Ellington Financial Inc (EFC) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Ellington Financial's third-quarter 2014 financial-results conference call. (operator instructions) It is now my pleasure to turn the floor over to Lindsay Tragler, Investor Relations. You may begin.

Thanks, [Susan]. 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 they are based on Management's beliefs, assumptions, and expectations.

As described under Item 1-A 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. Consequentially, 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 obligations to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

I have on the call with me today Larry Penn, Chief Executive Officer of Ellington 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, Lindsay.

Once again, it's our pleasure to speak with our shareholders this morning and to release our third-quarter results. As always, we appreciate your taking the time to participate on the call today.

First, a few highlights. It was a reasonably good quarter for Ellington Financial. Our net income was $0.46 per share, and both our agency and non-agency strategies made positive contributions to our net income.

We declared our eighth consecutive quarterly dividend at the $0.70 level, which equates to a 13.75% yield based on yesterday's closing price.

We successfully completed a common-share offering in early September and raised net proceeds of $188.2 million. We continue to see many attractive investment opportunities, particularly given our continued diversification, and the common-share offering has enabled us to capitalize on these.

We also closed a new financing facility in the quarter that I'll talk more about later. It's the kind of facility that I think can have a meaningful impact on how we manage our leverage and our liquidity going forward.

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. And I'll follow with some closing remarks before opening the floor for questions.

As a reminder, we have posted a third-quarter earnings conference-call presentation to our website, www.ellingtonfinancial.com. You can find it in three different places -- the home page of the website, the for-our-shareholders page, or the presentations page. Lisa's and Mark's prepared remarks will track the presentation.

So if you have that presentation in front of you, please turn to page 4 to follow along. I'm going to turn it over to Lisa now.

Thank you, Larry, and good morning, everyone.

As shown on our earnings-attribution table on page 4 of the presentation, our third-quarter net income was $12.9 million, or $0.46 per share. In the second quarter, our net income was $20.9 million, or $0.81 per share. Income from both our non-agency and agency strategies declined in the third quarter relative to the second.

Within our non-agency strategy, legacy RMBS continued to be the biggest revenue generator, but profits from these holdings were lower quarter over quarter as the rally in that sector eased.

However, our credit hedges, which are currently mainly in the form of credit-default swaps on high-yield corporate indices, offset some of the declines, as spreads on high-yield corporate credit widened during the quarter.

Our interest-rate hedges also generated net gains. Together, non-agency RMBS, related credit hedges, and interest-rate hedges, generated approximately $11 million, or $0.39 per share, of our total gross income of $15.9 million, or $0.56 per share.

Our commercial strategy, including small-balance distressed commercial loans and our preferred equity investment in a commercial real estate related private partnership, performed well, generating approximately $4.5 million, or $0.16 per share.

Our CLO strategy added another $2.1 million, or $0.08 per share, and our residential nonperforming and sub-performing loans contributed approximately $1.5 million, or $0.05 a share.

Our equity trading strategy had a net loss from the quarter of $2.3 million, or $0.08 a share. However, although the strategy generated a net loss during the third quarter, on a year-to-date basis, its contribution was positive at approximately $1 million, or $0.04 per share, as of quarter end. And following the end of the third quarter, as of today at least -- or yesterday, at least, the third-quarter loss has been offset by net gains.

During the quarter, we purchased our first non-legacy consumer ABS assets. And though they did not contribute significantly to our third-quarter results, as we ramp up we expect this asset class to become a meaningful contributor to earnings. Our agency strategy generated a gross income of $3.8 million, or $0.13 per share.

Agency [pass-throughs] are typically the primary driver of our income in this strategy, but during the quarter, our agency interest-only [securities] also performed well, as prepayment levels remained relatively low.

During the quarter, we had a [comal] net loss for our interest-rate hedges in that strategy, which continued to [principally the end] of short TBAs and interest-rate swaps.

At the end of the third quarter, our long non-agency portfolio grew to $732 million, up from $670 million last quarter. And our agency portfolio reached $1.1 billion, as compared to $962 million as of the end of [June].

For a little more detail on our non-agency portfolio, you can see the portfolio breakdown by sector on page 11 of the presentation; and on page 15, you can see the detail of our agency portfolio.

