Question-and-Answer Session
Operator
Thank you. [Operator Instructions].
Our first question is with Richard V. Shane with Jefferies and Company. Please go ahead sir.
Richard V. Shane - Jefferies & Co.
Larry, thanks for taking my question. I’m going to ask you to try to relate a bunch of different numbers here. When you gave the mid quarter update, you talked about the fact that you could get spreads of at least a 125 bips. Would you describe this primarily AAA super senior backed ? super senior mortgage backs? And if you can tell us, give us an update of what you think that is right now? And then also put that in a context of the 40 plus basis points that you think you are going to get on ?for spreads on originated mortgages and also ultimately put that in some context? Is it normally?would you normally expect to see that widespread between mortgage spreads and security spreads?
Mr. Larry A. Goldstone - Co-Founder, President, Chief Operating Office
Well actually its not so much. There are a whole bunch of things? there’s not so much the? its not so much that there’s a wide spread between mortgage yields and loan yields. It’s more that there is a divergence in financing alternatives available to the Company. So for example, if we were originating or buying mortgage assets ?either buying securities or originating loans, securitizing them to hold in our portfolio and we were electing to finance those in the reverse repurchase agreement market and we were going to hedge the interest rate risk of that portfolio. Using interest rate swaps, we would be realizing spreads between 90 and a 160 basis points depending upon what we were seeing there.
In an earlier version of this release and I’ll put it out there because I think its there, security spreads in that financing structure would be 90 to roughly 140 or 150. Loan origination ?securitized loan spreads would be more like 125 to 160. And so ?but again that is all predicated on obtaining our reverse repurchase agreement or other short-term financing and hedging those assets in the?using interest rate swaps.
Everything that we have acquired up to this point in time ? new assets have been acquired at spread in excess of the guidance that we provided of a 125 basis points net spread. So, all of the securities that we bought in September timeframe ? we haven’t bought a lot, but we bought some and in October have all been executed at spreads greater than 125. But I think we’re trying to give investors a range of what’s out there. Spreads have tightened to some extent in the securities market from where they were; certainly in August. We were not able to participate in some of that, in some of those spreads but at the end of the day, I think that the 1.5 point estimate is still accurate and achievable in this market environment.
The other financing strategy is to securitize our loans in permanent financing structure and obviously we have a desire to lean more in that direction. The returns that we’re seeing today are lower than what we had anticipated a month or so ago, but still in the context of a risk adjusted return perspective they are pretty attractive. Number one, is permanent financing not subjected to roll over risk or margin call risk, secondarily in the context of securitization transactions that we are doing today, they are fully hedged. In other words we are issuing fixed-rate securities that have cash flow and amortization characteristics identical to the underlying mortgage loans. So there’s no potential or any sort of mismatch between assets and liabilities with regard to those structures. So the risk adjusted returns whether the performance of those securities going forward ought to be very, very attractive.
We have only done one securitization transaction in the quarter, we some indications of where we can get a securitization transaction done today, and we believe that a range of 30 to 40 basis points is a fair assessment of what kind of spreads we can get today or at least a conservative assessment. Beyond that we have, we believe that credit enhancement levels for our collateral are beginning to come down. They are proven, that will be a benefit going forward. In the
August transaction I believed that we had subordinate classes or credit enhancement level to AAA of approximately 4.5% of the loans outstanding, and I believe that if we were to do a transaction today that number would probably be 80 to100 basis points lower. So we can achieve more subordination or less subordination and more leverage in those transactions on the going forward basis. And again, I don’t think we've got any concerns about loan quality.
I think probably one of the things that has surprised us more than anything else is the competition from some of the major money center banks, in the mortgage or loan origination business that we've encountered over the last couple of week as we’ve come back into the mortgage origination business.
Some of the largest banks appeared to the buying market share on a very aggressive basis. We’re not quite sure what their motivation is, but we clearly don’t understand where their generating profitability from where they trying to originate mortgages, and we have responded, because we still think that a 14% to 17% return on equity on a fully match funded basis, is a very, very good strategy going forward. So does that answer your questions, Rick?
Richard V. Shane – Jefferies & Co.
It does, I guess the one follow up to that is, So you’re basically saying that subordination levels are down 80 to 100 basis points. Does that mean you are?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
From August.
Unidentified Analyst
From August. Does that mean you are assuming that you are going to hold the AAs and below or do you think you are going to able to sell off some of the AAs as well.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Our anticipation going forward is that we will hold the AAs and below. We have been able to negotiate financing for all of the subordinate classes below AAA so the strategy that we are anticipating going forward is that we would sell off the AAAs, account for them as a financing and finance all of the AA and lower rated classes. So, that actually does provide some additional leverage in the context of the transaction.
Unidentified Analyst
And I apologize for taking so much time, but how do you, what is the financing you have arranged for the AAs and below?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
It is reverse repurchase agreement financing. I think it’s probably pretty obvious where we going to get that but obviously we have under writers who want to issue securities for us and in our securitization, rotation and they all have the capacity to provide financing and so that’s part of the deal.
