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Additional discussion of the risks summarized in this risk factor summary and other risks that we face can be found below and should be carefully considered, together with other information in this Form 10-K and our other filings with the SEC before making an investment decision regarding our securities.
−Removed: COVID-19 Pandemic-Related Risks
−Removed: • The market and economic disruptions caused by COVID-19 have negatively impacted our business and the continuation of this pandemic or future epidemics or pandemics and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, may precipitate or materially exacerbate one or more of the other risks described herein, and may significantly disrupt the markets in which we operate or rely for investments or funding or the operating and/or financial conditions of our operating partners, tenants or borrowers, any of which could materially adversely impact our business, the fair value of our assets, our results of operations, financial condition and ability to make distributions to our stockholders.
Risks Related to Our Business
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• Interest rate mismatches between the interest-earning assets held in our investment portfolio and the borrowings used to fund the purchases of those assets may reduce our net income or result in a loss during periods of changing interest rates.
−Removed: • Changes in prepayment rates may adversely affect the performance of our assets.
• Our portfolio of assets may at times be concentrated in certain asset types or secured by properties concentrated in a limited number of real estate sectors or geographic areas, which increases our exposure to economic downturns and risks associated with the real estate and lending industries in general.
+Added: • Our portfolio of business purpose loans exposes us to new and different risks from our traditional investments in residential mortgage loans.
• Our investments may include subordinated tranches of CMBS, RMBS and ABS, which are subordinate in right of payment to more senior securities and residential loans that have greater risk of loss than other investments.
−Removed: • Our portfolio of business purpose loans represents a growing portion of our overall investment portfolio, and such loans expose us to new and different risks from our traditional investments in residential mortgage loans.
+Added: • Prepayment rates can change, adversely affecting the performance of our assets.
• We have experienced and may experience in the future increased volatility in our GAAP results of operations as we have elected fair value option for majority of our investments.
• The failure of third-party service providers to perform a variety of services on which we rely may adversely impact our business and financial results.
−Removed: • If we sell or transfer any whole loans to a third party, including a securitization entity, we may be required to repurchase such loans or indemnify such third party if we breach representations and warranties.
• Our preferred equity and mezzanine loan investments involve greater risks of loss than more senior loans secured by income-producing properties.
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• Our operating partners could subject us to liabilities in excess of those contemplated or prevent us from taking actions which are in the best interests of our stockholders.
+Added: • We may not be able to complete the sale of our joint venture equity interests in multi-family properties on terms acceptable to us, or at all.
• Our real estate and real estate-related assets are subject to risks particular to real property.
• Due diligence as a part of our acquisition or underwriting process may be limited, may not reveal all of the risks associated with such assets and may not reveal other weaknesses in such assets, which could lead to material losses.
+Added: • The lack of liquidity in certain of our assets may adversely affect our business.
• The use of models in connection with the valuation of our assets subjects us to potential risks in the event that such models are incorrect, misleading or based on incomplete information.
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• Competition may prevent us from acquiring assets on favorable terms or at all.
+Added: • Maintaining cybersecurity and data security is important to our business, and a breach could result in serious harm.
• System failures and other operational disruptions in our information and communications systems and those of our third party service providers could significantly disrupt our business.
−Removed: • Cyber-incidents could negatively impact our business by causing a disruption to our or our third party service providers’ operations, a compromise or corruption of our confidential information or damage to our business relationships or reputation.
+Added: • We have made and may in the future make investments in companies that we do not control.
Risks Related to Debt Financing and Our Use of Hedging Strategies
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• Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either we or a lender files for bankruptcy.
+Added: • Negative impacts on our business may cause us to default on certain financial covenants contained in our financing arrangements.
• Hedging against interest rate and market value changes as well as other risks may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Risks Associated With Adverse Developments in the Mortgage, Real Estate, Credit and Financial Markets Generally
−Removed: • Difficult conditions in the mortgage and real estate markets, the financial markets and the economy generally may cause us to experience losses in the future.
+Added: • Difficult conditions in the mortgage, real estate, and financial markets and the economy generally may cause us to experience losses in the future.
+Added: • We cannot predict the effect that government policies, laws and interventions adopted in response to the COVID-19 pandemic or the current inflationary environment or the impact that future changes in the U.S.
+Added: political environment, governmental policy or regulation will have on our business and the markets in which we operate.
• The downgrade, or perceived potential downgrade, of the credit ratings of the U.S.
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Government may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
−Removed: • Uncertainty regarding LIBOR may adversely impact our borrowings and assets.
−Removed: • We cannot predict the effect that government policies, laws and interventions adopted in response to the COVID-19 pandemic or the impact that future changes in the U.S.
−Removed: political environment, governmental policy or regulation will have on our business and the markets in which we operate.
+Added: • The planned discontinuation of LIBOR and the transition from LIBOR to an alternative reference rate may adversely impact our borrowings and assets.
Risks Related To Our Organization, Our Structure and Other Risks
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• Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations.
−Removed: • Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments and may limit our ability to hedge effectively.
+Added: • Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments.
• The failure of certain investments subject to a repurchase agreement to qualify as real estate assets would adversely affect our ability to qualify as a REIT.
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Additional risks and uncertainties not presently known to us, or not presently deemed material by us, also may materially adversely affect our business, liquidity, operating results, prospects, financial condition and ability to make distributions to our stockholders.
−Removed: COVID-19 Pandemic-Related Risks
−Removed: The market and economic disruptions caused by COVID-19 have negatively impacted our business and the continuation of this pandemic or future epidemics or pandemics and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, may precipitate or materially exacerbate one or more of the other risks described herein, and may significantly disrupt the markets in which we operate or rely for investments or funding or the operating and/or financial conditions of our operating partners, tenants or borrowers, any of which could materially adversely impact our business, the fair value of our assets, our results of operations, financial condition and ability to make distributions to our stockholders.
−Removed: Since March 2020, the onset and evolution of the pandemic and worldwide spread of COVID-19 has disrupted the U.S.
−Removed: and global economies, has caused significant volatility, illiquidity and dislocations from time to time in the financial markets and continues to pose significant risk and uncertainty to the economy and financial markets.
−Removed: Several countries, including the United States, took steps to restrict travel, temporarily close businesses and issue quarantine orders to control its spread.
−Removed: As a result, the COVID-19 pandemic and the government reaction to it negatively affected almost every industry directly or indirectly, including our industry, resulting in lost business revenue and significant volatility in liquidity markets and the fair value of many assets, including those in which we invest.
−Removed: During March and April 2020, markets for mortgage-backed securities (“MBS”) and other credit-related assets experienced significant volatility, widening credit spreads and sharp declines in liquidity, which materially adversely impacted our investment portfolio.
−Removed: A significant portion of our investment securities portfolio and residential loan portfolio was previously pledged as collateral under daily mark-to-market repurchase agreements.
−Removed: Fluctuations in the value of our portfolio of MBS and whole loans, including as a result of changes in credit spreads, resulted in our being required to post additional collateral with our counterparties under these repurchase agreements.
−Removed: These fluctuations and requirements to post additional collateral were material.
−Removed: In an effort to mitigate the impact to our business from these developments and improve our liquidity, we sold a substantial portion of our MBS portfolio in 2020, for which we recorded significant realized losses.
−Removed: In addition, as a result of the disruptions in the financial markets caused by the COVID-19 pandemic, we recorded a significant amount of unrealized losses during 2020 due to declines in the fair value of many of our assets.
−Removed: The COVID-19 pandemic (or a future epidemic or pandemic) and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it could have a material and adverse effect on or cause disruption to our business or results of operations, financial condition, ability to make distributions to our stockholders and the market value of our assets or our securities due to, among other factors:
−Removed: • declines in or disruptions to the economy or financial markets that may result in a recession, which could adversely affect the operating and/or financial conditions of our operating partners, tenants or borrowers and their ability to satisfy their obligations to us or others in full, or at all, or to otherwise seek modifications of such obligations ;
−Removed: • greater stress placed on our loan servicers’ and third-party service providers’ finances, operations and human capital, which, in turn, may make it more difficult for the loan servicers and other third-party service providers we rely on to perform a variety of services for us;
−Removed: • an inability to access debt and equity capital on favorable terms, if at all, or a severe disruption of and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund our business operations, including margin calls, investment opportunities, refinance existing debt or redeem preferred equity or may reduce our ability to make distributions to our stockholders and increase our future interest expense;
−Removed: • declines in business activity and demand for real estate would adversely affect the fair value of many of our assets and our ability to successfully execute our investment strategies or expand our portfolio;
−Removed: • financial impacts could negatively affect our future compliance with financial and other covenants of our financing arrangements and other debt instruments, and the failure to comply with such covenants could result in a default that accelerates the payment of such debt;
−Removed: • the potential negative impact on the health of our employees or our Board of Directors, particularly if a significant number are impacted, or the impact of government actions or restrictions, including stay-at-home orders, restricting access to our offices, could result in a deterioration in our ability to ensure business continuity during a disruption;
−Removed: • the precipitation or exacerbation of one or more of the other risks described elsewhere herein.
−Removed: In light of the economic environment related to the COVID-19 outbreak, the market for mortgage-related, residential housing-related and credit-related assets may continue to experience significant volatility, illiquidity and dislocations that may result in our recording additional realized and unrealized losses and/or experiencing financial distress in the future, which may adversely affect our result of operations, financial condition, liquidity and ability to make distributions to our stockholders.
−Removed: Measures intended to prevent the spread of COVID-19 have disrupted our business operations.
−Removed: In response to the outbreak of COVID-19 and the federal and state mandates implemented to control its spread, a significant number of our employees are working remotely or coming into the office on a more limited basis.
−Removed: If our employees are unable to work effectively as a result of COVID-19 or any future endemic, pandemic, natural disaster or other work disruption, including because of illness, quarantines, office closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted.
−Removed: Further, remote work arrangements may increase the risk of cyber-security incidents and cyber-attacks, which could have a material adverse effect on our business and results of operations, due to, among other things, the loss of investor or proprietary data, interruptions or delays in the operation of our business and damage to our reputation.
