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MFA Mortgage Investments (NYSE:MFA)

Q4 2009 Earnings Call

February 11, 2010 10:00 AM ET

Executives

Stephanie Coyle - IR

Stewart Zimmerman - CEO

Bill Gorin - President and CFO

Ron Freydberg - EVP

Craig Knutson - EVP

Tim Korth - General Counsel

Teresa Covello - SVP & CAO

Kathleen Hanrahan – SVP

Analysts

Bose George - KBW

Douglas Harter - Credit Suisse

Andrew Wessel - JPMorgan

Mike Taiano - Sandler O'Neill

Mike Widner - Stifel Nicolaus

Jason Arnold - RBC Capital Markets

Daniel Furtado -Jeffries

Henry Coffey - Sterne Agee

Jeffrey Talbert - Wesley Capital

Steve DeLaney - JMP Securities

Jim Young - West Family Investments

Operator

Ladies and gentlemen, thank you very much for standing by and welcome to the MFA Mortgage Investments Fourth Quarter 2009 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 to you at that time. (Operator Instructions). As a reminder, today’s conference is being recorded.

I'd now like to turn the call over to Stephanie Coyle. Please go ahead.

Stephanie Coyle

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc. that reflect management's beliefs, expectations and assumptions as to MFA's future performance and operations.

When used statements which are not historical in nature, including those containing words such as believe, expect, anticipate, estimate, plan, continue, intend, should, may or similar expressions are intended to identify forward-looking statements. All forward-looking statements speak only as of the date on which they are made.

These types of statements are subject to various known and unknown risks, uncertainties, assumptions and other factors including, but not limited to, those relating to changes in interest rates and the market value of MFA's investment securities; changes in the prepayment rates on the mortgage loans securing MFA's investment securities; MFA's ability to borrow to finance its assets; implementation of or changes in government regulations or programs affecting MFA's business; MFA's ability to maintain its qualification as a real estate investment trust for federal income tax purposes; MFA's ability to maintain its exemption from registration under the Investment Company Act of 1940; and risks associated with investing in real estate related assets, including changes in business conditions and the general economy.

These and other risks, uncertainties and factors, including those described in MFA's annual report on Form 10-K for the year ended December 31, 2009 and other reports that it may file from time-to-time with the Securities and Exchange Commission, could cause MFA's actual results, performance and achievements to differ materially from those projected, expressed or implied in any forward-looking statements it makes.

For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in MFA's quarterly report on Form 10-Q for the quarter ended December 31, 2009 and/or the press release announcing MFA's fourth quarter 2009 financial results. Thank you for your time.

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

Stewart Zimmerman

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

With my opening remarks, I'd like to go over certain data highlights as they pertain to our fourth quarter 2009 results. Net income $76.5 million, $0.27 per share, dividend of $0.27 per share, book value on December 31 of $7.40, as of 01/31/10 $7.61. Return on equity 13.9%, our leverage overall debt-to-equity was 3.3 times, liquidity was $762 million in cash, unfledged agency securities and excess collateral.

Portfolio spread which is interest earning assets minus our cost of funds of 273 basis points. MBS net spread, which is our mortgage backed securities net yield minus our cost of funds, 307 basis points.

Our average cost basis of agency securities of 101.3% at PAR. Our re-pricing GAAP, assuming a 15% CPR of 16 months. Our CPR for the quarter was approximately 19%. Average purchase price of non-agency securities of 63.1% at PAR.

At this time, what I would like to do with some of the changes in the market place that we’ve read about over the last 24 hours. Turn it over to Bill Gorin, who can give you basically a market update.

Bill Gorin

Thanks, Stewart. As most of you know, yesterday in the morning Freddie announced a buyout plan of loans which are 120 plus days delinquent and those purchases will be reflected in the March factors, which we released to fifth business day of March. Later in the afternoon, Fannie Mae announced that they too will be buying out mortgages, underlying guaranteed mortgage-backed securities that are 120 plus days delinquent and that will occur over a couple of months and that will impact the factors released on the fifth business day of April and it will could from May and June.

Now for a long time now, it's been clear that there has been high delinquencies in the GSC guaranteed mortgage-backed security pool and that we’ve been concerned about default driven prepays going back a year ago.

So, the actions we've taken as a result; one, we have been preparing for higher prepays, we have not purchased, I might sound like a broken clock repeating myself, but it's been probably in excess of 18 months, we have not purchased any agency mortgage-backed securities.

