Chimera Investment Corporation (CIM) Q2 2009 Earnings Report, Transcript and Summary

Good morning and welcome, ladies and gentlemen, to the second quarter earnings call for Chimera Investment Corporation. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. This earnings call may contain certain forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions, some of which are beyond our control, may be identified by reference to a future period or periods or by the use of forward looking terminology such as may, will, believe, expect, anticipate, continue, or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors including, but not limited to, our business and investment strategy, our projected financial and operating results, our ability to maintain existing financing arrangements, obtain future financing arrangements, and the terms of such arrangements, general volatility of the securities markets in which we invest, the implementation, timing, and impact of, and changes to, various government programs including the US Department of the Treasury's plan to buy agency RMBF, the term asset, backed securities loan facility, and the public-private investment programs, our expected investment, changes in the value of our investment, interest rate mismatches between our mortgage-backed securities and our borrowings used to fund such purchases, changes in interest rates and mortgage prepayment rates, effects of interest rate caps on our adjustable-rate mortgage backed securities, rates of default or decreased recovered rates on our investments, prepayments of the mortgage and other loans underlying our mortgage backed or other asset-backed securities, degree to which our hedging strategies may or may not protect us from interest-rate volatility, impact of and changes in governmental regulations, tax law, and rates, accounting guidance and similar matters, availability of investment opportunities in real estate related and other securities, availability of qualified personnel, estimates related to our ability to make distributions to our stockholders in the future, our understanding of our competition, and market trends in our industry interest rate, the debt securities market, or the general economy. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see risk factors in our most recent annual report on Form 10-K and all subsequent quarterly reports on Form 10-Q. We do not undertake and specifically disclaim any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. I would now like to turn the conference over to Mr. Matthew Lambiase, Chief Executive Officer of Chimera Investment Corporation. Please go ahead, sir.

Thank you, Diana. Good morning and welcome to the second quarter earnings call for Chimera Investment Corporation. I'm Matt Lambiase, the CEO and President of Chimera. Joining me on the call today are members of the senior management team, our CFO, Alex Denahan, our Head of Investments, Chris Woschenko, our Head of Underwriting, Bill Dyer, and also joining me on the call, Wellington Denahan-Norris, the Chief Investment Officer for FIDAC and J Diamond, and Managing Director at FIDAC and a Director of Chimera. We're all here today to review the results of the second quarter of 2009 and answer any questions that you may have. But before we take your questions, I'd like to make a few general comments and then have Alex review the quarter. The second quarter of 2009 was a period of impressive growth for Chimera. We started the quarter with a market capital of roughly $500 million and after the company successfully launched and priced two secondary equity offerings, we ended the period with a market capitalization of greater than $2 billion. We explained to investors in April that there were significant opportunities for the company to raise new capital to acquire non agency residential mortgage-backed securities at deeply distressed prices and that the previously announced government plans to increase liquidity in the mortgage market could potentially have a very positive impact on pricing in the future. Many investors agreed with us that the timing was right, and on April 21st we completed the first secondary of the quarter, raising $850 million. The company went to work with the intent to prudently and carefully invest the new capital before the government's efforts became more clearly defined and while the market for residential mortgage-backed securities remained illiquid. Fortunately, after raising the capital we were able to take advantage of a wave of selling of RMBS from overseas banks and in short order, we were able to invest the capital into a higher-yielding portfolio. The income from this new portfolio allowed us to declare a higher divided for the quarter, an impressive fact when you consider that we more than doubled the share count and started investing later in the quarter. In May, the government delayed their announcement of the public-private investment partnership for legacy securities. We were still finding very attractive investment opportunities and being fully invested, we took to the road to raise more capital in order to continue to develop our portfolio. On June 2nd, we completed a $612 million capital raise, and I think it's important here to note that both secondary offerings that we priced in the quarter were beneficial to existing shareholders. They were accretive to book value and to earnings, they expanded our shareholder base, and increased liquidity for the shares. With the new capital we continue to be successful, finding deeply discounted non agency bonds, and I'm happy to report that all the capital from our latest secondary offering is now fully invested. Being fully invested, the company is now executing on its plan to add structural leverage to its new portfolio, utilizing re-REMIC resecuritizations. These transactions do take a significant amount of time and effort to structure and to market with the goal to increase the return potential of the portfolio going forward. We have been fortunate again that the government has announced the details on the PPIP for legacy securities just after the close of the quarter. This announcement, as expected, has had a materially positive on the prices of non agency mortgage-backed securities and has helped us in remarketing our re-REMIC transaction. The early results look promising and should be more evident in robust earning profile of the company in the quarters ahead. And with that, I'll turn it over to Alex.

