MFA Financial Inc (MFA) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2008 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to our host, Ms. Stephanie Coyle. Please go ahead.

Good morning. The Information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA that reflect management's beliefs, expectations and assumptions as to MFA's future and operations. Statements which are not historical in nature, including those containing words such as believe, expect, anticipate, estimate, plan, continue, intend, should, may, or similar expressions are intended to identify forward-looking statements. All forward-looking statements speak only as of the date on which they are made.

These types of statements are subject to various known and unknown risks, uncertainties, assumptions and other factors, including, but not limited to, those relating to changes in interest rates and the market value of MFA's investment securities, changes in the prepayment rates on the mortgage loans securing MFA's investment securities, MFA's ability to borrow to finance its assets, changes in government regulations affecting MFA'sbusiness, MFA's ability to maintain its qualification as a real estate investment trust for federal income tax purposes, MFA's ability to maintain its exemption from registration under the Investment Company Act of 1940, and risks associated with investing in real estate or related assets including business changes in business conditions and the general economy.

These and other risks, uncertainties, and factors, including those described in MFA's annual report on 10K for the year ended December 31, 2007, and other reports that might have filed from time to time with the Securities and Exchange Commission could cause MFA's actual results, performance and achievements to differ materially from those projected, expressed or implied in any forward-looking statements it makes.

For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in MFA's quarterly report on Form 10Q for for the quarter ended September 30, 2008, and/or the press release announcing MFA's third quarter 2008 financial results.

Thank you for your time. I would now like to turn the call over to Stewart Zimmerman, MFA's Chief Executive Officer.

Good morning and I welcome you to the MFA investment call announcing MFA's third quarter 2008 financial results. Joining me this morning are Bill Gorin, President and Chief Financial Officer, Ron Freydberg, Executive Vice President and Chief Investment Officer, Teresa Covello, Chief Accounting Office, Tim Korth, General Counsel, Craig Knutson, Senior Vice President, and Deborah Yang, Vice President.

Today we reported net income of $48 million, or $0.24 per share of common stock for the third quarter ended September 3, 2008. On October 1st, 2008, we announced our third quarter dividends of $0.22 per share, which was paid on October 31, 2008 to stockholders of record as of October 14th, 2008. As of September 30th, 2008, MFA's book value per share was $5.85. We remain focused on high quality agency mortgage backed securities and our portfolio spread has now trended up for seven consecutive quarters. This upward trend in spreads is due primarily to declines in borrowing costs, as both the fed funds rate and LIBOR have generally trended down over this period. LIBOR, however, has spiked up over the last several months due to well publicized asset liquidity issues affecting both bank lenders and borrowers. We currently anticipate that this sharp increase in LIBOR will have an impact on MFA's borrowing costs in the fourth quarter, resulting in some reduction in spread.

Beyond the fourth quarter, we presently expect MFA's borrowing cost to continue its downward trend in 2009 as coordinated global actions have greatly restored the capital base and reduced funding risks for many of the world's largest financial institutions.

On September 30, 2008, approximately 99% of our assets consisted of mortgage backed securities issued or guaranteed by an agency of the United States government or federally charted corporation, other MBS rated AAA by a national recognized rating agency, MBS related receivables and cash. Due to recent market volatility and credit issues throughout the financial system, we continue to maintain a modest leverage multiple and we currently are not purchasing new assets.

As of September 30th, our debt to equity multiple was 7.2 times, and our liquidity position was $601 million, consisting of $438 million of cash, $163 million of unpledged mortgage backed securities. Our quarterly dividend annualized provided investors with a 15% yield relative to our quarter end book value.

Unprecedented disruptions in the financial markets escalated in the second half of 2008, and investment and commercial bank liquidity and capital have remained stressed. In response, on October 14, 2008, the US Treasury announced its plans to purchase $250 billion of senior preferred shares in qualifying US institutions. Nine major institutions have committed to the program for an amount totaling $125 billion. During this continued period of market dislocation, various government actions have been attempted to address credit and liquidity issues.

The one government action which we believe will eventually have the largest positive impact on MFA occurred on September 7th, 2008 when Fannie Mae and Freddie Mac were placed under conservatorship by the Federal Housing Finance Agency. At this time, the US Treasury agreed to purchase senior preferred stock in Fannie Mae or Freddie Mac, if needed, to a maximum of $100 billion per company to maintain positive net worth. In return, Treasury received warrants to purchase 79.9% of each company. As a result, we believe there is now significantly stronger backing for these guarantors over agency mortgage backed securities and eventually will be positively reflected in the pricing of these securities as liquidity returns to the residential MBS marketplace.

