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Chimera Investment Corporation (NYSE:CIM)

Q2 2011 Earnings Call

August 2, 2011 11:00 AM ET

Executives

Matthew Lambiase – President and CEO

Christian Woschenko – Head, Investments

Alexandra Denahan – CFO

Rose-Marie Lyght – EVP and Co-Head Portfolio Management

Analysts

Jason Weaver – Sterne Agee

Bose George – KBW

Doug Harter – Credit Suisse

Stephen Laws – Deutsche Bank

Ken Bruce – Bank of America – Merrill Lynch

Daniel Furtado – Jefferies

Stephen Mead – Anchor Capital Advisors

Operator

Good morning and welcome to the second quarter earnings call for Chimera Investment Corporation. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. (Operator Instructions). At the request of the company, we will open the conference up for question and answers after the presentation.

Unidentified Company Representative

This earnings call may contain certain forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions some of which are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology such as may, will, believe, expect, anticipate, continue or similar terms of variations on those terms or the negative of those terms.

Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors including but not limited to our business and investment strategy; our projected financial and operating results; our ability to maintain existing financing arrangements, obtain future financing arrangements and the terms of such arrangements; general volatility of the securities markets in which we invest; the implementation, timing and impact of and changes to various government programs affecting the capital markets and the economy.

Our expected investments; changes in the value of our investments; interest rate mismatches between our investments and our borrowings used to funds such purchases; changes in interest rates and mortgage prepayment rates; effects of interest rate caps on our adjustable rate investments; rates of default or decreased recovery rates on our investments; prepayments of the mortgage and other loans underlying our mortgage-backed or other asset-backed securities; the degree to which our hedging strategies may or may not protect us from interest rate volatility; impact of and changes in governmental regulations; tax law, and rates; accounting guidance and similar matters; availability of investment opportunities in real estate-related and other securities; availability of qualified personnel; estimates relating to our ability to make distributions to our stockholders in the future; our understanding of our competition and market trends in our industry, interest rates, the debt securities markets; or the general economy.

For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see risk factors in our most recent annual report on Form 10-K and all subsequent quarterly reports on Form 10-Q. We do not undertake and specifically disclaim any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Operator

I will now turn the conference over to Mr. Matthew Lambiase, President and Chief Executive Officer. Please proceed, sir.

Matthew Lambiase

Thank you, (Rocco). Good morning and welcome to Chimera Investment Corp.’s second quarter 2011 earnings call. This is Matt Lambiase. I’m the President and CEO. And joining me on the call this morning I have Alex Denahan, our CFO; Chris Woschenko, our Head of Investments; Rose-Marie Lyght, the CIO of our manager FIDAC; Choudhary Yarlagadda, the Head of Structuring at FIDAC; and Jay Diamond, the Managing Director at FIDAC and a member of Chimera’s Board of Directors.

We’re all here to answer your questions after my comments. As you know, the mortgage market has experienced significant volatility in the recent quarter. Many bullish mortgage investors who were encouraged by the falling unemployment rate earlier in the year, had to reevaluate their positions in light of new and bleak data on home prices and home sales.

The distress is further compounded when a well-publicized sale of a large distressed mortgage-backed securities portfolio held by the Federal Reserve did not go well. Many banks with residential mortgage exposure and mortgage insurance companies also came under significant pressure during the period. So with all the volatility that we’ve experienced in the mortgage market in the last few months, I think it’s important to highlight certain aspects of Chimera’s portfolio.

First, Chimera does not own pay option ARMs, home-equity loans or second mortgage loans or securities in its portfolio. These assets saw a significant drop in price as the Federal Reserve had a difficult time liquidating the AIG Maiden Lane II portfolio during the second quarter.

The majority of the assets in the Maiden Lane II portfolio were home-equity securities and the prices of these bonds in the ABX Index which tracks them, went down materially as the market tried to absorb the supply.

Chimera is not involved in these types of securities and so the change in the level of the home-equity ABX Index is not a good proxy for the change in the value of our portfolio. To-date, we’ve been successful finding better risk reward in higher quality sectors of the mortgage credit space. And while all credit has traded off in the second quarter, the bonds in our portfolio were far less volatile than the ABX Index and home equity securities.

Second, the vast majority of Chimera’s mortgage credit investments were purchased at a meaningful discount to par. Owning bonds at a discount puts us in a significantly different position than a bank or a mortgage insurance company that underwrote their residential mortgage credit risk at one hundred cents on the dollar.

