MFA Financial Inc (MFA) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MFA Financial, Inc. third-quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session with instructions given at that time.

(Operator Instructions). And as a reminder, this conference is being recorded. At this point I would like to turn the meeting over to Ms. [Alexandra Giladi]. 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 some art 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 asset 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, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010, June 30, 2010, and September 30, 2010, 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 achievement to differ materially from those projected, expressed or implied in any forward-looking statements it makes.

For additional information regarding MFA's use of the forward-looking statements, please see the relevant disclosure in MFA's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, and/or the press release announcing MFA's third-quarter 2010 financial results.

Thank you for your time.

I would now like to turn this call over to Stewart Zimmerman, MFA's Chief Executive Officer.

Good morning and welcome to MFA's third-quarter 2010 earnings call. With me this morning are Bill Gorin, President; Ron Freydberg, Executive Vice President; Craig Knutson, Executive Vice President; Tim Korth, Senior Vice President and General Counsel; Teresa Covello, Senior Vice President and Chief Accounting Officer; and Kathleen Hanrahan, Senior Vice President.

By way of introduction, also joining us this morning is [Stephen Yared], our Chief Financial Officer.

Today, we announced financial results for the third quarter ended September 30, 2010. Recent financial results and other significant highlights for MFA include third-quarter net income per common share of $0.27 and core earnings per common share of $0.22. Book value was $7.83 per share at the end of the third quarter.

In the third quarter, our Non-Agency Residential Mortgage-Backed Security portfolio including Mortgage-Backed Securities underlying Mortgage-Backed Forwards generated an unlevered loss adjusted deal of 9.27%. At September 30, 2010, we owned $2.351 billion of Non-Agency Mortgage-Backed Securities, including MBS Forwards at advertised cost of 68.1% of par.

In the third quarter, our Agency MBS portfolio generated unlevered yields of 3.93%. At September 30, 2010, we owned $6.181 billion of Agency MBS consisting of $5.731 billion of hybrid and floating-rate mortgage-backed securities and $449.3 million of 15-year fixed-rate mortgage-backed securities. These Agency MBS had an average cost basis of 101.6% of par.

Subsequent to quarter end, we sold $985 million in principal value of Non-Agency Mortgage-Backed Securities as part of a resecuritization. In connection with this transaction, 246 million of AAA senior bonds were issued to third-party investors by a trust at a pass-through rate of LIBOR plus 125 basis points.

As required under GAAP, we will consolidate the resecuritization and will account for this transaction as a financing of the underlying mortgage-backed securities.

For the third quarter ended September 30, 2010, we generated net income available to common stock of $75.2 million or $0.27 per share of common stock. Core earnings for the third quarter were $61.7 million, or $0.22 per share of common stock. Core earnings represents a non-GAAP financial measure which reflects net income excluding changes in the unrealized net gains on MBS Forwards.

On October 1, 2010, we announced our third-quarter 2010 dividend of $0.225 per share of common stock, which was paid on October 29, 2010 to stockholders of record as of October 12, 2010.

I would like to go over certain additional data highlights as they pertain to our third-quarter 2010 results. Leverage overall debt to equity, 2.62 times. Portfolio spread, interest-earning assets minus cost of funds, 2.56%. Our MBS net spread, which is mortgage-backed securities net yields minus cost of funds, 2.84%, our repricing GAAP assuming a 15% CPR of 17 months and our agency CPR for 23.8%.

I would also like to take this opportunity to briefly touch upon the issues relating to the foreclosure moratorium, mortgage loan putbacks and other servicing-related deficiencies impacting the mortgage and mortgage-backed security markets that have been the recent subject of many highly publicized news reports, conferences and public debates. We are actively monitoring these issues and are currently evaluating all of our options. We are focused on protecting MFA's rights and interests in these matters.

We are aware of several actions presently underway by investor groups, State Attorneys General, and various trade groups relating to both the foreclosure and putback issues and are closely watching how these actions play out. Certain of these groups are acting to protect the interests of investors and Non-Agency securities, such as MFA, and these actions may be potentially in order to the benefit of all investors in the impacted securities.

I thank you for your continued interest in MFA Financial, and at this time, I would like to open the floor for questions.

(Operator Instructions). Bose George with KBW.

