Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Stephanie [Coil]

Stewart Zimmerman – Chairman of the Board & Chief Executive Officer

William S. Gorin – President & Chief Financial Officer

Ronald A. Freydberg – Executive Vice President & Chief Investment Officer

Teresa D. Covello – Senior Vice President, Chief Accounting Officer & Treasurer

Timothy W. Korth, II – Senior Vice President Business Development, General Counsel & Secretary

Craig L. Knutson – Senior Vice President Risk Management

Deborah Yang – Vice President

Analysts

Steven Delaney – JMP Securities

Jason Arnold – RBC Capital Markets

Michael Widner – Stifel Nicolaus & Company, Inc.

Gary Gordon – Portales Partners

James Ackor – Sterne, Agee & Leach

Bose George – Keefe, Bruyette & Woods

Matthew Howlett – Fox-Pitt Kelton

Omotayo Okusanya – UBS

[Richard Cribbs]

[Robert Schwartzberg – Compass Point]

MFA Mortgage Investments, Inc. (MFA) Q3 2008 Earnings Call November 3, 2008 10:00 AM ET

Operator

Welcome to the third quarter 2008 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions) I would now like to turn the conference over to our host Ms. Stephanie [Coil].

Stephanie [Coil]

The information discussed today may contain or refer to forward-looking statements regarding MFA that reflect management’s belief’s expectations and assumptions as to MFA’s future performance and operations. When used those statements which are not historical in nature including those containing words such as believes, expects, anticipates, estimates, 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 related to changes in interest rates and the market value of MFA’s investment securities, changes in the pre-payment rates on the mortgage loan securing MFA’s investment securities, MFA’s ability to borrow to finance its assets, changes in government regulations 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 or 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 31, 2007 and other reports that MFA might file from time-to-time with the Securities & Exchange Commission could cause MFA’s actual results, performance and achievements to differ materially from those projected, expressed or implied and any forward-looking statements it makes.

For additional information regarding MFA’s use of forward-looking statements, please see the relevant disclosure in MFA’s quarterly report on Form 10Q for the quarter ended September 30, 2008 and/or the press release announcing MFA’s third quarter 2008 financial results. Thank you for your time. I would now like to turn this call over to Stewart Zimmerman, MFA’s Chief Executive Officer.

Stewart Zimmerman

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

Today we reported net income of $48 million and $0.24 per share of common stock for the third quarter ended September 30, 2008. On October 1, 2008 we announced our third quarter dividend of $0.22 per share which was paid on October 31, 2008 to stockholders of record as of October 14, 2008. As of September 30, 2008 MFA’s book value per share was $5.85. We remain focused on high quality agency mortgage backed securities and our portfolio spread has now trended up for seven consecutive quarters.

This upward trend in spreads is due primarily due to declines in borrowing costs as both the Fed fund rates and LIBOR have generally trended down over this period. LIBOR however has spiked up over the last several months due to well-publicized asset liquidity issues affecting both bank lenders and borrowers. We currently anticipate that this sharp increase in LIBOR will have an impact on MFA’s borrowing cost in the fourth quarter resulting in some reduction in spread.

Beyond the fourth quarter we presently expect MFA’s borrowing cost to continue its downward trend in 2009 as coordinated global actions have greatly restored the capital base and reduced funding risks for many of the world’s largest financial institutions. On September 30, 2008 approximately 99% of our assets consisted of mortgage backed securities issued or guaranteed by an agency of the United States government of federally charted corporation, other MBS rated AAA by nationally recognized rating agency, MBS related receivables and cash.

Due to recent market volatility and credit issues throughout the financial system, we continued to maintain a modest leverage multiple and we current are not purchasing new assets. At September 30, 2008 our debt to equity multiple was 7.22 times and our liquidity position was $601 million consisting of $438 million of cash and $163 million of unpledged mortgage backed securities.

