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Item 1A. Risk Factors

2021-02-26 compared with 2020-02-25 · 297 added, 375 removed, 187 unchanged (78% of the section changed)

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If that happens, the trading price of our securities could decline, and you may lose all or part of your investment.

risks and uncertainties described below are not the only ones facing us.

The risks and uncertainties described below are not the only ones facing us.

Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.

Risks Related to Our Investing, Portfolio Management and Financing Activities

Risks Related to Our Investment and Portfolio Management Activities

We may change our targeted investments, investment guidelines and other operational policies without stockholder consent.

We may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described herein.

Our Board of Directors also determines our other operational policies, including our policies with respect to our REIT qualification, acquisitions, dispositions, operations, indebtedness and distributions.

Our Board of Directors may amend or revise such policies or authorize transactions that deviate from them, without a vote of, or notice to, our stockholders.

A change in our targeted investments, investment guidelines or other operational policies may increase our exposure to interest rate, spread, credit, prepayment, extension, liquidity and other risks, all of which could adversely affect our results of operations and financial condition and, in turn, our ability to make distributions to our common and preferred stockholders.

Any such change may increase our exposure to risks described herein or expose us to new risks that are not currently contemplated, which could materially impair our operations and financial performance.

The human and economic impacts of the COVID-19 pandemic and related events are uncertain and may negatively impact our business.

The global outbreak of the COVID-19 pandemic has extracted a significant human toll and adversely affected both the U.S.

and global economies.

Our business was materially impacted by the severe market disruptions and volatility resulting from the Pandemic in March and April 2020.

(See Recent Trends and Market Impacts under Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for additional information ) .

While the U.S.

government and the Fed have taken actions to reduce the negative impacts of the Pandemic, and several vaccines have begun to be deployed, the extent and rate at which these actions will be effective over the longer-term are unclear, and further fiscal, monetary or other actions may be required but are not assured.

Furthermore, if new, potentially more severe strains of the virus emerge, adverse conditions could persist or worsen leading to further economic and financial market instability.

There may also be unintended adverse consequences resulting from the magnitude of the Fed’s stimulative measures and other actions of other policy makers that could negatively impact our business.

• we may experience elevated rates of prepayments on our portfolio due to lower mortgage rates resulting from the Fed’s ongoing asset purchase program or buyouts of delinquent loans from the pools of mortgages underlying our Agency RMBS by Fannie Mae and Freddie Mac;

• an actual or anticipated reduction in the Fed’s asset purchase program or other stimulative policy measures may expose us to materially higher mortgage spread, interest rate and market volatility risks as well as lead to less favorable or potentially negative conditions in the TBA dollar roll and repo funding markets;

• we may be exposed to increased model and forecast risks due to a lack of relevant or reliable historical correlations due to the unprecedented conditions and policy measures associated with the Pandemic.

We may be unable to take actions necessary to mitigate these or other adverse consequences resulting from the Pandemic or they may be ineffective.

Consequently, our operating results may be impaired, and we could incur significant losses.

Our active portfolio management strategy may expose us to greater losses and lower returns than compared to passive strategies.

We employ an active management strategy to achieve our principal objective of preserving our net book value while generating attractive risk-adjusted returns.

The composition of our investment portfolio will vary as we believe changes to market conditions, risks and valuations warrant.

Consequently, we may experience significant investment gains or losses when we sell investments that we no longer believe provide attractive risk-adjusted returns or when we believe more attractive alternatives are available.

We may be incorrect in our assessment and select an investment portfolio that could generate lower returns than a more static management strategy.

Also, investors may be less able to assess the changes in our valuation and performance by observing changes in the mortgage market since we may have changed our strategy and portfolio from the last publicly available data.

Our leverage and hedging levels may also fluctuate as we pursue our active management strategy.

Our hedging strategies are not designed to mitigate spread risk.

When the spread between the market yield on our mortgage assets and benchmark interest rates widens, our net book value could decline.

We refer to this as "spread risk" or "basis risk." As a levered investor in mortgage-backed securities, spread risk is an inherent component of our investment strategy.

Consequently, although we use hedging instruments to attempt to protect against moves in interest rates, our hedges will typically not to protect us against spread risk.

Spreads may widen due to a variety of factors and can occur independent of moves in interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by U.S.

and foreign central banks, liquidity, or changes in required rates of return on different assets.

Consequently, while we use interest rate swaps and other hedges to attempt to protect against moves in interest rates, such instruments typically will not protect our net book value against spread risk.

If adverse spread movements result in the value of our mortgage assets to decline by more than the offsetting increase in value of our interest rate hedges or if, of similar effect, the value of our assets to increase by less than the offsetting decline in value of our interest rate hedges, our net book value will decline and our financial condition will be adversely impacted.

Purchases and sales of Agency mortgage-backed securities by the Fed could adversely affect the price and return associated with Agency securities.

The Fed is one of the largest holders of Agency RMBS.

In October 2017, the Fed began to taper its reinvestments of principal payments from its Agency RMBS, U.S.

Treasury and Agency debt portfolios acquired as a function of its quantitative easing programs.

The Fed could vary the pace of its tapering activity, stop altogether or conduct outright purchases or sales of its securities portfolio, which could impact the price and availability of Agency RMBS and the spread between our mortgage investments and interest rate hedges.

During periods in which the Fed increases the pace of its tapering, or undertakes outright sales of its securities portfolio, the price of Agency RMBS and U.S.

Treasury securities could decline, mortgage spreads could widen, our investments could prepay at a slower rate than anticipated and market volatility could be considerably higher than would have been the case absent such actions.

Similarly, if the Fed reduces the pace of tapering, stops altogether or purchases securities, interest rates could decline, and our investments could prepay at a faster rate than anticipated.

Consequently, the Fed's actions with respect to its securities portfolio could adversely affect the return on our investments.

Our strategy involves significant leverage, which increases the risk that we may incur substantial losses.

Our leverage will vary with market conditions and our assessment of the risks and returns on our investments.

We generally expect to maintain our leverage between six to twelve times the amount of our tangible stockholders' equity, but we may operate at levels outside of this range for an extended period.

We incur leverage by borrowing against a substantial portion of the market value of our assets.

While leverage is fundamental to our investment strategy, it also creates significant risks.

Consequently, we

could incur substantial losses if the value of our investments declines or if mortgage spreads widen and our investments underperform our interest rate hedges.

We may be unable to procure adequate financing or to renew or replace existing financing as it matures.

We use debt financing as a strategy to increase our return on equity, and because we rely primarily on short-term borrowings to finance our mortgage investments, our ability to achieve our investment objectives depends not only on our ability to borrow sufficient amounts and on favorable terms, but also on our ability to renew or replace our maturing short-term borrowings on a continuous basis.

However, we may be unable to borrow sufficient funds to achieve our desired leverage ratio for several reasons, including the following:

liquidity shortfalls in the repo market and other short-term funding markets;

lenders do not make repurchase agreements or other financing arrangements available to us at acceptable rates and terms;

lenders exit the market;

lenders require additional collateral to cover our borrowings, which we may be unable to deliver;

our funding levels and/or leverage ratio exceeds limits established by lenders, which could change at our lenders' discretion;

we default on our obligations, including failure to satisfy covenants or other requirements imposed by our lenders.

Disruptions in the repo market due to liquidity short-falls or other events can adversely impact the availability and cost of repo funding.

During such periods, it is possible that the Fed and other policymakers could fail to undertake measures to stabilize the repo market, or, if they attempt to stabilize the repo market, it is possible such measures could be ineffective.

Additionally, if/when they alter or cease to undertake such measures, it could cause a significant disruption in the repo market, negatively impacting the availability and cost of our repo funding.

In addition, current or new regulatory capital requirements imposed on our lenders may negatively impact their ability or willingness to lend to us.

Our lenders may also revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings based on factors such as the regulatory environment and their management of perceived risk.

If we default on one of our obligations under a repurchase transaction, the counterparty could terminate the transaction and cease entering into other repurchase transactions with us.

Additionally, our wholly-owned captive broker-dealer subsidiary's ability to access bilateral and triparty repo funding, such as through the FICC's GCF Repo service, requires that it continually meet regulatory and membership requirements established by FINRA and the FICC, which could change over time, potentially resulting in BES to lose access to these funding sources, which represents a significant portion of our total borrowing capacity.

Because of these and other factors, there is no assurance that we will be able to secure financing on terms that are acceptable to us.

If we cannot obtain sufficient funding on acceptable terms, we may have to sell assets, possibly under adverse market conditions, and our financial condition and results of operations could be adversely affected and our ability to make distributions to our stockholders could be limited.

Our borrowing costs may increase at a faster pace than the yield on our investments.

Since we rely primarily on short-term and/or variable rate borrowings to acquire fixed-rate securities with long-term maturities, our borrowing costs are particularly sensitive to increases in short-term interest rates, as well as overall funding availability, market liquidity, fluctuations in asset values and "haircut" levels applied to assets pledged under repurchase agreements and other factors.

The relationship between short and longer-term interest rates is often referred to as the "yield curve." Ordinarily, short-term interest rates are lower than longer-term interest rates, but a flattening of the yield curve can occur if short-term interest rates rise disproportionately relative to longer-term interest rates or if longer-term rates fall disproportionately relative to short-term rates.

It is also possible that the yield curve could invert, with short-term rates exceeding longer-term rates.

If either of these conditions occur, our borrowing costs could increase more rapidly than the interest income earned on our fixed-rate assets and our net interest margin would decline, or in extreme scenarios even turn negative, adversely impacting our results of operations and financial condition.

We employ an active management strategy to achieve our principal objective of preserving our tangible net book value while generating attractive risk-adjusted returns.

The composition of our investment portfolio, leverage ratio and hedge composition will vary as we believe changes to market conditions, risks and valuations warrant.

We may experience significant investment gains or losses when we sell investments that we no longer believe provide attractive risk-adjusted returns or when we believe more attractive alternatives are available.

We may be incorrect in our assessment and select an investment portfolio that may generate lower returns than a more static management strategy.

Furthermore, because of our active strategy, investors may be unable to assess changes in our financial position solely by observing changes in the mortgage market.

The Fed’s participation in the Agency mortgage market could adversely affect the value of and returns on Agency RMBS.

In March 2020, the Fed launched a series of quantitative easing measures and began unprecedented large-scale purchases of U.S.

Treasury securities and Agency RMBS to restore proper market functioning and the flow of credit to U.S.

households and businesses disrupted by the COVID-19 financial crisis.

Although its position on these matters may change over time, the Fed has stated its intent to maintain accommodative monetary policies until its objectives of maximum employment and a long-term average target inflation rate of 2% are achieved and that it will continue to increase its holdings of Treasury securities and Agency RMBS until substantial further progress has been made towards these goals.

There is no certainty that these programs will be continued, and the Fed may determine to reduce its level of purchases, curtail reinvestment in Agency RMBS or engage in outright sales.

The Fed’s involvement in the Agency mortgage market can materially impact the availability, price and returns associated with Agency RMBS.