Unidentified Analyst
Got it. Thank you very much.
Operator
Thank you. Our next question is with Paul Miller, with FBR Capital Market. Please go ahead sir.
Paul Miller - FBR Capital Market
Thank you very much. Clay, Larry. You know on the additional $236 million loss on the $5.5 million securities that were taken away. Is there any more potential loss on those securities and if there is, can you tell us why?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
We don’t believe that there is any additional potential loss and it’s principally because we have been diligently working on trying to reconcile all of those sale transactions. The majority of the problem, that we ran into and the reason that we had to come up with a revised loss estimate, a week or so ago, was because our ability to obtain pricing information, sale tickets in some cases some of those assets were not even sold. They were just mark-to-market and confiscated in some cases but the back cash statements were not achievable, we did not know where proceeds were going, there is still P&I outstanding so there is just been a? I think that there is an assumption and certainly before August I would have made the same assumption. The assumption that I would have made was, Gee, These are all securities and they are going to be sold and we are going to get sold in the same day and then somebody is going to turn over a trade confirmation the next day and the company is going to book the sale and that’s going to be the end of it. In the normal course, that’s the way things work. In a course of declaring entities into fault against borrowing agreements, confiscating collateral, liquidating them in all sorts of ways, confiscating collateral not wanting to disclose where they sold things. We have found that the finance counter-parties that put us into the fold to be highly uncooperative and they were uncooperative for the better part of last now two months. It was not until last week that we thought we had hard enough fix on just exactly what the revised estimate was going to be, the numbers were still moving around substantially and we did not believe that we wanted to put out multiple revised estimates because that’s likely would have happened, had we done something different. So, but we believe that we have now reconciled that the lion’s share of the items we believe we know, what the un reconciled items are and so we don’t anticipate any additional revisions to those estimates going forward.
Paul Miller - FBR Capital Market
And then the other question is, your duration which was I guess 10 months and correct me if I am wrong that usually runs closer to one month or two months. How long will it take you to get it down to that level again or you are comfortable with the 10 months duration this match between your assets and liabilities?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
I think we are comfortable with the10 months right now. We have a policy that suggests our portfolio duration be less than one year. So the lion’s share of the majority of the last several years, dating back to 2002 or 2003, we have been operating with the portfolio duration of roughly zero, give or take a couple of months but it’s been very, very? it’s been essentially neutral duration. However if you look back to the 2000, 2001 timeframe. The last time that the Federal Reserve Bank was actually reducing interest rates, we had a portfolio duration that was roughly 10 months or 11 months. We do have the opportunity to extend our portfolio duration to opportunistically take advantage of declining interest rate environments and I got to say that today I believe that we are in a neutral to declining interest rate environment as opposed to a positive or rising interest rate environment and that will if we are right about that that will have positive benefits for our portfolio spreads on a going-forward basis.
Paul Miller - FBR Capital Market
Okay. Thank you very much Larry.
Operator
Thank you sir, our next question is with Jim Delittle [ph] with Cambridge Place [ph]. Please go ahead.
Unidentified Analyst
Good morning. In past when people asked you questions about what was relatively high leverage for the industry, you always and appropriately so pointed to the relatively? I mean relatively the absolutely wonderful credit of the portfolio and yet in a liquidity crisis which we just went through, I mean that wasn’t the insurance we would have hoped to have been. I look at your suspending the dividend for liquidity saving reasons as sounds like a brilliant idea but it does also seem a little bit inconsistent, the way they run in the press release, you basically are maintaining a leverage of 27 times and I wondered may be you, could you address that seeming inconsistency?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Sure. I am not sure of that term you are interpreting our balance sheet quite the right way.
Unidentified Analyst
I am just reading the press release where you say 27 times leverage is the amount of leverage that we can obtain by securitizing our mortgage loans and permanently financing them in a securitization structure and there is no margin exposure or liquidity exposure to that securitization structure. So it does not use or require any additional liquidity or cash on a going forward basis. It is permanently locked in financing and it is not subject to margin calls or mark down to prices because collateral values change. So that is simply a strategy and in fact that part of our balance sheet which is the $21.6 billion of ARM loans that are collateralizing debt is up for reference our balance sheet, all of those assets are permanently financed and not subject to any liquidity event. I believe that we are referencing in our press release with regard to the dividend is the fact that there is uncertainty in the margin segments of the market potentially. We could see further, if in fact the structure investment vehicles which is I believe the biggest unknown that we have right this minute, if in fact the $350 to $400 billion of mortgage securities that are currently being held in the structured investment vehicles has to be liquidated or even if a material percentage has to be liquidated, that is going to likely put downward pressure on mortgage securities prices and widen mortgage security spreads in the near term. While the market tries to digest that collateral and that is the concern that we have and we want to preserve our liquidity in the event that we see securities prices decline. We have about $11.5 billion maybe $12 billion of our balance sheet currently financed with financing that is based upon the market value of assets and that is what we are trying to protect. At least in the near term. We believe that the structured investments vehicles will get results. I personally believe that they will get results in a favorable fashion because I think that the consequences of non- government, non- banking intervention would be disastrous for the entire market, beyond what we even saw in August potentially. But I believe it will get resolved it is just that there is some potential that some folks have tired of the banking sector, could end up being forced liquidators and by the way I have been told that 80%... roughly 80% of the collateral that is owned by these structured investment vehicles on mortgage securities that are not backed by prime mortgage assets. In other words it’s all pay in sub-prime. So, the valuations that they are going to get if in fact that collateral has to be sold, are going to be pretty awful. So, that’s kind of where we come from.
