Ready Capital Corporation (RC) Q2 2008 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the second quarter 2008 Anworth Mortgage earnings conference call. My name is Heather and I’ll be your coordinator for today. At this time all participants are in a listen only mode. We’ll be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions) Before we begin the call I will make a brief introductory statement. Statements made at this earnings call may contain forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Security Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words will, believe, expect, anticipate, intend, estimate, assume or other similar expressions. You should not rely on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors many of which are beyond our control. Statements regarding the following subjects are forward-looking statements by their nature, our business and investment strategy, market trends and risks, assumptions regarding interest rates and assumptions regarding prepayment rates on the mortgage loans securing our mortgage-backed securities. These forward-looking statements are subject to various risks and uncertainties including those relating to increases in the prepayment rates on the mortgage loans, securing our mortgage-backed securities, our ability to use borrowing to finance our assets and the extent of our leverage. Risks associated with investing in mortgage-related assets including changes in business conditions and the general economy, our ability to maintain our qualification as a real estate investment trust under the Internal Revenue Code and management’s ability to manage our growth and planned expansion. Other risks, uncertainties and factors including those discussed under the heading Risk Factors in our annual report on Form 10-K and other reports that we file from time to time with the Securities and Exchange Commission could cause our actual results to differ materially and adversely from those projected in any forward-looking statements we make. We are not obligated to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements that may be made today or that reflect any change in our expectations or any change in events, conditions or circumstances based on which any such statements are made. I would now like to introduce Mr. Lloyd McAdams, Chairman, President and Chief Executive Officer of Anworth Mortgage.

Good afternoon ladies and gentlemen. This is Lloyd McAdams and I welcome you to this conference call where we will discuss the company’s recent activities. During the second quarter of 2008 Anworth earned net income to common stockholders of $24.3 million or $0.29 per share based on weighted average of 85.1 million fully diluted shares outstanding during the quarter. This income consists primarily of income from continuing operations of $25.7 million and the $1.5 million of dividends paid to our preferred stock shareholders. Information about our balance sheet, Anworth’s portfolio of agency mortgage-backed securities at fair value at quarter end was approximately $5.67 billion and our portfolio of non-agency mortgage-backed securities at fair value at quarter end was approximately $24 million. Stockholders’ equity available to common stockholders of Anworth at quarter end was approximately $559.1 million or $6.64 per share based on 84.2 million shares of common stock outstanding at quarter end. The $559.1 million is calculated by the total stockholder equity of $608 million less the Series A Preferred Stock liquidating value of $46.9 million less the difference between the Series B Preferred Stock liquidating value of $30.1 million and the proceeds from its sale of $28.1 million. The book value per share of $6.64 also includes a negative adjustment of $0.76 per share which reflects the company’s net unrealized loss on its mortgage assets. Traded back to common stockholder equity this would be a book value calculation of $7.40 per share. Some information about the mortgage-backed securities, the agency and non-agency assets were eight times stockholder equity allocated to these portfolios. Agency and non-agency assets at quarter end was comprised of four categories, their mortgage-backed securities of adjustable rate in nature who will reset within one year, that is 16% of the portfolio. Hybrid agency adjustable rate mortgage-backed securities which will reset between one year and five years is 64% of the portfolio. Fixed-rate mortgage-backed securities is 19% of the portfolio and representing less than 1% of the portfolio is agency and non-agency collateralized mortgage obligation floating rate mortgage-backed securities. The average coupon on the agency mortgage-backed securities and non-agency mortgage-backed securities portfolios was 5.61% at quarter end. More specifically the coupon rate from Anworth’s agency and non-agency mortgage-backed portfolio at quarter end was the resetting within one year agency adjustable rate mortgage-backed securities 5.7%, the hybrid agency adjustable rate mortgage-backed securities 5.5%, the agency collateralized mortgage obligation floating rate mortgage-backed securities 3.28%, fixed rate agency mortgage-backed securities 5.79% and non-agency collateralized mortgage obligation floating rate mortgage-backed securities of 2.73%. The weighted average term to reset on Anworth’s agency mortgage-backed securities and non-agency adjustable rate mortgage-backed securities was 36 months at quarter end. The outstanding repurchase agreement balance which financed Anworth’s agency mortgage-backed securities portfolio at quarter end was $4.97 billion. The average term of our agency mortgage-backed security related repurchase agreements was 53 days and the average interest rate on our repurchase agreements was 2.55%. After adjusting for interest rate swap agreements the average interest rate was 3.49%, the average term to interest rate reset was 519 days, almost a year and a half. The prepayment of principal of Anworth’s agency mortgage-backed securities and non-agency mortgage-backed securities portfolio during the second quarter was also as follows, the one year agency category 31 CPR, the hybrid agency adjustable rate mortgage-backed securities 14CPR, fixed rate agency mortgage-backed securities 17 CPR and the agency and non-agency CMO floating rate mortgage-backed securities was 15 CPR. CPR of Anworth’s total agency and non-agency portfolio during the quarter was therefore 18%. The average cost of Anworth’s agency mortgage-backed securities was 101.22% which is increased slightly from the previous quarter. Anworth’s non-agency MBS were acquired at PAR value. Anworth’s stock price this afternoon closed at $6.02 per share. Also here with me today are Joe McAdams, our Chief Investment Officer and a Director; Thad Brown, our Chief Financial Officer; Chuck Siegel, our Senior Vice President of Finance. What we’d like to do now is turn the call over to Heather, our conference Operator, to begin the question-and-answer session. Thank you very much.

