Ellington Financial Inc (EFC) 2014 Q2 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial second-quarter 2014 financial results conference call.

Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. (Operator Instructions).

It is now my pleasure to turn the floor over to [Lindsay Tragler], Vice President of Investor Relations at Ellington Financial. You may begin.

Thank you Jackie. 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 with words such as believe, expect, anticipate, estimate, project, plan, continue, should, would, could, goal, objective, will, may, seek, or similar expressions or their negative forms or reference to strategies, plans or intentions as described under Item 1-A of our annual report on Form 10-Q filed 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 statement whether as a result of new information, future events or otherwise. Okay.

Now, I have with me today on the call Larry Penn, our 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 Lindsey. Once again, it's our pleasure to speak with our shareholders this morning as we release our second-quarter results. As always, we appreciate your taking the time to participate on the call today.

First a few highlights. It was another strong quarter for Ellington Financial. Our net income was $0.81 per share and the return on equity for the quarter was a solid 3.4% or over 14% annualized. Again, we were solidly profitable in both our non-Agency and Agency strategies. We declared our seventh consecutive regular dividend at the $0.77 level and we increased book value even after payment of our dividend.

Many of the market themes of the first quarter repeated themselves in the second quarter but of course we did not just sit idly by. We continue to position ourselves for where we see the next opportunities developing. As these new opportunities develop, we continue to be patient and disciplined on the investment side, maintaining lots of dry powder. And as always, we remain disciplined about hedging.

As you can see from our results, this quarter and last and from the evolving composition of our portfolio and our evolving sources of income, we have been able to continue to generate excellent profitability even while we have been setting the stage for growth in a number of exciting new areas. I will elaborate on our diversification efforts later in the call.

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 second-quarter earnings conference call presentation to our website, www.EllingtonFinancial.com. You can find it in three different places, the home page of our website, or our shareholders page or on 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 along. I'm going to turn it over to Lisa now.

Thanks Larry. Good morning everyone. As shown on our earnings attribution table on Page 4 of the presentation, our second-quarter net income was $20.9 million, or $0.81 per share. The decline from the first quarter, when our net income was $22.6 million or $0.88 per share, was attributable to a relatively smaller contribution from our non-Agency strategy. Compared to last quarter, our non-Agency earnings were lower but our Agency earnings increased. Our expenses, which include base management fees and operating expenses, were essentially flat quarter-over-quarter and we had no incentive fee expense in either period.

Our non-Agency strategy produced gross income of $20.3 million in the second quarter as compared to $23.1 million last quarter. The strong performance of our legacy RMBS investment was once again augmented by contributions from some of the other sectors in which we have recently become more active.

During the quarter, our European non-dollar denominated RMBS, our CMBS, our distressed small balance commercial loans and our residential nonperforming and sub performing loans were all especially notable contributors.

If we think of our gross income as consisting of interest income, net realized gains and change in net unrealized gains and losses, these four areas generated approximately $10 million of our $28.3 million in total gross revenue for the quarter. Of course, the contributions from any of these sectors can vary from quarter to quarter, but thus far we have been very pleased with the success of our diversification efforts.

The $2.8 million quarter-over-quarter decline in our non-Agency gross income was principally driven by two things. First, we had losses on our credit hedges which are largely in the form of short credit default swap positions on high-yield corporate indices. High-yield corporate credit spreads tightened during the quarter, thereby creating losses on our short position. But we believe these instruments provide an effective hedge for our non-Agency holdings over the longer term.

Second, in the second quarter, the contribution from our equity trading strategies was lower. In our equity strategies, we hold long and/or short position in equities or equity swaps. In the first quarter, they had performed exceptionally well, generating gross income of $2.8 million. In the current quarter, our results moderated here received equity strategies generating approximately $300,000.

During the quarter, we turned over approximately 18% of the non-Agency portfolio as measured by sales, excluding pay-downs. We monetized gains in the amount of $12.9 million, or $0.50 per share. While turnover rates will definitely fluctuate from quarter to quarter, active trading is always a key element of our strategy. As a result of lower purchase yields, our overall weighted average yield based on amortized costs dropped to 9.08% in the second quarter, down from 9.24% in the first quarter.

At the end of the second quarter, our long non-Agency portfolio was $670 million, up a little from $661 million last quarter. On Page 11 of the presentation, you can see the portfolio breakdown by sector.

