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MFA Financial, Inc. (NYSE:MFA)

Q2 2011 Earnings Call

August 3, 2011 10:00 AM ET

Executives

Alexandra Gelardi (ph)

Stewart Zimmerman – Chairman and CEO

Craig Knutson – EVP

Ron Freydberg – EVP

Goodmunder Christiansen (ph) – EVP

Bill Gorin – President

Analysts

Jason Weaver – Sterne Agee

Steve DeLaney – JMP Securities

Bose George – KBW

Jason Arnold – RBC Capital

Douglas Harter – Credit Suisse

Daniel Furtado – Jefferies

Mike Widner – Stifel Nicolaus

Henry Coffey – Sterne Agee

Operator

Ladies and gentlemen, thank you for standing by and welcome to the MFA Financial, Inc. second quarter 2011 earnings call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session with instructions being given at that time. (Operator Instructions). As a reminder, this conference is being recorded today.

I would like to turn the conference over to Alexandra Gelardi (ph) for opening remarks. Please go ahead.

Alexandra Gelardi (ph)

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, 2010 and other reports that mail file from time-to-time with the Securities And Exchange Commission could cause anaphase 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 disclosures in MFA’s quarterly report on Form 10-Q for the quarter ended June 30, 2011 and or the press release announcing MFA second quarter 2011 financial results.

Thank you for your time. I would now like turn this call over to Stewart Zimmerman, MFA’s Chief Executive Officer.

Stewart Zimmerman

Good morning and welcome to MFA second quarter 2011 earnings call. With me this morning are Bill Gorin, President; Stephen Yarad, Chief Financial Officer; Ron Freydberg, Executive Vice President; Craig Knutson, Executive Vice President; Hal Schwartz, Senior Vice President and General Counsel; Teresa Covello, Senior Vice President and Chief Accounting Officer; Kathleen Hanrahan, Senior Vice President; Shira Finkel, Senior Vice President; and Goodmunder Christiansen (ph), Vice President.

Today we announced financial results for the second quarter ended June 30, 2011. Recent financial results and other significant highlights for MFA include the following. Second quarter net income per common share of $0.22 and core earnings per common share of $0.26. On July 29, 2011 we paid our second quarter 2011 dividend of $0.25 per share of common stock to stockholders of record as of July 14, 2011.

In June, we sold $1.283 billion in principal value of Non-Agency Mortgage-Backed Securities as part of a resecuritization. In connection with this transaction $474.9 million of senior bonds rated AAA by DBRS were issued to third-party investors via a trust at a rate of LIBOR +125 basis points. As required under GAAP we will consolidate the resecuritization and will account for this transaction as a financing.

Book value per common share was $7.48 at the end of the second quarter versus $7.86 in March 31, 2011, due primarily to price weakness within the Non-Agency Mortgage-Backed Securities sector. In the quarter, we grew our Non-Agency MBS portfolio at an accelerated pace through the purchase of approximately $945 million of Non-Agency Mortgage-Backed Securities.

For the second quarter ended June 30, 2011; we generated net income allocable to common stockholders of $77.2 million or $0.22 per share of common stock. Core earnings for the second quarter were $91.6 million or $0.26 per common share of stock. Core earnings is a non-GAAP financial measure which reflects net income excluding $2.4 million of other than temporary impairment charges, $11.7 million of unrealized net losses on link transactions and includes an adjustment of $0.7 million to increase interest income, following the de-linking of certain Non-Agency Mortgage-Backed Securities previously reported as link transactions for GAAP.

We continue to provide stockholders with attractive returns to appropriate leverage investments in both Agency and Non-Agency residential mortgage-backed securities. We are well positioned with an Agency MBS portfolio with an average amortized cost of 102.4% of par.

In the second quarter, we continue to implement our strategy of identifying and acquiring Non-Agency Mortgage-Backed Securities with what we consider to be superior loss adjusted yields at prices well below par. We currently project that approximately two-thirds of our third quarter 2011 core earnings will be generated by Non-Agency Mortgage-Backed Securities.

