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Executives

Alexandra Giladi – Investor Relations

Stewart Zimmerman – Chairman and Chief Executive Officer

Stephen D. Yarad – Chief Financial Officer

Craig L. Knutson – Executive Vice President

Analysts

Bose George – Keefe, Bruyette & Woods, Inc.

Steven Delaney – JMP Securities

Jason Arnold – RBC Capital Markets

Douglas Harter – Credit Suisse

Jason Weaver – Sterne Agee & Leach Inc.

Arren Cyganovich – Evercore Partners

Christopher R. Donat – Sandler O'Neill

Daniel Furtado – Jefferies & Co.

Alan Straus – Schroders

Michael Widner – Stifel Nicolaus & Company, Inc.

MFA Financial, Inc., (MFA) Q1 2012 Earnings Call May 4, 2012 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MFA Financial, Inc. First Quarter 2012 Earnings Call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session, instructions will be given at that time. (Operator instructions) As a reminder this conference is being recorded.

I’ll now like to turn the conference over to Alexandra Giladi. Please go ahead.

Alexandra Giladi

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

When used, statements that are not historical in nature, including those containing words such as, will, believe, expect, anticipate, estimate, plan, continue, intend, should, could, would, 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, 2011 and other reports that it may file from time-to-time with the Securities and Exchange Commission could cause MFA’s actual results to differ materially from those projected, expressed or implied in any forward-looking statements they make. For additional information regarding MFA’s use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA’s first quarter 2012 financial results

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

Stewart Zimmerman

Good morning and welcome to MFA’s first quarter 2012 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; Harold Schwartz, Senior Vice President and General Counsel; Kathleen Hanrahan, Senior Vice President and Chief Accounting Officer; (Inaudible) Vice President.

Today, we announced financial results for the first quarter ended March 31, 2012.

Recent financial results and other significant highlights for MFA includes the following. Our first quarter net income per common share of $0.23 and core earnings per common share of $0.21. Book value per common share increased to $7.49 at the end of the first quarter versus $6.74 at 2011 year-end due primarily to price appreciation within our Non-Agency portfolio.

At April 30, 2012, we paid our first quarter 2012 dividend of $0.24 per share of common stock to stockholders of record as of April 4, 2012. In the first quarter, we added multi-year Non-Agency MBS financing; including an expanded collateralized financing arrangement and a re-securitization, reducing our reliance on short-term repurchase arrangements for Non-Agency mortgage-backed securities.

We increased $500 million in existing collateralized financing arrangement that effectively provides three year financing again for Non-Agency mortgage-backed securities. As part of a re-securitization, $186 million of senior bonds rated "AAA" by DBRS, were issued to third-party investors via a trust. These bonds, with an average life of 1.9 years, were priced at a 2.75% yield.

At quarter-end our debt to equity ratio including the liabilities underlying our Linked Transactions was 3.5:1. Our Agency portfolio had an average amortized cost of 102.8% of par as of March 31, and generated a 3.15% yield in the first quarter. Our Non-Agency portfolio had an average amortized cost of 73.1% of par as of March 31, 2012, and generated a loss-adjusted yield of 6.92% in the first quarter.

In the first quarter, book value per share increased by approximately 11% due primarily to appreciation within our Non-Agency portfolio. While housing fundamentals remain weak, we believe that we have appropriately factored this into our cash flow projections and credit reserve estimates.

These underlying mortgage loans were originated on average more than five years ago, so that we have access to more than 60 months of payment history. In the first quarter, we continued to add multi-year financing that serves to reduce our reliance on short-term repurchase agreements for Non-Agency mortgage-backed securities. While this financing is incrementally more expensive than short-term repo financing by approximately 100 to 150 basis points, we believe the certainty of the committed term outweighs the additional costs.

I thank you for your continued interest in MFA Financial. And at this time, I would like to open the call for questions. Operator?