In our Agency strategy, our second-quarter gross income was $5.2 million, or $0.20 per share, up from the first quarter when we earned $4.1 million, or $0.16 per share. Our Agency strategy utilizes less than 20% of our capital but contributes meaningfully to our results.

Our interest income was relatively flat quarter-over-quarter and we turned over approximately 21% of the Agency portfolio, thereby monetizing net realized gains of about $2 million or $0.08 per share.

Notwithstanding some of the ongoing press about a potential decline in the willingness of banks to provide repo financing, we've continued to find financing readily available. Our costs for both non-Agency and Agency repo have declined and we are active with our long-standing counterparties as well as with some new counterparties. Our weighted average repo borrowing costs fell quarter-over-quarter to 0.35% from 0.36% on our Agency borrowings and to 1.89% from 1.9% on our non-Agency borrowings.

In addition, we are putting on more of our non-Agency repo for a six-month term so the weighted average remaining days to maturity increased quarter-over-quarter by 18 days to 100 days. Importantly, we continue to utilize low leverage in the execution of our strategy.

As Larry mentioned, on Tuesday, our board declared a second-quarter dividend of $0.77 per share and based on yesterday's closing price of $22.95, our annualized dividend yield equates to 12.9%.

I will now turn the presentation over to Mark.

Thanks Lisa. In addition to talking about the mortgage market in the second quarter and how we managed the portfolio, I will also discuss what we are seeing so far in the third quarter given that we are over a month into it.

The third quarter so far is shaping up very differently from the second. We took some portfolio actions in the second quarter to help protect us from exactly the kind of moves we are seeing right now in the market. It just seemed to us the market has gotten very complacent about risk in the second quarter, so we were able to buy a lot of cheap protection.

In the non-Agency portfolio, while the market didn't presents us with tremendous entry points to net -- add a lot of investments, it did presents us with lots of opportunities to both upgrade and diversify our portfolio.

As Lisa mentioned, we continue to actively turn the portfolio over. Some of that activity was adding more better quality Alt-A where we continue to see material improvements in borrower default rates, largely in response to better overall economic conditions and continued home price appreciation.

We chose to exit some newer vintage subprime pools where we have grown increasingly concerned that the long liquidation timelines of certain regions will make it virtually impossible for the delinquent housing stock in those vintages to participate at all in the overall home price appreciation.

We also took advantage of the run-up in CMBS price to exit some of our positions at attractive levels and chose to reinvest largely in seasoned CLOs that look particularly attractive relative to our high-yield hedges.

Many of the market trends that were in place in the first quarter carried into the second quarter. Interest rates declined. Credit assets were well bid. Volatility was low and many different types of investors were actively putting cash to work. The almost universally held view that interest rates would rise this year was called into question in the first quarter and soundly rejected by the end of the second quarter. In fact, many market participants are now calling for further declines in yields. Bond funds got major inflows, rate forecasters began to call for a further rally, and credit spreads, particularly in the high-yield market, rallied to all-time heights.

Much of what we accomplished in the quarter, in addition to generating the strong returns we posted, was to position our portfolio to protect itself to the two powerful forces of gradually declining interest rates and gradually tightening credit spreads suddenly reversed.

When shocks occur in the market, prices can move violently and suddenly, and protecting portfolios in the midst of a shock is much more expensive than protecting them before the shock occurs. The second quarter had no shock. It was a wonderful quarter for bonds. Price went up and spreads tightened. Interest rate hedges and credit hedges we had in place weren't used in the quarter, but they were very cheap insurance.

We added to our corporate hedges in the second quarter as you can see on Slide 13. Since the end of the second quarter, we have seen these trends reverse. High-yield bonds are down a few points, CMBS spreads have widened, and Fannie Mae and Freddie Mac risk transfer bonds are as much as 150 basis points wider with some tranches down over 7 points. Our hedges right now are doing their jobs and as we've seen before, they are allowing us to act aggressively while others are playing defense. We could not have predicted that we would get a shock to corporate credit prices, but given the level of complacency in the market in the second quarter and the cheapness of the insurance, it just made a lot more sense for us to have hedges in place than not.