In the second quarter, Non-Agency Mortgage-Backed Securities generally experienced widespread price leakage, which created a buying opportunity. Due to underlying borrower characteristics and certain structural features, our portfolio was less impacted by the overall price movement declining an average of 3.4 points. We believe that the factors that impacted Non-Agency MBS prices were continued negative housing market views, concerns over the continuing sale of Maiden Lane II assets and overall weak economic data.

While housing fundamentals remain weak, we believe that we have appropriately factored this into our cash flow projections and credit reserve estimates. We continue to favor high yielding Non-Agency Mortgage-Backed Securities at discount prices as we believe the value of these assets will be positively impacted over time as the existing private label MBS universe continues to decline in size due to prepayments, defaults and limited issuance. I would like to go over certain additional data highlights as they pertain to our second quarter 2011 results.

Overall leverage debt-to-equity 3.3 times , portfolio spread which is interest earning assets minus cost of funds of 305 basis points, the portfolio spread which is interest earning assets minus cost including Mortgage-Backed Securities underlying link transactions of 318 basis points and our Agency CPR with 16.6%. I thank you for your continued interest in MFA Financial, and at this time I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). One moment please for the first question. Our question comes from the line of Jason Weaver of Sterne Agee. Please go ahead.

Jason Weaver – Sterne Agee

Good morning, thanks for taking my question. I was just hoping you could detail a little bit about the $1 billion in non-agency purchases you made this quarter, both on timing and how that compares with existing portfolio you have at the end of March?

Stewart Zimmerman

I’m going to turn it over to Craig Knutson who runs that area, and Craig if you would please answer.

Craig Knutson

Sure. So the purchases were pretty much spread out through the quarter although June was the heaviest. As you can see, we did a research your decision in early June which generated cash, so and it was actually lucky timing because the June month was really where we saw the most price weakness. So it was like I say spread to the quarter, but it was more in June than any other month. As far as the assets and how they compare the overall assets I would say they are very comparable to the assets and you will see in the Q in our table in the back where we list vintages by FICO buckets, the bonds are very similar to the bonds that we already owned.

Jason Weaver – Sterne Agee

Okay, thank you. And also I was just interested in your thoughts on the yield curve going forward. I know we’ve seen some flattening in the long and with the flight to quality, but I was just curious on your thoughts there.

Stewart Zimmerman

I continue to see great opportunities for our company in terms of the mortgage market. Yes, we had some flattening, the 10 year I guess is what about 260 plus or minus a basis point or two, but they are continued opportunities. So in fact you could continue to see a little bit of flattening on the longer side. I still think that as you look at the short end, not much is going to happen at some provides continuing opportunities for us.

Operator

Next we will go to the line of Steve DeLaney of JMP Securities.

Steve DeLaney – JMP Securities

Thank you, good morning everyone. A couple more thoughts or questions I guess on the Non-Agency portfolio, since that’s the sort of the current focus of the quarter. You reported in your press release that the portfolio, the Non-Agency book experienced an average price drop of 3.4%. Barclays puts out a data series on just indicative prices every week. And for the second quarter, at June 30 they were showing sort of all-dayish type of paper, down more like six point. And obviously every bond is a story, I know. But could you comment a little bit and I know you alluded to it in your press release, but is some of you’ve never really described your portfolio I guess at all today or prime, but it looks like some of the paper has more prime characteristics than Alt-A if we were to look at Barclays data as being realistic. Could you comment on that?

Craig Knutson

Sure Steve. Again, we don’t characterize it as Alt-A and prime, primarily the reason we don’t do that is there is not one universal measure of what constitutes Alt-A and what constitutes prime. So what we have done as a surrogate in our FICO table is we show bonds that had average FICO scores at origination of 715 and below and 715 and above.