Our quarterly dividend annualized provided investors with a 15% yield relative to our quarter end book value. Unprecedented disruptions in the financial markets have escalated in the second half of 2008 and an investment in commercial bank liquidity and capital have remained highly stressed. In response, on October 14, 2008 the US Treasury announced its plans to purchase $250 billion of senior preferred shares in qualifying US institutions. Nine major institutions have committed to the program for an amount totaling $125 billion.

During this continued period of market dislocation, various government actions have been attempted to address credit and liquidity issues. The one government action which we believe will eventually have the largest positive impact on MFA occurred on September 7, 2008 when Fannie Mae and Freddie Mac were placed under conservatorship by the Federal Housing Finance Agency. At this time the US Treasury agreed to purchase senior preferred stock in Fannie Mae or Freddy Mac if needed to a maximum of $100 billion per company to maintain positive net worth.

In return Treasury receipt warrants to purchase 79.9% of each company. As a result we believe there is now significantly stronger backing for these guarantors of their agency mortgage backed securities and eventually that this will be positively reflected in the pricing of these securities as liquidity returns to the residential MBS marketplace. On September 30, 2008 agency mortgage backed securities and related receivables constituted approximately 93.4% of our assets, AAA rated mortgage backed securities and related receivables were approximately 2% and cash was approximately 4.1%. The remaining .5% of assets consisted primarily of interest rate swaps, real estate securities rated below AAA and goodwill.

The average cost of our MBS portfolio is 101.26% of par at September 30th. Our assets continued to be financed with multiple funding providers through repurchase agreements and as of September 30, 2008 our portfolio was financed with six repurchase agreement counterparties. During the third quarter 2008 our portfolio spread which is the difference between our interest earning asset portfolio, net yield of 5.21 and our 3.60 cost of funds was 161 basis points versus 138 basis points in the second quarter 2008.

During the third quarter MFA’s MBS net spread which is the difference between our MBS net yields of 530 and our cost of funds was 170 basis points versus 151 basis points in the prior quarter. In the third quarter 2008 our cost for compensation of benefits and other G&A expense was $4.7 million. Our primary focus is high quality, high coupon agency hybrid and adjustable rate mortgage backed securities. The MBS in our portfolio are primarily adjustable rate or hybrids which have an initial fixed interest rate for a specified period of time and thereafter generally reset annually.

Assuming a 15% CPR, approximately 23% of the mortgage-backed securities in our portfolio are expected to pre-pay or have interest rates reset within the next 12 months with a total of 79% expected to reset or prepay during the next 15 months. We take in to account both coupon resets and expected pre-payments when measuring the sensitivity of our MBS portfolio to changing interest rates.

In measuring our assets to the pricing gap we measure the difference between the weighted average months until the coupon adjustments or rejected prepayment on our MBS portfolio and the months remaining on our repurchase agreement including the impact of interest rate swap agreements. Assuming a 15% CPR the weighted average time to repricing or assumed prepayment for our MBS portfolio as of September 30, 2008 was approximately 37 months and the average term remaining on our repurchase agreements including the impact of interest rate swaps was approximately 16 months resulting in a repricing gap of 21 months.

The repayment speed on our MBS portfolio average a 10.3% CPR during the third quarter of 2008. I thank you for your interest in MFA and at this time I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Steven Delaney – JMP Securities.

Steven Delaney – JMP Securities

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

William S. Gorin

It wasn’t a change in portfolio. One swap which I believe the notional amount was $27 million was with Lehman Brothers.

Steven Delaney – JMP Securities

Well that explains that.

William S. Gorin

So it wasn’t that we terminated a swap it was just they’re in technical default because they’re bankrupt so it’s as simple as that. There really wasn’t that much change to the swap portfolio.

Steven Delaney – JMP Securities

I see what you’re saying, you took a charge related to that swap position vis-à-vis collateral or something but are you saying the protection that –

William S. Gorin

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

Steven Delaney – JMP Securities

Just one final thing, it looks like you sold some shares, $8 million to $9 million and I may have missed this Bill, did you guys adopt like a continuous offering program? I guess I just missed if there was an 8K filing or a prospectus on that.

