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Capitals current portfolio has no exposure to thirty or fifteen-year fixed rate
mortgages, so in a period when interest rates are rising they will benefit from owning
mortgages that reset at higher rates
Luminent Mortgage Capital, Inc.
One Market, Spear Tower, 30th Floor
San Francisco, CA 94105
Gail P. Seneca Ph.D.
Chairman and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
November 3, 2005
Gail P. Seneca, Ph.D
Chairman of the Board of Directors and Chief Executive Officer
Ms. Seneca is the CEO of Luminent Mortgage Capital, which she founded and brought public
in 2003. She was the chief investment officer and founder of Seneca Capital
Management, LLC, a large institutional asset management firm. Prior to founding Seneca
Capital Management, LLC in 1989, Ms. Seneca served in senior investment capacities at
Wells Fargo Bank and Chase. Ms. Seneca attended New York University where she earned
B.A., M.A. and Ph.D degrees.
CEOCFO: Dr. Seneca, what
was your vision when you started the company and how has that developed?
Dr. Seneca: We knew that the market for home mortgages
would grow at a healthy rate. We also knew the mortgage market would change, due to
innovation and to the declining influence of the GSEs, Fannie Mae, Freddie Mac, etc. We
knew there would be an opportunity for a new entrant into the market to efficiently and
profitably provide funding to homeowners.
CEOCFO: How has that
worked so far?
Dr. Seneca: Very well so far. Since our foundation in
the spring of 2003, we have consistently paid dividends to our shareholders.
CEOCFO: What do you do
with the mortgages and how is it structured?
Dr. Seneca: We fund mortgages. We are not a retail
branch originator of mortgages but we are the ultimate investors in mortgages, which are
originated by banks, mortgage companies and so on. Our balance sheet consists of mortgages
that we have funded, many of which we hold in portfolio, some of which we securitize, and
sell to other investors.
CEOCFO: Are these
typically single-family homes?
Dr. Seneca: We deal almost exclusively in
CEOCFO: Is there a
particular geographic area where you focus?
Dr. Seneca: No, we are not interested in concentrating
geographically, but rather having diversification throughout the United States in our
CEOCFO: You have a
portfolio diversification strategy; will you tell us about that?
Dr. Seneca: We have developed a strategy whereby we can
get closer to the point of origination of mortgages without assuming the expense of a full
mortgage origination platform. The closer and more efficiently we can get to the point of
origination, the higher our potential returns to investors can be. In the past we funded
mortgages by buying already created securities in the mortgage backed securities markets.
Today, we have partnerships with originators. By eliminating the middleman we get better
pricing on the mortgages that we put on our books. We have a robust infrastructure
including software, credit underwriting guidelines and experienced people.
CEOCFO: What are the
risks in doing it that way?
Dr. Seneca: Our primary risk is a precipitous decline
in the volume of mortgage origination, to the point where we have difficulty in getting
access to mortgage investments. We do not think that is a serious risk given the size of
the mortgage market relative to the size of Luminent. A secondary risk is that the
mortgages that we fund and own will have credit problems beyond our loss provisions. We
believe our underwriting guidelines, our surveillance work, the quality of our properties
and our experience is sufficient to overcome that risk.
CEOCFO: It sounds like a
Dr. Seneca: The mortgage market is incredibly
sophisticated and is growing in complexity almost daily. There has been lots of press
about creative mortgage products, which allow borrowers to essentially pick their own
payments as opposed to the old-fashioned mortgage structure where everybody has a
thirty-year maturity mortgage with principle amortization on a monthly basis. Once
securitized, mortgages can be sliced and diced in a myriad of ways. We must be extremely
fluent with the capital markets in the mortgage arena, which means being expert at
securitization technology, and at understanding and managing interest rate and credit
CEOCFO: How do you
prepare for the interest rate swings and the various cycles, or does it make a difference?
Dr. Seneca: The increasing level of short-term rates is
a problem for investors in financial service companies, from banks to a mortgage REIT such
as Luminent. The lifeblood of our business is financing; we borrow money in order to
invest in mortgages and we use leverage. The current market environment is tough for
virtually all-financial services companies because we all have some reliance on short-term
funding. We use our best skills at hedging against that rising cost of financing. There is
only so much we can do; you cannot completely hedge against that rising cost of financing,
but to the extent that you can do anything to hedge interest rates, you will be in better
shape. One of the things that Luminent does in its expanded business strategy is that we
use securitization technology, which allows us to match fund our balance sheet, which
virtually eliminates interest rate risk.
CEOCFO: Are you
primarily involved in short-term mortgages?
Dr. Seneca: We are primarily involved in short-term
mortgages. Short-term mortgages have the virtue of resetting frequently, so in a period
like this, when interest rates are rising, we benefit from owning mortgages that reset at
higher rates as interest rates are rising. Our current portfolio has no exposure to
thirty-year or fifteen-year fixed rate mortgages.
CEOCFO: What is the
competitive landscape like for you?
Dr. Seneca: As a company of our size, we have committed
capital from our investors of about $550 million. We have no barriers to building a good
portfolio. There are certainly many competitors in our space, but our relatively small
size is actually helpful to us. The market is huge and within that huge market, we do not
need to get much market share in order to make a difference for our shareholders.
CEOCFO: In closing,
please tell us why potential investors should be interested?
Dr. Seneca: The reasons I think investors should be
interested in this stock at this time has to do with the efficiency of our operating
structure. We are organized as a REIT. Because we pay no taxes at the corporate level and
we distribute all of our earnings to our shareholders, shareholders can expect income
returns from Luminent over the long term. We are in the midst of an important
business diversification, which will strengthen and stabilize our income returns for
investors. Our company stock price trades far below the book value of the portfolio that
we own. We are building a franchise, which should be rewarded by investors with some
meaningful premium valuation to book. At this result, we think that Luminent at the
current price offers a very interesting entry point to investors that are interested not
only in income but interested in the growth of principal.
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