So while we don’t refer to 715 and below as Alt-A, that sort of a distinction we make. I think if you look at the FICO table in the Q, it’s probably 85%, give or take FICO 715 and higher, at about 15% 715 and below. So I would certainly say that most people would characterize the majority of our portfolio as prime or near prime. As far as price declines in the market, you are right. It’s really bond by bond. But I would say in general, an Alt-A portfolio probably was down five points, that’s probably right. So the reason that we are down a little less than 3.5 points is it skewed towards probably the higher end of that credit quality.

Stewart Zimmerman

Just to follow up on that, again Craig and his group are very selective, very careful in terms of what securities they do buy. And generally it to the higher end rather than the lower end.

Steve DeLaney – JMP Securities

I think your $0.74 on the dollar average price does suggest that there are definitely some better quality collateral in there.

Craig Knutson

Exactly.

Steve DeLaney – JMP Securities

My second question is about your credit reserve. You’re a little over $1.2 billion, and that’s about 83% of your discount, and it’s 22% of the par value of the Non-Agency portfolio. I was just curious if you could comment on how your actual losses, since you use the reserve you’re really not breaking out losses for us as some competitors do. We know they are just being taken against that reserve. Can you talk about how your actual losses are tracking against your model, and if you’ve made any adjustments, any transfers into or out of that reserve so far this year?

Craig Knutson

So yes Steve. The $1.2 billion on about $5 billion is about 22%. Also bear in mind that we still have about 6% structural credit enhancement that stands before that loss reserve. As far as what we are seeing, we really don’t have – quite frankly we really don’t have a lot of bonds that are in first loss position. So when we do have a bond that’s in first loss position, the loss will obviously hit that credit reserve, but for the most part it’s really too soon to tell . We continually reevaluate all of our assumptions, so it’s not just loss assumptions. It default loss severity and prepayments to adjust those over time.

And I think you know in the past there been times where we’ve increased our credit reserves due to those adjustments. But it’s something that we look at every quarter, and we feel pretty comfortable with those loss reserves. But it’s really way too soon to tell.

Steve DeLaney – JMP Securities

And the 6% structural support, is that current or is that original?

Craig Knutson

No. That’s current.

Steve DeLaney – JMP Securities

That’s current, okay. And can you venture to guess just very roughly, what percent of the bonds are not yet in a first loss? I mean, is it...

Craig Knutson

It’s just a guess. I’m sure it’s more than 90%, and it could be 95% of the bonds still have credit support. One of the considerations there is obviously, you buy bonds and the credit support goes away over time, and we certainly expect that. That’s why we have that credit reserve. But when we look at securities and we purchase securities, especially with and an eye towards resecuritization bond that’s have credit support are easier to resecuritization the bonds without credit support.

So I think again, everything depends on the price, but I think we certainly take into account the fact that a bond without credit support is more difficult to resecuritize when we value it in the first place.

Steve DeLaney – JMP Securities

Makes sense. Well, thanks very much for the comments, and good job on the quarter.

Operator

Thank you. Our next question will come from the line of Bose George with KBW. Please go ahead.

Bose George – KBW

Actually I have a follow-up on the Non-Agency purchases. I was curious about the dollar prices and loss adjusted yields on that compared to what you bought this quarter compared to what it was like in the first quarter?

Craig Knutson

So Boss, in the first quarter I think we pretty much consistently said yields were probably between six and seven loss adjusted unlevered. In the second quarter, for the first two months of the quarter they were probably still in that same range. In the month of June, I would say, they’re probably closer to seven. So still in that range, did we find bonds that yield between 7 and 7.5, yes we did. Did we still find bonds that yielded 6s, we do.

As far as dollar price, I think our average purchase price for the quarter was in the low 80s. So I think it’s fairly consistent with where we were in the first quarter, although June was somewhat opportunistic with some price softening. And having just completed a resecuritization we were in a little bit more of an aggressive buy position.