At September 30th, 2008, agency mortgage backed securities and related receivables constituted approximately 93.4% of our assets. AAA rated mortgage backed securities and later receivables were approximately 2%, and cash was approximately 4.1%. The remaining 0.5% of assets consisted primarily of interest rates swaps, real estate securities rated below AAA, and goodwill. The average cost of our MBS portfolio is 101.26% of par at September 30th. Our assets continue to be financed with multiple funding providers for repurchase agreements. And as of September 30th, our portfolio was financed with six repurchase agreement counterparties.

During the third quarter of 2008, our portfolio spread, which was the difference between our interest earning asset portfolio, net yield of 521 and our 3.60 cost of funds, was 161 basis points versus 138 basis points in the second quarter of 2008. During the third quarter, MFA's MBS net spread, which is the difference between our MBS net yields of 530 and cost of funds was 170 basis points versus 151 basis points in the prior quarter. In the third quarter of 2008, our cost for compensation of benefits and other G&A expense was $4.7 million.

Our primary focus is high quality, higher coupon agency hybrid and adjustable rate mortgage backed securities. The MBS in our portfolio are primarily adjustable rate or hybrids, which have an initial fixed interest rate for a specified period of time and thereafter generally reset annually. Assuming a 15% CPR, approximately 23% of the mortgage backed securities in our portfolio are expected to prepay or have interest rates reset for the next 12 months with a total of 79% expected to reset or repay during the next 15 months.

We take into account those coupon resets and expected prepayments of measuring the sensitivity of our MBS portfolio and changing interest rates. And measuring our assets to the pricing gap, we measure the difference between the weighted average months until coupon adjustment or projected prepayment on our MBS portfolio, and the months remaining on our repurchase agreements including the impact of interest rate swap agreements. Assuming a 15% CPR, the weighted average time to repricing or assume prepayment for our MBS portfolio as of September 30th, 2008, was approximately 37 months. And the average term remaining on our repurchase agreements, including the impact of interest rate swap, was approximately 16 months resulting in a repricing gap of 21 months. Repayment speed on our MBS portfolio averages 10.3% CPR during the third quarter of 2008.

I thank you for your interest in MFA and at this time I would like to open the call for questions.

Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from Steve Delaney with JMP Securities. Go ahead, please.

Thank you, good morning everyone. It appears in the P&L, there wasn't any description of the transaction but it looks like you terminated some swaps and took a modest charge to do that. Could you tell us a little bit about the notional amount that you terminated and maybe what you have left, I think it was like $4.2 billion at June. Where were you at September 30 and could you let us know what the average pay rate was at the end of the third quarter?

It wasn't a change of portfolio. One swap, which I believe the notional amount was $27 million was with Lehman Brothers. So it wasn't that we terminated a swap. They're in technical default because they're bankrupt. It's as simple as that. There really wasn't much change to the swap portfolio. c

I see what you're saying. You took a charge related to that swap position vis-a-vis collateral or something. Are you the saying protection?

The swap had a negative value when we terminated it, was part of it, and another part of it is about a couple hundred thousand was they had a little more collateral than they were entitled to which we were credited for. So it was less than $1million and we had a very small exposure at Lehman, and it was one small swap. So no real change to the swap portfolio, Steve. By the way, just so everyone knows, the 10Q will probably be out later today to give you all that kind of detail.

Great. One final thing. It looks like you sold some shares, 8 million to 9 million. And I may have missed this, Bill, did you guys adopt a continuous offering program? I missed it, there was an 8K filing or prospectus or something on that.

We've actually had the CEO program for a long time, but since we've done a series of equity raises we have been locked out of the market forever. That's why you might have forgotten. But we've always had CEO program.

I think, was it with Canner, the one you had?

Yes.

Thanks gentlemen.

Thank you. Our next question comes from Jason Arnold with RBC Capital. Go ahead please.

Good morning, guys. Can you give us your thoughts on leverage going forward. Are you comfortable in the 6.5 7 range, or would you see this coming down? And then perhaps you can give us an update on what you're seeing on the rate and haircut perspective on repo?