As of December 31, 2020, the Fed owned approximately 30% of all outstanding Agency RMBS.

When the Fed is actively purchasing securities, asset prices and liquidity typically increase, but we may simultaneously experience materially faster rates of prepayment and we may be unable to reinvest the repayments at acceptable yields.

The Fed’s participation may also adversely impact mortgage spreads.

For example, mortgage spreads could widen due to increased prepayment risk when the Fed is actively conducting asset purchases.

Mortgage spreads may also widen due to an actual or anticipated reduction in the Fed’s asset purchases, reinvestment rate or outright sales.

Given the scale of the Fed’s asset purchases, the adverse effects of the Fed’s involvement in the Agency mortgage market (and the timing and effects of any changes in Fed programs) may be difficult to predict and could result in a material decline in our financial position.

In an attempt to mitigate the impact of spread widening, we may reduce our leverage to below our normal target leverage range.

We may also attempt to adjust our asset and hedge composition, but these and other actions we may take could be ill timed or ineffective.

A decline in the fair value of our assets may adversely affect our financial condition and make it costlier to finance our assets.

We record our investments at fair value with changes in fair value reported in net income or other comprehensive income (a component of equity).

We record our investments at fair value with changes in fair value reported in net income or other comprehensive income.

A decline in the fair value of our investments could reduce both our net income and stockholders' equity.

We also use our investments as collateral for our financings and certain hedge transactions;

consequently, a decline in fair value, or perceived market uncertainty about the value of our assets, could make it difficult for us to obtain financing on favorable terms

or at all, or for us to maintain our compliance with terms of any agreements already in place.

consequently, a decline in fair value, or perceived market uncertainty about the value of our assets, could make it difficult for us to obtain financing on favorable terms or at all, or for us to maintain our compliance with terms of agreements already in place.

Since we primarily invest in long-term fixed rate securities, our investment portfolio is particularly sensitive to changes in longer-term interest rates.

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If this occurs, we could be required to sell assets at adverse prices and our ability to maintain or increase our net income would be significantly restricted.

It may be uneconomical to roll our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts.

We utilize TBA dollar roll transactions as a means of investing in and financing Agency RMBS, which represents a form of off-balance sheet financing and increases our "at risk" leverage.

Sales or declines in purchases of Agency RMBS by the Fed and other market participants could adversely impact the market for TBA dollar roll transactions.

TBAs subject us to margin calls under the provisions established by the Mortgage-Backed Securities Division ("MBSD") of the FICC, and our prime brokerage agreements may require that we post additional margin above the levels established by the MBSD.

Under certain market conditions it may be uneconomical to roll our TBA positions prior to the settlement date and we could have to take physical delivery of the underlying securities and settle our obligations for cash.

We may not have sufficient funds or alternative financing sources available to settle such obligations.

Additionally, if we take delivery of the underlying securities, we can expect to receive the "cheapest to deliver" securities, which have the least favorable prepayment attributes that can be delivered to satisfy the TBA contract, such as the anticipated collateral's weighted average coupon, weighted average maturity and projected CPR.

The specific securities we do receive may also consist of an insufficient number of "whole pool" securities for us to maintain a sufficient percentage of our assets in qualifying "mortgage and other liens in real estate" required to remain exempt from registration as an investment company under the Investment Company Act.

Consequently, failure to procure adequate financing to settle our obligations or to meet margin calls under our TBA contracts could result in defaults or a forced sale of assets in unfavorable market conditions and adversely affect our financial condition and results of operations.

Our funding and derivative agreements subject us to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

We enter into master repurchase agreements and derivative agreements with a variety of counterparty financial institutions.

These institutions require that we maintain a certain amount of collateral with them to protect them from loss in the event we default on our obligations under the agreements.

Borrowings under our master repurchase agreements are secured by the assets financed under the agreements.

Pursuant to the terms of our master repurchase agreements, a decline in the value of the collateral may result in our lenders initiating margin calls, where the lender requires us to pledge additional collateral.

The specific collateral value to borrowing ratio that would trigger a margin call is not set in the master repurchase agreements and is not determined until we engage in a repurchase transaction under these agreements.

Our fixed-rate collateral generally may be more susceptible to margin calls as increases in interest rates tend to affect more negatively the market value of fixed-rate securities.

In addition, some collateral may be less liquid than other instruments, which could cause it to be more susceptible to margin calls in a volatile market environment.

Moreover, collateral that prepays more quickly increases the frequency and magnitude of potential margin calls as there is a time lag between when the prepayment is reported (which reduces the market value of the security) and when the principal payment is received.

If we are unable to satisfy margin calls, our lenders may foreclose on our collateral.

The threat of or occurrence of a margin call could force us to sell, either directly or through a foreclosure, our collateral under adverse market conditions, which could result in substantial losses.

Collateral requirements under our derivative agreements are also impacted by changes in the value of the derivative instrument, the counterparties' perceived level of risk and other factors.

Our counterparties, or the central clearing agency, typically have the sole discretion to determine the value of the derivative instruments and the value of the collateral securing such instruments.

In the event of a margin call, we must generally provide additional collateral on the same business day.

Furthermore, our derivative agreements may also contain cross default provisions under which a default under certain of our other indebtedness above a certain threshold amount would cause an event of default under the derivative agreement.

Following an event of default, we could be required to settle our obligations under the agreements at their termination values.

The threat of or occurrence of margin calls or the forced settlement of our obligations under our derivative agreements at their termination values could force us to sell our investments under adverse market conditions, which could result in substantial losses.

Our funding and derivative agreements expose us to risk that our counterparties will not perform their obligations to us as and when due.

When we engage in a repurchase transaction, we initially transfer securities to the counterparty financial institution under one of our master repurchase agreements in exchange for cash, and our counterparty is obligated to resell such assets to us at the end of the term of the transaction.

The cash we receive when we initially sell the collateral is less than the value of that collateral and this difference is referred to as the "haircut." As a result, we borrow a smaller amount than the collateral we initially sell in

these transactions and increases in "haircuts" may require us to post additional collateral.

If a counterparty defaults on an obligation to resell collateral to us, we could incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities).

Our derivative agreements may also require that we pledge collateral to our derivative counterparties.

Based on changes in the value of our derivative agreements, we may also be entitled to receive collateral from our derivative counterparties.

Should our derivative counterparties fail to satisfy their obligations to us, such as return our collateral at the conclusion of the derivative transaction, fail to pledge collateral to us or fail to make other payments we are entitled to under the terms of our agreements as and when due, we could incur a loss on equal to the value of our collateral and/or other amounts due to us.

To limit our counterparty exposure, we diversify our funding across multiple counterparties and by counterparty region.

We also attempt to minimize counterparty risk by limiting our counterparties to registered central clearing exchanges and major financial institutions with acceptable credit ratings and by monitoring positions with individual counterparties.

However, there is no assurance that we will not suffer a loss due to a counterparty default, and, although we believe the risk is minimal due to initial and daily mark-to-mark requirements, guarantee funds, and other resources that are available in the event of default, we could be exposed to a risk of loss if an exchange or a central clearing member of the exchange defaults on its obligations.

Further, the enforceability of our derivative and repurchase agreements may also depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the domicile of the counterparty, applicable international requirements.

Consequently, we cannot assure you that we will not suffer a loss due to a counterparty's failure to fulfill its obligations under our agreements in a timely manner or at all.

Our rights under repurchase agreements are subject to the effects of bankruptcy laws in the event of our or our lender's bankruptcy or insolvency.

In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S.

Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S.

Bankruptcy Code and to foreclose on the collateral without delay.

In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as an unsecured creditor.

In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to recover our assets under a repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes.

Recoveries on these claims could be subject to significant delay and, if received, could be substantially less than the damages incurred.

Our hedging strategies may be ineffective.

We employ techniques that are intended to limit, or "hedge," the adverse effect of changes in interest rates on the value of our assets and financing costs, subject to complying with REIT tax requirements.

Hedging strategies are complex and there are no perfect hedges.

Our business model also calls for accepting certain amounts of risk.

Consequently, our hedging activities are generally designed to limit our interest rate exposure, but not to eliminate it, and they are generally not designed to hedge against spread risk and other risks inherent to our business model.

Our hedging strategies vary in scope based on our portfolio composition, liabilities and our assessment of the level and volatility of interest rates, expected prepayments, credit and other market conditions, and are expected to change over time.

We could fail to properly assess a risk or fail to recognize a risk entirely, leaving us exposed to losses without the benefit of any offsetting hedges.

Furthermore, the derivative financial instruments we select may not have the effect of reducing our risk.

Poorly designed hedging strategies or improperly executed transactions could increase our risk of loss.

Hedging activities could also result in losses if the hedged event does not occur.

Numerous other factors can also impact the effectiveness of our hedging strategies including the following:

the cost of interest rate hedges, which can be particularly costly during periods of interest rate volatility and rising rates;

the degree to which the interest rate hedge benchmark rate correlates to the interest rate risk for which protection is sought;

the degree to which the duration of the hedge matches the duration of the related asset or liability, particularly as interest rates change;

the amount of income that a REIT may earn from hedging transactions, other than hedging transactions that satisfy certain requirements of the Internal Revenue Code or that are done through a TRS, which is limited by federal tax provisions governing REITs;

the degree to which the value of our interest rate hedges changes relative to our assets as a result of fluctuations in interest rates, passage of time, or other factors.

For these reasons, our hedging strategies may fail to protect us from loss and could even result in greater losses than if we had not entered in the hedge transaction, which would negatively impact our operating results and financial condition.

Changes in prepayment rates may adversely affect the return on our investments.

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If the proceeds are reinvested at lower yields than our existing assets, our net interest margins would be negatively impacted.

We also amortize or accrete any premiums and discounts we pay or receive at purchase relative to the stated principal of our assets into interest income over their projected lives using the effective interest method.

We also amortize or accrete into interest income any premiums and discounts we pay or receive at purchase relative to the stated principal of our assets over their projected lives using the effective interest method.

If the actual and estimated future prepayment experience differs from our prior estimates, we are required to record an adjustment to interest income for the impact of the cumulative difference in the effective yield, which could negatively affect our interest income.

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In addition, should significant prepayments occur, there is no certainty that we will be able to identify acceptable new investments, which could reduce our invested capital or result in us investing in less favorable securities.

Prepayment rates are difficult to predict, and market conditions may disrupt the historical correlation between interest rate changes and prepayment trends.

Our success depends, in part, on our ability predict prepayment behavior under a variety of economic conditions and particularly the relationship between changing interest rates and the rate of prepayments.

As part of our overall portfolio risk management, we analyze interest rate changes and prepayment trends separately and collectively to assess their effects on our investment portfolio.

To a large extent our analysis is based on models that are dependent on a number of assumptions and inputs.

Many of the assumptions we use are based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions.

There is risk that our assumptions are incorrect.

Dislocations in the residential mortgage market and other developments may disrupt the relationship between the way that prepayment trends have historically responded to interest rate changes.