Bose George – KBW

Okay. So June was presumably kind of lower than that low 80s number?

Craig Knutson

I think so, yes.

Bose George – KBW

Okay, great. And then just switching to the loss reserve, just for taxable income, since you can’t really create a loss reserve, I’m curious when the losses due happened, how that GAAP in tax accounting reconciled, when the losses actually do hit.

Stewart Zimmerman

As Craig mentioned, the vast majority of our Non-Agency Mortgage-Backed Securities still have credit enhancement so there’s almost no real losses being experienced on GAAP basis. And you’re right, there is some differential between tax and GAAP, and our taxable income is somewhat higher, and I think we are approximately $0.02 under distributed as of the moment. So it’s not a large differential at the moment.

Operator

Thank you. And our next question will come from the line of Jason Arnold with RBC Capital. Please go ahead.

Jason Arnold – RBC Capital

I just had a quick follow-up on the resecuritization. I was just curious if you could comment on investor demand for the deal, and then on pricing and terms if you’ve seen any changes or moves there.

Craig Knutson

Sure. So the deal with price, we sold the AAA piece which is approximately the top 35%, which is about a two year average life security at LIBOR +125, which is comparable to the deal that we did in the fourth quarter, a little but wider than the deal that we did in the first quarter. But I think if you look back at credit spreads and when we did our deal in the first quarter, which is the early part of February, it was pretty much a tight in the market. So it’s certainly in the context of where we got deals done before, the deal was DBRS only rated, which does not have perhaps the same wide appetite that multiple rating agencies would. But again, the execution was very similar or spot on to where we had done prior deals.

Jason Arnold – RBC Capital

And then I guess I was also curious if you could update us on repo availability and haircuts, primarily on the Non-Agency side. Are you seeing any change to haircuts or rates here? And then while to me your repo on the agency side seems extremely likely to see any major changes investors still seem to have this on their mind. So maybe you could comment on that side as well, please.

Stewart Zimmerman

I’m going to ask Ron Freydberg to give you the kind of detail, and then I’m going to have just a couple of general remarks. So Ron.

Ron Freydberg

On the agency side, we’ve seen some volatility in rates over the last couple of weeks. As of today, rates look like they’re settling back to the mid-20s. We have not seen any change in haircuts, we’ve not seen any change in the availability, but the market is going through some flux. It was finished in a couple of weeks today with the debt ceiling haven’t passed yesterday you’ve seen the cash providers have come back in size so therefore rates have come back to what we saw a couple weeks ago.

Stewart Zimmerman

I think the answer; again, Ron was discussing the agency side. And again, repo is certainly ample again, you have a slight pickup, you know you have a volatile market, that doesn’t really faze us in the least. And then the Non-Agency side in terms of repo, that is also available to us, we utilize it, and again just to remind everybody during 2008 and 2009 we were able to finance and add repo for Non-Agency securities. So again, it’s a matter of having the relationships on the street and having the right collateral that people feel comfortable with. And we’ve been able to accomplish that going back to 2008 and 2009. And certainly is readily available to us in a very positive way.

Operator

Thank you. Our next question will come from the line of Douglas Harter at Credit Suisse. Please go ahead.

Douglas Harter – Credit Suisse

Thanks. I was just hoping you guys could talk a little bit about how are you viewing the agency opportunities right now, and sort of what direction you might be leaning on the portfolio there?

Stewart Zimmerman

(Goodmunder), I’ll turn it over to you to handle that.

Goodmunder Christiansen (ph)

Hi, this is (Goodmunder), well I mean we feel obviously you’ve seen rates have come down considerably over the last quarter or so, at over the last two weeks we have (inaudible) after we got some clarity on the debt ceiling and raising of the debt ceiling. Well at the same times, we’ve seen spreads widen to basically compensate for that. So overall, I think the opportunity is pretty attractive. We are able to invest depending our visit and hybrid space at a spread anywhere from 170 basis points to 220 basis points depending on how much you have and how sure are how long you have this sort of. And if you view that historically, that spread is very attractive, so we’ll continue to deploy cash there and from the leverage point of view I think we’ll kind of stay where we have been in the mid-sixes.

