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MFA Financial, Inc. (NYSE:MFA)

JPMorgan SMid Cap Conference Call

November 30, 2011 11:45 ET

Executives

Stewart Zimmerman – Chief Executive Officer

Bill Gorin – President

Craig Knutson – Executive Vice President

Analysts

Rich Shane – JPMorgan

Rich Shane – JPMorgan

Since we're already on the clock, I'm just going to do a very brief introduction. I'm Rick Shane from JPMorgan. I'm the specialty finance analyst. I'm delighted to introduce the management from MFA. MFA is one of the most established mortgage REITs. The company's current dividend is over 15%. MFA is a hybrid mortgage REIT with over $12 billion of assets, about $7.5 billion of that is in agency securities, just over $4 billion is in non-agency securities. We look at MFA as an absolute return play as opposed to some of the more relative return plays within the mortgage REIT industry. And with that, I will turn it over to management.

Stewart Zimmerman -- Chief Executive Officer

Thank you.

Rich Shane – JPMorgan

Thank you, Stewart.

Stewart Zimmerman – Chief Executive Officer

Good morning. Thanks for being here. My name is Stewart Zimmerman. I’m the CEO of MFA. With me is Bill Gorin is President, Craig Knutson, Executive Vice President, our CFO is sitting over here, Steve Yarad. So, thank you.

Generally, we do this kind of in a -- as we do everything, actually, in our office, kind of in the team efforts. So, I will kind of lead it off, and turn it over to Bill, turn it over to Craig, and then you ask some questions. We have the CFO here he can answer any of your accounting questions.

So when we look at this, this is for our attorneys. We are an internally managed REIT. We are positioned to benefit from with agency and non-agency residential mortgage-backed securities. One thing Rich said a moment ago, he used the term hybrid. It's not offensive, but we don't consider ourselves a hybrid REIT. We can consider ourselves if you will specialist in residential mortgage-backed securities, which consists of both agency and non-agency securities. But what our expertise is in residential mortgage-backed securities. So I would just like to make you understand that.

Kind of an experienced management team focused on residential MBS opportunities. I've been doing this since 1971 I guess. So that’s more than a couple of years. Non-agencies remain available at significant discounts. Craig will give you some data on that, but there is still wonderful opportunities non-agency arena very much so at or about the 8% level on a risk-adjusted return.

We continue to benefit from a steep yield curve, and our goal remains to generate double digit returns with appropriate levels of leverage and again you will see some slides in few moments in terms of leverage. I think you will find we're one of the lowest, if not the lowest, levered entity in our space.

We have had a 14.6% annual return compound down since January 2000, so for the last -- call it 10 years -- you can see for yourself. I'm kind of proud of this slide and the returns, and especially the fact we have been basically the lowest leverage of the company in our space.

Here I’m just going to go one or two things and I’m going to turn to Bill, but one or two things I would like to just point out to. So, when you look at our debt to equity and if you go to the far right column you can see that the agencies are levered at about 6.7 times, non-agencies were about two times. Overall leverage about 3.5 times.

So we've been able to get the kind of returns without upping the leverage. You can see the spread returns for yourself and Bill probably go into some greater detail.

So, with that moment I turn it over to Bill.

Bill Gorin – President

Okay, thanks. Great. So, staying on this slide, you can see how we allocate our equity and why we allocate the way we do. So, the first column is our ADC MBS portfolio, if you see the debt to equity ratio is 6.76, which is probably generally in line with mortgage REITs that focus principally on agencies. What’s interesting is the yields on our agency portfolio is 3.37, which I believe is at the high end, and we achieve that without owning any 30-year fixed rates. Obviously, you have a high yield in 30-year fixed rates, but if you could add too much interest rate risk. So, we are very happy with the yield on our agency assets.

Our cost of funds for agencies is 1.74 and that’s we are not happy with. We are probably in the high end of cost of funds for the agencies and the spread is 1.63. Now, the good news is our asset lives are a lot longer than our liability lives. This cost of funds on the agencies is trending down and it reflects the fact that five years ago we put on slop that costs us 4% and they are rolling off pretty regularly this year.

So, well we do believe that agency investment opportunities might lower your average yield, so you probably see people are investing in agencies that yield 2.25%, 2.3%, which would drive down the average yield. We uniquely will have our cost of funds going down almost in line with that. So, we see less compression on our spread going forward.