In September, we completed a follow-on common-share offering and successfully raised new capital. The increases in our non-agency and agency portfolios were related to the deployment of these proceeds. We also paid down a portion of our non-agency [post] debt. As a result of the offering, we expect that our expense ratio could decline approximately 20 basis points on an annualized basis.

Our leverage ratio excluding repo debt on US treasuries was 1.44 to 1 as the end of September. As we continue to purchase assets in some of our newer asset classes, which generally take longer to source and evaluate than MBS securities, our expectation is that our leverage ratio will increase.

Our [cost of] repo in the third quarter was essentially unchanged from the second quarter. In September, we closed a $150-million non-mark-to-market repo facility that provides financing for certain types of non-agency assets, with a term of two years.

We are pleased to have entered into this facility, as it provides added flexibility. We are currently utilizing almost all of the facility, and Larry will elaborate further on the significance of it in a little bit.

I will now turn the presentation over to Mark.

Thanks, Lisa.

During the third quarter, the credit and interest-rate environment was fairly benign. The yield curve continued to flatten in anticipation of a rate hike next year, but interest-rate volatility was low.

Credit spreads were more volatile. High-yield and some CMBX indices traded in a wide range, about 3 1/2 points, as did some of the Fannie Mae and Freddie Mac credit-risk transfer tranches.

Generally speaking, credit spreads widened in the quarter. Our own non-agency RMBS portfolio, the core driver of returns for EFC has almost a decade of seasoning and holds mostly floating-rate or adjustable-rate bonds. So we experienced much lower price volatility.

The macro backdrop that impacted high-yield indices in the stock market was not precipitated by any change in housing or US consumer-credit fundamentals. Broadly speaking, the credit metrics that are most impactful to our portfolio, home-price appreciation, borrower-default rates, and [loss severities], all continued their positive trajectories for the quarter, albeit at a slower pace than last year.

The powerful forces of home-price appreciation and the amortization of seasoned loans have materially decreased the sensitivity of our non-agency portfolio to small changes in home prices.

While we had slightly net reduced our non-agency position through the year, we were able to find selective buying opportunities during the [mini] market meltdown in July and early August, most notably in lower-priced alt-A bonds.

There were no big changes in the composition of our non-agency portfolio during the third quarter, other than the continued measured diversification into some new areas that Larry will discuss. The portfolio grew during the last few weeks of the quarter, as we deployed proceeds from the capital raised.

One of the overarching themes for us is that some of the best investment opportunities now come in sectors where banks are exiting because they don't want to take on the regulations or the asset is too capital-intensive.

The flow of compelling opportunities from banks as they continue to adapt to the new regulatory regime is one of the primary reasons we raised capital during the third quarter.

For example, residential nonperforming loans were 3% of our non-agency portfolio as of September 30. Since September 30, we bought a package of loans from a bank that is liquidating many of its legacy assets. For the package of nonperforming loans and [weak-]performing loans we bought, the bank was a highly motivated seller.

The bank sold the portfolio because these types of loans require a lot of capital reserves under Basel III, and they bring with them a lot of regulatory scrutiny.

This dynamic -- banks selling high-yield assets for noneconomic reasons -- is the type of opportunity we really want to capture. This is just one example of how our view that new regulation would yield strong deal flow is coming to fruition. We've been able to buy from this type of seller in virtually all of the diverse markets that we now target in our non-agency long portfolio.

Our (inaudible) agency portfolio continues to perform well. It generates a lot of interest income. And even though the level of trading activity as measured by portfolio turnover was lower than previous quarters, we had over $6 million in realized gains, both in terms of trading and longer-term holdings. We're essentially getting paid to go where the banks can't and won't go, and we think we'll continue to see a wide range of investment opportunities driven by increased regulation.

In our agency RMBS portfolio, we had a very strong quarter. However, the market as a whole didn't perform well relative to hedges, so most of our return came from actively trading our portfolio and appreciation of pool pay-ups.

Last quarter, I spoke about how cheap prepayment protection has been. During the third quarter, pay-ups increased despite the decline in mortgage bond prices. Prepayments were stable during the quarter, but those quarter-end rates have rallied, and that has caused a spike in the refi index.

It is still unclear whether this is going to materialize into anything because rates are now off their lows, but I think some people were surprised to see how quickly the refi index popped up in response to a small decrease in mortgage rates. All this will create some interesting opportunities if rates stay low.