Question-and-Answer Session

Operator

Yes, sir. Thank you. (Operator Instructions) And our first question goes to the line of Bose George from KBW. Please go ahead.

Bose George – Keefe, Bruyette & Woods, Inc.

Hey, guys good morning.

Stewart Zimmerman

Hi, Bose.

Bose George – Keefe, Bruyette & Woods, Inc.

First question, just given the increase in Non-Agency prices during the quarter, just wanted to get thoughts on the level of interest in Non-Agencies versus Agencies?

Stewart Zimmerman

Craig?

Craig L. Knutson

Bose, we still like the Non-Agencies, so yes, they’ve tightened a little bit during the quarter. That being said, I think they gapped up pretty wide in December. So we still think that they offer loss-adjusted yields in the sixes, depending on the bond might be low-sixes or mid-sixes. So we still think that in attractive asset class with the various forms of leverage that we have, it still provides a good return.

Stewart Zimmerman

Bose, I think one of the things we’d like to, we try and let folks better understand is the fact that with the two complimentary asset classes meeting both Agency and Non-Agency, we really have a choice. so that the idea is whenever we continue to see good value in the Non-Agency sector that, those are assets that we’ll continue to purchase and conversely on the Agency side as we've seen value and hopefully that comes to light during this call, we will continue to purchase those.

Bose George – Keefe, Bruyette & Woods, Inc.

Okay, great. And then actually just switching to your dividend, there’s $0.03 GAAP between the core EPS and the dividend, and taxable EPS is higher, but just curious how to think about that. and also I guess a related question, you’ve got $1 billion of pretty high cost swaps rolling off. So it’s reasonable to think that the core EPS going to get some upside from that?

Stephen D. Yarad

I guess there’s two parts to that question. As we’ve said before, taxable income is exceeding core income, because for taxable income, we can’t assume the impact of losses that haven’t occurred yet, though in fact, will occur over the next 25 years on a Non-Agency assets. The differential between taxable and core will be narrowing. So tax will should still keep core, but they should be more similar in the future, that’s question number one.

Question number two, you’re right, the cost of funds for our Non-Agency’s should trend down over the course of the year, which is a positive. Excuse me on Agency sorry; Agency financing should trend down over the course of the year. But what we try to emphasize to you is that we continue to increase the term for our Non-Agency financing, which will increase the cost of funds on the Non-Agency. So altogether from the company, I don’t see a big change, but it’s not that interest rates are going up on it. And that’s where our cost of funds are going up, we’re strategically increasing the terms of our Non-Agency funding. So they should, one will be going down, one will be going up.

Bose George – Keefe, Bruyette & Woods, Inc.

Okay, great thanks and does makes sense that you’re doing that with the funding. Thanks.

Stewart Zimmerman

Great. Thank you.

Operator

Thank you, and next we’ll go to the line of Steve DeLaney from JMP Securities. Please go ahead.

Steven Delaney – JMP Securities

Thank you. Good morning everyone.

Stewart Zimmerman

Good morning Steven.

Steven Delaney – JMP Securities

The Non-Agency portfolio is now up to $4.4 billion in terms of face value. I was wondering, is there a way to estimate your capacity to continue to add Non-Agency or MBS with the existing capital base or with simply a reallocation of equity from Agency to Non-Agency.

Stewart Zimmerman

Well, Steve actually the face amount of the Non-Agency is a little over $6 billion, it’s 4.4 amortized costs and it’s 4.5 market value.

Steven Delaney – JMP Securities

My bad (inaudible) I picked up the wrong number part of course.

Stephen D. Yarad

That’s okay. But it’s really the market value that you need to focus on as you know we have at least 55% of our asset in Agency whole pool.

Steven Delaney – JMP Securities

Right

Stephen D. Yarad

So it’s really the market value numbers that you look at to determine where we might be limited and I’m not sure exactly where we are, but I think right now we’re well over 60%.

Steven Delaney – JMP Securities

Yes.

