Ellington Financial Inc (EFC) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial first-quarter 2014 financial results conference call. Today's call is being recorded. (Operator Instructions).

It is now my pleasure to turn the floor over to Jason Frank, Secretary. You may begin.

Before we start, I would like to remind everyone that 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 believe, expect, anticipate, estimate, project, plan, continue, intend, should, would, could, goal, objective, will, may, seek, or other similar expressions or their negative forms, or by reference to strategies, plans or intentions.

As described under Item 1A of our annual report on Form 10-K filed on March 14, 2014, 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.

Okay, I have with me today on the call Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer.

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

Thanks, Jason. Once again, it is our pleasure to speak with our shareholders this morning as we release our first-quarter results. As always, we appreciate your taking the time to participate on the call today.

First, a few key highlights. It was another strong quarter for Ellington Financial. Our net income was $0.88 per share and our return of on equity for the quarter was 3.6%. Compounded, that is over 15% annualized. We declared our sixth consecutive regular dividend at $0.77 per share, and we increased book value even after payment of our dividend.

We continue to make a number of strategic and tactical moves that we'll talk about shortly. While the market environment was relatively calm last quarter in comparison to some of the gyrations we saw in 2013, we remained and we remain disciplined about our hedging program, as we think the market may be underestimating the chances of a resumption of volatility.

In the near and medium-term, we not only see our existing portfolio as continuing to generate excellent returns for Ellington Financial, but we expect numerous additional opportunities going forward that we believe we are well positioned to capitalize on over the remainder of the year and beyond.

We will follow the same format as we have on previous calls. First, Lisa will run through our financial results. Then Mark will discuss how the MBS market performed over the course of the quarter, how we positioned our portfolio and what our market outlook is. I will follow with some closing remarks before opening the floor to questions.

As a reminder, we have posted a first-quarter earnings conference call presentation to our website, www.ellingtonfinancial.com. You can find it in three different places: the homepage of the website, the For Our Shareholders page or the Presentations page. Lisa and Mark's prepared remarks will track the presentation. So if you have this presentation in front of you, please turn to page 4 to follow on.

I'm going to turn it over to Lisa now.

Thank you, Larry. Good morning, everyone. As shown on our earnings attribution table on page 4 of the presentation, in the first quarter we earned $22.6 million or $0.88 per share. On a sequential quarter-over-quarter basis, net income was up just a bit under 52%, and the increase came from strong contributions from both our non-agency and agency strategies.

Our non-agency strategy generated gross income of $23.1 million, which was up approximately 13% over the fourth quarter. The vast majority of our non-agency income continues to come from non-agency RMBS securities. But as we have continued to diversify our sources of revenue, we have had meaningful contributions from other areas.

If we think of our gross income as consisting of interest income, net realized gains, and change in net unrealized gains and losses, our non-agency results excluding RMBS securities contributed approximately 18% of our $26.2 million in total gross income for the quarter. In this context our non-agency results, excluding RMBS, include CMBS, distressed small balance commercial mortgage loans, CLOs and NPLs. Last quarter, the contribution to gross revenue from these other non-agency sectors was about 16%.

While we believe there remain ongoing opportunities in non-agency RMBS, over the medium-term we would expect that the relative contribution from these other areas will continue to grow. By the way, the 18% excludes income from our equities strategies, which contributed an additional $2.8 million or $0.11 per share in the quarter. Last year, income from these strategies was relatively small.

On our attribution table they are included as part of the line item labeled net credit hedges and other activities. Active trading of the nonexisting portfolio continued in the first quarter. Sales excluding principal paydowns were 34% of the portfolio in the first quarter. You can see on the attribution table that we monetized gains in the amount of $24.3 million or $0.93 per share.

During the first quarter, book yields on our held portfolio increased 25 basis points to 9.5%, as underlying projected cash flows have continued to improve on non-agency MBS.

Additionally, we have been able to purchase assets at attractive yields and on the whole, our weighted average yield improved to 9.2% -- I'm sorry, 9.24% in the first quarter from 8.97% in the fourth quarter.

Our non-agency holdings declined over the first quarter. At the end of the first quarter, our non-agency portfolio was $638 million compared to $700 million last quarter. You can see this on slide 11 of the presentation.