William S. Gorin

We actually have had the CDO program for a long time but since we’ve done a serious of equity raises we’ve been locked out of the market forever which is why you might have forgotten. But, we’ve always had a CDO program.

Steven Delaney – JMP Securities

I think was it with [Canner] the old one you had.

Operator

Our next question comes from Jason Arnold – RBC Capital Markets.

Jason Arnold – RBC Capital Markets

Can you give us your thoughts on leverage going forward? Are you comfortable in the 6.5 to 7 range or would you see this coming down? Then, perhaps you can give us an update on what you’re seeing on the rate and haircut perspective on REPO?

William S. Gorin

In terms of leverage we’ve generally been the least levered of the companies in our space. I think you realize that. At the end of the quarter we were certainly, certainly comfortable with where we are and we’ll continue to maintain a relatively modest amount of leverage until things kind of shake out. So, yes the answer is we’re comfortable at the levels that we’ve been at.

Jason Arnold – RBC Capital Markets

Then I guess on the REPO side can you offer us any color there?

Stewart Zimmerman

Sure. Actually, I’ll let Ron Freydberg will kind of give you the exact and then maybe I’ll add to it.

Ronald A. Freydberg

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

Jason Arnold – RBC Capital Markets

Also, I was wondering I guess lastly if you could talk a little bit about the factors impacting book value this quarter. I assume some swap mark-to-market and then also on the MBS side could you just kind of break that out for us as well please?

William S. Gorin

Let me just do it approximately. I believe on the swap side the change in value is approximately $10 million. While interest rates went down which would have been a negative, swamps spreads widen, it was actually a positive for us so only a $10 million diminution in value there. The bulk of the change would be on the MBS side and again while we gained on interest rates going down, spreads widened substantially. So, it’s only $10 million on the swap side, that would leave the remainder $100 million.

Jason Arnold – RBC Capital Markets

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

William S. Gorin

I just want to clarify one thing, it was $100 million on the agency side and approximately $50 on the AAA side. So there were three components a swap, the agency, and AAA.

Jason Arnold – RBC Capital Markets

Just from the spread perspective are you starting to see things tighten up on the hybrids or maybe you could give us some color there as well please?

Stewart Zimmerman

What we see in terms of what’s available in the market today as we look at pretty much a par coupon, they’re probably anywhere from 250 to 275 basis points.

William S. Gorin

But there is some tightening which began late last week which is good for our portfolio.

Operator

Our next question comes from Michael Widner – Stifel Nicolaus & Company, Inc.

Michael Widner – Stifel Nicolaus & Company, Inc.

I just wanted to follow up there on the book value question quickly, you indicated the agency and the MBS down about $100 million. On a percentage basis that seems to be down a bit more than some of your peers had marked and I know there’s a lot of volatility at the end of a quarter so we were just wondering if you could give any color on sort of how that has changed since the end of the quarter? What I’m getting at is just trying to figure out if there’s a very conservative mark at the end of the quarter or kind of where we stand from that standpoint?

William S. Gorin

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

Michael Widner – Stifel Nicolaus & Company, Inc.

Well, any comments on sort of how that has done since the end of the quarter? I mean MBS in general seems to have continued to price down since the end of the quarter so I’m just wondering if you have observed the same thing or what you are seeing?

William S. Gorin

There’s definitely volatility from day-to-day and as I mentioned there was some tightening beginning last week. It would appear to us that almost the best assets, the shortest assets are probably being impacted the most because that’s where people are selling because it’s the only place they can sell so it really changes day-to-day. You have independent views on to the agency hybrid markets, we own agency hybrids, nothing that would really contrast our change in value versus everyone else. These are agency Fannie and Freddie hybrids.

Stewart Zimmerman

The mark-to-market as you do know and actually you mentioned it’s very, very volatile but we have seen a little bit of a stiffing up of the market in the last three or four trading days.

Michael Widner – Stifel Nicolaus & Company, Inc.