Operator
Thank you. Your next question is with Bose George. Please go ahead with you question.
Bose George - Keefe, Bruyette & Woods
Hey, good morning. Actually I had a question on the 65 basis point normalized spread that you gave. Did that make an adjustment for the swap gain this quarter and the fact that, that reverses over the course of next year?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
It does not. It is really just a look at what at where we are going to be starting the fourth quarter is really what we’re essentially trying to do. That is kind of where we start the fourth quarter. We do have a swap benefit in the fourth quarter, we have a smaller swap benefit in the first quarter. We’ve tried to outline all of those. But our expectation is that, as we buy? there are going to be increases in our portfolio yield as well and so we are optimistic the spread can be actually improved from that level going forward. But all we are trying to do is give an indication where we think the starting point is going forward.
Bose George - Keefe, Bruyette & Woods
And switching to your repo funding; actually where the hair cuts move from fact before August and move to now and what does that do in terms of your targeted adjusted equited assets going forward. Like what level of capital do you need to work that business model.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Right. Let’s see, I would say that margin requirements have lined up? go ahead.
Clarence Simmons - Senior Executive Vice President and Chief Financial Officer
I think on AAA they think pretty much it’s gone from 5% hair cut to 7%. As you move down the spectrum things are widened down a little bit as well. We may be looking for maybe 10% hair cut on AAs and then as you move down the spectrum it widens out to maybe 30% hair cut on BBB
Bose George - Keefe, Bruyette & Woods
In terms of the adjusted guidelines for your adjusted equity assets like how much capital do you think you need for the repo side of the business.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
I think that we are thinking that we are going to try to operate with an 11% to 12% adjusted equity to asset ratio going forward. Where as we had been operating at 8% to 9% prior to August, and we ended the quarter and actually we could not put this number in the press release because it is not a GAAP number and? but we ended the quarter with an adjusted equity to asset ratio of roughly 16.8%. So, we are very conservatively leveraged with respect to our recourse borrowings today, and I think we tried to indicate that we would like to add another $2 billion in assets in the near term but we could add as much as $6 billion and still be in that 12% adjusted equity to asset range after adding $6 billion.
Bose George - Keefe, Bruyette & Woods
Okay. And there is one last thing, on the assets that were seized by the repo kind of parties. Is there any potential of recovery on that assets?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Well I would have to say that we are, I mean there is no that we get them back. I would say that the only way there is recovery is either to negotiate some sort of a settlement or to litigate and I would say that we are exploring very actively our case from a litigation prospective but I don’t want to say beyond but I don’t really want to say a whole lot more beyond that.
Bose George - Keefe, Bruyette & Woods
Okay. Thanks very much Larry.
Operator
Thank you. Our next question is with Jason Arnold, RBC Capital Markets. Please go ahead sir.
Jason Arnold - RBC Capital Markets
Hi, good morning guys. Some of my questions have already been answered but I was just wondering if you could offer a little bit of color on the pre-payment speed assumption that are baked into your premium amortization expectations provided in the release?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Sure Jason. We are assuming 13? well our actual speed was 13% CPR and so we are assuming 13% on average over the next 3 months and then the average CPR of all the factors based on the current environment, if you average amount over the remaining life of the assets, averages out to 25.5% CPR.
Jason Arnold - RBC Capital Markets
Okay. That’s helpful. And then could you also give a little bit of color on Wafter [ph] expectations going forward?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
I explained, I think our standard provision has been running at about $1 million a quarter. Is that correct? Is that a bubble? Yes so I would expect that that’s what our standard provision is going to be going forward.
Jason Arnold - RBC Capital Markets
Okay.
Clarence Simmons - Senior Executive Vice President and Chief Financial Officer
If you look at? if you look at our current reserves against our seriously delinquent loans we basically have a 25%, 26% additional LPV cushion but based on the reserves on the seriously delinquent loans. With our general reserve.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
And we think that’s adequate.
Jason Arnold - RBC Capital Markets
Okay. That’s it. Thank you so much.
Operator
Thank you. Our next question is with Greg Mason, A.G. Edwards. Please go ahead sir.
Greg Mason - A.G. Edwards & Co.
Hi, good morning gentlemen. A quick question where the net interest margin. What’s that going to be above the 65 basis point net spread?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Oh, did we make that calculation? We didn’t make that calculation. We are going to have to come, make a calculation for you, going forward. It’s going to be at least 125 basis points so we are going to get back to you on that one.