Chimera reported core earnings for the quarter ended June 30th of $48.9 million or $0.10 per share. Core earnings is a close approximatively for taxable earnings out of which we pay our dividend. We declared a dividend for the period of $0.08 per share, producing an annualized dividend yield of 9.17% based on the June 30th closing price of $3.49. Our book value at June 30th was $2.90. As opposed to core earnings, we reported GAAP net income for the quarter of $51.6 million or $0.10 per share. At June 30th, Chimera is levered one to one. Our portfolio at June 30th is comprised of $4.1 billion and is weighted to be approximately 55% non agency RMBF, 34% agency RMBF, and the remaining in securitized residential mortgage loans of high-credit quality. During the quarter we purchased $2.7 billion of new investments with the proceeds from our secondary offerings completed in May and June. We also sold $84.6 million of our investments and realized a gain of a little over $9 million. At quarter end we recorded an other than temporary impairment of our assets in the amount of $6.5 million on assets currently cash flowing as expected. Our annualized yield on the portfolio for the quarter was 6.83% and the annualized cost of funds was 2.4%, providing an interest rate spread of 443 basis points. As of quarter end, 1.05% of the balance in the securitized loan portfolio is greater than 60 days delinquent and 0.49% of the $531 million in secured loans is in some stage of foreclosure. We have recorded a provision for loan losses of approximately $3 million and have not recorded any charge loss against our reserve balances. At quarter end, Chimera had financed $1.5 billion in repurchase agreements, of which $123 million is with Annaly, and is collateralized by non agency RMBF. The remaining $1.4 billion of repo agreements is with other counterparties and is collateralized by agencies. At this time I will turn the call back over to the operator and we will answer any questions regarding this release.

Thank you. The question-and-answer session will begin at this time. (Operator's Instructions) And we have a question from the line of Douglas Harter, Credit Suisse. Please proceed.

Thanks. I was wondering if you could talk about — you said you're fully deployed, but it looks like the leverage on your agency book is very low — sort of the ability to add leverage there and redeploy that capital?

Yeah. I think that you're exactly right. The leverage on our agency book of business is low and it's purposely such that we're employing enough leverage to satisfy our whole pool test and it's really not the prime driver of earnings and the strategy. We think that the purchase of the mortgage credit is where we're going to look to have our earnings come from.

And is that something you would think about taking up, because if I remember, last quarter you had said you would think to be in sort of the four to five times range, which would still be low relative to the sort of Annaly?

It does move around and that is just a snapshot in time and I think it could be slightly higher next quarter or slightly lower. It's what we need to meet our whole pool test.

Great. Thank you.

And we have a question from the line of Steve DeLaney, JMP Securities. Please proceed.

Good morning, Matt. I'd like to start by thanking you guys, and I guess Alex particularly, for the new details on the portfolio that you put in the press release. That is very helpful to us. Thank you for that. We noticed that the Annaly repo dropped pretty significantly, and I guess my question is simple, did you decide to move collateral to the street or did you simply use cash reserves to pay that down?

Steve, that is a good catch. The Annaly repo did go down in the quarter. We raised the $612 million on June 2nd and the first thing we did was pay down our funding and then we're bringing it back up over time, and we haven't to date moved any of the funding around. Although things have been offered, we just don't feel that there are enough good counterparties out there right now, but things are starting to percolate even in that lending market.

