Ellington Financial's (EFC) CEO Larry Penn on Q1 2014 Results - Earnings Call Transcript

May.10.14 | About: Ellington Financial (EFC)

Ellington Financial LLC (NYSE:EFC)

Q1 2014 Results Earnings Conference Call

May 8, 2014; 11:00 a.m. ET

Executives

Larry Penn - Chief Executive Officer

Mark Tecotzky - Co-Chief Investment Officer

Lisa Mumford - Chief Financial Officer

Jason Frank - Secretary

Analysts

Steve DeLaney - JMP Securities

Mike Widner - KBW

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Ellington Financials, first quarter 2014 financial results conference call.

Today’s call is being recorded. At this time all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. (Operator Instructions).

It is now my pleasure to turn the floor over to Jason Frank, Secretary. You may begin.

Jason Frank

Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not historical in nature and can be identified by words such as believe, expect, anticipate, estimate, project, plan, continue, intend, should, would, could, goal, objective, will, may, seek or other similar expressions or their negative forms or by reference to strategies plans or intentions.

As described under item 1A of the annual report on Form 10-K filed on March 14, 2014 forward-looking statements are subject to a variety of risks and uncertainties that could cause the company’s actual results to differ from its believes, expectations, estimates and projections.

Consequently, you should rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Okay, I have with me today on the call, Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford our Chief Financial Officer.

With that, I will now turn the call over to Larry.

Larry Penn

Thanks Jason. Once again, it’s our pleasure to speak with our shareholders this morning as we release our first quarter results. As always, we appreciate you taking the time to participate on the call today.

First, a few key highlights. It was another strong quarter for Ellington Financial. Our net income was $0.88 per share and the return on equity for quarter was 3.6% compounded, that’s over 15% annualized.

We declared our sixth consecutive regular dividend at $0.77 per share and we increased book value even after payment of our dividend. We continued to make a number of strategic and tactical moves that we’ll take about shortly.

While the market environment was relatively clam last quarter comparison to some of the gyrations we saw in 2013, we remain and we remained disciplined about out hedging program. As we think the market maybe underestimating the chances of the resumption of our facility.

In the near and medium term, we not only see our existing portfolio as continuing to generate excellent returns for Ellington Financial, but we expect numerous additional opportunities to unfold, that we believe we are well positioned to capitalize on over the remainder of the year and beyond.

We will follow the same format as we have on previous calls. First, Lisa will run through our financial results. Then Mark will discuss how the MBS market performed over the course of the quarter, how we positioned our portfolio and what our market outlook is. I will follow with some closing remarks before openings the floor to questions.

As a remainder, we have posted a first quarter earnings conference call presentation to our website www.ellingtonfinancial.com. You can find it in three different places; the Homepage of the website, before our Shareholders page or the Presentations page. Lisa and Mark’s prepared remarks will track the presentation. So if you have this presentation in front of you, please turn to page four to follow on.

I’m going to turn it over to Lisa now.

Lisa Mumford

Thank you Larry and good morning everyone. As shown on our earnings attribution table on page four of the presentation, in the first quarter we earned $22.6 million or $0.88 per share. On a sequential quarter-over-quarter basis, net income was up just a bit under 52% and the increase came from strong contributions from both our non-agency and agency strategies.

Our non-agency strategy generated gross income of $23.1 million, which was up approximately 13% over the fourth quarter. The vast majority of our non-agency income continues to come from non-agency RMBS securities, but as we have continued to diversify our sources of revenue, we have had meaningful contributions from other areas.

If we think of our gross income as consisting of interest income, net realized gains and change in net unrealized gains and losses, our non-agency results, excluding RMBS securities contributed approximately 18% of our $26.2 million in total gross income for the quarter. In this context, our non-agency results, excluding RMBS include CMBS, distressed small balance commercial mortgage loans, CLOs and NPLs. Last quarter the contribution to gross revenues from these other non-agency sectors was about 16%.