Risks Related to Our Business
−Removed: Declines in the market values of assets in our investment portfolio may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.
+Added: Declines in the market values of assets in our investment portfolio may adversely affect periodic reported results and credit availability, which may reduce our earnings and book value and, in turn, may constrain our liquidity and cash available for distribution to our stockholders.
The market value of our investment portfolio may move inversely with changes in interest rates.
−Removed: We anticipate that increases in interest rates will generally tend to decrease our net income and the market value of our investment portfolio.
−Removed: Changes in the market values of investment securities available for sale where the Company elected the fair value option and residential loans at fair value will be reflected in earnings and changes in the market values of investment securities available for sale where the Company did not elect the fair value option will be reflected in stockholders’ equity.
−Removed: As a result, a decline in market values of assets in our investment portfolio may reduce the book value of our assets.
+Added: We anticipate that increases in interest rates will generally tend to decrease our net income and the market value of our investment portfolio, as occurred during much of 2022.
+Added: Changes in the market values of assets in our investment portfolio where the Company elected the fair value option will be reflected in earnings and changes in the market values of assets in our investment portfolio where the Company did not elect the fair value option will be reflected in stockholders’ equity.
+Added: As a result, a decline in market values of assets in our investment portfolio may reduce our earnings and book value.
A decline in the market value of our interest-bearing assets may adversely affect us, particularly in instances where we have borrowed money based on the market value of those assets.
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Moreover, if we liquidate the assets at prices lower than the amortized cost of such assets, we will incur realized losses.
−Removed: The market values of our investments may also decline without any general change in interest rates for a number of reasons, such as increases in defaults, actual or perceived increases in voluntary prepayments for those investments that we have that are subject to prepayment risk, a reduction in the liquidity of the assets and markets generally and widening of credit spreads, adverse legislation or regulatory developments and adverse global, national, regional and local geopolitical conditions and developments including those relating to pandemics and other health crises and natural disasters, such as the COVID-19 pandemic.
+Added: The market values of our investments may also decline without any general change in interest rates or in combination with a change in interest rates for a number of reasons, such as increases in defaults, actual or perceived increases in voluntary prepayments for those investments that we have that are subject to prepayment risk, a reduction in the liquidity of the assets and markets generally and widening of credit spreads, adverse legislation or regulatory developments and adverse global, national, regional or local economic, market or geopolitical conditions and developments including those relating to pandemics and other health crises and natural disasters, such as the COVID-19 pandemic or the market disruption related to the 2008 financial crisis.
If the market values of our investments were to decline for any reason, the value of your investment could also decline.
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Our credit policies and procedures may not be successful in limiting future delinquencies, defaults, foreclosures or losses, particularly in relation to declining economic conditions or significant market disruptions, or they may not be cost effective.
−Removed: Our underwriting process and due diligence efforts may not be effective.
+Added: Our underwriting process, due diligence efforts or hedging strategies, if any, may not be effective or sufficient.
Loan servicing companies or our operating partners may not cooperate with our loss mitigation efforts or those efforts may be ineffective.
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Delay of foreclosures could delay resolution and increase ultimate loss severities, as a result.
−Removed: The value of the properties we own interests in or that are collateralizing or underlying the loans, securities or interests we own may decline.
−Removed: The frequency of default and the loss severity on our assets upon default may be greater than we anticipate.
+Added: The value of the properties we own interests in or that are collateralizing or underlying the loans, securities or interests we own may decline, particularly if we experience a significant or prolonged economic downturn and/or interest rates rise.
+Added: The frequency of default and the loss severity on our assets upon default may be greater than we anticipate or price into the assets at acquisition.
Credit sensitive assets that are partially collateralized by non-real estate assets may have increased risks and severity of loss.
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An increase in interest rates may cause a decrease in the availability of certain of our targeted assets and could cause our interest expense to increase, which could materially adversely affect our ability to acquire targeted assets that satisfy our investment objectives, our earnings and our ability to make distributions to our stockholders.
−Removed: Rising interest rates generally reduce economic activity, which, in turn, generally reduces the demand for mortgage loans due to the higher cost of borrowing and new construction redevelopment or renovation.
+Added: Rising interest rates, which we experienced throughout much of 2022, generally reduce economic activity, which, in turn, generally reduces the demand for mortgage loans due to the higher cost of borrowing and new construction redevelopment or renovation.
A reduction in the volume of mortgage loans originated or in new construction, redevelopment or renovation of multi-family properties may affect the volume of targeted assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment and business objectives.
−Removed: Rising interest rates may also cause our targeted assets that were issued, originated or acquired prior to an interest rate increase to experience a decline in their fair value or provide yields that are below prevailing market interest rates.
−Removed: If rising interest rates cause us to be unable to acquire a sufficient volume of our targeted assets with a yield that is sufficiently above our borrowing cost, our ability to satisfy our investment objectives and to generate income and make distributions to our stockholders will be materially and adversely affected.
+Added: We also expect that rising interest rates will cause our targeted assets that were issued, originated or acquired prior to an interest rate increase to experience a decline in their fair value or provide yields that are below prevailing market interest rates.
+Added: If rising interest rates or interest rate volatility cause us to be unable to acquire a sufficient volume of our targeted assets with a yield that is sufficiently above our borrowing cost, our ability to satisfy our investment objectives and to generate income and make distributions to our stockholders will be materially and adversely affected.
In addition, a portion of the RMBS and residential loans we invest in may be comprised of ARMs that are subject to periodic and lifetime interest rate caps.
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Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields of the new investments and available borrowing rates may decline, which would likely decrease our net income.
−Removed: It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur significant operating losses.
+Added: It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), as occurred most recently during 2022, in which event our borrowing costs may exceed our interest income and we could incur significant operating losses.
Interest rate mismatches between the interest-earning assets held in our investment portfolio and the borrowings used to fund the purchases of those assets may reduce our net income or result in a loss during periods of changing interest rates.
A significant portion of the assets held in our investment portfolio have a fixed coupon rate, generally for a significant period, and in some cases, for the average maturity of the asset.
−Removed: At the same time, certain of our borrowings provide for a payment reset period of 30 days.
+Added: At the same time, certain of our borrowings provide for a payment reset period of as short as 30 days.
In addition, the average maturity of our borrowings generally will be shorter than the average maturity of the assets currently in our portfolio and certain other targeted assets in which we seek to invest.
−Removed: Historically, we have used swap agreements as a means for attempting to fix the cost of certain of our liabilities over a period of time;
−Removed: however, these agreements will not be sufficient to match the cost of all our liabilities against all of our investments and we are presently not employing any hedging instruments.
+Added: We have used swap agreements in the past and currently use interest rate caps as a means for attempting to fix the cost of certain of our liabilities over a period of time;
+Added: however, these agreements would not be sufficient to match the cost of all our liabilities against all of our investments.
In the event we experience unexpectedly high or low prepayment rates on the assets in our portfolio, our strategy for matching our assets with our liabilities is more likely to be unsuccessful which may result in reduced earnings or losses and reduced cash available for distribution to our stockholders.
−Removed: Prepayment rates can change, adversely affecting the performance of our assets.
−Removed: The frequency at which prepayments (including both voluntary prepayments by the borrowers and liquidations due to defaults and foreclosures) occur on the residential loans we own and those that underlie our RMBS and some of the multi-family real estate investments and loans we originate or acquire is difficult to predict and is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, legislative and other factors.
−Removed: Generally, borrowers tend to prepay their mortgages when prevailing mortgage rates fall below the interest rates on their mortgage loans.
−Removed: In general, “premium” assets (assets whose market values exceed their principal or par amounts) are adversely affected by faster-than-anticipated prepayments because the above-market coupon that such premium assets carry will be earned for a shorter period of time.
−Removed: Generally, “discount” assets (assets whose principal or par amounts exceed their market values) are adversely affected by slower-than-anticipated prepayments.
−Removed: Because our portfolio is comprised of both discount assets and premium assets, our portfolio may be adversely affected by changes in prepayments in any interest rate environment.
−Removed: Although we estimate prepayment rates to determine the effective yield of our assets and valuations, these estimates are not precise and prepayment rates do not necessarily change in a predictable manner as a function of interest rate changes.
−Removed: The adverse effects of prepayments may impact us in various ways.
−Removed: First, certain investments, such as IOs, may experience outright losses in an environment of faster actual or anticipated prepayments.
−Removed: Second, particular investments may under-perform relative to any hedges that we may have constructed for these assets, resulting in a loss to us.
−Removed: In particular, prepayments (at par) may limit the potential upside of many RMBS to their principal or par amounts, whereas their corresponding hedges often have the potential for unlimited loss.
−Removed: Furthermore, to the extent that faster prepayment rates are due to lower interest rates, the principal payments received from prepayments will tend to be reinvested in lower-yielding assets, which may reduce our income in the long run.
−Removed: Therefore, if actual prepayment rates differ from anticipated prepayment rates, our business, financial condition and results of operations and ability to make distributions to our stockholders could be materially adversely affected.
−Removed: Some of the multi-family real estate investments and loans we may originate or that underlie our CMBS may allow the borrower to make prepayments without incurring a prepayment penalty and some may include provisions allowing the borrower or operating partner to extend the term of the loan or instrument beyond the originally scheduled maturity.
−Removed: Because the decision to prepay or extend such a multi-family loan or instrument is typically controlled by the borrower, we may not accurately anticipate the timing of these events, which could affect the earnings and cash flows we anticipate and could impact our ability to finance these assets.
Our portfolio of assets may at times be concentrated in certain asset types or secured by properties concentrated in a limited number of real estate sectors or geographic areas, which increases, with respect to those asset types, property types or geographic locations, our exposure to economic downturns and risks associated with the real estate and lending industries in general.
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As of December 31, 2022, approximately 17.4% of our total investment portfolio represented direct or indirect investments in multi-family properties.