(Operator Instructions) We’ll pause a moment while questions compile. Your first question comes from Stephen Laws – Deutsche Bank Securities, Inc. Stephen Laws – Deutsche Bank Securities, Inc.: I wanted to see if you could give us a little more detail about putting money to work during the quarter. Obviously leverage came down sequentially. Can you maybe talk about with the new capital you raised what type of leverage you put that new capital work at to blend overall portfolio leverage down and what type of spreads you were able to put in place on the new capital?

During the quarter we did raise some equity capital, it was not a significant percentage of the firm’s overall capital but we did deploy it in line with our target leverage percentage as you pointed out and I think as we discussed in the last quarterly call, we had been looking to let a portfolio run off bring our leverage down during the first part of the second quarter and also some of the significant recovery in the asset values also played a part of that. A certain amount of reduction of the overall portfolio was in place late in the first quarter and into the early second quarter but as the prices declined the leverage stayed relatively high. The concept of the overall leverage target about 7.5 to 8 times our total capital is where we’re looking to maintain the portfolio. So I think it would be fair to say that the incremental capital that was raised during the quarter was deployed at sort of a similar leverage. A significant change in the leverage during the portfolio came from the improvement in the actual collateral value of the portfolio. There were no sales of assets during the quarter. Stephen Laws – Deutsche Bank Securities, Inc.: And one follow up if I may, Lloyd, you know we had the Fed meeting meet today and one descending vote but left funds unchanged at 2%. I’d love to get your comments on that overall in a bigger picture and maybe if you could share your personal views on what we’re going to see out of the Fed in your opinion here the remainder of the year.

I believe as we have discussed in the past it seems that the Fed is in a position of neither raising interest rates because of the negative consequences that would have on the housing market and reducing interest rates because of the negative consequences that will have on the current account deficit and the value of the dollar. Both of those as we all recognize quickly are very serious issues for the United States. Therefore the general outlook that I have and as I think we may discuss this some more with you is that the most probably outcome is that there will not be a material change in interest rates between now and the end of the year. I hope this is not just wishful thinking because obviously such a forecast bodes very well for Anworth as long as there is sufficient stability in the comparable markets. I’m not expecting them to have to move rates either direction materially because of the negative consequences that will have on two of the most important aspects of our economic stability right now.

Your next question comes from Steven C. DeLaney – JMP Securities. Steven C. DeLaney – JMP Securities: It looks in your controlled equity offering plan, I know you’ve put in your 10-Q that you had sold about 5.5 million but it looks like maybe you ended up doing a little more in the quarter, maybe something North of 7 million shares. Could you maybe tell us, do you have handy what your average price you were able to sell that at was for the quarter?

