Ellington Financial Inc (EFC) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Ellington Financial third quarter 2010 financial results conference call. (Operator Instructions)

This conference call is being recorded today, November 17. I would now like to turn the conference over to your host, Ellington Financial Vice President Neha Mathur. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and welcome to our third quarter 2010 Ellington Financial earnings call. I am Neha Mathur, Vice President of Ellington Financial. Before we start, I would like to read the following cautionary statement.

Certain 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 and can be identified by words such as anticipate, estimate, will, should, expect, believe, intend, seek, plan, and similar expressions or their negative forms or by references to strategy, plans, or intentions. 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.

Factors that could cause the Company's actual results to differ from its beliefs, expectations, estimates, and projections include, among other things, the risks described in Exhibit 99.2 to the Company's current report on Form 8-K filed with the SEC earlier this morning. The Form 8-K can be accessed through the Company's website at www.ellingtonfinancial.com.

Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports the Company files with the SEC, including reports on Forms 10-Q, 10-K, and 8-K. We further caution you that the 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.

Okay. Let's get started. With me today on the call are Mike Vranos, Co-Chief Investment Officer of Ellington Financial and Chief Executive Officer of Ellington Management Group; Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our other Co-Chief Investment Officer; Rob Kinderman, Ellington's Head Trader for MBS and ABS credit; and Lisa Mumford, our Chief Financial Officer. First, we would like to provide some prepared remarks highlighting the events of the quarter and our recent IPO, and then we would be happy to answer any questions you may have.

We issued an earnings release yesterday afternoon which covers several relevant performance statistics for the quarter, as well as some information on our portfolio. To better follow this call, it would be very helpful to have the earnings release with you. You can access the release on our website, and we'll be going over several details of that release on this call.

With that, I will turn it over to Mike Vranos.

Thanks, Neha. Welcome, everyone, to our third quarter earnings conference call. I am very pleased with our -- to speak with our shareholders this morning for the first time as a public Company, and I appreciate your taking the time to participate in the call today.

I would like to begin today's discussion by talking a bit about our recent initial public offering. We're very pleased to have completed the IPO, which raised approximately $95 million net of expenses. We issued 4.5 million common shares at a price of $22.50 per share, bringing our total equity capitalization to $404 million.

This was obviously an important liquidity event and share price valuation event for our existing shareholders. For the Company, the timing of the offering was excellent, as there are many attractive opportunities in non-agency MBS, and we're excited to be putting the new capital to work. The Company also now enjoys the economies of scale and other benefits of a larger capital base and a publicly traded stock.

Going forward, our efforts will continue to be focused on building shareholder value. While building shareholder value will come primarily from investment performance, we also recognize the importance of broadening our shareholder base, both to improve the liquidity of our stock and to capture other benefits, including ultimately greater economies of scale. We are in the midst of an historic opportunity in the markets with compelling, and we believe sustainable, economics on new investments.

The MBS crisis that first hit the market in 2007 is far from over. There is still a large overhang in the housing market, mostly the shadow inventory of delinquent mortgages that we believe will cause additional home price declines over the next 12 to 18 months. Spreads remain wide because of supply/demand imbalance.

On the demand side, the severe downgrades of the great majority of non-agency RMBS -- most are now below investment grade -- continue to exclude a broad range of traditional buyers, especially banks. On the supply side, we see hundreds of millions of non-agency RMBS in for the bid on an average day, allowing us to remain extremely selective and still finding attractive investment opportunities.

MBS prices aren't as distressed as they were in the late 2008/early 2009 period, but they're still extremely distressed in many sectors. We firmly believe, as do so many market participants, that the residential mortgage sector is still easily the most attractive asset class out there.

Ellington has been in this business for over 15 years. Larry, Mark, and I have been in the MBS business for over -- on average, 25 years. We have been through and survived all the cycles and crises, but the current environment is by far the most exciting we have seen.

I firmly believe that Ellington's infrastructure, research, analytics, and experience, particularly in the MBS credit space, give us a clear competitive advantage. It goes without saying that Ellington Financial is the most visible thing we have ever done and probably will ever do. We are totally driven to succeed, and we are confident that we will produce results.