As Lisa mentioned, our efforts to diversify our revenue streams continue to benefit shareholders. These days, we are casting a much wider net than we used in our pursuit of assets to drive returns, and this has been really critical given the amount of liquidity the Fed has injected in the system. By looking at more markets in the US and Europe to find opportunities, we've been able to maintain high current yields without having to add additional leverage or having to go down in the capital structure when we weren't getting paid enough for it.

When we think about the hedges we have in place and the cost of those hedges, we are always debating how many we need, how to keep the costs down, how to use them as a source of trading gains. One thing that we keep in mind is that these markets can move quickly and sometimes the catalyst is hard to see. While our credit hedges didn't do much for us in the second quarter, they have been very valuable post-quarter end.

We have also seen interest rate volatility pick up since quarter end of 2012. Our view is that as the Fed takes fewer treasury Agency bonds out of the market, it may decrease capital available for risk assets which periodically come under pressure, especially if interest rate levels become more volatile.

Our view by the end of the second quarter was that the high-yield credit markets had reached precarious levels. If the economy were to weaken, the loss adjusted yields of high-yield bonds would have to increase if market expectations or defaults would increase into very low levels. Conversely, if the economy were to improve, first interest rates would increase, then bond funds would face redemption, then bonds (inaudible) would pressure high-yield spreads wider. Since quarter end, you've seen exactly this. Even without a large spike in interest rates, wider high-yield credit spreads and big outflows from high-yield funds and high-yield EPS.

We don't see similar kinds of credit bubbles in the non-Agency mortgage markets. Post quarter end, the non-Agency mortgage market has absorbed two multibillion-dollar O&M option from Blackrock Solutions without any weakening in prices. We attribute some of the differences versus high-yield to radically different market technicals. The non-Agency market is shrinking so investors own less and less of it over time as it pays down and investors who want to maintain their current portfolio investments need to buy more every month.

Another factor is that the non-Agency mortgage market is backed by real assets, namely houses. There is a strong correlation between home prices and portions of the CPI index. So, we have constantly constructed a deeply discounted portfolio, so further improvements in home prices should lead to higher prices on our bonds. That offers us some protection if rising interest rates are precipitated by inflation fears. While Non-Agency MBS aren't immune to all shocks of the credit market, they stand on much firmer footing.

Let's move to our Agency strategy. Our Agency strategy performed well during the second quarter. Performance was supported by four strong factors -- low interest rate volatility and generally declining interest rates, low levels of prepayments despite a 25 basis point decline in mortgage rates, low levels of production of Agency mortgages, and continued but gradually declining support from the Fed.

Despite the low levels of prepayments realized in the quarter, the two most recent prepayment reports showed some surprising increase in speeds on some of the newer production cohorts. Payments for higher coupon prepay (technical difficulty) did increase in the quarter and post quarter end, we have continued see prepayment protection increase in value. Our view on this is similar to our view on credit hedges. When you have risk (inaudible) both repayment and credit risk, and when insurance is very inexpensive whether in the form of prepayment protection provided by specified pools or high-yield hedges for credit risk protection, it makes sense to have that protection in place.

Since early July, the fact that net purchases by the Fed have dropped to less than half of what they were at the start of the year is clearly laying on the TBA market. Rolls into the July/August cycle were visually weaker than they were at the start of the second quarter. The weakness in the rolls hurts TBA mortgages, which we are short, and helps those five pools which we are long.

As dealer balance sheets continue to contract and dealer risk appetite continues to weaken, we find the market presenting us with worse liquidity but better trading opportunities. Paradoxically, as time passes and we are getting closer and closer to the Fed's first rate increases, the market seems less and less concerned about it. Both actual and realized volatility are at low levels. We believe our hedging strategy will position us well to take advantage of any pricing dislocations that should occur if the market adjusts to some unforeseen news or flows.

With that, I like to turn the call back over to Larry.

Thanks Mark. As I mentioned earlier, I'd like to elaborate on our diversification efforts. But before I do so, I wanted to follow up briefly on Mark's discussion earlier about our credit hedges and high yield. This is a great example of our discipline and our patience on the investment side. We didn't bail out of these hedges just because they moved against us earlier this year. And our discipline and patience paid off in July when corporate credit spreads finally cracked.

Our thesis, which we believe still holds, is that not only is non-Agency RMBS credit superior to high-yield credit on a fundamental basis, but the technical factors should ultimately prevail there as well. There is barely any supply of non-Agency RMBS, especially compared to the extremely new issued heavy supply of corporate debt, including high-yield bonds and leveraged loans. In fact, with the run off of the legacy product, the supply of non-Agency RMBS is arguably negative. These corporate credit hedges are also a great example of how we are not afraid of negative carry at Ellington Financial.

