MFA Financial Inc (MFA) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the MFA Mortgage Investments fourth-quarter 2009 earnings conference call. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to turn the call over to 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 Financial Inc. that reflect management's beliefs, expectations, and assumptions as to MFA's future performance and operations. When used, 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; implementation of or changes in government regulations or programs affecting MFA's business; 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-related assets, including changes in business conditions and the general economy.

These and other risks, uncertainties, and factors, including those described in MFA's annual report on Form 10-K for the year ended December 31, 2009, and other reports that it may file 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 annual report on Form 10-K for the year ended December 31, 2009, and/or the press release announcing MFA's fourth-quarter 2009 financial results.

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

Thank you and good morning, everybody, and welcome to MFA's fourth-quarter 2009 earnings call. With me this morning are Bill Gorin, President and CFO; Ron Freydberg, Executive Vice President; Craig Knutson, Executive Vice President; Tim Korth, General Counsel; Teresa Covello, Senior Vice President and Chief Accounting Officer; and Kathleen Hanrahan, Senior Vice President.

With my opening remarks, I would like to go over certain data highlights as they pertain to our fourth-quarter 2009 results. Net income, $76.5 million, $0.27 per share, with dividend of $0.27 per share. Book value on December 31 of $7.40; as of 1-31-10, $7.61. Return on equity, 13.9%.

Our leverage overall debt to equity was 3.3 times. Liquidity was $763 million in cash, unpledged agency securities, and excess collateral. Portfolio spread, which is interest-earning assets minus our cost of funds, of 273 basis points. MBS net spread, which is our mortgage-backed securities and yield minus our cost of funds, 307 basis points. Our average cost base of [these] agency securities of 101.3% of par.

Our repricing gap, assuming a 15% CPR of 16 months; our CPR for the quarter of 19; and our average purchase price of non-agency securities of 63.1% of par.

At this time, what I'd like to do with some of the changes in the marketplace that we've about over the last 24 hours, I'll turn it over to Bill Gorin who can give you basically a market update.

Thanks, Stewart. As most of you know, yesterday, in the morning, Freddie announced a buyout plan of loans which are 120-plus days delinquent, and those purchases will be reflected in the March factors which would be released the fifth business day of March.

Later in the afternoon, Fannie Mae announced that they, too, will be buying out mortgages underlying guaranteed mortgage-backed securities that are 120-plus days delinquent, and that will occur over a couple of months and that will be -- that will impact the factors released on the fifth business day of April, and it could continue for May and June.

Now, for a long time now, it's been clear that there's been high delinquencies in the GSE guaranteed mortgage-backed securities pools, and that we've been concerned about default-driven pre-pays going back a year ago. So the actions we've taken as a result are, one, we have been preparing for higher pre-pays. We've not purchased, and I might sound like a broken clock repeating myself, but it's been probably in excess of 18 months, we've not purchased any agency mortgage-backed securities.

As a result, we've kept our premiums down. Our average purchase premium on our agency portfolio is 1.3%. Importantly, while our agency portfolio at one time had been in excess of $10 billion, for the last six months we publicly have been saying that towards the end of the first quarter, towards the end of March, this portfolio should be down to about $7 billion. As a result, we're less impacted by changes in pre-pay speeds.

What impacts do we see? Clearly, CPRs will be elevated for the months of March, April, and May. Probably CPRs might be lower going forward to the extent we cleared out a large part of these delinquencies. So, there should be less delinquency-driven pre-pays over the life of these assets. So, over the life of the assets, the pre-pay rate really hasn't changed. We're just getting a lot of this higher prepayment rate over the next couple of months.

So, you'll see the impact -- maybe you'll see some of the impact in the first quarter, but probably more so in the second quarter. That -- hopefully, you've seen this in the newspapers. It's something we've prepared for.

We did not think it would be -- Freddie Mac would do all their delinquency-driven buyouts in one month. So that was a surprise to us. But it just concentrates these prepayments, so it will be higher for a couple of months or three months, and then should go back to a lower path.