And with that, I would like to turn it over to Larry.

Thanks, Mike. Ellington Financial is a specialty finance company organized as a publicly traded partnership or PTP. We specialize in acquiring and managing mortgage-related assets, and within that space, we have a broad mandate. While we view the mortgage REITs as our peer group, we are not subject to the various asset and income tests that REITs are subject to.

Our PTP structure gives us the flexibility to protect against many downside risks. In particular, we have maintained a significant derivatives portfolio, where we have hedged interest rate risk and some credit risk as we have seen fit. In 2008 and early 2009, when many other agency and non-agency mortgage REITs lost the majority of their book value or worse, we maintained our book value. We believe that the discipline and patience with which we may -- manage the portfolio will serve our shareholders very well in the long-term.

To give a little detail on our investment strategy and the portfolio, the great majority of our capital is deployed in non-agency MBS/ABS strategies. While we are definitely believers in the old saw, "There are no bad bonds, only bad prices", we have recently been favoring senior tranches from RMBS securitizations where more of the underlying borrowers still have significant equity in their homes. This naturally has led us to focus on -- the long side of our portfolio on the more seasoned vintages of subprime, Alt A and similar sectors, where yields remain high but you can still pick up all the advantages of higher quality borrowers, seasoning, and structure.

We also invest in agency--Fannie, Freddie, and Ginnie--whole pool pass-through certificates, primarily to maintain our exclusion from regulation as an investment Company under the Investment Company Act of 1940. These investments have typically utilized roughly 10% to 15% of our equity capital. We also actively use derivatives, such as swaps and futures, as well as TBAs.

As most of you know, TBAs are forward contracts on fixed rate agency MBS pools where the seller promises to deliver qualifying pools to the buyer on a to-be-announced basis. TBAs are the most liquid instruments in the mortgage market. To hedge interest rate risk, which we have, on both the agency and non-agency sides of the portfolio, we have typically used interest rate swaps, futures, and TBAs.

We also opportunistically use credit derivatives, especially credit default swaps on the MBS indices, such as ABX, or on single name MBS/ABS tranches. We do this to hedge some of our credit risk, as well as to gain long exposure to certain MBS/ABS credits that we like. Our use of credit derivatives is opportunistic in that we adapt our credit derivative position to our outlook on the various sectors, to our appetite for risk, and to the opportunities that present themselves.

And in 2008, we maintained much larger short credit positions -- this is what enabled us to preserve book value -- while for most of 2009, we maintained much smaller short credit positions, when the risk/reward balance had shifted. In 2010, the size of our short credit position has varied somewhat, but we have tended to maintain a distinct long portfolio bias in light of our continuing view that the non-agency MBS sector has tremendous value.

That being said, we tend to turn over our portfolio much more frequently than most of our peer group, and we are continuously looking to upgrade the portfolio whenever we can. We have also tended to maintain high levels of liquidity relative to many of our peers, which has allowed us to be nimble. But, as the financing environment changes, and lately it has improved a great deal, we reevaluate our targeted levels of leverage and liquidity.

Let me elaborate on this improved financing environment. The agency pool financing market hasn't really changed much. It has always been easy to finance agency pools, but the non-agency RMBS financing market has improved dramatically over the course of this year. We finance our non-agency RMBS positions in the repo market, of course, with the large broker-dealers. And the major risk in using the repo market -- in using repo financing is roll risk, that is to say the risk that repo lenders won't roll their financing.

Assessing and quantifying this roll risk is a major component in our liquidity risk management systems. Our liquidity risk management systems effectively reward longer-term repo, counterparty diversification, and staggered maturities. Not only are we seeing more counterparties aggressively pursue Ellington's financing business, but we're being offered more and more financing terms that are extremely attractive from a liquidity management perspective, and that will enable us over time, all other things being equal, to use more leverage.