Our discounted dollar price serves as a buffer to our invested capital. As expected, losses occur on the bonds. We assume and expect losses to occur on our discounted bonds and the yields that we book on these assets are adjusted for those loss assumptions.

Third, Chimera is operating with very low leverage. Our current asset mix is achieving a high relative return and allows us the flexibility to take advantage of opportunities. Roughly 80% of our capital is invested in discounted residential mortgage credit.

We own these mortgage credit investments for cash without any leverage from repo borrowings or bank loans. In a timely move in the first quarter, we increased our allocation to US agency mortgage-backed securities. Chimera now has roughly 20% of its capital allocated to a modestly levered US agency mortgage-backed securities portfolio. These securities are highly liquid, Fannie Mae, Freddie Mac and Ginnie Mae pass-through securities which have performed well in the last quarter.

This position affords us great flexibility in the current environment. Should credit prices become more attractive, we have the liquidity to buy; and should the market begin to shed some of its volatility, we have the ability to increase our leverage. It’s our view, however, that the credit markets will most likely continue to exhibit more volatility until the debt ceiling issues are resolved, Europe’s sovereign debt crisis clears and the domestic economy starts to show stability and some job growth.

The turbulent market creates opportunities for companies like Chimera who are operating with low leverage and have liquidity. A combination of regulatory reform from Dodd-Frank, capital reform from Basel III and the general deleveraging of financial institutions has led and will continue to lead to portfolio sales and other asset trades.

We are currently having discussions with both domestic and foreign banks regarding asset sales and restructuring opportunities. We are in the unique position of having (dry powder) to take advantage of this environment and we are actively looking to add to our portfolio of high-yielding investments.

It’s evident that the market’s fear and uncertainty are driving yields and rates of return in the fixed income market to ultra-low levels. Three month T-bills are at eight basis points and the 10 year treasury is yielding about 270. At the same time, Chimera’s producing a high-teens return on equity while operating at a 1.3 to 1 leverage ratio. Our credit investments, as we stated on previous earnings calls, are performing better than what we modeled when we purchased them and they’re locked out from principal flows.

With this structure, our team has built a portfolio that is intended to enable Chimera to continue to produce robust and high relative return even without significant leverage.

I believe Chimera is well positioned. We are operating at low leverage, we are producing a high rate of return and we have the ability to take advantage of the opportunities that present themselves in the turbulent market.

So with that, I’ll open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Jason Weaver of Sterne Agee. Please go ahead.

Jason Weaver – Sterne Agee

Good morning. Thanks for taking my question. First of all, I think you mentioned last quarter the reasoning behind the money in your sales was related to downgrading risk and certain Re-REMIC.

Matthew Lambiase

Yes.

Jason Weaver – Sterne Agee

Can you just update us what you’re thinking on that asset class now and if you’re looking to reallocate there?

Matthew Lambiase

Well, I think the first quarter our thoughts were that owning AAA-bonds in this environment with declining house prices and declining home sales, bonds could come under some risk from the rating agencies reevaluating their criteria and they could get downgraded.

We are in the process of watching the rating agencies work and they have been reevaluating their criteria on mortgage credit, and it’s been a little choppy there. And I think the other reason why we sold those bonds in the first quarter is because we wanted to take the risk assets off of repo and replace them with agency – replace that capital with the agency mortgage-backed securities and repo. And I think the trouble in Europe is a real problem and I think you have to be very careful with the sovereign debt in some of the European banks and we don’t want to be in a position of where we have assets out, credit assets out on repo with banks that get into some kind of financial troubles.

They want to de-risk at a time when everybody else wants to de-risk and it can get very choppy having those types of bonds on repo. You’re much better with agencies or treasury bonds on repo in this type of environment and I think that, that move was very good for the company in the first quarter.

Jason Weaver – Sterne Agee

Okay. Thank you. Also touching on what you said in your comments, Matt, with what we saw into the second quarter with the technical overhang related to both the Maiden Lane II and the European sales, what do you see ongoing? Any meaningful pressure on your non-agency book, even though they’re not of similar quality?