This was part of our strategy of diversifying. Non-agencies do not have the same pre-pay characteristics. There, we've purchased at large discounts, and an increase in pre-pays actually helps your earnings and book value on the non-agency side.

So with that, I think Stewart and I and the management of MFA are open for any questions you might have.

Right. The only thing I would like to add to that, and as Bill mentioned relative to both Freddie Mac and Fannie Mae, at the end of December we had about $550 million of Freddie, about $6.6 billion of Fannie. So, that's the breakdown in the K, which should be filed a little bit later today. You'll be able to find that. Having said that, love to have the call open for questions, please.

(Operator Instructions). Bose George, Keefe, Bruyette & Woods.

Congratulations on a nice quarter. First question I had was just on your cash. You guys clearly have significant dry powder here. Is your strategy still to -- you know, pay down agencies to buy non-agencies, and then see what happens after the Fed is done on the agency side? I'm just curious how you're thinking about that.

We wanted to have, and as Bill said, we've both said this ad nauseum, we wanted to have very, very nice cash position, which we have built up. And again, there is no magic formula to say that it should be agencies or not agencies.

In retrospect, our nonagency strategy has turned out to be a very positive one for us and for our shareholders. Having said that, we're going to see how the agency market kind of shakes out, and if there is some value in the agency step through, that certainly gives us the optionality of going in that direction, so there is not a bogey that we have to hit on one side or the other.

Then I just wanted to touch on re-REMICs, just what your thoughts are there, how we could see that shaping out in terms of your nonagency portfolio.

Let's turn it over to Craig Knutson, who can give you both chapter and verse.

We continue to look at the re-REMIC market. I think when we were first approached about a resecuritization almost a year ago, and the AAA level would've been about 11%, so we've seen the executions continue to improve. We've seen structural nuances that have improved executions. So we continue to look at it.

I think the other thing to note is that we were not capital constrained in our efforts to buy non-agencies. So, like I say, we continue to look at it, the executions continue to get better, and we spend quite a bit of amount of time looking at these resecuritizations.

Okay, so that's still a possibility at some point for you guys?

Absolutely.

Great. Thanks.

Douglas Harter, Credit Suisse.

I was wondering if you could talk about sort of the net portfolio of accretion/amortization for the quarter?

Sure, hang on one second. So the premium amortization -- so you want -- so the premium amortization on the agencies and the accretion on the non-agencies.

Correct.

Give us one moment and we'll have that for you.

Absolutely. And I guess while you're looking for that, a bigger-picture question. What are your current expectations as to what happens with April 1 when the Fed is no longer in there buying agency MBS as far as spreads?

Again, I'm going to make the assumption that it's already, to a certain degree, already priced into the marketplace. So, we'll see really what happens on the agency side, but again, one of the reasons we have created as much kind of dry powder as we have is, one, to meet kind of the unknowns in the marketplace and the other side is to be able to take advantage, potentially, of agency opportunities. So, again, it's kind of a reiteration of what I said a moment ago, but it's just really where the opportunity is.

Andrew Wessel, JPMorgan.

Andrew Wessel, JPMorgan. I think most of my questions have been answered, but just in terms of the nonagency market, you've been buying senior cash flows with bonds. Is there -- with spreads coming in and seeming getting a little bit more stability in that space with less volatility, is there anything you see further down the stack that you like? Are you going to stay up in the senior part of the cash flows, and just kind of look for relative value there?

Craig?

We look at -- we look further down the stack. At this point, we still see pretty good value in the senior securities. But, suffice it to say, we've certainly widened the aperture a little bit on looking at other cash flows.

Mike Taiano, Sandler O'Neill & Partners.

There's been a lot of talk in the press over the last couple of weeks about the Fed potentially coming in with reverse repos, and I just want to kind of get your sense of what you think that could potentially do to repo pricing?

That is all -- they need to show how they can reduce this quantitative easing without being forced to sell agency mortgage-backed securities, right?

So the way to do it without selling is to put the securities out and get the cash back. So, it's just Ben Bernanke explaining how you can reverse quantitative easing without panicking the market, without selling mortgage-backed securities.