The non-agency side which is about $4 billion value of assets and you will see we actually have more of our equity allocated there. We have $1.4 billion of equity allocated to non-agencies, but we use less leverage. There it's 2-to-1 debt to equity. Why are we allocating more equity to the non-agency side? Look at the un-levered loss adjusted yield 7.29% in the third quarter.

And the good news there is we actually have better investment opportunities now than we did historically. As you probably are aware, our non-agency prices have come down, mainly because of technical factors, no it’s really decreased their forecast of what these assets are going to yield, but there has been some selling pressure out of European banks. As a result, we are able to acquire at even higher yields going forward. The leverage of 2-to-1 sort of it's a place we were happy to reflect not only the amount of leverage, but the types of leverage where we have been using more securitized debt where there are no mark-to-markets and no repo rollover risk. So overall, the leverage is 3.5 and that’s – that leverage is generating a 15% dividend right now. So, we are very happy where we are. We are also very happy with our investment opportunities going forward.

Here is where we look at really the time until reset or the term of the various assets. So, going down the agency column, you will see the longest term assets we have are 15 years. Now, 15-year agency assets also have 15-year amortizing life. So, these are lot shorter than 30 years, which have a 30-year amortizing life on them. The non-agency side, the assets maybe longer, but we don’t feel this is much interest rate risk on non-agencies, because if an asset is yielding you in excess of 7%, how sensitive is it to fed funds action? So, fed funds go from a 25 to 50 to 1. It's not clear that non-agencies would lose value if interest rates go up. In fact, you might believe the value of non-agencies would go up if interest rates go up, because it might reflect a better economy, and therefore, you have to re-look at credit assumptions to the better.

This just shows you how we've taken advantage of non-agencies. We really jump into it at the exact right time, which will be December of 2008. We are growing the portfolio substantially since then and again the 7.29 that’s what out leverage. So, leverage only increases that ROE more.

The other thing we'd like to point out is that not only of these assets less sensitive to interest rate, they are less sensitive to prepays. So, as you all know, agency assets required premiums and if prepays go up, you have to amortize that premium, you have to lower your yield on your assets. Non-agencies is the opposite. Our purchase price is about $0.70 on the dollar. So, when you have prepay, you have to accrete the discount actually increases your income. So, prepays going up is a good thing for non-agencies. While decreasing interest rate risk and while decreasing prepay risk we have added credit exposure. We were not guaranteed by the government. So, the underlying cash flows drive your yields.

So, here is a way that we like to present the credit analysis. The face amount of the assets we've purchased is about $5.7 billion. The purchase price is 73% of that. So, how much of the remaining discount are we accreting through income, a very small amount. We are assuming that there will be credit losses of $2 billion on this $5.6 billion face of Non-agency. So, almost a 21% credit reserve.

Now, on the next of couple pages, Craig will show you how the portfolio was actually performing and why we think this credit reserve is very low, but basically we are booking a yield of 7.25. The actually coupon yield is closer to 6, so only accreting from $0.73 in the dollar to $0.79 on the dollar. So, we are assuming we lose $0.21 eventually on over the life of these assets.

So, with that, I'd like to hand it over to Craig.

Craig Knutson – Executive Vice President

Thanks, Bill. So, this slide shows the 20 largest non-agency positions that we have. Couple of things that I'll point out here, first of all, the column on the left, the percentage of total portfolio, so, we think it's pretty diversified. The largest asset is still less than 2% of the portfolio. You can see under collateral type. It's a combination of fixed and hybrid collateral. The whole portfolio is about three quarters, hybrid and about one quarter fixed.

If you look at the next column, the FICO column that look along the bottom so, the 734 FICO, most people familiar with this product would look at that and say, this is the FICO at origination. This is prime or near-prime type collateral as opposed to Alt-A sub-prime or option arm.

The next column, the weighted average loan age, 59 months so on average, these loans are all five years old, which is very significant where you start to analyze credit because while some people might look at the loan files at origination and say, there is a lot of similar dark loans in here. We'll take five years of pay history any day over how thick the loan file is five years ago. If the borrower hasn't missed a payment in five years, that tells me a whole lot more about the likelihood of default than a thick loan file is five years old.

If you skip over to the 60 plus delinquency column, the number circled at the bottom, the 22% so that's the whole portfolio 22% of the loans or 60 plus days delinquent again most people that are familiar with this product area we look at that 22 and say, these are prime or near-prime type assets. If these were Alt-A for instance, that number will be something more in the order of 35%. The next column shows you that baked into those yield assumptions that we have of 729 or certain assumptions about defaults, loss severity, and also prepayments.