Good morning. Congratulations on a good quarter. Just wanted to -- first question I had just was on the [reramping] that you did. I was just curious how you see the economics of doing the reramping versus getting funding in the repo market? And when you do that, should we see it as kind of a substitute for repo or incremental leverage?

I think the answer is probably both. The securities that we issued the third-party investors were at a rate of LIBOR +125, which obviously looks very much like repo except that there is no haircut and no recourse obviously. But in addition, it also creates a large portion of securities that has investment grades ratings that make it very easy to finance those.

So I really think it's both. It's a form of repo in the bonds that are issued to third-party investors; but it also facilitates repo financing on much of the rest of the security.

Great. Thanks. And then just a question on the agency side. I think this is the first move you guys have had into the 15-year fixed sector.

Can you just comment on your approach to what you're doing there?

(Technical difficulties) than I believe on our last press release. We also talked about adding 15 years.

Okay.

It was in the second -- we did some in the second quarter. We did that a little bit in the third quarter. We think from an incremental basis that it gives us better deals and a little bit better duration than some of the longer hybrids that have been out there.

So we picked specific bonds that we thought were going to protect us and going to protect us from the duration and from an earnings standpoint.

What we did, as you know, we've basically been an ARM buyer just in terms of hybrids. What we saw, we saw a bit of opportunity in the 15-year and we took advantage of it. That's really what it was.

And from a duration perspective, do you think it's whatever equal to or less than maybe a maybe a 7, 1?

I would say, depending upon the coupon, that higher coupons are closer to 5, 1 and as you get to the 4%, they are probably closer to 7, 1.

Okay, great. Thanks.

Oh, let me just add two things. In terms of the Non-Agency strategy on the resecuritization, so one, obviously, gives us some permanent funding. It also gives us higher rated assets to borrow against. So it makes the availability of repo funding more predictable in the future and, therefore, you'll see over time we may be comfortable running with more leverage on the Non-Agency side. So that's the key to that execution.

The only thing I'd like to add on Ron's answer on the 15 years, we did a lot of this buying in the second quarter. We bought these well. We bought them at the right time. On the 15 years.

Steve DeLaney with JMP Securities.

In the third quarter, you continued to steadily add the Non-Agency paper, but also sort of an equal amount of Agency paper. A little over $350 million, $370 million each. Kind of a 50-50. Is that something -- should we expect that as you go forward and add additional find, additional Non-Agency that you'll keep this relationship relatively even?

There really wasn't above a bogie. It was really where the opportunity was. And during the quarter we saw our opportunity both in the Agency and Non-Agency side so it wasn't that we wanted to be 50-50 or 70/30. It (multiple speakers) was not the key to it.

Okay. Well on your 40 [act] exemption I believe that your absolute level is to maintain at least 55% of Agency whole pools, right?

Right. That's the rule. However, just to let you know, we are always significantly above that.

Right. I think you are about 70% as I see the balance sheet here now. And then I guess the last piece or the follow-up to that would be, given the balance sheet that you have today and the leverage looks pretty low. I mean, combined at 2.8%, but the Agency leverage at about 5.6% and Non-Agency at 1%, you certainly have reasonable leverage.

What is your capacity? Let's just, assuming the opportunities, Craig and Ron, still are finding good opportunities, but I guess I'm asking specifically on the Non-Agency side given where those prices have moved. What is your capacity to continue to add more Non-Agency RMBS to the portfolio without having to come to the market for -- for more capital?

Is there some way to quantify that in terms of how you see your liquidity and your borrowing capability in your current leverage?

In terms of our current leverage, again this is a very good time to be very prudent to be cautious. Again we have more than ample opportunities to be able to continue to roll repo. Both Agency and Non-Agency, we are very, very comfortable about how we are situated.

In terms of going forward, in terms of ratcheting up leverage, again we have been and will continue to be cautious. We have the opportunity to do that mathematically, we can certainly go significantly higher at leverage, but it is not the place that I think we want to go. Could it be extended slightly? The answer is yes.

I think to answer your question in terms of the assets we acquired and I don't want to sound like a broken record, but we continue to grow the Non-Agency portfolio on a net basis almost $100 million a month. And I think I've been saying that for about eight quarters now. On the Agency side, we've publicly said we would like to keep the portfolio between $6 billion and $6.5 billion.

So we basically have been replacing runoff so it's a coincidence that they were the same number for the same quarter.