Then just to touch on another question that I think Steve mentioned in the beginning. You mentioned being comfortable with the leverage here at I guess about 7.2, that is where you finished the last couple of quarters and again I just wonder if sort of being higher than the upper sixes is a function of sort of the volatile marks or if you guys are sort of consciously shooting for something towards the low seven range as opposed to the high six range?

Stewart Zimmerman

It really has nothing to do with the high sixes or low sevens. Again, it’s a mark-to-market it’s not tracking time and with the market being this volatile as it’s been, that’s where it came in so it’s really more a function of simply market price at a moment in time.

Michael Widner – Stifel Nicolaus & Company, Inc.

So you guys are sort of comfortable, if I’m reading between the lines here, sort of comfortable with the portfolio size which didn’t change a whole lot and the leverage is floating around a little bit just due to volatility.

Stewart Zimmerman

That’s correct.

Operator

Our next question comes from Gary Gordon – Portales Partners.

Gary Gordon – Portales Partners

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

William S. Gorin

Yes, that sounds ballpark right.

Gary Gordon – Portales Partners

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

Stewart Zimmerman

That’s true. That’s absolutely correct.

Gary Gordon – Portales Partners

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

William S. Gorin

As it says in the release I think for the last quarter it was about a 10% CPR. We try to use a convention that people can identify with so the 15% CPR is what we’ve used over time but we show you where it’s been. So again, if CPR was 20% I would have told you 20% but I think it was 10.3% for the quarter.

Gary Gordon – Portales Partners

And presumably essentially none of your existing borrowers it would make sense for them to refi or to swap?

William S. Gorin

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

Operator

Our next question comes from James Ackor – Sterne, Agee & Leach.

James Ackor – Sterne, Agee & Leach

We heard on a few other conference calls, some of the people in this industry sort of flushing out little bit some of the advancements or efforts being made to diversify away from the primary dealers as the sole source of REPO and we’ve heard a few discussions about going direct to sources of cash, using smaller broker/dealers that are coming in to the market with more competitive pricing. I was wondering if you guys might be able to discuss generically or in global terms what efforts you guys are making to diversify sources of financing?

William S. Gorin

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

James Ackor – Sterne, Agee & Leach

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

William S. Gorin

Well, you said that you’ve heard that on some of the other calls and we’re also letting you know that we’re seeing something similar so my guess is over the next number of quarters that you probably will be seeing something.

Operator

Our next question comes from Bose George – Keefe, Bruyette & Woods.

Bose George – Keefe, Bruyette & Woods

A couple of things, one can I just get your portfolio, the net duration number for the quarter? I’ll just ask my second question as well, just basically on the spread you’ve guided to 4Q being somewhat weaker with the spike in LIBOR but LIBOR obviously has come down pretty hard. It looks like it’s continuing to come down. Is it possible you could turn out to be too cautious if we have labor where it is or coming down even further this quarter?

Stewart Zimmerman

I think Bill and Ron will respond to your first question second. I’ll do your second question, in terms of are we being too cautious, the answer is no? We are not being too cautious. As you know, with the volatility again, I’ve been in this business since the last 60s and we’ve never quite seen anything like this. To be too cautious, I don’t think that’s anything anybody is going to throw any stones at us about.

So, we are going to continue to be cautious until whatever the new normal is. But, I don’t think the new normal is going to be where we were two or three years ago. So, as things become more normalized we’ll surely take another look at the marketplace but I don’t think we’ll be criticized for being too cautious.

William S. Gorin

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

Stewart Zimmerman

But, I think your point is well taken though, we do have some breathing room now with LIBOR kind of spiking down if you will as much as it has so as we continue to role REPO obviously we’ll get the benefit of that.

William S. Gorin

I mean that’s why we’re very optimistic about 2009.

Operator

Our next question comes from Matthew Howlett – Fox-Pitt Kelton.

Matthew Howlett – Fox-Pitt Kelton

Just on the duration gap or the repressuring gap as you guys describe it, where do you see that going? It’s been widening out the past few quarters. I know you’re not going to purchase really any new assets this quarter. Where would you like to keep that sort of going in to ’09?