So what we show you in the next column is of all loans are in the pool today, how many of those we expect in our assumptions to default over the life of that security. So, you can see it's just about doubled the amount of loans that are 60 plus days delinquent.

In the projected principle recovery of these 20 assets is 81. If you recall the last slide, we had a 21 point credit reserves. So, on the whole portfolio, we're saying we get back 79. These assets are perhaps slightly better than the average for the whole portfolio, but it's about the same number, that 81%.

So, Bill talked a little bit about leverage and leverage on non-agencies, we worked real hard to try to optimize our capital structure around our non-agencies, and closed to 40% of our leverage on our non-agencies is through the form of re-securitizations. In these re-securitizations in our mind are truly the best kind of leverage we can have. What we do is we take these bonds, we put them into a trust rating agency looks at it and says, with 65% subordination you can get 35% AAAs. We've then structured that AAA as a floating rate security. They have been typically LIBOR plus 100 or LIBOR plus 125 and we sell those to third-party investors.

So LIBOR plus 125 looks very much like the cost of repo, but this actually is way better than repo, because that's permanent financing for us. There is no haircut. There is no mark-to-market. There is no margin call and it's in general is about two-year average life financing. So we think we've taken real advantage of that and we continue to look for those opportunities.

So, again, the non-agency leverage that includes both repo and also the securitized debt. In addition, it's not on the slide, but it was in our 10-Q for September, we show that we have some three-year financing on non-agencies. So, the other sort of third leg to this stool is to the extent that we can extend maturities for financing on non-agencies, and we have been able to go out three years. We think that's a very big advantage and makes us more comfortable with that leverage, which again was only two times leverage to begin with.

So, we've had some questions about non-agency repo and clearly we have non-agency repo although, again we were real hard to make sure that all of our leverage is not repo. But in terms of non-agency repo is very different today than it was prior to 2009 that the overall leverage in the system is lower, haircuts are much higher. So, our haircuts are typically approximately 30%. On investment grade rated assets, they might be as low as 10% or 15% on lower rate at a non-rated assets, the haircut could be as high as 50% or 55%. But the end of the day, those much higher haircuts mean that the counterparties are lenders or much better protected.

If you go back to 2008 or so, the haircuts on non-agencies were typically 5%. So, we think there is obviously much higher haircut puts the lender in a much more comfortable position. The returns that lenders get is also pretty attractive we think, LIBOR plus 150 give or take on repo. The longer term stuff is probably more like LIBOR plus 200 or a little bit higher than that, again, because the assets yield so much. It still offers a good spread, but it’s a good return for the lenders as well.

Also and this is changed in the last year or year and a half or so that non-agency repo was transferable and fungible. And by that I mean when we have done these re-securitizations we have bonds that are on repo with various counterparties around the street. We take those bonds back in to go into the re-securitization and then we substitute other collateral to them. When repo first came back to the non-agency market in the summer of 2009, basically the only way that you got repo on it was you buy a bond from the dealer and they lend you money, but they don’t want to finance a bond that you buy from anybody else. So, that market really has opened up quite a bit.

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

Question-and-Answer Session

Unidentified Company Speaker

It's still my favorite thing which is stand in front of the podium.

Unidentified Company Speaker

(Check), fairly see over. Hey go ahead.

Unidentified Analyst

Hi. What’s the macro argument for investing in companies such as yours, looking beyond the next year and a half when LIBOR rates may start going up and interest rates start going up and so on?

Stewart Zimmerman

Well, as we said at the beginning we are not an agency only REIT, it’s agencies and non-agencies. We are able to buy non-agencies today as an example at an 8% risk-adjusted un-levered return, right. If interest rates go up which is what you are suggesting, does that hurt us? What’s the inference on a non-agency security, if interest rates go up? If anything they may in fact improved rather than go negative. So, I would say that we are very, very well situated if interest rates stay the way they are, I think we are 5. If in fact if interest rates go up, the value of what we own, because if interest rates go up generally it will happen is that the economy is doing better – economy is doing better the underlying borrowers are non-agency securities have a greater ability to pay rather than a lesser ability.

