MFA Financial Inc (MFA) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial Inc. Third Quarter 2012 Earnings Call. (Operator Instructions). I would now like to turn the conference over to our host, Ms. Danielle Rosatelli. 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., which reflect management's beliefs, expectations and assumptions as to MFA's future performance and operations.

When used, statements that are not historical in nature, including those containing words such as will, believe, expect, anticipate, estimate, plan, continue, intend, should, could, would, 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 pre-payment rates on the mortgage loans securing MFA's investment securities, changes in the default rate, and management's assumptions regarding default rates on the mortgage loans securing MFA's MBS, 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 10K for the year ended December 31st, 2011, its quarterly reports on Form 10Q for the quarters ended March 31st and June 30th, 2012, and other reports that it may file from time to time with the Securities and Exchange Commission, could cause MFA's actual results 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 the press release announcing MFA's first quarter 2012 financial results. Thank you for your time.

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

Good morning, everybody, and thank you for joining our third quarter 2012 earnings call. Before we begin the call, we would like to express our condolences to our friends at Annaly on the passing of Mike Farrell, a noted leader in our industry. We do express our condolences, and we do hope that, with the passing of time, the pain somewhat eases.

As far as MFA is concerned, again, I would like to welcome you to our third quarter 2012 earnings call. Joining me this morning on the call are Bill Gorin, President, Steve Yarad, Chief Financial Officer, Ron Freydberg, Executive Vice President, Craig Knutson, Executive Vice President, Harold Schwartz, Senior Vice President and General Counsel, Kathleen Hanrahan, Senior Vice President and Chief Accounting Officer, Shira Finkel, Senior Vice President.

Today, we announced financial results for the third quarter, ended September 30th, 2012. Recent financial results and other significant highlights for MFA include the following, and I'm certainly going to go over the couple of bullet points that we have in the press release that you've seen, and then kind of open the call for questions.

So, third quarter net income per common share of $0.21, and core earnings per common share of $0.19. Book value per common share grew at $8.80 as of September 30th, 2012, compared to $7.45 as of June 30th, 2012, and $6.74 at December 31st, 2011. This 18% increase in book value per share in the third quarter and the 30% increase of book value per share in the first nine months of 2012 are the results of our total returns strategy of investing above agency and discounted non-agency mortgage-backed securities. On October 31st, 2012, we paid our third quarter 2012 dividend of $0.21 per share to stockholders of record as of October 12th, 2012.

A couple of other items I would just like to go over with you quickly is that at quarter-end, our debt-to-equity ratio was 3.2 to 1, and in this low-interest rate environment, core earnings per share were $0.19 versus $0.20 in the second quarter.

Our agency portfolio had an average amortized cost of 103.2% of par as of September 30th, 2012, and generated a 2.66% yield in the third quarter. Our non-agency portfolio had an average amortized cost of 72.6% of par as of September 30th, 2012, and generated a loss-adjusted yield of 6.65% in the third quarter.

We are pleased with the quarter, hope the folks on the call understand that this has been a very difficult environment in which to work, and I'm very proud of the team and how we progressed during the quarter.

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

(Operator Instructions). We'll go to the line of Jason Weaver of Sterne Agee. Please go ahead.

Alright, guys, good morning. Thanks for taking my questions. First, I'd like to get your perspective on what is a little over half of the non-agency portfolio that five months to reset bucket. It's still running, I see, at 14.3 CPR. Can you talk a little bit of the makeup of those bonds and what you think is holding back prepays there at such a low level?

Craig, you want to handle that? Craig?

I will now go to the line of Bose George with KBW. Please go ahead.

Good morning, this is actually [Ryan Osteen] on for Bose. My first question is, just looking at the portfolio breakout, it looks like most of the incremental purchases on the agency side were in the 15-year bucket. Can you just kind of talk about your asset allocation going forward, what you like looking at new purchases?

Bill?

Excuse me. This is Danielle. They can't hear the call. Can you hear the call, Shira?

We can hear the questions, we were starting to answer, and then somebody else cut in.

Yes, MFA cannot answer the questions from their host line.