Stewart Zimmerman

Whole pool Agency, so we still have obviously some room there.

Stephen D. Yarad

So Steve, right now we are not at all limited [correct], in the month of April where we acquiring Non-Agency.

Stewart Zimmerman

We probably we added close to 400 in the first quarter, we probably added a little more than 200 in the month of April and first few days of May.

Stephen D. Yarad

So with the cash we have we can grow both the Agency and Non-Agency at the same time.

Steven Delaney – JMP Securities

Okay, Got it. And, these 400 and 200, are those net additions or those gross, and I know the pay-offs aren’t very large, so I’ve assumed this…

Stephen D. Yarad

Those are gross additions actually that brings up the good point, one of the thing that, that you need to keep – in my words it’s a little more complicated to do that 55% sales. The AAA securities on the re-securitization that have been sold to third party investors, those actually get backed out, so those do not count as bad assets, because those have been sold.

Stewart Zimmerman

Exactly

Stephen D. Yarad

Okay. So and just so you know our pay downs on the Non-Agencies they run approximately $50 million a month or so, although the majority of that, are on bonds that have been re-securitized. So we actually don’t get that cash, but in-terms of the balance sheet, that $50 million runs-off the month.

Steven Delaney – JMP Securities

All right, Craig and could you comment just on general liquidity and the market for the Non-Agency RMBS as far as like weekly trading volumes, and I guess specifically, I know some of that is subprime and that’s not your thing, so more in the (inaudible) category. What’s your kind of seeing in flows and whether trading volumes are trending higher, or trending slower, kind of what you’re seeing since the beginning of the year.

Craig L. Knutson

Steve, I would say that trading volumes are still pretty good. They’ve been a little bit choppy this year. So they’ve been, as I’m sure they’ve been a lot of sort of large sales that have taken place, but then around those large sales, you’ll get packets of smaller trade. So, it’s not a completely fluid market where an equal amount of bonds trade every single day. So in that sense it is sporty, but the liquidity is still pretty good, there’s still ample suppliers as we just said, we’ve been able to add significant product in the first quarter and even in the last month or so.

Stewart Zimmerman

Steve its, Stewart. I think that’s an important piece of this puzzle is that, we are seeing the right assets that you purchased and again, that is an important piece of our strategy.

Steven Delaney – JMP Securities

Yeah, exactly and that’s kind of where I was going is, what your apatite was and what the potential was based on what the market is showing you. And just lastly, you maiden three is out there, I realize that’s not your asset class directly its more CDOs and lot of commercial stuff, but obviously any time dealers are facing potential overhang is going to affect other markets. Have you seen any impact on – any price pressure or people backing away any because of this maiden three out there?

Stewart Zimmerman

We really haven’t Steve in fact as ironic as it sound, but I think these large program trades in the maiden lane 2 trade that we’ve seen in this part of the year have actually strengthened the market. So there has been more interest in larger trade and again, same thing for this one, you’re right there is CDOs, there is a lot of commercial, there actually are some, so there is some residential product in those, but it’s not clear that those bonds can be extracted from the CDOs. So if they can, it’s possibly something that we might have interest in, but it’s not clear that those could be – that the CDOs can be liquid at this point.

Steven Delaney – JMP Securities

Right understood. Okay. Thank you, gentlemen. Appreciate the comments.

Stewart Zimmerman

Thanks Steve.

Operator

Thank you and next we’ll go to line of Jason Arnold from RBC Capital Markets. Please go ahead.

Jason Arnold – RBC Capital Markets

Hi good morning guys. I just had a quick question for you on the Non-Agency prepay end of the equation. It looks like it ticked up a little bit here in this quarter, so I was just wondering if you could kind of share your thoughts there and kind of perspectively on the Non-Agency prepaids in particular.

Stewart Zimmerman

Yeah, Jason there is a seasonality into this. So you went from 13 to 13.98, so there is no real information there.

