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We seek to manage interest rate risk in our portfolio by utilizing interest rate caps, interest rate swaps, swaptions, futures, options on futures and U.S.
−Removed: Treasury securities with the goal of optimizing the earnings potential while seeking to maintain long term stable portfolio values.
+Added: Treasury securities with the goal of optimizing earnings potential while seeking to maintain long term stable portfolio values.
Certain of our consolidated multi-family properties with variable-rate mortgages payable have entered into interest rate cap contracts as required by the respective mortgage loan agreements.
−Removed: The Company also has an interest rate cap contract related to a repurchase agreement for residential loans, as required by the counterparty.
+Added: The Company may also be required by lenders on repurchase agreements for residential loans to enter into interest rate cap contracts.
We utilize a model-based risk analysis system to assist in projecting interest rate-sensitive asset and liability portfolio performances over a scenario of different interest rates.
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Actual results could differ significantly from those estimated in the table.
−Removed: Interest rate changes may also impact our GAAP book value and adjusted book value as many of our assets and related hedge derivatives, if any, are marked-to-market each quarter.
−Removed: Generally, as interest rates increase, the value of our mortgage assets decreases, and conversely, as interest rates decrease, the value of such investments will increase.
−Removed: In general, we expect that, over time, decreases in the value of our portfolio attributable to interest rate changes may be offset, to the degree we are hedged, by increases in the value of our interest rate swaps or other financial instruments used for hedging purposes, and vice versa.
−Removed: However, the relationship between spreads on our assets and spreads on our hedging instruments may vary from time to time, resulting in a net aggregate book value increase or decline.
−Removed: Our net interest income, adjusted net interest income and the fair value of our assets and our financing activities could be negatively affected by volatility in interest rates, as has been the case throughout much of 2022 and in 2023.
+Added: Interest rate changes may also impact our GAAP book value and adjusted book value as many of our assets and liabilities and related hedge derivatives, if any, are marked-to-market each quarter.
+Added: Generally, as interest rates increase, the value of our mortgage-related assets decreases, and conversely, as interest rates decrease, the value of such investments will increase.
+Added: Changes in interest rates would have the opposite impact on our liabilities at fair value.
+Added: In general, we expect that, over time, changes in the net fair value of our portfolio attributable to interest rate changes may be offset, to the degree we are hedged, by changes in the value of our interest rate swaps or other financial instruments used for hedging purposes.
+Added: However, the relationship between spreads on our assets and liabilities and spreads on our hedging instruments may vary from time to time, resulting in a net aggregate GAAP book value and adjusted book value increase or decline.
+Added: The floating rates that become effective at the conclusion of the fixed rate period on our Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock subject us to interest rate risk and could significantly increase the cost of dividends on such preferred stock.
+Added: Such increased dividend costs could have an impact on net aggregate GAAP book value and adjusted book value.
+Added: Our net interest income, adjusted net interest income and the fair value of our assets and our financing activities could be negatively affected by volatility in interest rates, as was the case in 2024.
A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies.
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We plan to meet liquidity through normal operations with the goal of avoiding unplanned sales of assets or emergency borrowing of funds.
−Removed: We are subject to “margin call” risk on a portion of our repurchase agreements.
−Removed: In the event the value of our assets pledged as collateral suddenly decreases, margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position.
+Added: We are subject to “margin call” risk on a significant portion of our repurchase agreements and certain derivative instruments.
+Added: In the event the value of our assets pledged as collateral or the value of our derivative instruments suddenly decrease, margin calls could increase, causing an adverse change in our liquidity position.
Additionally, if one or more of our repurchase agreement counterparties chooses not to provide ongoing funding, we may be unable to replace the financing through other lenders on favorable terms or at all.
−Removed: As previously disclosed, in March 2020, we observed unprecedented illiquidity in repurchase agreement financing and MBS markets which resulted in our receiving margin calls under our repurchase agreements that were well beyond historical norms.
−Removed: We took a number of decisive actions in response to these conditions, including the sale of assets and termination of our interest rate swaps.
−Removed: Since this time, we have placed a greater emphasis on procuring longer-termed and/or more committed financing arrangements for our credit investments, such as non-mark-to-market repurchase agreements, securitizations and other term financings, which may involve greater expense relative to repurchase agreement funding.
+Added: We also utilize longer-termed and/or more committed financing arrangements for certain of our credit investments, such as securitizations, term financings and corporate debt securities that provide less or no exposure to fluctuations in the collateral repricing determinations of financing counterparties or rapid liquidity reductions in repurchase agreement financing markets.
+Added: These financings may involve greater expense relative to repurchase agreement funding.
We provide no assurance that we will be able in the future to access sources of capital that are attractive to us, that we will be able to roll over or replace our repurchase agreements or other financing instruments as they mature from time to time in the future or that we otherwise will not need to resort to unplanned sales of assets to provide liquidity in the future.
"Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources" and the other information in this Annual Report on Form 10-K for further information about our liquidity and capital resource management.
−Removed: Derivative financial instruments are also subject to “margin call” risk.
−Removed: For example, under the interest rate swaps we utilize, typically we pay a fixed rate to the counterparties while they pay us a floating rate.