−Removed: Our direct and indirect investments in multi-family properties are subject to the ability of the property owner to generate net income from operating the property, which is impacted by numerous factors.
−Removed: See “Our investments in multi-family properties are subject to the ability of the property owner to generate net income from operating the property as well as the risks of delinquency, default and foreclosure .
−Removed: ” To the extent any of these factors materially adversely impact the multi-family property sector or the geographic regions in which we invest, the market values of our multi-family assets and our business, financial condition and results of operations may be materially adversely affected.
+Added: Moreover, as of December 31, 2022, 33.8%, 17.7% and 13.9% of the outstanding balance of our Mezzanine Lending investments were made on properties located in Florida, Texas and Alabama, respectively, and 42.9%, 28.7% and 10.1% of our joint venture equity investments owned multi-family properties located in Florida, Texas and Alabama, respectively.
+Added: Our direct and indirect investments in multi-family properties are subject to the ability of the property owner to generate net income from operating the property, which is impacted by numerous factors and developments, including many risks that affect real estate generally.
+Added: See “-Our investments in multi-family properties are subject to the ability of the property owner to generate net income from operating the property as well as the risks of delinquency, default and foreclosure” and “-Our business is subject to risks particular to the real property and real estate-related assets.” To the extent any of these factors materially adversely impact the multi-family property sector or the geographic regions in which we invest, the market values of our multi-family assets and our business, financial condition and results of operations may be materially adversely affected.
Similarly, as of December 31, 2022, approximately 78.0% of our total investment portfolio was comprised of residential loans and non-Agency RMBS.
−Removed: Moreover, as of December 31, 2021, significant portions of the properties that secure our residential loans, including loans that secure Consolidated SLST, were concentrated in California, Florida, Texas and New York, among other states.
−Removed: To the extent that our portfolio is concentrated in any region, or by type of asset or real estate sector, downturns relating generally to such region, type of borrower, asset or sector may result in defaults on a number of our assets within a short time period, which may materially adversely affect our business, liquidity, financial condition and results of operations and our ability to make distributions to our stockholders.
−Removed: Our investments may include subordinated tranches of CMBS, RMBS and ABS, which are subordinate in right of payment to more senior securities and have greater risk of loss than other investments.
−Removed: Our investments include or may include subordinated tranches of CMBS, RMBS and ABS, which are subordinated classes of securities in a structure of securities collateralized by a pool of assets consisting primarily of multi-family or other commercial mortgage loans, residential mortgage loans and auto loans, respectively.
−Removed: Accordingly, the subordinated tranches of securities that we own and invest in, such as certain non-Agency RMBS and ABS, are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal.
−Removed: Additionally, estimated fair values of these subordinated interests tend to be more sensitive to changes in economic conditions and increases in defaults, delinquencies and losses than more senior securities.
−Removed: Moreover, subordinated interests generally are not actively traded and may not provide holders thereof with liquid investment, as was the case with certain asset classes in March 2020 during the market disruption caused by the COVID-19 pandemic.
−Removed: Numerous factors may affect an issuing entity’s ability to repay or fulfill its payment obligations on its subordinated securities, including, without limitation, the failure to meet its business plan, a downturn in its industry, rising interest rates, negative economic conditions or risks particular to real property.
−Removed: As of December 31, 2021, our portfolio included approximately $344.3 million of subordinated non-Agency RMBS, including $213.8 million of first loss securities, and $39.7 million of first loss ABS.
−Removed: In the event any of these factors cause the securitization entities in which we own subordinated securities to experience losses, the market value of our assets, our business, financial condition and results of operations and ability to make distributions to our stockholders may be materially adversely affected.
+Added: Moreover, as of December 31, 2022, significant portions of the properties that secure our residential loans, including loans that secure Consolidated SLST, were concentrated in California, Florida, Texas, New York and New Jersey among other states.
+Added: California is particularly susceptible to wildfire risk while Florida and Texas are susceptible to hurricane, wind and flood risks.
+Added: To the extent that our portfolio is concentrated in any region, or by type of asset or real estate sector, downturns or developments relating generally to such region, type of borrower, asset or sector may result in defaults or losses on a number of our assets within a short time period, which may materially adversely affect our business, liquidity, financial condition and results of operations and our ability to make distributions to our stockholders.
+Added: See “-Our business is subject to risks particular to real property and real estate-related assets.”
Residential loans are subject to increased risks of loss.
−Removed: We acquire and manage residential loans, including performing, re-performing and non-performing loans and loans that may not meet or conform to the underwriting standards of any GSE.
+Added: We acquire and manage residential loans, including performing, re-performing, non-performing and business purpose loans and loans that may not meet or conform to the underwriting standards of any GSE.
Residential loans are subject to increased risks of loss.
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Many of the loans we own or seek to acquire have been purchased by us at a discount to par value.
−Removed: These residential loans sell at a discount because they may constitute riskier investments than those selling at or above par value.
+Added: These residential loans sell at a discount because they generally constitute riskier investments than those selling at or above par value.
The residential loans we invest in may be distressed or purchased at a discount because a borrower may have defaulted thereupon, because the borrower is or has been in the past delinquent on paying all or a portion of his obligation under the loan, because the loan may otherwise contain credit quality that is considered to be poor, because of errors by the originator in the loan origination underwriting process or because the loan documentation fails to meet certain standards.
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Although we typically expect to receive less than the principal amount or face value of the residential loans that we purchase, the return that we in fact receive thereupon may be less than our investment in such loans due to the failure of the loans to perform or reperform.
−Removed: An economic downturn, such as the one caused by the COVID-19 pandemic, would exacerbate the risks of the recovery of the full value of the loan or the cost of our investment therein.
+Added: An economic downturn would exacerbate the risks of the recovery of the full value of the loan or the cost of our investment therein.
Finally, residential loans are also subject to "special hazard" risk (property damage caused by hazards, such as earthquakes or environmental hazards, not covered by standard property insurance policies), and to bankruptcy risk (reduction in a borrower's mortgage debt by a bankruptcy court).
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In some cases, these liabilities may be "recourse liabilities" or may otherwise lead to losses in excess of the purchase price of the related mortgage or property.
−Removed: Our portfolio of business purpose loans represents a growing portion of our overall investment portfolio, and such loans expose us to new and different risks from our traditional investments in residential mortgage loans.
−Removed: A growing portion of our portfolio of loans is made up of business purpose loans.
+Added: Our portfolio of business purpose loans exposes us to new and different risks from our traditional investments in residential mortgage loans.
+Added: As of December 31, 2022, approximately 40.3% of the asset value of our total investment portfolio is comprised of business purpose loans.
+Added: Business purpose loans refer to (i) short-term loans with terms of generally twelve to 24 months that are collateralized by residential properties and are made to investors who intend to rehabilitate and sell the residential property for a profit, which we refer to as “business purpose bridge loans,” and (ii) loans that finance (or refinance) non-owner occupied residential properties that are rented to one or more tenants, which we refer to as “business purpose rental loans”.
Business purpose loans are directly exposed to losses resulting from default and foreclosure.
Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower and the priority and enforceability of the lien will significantly impact the value of such mortgages.
−Removed: Whether or not we have participated in the negotiation of the terms of any such mortgages, there can be no assurance as to the adequacy of the protection of the terms of the loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests.
+Added: Whether or not a loan is originated in accordance with our underwriting standards for such loans, there can be no assurance as to the adequacy of the protection of the terms of the loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests.
Furthermore, claims may be asserted that might interfere with enforcement of our rights.
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Any costs or delays involved in the completion of a foreclosure of the loan or a liquidation of the underlying property will further reduce the proceeds and thus increase the loss.
−Removed: Business purpose loans we own are subject to similar risks as those described above with respect to residential mortgage loans, to the extent business purpose loan borrowers that have been negatively impacted by the COVID-19 pandemic or otherwise do not timely remit payments of principal and interest relating to their mortgage loans.
−Removed: In addition, if tenants who rent their residence from a multifamily or business purpose loan borrower are unable to make rental payments, are unwilling to make rental payments, or a waiver of the requirement to make rental payments on a timely basis, or at all, is available under the terms of any applicable forbearance or waiver agreement or program (which rental payment forbearance or waiver program may be available as a result of a government-sponsored or -imposed program or under any such agreement or program a landlord may otherwise offer to tenants), then the value of business purpose loans we own will likely be impaired, and business purpose loan borrowers that have been negatively impacted by the COVID-19 pandemic or otherwise may not make payments of principal and interest relating to their mortgage loans on a timely basis, or at all, which could negatively impact our business.
+Added: Business purpose loans we own are subject to similar risks as those described above with respect to residential mortgage loans, to the extent business purpose loan borrowers do not timely remit payments of principal and interest relating to their mortgage loans.
+Added: In addition, if tenants who rent their residence from a multifamily or business purpose loan borrower are unable to make rental payments, are unwilling to make rental payments, or a waiver of the requirement to make rental payments on a timely basis, or at all, is available under the terms of any applicable forbearance or waiver agreement or program (which rental payment forbearance or waiver program may be available as a result of a government-sponsored or -imposed program or under any such agreement or program a landlord may otherwise offer to tenants), then the value of business purpose loans we own will likely be impaired, which would negatively impact our business.
A portion of our business purpose loan portfolio currently is, and in the future may be, delinquent and subject to increased risks of credit loss for a variety of reasons, including, without limitation, because the underlying property is too highly-leveraged or the borrower experiences financial distress.
+Added: Indeed, loans similar to business purpose bridge loans performed poorly during the 2008 financial crisis due, in large part, to high leverage and borrower distress and it is likely these types of loans may perform poorly in an economic downturn or in an environment of decreasing real estate prices.
Delinquent loans may require a substantial amount of workout negotiations or restructuring, which may entail, among other things, a reduction in the interest rate or capitalization of past due interest.
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Any such reductions could materially and adversely affect the value of the loan and could, in aggregate, have a material and adverse effect on our business, results of operations and financial condition.