Okay. Got it. So I mean should we -- it sounds like you are still on the plan of targeting or looking to add about $100 million per month on the Non-Agency side. Did I hear you right on that?

And sort of solves that -- your initial question, which means we are comfortable having some more assets relative to our existing equity base. And that ties in with the resecuritization answer.

Okay. Great.

You can see us increasing our leverage on the Non-Agency side, somewhat.

All right. Great. That's what I was looking for. Thanks a lot. Nice quarter.

Jason Arnold with RBC Capital Markets.

Just a quick follow-up on Bose's question on the re-REMIC transaction. Would you expect to do more re-REMICs ahead or was this kind of a one-off opportunistic deal?

No, I think you could expect that we could certainly do more in the future. You know, it's a nice transaction both from an availability of financing, but also in sort of shoring up the assets that we have and making them more easily financed.

And just one other quick one. Looking at my screen here today I've got roughly 70 basis points on the three-year swap.

So I was curious. What are your thoughts on adding additional swap exposure to lock in borrowing rates here for down the road? You know, I guess the risk is that rates could still go lower from here, but just be great to hear your perspective on this.

You know, we don't really try and [bid] on interest rates. And I think where we are swap now in terms of our swap percentage, I am very comfortable with where we are. So just to go ahead and increase the swap ratio for the sake of doing it doesn't make a lot of sense. As again as swaps roll off and expensive ones as you can see are rolling off and the opportunity to buy additional assets would become a little less swap we will look at that opportunity. But it is not something that we are just going to do for the sake of doing it.

You know, I get this question a lot which is swap, which lets us -- if we are not adding a lot of interest rate risk to our assets, we don't need to buy interest rate insurance on our liabilities. Does that answer the question?

Absolutely. Now that makes tons of sense. Thank you.

Mike Taiano. Sandler O'Neill.

Just to hit on the question about potentially doing additional re-REMICs. Is it -- my understanding was that it could become more difficult to do re-REMICs with the Dodd Frank Act, I guess, in terms of the additional regulatory requirements. And I guess you -- I guess they're going to require that private placement sort of the same disclosures as public deals on a loan by loan basis.

Can you maybe comment on the changing landscape on the regulatory side with respect to re-REMICs?

Yes. It's far from certain at this point. So we continue to follow it as I think you know these transactions are typically private deals. So they would certainly be more difficult than public deals, but it's something that we are continuing to follow and for the time these private resecuritizations are still getting done every month.

Okay. Great. And then just to hit on the leverage point again. I mean you suggested that leverage, at least on the Non-Agency side, could increase. Can you maybe just give us some general sense of is it as high as two times leverage would you be comfortable with? And just trying to get a sense of obviously yields have come down on Non-Agency paper recently. And I would assume in order to keep returns where they are, you would have to increase leverage, all else being equal. Maybe you can give us some comments on that.

Yes. In terms of the -- look, we are incrementally going to increase the leverage on the Non-Agency side and we're not going to set up a bogey. I don't think we are immediately going to go from one times to two times. But you'll see an incremental increase in the Non-Agency and it could increase more rapidly, depending on availability.

Matthew Kelly with Morgan Stanley.

Can you give us a little bit more color on what you see as the most attractive Non-Agency MBS, both in the third quarter and fourth quarter? What are the best opportunities you guys are seeing out there?

I really prefer not to. Again, I think one of the advantages we have is kind of the group here who have looked at these assets and have been able to see some values. So again you know what we bought and as we continue to see value, we will continue to buy those types of assets. But just to let the kind of the whole world understand exactly what we're doing, I don't think is the most prudent thing for us.

Understood. Then just a broader question on the Fed's announcement yesterday. What are your thoughts there and how do you think it could impact your book and purchasing strategy going forward?

In terms of QE2, I guess we are in a position where interest rates don't look like they will be going up relatively soon. So in terms of the Company, I think we are very, very well positioned in terms of how the book is now and in the continued opportunities that we will continue to see.

The move was fairly well telegraphed and we were expecting it. People have -- we have been focused on QE2 since August and that is why we have been growing this high yielding Non-Agency portfolio.

Okay. And then one quick follow-up on the Non-Agency leverage question you guys have gotten a little bit. What do you guys look for in terms of when is a good time to potentially start increasing that leverage? Like when is it less risky? What are the couple of indicators you look for?