Matthew Lambiase

We would’ve hoped that we would’ve seen more pressure on the high grade part of the mortgage credit market. We hadn’t seen a big sell off in the paper that we’ve been trafficking in and trading in; and I think a sell off would mean the way the company is set up right now is we can take advantage of it. I mean we’re actually – this volatility is actually I think a good thing for us the way we’re set up.

Jason Weaver – Sterne Agee

Okay. Thanks, guys. Solid quarter, looking forward to talking to you soon.

Operator

Our next question comes from Bose George of KBW. Please go ahead.

Bose George – KBW

Good morning. I had a couple of things. First just can you comment on investment opportunities in the market right now, just what kind of unlevered returns? And just on the funding side, what’s going on in the Re-REMIC market?

Matthew Lambiase

Sure, I will have Chris.

Christian Woschenko

Yes. I mean on the underlying collateral, dependent on the bond, you can find something at about a mid-sevens kind of yields that we’ll restructure into the low teens, depending on what kind of splits you get from the rating agency.

Bose George – KBW

You said mid-sevens for the unlevered yield?

Christian Woschenko

Mid-sevens for the unlevered yield on the collateral and then once we sell off the seniors, we’d own the subs in the low teens.

Bose George – KBW

And the Re-REMIC market, has there been much activity there recently?

Christian Woschenko

No, there hasn’t.

Bose George – KBW

Is that based on sort of lack of investor demand?

Christian Woschenko

I mean I think there’s a little bit of uncertainty regarding the rating agencies and you can’t really own the bottom piece where you used to be able to. So it’s not quite as attractive a trade as it was before.

Operator

Our next question comes from Doug Harter of Credit Suisse. Please go ahead.

Doug Harter – Credit Suisse

Thanks. Matt, I know you said you guys aren’t in subprime or pay option bonds, given that those have sold off more, is that something that you would look at today? Or is that something you guys are kind of – just have a bias against?

Matthew Lambiase

Well, I would say with regard to pay option ARMs specifically, we hate them. We probably will never buy them here at any price; we just don’t like them at all. With regard to home equity securities, they’re not cheap enough for us to care. The majority of the bonds that were in the Maiden Lane II portfolio were longer home equity bonds that were floating rate in nature, so they have an awful lot of tail credit risk on them and you don’t get paid a lot of coupon for owning them up front so they really don’t fit well into our business model. I mean at some price, we would probably care about them; but at the moment, probably not.

Doug Harter – Credit Suisse

Great. And then I was just hoping you could help us understand, on the credit losses that have been flowing through, is there any amount? How should we have a sense of that amount going forward? Obviously there is a large amount of discount that you bought these bonds for, but trying to figure out what that credit component is going to look like going forward?

Alexandra Denahan

I believe we said in earlier calls that the credit losses have come in to date lower than what we expected but we do expect them to continue to come in. We don’t disclose, they will be lumpy based on how the actual securities pay and write-offs flow through the securities so we do expect them to be lumpy, but in general, we’re not expecting them to mitigate in the near future and we expect that they will continue to come. We have $2 billion in discounts that we obviously don’t expect to receive all of that back.

Operator

Our next question comes from Stephen Laws of Deutsche Bank. Please go ahead.

Stephen Laws – Deutsche Bank

Hi. Thanks for taking my question. Matt, a couple of questions and I guess maybe you can just talk to your thoughts on leverage and then ROEs on the portfolio. If we adjust the fourth quarter results for kind of a slow deployment of capital raised late in Q3, we’ve seen ROEs come down, core ROEs come down six quarters in a row. Now that said, if we somewhat adjust the leverage to try and back out the repos tied to the agency assets, it looks like leverage on the non-agency portfolio has come down quite a bit as well from kind of early levels last year.

Can you maybe talk about what’s driving those decisions? What would it take for you guys to take a different stance on leverage so we would see ROEs turn back the other way? Or maybe a better way to ask the question is just simply where do you see ROEs trending to in the next two to three quarters?

Matthew Lambiase

I think that’s great. I think the first thing is that our return on equity I think is terrific for a company that’s as low levered as we are. I think we’re in as defensive a position as you can be in the mortgage credit space. I think we raised capital in the fourth quarter and as everybody saw in the fourth quarter and beginning of the first quarter, the credit market rallied significantly. People were getting very bulled up on the economy and thinking things were going to get better and unfortunately, those hopes and those expectations changed late in the first quarter.

And I think our return on equity is extremely strong for the amount of leverage we have. I don’t see us increasing the leverage on our balance sheet in this environment with the challenges that we have in the global economy happening.