In terms of leverage, we always generally been the least levered of the companies in our space. I think you realize that. At the end of the quarter, we were certainly comfortable with where we are. We will continue to maintain relatively modest leverage until things shake out. So yes, the answer is we are comfortable at the levels that we have been at.

And then on the repo side, can you offer us color there?

Sure. I'll actually let -- Ron Freydberg will give you the exact. Maybe I will add to it.

Jason, we saw haircuts creep up a little bit in the third thinker. Our weighted average haircut is between now between 5% and 6%. But haircuts have stabilized over the last four to six weeks. I guess your next question deals with what is going on with rates. LIBOR has come down somewhat significantly since the beginning of, the end of last week. Three month LIBOR is going to be down another 14 basis points tomorrow. We fund ourselves based upon LIBOR so we would anticipate funding in or around the LIBOR area.

Great. Good to hear that they are continuing to improve there. Also I was wondering, lastly, if you could talk a little bit about the factors impacting book value this quarter. I assume some swap mark to market. And then also on the mbs side. Could you break that out for us as well, please?

Yes, this is Bill Gormin. ) We can do it approximately. I believe on the swap side, the change in value is approximately $10 million. While interest rates went down, which would have been a negative, swap spreads widened and it actually was a positive for us. So only $10 million there. The bulk of the change would be on the MBS side. And again, while we gained on interest rates going down, our spreads widened substantially. So it's only $10million on the swap side. That would leave the remainder -- what was our change? Hold on one second. About $100 million.

What are you guys seeing on the spread side now? Are you starting to see some improvement there?

With $100 million on the agency side and approximately $50 million on the AAA side. So there's three components, swap, agency and AAA.

Just from the spread perspective, are you starting to see things tighten up on the hybrids, or maybe you can give us color there.

What we've seen in terms of what's available in the market today, if you looked at pretty much a coupon, they're probably anywhere from 250 to 257 basis points.

But there is some timing which began last week. Which is good for our portfolio.

Okay. Thank you guys so much.

Our next question comes from Mike Widner with Stifel Nicolaus.

Good morning, guys, congrats on a solid quarter. Just wanted to follow up on the book value question. You had indicated the agency MBS down about $100 million. On a percentage basis that seems to be down a bit more than some of your peers had marked. I know there is a lot of volatility at the end of the quarter. We are wondering if you could give any color on how that has changed since the end of the quarter. What I'm getting at is just trying to figure out if there is a very conservative mark at the end of the quarter or where we stand from that standpoint.

We use a third party pricing service, and I can't tell you what everybody else marks, so it's not a question of being conservative, it's a question of being accurate in using independent third party which we think is the best source available.

Okay. Any comments on how that has done since the end of the quarter. Mbs seems to continued to price down since the end of the quarter. MBS, in general, seems to have continued to price down since the end of the quarter. So just wondering if you observed the same thing.

There is definitely volatility day-to-day. And as I mentioned, there was some tightening beginning last week. It would appear to us that almost the best assets, the shortest assets probably are being impacted the most because that's where people are selling because it's the only place they can sell. It changes day-to-day. You have independent views unto the agency, hybrid markets. We own agency hybrids. Nothing that would contrast our change of values versus everyone else's. These are agency, Fannie and Freddie hybrids.

But the mark to market, as you do know, and you mentioned it, it's very, very volatile. But we have seen a little bit of a stiffening up of the market in the last three to four trading days.

Great, thanks. Just to touch on another question I think that Steve mentioned at the beginning, you mentioned being comfortable with the leverage here at about I 7.2. That is a bit up from where you finished the last couple of quarters. Just wondering if being higher than the upper 6s is a function of the volatile marks, or if you guys are consciously shooting for something in the low 7 range as opposed to high 6 range.

It has nothing to do with the high 6s or low 7s. It's a mark to market, it's a snapshot in time. And with the market being as volatile as it's been, that's where it came in. It's really more a function of simply market price at a moment in time.

So you guys are comfortable, if I'm reading between the lines, comfortable with the portfolio size which didn't change a whole lot. And the leverages floating around a little bit just due to volatility.

That's correct.

Great, thanks a lot, appreciate it, guys. Congrats on a solid quarter.

Our next question comes from Eric Gordon with (inaudible). Go ahead please.

Two things on capital. One, you gave a number in your release for available cash, about $600 million. Can I just literally take your shareholders equity minus that and say the rest is effectively your collateral, your haircut?