Prepayment rates are also impacted by other factors beyond interest rates, such as when borrowers sell their property and use the proceeds to prepay their mortgage or when borrowers default on their mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property.

Fannie Mae and Freddie Mac will also generally purchase mortgages that are 120 days or more delinquent from RMBS trusts when the cost of guarantee payments to security holders exceeds the cost of holding the nonperforming loans in their portfolios.

In addition, the introduction of U.S.

Government programs, or changes to existing programs, could increase the availability of mortgage credit to homeowners, which could impact prepayment rates, particularly for Fannie Mae and Freddie Mac Agency RMBS.

The impact of each of these factors on prepayment rates is difficult to predict and may negatively impact our ability to assess the market value of our investment portfolio, implement hedging strategies and/or implement techniques to reduce our prepayment rate volatility, which could adversely affect our financial condition and results of operations.

We use analytical models and data in connection with the valuation of assets and our risk management and hedging activities, and any incorrect, misleading or incomplete information used in connection therewith would subject us to potential risks.

We use analytical models (both those supplied by third parties and proprietary models developed by us) and data and other information supplied by our third-party vendors to value assets, assess potential asset purchases and in connection with our risk management and hedging activities.

Models are dependent on a number of assumptions and inputs.

Models may also assume a

static portfolio;

however, we actively manage our portfolio and, thus, actual results could differ materially from these estimates.

If either the models, their underlying assumptions or data inputs prove to be incorrect, misleading or incomplete, any decisions we make in reliance thereon expose us to potential risks.

For example, we may be induced to buy certain assets at prices that are too high, sell certain other assets at prices that are too low or forego favorable opportunities altogether.

Similarly, any hedging based on faulty models and data may prove to be unsuccessful and expose us to losses on our hedging activities.

Many of the analytical models used by us, such as mortgage prepayment models or mortgage default models, are predictive in nature.

Prepayment rates are difficult to predict, and market conditions and technology advancements in mortgage origination channels may disrupt the historical correlation between interest rate changes and prepayment trends.

Our success depends on our ability to predict prepayment behavior under a variety of economic conditions and particularly the relationship between changing interest rates and other market conditions and the rate of prepayments.

As part of our overall portfolio risk management, we analyze interest rate changes and prepayment trends to assess their effects on our investment portfolio.

Our analysis is based on models that depend on multiple assumptions and inputs.

Many of the assumptions we use are based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions, which may not correctly predict future prepayment activity.

Dislocations in the residential mortgage market and other developments may disrupt the relationship between the way that prepayment trends have historically responded to interest rate changes and our actual prepayment experience.

Prepayment rates are also impacted by other factors beyond interest rates, such as when borrowers sell their property and use the proceeds to prepay their mortgage or when borrowers default on their mortgages and the defaulted loans are either purchased from the RMBS trust or the mortgages are prepaid from the proceeds of a foreclosure sale of the property.

Historically, Fannie Mae and Freddie Mac repurchased mortgages that are 120 days or more delinquent from RMBS trusts.

However, in response to the unprecedented circumstances of COVID-19, the GSEs temporarily extended the timeline for repurchasing delinquent loans that are in forbearance.

The GSE delinquent loan buyout policy was further modified on September 30, 2020 to extend the timeline for its delinquent loan buyout trigger from 4 consecutively missed monthly payments to 24 consecutively missed monthly payments.

However, most delinquent loans are likely to be repurchased before

the 24-month period expires for numerous reasons, including repayment or satisfaction in full, debt forgiveness, repurchases by seller/servicers under their guidelines, loan modifications, short-sales or deeds in lieu of foreclosure or referrals of loans to foreclosure.

There is no guarantee that the GSEs will continue to defer buyouts of loans from the RMBS trusts during the forbearance period.

Thus, the large number of loans currently delinquent or in forbearance could accelerate prepayments on our investment portfolio.

Changes to or new U.S.

Government programs could also increase the availability of mortgage credit to homeowners, which could impact prepayment rates.

Furthermore, current and future technological advancements are expected to improve efficiencies in mortgage origination and servicing, which may reduce borrowing costs and increase the rate of prepayment activity.

The impacts of these factors are difficult to predict and may negatively affect our ability to assess prepayment risk or to implement effective hedging strategies and other techniques to reduce our exposure to prepayment risk.

The analytical models and third-party data that we rely on to manage our portfolio and conduct our business objectives may be incorrect, misleading or incomplete.

We use analytical models, data and other information to value assets, assess potential asset purchases and in connection with our risk management and hedging activities.

We may source our models and data from third-parties or develop them internally.

Models are dependent on multiple assumptions and inputs.

Models typically also assume a static portfolio.

If either the models, their underlying assumptions or data inputs prove to be incorrect, misleading or incomplete, any decisions we make in reliance on such information may be faulty and expose us to potential risks.

Many of the analytical models we use are predictive in nature, such as mortgage prepayment and default models.

The use of predictive models has inherent risks and may incorrectly forecast future behavior, leading to potential losses.

Furthermore, since predictive models are usually constructed based on historical trends using data supplied by third parties, the success of relying on such models depends heavily on the accuracy and reliability of the supplied historical data.

Additionally, multiple factors could disrupt the relationships between data and historical trends, reducing the ability of our models to predict future outcomes, or even render them invalid, which we are at greater risk of during periods of high volatility.

Additionally, multiple factors could disrupt the relationships between data and historical trends, reducing the ability of our models to predict future outcomes, or even render them invalid.

We are at greater risk of this occurring during periods of high volatility or unprecedented financial or economic events, such as during the COVID-19 pandemic.

Consequently, actual results could differ materially from our projections.

Moreover, use of different models could result in materially different projections.

Some of the risks of relying on analytical models and third-party data are particular to analyzing tranches from securitizations, such as residential and commercial mortgage-backed securities.

These risks include, but are not limited to, the following:

(i) collateral cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on simplifying assumptions that lead to errors;

Valuation models rely on the accuracy of market data inputs.

If incorrect market data is entered into even a well-founded valuation model, the resulting valuations will be incorrect.

However, even if market data is inputted correctly, "model prices" may differ substantially from market prices, especially for securities with complex characteristics or illiquid instruments.

Analytical models and third-party data used to analyze securitizations backed by non-Agency and residential and commercial mortgages also expose us to the risk that the (i) collateral cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on simplifying assumptions that lead to errors;

(ii) information about collateral may be incorrect, incomplete or misleading;

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or (iv) collateral or bond information may be outdated, in which case the models may contain incorrect assumptions as to what has occurred since the date information was last updated.

Many of the models we use include LIBOR as an input.

The expected transition away from LIBOR may require changes to models, may change the underlying economic relationships being modeled, and may require the models to be run with less historical data than is currently available for LIBOR.

We may incorrectly value LIBOR-based instruments because our models do not currently account for LIBOR cessation.

The models we use may include LIBOR as an input.

The expected transition away from LIBOR may require changes to these models that may change the underlying economic relationships being modeled and the models may be run with less historical data than is currently available for LIBOR.

The fair value of our investments may not be readily determinable or may be materially different from the value that we ultimately realize upon their disposal.

We measure the fair value of our investments in accordance with guidance set forth in Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures .

Fair value is only an estimate based on good faith judgment of the price at which an investment can be sold since market prices of investments can only be determined by negotiation between a willing buyer and seller.

Our determination of the fair value of our investments includes inputs provided by pricing services and third-party dealers.

Valuations of certain investments in which we invest may be difficult to obtain or unreliable.

In general, pricing services and dealers heavily disclaim their valuations and we do not have recourse against them in the event of inaccurate price quotes or other inputs used to determine the fair value of our investments.

Depending on the complexity and illiquidity of a security, valuations of the same security can vary substantially from one pricing service or dealer to another.

Moreover, fair value and estimates of fair value may fluctuate over short periods of time.

For these reasons, the fair value at which our investments are recorded may not be an accurate indication of their realizable value.

The ultimate realization of the value of an asset depends on economic and other conditions that are beyond our control.

Consequently, if we were to sell an asset,

particularly in a forced liquidation, the realized value may be less than the amount at which the asset is recorded, which would negatively affect our results of operations and financial condition.

The mortgage loans referenced by our CRT securities or that underlie our non-Agency securities may be or could become subject to delinquency or foreclosure, which could result in significant losses to us.

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Government agency, subject us to the potential risk of loss of principal and/or interest due to delinquency, foreclosure and related losses on the underlying mortgage loans.

CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third-party market participants.

The CRT securities issued by Fannie Mae and Freddie Mac are designed to transfer mortgage credit risk from the entities to private investors.

The transactions are structured as unsecured and unguaranteed bonds issued by the GSEs whose principal payments are determined by the delinquency and prepayment experience of a reference pool of mortgages guaranteed by the GSE.

CRT transactions arranged by third-party market participants are similarly structured to reference a specific pool of loans that have been securitized by Fannie Mae or Freddie Mac and transfer mortgage credit risk related to those loans to the purchaser of the securities.

The holder of CRT securities bears the risk that the borrowers may default on their obligations to make full and timely payments of principal and interest.

The return of the principal invested in CRT securities is dependent on the level of borrower defaults on the underlying pool of mortgages.

CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third-party market participants, that are designed to synthetically transfer mortgage credit risk from the issuing entity to private investors.

The transactions are structured as unsecured and unguaranteed bonds whose principal payments are determined by the delinquency and prepayment experience of a reference pool of mortgages guaranteed by Fannie Mae or Freddie Mac.

An investor in CRT securities bears the risk that the borrowers in the reference pool of loans may default on their obligations to make full and timely payments of principal and interest.

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The ability of a borrower to repay a loan secured by residential property is dependent upon the income or assets of the borrower.

Many factors could impair a borrower's ability to repay the loan, including:

loss of employment, divorce, illness, acts of God, acts of war or terrorism, adverse changes in economic and market conditions, changes in laws and regulations, changes in fiscal policies and zoning ordinances, costs of remediation and liabilities associated with environmental conditions such as mold, and the potential for uninsured or under-insured property losses.

Commercial mortgage loans underlying CMBS are generally secured by multifamily or other commercial property and are subject to risks of delinquency and foreclosure and risks of loss that are greater than similar risks associated with loans made on the security of residential property.

Many factors could impair a borrower's ability to repay the loan, including loss of employment, divorce, illness, acts of God (including pandemics), acts of war or terrorism, adverse changes in economic and market conditions, changes in laws and regulations, changes in fiscal policies and zoning ordinances, costs of remediation and liabilities associated with environmental conditions such as mold, and the potential for uninsured or under-insured property losses.

Commercial mortgage loans underlying CMBS are generally secured by multifamily or other commercial properties and are subject to risks of delinquency and foreclosure and risks of loss that are greater than similar risks associated with loans made on the security of residential property.

The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower.

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Net operating income of an income producing property can be affected by numerous factors, such as:

occupancy rates,

tenant mix, success of tenant businesses, property management decisions, property location and condition, changes in economic conditions and other factors.

