American Capital Agency Corp. (NASDAQ:AGNC)
Citi Global Financial Conference (Transcript)
November 20, 2013 03:00 AM ET
Gary Kain - President and Chief Investment Officer
And it’s my pleasure to introduce Gary Kain, from American Capital Agency Corp. For those of you, American Capital Agency Corp. is a mortgage REIT that invests in agency securities, where the principal and interests are secured, are guaranteed rather by U.S. government agency or U.S. government sponsored entity. And Gary is the President and CIO. He has been President since 2011 and CIO since 2009. He is also President of American Capital AGNC Management. Prior to that, Gary held several roles at one of the government sponsored entity.
So with that I will turn it over to Gary. Gary, thank you.
Thank you. Well thanks [Armando] and good afternoon and thank you for your interest in AGNC. And I’d like to thank you for the opportunity to be here in Hong Kong at the Global Financials Conference. So for those that are not familiar with AGNC, we are as Armando said an agency mortgage REIT, an agency mortgage REIT invest only in Freddie Mac, Fannie Mae or Ginnie Mae mortgage securities. And we do so, in order to qualify as a REIT generally there is a number of different roles, but we essentially have to pay out 90% of our taxable income on an annual basis. So for that reason, we tend to be a lot of our value returns to shareholders comes from dividends, but we're also focused on capital appreciation.
And if you look at the left side of this slide what you’ll see is that we IPOed in May of 2008 at a dollar price of $20 per share. Since then we've paid almost $27 worth of dividends during that 5.5 year period. Book value during, over that period has increased as well to $25.27 as of September 30th. And in addition the company has grown from its original $300 million in market cap to a market cap of just under $10 billion.
So while we feel very good about both the returns that we've generated, as well as the growth of the company, we're still very excited about the long run prospects for the company and we feel that there are going to be great opportunities as the Fed plays a smaller role in the mortgage market and private capital really is in a position to takeover. And so we think that there are going to be great opportunities over the long run for REITs and players such as AGNC.
So with that, I am going to take, I am going to quickly review sort of the mortgage market for those of you who are not as familiar with how mortgages in the U.S. are made and how that market works. So just first off, unlike most places in the world, the majority of mortgages in the U.S. are fixed rate with relatively long-terms, 30 years, more than 80% of the mortgages are 30 year mortgages. There is also a fair amount of 15 year mortgages. And unlike again loans in other places, these amortized. So a borrower every month is paying both principle and interest on their loan. And in that way the loan is retired over the term.
But what really differentiates mortgages or mortgage securities from other fixed income instruments is the prepayment option. So the borrowers in the U.S. don't have for the most part prepayment penalties. There are some costs associated with refinancing and you have to qualify for a loan. But outside of that, you are free to refinance if interest rates come down as long as you can get the other loan. And that's again a key distinction between mortgages and other kind of fixed income or other bonds.
So just quickly, this is a picture of the mortgage market and how it's evolved. And as you can see, the overall market is almost $11 trillion. So the U.S. mortgage market is huge. Agency mortgages make up just about half of that and they are shown in blue at full $5.4 trillion. The small line; the red line in the middle are non-agency securities. You’ve probably all heard about non-agency securities that were kind of at the heat of the storm in 2008. We've seen a very little origination of securities outside of the GSEs. And so that number is shrinking relatively rapidly. And then the green line are just home loans that are on bank or other financial institution balance sheets.
So with that as kind of just the overall landscape what’s really interesting as well in addition to size the market’s not only very big, but it’s also extremely liquid and this is probably least understood by a lot of investors. So clearly the most liquid bond markets in the world are U.S. treasuries. You see trading volumes average daily traded volumes in U.S. treasuries are in the area of $500 billion, $600 billion a day. And those are the dark blue lines.
The light blue lines here are agency CMBS which trade about $300 billion a day over let’s say the last five years. And so you’ve got tremendous liquidity in this market. Now as a kind of point of comparison, the little red bars at the bottom are the trading volumes of the entire U.S. corporate bond market. And so there you can barely pick them out on the bottom of the graph. So keep in mind mortgages are huge market and they are extremely liquid which is important when we get to our business model which involves leverage and which takes advantage of the liquidity.
Just a quick look at how the landscape in the agency market has changed since 2006. If you look at in 2006 about a third of the markets were non-agency securities as you saw on the other graph those securities have been paying down. And at this point almost 90% of all mortgage securities in the U.S. are guaranteed by Freddie, Fannie or Ginnie or basically government support.