We are total return oriented. So when we think the risk-reward is in our favor, we are willing to go short CDX or go short loss of TBAs work buy swaptions for that matter.

On last quarter's earnings call, we talked a lot about our ongoing diversification efforts. These efforts are not only continuing, but they are starting to generate significant positive results. Obviously, our portfolio is still dominated by legacy non-Agency RMBS and Agency RMBS, and these sectors continue to generate strong income for us. Nevertheless, I am really pleased with how we planted the seeds for growth over the coming months and years in so many new areas and how many of those seeds are sprouting already.

As Lisa mentioned, a full 35% of our non-Agency gross revenue at $10 million out of $28.3 million were from four areas away from legacy RMBS. Our CLO portfolio now represents over 12% of our non-Agency portfolio, up from 7% in the first quarter and 5% at year-end. We are still focusing on the legacy CLO sector and the flood of new issue CLOs is actually helping us build our portfolio as it helps depress prices for the legacy sectors which have to be sold by dealers and investors to make room for the new issues that seem to be en vogue. Meanwhile, our European MBS/ABS portfolio is already generating meaningful income for us.

We of course also continue to be active in new issue CMBSB pieces. More generally, our CMBS strategy overall has generated fantastic returns for us the first half of the year.

In all of our markets, we continue to focus our efforts on enhancing our sourcing capabilities, and we have had very tangible results here. We have expanded our staff in London, focusing on European MBS/ABS and even CLOs. And on the private transaction side, we just recently closed on a purchase of nonperforming consumer loans from one of the periphery countries at pennies on the dollar or cents on the euro, I suppose.

In the second quarter, we closed on a private transaction involving a nonperforming mortgage on a Parisian office complex. At the very beginning of the third quarter, we closed on a private preferred equity investment in a partnership that will acquire and manage equity and mezzanine investments in multifamily and other housing related properties.

Originating private commercial real estate debt related investments is another area where we hope to see significant growth. And these investments of course are managed by Leo Huang, Ellington's head portfolio manager for commercial real estate debt. We also continue to be pleased with our pipeline of distressed small balance commercial mortgage loans and our sourcing capabilities in that space.

We are seeing the advantages of our size in this environment. We are not a $40 billion mutual fund that can't be bothered with $5 million investments. We love $5 million investments. In many of the markets in which we are active, when you don't have to compete with the behemoths, you can get things a whole lot cheaper. That is especially true in the distressed space, whether it be distressed commercial mortgages, or distressed financial NPLs.

We only bought one NPL pool in the second quarter, but based on our projections, it was literally many hundreds of basis points wider in yield than where the big packages are trading.

We're also seeing attractive opportunities to enter adjacent sectors by leveraging our expertise and strategically expanding our team. In the mortgage originations space where, to our advantage, we have been patient, we have been moving a number of transactions towards completion.

Earlier this year, we hired two very senior and experienced professionals with deep relationships in the mortgage banking space. And they are helping us source our strategic investments in mortgage originators and develop our non-QM mortgage business. I expect to have one or two of these investments closed in the third quarter and three or four in total closed by the end of the year. These will be relatively small investments to start with, but they should have the potential to generate a large pipeline of new investments for us, especially in the non-QM nonprime space.

We've talked in the past about how Dodd-Frank, the Volcker Rule and Basel III are reducing liquidity in many of the sectors that we invest in has created opportunities by reducing competition. Well, there is another way that Dodd-Frank is creating opportunities for us. It's creating opportunities for Ellington to hire incredibly talented portfolio managers who were managing proprietary books at investment banks. We've done this in a number of areas recently.

But perhaps the most notable for Ellington Financial in the second quarter is our recent hire of Will Mesmore who will be focusing on the ABS and consumer loan spaces. Will has well-established relationships with many consumer loan and small business loan originators and long experience investing in these areas. It's an incredibly fragmented space, so we expect to generate a wide variety of investments, including whole pools consumer and small business loans, investments in securitizations all throughout the capital structure, and even strategic investments in the originators themselves, again all throughout the capital structure.