As a result, we’ve kept our premiums down, our average purchase premium on our HT portfolio is 1.3%. Importantly, while our agency portfolio one-time has been in excess of $10 billion. For the last six months, we've publicly been saying that towards the end of the first quarter, towards the end of March, this portfolio should be down to about $7 billion.

As a result, we’re left impacted by changes in prepaid speech. What impacts do we see clearly, CPR's will be elevated for the months of March, April and May. Probably CPR’s might be lower going forward to the extent we’ve cleared out a large part of these delinquencies, so there should be less delinquency-driven prepays over the life of these assets.

So over the life of the assets, the prepaid rate really hasn’t changed, we are just getting a lot of this higher prepayment rate over the next couple of months. So you’ll see the impact, maybe you will see some of the impact in the first quarter, but probably more so and in the second quarter.

Hopefully, you’ve seen in this in the newspapers, it is something we prepared for. We did not think it would be, Freddie Mac will do all their delinquency-driven pay buyouts in one month, that was a surprise to us, but it just concentrates these prepayments, so it will be higher for a couple of months or three months and then it should go back to a lower tax.

This was part of our strategy of diversified; non-agencies do not have the same prepaid characteristics there we’ve purchased at large discounts and an increase in prepays actually helps your earnings and book value on these non-agency side.

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

Stewart Zimmerman

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Bose George, KBW

Bose George - KBW

First question I had was just on your cash and you guys really have significant dry powder here. Is your strategy still to use pay downs of agencies to buy non-agencies and then see what happens after the FED is done on the agency side. I’m just curious how you’re thinking about that?

Bill Gorin

We wanted to have and still say, we both said this (inaudible). We wanted to have a very, very nice cash position, which we have built up. And again, there is no magic formula to say that it is the agencies or non-agencies. In retrospect, our non-agency strategy has turned out to be a very positive one for us and for our shareholders. Having said that, we’re going to see how the agency market kind of shakes out and if there is some value in the agency staff through that certainly gives us the optionality of going in that direction. So there is not a bogie that we have to hit on one side or the other.

Bose George - KBW

And then just wanted to touch on REIT REMICs what your thoughts are there? How we could see that shaping out in terms of your non-agency portfolio?

Stewart Zimmerman

I will turn it over to Craig Knutson who can give you both chapter and verse.

Craig Knutson

We continue to look at the REIT REMICs market, I think when we were first approached about REIT securitization almost a year ago when the AAA levels were then about 11%. So, we’ve seen the executions continue to improve, we’ve seen structural nuances that have improved executions. So, we continue to look at, I think the other thing to note is that we were not capital constrained in our efforts to buy non-agencies. So, like I said, we continue to look at it, the executions continue to get better and we spend quite a bit amount of time looking at these REIT securitizations.

Bose George - KBW

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

Craig Knutson

Absolutely.

Operator

Your next question comes from Douglas Harter, Credit Suisse.

Douglas Harter - Credit Suisse

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

Bill Gorin

So, you want the premium amortization on the agencies and the regional of non-agencies. Give us one moment, we will have that for you.

Douglas Harter - Credit Suisse

And I guess sort of while you’re looking for that, sort of bigger picture question. What are your current expectations as to what happens with April 1, when the FED is no longer in there and buying agent CMBS as far as Fred’s?

Bill Gorin

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

Operator

Your next question comes from Andrew Wessel, JPMorgan.

Andrew Wessel - JPMorgan

I think most of my questions have been answered, but just in terms of the non-agency market, you have been buying senior cash loads of bonds. With spreads coming in and [seeming] getting a little bit more stability in that space with lost volatility, is there anything you see further down the stack that you like or are you going to stay up in the senior part of the cash flows and just kind of look for relative value there?

Bill Gorin

We look further down the stack, at this point we still see pretty good value in the senior securities, but here sufficed to say, we certainly widened the aperture a little bit on looking at other cash flows.

Operator

Your next question comes from Mike Taiano, Sandler O'Neill.

Mike Taiano - Sandler O'Neill

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

Bill Gorin

They need to show how they can reduce this quantitative easing without being forced to sell agency mortgage-backed securities, right. So, the way to do it without selling is to put the securities out and get the cash back. So, it’s just Ben Bernanke explaining how you can reverse quantitative easing without panicking the market, without selling mortgage-backed securities.

So, I don’t see any reverse quantitative easing immediately, they need to get through the period when they stop buying agency mortgage-backed securities, so the market is [weaned] from the government assistance. It’s something that could happen in the future, but to me it’s just a process that they are showing works that they said at the documentation that they can reduce quantitative easing importantly without selling agency mortgage-backed securities. So that’s how we look at it Mike.