That sounds ballpark right.

Two, on these marks, obviously with a negative mark, you had an increase in the spread, presumably what the market, the market value doesn't affect your income but theoretically the negative mark does require you to hold more capital.

That's true, that's absolutely correct.

The last thing is on your CPR assumption. I would think at least right now very few, if any, of your borrowers could refinance, or if they hit the adjustable rate period it would probably make more sense to stick with your loan as opposed to swapping in to a new one. Does that make sense? I don't know if you could give a feel, you talked about a 15% CPR assumption, where you are today.

As it says in the release, I think for the last quarter we were around 10, it was about a 10 CPR. We tried to use a convention that people can identify with. So 15 CPR is what we used over time. But we show you where it's been. So, again, If the CPR was 20, I would have told you 20, but it was about, I think it was 10.3 for the quarter.

Presumably essentially none of your existing borrowers, it would make sense for them to refi or to swap.

As you know it's tough to refi, and you have to write a check for $50,000 because your value went down. I think what you're suggesting is that, are we going to continue to be in probably a low prepay environment. The answer is yes.

Thank you.

Our next question comes from Jim Ackor with Sterne Agee. Go ahead please.

Good morning, guys. We heard on a few other conference calls, some of the people in this industry fleshing out a little bit some of the advancements or efforts being made to diversify away from the primary dealers as the sole source of repo. And we've heard a few discussions about going direct to sources of cash using smaller broker dealers that are coming into the market with more competitive pricing. Wondering if you might be able to discuss generically or in global terms what efforts you guys are making to diversify sources of financing.

I can speak generically. We have seen one or two opportunities away from let's call it standard or more normalized repo, and again we are pursuing that and have had a number of discussions. That's the most I can really say about it. I can't give you the kind of detail that you might like.

Maybe you could just comment, then, do you over the next, three, six, maybe 12 months, there will be more detail, not just from MFA, but coming out of the industry as a whole? More progress with regard to finding sources of financing outside the primary dealer arena?

You said you heard that in some of the other calls. We are also letting you know we've seen something similar,so my guess that over the next number of quarters that you probably will be seeing something.

Thanks a lot.

Our next question comes from Bose George with KBW. Go ahead, please

Good morning. Couple of things. One, could I get your portfolio, the net duration number for the quarter?

Give us second, Bose .

I will just ask my second question as well. On your, basically on the spread you've guided to 4Q being somewhat weaker with the spike in LIBOR, but LIBOR has obviously come down pretty hard. It looks like it's continuing to come down. Is it possible you could turn out to be too cautious if we have LIBOR where it is or coming down even further this quarter?

Bill and Ron will respond to your first question second. I will do the second question first. In terms of being too cautious, the answer is no. We are not being too cautious. As you know, with the volatility -- and, again, I have been in this business since the late '60s, and we've never quite seen anything like this. To be too cautious I don't think that's something anybody is going to throw any stones at us about. We are going to continue to be cautious until whatever the new normal is. I don't think the new normal is going to be where we were two or three years ago. So, as things become more normalized, we will take another look at the marketplace. But I don't think we'll be criticized for being too cautious.

The effective duration was 1.7. In terms of conservative, look, we are just saying LIBOR is up. And it is already going to be up. October is already baked, right? And to the extent we did funding in October, it's going to impact November's LIBOR cost. In addition, as we all know, the last week of December tends to see a LIBOR spike, too.

Thank you very much.

I think your point is well taken, though. We do have some breathing room now with LIBOR spiking down, if you will, as much as it has. As we continue to roll repo, obviously we will get the benefit of that.

And that's why we are very optimistic about 2009.

Great, thanks.

Our next question comes from Matthew Howlett from Fox-Pitt Kelton. Go ahead please.

Good morning, guys, thanks for taking my question. On the duration gap, or the repricing gap, as you guys describe it, where do you see that going? It's been widening out the past few quarters. I know you're not going to purchase any new assets this quarter. Where would you like to keep that going in to '09.

We did widen it a bit, you're right, and it ended up working out our way very well If you remember last summer, people were talking about fed tightening. So it actually has worked our way to the extend, a little bit. I don't see it changing that much going forward. We did extend it somewhat but that's worked out very well.

But historically it's on the high end of where you guys have been historically.