But importantly I think more interesting is the ownership structure of agency mortgages since 2006. And if you look at the differences, we’ll start on the left, which is the most important because it’s the Fed. So the Fed went from owning zero in 2006 to being more than 25% of the agency mortgage market and obviously in QE3 it gets a lot of attention, that’s a driver of it.
In addition, the banks, next one, banks not a big change. Other big change GSEs going from 22% to 8% that’s a big move in terms of the shrinking of the GSE portfolios, the retained portfolios. Then if you go a few, two more boxes over, you end up with the mortgage REITs which is AGNC is one of the mortgage REITs. REITs were small back in 2006, 2% of market. We have grown a lot, but we are still only 6% of the market.
And keep that in mind there is still a lot of room for growth in the future as probably at some point the Fed line starts dropping. The other thing to keep in mind are the money managers. So clearly money managers have become a smaller percentage of the market, as the Fed has absorbed more and more of the mortgage supply.
So this is a good background for kind of talking about for the landscape of the mortgage market when you try to think about where AGNC and other mortgage REIT might be where we are kind of interacting.
So with that, let me move on and talk a little bit about AGNC’s portfolio and our business model. So first off, as and again we purchased agency MBS. Now we tend to fund those positions with agency repo which is collateralized borrowing against those positions. Those rates are very low, it’s essentially government repo. So you are talking 30, 35 basis points in this environment, but we also hedge out a lot of our interest rate exposure.
Now with respect to leverage and this is something that people really want to focus on. We have averaged about eight times leverage over the past five or so years. But when you borrow against an agency security you can get advanced rates of about 95%. So in theory if we were fully levered, we could lever at 20 to 1, I mean wouldn’t do that. But given the haircuts which are 5%, you could in theory get up to 20%. We have averaged around 8, we’re a little lower than that today. And then when with 8 times leverage roughly 50% of your equity is unencumbered and available to meet margin call. So you are not operating anywhere near kind of the fully levered position.
Now with respect to hedges and this is probably the biggest misconception about the REIT space which is that they just have long assets and then we fund them short with repo. The reality is that we use a lot of hedges and we’ll touch on this in a second. But our duration gap is right now or as of September 30th was around a year. And the notional amount of our hedges covered about 90% of our assets. So you shouldn’t think of this as a short funded kind of business model and yet sometimes people think of REITs along those lines.
Looking just with respect to asset selection, a key issue about agency mortgages we saw they’re big and liquid. And so a lot of people are [feeling] that if you’re buying a government backed bond then how could people have different performance with different government backed bonds. I mean they’re government backed there is no credit risk or negligible credit risk. So everyone pretty much does the same. Well the difference is that prepayment option and the different maturities make these very different cash flows.
And so if you look at this graph on the left side what you’ll see is that the top blue line are Fannie Mae mortgage securities issued in 2011, actually all of the lines here are Fannie Mae securities issued in 2011, but yet the prepayment behavior is very different. Now prepayments are people we [quote] prepayments in something called CPR which is the percentage that pay-off in a year. So on the top you could see the blue line of larger mortgages of 300,000 or more have prepaid around 35 CPR which means 35% of those loans or the pool would disappear over the course of the year.
On the other hand, same origination, same coupons, same credit, but smaller loans let’s say that silver line on the bottom have basically been at 10 or under for this whole time. So why is that important? Look at the table on the side and it's really important on a mortgage especially at that set of premium to par, because the yield on a mortgage if it prepays a 10 CPR is if we tell in this example, 3.17 that’s our market price at the time. And at a 30 CPR for example it's just over 2%.
If we use a sample cost of funds that not only includes the borrowing costs, but also some hedges, look at what happens to the net margins, at 10 CPR to 132 basis points, at 30 CPR it's 17. ROEs, if you apply, we make a fictitious REIT portfolio with 7.5 times leverage. We can get a gross ROE of 13, if you get slow prepayments, whereas you're at 3, if prepayments are faster. So, prepayments are a big deal in many environments.
But this is not the only thing that matters. Here we compare 30 year and 15 year mortgages. 30 year mortgages while they amortize can still be 8 to 10 year type instruments, 15 year mortgages are much longer. What you can see is this shows the cash flow is just due to prepayments or due to amortization and a small amount of prepayments from both 30 year and 15 year. So what you might expect in a rising rate environment.