Geographic concentration can expose us to greater risk of default and loss.

Repayments by borrowers and the market value of the related assets underlying our investments are affected by national as well as local and regional economic conditions.

occupancy rates, tenant mix, success of tenant businesses, property management decisions, property location and condition, changes in economic or operating conditions (such as a pandemic) and other factors.

Geographic concentration of our assets can expose us to greater risk of default and loss.

Repayments by borrowers and the market value of the related assets underlying our investments are affected by national as well as local and regional economic and other conditions.

As a result, concentrations of investments tied to geographic regions increase the risk that adverse economic conditions or other developments affecting a region could increase the frequency and severity of losses on our investments.

Additionally, assets in certain regional areas may be more susceptible to certain hazards (such as earthquakes, widespread fires, rising sea levels, floods, hurricanes and certain climate risks) than properties in other parts of the country, and assets located in coastal states may be more susceptible to hurricanes than properties in other parts of the country.

As a result, areas affected by such events often experience disruptions in travel, transportation and tourism, loss of jobs and an overall decrease in consumer activity, and often a decline in real estate-related investments, and their economies may not recover sufficiently to support income producing real estate at pre-event levels.

Additionally, assets in certain regional areas may be more susceptible to certain hazards (such as earthquakes, widespread fires, rising sea levels, disease, floods, hurricanes and certain climate risks) than properties in other parts of the country, and assets located in coastal states may be more susceptible to hurricanes or sea level rise than properties in other parts of the country.

Areas affected by these types of events often experience disruptions in travel, transportation and tourism, loss of jobs, a decrease in consumer activity, and a decline in real estate-related investments, and their economies may not recover sufficiently to support income producing real estate at pre-event levels.

These types of occurrences may increase over time or become more severe due to changes in weather patterns and other climate changes.

Although our investments in CRT and non-Agency securities may benefit from private mortgage insurance, this insurance may not be sufficient to cover losses.

Private mortgage insurance may not cover losses on loans referenced to or underlying our CRT and non-Agency RMBS.

In certain instances, mortgage loans referenced to our CRT securities or underlying our non-Agency RMBS may have private mortgage insurance.

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If private mortgage insurers fail to remit insurance payments for insured portions of loans when losses are incurred and where applicable, whether due to breach of contract or to an insurer's insolvency, we may experience a loss on related CRT or non-Agency RMBS securities for the amount that was insured by such insurers.

Credit ratings assigned to our credit risk-oriented investments are subject to ongoing evaluation and revision and could be downgraded, adversely affecting the value of our investments.

Some of our investments are rated by nationally recognized rating agencies, such as Moody's Investors Service, Fitch Ratings, Standard & Poor's and others.

Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings will not be changed or withdrawn by a rating agency in the future.

If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the value of these investments could significantly decline, which would adversely affect the value of our investment portfolio and could result in losses upon disposition.

Changes in credit spreads may adversely affect our profitability.

A significant component of the fair value of CRT and non-Agency securities and other credit risk-oriented investments is attributable to the credit spread, or the difference between the value the credit instrument and the value of a financial instrument with similar interest rate exposure, but with no credit risk, such as a U.S.

Treasury note, and the credit instrument.

Credit spreads are subject to market factors and can be highly volatile.

In addition, hedging fair value changes associated with credit spreads can be inefficient and our hedging strategies are generally not designed to mitigate credit spread risk.

A significant component of the fair value of CRT and non-Agency securities and other credit risk-oriented investments is attributable to the credit spread, or the difference between the value of the credit instrument and the value of a financial instrument with similar interest rate exposure, but with no credit risk, such as a U.S.

Treasury note.

Credit spreads can be highly volatile and may fluctuate due to changes in economic conditions, liquidity, investor demand and other factors.

Credits spreads

typically widen in times of increased market uncertainty or when economic conditions have or are expected to deteriorate.

Credit spreads may also widen due to actual or anticipated rating downgrades on the securities we hold or similar securities.

Hedging fair value changes associated with credit spreads can be inefficient and our hedging strategies are generally not designed to mitigate credit spread risk.

Consequently, changes in credit spreads could adversely affect our profitability and financial condition.

The anticipated discontinuation of LIBOR and transition from LIBOR to an alternative reference rate could negatively impact our variable rate financial instruments and the dividends we pay on our fixed-to-floating rate cumulative redeemable preferred stock.

Our outstanding fixed-to-floating rate cumulative redeemable preferred stock agreements, variable rate investments, swaption agreements and certain of our interest rate swap and borrowing agreements are indexed to USD LIBOR.

LIBOR is an indicative measure of the average interest rate at which major global banks could borrow from one another and is used extensively as a “benchmark” or “reference rate” for various financial and commercial contracts.

LIBOR is quoted in multiple currencies and multiple time frames using data reported by private-sector banks.

In July 2017, the regulator of LIBOR, the United Kingdom Financial Conduct Authority, announced its intent to phase out the use of LIBOR by the end of 2021, citing a number of banks' reluctance to participate in setting LIBOR rates and an insufficient number of interbank lending transactions from which LIBOR may be set.

In anticipation of the discontinuation of LIBOR, in the U.S., the Alternative Reference Rates Committee (“ARRC”), a group convened by the Federal Reserve Board and the Federal Reserve Bank of New York comprised of large U.S.

financial institutions, regulators and other private and public-sector entities, has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for USD LIBOR.

SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S.

Treasury securities, and is based on directly observable U.S.

Treasury-backed repurchase transactions.

Although the U.S.

Treasury-backed overnight repo market is a highly liquid, there is currently no robust market for determining, forward-looking, SOFR term rates.

Additionally, certain of our LIBOR based contracts that may be in effect at the time of LIBOR discontinuation may not contain fallback language in the event LIBOR is unavailable or may not contain fallback language that contemplates the permanent discontinuation of LIBOR.

Consequently, there is uncertainty as to how our LIBOR based financial instruments may react to its discontinuation.

It also is possible that not all of our LIBOR based assets and liabilities will transition away from LIBOR at the same time, and it is possible that not all of our assets and liabilities will transition to the same alternative reference rate, in each case increasing the difficulty of hedging.

Switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a fixed spread to account for differences between LIBOR and SOFR.

Industry organizations are attempting to structure the spread calculation in a manner that minimizes the possibility of value transfer between counterparties by virtue of the transition, but there is no assurance that the calculated spread will be fair and accurate or that similar financial instruments will use the same spread.

We and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging, and risk management.

The process of transition may also involve operational risks.

It is also possible that no transition will occur for certain financial instruments, meaning that those instruments would continue to be subject to the weaknesses of the LIBOR calculation process and/or, as is the potential case for our Series C fixed-to-floating rate preferred stock, that the determination of LIBOR would be dependent on banks voluntarily providing quotations of LIBOR to us based on specified procedures, which an insufficient number of banks may be willing or able to do, in which case the variable rate instrument could convert to a fixed-rate instrument based on the most recent rate in effect for the instrument.

At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be implemented.

The nature of such potential changes, alternative reference rates or other reforms could adversely affect the market for or value of our financial instruments and the dividends we pay on our fixed-to-floating rate preferred stock on which the interest is determined by reference to LIBOR.

Regulations adopted by the U.S.

Commodity Futures Trading Commission ("CFTC") and regulators of other countries could impose increased margin requirements and require additional operational and compliance costs.

The CFTC subjects certain swaps to clearing and exchange trading requirements, margin requirements, reporting and record keeping requirements and counterparties to business conduct rules.

Current and future rules and regulations promulgated by the CFTC and regulators of other countries may adversely affect our ability to engage in derivative transactions or may increase the cost of our hedging activity and potentially result in higher collateral requirements.

Such increased costs and potentially higher collateral requirements could have an adverse impact on our business and results of operations.

Our investments are recorded at fair value, which may not be readily determinable or may be materially different from the value that we ultimately realize upon their disposal.

We measure the fair value of our investments in accordance with guidance set forth in Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures .

Our determination of the fair value of our investments includes inputs provided by third-party dealers and pricing services.

Valuations of certain investments in which we invest may be difficult to obtain or unreliable.

In general, dealers and pricing services heavily disclaim their valuations and we do not have recourse against them due to liabilities and other damages arising from inaccurate price quotes or other inputs used to determine the fair value of our investments.

Depending on the complexity and illiquidity of a security, valuations of the same security can vary substantially from one dealer or pricing service to another.

Moreover, fair value and estimates of fair value may fluctuate over short periods of time.

For these reasons, the fair value at which our investments are recorded may not be an indication of their realizable value.

Furthermore, the ultimate realization of the value of an asset depends on economic and other conditions that are beyond our control.

Consequently, if we were to liquidate an asset, particularly in a forced liquidation, the realized value may be less than the amount at which the asset is recorded, which would negatively affect our results of operations and financial condition.

Actions of the U.S.

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To the extent the markets do not respond favorably to any such actions or such actions do not function as intended, they could have broad adverse market implications and could negatively impact our financial condition and results of operations.

New regulatory requirements could adversely affect the availability or terms of financing from our lender counterparties, could impose more stringent capital rules on financial institutions, could restrict the origination of residential mortgage loans and the formation of new issuances of mortgage-backed securities and could limit the trading activities of certain banking entities and other systemically significant organizations that are

important to our business.

banking and financial regulators have begun to examine root causes of financial dislocations that occurred in March and April 2020 in response to the Pandemic and to identify areas for potential regulatory reforms that may be adopted in the future.

New regulatory requirements could adversely affect the availability or terms of financing from our lender counterparties, impose more stringent capital rules on financial institutions, restrict the origination of residential mortgage loans and the formation of new issuances of mortgage-backed securities and limit the trading activities of certain banking entities and other systemically significant organizations that are important to our business.

Together or individually these new regulatory requirements could materially affect our financial condition or results of operations in an adverse way.

Federal housing finance reform, including potential changes to the Federal conservatorship of Fannie Mae and Freddie Mac or to laws or regulations affecting the relationship between the GSEs and the U.S.

Federal housing finance reform and potential changes to the Federal conservatorship of Fannie Mae and Freddie Mac or to laws or regulations affecting the relationship between the GSEs and the U.S.

Government may adversely affect our business.

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Department of the Treasury has provided a liquidity backstop to Fannie Mae and Freddie Mac to ensure their financial stability.

Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S.

Shortly after the start of the federal conservatorships, the Secretary of the U.S.

Treasury suggested that the guarantee payment structure of Fannie Mae and Freddie Mac in the U.S.

housing finance market should be re-examined.

The release of the Presidential Memorandum on Federal Housing Finance Reform in March 2019, which directed the Secretary of the Treasury to develop a plan to end GSE conservatorship, and housing finance reform plans by both the Treasury Department and the Department of Housing and Urban Development in September 2019, coupled with new leadership at the FHFA, has elevated the potential for administrative and/or legislative action to affect structural GSE and federal housing reform.

Consequently, the U.S.