Europe is a mess. I mean I think the debt crisis issue will get put behind us this week, hopefully. But Europe is really the ongoing problem here and how it affects the banks. And you’ve got to remember especially in the credit space when you’re borrowing money against credit assets, you’re only as good as the people lending you the money. And I think a lot of these banks could be in some serious trouble going forward.

So it’s better for us to run a low-levered balance sheet and produce this type of return and be around with dry powder to go after the opportunities of these guys that are going to be forced to sell stuff. And we are talking to quite a few different institutions, both domestically and internationally to hopefully pick up some of their assets when they’re selling them.

Stephen Laws – Deutsche Bank

Great. And I guess follow-up question just as far as capital raises going forward. Kind of a multi-part question. One, can you talk about whether or not you would look at the deal as being accretive are not based on the GAAP book value or the recently released economic book value metric?

And secondly, maybe comment towards reallocation of capital, existing capital versus new capital in that do you view the agency RMBS portfolio which is half of the portfolio on a fair value basis, as a source of capital to redeploy into non-agencies as you see pricing change? Or is that a segment of the portfolio we should look at as being fairly constant and any growth would be through any growth in the non-agency side would be through new capital being raised?

Matthew Lambiase

As any investment manager and other people on this call knows, when you see things change you have to make adjustments for it. That’s we did in the first quarter. We thought that the bid was very strong for our non-agency AAA-bonds. We sold them and we took the capital and reinvested it into agency mortgage-backed securities as a place that we knew was going to be safe through the turbulent times we’re going to go through. And I think, if things get cheap enough, we will certainly go to our agency mortgage-backed securities portfolio and as a source of liquidity to go after mortgage credit when things cheapen up significantly. And I, hopefully that’s we’re articulating to everybody here, is that, that’s our intention is when we see stuff, portfolios or bonds or whatever get cheap enough, we’re going to go first to our liquidity sources of the agency.

Stephen Laws – Deutsche Bank

Great. So I should read that, that as we’ll see that agency investments come down likely before we would see another capital raise?

Matthew Lambiase

Those things that I don’t, we have a policy here we don’t like to talk about capital raise in our capital markets activity. But we consider all these things as avenues of opportunity when we see it.

Operator

(Operator Instructions) our next question comes from Ken Bruce of Bank of America – Merrill Lynch. Please go ahead.

Ken Bruce – Bank of America – Merrill Lynch

Good. I was hoping you could provide a little bit more context just so we can reconcile a couple of the statements that have been made. So I understand current unlevered yields, mid-sevens for something that you could get in the low teens. I guess that doesn’t quite reconcile with the lack of access to the Re-REMIC markets. I guess I would like to just understand how you would get into the mid-teens type return on new investment as the market kind of closed out or how we should think about that?

Matthew Lambiase

I think right now, the market is, you know, you buy the underlying securities in the seven to eight type yield range unlevered and then when you Re-REMIC it, you get into the low teens type of return on it through our loss assumptions. I think that’s what the current economics of the Re-REMIC business is. I would say that the rating agencies have been more and more difficult with re-rating and making assumptions on collateral in the present market and I think things are certainly, the activity in the Re-REMIC market is certainly more quiet than it’s been in the past.

Ken Bruce – Bank of America – Merrill Lynch

Right. I guess just maybe a follow-on to one of the earlier questions that your returns are going to be drifting down to wherever kind of current returns are in the market. It sounds like that’s going to be, call it low to mid-teens. That’s based on the position that you’ve taken, that’s not a bad?

Matthew Lambiase

Yes. And I would say this, Kenneth. You have to think about it. The majority of the investments that we made these Re-REMIC subs that we own, don’t get paid down in principle, right? So they’re not going to get a lot of principle close. They’re not going to pay down significantly for some period of time going forward. So that return is going to be pretty strong going forward and then on top of it, you’re talking about the reinvestment risks, right? Into the low teens, which is as you think about just the environment that we’re in, you get a 270 10 year and an eight basis points on the three year T-bills, there’s nothing wrong with 14%, 15% ROEs, especially not with any thinking on a significant amount of leverage to get them.

We have to be somewhat realistic in terms of the market. We’re trying to produce really high returns and not take a significant amount of leverage risk in the credit book at this point. And that’s not to say that we won’t take credit leverage going forward, we won’t increase leverage going forward, just not at this moment.