Jason Arnold – RBC Capital Markets

Okay. But obviously I guess, it’s a good thing given that there is probably still some resets and things like that to actually see (inaudible) pick up in that segment I guess (inaudible) at the Agency side, right?

Craig L. Knutson

Yes, but remember though on the Non-Agency side we’re selling like the assets and yes, we have a very significant discount. But again, we’ve modeled that I think at a very, at a rate in terms of prepaid that are very benign.

Jason Arnold – RBC Capital Markets

Okay

Craig L. Knutson

But again, if that were to pick up, you can do the math as its pretty good for us.

Jason Arnold – RBC Capital Markets

Yes, absolutely. Okay, and then just one quick follow-up on the swap question that Bose asked. I guess, were are you typically adding on new swaps where the old ones are rolling off, is it a kind of in the three year range or (inaudible) there?

Stewart Zimmerman

We actually have not added swaps this year, because we really haven’t added any interest rate risk on the asset side.

Jason Arnold – RBC Capital Markets

Okay. But like i guess perspectively as the additional whatever $800 million roll-off would you kind of continue that line of thought and not add as much on the new swaps or…?

William S. Gorin

You can mentally you add interest rate risk to the portfolio you would have to hedge that out. But right now, we believe there is very little interest rate risk within our portfolio. Our central states this is Non-Agencies that are not correlated with the treasuries and we’re probably inverse the correlated [pressures]

Stewart Zimmerman

As Bill said, if we buy longer duration assets and which would be more or less on the agency side it's something that we would consider.

Jason Arnold – RBC Capital Markets

It makes sense. Okay. Perfect. Thanks guys.

Stewart Zimmerman

Thank you

Operator

Thank you, sir and next we’ll go to the line of Douglas Harter from Credit Suisse. Please go ahead.

Douglas Harter – Credit Suisse

Thanks, folks. I wonder if you could talk about your appetite your philosophy about continuing to add more longer term financing on the Non-Agency side

Craig L. Knutson

I’ll do it from 25,000 feet, you want to continue to do that? We think it's in the best stages of the portfolio. But Craig, do you want to handle some of the details.

Craig L. Knutson

Sure, Doug. As you know, we’ve done a lot of stuff to address the longer term financing on the Non-Agencies. We’ve done four re-securitizations and (inaudible) anybody as we accumulate more collateral and if market conditions permit to see more of those. As far as the three-year was looked at additions to three-year financing, we’ve done some further goes out 12 months and more. So we’ll continue to add those when they are cost effective. I don’t think it’s realistic to expect that we won’t have any repo of less than 12 months, but we’ve significantly reduced our reliance on repo of less than 12 months. And obviously there is some cost associated with that. But we think that the benefit and the surety of financing is certainly weren’t that hard.

Stewart Zimmerman

In addition, I know you know Doug, our last re-securitization was fixed rate. So probably our next re-securitization would also look at a fixed rate alternative. So, it’s higher cost and longer term.

Douglas Harter – Credit Suisse

Just on that, can you just talk a little bit about the health of the re-securitization market right now?

Stewart Zimmerman

Sure, it’s still at this point limited to one rating agency, which is DBRS, which makes it admittedly more difficult to do re-securitizations. The market is not as deep for a single rated DBRS only, AAA as it would be if we had some of the other rating agencies involved. But that being said, we’ve done the last three deals that we’ve done have been DBRS only. So, while maybe not as efficient as it could be, it’s still very viable for us.

Craig L. Knutson

It’s funny; it’s actually an advantage to us. If there is multiple rating agencies for these re-securitizations the execution might be better. But there will be more people competing for the Non-Agency NBF to begin with. So we’d rather be able to buy the assets over a lower price to resecuritizations now with one rating agency, if other rating agencies re-enter they’ll just beat to our benefit.

Douglas Harter – Credit Suisse

Great, thank you.

Stewart Zimmerman

Thank you.

Operator

Thank you and next we’ll go to the line of Jason Weaver from Sterne, Agee. Please go ahead.

