Still Searching for Housing Bottom

Michael Herbst: Could you touch down a little bit...I know in the past Met West has been very active in the non-government mortgage-backed area, both on the residential side and the commercial side. Given some of the efforts that the government has undertaken to essentially rebuild those markets and rebuild or restore the pricing and trading in those markets, are you seeing a broad range of response in the market or a difference in response between the residential and the commercial mortgage-backed securities?

Tad Rivelle: Well, the housing market continues to struggle. That is not exactly newsworthy to anybody. Though capital markets are forward-looking, for the most part, I do not think that the capital markets have yet to feel a confirmed bottom in the housing market. And this is continuing to impact the pricing of much of the non-agency residential mortgage-backed securities marketplace. We have seen a little bit in the way of a rebound in liquidity and a rebound in return in recent days and weeks, but it is very tentative.<TRANSCRIPT>

If it carries through, the likelihood is that there will be exceptional double-digit rates of return earned on AAA assets in this particular sector. It is a very attractive area, but as we suggest, it is one that the capital markets have not yet fully embraced.

Herbst: From your perspective in terms of the attractiveness of the opportunity, it seems the residential mortgage-backed securities--because they have not rebounded to the extent that maybe the commercial mortgage-backed securities have--does that present an opportunity or is there a real danger there that the residential side might not recover in the way that people might have hoped?

Rivelle: Longer term, I think the prospect is that all of the markets will ultimately recover, that the required rates of return that the capital market is demanding in residential mortgages, versus commercial mortgages, versus corporates is going to start converging towards what it has been historically. One of the recent fires that got lit underneath the commercial mortgage-backed marketplace was the expansion of one of the government's support programs for the securitization markets, the TALF program.

The TALF program, as we know, began in March and followed an approach that focused primarily, if not exclusively, on newly underwritten type structures in auto loans and in credit cards.

It has recently been expanded to include some of the so-called legacy assets. That is to say, commercial mortgage-backed securities that were underwritten in years gone by.

Our suspicion is that to the extent to which the commercial mortgage-backed market response favorably as it has so far to this governmental program, we would presume that the government will expand its market-enhancing efforts into residential mortgages in time if that recovery doesn't occur organically.