Let's get specific, using senior subprime RMBS tranches as an example, since that's a typical investment we hold. Haircuts and financing rates haven't changed much on repo, but that's okay. 30% to 40% haircuts are more than adequate on senior subprime RMBS, theoretically allowing up to 3 to 1 leverage (measured assets to capital) on these assets.

And financing rates are still attractive at around LIBOR plus 125 to LIBOR plus 175; after all the yield spread on the underlying assets are a multiple of these financing spreads. What has changed, first and foremost, is that we're seeing longer repo maturities offered. A large number of counterparties are now offering six month financing terms. A year ago, it was hard to find even one-month financing.

We're also starting to see evergreen financing where, for example, halfway through a term repo, the repo automatically gets re-extended to re-establish its original term, unless notified otherwise. So one month into a two-month repo with this feature, the repo would automatically extend an extra month. In a similar vein, we're also seeing forward rolls being offered, where a month or so before the maturity of a term repo, we can lock in forward starting term repo, effectively extending the repo term well before it has matured. These are all, in our opinion, extremely useful liquidity management tools, and over time we expect them to factor into our use of leverage.

Switching gears a bit, I would like to say a few words regarding our dividend policy. We intend to pay out 100% of our earnings each year. Now, since our earnings include not only net investment income but also mark-to-market effects, we expect our quarterly earnings to continue to be somewhat lumpy and thus our quarterly dividends as well.

On November 9, we announced a quarterly dividend of $0.80 per common share for the third quarter of 2010. This dividend will be paid on December 15, to shareholders of record on December 1. Based on the IPO share price of $22.50, this annualizes to a dividend yield of approximately 14.2%. For 2010, earnings per share through September 30, are $2.21, and we have now paid out a total of $1.20 in dividends per share. Compared to our REIT peers, while we expect our dividends to be choppier in the short run with our greater emphasis on maintaining book value, we would like to think that over the long run our dividends will be more reliable and more stable.

Now I will turn it over to Lisa to discuss some of the financial highlights of the third quarter.

Thank you, Larry, and good morning, everyone. Before I review our third quarter results, I would like to provide an overview of the Company's financial framework, since it is our first quarter reporting our results as a public Company.

As already mentioned by Larry, Ellington Financial is a limited liability specialty finance company structured as a publicly-traded partnership. We deliberately chose to be a PTP, as our PTP status gives us the ability to hedge our risks when and as we see fit. Also as a PTP, for federal income tax purposes, we are a pass-through entity. This means the Company is not subject to federal income tax, so long as we continue to qualify as a PTP.

For accounting purposes, we apply ASC 946, Financial Services-Investment Companies. As a result, our RMBS investments and derivative positions are all carried at fair value, and all valuation changes are recorded in our consolidated statement of operations. We believe that recording valuation changes through earnings not only is consistent with our total return investing strategy but also simplifies the understanding of our results as our statement of operations reflects all of our operating activities. As a result, we do not present other comprehensive income or other than temporary impairments.

With that as a backdrop, I would like now to provide a brief overview of our results for the quarter. For the quarter ended September 30, 2010, Ellington Financial reported earnings of $16 million or $1.30 per basic and diluted share. Diluted shares include the Company's outstanding common shares as well as its outstanding long-term incentive plan units or LTIPs. Since LTIPs are considered participating securities for purposes of earnings per share, basic and diluted earnings per share are the same.

Of our total per share earnings of $1.30, $0.35 came from net investment income with the remaining $0.95 coming from net realized and unrealized gains on investments and derivative holdings. This $0.95 per share of net realized and unrealized gains consisted of $2.05 per share of gains from our RMBS portfolio excluding TBAs, offset by $1.10 per share of losses from our derivative and TBA portfolio. Gains in our RMBS portfolio were principally related to our non-agency book, as we continued to see firmer pricing in the sectors in which we are invested.

Net losses from our derivatives and TBA portfolio were principally from losses on our TBAs and interest rate hedges, given that we were fully hedged against rising interest rates and given that swap rates dropped sharply throughout the quarter. While the five-year swap rate declined approximately 53 basis points during the quarter, I would like to point out that, as of yesterday, the five-year swap rate had rebounded almost 30 basis points since the quarter end. By the way, the average term of our outstanding interest rate swap at September 30, was around six years, so the benchmark five years swap is a pretty good proxy.