While we believe there remain ongoing opportunities in non-agency RMBS, over the medium term we would expect that the relative contribution from these other areas will continue to grow. By the way, the 18% excludes income from our equity strategies, which contributed an additional $2.8 million or $0.11 per share in the quarter. Last year income from these strategies was relatively small. On our attribution table they are included as part of the line items labeled net credit hedges and other activities.

Active trading on the non-agency portfolio continued in the first quarter. Sales excluding principle pay downs were 34% of the portfolio in the first quarter. You can see on the attribution table that we monetized gains in the amount of $24.3 million or $0.93 per share.

During the first quarter, book yields on our health portfolio increased 25 basis points to 9.5% as underlying projected cash flow have continued to improve our non-agency MBS. Additionally, we have been able to purchase asset at attractive yields and on the whole our weighted average yield improved to 9.24% in the first quarter from 8.97% in the fourth quarter.

Our non-agency holdings declined over the first quarter. At the end of the first quarter our non-agency portfolio was $638 million compared to $700 million last quarter. You can see this on slide 11 of the presentation. Our outstanding borrowings and debt to equity ratio also declined. Given the rally in non-agencies, we have elected to have a slightly smaller portfolio for the time being; however, we are ready and able to delve back up as attractive opportunities derive.

In our agency strategy, our gross income was $4.1 million or $0.16 per share in the first quarter, up significantly from the forth quarter when we recognized $1.9 million or $0.08 per share.

Our long portfolio includes investment in agency IOs, which represent about 6% of the portfolio based on value or approximately $41 million at quarter end. These securities have performed very well recently as a result of the very low level of refinancing activity. Our overall interest income was down slightly in our agency strategy quarter-over-quarter, because our average holdings were down during the quarter.

Our average yields were basically flat quarter-over-quarter after taking into account a small positive catch up adjustment we’re seeing in amortization.

On an annualized basis, in the first quarter our core expense ratio increased to 2.8%. This increase was mainly related to increased professional feels incurred in connection with some of our new initiatives.

We’ve seen our repo borrowings cost decline in recent months with respect to both our agency and non-agency repo. We have found increased competition from both our long-standing and some newer relationships to provide repo financing at attractive rates and in particular, non-agency repo spreads are noticeably tighter.

Our weighted average repo borrowing cost at the end of the first quarter feel to 0.36% from 0.40% on our agency borrowings and to 1.9% from 1.96% on our non-agency borrowings. As our older repo continues to roll off, we’d expect to see further decline.

As Larry mentioned, on Tuesday of this week our Broad of Directors declared a first quarter dividend of $0.77 per share. Based on yesterday’s closing price of $24.39 our annualized dividend yield equates to 12.6%.

I’ll now turn the presentation over the Mark.

Mark Tecotzky

Thanks Lisa. Q1 is generally a good quarter for fixed income strategies. It was actually an exceptionally strong quarter for investors that did not protect themselves in the risk of interest rate increases, but that’s not us.

We were able to generate over a 15% annualized return on equity, even after absorbing costs of around $13 million on our interest rate hedges. To put this quarter in perspective, it needs to be looked at in the context of how we performed in Q3 and Q4 of last year, when the sharp increase in interest rates and extreme interest rate volatility caused problems for so many mortgage REIT’s.

While our strategy to drive returns for shareholders evolves substantially from where we were last year, our strategy to protect book value has remained the same and it’s a strategy designed to generate returns of the market cycles, not just in bond market.

In order to generate returns, our portfolio has evolved and now involves NPLs, CLOs, small balance commercial loans, CMBS subordinate bonds and European assets, all newer sources to returned diversification for our shareholders.

But our commitment to try to mitigate the impact of interest rate shift and yield per shift on book value remains consistent. Our interest rate hedge, yield curve hedge, lower leverage actively managed approach for investing is a driver of the consistency of our returns and a consistency of our book values. Another constant is our commitment to active trading, to capitalize on dislocations and opportunities to further enhance returns.

