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MFA Mortgage Investments (NYSE:MFA)

Q4 2007 Earnings Call

February 14, 200 10:00 am ET

Executives

[Deb Nichol]

Stewart Zimmerman –Chief Executive Officer, President and Chairman

William S. Gorin - Executive Vice President, Chief Financial Officer and Treasurer

Ronald A. Freydberg - Executive Vice President and Chief Portfolio Manager

Analysts

Michael Widner – Stifel Nicolaus & Company, Inc.

Steven Delaney – JMP Securities

Stephen Laws – Deutsche Bank Securities

David Hochstim – Bear Stearns

Jordan Hymowitz – Philadelphia Financial

Gary Gordon – Portales Partners

Michael [Cohen] – [Snowbook Capital]

Bose George – Keefe, Bruyette & Woods

Matthew Howlett – Fox-Pitt Kelton

Operator

Welcome to the fourth quarter financial results conference call (Operator Instructions) I would now like to turn the conference over to [Deb Nichol].

[Deb Nichol]

The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA that reflect management’s belief, expectations and assumptions as to MFA’s future performance and operations. When used statements which are not historical in nature including those words such as anticipate, estimate, should, expect, believe, intend and similar expressions are intended to identify forward-looking statements.

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 in the market value of MFA’s investment securities, changes in the prepayment rate on the mortgage loan securing MFA’s investment securities, MFA’s ability to use borrowing to finance its assets, changes in government regulations affecting MFA’s business, MFA’s ability to maintain its qualifications as a real estate investment trust for federal income tax purposes 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, 2007 and other reports that it may file from time-to-time with the Securities & Exchange Commission could cause MFA’s 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 disclosure in MFA’s annual report on Form 10-K for the year ended December 31, 2007 and/or the press release announcing MFA’s fourth quarter 2007 financial results. Thank you for your time.

I would now like to turn this call over to Stewart Zimmerman, MFA’s Chief Executive Officer and President.

Stewart Zimmerman

I welcome you to the MFA investor call announcing MFA’s fourth quarter 2007 financial results. Joining me this morning is Bill Gorin, Executive Vice President and Chief Financial Officer; Ron Freydberg, Executive Vice President and Chief Portfolio Officer; Teresa Covello, Chief Accounting Officer; Tim Korth, General Counsel; and [Debra Yang], Vice President, Financial Analytics.

MFA Mortgage Investments today reported earnings available to common stockholders of $18.6 million or $0.16 per share of common stock for the fourth quarter ended December 31, 2007. On December 13, 2007 we announced our fourth quarter dividend of $0.145 per share of common stock. The dividend was paid on January 31, 2008 to stockholders of record as of December 31, 2007.

In light of continuing concerns regarding the residential mortgage and housing market, we are pleased with both our strategy of investing in high-quality assets and our fourth quarter 2007 financial results. Our portfolio spread and dividend have trended up in each of the last four quarters.

At December 31, 2007 approximately 99% of our assets consisted of mortgage backed securities issued or guaranteed by an agency of the United States government or a federally chartered corporation, other mortgage backed securities rated “AAA” by Standard & Poor’s Corporation, mortgage backed securities related receivables and cash.

Concerns about increased mortgage delinquencies led investors to question the underlying risk and value of mortgage-backed securities across the ratings spectrum. Banks, brokers and insurers have announced billions in losses from exposure to the U.S. mortgage market. These losses have reduced financial industry capital and have led to reduced liquidity. This reduced liquidity has led to forced asset sales creating very attractive investment opportunities for us at MFA.

In the fourth quarter, we completed two public offerings of our common stock. On October 2, 2007 we completed a public offering of 8,050,000 shares priced at $7.90 and received net proceeds of approximately $60.2 million. And on November 14, 2007 we completed a public offering of 17,250,000 shares priced at $7.95 and received net proceeds of approximately $130 million.

Subsequent to yearend on January 23, 2008 we completed an additional public offering of 28,750,000 shares priced at $9.25 and received net proceeds of approximately $253 million. We have invested these equity proceeds on a leveraged basis in additional agency mortgage backed securities. The investment of this equity along with our reduced funding costs should lead to increased earnings and portfolio spreads in the first quarter of 2008.

During the fourth quarter of 2007 we acquired or committed to purchase approximately $1.8 billion of agency mortgage backed securities. These transactions increased our concentration in agency MBS and positively impacted our portfolio spread.