Bill Gorin

So, this is the question we’ve prepared for all the time. So, the last time, the three of us have worked together before it was 1981 and interest rates were 18%. So, we think if anyone was going to run a mortgage REIT, that’s where they should start, when interest rates are 18%. In the 13 years of the company, we lived though a cycle when the fed cut 13 times or raised 12 times. So, like the generals we will fight the last battle. So, what historically has been the risk of these companies yield curve changes fed fund actions and prepay. So, we think we have addressed that with non-agencies.

When you buy an asset, so right now treasuries yield about 2% and we are telling you we could buy non-agencies that yield 8%. So, three quarters of the yield is coming from credit work and one quarter of the yield is coming from interest rates, pure interest rates. Historically, an asset that yields so much more than treasury has a negative correlation to treasury, that’s the theory, which means when interest rates are going up, if a junk bond yielded 500 over treasuries and interest rates went up, the junk bond gained value, it meant the economy was doing better, that’s the theory. What’s the practice? So, we’ve owned these assets and quality for a number of years. There was no – it's inversely correlated to treasuries, so when the economy is terrible, and everyone is buying treasuries, non-agency assets don’t do well. Non-agency assets traded with the stock market. So, it's much more of a credit component less of an interest rate component, we think we've really decreased interest rate risk. Theoretically, we'd say, we have the opposite of interest rate risk. If the economy is doing better, interest rates go up, these assets should gain value. So, we’ve looked at the issue.

Unidentified Analyst

And in the scenario, just a follow-up, what typically happens to your share price?

Bill Gorin

If the stock market is going down and everyone is flowing to treasuries typically our share price is going down with the stock market.

Unidentified Analyst

The 21% assumption on non-performing, non-agency mortgages, again I don’t know your company, so I apologize, help me with the math behind that, because it's sort of a scary number.

Bill Gorin

That's not an assumption, that's a fact. They are right now. These assets – the underlying loans are more than five years old. These are high quality borrowers on jumbo mortgages, the average FICO is 734, not an assumption, it's the fact, 22% currently or 60-plus days delinquent.

Unidentified Analyst

He's asking about the 21 point credit reserve.

Bill Gorin

The credit reserve, so in order – that's right. It is scary. So in order for us the 21% credit realized losses. We're assuming 43% default and a 50% severity. So, that's right. If what we're assuming occurs, I don't know how others equities are performing. This is the high-end of borrowers and we're assuming 43% default.

Unidentified Analyst

Bill and can I direct you or redirect you a little bit on this question, which is that what happens to the yield on the assets if you actually approach that 21% lifetime loss, cum loss rate. And also if in fact your cum losses or lifetime losses are below that, how do you accrete that additional reserve back into?

Bill Gorin

So, if the 43% projected default number is right then we don't need to adjust our yield assumption. So, the yield of 7.29% remains constant. If in fact less default or if the severities are less than 50%, we'll have to adjust our yield overtime and Craig can go over to the detail what we do every quarter.

Craig Knutson

And we have done that for the last probably year and half or two years or so every quarter we review basically all the assets in the portfolio and to the extent that we see performance that exceeds or is less than our assumptions, we changed those assumptions. We had a fairly large move last year where we moved close to a $100 million from that credit reserve to accretable discount and it was primarily on assets that we purchased in late 2008 and 2009. We're quite frankly the world look pretty dark in our assumptions were somewhat ridiculous. We assumed that 80% of loans would go bad and 70% loss severity that we still had a 12% yield. Well, it turns out that 80% of those loans are probably not going to default.

So, we do look at that every quarter. The important thing to notice unlike a bank where those loan loss reserves flow through the banks income statement when they make those changes. This change does not flow through our income statement so, what happens is we decreased our credit reserve, we increased our accretable discount and so the effect is a slightly higher yield in the future because we have that additional accretable discount.

Unidentified Analyst

Is management targeting that 43% rate to try to get that down is that something new?

Craig Knutson

No, we don't touch the – we understand the underlying collateral, but we don't have the ability to touch the underlying, we don't go to the borrowers.

Unidentified Analyst

It's a function of the price.

Craig Knutson

Right.

Bill Gorin

Right.

Craig Knutson

So, we're bond guys, we talked to equity guys a lot, and they say, how do you know you have good assets and so, it's not really the question of good assets is good prices for those assets, right, because there is no bond that we don't paid at some price. There is no bond that we don't love at some price.

Unidentified Analyst

The SEC, a couple of months ago came out with question about those sectors.