Jason Weaver – Sterne Agee & Leach Inc.

Hi, good morning, guys. Thanks for taking my question.

Stewart Zimmerman

Good morning.

Jason Weaver – Sterne Agee & Leach Inc.

I just wanted to get your macro thoughts as it affects Non-Agency markets right now. It seems like last years down drop was really concurrent with the high pitch of (inaudible) and now that the talk has sort of resurfaced, how do you think about technical risks here?

Stewart Zimmerman

So going back to last year we saw the head line news was Greece, for example so that’s sort of one of the downward trend that in maiden lane was a downward trend. And what did it impact Non-Agencies where perhaps or the high yield assets, the theory was the European bank held these assets they’d have to shrink and they’ll have to sell these assets. Here that’s not the same situation while the banks still face capital issues, because of the financing provide to them under the LTRO. It doesn’t look like there is any pressure for them to sell these relatively high yielding assets.

Jason Weaver – Sterne Agee & Leach Inc.

All right, fair enough. And just one more may be tinnier detail. I’m curious where you are seeing severity trends on your own portfolio moving and how you’re thinking about that right now?

Stewart Zimmerman

So, well severities, give or take are probably around 50%, they might on the low 50’s. We haven’t really seen those change all that much and you have to keep in mind that severities are largely a function of how long these loans stay in the pipeline. And because there have been various publicized legal and regulatory issues with respect to servicing and servicing foreclosed loans. The pipelines have actually the time periods have lengthened over the last year, year and a half or so.

So I think severities are much more a function of the state where the property is located right, so loans in Florida could typically sit in foreclosure for three years and higher severities there, but also just in general, how long these pipelines are. So I think to look at severities as just the top line number is really a little bit misleading, when we look at any bond and we look at those loans in the bond. We look at how long the loans that are delinquent, have been delinquent. How long they’ve been in that pipeline and we can predict pretty accurately, what those severities will look like just based on how long those loans have been in there.

Jason Weaver – Sterne Agee & Leach Inc.

Craig, would you say that severities that we’d seen are pretty much in line with what we modeled?

Craig L. Knutson

Yes, yes and I do think that overtime as these foreclosure pipelines get narrowed down, that you will see some improvements in severities, but equities will be a couple of years out

Jason Weaver – Sterne Agee & Leach Inc.

Gotcha. And in addition to the timeline, the things that I was hearing from different market strategist revolve around, the LTV’s that are were in the pipeline and became today’s liquidation, though it were much higher than those, that are in the delinquency pipeline now, do you have any perspective there?

Craig L. Knutson

Yeah, I think that’s why especially to the extend that you have strategic default, so you know strategic defaults that two years ago were 150 mark-to-market LTVs, I think yes, that is the case, that a lot of those loans that were really underwater or were the early loans through the pipeline if you will.

Jason Weaver – Sterne Agee & Leach Inc.

Okay. Well, thanks a lot guys.

Stewart Zimmerman

Thank you.

Operator

Thank you. (Operator Instructions) And now we’ll go to the line of Arren Cyganovich, from Evercore. Please go ahead.

Arren Cyganovich – Evercore Partners

Thanks. Could you talk about whether or not the increase in the Non-Agency prices that in more of a technical issue or are you seeing any fundamental improvement in the underlying mortgage assets?

Stephen D. Yarad

So, it’s a good question and what we asked ourselves last year over certainly the last six months of the year is part of the price decline is due to fundamental and technical. And I think our conclusion and I think pretty much the overall conclusion was that they were based on technicals, and I would say honestly that so far this year the price improvement is more technical than it is fundamental.

There are some pockets of what I’d say good news or not necessarily bad news. There are some pockets of those if you look at housing price data. There is an article I read in the paper a week or two ago, about bidding wars for houses and various localities where inventories are very low. So the housing data, well, I certainly won’t say it’s all positive. It’s mix. It’s not all bad anymore, but I still haven’t seen people adjusting assumptions fundamentally on cash flows in the future.