Treasury could also stop providing credit support to Fannie Mae and Freddie Mac in the future, the future roles of Fannie Mae and Freddie Mac could be significantly modified and/or the nature of their guarantee obligations could be considerably limited relative to historical measurements.

If conservatorship were ended without legislative action to authorize an explicit government guarantee, Agency RMBS could be more difficult to finance, and the price of Agency RMBS could decline.

Additionally, without a sufficiently robust U.S.

government backstop, Fannie Mae and Freddie Mac Agency securities would likely no longer be fungible with one another, leading to a failure of the Uniform Mortgage Backed Security ("UMBS") TBA program, which is intended to improve the overall liquidity of Agency securities and help ensure the liquidity of the federal housing market.

Changes to the nature of GSE guarantee obligations could also re-define what constitutes an Agency security.

Consequently, ending GSE conservatorship without an explicit government guarantee (or a sufficient U.S.

Treasury backstop) or the enactment of other federal housing reform measures could have broad adverse implications and negatively affect our financial position and results of operations.

In 2019, the U.S.

Treasury Department and Department of Housing and Urban Development issued housing reform plans that expressed support for a future end to the conservatorships.

In November 2020, the FHFA promulgated regulations that established new regulatory capital requirements for Fannie Mae and Freddie Mac.

In January 2021, the U.S.

Treasury Department amended the terms of its liquidity backstop to enable Fannie Mae and Freddie Mac to retain a greater amount of capital in order to achieve these levels, subject to certain conditions.

These administrative actions may have significant impact on the source, pricing, volume and nature of Agency RMBS and other mortgage securities that Fannie Mae and Freddie Mac issue, which may reduce or otherwise impact their availability in the future.

Further administrative and/or legislative actions may be taken that affect structural GSE and federal housing reform, alter the amount or nature of the credit support provided by the U.S.

Treasury to Fannie Mae and Freddie Mac, or modify the future roles of Fannie Mae and Freddie Mac in housing finance.

Any legal or administrative actions affecting these GSEs may create market uncertainty, may have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by them or may otherwise impact the size and scope of the Agency RMBS markets.

Administrative or legislative action that would terminate the conservatorships without simultaneously providing for a sufficiently robust U.S.

government guaranty could re-define what constitutes an Agency security and have broad adverse implications for the mortgage markets and our business:

such changes could subject Agency RMBS to Fannie Mae or Freddie Mac credit risk, make them more difficult to finance, and cause their values to decline.

We may be unable to acquire desirable investments due to competition, a reduction in the supply of new production Agency RMBS having the specific attributes we seek, and other factors.

We invest in Agency RMBS as well as other types of mortgage and mortgage-related residential and commercial mortgage-backed securities and other investments in, or related to, the housing, mortgage or real estate markets.

Our profitability depends, in large part, on our ability to acquire our target assets at attractive prices.

We may seek assets that include specific attributes that affect their propensity for prepayment under certain market conditions or enable us to satisfy certain asset test requirements to maintain our REIT qualification status or exemption from regulation under the Investment Company Act (such as "whole pool" Agency RMBS).

A sufficient supply of our target assets may not be available at attractive prices, or even available at all.

We also may compete for these assets with a variety of other investors, including other REITs, specialty finance companies, public and private funds, government entities, commercial and investment banks, insurance companies and other financial institutions, who may have competitive advantages over us, such as a lower cost of funds and access to funding sources that may not be available to us.

Federal housing finance reform initiatives may also affect the supply of new production Agency RMBS “whole pool” securities.

On May 13, 2014, the FHFA released its updated 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, which set forth goals for the next phase of the Fannie Mae and Freddie Mac conservatorships, including a desire to build a new single-family securitization infrastructure for use by the GSEs and adaptable for use by other participants in the secondary market.

Pursuant to this strategic plan and at the direction of the FHFA, Fannie Mae and Freddie Mac completed a joint initiative to develop a common mortgage backed security to be issued by the GSEs, commonly referred to as the Single Security Initiative, and began issuing UMBS in 2019.

Concomitant with this initiative, the GSE’s have adopted practices in issuing RMBS pools that have impacted the supply of new issuance “whole pool” securities.

In November 2019, the FHFA issued a request for information concerning the GSE’s pooling practices, which included some recommendations that, if implemented, would require the GSE’s to predominantly issue large multi-lender mortgage pools and would constrain issuances of specified mortgage pools.

This proposal engendered significant opposition from many sectors of the housing finance industry, but its

adoption as a whole or in part remains uncertain.

Some other housing finance reform proposals that have been made would seek to implement more stringent guidelines that reduce the types and sizes of mortgage loans eligible to be purchased by the GSEs.

The extent to which any of these initiatives will be implemented remains uncertain, but each of them may limit the overall supply of “whole pool” Agency RMBS with desirable prepayment and other characteristics.

Consequently, we cannot guarantee that we will be able to obtain a sufficient level of desirable investments, which could negatively impact our ability to achieve our target leverage ratio, raise additional equity at otherwise opportune times, continue to maintain our REIT qualification or exemption from regulation under the Investment Company Act, or sufficiently reduce our exposure to prepayment, extension and other risks, which could negatively impact our financial condition and results of operation.

Changes to the U.S.

federal income tax code could have a material impact on the residential mortgage market, which could impact the pricing of RMBS.

Changes to the federal income tax code pertaining to the deductibility of home mortgage interest and the treatment of other items related to home ownership can negatively impact the housing market and pricing of RMBS.

Most recently, the Tax Cuts and Jobs Act ("TCJA"), which generally went into effect on January 1, 2018, set limits on deductions of state and local income and property taxes to an aggregate amount of $10,000 and modified the amount of residential mortgage interest that is deductible, limiting the deduction available for mortgage interest by reducing the amount of mortgage debt that can qualify from $1 million to $750,000, subject to grandfathering mortgage debt outstanding at the time of enactment.

In addition, the TCJA eliminated the home equity mortgage interest deduction.

Absent future legislation, many of the changes affecting individual taxpayers under the TCJA will cease to apply after December 31, 2025 and will revert to their pre-2018 form, but it is expected that the number of individual taxpayers that itemize deductions have or will decrease significantly causing the income tax benefits of residential home ownership to decline materially.

These factors, and future changes to the federal income tax code, could reduce the demand for home ownership, result in a decline in the pricing of residential real estate as well as alter the prepayment patterns of residential mortgages, all of which could have a significant impact on the pricing and returns of RMBS.

Our profitability depends on our ability to acquire our target assets at attractive prices.

We may seek assets that include specific attributes that affect their propensity for prepayment under certain market conditions or enable us to satisfy asset test requirements to maintain our REIT qualification status or exemption from regulation under the Investment Company Act (such as "whole pool" Agency RMBS).

The supply of our target assets may be impacted by policies and procedures adopted by the GSEs, such as pooling practices, or their regulator, the FHFA, or actions by other governmental agencies.

Housing finance reform measures may also impact the supply and availability of our target assets.

Consequently, a sufficient supply of our target assets may not be available or available at attractive prices.

We may also compete for these assets with a variety of other

investors, including other REITs, specialty finance companies, public and private funds, government entities, banks, insurance companies and other financial institutions, who may have competitive advantages over us, such as a lower cost of funds and access to funding sources not available to us.

If we are unable to acquire a sufficient supply of our target assets, we may be unable to achieve our investment objectives or to maintain our REIT qualification status or exemption from regulation under the Investment Company Act.

Risks Related to Our Financing and Hedging Activities

Our use of significant leverage increases the risk that we may incur substantial losses.

Our strategy involves the significant use of leverage which will vary depending on our assessment of market conditions and risk adjusted returns.

We generally expect to maintain our leverage between six to twelve times the amount of our tangible stockholders' equity, but we may operate at levels outside of this range for extended periods.

We incur leverage by borrowing against a substantial portion of the market value of our assets.

While leverage is fundamental to our investment strategy, it also creates significant risks because leverage amplifies the effect of changes in underlying asset values.

Because of our leverage, we may incur substantial losses if the value of our investments declines or if mortgage spreads widen and our investments underperform our interest rate hedges.

Spread risk is an inherent component of our business as a levered investor.

When the spread between the market yield on our mortgage assets and benchmark interest rates widens, our tangible net book value will typically decline.

We refer to this as "spread risk" or "basis risk." As a levered investor primarily in fixed-rate Agency RMBS, spread risk is an inherent component of our investment strategy.

Although we use hedging instruments to attempt to protect against moves in interest rates, our hedges will typically not protect us against spread risk.

Spreads may widen due to numerous factors, including changes in mortgage and fixed income markets due to actual or expected monetary policy actions by U.S.

and foreign central banks, market liquidity or changes in investor return requirements and sentiment.

Wider spreads can occur independent of moves in interest rates.

We may be unable to procure adequate financing or to renew or replace existing financing as it matures.

We rely primarily on short-term borrowings to finance our mortgage investments.

Consequently, our ability to achieve our investment objectives depends not only on our ability to borrow sufficient amounts and on favorable terms, but also our ability to renew or replace our maturing short-term borrowings on a continuous basis.

A variety of factors could prevent us from being able to achieve our intended borrowing and leverage objectives, including:

• disruptions in the repo market that adversely impact the availability and cost of repo funding, including failure of the Fed and other policy makers to stabilize the repo market or a discontinuation of such stabilization measures;

• lenders require additional collateral to cover our borrowings, which we may be unable to deliver;

• lenders exit the market or are unwilling to make repurchase agreements or other financing arrangements available to us at acceptable rates and terms;

• regulatory capital requirements or other limitations imposed on our lenders that may negatively impact their ability or willingness to lend to us;

• our failure to satisfy covenants, leverage limits, or other requirements imposed by our lenders, in which case our lenders may terminate and cease entering into repurchase transactions with us;

• our wholly-owned captive broker-dealer’s inability to continually meet FINRA and FICC regulatory and membership requirements, which may change over time, resulting in our inability to access triparty repo funding through the FICC's GCF Repo service, which represents a significant portion of our total borrowing capacity.

Because of these and other factors, there is no assurance that we will be able to secure financing on terms that are acceptable to us.

If we cannot obtain sufficient funding on acceptable terms, we may have to sell assets possibly under adverse market conditions.

Our borrowing costs may increase at a faster pace than the yield on our investments.

Our borrowing costs are particularly sensitive to changes in short-term interest rates, as well as overall funding availability and market liquidity, whereas the yield on our fixed rate assets is largely influenced by longer-term rates and conditions in the mortgage market.

Consequently, our borrowing costs may rise at a faster pace or decline at a slower pace than the yield on our assets, negatively impacting our net interest margin.

In extreme scenarios, our net interest margin could even turn negative.

It may be uneconomical to roll our TBA dollar roll transactions and we may be required to take physical delivery of the underlying securities and fund our obligations with cash or other financing sources.

We utilize TBA dollar roll transactions as an alternate means of investing in and financing Agency RMBS, which represent a form of off-balance sheet financing and increase our "at risk" leverage.