We filed that document which is not in the 10-Q, it’s its own separate document, the B-24 or 424 was filed the first week of July. My recollection it was between 6.5 million and 6.75 million. Steven C. DeLaney – JMP Securities: I think you increased the plan up to about 15 million shares, right?

Right. Issued what amounts to S3s prospectus supplement which is filed under our existing shelf registration statement and we had sold all the stock that was filed for in the prior prospectus supplement so we issued a new prospectus supplement of 15 million shares, that is correct. Steven C. DeLaney – JMP Securities: What do you have left in the plan?

No, there’s plan. It’s what do we have left in the [inaudible]. Steven C. DeLaney – JMP Securities: The shares, yes.

It’s not like a dividend reinvestment plan or anything of that nature which is completely separate from a prospectus supplement. I guess if we tear off the 15 and sold 6 we’re probably around 9. Steven C. DeLaney – JMP Securities: Lloyd, the spread was really I think the highlight of the quarter flowing out the way it did plus 60 some basis points. You’re nice enough to give us not only some data for the quarter but you give us some spot data at June 30. Just looking at that, it looks like your [WAC] was actually 8 to 10 basis points higher maybe at June than it was for the quarter and your repo cost swap adjusted was actually lower. It’s certainly suggesting that we should model a wider spread for Anworth in the third quarter than what you averaged in the second quarter and I was just wondering if you guys see it that way and you care to comment on that?

I’ll make one brief comment and let Joe comment in more detail. As you may recall we did not enter into a lot of portfolio restructuring in the past and many of the reductions in interest rates and you could say that our portfolio is restructuring itself now. That’s one of the reasons I think there was the rather materially high improvement in the spread. Joe, you might want to provide some details.

We talked about this last quarter, when you compare the average for the quarter versus the quarter end snapshot then I think it was fairly straightforward to extrapolate that we were going to have a significant increase in the spread from the first quarter to the second quarter. What we expect to do is walk through the same sort of mechanics I guess at this point, what you would see an average cost of funds if you turn to the page in the press release where they discuss the average repo rate, not accounting for the swaps because the swap rates are generally fixed and we haven’t seen a significant change at least in the last month on those swap rates, 2.55% was the average interest rate on our actual repos. That’s still generally the sort of area where repos are taking place. I think we’re at the point as of June 30th where the repos that are rolling over every three months or so are priced to the market now and that wasn’t necessarily the case at March 31st. What we also see is that the average interest rate including the swaps was 3.49% at June 30th and was 3.62% on average for the quarter. I do think there’s some incremental upside to the spread from comparing the snapshot to the average. I don’t think we will see a material change in our cost of funds from June 30th into this quarter because I think they were reasonably priced in and if you look at where the swap rates are, they’re not substantially different from the book that we have on at this point. I guess the question will be on the asset side. We have seen mortgage yields increase some so we’re seeing a little better in the spreads, it’s done fairly well in the quarter. We are seeing a little better yield available on the asset side and we are starting to see a few of our ARM securities now resetting with their coupons downward but not by a significant amount. I think we’re going to potentially see about 5 basis points of decrease on the coupon side of the portfolio, 10 to 15 basis points of improvement on the liability side and I think the two issues that will determine the other issue that will determine the spread will be new investments and prepayments. I think it would be fair to say we expect the spread to be wider. I wouldn’t say anything of the magnitude of the increase we saw from the first to the second quarter and then the other part of the equation would be while we are currently comfortable at our leverage ratio where it is, at about 7.5 times total investment capital, I do think that the next move we have in leverage is to start moving that up to a little closer to 8 times. I feel given the tenor of the market, given that we’ve gotten through to a good degree of a lot of the uncertainties surrounding the GSEs a few weeks ago. I think that’s the other part of the equation. That would be our outlook walking through the same mechanics that we did last time. Steven C. DeLaney – JMP Securities: One final quick thing, you’re still doing most of your repo on a 90 day roll?

That does have a slightly negative on our spread because there is a 15 basis point or so difference between a 90 day and 30 day repo. The majority of our repos we’re still doing for 90 days. On one hand all of the 90 day repos we do that have swaps associated with them our fixed costs are the same because we pay a fixed interest rate even 90 day LIBOR floating on the other side but for the half of our repo balance that doesn’t have swaps there is some incremental cost to that but it’s been our position really for the past year that by trying to push to have longer term repos if there were to be additional events concerning individual counterparties or even the market as a whole, it significantly reduces the refinancing burden we have on any given day, week or month by having it stretched out over that period of time.