Stewart Zimmerman

But Doug just so you know, reinforce what we have said, we’ve seen higher value added investment opportunities on the Non-Agency side.

Douglas Harter – Credit Suisse

And I guess just on the agency side, what’s your kind of outlook for prepaid given the rally we’ve seen in rates?

Craig Knutson

Well, I think prepayments will definitely pick up. And we’ve already seen that in the latest report with which we saw in July, and that’s something that was kind of on the table already before the rally. Because keep in mind rates have been rallying since April, pretty much. When you look at primary rates, the mortgage curve has also steepened. What that means is the mortgage rate is available to the homeowner on the hybrid side, 51 from 71 has gone down more than on the 30 side. So prepayment risk is probably increase a little bit more in the hybrid side, and also on 51 side the relative to the 30-year mortgages, which basically means that assets election is even more critical, meaning you got to stay away from characteristics that can bring on high prepaid.

Operator

Thank you. (Operator Instructions). And our next question comes from the line of Daniel Furtado at Jefferies. Please go ahead.

Daniel Furtado – Jefferies

Thanks for taking the time guys, and nice quarter. Just two real quick questions. The first is on the Re-REMIC. One, are you providing the name of the Re-REMIC or will that be in the Q?

Craig Knutson

I believe it’s in the Q.

Daniel Furtado – Jefferies

Okay good. And then the second is where there any major structural differences, because you had really good execution on that deal, was there any major structural changes from the previous two deals?

Craig Knutson

I would say the structure was almost a carbon copy of the deal that we did in February. And actually we sold a thicker slice than we did in the October deal. So, same as February, and we sold more bonds so as a longer average life than the deal we did last October.

Daniel Furtado – Jefferies

Excellent. Then the second question is how should we or how do you think about the $2 billion in the Non-Agency ARMs that are at about a six month to reset on the interest rate? Just kind of how do you anticipate that to impact yield or how would you guide investors to think about that as we move forward?

Craig Knutson

Well, the yield that we book is really based on assumptions over the life of the security. So, we know when we buy it that the mortgages will reset in six months or one year or two years or whatever it is. So, I don’t think it should really have that much impact.

We also know, for instance, that hybrids, when they reset, the prepayment speed will likely slow down, especially these days were the coupons typically reset to 3% type rates. So, I think all those are sort of baked into our purchase assumptions when we buy these securities.

Operator

Thank you. And next we go to the line of Mike Widner of Stifel Nicolaus. Please go ahead.

Mike Widner – Stifel Nicolaus

Good morning guys and congrats on a solid quarter. So a lot of my questions have been asked, so I’m going to ask you sort of a little bit of a philosophical question about how you guys allocate and specifically I guess thinking about the thoughts on the Agency versus the Non-Agency allocation and the relative attractiveness.

And before you answer, let me prefix it with obviously the mix has been moving or at least the preponderance of the asset growth has been moving for two years now in favor of the Non-Agencies and throughout that time, up until at least last quarter, the prices on those Non-Agencies have been generally rising in terms of dollar prices as a percentage of par.

And that was in part I think in the broad marketplace a reflection of expectation that housing was improving, the economy was improving, things were getting better, we were heading back to something that was closer to normal. And last quarter and really more recently obviously, the broad market is telling us that it’s starting to rethink that, that maybe we are not quite out of the woods yet, maybe the economy is not really recovering.