22% of your cash flows or your principle will be returned on a 30 year mortgage in year five, year free, whereas almost 40%, 37% on a 15 year. So what maturity you’re can have a very important kind of role in terms of when you'll be able to reinvest to the extent that opportunities present themselves later.
Just quickly about AGNC’s portfolio at the end of September with a $77 billion portfolio, a little over half of it was 15 year fixed. The next biggest chunk was clearly 30 year fixed and the remaining 5% is made up of ARMs 20 year and some structured mortgages.
We do have a fair amount of low loan balanced mortgages and mortgages that were originated through the HARP program. And while prepayments today, because rates have gone up are less important, they could very easily become important down the road. And the premiums or the pay-ups for those are much lower now and so still makes sense to make sure you have prepayment protection for certain environments.
If you look at the chart at the bottom which you can see is that AGNC has been able to maintain very slow prepayments and consistent prepayments irrespective of kind of the environment even when the speeds on the universe, as shown by the top-line have been pretty fast, speeds on AGNC’s portfolio have remained very stable. And if you go back to that chart on ROE and yield that’s critical.
It’s just another picture of way to look at our portfolio which is relative to the mortgage market as a whole where the mortgage universe where is AGNC’s portfolio positioned. And what you can see is we have a very, we have a large overweight towards 15 year versus 30 year mortgages. We prefer to have shorter assets right now.
And within 30 year we are avoiding the lowest coupons because we are worried about how they will perform in an environment with the Fed tapering and the highest coupons which have really been uninvestable from our perspective because of the fact that there are more policy risks and the HARP program has made speeds really fast there.
So this is a good picture of kind of if you are looking at AGNC’s portfolio what are they own versus what’s out there, this kind of gives you the story. And I’ve mentioned earlier on slide 15 that we were that we do hedge and we hedge a lot of the interest rate risk associated with our portfolio.
This is just a high level overview as you can see, we use swaps, swaptions at the bottom on the left side, we use treasuries, treasury futures we have few mortgage options. But if you add that up we have $70 billion in hedges against the $77 billion portfolio and look at the interest rate swaps, an average duration of 4.7 years. So we swap $50 billion of our short-term borrowings for five years. We are not as sensitive to interest rates as we and others kind of once were and also as kind of what people think when they think about the REIT.
If you look at the other side, what you will see is our duration gap. And when you combine our assets and our hedges, again you can see the duration gap was just under a year of 0.9 years. The assets are 4.8 years. The reason they are not longer is because of the 15 year brings that down.
Our fixed hedges swaps and treasuries all that adds up to taking off about 3.2 years of that duration when measured against the size of the assets. And then the swaptions really make up for the rest. But what’s important is also to focus on what happens when mortgage durations change as prepayment change and rates move. So we tend to think more about what our duration gap is if rates go up a 100, because of this change.
And so if you look at that picture we are pretty comfortable with the fact that our duration gap only extends about a quarter-over-year to 1.2 years and that's unusual. Usually on a mortgage portfolio there is a lot more extension. A lot of that comes from the 15 year portfolio not having the extension risk. And then also some of the extension in 30 years we've already seen given the move so far in 2013.
We’d be willing realistically more often and more normal times to run a two year duration gap up 100, we’re obviously being more conservative now. But again, that's kind of how we tend to look at things is what happens to our duration gap in a rising rate environment.
So the last section, I just want to touch on kind of AGNC performance and then finish with kind of how we see the current landscape. So this slide shows AGNC’s total stock returns since its inception in 2008. And as you can see AGNC has produced very strong total returns and that's despite the weakness that we've seen really in the last six months of 2013. And even with that weakness, the total stock returns since IPO is close to 190% and that’s still averaging over 30% a year in terms of an annualized return and that's when you include both dividends and stock price return.
But importantly for any investment type vehicle you also have to compare yourselves against peers. And the orange line is other agency mortgage REITs that we use as a comp index. And as you can see AGNC has significantly outperformed our peers over the period and that goes back to not all agency REITs will produce the same results.
But this is at our mind is actually kind of a more instructive way to think about the performance of any professionally managed investment vehicle which we are in mortgages. And here what we're looking at is we're looking at what we call economic return. And it’s just the combination of the cash dividends that we pay to our investors coupled with our change in NAV or book value.