So, I don't see them reversing this quantitative easing immediately. They need to get through the period when they stop buying agency mortgage-backed securities so the market is weaned from the government assistance. It's something that could happen in the future, but to me it's just a process that they are showing work, that they've set up the documentation, that they can reduce quantitative easing importantly without selling the agency mortgage-backed securities. So that's how we look at it, Mike.

Right, but do you think directionally that would push up repo rates, potentially?

Other things being equal, if you have someone trying basically to raise repo rates, that repo rates would probably go up.

Okay. And then, just the second question. The MBS that you sold, the agency MBS that you sold during the quarter, was that more or less similar to the prior quarter where you were selling more longer duration assets?

Yes. The whole strategy has been to be able to kind of look forward a bit, to take out duration risk. So, that's been the strategy, and we'll continue to look at -- when those opportunities are there to do that, we'll continue to go in that direction.

Let me get back to Doug Harter's question. The discount accretion was $8.3 million, approximately. The premium amortization was $6.3 million, approximately, so we are about $2 million to the positive there.

So, again, that shows you the beauty of combining. When you're focused on residential mortgage-backed securities, combining agencies which do trade at a premium and non-agencies at a discount, net net you actually had a positive on -- due to prepays.

Mike Widner, Stifel Nicolaus.

Congrats on a solid quarter. On this -- the issue of the Fannie and Freddie buyouts, I was just wondering if either now or perhaps in the K you might be able to give us some breakdown that would help us triangulate a little bit better on what the impact might be. And so, I mean, some things that might be useful, and I don't know if you have any of these available or to get them, would be either 120-plus delinquencies in your existing pools or perhaps just a breakout of where your MBS holdings are by vintage since there seem to be pretty substantial delinquency differences across the different vintages.

First of all, the K will probably be filed in the next hour or two, so I'm not going to hold it up for that.

But we've publicly said that we owned hybrids, not fixed rates. And you can look at Fannie and Freddie data yourself and see the delinquency -- 120-plus-day delinquencies are going to be higher on hybrids than fixed rates. So, you'll be able to pull public data which will give you a good feel for what we have. Basically, we have a 2005, 2006, 2007 vintage hybrids.

So your concentration is decidedly the 2005 through 2007 range?

Yes, and the hybrids are not fixed rates.

And they're primarily I/O hybrids.

Yes.

Great, that helps. Thanks.

Jason Arnold, RBC Capital Markets.

Nice job this quarter. Just a quick question on the portfolio. You mentioned the targeted decline to roughly $7 billion range. Is that somewhat of a floor in your minds or do you foresee, if things kind of don't pan out as expected, to continue to shrink the portfolio at all?

Yes, as I said, Jason, there's not a magic bogey number. Again, it's really where the opportunity is, and again, when the dust settles, if there's really opportunity in the agencies, that that would be fine.

But again, if we continue to see the types of opportunities that we saw -- that we're seeing on the nonagency side, we will go in that direction. But as Bill said in his remarks, we haven't bought an agency security for 18 months.

Jason, the reason for the last six months, we've set this March 30 date, is we all know the Fed will be done buying them. So we might face a very different reality then, probably a better one to purchase. So, that's sort of why we've focused on this date and that amount.

But, there will be a new marketplace, and so it's not clear that that will be a floor, but it's sort of where we want to be approximately when the Fed is done buying.

Okay, perfect. No, that's certainly the prudent approach. And then, I guess, could you also give us a little bit of an update on what you're seeing in terms of repo availability on the nonagency side? It seems like things kind of lightened up there around, so just a little color would be helpful.

Sure. And if you recall, we actually did announce in the third quarter that we had done some nonagency repo. So, we continue to see that market open up. It's typically for the better quality assets, although not exclusively for better quality assets, but we see more and more dealers that are willing to extend repo financing on non-agencies.

Terrific. Thank you very much, guys.

Daniel Furtado, Jeffries & Company.

Congratulations. The expectation that the first quarter will be similar to the fourth quarter from a core perspective, does that incorporate the Fannie/Freddie news or does it exclude the Fannie/Freddie news?

Don't forget, the Fannie news probably will not be -- any change to the Fannie policy probably won't be in the first quarter.