Our outstanding borrowings and debt to equity ratio also declined. Given the rally in non-agencies, we have elected to have a slightly smaller portfolio for the time being. However, we are ready and able to dial back up as attractive opportunities arise.

In our agency strategy, our gross income was $4.1 million or $0.16 per share in the first quarter, up significantly from the fourth quarter when we recognized $1.9 million or $0.08 per share. Our long portfolio includes investments in agency IOs, which represent about 6% of the portfolio based on value or approximately $41 million at quarter end.

These securities have performed very well recently as a result of the very low level of refinancing activities. Our overall interest income was down slightly in our agency strategy quarter-over-quarter because our average holdings were down during the quarter.

Our average yields were basically flat quarter-over-quarter after taking into account a small positive catch-up adjustment to premium amortization.

On an annualized basis in the first quarter, our core expense ratio increased to 2.8%. This increase was mainly related to increased professional fees incurred in connection with some of our new initiatives. We've seen our repo borrowing costs decline in recent months with respect to both our agency and non-agency repo.

We have found increased competition from both our long-standing and some newer relationships to provide repo financing at attractive rates, and in particular non-agency repo spreads are noticeably tighter. Our weighted average repo borrowings cost at the end of the first quarter fell to 0.36% from 0.40% on our agency borrowings, and to 1.9% from 1.96% on our non-agency borrowings. As our older repo continues to roll off, we would expect to see further decline.

As Larry mentioned, on Tuesday of this week our Board of Directors declared a first-quarter dividend of $0.77 per share. Based on yesterday's closing price of $24.39, our annualized dividend yield equates to 12.6%.

I will now turn the presentation over to Mark.

Thanks, Lisa. Q1 was generally a good quarter for fixed-income strategies. It was actually an exceptionally strong quarter for investors that did not protect themselves from the risk of interest rate increases, but that is not us. We are able to generate over a 15% annualized return on equity even after absorbing costs of around $13 million on our interest rate hedges.

To put this quarter in perspective, it needs to be looked at in the context of how we performed in Q3 and Q4 of last year when the sharp increase in interest rates and extreme interest rate volatility caused problems for so many mortgage REITs. While our strategy to drive returns for shareholders has evolved substantially from where we were last year, our strategy to protect book value has remained the same. And it's a strategy designed to generate returns over market cycles, not just in bull markets.

In order to generate returns, our portfolio has evolved and now involves NPLs, CLOs, small balance commercial loans, CMBS subordinate bonds, and European assets, all newer sources of return and diversification for our shareholders.

With our commitment to try to mitigate the impact of interest rate shift in yields compared to shift on book value remains consistent. Our interest rate hedge, yield curve hedge, lower leverage, actively managed approach to investing is the driver of the consistency of our returns and the consistency of our book value.

Another constant is our commitment to active trading to capitalize on dislocations and opportunities to further enhance returns.

So let's talk about the non-agency portfolio, slide 11. As interest rates stabilized in the fourth quarter, and then with long-term rates dropping in the first quarter, bond outflow stopped and inflow started. In addition, after 2013's tremendous stock market performance, many pension funds became sufficiently close to being fully funded that they have reallocated capital back to fixed income where they are looking mainly for long-duration assets or credit-sensitive assets like non-agency MBS and CMBS.

As a result, spreads tightened in the quarter and some of our holdings reached prices where they no longer offer the best risk-adjusted returns available. We sold these assets, in effect raising capital internally that will be deployed in the future.

One big benefit of our efforts to diversify our strategies is that we now look at many different asset classes for investments: PLOs, NPLs, CMBS, etc. While one sector might be quiet, another one might have tremendous opportunity. Having some dry powder here makes sense as the first-quarter environment for credit assets was a rare combination of stable and declining interest rates, capital allocations from bond funds and pension funds and continued strong home price data.

While new home sales in housing starts data underwhelmed on a seasonally adjusted basis, home prices were stable, and REO and delinquency numbers continued to drop. Generally, a decline in long-term interest rates like what we saw in Q1 is not accompanied by a strong environment for credit. So Q1 was somewhat unique in that regard.

Another big change from the end of last year to Q1 of this year is that the end of last year, investors doubted the Fed's ability to taper their QE purchases without creating substantial volatility. Now investors are pricing assets, assuming the Fed can taper without causing any dislocation at all.