Sure. And keep in mind that agency cost of funding is cheaper than non agency cost of funding. So if I put my repo out with the street, my agency is out with the street, and it reduces my cost of funding. And also keep in mind that my assets are not fully settled at quarter end.

Right, got it. You definitely have it — we noticed you had a payable what — some $200 million for a bonds purchase. And as Douglas pointed out, you've got a lot of liquidity flexibility in your agency book. Matt, you alluded to re-REMIC conceptually, there was nothing in the press release. It sounds like you're working on some things, but did you complete any transactions in the second quarter and can you confirm that? I think in one of your prospectus supplements — I can't recall whether that was the first deal or the second deal you gave us some disclosure — I think that was a first quarter transaction though.

Yeah. That was a first quarter transaction. We did no re-REMIC securitizations in the second quarter and obviously these securities are complicated, they take time to market, and they are in gestation right now with us so we'll obviously have disclosure when they come around in the future.

Great. And when you do, because that is an evolving source of leverage, I guess you will decide on that time, based on materiality, whether you want to inform us per an 8-K or whether you just want to wait for the 10-Q.

Yes.

Yes.

Okay. And then I guess in line with that — I just said thank you for the data and now I'm going to suggest one other thing (laughter) — because re-REMICs are a new beast for a lot of us out here — we're learning about them pretty quick. The A2 bonds obviously have an entirely different yield profile and cost basis so I just would suggest as that becomes a more material element, maybe we need another column of asset class so that we don't have the A2 yield just mixed in with the super seniors.

Absolutely. We're looking at that.

Okay. Thanks, folks. I appreciate it.

We have a question from the line of Stephen Laws, Deutsche Bank. Please proceed.

Great. Hi, good morning, thanks for hosting the conference call. A number of my questions were hit on by the first couple of callers, but could you talk about any scenario where you would look at recourse leverage on the non agency assets or is that simply not something that you're looking at doing anytime in the near future?

I think that those markets, the borrowing markets for non agency mortgage backed securities are coming back. You're starting to see more interest from people whether they want to sell securities and offer financing or offer financing at relatively high rates, you are definitely seeing interest now. For us, I think that we're comfortable where we are with our leverage, and until we see a much more robust market for lending, I don't think we're going to change our leverage stance on the non agency assets any time in the near future unless we see a lot of people come in. I think the TARP announcement would be beneficial to having more players come into the market and have more fundable funding. One of the things when you borrow money against non agency assets and they're rolling over is the ability to move them to another dealer, if you don't like the rates and the terms that you're being quoted. And right now you have one or two or three people looking to put assets on and you don't have a very robust market, and we need to have more people involved in the market before we're going to feel comfortable moving our stuff out of where we have it financed right now.

Alright. I guess in the marketplace for valuations and liquidity, could you maybe talk about what the market's like today versus what it was like that led to the decisions to raise capital, I believe it was in April and June? Can you talk about the changes in the market environment you've seen in the last three months?

Yeah. I mean it's generally improved, different sectors have improved by varying amounts. But in the areas we're focusing it's probably a couple hundred basis points better.

Okay, great. Thanks a lot.

We have a question from the line of Joe Stieven, Stieven Capital. Please proceed.

Good morning. First of all, good quarter. I don't know if I heard you correctly or not, but I think you said you are now fully invested, and I didn't know if that came after the quarter or at the end of the June quarter, so that was question number one. And then question number two is, if there is a difference between being fully invested than what you were at June, could you sort of tell us where out on the balance sheet there are changes?

Well, I think we were very close to being fully invested by the end of the quarter and there's nothing significant — I don't think that there's anything really materially significant.

No. The unsettled trades will not change the asset mix and so what you're seeing on the balance sheet is substantially where we are today.

Okay. When I heard you I just didn't know if you were trying to imply that there were some changes. Thank you.