−Removed: Additionally, business purpose bridge loans on properties in transition may involve a greater risk of loss than traditional mortgage loans.
+Added: Additionally, business purpose bridge loans on properties in transition may involve a greater risk of loss than traditional mortgage loans and this risk may be heightened during periods of rising interest rates or declining home values.
This type of loan is typically used for acquiring and rehabilitating or improving the quality of single-family residential investment properties and generally serves as an interim financing solution for borrowers and/or properties prior to the borrower selling the property or stabilizing the property and obtaining long-term permanent financing.
The typical borrower of these business purpose bridge loans has often identified an undervalued asset that has been under-managed or is located in a recovering market.
−Removed: If the market in which the asset is located fails to improve according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the transitional loan, and we bear the risk that we may not recover some or all of our investment.
+Added: If the market in which the asset is located experiences a downturn or fails to improve according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management or the value of the asset or the borrower's expenses exceed expectations due to rising costs, rising interest rates or otherwise without a corresponding increase in asset value or income to be derived from the property, the borrower may not receive a sufficient return on the asset to satisfy the transitional loan, and we bear the risk that we may not recover some or all of our investment.
In addition, borrowers often use the proceeds of a conventional mortgage to repay a business purpose bridge loan.
−Removed: Business purpose bridge loans therefore are subject to risks of a borrower’s inability to obtain permanent financing to repay the loan.
+Added: Business purpose bridge loans therefore are subject to risk of a borrower’s inability to obtain permanent financing to repay the loan.
Business purpose bridge loans are also subject to risks of borrower defaults, bankruptcies, fraud, and other losses.
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To the extent we suffer such losses with respect to these loans, our business, results of operations and financial condition may be materially adversely affected.
−Removed: We have experienced and may experience in the future increased volatility in our GAAP results of operations as we have elected fair value option for majority of our investments
+Added: Our investments may include subordinated tranches of CMBS, RMBS and ABS, which are subordinate in right of payment to more senior securities and have greater risk of loss than other investments.
+Added: Our investments include or may include subordinated tranches of CMBS, RMBS and ABS, which are subordinated classes of securities in a structure of securities collateralized by a pool of assets consisting primarily of multi-family or other commercial mortgage loans, residential mortgage loans and auto loans, respectively.
+Added: Accordingly, the subordinated tranches of securities that we own and invest in, such as certain non-Agency RMBS and ABS, are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal.
+Added: Additionally, estimated fair values of these subordinated interests tend to be more sensitive to changes in economic conditions and increases in defaults, delinquencies and losses than more senior securities.
+Added: Moreover, subordinated interests generally are not actively traded and may not provide holders thereof with a liquid investment, particularly during periods of market disruption.
+Added: Numerous factors may affect an issuing entity’s ability to repay or fulfill its payment obligations on its subordinated securities, including, without limitation, the failure to meet its business plan, a downturn in its industry, rising interest rates, negative economic conditions or risks particular to real property.
+Added: As of December 31, 2022, our portfolio included approximately $185.4 million of subordinated, first loss non-Agency RMBS and $0.9 million of first loss ABS.
+Added: In the event any of these factors cause the securitization entities in which we own subordinated securities to experience losses, the market value of our assets, our business, financial condition and results of operations and ability to make distributions to our stockholders may be materially adversely affected.
+Added: Prepayment rates can change, adversely affecting the performance of our assets.
+Added: The frequency at which prepayments (including both voluntary prepayments by the borrowers and liquidations due to defaults and foreclosures) occur on the residential loans we own and those that underlie our RMBS and some of the multi-family real estate investments and loans we originate or acquire is difficult to predict and is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, legislative and other factors.
+Added: Generally, borrowers tend to prepay their mortgages when prevailing mortgage rates fall below the interest rates on their mortgage loans.
+Added: In general, “premium” assets (assets whose market values exceed their principal or par amounts) are adversely affected by faster-than-anticipated prepayments because the above-market coupon that such premium assets carry will be earned for a shorter period of time.
+Added: Generally, “discount” assets (assets whose principal or par amounts exceed their market values) are adversely affected by slower-than-anticipated prepayments.
+Added: Because our portfolio is comprised of both discount assets and premium assets, our portfolio may be adversely affected by changes in prepayments in any interest rate environment.
+Added: Although we estimate prepayment rates to determine the effective yield of our assets and valuations, these estimates are not precise and prepayment rates do not necessarily change in a predictable manner as a function of interest rate changes.
+Added: The adverse effects of prepayments may impact us in various ways.
+Added: First, certain investments, such as IOs, may experience outright losses in an environment of faster actual or anticipated prepayments.
+Added: Second, particular investments may under-perform relative to any hedges that we may have constructed for these assets, resulting in a loss to us.
+Added: In particular, prepayments (at par) may limit the potential upside of many RMBS to their principal or par amounts, whereas their corresponding hedges often have the potential for unlimited loss.
+Added: Furthermore, to the extent that faster prepayment rates are due to lower interest rates, the principal payments received from prepayments will tend to be reinvested in lower-yielding assets, which may reduce our income in the long run.
+Added: Therefore, if actual prepayment rates differ from anticipated prepayment rates, our business, financial condition and results of operations and ability to make distributions to our stockholders could be materially adversely affected.
+Added: Some of the multi-family real estate investments and loans we may originate or that underlie our CMBS may allow the borrower to make prepayments without incurring a prepayment penalty and some may include provisions allowing the borrower or operating partner to extend the term of the loan or instrument beyond the originally scheduled maturity.
+Added: Because the decision to prepay or extend such a multi-family loan or instrument is typically controlled by the borrower, we may not accurately anticipate the timing of these events, which could affect the earnings and cash flows we anticipate and could impact our ability to finance these assets.
+Added: We have experienced and may experience in the future increased volatility in our GAAP results of operations as we have elected fair value option for the majority of our investments.
We have elected the fair value option accounting model for the majority of our investments.
−Removed: Changes in the fair value of assets, and a portion of the changes in the fair value of liabilities, accounted for using the fair value option are recorded in our consolidated statements of operations each period, which may result in volatility in our financial results, similar to the volatility we experienced in 2020 at the height of the COVID-19-related market dislocations.
+Added: Changes in the fair value of assets, and a portion of the changes in the fair value of liabilities, accounted for using the fair value option are recorded in our consolidated statements of operations each period, which may result in volatility in our financial results.
There can be no assurance that such volatility in periodic financial results will not occur during 2022 or in future periods.
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Any costs or delays involved in the completion of a foreclosure or liquidation of the underlying property of the residential loans we own may further reduce proceeds from the property and may increase our loss.
−Removed: We may find it necessary or desirable from time to time to foreclose on some, if not many, of the residential mortgage loans we acquire, and the foreclosure process may be lengthy and expensive.
+Added: We may find it necessary or desirable from time to time to foreclose on some of the residential mortgage loans we acquire and the foreclosure process may be lengthy and expensive.
Borrowers may resist mortgage foreclosure actions by asserting numerous claims, counterclaims and defenses against us including, without limitation, numerous lender liability claims and defenses, even when such assertions may have no basis in fact, in an effort to prolong the foreclosure action and force us into a modification of the loan or a favorable buy-out of the borrower’s position.
In some states, foreclosure actions can sometimes take several years or more to litigate.
+Added: Moreover, during the COVID-19 pandemic, actions were taken by federal, state and local governments and regulators to make foreclosure more difficult, and in some cases, unavailable.
At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the foreclosure process.
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In addition, mezzanine loans and preferred equity investments are often used to achieve a very high leverage on large commercial projects, resulting in less equity in the property and increasing the risk of loss of principal or investment.
−Removed: If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan or preferred equity investment will be satisfied only after the senior debt, in case of a mezzanine loan, or all senior and subordinated debt, in case of a preferred equity investment, is paid in full.
+Added: If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan or preferred equity investment will be satisfied only after the senior debt, in the case of a mezzanine loan, or all senior and subordinated debt, in the case of a preferred equity investment, is paid in full.
Where senior debt exists, the presence of intercreditor arrangements, which in this case are arrangements between the lender of the senior loan and the mezzanine lender or preferred equity investor that stipulate the rights and obligations of the parties, may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies or control decisions made in bankruptcy proceedings relating to borrowers or preferred equity investors.
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Our investments in multi-family properties are subject to risks of delinquency, default and foreclosure on the properties that underlie or back these investments, and risk of loss that may be greater than similar risks associated with loans made on the security of a single-family residential property.
−Removed: The ability of a borrower to repay a loan or obligation secured by, or an equity interest in an entity that owns, an income-producing property typically is dependent primarily upon the successful operation of such property.
+Added: The ability of a borrower to repay a loan or obligation secured by, and the return on an equity interest in an entity that owns, an income-producing property typically is dependent primarily upon the successful operation of such property.
If the net operating income of the subject property is reduced, the borrower's ability to repay the loan, on a timely basis or at all, or our ability to receive adequate returns on our investment, may be impaired.
+Added: Similarly, the single-family rental properties we own are subject to the risk that the tenant will be unable to pay rent timely or at all.
Net operating income of an income-producing property can be adversely affected by, among other things:
• tenant mix;
−Removed: • the performance, actions and decisions of operating partners and the property managers they engage in the day-to-day management and maintenance of the property;
+Added: • the performance, actions and decisions of operating partners and the property managers we or they engage in the day-to-day management and maintenance of the property;
• property location, condition, and design;
−Removed: • competition, including new construction of competitive properties;
+Added: • competition, including new construction or rehabilitation of competitive properties;
• a surge in homeownership rates;
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• changes in specific industry segments, including the labor, credit and securitization markets;
−Removed: • declines in regional or local real estate values;
+Added: • declines in regional or local real estate values or economic conditions;
• declines in regional or local rental or occupancy rates;
−Removed: • increases in interest rates, real estate tax rates, energy costs and other operating expenses;
+Added: • increases in interest rates, real estate tax rates, construction costs, energy costs and other operating expenses;
• costs of remediation and liabilities associated with environmental conditions;
• the potential for uninsured or underinsured property losses;
−Removed: • the risks particular to real property, including those described in “-Our real estate and real estate-related assets are subject to risks particular to real property.”