So lets talk about the non-agency portfolio, slide 11. As interest rates stabilize in the fourth quarter, and then its long-term rates dropping in the first quarter, bond outflows stopped and inflows started. In addition, after 2013’s tremendous stock market performance, many pension funds become sufficiently close to being fully funded that they have reallocated capital back to fixed income, where they are looking mainly for long duration assets or credit sensitive assets like non-agency MBS and CMBS.

As the result spreads tightened in the quarter and some of our holdings reached prices where they no longer offer the best risk adjusted returns available, we sold these assets and in fact weighting capital internally will be deployed in the future.

One big benefit of our efforts to diversify our strategy is that we now look at many different asset classes for investment; CLOs, NPLs, CMBS, etcetera. While one sector might be quiet, another one might have tremendous opportunities.

Having some dry powder here makes sense as the first quarter environment for credit assets was a rare combination, stabile in the timing of interest rates, capital allocations from bond funds and pension funds and continued strong home price data. While new home sales and housing starts data under whelmed on a seasonally adjusted basis, home prices were stable and the REO and delinquency numbers continue to drop.

Generally, a decline in long-term interest rates as what we saw in Q1 was not accompanied by a strong environment for credit, so Q1 was somewhat unique in that regard. Another big change in the end of last year to Q1 of this year is at the end of last year investors doubted the feds ability to pay for their two repurchases without meeting substantial volatility.

Now investors are placing assets, assuming the feds can take without causing any dislocation at all. The sharp rise in swaps and prices last summer and the subsequent plummet this quarter dramatically shows the change in investor sentiment.

So what’s the right answer? So we don’t know, but it seems likely to us that should the economy surprise to the upside and long rates sell off, we might again see bond fund losses lead to bond fund selling, pressure in prices on credit assets lower similar to what we saw last summer, but perhaps not as violent.

The Wall Street balance sheet continued to contract and liquidity these days is highly correlated to demand. There are multiple buyers for an asset class, liquidity is very good, when there are multiple sellers, liquidity arose as they come into buyers market. We saw that transition approximately between May and July of last year. For all those reasons, we sold some assets in the first quarter and raised some cash.

Our non-agency turnover was approximately 34% and our non-agency portfolio only declined by 9%. Well, obviously they are still finding many attractive things to buy. By late summer we think that the cumulative effects of the fed tapering within the inflection point, that couldn’t create any variance in dislocation.

Next I would like to turn to slide 13 to discuss our credit-hedging portfolio. We still see the opportunity in housing as a long credit opportunity and we still prefer to have our credit protection primarily come in the from of short positions on high end corporate bond indices, where ravenous investor demand for high yield bonds and leveraged loans has allowed an issuance boom where borrowers think they’ll be upper hand in covenant negotiations with investors. Besides, our corporate hedge came down nearly as our portfolio shrank.

The agency portfolio: So the agency said you also had a strong quarter. They may have also diversified our holdings over time, continuing allocations to IOs and agency reversed mortgage pools.

Towards the end of last year when agency mortgages were so stressed, we reduced our TBA hedges in the service file. After nearly six months of anticipation back to logistics and consequently the federal judge tapering of its QE3 by program. In the first part of the year investors could finally see market reactions in the taper and the reaction was a big whole hub.

After we explained volatility in the second half of 2013 the anticipation of tapering. Once tapering was actually upon us waiting were subdued and the U.S. pricing marched higher and the reduction in fed bond wasn’t even apparent. MBS prices were supported by reduced interest rate volatility, slow prepayments and very limited creation of new agency flows.

With that, I’ll turn the call back to Larry.

Larry Penn

Thanks Mark. As Mark alluded to earlier, we don’t generate our returns at Ellington Financial by standing on interest rate. In fact, we aim to be at agnostic to rising or falling rates. Interest rate prognostication is not our edge. Our edge is identifying value within the MBS, ABS and related markets, both absolute value and relative value, both on a sector selection basis and on an individual security selection basis.