Ken Bruce – Bank of America – Merrill Lynch

Right. I’m not trying to be antagonistic here, I’m just trying to understand kind of what the dynamic in the portfolio’s going to look like as we try to model it going forward.

Matthew Lambiase

Got you.

Ken Bruce – Bank of America – Merrill Lynch

And the, I guess could you remind us how much of the subordinate portfolio today is actually receiving principal or how much of that is locked out?

Alexandra Denahan

Really very little of the subs are receiving principal.

Ken Bruce – Bank of America – Merrill Lynch

Okay.

Matthew Lambiase

Yes.

Ken Bruce – Bank of America – Merrill Lynch

And I will follow up with that later, but could you just remind us as to you’ve got now – you’ve always had a very conservative view in terms of how the housing market was going to play out, but that’s clearly the FIDAC and the Annaly view from the top of the house, and that appears to be kind of factored into the discount that you’ve got for the existing portfolio. Do you find yourself revising your expectations as you look at new investments? As that, I guess that degree of weakness that you see in the housing market changing at all?

Matthew Lambiase

To date, no. I mean I think we were very negative and we continue to be negative on the housing market. I know that’s kind of reflected in our cash flows and our valuations and it’s really talking about recoveries when loans go into default and Chris and the team haven’t changed their recovery assumptions and they are still much higher than what we’ve been actually witnessing in the remittance reports that we’ve been getting.

So we’re still negative. We haven’t changed the way we look at credit. I think what stops us a little bit from buying credit like in the first quarter is that a lot of other investors started changing their loss assumptions to the positive and we never did that. And we became a non-competitive bid in the marketplace for credit. I think we turned out to be right after all, and I think we continue to be negative on the housing market.

We think that there is still more to go in terms of the housing market to go down in price, and we’re going to probably see weakness in housing for the foreseeable future.

I think all that coupled together means that there’s going to be a lot of opportunities for us in this kind of turmoil of an unsettled market to find great opportunities to invest.

Ken Bruce – Bank of America – Merrill Lynch

Right. Understood. So you basically have a very conservative view, you’re waiting for prices to wash out some more.

Matthew Lambiase

That’s right. That’s the reason we’re at such a low leverage ratio. We’re not borrowing money in the credit space or bank loans are on repo and we’re waiting to see, I think, another down draft here and I think that’s going to be a great opportunity for us.

Ken Bruce – Bank of America – Merrill Lynch

And then ideally that the rating agencies or just the securitization market effectively begins to function a little bit more routinely?

Matthew Lambiase

We would love that; we would love the rating agencies to function.

Operator

Our next question comes from Daniel Furtado of Jefferies. Please go ahead.

Daniel Furtado – Jefferies

Good morning. Thanks for the time, Matt and everybody. Just a couple of quick questions. Do you have any whole loans on the balance sheet right now?

Matthew Lambiase

We have the original or the legacy deals that we did back in 2008. If you remember we bought, when we first started up, about $1 billion worth of whole loans from PHH Mortgage and we securitized them; and those are the only loans that we have at the moment.

It is the company’s intention; however, to get back into that business, the jumbo prime origination business and we have been actively setting up the foundation for that business in the last quarter or two. But we have nothing at the moment on the balance sheet.

Daniel Furtado – Jefferies

Understood. And the last quarter or two there’s been an increased focus as opposed to call it like a year ago?

Matthew Lambiase

Yes, absolutely. Absolutely.

Daniel Furtado – Jefferies

Great. And then from the standpoint of the repo that’s on the balance sheet, can I assume that that’s all agency?

Matthew Lambiase

Its 100% agency.

Daniel Furtado – Jefferies

Okay, great. And then you’re speaking about it like being ready for a down draft with Ken earlier, and just kind of hypothetically speaking, if you saw the down draft, let’s say you wanted to take leverage higher on the non-agency book, how like what would be the process in which you would do that?

Matthew Lambiase

I’m not so sure we would just take leverage higher on the non-agency book in a down draft. I think you would probably sell the agencies and use the capital to buy credit investments.

Daniel Furtado – Jefferies

Got you, got you.

Matthew Lambiase

It’s one way or the other but the nice thing is we bought the agencies back in the first quarter, they performed extremely well as you can imagine during this rally here. So they are at a good, at the current moment they’re at a nice profit position for the company.