Arren Cyganovich – Evercore Partners

Okay, that’s helpful. And then maybe in terms of you’re adding a little bit more duration on the Non-Agency funding side. Are you doing that from a concern about that repo risk in general or is it just more of a longer-term view of stepping more diverse and safe funding?

Stewart Zimmerman

The latter, we like the idea of having the certainty of the funding and I think as Craig and I think Bill said it also, it’s a little more expensive in that slide. But having the certainty of the funding, we think much more outweighs the additional cost.

Arren Cyganovich – Evercore Partners

Okay. And then lastly, on the agency side, the CPRs tick down a little bit in the first quarter. Do you have any outlook on where you think CPRs will be going in the near-term?

Stewart Zimmerman

I’m going to turn it over to (inaudible).

Unidentified Company Representative

Hi, this is (inaudible). Well, it seems to have for the fourth quarter was 19.4 and you’re right, it stick down to 17.9 in the third quarter. Going forward, I think it’s going to be in the same zip code, I wouldn’t expect a whole lot of changes there.

Arren Cyganovich – Evercore Partners

Thank you very much.

Stewart Zimmerman

Thank you.

Stephen D. Yarad

Thank you.

Operator

Thank you. And next, we’ll go to the line of Chris Donat from Sandler O'Neill. Please go ahead.

Christopher R. Donat – Sandler O'Neill

Hi, good morning everyone it’s, Chris Donat here.

Stewart Zimmerman

Hi, Chris.

Christopher R. Donat – Sandler O'Neill

Just to revisit the issue of the portfolio on the mix of Agencies and Non-Agencies, in terms of the market value, Non-Agencies have prepped up to nearly 40% of the portfolio. Is there a sort of balance as you look at the complimentary nature of the portfolio, or would you go 50-50 in terms of the mix?

Stephen D. Yarad

We are probably continuing to reallocate a little bit more towards the Non-Agency. There is no one absolute strategic number. As we mentioned, there are a certain regulatory constraints, but then you have to adjust for the securitization. So you can’t just look at the growth amount on the balance sheet. I think you can see us continuing to grow more rapidly in the Non-Agency side.

Christopher R. Donat – Sandler O'Neill

Okay. And then more of a small point here, but just looking at the compensation level, imagine there is some seasonal issues there, but it picked up little over $2 million from the fourth quarter. Just any comments on (inaudible) wanted to touch up there.

Stephen D. Yarad

I think the number is more consistent with the first three quarters of last year, and in the fourth quarter we actually had a reversal of the bonds accruals, so the bond (inaudible), so it should just appear to fourth to the first.

Christopher R. Donat – Sandler O'Neill

Okay, got it. Thank you.

Stewart Zimmerman

Thank you.

Operator

Thank you. And next we’ll go to the line of Daniel Furtado from Jefferies. Please go ahead.

Daniel Furtado – Jefferies & Co.

Good morning, everybody. Thank you for the opportunity.

Stephen D. Yarad

Sure.

Stewart Zimmerman

Good morning Danny.

Daniel Furtado – Jefferies & Co.

Good morning. Hey, would you mind telling me if there is any significant differences structurally or otherwise in the most recent securitization or is it relatively from a structure perspective unchanged from the last couple?

Stewart Zimmerman

So it’s actually good question, Dan. The structure is more or less the same as the prior two resecuritizations. so it’s DBRS the only rate bonds down to A, so we get AAA or AA or A in a non-rated class. But there was one improvement in the last transaction, and that was that we got more AAA. so I think we got approximately 43% AAAs in our last transaction, which was up from about 37% in the two before that. So that obviously is a good thing, because we had more AAAs that we could sell. and I think that’s not necessarily, because we had different collateral than we had before. I just think that the rating agencies have constantly gone back to recalibrate models, and they look at the economic data, just like we do and we found in particular on more season collaterals that we were getting slightly better levels.