In any event, given the historically extremely low levels of interest rates, and given that there are ample opportunities to earn attractive returns in MBS credit without having to take large interest rate bets, we think our interest rate hedging strategy makes a lot of sense. We also had losses in our credit default swap hedges both on the ABX indices and on single name MBS and ABS credits.

The Company's book value at the end of September was $309 million or $25.78 per share which on a diluted basis is $24.99. This figure does not reflect the impact of the $95 million of net proceeds raised in the Company's initial public offering, which closed on October 14. On a pro-forma basis after giving effect to the offering, September book value per share was $24.50 and on a diluted basis $23.95.

Next, I would like to spend a minute or two discussing TBAs and how they affect our balance sheet. First, as Larry mentioned, we trade TBAs as a way to hedge interest rate risk and other risks in our RMBS portfolio. As a result, we generally carry a net short TBA position, and we typically do not settle TBA transactions but rather terminate them or roll them. Because of accounting rules for companies that apply investment company accounting, we account for our TBAs on a gross basis, and we account for them as investments, not as derivatives, even though we use them principally as derivatives.

As a hypothetical example, we might have a net short position in, say, Fannie 4.5's of $50 million, but that net short could be comprised of a long position with one counterparty of $25 million and a short position with another counterparty for $75 million. So as long as those long and short positions are with different counterparties, they must be reported on a gross basis. So in this example, both sides of our balance sheet would be grossed up by $75 million as opposed to by $50 million if we're reporting on a net basis and as opposed to the off balance sheet treatment if we were using derivative accounting.

Of course, in assessing our risk, we are primarily managing to the net position of $50 million, in my example. In order to see this more clearly, I direct you to our balance sheet on the last page of our earnings release. As of September 30, included in the $1.2 billion line item investments at value, are long TBAs with a value of $529.8 million. In the liability section, investments sold short in the amount of $893.3 million consisting entirely of short TBAs. So our TBA position on a net basis is $363.4 million short position, but we wanted to point out how the components of the TBAs gross up our balance sheet.

Additionally, because these positions are unsettled, we also have payables for securities purchased and receivables for securities sold related to TBAs, further grossing up the balance sheet. As of September 30, payable for securities purchased related to TBAs was $529.8 million, and receivables for securities sold related to TBAs was $893.3 million. As we assign or pair off our TBA positions, which we have always done, the payables and receivables are ultimately netted against each other. If, on the other hand, we were to report TBAs as derivatives, we'd only reflect the unrealized gain or loss of the derivatives position, therefore not having the gross up impact.

At the end of June, we had a net short TBA position of $515.5 million. And you can see that, based on our September net short position of $363.4 million, we decided to reduce our short TBA position over the course of the quarter, all the while replacing the short interest rate exposure with interest rate swaps. Depending on where we see the best relative value, the particular mix of swaps, futures, and TBAs can fluctuate from quarter to quarter.

Finally, our non-investment expenses as a percentage of our average net assets was 4.1% at September 30. Based on the new capital raised and our projection of expenses going forward, we believe that number should drop to approximately 3.3% on an annualized basis. Keep in mind that our base management fee of 1.5% is a fixed portion of this ratio. Because we have been managing ourselves like a public company for some time now, we don't expect much in the way of incremental expenses as a result of the offering, and our goal is to get this ratio under 3% over time, even with the existing capital base.

I will now turn the presentation over to Mark.

Thanks, Lisa.

Larry mentioned we have RMBS holdings in a variety of sectors, with larger concentrations in seasoned vintages of subprime, Alt A, and similar sectors. Also, given that we're a PTP, not a REIT, we have the flexibility to opportunistically hedge our interest rate risk and credit risk to maximize long-term risk adjusted returns. Interest rate risk was something we discussed extensively on the IPO roadshow given how low swap rates were at the time. Our view was that the highly diminished cost of protecting the Company from interest rate risk was well worth it, given the potential downside.