Mike Taiano - Sandler O'Neill

But do you think directionally that would push up repo rates potentially?

Stewart Zimmerman

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

Mike Taiano - Sandler O'Neill

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

Stewart Zimmerman

The whole strategy is been labeled kind of go look forward to take out (inaudible). So that’s been the strategy and we will continue to look at – when those opportunities are there to do that, we will continue to go in that direction.

Bill Gorin

By the way I will get back to Doug Harter’s question. The discount accretion was $8.3 million approximately. The premium amortization was $6.3 million approximately. So, we’re about $2 million for the positive there. So, again that shows you the beauty of combining. When you are focused on residential mortgage-backed securities combining agencies, which do trade at a premium and non-agencies at a discount, net-net you actually had a positive due to prepays.

Operator

Your next question comes from Mike Widner, Stifel Nicolaus.

Mike Widner - Stifel Nicolaus

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

Stewart Zimmerman

First of all, the K will be probably filed in the next hour or two, so I’m not going to hold it up for that, but we’ve publicly said that we owned hybrids in our fixed rates. And you can look at Fannie and Freddie data yourself and see the delinquency, 120 plus day delinquencies are going to be higher on hybrids than fixed rates. (Inaudible) public data, which will give you a good feel for what we have, basically we have ‘05, ‘06, ‘07 vintage hybrids.

Mike Widner - Stifel Nicolaus

Okay. So your concentration is decidedly for ‘05 37 range?

Stewart Zimmerman

And it is our hybrids and our fixed rates.

Mike Widner - Stifel Nicolaus

And they’re primarily [IO] hybrids?

Stewart Zimmerman

Yes.

Operator

Your next question comes from Jason Arnold with RBC Capital Markets.

Jason Arnold - RBC Capital Markets

Just a quick question on the portfolio, you mentioned the targeted declined in roughly $7 billion range, is that somewhat of a floor in your minds or do you foresee if things kind of don’t turnout as expected to kind of continue to shrink the portfolio at all?

Stewart Zimmerman

As I said Jason, there’s not a magic bogie number. Again it’s really where the opportunity is and again there was the kind of the dust settles if there is really opportunity in the agency that will be fine, but again if we continue to see the types of opportunities that we’ve seen on the non-Agency side, we’ll go in that direction, but as Bill said in his remarks, we haven’t bought an agency security for 18 months.

Bill Gorin

Jason the reason for the last six months, we’ve sort of set this March 30 date is we all know that Fed will be done buying them, so we might face a very different reality than probably a better one to purchase, so that’s sort of why we’re focused on this data in that amount. But there will be a new marketplace and so it’s not clear that will be floor, but it’s sort of where we want to be approximately when the Fed is done by.

Jason Arnold - RBC Capital Markets

Okay perfect, that’s certainly the prudent approach. Could you also give us a little of an update on what you are seeing in terms repo availability on the non-Agency side, it seems like things kind of widened up there and so just little color would be helpful?

Stewart Zimmerman

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

Operator

Your next question is from Daniel Furtado, Jeffries.

Daniel Furtado - Jeffries

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

Stewart Zimmerman

Well, don’t think the Fannie news probably will not be in the first, any change in Fannie policy probably won’t be in the first quarter.

Daniel Furtado - Jeffries

Okay, so it’s at least some moderate amount of unknown surrounding this news from your perspective right?

Stewart Zimmerman

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

Daniel Furtado -Jeffries

Got you. So look for this to be a 2Q event if it doesn’t event at all?

Stewart Zimmerman

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

Daniel Furtado -Jeffries

Great. What type of impact to the non-Agency sector, do you think that this news could have?

Bill Gorin

We had that discussion at 7:30 this morning. Really did, I brought that up to Craig and the guys and I can’t say, where do you think? I think where I came out, I think it will be positive. I think the non-Agency sector will continue to have some additional (Inaudible). I think people folks, one, there is going to be a lot of money in the marketplace, admittedly that was lot of Agency money that was in your market, but I think that the non-Agency markets will continue to be as we bought it.

Stewart Zimmerman

In bigger picture what does it mean, that their announcement to own free and clear $200 billion of distressed mortgages. They are going to have little more option warrants to try new forms of the modifications here. There is no other interest, no mortgage-backed security older, they own it. Their government sponsors into the under control of FHA Feds. It might be a first step towards addressing the decline in home prices here. So generally I see as a positive.