The accomplishments to a combination of deep experience and serious investments in research and analytics. With credit spreads having tightened recently in RMBS, careful asset selection has become much more important.

Our edge is also enhancing returns to active trading. Turnover in our non-agency portfolio was 34% last quarter; who else in this space comes close to that? Our edge is focusing on total returns and protecting book value, but also it’s to achieve our objective of capturing upside and good markets, while controlling downside and rough markets.

Please turn to page 27 in the presentation and you’ll see exactly what I mean about performance over market cycles.

Both Lisa and Mark touched on diversification and I’d like to amplify a bit on that. As you can tell, at Ellington Financial we’ve been setting ourselves up for opportunities in a wide variety of markets, but there’s a market that comes under pressure and presents a compelling opportunity. We want to be involved so that we can participate.

The European mortgage and asset back market is a great example. So far our investments in that sector have been modest, but we think that there’s a significant probability of an exceptional opportunity developing and we’ve geared up our efforts there and we are ready to pounce when the time is right.

The CLO market is another great example. As you know, we’ve been involved in the CLO market for a while now, but we’ve mostly only seen value in legacy CLO’s, so that’s where we’ve been focusing. That’s been a very nice source of returns for us so far. But thinking bigger, we see the leverage loan market as a possible accident waiting to happen down the road. If underwriting standards in the new issued leverage load market continue to degrade and the market ultimately implodes or even just has a significant hiccup, we plan to be there to capitalize.

The distressed more balance commercial loan sector is another example. While our portfolio has been relatively small in this sector, this has been one of Ellington Financials best strategies recently on a return on asset basis. We were able to find some excellent opportunities last quarter and we doubled our holdings in the sector. In one case we bought a non-performing commercial loan for about $3.2 million in mid-march and we’ve already resolved it on April 30 via a short sale at just over $4 million. That was a 27% profit in less than 50 days.

Now obviously that’s not typically, but again it shows why we’d love the small balance non-performing space in particular, and in general it shows the value of having eyes and ears in so many different sectors.

Lets move on to residential loans. We continue to gear up residential mortgage loan operations at Ellington. I realize this hasn’t translated into a large pool of investments for Ellington Financial yet, but I can assure you that we are very excited about many different opportunities in the residential loan space. We continue to explore multiple mortgage origination platforms, either for acquisitions or joint venture.

On a related note, this past quarter we started to take concrete steps to enter the non-QM, non-prime space or exploring entering the space at various points in the supply chain, including even potentially acquiring or starting up a specialty lending. And of course, in the residential mortgage loan space there is the residential NPL sector that’s non-performing residential mortgage loans. But we still only purchased that one $36 million NLP pool from HUD so far. We are seeing NLP sales accelerate and we expect this to be a nice growth area for us. The next HUD sale is coming later this quarter and it’s expected to the largest sale yet.

We expect this diversification trend to continue. There are a lot of MBS, ABS related asset classes, but we haven’t even begun to scratch the surface side, especially in the asset backed space, and with CMBS volume, issuance volumes expected to stay high, we hope to continue to find attractive to beat these opportunities and these are core, high yield in holdings that we expect to benefit from for a long time

As has been reported, Ellington was actually the third most active institutional investor in this market in the first quarter. We have a great team identifying opportunities in the CMBS markets led by Leo Wong, formally of Goldman Sachs and Star Award.

To summarize, we’re not only executing our existing strategies, but we are diversifying and thereby setting the stage to capitalize any opportunities that we see coming down the road. We are excited about these opportunities that are developing in so many different markets and we believe that we are well positioned for the rest of 2014 and beyond.

This concludes our prepared remarks. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steve DeLaney of JMP Securities.

Steve DeLaney - JMP Securities

Hi, good morning everyone and congratulations on a strong start to 2014.