As usual, we won't want to compete with the big money center banks, so we will be venturing where they can't, again, thanks to the new regulatory regime that the banks find themselves in.

As you can tell, we think that each of these areas has the potential not only to generate great returns but to be a source of significant future growth as well. And as you can also tell, we have many, many irons in the fire. These strategies are not your run-of-the-mill strategies. They each have substantial barriers to entry. And to execute these strategies, we are not only drawing on our existing expertise and infrastructure but also bringing in new resources.

We are making progress on additional initiatives that we hope to announce in upcoming quarters. If only a couple of these strategies bear fruit, that would probably be enough to keep EFC humming along for the next few years, but I really think that we will see substantial growth in most, if not just about all, of these areas.

Meanwhile, as you can see from our results, we continue to execute on our older strategies, even as we are setting the stage to capitalize on these other opportunities that we see coming down the road in so many different markets. It's an exciting time for us, and I think it's only going to get more exciting.

This concludes our prepared remarks. Operator?

The floor is now open for questions. (Operator Instructions). Steve Delaney, JMP Securities.

Good morning everyone, and I don't know whether to say congrats on another solid quarter or wow about all the new initiatives that Larry outlined in terms of diversification. But congrats on both fronts.

I really want to focus on this diversification if we can. And I don't know. Obviously when you bring out new products to the market, I'm sure you want to be somewhat reserved in telling the whole world what you are doing. But given the restart of a whole loan -- resi whole loan business with the two guys you hired, could you at least maybe talk about how, mechanically, what you're trying to do there? And it sounds like that you are definitely not trying to be generic, just in terms of a volume play, whether it's prime or conforming, but you're very much focused on this nonconforming market. Can you say anything about where maybe you see, whether it's through a specific product or structure, that you think the market the mortgage market needs? And as you acquire those loans, then what's the pipeline, Larry, between either holding them in whole loan with financing, or do you envision the securitization market eventually being the ultimate source? Sorry for the long question.

I get it. Thanks Steve. So it's going to be tailored to each particular opportunity, so it's not going to be one-size-fits-all. I think in general we would like to make strategic investments in originators -- or first of all, obviously, we believe in the platform and in management, but where we can also add value by providing an outlet for non-QM and help them grow that way.

Right.

So I think that's a common theme to most of these investments that we are looking at. It's tough for these originators to raise capital, so clearly we're going to charge a higher rate for our capital, and it could take the form of subordinated debt, senior debt. It all depends upon where these -- how evolved these companies are. We are obviously building covenants for our investment when we can. We will take equity stakes, and again, in some of the smaller cases, they will be significant equity stakes we think will reward us very nicely down the road as these originators grow with us. So it's all different sizes we're looking at, again, off the beaten track, not just the vanilla Agency conforming mortgages, but looking at helping these originators grow through what we see as the opportunity in the non-QM space.

It sounds like that fits the same theme of operating in smaller markets, more niche markets. And as you expressed, putting $5 million to work, you can get much better return than you can if you're just trying to gain market share.

Yes. And they will be -- so the way we look them I think in a lot of these cases, they'll be cheap options in terms of the profitability of these enterprises themselves but they will also, just as importantly if not probably more importantly, be a pipeline of investments for us going forward.

And then to answer sort of the second half of your question, as we buy these investments, I think initially we'll buy them for cash. I think we will finance them -- the big banks are actually willing to give pretty good terms, financing loans. There are a number of banks that approached us already in terms of financing non-QM production.

And then of course securitization down the road, still too early to tell when that's going to happen. The economics still aren't great, but the important thing for us is to be buying loans that we think makes sense and offer substantial yield premiums over the regular loans that are originated in the marketplace. And the super jumbo, super prime loans that we probably won't be participating in, we are looking definitely for higher-yielding product that, even if we do have to hold it for a while on a leverage basis versus the lines we can get, the ROEs we think will be excellent. So, we're going to be able to be patient there.

We noticed yesterday that Zeis actually bought a platform down in the South. It sounds like what you're trying to do is maybe avoid the licensing headaches and maybe the CFPB risk of letting someone else kind of own the platform and deal with all that and you be a money partner. Am I reading that right?

Yes and no. I think, yes, certainly in terms of it will be an existing originator that already has licenses, maybe in some cases will continue to expand their licenses, and dealing with the regulators will be them. But that being said, in many cases, these stakes will be significant enough, or some of our controls will be significant enough that it may require applications for change of control --

Got it.