That's not exactly true. What's happened is we used to look at it with a lot higher prepayment assumption. So it's not that the assets and liabilities have really changed that much. It's that, as prepays have trended down more than we would have forecasted a year ago, we've lowered the estimated speed. If we up that 15 speed to 25, you would see a mismatch closer to what you've historically seen. If you look back, what you'l see is we use a higher prepay assumption.

But we used to use the 25 as a standard. And what we've tried to do is continually look at the marketplace and use something that's more realistic to the market that we are in.

Got you. And then the second question. Just on -- you said the new spread on acquisitions is, I think you said 250 to 275. I know it's hard to look at that going forward but do you think these prices are going to be around, these types of spreads are going to be available in 09? I think you said you thought the biggest positive element was Fannie and Freddie, debt essentially being guaranteed by the government. Does this all go away when the dealer haircuts come down, and Fannie and Freddie are buying again, the Treasury's buying again? Or do you think that type of spread is going to be around for most of '09 given the US government's going to be issuing treasuries to fund the purchase of MBS and that's to keep the curve steep? It doesn't look like the banks are going to be all that active in '09. Any type of guidance you can give us on what you may see in '09?

My own thought is that you're going to see, we are going to continue to have a steep yield curve for a significant period of time. We are going to continue to see terrific opportunities when we buy assets. In terms of, what I'm interpreting you to say is are we going to get back to what we used to consider to be normal and my best guess is no we're not, we're not going to get back to that.

So the 80, 90 or whatever is normalized, we're far from seeing that again.

I don't think so because you're in a different marketplace, this is a different time, and it's really a very very different world. I think you're going to continue to see larger spreads available to us. We will take advantage of them when it's appropriate.

The other important thing is, I don't think we are going too far out on a limb to say we expect the yield curve to be steep and not inverted. And historically that has really helped our spreads.

Right, exactly. Thank you.

Our next question comes from Omotayo Okusanya from UBS.

Good morning. Two quick questions. One, could you please tell us what spreads were at the end of third quarter of ' 08. And, two, if you were to originate or buy MBS right now, at about what spread would you be able to put them onto the books?

Let's do the second part first and turn it over to Ron.

A par price coupon, par price 5.1 right now, is probably somewhere between 5.5 and 5.75, across 5 5/8ths. If I were to go and get three month funding today, it's at about 2.85, so you can subtract the two and you're in the 2.50ish range for new assets.

In terms of your other question, and this will help illustrate our point to the fourth quarter, basically during the whole quarter, the yield on assets remained fairly constant. What you did see was while our average funding cost for the quarter was 3.60 for the whole quarter, that did trend up. In September it was as high as 3.70. So the spreads were actually, in the month of September, 1.54. That's what we are trying to point out to you. LIBOR started moving up midway through September. It impacted our spreads in September. It'll impact a little bit more in October and November. So we do know that, and that's what we want to make clear to you.

Got it. Thanks, gentlemen. Good quarter.

(OPERATOR INSTRUCTIONS0 Our next question comes from Richard Krebs. Go ahead, please.

Hi, guys, thanks again for another great quarter.

Thank you, Richard.

I have a couple quick questions. One is regarding the income that's actually been derived this year versus the payout. Can you tell me year to date where we stand, income versus outgo? In dividends?

What drives our dividend is our taxable income, not our GAAP income. They are almost matched. They're almost matched dollar per dollar right now So we're distributing what we've earned.

No pennies at the moment then. One last question, if I may. During the last quarter, you made a projection of a spread provided the fed didn't raise interest rates. They're coming in somewhere around 1.55. You did beat that, which is kind of nice, but is there any way you can give some kind of number to dummies like me, like the 1.55, assuming the feds didn't raise rates again during this next quarter, what the spread might actually arrive at.

I don't think the fed is going to be raising rates.

I agree with that.

This quarter. I'm probably not going out too much. I'm just spitballing here for you, but I don't think that's going to be a problem. In terms of where the spread will be for the fourth quarter, again as I certainly know and we discussed on the call, that LIBOR has spiked up earlier, and that, , gain we have to fund ourselves. So that LIBOR spike does affect you. LIBOR now is down somewhat precipitously and as we continue to roll our repo we'll be able to take advantage of that, meaning later in the quarter, that could be latter part of November going into December, we will take advantage of it. So it's really difficult to pinpoint the number for you. It really just depends. If LIBOR goes down another 35 or 40 basis points that will help us significantly. I just don't know how that's going to work out. I'm sorry I can't give you exactly what you're looking

That's a fair answer. One last question so I really understand. Should I be looking at the three month LIBOR rate as the closest thing to what your funding cost is?