At December 31, 2007, agency MBS and related receivables constituted approximately 92% of our assets or approximately $7.9 billion. AAA MBS and related receivables were approximately 5% or approximately $427 million, and total cash was approximately 3% or approximately $234 million.

The weighted average cost basis of our mortgage backed securities portfolio was 101.25% of par as of December 31, 2007. Our MBS assets are liquid and continue to be financed with multiple funding providers through repurchase agreements. Our leverage as measured by assets-to-equity was 9.3x on December 31, 2007.

The mortgage-backed securities in our portfolio are primarily adjustable rate or hybrids, which have an initial fixed interest rate for a specified period of time and thereafter generally reset annually. Assuming a 20% CPR rate approximately 34% of the mortgage-backed securities in our portfolio are expected to prepay or have their interest rates reset within the next 12 months with a total of 85% expected to reset or prepay during the next 60 months.

We utilize interest rate swaps to lock in funding costs relative to hybrid on all our mortgage-backed securities. As of December 31, 2007 we had interest rate swap agreements with an initial amount of approximately $4.6 billion locking in an average fixed cost of 4.83% with a weighted average remaining term of 30 months. In comparison we owned $8.3 billion of mortgage backed securities.

During the fourth quarter of 2007 the MBS gained $45.3 million in value or the value of the interest rate swaps lost approximately $72 million. The decline on our interest rate swap value reflects the changes in the forward curve. During the fourth quarter MFA paid 4.96% on its swaps while receiving 4.98%.

We take into account both coupon resets and expected prepayments when measuring the sensitivity of our mortgage backed securities portfolio to changing interest rates. In measuring our assets to borrowing re-pricing gap, we measure the difference between the weighted average months until coupon adjustment or projected prepayment on our MBS portfolio and the months remaining on our repurchase agreements including the impact of interest rate swap agreements.

Assuming the 20% CPR the weighted average time to re-pricing or assumed prepayment for our MBS portfolio as of December 31, 2007 was approximately 33 months and the average term remaining on our repurchase agreements including the impact of interest rate swaps was approximately 23 months resulting in a re-pricing gap of approximately 10 months. The prepayment speed on our MBS portfolio averaged 13.4% CPR during the fourth quarter of 2007.

During the fourth quarter of 2007, the gross yield on our interest earning assets was approximately 6.08% while the net yield on interest earning assets was 5.70% primarily reflecting the cost of premium amortization of our MBS portfolio.

The portfolio spread which is the difference between our interest earning asset portfolio net yield of 5.70% and its 5.05% cost of funds was 65 basis points for the fourth quarter of 2007. By comparison, the portfolio spread in the third quarter of 2007 was 36 basis points.

Our costs for compensation and benefits and other G&A expense was $3.2 million or 16 basis points of average assets for the quarter ended December 31, 2007. As of December 31, 2007, MFA’s book value per share of common stock was $6.76.

I am very pleased to announce at this time the filing of an initial registration statement this week for MF Residential Investment, Inc., a newly organized Maryland corporation that will invest primarily on a leverage basis in residential mortgage backed securities, residential mortgage loans, and other real estate related financial assets.

MF Residential will be externally managed by a subsidiary of MFA, for which MFA will indirectly earn additional management fee income. We are extremely excited about the launch of MF Residential and its implications for MFA.

At this time I would like to thank you for your continued interest in MFA and I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Widner - Stifel Nicolaus & Company, Inc.

Michael Widner – Stifel Nicolaus & Company, Inc.

Could you provide some more guidance on your expected leverage? In the last call you indicated that 10:1 going forward but obviously you raised a lot of money in the quarter. By my estimates you actually declined your leverage a bit over the quarter. Where do you see yourself going now especially considering you’ve also done some pretty aggressive raises in 1Q?

Stewart Zimmerman

We did a quick analysis. Generally we’ve averaged about 9.5x over the last number of years in terms of leverage. And, what we said on the recent road shows is that we would be anywhere between 9x and 10x which you know is about 9.5x. Fully levered we are at or about 10x.

I think if you kind of do a comparison of us relative to companies in our space I think you will continue to find us the lowered levered and that’s not an envelope that I’m going to push. So at or about 9.5x we feel real comfortable.

Michael Widner – Stifel Nicolaus & Company, Inc.