-- on the licenses. So when that happens, typically the investment would initially be structured as a debt investment. That would only convert to an equity investment upon successful approval on the change of control.

Got it.

You don't have to have control per se --

Yes.

-- to have to apply for change of control in many jurisdictions, many states.

What do the lawyers call that, piercing the corporate veil or something like that?

No, no, no, let's not go there now.

Okay. And just one last thing, I'll turn it over to somebody else. I think the market -- I was surprised to see this Freddie Mac kind of on the QT bought this $600 million NPL deal last week. And I was just curious if you guys were able to get a look at that. And do you have any expectation that we are going to see a lot more of that paper coming from Freddie and Fannie going forward?

It's Mark. So yes, we did look at that. And Freddie Mac and Fannie Mae, they are the largest holders of NPLs and REO in the country. And if you think about how they're being managed in conservatorship with the portfolio targets have reduced their Agency portfolio and they actually reduced their credit sensitive portfolios. That's the motivation behind a lot of their activity for the last year where they have been aggressive sellers of CMBS. They have been aggressive sellers of non-Agency securities. They have been active issuers of these risk transfer deals, the cast and the stacker deals.

Yes.

And I think this is just another arrow in their quiver to get out of risk assets to some -- this sale. So we looked at it. I guess I said in my prepared comments we have been -- we are a little bit less optimistic than maybe some other market participants about the extent to which properties that have been delinquent for long periods of time are participating in sort of the broad measures of home price appreciation that you might see coming out of Case-Shiller or CoreLogic.

So, I congratulate Freddie Mac on good execution levels, but those assets didn't look to us as levels where they traded at something that would be driving the kind of returns you want to deliver to shareholders. So Larry mentioned we bought a smaller pool of NPLs. That was not nearly as hotly contested as the Freddie Mac portfolio.

Right.

-- at levels we think will drive the kind of return we want to deliver to shareholders. So I think you will see more of that paper coming out of Fannie and Freddie.

It's interesting. Those risk transfer deals have widened substantially since quarter end, yet they still priced another one last week. So, even if you look at -- even at the wider levels, those risk transfer deals I think make a lot of sense for both companies against the backdrop of the much wider GPs we are able to get in the marketplace. So we expect Fannie and Freddie to be sellers of credit assets sort of in multiple -- in all those multiple ways in the market. But yes, I think you'll see more of that from both agencies.

Yes, let me just add to that. So first of all, and Mark, correct me if I'm wrong, but I think the Freddie auction,, which was done through BAML, right?

Yes.

And BAML actually acted as principal in that trade. I think it was -- there were at least two pools that it was divided into and we bid on one of them. The level that it traded at, the pool that we bid on, we were shocked actually how high it traded.

And what happened, so first of all, even though I don't know whether Freddie has announced anything yet -- I don't think Fannie by the way has announced anything at all --

Yes.

-- about its plans to sell NPLs, but based upon this, we are sort of advertised as a trial balloon. With Freddie Mac, I think they're going to come back to market. Now, after they got the execution that they've gotten across BAML who conducted the sale, saw firsthand what those prices were, BAML turned around, from what I understand, and announced it would be selling big pools of NPLs.

Wow.

So I think that this market is getting very heady and you are seeing the supply come out in response to these prices. As Mark mentioned, in many cases, the prices could be even lower and still make sense, so for example in these risk transfer deals, which we haven't liked, as you know --

Right.

-- when you look at the GC's that are being charged, it is still a massive arbitrage for the agencies to be selling these risk transfer deals. They are getting out of their risk at a fraction of where they're putting it on. So this is all going towards where the supply and the volume of supply that we see coming in all sorts of mortgage credit products.

Thanks for the comments guys, and congrats on your credit call going into the third quarter. We will keep an eye out for the progress on diversification as we move towards the end of the year. Thanks.

Jim Young, West Family Investments.

Yes, hi. You mentioned the number of different assets you are involved in and the non-Agency segment on Page 11 of your presentation. But the one area that isn't mentioned are re-performing loans. I was just wondering what your thoughts are on this area.

It's Mark. We had looked at them. And you know, they trade at very high percentages of BPO or broker price opinion, so we see it, in the large part, we see it as sort of just an HPA play. And we think we can, through the discounted non-Agency securities, we think we can just get ourselves into sort of a similar risk position at lower price levels.