We have a question from the line of Henry Coffey from Sterne Agee. Please proceed.

Yeah, good morning. The questions get more interesting as they get down the load — I do appreciate the disclosure as well. Your whole loan business was an important part of where you started awhile ago and obviously it's a better yielding asset that helps you with your whole pool test. Are you looking at the whole loan market as you look at agency opportunities or is that just off the table for now?

Yeah. I mean we're looking at it all the time. The arm is just upside-down right now.

Meaning?

You can't buy loans and securitize them at a profit.

What about just buying and holding the asset?

There's really not that much paper available. Well, I mean if you look at loans right now, at least the loans that we've been purchasing in the past have been high credit quality, recently originated jumbo prime mortgages, and those mortgages are being originated by the major banks and they have them in portfolio. They generally have coupons between say 5.75%-6.25%. They would happily sell me those loans at par, I think, right around now. I cannot securitize them in this marketplace. If I were to buy a package of them I would have to pay on the AAA bonds, probably 8.5%-9% yield, so I would lose money on the transaction. And to hold them for cash doesn't make any sense when I have securities that I can buy in the teens.

But what about stepping into the distress side of the whole loan business?

I think right now, the opportunity for our company lies in buying the securities that we've been doing. I mean, right now the best opportunities in the mortgage market are buying these deeply discounted priced once AAA RMBS bonds. They have, I think, a tremendous return profile when you hold them for cash and I think if you can add leverage to them through re-REMIC transactions, they have a tremendous amount of potential that far outweighs any other investment in the mortgage market.

We've sort of been operating under the assumption that eventually, or if it isn't eventually, hopefully it's happening as we speak, banks are going to have to start getting rid of these once AAA rated assets, but we haven't seen a big flood of that yet. You're closer to it than we are obviously —

Yeah. I think over time we are definitely going to see that market come back and we will definitely be in a position — we have Bill Dyer and his team of people here to evaluate and underwrite residential mortgages and I think that the mortgages being underwritten today are probably the best quality mortgages seen in certainly a generation. People who are getting mortgages today are being asked to get two appraisals on a house, document three years of their income, and put down quite a bit of money as a down payment. And you put that together — nobody wants to make a bad loan during a credit crunch, and if we have the chance to securitize them and do it profitably for the company we would certainly buy the credit that's being originated today.

What about banks being forced to get rid of their formally AAA rated stuff, is that —

That is part of the business that we're involved in today.

I mean has that started to accelerate or is that still —

No. I think it's been a constant drip into the market. As these bonds, the residential-backed securities get downgraded, banks have to move them from their health and maturity to probably a home for sale account and they have to hold a lot more capital against the bonds and they are choosing to sell them and they have been the net sellers, I think in the market, from which we've been buying, although we're not doing it directly as we're doing it through brokerage firms.

But it's more of a drip than a flood is kind of how you put it?

Yeah. I think so.

Thank you.

We have had obviously no problem finding securities and putting them into the portfolio over the last quarter.

Well, thank you very much.

You have a question from the line of Bose George, KBW. Please proceed.

Hey, good afternoon. I had a question on — you gave me a portfolio yield at 14.85 at quarter and I was just wondering how that's calculated — can you just aggregate that between the cash return and then the accretion that goes into it?

We don't just aggregate it. The yield is the snapshot at the end of the quarter and it is on — you're looking at the non agency book. That is the weighted average yield on the non agency book at 6:30.

So I mean is that calculated just say the coupon is X and based on the fair value of the security?

That is a loss adjusted yield based on your purchase price and your expectation of future cash flows on that bond — it's a loss-adjusted yield. So if I'm buying at a discount it's taking into account any principle losses I'm expecting on that bond as well as my coupon income I expect to receive back.

So there is a coupon plus some other —

In the case of my non agency portfolio, plus accretion of discount.

Okay. So I was just trying to see if there was no way to really separate those two numbers, is that —

Separate the yield from the coupon?