Daniel Furtado – Jefferies & Co.

Got you. So collateral performance is expected to be better by the rating agency, which is driving the level slightly different, excellent?

Stewart Zimmerman

Dan, and one other thing too, we mentioned this before. but the AAA that was sold was a fixed rate rather than a floating rate. And that was because the market acceptance of a fixed rate was better than a floating rate. I think that’s largely due to folks view on interest rates. So, if you’re view is at interest rates are really going to stay low through the end of 2014 or so. But I think the buyer base is more reluctant to pay up to buy a floating rate security that has a two-year average life.

Daniel Furtado – Jefferies & Co.

Understood, yeah it makes perfect sense. Thanks for the detail there. The second question in the Non-Agencies space, are you noticing kind of any type of rotation within the station towards even like more liquid easier to finance securities. The idea being that as people’s expectations per performance and recovery levels increases, investors want to get the more liquid securities to lever that more aggressively than we’ve seen in the past or you’re not really noticing that type of shift in the market?

Stewart Zimmerman

It’s not really material. I don’t think that one type of security is necessarily easier to finance than another. That being said, there is often a slight pay up for larger block size. So the larger trades tend to get more interest. I don’t know that it’s certainly because they are better it’s just the larger trades get more interest and therefore they end up trading a little bit higher.

But we try to keep in mind sort of an ROE strategy as we look at assets. So because we’ve done a number of resecuritizations, we have a pretty good sense if not an exact sense of where these (inaudible) come in on bonds and we have various sources of funding as you know. Right, we have some term funding. So when we look at bonds, we don’t just look at the yield on the bond, we look at what we can do with that bond around our capital structure and what sort of ROE we can produce.

Daniel Furtado – Jefferies & Co.

Understood, thanks a lot for the time, everybody.

Stewart Zimmerman

Sure.

Craig L. Knutson

Thank you.

Operator

Thank you. And next we’ll go to the line of Alan Straus from Schroders. Please go ahead

Alan Straus – Schroders

Why not there is – what did you do with the proceeds from a (inaudible)?

Craig L. Knutson

Right, so the proceeds were about 90 somewhat million, which went into our cash, which already was about $400 million. So as we mentioned, we bought at least $200 million of Non-Agencies since the start of the quarter.

Stewart Zimmerman

Right. It’s fungible. So again, what we buy securities or…

Stewart Zimmerman

It’s primarily done into Non-Agency assets.

Alan Straus – Schroders

And have you brought the cash balances down even further?

Stewart Zimmerman

They’re not appreciably different than at the end of the quarter.

Alan Straus – Schroders

Okay, thank you.

Stewart Zimmerman

Sure.

Craig L. Knutson

You’re welcome.

Operator

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

Michael Widner – Stifel Nicolaus & Company, Inc.

Good morning, guys.

Stewart Zimmerman

Good morning, Mike.

Michael Widner – Stifel Nicolaus & Company, Inc.

So, most of my real questions have been answered so I’m going to give guys a couple real big picture questions. And I guess, just starting with the asset mix and you made some references to ROEs. On the Non-Agency side of the portfolio, I mean a couple of years ago that was a great place where you could put unlevered cash and get mid-teens kind of returns and that’s obviously changed over the last couple of years. And really just looking over the last years, I mean it’s been a fairly dramatic tightening of spreads for putting money to work there and I mean just looking at you guys and I think the spreads on the Non-Agency business and granted the funding is different, but the spreads are down 185 basis points year-over-year. And so to continue to get kind of the mid-teens returns there we’re obviously moving much higher in leverage, you guys have actually had a slight, if I look at the ratings on the assets a slight drift lower in terms of – you had credit ratings in the assets. And so, by and large I mean you have to work harder and harder and take on more leverage and arguably take on a little more risk to get the same kind of returns. And then I look over on the agency side of the portfolio, I don’t want to say that well, I mean the ROEs you’re getting there are kind of much lower than what we’re seeing in the pure agency REIT sector is an average, and so I don’t know, I mean not that I’m arguing or they’re criticizing what you’re doing? But just wondering if you give some big picture commentary on that general trend, I mean working harder and harder to generate returns in a shrinking asset class where there’s more and more capital being put to work and more people battling it out for the same bunch of so-called toxic assets and you’ve got a multi-trillion dollar asset class that in most of your tiers, you’re generating the same kind of ROEs that you’re generating on the Non-Agency side. So anyway, I’ll leave with that.