Your next question comes from Bose George - Keefe, Bruyette & Woods. Bose George - Keefe, Bruyette & Woods: That was great color on the spread, I just had a follow up on that. What’s the spread on the new investments, in terms of basis points?

The spread’s always a function of one asset you buy and what tenor you can answer to. Given the steepness of the yield curve the spread well in excess of 200 basis points are available if you use short term financing versus longer term mortgage assets. In general since we’re talking in our portfolio we have a portfolio that’s 80% adjustable rate mortgages, we don’t buy hybrid mortgages that have more than five years to reset. On the portfolio we tend to have significantly less price volatility than a fixed rate mortgage. During the quarter fixed rate mortgages were down over a point in price, three one hybrids were basically unchanged and five one hybrids were down maybe a quarter to a half a point. Having significantly less price volatility it is important to us as is also having a fairly disciplined hedging process. We have a balance equal to over half of our repo borrowings hedged with swaps that have an average term to maturity of two and a half years. We have swaps all the way out to five years against some of these cash flows. And I think the fact that our book value has been relatively stable is a testament to that. That said, the mix of assets that we have been acquiring in the past and are going to continue to look to acquire, we would think that spreads tighten during the quarter, probably near the end of the quarter was probably maybe the tighter point spread wise. I think that spreads on new investments we’re making are on that mix of assets from shorter reset hybrids out to some percentage of fixed rates are still ranging from maybe 150 basis points on the low end to about 200 basis points on the high end hedged consistently with how we’ve hedged in the past. It’s a fairly wide range but when the yield curve is as steep as it is and there’s enough of a pricing difference between different classes of mortgages that’s the range you have to work with. Bose George - Keefe, Bruyette & Woods: Could you comment at all on changes in book value since quarter end?

Our book value, if you take out the dividend, would be $6.35 because it had not been declared as of June 30th. Since June we’ve seen again I think I just spoke before fixed rate securities are down a point since the end of the quarter, they were down two points during the second quarter. I think I might have said one point.

Yes.

Fixed rate securities, agency mortgage-backed securities are down approximately a point since the end of the quarter, again hybrid are down a significantly smaller fraction of that. I’ve given our portfolio I would say on the asset side we would have somewhere in the neighborhood a 3% to 4% decline in the value of the portfolio in taking our 8 times leverage roughly times somewhere in the neighborhood of a 3/8 to a .5 point decline. All of that has come through a widening versus swap rates, short term swap rates, five year swap rate is a little changed in the quarter so we have not seen a significant change in the value of our hedging portfolio. I think if you look at 6.35 as a starting point we could be down $0.25 or so from asset changes and if you look at certainly the earnings rate of the second quarter of $0.29 you would think at this point we’ve probably got $0.10 or so of the retained earnings in the book value from June 30th as well. Somewhere in the neighborhood maybe down $0.20 or so would probably be an estimate of where we stand today.

Your next question comes from Douglas Harter – Credit Suisse Securities (USA) LLC. Douglas Harter – Credit Suisse Securities (USA) LLC: I was wondering if you could expand upon your comments about what it will take to get you guys comfortable to increase the leverage from current levels, first to 8 and then back more in line with historical averages?