And certainly, the talk out there that comes up now and then is starting to resurface again, that maybe we’re actually in a more Japan like scenario than we had previously thought. You see that in the yield curve as well. So against that kind of backdrop, I’m wondering what your guys’ expectations are and if it changes how you view the asset allocations in terms of what the expected shape of recovery is and relative to what you have been doing recently, what you are doing today, particularly the sort of preference for Non-Agency assets, would that change at all if your view was that we were in fact in kind of a much longer, much slower, much weaker recovery than the market had sort of thought we were? If we are in a Japan scenario, would that change your allocations at all?

Stewart Zimmerman

Hi, this is Stewart, then I’m going to turn it over to Bill. In terms of asset allocations we continue to favor the Non-Agency side. In terms of housing, we continue to have a very negative perception in terms of housing.

Having said that, that’s really baked into the assumptions when we buy the Non-Agency, which we perceive gives us kind of a leg up. But having said that, Bill, do want to address that?

Bill Gorin

Yes. So we look at this asset class and the purchase prices we all know what they are, so the variable is what are you forecast is going to happen in the future. We say the yields are close to 7% where we base on our assumptions on, how could you be comfortable their assumptions take into account potential downward trends in the economy.

So we point to the credit reserve, which is approximately $1.2 billion. And I think Steve DeLaney pointed out that’s 22% of the (phase). Coincidentally, about 22% of the underlying mortgages and securities, or 60 days delinquent. So basically if you took a snapshot as to what’s current, what’s delinquent, basically we have reserved 100 cents on the dollar against mortgages which are 60 plus days delinquent.

Now as you know, we own the top tranches, and this is not a subprime or option on our portfolio. It’s a jumbo portfolio. So we think that we have more than taken into account continue downward trends in home prices, a continued very soft economy. You can draw analogies to Japan, which is inadequate consumption relative to productive capacity, but the huge difference is the demographic change between us and Japan which you have an older society and less home formation which is very bad for housing.

So while we will go through a rough patch here, because it’s very, very difficult as you know. If you’re pristine, you can get a mortgage at excellent rates. If you’re not pristine you can’t get a mortgage. So basically, incremental home is being priced on when the cash buyer can pay or what you could pay if you bought it for cash, and lease the house out. We think we’ve proven we’ve been conservative, in no way were we ever calling a turn in any of our public calls.

In fact what we’ve always said is we’re probably the most pessimistic, and that’s who you want picking the assets. So I’m not sure that the change in prices of the assets going to the fourth quarter and first quarter was reflection of people calling the bottom in housing. And we are not sure if it’s the new housing news that has impacted the prices going into the second quarter.

There was generally bad economic news, certainly was a lot of new supply or pre-existing supply came to market as we hit certain price levels. And as we retrieved those price levels that incremental supply seems to have disappeared. So we continue to prefer the non-agencies on an incremental basis. And consistently we’ve said 55% to 60% of our assets; our agencies will continue to be that way. So there hasn’t been a large fundamental change here.

Stewart Zimmerman

And we continue to like both the non-agency and the agency markets, as Bill just kind of alluded to a few moments ago in terms of the available yields that are available on the Agency side. So again, these are complementary asset classes and we think it works quite well for our shareholders.

Mike Widner – Stifel Nicolaus

I would clearly agree with that. I guess really what I’m hearing from you is that, if I am interpreting you correctly, that you like the assets, no doubt about that. I don’t think anybody on this call or at least anyone that has spoken so far is going to complain about the quality of the assets you’ve bought thus far. I guess I am thinking more about clearly expectations and even backward revisions to the economy, and GDP growth has been nowhere near as strong as prior reports have said.

Unemployment is clearly heading in the wrong direction again, and I don’t know if you believe the ADP numbers this morning, but even if you do, it says that things are moving sideways more than improving. And then of course, we have the circus in DC. I don’t it’s really going to do much to help anything in the economy next year as we focus more on cuts and spending and blah blah blah.