So this is analogous look to the way any money manager would report their earnings, any hedge fund. It’s the cash you pay and then the change in your mark-to-market book value. So you can think of this as everyone, both us and our peers produce book values at the end of every quarter, we pay a dividend. And when you use those disclosed numbers what you can see is that AGNC has been able to outperform against its peers not only in stock price, but also on economic return.
Now two things to keep in mind on this slide, we've divided this into pre and post QE3, because QE3 has presented some unique challenges to our space. And if you look at the pre-QE3, prepayment behavior was the key driver. We were in a low rate environment. And AGNC I believe has been able to outperform its peers by picking the right mortgages and really getting a handle on prepayment risk.
Since QE3, it's been a tougher environment for the whole space; it's been a tougher environment for us. But what maybe very surprising to people is when you look at beginning basically Q3 2012 through Q3 2013 despite the weakness in the stock price AGNC’s mark-to-market returns of its portfolio have actually been positive 5% again not a good year, but not a big negative number. And we have continued to outperform our peers, but based of different things partially due to our hedging strategies and partially due to the rotation out of lower coupon 30 years into 15 year.
But what's different, the difference between these two slides, the stock slide and the kind of [QR] mark-to-market return of the portfolio is price-to-book ratio. And so the reality is stock prices move based on a lot of other factors as we all know in all industries. And what's really hurt the REIT space and AGNC in terms of stock performance this year has been change in price-to-book ratios and so we averaged as you can see over the last four or five years in between 110 and 120 a book.
And now in the recent past, the REIT space more generally has been sub in the last couple of sub-90% of book. What does that mean? It means that you can buy a portfolio of agency mortgages at $0.85 or $0.90 and the $1.
Now in a lot of industries, companies trade at a discount-to-book. It’s not unusual it can, and last a while. On the other hand, I don’t think that’s as instructive as people might think when they think about agency REITs. And the reason is our assets are incredibly liquid, remember that slide $300 billion of trading volume a day.
We are not talking about a mid-size bank with unique exposures to loans that are hard to value. We’re not talking about regulatory risk or a legal risk or law suits that can make an entity traded at a deep discount. These are extremely liquid instruments that are very easy to value that can very easily be sold with very small bid offers spreads.
And so when you put that together there really aren’t many examples of portfolios of very, very liquid easy to value instruments that have stayed at a discount-to-book for any extended period of time. And to that point, we have announced that we’ve been buying back our shares, we can sell agency mortgages and make more room for further stock buybacks and that is definitely something that we have been doing. But big picture I think the big difference here is a unique period. And I would say a unique opportunity for investors to be able to buy very liquid instruments at a significant discount-to-book.
And then just I want to conclude by going over quickly two slides that we went over in our earnings presentation at the end of October. And one of the challenges and one of the things that has concerned investors is how dependent the near-term outlook for any fixed income security and in particular the US, but really throughout the world, how sensitive things are to the Fed and tapering. And the reality is they are very sensitive. We think the lot of that adjustment has already occurred, but it’s hard to kind of disregard the signals that we’ve seen from the market which is it’s very possible they are going to be overreactions in the short run to Fed tapers early.
So if you look at the slide, on the left side we have got the tapering early kind of scenario, let’s say the Fed tapers is decent. And we got to be clear given the last employment report we saw. This is a higher probability than it probably was before. But even in that scenario, the Fed is going to buy $350 billion to $450 billion or something in that neighborhood of securities, it’s a lot.
We think again positions in the mortgage market are much cleaner and in bond market as a whole, we don’t think it’s a disaster. But clearly if you expect that to happen, you probably want lower leverage, you want to reduce your exposure to 30 year mortgages even further, you’d want to be pretty fully hedged because rates are probably going to back up some.
On the other side, it’s very possible that the Fed does a taper to later; let’s call it the middle of the year after that. In that case, they are going to buy maybe $650 billion to $850 billion in mortgages. Fixed income in general, rates are probably going to be lower 2% to 2.5% on the 10 year since Feds are going to probably tighten. And in an environment like that you’d want to have kind of the opposite position, higher leverage more 30 year mortgages. And the reality is the Fed’s made a tough call. We at AGNC don’t feel we have any unique insight into the Fed. And so this is not, we’re not willing to make kind of a large bet on either side of this. But what I would say is what we feel is really important for the long run and what we feel that we really do feel, do understand and do think is something that we should position for. It’s more of the intermediate term once the Fed is gone.
