AGNC Investment Corp. 10-Q

Item 1A. Risk Factors Except provided below, there have been no material updates to the risk factors previously disclosed in our 2019 Form 10-K. The following supplement should be read in conjunction with the "Risk Factors" identified in Part I, Item 1A of our 2019 Form 10-K. The risks we face could materially adversely affect our business, results of operations, financial condition, liquidity and tangible net book value, and could cause our actual results to differ materially from our past results or the results contemplated by any forward-looking statements we make. The risks described in this report and our 2019 Form 10-K are not the only risks we face. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance. The economic and financial market turbulence resulting from the COVID-19 pandemic (the "Pandemic") has adversely affected our financial results and financial position and could continue to negatively impact our business. The rapid global outbreak of COVID-19, a respiratory disease caused by a novel coronavirus, has led to substantial financial market volatility and has significantly adversely affected both the U.S. and global economies. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic, and on, March 13, 2020, President Trump declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 outbreak in the United States has resulted in stay-at-home orders, school closures and widespread business shutdowns across the country. These shutdowns and other reductions in business activity have resulted in a contraction of U.S. GDP for the first quarter of 2020 and substantially increased current and projected unemployment levels. While the U.S. federal government and the Federal Reserve (the "Fed") have taken actions to reduce the negative economic impact of the Pandemic, the extent to which these actions will mitigate the short-term and long-term negative impacts of the Pandemic on the U.S. economy, financial markets and our business is unclear, and the drop in the level of U.S. economic activity from these events could be sustained. The sudden and dramatic change to U.S. and global economic activity due to the Pandemic has resulted in severe financial market dislocations, varying degrees of illiquidity among fixed income assets, and a significant increase in market volatility, and such events may recur, persist or worsen. The economic and financial market turbulence resulting from the Pandemic negatively impacted our results of operations and our tangible net book value and could continue to negatively impact our business. Each of the "Risk Factors" described in our 2019 Form 10-K could be materially impacted by conditions resulting from the Pandemic. Risks that we believe may be heightened during and following the Pandemic and related developments are described below; however, you should review each of the risk factors described in our 2019 Form 10-K carefully in light of the Pandemic and related developments. Because 46 the direct and indirect impacts of the Pandemic and related developments are uncertain and depend on future events, they may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not expect to present significant risks. Model and forecast risks - The Pandemic and its impact on the U.S. and global economies, and the related governmental responses, have been unprecedented. It is difficult to assess or predict the impact of unprecedented events on our business, financial results and condition. Our forecasts and expectations relating to these developments are subject to many uncertainties and may change, perhaps substantially, from our current forecasts and expectations. Furthermore, our analytical models were not designed to incorporate the unique circumstances associated with the Pandemic and related developments. We use analytical models (both those supplied by third parties and proprietary models developed by us) and information supplied by our third-party vendors to value assets; forecast prepayment, default and foreclosure rates; and to manage risk. These predictive models are usually constructed based on historical trends, and the success of relying on such models depends heavily on the correlation between the reported historical data and future events or behavior. As such, the unprecedented economic and financial market events associated with the Pandemic reduce the ability of our models to predict future outcomes and could even render them invalid. Consequently, actual results could differ materially from our projections. Spread and credit risks - Spread risk is an inherent component of our business and is increased by the use of leverage. Our hedging strategies are not designed to mitigate spread risk, and, thus, wider spreads negatively impact our tangible net book value. Spreads can widen due to a variety of factors, including changes in interest rates, prepayment expectations, actual or anticipated monetary policy actions by the U.S. and foreign central banks, liquidity conditions, required rates of returns on different assets and other market supply and demand factors, nearly all of which have been impacted by the Pandemic and related developments and are likely to continue to be impacted over at least the short to intermediate term as markets continue to grapple with their effects. The unprecedented decline in interest rates, extreme market volatility, and illiquidity across the fixed income markets stemming from these developments resulted in historically wide and volatile spread movements during the first quarter of 2020. The Fed's unprecedented purchases of Agency RMBS and U.S. Treasury securities that began in March have eased conditions somewhat, but markets remain fragile. The Fed has committed its continued support of the U.S. Treasury and Agency RMBS markets and to the liquidity of repo funding markets backed by U.S. Treasury and Agency collateral. However, should the Fed fail to maintain an adequate level of support, prematurely reduce its support or stop its support altogether any number of adverse market reactions could occur, including materially wider spread movements. It is also possible that despite substantial Fed support, the funding market for Agency MBS could still deteriorate if primary dealers are unwilling to pass along the liquidity provided by the Fed to broader market participants. Additionally, an unwinding of the Fed's purchases of Agency and U.S. Treasury securities