We're responding, but -- we can hear the questions, we're responding, but then another question cut in.

Operator?

Operator?

Okay. We heard nothing coming from the host conference room, I apologize.

At all?

We heard nothing either. But you were speaking -- I know you guys were.

But did you hear Stewart Zimmerman's comments?

Yes, we heard Stewart, but then we didn't hear anything.

Yes, so, then, after that, the first call came in, we heard the question, Craig just started to speak for like one sentence, but --

Yes, they can hear me.

Yeah, we couldn't hear Craig on the line, either.

You could not hear Craig's response?

Could not hear Craig.

Can you hear us now, Stewart?

I can hear you.

Alright, there we go.

Alright, so, we apologize. We had some problem with the small conference room that we were in, so we're all in a small office. So, I guess we can maybe do the second question and then we can go back to the first question (inaudible) hear the response.

Craig, if it's okay, can we just change that order? Why don't we respond to the first question, and then we'll do the second question.

Sure, okay. So, Jason asked about the non-agencies that have less than two years to reset with an average reset of five months, and about the speeds on those and maybe why they're not faster, and I guess the way to think about those are, those are, for the most part, if not exclusively, post-reset hybrid securities, so they're post-reset 5 1s or 7 1s that have already come up to the end of their fixed-rate period, and the reason that I would imagine that we don't see faster speeds on those is because when those reset, they reset to typically LIBOR plus 200 or LIBOR plus 225, so the coupon actually resets down on those securities.

The original coupon was probably 5 and a half or so, but the coupon resets down. Now, it's a little more complicated, because in some cases, they begin amortizing, so they amortize over the balance of 25 years, but that's why I don't think -- because the coupon went down by so much, that's why we're not typically seeing the prepayments go up on those. It's not your typical reset that you would see on a subprime security, for instance, where the margin might be 600 and the payment would go up with the reset. In many cases here, the payment actually goes down.

So, Jason, if that doesn't answer your question, or you have a follow-up, why don't you come back into the queue, and you want to go to the (inaudible).

Why don't we go to the second one now.

Yes, and thanks, and I was just curious to how you're thinking about capital allocation on new investments.

Bill, do you want to run by that one?

Yes, capital allocation -- remaining fairly consistent, which is about 60% of our assets agencies and 40% non-agencies, and in the third quarter, that actually was a challenge, because the non-agencies were appreciating, so we had to buy agencies just to keep the relationship the same.

So, it's the same asset allocation we've had throughout the year.

Okay, and just in terms of prepayments, it looks like there is a bit of a spike in the short reset arms kind of offset by a decline in the 15-year bucket. Any updates on trends since quarter-end and what your expectations are?

(inaudible)

Yes, well, on the agency side, I mean, it's well-advertised that the Fed is now purchasing about -- growing their (inaudible) portfolio by about $40 billion a month, and they have extended their rate guidance until 2015, where they anticipate to keep rates low.

On top of that, there is hope that they are not going to start buying mortgages and not going to raise rates until they see a meaningful recovery in the labor markets.

So, basically, they are obviously putting a lot of pressure in terms of increasing prepays by keeping mortgage rates low. So, when we think about prepayments on the agency side, we think the probability of increases in prepayments have actually gone up, and you have, obviously, opposing forces in terms of [GCs] going up, but we do think that the Fed dwarfs that.

In terms of our own portfolio, basically what we have been adding on the agency side has been -- the majority of new acquisitions has been in 15-year fixed, and in prepayment-protected collateral, lower loan balance or high-LTV paper, and as you look at the changes on the agency side, you notice the 15-year allocation has gone from 22% to approximately 29%, and most of those bonds we added there were lower coupons, but also, on top of that, prepayment-protected collateral.

I think he asked about subsequent to quarter-end, so, October speed.

Oh, so, October speed was 18 (inaudible), and also, in the Q that's coming out later today, we've added a couple of tables to increase the disclosure on the agency side. We're basically -- we break the portfolio into 15 years in hybrids and kind of show the allocation to prepayment-protected collateral and different segments. That should help give people and investors more -- a better handle on kind of prepayment exposure and interest risk.