During the third quarter in the non-agency mortgage market we favored securities backed by seasoned loans where borrowers still have equity in their homes and may be able to refinance into a low rate agency mortgage. Given the uncertainty about future public policy housing initiatives, we run numerous what-if shocks on the portfolio to manage risk from events such as changes in foreclosure procedures, loan modifications, servicer advance rates, and bankruptcy cram downs. One of the greatest uncertainties in the mortgage markets relates to future loss severities on loans that are currently delinquent in securitizations, as many of these properties have endured long periods of time without any mortgage payments being made and presumably have built up a lot of deferred maintenance and back taxes.

During the quarter, we added to our long PrimeX position. Given our view that PrimeX is relatively low credit risk, pricing levels provide very attractive risk adjusted income streams and are compelling relative to cash securities. We believe that our short ABX positions are on a loss adjusted basis close to flat carry positions, but obviously they reduce a lot of risks, such as housing price and severity risk.

In our non-agency book, the positive carry from our long PrimeX position goes a long way to offset the negative carry from our interest rate hedges, so collectively, and given our views on PrimeX and ABX, we believe we're mitigating a tremendous amount of potential downside risk at a very low cost. When we want to hedge credit risk and future home price risk, we generally use some of the ABX indices. We also use single name CDS on ABS.

While we believe that non-agency MBS remains very attractive relative to other fixed income sectors, some of the concerns about such things as foreclosure processes, robo-signers, improper notarizations, can negatively impact securities underlying the ABX indices. We believe that as states' Attorneys General and others focus on foreclosure practices at the large servicers, the end result will be a lengthier and more expensive foreclosure process. These longer and more costly timelines are a big negative for the ABX tranches we are short.

In our agency whole pool strategy for the quarter, many of our low loan balance pools had substantial price appreciation relative to our hedges. As a result, we have recently shifted our focus to certain other specified pools where the pay ups versus TBAs are much more modest but where we believe the market is undervaluing what we see as extremely favorable prepayment characteristics.

Another noteworthy event of the third quarter was the filing of some lawsuits alleging breaches of reps and warrants and flawed servicing practices in non-agency deals. The potential for successful putback claims for breaches of reps and warranties or flawed servicing practices is a positive for securities holders, but attempting to construct a portfolio to take advantage of these potential cash flows comes with a myriad of other risks. Securities that are most likely to benefit from successful putback claims are also the ones most likely to be disadvantaged by longer foreclosure timelines. We believe that market pricing for highly delinquent securities in the short run will be more impacted by changes in foreclosure timelines and changes in servicer advance rates, as those changes will impact the securities cash flows immediately, while cash flow from successful putbacks is difficult to estimate now and will likely not materialize immediately.

Looking forward, our structure allows us to employ a flexible strategy where we're able to buy what we like and we're able to reorient the portfolio into sectors we want to own. As Larry mentioned, we trade actively to ensure that what we own is exactly what we want to own, we value diversity in the portfolio, and we are continually evaluating which areas of the market have the best value at any given time.

Thank you, and with that I will turn it back over to Larry.

Thanks, Mark. This concludes our prepared remarks.

Before we open up the call for Q&A, I would like to remind everyone that we will be happy to respond to your questions to the extent they are directed to matters related either specifically to Ellington Financial or, more generally, to the mortgage and asset backed marketplace in which it operates. We will not be responding to questions on Ellington's private funds or other activities.

Also, as you may have seen, during the first week of November, we released an estimate of our October month-end book value per share. While we're happy to discuss overall market events and trends and our outlook for the future, we won't be answering any questions concerning Ellington Financial's performance or portfolio composition beyond the period covered by yesterday's earnings release, namely, September 30, 2010. Operator.

Thank you, sir. We will now begin the question and answer session.

(Operator Instructions) One moment, please. And our first question comes from the line of Stephen Laws with Deutsche Bank. Please go ahead.

Great. Good morning. Congratulations on a nice quarter, especially as the first one as a public company.