Greg Mason - A.G. Edwards & Co.
Okay. Great, and then Larry, I agree with you with the structured investment vehicle some significant current concerns. I want to get your gut feeling. This $100 billion fund that we have been hearing about. Do you think 1) will it be put together in time to help benefit these SIVs and 2) Is it enough? What’s your gut feel on that fund?
Larry A. Goldstone - Co-Founder, President and Chief Operating officer
My gut feel is that it will get put together. My gut feel is that? it may not even in itself be enough but there will be other measures I believe that will be taken to try to make sure that this collateral that is hanging out there does not get dumped on the market at fire sale prices. It’s fairly clear now that the Treasury and the Federal Reserve are on a heightened state of alert if you will, with respect to the exposure here. I think this is a situation that is very similar to the long term capital situation in 1998 and I expect that there will be two responses from the Fed or the Treasury, one of which will be a continued reduction in the Fed Funds rate in order to provide liquidity and steepen the yield curve because I think that’s the way that carry trade investors are going to feel Well I can come in and buy more in securities so I think that’s one way to create liquidity and create professional interest in those assets and then secondarily, I believe that they will try to arbitrate or mediate some form of a financing bail out to allow these assets to be blooded in the market over time I suppose to dumped on the market all at one time. That said I also understand that there are a couple of fairly large structured investment vehicles that are currently failing their commercial paper, can’t do a test and as a result we very likely will see some forced liquidations of collateral in the next month or two.
Greg Mason - A.G. Edwards & Co.
Hey, great. Thanks Larry.
Operator
Thank you. Our next question is with Robert Napoli, Piper Jaffray. Please go ahead.
Robert Napoli – Piper Jaffray
Hi, this is Jason Delu [ph] calling in for Bob. Thanks for taking my question. There could be a lot of moving parts with the spread over the next 6 months or so, six months to a year, in particular on cost of funds side. And we might get a Fed rate, we might not, the hedge benefits can be turning to an expense and I am just wondering Larry how you guys are thinking about setting your dividend? I mean if you do pay one in the fourth quarter, what rate would you want to set it at? Would you be thinking about maybe doing a one time special dividend at the end of the year? What’s your whole thought process right now with the dividend going forward?
Larry A. Goldstone - Co-Founder, President and Chief Operating officer
Well I would say that the first thing that we would like to do is we would like to come up with a dividend level that is sustainable. We would like to set the dividend such that it is not volatile but rather is non volatile. And while we understand that there are, there appears to be a fair amount of potential volatility in our funding costs over the next 12 to 15 months. We also have models if you will and we have the capacity to model a variety of different interest rate outcomes, interest rate scenarios and look at earnings on an annual basis, as opposed to specifically on a quarterly basis, and it would very well could be that we would have an earnings rate in the fourth quarter and the first quarter of next year that could be better than what we might see in the second and third quarter and then maybe we would see a recovery in the fourth quarter of next year. We can set a dividend book rate and a dividend policy around that and I would expect that we would set a dividend level in the fourth quarter that we believe will be conservative and sustainable, truthfully I think if you were to back out a lot of the one time adjustments that we have made in this quarter you would find that our operating run rate might be somewhere in the neighborhood of $0.25 to$0.35 per quarter per share. And so I think that that’s going to become the basis for at least re-establishing a dividend level on a going forward basis and then it’s going to depend a lot on reinvestment spread to reinvestment rate, our ability to originate loans our ability to securitize loans, our ability to free up capital where our liquidity situation looks like but it’s very clearly a market environment where buying assets and putting assets to work could be very, very favorable. And so it’s 80 million and 65 basis points, okay. So, I think that there is a way to in fact come up with the dividend level going forward.
Unidentified Analyst
Okay. Thanks for that color and what was the diluted share count?
Larry A. Goldstone - Co-Founder, President, Chief Operating Officer
We don’t look, I mean because we have lost we didn’t calculated it’s roughly 173 million shares.
Unidentified Analyst
Thanks. That’s all from my questions.
Operator
Thank you. Our next question is with [inaudible] Capital. Please go ahead.
Unidentified Analyst
Good morning.
Operator
We’ll move on to the next question. Next question is with [inaudible] with IMS Capital Management.
Unidentified Analyst
Thank you. Could you give us the total in your balance sheet on the asset side in par or nominal that is either CMO’s, CLO’s, CPO’s or something other than whole long or pastures something that has a structured and there is different levels and different prices?
Unidentified Company Representative
Well, I think what he wants. We have $10 billion, what we call purchased ARM assets. Of that group I would say 8 billion we don’t have any CDO’s, we don’t have any CLO’s, we don’t have any CBO’s, we do have some CMO’s that would be agency CMO’s structured? our structured securities backed by agency collateral and agency mortgages maybe in the neighborhood of $2 billion that are LIBOR floating rate instruments. But other than that there is nothing in this, there are no re-securitized sub bonds non of that sort of, stuff it’s all pretty straight forward past to our securities.