William S. Gorin

We did wind it a bit, you’re right and it ended up working out our way very well because if you remember last summer people were talking about Fed tightening so it actually has worked our way to the extent it’s extended a little bit. I don’t see it changing that much going forward. We did extend it somewhat but that’s worked out very well.

Matthew Howlett – Fox-Pitt Kelton

But, historically it’s sort of on the high end of where you guys have been historically, right?

William S. Gorin

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

Stewart Zimmerman

We usually use a 25 as a standard and what we’ve tried to do is to continually look at the marketplace and use something that is more realistic to the market that we’re in.

Matthew Howlett – Fox-Pitt Kelton

Then the second question, just on you said the new spread on acquisitions I think you said is 250 to 275. I know it’s sort of hard to look at that going forward but do you think these prices are going to be around to set the spreads [inaudible] going to be available in ’09? I think you said that you thought the biggest positive development was Fannie or Freddie debt being either guaranteed by the government. Does this all go away when the dealer haircuts come down and Fannie, Freddie buying again, and the Treasury is buying again?

Or, do you think that type of spread is going to be around for most of ’09 given the US has got to be issuing treasuries to fund the purchase of MBS and that could keep the curve steep? And, it doesn’t look like the banks are going to be all that active in ’09? Any type of guidance you can give us on what you may see in ’09?

Stewart Zimmerman

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

Matthew Howlett – Fox-Pitt Kelton

Right so the 80 or 90 bips as normalized, we’re far from seeing that again.

Stewart Zimmerman

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

William S. Gorin

The other important thing is I don’t think we’re going too far out on a limb to say that we expect the yield curve to be steep and not inverted and that’s really helped our spreads.

Operator

Our next question comes from Omotayo Okusanya – UBS.

Omotayo Okusanya – UBS

Just two quick questions, one could you please tell us what spreads were at the end of third quarter ’08? Then two, if you were to originate or buy MBS right now, at about what spreads would you be able to put them on to the books?

Stewart Zimmerman

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

William S. Gorin

A par price coupon, par price 51 right now is probably somewhere between 5.5 and 5.25 so it call it 5.58. If I were to go and get three month funding today that’s at about 285 so you can subtract the two and you’re in the 250ish range for new assets.

Ronald A. Freydberg

In terms of your other question and this will help illustrate our point for the fourth quarter, basically during the whole quarter the yield on assets remained fairly constant. What you did see was while our average funding cost for the quarter was 360 for the whole quarter, that did trend up. In September, it was as high as 370 so spreads were actually, in the month of September it was 150 and that’s what we’re trying to point out to you, that LIBOR started to move up mid way through September and it impacted our spreads in September, it will impact a little bit more in October and November so we do know that and that’s what we want to make clear to you.

Operator

Our next question is from [Richard Cribbs].

[Richard Cribbs]

A couple of quick questions, one is regarding the income that has actually been derived this year versus the pay out. Can you tell me year-to-date where we stand income versus out go in dividends?

William S. Gorin

Yes. What drives our dividend I out taxable income, not our GAAP income and they’re almost matched dollar for dollar right now. So, we’re distributing what we’ve earned.

[Richard Cribbs]

One last question if I may, during the last quarter you made a projection of a spread provided the Fed didn’t raise interest rates and coming in somewhere around 155. You did beat that which is kind of nice but is there any way you can give some kind of number to dummies like me like the 155 assuming the Fed didn’t raise rates again during this next quarter what the spread might actually arrive at?

Stewart Zimmerman

I don’t think the Fed is going to be raising rates.

[Richard Cribbs]

I agree with that.

Stewart Zimmerman

At least this quarter. I’m probably not going out to much, I’m just spit balling it here for you, but I don’t think that’s going to be a problem. In terms of where the spread will be for the fourth quarter, again as you certainly know and we discussed on the call that LIBOR has spiked up earlier and that again we have to fund ourselves so that LIBOR spike does affect you. LIBOR now is down and somewhat precipitously and as we continue to roll our REPO we’ll be able to take advantage of that meaning later in the quarter, that could be later parts of November going in to December we’ll take advantage of it so it’s really difficult to kind of pinpoint the number for you.