And so I think most people would agree two years from now that Feds aren’t likely to be buying a lot of into CMBS may not be buying anymore. And they’re going to be a much smaller percentage of the market. At that point then the private sector is going to have to pick up that slack. And at the same time, rates maybe a little higher, bank capital requirements have gotten a lot stiffer. In addition we’re going to probably see more non-agency mortgages being produced. Non-agency mortgages need more capital than an agency mortgage does. You can’t lever it as much, there is both credit risk and interest rate risk. And then you go to the fact that the GSEs will probably continue to sell credit risk.
So when you put that together, it’s going to be a lot of demands for private capital. So ROEs are likely to be higher in the future. And so we feel that those are going to be really good investment opportunities. We can make reasonable money now, but we do feel that what we don’t want to do is be really offside or not be in a position to reinvest two to five years from now, because to us this is much clear irrespective of when the Fed tapers. This picture is something that that factors a lot into our decision. And what I would say is it’s a lot of the reason why we've increased the share of 15-year in a portfolio as I talked about before, because we get all that cash back even in a rising rate scenario and it’s also why leverage has turned it lower.
So with that, let me stop and make sure I can take some questions.
So Gary why don’t I kick it off, you talked about tapering and rising rate, like maybe give us a little bit more color in terms of how you’re thinking about from a timing perspective that tapering relative to rising rates? And after tapering occurs, could that be an attractive investment opportunity or do you think (inaudible) that short-term rates, it’s too much of a concern really to overcome or too much of a concern to buy more agency mortgage-backed securities?
So I think that tapering I think the market struggled with us, but tapering and raising short-term rates are pretty different to the Fed and they keep trying to explain it to us. And I think we as a market keep up until recently, maybe the last month or two when listen, but I think the market is getting that. I think the Fed and it’s not even clear that that many people that [Gary Galens] knew. The doves maybe very comfortable continuing with QE a lot longer. There are clearly others at the Fed that feel differently. But I think there is a complete consensus there about not raising rate for multiple years. And so we actually feel pretty good about especially short rates over the near term. But it's much harder to say we are the ten-year treasury will be what's tapering has done even with, even if funds stay low for two or three years.
So when we think about kind of positioning the portfolio, it goes to where we feel pretty good for the next two or three years with the interest rate picture. Beyond that a part of, it's hard to kind of pay the economy, but at that point any kind of assurances from the Fed or certainly not really on the table. But this picture the interesting thing is that even if you have kind of negative surprises in this process, in many ways the stock is already price for those given the discount.
So when we saw the chart that you were trading below book value. So just to talk that probably the market is saying that for you, the rise in interest rates could be negative as well as the hedge cost could go up substantially. Is that the scenario, which you have kind of built in as well which is in terms of but I didn’t see anything on the hedging cost, I just saw that hedging duration would be so much.
No, it's a very good question, I mean clearly and we've been -- we have mentioned this on our calls, which is there is a cost to hedging right and we have brought down our dividend, our dividend was $1.25 at the beginning of the year, it was last -- our last dividend was $0.80, but I think what’s important is yes this increase in hedging cost and the longer duration of mortgages has reduced our earnings power as well as lower leverage. But the question really comes up is to keep in mind how high the dividends were in the past, I mean so even our reduced dividend and again I am not -- we have to look at dividends quarterly, so I don’t k now where they are going to be in the future, but the reality is even if dividends were to come down substantially more than they have both for (inaudible) they would still be attractive, our last dividend the $0.80 was still like a 13% to 15% dividend yield off of today’s prices. So I think what’s important to keep in mind is that dividend yields are still very attractive and we can’t still produce reasonable returns just not what they were in the past.
And so the other part of your question and I got this in an earlier meeting today is, is this price to book -- reduced price to book just the market saying we think you are going to lose more book value, your book value is just going to be lower going forward. And what I would point out is from the total return perspective and go back to, if we go back to the slide, it’s actually if well we’ve lost the slides, but if you remember that slide post QE3 on our economic returns despite a 125 basis point moving rates, why the mortgage spreads lots of rebalancing of the portfolio, we still generated in that environment 5% positive total return. I mean again book value declined but there was a positive total return there. So I don’t think that and obviously risk is lower, rates are already higher.
Our projections would indicate that and we released this in our earnings presentation that for 100 basis point moving rates, if we did know hedging activity that would produce the decline of around 8% of our book, in our book value and again the discount is considerably more than that.
Okay. You talked a little bit about leveraging the presentation, like how are you thinking about leverage, where do you see that going forward?
