a lot like 2017 standing on its head, right? 2017 was sort of -- except for that little bit of widening in CRT, most other sectors, like non-Agency MBS high-yield, sort of had almost, like, continual tightening in 2017. And now, some of those things are moving in reverse. So we're keeping our eye on it, but it hasn't been enough yet, in my mind, that we'd want to swing some of the capital back that way yet.

Yes, not even -- it's not even close.

Got it. That's helpful. Okay. Relative to where you see your returns on the Agency portfolio. And my final question would be this. We're up about mortgages, so I think primary rates now, around 4.5% and up 75 basis points from the September recent lows. I'm just curious, we -- when I think about spec pools in the payups, and I look at that as an insurance policy for more stable prepays, I'm asking, are primary rates at a level right now that you don't need to buy that insurance? Or is it a question that, while even if you felt that way, are you just a little scared off from the TBAs given the Fed taper and how sloppy they may get?

I would say that in some of the coupons, say, like 3.5 coupons, the cost of that insurance has come down a lot, right? So it's not like you have to spend a lot of money for it. And payups on specified pools, they do have an interest rate component to them. So they've come down, but they've probably come down an amount that's sort of commensurate with the change in interest rates. So, yes, like certain parts of the TBA stack right now, you don't need as much prepayment protection. Also, the other big thing is that just as the yield curve has steepened out, forward mortgage rates have moved up even more than just spot rates, right, because yield curve has steepened out. So now versus the forward curve, there's a bunch of coupons where you don't have all that many scenarios when mortgage prepayments rear their head. So I would say in some of these lower coupons, we're only going to really buy that prepayment protection if we can get it very cheaply priced on the order of a handful of ticks.

I just would add one more thing which is that when you've got a volatile interest rate environment like we have here, we rebalance the portfolio with -- as interest rates move. And as you know, if you've got a portfolio of very pre-payable mortgages, then that rebalancing is going to cost you money. It could be a lot of money if things are really, really volatile. So, especially in the environment that we're in now, specified pools because they're going to hold up better and going to have more stable average life profile across different interest rate scenarios, your rebalancing costs are a lot lower on those. So in a more volatile environment, true, that we're higher in rates, and that would argue maybe against it if you thought we're going to stay there. But on a more volatile environment, that's a good reason to be attracted to those as well. And another reason why we think that those sometimes have value that's not appreciated by the market.

At this time, there are no further questions. That does conclude the Ellington Residential Mortgage REIT 2017 Fourth Quarter Financial Results conference call. You may now disconnect your lines, and have a wonderful day.