The dynamic that we are looking at is number one, the potential price volatility of our assets. We have obviously a great deal of comfort in the creditworthiness of our assets but we have seen price volatility in these securities. We have seen some periods back in March where we saw significant unhinging of the price relationships between agency mortgage-backed securities and other benchmarks including the swap rate that we used to hedge the portfolio. I think is generally improving although mortgages had a rough day or two, agency mortgages in general have performed pretty well, certainly have underperformed subsequent to the end of the quarter predominantly on the concern surrounding Fannie and Freddie but certainly have performed relatively well versus other asset classes. That’s one issue that I think in general is improving and the resolutions that have come about from the problems with Fannie and Freddie I think will net improve this situation for our agency mortgage-backed securities in terms of their perception in the marketplace as good quality collateral. The second concern that we continue to monitor is our counterparties and their financial strength and their willingness to continue to support their repurchase market and that there will be adequate funds available at reasonable rates and reasonable terms. I think that has been improving over the last six months although at sort of inconsistent starts and I guess related to that would be the market’s general view in terms of haircuts and the like and I think while there was some concerns originally surrounding some of the increases in haircuts in other types of securities than what we own at Anworth given that our average haircut remains very close to 5%, 5.25%, that’s a concern that for the by and large I think has dissipated. It’s been encouraging, the progress and I think it’s what has allowed to feel comfortable moving out of March and through this quarter without needing to go through any asset sales to dramatically bring the leverage down and I think we’ve been able to get down to a level where we’re comfortable and I expect to see it moving forward. But really most of the issues we are watching involve our counterparties and the market’s perception of our collateral as really not necessarily a judgment we’re making about Anworth itself. There’s lending available and the market is functioning, it’s a question of not wanting to put ourselves in a position where we overextend ourselves through an episode where the market might contract again. As we discussed in the prior question, having these longer term repos give us a little more comfort in that fact and also if we’re concerned about potential for dramatic changes in prices of the securities the fact that we have what we feel is a significant hedge position on our swaps gives us a little more comfort as well and the fact that our agency mortgage-backed securities are relatively short in maturity and have actually performed fairly well during this period versus longer fixed rates. Those are the factors. There’s not going to be I think a moment in time where we turn the switch on or off but we are thinking about an appropriate range is probably closer to 8 at this point in time so looking to opportunistically move towards that area. Douglas Harter – Credit Suisse Securities (USA) LLC: A follow up, how many counterparties are you dealing with currently and how does that compare to last quarter?

The number of counterparties is unchanged since March 31st. We’ve added a new counterparty and Bear Stearns is no longer a counterparty. The number is 14.

Your next question comes from Matthew Kelley – Sterne Agee. Matthew Kelley – Sterne Agee: Just a follow up on that question, you mentioned that the average haircut is 5% but were there any counterparties that changed haircuts during the quarter or was it pretty consistent in terms of policy?

Most of the haircut moves that took place were around the end of the first quarter and either would have been included as of March 31st or certainly included by the time we discussed it in the first quarter earnings call. If anything, we have seen a few counterparties that moved their haircut up to 5% or in a few cases actually wound up moving haircuts up to 6%, have moved them back down. I think we’ve discussed this in the past that we do tend to have a little higher haircut than we necessarily have to because of our choice to enter into 90 day repos. A number of our counterparties do have 5% haircuts with Anworth would be willing to do shorter term trades at a lower haircut. We are certainly structuring our borrowing strategy around the haircut. Given our level of leverage we feel comfortable within the full range of haircuts that are out there and plausible in the market. We would be comfortable with that range and we choose our repo strategy and our counterparties based on our perception of their strength and their rate and the terms of the borrowing and the haircut is really a byproduct. Matthew Kelley – Sterne Agee: Do you think that the counterparties that you deal with have shaken out in terms of their policies in haircuts over the last couple of weeks and months now so that that 5% is something that will be consistent going forward? Are we through the bulk of the volatility and how these are structured dealer by dealer?

I think so but we’ve had all of our repos roll over basically since the last time we talked and the policies that were in place have been in place for a while and I was not aware of any real material changes that were discussed even around the period of uncertainty with Fannie and Freddie. I thought that was generally a good sign that the counterparties seem to have had a policy in place they are comfortable with. Matthew Kelley – Sterne Agee: A question on expenses, I know in the past they’ve hovered around 1.5% to 2% of average equity or 20 to 25 basis points of assets. Are those still good levels to work with going forward?

I think probably the expense ratio would be slightly higher in 2008 largely because the compensation expense in 2007 was the lowest it’s ever been as a percentage of equity. So I think the compensation expense will be back up to a more historical level since we are providing a substantially higher level of earnings which is the primary determinant of compensation expense at Anworth. Matthew Kelley – Sterne Agee: What would those levels be, just as a reminder, relative to equity?

I’d have to get an annual report out here and look but I think you’re closer to a cent and a half. Matthew Kelley – Sterne Agee: 1.5% you said?