Unidentified Analyst
Thank you.
Operator
Thank you. Our next question is with Roger [inaudible] A.G. Edwards. Please go ahead.
Unidentified Analyst
Yes. Confirming the dividend your comment on the common and the class acts preferred, what about the other preferred issues?
Unidentified Company Representative
All of those dividends have been declared and will be paid on schedule.
Unidentified Analyst
Very good. Thanks.
Operator
Thank you. Our next question is with Scott Johnson, Forest Hill Capital. Please go ahead.
Scott Johnson - Forest Hill Capital
Good morning. Few question first of all regarding your purchase time on assets. I assume those would be financial free programs?
Larry A. Goldstone - Co-Founder, President, Chief Operating Officer
Yes.
Scott Johnson - Forest Hill Capital
And what are the restrictions in the reprogramming for extending those cash flows to the whole curve?
Larry A. Goldstone - Co-Founder, President, Chief Operating Officer
Up-streaming those cash flows to.
Scott Johnson - Forest Hill Capital
Are there any restrictions that the repos vendors have?
Larry A. Goldstone - Co-Founder, President, Chief Operating Officer
No.
Scott Johnson - Forest Hill Capital
You guys are pulling cash out of this.
Larry A. Goldstone - Co-Founder, President, Chief Operating Officer
No. These are just financing arrangements and in the normal course we pay interest on a monthly basis generally speaking and we roll them over on a monthly basis generally speaking and that’s just, they are just financing agreement.
Scott Johnson - Forest Hill Capital
Okay. And the same question with regards to the CMO’s you have you said they are non-market test on a $22 billion that you have?
Unidentified Company Representative
They are not subject to market valuation changes.
Scott Johnson - Forest Hill Capital
And so to what extent, so are the covenants guided within those?
Unidentified Company Representative
No, they are? I mean, we take our mortgage loans and we turn them into a series of classes of mortgages securities. So there’s a AAA, AA and A, BBB, BB, B and a non-rated class.
Scott Johnson-Forest Hill Capital
And you are trying to sell AAA and sell everything below that?
Larry A. Goldstone - Co-Founder, President, Chief Operating Officer
That’s correct and typically the not quite sure, I mean typically the above investment grade rated classes participate in the interest pro-rata with the AAA bonds and principals, principal cash flows are also pro-rata, but the subordinate classes above below investment rated classes don’t participate in principle or interest? they get interest, they don’t get principal and their claim on interest is subordinating in other words, if for some reason there is not enough interest collected to pay the AAA then the subordinate bonds have to give up their interest portion in order to support the AAA’s and that’s how you get to the AAA rating.
Scott Johnson - Forest Hill Capital
And it’s a waterfall schedule?
Larry A. Goldstone - Co-Founder, President, Chief Operating Officer
It’s a waterfall schedule that’s correct, but at the end of the day, so long as all of the collateral performs consistent with the way it’s supposed to perform, everybody gets their interest, there could be some timing differences.
Scott Johnson - Forest Hill Capital
Sure. And do you guys hold the equity chart?
Larry A. Goldstone - Co-Founder, President, Chief Operating Officer
Yes. We hold all the classes.
Scott Johnson - Forest Hill Capital
Okay. And for the close to your infinity, to what extend is that going to be impacted going forward given the billion dollar per class?
Unidentified Company Representative
Well, it will the way I say it few works is it’s a quarterly fee and so consequently beginning with the fourth quarter to the extent that we can return earn a return on equity that is greater than the 10 year treasury plus 1%. We will begin to share in those earnings on a 20%, 80% split between management and the shareholders.
Scott Johnson - Forest Hill Capital
So there is no make up provision with regards to cap losses?
Unidentified Company Representative
No, there is not.
Scott Johnson - Forest Hill Capital
Okay. Nice until in fact I get that agreement?
Unidentified Company Representative
Let’s just think about that for a minute because obviously the base on which we earned the incentive is far less than what it was previously if they some which we earned with this management fee is far less than it was earlier. and at the end of the day it appears to me that all of us as shareholders and as management benefit by the company, management returning the company to profitability and improving return on equity as quickly as possible and what better way to resend that then to have the clock restart.
Unidentified Analyst
Yes. I am with you. As a manager of assets I would love that but unfortunately my own people don’t give me that luxury and lastly with regards to the commended and you did not pay which by the way I thought was? it’s a big surprise to the market given a comment you guys made in your October 9th press release. Was there anything that was preventing you guys from doing that or was it simply the board are like not to do it to be prudent given the outlook in the mortgage market?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
I think we were just being prudent, we have the liquidity certainly to pay the dividend, on some level. We were sort of debating the $0.20 type number and we’ve allocated $25 million, but on the other hand in the context of the August environment and parts of the September environment, $25 million was meaningful. Beyond that so no, it had nothing to do with that. I think that the fact that we had $0.08 of negative taxable earnings also played into that decision as well, but I think primarily the decision revolves around the fact that the financing markets continue to not be functioning as well as we would like them to function and so we wanted to be prudent in our decision.