So it’s not so much a question of do you feel good about the assets that are there as much as it clearly seems that there is a softer tone in the economy than many people had thought. Really does that impact at all your decisions? Have you changed anything about your assessments of the collateral or your expectations going forward, or is it just kind of look, this is already what we expected, it’s already built into our models, we knew everything was going to be horrible and despite all of the recent data, we still like everything just as much as we did before?

Stewart Zimmerman

We still like the asset class and I believe what’s happened in the market and if you look at the economy, it gives us more opportunity rather than less opportunity with the hot potentially with the higher yield to shareholders rather than a lower yield.

Mike Widner – Stifel Nicolaus

Certainly a fair point. I guess the question is – we’ve certainly heard the story before that oh my God, these things are $0.85 on the dollar. They can’t possibly trade lower than that. And all of a sudden it’s $0.75, $0.65, $0.55, $0.45 and –

Stewart Zimmerman

But Mike that’s okay. That’s perfectly all right. As you know, the markets move, markets are volatile, and again if we bought a particular asset at $0.80 on the $1 and we feel good about that, that’s fine. And generally what’s happened over time is that we have absolutely in terms of underestimated in terms what the absolute returns have been. Returns have been than our forecast.

Bill Gorin

I would say for the last X years, we’ve never said we are calling the bottom. What we have said is we had the advantage of a structure of having a permanent capital. That we think would do a very good job forecasting what the yield is going to be on the assets, but you need to make sure you have the staying power to realize those returns.

So in no way do we try to pull bottom, we get excited when the prices went down. And what you should look to management is to make sure that they have liquidity to take advantage of downturn, and I think that’s what we did in the second quarter and what we are doing in the third quarter.

Mike Widner – Stifel Nicolaus

Yes, that all fair, I mean, certainly as I look at the delinquency trends on your underlying collateral, I mean, I would describe them as stable. So I certainly don’t mean to imply that I worry about the collateral you guys already have in the line or the securitizations you already bought.

Just wanted kind of hear your views on whether or not anything has changed in again, the tone in the markets is clearly one of great caution these days, and just wanted to see if you are thinking about things any differently, then maybe taking a step toward being a little more cautious right now.

But it sounds like your answer is basically you been cautious all along. And adequately prepared and I don’t that I would argue with that?

Stewart Zimmerman

Well, I would reiterate, we have been cautious all along, will continue to be cautious, but I think we are making the right investments and people are getting very nice returns for our shareholders.

Operator

Thank you. We have a follow up from line of the Jason Weaver, Sterne Agee. Please go ahead.

Henry Coffey – Sterne Agee

Hi. It’s actually Henry Coffey, my phone failed on me. When you look at current marks, today versus June 30 or during the second quarter, obviously you constantly you know, you would either going to get great reinvestment returns or great book value marks, but rarely both. At current marks since June 30 changed a whole lot, so is this an environment that puts pressure on book values with that offers great reinvestment rates, or what is the view kind of short-term?

Stewart Zimmerman

Henry, I assume you’re talking about Non-Agency’s?

Henry Coffey – Sterne Agee

Yes sir.

Stewart Zimmerman

So Henry as far as Non-Agency pricing in the month of July, a week ago I probably would’ve told you they were up maybe 0.5 point or so. There hasn’t been a lot of trading volume so it’s a little difficult to say. Dealer inventories are also fairly light. So I think what little trading there is it’s very easy to dealers to jump in and snap up bonds. So I would say it’s unchanged maybe up a little bit in the month of July.

Operator

Thank you and gentlemen, there are no further questions in the queue; I’ll turn it back to you at this time.

Stewart Zimmerman

Well, thank you. I appreciate your interest in MFA. We look forward to speaking with you next quarter.

Operator

Thank you. And ladies and gentlemen, today’s conference will be available for replay after 11:30 a.m. Eastern time today through August 10 at midnight. You may access AT&T teleconference replay system at any time by dialing 1800-475-6701 and entering the access code of 212189. International participants may dial 320-365-3844. That does conclude your conference for today, thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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