Should we expect kind of at the end of Q1 since you’ve also raised a lot of money in Q1 that you’ll probably be more likely than not to be below the 9.5x?

William S. Gorin

The asset to equity was 9.3x and I think what Stewart is saying is we’ve consistently remained between 9x and 10x.

Michael Widner – Stifel Nicolaus & Company, Inc.

By the number you gave of swaps, $4.6 billion I think you indicated at the end of December, sounds like you put about $1.4 billion on during Q4 versus about $1.87 you mentioned of assets. So, by my math that says about 75% of what you put on was effectively swapped out. Is my math right there?

William S. Gorin

That’s effectively the right number. Swaps are a counterpart of how we lock in longer term funding and that’s the most effective way to put on longer term funding right now.

Michael Widner – Stifel Nicolaus & Company, Inc.

So, effectively 75% of what you bought in Q4 you’ve locked longer term funding in and you gave the average duration of the swaps at 30 months. Is that generally the vicinity of the swaps you put on in Q4 as well?

William S. Gorin

It all depends upon the asset that we buy. Each asset we look at and put a different type of swap on it. You look at what the actual schedule is going to be over time. You also have some of the assets have paid down and you have some of the swaps have also paid down. There’s no actual formula for what we’re trying to do its all asset related and where we see the good yields.

Michael Widner – Stifel Nicolaus & Company, Inc.

I understand the pay downs and the prepays but it feels to me like you’ve effectively locked in a spread on 75% or so of the assets you’ve bought in Q4. We know roughly what the spreads on those were but does that make sense? And, could you maybe do some color commentary on what’s the effective spreads on the assets that you booked and kind of used swaps to lock in would be in Q4?

Stewart Zimmerman

What I said on the road shows and it has held to be true is that in the last equity raise that we did we said that we were looking at agency assets that had a spread of about 115 basis points. And if you use leverage of approximately 9x you wound up somewhere between a 15% to 16% return on equity on those incremental assets. That has turned out to be a very accurate number.

You know here and there we’ve been able to exceed that, but again on an average about 115 basis points. To get to your answer or a more specific answer on the hedge numbers your math is relatively good math but there is no magic formula. Again, we certainly have a view on interest rates, we take a lot into consideration but what we’ve never done is kind of made bets on the rates going up or the Fed doing this or that.

We try not to do that, we try and lock in a spread. If we can lock in 115 basis points by doing longer term funding we’re going to do that because if we can return a 16% or so return on equity on this incremental asset I think we’re making a good decision for the shareholders. That’s the best answer I can give you. I can’t give you a particular formula that says we’re going to swap about 50% or 75%. What you’re looking at is a snapshot at a point in time.

Michael Widner – Stifel Nicolaus & Company, Inc.

Is there any color commentary you might be able to give on spreads in the current environment in January and sort of early February.

Ronald A. Freydberg

Stewart was just mentioning that when we went on the road we talked about 115 basis points and based on what’s going on in the market place we feel comfortable in the 115 basis point neighborhood. There are many different opportunities out there but that seems like a good number.

Operator

Your next question comes from Steven Delaney - JMP Securities.

Steven Delaney – JMP Securities

My question was just on the mark-to-market and just reading all of the mortgage research that’s coming out and it seems to me that based on your numbers your negative mark on your swaps exceeded the mark on the RFDF by about $25 million in the fourth quarter it appears. That contributed maybe negative $0.20 on book value.

But, what I recall from reading is that anecdotally is that agency RMBS pricing in the fourth quarter underperformed interest rates in general such that I guess we call that credit spreads widening a little bit and I think that’s why you had such a good investment opportunity.

But let’s shift gears now to the first quarter, on the other side of the coin, I’m hearing people talking about credit spreads tightening on agencies and agency pricing outperforming here in the first quarter. So we know swap rates are down again in the first quarter but, can you give us any sense as to at this point in time how the market value of the agency RMBS has responded relative to the drop in interest rates in contrast as to how it performed in the fourth quarter?

Ronald A. Freydberg

I am not sure that spreads have tightened we said that spreads were 115 in December and January and we’re saying that now. Perhaps there’s some tightening but it’s really not across the board in a big way. But, spreads have not widened more so if your point is interest rates have declined which would impact the swaps but if spreads haven’t changed much would we expect a like change in the mortgage backed securities values, I think the answered be yes.