Unidentified Analyst
Okay. Appreciate it.
Operator
Thank you. Our next question is with Michael Hussey with Mid-Continent Capital. Please go ahead sir.
Michael Hussey - Mid-Continent Capital
Well, I think my question was just answered but I’ll rephrase it just to clarify. The dividend payment would have been in my mind a relatively inconsequential amount of money, particularly given comments that you’ve made in past quarters about the dividend stream being sort of a compact with your shareholders because this is not a widely institutionally owned company. Your view is that $10, $15, $25 million in the context of what you see potentially developing historic significant amount of money?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Yes.
Michael Hussey - Mid-Continent Capital
Okay. And secondly the up tick in the delinquencies to 27 basis points I think it was?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Yes.
Michael Hussey - Mid-Continent Capital
That’s from as you said 23 in July, 21 in June and I think 11 at the end of the March quarter, is that right?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Let see I can, yes it was, correct.
Michael Hussey - Mid-Continent Capital
Okay. And obviously we are still talking about small numbers but directionally in percentage terms things are picking up speed pretty quickly. Can you talk about how comfortable? you said you feel it is inadequate and inappropriate amount of reserving the $70 million given the performance of the portfolio but can you help flesh out a little bit more detail for us on how you determine that that $70 million is the correct figure?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Well, we have a credit reserve model against which we load in all of our delinquent loans and we assign a loss rate or range of loss rates for what we would lose on all of those loans and then we forecast what we think a default rate is going to be going forward so we are not doing a, we are not using a static, in other words we are not just looking at the loans that are currently in delinquent status, but we are also making a forecast about what we think delinquencies are going to be going forward and that’s not based upon our own experience because we don’t have enough experience, rather that’s based on experience from a broad universe of securitized mortgage pools dating back to 1990. So we are trying to see how prime originated mortgage loans in the broader market have performed from a delinquency perspective going forward and then we apply a default percentage to those and a severity to that and we calculate what we think our range of what we think our loss exposures going to be and I believe that’s a 24-month look forward.
Michael Hussey - Mid-Continent Capital
Okay. The jump? focusing on the loans that have turns sour since March. Is there anything about them characteristically that strikes you as wary of known any common characteristics geographic similarities whatever?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Well. Yes.
Michael Hussey - Mid-Continent Capital
Like a scores loan to value ratios?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
I think there is a couple of things. Number one, there are two components broadly to our loan portfolio. There are those loans that we originated and there are those loans that we bought in both packages from others and.
Unidentified Company Representative
We are power originate where’s the balance of our?
Michael Hussey - Mid-Continent Capital
21.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
21 billion is our, no, it’s 17.7 a very higher rate. There it is. Okay. So 17.8 billion of our $24-$25 billion port folio are our originations and $7 billion are purchased from third parties. There is first of all a difference in delinquency characteristics between those two groups of loans, although in the bulk purchase universe there is a group of pay options ARM’s as well that probably accounts for part of that difference but suffice to say that buying both loans is despite our attempts to add managing credit risk, those loans are performing less attractively than our own. Albeit it, in the context of the industry we are talking about pretty low numbers and the performance continues to be pretty extraordinary.
Michael Hussey - Mid-Continent Capital
Okay.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Secondarily, I would have to say that the lion share other than the pay option ARMs, the lion share of our delinquent loans are in the very low end of the mortgage loan balance spectrum. They are principally, in fact rather well under $500,000 on average. That probably accounts for just eyeballing this list. 85% to 90% of the loan by account are very likely in the low balance loans in our portfolio. Any of them confirming up balances and what that tells me is that it is the smaller more average, Middle America home owner that is having the most difficulty with their mortgage payments, the most difficulty with housing prices and the most? that’s where this credit environment is hitting the hardest. We have a substantial portion of our portfolio in loan amounts greater than $500,000, greater than $750,000 and on balance that portfolio is performing extremely well. Those folks aren’t having problems.
Michael Hussey - Mid-Continent Capital
Okay. Got you. Last question. Have you all laid anybody off?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
We have not.
Michael Hussey - Mid-Continent Capital
Okay. Thanks very much.
Operator
Thank you. Our next question is with Steve Johnson with Quest Funds. Please go ahead.
Steve Johnson - Quest Funds
Good afternoon. How are you doing?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Pretty good.
Steve Johnson - Quest Funds
All right. I had a question on?I know, I understand that you are drop the dividend up fine. Looking at the company valuation. I mean, are you looking at, do you feel like yours? undervalued at this level and will they continue inside of buying?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
We don’t really like to make comments on evaluation truthfully. I think that is for investors to determine. I guess I will say this. Management, particularly, Mr. Thornburg, the Chairman and CEO and myself own significant shares and we are not sellers. We have never ever been sellers and in fact we have been buyers recently, some before August and some after August and I think that is an indication of what we personally believe is the potential for the company over the longer term. I think that the decision that we made or that the board made with respect to the dividend was a decision that was extraordinarily well considered and definitely in the context of the long-term interest of the company and its shareholders. I think paying the dividend would have been potentially perceived as a selfish and a short-term decision that would not have been well received by some, particularly in the event that liquidity crisis came back to plague us in the next month or so. So I think that, our view is that the going forward prospects for the company particularly with respect to what the stock prices today are very promising but obviously we have to deliver on that outlook.