Somewhere between one month and three month.

Can you tell me what the current one month and three month is, please?

Sure. One month LIBOR this morning is, I'm going to round out the number, it's 2.36. 2.86 on three month.

And, again, that's going to be going down tomorrow, correct?

That's what they are forecasting.

Thank you for an excellent quarter, appreciate your conservative approach to this business.

Our next question comes from Robert Schwartzberg with Compass Point.

Good morning. I have two questions. One, what are some of the factors causing the spread widening, which caused the decrease in the book value besides overall market sentiment? Are there portfolios on the market causing that? Along with that question, what would cause a permanent impairment, or when would you have to recognize that? And then last question would be, what would be some of the factors you would be looking for to increase your leverage to more normalized levels?

Let's start with the third one first. In terms of going back to -- historically we've been anywhere from 8 to 10 times levered. And you have to go back to a time where funding and the idea of a more normalized market is prevalent. You're not there yet. Things are certainly better today than they were a week ago today, as an example. But you need to see a time of some type of normalization. So I think it's very very important for us to continue to be prudent, . to have a little more conservative leverage ratio. Once we see this more of a normalized market, that's fine. Then we will go back to a more normalized time. However, remember, you can be a lot low levered at 250 to 275 basis points than being 8 to 10 times levered at 50 basis points. It really just depends on the market and whatever normalization might or might not

In terms of -- we'll keep working reverse order -- question two was impairment. Obviously there is no credit issues there. If anything, Fannie and Freddie have a better credit, so that certainly doesn't cause any impairment in our mind, as we have the same projected cash flows. We have the intent and the ability to hold these assets, as proven by the fact that in March we decided to take down leverage. We got on this phone and told you. We have not sold an asset since. So we are clearly showing the intent and the ability to hold these assets. So hopefully that answers questions two.

Let me just add to that, if I might. Remember, in terms of these assets, these are all agency assets, or I think have paid back to par. The agencies get paid back to par. Again, that's a very very significant part of our portfolio. So we are going to get back $1 on the dollar.

In terms of question one, question one was wide spreads. Was that your question?

I'm just asking are there other factors besides overall sentiment? In other words, are there actual firms similar to yourself, private or public, that are having margin calls or being forced to downsize? I'm looking for what's the light at the the end of this tunnel when spreads might narrow again.

We think we are getting very close to light at the end of the tunnel. Who would have thought after September 7th when Fannie and Freddie were put into conservatorship where the Treasury offered them up to $100 billion each to make sure the network stayed positive, and there's probably more there, that spreads would have tightened, right? So why is it going the opposite why? We have no perfect answer but a couple of potential answers.

One, ignoring the sellers, let's look at the buyers. I think if you read between the lines of what FHFA said last week and what Bernanke said last week, what does the government guarantee mean. It's an effective guarantee but it's still not explicit. On the other hand, you appear to be getting explicit government guarantees on bank debt. To us, the foreign investors are comparing the wording very carefully as to what the guarantees are. That's what Bernanke was getting to last week, is maybe the government needs to be a little more explicit.

I think the foreign investors are differentiating between the effective guarantee, which we're all comfortable with, versus the explicit guarantee which is going to be on bank paper going forward. So there is that competition of this quasi government guarantee for a very wide range of paper right now. I think that's the big driver in terms of buyers.

In terms of selling, we would guess there is some distressed selling. We see reduced bid lists and spreads are very wide in the bid list. That's what is driving our marks. We think people are selling what they think they'd have the smallest loss on. That's why you actually see greater markdowns on your 1-1s versus your 7- 1s and 10- 1s. People are selling the shortest, most liquid paper.

I don't think we or our competitors are really being faced by a lot of margin calls because we all came through this with relatively low leverage. I can't speak as much to the hedge funds though. Does that answer your question?

Very helpful, thank you.

Thank you. Gentlemen, we have no further questions at this time. I would like to turn the conference back over to management for closing statements.

Just want to say thank you very much for your continued interest in MFA and we look forward to speaking with you next quarter. Thank you and good-bye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using AT&T teleconference. You may now disconnect.