Thanks. I look forward to that detail. I'll hop off.

Thank you.

I will now go to the line of Stephen Laws from Deutsche Bank. Please go ahead.

Hi, good morning.

Good morning.

I appreciate the color on the asset split going forward. One follow-up there. Can you maybe quantify what yields you're seeing on new investments or spreads or however you guys prefer to look at it on the non-agency side, say new investments for them?

Sure. So, on the non-agency side, it really varies by product type, so I would say the cleanest assets with these price runups, the cleanest assets are probably as low as 4%, call it 4% to mid-4s. On the other side of the spectrum, they might be as wide as 5% to 6%. I would say the area that we're focusing is sort of in the middle or so, so, somewhere, give or take around 5% loss-adjusted yields.

Okay, great, and then, clearly, we've seen some securitization was done on a couple of jumbo deals you guys have done some (inaudible) transactions, I believe Northstar just did a CMBS deal. Are you guys seeing any kind of additional options opening up there for maybe some non-recourse financing to grow that there, or can you talk about what you're seeing in those markets?

Sure. The last lease securitization that we did with non-agency securities was in February. We then did a structured financing transaction subsequent to that, a few months later than that, I think it closed on June 30th, actually, which was -- we achieved substantially the same economic and legal benefits that we did with a resecuritization, so the resecuritization market is still there. Unfortunately, the only rating agency that is really still involved in that is DBRS, and those securities don't have quite the market acceptance that a resecuritization with S&P or other rating agencies would, so, at least for the time being, we haven't done another resecuritization.

The Redwood-type deals, those are -- on whole loans, obviously, those are on new originations, not existing securities, so those are a little bit different, although market acceptance of those deals, at least the last one, was very, very good.

So, it's something that we continue to monitor but, like I say, with only one rating agency, and that's DBRS, those deals are a little bit more difficult than they were.

And if we were to do one unrated, because there have been some unrated deals, the execution on that senior bond is really not that attractive relative to where we can get long-term financing, because we have close to $1 billion on long-term financing on these securities as well, so it's just -- it's a constant tradeoff in execution and sort of what the market gives us.

Great, I appreciate the color on that, and one final question, if I may. Looking at the June Q, and I haven't had a chance to look at the most recent one, it looks like you had 18% to 20% of your swap book was resetting within six months of June 30th, all of which was -- most of which was at about 4.45%. Can you -- as that rolls of and matures in the next three to four months, can -- how should we think about -- is that being replaced? Will you guys add new swaps and hold that constant? Will that swap percentage come down? If you're adding new swaps, where exactly are you going to look so I can think about building that pricing into my model?

Alright, I think --

Look, it's not the percentage of repo that we look at as much as how much interest rate exposure do we have on the asset side and how much of that do we have to hedge, and what you'll actually see is, our interest rate exposure has gone down over the last couple of quarters.

Give them -- what has the duration been over the last couple of quarters?

Duration now, at the end of the third quarter, was 21 basis points.

So, there is not a compelling need to replace all these swaps. Incrementally, there might be some new swaps put on, but it's not -- in no way do we -- as we're structured now, do we see a dollar-for-dollar replacement of the swaps that run off.

So -- this is Stewart. What is our percentage in terms of our swap position now?

It's about 43% versus the agency repo.

Right, which is approximately where it's been.

Yes, that sounds about -- roughly where it's been from what I've been following, as well.

Right, so, and I think -- to reiterate what Bill said, we're very comfortable with our interest rate exposure, and that really is the key -- that's just putting on swaps for the sake of doing it, because we're in such a low interest rate environment, but really looking at the portfolio and trying to make sure that we have, in fact, ameliorated the risk that does exist.

Well, great. It looks like there should be some nice benefits to earnings next year from these higher cost-swaps maturing. Thank you.

Thank you.

(Operator Instructions) I will now go to the line of Steven C. Delaney of JMP Securities. Please go ahead.

Thank you. Good morning, everyone, and congratulations on a 21% total return in the third quarter.

Thank you.

Don't have that kind of quarter very often, so enjoy it.

Thanks.