So it's still -- there's at least a moderate amount of unknowns surrounding this news from your perspective, yes?

Correct, correct, but it's our expectation that the first quarter will not be impacted by Fannie. It will be impacted by the Freddie news, but Freddie is less than 10% of our portfolio.

Got you. So look for this to be a 2Q event, if it is an event at all.

It should be the tail end of Q1, but the bulk in Q2.

Tell me this, do you -- have you -- what type of impact to the non-agency sector do you think that this news could have, if any?

No, I didn't say. We had that discussion about 7:30 this morning. We really did. I brought that up to Craig and the guys, and I said, where do you think?

I tell you where I came out. I think it will be a positive. I think that the nonagency sector will continue to have some additional luster to it and I think people -- folks -- one, there's going to be a lot of money in the marketplace. Admittedly, that was a lot of agency money that was earmarked. But I think that the nonagency market will continue to be buoyant.

You know, bigger picture, what does it mean that they're now going to own free and clear $200 billion of distressed mortgages. They're going to have a little more carte blanche to try new forms of modifications here.

There is no other interest. There's no mortgage-backed security holder. It's them. They own it. They're a government-sponsored entity under control of FHFA. It might be a first step towards addressing the decline in home prices here. So, generally, I see it as a positive.

Yes, I was just thinking that potentially they could turn around and sell these as whole loans out the back door, kind of giving more supply into that non-agency space.

These are all -- they are all 120-plus delinquents. Something has to happen first.

Right. Perfect, thanks for the color. Good job on the quarter.

Henry Coffey, Sterne, Agee & Leach, Inc..

Good morning, everyone, and again, congratulations. I can't think of anything in the last 24 hours that makes me glad you're following this dual track.

In terms of trying to quantify the impact of the buyback, is there some easy metric we can use, like make some estimates about your delinquencies in the portfolio which are, what, eight, nine, six? Can you give us some sense of what the delinquency looks like and then how we should sort of [fix] it through the math in trying to figure out the impact of all of it?

It still looks like the answer we already gave. We said by the end of March, so before these buyouts occur, we should be in the ballpark of $7 billion of agencies, number one.

Number two, we said if you want to look at delinquencies, assume we are spread (multiple speakers) across 2005 (technical difficulty) and 2007 vintage (technical difficulty) on the Ohio, so you should be able to get rough data from Fannie and Freddie. They provided the delinquency rates in those buckets.

Right, so take the average of those buckets in the I/Os? Just take a simple average of the three and then sort of work the math from there?

Henry, it's Ron. With Fannie and Freddie (technical difficulty) low levels they did, it tells us what -- where delinquencies are.

In the -- yes.

So you can use that as a proxy for assuming that -- you know, you know that we have I/Os. You know that, for the most part, we have hybrids, and as Bill said, 2005 to 2007 are the vintages that we purchased. That's the proxy that you can use to get that information.

Freddie did a very good job of breaking that yesterday for both (multiple speakers) and hybrids, and Fannie only broke out fixed-rate yesterday. But we were expecting them to break out the hybrids in the next couple of days.

So Henry, you'll be able to do it as well as we are. Use the Freddie data, extrapolate to the Fannie, and you sort of know roughly what our portfolio looks like.

Yes, and that was our first guess. So this is helpful. Then second, you obviously are getting to watch to see how assets are trading. Has there been a real reaction within certain subclasses of mortgage-backed securities today or is the market sort of well digested on this event?

Yesterday in the market, there weren't many traders around. So you're probably getting -- these first couple of hours, people have reacted to the last 24 hours of news. But this is the advantage of having a smaller portfolio and a very, very low premium portfolio. We'll see where these market prices play out over the next couple of days.

No, I agree with you. This is -- kudos for your care over the last 18 months. Thank you. Congratulations again.

Jeffrey Talbert, Wesley Capital.

Quick question. On your asset sales last quarter, it looks like you really just knocked the cover off the ball in terms of being able to hit the top of the market on pricing. Can you give us a sense of what the base is and what the sale price was on those assets, please?

Sure. We sold about $200 million of current face. The purchase price was just below $102 and the sale price was a little bit above $106.25.