The sharp rise in swaption price of last summer and their subsequent plummet this quarter dramatically shows the change in investor sentiment. So what is the right answer? You know, we don't know. But it seems likely to us that should the economy surprise to the upside and long rate sell-off, we might again see bond fund losses lead to bond fund selling, pressuring prices on credit assets lower, similar to what we saw last summer, though perhaps not as violent.

Wall Street balance sheets continue to contract and liquidity these days is highly correlated to demand. Where there are multiple buyers for an asset class, liquidity is very good. Where there are multiple sellers, liquidity arose and it becomes a buyer's market. We saw that transition occur quickly between May and July of last year.

For all those reasons, we sold some assets in the first quarter and raised some cash. Our non-agency turnover was approximately 34%, but our non-agency portfolio only declined by 9%. So obviously, we are still finding many attractive things to buy.

By late summer, we think that the cumulative effects of the Fed tapering will hit an inflection point that could create some variance in dislocations.

Next, I would like to turn to slide 13 to discuss our credit hedging portfolio. We still see the opportunity in housing as a long credit opportunity, and we still prefer to have our credit protection primarily come in the form of short positions on high-yield corporate bond indices, where ravenous investor demand for high-yield bonds and leverage loans has allowed an issuance boom where borrowers seem to have the upper hand in covenant negotiations with investors. The size of our corporate hedge came down merely as our portfolio shrank.

The agency portfolio. So the agency strategy also had a strong quarter. There we have also diversified our holdings over time, continuing allocations to IOs and agency reverse mortgage pools. Towards the end of last year when agency mortgages were so stressed, we reduced our TBA hedges and that served us well. After nearly 6 months of anticipation about the logistics and consequences of the Federal Reserve's tapering of its QE3 buy program, in the first quarter of the year investors could finally see market reaction to the taper, and the reaction was a big ho-hum.

After the extreme volatility of the second half of 2013 in anticipation of tapering, once tapering was actually upon us, rate movements were subdued, MBS prices marched higher and the reduction in Fed buying wasn't even apparent. MBS prices were supported by reduced interest rate volatility, slow prepayments, and very limited creation of new agency pools.

With that, I will turn the call back to Larry.

Thanks, Mark. As Mark alluded to earlier, we don't generate our returns at Ellington Financial by betting on interest rates. In fact, we aim to be agnostic to rising or falling rates. Interest rate prognostication is not our edge. Our edge is identifying value within the MBS, ABS, and related markets, both absolute value and relative value, both on a sector selection basis and on individual security selection basis.

We accomplish this through a combination of deep experience and serious investments in research and analytics. With credit spreads having tightened recently in RMBS, careful asset selection has become much more important.

Our edge is also enhancing returns through active trading. Turnover in our non-agency portfolio was 34% last quarter. Who else in the space comes close to that? Our edge is focusing on total return and protecting book value, all so as to achieve our objective of capturing upside in good markets while controlling downside in rough markets.

Please turn to page 27 in the presentation and you will see exactly what I mean about performance over market cycles. Both Lisa and Mark touched on diversification, and I would like to amplify a bit on that. As you can tell, at Ellington Financial we have been setting ourselves up for opportunities in a wide variety of markets. If there is a market that comes under pressure and presents a compelling opportunity, we want to be involved so that we can participate.

The European mortgage and asset-backed market is a great example. So far, our investments in that sector have been modest, but we think that there is a significant probability of an exceptional opportunity developing, and we have geared up our efforts there and we are ready to pounce when the time is right.

The CLO market is another great example. As you know, we have been involved in the CLO market for a while now, but we've mostly only seen value in legacy CLOs, so that's where we have been focusing. And that has been a very nice source of returns for us so far.

But thinking bigger, we see the leverage loan market as a possible accident waiting to happen down the road. If underwriting standards in the new issue leveraged loan market continue to degrade and the market ultimately implodes or even just has a significant hiccup, we plan to be there to capitalize.

The distressed small balance commercial loan sector is another example. While our portfolio has been relatively small in this sector, this has been one of Ellington Financial's best strategies recently on a return on asset basis. We were able to find some excellent opportunities last quarter, and we doubled our holdings in this sector.

In one case, we bought a nonperforming commercial loan for about $3.2 million in mid-March, and we have already resolved it on April 30 via a short sale at just over $4 million. That was a 27% profit in less than 50 days. So obviously, that is not typical, but again it shows why we love the small balance nonperforming space in particular. And in general, it shows the value of having eyes and ears in so many different sectors.