So, guys, I guess a couple things. You reported your -- obviously, that return came from the growth in book and especially the strong performance in the non-agency RMBS, looks like bonds from what we saw, up 5 to 6 points, and I think your specific portfolio up 6.5, we're seeing things kind of flat since September 30. Just wondering, Craig, if you're sort of seeing the same thing in the marketplace as far as dollar prices on cash bonds?

So, Steve, I would say, again, it always depends upon specific bonds, but I would say, generally, the non-agency sector has been pretty strong since the end of the quarter. I would say we're certainly not up a lot, but, overall, the sector is probably up at least a half a point, and maybe as much as a point on some bonds.

Alright, good, so certainly haven't given anything back, it doesn't sound like.

It doesn't feel like it.

And I noticed the -- there was only a -- despite the higher prices, the lower yields, and you went through sort of your 4% to 5% unlevered yield, the overall non-agency portfolio yield, though, in the third quarter, held up pretty good at 6.65%, only down 10 basis points from 6.75%.

I mean, do we -- should we imply for that -- I mean, you give us the speeds, and we know things are only repaying at a measured -- a fairly measured rate, but it also looks like you're really not trying to sort of force a lot of new bonds in at these lower returns. Am I interpreting that correct, and do you see that 6.65% yield as being reasonably stable over the next couple of quarters?

So, a couple of things, Steve. I mean, it's hard, obviously, to predict the future. I think what you'll see in our Q is, we added about $300 million of non-agencies in the third quarter, I think the number was $295 million, and we've added $1 billion, $1 billion and change, but $1.0-something billion in the first 9 months of the year.

So, the third quarter was more or less -- the kind of average acquisition rate during the year was probably a little bit higher earlier in the year. As far as yields, there are a lot, a lot of moving parts to that yield number, so one part, and you'll notice this in the Q, and I think we mentioned this in our press release as well, we released approximately $54 million from our credit reserve to our accretable discounts.

That's on a total of about $800 million amortized cost of non-agencies. It's about a third of the portfolio, so they were reviewed in the third quarter, those were last reviewed in the fourth quarter of last year, so the $800 million on which we changed those assumptions, where we moved that $50 million of credit reserve, it increased the yields on those bonds on a weighted average by approximately 40 basis points.

So, that's one moving part. The second moving part, as you know, those non-agency yields are also sensitive to the forward curve. So, the forward curve actually brought yields down a little bit in the third quarter versus the second quarter, but, again, looking out into the future, should the curve steepen and the forward curve steepen, then that will give rise to an increase in yield, so it just -- unfortunately, there are a lot of moving pieces, so it's very hard to handicap exactly what happens to that yield number.

Understand. Just one final thing, as far as your -- as far as the dividend relative to reported core earnings, we've been able to -- or you have been able to reward shareholders with a slightly higher dividend payout relative to core earnings because your taxable has -- EPS has exceeded core due to the difference on timing on loss recognition, and it looks like that was about $0.02 in the third quarter. Can you just give us any feel for whether -- I assume that difference, certainly it used to be wider, it's tightened down a little bit, but do you expect there will still be a penny or so of excess of taxable over core as we look out over the next couple of quarters?

As we told you over the course of the year, they should be coming together closer, the taxable and the core, and you're right to point out that it looks like the taxable income exceeded the core, because our dividend matches taxable income. The exact timing and the forecast, it's hard to tell you, because taxable is based on actual defaults, which is impossible to predict, because we don't control the servicers.

So, it looks like taxable will exceed or be generally in line with core over the next couple of quarters, but we can't predict more closely than that because we don't control actual foreclosures.

So, well, listen. Thanks, good quarter, thanks for the color.

Thanks, Steve.

I will now go to the line of Jason Arnold of RBC Capital Markets. Please go ahead.

Hi, good morning, guys. Just curious if you could talk about the supply of non-agency MBS to purchase and then, just as a follow up, I guess, assuming we eventually get some more new issue supply in the non-agency space, eventually being kind of the key operator, is that a market that you would expect to participate in? Thanks.