Steven Delaney – JMP Securities

So maybe I should’ve said, at least they kept pace in this quarter and we know that factually you have the swaps for some percentage of notionally of the RMBS whether that’s 70% or 75% you are net long against your equity. That would indicate that at least that’d be there’s a good chance this quarter that the RMBS mark at this point in time may exceed the negative swap bar. That’s where I was going

Ronald A. Freydberg

There shouldn’t be a big difference between the two right now.

Operator

Your next question comes from Stephen Laws - Deutsche Bank.

Stephen Laws – Deutsche Bank Securities

Can you take a second to comment on your thoughts on the increase in Fanny/Freddy caps, what that might do to the sector and kind of how you expect that to impact the MFA, if at all?

Stewart Zimmerman

Well, you know with the Fanny and Freddy caps expanding and with the potential for both FHA and VA limits to expand you reinvigorate the [Jenny] program with the FHA and VAs and again. I think that you certainly create a situation with expanding caps on Fanny and Freddy with that much more product available for us. So, I think from a prospective from MFA it’s very positive.

What one could also read in to it to be candid with you, is do you then have the potential for prepays to increase, that’s something we’re always very sensitive to, and we continue to look at the market. We haven’t seen that to date, but it’s something we certainly have our ear to the ground. So sometimes there’s a double-edged sword, but just to let you know we certainly are cognizant of it and kind of wary.

Stephen Laws – Deutsche Bank Securities

And for the prepays do you think that would be really more impact what would have been a jumbo loan refinancing to now conforming given that we might see a decline in coupons loans?

Stewart Zimmerman

That’s exactly the point. But again, we’re on a public call and I’d like to really tell what my thoughts are. Again, we always look at if there’s a positive sometimes there’s a negative lurking out there so you always have to be careful.

Operator

Your next question comes from David Hochstim - Bear Stearns.

David Hochstim – Bear Stearns

Could you just clarify have you fully invested the proceeds from the last capital raise?

Stewart Zimmerman

When you say fully invested what we had said was that at the end of December we were at 9.3x in terms of leverage and we have been anywhere from 9.5x is kind of the mid-point but anywhere from 9x to 10x is where we feel comfortably levered. There is no reason to believe that we won’t be at a number similar to that.

David Hochstim – Bear Stearns

What I am trying to figure out is it seemed like you had a fair amount of cash at year-end too. So I thought you hadn’t fully invested the proceeds of the last offering before year end and now you’ve done another one in January.

Stewart Zimmerman

David you can’t look at it like that. First of all it’s a snapshot in time, you’re looking at December 31 and we always keep a certain amount of cash and free agency securities available to meet our obligations, so I don’t think you’re potentially drawing the right conclusion.

We always have cash and free agency securities available to meet margin calls and any other obligations that we have. So whether that number is $200 million or whatever the number might be at a point in time you’re looking at it simply at a point in time. I don’t know that you can draw that absolute conclusion.

David Hochstim – Bear Stearns

So, I should think about what leverage should be given the equity you have at the end of January.

Stewart Zimmerman

That would probably be more meaningful and what I’d continue to say is that at or about 9.5x, using that as a middle number we feel very comfortable.

David Hochstim – Bear Stearns

Could you just talk about premiums and how premiums changed in January and February relative to what you report for the year end?

Stewart Zimmerman

I think our premium exposure is 1.25% as of December 31, if I remember correctly.

David Hochstim – Bear Stearns

But since then would it be that you have had a lot more money to put to work since then. I guess in one regard you said $101.25.

Stewart Zimmerman

What Ron has reported to me and what we’ve seen in the market for the types of securities that we buy, which are generally higher coupon hybrids as defined as 5171 and 101s , you’re in the 101s to very, very low 102s is what we’ve seen. So if what you’re asking me has there been some premium creep relative to these types of assets, the answer is yes.

Operator

Your our next question comes from Jordan Hymowitz - Philadelphia Financial.

Jordan Hymowitz – Philadelphia Financial

Can you disclose what your book value is post the equity deal that you fund?

William S. Gorin

We haven’t provided any numbers beyond year end. You know, the share price that we issued stock at so you should be able to do that adjustment yourself.

Jordan Hymowitz – Philadelphia Financial

With the jumbo market now being expanded by the agencies there should be a lot more agency paper coming on the market and that could drive down premiums. Is that a rational thought process?