Let's move on to residential loans. We continue to gear up our residential mortgage loan operations at Ellington. I realize this hasn't translated into a large pool of investments for Ellington Financial yet, but I can assure you that we are very excited about many different opportunities in the residential loan space. We continue to explore multiple mortgage origination platforms, either for acquisition or joint venture.

On a related note, this past quarter we started to take concrete steps to enter the non-QM, nonprime space. We are exploring entering this space at various points in the supply chain, including even potentially acquiring or starting up a specialty lender.

And of course, in the residential mortgage loan space, there is the residential NPL sector; that is nonperforming residential mortgage loans. While we've still only purchased that one $36 million NPL pool from HUD so far, we are seeing NPL sales accelerate and we expect this to be a nice growth area for us. The next HUD sale is coming later this quarter, and it is expected to be their largest sale yet.

We expect this diversification trend to continue. There are a lot of MBS, ABS-related asset classes that we haven't even begun to scratch the surface on, especially in the asset-backed space. And with CMBS volume, issuance volumes, expected to stay high we hope to continue to find attractive B piece opportunities. And these are core, high-yielding holdings that we expect to benefit from for a long time.

As has been reported, Ellington was actually the third most active institutional investor in this market in the first quarter. We have a great team identifying opportunities in the CMBS markets led by [Leah Wong], formerly of Goldman Sachs and Starwood.

To summarize, we are not only executing our existing strategies, but we are diversifying, and thereby setting the stage to capitalize on the opportunities that we see coming down the road. We are excited about these opportunities that are developing in so many more different markets, and we believe that we are well-positioned for the rest of 2014 and beyond.

This concludes our prepared remarks. Operator?

(Operator Instructions) Steve DeLaney, JMP Securities.

Good morning, everyone, and congratulations on a strong start to 2014.

Morning, Steve.

Thanks. Larry, saw the dividend announcement last night. And last year when the dividend was announced, I recall that there was some statement about that that was a rate that the Board felt we could view as a run rate for the year. And you were true on that, and you said 6 straight times. But as the year went on, there was not really a lot of drama or uncertainty about what your dividend was going to be.

I am just wondering if you could comment on the deliberations when the Board set this first-quarter dividend at $0.77, was that done with the thought that that would be the run rate until such time that market conditions warranted a change, or will it be revisited kind of every quarter?

Right. So what I would say is that obviously if anything big happens, some surprise to the upside or the downside obviously, we would be open to reconsidering that. And when you use the term run rate, I just want to point out that some people might interpret that as meaning just looking at the yield on your assets, leverage looking at your portfolio as static. And we don't look at it that way.

So we see our active trading style as generating returns above and beyond just the run rate on the pure yield on our assets.

Sure.

In fact, we, as you know, we stayed lower leveraged than the rest of the peer group in order to be able to be more nimble and to more actively trade. But that being said, we are looking obviously at our recent performance which has certainly supported that dividend.

We are looking at the opportunity set that we see now. We're looking at the different markets that we are getting into. And management and the Board were comfortable with that level of dividend as being something that was sustainable in terms of the visibility that we have.

That is helpful. Just to clarify, bad choice of word in run rate because when I view it, I am thinking of it as a total return; understanding the active style and that that is certainly not just some implied levered carry. That reflects return from your active trading as well.

Exactly.

So in $0.77 annualized with the latest book value April 30 would imply about a 13% kind of expected total return, as far as the base case.

Wanted to also ask you, we've seen a number of non-bank mortgage investors, mortgage REITs in particular, electing to join the Federal Home Loan Bank system. And while I don't necessarily look at Ellington and see a lot of whole loan activity or necessarily a lot of investment-grade non-agency securities, I am just curious if you see a use for having access to the Home Loan Bank system. And if so, what types of future assets might that be a good fit, a funding fit for?

So we are absolutely looking into that. At this point, it is really more research. We haven't taken any concrete steps. To do that, as you know, it involves creating reinsurance subsidiaries, etc,. and we have been looking at that market as well here at Ellington.

I think for Ellington Financial, it could be a very interesting funding source. I think that it is not really necessarily the kind of asset that you can fund, and it's not even really necessarily the rate. But I think the thing that is very interesting is the term or the length of the financing that you can get. To me, that is the most interesting thing.