This is Stewart. Let me answer the second part and then we'll turn it over to Craig. Yes, we would expect to participate in that market. It's a market we find very attractive. Again, depending upon, of course, what yields are at the time, but that is a market that we look forward to participating in if and when it comes back. I'd like to say when it comes back, but, Craig, do you want to handle the other part?

Sure. As far as existing supply of the '05, '06, '07 vintage non-agencies, there continues to be supply. It's at least, recently, as you would expect, very much a seller's market, so, many of these lists that come trade on an all-or-none basis which -- those are difficult for dealers to bid because typically it's hard to get orders on bonds.

But there still is supply, obviously, the levels are tighter and we have to look a little bit harder at various securities to find bonds that are as attractive to us, but we're still able to find bonds. We bought a bond yesterday. The supply is still there.

Craig, just remind everybody, remind me, too. What did we purchase in non-agencies during the quarter, the third quarter?

$295 million.

Right, so, just shy of $300 million.

Excellent. Okay, thanks, and then just one other quick follow-up. I guess you mentioned you did have a little bit of a release on the credit reserve side for your non-agency bonds, and you still have a very conservative mark there on that front.

I guess, what would be the biggest moving part that would get you to revise kind of those credit-loss expectations? Would it be home prices going up more, would it be the loss severities? I know there's a lot of moving parts there, but I guess I just want to kind of hear your perspective on that, because that's a big slug of the total notional value there of the bonds.

Sure, and what causes us to change that, as you pointed out, there are a lot of moving parts, there are a lot of pieces to that. I would say, if we were to see sustained faster prepayment fees, obviously that would probably be indicate that we could release more of the credit reserve. The way we really look at it is, most of those changes are due to the fact that when we look at a bond and we look at the mortgages underneath that, and we look at the number of bonds, the number of mortgages that we're liquidating in our assumptions, and given the pay histories, and, again, every six months, every year that goes by, we have another string of pay history, and couple that with some home price depreciation or, at least, firming, and add to that the fact that many of these post-reset hybrids are now amortizing, so the homeowner is now paying principle back and, because the rate is so low, they actually pay quite a bit of principle, even in that first year.

So, it's a whole combination of things, but typically what leads that decision is, we look and say, you know what? We think we're probably liquidating too many of the loans that are current today, and so when we make those assumption changes, we dial back our expectation of future liquidations of loans that are current today. Does that make sense?

That helps out. That's great. Thank you very much.

You bet.

I will now go to the line of Rick Shane, JPMorgan. Please go ahead.

Hey, guys. Thanks for taking my question. When you look at the embedded gains in the portfolio and the difference between the agency book and the non-agency book, how do you think about leveraging those gains, given particularly the prepayment risk associated with the agency book? The -- part of what triggered that question was Bill's comment at the beginning that you increased the agency book this quarter modestly in order to maintain balance. Is that going to be the strategy, or do you think at some point you may make more of a tactical call in terms of what's going on in the market where you want to be slightly more overweight?

When you say overweight, overweight which?

One or the other. I mean --

So, Rick, as we've explained, there's certain limitations in terms of agency whole pools that a mortgage REIT must own, so we really cannot increase substantially our non-agency allocations from where we are.

Got it. And when you look at those -- that's helpful, Bill, I appreciate that. And then the other element of that is that, when you look at the embedded gains in the portfolio and, again, your overall growth doesn't fully reflect the embedded gains, but you take a little bit of leverage on the embedded gains, how do you sort of think about that in terms of the differences between the unrealized gains in the agency book and the non-agency book?

Good question, Rick. So, you're right, we have a cost basis, and it's an old cost basis, but you need to know what the asset is going to yield going forward based on its new value, and Goodmunder and Craig do a great job of that, so we might have paid 102, but if we could sell the asset at 107 and we decide not to sell it, what's our incremental return for holding that asset? That's exactly how we look at it, and we very selectively sold some agencies in the third quarter, but basically, we're happy holding what we have.

So, we do look at it the way you mentioned, Rick.

Okay, great. Thank you.

I will now go to the line of Chris Donat from Sandler O'Neill. Please go ahead.