Steve Johnson - Quest Funds
If the right offer was made, would you consider selling the company?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
No.
Steve Johnson - Quest Funds
So you are not for sale then.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
We are not for sale.
Steve Johnson - Quest Funds
All right. Thank you.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Okay.
Operator
Thank you. Our next question is with Omotayo Okusanya with UBS. Please go ahead.
Omotayo Okusanya - UBS
Good afternoon, Larry. Two quick questions, the first one being the GAAP loss for the quarter was kind of in line with what I was expecting but the taxable loss of $0.08 wasn’t and I am just trying to understand what some of the big items were between the GAAP EPS and the tax EPS and which of those items will be recurring going forward?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Did anyone speak to that?
Unidentified Company Representative
The biggest difference is that the losses which we incurred on the creation of the portfolio sales and liquidations by third party cannot be deducted for tax purposes except to the extent we have gained and since we don’t have significant gains in the quarter, most of that loss is not in this period for tax purposes.
Omotayo Okusanya - UBS
Are there any other items from an operating perspective that were negative tax effects? Obviously the $12 million.
Unidentified Company Representative
I think, I always? we discussed earlier this morning the? there is about $44 million worth of unusual negatives which we only consider one time negatives, again $8 million of unusual positive. In large measure, they relate in two general categories, the negatives would be on our hedging instruments that relate to securitization, transactions and the portion of the hedging instrument that’s on our balance sheet that created income which was eligible for GAAP but not eligible for tax and the other big item was the DDR, PSR recovery which is not income for tax and so I think that, without getting into the super arcane handout dimensions of booked versus tax accounting, I think, from our perspective, those accounted for one time items.
Omotayo Okusanya - UBS
Okay. That’s really perfect, I think that’s exactly what I needed. And then the second thing with the portfolio not being now mark-to-market, at what price do you guys estimate that you are currently carrying your assets on your books?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
I can speak for that as well. I think in general, the securitized ARM loans are being carried at about $0.93 on the dollar.
Omotayo Okusanya - UBS
Okay. Securities portfolio?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Yes. And the securities, the purchased ARM asset is $10.5 billion, it’s 97.8% apart.
Omotayo Okusanya - UBS
The securitized ARM is $0.93 and then the purchased ARM is about $10 billion is 97.8.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
That is correct.
Omotayo Okusanya - UBS
Thank you very much.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Welcome.
Operator
Thank you. Our next question is with Ravi Chopra with Salman. Please go ahead.
Ravi Chopra – Salman Partners Inc
Hi, good afternoon Larry. Can you just reiterate the 65 basis points that you talk about being a sort of normalized September spread, would that was on the asset yield and the cost of funds and that was pretty average for this month or just sort of end of period number?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Well, that is not, it is more than average for the month strictly. It is not an end of period number and it’s an estimate that we’re trying to make to get back to something that would be a little bit more normalized since the spreads for the quarter were so low.
Ravi Chopra – Salman Partners Inc
Okay. And so that’s where your go forward spread, going in the fourth quarter. Is that the way to think about it?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Yes. That is correct.
Ravi Chopra – Salman Partners Inc
Okay. And just for clarity the 25 to? I think it was, sorry $0.25 to $0.35 of kind of quarter earnings that you are guesstimating at. Is that inclusive, is that based on that 65 basis points of spread that you alluded to?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Is it? I don’t know that it really is. I think it’s more trying to take our operating income or the loss the $1.9 billion of loss and then subtracting out of that.
Ravi Chopra – Salman Partners Inc
All at one time.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
All the one time stuff. And then applying a more normalized amortization rate to that and then adjusting that for an incentive fee because that, that would have been an operating level that would have generated some incentive fee. But just to restate that. It would have all the margin adjustments as well as some other one-time adjustments that didn’t affect margin.
Ravi Chopra – Salman Partners Inc
Right. Okay. And so in Q4 I mean would that be the kind of a number you’d think about going forward into Q4 as well or how should I think about that?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Well I think that’s kind of what that implies.
Ravi Chopra – Salman Partners Inc
Okay.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
And again we're trying not to make too many forecasts here about Q4 but that is? we've tried to reconcile and provide information to the best of our ability to allow people to make a couple of different calculations about how to look at the going forward. Our earnings rate given that there were so many one time and unusual factors in the quarter.
Ravi Chopra – Salman Partners Inc
Now that’s very helpful. There are a lot of moving parts for us so. That is helpful. So I need to take into account is from that 65 basis points roughly spread that you have going into Q4 the swing from a net gain of I guess $27 million on the swaps too I guess a net loss of $15 million over the next three quarters which is about say 48 basis points over the next three or four quarters?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Well there is, I’m sorry. There is a gain, we've sort of played out for you what the gain is going to be in the fourth quarter about $27.7 million then it’s a $2.9 million benefit in the first quarter and it does turn to about a $12 million to $15 million loss per quarter going forward. Starting with the second quarter of next year.