So if something changes in that market, we could be an investor. But the way we have analyzed it so far, the combination of either NPLs to smaller packages or discounted non-Agency securities look to us like they gave us similar exposure at more attractive yields. But you know, as Larry mentioned, there's been supply of RPLs. There's been a lot of supply of NPLs. So that price can change quickly, so we are definitely keeping our eye on it.

Thank you.

(Operator Instructions). Mike Widner, KBW.

Good morning guys. I guess two questions. The first one I already know the answer to but I'm going to ask anyway. So, this is right about the time you guys usually give the July 31 book value estimate, but I didn't see it anywhere in here. So should we expect a press release on that soon, or you want to give any sort of comments since you kind of indicated that things have been going well in terms of your strategy since quarter end?

Yes. So, the way it works is I would say almost always we put out that estimate at the close of business on the fifth business day of the month, and that's just based upon really our evaluation process here in getting all the valuations from dealers and pricing services and whatnot and then compiling that. It is a process. So it's sort of random in terms of where that fifth business day falls relative to when we have this earnings call. Sometimes it's the day before; sometimes it's the day after. It's usually pretty close. So in this particular case, with the weekend having fallen in the middle here, we are looking at the seventh of the month, which is tonight. So, that's when we expect to put it out.

All right, so I've got to wait another --

Couple of hours.

-- Couple of hours for that. All right.

So, let me just follow up on one of the things you said. I wanted to make sure I kind of heard you correctly and was just trying to reconcile these things. At some point during your comments, I thought you gave an example of some of the GSE risk-sharing bonds, transactions not trading not so well this quarter, and I thought I heard you say that one of them was down like 7 points, as an example. And then at the same time, you were talking about the NPL deals kind of trading or selling at pretty lofty prices. I'm just sort of trying to reconcile that. It seems that's two different market views on credit it would seem.

Yes. This is Mark. Right, so that Freddie -- I have to think back. That Freddie NPL transaction, I think that might have been awarded last week or the week before. And some of the weakness in those Fannie/Freddie risk transfer trades has really sort of picked up steam this week. I think some of that is correlated to big stock market drops we saw in the last week. And also, in the case of the Fannie/Freddie deals, they had another deal in the market that actually priced yesterday.

So they are very different buyers, too. So one is a bond which is widely traded in a sense of the risk-sharing transactions. These bonds by the way are very leveraged to the assumptions. They are very, very thin slices in the capital structure, so the type of thing where you'll be fine until you're not, and then you actually get wiped out if future defaults and severities end up being higher than you thought. So I think they are much more subject to sentiment. It's a very different buyer base. The NPL, obviously not everybody can buy NPLs. There's only a much smaller group, although much bigger than it used to be, of investment funds and participants that can buy NPLs. And they are much shorter duration trades, right. Most people think of an NPL trade as a couple of years tops on average. So it's a very different buyer base.

If you see, if you think that home prices are going up, you aren't really -- that doesn't necessarily lead to much higher prices in terms of on the risk-sharing transactions which leads to the fact that you will get your principal back so you will be rewarded from that standpoint but you're sort of tapped out. On an NPL trade, you really believe that when you resolve these houses, you'll get much higher prices. Then that's going to accrue to your benefit dollar for dollar. So, they are sort of different trades, different buyer base, different risks.

Yes, that certainly makes sense and I appreciated all that. I guess it seems like to me just more broadly speaking is -- as you guys indicated, there is sort of a voracious appetite out there for risk of any sort to a degree. And we've seen prices kind of rally on just about everything. And it feels like, over the last few weeks, we've seen sort of some fraying around the edges and it's not a wholesale selloff yet but you are seeing pieces of it where the enthusiasm wanes and then you see those pieces fall out, but certainly there still seems to be a strong bid on a lot of stuff out there. I mean, is that fair to say?

Yes, absolutely. But as we know, things are much more volatile and skittish than they used to be. So, if corporate credit starts to crack and there are outflows, -- that's the same buyer base, they are going to dump maybe some of these risk-sharing tranches as well. Nobody can dump NPLs, it just doesn't work that way.

Right.

So, that market, the prices are going to move a little more gradually than in the other markets.

Yep. All right. Well, thanks for the comments and the color, as always guys, and another solid quarter. Congrats.

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