+Added: • the risks particular to real property, including those described in “-Our business is subject to risks particular to real property and real estate-related assets.”
In the event of any default under a loan held directly by us, we will bear a risk of loss to the extent of any deficiency between the value of the collateral and the outstanding principal and accrued interest of the mortgage loan, and any such losses could have a material adverse effect on our cash flow from operations and our ability to make distributions to our stockholders.
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Foreclosure of a commercial mortgage loan can be an expensive and lengthy process, which could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
−Removed: Actions of our operating partners could subject us to liabilities in excess of those contemplated or prevent us from taking actions which are in the best interests of our stockholders, which could result in lower investment returns to our stockholders.
−Removed: We have and may in the future make mezzanine loans to or preferred or joint venture equity investments in owners of multi-family properties.
+Added: Actions of our operating partners could subject us to liabilities in excess of those contemplated or prevent us from taking actions that are in the best interests of our stockholders, which could result in lower investment returns to our stockholders.
+Added: We make mezzanine loans to and preferred equity investments in owners of multi-family properties as part of our investment strategy and presently own joint venture equity investments in owners of multi-family properties.
We consider such owners to be our operating partners with respect to the acquisition, improvement or financing of the underlying properties, as the case may be.
−Removed: We may also make investments in properties through operating agreements, partnerships, co-tenancies or other co-ownership arrangements.
+Added: We may also make indirect investments in properties through other arrangements.
Such investments may involve risks not otherwise present when acquiring real estate directly, including, for example:
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If our interest is subject to a buy/sell right, we may not have sufficient cash, available borrowing capacity or other capital resources to allow us to elect to purchase the interest of our operating partner that is subject to the buy/sell right, in which case we may be forced to sell our interest as the result of the exercise of such right when we would otherwise prefer to keep our interest.
−Removed: Pursuant to the operating agreement for one of our joint venture investments, subject to certain conditions, third party investors have the ability to sell their ownership interests to us, at their election, and we are obligated to purchase such interests for cash.
+Added: Pursuant to the operating agreement for one of our joint venture investments, s third party investors have the ability to sell their ownership interests to us at their election once a year subject to annual minimum and maximum amount limitations and we are obligated to purchase such interests for cash.
We may not have sufficient cash, available borrowing capacity or other capital resources to allow us to finance the purchase of such interests, which may cause us to breach our obligations under the operating agreement, or we may be required to purchase such interest at a time when it would not otherwise be in our best interest to do so.
−Removed: Finally, we may not be able to sell our interest in a venture if we desire to exit the venture.
+Added: Finally, we may not be able to sell our interest in a venture if we desire to exit the venture without our operating partner's consent.
+Added: The proposed disposition of our portfolio of joint venture equity interests in multi-family properties is subject to a number of risks, including the risk that we may be unable to complete the sale of our joint venture equity portfolio on terms acceptable to us, or at all.
+Added: In September 2022, we announced that our Board of Directors had approved a strategic repositioning of our business pursuant to which we will opportunistically dispose of our joint venture equity interests in multi-family properties over time and, following disposition, we will reallocate the capital associated with such assets to our targeted assets.
+Added: As a result, we are considering various opportunities to monetize our multi-family joint venture equity investments.
+Added: As of December 31, 2022 , we held $388.8 million in joint venture equity interests in multi-family properties, representing approximately 10.2% of our total investment portfolio.
+Added: To date, we have disposed of one multi-family property under this disposition strategy.
+Added: Although we intend to acquire additional targeted assets with the proceeds from the sale of our joint venture equity interests, we face significant competition for acquisition of our targeted assets and we may not be able or have the opportunity to make suitable investments on favorable terms.
+Added: We can provide no assurances regarding the timing or pricing of the sales of our joint venture equity interests in multi-family properties, or that such sales will occur at all.
+Added: If we cannot sell these joint venture equity interests in a timely manner and/or on terms acceptable to us, we may have less flexibility to rotate into more preferred asset classes, which may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Our business is subject to risks particular to real property and real estate-related assets.
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Real estate and real estate-related assets are subject to various risks, including:
−Removed: • acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses;
+Added: • acts of God, including earthquakes, wildfires, hurricanes, tornadoes, floods and other natural disasters, which may result in uninsured losses;
• acts of domestic or international war or terrorism, social unrest and civil disturbances, including the consequences thereof, such as materially negative impacts on U.S.
economic and market conditions;
−Removed: • adverse changes in global, national, regional and local economic and market conditions, including those relating to pandemics and health crises, such as the recent outbreak of COVID-19;
+Added: • adverse changes in global, national, regional and local economic and market conditions, including those relating to pandemics and health crises, ;
• changes in federal, state or local governmental laws and regulations, fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance with federal, state or local laws and regulations, fiscal policies and ordinances;
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The lack of liquidity in certain of our assets may adversely affect our business.
−Removed: A portion of the assets we own or acquire may be subject to legal, contractual and other restrictions on resale or will otherwise be less liquid than publicly traded securities.
+Added: Many of the assets we own or acquire may be subject to legal, contractual and other restrictions on resale or will otherwise be less liquid than publicly traded securities.
For example, certain of our assets may be securitized and are held in a securitization trust and may not be sold or transferred until the note issued by the securitization trust matures or is repaid.
−Removed: Moreover, because many of our assets are subordinated to more senior securities or loans, any potential buyer of those assets may request to conduct due diligence on those assets, which may delay the sale or transfer of those assets.
+Added: Moreover, because many of our assets are subordinated to more senior securities or loans or depend on the ability of a borrower, tenant or operating partner to meet their contractual obligations, any potential buyer of those assets may request to conduct due diligence on those assets, which may delay the sale or transfer of those assets.
The illiquidity of certain of our assets may make it difficult for us to sell such assets on a timely basis or at all if the need or desire arises.
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However, there may be impediments to executing a refinancing strategy for NPLs and RPLs.
−Removed: For example, many mortgage lenders have adjusted their loan programs and underwriting standards, which has reduced the availability of mortgage credit to prospective borrowers.
+Added: For example, a number of mortgage lenders have adjusted their loan programs and underwriting standards, which has reduced the availability of mortgage credit to prospective borrowers.
This has resulted in reduced availability of financing alternatives for borrowers seeking to refinance their mortgage loans.
−Removed: In addition, the value of some borrowers’ homes may have declined below the amount of the mortgage loans on such homes resulting in higher loan-to-value ratios, which has left the borrowers with insufficient equity in their homes to permit them to refinance.
−Removed: To the extent prevailing mortgage interest rates rise from their current low levels, these risks would be exacerbated.
+Added: In addition, the value of some borrowers’ homes may decline below the amount of the mortgage loans on such homes resulting in higher loan-to-value ratios, which may leave the borrowers with insufficient equity in their homes to permit them to refinance.
+Added: With prevailing mortgage interest rates having risen in a meaningful way from their recent low levels, these risks may be exacerbated.
The effect of the above would likely serve to make the refinancing of NPLs and RPLs potentially more difficult and less profitable for us.
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In acquiring our targeted assets, we compete with other REITs, investment banking firms, savings and loan associations, banks, insurance companies, mutual funds, private investors, lenders and other entities that purchase mortgage-related assets, many of which have greater financial resources than us.
+Added: Greater demand for the assets we target for investment tends to increase prices and reduce the estimated yield on the asset.
Additionally, many of our potential competitors are not subject to REIT tax compliance or required to maintain an exclusion from the Investment Company Act.
−Removed: As a result, we may not in the future be able to acquire sufficient quantities of our targeted assets at favorable spreads over our borrowing costs, which could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.
+Added: During much of 2021, increased demand for the assets we target resulted in reduced levels of investment by us which negatively impacted our net earnings during those periods.
+Added: As in the recent past, we may not in the future be able to acquire sufficient quantities of our targeted assets at favorable spreads over our borrowing costs, which could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.
+Added: Maintaining cybersecurity and data security is important to our business and a breach of our cybersecurity or data security could result in serious harm to our reputation and have a material adverse impact on our business and financial results.
+Added: When we acquire residential loans or make investments in multi-family or single-family rental properties, we may come into possession of borrower non-public personal information that an identity thief could utilize in engaging in fraudulent activity or theft.
+Added: We may share this information with third parties, such as loan sub-servicers, property managers, outside vendors, third parties interested in acquiring such loans from us, or lenders extending credit to us collateralized by such loans.
+Added: While we have security measures in place to protect this information and prevent security breaches, these security measures may be compromised as a result of third-party action, including intentional misconduct by computer hackers, cyber-attacks, “phishing” attacks, service provider or vendor error, or malfeasance or other intentional or unintentional acts by third parties and bad actors, including third-party service providers.
+Added: Furthermore, borrower data, including personally identifiable information, may be lost, exposed, or subject to unauthorized access or use as a result of accidents, errors, or malfeasance by our employees, independent contractors, or others working with us or on our behalf.
+Added: Our servers and systems, and those of our service providers, operating partners and the companies in which we invest from time to time, may be vulnerable to computer malware, break-ins, denial-of-service attacks, and similar disruptions from unauthorized tampering with our computer systems, which could result in someone obtaining unauthorized access to borrowers’ data or our data, including other confidential business information.
+Added: We have further developed and enhanced our cybersecurity systems and processes that are intended to protect this type of data and information;
+Added: however, they may not be effective in preventing unauthorized access in the future and such unauthorized access could have a material adverse effect on our business and financial results.
+Added: Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.
+Added: We may also experience security breaches that may remain undetected for an extended period.
+Added: We may be liable for losses suffered by individuals whose identities are stolen as a result of a breach of the security of the systems that we or third-parties, operating partners, companies in which we invest and service providers of ours store this information on, and any such liability could be material.
+Added: Even if we are not liable for such losses, any breach of these systems could expose us to material costs in notifying affected individuals and providing credit monitoring services to them, as well as regulatory fines or penalties.