Larry Penn

Good morning Steve.

Steve DeLaney - JMP Securities

Thanks. Larry, I saw the dividend announcement last night and last year when the dividend was announced, I recall that there was some statement about that that was a rate that the broad felt that we could use a run rate for the year and you were true on that. You said you fixed rate times, but as the year went on there was not really a lot of drama or uncertainty about what your dividend was going to be. I was just wondering if you could comment on the deliberations when the board set this first quarter dividend at $0.77. Was that done with the thought that that would be the run rate until such time the market conditions warranted a change or will it be revisited kind of every quarter?

Larry Penn

Right. So what I would say is that obviously if anything big happens, some surprise to the upside or the downside obviously, we would be open, so we’re considering that, but when you determine run rate, I just want to point out that some people might interpret that as meaning, just looking at the yield on your assets, leverage, looking at your portfolio as static and we don’t look at it that way.

So we see our active trading style as generating returns above and beyond just the run rate and the pure yield in our assets and in fact we as you know, we stay lower leveraged than the rest of the peer group in order to be able to be more nimble and to more actively trade.

But that being said, we are looking obviously at our recent performance, which certainly support that dividend. We’re looking at the opportunity set that we see now, we’re looking at the different markets that we’re getting into and management and the board were comfortable with that level of dividend as being something that was sustainable in terms of the visibility that we have.

Steve DeLaney - JMP Securities

That’s helpful, and just to clarify, I want to ask that that’s what the word in run rate, because when I view it I’m thinking of it as a total return, understanding the active style and that that is certainly not just some implied levered carry that reflects return from your active trading as well.

Larry Penn

Exactly.

Steve DeLaney - JMP Securities

And $0.77 annualized with the latest book value, April 30 would imply about a 13% kind of expected total return as far as the base case.

I wanted to also ask you, we’ve seen a number of non-bank mortgage investors, mortgage REITs in particular, electing to join the federal home loan bank system and while I don’t necessarily look at Ellington and see a lot of whole loan activity or necessarily a lot of investment grade non-agency securities, I’m just curious if you see a use for having access to the home loan bank system and if so, what types of future assets might that be a good funding fit for?

Larry Penn

So we’re absolutely looking into that. At this point its really more research and we haven’t taken any concrete steps to do that, as you know it involves clearing reinsurance subsidiaries, etcetera, and we have been looking at that market as well here at Ellington.

I think for Ellington Financial it could be a very interesting funding source. I think that it’s not really necessarily the kind of assets that you can fund and its not even really necessarily the rate, but I think the thing that’s very interesting is the term or the length of financing that you can get. Today that’s the most interesting thing. So yes, something we’re looking at.

I think that in the near term, I don’t think it would confer necessarily a large competitive advantage considering that the financing is really very good right now and we don’t see a financing crisis coming around the corner, but its absolutely something we’re looking at and I think its potentially interesting.

Steve DeLaney - JMP Securities

Okay, that’s good to hear, okay. And then lastly if I may, just one final thing, just listening to a lot of earnings calls this quarter over the last two weeks, it seems like that the hybrid mortgage REITs that are focused on really on the residential side and on just legacy R&D. So we’re really kind of struggling with identifying attractive places to deploy capital. Just curious how Ellington views sort of it as we sit today, like the relative credit opportunities between and in the credit world between the residential sector and the commercial real estate sector.

Mark Tecotzky

Yes, hey Steve, its Mark.

Steve DeLaney - JMP Securities

Yes Mark.

Mark Tecotzky

So, you know in the first quarter of this year we found some very, very attractive trades in CMBS and Mary talked about the slower balanced commercial loans. So we count pockets where you could deploy capital that looked to us. You know when we entered them, we have a great total return potential and a lot of them would monetize and that was the case.