Hi, good morning, everyone. I think I will just ask one philosophical question here. With some of the other mortgage REITs announcing share repurchase authorization, just what, philosophically, is your view on MFA taking a similar course?

This is Stewart. We do have a plan in place, I think it's -- correct me, Hal, if I'm wrong, I think it's about 4 million shares. We continue to look at that in terms of is that something we should implement, again, looking at our book value and looking at our share price. We continue to do that.

We have, in fact, implemented share repurchases in the past. Right now, we continue to look at it, and that's really the best answer I can give you.

And, Chris, another thing to add, we're not investment-constrained, because we don't tie ourselves only to agencies, but across the residential mortgage investment universe, we actually are looking at attractive investment opportunities, and have good use of capital.

Okay, thank you very much.

I will now go to the line of Daniel Furtado of Jefferies. Please go ahead.

Good morning. Thank you for the opportunity to ask a couple questions. The first is, does the natural hedging dynamics between the agency and non-agency books change, if at all, if the non-agency books were to move closer to par value?

Good question. I actually have to tie back to Craig's answer to Steve Delaney on this one. Earlier on, we talked about the fact that a lot of our non-agencies are in an adjustable period and Craig mentioned, gee, if the forward curve goes down, the yield on our non-agencies goes down.

On the other hand, if the forward curve moves up, the yields on our non-agencies move up in that period. You don't actually have to wait for the coupon to reset because of the non-agencies purchased at deep discounts with low ratings, you book your earnings based on expected yields, and the expected yield we use for the assumptions of curves is based on the forward curve.

If the forward curve moves up, then the yield on the non-agencies will move up in that quarter. So, yes, despite the fact that prices are appreciated, our cost space is about 73, and our average market is now 80-ish, 80. So, with -- there's still deep discount, one, so they're not yet sensitive to prices, it's not like they're trading to par, and what's important is, the yield will actually adjust quickly if interest rates go up.

So, yes, we do still think they're a natural hedge against movements and interest rates.

And, Dan, the one thing I would add to that is, as the non-agencies increase in price -- not increase from the 70s to 80, but to the extent that we're seeing prices in some securities that could be in the 90s or even higher, to the extent that those are -- certainly if they're fixed-rate securities or if they're 10 ones with still many years to the reset, we do start to think about those as possibly having some interest rate sensitivity.

Gotcha. Thank you for the clarity on that, it's very helpful. The second question, and I don't know to what extent you can comment on this, but what are your expectations regarding the GSEs' potential issuance of credit securities?

We've been looking at this for a long time. Traditionally, they've been underpaid for the credit risk they have taken. They might be surprised at how much the private sector might want to be paid to accept this credit risk, so we're not sure where they're going to end up, but that's how we're thinking about it.

I would also add to that that, at least in my opinion, (inaudible) the Company's opinion, there will be an entity -- whether it's called Fannie, whether it's called Freddie, again, whether the pricing is different, there will be a guaranteeing entity.

Gotcha. Understood. Thank you for your time, everybody, and congratulations on a strong quarter.

Thank you.

I will now go to the line of Mike Widner from Stifel Nicolaus. Please go ahead.

Hey, guys. I'm not going to be quite as philosophical, but if we talk just about this little election that's coming up today, I'm wondering what your view is -- let's just imagine the two possible scenarios, an Obama continuation or a Romney victory. Are either one of those good for mortgage REITs in general, agency-side or non-agency-side? Is either scenario better than the other, and, I guess, wondering maybe if you could talk about some of the risks and, specifically, let me throw out there, on the Romney side, some of the stuff we're reading and hearing lately is about one of his chief economic advisors, Hubbard, over there in New York with you guys being supportive of refi programs as well, and giving more Americans the chance to refi at all-time low rates and using that as a mechanism for basically stimulating the economy, etc.

So, it seems like there is, again, if that is to be believed, then it seems like there is a bias in both parties, actually, for more free money for more people for longer, which doesn't necessarily tend to be the greatest thing in the world for securities being held at high dollar values but, anyway, wondering if you could compare and contrast and not necessarily tell us which way you're going to vote or whatnot, but how do you see it shaping up, and is there any better scenario than another one?