Thank you.

Wanted to start. You kind of touched on the mortgage foreclosure situation at the end of the prepared remarks, but I wanted to see if maybe you could talk a little more there as far as anything specific you're doing in your portfolio around that, kind of how long do you think it will take this process to play out, and I guess maybe, in general, kind of an overall view of from management on the housing market in the US and where we stand in that today from your eyes?

Sure. Thanks, Stephen. Great question.

We have actually researched these questions quite a bit, including even consulting with some of the leading attorneys that are involved in this space. Probably you saw just yesterday and in the papers today that there is going to be a potential settlement between BofA and some other banks and the Attorneys General. You know, I think that it just shows you, just to sort of take a step back, that when you invest in this market, you have to be mindful that the policymakers, the bank servicers, they're -- unfortunately will almost always put sort of the interest of the homeowners and the interests of the banks and the servicers, unfortunately a lot of times ahead of the bond holders. And this is an example where again, as Mark mentioned, the -- it looks like the foreclosure timeline is just going to get extended even further, potentially.

So, but anyway, let me break up this into sort of two parts because we think of it and everyone sort of sees it in two parts. There is the sort of the foreclosure crisis or the foreclosure fiasco, as some have called it, and then there's the whole putback issue. So, let's start with the foreclosure process and what's going on there with robo-signing and whatnot.

Here the issue is whether the servicer took sort of necessary and proper steps when they seized a property from a defaulted borrower. And here we actually believe, as most servicers have maintained, that these problems have been largely technical and operational, and they will be fixed. But again, the result will be that foreclosure timelines will extend somewhat as a result, and that will increase loan loss severities in the longer term and, as Mark mentioned, that comes from things like property deterioration, it comes from amplified legal costs, and other factors, so what does this affect? This affects mostly those securitizations with a larger proportion of delinquent borrowers, especially the 2006 and 2007 subprime RMBS.

Now, the foreclosure timelines have already extended tremendously in these sectors, so this is an incremental extension, and it is definitely a negative for these sectors, but it is not going to devastate the majority of the non-agency RMBS market, as some people have speculated. There are always going be to isolated incidents and anecdotes that get a lot of press, individual judges and jurisdictions, but overall the impact, we think, will be contained. And as you know, most servicers have in fact announced -- that had announced these foreclosure suspensions reassessed and have resumed processing foreclosures.

They now -- the second concern relates to -- in this whole foreclosure fiasco is potentially more serious, relates to very good -- the very issue of good title itself and legal standing to foreclose. And some have even questioned the legality of the MERS system, which is widely used to track and transfer ownership of mortgage loans. And again, you will see isolated instances, particular judges and jurisdictions, where the standing of mortgage servicers to foreclose will be successfully challenged and has been. And again, this is all going to lead to stalled or suspended foreclosure timelines, and therefore poor performance, especially in the more heavily nonperforming vintages, but we think that fears of a widespread catastrophe here are overstated.

There was a brief scare when certain title insurance companies withdrew for a short time from insuring title in certain circumstances, but this was short-lived, and basically, we think that not only is the law on the side of the servicers, but the degree of chaos that would ensue should good title and legal standing be denied on a large scale would be completely unacceptable, politically and economically.

Now moving on to putbacks, which relates to the obligations of loan originators and securitization sponsors, to repurchase mortgage loans based on reps and warranties that were made at the time of securitization or sale. There are huge stakes here, as you know, and we believe that the banking industry is going to fight putback claims tooth and nail, as they've said. And we think, though, that it is dangerous to extrapolate to the non-agency RMBS market the modest success that the GSEs, Fannie and Freddie, have had in putting back mortgage loans that they purchased or guaranteed, putting them back to the originators.

In fact, given the tremendous uncertainties concerning putbacks and the extremely long timeframe it will probably take for all this to play out--and it's going to take years--we think that there are much more important factors, future housing prices, for example, in how the affected securities are going to perform. And we think it doesn't make sense for the hope of future putbacks to play that much of a role at this point in the investment selection process. Again, as Mark said, keep in mind that the tranches that are going to potentially benefit from this years from now are the same tranches that are probably going to be negatively affected by the extension of foreclosure timelines.