But the size of the opportunity isn’t as big as what it is in the residential market. (inaudible) the residential market, yes yields have come in, but pricing dislocations remain as big as they were and I mentioned that in my prepared comments that there has been a continual decline in the investment banks willingness and ability to function as market makers in this market and market makers that keep relative value relationships in check. I mean the only function that role allows for people like ourselves to step in and capture some of the bid offer spreads that predicts what the problem is with the market makers.

So when you look at that in combination with the various case loans, base case current loans in our agency market, that’s still a very compelling opportunity and you can put a lot of money to work there. So I would welcome the diversification we’re getting from all these other sectors and we saw it contribute meaningfully to our return this quarter and I think that will continue to be the case, but there is still lots and lots of ways to generate return in the non-agency market.

Steve DeLaney - JMP Securities

Well, that’s very helpful Mark, because I was thinking about the opportunity and more of a plane vanilla sort of buy and hold strategy and it does sound like that is tied to the point where its maybe less compelling, but I just assume that the tightening if you will and the reduction of yield might have narrowed some of those relative value traits, but it doesn’t sound like that’s the case. So I’m hearing you say that you’ll still be very active in that space if you see it going forward.

Mark Tecotzky

Absolutely. But I think our size is an advantage too there right. I mean by staying nimble we can really make some very concrete contributions from just a few trades during any given quarter or during the year. So we can afford to – we shrank the portfolio by what, 8% or 9%, the non-agency portfolio. If you do the math and you see okay, how much does your carry or run rate if you will, decline just on that basis and you translate that into dollars, its not that many dollars.

Steve DeLaney - JMP Securities

Well listen, thank you guys all for the comments and a great quarter. Thanks.

Mark Tecotzky

Thank you Steve.

Operator

(Operator Instructions) Your next question comes from the line of Mike Widner of KBW.

Mike Widner – KBW

Good morning guys. I was going to ask the same question that Steve just went through with you.

Larry Penn

And we’re going to give you the same answer.

Mike Widner – KBW

Yes, I mean I guess just elaborating on it a little bit, I mean basically the thesis was, its easy to ride the wave of certain credit spreads tightening, which has been expanded over the past four years really and again over each of the last two years. The last year your total return performance was best in the sector and the year before it was 45%, so hard to complain about that even if a couple of guys squeaked in higher. But I mean as Steve indicated, we heard from a lot of people and I think with you and everywhere the credit spreads has tightened up, so that there’s not so much an easy way to ride right now.

Now what you articulated was there’s still opportunity, so the broker dealers have sort of stepped out of capitalizing on the bid spread, no issues. I guess to what degree, I mean is that a Dodd Frank thing or I mean is it – what is that and is that sustainable I guess is the question.

Larry Penn

Yes, I think it is and I think it is sustainable. I think the risk profile of so many banks has gone down considerably, just announcing it this morning that one of the big fixed income areas shrinking, one of the major money center banks, investment banks now. I think that that’s something that we think is going to be here to stay for a while in terms of – and you know there’s obviously. It’s a good news, bad news things right. The good news is that we will have less competition. The bad news is that it creates a more volatile market and we enjoy that though in general.

Mike Widner – KBW

So, that’s how you make your money.

Larry Penn

Yes, that’s part of how we make our money, that’s right. By being there basically when there is a dislocation. In the past the street was always a buffer, so if a customer had something to sell, there was just a limit to how fast prices would drop, because the street would be there at a big – they had a big pathway to increase their inventory and that’s just not as much the case anymore. So yes, so that’s a thing that’s definitely a positive for us on balance.

But to answer your question, there’s no question that the opportunity set was concentrated in the legacy RMBS market and to some extent it still is for us. But the relative proportions are definitely shifting and we see that and we recognize that and that’s why we’re going to where we think the next opportunity is, either maybe or we feel confident it will be.

Mike Widner – KBW

Great, thanks. That makes sense. I guess second semi related question is when I hear you guys talk about originating non-QM, non-prime loans and potentially in three loan originations and I start to sort of think about operating companies and actually building out an infrastructure which is potentially very attractive, but at the same time very different than what your talking about.