It really just depends. If LIBOR goes down another 35 or 40 basis points that will help us significantly but I just don’t know how that’s going to work out. I’m sorry I can’t kind of give you exactly what you’re looking for.

[Richard Cribbs]

One last question so I really understand, should I be looking at the three-month LIBOR rate as the closest thing to what your funding cost is?

William S. Gorin

Somewhere between one month and three months.

[Richard Cribbs]

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

Stewart Zimmerman

One month LIBOR this morning, I’m going to round out the number 236 and 286 on three months.

[Richard Cribbs]

Again, that’s going to be going down tomorrow, correct?

Stewart Zimmerman

That’s what they’re forecasting.

Operator

Our next question comes from [Robert Schwartzberg – Compass Point].

[Robert Schwartzberg – Compass Point]

I have two questions, one what are some of the factors causing this spread widening which caused the decrease in the book value besides overall market sentiment? Are there portfolios on the market causing that? And, I guess along with that question what would cause a permanent impairment or when would you have to recognize that?

Then last question would be what would be some of the factors you’d be looking for to increase your leverage to a more normalized levels?

Stewart Zimmerman

Let’s start with the third one first, in terms of going back to I guess historical we’ve been anywhere from eight to 10 times levered. Again, you’d have to go back to a time where funding and the idea of a more normalized market is prevalent and you’re not there yet. Things are certainly better today than they were a week ago today as an example. You need to see a time of some type of normalization so I think it’s very, very important for us to continue to be prudent, continue to have a little more conservative leverage ratio.

Once we see this more a bit normalized market that is fine then we’ll go back to a more normalized time. However, remember you can be a lot low levered at 250 to 275 basis points than being eight to 10 times levered at 50 basis points. So it just really depends on the market and whatever normalization might or might not happen.

William S. Gorin

We’ll keep working reverse order, question two was impairment, look obviously there was no credit issues here, if anything Fannie and Freddie have a better credit so that’s really been causing an impairment in our mind is we have the same projected cash flows. We have the intent and the ability to hold these assets as proven by the fact that in March we decided to take down leverage, we got on this phone and we told you, we have not sold an asset since so we’re clearly showing the intent and ability to hold these assets. So, hopefully that answers question two.

Stewart Zimmerman

Let me just add to that if I might, remember in terms of these assets, these are all agency assets, they get paid back at par.

William S. Gorin

Not all.

Stewart Zimmerman

But the agencies get paid back to par so again that’s a very, very significant part of our portfolio so we’re going to get back 100 cents on the dollar.

William S. Gorin

In terms of question one I guess the question was why have spreads widened? Was that your question?

[Robert Schwartzberg – Compass Point]

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

William S. Gorin

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

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

I think these foreign investors are differentiating between the effect guarantee which we’re all comfortable versus the explicit guarantee which is going to be on bank paper going forward. So, there is that competition, this quasi government guarantee for a very wide range of paper right now. I think that’s the big driver in terms of buyers. In terms of selling we would guess there is some distressed selling, we see reduced bid list and spreads are very wide on the bid list. That’s what driving our marks.

We think people are selling what they think they’ll have the smallest loss on, that’s why you actually see greater mark downs on your one/ones versus your seven/ones and 10/ones. People are selling the shortest most liquid paper. I don’t think our competitors are really being phased by a lot of margin calls because we all came to it as a relatively low leverage. I can’t speak as much to the hedge funds though.

Operator

Gentlemen we have no further questions at this time. I’d like to turn the conference back over to management for any closing remarks.

Stewart Zimmerman

I just wanted to say thank you very much for your continued interest in MFA and we look forward to speaking with you next quarter. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: MFA Mortgage Investments, Inc. Q3 2008 (Qtr End 9/30/08) Earnings Call Transcript
This Transcript
All Transcripts