So yes, it's something we're looking at. I think that in the near term, I don't think it would confer necessarily a large competitive advantage, considering that financing is really very good right now and we don't see a financing crisis coming around the quarter. But it's absolutely something we are looking at, and I think it is potentially interesting.

Okay. That is good to hear. And then lastly if I may, just one final thing. Just listening to a lot of earnings calls this quarter over the last two weeks, it seems like the hybrid mortgage REITs that are focused really on the residential side and on just legacy RMBS are really kind of struggling with identifying attractive ways to deploy capital.

I was curious how Ellington views sort of as we sit today the relative credit opportunities between -- in the credit world -- between the residential sector and the commercial real estate sector?

Hey, Steve, it's Mark. You know, in the first quarter of this year, we found some very, very attractive tradings in CMBS. And Larry talked about the smaller balance commercial loans. So we found pockets where you could deploy capital that looked to us when we entered them would have a great total return potential. And a lot of them we have monetized, and that was the case.

But the size of the opportunity isn't as big as what it is in the residential market. So I look at the residential market, yes, yields have come in, but pricing dislocations remain as big as they were. And I mentioned it to my prepared comments that there has been a continual decline in the investment banks' willingness and ability to function as market makers in this market, and market makers that keep relative value relationships in check.

I mean they don't really function in that role that allows for people like ourselves to step in and capture some of the bid offer spread that traditionally was the problem with the market makers. So when you look at that in combination with the very still strong base case current yields in nonagency market, that is still a very compelling opportunity and you can put a lot of money to work there.

So, you know, I welcome the diversification we are getting from all these other sectors, and these continued meaningfully to our return this quarter and I think that will continue to be the case. But there is still lots and lots of ways to generate return in the non-agency market.

That is very helpful, Mark, because I was thinking about the opportunity in more of a plain vanilla sort of buy-and-hold strategy, and it does sound like that has tightened to the point where it may be less compelling. But I just assumed that the tightening, if you will, and the reduction of yield might have narrowed some of those relative value trades, but it doesn't sound like that is the case. So I am hearing you say you will still be very active in that space as you see it going forward.

Absolutely.

Okay.

And I think our size is an advantage too there. right? I mean we are not -- by staying nimble, we can really make some very concrete contributions from just a few trades during any given quarter or during the year. So we can afford to -- you know, we shrank the portfolio by what 8% or 9%, the nonagency portfolio.

Yes.

If you do the math and you see, okay, how much does your carrier run rate, if you will, decline just on that basis and you translate that into dollars, it is not that many dollars.

Listen, thank you, guys, all for the comments, and great quarter. Thanks.

Thanks.

Mike Widner, KBW.

Good morning, guys. You know, I was going to ask the same question that Steve just went through with you.

And it's going to be the same answer.

Yes. I mean, I guess just elaborating on it a little bit, basically the thesis was it is easy to ride the wave of sort of credit spread tightening, which has been a trend over the past four years really. And I mean over each of the last two years you are -- last year your total return performance was the best in the sector. The year before it was 45%, so hard to complain about that even if a couple guys squeaked in higher.

But as Steve indicated, we hear from a lot of people and I think what you would agree with is that the credit spreads have tightened up, so that there is not so much an easy wave to ride right now. Now, what you articulated was there is still opportunities because the broker-dealers have sort of stepped out of capitalizing on the bid-ask spread issues.

I guess to what degree -- I mean is that a Dodd-Frank thing? Why is that, and is that sustainable, I guess is the question?

Yes, I think it is, and I think it is sustainable. I think the risk profile of so many banks has gone down considerably. There was just an announcement this morning about one of the big fixed-income areas shrinking, one of the major money center banks, investment banks.

So I think that that is something that we think is going to be here to stay for a while, in terms of -- and there is obviously -- it is a good news/bad news thing, right? The good news is that we have less competition. The bad news is that -- it creates a more volatile market. I mean we enjoy that, though, in general.

Well, yes, that's how you make your money.

Yes, that is part of how we make our money, that's right, by being there basically when there is a dislocation. In the past, the street was always a buffer. So if a customer had something to sell and there was just a limit to how fast prices would drop, because the street would be there. They had a big capacity to increase their inventory, and that is just not as much the case anymore.