Stewart Zimmerman

Yes, it’s a rational thought process, the question is how quickly and will you have a bifurcated market. Will you have in fact the market that’ll be a jumbo agency market and then you’ll have what we now consider the conforming agency market. That’s kind of an unknown as far as me looking at the market place but I think it’s all good news for us.

Jordan Hymowitz – Philadelphia Financial

Can you explain what you mean by bifurcated market?

Stewart Zimmerman

Again, I don’t know exactly how they’re going to do it. Years and years ago, we did have current coupon markets and we had market places that basically differentiated and spreads were different based on various coupon ranges, not loan amounts.

Now all of the sudden you’ll whatever the coupon will be but you’re going to have different loan amounts, so you’re going to have 417s mixed in with 600s or you’ll have 600s only, I don’t know the answer to that question.

Jordan Hymowitz – Philadelphia Financial

But you’ll be purchasing agency coupons of 600s, won’t you?

Stewart Zimmerman

I’m talking about the underlying collateral, the coupon will be, whatever the coupon is.

Jordan Hymowitz – Philadelphia Financial

Not the coupons, you will be purchasing collateral whether it be a $200,000 underlying collateral or $600,000 right?

Stewart Zimmerman

Right.

Ronald A. Freydberg

Stewart’s point is will they be combined in one security or will there be a security of $600,000 mortgages underlying the security or one mixed in with everything that preexisted. So the underlying mortgages will behave differently depending on whether the securities have them all bunched together or not Jordan, that’s Stewart’s point.

Jordan Hymowitz – Philadelphia Financial

My point is you’ll be purchasing both securities even if they are bifurcated, and there’s going to be a lot more supply and hence that would lower prices naturally.

Stewart Zimmerman

But your points are well taken. I’m just telling you I don’t know exactly how it’s going to be structured.

Jordan Hymowitz – Philadelphia Financial

Do you have any sense is this retroactive do you know, or not retroactive?

Stewart Zimmerman

Jordan, I don’t know the answer.

William S. Gorin

Jordan the last talk we’re looking at is there’re going to start it up July first.

Jordan Hymowitz – Philadelphia Financial

But will people be able to refinance their existing jumbos and to get low rates or not? Have they decided that yet?

Steward Zimmerman

If it’s a refi it’s a whole new mortgage so why would it be any different than anybody else?

William S. Gorin

The idea is to make the amount of people who can qualify for the agencies to be a larger audience so that would allow people who are currently in jumbo to potentially go into agencies. The agencies haven’t figured out. They had this talk about having different guarantee fees to do the tiering the way Stewart was talking about. There’s still a lot of stuff to be worked out.

Operator

Your next question comes from Gary Gordon - Portales Partners

Gary Gordon – Portales Partners

Obviously prepayments are slowing, there’s pressure on them to slow because of lower home prices and tightening credit. How much do you think that’s going to influence the kind of loans that you hold? And is there any hedging implications to you because of that?

William S. Gorin

Gary, we are buying agency securities. When we’re put our prepay factor on there we start with a lower prepay and as it gets closer to the reset we assume that it’s going to prepay it at a faster speed. Research is still showing that as these hybrids approach resets the prepay speeds continue to take off including what we got for last month.

So, while prepays are going to be somewhat muted because of the credit and what’s going on in the housing market people are still going to prepay their hybrids and especially as we get close to the reset date.

Gary Gordon – Portales Partners

With the decline in short rates, what’s sort of the bump now from the initial rate to the reset rate?

William S. Gorin

As you have some of these 31s and 51s coming close to reset the bump might not be a bump it might actually be a decrease, it all depends upon the timing and what else was going on at the time. We’re seeing that some rates may stay flat and some rates might actually start to come down a little bit.

Gary Gordon – Portales Partners

Which would obviously change your pre-payment pattern?

William S. Gorin

Right.

Gary Gordon – Portales Partners

This new venture MFA Realty, what sort of assets are in there versus what you buy in the MFA proper?

Stewart Zimmerman

Generally, what we’re going to look at are top quality non-agency assets for the most part. When I say for the most part, it’s for the majority. There’ll still be some agency product there but generally it’ll be non-agency product, it could be AAA securities, could be other real estate ventures, could be a loan sometime in the future if and when the securitization market comes back. So, I think there is a lot of opportunity for us and for particularly for our shareholders.