+Added: In addition, any breach of these systems could disrupt our normal business operations and expose us to reputational damage and lost business, revenues, and profits.
+Added: Any insurance we maintain against the risk of this type of loss may not be sufficient to cover actual losses, or may not apply to the circumstances relating to any particular breach.
+Added: Security breaches could also significantly damage our reputation with existing and prospective business partners, borrowers, and third parties with whom we do business.
+Added: Any publicized security problems affecting our businesses and/or those of such third parties may negatively impact the market perception of our products and discourage market participants from doing business with us.
+Added: These risks may increase in the future as we continue to increase our reliance on the internet and use of web-based product offerings and on the use of cybersecurity.
+Added: Moreover, as a non-controlling equity investor in a residential loan originator, our investment in the loan originator, business and reputation could be negatively impacted if such originator fails to comply with such federal, state and local laws, rules and regulations or receives negative media or marketing attention related to its operations.
We are highly dependent on information and communication systems and system failures and other operational disruptions could significantly disrupt our business, which may, in turn, materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
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Any failure or interruption in the availability and functionality of our systems or those of our third party service providers and other operational disruptions could cause delays or other problems in our trading, investment, financing, hedging and other operating activities which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
−Removed: The occurrence of cyber-incidents, or a deficiency in our cybersecurity or in those of any of our third party service providers, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information or damage to our business relationships or reputation, all of which could materially adversely impact our business, financial condition and results of operations.
−Removed: A cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources or the information resources of our third party service providers.
−Removed: More specifically, a cyber-incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information.
−Removed: As our reliance on technology has increased, so have the risks posed to our systems and to the systems of our third party service providers.
−Removed: The primary risks that could directly result from the occurrence of a cyber-incident include operational interruption and private data exposure.
−Removed: Although we have implemented processes, procedures and controls to help mitigate these risks, there can be no assurance that these measures, together with our increased awareness of a risk of a cyber-incident, will be successful in averting a cyber-incident or attack that our business and results of operations will not be negatively impacted by such an incident.
+Added: We have made and may in the future make investments in companies that we do not control.
+Added: Some of our investments currently and may in the future include, debt instruments and/or equity securities of companies or investment vehicles that we do not control.
+Added: Those investments will be subject to the risk that the company or entity in which the investment is made may make business, financial or management decisions with which we do not agree or that the majority stakeholders or the management of such company or entity may take risks or otherwise act in a manner that does not serve our interests.
+Added: The entities in which we invest could be thinly capitalized, highly leveraged, dependent on a small number of key individuals, subject to regulatory concerns, underperform expectations, or face other obstacles that could adversely affect the business and results of operations of any such entity.
+Added: If any of the foregoing were to occur, our investments in these entities could be lost in their entirety, and our financial condition, results of operations and cash flow could suffer as a result.
Risks Related to Debt Financing and Our Use of Hedging Strategies
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We depend upon the availability of adequate capital and financing sources on acceptable terms to fund our operations, meet financial obligations, and finance asset acquisitions.
−Removed: However, the capital and credit markets have experienced unprecedented levels of volatility and disruption in recent years, including most recently in 2020 as a result of the ongoing COVID-19 pandemic, that have generally negatively impacted the availability of credit from time-to-time.
+Added: However, the capital and credit markets have experienced unprecedented levels of volatility and disruption in recent years, including most recently in 2020 as a result of the COVID-19 pandemic and, prior to that, the 2008 financial crisis, that have generally negatively impacted the availability of credit from time-to-time.
Continued volatility or disruption in the credit or finance markets or a downturn in the global economy could materially adversely affect one or more of our lenders and could cause one or more of our lenders to be unwilling or unable to provide us with financing, to increase the costs of that financing or make the terms less attractive, or to become insolvent.
+Added: Such volatility or disruption could also limit or halt our access to securitization financing.
Although we finance some of our assets with longer-term financing, we have also historically relied on access to short-term borrowings in the form of repurchase agreements to finance our investments.
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If we are faced with a larger haircut in order to roll a financing with a particular counterparty, or in order to move a financing from one counterparty to another, then we would need to make up the difference between the two haircuts in the form of cash, which could similarly require us to dispose of assets at significantly depressed prices and at inopportune times, which could cause significant losses.
−Removed: Issues related to financing are exacerbated in times of significant dislocation in the financial markets, such as those experienced during the height of the March 2020 market disruption.
+Added: Issues related to financing are exacerbated in times of significant dislocation in the financial markets.
It is possible that our financing counterparties will become unwilling or unable to provide us with financing, and we could be forced to sell our assets at an inopportune time when prices are depressed or markets are illiquid, which could cause significant losses.
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In general, this could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price.
−Removed: Finally, securitizations have been limited in the recent past.
+Added: Finally, securitization financing has been limited from time to time in the recent past.
+Added: Currently, due to rising interest rates and current market conditions, residential loan securitization activity has fallen in a significant way as the terms of such financing, in many cases, have become less attractive.
A prolonged decline in securitization activity may limit borrowings under warehouse facilities and other credit facilities that are intended to be refinanced by such securitizations.
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In certain cases, these repurchase agreements allows the lender, to varying degrees, to revalue the collateral to values that the lender considers to reflect the market value.
−Removed: In these cases, a lender determines that the value of the collateral has decreased, it may initiate a margin call, in which case we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so.
+Added: In these cases, when a lender determines that the value of the collateral has decreased, it may initiate a margin call, in which case we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so.
Typically, repurchase agreements grant the repurchase agreement counterparty the absolute right to reevaluate the fair market value of the assets that cover the amount financed under the repurchase agreement at any time.
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Significant margin calls could have a material adverse effect on our results of operations, financial condition, business, liquidity, and ability to make distributions to our stockholders, and could cause the value of our capital stock to decline.
−Removed: As a result of the COVID-19 outbreak, late in the first quarter of 2020, we observed a mark-down of a portion of our assets by our repurchase agreement counterparties, resulting in us having to pay cash and securities to satisfy margin calls that were well beyond historical norms.
+Added: As a result of the COVID-19 outbreak, we observed a mark-down of a portion of our assets by our repurchase agreement counterparties during the first quarter of 2020, resulting in us having to pay cash and securities to satisfy margin calls that were well beyond historical norms.
Events of this type, were they to occur again in the future, could have a material adverse impact on our liquidity and could lead to significant losses, a rapid deterioration of our financial condition and possibly require us to file for protection under the U.S.
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If we are unable to leverage our equity to the extent we currently anticipate, the returns on certain of our assets could be diminished, which may limit or eliminate our ability to make distributions to our stockholders.
−Removed: If we are limited in our ability to leverage our assets to the extent we currently anticipate, the returns on these assets may be harmed.
+Added: If we are limited in our ability to leverage our assets to the extent we currently anticipate, the returns on these assets may be negatively impacted.
We have historically used leverage to increase the size of our portfolio in order to enhance our returns.
−Removed: As discussed above, the capital and credit markets have experienced unprecedented levels of volatility and disruption in recent years, including as a result of the ongoing COVID-19 pandemic, that has generally negatively impacted the availability and terms of financing from time-to-time.
−Removed: If we are unable to leverage our equity to the extent we currently anticipate, the returns on our portfolio could be diminished, which may limit or eliminate our ability to make distributions to our stockholders.
+Added: The capital and credit markets have experienced unprecedented levels of volatility and disruption in recent years, including as a result of the COVID-19 pandemic, and the current inflationary environment that has generally negatively impacted the availability and/or terms of financing from time-to-time.
+Added: If we are unable to leverage our equity to the extent we currently anticipate due to unavailability or less attractive terms or otherwise, the returns on our portfolio could be diminished, which may limit or eliminate our ability to make distributions to our stockholders.
We directly or indirectly utilize non-recourse securitizations and recourse structured financings and such structures expose us to risks that could result in losses to us.
2 unchanged sentences
In a typical securitization, we convey assets to a special purpose vehicle (“SPE”), the issuer, which then issues one or more classes of notes secured by the assets pursuant to the terms of an indenture.
−Removed: In exchange for conveying assets to the SPE, we may receive the ownership certificate or residual interest in the securitization and we frequently retain a subordinated interest in the securitization as well.
+Added: In exchange for conveying assets to the SPE, we may receive the ownership certificate or residual interest in the securitization and we frequently retain a subordinated interest in the securitization.
To the extent that we retain the most subordinated economic interests in the issuer, we would continue to be exposed to losses on the assets for as long as those retained interests remained outstanding and therefore able to absorb such losses.
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There can be no assurance that we will be able to access the securitization markets in the future or be able to do so at favorable rates to finance the assets we accumulate as part of our investment strategy.
−Removed: The inability to consummate longer-term financing for the credit sensitive assets in our portfolio could require us to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price, which could adversely affect our performance and our ability to grow our business.
+Added: The inability to consummate longer-term financing for the credit sensitive assets in our portfolio could require us to seek other forms of potentially less attractive financing or to liquidate assets at inopportune times or prices, which could adversely affect our performance and our ability to grow our business.
In addition, under the terms of the securitization or structured financing, we may have limited or no ability to sell, transfer or replace the assets transferred to the SPE, which could have a material adverse effect on our ability to sell the assets opportunistically or during periods when our liquidity is constrained or to refinance the assets.
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As part of our financing strategy, we have in the past and may in the future guarantee certain terms or conditions of these financings, including the payment of principal and interest on the debt issued by the SPE, the cash flows for which are typically derived from the assets transferred to the entity.
−Removed: If a SPE defaults on its obligations and we have guaranteed the satisfaction of that obligation, we may be materially adversely affected.
+Added: If an SPE defaults on its obligations and we have guaranteed the satisfaction of that obligation, we may be materially adversely affected.
In connection with our securitizations, we generally are required to prepare disclosure documentation for investors, including term sheets and offering memoranda, which contain information regarding the securitization generally, the securities being issued, and the assets being securitized.