Additionally, with the Federal Reserve having included their net purchase of mortgages at the end of October, we expect to see improving opportunities in the agency MBS.

Let's look at hedges. Picking the right hedge really requires as much thought and insight as picking the right asset. We spend a lot of time on it and have developed a lot of proprietary models to assist us.

Volatility in hedge prices can also be a great source of trading opportunities and incremental returns for us, and we made $2.7 million in our credit hedges for the third quarter, as hedge gains were a meaningful contributor to our earnings in a relatively uneventful quarter.

A fair amount of macro volatility created some opportunities for us to trade our high-yield hedges. Midway through the quarter, the S&P had a sudden 4% drop; and as I previously mentioned, high-yield indices moved in a wide range of 3 1/2 points. We opportunistically traded our credit hedges, so this sort of price volatility is generally good for us, as it creates trading opportunities.

We closely monitor trends in mortgage credit and home prices. There was no material change in those metrics within the quarter that would cause big changes in our cash-flow expectations on our assets, so this kind of volatility in hedge prices is particularly beneficial.

While we opportunistically generate gains from our hedges, first and foremost our focus here is on preserving book value using both interest rate and credit hedges.

On the interest-rate side, we generally hedge the portfolio with a goal of being close to zero duration. On the credit-hedging side, our PTP structure enables us to use hedging strategies that traditional REITs can't. REIT rules only allow for liability hedging, basically [interest-rate] risk; but the PTP structure gives us the flexibility to hedge assets, such as credit risk and spread risk, as well.

While we generally hedge some of our credit risk, we do leave some of it on where we believe we have an edge or expertise or where we feel we're getting well compensated for the risk. As we saw this quarter, these credit hedges can be a great source of return in addition to stability.

Looking forward, we think the portfolio is well hedged for a potential raise in rates and that we're prepared for volatility. We're also excited about the opportunities from now until year end. It's typically a time when many investors close their books. That's certainly not the case with us. We have capital to deploy, and we plan to use it opportunistically to capitalize on any year-end selling pressures.

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

Thanks, Mark.

As Mark mentioned, we continue to find attractive investments in select pockets of the non-agency RMBS market. Our non-agency RMBS holdings still represent the largest sector allocation in our portfolio, and that will likely be the case for some time. However, we're making excellent progress on diversifying our sources of return and broadening our investment opportunity set.

We've continued to strategically expand into adjacent sectors of structured products. We believe we can leverage our expertise in analytical capabilities to achieve attractive, risk-adjusted returns.

You shouldn't expect to see a dramatic change in the composition of our portfolio in a single quarter, but we're positioning ourselves to access additional sources of return. Our target sectors are ones in which our research and systems, which have distinguished Ellington since day one, give us an advantage and enable us to capitalize in inefficiencies. More specifically, we believe that granular data analytics and loan-level modeling give us competitive advantages in many of these sectors.

Leveraging these core competencies, we've been extremely pleased with our investments in CMBS, including B-pieces, CLOs, distressed small-balance commercial mortgage loans, residential NPLs, and European MBS and ABS.

In fact, Europe is a great example of the kind of adjacency and competitive advantages we're looking for. Loan-level data for UK RMBS has become more and more available. And so we've used our US non-agency models and research and analytical tools to build similar models and research and analytical tools for the UK market.

In other European markets where we see opportunity, such as Spain, the data availability is not as good, but that's okay because the market inefficiencies are that much greater. With the help of these tools, our team in Europe has been ramping up and sourcing a number of opportunities.

The majority of our European holdings are still legacy RMBS, but we're also actively pursuing non-security opportunities, such as distressed loan pools, like that Spanish consumer NPL pool that we bought during the third quarter.

And in the third quarter, European MBS and ABS spreads tightened in anticipation of possible ECB quantitative easing. So we exiting and rotated some positions during the third quarter, which is why it looks a little smaller as a percentage of the portfolio as of September 30.

However, as you know, European banks still have a long way to go to clean up their balance sheets. And when they sell assets, they tend to do it in a dramatic way. So just one large transaction could have a meaningful impact on our portfolio.