You’re talking about total expense ratio? Matthew Kelley – Sterne Agee: Yes, total.

You asked me historically. I’m giving you an average of a long list of numbers here that go back to 2003.

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

Just in terms of the portfolio mix going forward, can we expect a change in terms of the premium on the balance sheet and the split between short ARMs, intermediate ARMs and fixed rate given where you see value in in the MBS market today?

I think that our mix is going to stay fairly constant. We have made a concerted effort over the past several quarters of bringing our overall premium down. I guess you could say at some point when one of the concerns tilts more towards rising rates it would probably be a good time to have a little more premium as a cushion for rising rates. But at this point we’re not looking to make that shift. We have historically had between 10% and 20% of the portfolio at fixed rates. We’re at the high end of that range currently at around 19%. There are significantly higher spreads available in fixed rates than in hybrids. It’s been our position that given the yield comparisons, given the liquidity differences that owning a smaller percentage of fixed rates would be a better risk reward trade off than having a larger percentage of 7 1 or 10 1 hybrids that tend to trade much more closer in price volatility to a fixed rate. I think that we’ll remain near the high end of that range, 10% to 20%, in our fixed rate position. We are looking to continue to keep a reasonable mix between shorter reset ARMs and 51 hybrids. We’re not looking to make any change in our general investment position having the bulk of the portfolio, the 80+% which are in ARMs B five years or less in terms of lease debt. We think certainly the benefits of that have been seen over the last quarter or two and at substantially less price volatility we’ve seen in the portfolio. I think ARMs are still as a whole attractive versus a fixed rate. There have not been a lot of supply of ARMs, there’s been a significant demand for ARMs. Usually REITs are not the big marginal buyer of ARMs but there have been a significant amount of capital raised by REITs that really constrain themselves to only buy ARMs and I think that had certainly something to do with the tightening of spread that we saw during the second quarter. Having the flexibility to look at fixed rates or ARMs I think has benefited Anworth but I don’t expect that that overall mix is going to change dramatically.

One last question, Joe and Lloyd, I know you don’t have crystal balls but just in terms of the spread of 166 basis points at least twice what Anworth has done historically and what the group has done overall and it looks like new acquisitions are running ahead of that. How long do you think that spread is going to be available? Is it a permanent shift you see in the mortgage market or do you see a normalization in that spread at some point in time when let’s say liquidity comes back to the marketplace or the Fed begins raising interest rates or is this something you think could last for an indefinite period of time?

Historically the spread tends to increase during periods of time where the yield curve is steep and I think as we’ve discussed in the past some of the spread and pricing dislocations that we saw in late 2007 and then I think a certainly more rapid that might have been expected easing that took place during the first part of 2008 has moved spreads wider fairly quickly, maybe more quickly than you would have expected given where we stand in the economic cycle. I would tend to think that, and at the risk of oversimplifying it, that the short end of the yield curve that’s going to drive a decent amount of our financing is going to be a function of where the Fed’s monetary policy is and that seems to be something that I think you have to guess rates will go up at some point in the future but it doesn’t seem to be imminent. The longer the yield curve is typically driven by overall longer term inflationary expectations which certainly only seem to be getting higher. I would still think that we’re relatively early in the yield curve steepening part of the cycle which should bode well for the spread going forward, but again we’re moving just as the yield curve is moving to a point that’s probably steeper than average now, our spread is moving to a point that’s higher than average. In terms of how long it can last, I guess the first question is how long does this DPO curve last? And the second point would be that we have a portfolio that has a significant number of ARMs, has a significant amount of prepayments that are re-pricing to whatever the market yield is and we have half of our borrowings that are going to be rolling over every 90 days or so. A decent percentage of the portfolio is going to be re-pricing towards a market yield spread which I think will still be maybe at some point tighter than 160 but currently not. And the rest of our portfolio we have a series of borrowings from one year out to five years with two and a half years on average currently locked in at rates that we pay versus a portfolio of some fixed rates and some hybrid securities that have a fixed coupon. Absent of any rate change we have a significant amount of our portfolio spread, locked in I think as much as you can lock it in, and on the portion of the portfolio that’s rolling over I think there’s an argument to be made that we’re still looking a steeper yield curve going forward than we see now. Maybe some of that steepness offsets this spread progression we talk about as we move through this liquidity period. I think maybe spread the Treasuries, spread the swaps in general might get tighter as we move through this period but the steeper the yield curve I think we’ll have a counter bailing effect.