Daniel Furtado -Jeffries

Yeah, I was just thinking that potentially like a turn around and sell these as whole loans out the back door given more supply into that non-Agency space?

Stewart Zimmerman

These are well under 120 plus delinquent something has to happen first.

Operator

Your next question comes from Henry Coffey, Sterne Agee.

Henry Coffey - Sterne Agee

I can’t think of anything in the last 24 hours that makes me glad you are following this dual track. In terms of trying to quantify the impact of the buyback, is there some easy metric we can use like, make some estimates about your delinquencies in the portfolio which are 8, 9 and 6. Can you give us some sense of what the delinquency looks like and then how we should sort of take it to the math and try to figure out the impact of all that

Stewart Zimmerman

If you look to the answer we already gave, we said by the end of March that before this buyouts to occur, we should be in ballpark at $7 billion of Agencies, one. Number two, we said, if you want to look at delinquencies assume we’re spread (inaudible) ’07 vintage (inaudible) from Fannie and Freddie, they provided delinquency rates in those buckets.

Henry Coffey - Sterne Agee

Right. So sort of take the average of those buckets in the I/Os. Let’s take a simple average of the three and then sort of work the math from there?

Ron Freydberg

Henry this is Ron. With Fannie and Freddie something like loan levels (inaudible) what delinquencies are. So if you can use that as a proxy for assuming that, you know that we have I/Os, you know for the most part we have hybrids, and still 2005 to 2007, the vintage is that we purchased. That’s the proxy that you can use to get that information. Freddie did a good job of breaking that yesterday (inaudible) and hybrids. Fannie, always look at fixed rate as we’re expecting to breakout the hybrids in next couple of days. So Henry you will be able to do as well as we are using Freddie data extrapolate to the Fannie and you sort of know roughly what our portfolio looks like.

Henry Coffey - Sterne Agee

And that was our first guess if this is helpful. Second, you’re obviously are getting to watch, to see how assets are trading, has there been a real reaction within certain sub classes of mortgage backed securities to this today or is the market sort well digested under for them?

Stewart Zimmerman

We know yesterday that’s market had many traders around, so if you probably get in, the first couple of hours people are reacting to last 24 hours of news. But this is the advantage of having a smaller portfolio and a very, very low premium portfolio. We’ll see where these market prices play out over the next couple of days.

Henry Coffey - Sterne Agee

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

Operator

Your next question comes from Jeffrey Talbert, Wesley Capital.

Jeffrey Talbert - Wesley Capital

Quick question on your asset sales last quarter, I also think you really just not cover off the ball, being able to hit the top of the market on pricing. Can you give us a sense of what the basis and what the sell price was on those assets, please?

Bill Gorin

Well sold about 200 million of current space, the purchase price was just below 102 and the sales price was little bit above 106 in the quarter.

Stewart Zimmerman

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

Operator

Your next question comes from [Matt Hallett].

Unidentified Analyst

Just another question on the buyouts, any estimate on where CPRs on your hybrids could go one month CPRs, I have seen projections for 95 CPR for Freddie pools in March Now, somewhere in that range for three months CPRs on Fannies?

Stewart Zimmerman

The CPR numbers, we’re actually going to stay with single monthly mortality numbers, because the CPR number is annualized exponentially. So the question is, what percent of the pool can prepay that’s the sort of how we are looking at it, because the CPR numbers don’t begin to mean much a very high numbers. So if the question is, can we see more that 10% of an asset prepaid, the answer is, yes. And that’s going to give you a very high CPR number, we don’t know exactly, but we’ve seen numbers ranging between 60 and 90. So, there is wide range there.

Unidentified Analyst

Okay. Well you guys are certainly seeing better positions in some others out there. And then just getting back to redeploying capital in the Agency market, I think MFA historically have been against adding really high dollar price, just curious to see the portfolio, after these buyout are done would you consider going up to six - 6.5 higher coupons and paying maybe 105, 106 if you think to prepay (inaudible) story was there?

Stewart Zimmerman

As you qualified your question that has never been something that I’m prone to do. We’ve never been a big buyer of high coupon very, very high dollar price, it just doesn’t make a lot of sense to us, I’ve never seen that, we always look at the marketplace, we always see what the opportunities are, but I don’t see us being a 104, 105 buyer.

Unidentified Analyst

And then just last question on the non-Agency book, and the debt market (inaudible) rally, you guys have done a good job there. When you look at unlevered deals today cost that market, I know there wide, but in the segment that you’re implying in sort of the higher quality, where are they today, and can you give us any color based on your stresses where you see unlevered deals on that market?