Yeah, the coupon from the discount that would be returned.

No.

Okay. Then just I wanted to followup on the Annaly repo line, I just wanted to clarify, so is some of that going to be funded again through that line? I wasn't clear the way you responded to Steve's question.

The repo line with Annaly is the same line we have had in place, same after repurchase agreement that's been in place since September of '08, and we can take that balance up or down at the discretion of Annaly whether it's a credit choice for Annaly and right at this time, Annaly's comfortable with the assets that it's financing. Now typically when you raise capital, the first thing you do is you pay down your repo to avoid that cost and so we do pay down that repo right away, and especially since it's non agency, it's a higher cost of funding than my agency book. So, typically Annaly is the first counterparty I pay off when I have cash.

But it's fair to assume for us, for modeling purposes, that those assets can be funded going forward?

Yes.

Oh yes, absolutely.

You have a question from the line of Andrew Wessel, JPMorgan. Please proceed.

Hi, good afternoon. Just a question about opportunity, what you're buying in the market right now. I mean it seems like the loss-adjusted yield you've stated is maybe kind of in the middle to the lower-end of the range that I guess people are expecting in the market. So in any case you've bought a lot of senior level prime jumbo securities, is there kind of a need at this point to kind of start looking lower on the credit spectrum for the securities you're going to purchase to find the same kind of deeply discounted valuations, or is there still, do you think, a lot of opportunity in the prime kind of credit quality area where the risk-adjusted returns are still attractive kind of mid-teens level?

We didn't really buy any prime paper. I mean, most of what we bought was more sort of all day time paper.

And today are you still seeing the same kind 14%-15% loss-adjusted yields there?

Yes. Maybe a tad lower, but that's in the ballpark.

Okay, thanks.

We have a question from the line of Neil Shyer (ph), private investor. Please proceed.

Thank you so much for taking my call. My questions are essentially follow ons to what has already been asked so please bear with me. Is there any thought about how long this current spread can be sustained? It was really eye popping when I saw it. It was really astonishing when I saw it.

Well, the deeply discounted securities that we're buying have fairly — Chris, what do you think the average life —

Four or five-year average lives.

Four or five-year average lives on the securities — and I would say that we added the securities over the period of the quarter and you're going to see that spread I think remain live for a very long period as a security stay outstanding.

Great. And then my second question, and again it's sort of a followup to what's already been asked, and that is the current leverage ratio is also a remarkable one to one. There is no thought towards that going down, am I correct?

Like the spread and the leverage, those are all kind of the moving parts of the strategy and if we find good leverage, if it's TARP leverage from the government, we'll certainly utilize it from the government and take advantage of it. If we find great investment opportunity that might be slightly lower yielding and we think it's the right choice to make, we'll take advantage of that as well. So those are kind of the moving aspects of the strategy.

Okay. Once again, thank you so much for taking my call.

We have a question from the line of Jonathan Vyorst, Paradigm Capital Management. Please proceed.

Yeah, hi. I just wanted to ask you a quick question about your average cost versus fair value at the end of the quarter. Where is that coming from and that's on the non agency side?

Are you asking how am I calculating weighted average cost?

No, no. Is this due to securities that you've purchased after your two offerings or are these legacy securities that — because basically you're under water on the securities, so why is that?

Right. There is a portion of the portfolio that was purchased in 2007 and the cost of the non agency portfolio was significantly higher, and so what you're seeing is a blending of the legacy portfolio with assets that we purchased in May and June at very different cost bases.

Great. So in the purchases that you did in May and June, what do you think your cost versus share value is?

We wouldn't disclose that at this point in time, but you should assume that, as Matt said earlier, that market's moved a little since May and June, but not anything significant, so you should assume that the securities that we purchased recently shouldn't have very much a movement between their mark and their call.

Yeah, okay. And is there a difference between the two — basically was the first offering and security that you purchased after the first offering more favorable than the second or vice versa?

Very similar.