Operator

Our next question comes from Stephen Mead of Anchor Capital Advisors. Please go ahead.

Stephen Mead – Anchor Capital Advisors

Could you provide a little bit more sort of color on the agency portfolio? And I don’t know whether you took the leverage up say from the first quarter on that portfolio, and I was trying to get a sense of in terms of contribution to quarterly dividend, with the agency portfolio does for you?

Alexandra Denahan

At the end of the first quarter the agencies were little over five times levered. At the end of the second quarter they were little over six times levered. We had some assets that were unsettled at the end of the first quarter. With regard to the contributions of the agencies to the portfolio, we provide an annualized yield in the press release to give you an idea based on the pace of the contribution of their incomes to the portfolio.

Rose-Marie Lyght

This is Rose. The agencies currently at their leverage ratio are producing mid-to-high teens ROEs.

Stephen Mead – Anchor Capital Advisors

And what is the composition of the agency portfolio at this point in terms of...

Rose-Marie Lyght

A combination of, as Matt had said in his comments, Fannie, Freddie, and Ginnie 15 and 30 year pass-throughs. So they are straight fixed rate pass-throughs, no structure in them.

Stephen Mead – Anchor Capital Advisors

And then do you –- I mean how much hedging or swapping do you do on that portfolio?

Rose-Marie Lyght

We do have swaps on the portfolio; currently we have about $950 million of swaps against the agencies. That is something that Chris and myself and the team monitor and we will look to add swaps as we see fit as we do with all the company.

Stephen Mead – Anchor Capital Advisors

Okay. And your CPR on the agency side?

Rose-Marie Lyght

It’s about a mid-teens, right, 17.

Alexandra Denahan

I am sorry. That’s the entire portfolio, two lower on the agency.

Rose-Marie Lyght

The agencies are at about a seven.

Alexandra Denahan

So the entire portfolio.

Stephen Mead – Anchor Capital Advisors

The agencies are at a seven?

Alexandra Denahan

Yes.

Stephen Mead – Anchor Capital Advisors

Okay. And then what kind of ROE do you need to generate on the non-agency side to in a sense move the portfolio more aggressively to that paper?

Matthew Lambiase

Well, the whole trade has got to be a good deal, right? So we’re going to need to pick up yield to unwind the agencies.

Stephen Mead – Anchor Capital Advisors

Yes, okay.

Alexandra Denahan

And it comes down to the risks, to monitoring the risk in the different asset class.es I mean each asset class is going to have different risks associated with it and as managers we’re going to have to make decisions on which risk we feel more comfortable taking at those yield levels.

Obviously in the first quarter, we made a decision that the risks we were comfortable taking at that time were more in the agency space and that’s why we moved slightly over to that area. But I don’t necessarily know that it’s a one-for-one yield differential but I think you have to take the whole risk associated with each asset class into consideration.

Stephen Mead – Anchor Capital Advisors

Okay. One last thing, there were others in the REIT space, mortgage REIT space, that rate capital with the statement that the non-agency space now offered adequate returns or attractive returns. You sound like you’re much more in the camp of waiting for better returns that what others have seen.

Matthew Lambiase

Well, I think the difference is that if there is non-agency repo available in the marketplace. This company and the management currently here doesn’t want to go out and borrow money against non-agency bonds just because we think the risk is not worth the reward to the shareholders in the long run. I think while the banks are still having the kind of trouble that they are having, and I think the banking system is a lot weaker than perhaps people, at least I think they’re a lot weaker than some people think, so until things settle down we don’t want to do that and we are not going to take the leverage up there for the foreseeable future until we see things calm down.

And I think that’s the more prudent way to do it. I think we have the luxury of doing that and not chasing after a lot of yield in this market because we’ve put a lot of risk on at very cheap prices earlier, and we get to run at low leverage, keep our powder dry and wait for some opportunities to come around right now. It’s a very nice position to be in and still be able to produce I think one of the highest returns in the sector.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Lambiase for any closing remarks.

Matthew Lambiase

Thank you, (Rocco). And thank you all for participating in our second quarter 2011 earnings call; and we look forward to speaking to you in the third quarter.

Operator

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 877-344-7529 or 412-317-0088 with an ID number of 10002677. This concludes our conference for today. Thank you for participating and have a nice day. All parties may now disconnect.

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