Another notable adjacent sector for us is the consumer ABS space. Will Messmore has been leveraging his relationships and has already put money to work for us. He made his first investments during the third quarter, and he has a healthy pipeline of fourth-quarter opportunities shaping up.

In all these markets, we believe that we have the competitive advantages and resources to help us execute. Being active in so many different sectors, we have the ability to be much more opportunistic with our capital application, and that's another reason why we keep our leverage low and our liquidity high.

We don't know which of these areas will be the most fruitful or will present a sudden buying opportunity. But whichever it is, we believe that we'll be ready.

This was one of the main motivating factors for our early September follow-on common-share offering. Just as importantly, we raised the $188 million of net proceeds right around book value [all in], so it was essentially non-dilutive to existing shareholders. And we believe the bigger capital base will lower our expense ratio by 20 basis points.

Finally, the offering has already produced another benefit. Namely, it has improved the liquidity of our stock dramatically. Our average daily trading volume is now returning about 250,000 shares a day, which is more than two and a half times the 95,000-share average daily trading volume for the six months leading up to the offering. And two months after completing the offering, we've deployed the vast majority of the proceeds.

Now I'd like to close with a discussion of the new financing facility that we established in the third quarter.

First, it's a non-agency borrowing facility. It has a minimum two-year term, but after one and a half years it converts into a rolling six-month facility. So we always get at least six months' notice if a lender decides not to roll.

However, the most important feature is that it's a non-mark-to-market facility. So we post the initial haircut when we finance the investment, and we never have to post any additional cash or margin after that, even if the market crashes.

Why is this so significant for us? Well, one of the main reasons that we've kept our leverage low at Ellington Financial is that we are acutely aware of the dangers of overleveraging in a market crisis.

The founders of Ellington have seen firsthand, both on the sales side and at Ellington, what happens in a financial crisis, such as 1994, 1998, and of course, 2008, when lenders don't roll repo financing.

We've witnessed the dangers of leveraging too much, and we've benefitted from the buying opportunities that arise in the wake of these financial crises. We don't want to be selling into these crises when prices drop. We want to be buying.

And because of that, we long ago adopted, and we continue to refine, what we think are robust and well-thought-out liquidity risk-management processes; and that's the main reason why we have kept our leverage low relative to our mortgage REIT peers and kept our liquidity, in the form of cash and/or unencumbered agency pools, high relative to our peers.

So for the portion of our non-agency portfolio that is financed with typical repo with mark-to-market margining, we've typically used at most one full turn of leverage, even though the repo haircut terms would allow two full turns of leverage or more.

But our new non-mark-to-market facility is different. Now, its haircut is comparable to our mark-to-market repo financing alternatives. However, we're paying around 50 to 60 basis points more for the non-mark-to-market feature.

Why is that worth it? Well, here's the math. By not having to worry about margin calls, we freed up all that low-yielding cash that our liquidity management systems don't let us deploy. So on the assets that are in this new facility, we get to use almost a full turn of leverage more. And if you look at our net-interest margin, I'm sure you'd agree that extra [NIM] more than compensates for the slightly higher cost of the facility.

Now re-REMICs are in some ways a similar technology that others have used in the past. But in a re-REMIC, you lock up your assets. You lose the flexibility to actively trade, which as you know, we think is worth a lot. And here, just like in the repo market, with this new facility, as long as the lender okays a substitution, we can substitute collateral freely and trade freely.

As Lisa mentioned, we've already just about filled up this line. At $150 million, this line in and of itself won't be transformational. But we're hopeful that this represents the wave of the future for us. Obviously, our permanent capital and reputation as conservative risk managers plays a big part in our ability to secure financing lines like this one.

This includes our prepared remarks. We're now pleased to take your questions.

The floor is now open for your questions. (operator instructions) Steve Delaney, JMP Securities.

Larry, congratulations on that facility. That is unique and an exciting development.

Thanks, Steve.

Obviously -- look, you guys have been such strong performers and so consistent that any time you get any kind of blip in a quarter, it's bound to raise questions. Nobody doubts the ability of the managers, just wondering what was going on behind the scenes. And Mark, thanks, you did a great job with telling us what was happening within credit.

A couple questions around the change, the move from the $0.80 kind quarter that you've had earlier this year to this $0.46. The offering certainly had to have some impact. And our back of the envelope looks like that may have cost you $0.04 to $0.05 with respect to higher share count for a portion of the quarter. I was curious if you -- internally you guys come up with a number similar to that.