One, we are increasing and part of that was the resecuritization, which gave us some permanent funding without haircuts. And, two, it took us a number of assets that were below investment-grade and made them investment-grade which makes them more easily repurchased -- borrowed against now and in the future.

We are increasing the leverage in the Non-Agency side in increments.

Henry Coffey with Sterne, Agee.

Good morning, everyone, and appreciate all this information you are sharing with us. So you sound pretty confident that rates are going to go up for a while. I think that's almost a given. Yes, the Republicans are going to fix everything.

As we -- once we look at this re-REMIC transaction which will get a chance to kind of examine when you report your December results, what are the component pieces going to look like in terms of how you are going to play it out? Do you break the bonds into three or four different classes the way one of your competitors does? Or does it get presented as a pure financing? And just a related question, were there any kind of unusual cost related to that that could impact the fourth quarter?

Is your question the exact execution or how is it going to be accounted for?

How is it going to be accounted for?

I think from an accounting standpoint as we mentioned in the press release, we will be consolidating the trusted issue (multiple speakers) but in terms of the presentation, in terms of GAAP presentation as well as our MD&A type disclosure, it's fair to say that we are still working through that exact presentation and how we will disclose it, whether we will disclose it similar to some of our competitors or not. So at this point in time, we are still working through that.

And let me just as the question and different way and if you can't put it any light on it that's understandable. But I mean, will we be presented with a senior bond, an off-balance-sheet bond, an I/O, a sub bond and all those different component pieces which seem to have a way of kind of complicating the book value marks? Or is it more just we look at the aggregate portfolio and see how that gets valued?

Again, are you asking an accounting question or how is the resecuritization structured?

Both, really.

Well, as far as the resecuritization, and it's available on Bloomberg, the structure is a little bit different from some of the other structures that they may have seen. We actually split this (technical difficulties) from classes and we sold the top (technical difficulties). There is another AAA piece that we retained and then we've got AA, A, BBB, BB, B and then a non-rated.

So what we really tried to do here is [reserve flexibility] in the future to take advantage of market opportunities, either repo those securities or see them into the marketplace.

Did you create an I/O in this process as well? Or -- and then, obviously, the non-rated bonds are the equivalent of a sub bond.

There is an I/O that is associated with the A1 [traunch] that was issued to third parties. It's basically to get the coupon to a part by execution. And we also have the flexibility and the [sub tranches] at the time that those could be also (technical difficulty) third-party investors to strip off a piece of those to get to a VAR execution.

Would there be any unusual cost for this or does everything just get amortized over the expected life of the financing?

Yes. It is constantly incurred, still gets spread over the life. The other thing that I would just add from a disclosure standpoint. Bear in mind that pieces that we took back from eliminating consolidation because we consolidate the trust and expect it to, from a balance sheet perspective that is really just the piece a sold to third parties. It gets grossed up on our balance sheet.

And let me add one thing. So the exact GAAP accounting is yet to be finalized. But whatever that is, we will strive to explain the economics in the Q and in the press release, too.

Gabe Poggi. FBR Capital Markets.

Quick question kind of going back to your opportunity set. I've heard that dealers [are long] quite a bit of paper heading into the end of the year. Are you guys expecting any volatility in paper and except -- expect to see maybe a bigger opportunity set as we get closer to year end?

I'm trying to get a gauge on how many pictures you guys think you can hit over the course of the rest of the year? So to speak.

The agency -- we're having -- we are finding assets that meet our internal bogey. I don't think the Street is all that long on the agency side especially on the hybrid. But I don't anticipate a whole lot of price volatility coming in that sector just because it is still backed by the agencies, from when were still good with that. Craig?

And as far as the non-agencies, we've seen some pretty heavy activity over, certainly, the last month or so. And there has been rumored selling in the fourth quarter. But the market is pretty orderly and if anything, the market is probably up a little bit stronger now than it was a month ago.

The important thing, once a month day to day is one thing but the technicals for non-agencies were so in our favor. They are not producing any more Non-Agency Securities. In fact they are prepaying either voluntary or delinquent. So the technicals are there with QE2. We are pretty optimistic about prices, but we are still a buyer.

Right. Okay. Great. That's very helpful. Thanks, guys. Good quarter.

Dan Furtado. Jefferies.