So yes, so that's I think definitely a positive for us on balance. But to answer your question, there is no question that the opportunity set was concentrated in the legacy RMBS market, and to some extent it still is for us. But the relative proportions are definitely shifting. And we see that and we recognize that, and that is why we are going to where we think the next opportunities either may be or we feel confident will be.

Great, thanks, that makes sense. I guess a second semi-related question is, when I hear you guys talk about originating, non-QM, non-prime loans, and potentially through your own originations, I start to sort of think about operating companies and actually building out an infrastructure which is potentially very attractive, but at the same time very different than what you're talking about.

I mean, you guys have effectively taken over where the prop desks vanished in capitalizing on -- you're not going to make $50 million in a week or 20%, whatever, return in a week on the kind of stuff you talked about with or 50 days with your commercial loan, once you put it in infrastructure to originate loans.

So I guess I'm sort of wrestling with the tension of are you guys thinking about becoming more of an operating company where the focus is, again, philosophically quite different? Filling a niche where the market isn't in terms of originating loans could be very profitable, but it's also very hard to capitalize on the vol, if you will.

Right, we will see -- I guess what I'd say is we will see where it takes us. So, for example, in the non-QM, nonprime space we can definitely -- we believe we can be a significant player in that space and not necessarily have our own origination capabilities, right?

The originators -- the point of that opportunity, right, is that the big banks do not want to originate/retain that product. And the smaller banks don't have the balance sheet, the small lenders don't have the balance sheet to do that. So that creates the opportunity.

Whether we are actually employing, if you will, the loan officers or whether we are the takeout for the originated loan, in the end it doesn't matter. We are going to do what we need to do to take advantage of that opportunity, but it doesn't necessarily mean creating a huge operating infrastructure.

On the other hand, if that is what it takes we feel that we have a lot of experience here and a lot of expertise in overseeing, and we would bring in the right people to run that kind of operation, or we would acquire one.

So we agree that that would create a whole other set of challenges for us, and it's not something that we would take lightly and it's not something that we have done yet in this particular space. But it is something that we aren't going to shy away from if that is the best way to take advantage of the opportunity.

So I mean -- and it will be my last one -- I mean, philosophically, also on sort of non-QM lending, it sort of surprises me that the CFPD sort of expected it to happen a lot faster than it has and in a lot more scale than it has, which is to say more than zero, and it hasn't. And I think a lot of people looked at it ahead of the time and said, look, it is not going to happen, given what you guys are putting in place.

So, I mean, I guess what I still wrestle with on the non-QM lending front is the legal risks just seem pretty massive, and it hasn't developed for sort of a reason. So I guess my question is, do you spot that there is this sort of massive valuation gap between nothing happening and borrowers are willing to pay much higher amounts, or is it sort of the legal risk is just that no one wants to do the loans because you can't make the loans at a level that makes profit.

So I guess you guys have obviously looked at it a fair amount. I'm wondering what is the hang-up right now, and how do you see you guys capitalizing and being able to fill that gap?

Well, first of all, I think we are still talking about rules that were only recently put in place. So it is -- it's going to happen pretty soon, I think, in this market. I think it is going to -- even though you haven't seen it start yet, I think it is happening now. And we are getting involved, but others as well. So I think you will start to see it.

I think that different companies are going to have a different view on what niche, what parts of the non-QM market they want to be taking risk on and getting involved in. And they will have different risk profiles in terms of legal risk, legal regulatory risk, or investment risk. But I think the market is going to sort itself out.

Now, whether the securitization market is going to be there right away to make the economics of originate, securitize, retain the risk, whether that is going to be there right away, I think that might take a little bit longer. Because as we all know, the residential securitization market is really still taking a long time to come back.

But I think in terms of -- obviously, you can still warehouse the product. And in terms of the numbers that we are looking at, and of course it's a little hypothetical right now because it is difficult to predict exactly what the market will bear, but we think that it looks like it could be a very good business.

Well, I look forward to seeing how the economics of that business shake out. It would be nice to see somebody other than the government kind of involved in the loan market at this point.

Thank you.

(Operator Instructions) Douglas Harter, Credit Suisse.

Thanks. Our questions have been asked and answered.

Great.

There are no further questions at this time. Ladies and gentlemen, this concludes Ellington Financial's first-quarter 2014 financial results conference call. Please disconnect your lines at this time, and have a wonderful day.