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Thus, the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either a lender or us.
−Removed: Negative impacts on our business caused by significant market disruptions may cause us to default on certain financial covenants contained in our financing arrangements.
−Removed: The repurchase agreements that finance a portion of our investment portfolio and certain of our other existing financing arrangements, including our senior unsecured notes, and those we enter into in the future, may contain financial covenants.
−Removed: The negative impacts on our business caused by significant market disruptions, including those caused by COVID-19, have and may make it more difficult to meet or satisfy these covenants, and we cannot assure you that we will remain in compliance with these covenants in the future.
−Removed: If we fail to meet or satisfy any of these covenants, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and the financing counterparties could elect to declare the repurchase price due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral.
+Added: Negative impacts on our business may cause us to default on certain financial covenants contained in our financing arrangements.
+Added: The repurchase agreements that finance a portion of our investment portfolio and certain of our other existing financing arrangements, including our senior unsecured notes, and those we enter into in the future, contain or may contain financial covenants.
+Added: Negative impacts on our business, including those caused by significant market disruptions like the COVID-19 pandemic or an economic recession, have and/or may make it more difficult to meet or satisfy these covenants, and we cannot assure you that we will remain in compliance with these covenants in the future.
+Added: If we fail to meet or satisfy any of these covenants, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and the financing counterparties could elect to declare the repurchase price or principal and interest due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral.
A default also could significantly limit our financing alternatives, which could cause us to curtail our investment activities or dispose of assets when we otherwise would not choose to do so.
As a result, a default on any of our financing agreements could materially and adversely affect our business, results of operations, financial condition and ability to make distributions to our stockholders.
−Removed: Hedging against interest rate and market value changes as well as other risks may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
−Removed: Subject to compliance with the requirements to maintain our qualification as a REIT, we may engage in certain hedging transactions to limit our exposure to changes in interest rates and therefore may expose ourselves to risks associated with such transactions.
+Added: Hedging against interest rate, credit and market value changes as well as other risks may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
+Added: Subject to compliance with the requirements to maintain our qualification as a REIT, we may engage in certain hedging transactions to limit our exposure to changes in interest rates and credit markets and therefore may expose ourselves to risks associated with such transactions.
We may utilize instruments such as interest rate swaps, interest rate swaptions, Eurodollars and U.S.
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Risks Associated with Adverse Developments in the Mortgage, Real Estate, Credit and Financial Markets Generally
−Removed: Difficult conditions in the mortgage and real estate markets, the financial markets and the economy generally have caused and may cause us to experience losses in the future.
+Added: Difficult conditions in the mortgage, real estate and financial markets and the economy generally have caused and may cause us to experience losses in the future.
Our business is materially affected by conditions in the residential and commercial mortgage markets, the residential and commercial real estate markets, the financial markets and the economy generally.
−Removed: Furthermore, because a significant portion of our current assets and our targeted assets are credit sensitive, we believe the risks associated with our investments will be more acute during periods of economic slowdown, recession or market dislocations, especially if these periods are accompanied by declining real estate values and defaults.
−Removed: In prior years, concerns about the health of the global economy generally and the residential and commercial mortgage markets specifically, as well as inflation, energy costs, changes in monetary policy, perceived or actual changes in interest rates, European sovereign debt, U.S.
−Removed: budget debates, geopolitical issues, global pandemics such as the COVID-19 pandemic and the availability and cost of credit have contributed to increased volatility and uncertainty for the economy and financial markets.
−Removed: The residential and commercial mortgage markets were materially adversely affected by changes in the lending landscape during the financial market crisis of 2008 and again by the significant market disruption in March and April 2020 resulting from the COVID-19 pandemic, the severity of which, in each case, was largely unanticipated by the markets, and there can be no assurance that such adverse markets will not occur or continue in the future.
−Removed: In addition, an economic slowdown or general disruption in the mortgage markets may result in decreased demand for residential and commercial property, which would likely further compress homeownership rates and place additional pressure on home price performance, while forcing commercial property owners to lower rents on properties with excess supply or experience higher vacancy rates.
+Added: Furthermore, because a significant portion of our current assets and our targeted assets are credit sensitive, we believe the risks associated with our investments will be more acute during periods of economic slowdown, recession or market dislocations, especially if these periods are accompanied by declining real estate values and increasing delinquencies and defaults.
+Added: In recent years, concerns about the health of the global economy generally and the residential and commercial mortgage markets specifically, as well as inflation, energy costs, changes in monetary policy, perceived or actual changes in interest rates, European sovereign debt, U.S.
+Added: budget debates, geopolitical issues, global pandemics such as the COVID-19 pandemic and the availability and cost of credit have contributed to increased volatility and uncertainty for the economy and mortgage, real estate and financial markets.
+Added: The residential and commercial mortgage markets were materially adversely affected by changes in the lending landscape during the financial market crisis of 2008 and again by the significant market disruption in March and April 2020 resulting from the COVID-19 pandemic, the severity of which, in each case, was largely unanticipated by the markets, and there can be no assurance that such adverse markets will not occur in the future, particularly in light of current economic uncertainty.
+Added: In addition, an economic slowdown or general disruption in the mortgage markets may result in decreased demand for residential and commercial property, which would likely further compress homeownership rates and place pressure on home price performance, while potentially forcing commercial property owners to lower rents on properties with excess supply or experience higher vacancy rates.
We believe there is a strong correlation between home price growth rates and mortgage loan delinquencies.
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If the borrowers of our mortgage loans, the loans underlying certain of our investment securities or the multi-family properties that we finance or in which we invest, default or become delinquent on their obligations, we may incur material losses on those loans or investments.
−Removed: Any sustained period of increased payment delinquencies, defaults, foreclosures or losses could adversely affect both our net interest income and our ability to acquire our targeted assets in the future on favorable terms or at all.
+Added: Any sustained period of increased payment delinquencies, defaults, foreclosures or losses could adversely affect both our net interest income and earnings and our ability to acquire our targeted assets in the future on favorable terms or at all.
In addition, the deterioration of the mortgage markets, the residential or commercial real estate markets, the financial markets and the economy generally may result in a decline in the market value of our assets or cause us to experience losses related thereto, which may adversely affect our results of operations or book value, the availability and cost of credit and our ability to make distributions to our stockholders.
−Removed: We cannot predict the effect that government policies, laws and interventions adopted in response to the COVID-19 pandemic or the impact that future changes in the U.S.
+Added: We cannot predict the effect that government policies, laws and interventions adopted in response to the COVID-19 pandemic or the current inflationary environment or the impact that future changes in the U.S.
political environment, governmental policy or regulation will have on our business and the markets in which we operate.
−Removed: government and the Federal Reserve have taken significant actions to support the economy and the continued functioning of the financial markets in response to the COVID-19 pandemic through multiple relief bills.
+Added: Government and the Federal Reserve took significant actions to support the economy and the continued functioning of the financial markets in response to the COVID-19 pandemic through multiple relief bills.
+Added: More recently, the U.S.
+Added: Government and the Federal Reserve have taken significant actions in response to the current inflationary environment in the U.S.
+Added: Indeed, the Federal Reserve increased the target rate for the fed funds rate by 425 bps during 2022 to reduce inflation, creating a great deal of volatility in markets.
There can be no assurance as to how, in the long term, these and other actions by the U.S.
−Removed: government will affect the efficiency, liquidity and stability of the financial and mortgage markets.
+Added: Government or the Federal Reserve will affect the efficiency, liquidity and stability of the financial and mortgage markets or whether they will be successful in reducing inflation to acceptable levels without creating an economic recession.
There can be no assurance as to how, in the long term, these and other actions by the U.S.
−Removed: government will affect our business and the efficiency, liquidity and stability of financial and mortgage markets.
+Added: Government or the Federal Reserve will affect our business and the efficiency, liquidity and stability of financial and mortgage markets.
Moreover, uncertainty with respect to the actions discussed above combined with uncertainty surrounding legislation, regulation and government policy at the federal, state and local levels have introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications.
3 unchanged sentences
New legislative, regulatory or policy changes could significantly impact our business and the markets in which we operate.
−Removed: In addition, disagreements over the federal budget have led to the shutdown of the U.S.
+Added: In addition, disagreements over the federal budget and federal debt limits have led to the shutdown of the U.S.
Government for periods of time in the recent past and may recur in the future.
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Government's sovereign credit rating or its perceived creditworthiness could adversely affect the U.S.
−Removed: and global financial markets and economic conditions and would likely impact the credit risk associated with some of the targeted assets in our portfolio, such as Agency RMBS and Agency CMBS.
+Added: and global financial markets and economic conditions and would likely impact the credit risk associated with some of the targeted assets in our portfolio or those we may seek to acquire.
A downgrade of the U.S.
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In September 2008, in response to the deteriorating financial condition of Fannie Mae and Freddie Mac, the U.S.
−Removed: Government placed Fannie Mae and Freddie Mac into the conservatorship of the Federal Housing Finance Agency (the “FHFA”), their federal regulator, and required these GSEs to reduce the amount of mortgage loans they own or for which they provide guarantees on Agency RMBS.
+Added: Government placed Fannie Mae and Freddie Mac into the conservatorship of the Federal Housing Finance Agency (the “FHFA”), their federal regulator.
Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S.
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The substantial financial assistance provided by the U.S.
−Removed: Government to Fannie Mae and Freddie Mac, especially in the course of their being placed into conservatorship and thereafter, together with the substantial financial assistance provided by the U.S.
−Removed: Government to the mortgage-related operations of other GSEs and government agencies, such as the FHA, VA and Ginnie Mae, has stirred debate among many federal policymakers over the continued role of the U.S.
+Added: Government to Fannie Mae and Freddie Mac and the mortgage-related operations of other GSEs and government agencies, such as the FHA, VA and Ginnie Mae, has stirred debate among many federal policymakers over the continued role of the U.S.
Government in providing such financial support for the mortgage-related GSEs in particular, and for the mortgage and housing markets in general.