Nice quarter. Couple of quick questions. Do you mind disclosing what the CPR was on the agency only side of the business?

For the agency it was 24.

24. And generally speaking, I guess this would be for Ron, when you are looking to purchase agency bonds in the market today are you -- do you tend to gravitate towards generic agencies or specified pools?

We look at all the sectors in the marketplace, and we tend to purchase where we think that we are going to get the best value. I would say that, over time, specified pools have worked better for us than the TBA. But we still look at all different markets.

Excellent. Okay. And I guess this would be for Craig.

When I'm thinking about the re-REMIC, and appreciate how this structure is different, how do I think about the actual haircuts and financing costs on the repo as we move down this stack? Is it kind of like if it's investment grade or above are you going to get one rate? Or is it going to be more traunched out where the AAs are going to come at some type of haircut versus the As, etc., etc.?

Again it is very, like, counterparty, but I would say generally and I think we've said this before that investment grades-rated assets are fairly easy to finance and, typically, the haircuts on those are approximately 10%. For, you know, for CCC asset, not resecuritizations but CCC assets, financing is available on those. It depends on the dollar price of the particular bond.

But those haircuts could be possibly as low as 20% and more likely 25% or 30%.

Okay. So I guess the way when I'm thinking about the all-in economics on this deal, using the 10 -- again I don't know have a clue what type of repo you are going to put specifically towards the re-REMIC and I appreciate that. But just from a modeling standpoint, I can assume whatever bonds you repo that are double being above are going to come out at about a 10% haircut.

Well, BBB. Right?

I'm sorry. Yes. BBB. Okay.

Typically that's true. You have BBBs that are locked out, might be 15% haircut but you are in the right ballpark.

Excellent. Thanks. Congratulations again on the quarter.

Douglas Harter with Credit Suisse.

Thanks. My questions have been answered.

Mike Widner with Stifel Nicolaus.

Good morning and congratulations on a solid quarter. I was just wondering maybe this is in the press release and I haven't found it, but in your reconciliation of GAAP to core, you back out $13.5 million of the $21.3 million of the Forwards -- and why that split? I mean, why not the entire thing? What's the other $8 million that is included in Core?

Yes. The other, I mean, is the net accrued interest on the underlying repo.

Okay. Got you. Another question. Just wondering how you guys are thinking about dividend policy? And I say that because we have heard sort of different views from a number of the different mortgage REITs out there. And you know, some think about paying the dividend out of current total earnings. Some think about it, relative to Core earnings. Some think about it, relative to expected run rate earnings. Others talk about economic earnings. And for you guys, just wondering what we should sort of expect going forward and how you think about what the right level for the dividend is?

I think when you look at what we've done historically there is no reason to change. I mean, just look at our Core Earnings.

Okay. And so I mean, you are a little -- [22.5 versus 22], I guess pretty much right in line. Is that kind of what we should think about sort of around that level going forward?

Going forward, I really don't really want to comment on.

Well, I don't mean -- sorry, continuing to pay pretty much right around your core earnings level, give or take out $0.05 as opposed to 90% of core or something like that.

Actually you gave us a number of options of earnings to look at. I don't know if you include the absolute right one which is the taxable income. And historically, we've always said and it remains the case on an annualized basis, we are looking at where our taxable income is and we are going to distribute it. So it may not be tied exactly to the earnings that quarter and it may not be tied to core earnings or GAAP earnings. It is going to be tied to taxable income over the year.

So it is not completely predictable for you quarter to quarter.

That's too bad because I would like it to be 100% predictable.

I know.

One other quick one, if I could. Just looking at the kind of leverage you have on the two halves of your portfolio and you finished the quarter at about 5.6, 5.5 times on the Agency side and then just about 1 time on the Non-Agency side. Is that a level you're comfortable with? You know, looking for more, looking for the same, looking for less?

Well, I repeat the way I've answered the questions. I think we are looking for more than 1 times on the Non-Agency side. And that is because we want to grow the assets there. On the Agency side, we are sort of running in place.

Okay. So we should continue to think of the Agency side as 5.5-ish? And --?

It could be, you know, within the --. It could be 6. I can't rule out that it could move, but it is not going to be a huge increment.

You're not targeting 7.5 or something like that?

Correct. Correct.