Okay, great. Thank you.

We have a question from the line of Papa Kasta (ph), Locust Wood Capital. Please proceed.

Our questions were asked, thank you.

Thank you.

We have a question from the line of Jordan Hymowitz, Philadelphia Financial. Please proceed.

Thank you very much. Two questions, first going back to Bose's question, you guys must know what the yield on cost is. I mean if there's no accretion of discount, what is the current yield of what you're buying on the cost basis?

Are you asking me to provide the yield on a cost basis?

Yeah. I mean it must be available. I mean, maybe you didn't understand Bose's question, but on what you're buying today, what is the yield on cost of what you bought in the quarter.

The loss-adjusted yield is what —

No, not loss adjusted because you could say the losses are going to be anything from zero to everything, but on a cost basis of what you bought in the quarter, what is the yield on what you're buying?

What I'm saying is that we do not disclose that information. I am disclosing a loss-adjusted yield on the portfolio.

But the loss-adjusted yield is very subjective as to what you think losses are going to be. I mean you could just — the variants could be ginormous (sic.) depending on your assumptions for losses, but we know what the actual cash yield is on that basis, can you disclose that?

Not at this time.

Jordan, losses have to be taken into account, this is Wellington here. And again, all the yields would be presented based on what we paid for them, not based on where they're marked.

That's what I'm saying, yield based on what you paid for them.

Yeah. I think what you're asking is how much of the yield is coming from coupon and how much is coming from discount accretion?

Correct.

You have to figure in a loss-adjusted accretion because part of that coming back to you contains losses, you can't ignore it. And yeah, you have to make assumptions. And you could assume that there's nothing, which I think would be very foolish, or you can assume a reasonable loss-adjusted return.

But as a baseline, you get what the return is on a cost basis and then we can all make our own assumptions.

But on your baseline you have to figure that you have a certain amount of losses baked into that. You can't ignore it.

Okay. My second question is that you made a very interesting comment that buying loans at this point is not nearly as advantageous as buying securities given that there's no market to resell those loans in the secondary market if things improve. Is that a temporary thing in your mind, because obviously there's many IPOs in the market today that are saying just the opposite, so I was interested in your viewpoint there.

Well, there are IPOs in the market for prime jumbo paper.

Alright, it's tough to know what they're buying and without mentioning names —

I would think that the prime jumbo paper, at least the paper, the mortgages that we purchased in the past, there was no efficient way for us to securitize them or for anyone for that matter, to buy them from the banks that are originating them today at par and then try to sell them as securities, at least the senior partner securities, you'd have to do that at a much higher interest rate than the coupon on the underlying mortgages which means you're going to take a loss doing it. I think it's temporary. I think it's one of the issues that the government is trying to address with all its liquidity programs. They want to get this back into kilter and one of the reasons why the primary securitization of mortgages is not working right now is because there is this giant overhang in the secondary market, the one that we're buying all these deeply discounted mortgage-backed securities. Once that is cleared up and secondary mortgage-backed securities start trading at more normalized levels, you will see the primary market come back online and it will be profitable for us, I think, in the future, to do that. But right now, it isn't.

Okay, very interesting. And let me just go back, if I ask if this way, could you give the cash-on-cash return of what you're purchasing, because that you should be able to figure out from the cash flow statement?

I think what you're trying to back into, you can derive a close number from, from the information that I've disclosed in the press release. I think if you use the weighted average cost basis and the coupon that I've disclosed, you should be able to get a feel for what the cash-on-cash yield is on that security and then you should be able to see the difference between the loss-adjusted yield and the cash-on-cash yield should give you your accretion of discount. And I think you should be able to back into an idea of what you're looking for.

We have a question from the line of Patrick Donnelly, Blackrock. Please proceed.