To date, no definitive legislation has been enacted with respect to a possible unwinding of Fannie Mae or Freddie Mac or a material reduction in their roles in the U.S.
−Removed: mortgage market, and it is not possible at this time to predict the scope and nature of the actions that the U.S.
+Added: mortgage market, and it is not possible at this time to predict the scope and nature of the actions, if any, that the U.S.
Government will ultimately take with respect to these entities.
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In addition, any market uncertainty that arises from any such proposed changes, or the perception that such changes will come to fruition, could have a similar impact on us and the values of the MBS and other assets that we own.
−Removed: Uncertainty regarding LIBOR may adversely impact our borrowings and assets.
+Added: The planned discontinuation of LIBOR and the transition from LIBOR to an alternative reference rate may adversely impact our borrowings and assets.
Our repurchase agreements, subordinated debt, mortgage debt related to our consolidated multi-family properties, Series D Preferred Stock, Series E Preferred Stock and certain of our floating rate assets, particularly residential loans, are linked to LIBOR, which has been the subject of recent reform.
−Removed: Financial Conduct Authority, the regulator of LIBOR, stopping publishing USD LIBOR for the one week and two month USD LIBOR tenors on December 31, 2021 and intends to stop publishing the remainder of USD LIBOR tenors on June 30, 2023.
+Added: Financial Conduct Authority, the regulator of LIBOR, stopped publishing USD LIBOR for the one week and two month USD LIBOR tenors on December 31, 2021 and intends to stop publishing the remainder of USD LIBOR tenors on June 30, 2023.
The Alternative Reference Rates Committee (the “ARRC”), a steering committee comprised of large U.S.
2 unchanged sentences
SOFR is calculated based on overnight transactions under repurchase agreements, backed by Treasury securities, and is observed and backward looking, whereas USD LIBOR is an estimated forward-looking rate that relies, to some degree, on the expert judgment of submitting panel members.
−Removed: Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR).
+Added: Given that SOFR is a secured rate backed by government securities, it is a rate that does not take into account bank credit risk (as is the case with LIBOR).
SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions.
It is uncertain at this time if the remaining tenors of USD LIBOR will cease to exist prior to June 30, 2023, or whether additional reforms to LIBOR may be enacted, or whether alternative reference rates such as SOFR will gain market acceptance as a replacement for LIBOR.
−Removed: We may need to amend the debt and loan agreements that utilize LIBOR as a factor in determining the interest rate based on a new standard that is established, if any.
+Added: Further, we may need to amend the debt and loan agreements that utilize LIBOR as a factor in determining the interest rate based on a new standard that is established, if any.
However, these efforts may not be successful in mitigating the legal and financial risk from changing the reference rate in our legacy agreements.
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Moreover, while our Board of Directors or a duly designated committee thereof periodically reviews our investment guidelines and our investment portfolio, our directors do not approve every individual investment that we make, leaving management with day-to-day discretion over the portfolio composition within the investment guidelines.
−Removed: Within those guidelines, management has discretion to significantly change the composition of the portfolio.
+Added: Within those guidelines, management has discretion to significantly change the composition of the portfolio and utilize leverage.
In addition, in conducting periodic reviews, the directors may rely primarily on information provided to them by our management.
−Removed: Moreover, because our management has great latitude within our investment guidelines in determining the types and amounts of assets in which to invest on our behalf, there can be no assurance that our management will not make or approve investments that result in returns that are substantially below expectations or result in losses, which would materially adversely affect our business, results of operations, financial condition and ability to make distributions to our stockholders.
+Added: Moreover, because our management has great latitude within our investment guidelines in determining the types and amounts of assets in which to invest and leverage to employ on our behalf, there can be no assurance that our management will not make or approve investments that result in returns that are substantially below expectations or result in losses, which would materially adversely affect our business, results of operations, financial condition and ability to make distributions to our stockholders.
Maintenance of our Investment Company Act exemption imposes limits on our operations.
3 unchanged sentences
On August 31, 2011, the SEC published a concept release entitled “Companies Engaged in the Business of Acquiring Mortgages and Mortgage Related Instruments” (Investment Company Act Rel.
−Removed: This release suggests that the SEC may modify the exclusion relied upon by companies similar to us that invest in mortgage loans and mortgage-backed securities.
+Added: This release suggests that the SEC may modify the exclusion relied upon by companies similar to us that invest in mortgage loans and mortgage-backed securities, although no such action has been taken at this time.
If the SEC acts to narrow the availability of, or if we otherwise fail to qualify for, our exclusion, we could, among other things, be required either (a) to change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have a material adverse effect on our operations and the market price of our common stock.
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Named defendants in these cases have included numerous participants within the secondary mortgage market.
−Removed: If loans in our portfolio are found to have been originated in violation of predatory or abusive lending laws, we could incur losses that would materially adversely affect our business.
+Added: Moreover, as a non-controlling equity investor in a residential loan originator, our investment in the loan originator, business and reputation could be negatively impacted if such originator fails to comply with such federal, state and local laws, rules and regulations or receives negative media or marketing attention related to its operations.
+Added: If loans in our portfolio or those originated by entities in which we have or have previously made an investments are found to have been originated in violation of predatory or abusive lending laws, we could incur losses that would materially adversely affect our business.
Our business is subject to extensive regulation.
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Pursuant to Revenue Procedure 2017-45, the IRS will treat the distribution of stock pursuant to an elective cash/stock dividend as a distribution of property under Section 301 of the Internal Revenue Code (i.e., a dividend), as long as at least 20% of the total dividend is available in cash and certain other parameters detailed in the Revenue Procedure are satisfied.
−Removed: On November 30, 2021, the IRS issued Revenue Procedure 2021-53, which temporarily reduced (through June 30, 2022) the minimum amount of the distribution that must be available in cash to 10%.
Although we have no current intention of paying dividends in our own stock, if in the future we choose to pay dividends in our own stock, our stockholder may be required to pay tax in excess of the cash that they receive.
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We own certain non-managing member interests in partnerships and limited liability companies that are joint ventures, as well as preferred equity investments treated as partnership interests for U.S.
−Removed: federal income tax purposes, and we intend to acquire similar interests in the future.
+Added: federal income tax purposes, and we intend to continue to invest in preferred equity investments in the future.
If a partnership or limited liability company in which we own an interest takes or expects to take actions that could jeopardize our qualification as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity.
6 unchanged sentences
federal corporate income tax.
+Added: The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.
+Added: Our securitizations have, and could in the future, result in the creation of taxable mortgage pools (“TMPs”), for U.S.
+Added: federal income tax purposes.
+Added: As a REIT, so long as we own (or a subsidiary REIT of ours owns) 100% of the equity interests in a TMP, we generally will not be adversely affected by the characterization of the securitization as a TMP.
+Added: A subsidiary REIT of ours currently owns 100% of the equity interests in a TMP created by one of our securitizations.
+Added: To the extent that we (as opposed to our subsidiary REIT) own equity interests in a TMP, certain categories of stockholders, however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the TMP, known as “excess inclusion income.” In addition, to the extent that we (as opposed to our subsidiary REIT) own equity interests in a TMP, and our common stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion of our income from such TMP.
+Added: However, we believe that we have structured our securitizations such that the above taxes will not apply to us or our stockholders.
+Added: However, because our subsidiary REIT is, in part, owned by a TRS of ours, that TRS will be subject to tax on any dividend income from our subsidiary REIT, including any excess inclusion income allocated to it.
+Added: In addition, in certain instances, we may be precluded from selling equity interests in our securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for U.S.
+Added: federal income tax purposes.
+Added: These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.
+Added: If our subsidiary REIT failed to qualify as a REIT, we could be subject to higher taxes and could fail to remain qualified as a REIT.
+Added: We indirectly own 100% of the common interests in a subsidiary that has elected to be taxed as a REIT for U.S.
+Added: federal income tax purposes.
+Added: Our subsidiary REIT is subject to the various REIT qualification requirements and other limitations described herein that are applicable to us.
+Added: If our subsidiary REIT were to fail to qualify as a REIT, then (i) such subsidiary REIT would become subject to U.S.
+Added: federal income tax and applicable state and local taxes on its taxable income at regular corporate rates and (ii) the indirect interests we hold in such subsidiary REIT would cease to be a qualifying asset for purposes of the asset tests applicable to REITs.
+Added: If our subsidiary REIT were to fail to qualify as a REIT, it is possible that we would fail certain of the asset tests applicable to REITs, in which event we would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions.
+Added: We have made a “protective” TRS election with respect to our subsidiary REIT and may implement other protective arrangements intended to avoid such an outcome if our subsidiary REIT were not to qualify as a REIT, but there can be no assurance that such “protective” TRS elections and other arrangements will be effective to avoid the resulting adverse consequences to us.
+Added: Moreover, even if the “protective” TRS election were to be effective in the event of the failure of our subsidiary REIT to qualify as a REIT, such subsidiary REIT would be subject to U.S.
+Added: federal income tax and applicable state and local taxes on its taxable income at regular corporate rates and we cannot assure you that we would not fail to satisfy the requirement that not more than 20% of the value of our total assets may be represented by the securities of one or more TRSs.
+Added: In this event, we would fail to qualify as a REIT unless we or such subsidiary REIT could avail ourselves or itself of certain relief provisions.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.
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We are dependent on certain key personnel.
−Removed: We are a small company and are substantially dependent upon the efforts of our Chief Executive Officer and President, Jason T.
−Removed: Serrano, and certain other key individuals employed by us.
−Removed: The sudden loss of Mr.
−Removed: Serrano or any key personnel of our Company could have a material adverse effect on our operations.
+Added: We are a small company and are substantially dependent upon the efforts of our Chief Executive Officer, Jason T.
+Added: Serrano, our President, Nicholas Mah, and certain other key individuals employed by us.
+Added: The sudden loss of Messrs.
+Added: Serrano or Mah or any key personnel of our Company could have a material adverse effect on our operations.
Investing in our securities involves a high degree of risk.
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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.