Stewart Zimmerman

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

Unidentified Analyst

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

Stewart Zimmerman

Yeah, obviously we are not at 15 to 18 anymore, but relative to other fixed income classes, we still think it’s a pretty attractive asset class.

Operator

Our next question comes from Steve DeLaney, JMP Securities.

Steve DeLaney - JMP Securities

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

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

Stewart Zimmerman

One is the good question. But then again you have asked good questions. On the Agency side, let’s see what happens after March, and lets see what happens in the following March that maybe the opportunity. On the non-Agency side what Craig has said I think leads to the potential answer relative to fact that repo has become more or rather less available on non-Agency and when you’re able to increase your returns by a turn to a turn and half of leverage, those are still very, very attractive returns.

So with that advent or with the potential for that advent and continue freeing up of repo on non-Agencies and with the advent of potentially a more attractive returns on the agency side, I feel pretty good about 2010.

Steve Delaney - JMP Securities

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

Stewart Zimmerman

I think you're right, and I think the other potential piece of that puzzle is the resecuritization, right, so to the same thing as additional repo.

Steve Delaney - JMP Securities

Have you talked about that yet in your call?

Stewart Zimmerman

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

Operator

Your next question is from David (Inaudible) with UBS Financial.

Unidentified Analyst

I'm going to ask a couple of questions here and I apologize if they are a little simplistic I'm not an analyst, but in your prior calls, you had mentioned in the non-Agency MBS area that you have be looking for high teens rates of returns. In the quarter I noticed that you have a lost adjusted yield of 11.3 now, I understand difference between yield and total returns.

I'm wondering if I remembered correctly whether you were looking for a high teens yield or a high yield total rate of return and if you were looking for a high teens yield, it looks to me like may be the non-Agency MBS disappointment on the yield side on the quarter? But again my recollection of your prior calls comment might be flawed.

Craig Knutson

This is Craig. When we first began investing in the non-Agency space, which was December of ’08, first quarter of ’09, the yields available in the market place were generally high teens. They came down over the course of 2009 and we did discuss this on subsequent quarter earnings calls on they continued to come down I think pretty much every earnings call, we were asked, (Inaudible) you know the market has heightened, prices are higher, where are yields now? So I think, yes, the number was 11.3, but that obviously takes into account assets that were put on at higher yield at the beginning of the year and assets that were put on at lower yields at the end of the year.

Unidentified Analyst

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

Stewart Zimmerman

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

Unidentified Analyst

Okay. Second question, you have 3 billion of a swap where it looks like you have a 4.23 fixed cost on the swap and you are receiving a floating of a quarter of a percent right now.

Stewart Zimmerman

Correct.

Unidentified Analyst

So if I understand that correctly, when the Fed starts raising rates then the cost of that funding should decline because our variable payment will appreciate, is that correct?

Stewart Zimmerman

That is true, but the time that Fed starts raising that $3 billion, probably close to 2 billion.

Unidentified Analyst

Okay. So we won’t get as much of a help on that. Okay and other quick question which is more just a big picture question. There was an article in the journal on Monday about (inaudible) yesterday about how the Fed might go about using the liquidity and taking liquidity out of the system. And one thing that I thought was interesting was that in the past I guess we all got pretty used to the Fed raising rates incrementally and giving us a lot of warning as they did say ’04, ‘06 where they went up a quarter a point every time.

There was a discussion in that article about how many of the insiders and the FED thought that was a negative policy that actually added to the leverage in the system, and that they were talking about possibly incrementally raising rates each time on a much dramatic basis and then possibly holding rates constant for a longer period of time. And I wondered if your models, if you look at some type of shock treatment where the FED actually comes out and in there first raise goes up 100 or 150 basis points, I never would have thought they would have done that, but given the tenor of that article, it seems like that might be more of a possibility than every meeting quarter per point raise that we all got used to. So, I was wondering if you had any thoughts on that.

Stewart Zimmerman

Your point is basically how we’ve been running in this company. One, FED funds can’t go below zero, so there will be no positive surprise, it will only be negative surprises on interest rates. As a result, we’ve cut our leverage down sort of three handle from a seven handle. We are not generating these dividends from carry trade where you by fixed rates and fund them for a month or very short.

We are generating value added to the shareholders by selecting through an asset class that people don't have the capability to analyze. That the unlevered yields regardless of what they FED does, as you saw over 11% in the fourth quarter.