So, if anything ever does come of this, we think that there's going to be plenty of time to pick a better entry point. The RMBS market is notorious for underpricing these kinds of performance kickers, even when they're recognized as fairly probable of kicking in.

And finally, keep in mind that many of the securitization sponsors that made these reps and warranties, including sponsors from a number of the securitizations in the ABX indices, are actually bankrupt--your New Century, Fremont, et cetera--so probably no collecting there. And it is also been suggested that Bank of America could, push come to shove, put its Countrywide subsidiary into bankruptcy, which would obviously create another major obstacle for putback plaintiffs.

Now let me tie this back to Ellington Financial for a moment. I think you can tell that we don't believe that these have much current impact on the long side of our portfolio, especially given our predilection for more seasoned vintages. But on the short side we think, if anything, this is going to benefit us, especially with the extended foreclosure timelines.

Let me just assure you that we continue to be acutely aware of the impact that major regulatory changes, unexpected policy shocks, and all sorts of event risks, servicer advance rates, all of these things that they could have on the various sectors of the non-agency RMBS market in general, and of course, on our particular portfolio. And as Mark alluded to, we have specific analytical tools here to help us quantify this in our portfolio selection of management process. I hope that answers your question.

That does. I really appreciate the color on those two events going on in the sector right now.

I guess to move a little more specific to Ellington, can you talk about -- and I know that you may not go into a ton of color here -- but given the IPO did close about a month ago, can you maybe talk about use of that proceeds to date, kind of any initial investments you guys have made with the new capital?

Yes. We're not going to get into much specifics here, other than say that everything is going as planned. We are putting to money the work at the pace that we would have expected, and no surprises or deviations from what you would have expected, given our September 30 portfolio. Sorry I can't give more.

I understand. Just wanted to see if there is any color there.

And to touch on the dividend a second, I think in the prepared remarks you commented that while you're not tied to REIT rules that determine distribution payouts, you guys have elected to pay out roughly 100% over I guess a period of a year through regular and special dividends. Adjusting for the higher share count for the most recent dividend, it looks like you've got just below $0.55 of undistributed income year-to-date, if you assume the 100% payout. Can you kind of talk about, just in general, the Company's philosophy towards dividends? Going to be roughly a 50% or 60% payout on a quarterly basis with a catch up, special dividend, or how you will you guys look to distribute the income to shareholders over the course of a, say, calendar year?

Okay. Great questions. Let me break it up in two parts.

First of all, why do we have 100% payout? We think that this -- that our Company is a great way for a wide variety of investors who wouldn't otherwise have a way to take advantage of what's going on in this space to take advantage of it. And we realize, especially with yields so low right now, we are investing in yield product, and we think that this is what the marketplace wants, and we're happy to provide it. And we think this is what will drive ultimately shareholder value, so that's why we have the 100% payout.

In terms of how that will sort of run the course over the course of the year, if you look at what we have done historically, it has been a little less than a 50% payout, sort of cumulatively throughout the year, and then with a makeup we would plan for the first quarter of next year. And the idea, of course, is that we want our distributions for shareholders to match their income, so it will be -- so we don't have any plans at this point to deviate from that policy. It is not an official policy. It could be dependent upon sort of the volatilities of the marketplace and what we think the chances are of giving back some of that income, but that is what we have done so far, and right now we have no reasons or intentions to deviate from that trend.

Great. Thanks a lot for taking my questions.

Thank you. And our next question comes from the line of Bose George with KBW. Please go ahead.

Yes. Hi. This is Jade Romani from KBW on for Bose George.

Regarding the rep and warranty debate and your comments, have you guys seen any potential traction in terms of the values of the securities that either you hold or have targeted for purchase? And what do you think the impact on valuation is likely to be?

I will have Rob Kinderman, our Head Trader, answer that.