Wow. Good job. Thank you thanks very much.

Jeffrey, thanks for not yelling at us for not selling more.

Matthew Howlett, Fox-Pitt Kelton Cochran Caronia Waller.

Just another question on the buyouts. Any estimate on where CPRs on your hybrids could go? One-month CPRs? I've seen projections -- 95 CPRs for Freddie pools in March, somewhere in that range for three-month CPRs on Fannies.

Yes, you see, the CPR numbers, we are actually going to stay with single monthly mortality numbers. Because the CPR number annualizes exponentially.

So the better question is, what percent of the pool could prepay? That's sort of how we are looking at it because CPR numbers don't begin to mean much at very high numbers. So if the question is, can we see more than 10% of an asset prepaying, the answer is yes, and that's going to give you a very high CPR number, whether -- we don't know exactly, but it could be -- we've seen numbers ranging between 60 and 90. So there is a wide range there.

Okay. Well, you guys certainly seem better positioned than some others out there.

And then, just getting back to redeploying capital in the agency market, I think MFA historically had been against adding really high dollar priced securities to the portfolio. After these buyouts are done, would you consider going up to 6%, 6.5%, higher up coupons and paying maybe 105, 106 if you think the prepay connects to the story was there?

You know, as you said, as you qualified your question, that's never been something that I'm really prone to do. Again, we've never been a big buyer of high coupon, very, very high dollar price. It just doesn't make a lot of sense to do it.

Look, I'll never say never. We always look at the marketplace. You always are seeing what the opportunities are, but I don't see us being a 104, 105 buyer.

Fair enough. And then, just last question on the nonagency book, that market obviously has rallied. You guys have done a good job there. When you look at unlevered deals today across that market, I know there they are wide, but in the segment that you're playing in, sort of the higher quality, where are they today? Could you give us any color sort of where -- based on your sort of stresses, where you see unlevered deals in that market?

Sure. I would say today we see that market loss-adjusted yields are probably 7.5% to 9% or so.

So sort of a half a turn of leverage gets you there to sort of the mid-teens return, that would seem desirable?

Yes, yes. Obviously, we're not at 15% to 18% anymore. But relative to other fixed-income classes, we still think it's a pretty attractive asset class.

Steve Delaney, JMP Securities.

I was a little late getting on the call, so I apologize if this is repetitive. You can just tell me so. Your guidance on first-quarter is totally understood given your posture on the agency space and focus on building book and de-risking the portfolio. But just looking ahead beyond that, and I'm certainly -- I'm not looking for anything specific here, but could you talk for a minute about what market conditions or transactions or opportunities -- what do we have to see happen where the flat trend in core earnings could turn to a slight upward trend?

And I guess the first thing -- the obvious thing is the fed exits agency MBS become more attractive to Ron and the team and you deploy capital. Is that the big one, and I guess what else could happen to -- even if you stayed neutral on agency, is there anything that could evolve over the course of 2010 that could lead us to believe that we could move higher on core earnings?

It's Stewart. One, it's a good question, but then again you always ask good questions. But, look, on the agency side, let's see what happens after March happens and let's see what happens in the following months. That may be the opportunity.

On the nonagency side, what Craig has said I think leads to the potential answer relative to the fact that repo has become more rather than less available on nonagency, and when you're able to increase your returns by a turn to 1.5 turns of leverage, those are still very, very attractive returns. So with that advent or with the potential for that advent and the continued freeing up of repos on nonagencys, and with the advent of potentially more attractive returns on the agency side, I feel pretty good about 2010.

And on the nonagency portfolio, it is possible -- I think what I want to understand there is you have a certain amount of equity allocated there, and as agency pays down, that frees up more. But let's say that you leave your -- you stay at your 47%. What I think I'm hearing you say, Stewart, is that there's flexibility now with repo that using that same equity that's allocated to nonagency, Craig could go out and grow that portfolio just by putting more of the senior bonds on repo and taking that cash and reinvesting. So you could grow your nonagency portfolio, and therefore also your earnings, without a greater -- without an increase in the capital allocation there.