The question we play with, if I guy an asset, it yields me 11 and FED funds go from 0 to 1 or 2 or 3, what happens to the value of that asset. It's not even clear to me that the value of the asset goes down, because perhaps it means you’re in recovery that the credit, our credit analysis was wrong that the economy does better than we thought, and the yield in the asset goes up. So, what you're saying is right, there is less certainty; the surprises cannot be positive ones. As a result, we’ve decreased the interest rates sensitivity of our investments.

Operator

Your next question comes from Jim Young, West Family Investments.

Jim Young - West Family Investments

Could you talk a little bit more specifically about how you are thinking about the funding of the non-agency bonds from the perspective of the REIT REMIC’S versus the repo, what kind of duration you're looking at for the repo financing. What kind of terms you're currently seeing in the marketplace today. How are they compared to last quarter? And again, just how do you think of the relative trade-off between the REIT REMIC versus the repo financing? Thank you

Bill Gorin

As far as the repo market for non-agency this quarter versus the last quarter, there are more counterparties, (inaudible) if anything are probably a touch slower and the rates are a little bit more aggressive, but I would say the quantitative differences are fairly subtle, the more significant factor is there are significantly more players out there and it’s more available. Pretty much almost all of the non-agency repo that we did was six months.

We expect to roll some of the first ones that we did shortly. As far as the REIT REMIC versus repo, they are actually not mutually exclusive and some of the more interesting structures on REIT REMIC’S would have a senior bond, but a smaller senior bond at the top of the senior bond on the capital structure and that would then create potentially a security below that that would be our repo.

As we said, we continue to look at the REIT securitization market, there have been some very innovative structures done in the last month or so. And so, we think that is to our benefit and that we will be able to take advantage of that.

Jim Young - West Family Investments

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

Bill Gorin

Typically 12 months is sort of a barrier, because of capital charges with the counterparty, but six to nine months is certainly available.

Operator

Your next question comes from Steve Covington, Steven Capital.

Unidentified Analyst

Hi guys this is actually [Joe Stephen]. This is a non-MFA question. When you guys were top ticking the market, when you were selling your securities, what is your market (inaudible) who was the one buying these and who is going to experience some blowups in here, that’s question number one?

Bill Gorin

We weren’t selling them to other REITS, if that’s the question?

Unidentified Analyst

I understand that, because most of the REITS aren’t buying, so who is out there buying them?

Stewart Zimmerman

It’s our general impression that even with potential volatility in the values that I could see a very positive return over the holding period for a bank. So, if a bank has zero cost of funds, I’m having a hard time making good quality loans. Almost any scenario, because of the carry, it’s still a positive rate of return. So, it’s not an irrational purchase for a bank to buy these assets.

Unidentified Analyst

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

Bill Gorin

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

Unidentified Analyst

I’m just trying to get some market intelligence from you. All my specific questions were answered. Guys again congratulations and very good run.

Operator

Your next question comes from Bose George, KBW.

Bose George - KBW

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

Stewart Zimmerman

What’s the next question while we are looking?

Bose George - KBW

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

Stewart Zimmerman

First question is the duration; that you will see in the case 0.99.

Bose George - KBW

0.99. Okay, great.

Stewart Zimmerman

In has the capacity of negative 1.01.

Bose George - KBW

And just a weighted average coupon, is that to be used like something in 5 to 5.5?

Stewart Zimmerman

Weighted average coupon 5.36.

Operator

Your next question comes from Jason Arnold, RBC Capital Markets.

Jason Arnold - RBC Capital Markets

One quick follow-up. Can you remind us, it’s around 900 million to a billion of swap notional value that’s rolling off in 2010 is that correct?

Stewart Zimmerman

Yes, that would be in the K, that is ballpark right.

Jason Arnold - RBC Capital Markets

Is it safe to assume that the average pay fix rate should decline pretty meaningfully I guess by the end of the year or is the benefit there of the roll-off coming from notional decline primarily?

Stewart Zimmerman

I think the average pay will remain about the same or sort of small notional matter.

Jason Arnold - RBC Capital Markets

So, it just will add of course with the decline incremental improvement on the average cost of borrowing side of things?

Bill Gorin

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

Operator

Thank you. There are no further questions.

Stewart Zimmerman

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

Operator

Thank you. Ladies and gentlemen, this conference will be available for a replay starting today at noon and will run until February 18, 2010, at midnight. You may access the replay service by dialing 1-800-475-6701 and entering the access code of 146379. You may also dial 320-365-3844 and also enter the access code 146379.

That does conclude our conference for today. Thank you very much for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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