Bill Gorin

(Indiscernible).

Unidentified Analyst

Yeah, I'm going to get my facts wrong, I'm sorry. You know what I'm talking about. Can you comment?

Bill Gorin

Sure.

Unidentified Analyst

I guess explained to…

Stewart Zimmerman

The SEC came out with a concept release, which is going back – this is recent, but there has been discussions between group of mortgage rates under the umbrella of NAREIT relative to should will be – should we be subject to an investment company again. Okay and right now we are able to use what are called whole pool agency securities, where a minimum of 55% of our assets after the whole pool agency securities and there we're exempt under the 40-Act.

There were two particular staffers within the SEC who felt somewhat uncomfortable that there were certain a number of IPOs that were coming, and they were using agency, securities to be exempt under the 40 Act, but actually we are involved in other businesses. They felt uncomfortable. They went to the head of the investment division of the SEC and what you required was a whitepaper be written that was done, again, under the umbrella of NAREIT. And that was satisfactory, and everything was understood. He left the SEC. They have a new director of the investment division. These two particular staffers came back to the new director and they came out with a concept release. What is happened since then is that the date has come and gone, I think it was November 7th where you could have your responses in.

The responses are public, if you want to go on the website. There was about 99% were saying kind of leave the mortgage REITs alone. We like the returns we’re getting. They are regulator, as an example we’re Sarb-Ox, New York Stock Exchange, the SEC, so on and so forth. We are a regulated entity. So, the long and short of this is actually spoke to counsel yesterday and there hasn’t been anything back. No feedback yet from the SEC and that may take months. It may take longer. That is the status of it.

Unidentified Analyst

Can you give us a breakdown of the vintage of underlying collaterals in your portfolio and second question have is what’s the loss severity trend in your portfolio recently?

Stewart Zimmerman

Go back to slide 10. Can you just go to slide 10?

Bill Gorin

There it is.

Craig Knutson

So as far as the vintage -- I'm just pulling up, the 10-Q we have a page in the back of the 10-Q, which lists the whole portfolio by vintage so its 2007, 2006, 2005 in prior. I don't have that percentage at the tip of my finger, but it’s in the 10-Q. As far as loss severities and what we've seen that slide if you look at the right hand side what does it say? 49%. To be honest with you that number is -- you have to take that somewhat with a grain of salt, because some of those bonds may only have -- may only have been two liquidations in the last six months or so. So, to take those just two data points and say that’s the loss severity it was not necessarily meaningful. So, something that we keep a real close eye on keep in mind that the average balance of the loans are in the high 400,000, 500,000 type range.

So, it’s not sub-prime collateral, where you have a $100,000 mortgage and you can easily have a 100% loss severity and its really state dependence. So, when we do our analysis, when we look at a bond, we look to loan level detail on every bond. So, we look at the underlying ZIP codes on all those loans. So, we know for instance that if this loan was originated in the particular ZIP code in February of 2005, we know what house prices have done in that ZIP code since February 2005. So, we can mark that loan-to-value ratio to market today. We know its 125% loan-to-value ratio today. So why do we care about that. We care about that, one, because it helps us predict loss severity if we know what the properties worth relative to the mortgage. But, two we are also helps us to predict the likelihood of default, or specifically strategic default.

Unidentified Analyst

So just roughly if you look on page 62 of our third quarter 10-Q roughly 40% is 2007 and roughly 30% is 2006 and 2005?

Craig Knutson

The other number that you will find interesting on that same pages, we show you what the credit reserved is for each of those buckets. So, for instance what you most -- and we also designated by FICO. So we have one side we have FICO below 715 and then 715 and above. I think it’s about 86%, 715 and above. But if you look at those vintages you would say I'm more worried about 2007 vintage with below 715 FICO. Right those are probably of all the six categories there. Those are the ones I would be most worried about. So, you can look down and do the math, and actually, I think we finally put that number and right. We will show you what the percentage credit reserve is. So, across the whole portfolio our credit reserve is 21%, but you will see that for the 2007 its $200 million and our credit reserve is $83 million. So, the percentage of credit reserve on those sort of higher risk buckets, if you will, you will find is much higher than the overall portfolio average.

Unidentified Analyst

You think it's fair to assume, that the loss ratio will go down say post 2010 mortgages since it’s more difficult to get a mortgage? The people who are getting it are in better financial shape etcetera?