Steve, I think you're right, and I think the other potential piece of that puzzle is the resecuritization, which accomplishes sort of the same thing as additional repo.

Have you talked about that yet on your call?

We did. We continue to look at it. We were asked if this was something that might be forthcoming and we said that there is a good chance that it would be.

Thanks, Steve.

[David Blasino], UBS.

I'm going to ask a couple of questions here and I apologize if they are a little simplistic. I'm not an analyst, but in your prior calls, you had mentioned in the non-mortgage-backed -- the nonagency MBS area that you'd been looking for high teens rates of returns. In the quarter, I noticed you have a loss adjusted yield of 11.3. Now, I understand the difference between yield and total return, so I'm wondering if I remembered correctly whether you were looking for a high teens yield or a high yields total rate of return, and if you were looking for a high teens yield, it looks to me like maybe the nonagency MBS disappointed on the yield side in the quarter. But again, my recollection of your prior call's comments might be flawed.

This is Craig. When we first began investing in the nonagency space, which was December of 2008, first quarter of 2009, the yields available in the marketplace were generally high teens.

They came down over the course of 2009, and we did discuss this on subsequent earnings calls. They continue to come down. I think pretty much every earnings call, we were asked, well, gee, we know the market has tightened, prices are higher, where are yields now?

So, I think, yes, the number was 11.3, but that obviously takes into account assets that were put on at higher yields at the beginning of the year and assets that were put on at lower yields at the end of the year.

In general, are you pleased -- I mean, I understand the portfolio appreciated dramatically on a price basis, but are you -- clearly, then, you are comfortable with the performance of that portfolio in the sense of the dynamics that occurred during the quarter.

It's Stewart, the answer is yes. We are very pleased. Again, with the kind of stress that we put on this portfolio, I would say that it's acting better than anticipated and I continue to look forward to that for 2010.

Second question, you have 3 billion of a swap on, where it looks like you have a 4.23 fixed cost on a swap and you are receiving a floating of 0.25% right now. So if I understand that correctly, when the Fed starts raising rates, then the negative -- the cost of that funding should decline because our variable payment will appreciate. Is that correct?

That is true. But at the time the Fed starts raising, that $3 billion will probably be closer to $2 billion.

So we won't get as much of it. And one other quick question, which is more just a big-picture question. There was an article in the Journal on Monday about -- in Bernanke's testimony yesterday about how the Fed might go about easing the liquidity and taking liquidity out of the system, and one thing I thought was interesting was that in the past, I guess we all got pretty used to the Fed raising rates incrementally and giving us a lot of warning as they did a la, say, 2004, 2006, where they went up a quarter-point every time.

And there was a discussion in that article about how many of the insiders in the Fed thought that that was a negative policy, that that actually added to the leverage in the system, and that they were talking about possibly incrementally raising rates each time on a much dramatic basis and then holding -- possibly holding rates constant for a longer period of time.

And I wondered if your models, if you look at some type of shock treatment where the Fed actually comes out and in their first raise goes up 100 or 150 basis points. I never would've thought they would've done that, but given the tenor of that article, it seems like that might be more of a possibility than the every meeting, quarter of a point raise that we all got used to. So, I was wondering if you had any thoughts on that.

Yes, your point is basically how we have been running this Company that, one, Fed funds can't go below zero, so there will be no positive surprises. There can only be negative surprises on interest rates.

As a result, we've cut our leverage down to a three handle from a seven handle. We are not generating these dividends from carry trade where you buy fixed rates and fund them for a month or very short. We are generating value added to the shareholders by selecting through an asset class that people don't have the capability to analyze, that the unlevered yields, regardless of what the Fed does, as you saw were 11% in the fourth quarter.

Our -- the question we play with is, if I buy an asset that yields me 11% and Fed funds go from 0 to 1 or 2 or 3, what happens to the value of that asset? It's not even clear to me the value of the asset goes down because perhaps it means you're in recovery, that the credit -- our credit analysis was wrong, that the economy does better than we thought and the yield in that asset goes up.

So, what you're saying is right. There's less certainty. The surprises cannot be positive ones. As a result, we've decreased the interest-rate sensitivity of our investments.