Hey, guys. This is more of a statement than a question — well no, it's a question I guess. In terms of capital, now that you're fully deployed, what are your thoughts in terms of capital and where you're going to procure that capital — either through additional equity raises or through levering up? And to give you my two cents, we're of the mind that we'd much rather see you guys lever up and procure capital that way because it's more cost efficient, if you will, and quite honestly, investors like ourselves can get a sense as to a clean quarter in Q3 and see how well the earnings accretion play out from your previous raises.

Yeah. Thank you, Patrick. I think we're in the process right now of trying to optimize the portfolio and that's front and center on our plate and I appreciate your comments.

Okay, good. And then another statement, which is kind of more technical, not exactly fundamental, but I think we've talked about this in the past and that's in regards to getting that stock price up via a reverse split, and it's kind of a silly thing, but from my perspective what it does is relieve the connotation of risk that a sub $5 stock conveys to the investor base, and quite honestly I think it keeps away some retail investors that look at a sub $5 stock with a big dividend yield and say yuck. If you get that stock price where — I don't know, again, a reverse split gets it up $10 and whatever, it just gets more attraction from a wider base of investors in my opinion.

Well, I appreciate that. It is something that we do consider and we'll look at it going forward.

Yeah. We certainly hope the fundamentals, the earnings power of the company will do it without, "chemistry."

We're going to get to 10 bucks in the next 12 months (laughter) (interposing)? Alright. Thanks, guys.

Thank you.

And we have a question from the line of Peter Holman (ph), Parkman (ph). Please proceed.

Hi. Thank you very much for a terrific quarter, and I for one appreciate your conservatism in the way you report loss-adjusted yields, et cetera, so thank you very much for a good quarter. I only had one question and that is the $8.5 million, for instance, non temporary impairment charge — I read through the release and I didn't think I saw a description of what that was. I presume that's noncash, but can you describe to me what it is?

Absolutely. Under FASB 157, there is a new guideline for how you calculate and record other than temporary impairments. So during the quarter I had some securities, largely related to one deal to a securitization that Chimera affected, that although the deal itself did not have a single delinquency since its inception, we have to model what we think the potential losses will be over the life of those securities. And so I cannot reasonably say that I don't expect any losses to come through on the securitization, because I do expect at some point there is going to be a loan that goes bad in this yield — So because when I model going forward that there is going to be some potential losses and that loss is in excess of where I'm holding my sub piece, I have to recognize a loss in my income statement and take it out of unrealized losses. Now, that does not mean that I have experienced a single loss on those, I have not. So it's moved from other comprehensive income which is an unrealized loss to a realized loss. So the actual impairment that are recorded is the $6 million that you see. The difference between the six and the eight, the $2 million, is the remaining unrealized loss position that is still on those securities in my portfolio.

And just as the estimation of the impairment is your best estimate, if market conditions change, you could decide or it could become clear to you that the charge you took in this quarter was in excess of what is likely to happen and there could, in some future quarter, be a non temporary reverse of impairment?

Well, actually no. You can take the unrealized gain in your other comprehensive income, but you don't recognize the gain in your income statement. So it only goes one direction.

But it is noncash?

It is noncash and it doesn't affect your dividend because it is a noncash GAAP adjustment.

Okay. Listen, that's great. I appreciate it.

And we have a question from the line of John Sights (ph), Sterne Agee. Please proceed.

Hi. Good morning, everyone. I have a quick question, Chris, for you, regarding the structural leverage you're able to obtain right now. I know given the difference in collateral and a lot of the deals, if you were just to assume just kind of average severities and CDRs for the portfolio, what kind of leverage do you think you'll be obtain through a re-REMIC?

Probably somewhere between 60-40. 50% super senior, so that is a guess.

Okay, understood. Thank you.

There are no further questions at this time. I will turn the call back to Mr. Lambiase.

Thank you, operator, and thank you all for participating in the call today and we look forward to speaking with you in the fall. Thank you.

Ladies and gentlemen, if you wish to access a reply for this call you may do so by dialing 888-286-8010 with an ID of 49820576. This concludes our conference for today. Thank you for participating and have a nice day. All parties may now disconnect.