I --

(inaudible) reasonable (inaudible) the proceeds came in the early part of September.

We were just assuming the no material earnings benefit and just looking at the incremental additional shares. It looked about a 10% impact on a per-share. But obviously --.

Yes, that makes sense. I mean, you're talking about a third of quarter and a third of --.

[36%] new shares (multiple speakers) bingo. Exactly. So obviously, the bigger impact was within the portfolio. And just looking at your slide on page 4 -- and I'm trying to frame this, Larry, to focus in on what the big thing was. I'm not trying to be micro or anything. But when we look at the change in 2Q to 3Q on your gains on credit -- both realized and unrealized -- that was like a minus $15 million delta. And your hedges were a plus $6 million delta. Well, we're looking at that and saying, okay, the long side obviously underperformed.

The hedges helped a little bit, but that $9-million swing, that right there is 30-some cents of earnings. And I'm sure there's other things that are a few pennies here and there, but as I'm looking at the quarter I think it just tells me that the credit-spread volatility that we saw in this quarter relative to earlier in the year is really the challenge that you faced. And I guess I'm just asking if that thought process of mine is similar to what you guys were thinking during the quarter and as you looked at the results.

I think there's a few things going on. Because we've actively traded in the past, I think -- and I know you'd agree -- it's tougher to just do the math on us.

And we realize that. And what's going to happen is that in -- there are going to be quarters like this where we trade a little less actively than others. And there can be a lot of reasons for that, both good and bad, and I think that we had a little less trading than we normally do. And I think you saw that in our results.

I don't think that's necessarily indicative of what we're going to see going forward. I just think it's one of those things. So we had summer months -- I mean, there's just a lot of things going on.

So we've always -- our leverage, obviously, has been lower than our peers. If you have ever done the math on our run rate, you'd never, obviously, get close to what our quarter-to-quarter earnings are.

So it's -- we realize that makes us a little bit tougher to model from an analyst's perspective or maybe even an investor's perspective. But you're going to see some quarters where we have fewer trading gains and others where we have more. And it's really impossible going in to predict.

I will tell you -- and I'll let Mark elaborate on this -- with all the different sectors that we're involved and what we're seeing with banks exiting certain markets, we're still very optimistic about our opportunities going forward.

Steve, it's Mark. I would just add that when you get a lot of macro volatility in the market, S&P moving around a lot, credit indices moving around a lot, it slows down a little bit sometimes the volume of cash bonds that trade, [sopusive] bonds that trade. So I think that was part of reason why the turnover was a little bit lower for the quarter.

When I look at all the areas we're in and then all the opportunities in those areas, it looks like a very opportunity-rich environment for us. So I see probably more opportunities for us to pursue now than I did at the start of the year.

Well, that's great timing to have that view with the incremental capital and the credit facility. Switching over to the portfolio -- and one more thing about the quarter. We should be seeing your October 31 book value any day now. Can you make any comments -- the volatility that you had in the third quarter -- it seems like bonds have generally settled into a range here. Would you say the conditions since September 30 are generally more favorable to the way that you would normally operate?

Just from a book-value perspective?

Yes, exactly, or in terms of the price -- the 3.5% price range that you saw in 3Q -- have you seen prices tighter since September?

I think a little bit.

Okay.

Obviously, October started. The first few weeks in October were very volatile, to the downside and the upside. There was --.

I guess you're right. It's only been the last couple weeks only that we've seen some stability in rates. But switching away from that to just more big-picture. One of these and then I'll hop off. I'm looking at incrementally -- it takes a while now to read through, especially on the credit side the different paragraphs of all the new initiatives. And I guess, as I look at this -- I was trying to think through it last night -- okay, what are you guys really trying to do here? And I came up -- you mentioned it in your comments -- I came up with this thought of targeting inefficient markets or less-liquid markets, such that you're now looking at investing in more of an incremental approach rather than some kind of macro theme. And I was curious if you would comment if that really is what you're really trying to focus on.

I guess -- this is Mark -- I think about it as -- one thing for us is, buy assets or focus on businesses that banks want to sell, as opposed to banks want to buy. So that's why we've been thinking a lot about non-QM lending. We are not focused on the jumbo space, where the banks want to be active. We're much more focused on the parts of that market where the banks aren't going to want to go.