Jim Young, West Family Investments.

Could you talk a little bit more specifically about how you're thinking about the funding of the nonagency bonds from the perspective of the re-REMICs versus repo? What kind of duration are you looking at for the repo financing? What kind of terms are you currently seeing in the marketplace today? How do they compare to last quarter?

And again, just how do you think of the relative trade-off between the re-REMIC versus the repo financing? Thank you.

As far as the repo market for nonagency, this quarter versus the last quarter, there are more counterparties. Haircuts, if anything, are probably a touch lower and the rates are a little bit more aggressive.

But I would say the quantitative differences are fairly subtle. The more significant factor is there are significantly more players out there, and it's more available. Pretty much almost all of the nonagency repo that we did was six months. We expect to roll some of the first ones that we did shortly.

As far as the re-REMIC versus repo, they are actually not mutually exclusive. And some of the more interesting structures on re-REMICs would have a senior bond but a smaller senior bond at the top of the senior bond in the capital structure, and that would then create, potentially, a security below that that would be repoable.

So as we've said, we continue to look at the resecuritization market. There've been some very innovative structures done in the last month or so. So we think that's to our benefit and that we'll be able to take advantage of that.

So I'm hearing that you are looking at on the repo side still staying with six month? Is it economical? Are you seeing economical repo out to nine months or a year at this point?

(Technical difficulty) discussions, typically 12 months is sort of a barrier because of capital charges versus the counterparties. But, six months -- six to nine months is certainly available.

Any other questions?

Steve Covington, Stieven Capital Advisors.

This is actually Joe Stieven. First of all, good morning. This is a non-MFA question. When you guys were top-ticking the market, when you were selling your securities, what is your market [of talent tears], who was the one buying these and who is going to experience some blow-ups in here? That's question number one.

We weren't selling them to other REITs, if that's the question.

Right, no, I understand that because most of the REITs aren't buying them. So who is out there buying them?

It's our general impression that even with volatility -- the potential volatility in the values that I can see a very positive returns over the holding period for a bank. So, if a bank has a zero cost of funds, I'm having a hard time making good quality loans, I will under almost any scenario, because of the carry, it's still a positive rate of return, so it's not an irrational purchase for banks to buy these assets (multiple speakers)

Right, but somebody is going to have some marks on them, though, very quickly.

You are correct, but the truth is we don't know who bought whatever.

Right, no, I'm just trying to get some market intelligence from you. All of my specific questions were answered and, guys, again, congratulations. Very good run.

Bose George.

I just had a couple of follow-ups again. One is just, I wanted to get the duration of your portfolio. I know you give it in your K, but if you have it handy?

Hold on one second.

What's the next question, while we are looking?

Next question was just a follow up, again, on the earlier questions about trying to get a better feel for where the prepayments might come out on this Fannie/Freddie issue. The weighted average coupon was 537, I guess that was the last-quarter number. So if you look at the 5s and the 5.5s and something in the middle, that gives us a reasonable feel for the coupon we should be using.

Ron?

First question, expected duration that you will see in the K is 0.99.

0.99, okay, great.

Actually, [come back] to the negative 1.01.

And then, yes, just the weighted average coupon. Is that -- if you use something in the 5% to 5.5%?

Weighted average coupon is about 5.36%.

Jason Arnold, RBC Capital Markets.

One quick follow-up. Can you remind us -- it's around $900 million to $1 billion of swap notional value that's rolling off in 2010. Is that correct?

Yes, that will be in the K. That's ballpark right.

Okay. And then, is it safe to assume that the average pay fixed rate should decline pretty meaningfully, I guess, by the end of the year or is the benefit there of the rolloff coming from the notional decline primarily?

I think the average pay will remain about the same with some smaller notional amount.

Okay, so it's just -- it will add, of course, with the decline incremental improvement on the average cost of borrowing side of things and (multiple speakers)

The negative impact of the swaps continues to go down, both on book value, which is positive, and in terms of cost of funds.

There are no further questions.

I'd like to thank everybody for joining us. We look forward to speaking with you next quarter.

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