Leverage has come down from our average to 7.2, but it’s one thing that when people on the [REIT] phase generally talk about risk, they focus how much, too much on leverage, the reality is hedging is the first, hedging and asset selection are much, much bigger contributors to your risk position than leverages. That being said, leverage is a factor. So we generally brought leverage down and as I said we moved into 15-year which is also risk reducing on the asset side.
And we are doing that because of the idiosyncratic nature of the market right now, it’s not that we don’t -- we are not negative in the current run on mortgage spreads because of the QE3 and Fed even in the tapering scenario, but we view it as volatile and we feel that again that's where you play in the period two or three years or whatever down the road, where you want to make sure your set off. So lower leverage is consistent with kind of our the combination of the idiosyncratic grip we see today, coupled with the be intermediate term that I talked about.
Can I just ask the question about funding, your repo side of it? Obviously, with this increased focus on leverage for the U.S. banks and well everywhere, repo is one of the areas where everyone feels kind of under pressure and there has been a bit of talk about repricing as a way to kind of improve the returns and repay under this leverage. So are you seeing any of that, do you anticipate seeing any of that, do you see that as a risk?
It’s a great question. It obviously is a risk, but I don’t see it as a very likely near-term issue. And the reason is because we've 32 or 33 repo counterparties, only eight or the top banks that have higher leverage ratios. And the percentage of repo for them, it’s not low, but it’s certainly not growing and it doesn’t need to grow at this point, it’s actually coming down.
And so one thing that is lost in that, kind of in that thought process is the demand for repo so that effects the supply of repo from banks, or how much they can put on their balance sheet, but the demand for repo is down dramatically as well. So REITs a year ago, we’re raising money very quickly. In that kind of environment, this would probably be a bigger issue, because we need more capacity, at the same time it would be harder for them to give it to us, but REITs have been buying back stock, have reduced leverage, have generally sold assets, so they are 15% 20% smaller than they were.
In addition at the same time and more importantly the Fed has absorbed over $0.5 trillion worth of agency mortgages and treasuries, a lot of that would have actually gone on repo by other people as well. And so in an environment where the Fed is absorbing so many government backed bonds and in an environment where REITs are not growing and not likely to be growing quickly for a while and have actually been shrinking, the demand side for repo has already moved and come down a lot. And so while the supply side maybe under some pressure in the larger banks, it’s not likely to negatively impact the repo market in the near-term. And in addition, we think that over time what’s going to happen is the repo capacity is sort of going to be allocated kind of to smaller or kind of mid-sized institutions for just the largest ones.
So Chris just a small variant on [Carolyn’s] question. So I guess her question was on funding cost, my question is more on the cost of the swaps and hedging, because clearly as you know the way banks leverage calculations are work is on notional and the longer duration of the interest rate swap, the greater the weight for banks. So are you seeing any changes in terms of hedging cost?
What we've seen is obviously our swaps are now, new swaps are cleared. And with cleared swaps essentially the one change has been prior upfront margin. So in a sense, we face repo haircuts, which again those are 95% advance rates or 5% haircuts or haircuts on longer swaps have also gone up. But they are still much more than their haircut. So down the road with clear swaps and higher haircuts, that can impact your ability if you were trying to run very high leverage. So if you are trying to run leverage ten or more times, then you are only doing clear swaps at that point, you start to have a little bit greater [drain] there.
In terms of the cost of swap, I don't -- swaps are obviously so liquid, you can see swaps rising prices. The reality is I think that market is so gigantic and I don't think we don't expect to see much in the way of changing actual swap rates due to that or swap spreads.
What do you think happens to Fannie and Freddie?
So I worked at Freddie for 20 years. Look, I think Fannie and Freddie are going in the right direction right now. Of all the things even though we're an agency mortgage REIT and you would think that, all we would worry about is Fannie and Freddie and what happens with GSE reform. That's like kind of the least of our worries right now. We feel that the regulator FHFA is moving them where they are selling credit risk, their portfolios are already shrinking. They are basically guarantors. And so if they get renamed, if one of these, if the (inaudible) bill passes or something like that, they won’t be Fannie and Freddie but they are going to do pretty much exactly where the same thing that the regulator is trying to get them to now. So big picture I would say there always be headline, there is going to be noise and headline risk on that front, but when it comes to kind of big changes I don’t see anything down the pipe that we feel is likely to change or change the business.
Okay. With that, we’re almost out of time. So thank you so much.
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