Well, let me just give you a preamble, and then we'll see if Bill, Craig or Ron or somebody else has something to add. When you look on the agency side in terms of free money, in terms of prepayments and what it might or might not mean, one thing is, to have the type of premium exposure we have, the other thing is to have the premium exposure that may be twice that.

So, that doesn't give me a lot of (inaudible) in terms of which side wins and, again, I think, unfortunately, I think many times when we listen to whichever side, what they say during an election campaign is sometimes very different from what they wind up doing and/or what they can do.

But if you want to give -- fellows, if you want to give more clarity, please go ahead.

Yes, so, if we -- if things run down the middle, it doesn't matter. So, I think, Mike, your question is the tails, the extremes, and talking about making prepays easier.

So, marginally, people continue to make agencies easier for agency-guaranteed assets, right? It's just been a trend over the least five or six years. Well, what happens if they go all the way and make prepayments easier for non-agencies? We might -- we have a two or three-point premium on our agencies, we have close to a 30-point discount on our non-agencies, so if you do get to an extreme tail, we're not at risk there, it could be a gain for us.

That's -- but, look, we are very supportive of what Ben Bernanke has done, so we have mixed feelings -- but either way, I think as Stewart mentions, we don't see extreme changes, because what they say and what happens are two different things, but at the extremes, we think our portfolio is well-protected.

So, I mean, in short, you guys see yourselves as -- I don't want to necessarily say uniquely positioned, but, relative to a lot of the pure agency guys, you might -- it sounds like what you're saying is, look, you've got a lower premium, and that inherently makes you less subject to the risk, and then, on the non-agency side, faster prepays are better, so --

Rather than comparing us to the agency folks, I mean, if you just look at us as an entity, I think we're very well-positioned.

It sounds like you're not concerned really either way that there's much of a disaster scenario.

Let's say I have a personal bias that we're not going to discuss on this call.

Well, aside from the personal bias, but when it comes to -- just given the way that you've positioned the portfolio, it doesn't seem like there's necessarily a disaster scenario or a big downside risk that you see as balanced. One side is much more dangerous to you or the other just because of the way you've uniquely positioned the portfolio. Is that fair?

I think that's fair.

Well, I appreciate the comments and the color, and I'm hoping maybe next quarter you can get to the 20% Q-over-Q book value. 18% was nice, but let's try and stretch that.

We'll go for it.

I will now go to the line of Jim Young with West Family Investments. Please go ahead.

Yes, hi. Can you talk about the factors that drove your decision to transfer to the (inaudible) discounts from your credit reserve the $54.1 million, and, from what you see in the current quarter, would you expect that level to be similar and increase or decrease? Thank you.

Craig?

So, again, it's impossible for me to predict the next couple quarters. We review approximately a third of the portfolio every quarter, so we reviewed a third of the portfolio during the third quarter.

The things that lead us to change that credit reserve are faster prepayments, pay histories, transition rates that go down, but basically, as I said before, it's typically a case where -- and we do this on a bond-by-bond basis, obviously, where we believe that we're probably liquidating too many of the loans that are current today.

So, we're still assuming that at any one that's delinquent today defaults. Where the art meets the science here is, on the loans that are current today, how many of those loans will go bad in the future, and so the assumption changes typically are built around that number, of the future expected defaults from loans that are current today.

So, it's a variety of factors that influence those. Again, it was a third of the portfolio that we went through, so it was about $1.4 billion face amount, it was about $800 million amortized cost amount that we changed those credit reserves on, and it added about 40 basis points of yield to those bonds.

So, the other -- we'll do another third during the fourth quarter, and we'll do another third during the fourth quarter of next year. So, it's obviously good news, and it was good to see that our original assumptions were probably a little bit too heavy, but it's a quarter-by-quarter and a bond-by-bond thing.

Okay, thank you.

Thank you.

Sure.

Speakers, there are no more callers in queue. Please go ahead.

Well, thank you very much, everybody. We appreciate your continued interest in MFA Financial, and we look forward to speaking with you next quarter.

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