−Removed: If interest rates drop below the fixed rate we pay on an interest rate swap, we may be required to post cash margin.
Prepayment Risk
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Similarly, decreased prepayments are generally associated with increasing market interest rates and may slow our ability to redeploy capital to generally higher-yielding investments.
−Removed: Our modeled prepayments will help determine the amount of hedging we use to off-set changes in interest rates.
+Added: Our modeled prepayments will help determine the amount of hedging we use to offset changes in interest rates.
If actual prepayment rates are higher than modeled, the yield will be less than modeled in cases where we paid a premium for the particular residential mortgage asset.
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Nevertheless, these procedures provide no assurance that we will not experience unanticipated credit losses which would materially affect our operating results.
−Removed: Current inflationary pressures have caused, and a possible economic recession in the U.S.
+Added: We also manage credit risk with credit default swaps on corporate bond indices for which the Company buys credit protection and pays periodic payments at fixed rates to credit protection sellers, in return for compensation for default (or similar credit event) by a reference index.
+Added: Recent inflationary pressures have caused, and a possible economic recession or stagnation in the U.S.
in the near future may cause, an increase in the credit risk of our credit sensitive assets.
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Any future period of payment deferrals, forbearance, delinquencies, defaults, foreclosures or losses will likely adversely affect our net interest income and adjusted net interest income from multi-family loans, residential loans, and our RMBS investments and rental income and reduce the distributions we receive from our joint venture equity investments in multi-family apartment communities, the fair value of these assets, our ability to liquidate the collateral that may underlie these investments or obtain additional financing and the future profitability of our investments.
−Removed: Further, in the event of delinquencies, defaults and foreclosure, regulatory changes and policies designed to protect borrowers and renters may slow or prevent us from taking remediation actions.
+Added: Further, in the event of delinquencies, defaults and foreclosure, regulatory changes and policies designed to protect borrowers and renters may slow or prevent us from taking remediation actions or optimizing a resolution for or exit from the asset.
We purchase certain residential loans at a discount to par, reflecting a perceived higher risk of default.
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In addition, as part of our process, we focus on selecting a servicer with the appropriate expertise to mitigate losses and maximize our overall return on these residential loans.
−Removed: This involves, among other things, performing due diligence on the servicer prior to their engagement, assigning the appropriate servicer on each loan based on certain characteristics and monitoring each servicer's performance on an ongoing basis.
−Removed: Investments in non-Agency RMBS, CMBS and ABS contain credit risk.
+Added: This involves, among other things, performing due diligence on the servicer prior to their engagement, assigning the appropriate servicer for each loan based on certain characteristics and monitoring each servicer's performance on an ongoing basis.
+Added: Investments in non-Agency RMBS, CMBS and ABS also contain credit risk.
These investments typically consist of either the senior, mezzanine or subordinate tranches in securitizations.
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These securities have varying levels of credit enhancement which provide some structural protection from losses within the securitization.
−Removed: We undertake an in-depth assessment of the underlying collateral and securitization structure when investing in these assets, which may include modeling defaults, prepayments and loss across different scenarios.
+Added: We undertake an in-depth assessment of the underlying collateral and securitization structure when investing in these assets, which may include modeling defaults, prepayments and losses across different scenarios.
In addition, we are exposed to credit risk in our Mezzanine Lending and equity investments in owners of multi-family properties, including joint venture equity investments in multi-family apartment communities.
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Also, because of differences in methodologies and assumptions used to estimate fair values, the fair values used by us should not be compared to those of other companies.
−Removed: The table below presents the sensitivity of the fair value and net duration changes of our portfolio as of December 31, 2023, using a discounted cash flow simulation model assuming an instantaneous interest rate shift.
+Added: The table below presents the sensitivity of the fair value of our portfolio as of December 31, 2024, using a discounted cash flow simulation model assuming an instantaneous interest rate shift.
Application of this method results in an estimation of the fair market value change of our assets, liabilities and hedging instruments per 100 basis point shift in interest rates.
−Removed: Net duration is the sensitivity of our portfolio to changes in interest rates and we estimate duration using management's assumptions.
This analysis also takes into consideration the value of options embedded in certain of our assets including constraints on the re-pricing of the interest rate of assets resulting from periodic and lifetime cap features, as well as prepayment options.
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Changes in Interest Rates Changes in Fair Value (1)
−Removed: Net Duration (1)
+Added: Percentage Change in Portfolio Fair Value (1)
(basis points) (dollar amounts in thousands)
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-200 $123,573 2.12%
−Removed: (1) Assets analyzed include residential loans, Mezzanine Lending investments, investment securities and derivatives held at fair value.
+Added: (1) Includes residential loans, Mezzanine Lending investments, investment securities, derivatives, mortgage servicing rights, residential loan securitizations, non-Agency RMBS re-securitization and senior unsecured notes at fair value.
Although the use of a model to perform market value sensitivity analysis is widely accepted as a tool in identifying potential risk in a changing interest rate environment, it should be noted that the model does not take into consideration changes that may occur such as, but not limited to, changes in portfolio composition, financing strategies, market spreads, business volumes or overall market liquidity.
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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.