Okay. And then yes, I think you answered the question on the Non-Agency side. Great. That's all mine. Thanks.

Jim Ballan. Lazard Capital Markets.

It looks like you had some of the higher costs swaps roll off in the quarter but the total notional amount has come down some. Do you think we will -- do you think especially with the expectation that you are going to be increasing assets that, maybe, we would see that national number come back up by the end of the year?

When you look at it look at the assets that we are replacing. And again if there are -- well, it depends what you know what interest rate risk we think we have. So when, again, we're really not replacing as much on the interest-rate side.

So again I'm really comfortable with where we are.

Again it's the way we answered the question before. If we are not adding a lot of interest-rate risk on the asset side, we don't need to build more interest-rate insurance on the liability side.

So I mean, should I take from that, that on the Non-Agency side there's less interest rate risk and so that is where the incremental dollars are being spent that maybe we don't see that -- the need to have that swap number come up? Is that the rate to interpret that?

That's a good assumption.

Matthew Howlett. Macquarie.

Just on the re-REMIC sub. Did you guys give the accrual rate there you are going to use to book those?

Sorry?

The accrual rates and the subs you take down to re-REMIC. I mean, what can we assume for what will be the GAAP accrual rate? Presumably it is higher than your unlevered deal for 9%.

Again, I think the way to look at it is to look at the underlying assets that went in, right? And you'll see in our Q today what the average yield on the assets that go in. The assets that went in look like the overall portfolio. So and this is really the way that we think about it.

So it's really not so much about the securities that we create in the resecuritization. It's a means of financing. And that is how we account for it for GAAP.

Okay. I just didn't know if -- even though, if -- do you run some IR analysis on the subs and what they would come out to be, but I realize how it's going to come out through a NIM on the GAAP, I just didn't realize -- just wanted to get a point of what type of sort of yield can we assume [implied] deal that's on those securities that you create?

Yes. I think what you have to do is look at the underlying assets and what we are telling you is the nature of the underlying assets hasn't changed for our accounting purposes. It's still at $900 some odd million. That was yielding us whatever. That doesn't change because of the re-REMIC. It's all consolidated.

Then you have to subtract what you are going to pay out on the A1's. So the asset yield -- and our whole asset yields on [non H's was 9-ish] percent. That is similar to what we are going to yield on our whole $900 million of assets underlying the re-REMIC.

I guess the question is, what was the underlying -- the leverage that was should be higher than re-REMIC, I guess. I mean, are you taking leverage up [granted] in a nonrecourse manner, but is the structural leverage inside the REMIC (sic) you create higher than what you would have done just by rebuilding out the assets?

If you want we can take this off-line because just explaining the (multiple speakers).

Okay. Fair enough. Then just on the [taxables] we mentioned that you know -- the [taxable depends] on how you pay your dividends. Presumably when you sell these re-REMICs, I know for GAAP it's financing but is there a taxable gain in the sale?

We try to select the assets such as there wouldn't have been a taxable impact.

Got you. Okay. And then just moving towards the over all Non-Agency book. I know you addressed -- Stewart, you addressed the moratorium, foreclosure moratoriums. Do you think I mean are any of those from pay bonds? Could they be impacted negatively if these foreclosure moratoriums get strung out in terms of [hurting loss] severities or extending the liquidation timeline?

Sure. And as you point out pretty much all the securities are senior-most capital so they are front page securities and a foreclosure moratorium does delay the liquidation. So you know, we've heard that it's sort of the zero-sum game that they advance just the principal and interest. And then they deduct it from the liquidation.

So you get it now and your loss severity goes up by that amount. You're not really a zero-sum game, right, because on a front to value basis you'd rather guess it -- you'd rather take the loss sooner than later.

In addition you also have insurance and property taxes on the property that have to get paid during that period. So you know, it's certainly not a positive. It's a negative.

But we've run some numbers and a lot of the streets run numbers and try to quantify that. And it's really not a whole lot. It really depends on the assets going in as well. If you had if you took Option ARM or sub-prime paper where you might have 50%, 60+ days delinquent, it is going to have a much more significant effect than if you have prime and all [save] paper where your delinquency pipeline is much smaller.

So the numbers that we've seen around the street, most of these are for option type or collateral. It's anywhere from maybe 20 to 70 basis points in yield. But it's very hard. You know, it is very hard to quantify and it is very hard to loan, to predict as well.