I mean you guys effectively have taken over where the prop desks vanished and capitalizing on. Your not going to make $50 million in a week on 20% or whatever return in a week on the kind of stuff you talked about with a 50 days with your commercial loan once you put in an infrastructure originated loans.

So I guess I’m sort of wrestling with the tension of are you guys thinking about becoming more of an operating company, where the focus is again philosophically quiet different, following a nice where the market isn’t in terms of originating loans could be very profitable, but its also very hard to capitalize on the ball if you will.

Larry Penn

Right, I mean I guess what it is we’ll see where it takes us. So for example in the non-prime space, we can definitely – we believe that we can be a significant player in that space and not necessarily have loan origination capabilities right.

The originators, the point of that opportunity right is that the big banks do not want to originate/repay in that product and the smaller banks don’t have the balance sheet, the small lenders don’t have the balance sheet to do that, so that creates the opportunity. Whether we are actually employing if you will the loan officers or whether we are to take out for the originated loan, in the end it doesn’t matter. We’re going to do what we need to do to take advantage of that opportunity, but it doesn’t necessarily mean creating a huge operating infrastructure.

On the other hand if that’s what it takes, we feel that we have a lot of experience and a lot of expertise in overseeing and we will bring in the right people to run that kind of operation or we would acquire them. So we agreed that that would create a whole other set of challenges for us and it’s not something that we would take lightly and it’s not something that we’ve done yet in this particular space. But its something that we aren’t going to shy away from if that’s the best way to take advantage of the opportunities.

Mike Widner – KBW

So, I mean and it will be my last one. I mean philosophically also on sort of non-QM lending, it sort of surprises me that the CFPB sort of expected it to happen a lot faster than it has and a lot more scale than it has, which is as I said more than zero and it hasn’t, and I think a lot of people looked ahead of time and said, look, its not going to happen given what you guys are putting in place.

So I mean I guess what I still wrestle with on the non-QM lending front is the yes, legal sort of risks just seem pretty massive and it hasn’t developed for sort of a reasons. So I guess my question is, I mean did you spot that there is this sort of massive valuation gap between nothing happening and borrowers are willing to pay a much higher amounts, so its sort of – the legal risk, it’s just that no one wants to do the loans, because you can’t make loans at a level that makes profit.

So I guess yes, you guys have obviously looked at it a fair amount and I’m wondering, what is the hang up right now and have you seen guys capitalizing and being able to fill that gap.

Larry Penn

Yes, well first of all I think we’re still talking about rules that were only recently put in place, right. So its going to happen pretty soon I think in this market. I think it’s going to – you haven’t seen it start yet. I think its happening now and we’re getting involved with others as well.

So I think you will start to see it. I think that different companies are going to have a different view on what niche, what parts of the non-QM market they want to be taking risk on and getting involved in and they’ll have different risk profiles in terms of legal risk and with the regulatory risk or investment risk, but I think the market’s going to sort itself out.

Now whether the securitization market is going to be there right away, to make the economics of originate securitize repaying the risk, whether that’s going to be there right away. I think that might take a little bit longer, right, because as we all know the residential securitization market, it really still takes a long time to come back, but I think in terms of obviously the warehouse product and in terms of the numbers that we’re looking at and of course it’s a little hypothetical right now, because its difficult to predict exactly what the market will bear, but we think that it looks like it could be a very good business.

Mike Widner – KBW

Well, I look forward to seeing how the economics of that business shake out. It will be nice to see somebody in the government kind of envelop in the loan market at this point.

Larry Penn

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Douglas Harter of Credit Suisse.

Douglas Harter - Credit Suisse

Thanks. Our questions have been asked and answered.

Larry Penn

Great.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes Ellington Financials first quarter 2014 financial results conference call. Please disconnect your lines at this time and have a wonderful day.

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