could severely disrupt the fixed income markets, resulting in interest rate volatility and wider spreads. Should any of these events occur, our tangible net book value and our financial position could be materially adversely impacted. In addition to spread risks, our investments in CRT and non-agency RMBS and CMBS are subject to credit risk, and the Pandemic and related developments may adversely impact the credit quality of those investments and result in our experiencing a loss on these investments. Prepayment risk - The Pandemic has led to historically low interest rates. Prepayments on our investment securities typically increase when interest rates fall. An increase in prepayments can negatively impact our net interest margin and tangible net book value, which could be material. Mortgage rates have declined to historic lows and could continue to decline. It is also possible that after the Pandemic induced extended forbearance periods offered by the GSEs, which may extend up to 12 months, borrowers may be unable to resume monthly payments leading to a large scale buyouts of delinquent loans from mortgage pools by the GSE's. Additionally, technological advances throughout origination channels and changes to GSE underwriting requirements, potentially implemented in part or in whole in response to the Pandemic, could increase and/or accelerate the pace of mortgage origination activity. Any one of these factors could lead to materially faster prepayments. Furthermore, since prepayment models were not designed to incorporate the unique circumstances associated with the Pandemic, they may be less predictive of prepayment activity, hindering our ability to accurately forecast prepayment rates. Extension risk - The social distancing measures instituted to combat the Pandemic have resulted in curtailed or ceased activity in many parts of the economy and have raised fears that the U.S. and global economies will enter a deep and protracted recession, or even depression. These fears have led to a historic decline in interest rates; however, should the U.S. economy recover faster than anticipated, interest rates could rise rapidly. Should this occur, the duration of our mortgage portfolio could extend faster than we expect and negatively impact our net book value. Although we expect to hedge against an increase in interest rates and manage our net duration gap, we cannot guarantee that our hedges or other funding and liability management activities will adequately protect us against extension risk and, thus, our tangible net book value could be materially adversely impacted should this occur. Hedging and interest rate risks - Our hedges are intended to limit the adverse effect of changes in interest rates on our assets and cost of funds. Hedging strategies are complex and we use analytical models to help manage our risk. Since analytical models may be less reliable given the unprecedented events stemming from the Pandemic, there is an increased risk that our hedging strategies may be less effective, or even ineffective, which could materially adversely affect our financial 47 position and tangible net book value. There are also many uncertainties associated with the Pandemic and the short and long-term economic and fiscal tolls are difficult to predict. With interest rates at or near their zero-bound range, an actual or anticipated severe economic recession or depression could cause interest rates to fall below zero. Negative rates could result in material losses on our interest rate hedges and negatively impact our net interest margin, adversely affecting our net income and tangible net book value. Although we expect that the Fed would use all its monetary policy tools to prevent negative rates, there is no guarantee that it will do so or that it would be successful at keeping rates above zero. Liquidity risks - Turbulent market conditions resulting from the Pandemic increase the risk of margin calls under our funding and derivative agreements. If the value of our pledged collateral or if the value of our interest rate hedges declines, we will be required to post additional collateral. Counterparties may also increase haircut levels or overall margin requirements and generally have the right to unilaterally value our collateral. Counterparties to certain agreements, such as TBA clearing agreements, may only post collateral to us up to certain limits, resulting in our inability to receive collateral when it would otherwise have been due. Certain assets, such as credit assets, may not be financeable, or haircuts and pricing for such assets could increase substantially, particularly in periods of market volatility. Lastly, to the extent we are entitled to receive collateral from counterparties, they may be unwilling or unable to return collateral in a timely manner. If conditions result in our inability to meet margin calls, we could default on our obligations and be forced to sell assets under adverse conditions. In addition, if counterparties fail to fulfill their obligations to us, we could experience a loss. We may be unable to raise additional equity capital or procure funding, at all or on favorable terms, to address liquidity or other needs. Human capital and business resiliency risks - Since mid-March, all of our workforce has been working remotely consistent with our business continuity plan. Stay-at-home orders and other Pandemic related restrictions in effect in the states and localities where our workforce is located may be extended in whole or in part for several additional months. The strain on our workforce and our business operations caused by this shift in our operating environment may result in business interruptions, reduced productivity and other adverse impacts on our operations. While our technological systems to date have continued to function with our workforce working remotely, this telework arrangement increases the risk of technological or cybersecurity incidents that could negatively affect our business operations. This telework arrangement, the risk that our employees or their family members could contract COVID-19 and our reliance for some services and functions on third parties, which are largely working under similar conditions, could also adversely affect our ability to maintain effective controls and procedures, which could result in material errors in our reported results or disclosures that are not complete or accurate.