Hi. So, the robo-signing, and there were a number of these developments were co-mingled in the media and so on. The immediate impact in October on the ABX indices which are most -- which have the highest delinquencies and most exposure, as Mark said, to both the foreclosure delays and potential putback upside, actually traded down on the news. In any event, this creates a lot more uncertainty for the tranches, so we haven't really seen -- one would think that securities with a non-bankrupt entity on the hook would trade if there was significant differentiation that these would trade significantly or somewhat higher than their cash flow value otherwise, relative to securities that don't have a solvent entity on the hook, and we don't really see that at this point. So I don't know that the market is really pricing much of anything in at this point in terms of upside from putbacks.

Okay. Thanks for that. And just more broadly, is it safe to say that you guys aren't expecting any potential traction from the putbacks on the non-agency side?

As Mark and Larry said, it is not -- we think it is certainly possible that there are going to be some successful putbacks, but again to extrapolate from what's been going on, on the agency side, where the banks are beholden to the GSEs for fees from new originations, or really can't deny putback claims in those, the reps are stronger, and there isn't a question of standing and so on. These are much more difficult, and there is really no reason why the banks should try to cooperate. So, we think you will see the banks fight this tooth and nail.

And the trouble is that, as Larry said, if your -- if you change your going forward severity assumption, for example, on '06 subprime, you think it is going to be, severities are going to be 80%, so when a loan is liquidated, you are going to recover $0.20 instead of $0.30 that's going to tend to dominate whatever optimistic putback scenario you might have for the collateral. So it's -- given the long dated nature, given the uncertainty, it is quite difficult to know how one would play this at this point. The trouble is you can't -- if one could just own the loans that had potential putback claims, and buy those loans in the open market, and then pursue putbacks, that might be a quite excellent strategy actually, but these securities come bundled, and one can't segregate the putback upside from all of these other risks.

Great. Thanks. And then, lastly, I just wanted to ask about the jumbo market. If you guys have any thoughts on whether that market is showing signs of life and whether that could continue in 2011. Thanks for taking the questions.

Sure. This is Mark.

I think in regards to new issue jumbo securitizations, you did see one deal that got done earlier in the year underwritten by Citibank, and I think investor appetite is strong, so there are a lot of banks, Larry mentioned before, precluded from buying a lot of the non-agency market because the ratings translate into an unattractive capital charge for them, so there is a lot of triple A money out in the market. And you do see securities that are still rated triple A trade in the secondary market and trade very well. So I think the investor appetite is strong for triple A securitizations, and I think people recognize if you extrapolate from the 2010 book of business, you're seeing coming out of Fannie Mae and Freddie Mac, that the underwriting is extremely high quality. Fannie and Freddie, FICO scores are now in the 760s, LTVs are in the 60s, and against the backdrop of home prices down broadly 30% from the peak, a lot of investors rightly look at the new production and think it's going to have very low levels of loss.

The hold-up on new non-agency jumbo securitizations, I think has been one of getting capital structures out of the rating agencies that allow the economics to work. So I think triple A securities would trade extremely well, say 4% yield. So I think the issue is largely getting the rating agencies to put capital structures on the securities that allow the economics to be at least break even for the underwriters, and for the issuing entities to have clear rules on how much of -- what sort of retention they have to have in the securitization. So if you look at, by analogy the CMBS market, there you are starting to see a little more securitization getting done, and that helps to heal the market, right? When you have an active securitization market, it allows people to refinance, and it winds up lowering people's debt loads. So I think you will see it happen, but I don't think the issue is a ready pool of borrowers--I think that exists--and I don't think the issue is investor appetite. I just think it's more in the hands of the rating agencies and clear guidelines on how much -- what retention issuing entities have to have.

Thanks very much.

You're welcome.

Thank you.

(Operator Instructions) And there appear to be no questions at this time. I would now like to turn the floor back to Larry Penn for closing comments.

All right. Thank you, operator, and thanks, everyone, for joining us this morning, and for the questions. We look forward to doing this again early next year. Happy holidays.

Thank you. This concludes today's Ellington Financial third quarter 2010 financial results conference call. You may now disconnect.