It may become uneconomical for us to roll forward our TBA positions prior to their settlement dates due to market conditions, which can be impacted by a variety of factors including the Fed’s purchases and sales of Agency RMBS in the TBA market.

TBA dollar roll transactions include a deferred purchase price obligation on our part, and an inability or unwillingness to continue to roll forward our position has effects similar to a termination of financing:

In that circumstance, we would be required to settle the obligations for cash and would then take physical delivery of underlying Agency RMBS.

We may not have sufficient funds or alternative financing sources available to settle such obligations.

If we take delivery of the underlying securities, we expect to receive the "cheapest to deliver" securities with the least favorable prepayment attributes that satisfy the terms of the TBA contract.

Additionally, the specific securities that we receive may include few, if any, “whole pool” securities, which could inhibit our ability to remain exempt from and regulation as an investment company under the Investment Company Act (see “Loss of our exemption from regulation pursuant to the Investment Company Act would adversely affect us” below).

TBA contracts also subject us to margin requirements as described further below.

Our inability to roll forward our TBA positions or failure to obtain adequate financing to settle our obligations or to meet margin calls under our TBA contracts could force us to sell assets under adverse market conditions potentially causing us to incur significant losses.

Our funding and derivative agreements subject us to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

Our financing and hedging arrangements require that we maintain certain levels of collateral with our counterparties, called margin, to protect them from loss in the event we default on our obligations.

Our counterparties in these arrangements require us to post additional margin if the value of the posted collateral declines to re-establish the agreed-upon collateral level.

Our fixed-rate collateral is generally more susceptible to margin calls due to its price sensitivity to changes in interest rates.

In addition, some collateral may be less liquid than other instruments, which could cause it to be more susceptible to margin calls in a volatile market environment.

Additionally, faster rates of prepayment increase the magnitude of potential margin calls as there is a time lag between the effective date of the prepayment and when we receive the principal payment.

Our derivative agreements also subject us to margin calls.

Collateral requirements under our derivative agreements are typically dictated by contract or clearinghouse rules and regulations adopted by the U.S.

Commodity Futures Trading Commission (“CFTC”) and regulators of other countries.

Thus, changes in clearinghouse rules and other regulations can increase our margin requirements and the cost of our hedges.

Our counterparties typically have the sole discretion to determine eligible collateral, the value of our collateral and, in the case of our derivative counterparties, the value of our derivative instruments.

Additionally, for cleared swaps and futures, the futures commission merchant, or FCM, that we transact through typically has the right to require more collateral than the clearinghouse requires.

The requirement to meet margin calls can create liquidity risks.

In the event of a margin call, we must generally provide additional collateral on the same business day.

Following an event of default, we could be required to settle our obligations under the agreements.

Our derivative agreements may also contain cross default provisions under which a default under our other indebtedness may cause an event of default under the derivative agreement.

The threat or occurrence of margin calls or the forced settlement of our obligations under our agreements could force us to sell our investments under adverse market conditions and result in substantial losses.

Our funding and derivative agreement counterparties may not fulfill their obligations to us as and when due.

If a repurchase agreement counterparty defaults on its obligation to resell collateral to us, we could incur a loss on the transaction equal to the difference between the value of our collateral and the amount of our borrowing.

Similarly, if a derivative agreement counterparty fails to return collateral to us at the conclusion of the derivative transaction or fails to pledge collateral to us or to make other payments we are entitled to under the terms of our agreement as and when due, we could incur a loss equal to the value of our collateral and other amounts due to us.

We attempt to limit our counterparty exposure by diversifying our funding across multiple counterparties and limiting our counterparties to registered central clearing exchanges and major financial institutions with acceptable credit ratings.

However, these measures may not sufficiently reduce our risk of loss.

Central clearing exchanges typically attempt to reduce the risk of default by requiring initial and daily variation margin from their clearinghouse members and maintain guarantee funds and other resources that are available in the event of default.

Nonetheless, we could be exposed to a risk of loss if an exchange or one or more of its clearing members defaults on its obligations.

Most of the swaps that we enter into must be cleared by a Derivatives Clearing Organization, or DCO.

DCOs are subject to regulatory oversight, use extensive risk management processes, and might receive "too big to fail" support from the government in the case of insolvency.

We access the DCO

through several FCMs, which may establish their own collateral requirements beyond that of the DCO.

Consequently, for any cleared swap, we bear the credit risk of both the DCO and the relevant FCM as to obligations under our swap agreements.

The enforceability of our derivative and repurchase agreements may also depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the domicile of the counterparty, applicable international requirements.

Our rights under repurchase agreements in the event bankruptcy or insolvency may be limited.

In the event of our bankruptcy or insolvency, our repurchase agreements may qualify for special treatment under the U.S.

Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S.

Bankruptcy Code and to foreclose on the collateral without delay.

In the event of a lender’s insolvency or bankruptcy, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as an unsecured creditor.

Recoveries on these claims could be subject to significant delay and, if received, could be substantially less than the damages incurred.

Our hedging strategies may be ineffective.

We attempt to limit, or hedge against, the adverse effect of changes in interest rates on the value of our assets and financing costs, subject to complying with REIT tax requirements.

Hedging strategies are complex and do not fully protect against adverse changes under all circumstances.

Our business model also calls for accepting certain amounts of risk.

Consequently, our hedging activities are generally designed to limit interest rate exposure, but not to eliminate it, and they are generally not designed to hedge against spread risk and other risks inherent to our business model.

Our hedging strategies may vary in scope based on our portfolio composition, liabilities and our assessment of the level and volatility of interest rates, expected prepayments, credit and other market conditions, and are expected to change over time.

We could fail to properly assess a risk or fail to recognize a risk entirely, leaving us exposed to losses without the benefit of any offsetting hedges.

Furthermore, the techniques and derivative instruments we select may not have the effect of reducing our risk.

Poorly designed hedging strategies or improperly executed transactions could increase our risk of loss.

Hedging activities could also result in losses if the hedged event does not occur.

Numerous other factors can impact the effectiveness of our hedging strategies, including the following:

• the cost of interest rate hedges;

• the degree to which the interest rate hedge benchmark rate correlates to the interest rate risk being hedged;

• the degree to which the duration of the hedge matches that of the related asset or liability, particularly as interest rates change;

• the amount of income that a REIT may earn from hedging transactions that do not satisfy certain requirements of the Internal Revenue Code or that are not done through a TRS;

• the degree to which the value of our interest rate hedges changes relative to our assets as a result of fluctuations in interest rates, passage of time, or other factors.

Additionally, regulations adopted by the CFTC and regulators of other countries could adversely affect our ability to engage in derivative transactions or impose increased margin requirements and require additional operational and compliance costs.

Consequently, our hedging strategies may fail to protect us from loss and could even result in greater losses than if we had not entered in the hedge transaction.

The discontinuation of LIBOR could negatively impact the dividends we pay on our fixed-to-floating rate cumulative redeemable preferred stock and the value of our variable rate financial instruments.

Our outstanding fixed-to-floating rate cumulative redeemable preferred stock agreements are indexed to three-month USD LIBOR.

In addition, we also have certain investments and interest rate derivatives that reference USD LIBOR.

In July 2017, the United Kingdom Financial Conduct Authority announced that it intends to phase out the use of LIBOR by the end of 2021.

In November 2020, ICE Benchmark Administration (IBA), the administrator of LIBOR, signaled a potential extension of USD LIBOR, announcing a December consultation on its intention to publish one-month and three-month USD LIBOR, along with three other tenors, through June 30, 2023.

The Alternative Reference Rates Committee (“ARRC”), a group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for USD LIBOR.

SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S.

Treasury securities, and is

based on directly observable U.S.

Treasury-backed repurchase transactions.

Treasury-backed overnight repo market is highly liquid, but there is currently no robust market for determining forward-looking SOFR term rates.

Switching existing financial instruments from LIBOR to SOFR requires calculations of a fixed spread to account for differences between the two, which may not favor all parties equally.

Additionally, certain of our LIBOR based contracts may not contain fallback language for the permanent discontinuation of LIBOR, which may result in disputes or litigation over the appropriateness of the substitute index and fixed spread to LIBOR.

Risks Related to Our Business Operations

Our executive officers and other key personnel are critical to our success and the loss of any executive officer or key employee may materially adversely affect our business.

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The departure of any of our executive officers and/or key personnel could have a material adverse effect on our operations and performance.

We are highly dependent on information systems and third parties, and systems failures or cybersecurity incidents could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to operate our business.

We are highly dependent on information systems and third-parties, and system failures or cybersecurity incidents incurred by us or the third-parties that we rely on could significantly disrupt our ability to operate our business.

Our business is highly dependent on communications and information systems.

Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading activities, including mortgage-backed securities trading activities.

A disruption or breach could also lead to unauthorized access to and release, misuse, loss or destruction of our confidential information or personal or confidential information of our employees or third parties, which could lead to regulatory fines, costs of remediating the breach, reputational harm, financial losses, litigation and increased difficulty doing business with third parties that rely on us to meet their own data protection requirements.

Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading and risk management activities.

A disruption or breach could also lead to unauthorized access to and release, misuse, loss or destruction of our confidential information or confidential information of our employees or third parties, which could lead to regulatory fines, costs of remediating the breach, reputational harm, financial losses, litigation and increased difficulty doing business with third parties that rely on us to meet their own data protection requirements.

In addition, we also face the risk of operational failure, termination or capacity constraints of any of the third parties with which we do business or that facilitate our business activities, including clearing agents or other financial intermediaries we use to facilitate our securities transactions, if their respective systems experience failure, interruption, cyberattacks, or security breaches.

We may face increased costs as we continue to evolve our cyber defenses in order to contend with changing risks.

We may face increased costs as we continue to evolve our cyber defenses to contend with changing risks.

These costs and losses associated with these risks are difficult to predict and quantify but could have a significant adverse effect on our operating results.

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There is no assurance that we, or the third parties that facilitate our business activities, have not or will not experience a breach.

business activities) or any failure to maintain performance, reliability and security of our technical infrastructure, but such computer malware, viruses, and computer hacking and phishing attacks may negatively affect our operations.

It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of our networks or systems (or the networks or systems of third parties that facilitate our business activities) or any failure to maintain performance, reliability and security of our technical infrastructure, but such computer malware, viruses, and computer hacking and phishing attacks may negatively affect our operations.

Risks Related to Our Taxation as a REIT

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Furthermore, the proper classification of an instrument as debt or equity for federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset requirements.

We are also required to distribute to stockholders at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain).

also required to distribute to stockholders at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain).

If we fail to qualify as a REIT in any tax year, we would be subject to U.S.

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federal corporate tax rate in effect at the time of the failure if that amount exceeds $50,000 per failure, and, in case of income test failures, will be a 100% tax on an amount based on the magnitude of the failure, as adjusted to reflect the profit margin associated with our gross income.

New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to remain qualified as a REIT or it could otherwise adversely affect REITs and their stockholders.

New legislation or administrative or judicial action could make it more difficult or impossible for us to remain qualified as a REIT or it could otherwise adversely affect REITs and their stockholders.