Your next question is from Shamo Sadukan – Lotus Partners. Shamo Sadukan – Lotus Partners: Can you talk about right now how much cushion you have on your agency MBS portfolio? Meaning how much would the value of those securities have to decline before there would be any sort of issues with margin calls on the repo lines?

The average leverage of borrowings to capital is about 7.5 times. So what we have is if you have 7.5 times that equity you’ve got in the neighborhood of 11% to 12% equity investment in the MBS portfolio. We have to post a haircut that’s a round number of .525% so we have almost 7% cushion above and beyond our haircut requirements. Also when the prices of mortgages change we have a balance of swaps that’s about 50% of the balance of those mortgages and there’s certainly no guarantee that the PAR value of the swap offsets the value of the mortgage-backed securities but in general the price of the mortgages are going down because interest rates are rising, we’re going to have positive market value in the swaps and our counterparties will be making margin calls to those counterparties which will tend to offset some of the price change. So above and beyond the haircut we have almost 7% equity at a 7.5 times leverage. It’s sort of minutia but it’s certainly important to us is agency mortgage-backed securities the payments are collected at Fannie and Freddie on the first of the month, they announced that there is going to be a new balance for the portfolio and it typically takes 10 to 15 days for that money to be remitted to Anworth. During that period of time just through the normal pay down on the securities we could have, if there’s a 18% CPR in the portfolio there’s going to be about 1.5% of a receivable from the two agencies and even though you’d say that’s a money good receivable because it’s coming from Fannie and Freddie, it doesn’t remove our obligation to make a margin call on the reduced principal value of our portfolio so during a week or two every month that 7% cushion is temporarily reduced by 1.5% due that prepayment. We have at times in the past when prepayments have been high been able to pledge those receivables as additional collateral against our repos but there’s no guarantee that that will be something we do in the future. So that’s sort of the full dynamic of how our general excess capital excess securities works.

I’ll add one last thing, when you look at, you can pick it up, but on our financial statement which when we file our 10-Q we will state on the second line of the balance sheet the unencumbered assets and those are the assets that are available to be used to meet margin call. Shamo Sadukan – Lotus Partners: So if you look at the situation that occurred say around the Bear Stearns time or earlier times during the last year when spreads have really blown out, in the credit crisis really panic was in the market, how far did that cushion shrink on the worst days of the credit crunch?

There was some periods where I think on a mark-to-market basis the value of our portfolio relative to let’s say previous quarter end could have been down in excess of 10% and that was back at the period of time where we had leverage a little closer to 10. Back in March during the Bear Stearns episode, we had approximately 10 times leverage, 9 to 10 times leverage, so our equity investment instead of being 12% as it is now was between 9% and 10%. Our haircuts were more in the range of 4.5% and we saw some periods where we had net of our swaps a decline of a little more than a percent. I guess you could say that Bear Stearns episode maybe used up temporarily for a day or two before the market turned around 20% to 25% of that reserve. Shamo Sadukan – Lotus Partners: Meaning instead of having a 5% cushion out of your swaps you had a 4% or 3.5% cushion, that type of thing?

I think the major concern during that period given the assets we have and some other kinds of agency CMOs and other non-agency securities have much bigger price swings during that period which would have exacerbated that exercise. But one of the concerns in the market at the time would be not so much could the price of these securities go down three or four points, but what if everyone wanted a three or four point higher haircut? That might change that equation more rapidly than an actual move in the marketplace. Shamo Sadukan – Lotus Partners: If you have term repos, the haircuts can’t be changed until the end of the term?