So I mentioned we bought this package of nonperforming and weak-performing loans from a bank that was liquidating legacy assets. We did that post quarter-end. That's an example of buying the assets the banks are selling en masse and not trying to focus on the assets that the banks are aggressively looking to buy because their funding is so low.

So I would say that's one thing for us. In terms of liquidity -- we're not targeting things that are less liquid by nature. I think we're trying to target markets where we feel like they're underserved from a capital perspective. So markets where there hasn't been a lot of capital.

So we have liked for a long time the distressed commercial mortgage loans. That has been an underserved -- there hasn't been a lot of capital there. There's been a lot of capital for big trophy properties. That's not what we're interested in. And there's also been capital for smaller properties.

But there hasn't been a lot of capital for distressed loans on smaller properties, and that's been a great niche for us. It's not super-competitive. The returns are great. We can get quick resolutions. We think we have limited downside.

So I would say targeting things that the banks want to sell as opposed to things the banks want to buy and targeting corners of the market where we don't think there's a lot of institutional capital amassed relative to the opportunity.

Very helpful. Thanks, Mark. I appreciate the --.

And I want to add one more thing, which is that we try to be counter-cyclical. So we don't -- here's what we don't want to do. We don't want to say, look, here's our dividend; here's the yield. What does that mean -- how much does that mean we need to leverage, given where assets are trading in the marketplace in order to achieve that yield? That's just not the way we think, and we think that's how you get into trouble.

So if certain types of investors are bidding up the market, we want to be selling into that market, not leverage up more in that market, just to achieve the return that we want.

So we're going to be patient. We're going to make sure that we've got our fingers in a lot of different pies out there, whether it's Europe or non-QM or commercial -- whatever it is, so that when that opportunity arises and when there is a big seller or there is something that happens, we're ready to increase our capital allocation a lot to that sector. So I think discipline is really important in a market like this.

Guys, that's very helpful, appreciate the comments.

(operator instructions) Lucy Webster, Compass Point.

Good morning. It's Jason for Lucy. A question on the agency portfolio. It looks like you added a little bit in the low-FICO specified pool bucket. I'm just looking at the CPR increase and wondering if that was mainly due to the addition or if there's some underlying trends going on here.

Well, this -- this is Mark -- this quarter was the highest quarter for prepayments from a seasonal basis. So there is a big seasonality to prepayments. And between midsummer to the winter, it's typically almost like a doubling peak to trough.

So we've seen -- we haven't seen anything surprising us on the prepayments in our portfolio for the quarter. I would say I think the most interesting thing with prepayments occurred post quarter end when you had that drop in interest rates, lowering of mortgage rates; and you saw a very quick and sudden change in the refi index. It spiked up a lot. And when people drove down on that change in the refi index, it really was coming from a lot of larger-loan-balance loans that are in there.

So that is sort of behind some of the increase in the value of prepayment protection. So I think that was sort of the most interesting thing. But that really occurred at the end of the quarter.

I think what you saw going on in the quarter was primarily just seasonality -- especially when you're at very low levels of prepayments where we are. So prepayments went from basically 5 up to about 8 on a three-month basis. That's just seasonal turnover changes. That has a cyclical pattern throughout the year.

Okay. And in the MHA portfolio, just curious to get your thoughts on how those are positioned, especially if we start to see lower [LLPAs] or we perhaps get some credit widening at the GSEs. Thanks.

I think on the MHA portfolio, we have focused more on the higher LTV sectors, over 100 LTV. We have been very sensitive to modest amounts of home-price appreciation can degrade the quality of prepayment protection for the lower-LTV MHA stories here, like the 80- to 90-story.

I think we need to -- it's hard to make any specific comments on what changes we're going to see out of FHFA. Mel Watt made some comments, but we haven't seen the specifics there about some of this high-LTV program and changes in rep and warrants.

I think it's interesting. I don't think that is going to be very impactful on MHA speeds. I think the MHA speeds are going to be more impacted by the rate of home-price appreciation. But I do think some of the changes you might see out of FHA could -- they could promote some more first-time home-buying, which could be supportive of home prices.

Thank you.

You're welcome.

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