Stewart Zimmerman

Great. So we don’t know, which part to (inaudible) first, because I’ll take a shot. so we’ll start with the Agencies, because that’s simpler. So in terms of our Agency yield, I believe our Agency yields are very competitive, especially when you take into account that we have no [third] year fixed rate. So Agency yield is in excess of [20%] and comps better than I do.

Michael Widner – Stifel Nicolaus & Company, Inc.

But just let me step back. I mean the ROE is at least if I go by what you guys are publishing pretty expenses, you’re still kind of in the 12-ish or 11.5-ish ROE range on that segment, then add some overhead expenses, I mean that is clearly a lower ROE than pretty much anybody in the [Asia Pacific]?

Stewart Zimmerman

Yes, I agree. But what ROE is your yield, lesser cost of funds, gives you the spread, and then if you return on your assets for few leverage multiple. So I have to go up. so I’m going to address the ROE. but on the agencies as I said, the Agency yield itself is comparable to everyone else’s. Our cost of funds on agencies is higher, we have an older portfolio, I mean older hedges, which we told you is significantly running off during the course of the year, such as the cost of funds on our agencies will go down and our interest rate spread should not deteriorate and depending on prepaid speeds and reinvestments, we might actually have interest rate spread increased over the course of the year, which I think it will be pretty unique on the Agency side.

On the Non-Agencies, you’re talking about it becoming more competitive. In fact, the most competitive time for Non-Agencies was over a year ago. it would have been February of the prior year. Yields actually have gone up on Non-agencies, they’re higher now than they were a year ago, last February. So it’s been a very good buying opportunity. So I’ve said this before, initially when you start buy a Non-Agencies, the question always was, is too soon, and then for the last two years the question has always been, is it too late. And it wasn’t too soon, and we still think when you compare the risk award tradeoff, the fact that in the gates of prepayment risk, the fact that we believe there’s not interest rate risk on these assets. Incremental investments was a six-handle, we find very attractive. The forms of financing have changed. You’re right, initially there was no leverage. The high ROE without leverage, then there was a ROE with leverage, which was short-term repo. We’re not stretching to generate ROEs, that’s one thing MFA has never done. We’re comfortable using these longer terms of leverage will pay upward and even if the spread is a little bit less, we’re more comfortable with the forms of leverage we’re using. So no way are we stretching for ROE target. it just so happened, the two investment classes we’re investing in generate very high ROEs and we’re happy with what we’re doing.

Michael Widner – Stifel Nicolaus & Company, Inc.

All right, well. I appreciate that you guys are certainly doing it in a unique way. so you bring some different to the space there. And I appreciate the comments.

Stewart Zimmerman

Sure.

Craig L. Knutson

Thank you.

Operator

Thank you. And next we’ll go to the line of Steven Eisman from (inaudible). Please go ahead.

Unidentified Analyst

Hi, guys.

Craig L. Knutson

Hi, Steve.

Unidentified Analyst

All my questions have been asked, just wanted to tell you impressive growth on book value and have a nice weekend.

Craig L. Knutson

Steve, thank you very much.

Operator

Thank you. and currently, we have no further questions. please continue.

Stewart Zimmerman

On that note, I want to thank everybody for participating. we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, this conference will be available for replay after 12:00 pm today through May 11. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701 and entering the access code 247472. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code of 247472.

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