The present U.S.

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Our stockholders would then increase the adjusted basis of their stock by the difference between (a) the amounts of capital gain dividends that we designated and that they include in their taxable income, minus (b) the tax that we paid on their behalf with respect to that income.

We intend to make distributions

to our stockholders to comply with the REIT qualification requirements of the Internal Revenue Code, which limits our ability to retain earnings and thereby replenish or increase capital from operations.

We intend to make distributions to our stockholders to comply with the REIT qualification requirements of the Internal Revenue Code, which limits our ability to retain earnings and thereby replenish or increase capital from operations.

To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S.

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Furthermore, if we should fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (x) the amounts actually distributed, (y) the amounts of income we retained and on which we have paid corporate income tax and (z) any excess distributions from prior periods.

From time to time, we may generate taxable income greater than our reported income prepared in accordance with GAAP.

We may generate taxable income greater than our reported income prepared in accordance with GAAP.

Differences in the timing of the recognition of taxable income and deductible expenses and the actual receipt or disbursement of cash may also occur.

For example, if we purchase mortgage securities at issuance with a discount, we are generally required to accrete the discount into taxable income prior to receiving the cash proceeds.

In addition, we generally will be required to take certain amounts into income no later than the time such amounts are reflected on certain financial statements.

The application of this rule may require the accrual of, among other categories of income, income with respect to certain debt instruments or mortgage-backed securities, such as original issue discount or market discount, earlier than would be the case under the general tax rules, although the precise application of this rule is unclear at this time.

This rule generally is effective for tax years beginning after December 31, 2017 or, for debt instruments or mortgage-backed securities issued with original issue discount, for tax years beginning after December 31, 2018.

Moreover, we are not allowed to reduce our taxable income for a net capital loss incurred;

For example, market gains and losses on our hedging instruments, such as interest rate swaps, may be deferred for income tax purposes and amortized into taxable income over the original contract term of the instrument even if we have exited the instrument and settled such gains or losses for cash.

We are also not allowed to reduce our taxable income for a net capital loss incurred;

instead, the net capital loss may be carried forward for a period of up to five years and applied against future capital gains subject to our ability to generate sufficient capital gains, which cannot be assured.

If we do not have funds available in these situations, we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to maintain our qualification as a REIT or avoid corporate income tax and the 4% annual excise tax.

These alternatives could increase our costs and reduce our stockholders' equity.

Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.

We may in the future choose to pay dividends in our own stock, in which case stockholders may be required to pay income taxes in excess of cash dividends received.

If we do not have funds available in these situations to meet our REIT distribution requirements or to avoid corporate income taxes or the 4% excise tax

altogether, we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions.

We may choose to pay dividends in our own stock, in which case stockholders may be required to pay income taxes in excess of cash dividends received.

We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder.

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federal income tax purposes.

As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received.

As a result, stockholders may be required to pay income taxes with respect to such dividends that are in excess of the cash dividends received.

stockholder sells the stock that it receives as a dividend to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale.

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tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock.

In addition, if a significant number of our stockholders determine to sell shares of our common stock to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

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Any of these or other taxes we may incur would decrease cash available for distribution to our stockholders.

• Regular U.S.

federal and state corporate income taxes on any undistributed taxable income, including undistributed net capital gains.

• A non-deductible 4% excise tax if the actual amount distributed to our stockholders in a calendar year is less than a minimum amount specified under Federal tax laws.

Corporate income taxes on the earnings of subsidiaries, to the extent that such subsidiaries are subchapter C corporations and are not qualified REIT subsidiaries or other disregarded entity for federal income tax purposes.

• Corporate income taxes on the earnings of subsidiaries, to the extent that such subsidiaries are subchapter C corporations and are not qualified REIT subsidiaries or other disregarded entities for federal income tax purposes.

• A 100% tax on certain transactions between us and our TRSs that do not reflect arm's-length terms.

If we acquire appreciated assets from a corporation that is not a REIT (i.e., a corporation taxable under subchapter C of the Internal Revenue Code) in a transaction in which the adjusted tax basis of the assets in our hands is determined by reference to the adjusted tax basis of the assets in the hands of the subchapter C corporation, we may be subject

to tax on such appreciation at the highest corporate income tax rate then applicable if we subsequently recognize a gain on a disposition of any such assets during the five-year period following their acquisition from the subchapter C corporation.

• If we acquire appreciated assets from a corporation that is not a REIT (i.e., a corporation taxable under subchapter C of the Internal Revenue Code) in a transaction in which the adjusted tax basis of the assets in our hands is determined by reference to the adjusted tax basis of the assets in the hands of the subchapter C corporation, we may be subject to tax on such appreciation at the highest corporate income tax rate then applicable if we subsequently recognize a gain on a disposition of any such assets during the five-year period following their acquisition from the subchapter C corporation.

• A 100% tax on net income and gains from "prohibited transactions."

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federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders and the ownership of our stock.

We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and we may be unable to pursue investments that would be otherwise advantageous to us to remain qualified as a REIT.

Thus, compliance with the REIT requirements may hinder our ability to make and, in certain cases, to maintain ownership of, certain attractive investments.

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If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences.

As a result, we may be required sell otherwise attractive investments from our investment portfolio.

As a result, we may be required to sell otherwise attractive investments from our investment portfolio.

These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to remain qualified as a REIT.

We enter into financing arrangements that are structured as sale and repurchase agreements pursuant to which we nominally sell assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in exchange for a purchase price.

Economically, these agreements are financings that are secured by the assets sold pursuant thereto.

We believe that we would be treated for REIT asset and income test purposes as the owner of the assets that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement.

It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase agreement, in which case we could fail to remain qualified as a REIT.

Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

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To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both gross income tests.

As such, we may have to limit our use of advantageous hedging techniques or implement those hedges through our TRS.

As such, we may have to limit our use of advantageous hedging techniques or implement those hedges through a TRS.

This could increase the cost of our hedging activities as our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.

In addition, losses in our TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRS.

In addition, losses in a TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRS.

Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.

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Government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property or other qualifying income for purposes of the 75% gross income test.

However, we treat our TBAs as qualifying assets for purposes of the REIT 75% asset test, and we treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion of Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of our TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS.

However, we treat our TBAs as qualifying assets for purposes of the REIT 75% asset test, and we treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, based on a legal opinion of Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”) substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of our TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS.

Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions.

In addition, it must be emphasized that the opinion of Skadden, Arps, Slate, Meagher & Flom LLP is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations and covenants made by our management regarding our TBAs.

In addition, it must be emphasized that Skadden’s opinion is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations and covenants made by our management regarding our TBAs.

No assurance can be given that the IRS would not assert that such assets or income are not qualifying assets or income.

If the IRS were to successfully challenge the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.

If the IRS were to successfully challenge Skadden’s opinion, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.

Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only limited judicial and administrative authorities exist.

Even a technical or inadvertent violation could jeopardize our REIT qualification.

Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis.

In addition, our ability to satisfy the requirements to remain qualified as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including cases where we own an equity interest in an entity that is classified as a partnership for federal income tax purposes.

Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions on a continuous basis for which only limited judicial and administrative authorities exist.

Our application of such provisions may be dependent on interpretations of the provisions by the staff of the Internal Revenue Service, which may change over time.

Even a technical or inadvertent violation of the Internal Revenue Code provisions could jeopardize our REIT qualification.

The tax on prohibited transactions could limit our ability to engage in certain transactions.

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The term "prohibited transaction" generally includes a sale or other disposition of property that is held primarily for sale to customers in the ordinary course of a trade or business by us or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to us.

We could be subject to this tax if we were to dispose of or structure CMOs in a manner that was treated as a prohibited transaction for federal income tax purposes.

We intend to conduct our operations so that no asset that we own (or are treated as owning) at the REIT level will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business.

We could be subject to this tax if we were to dispose of assets or structure transactions in a manner that is treated as a prohibited transaction for federal income tax purposes.

We intend to structure our activities to avoid classification as prohibited transactions.

As a result, we may choose not to engage in certain transactions at the REIT level that might otherwise be beneficial to us.

In addition, whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends on the particular facts and circumstances.

No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Internal Revenue Code that would prevent such treatment.

The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates.

We intend to structure our activities to avoid prohibited transaction characterization.

Distributions to tax-exempt investors, or gains on sale of our common stock by tax-exempt investors, may be classified as unrelated business taxable income.

Distributions with respect to our common stock and gains from the sale of our common stock should generally not constitute unrelated business taxable income to a tax-exempt investor.

However, there are certain exceptions to this rule.

For example, if (i) all or a portion of our assets are subject to the rules relating to "taxable mortgage pools" or we hold residual interests in a real estate mortgage investment conduit (or "REMIC");

(ii) we are a "pension held REIT;" (iii) a tax-exempt stockholder has incurred debt to purchase or hold our common stock;

or (iv) a tax-exempt stockholder is classified as a social club, voluntary employee benefit association, supplemental unemployment benefit trust or a qualified group legal services plan, then a portion of our distributions to tax-exempt stockholders and, in the case of stockholders described in clauses (iii) and (iv), gains realized on the sale of our common stock by tax-exempt stockholders may be subject to U.S.

federal income tax as unrelated business taxable income under the Internal Revenue Code.

Our inability to deduct for tax purposes compensation paid to our executives could require us to increase our distributions to stockholders or pay entity level taxes to maintain our REIT status.

Section 162(m) of the Internal Revenue Code prohibits publicly held corporations from taking a tax deduction for annual compensation in excess of $1 million paid to any of the corporation’s "covered employees." Prior to the enactment of the TCJA, a publicly held corporation’s covered employees included its chief executive officer and the three other most highly compensated executive officers (other than the chief financial officer), and certain "performance-based compensation" was excluded from the $1 million cap.

The TCJA made certain changes to Section 162(m), effective for taxable years beginning after December 31, 2017.

These changes include, among others, expanding the definition of "covered employee" to include the chief financial officer and repealing the performance-based compensation exception to the $1 million cap, subject to certain transition rules.

The TCJA also added that once an individual becomes a covered employee after December 31, 2016, that individual will remain a covered employee for all future years including after termination or death.

Compensation paid to "covered employees" in excess of the 162(m) deductibility limit increases our taxable income compared to fully deductible compensation and, as a result, increases the amount of dividends we must distribute to stockholders to maintain our REIT status and/or to avoid U.S.

federal and state income tax, which could adversely affect our financial condition.

Thus, no assurance can be given that any property that we sell will not be treated as such or that we can comply with certain safe-harbor provisions of the Internal Revenue Code that would prevent such treatment.

The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax at the entity’s regular corporate rates.

Distributions to tax-exempt investors may be classified as unrelated business taxable income.

Although distributions with respect to our common stock generally do not constitute unrelated business taxable income, there are some circumstances where they may.