They cannot, that’s correct. Shamo Sadukan – Lotus Partners: Do you believe that what’s gone on with the agency, with the GSEs has basically taken the real danger scenario off the table for Anworth? Meaning if you look at two quarters ago, you were still taking down leverage, last quarter you’ve taken down leverage. If you look at what some of your big competitor is doing, [Anway], they’ve taken down leverage and now today you’re talking about taking up leverage potentially if things get a little bit better or you feel better about the market. Is that because you feel that basically with the government coming out and having a plan for the GSEs that the really difficult scenario for you where even though there’s very little credit risk on these securities, the securities fell off in the market and then you’re forced to sell assets to do margin calls. Do you feel that that scenario is somewhat off the table now or is there something else you’re seeing in the market that is making you feel like you can be a little less conservative in terms of your leverage level?

I think the concern that we would have in the marketplace would be one of a more broad scale de-leveraging than what we’ve seen so far where the sorts of entities that would hold agency mortgage-backed securities that would be financing, agency mortgage-backed security repos through their short term investments or through their repo desk, that a significant number of them might be de-leveraging even on a larger scale than they have to date. I think that’s still our concern would be one where having as high a quality asset that we have, you have to know that if there was ever a day where a significant number of Wall Street firms didn’t want to do agency MBS repo then they certainly don’t want to do any repo against any other sort of collateral in the world other than maybe Treasuries and that would be a very bad scenario for the market in general. The danger scenario is one where it becomes harder to find financing for these securities and if it were to be widespread enough that you would be caught offside by having more leverage or more repo coming through than you could find a home for, you would need to sell securities and might be selling securities into a distressed market. It was the end of March it was no exaggeration, it was the worst day for mortgage-backed securities in 15 years and it was probably also the worst day of the financing market for 15 years. I think those two things went hand in hand. There were people who were forced to sell during that period of time and that’s what made it as bad a day as it was. Shamo Sadukan – Lotus Partners: I guess what I’m trying to understand is just three weeks ago we had basically a crisis with the GSEs where people were unsure of what would happen and then the government sort of over the weekend came out with a plan to “stabilize the GSEs”. I’m just trying to understand why it is you guys are feeling comfortable, what you’re seeing in the market that would make you feel comfortable with taking leverage back up a little bit given that we just had this event just three weeks ago. Clearly you’re seeing something that would suggest that you feel a little bit better about the market now and I’m trying to understand what that is.

In our market even though we invest in agency mortgage-backed securities the events in March were a much more substantial disruption than what took place with the agencies. If you look at the moves of prices in the marketplace there was some spread widening in agency mortgage-backed securities that may have underperformed Treasuries by a point at fixed rates, but the real crisis was the complete collapse of the equity prices. Even the unsecured agency debentures, 100 cents on the dollar are an IOU of Fannie and Freddie and not supported by mortgage prices certainly widened out but not to all time wide. I think that the crisis in the marketplace was much more one of the equity market and concerns about potential liquidity issues at the agencies that I think were pretty quickly backstopped by the Treasury plan. In a magnitude the events of late March I think were much more concerning to us in terms of how far reaching the effects would be of what was going on at Bear Stearns to all of Anworth’s other counterparties. The agency issue was more a function of what’s going to happen to the price of securities, they went down some but there was no real concern from the marketplace in general or our counterparties as to the overall creditworthiness of the issues. No one wanted to change a haircut, they all just wanted to make sure they had the right price in security.

You asked what has given us some more confidence, just the entire resolution of the so called agency crisis has in effect cleared the air and what I believe I probably always thought was the case, has now been pretty much confirmed that Fannie and Freddie are an integral part of US housing finance policy in the United States and they will never not be an integral part of housing finance policy of an instrument of the United States government. So how that played out we’re not sure, but the government confirmed their important role in the future of housing finance in the United States. So that’s in itself something that can give you a considerable amount of confidence that an uncertainty that would have existed three months ago at whatever level it was to whomever, the air has cleared and it’s nowhere near the uncertainty that it was then. That’s reason to be pretty confident.

As there are no further questions in queue at this time, I’d like to turn the call back over to Mr. McAdams for closing remarks.

Thank you very much for attending our call today. We very much appreciate your attendance and we appreciate your interest in Anworth. If you require additional information, material about the company, please contact our Investor Relations office here in Santa Monica. Thanks again for your participation. We look forward to visiting with you either in person or again at our conference call about the same time next quarter. Thanks again.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.