Unidentified Company Representative
And that’s just on the terminateds. That’s just on the terminated swaps, it doesn’t relate to the payments that we get on the, on our existing derivatives.
Ravi Chopra – Salman Partners Inc
Sure. But I thought I’d make sure from all purposes. I thought during the Q1 I’ll have a pretty big drop off and in Q2 have a pretty big drop off and spread just based on these gains becoming smaller and eventually going away.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Right but, it would keep in mind that the implication is in the forward curve is that rates are going down so I think we would stand to benefit from a drop in LIBOR going forward and then that would offset the swap benefit which is designed to make up the difference between what LIBOR was when we paired those swaps off which was in the high fives. To where the forward curves suggested.
Ravi Chopra – Salman Partners Inc
Got you. Yes. That’s what I was going to come back to you, what cost of funds and is implicit in 65 basis points if you can kind of compare that to where LIBOR is today.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Very implicit on at 5%.
Ravi Chopra – Salman Partners Inc
At 5% so just, I think you made a comment earlier that it’s not really beneficial for you to put on swaps right now. But if I look at the swap curve maybe you could do something in 4-7 range or something like that if you look at four year swaps. Why wouldn’t you see that as being beneficial to you rather than paying 5+ percent on one month LIBOR?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Well I think that those are circumstances that we are evaluating but we expect that a one month LIBOR financing rate is 4.78% today. So we anticipate that our cost of funds that are flowing rate cost of funds is going to move down as LIBOR has moved down.
Ravi Chopra – Salman Partners Inc
Got you. So you will pick up. You said there was 5% in September and its 4.78% going forward. You pick up 22 basis points on LIBOR being lower.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Yes.
Ravi Chopra – Salman Partners Inc
Okay. One last question and I’ll let you guys go. How much of the $10 or $11 billion in repos and CBCP, I guess really the repos, how much of that is longer- term that hasn’t come up for renewal or for roll yet?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
I think we've repriced everything
Ravi Chopra – Salman Partners Inc
So everything is repriced in the 10 billion and margin requirements have already been reflected for all $10 billion of the repos?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Yes. For the lions share of it. That’s right, yes. If they haven’t been reflected in the margin, they’ve been marked down in price.
Ravi Chopra – Salman Partners Inc
Got it. Okay. Thank you very much.
Operator
Thank you. Next question is with Felicia Gelmen, Senova Capital. Please go ahead.
Unidentified Analyst
Thank you. I think my questions have been answered.
Unidentified Company Representative
Okay. Thank you.
Operator
Thank you. Our next question is a follow up question with Jim Elethal [ph], Cambridge Place. Please go ahead.
Unidentified Analyst
Actually my questions have been answered also.
Unidentified Company Representative
Thank you too.
Operator
And our next question is with Tom Mansan, RBC Dan Roucher [ph]. Please go ahead.
Unidentified Analyst
Has there been a recalculation of book value?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
It was disclosed in the press release as $10 and?
Unidentified Company Representative
$10.14.
Unidentified Company Representative
$10.14 is our GAAP book value. Tom I’m sorry I missed that. Thank you.
Unidentified Company Representative
Yep.
Operator
[Operator Instructions]
The next question is with Edmond Ostik, with Raymond James. Please go ahead.
Edmond Ostik - Raymond James
How comfortable are you with the new revised forecast earnings for 2008?
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
I have not seen any new revised forecast and we typically don’t comment or we're not commenting on that at the current moment. Is there some specific estimate that you're looking at?
Edmond Ostik - Raymond James
I’m looking the $1.43.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Is that the consensus?
Edmond Ostik - Raymond James
That’s the consensus.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
Well no. I don’t know what to say. I think it’s been well considered and well thought out and I think we've provided a substantial amount of information in the context of this press release to allow people to make a reasonable estimate of what they expect for 2008.
Edmond Ostik - Raymond James
Okay. Thank you.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
You bet.
Operator
Management at this time I show no further questions.
Larry A. Goldstone - Co-Founder, President and Chief Operating Officer
All right. Pretty good. Well for all of those of you who have remained on the call obviously again very disappointing quarter. But I think that it is our intention as your management team to look forward here. We want to put this third quarter behind us as quickly as we can. We do believe in this business model. We do believe in this management team. We do believe in the philosophy that we bring to the mortgage space. We are obviously giving very careful consideration to a variety of different strategies and alternatives that we hope will only make this company better and stronger on a going forward basis and we hope that that can be reflected in our next quarter’s earnings release and in all subsequent releases going forward. We remain available to answer questions offline should others have it available or should others want to call in. But for now we will talk to you in the December January timeframe. Bye now.
Operator
Thank you. Ladies and gentlemen, this concludes the conference call for today. Once again we’d like to thank you for your participation. You may now disconnect.
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