Okay. And prices since quarter end, they haven't really been impacted one way or the or the other from all these announcements. Is that fair to say?

Not very much. If there's any impacted probably on the less clean collateral so that the much higher delinquency type paper is maybe a little bit weaker. Because that is obviously what's affected the most, or could be affected the most.

(Operator Instructions). Jim Young. West Family.

You've mentioned that it's a good time to be prudent and that you continue to be cautious. Can you share with us some of your major concerns or issues that are on your mind that's leading you in this direction? And how do you see those issues changing over the next couple of months? Thank you.

We've always been prudent and cautious. (Laughing). And we will continue to be that way. So again, you look at the landscape, you look at some of the unknowns. So again, it is not a good time to -- you don't have your agency leverage eight or nine times. Where we are, as Bill said a moment ago, you know, whether it is 5.5 or kind of bumps up to 6, that's fine.

We've said a few times on the call that the Non-Agency side may make off a touch. And [we'll] continue to be at those types of levels.

I can appreciate that, but I'm just thinking when you are looking and thinking about the economy, when you are thinking about the Fed's direction and other issues out there, what are some of those factors and issues that are most concerning to you? And how do you see -- from your views on these developments, how do you see those issues changing over the next couple of months or quarters?

It's tough to have a crystal ball today, especially when we are going to have a new Congress starting in January. So again, we touched on the idea of the moratorium. We touched on the idea of the putbacks. So all of that, all of that is something that we look at and we monitor.

Having said that, again very, very comfortable with where we are. Are there unknowns out there? The answer is yes. There are unknowns. But that's the nature of it.

And on top of that, you have QE2 and the -- you know, they are going to continue, I think, to pour money into the economy to try and get it to -- try and get it moving again.

Henry Coffey with Sterne, Agee.

Yes. I was just looking at the balance sheet. The use of the Forwards, is that going to change as you get a more natural financing structure with the re-REMICs? Or does that continue to be viewed as just a real viable way of funding and leveraging Non-Agency purchases?

Well, I think with the Forwards whether we continue to account for those derivatives have been Forwards, so whether they become [unlinked] is going to depend primarily on our ability to be able to substitute the collateral or finance those positions with someone other than who we purchase the bonds from. So that is going to be the key driver.

You know the go-forward accounting on the (multiple speakers).

Henry, let me just clear up a possible misunderstanding from your question. We financed them. These assets are assets we purchased them at a firm and we put them on repo there. And for accounting purposes those are considered linked transactions and they show up as Forwards on the balance sheet. They really are assets we own that are repoed at the firm where we purchased them.

So it has nothing to do with economics or structure. This is just GAAP accounting.

That's helpful. Thank you.

[Stephen Zadeklik]. Private investor.

With regard to the Non-Agency MBS's, what is the portion that's in judicial state versus nonjudicial?

We'd have to look. I don't know that we have that.

Okay. And when a Non-Agency property goes through foreclosure, why is it not carried on your balance sheet as real estate-owned?

Because we own the security, right? The REO is in the trust, but we still own the security. So that we still get advanced principal and interest on those loans until they are liquidated as long as the debts are deemed recoverable. Again, we own securities, not loans.

I would just like to add to Craig's answer. We do know easily know the percentage in California which is --.

Yes. Yes. And that's in the Q1, page 51 that you will see later today. But it is about 46%, California. We list the top five states. So 46%, California, 8.5% Florida, about 5% in New York.

And California is not a judicial state.

Bose George with KBW.

I just wanted to follow up on the unlevered yields you are seeing in the Non-Agency market and the spreads you are seeing in the agency market right now.

Ron, why don't you start with the agencies?

In the agency market, a lot of it depends upon the assets and the duration of the average life, but we are seeing yields in the mid-2s and funding -- really, funding cost really hasn't changed. You know, one-month funding is still in the high 20s. Three-month funding is still in the low 30s or high 20s to low 30s. So the spreads are within that band.

Okay, great. And then on the Non-Agency side?

Non-Agency side, again, it also depends on the assets. But I would say those yields range anywhere from mid-6's to in the 8 type range.

Okay. Great. Thanks.

At this point, we have no additional questions in queue.

Well, I'd like to thank everybody for participating on today's earnings call. We look forward to speaking with you next quarter. Thank you.

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