Craig Knutson

The answer is yes, but I'll also mention at the outset that the least seasoned loan we have in our non-agency portfolio was originated in 2007. So, basically start making these non-agency securities in 2007. So, yes, we do think that losses on 2010 and more recent vintage will be lower, exactly for the reason that you say, because they are underwritten much more stringently, how many – you don’t pickup the paper any day and read how difficult it is for this person that person to get a mortgage or get a refinance. So, I certainly think that will be the case going forward.

Unidentified Analyst

Does that help your 2013, 2014, 2015 business model or is it not significant?

Stewart Zimmerman

The question is we are going out that far in the future what happens to the securitization market? Does the securitization market come back? Our interest rates are still at as an example, Bill had mentioned agency yields are 2 and 2.25%, where are we going to be. So, the whole – the question rests on the thesis is what happens to the securitization market? If the securitization market does not come back, then the question is moot. Conversely, if the securitization market does come back, chances are interest rates are higher, that will create additional product for us to buy, but there is still over $1 trillion of the types of securities that we purchase, if you will, the non-agency securities are still available in the marketplace.

Unidentified Analyst

You said early on you were seeing some selling of the product coming out of Europe. Are you buying and adding any leverage at this time?

Craig Knutson

We haven’t changed our leverage ratio significantly for several quarters on the non-agencies. We’ve bought a few bonds in the last quarter or so, but I would say it's been pretty fairly selective buying. I think what will make us more comfortable adding those bonds, which we think are priced very attractively now, is shoring up and making that financing – longer term financing, re-securitization, so something other than 30, 60, 90 day repo. So, we could go out tomorrow and buy 8% yielding assets and fund them with 30, 60, or 90-day repo, and yes, we do have some 30, 60, 90-day repo, but I think our first priority is to shore up longer term financing, which will make us more comfortable and we can ride out price swings on those assets should that occur.

Bill Gorin

There is run-off each quarter about a $150 million from non-agencies. So, we've purchased $150 million just to replace what runs off each quarter.

Unidentified Analyst

I am going to ask one quick question, which is in light of the recent HARP 2.0 developments, how do you think things play out over the next six to nine months and then what are the longer term implications in terms of your strategy with higher prepayments and then ultimately probably with new mortgage securities being created with extremely long durations after that?

Bill Gorin

So, Will’s question is really specific to the agency portfolio. So, we’ve answered the questions on QE1, QE2 and we expect it will be a HARP 3 or 4. So, it impacts assets that are pre-2009 and we think the biggest impact will be on high coupon fixed rate pre 2009 agencies. Now, we don’t have any of those. We don’t have any fixed rates prior to 2009. They are mainly hybrids. So, our hybrids are approaching their resets. So, the coupons are about to go from 5% to 3% anyway. In addition, the vast majority of these assets were interest-only, there is no principle amortization. So, if you were able to take advantage HARP 2.0 if you were locked out before, now you can refi.

What’s the rush? It’s not clear that the payment will go down these assets, because one if you go into a 30-year fixed rate, there is 30-year amortization. So, in addition to paying the interest, you have to pay some principle back. The assets we own typically the homeowners are not paying any principle back to interest-only for 10 years. In addition to our hybrids, the coupons were about to set down anyway. So, there is not a large savings. We have said publicly in our last phone call that our CPRs in agencies was running about 20% in the third quarter and two-thirds of the way to the fourth quarter we haven’t seen much of a change. So, we don’t see much of an impact, Rick.

Stewart Zimmerman

But I would love to see CPR increase dramatically on the non-agencies, if that happens we would have a lot of smiles.

Unidentified Analyst

In longer term what’s your strategy assuming that there are agency securities being created 12 months from now that are at extremely low rates with long durations, is that an opportunity to take advantage of low swap rates and increase leverage modestly?

Bill Gorin

It's incrementally how much interest rate risk that you are adding to the whole portfolio and what we are seeing is on non–agency side, it's not clear that we are adding any in fact we might be decreasing the risk. If we do add interest rate duration to our agency portfolio, we will adjust on our liability side by either longer term repos or by adding swaps. So, we'd like to keep the interest rate sensitivity constant.

Rich Shane – JPMorgan

Any other questions from the audience? Guys, thank you very much.

Stewart Zimmerman – Chief Executive Officer

Thank you. Thank you everybody.

Rich Shane – JPMorgan

Thank you, guys.

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