Operator

Your next question comes from Michael [Cohen] with [Snowbook Capital]

Michael [Cohen] – [Snowbook Capital]

Could you provide just a little more color commentary aside from just you know what MFA Realty’s going to be looking at, how large is it, how much capitol will you be employing and are you going be taking the credit risk there or is it a asset management arrangement? Just any more color commentary on what it is and such, would be helpful.

Stewart Zimmerman

We filed yesterday with the SEC, we’re in a waiting period with the SEC, and I don’t know that it is absolutely correct for me to really comment on it, other than what I said relative to what Gary’s question was. I think if you could, and I mean this respectfully, if you can take a look at the filing and as we get down the line with SEC and as we’re permitted to we can speak a little more openly about it I’d be happy to do that. I would just hope that you would understand that and I mean that very respectfully. The name of the company is actually MF Residential.

Michael [Cohen] – [Snowbook Capital]

Is there a ticker symbol?

Stewart Zimmerman

No. We’ve applied for MFR, we have not heard back that that’s accepted.

Operator

Your next question comes from Bose George - KBW.

Bose George – Keefe, Bruyette & Woods

The timing of your pre-Q dividend, does that reduce your book value by $0.10 this quarter, the fact that it’s paid out in the fourth quarter?

William S. Gorin

Do you mean the fourth quarter dividend?

Bose George – Keefe, Bruyette & Woods

No, the third quarter dividend, since both the third and the fourth quarter dividends.

William S. Gorin

Bose, you’re right. There were two dividends that came out of the book value in the fourth quarter.

Bose George – Keefe, Bruyette & Woods

Can you give a quarter end interest spread, how much it had improved over the quarter over the average?

William S. Gorin

65 was pretty consistent across the quarter.

Operator

Your next question comes from Matthew Howlett - Fox-Pitt Kelton.

Matthew Howlett – Fox-Pitt Kelton

Have you seen banks selling for the first part of January, we have and they have actually been buying. But do you expect that to happen throughout the course of the year if they are, they need to raise capital. Are you positioned if there is a meaningful underperformance in MBS are you positioned sort of from a leverage standpoint to handle any type of sell-off?

Stewart Zimmerman

In terms of the leverage position I think I’ve answered that a couple of times but we’re going to be between 9x and 10x, called 9.5x, that’s where we feel very comfortable. But that also gives us a lot of opportunity, if there were additional opportunities we could always bump it up a half a notch or notch of leverage if we felt that opportunity was there. Having said that, consider us levered at or about 9.5x or 10x and that’s where we’re going to be.

In terms of the supply side of it we haven’t seen any problems in being able to invest in terms of being able to see the types of securities that we’ve enjoyed purchasing for the portfolio. We are selective, we don’t certainly buy everything that we see but we’re seeing ample supply and with the potential up-limit in Fanny and Freddy securities my guess is we’re going to start to see more.

Matthew Howlett – Fox-Pitt Kelton

The asset yield side, with the reset and potentially higher prepays can we assume that’s where the 570 net yields sort of peaked and are caps an issue at this point sort of going forward? On the re-pricing, are caps an issue on the resets of the hybrids?

Stewart Zimmerman

We haven’t hit any caps or come close.

William S. Gorin

Well to the extent we’re saying that index rates are lower now, you certainly not going to be bumping into caps.

Matthew Howlett – Fox-Pitt Kelton

But presumably that asset yield would be going down, going forward given things are resetting lower and then prepays in January were up a little bit.

William S. Gorin

To the extent you’re approaching resets, but you really have very little resetting most of it is expected prepays over the next 12 months.

Ronald A. Freydberg

By the time you get to the reset you have about 10% left and that’s about it.

Matthew Howlett – Fox-Pitt Kelton

Well just going for the trajectories in sort of the [inaudible] will be going down as you add lower yielding securities on and everything sort of re-prices, is that fair to assume as we model things out?

Ronald A. Freydberg

If you’re going to model that’s true, but you should also assume that the cost of funding on that asset is going down even more.

Matthew Howlett – Fox-Pitt Kelton

On the expense ratio sort of 16 bps is that going forward sort of an operating expense to average earning asset type of modeling, or will we continue to see improvement on that end?

Stewart Zimmerman

It’s a reasonable number. We have also added some additional human resources here and we’ve done a good job doing that.

Operator

We have no additional questions.

Stewart Zimmerman

Well, I’d like to thank everybody for taking part in the call this morning. We appreciate your support and look forward speaking with you next quarter. Thank you.

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