If (i) we generate "excess inclusion income" as a result of all or a portion of our assets being subject to rules relating to "taxable mortgage pools" or as a result of holding residual interests in a REMIC or (ii) we become a "pension held REIT," then a portion of the distributions to tax exempt investors may be subject to U.S.

federal income tax as unrelated business taxable income under the Code.

Risks Related to Our Business Structure

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We treat partial pool securities, CRT and other mortgage related securities as real estate-related assets.

Consequently, our ability to satisfy the exemption under the Investment Company Act is dependent upon our ability to acquire and hold on a continuous basis a sufficient amount of whole pool securities, The availability of whole pool securities may be adversely impacted by a variety of factors, including GSE pooling practices, which can change over time, housing finance reform initiatives and competition for whole pool securities with other mortgage REITs.

Additionally, if the SEC determines that any of our securities are not qualifying interests in real estate or real estate-related assets, adopts a contrary interpretation with respect to these securities or otherwise believes we do not satisfy the above exceptions or changes its interpretation of the above exceptions, we could be required to restructure our activities or sell certain of our assets.

As such, we cannot guarantee that we will be able acquire or hold a sufficient amount of whole pool securities to maintain our exemption under the Investment Company Act, and our compliance with these requirements may at times lead us to adopt less efficient methods of financing certain of our investments or to forego acquiring higher yielding securities.

The availability of whole pool securities may be adversely impacted by a variety of factors, including GSE pooling practices, which can change over time, housing finance reform initiatives and competition for whole pool securities with other mortgage REITs.

Additionally, if the SEC determines that any of our securities are not qualifying interests in real estate or real estate-related assets, otherwise believes we do not satisfy the above exceptions or changes its interpretation with respect to these securities or the above exceptions, we could be required to restructure our activities or sell certain of our assets.

As such, we cannot guarantee that we will be able to acquire or hold enough whole pool securities to maintain our exemption under the Investment Company Act, and our compliance with these requirements may at times lead us to adopt less efficient methods of financing certain of our investments or to forego acquiring higher yielding securities.

Importantly, if we fail to qualify for this exemption, our ability to use leverage would be substantially reduced and we would be unable to conduct our business as we currently conduct it, which could materially and adversely affect our business.

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The market price and trading volume of our common stock may be highly volatile and subject to wide fluctuations.

Price variations may be unrelated to our operating performance.

If the market price of our common stock declines significantly, stockholders may be unable to resell shares at a gain.

Further, fluctuations in the trading price of our common stock may adversely affect the liquidity of the trading market for our common stock and our ability to raise additional equity capital

Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

actual or anticipated variations in our quarterly operating results or distributions;

changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry;

increases in market interest rates that lead purchasers of our shares of common stock to demand a higher yield;

Furthermore, fluctuations in the trading price of our common stock may adversely affect the liquidity of our common stock and our ability to raise additional equity capital.

Price fluctuations may result in our stock trading below our reported net tangible book value per share for extended periods of time.

Variations in the price of our common stock can be affected by any one of the risk factors described herein.

Variations may also occur due to a variety of factors unrelated to our financial performance, such as:

• general market and economic conditions;

• changes in government policy, rules and regulations applicable to mortgage REITs, including tax laws, financial accounting and reporting standards, and exemptions from the Investment Company Act of 1940, as amended;

• actual or anticipated variations in our quarterly operating results as well as relative to levels expected by securities analysts;

• issuance of shares of common stock or securities convertible into common stock, which may be issued at a price below tangible net book value per share of common stock;

• changes in market valuations of similar companies;

adverse market reaction to any increased indebtedness we incur in the future;

issuance of additional equity securities;

our repurchases of shares of our common stock;

actions by institutional stockholders;

• adverse market reaction to any increased indebtedness we incur in the future or issuance of preferred stock senior in priority to our common stock;

• actions by stockholders, individually or collectively;

• additions or departures of key management personnel;

• speculation in the press or investment community;

price and volume fluctuations in the stock market from time to time, which are often unrelated to our operating performance;

changes in regulatory policies, tax laws and financial accounting and reporting standards, particularly with respect to REITs, or applicable exemptions from the Investment Company Act of 1940, as amended;

actual or anticipated changes in our dividend policy and earnings or variations in operating results;

any shortfall in revenue or net income or any increase in losses from levels expected by securities analysts;

decreases in our net book value per share;

loss of major repurchase agreement providers;

general market and economic conditions.

In addition, the price of our common stock may be below our reported net book value per common share.

We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future.

Future offerings of debt securities, which would rank senior to our common and preferred upon our liquidation, and future offerings of equity securities, which would dilute our existing stockholders or may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

In the future, we may raise capital through the issuance of debt or equity securities.

Upon liquidation, holders of our debt securities, if any, preferred stock and lenders with respect to other borrowings will be entitled to our available assets prior to the holders of our common stock.

Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both.

Our preferred stock has a preference on liquidating distributions and a preference on dividend payments that could limit our ability to pay dividends to the holders of our common stock.

Sales of substantial amounts of our common stock, or the perception that these sales could occur, could have a material adverse effect on the price of our common stock.

Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.

Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us.

Future sales of shares of our common stock may depress the price of our shares.

We cannot predict the effect, if any, of future sales of our common stock or the availability of shares for future sales on the market price of our common stock.

Any sales of a substantial number of our shares in the public market, or the perception that sales might occur, may cause the market price of our shares to decline.

We have not established a minimum dividend payment level and we cannot assure you of our ability to pay dividends in the future.

• actual or anticipated changes in our dividend policy;

• changes to our targeted investments or investment guidelines.

We have not established a minimum dividend payment level and may be unable to pay dividends in the future.

We intend to pay monthly dividends to our common stockholders in an amount that all or substantially all our taxable income is distributed within the limits prescribed by the Internal Revenue Code.

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All distributions will be made at the discretion of our Board of Directors and will depend on our earnings and financial condition, the requirements for REIT qualification and such other factors as our Board of Directors deems relevant from time to time.

We may not be able to make distributions in the future or our Board of Directors may change our dividend policy.

In addition, some of our distributions may include a return of capital.

To the extent that we decide to pay dividends in excess of our current and accumulated tax earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes.

A return of capital reduces the cost basis of a stockholder's investment in our common stock to the extent of such basis and is treated as capital gain thereafter.

An increase in market interest rates may cause a material decrease in our net book value and the market price of our common stock.

Market interest rate fluctuations and capital market conditions can have a significant adverse effect on our net book value and the market price of our common stock.

For instance, rising interest rates would result in increased interest expense on our variable rate debt, thereby reducing cash flow and our ability to service our indebtedness and pay distributions.

In addition, if market interest rates rise without an increase in our distribution rate, the market price of our common stock could decrease as potential investors may require a higher distribution yield on our common stock or seek other investments paying higher distributions or interest.

The stock ownership limit imposed by the Internal Revenue Code for REITs and our amended and restated certificate of incorporation may restrict our business combination opportunities.

To qualify as a REIT under the Internal Revenue Code, not more than 50% of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year in which we qualify as a REIT.

Our amended and restated certificate of incorporation, with certain exceptions, authorizes our Board of Directors to take the actions that are necessary and desirable to qualify as a REIT.

Pursuant to our amended and restated certificate of incorporation, no person may beneficially or constructively own more than 9.8% in value or in number of shares, whichever is more restrictive, of our common or capital stock.

Our Board of Directors may grant an exemption from this 9.8% stock ownership limitation, in its sole discretion, subject to such conditions, representations and undertakings as it may determine are reasonably necessary.

Pursuant to our amended and restated certificate of incorporation, our Board of Directors has the power to increase or decrease the percentage of common or capital stock that a person may beneficially or constructively own.

However, any decreased stock ownership limit will not apply to any person whose percentage ownership of our common or capital stock is in excess of such decreased stock ownership limit until that person's percentage ownership of our common or capital stock equals or falls below the decreased stock ownership limit.

Until such a person's percentage ownership of our common or capital stock falls below such decreased stock ownership limit, any further acquisition of our common or capital stock will be in violation of the decreased stock ownership limit.

The ownership limits imposed by the tax law are based upon direct or indirect ownership by "individuals," but only during the last half of a tax year.

The ownership limits contained in our amended and restated certificate of incorporation apply to the ownership at any time by any "person," which term includes entities.

Any attempt to own or transfer shares of our common stock or capital stock in violation of these restrictions may result in the shares being transferred to a charitable trust or may be void.

These ownership limitations are intended to assist us in complying with the tax law requirements, and to minimize administrative burdens.

However, these ownership limits might also delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

The stock ownership limitation contained in our amended and restated certificate of incorporation generally does not permit ownership of more than 9.8% of our common or capital stock and attempts to acquire our common or capital stock above this limit will be ineffective unless an exemption is granted by our Board of Directors.

As described above, our amended and restated certificate of incorporation generally prohibits beneficial or constructive ownership by any person of more than 9.8% (by value or by number of shares, whichever is more restrictive) of our common or capital stock, unless exempted by our Board of Directors.

Our amended and restated certificate of incorporation's constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity.

As a result, the acquisition of 9.8% or less of the outstanding stock by an individual or entity or group could result in constructive ownership greater than 9.8% and thus be subject to our amended and restated certificate of incorporation's ownership limit.

Additionally, our preferred stock has a preference on dividend payments and liquidating distributions that could limit our ability to pay dividends to the holders of our common stock.

Therefore, we may not be able to make distributions in the future or our Board of Directors may change our dividend policy.

Our certificate of incorporation generally does not permit ownership of more than 9.8% of our common or capital stock and attempts to acquire amounts above this limit will be ineffective unless an exemption is granted by our Board of Directors.

For the purpose of complying with REIT ownership limitations under the Internal Revenue Code, our amended and restated certificate of incorporation generally prohibits beneficial or constructive ownership by any person of more than 9.8% of our common or capital stock (by value or by number of shares, whichever is more restrictive), unless exempted by our Board of Directors.

Such constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity.

As a result, the acquisition of 9.8% or less of the outstanding stock by an individual, entity or group could result in constructive ownership greater than 9.8% and thus be subject to our amended and restated certificate of incorporation's ownership limit.

Any attempt to own or transfer shares of our common or preferred stock more than the ownership limit without the consent of the Board of Directors will result in the shares being automatically transferred to a charitable trust or, if the transfer to a charitable trust would not be effective, such transfer being treated as invalid from the outset.

Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws could discourage a change of control that our stockholders may favor, which could also adversely affect the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and bylaws may make it more difficult and expensive for a third-party to acquire control of us, even if a change of control would be beneficial to our stockholders.

We could issue a series of preferred stock to impede the completion of a merger, tender offer or other takeover attempt.

The anti-takeover provisions in our amended and restated certificate of incorporation and bylaws may impede takeover attempts, or other transactions, that may be in the best interests of our stockholders.

In addition, the market price of our common stock could be adversely affected to the

extent that provisions of our amended and restated certificate of incorporation and bylaws discourage potential takeover attempts, or other transactions, that our stockholders may favor.

Such ownership limit could also delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Unresolved Staff Comments

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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.

What changed 10-K

Item 1A. Risk Factors