1 unchanged sentence
Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices and equity prices.
−Removed: The primary market risks that we are exposed to are interest rate, prepayment, spread, liquidity, extension and credit risk.
+Added: The primary market risks that we are exposed to are interest rate, prepayment, spread, liquidity, extension and credit risks.
Interest Rate Risk
11 unchanged sentences
Our hedging techniques are highly complex and are partly based on assumed levels of prepayments of our assets.
−Removed: If prepayments are slower or faster than assumed, the maturity our investments will also differ from our expectations, which could reduce the effectiveness of our hedging strategies and may cause losses on such transactions and adversely affect our cash flow.
+Added: If prepayments are slower or faster than assumed, the maturity of our investments will also differ from our expectations, which could reduce the effectiveness of our hedging strategies and may cause losses on such transactions and adversely affect our cash flow.
The severity of potential declines in our tangible net book value due to fluctuations in interest rates would depend on our asset, liability, and hedge composition at the time, as well as the magnitude and duration of the interest rate change.
1 unchanged sentence
Duration measures the estimated percentage change in market value of an instrument that would be caused by a parallel change in short and long-term interest rates.
−Removed: The duration of our assets will vary with changes in interest rates and tends to increase when interest rates rise
−Removed: and decrease when interest rates fall.
+Added: The duration of our assets will vary with changes in interest rates and tends to increase when interest rates rise and decrease when interest rates fall.
This "negative convexity" generally increases the interest rate exposure of our investment portfolio in excess of what is measured by duration alone.
We estimate the duration and convexity of our assets using a third-party risk management system and market data.
−Removed: We review the duration estimates from the third-party model and may make adjustments based on our judgment to better reflect any unique characteristics and market trading conventions associated with certain types of securities.
+Added: We review the estimates for reasonableness, giving consideration to any unique characteristics of our securities, market conditions and other factors likely to impact these estimates, and based on our judgement we may make adjustments to the third-party estimates.
The table below quantifies the estimated changes in the fair value of our investment portfolio (including derivatives and other securities used for hedging purposes) and in our tangible net book value per common share as of December 31, 2021 and 2020 should interest rates go up or down by 25, 50 and 75 basis points, assuming instantaneous parallel shifts in the yield curve and including the impact of both duration and convexity.
1 unchanged sentence
The base interest rate scenario assumes interest rates and prepayment projections as of December 31, 2021 and 2020.
−Removed: To the extent that these estimates or other assumptions do not hold true, which is likely in a period of high volatility, actual results could differ materially from our projections.
+Added: To the extent that these estimates or other assumptions do not hold true, which may be more likely during periods of elevated market volatility, actual results could differ materially from our projections.
Moreover, if different models were employed in the analysis, materially different projections could result.
−Removed: Lastly, while the table below reflects the estimated impact of interest rate changes on a static portfolio, we actively manage our portfolio and we continuously adjust the size and composition of our asset and hedge portfolio.
+Added: Lastly, while the table below reflects the estimated
+Added: impact of interest rate changes on a static portfolio, we actively manage our portfolio and we continuously adjust the size and composition of our asset and hedge portfolio.
Interest Rate Sensitivity 1,2
8 unchanged sentences
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−Removed: Derived from models that are dependent on inputs and assumptions provided by third parties, assumes there are no changes in mortgage spreads and assumes a static portfolio.
+Added: Derived from models that are dependent on inputs and assumptions, assumes there are no changes in mortgage spreads and assumes a static portfolio.
Actual results could differ materially from these estimates.
4 unchanged sentences
Interest rates and numerous other factors affect the rate of prepayments, such as housing prices, general economic conditions, loan age, size and loan-to-value ratios, and GSE buyouts of delinquent loans underlying our securities.
−Removed: Generally, prepayments increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates.
−Removed: However, this may not always be the case.
+Added: Generally, declining mortgage rates increase the rate of prepayments, while rising rates have the opposite effect.
If our assets prepay at a faster rate than anticipated, we may be unable to reinvest the repayments at acceptable yields.
4 unchanged sentences
Extension risk is the risk that our assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise.
−Removed: In rising or higher interest rate environment, we may have to finance our investments at potentially higher costs without the ability to reinvest principal into higher yielding securities because borrowers prepay their mortgages at a slower pace than originally expected, adversely impacting our net interest spread, and thus our net interest income.
+Added: In a rising or higher interest rate environment, we may be required to finance our investments at potentially higher costs without the ability to reinvest principal into higher yielding securities as a result of borrowers prepaying their mortgages at a slower pace than originally anticipated, adversely impacting our net interest spread, and thus our net interest income.
As of December 31, 2021 and 2020, our investment securities (excluding TBAs) had a weighted average projected CPR of 10.9% and 17.6%, respectively, and a weighted average yield of 2.43% and 2.33%, respectively.
The table below presents estimated weighted average projected CPRs and yields for our investment securities should interest rates go up or down instantaneously by 25, 50 and 75 basis points.
−Removed: Estimated yields exclude the impact of retroactive "catch-up" premium amortization adjustments from prior periods due to changes in the projected CPR assumption.
+Added: Estimated yields exclude the impact of retroactive "catch-up" premium amortization adjustments for prior periods due to changes in the projected CPR assumption.
Interest Rate Sensitivity 1
10 unchanged sentences
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−Removed: Derived from models that are dependent on inputs and assumptions provided by third parties and assumes a static portfolio.
+Added: Derived from models that are dependent on inputs and assumptions and assumes a static portfolio.
Actual results could differ materially from these estimates.
4 unchanged sentences
As a levered investor in mortgage-backed securities, spread risk is an inherent component of our investment strategy.
−Removed: Consequently, although we use hedging instruments to attempt to protect against moves in interest rates, our hedges are generally not designed to protect against spread risk, and our tangible net book value could decline if spreads widen.
+Added: Therefore, although we use hedging instruments to attempt to protect against moves in interest rates, our hedges are generally not designed to protect against spread risk, and our tangible net book value could decline if spreads widen.
Fluctuations in mortgage spreads can occur due to a variety of factors, including changes in interest rates, prepayment expectations, actual or anticipated monetary policy actions by the U.S.
15 unchanged sentences
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−Removed: Spread sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties, assumes there are no changes in interest rates and assumes a static portfolio.
+Added: Spread sensitivity is derived from models that are dependent on inputs and assumptions, assumes there are no changes in interest rates and assumes a static portfolio.
Actual results could differ materially from these estimates.
2 unchanged sentences
Our liquidity risk principally arises from financing long-term fixed rate assets with shorter-term variable rate borrowings.
−Removed: Future borrowings are dependent upon the willingness of lenders to finance our investments, lender collateral requirements and the lenders’ determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates and liquidity conditions within the commercial banking and mortgage finance industries.
+Added: Future borrowings are dependent upon the willingness of lenders to finance our investments, lender collateral
+Added: requirements and the lenders’ determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates and liquidity conditions within the commercial banking and mortgage finance industries.
As of December 31, 2021, we believe that we have sufficient liquidity and capital resources available to execute our business strategy (see Liquidity and Capital Resources in this Form 10-K for additional details).
12 unchanged sentences
There is no guarantee that our efforts to manage credit risk will be successful and we could suffer losses if credit performance is worse than our expectations or our counterparties default on their obligations.
−Removed: Excluding central clearing exchanges, as of December 31, 2020, our maximum amount at risk with any counterparty related to our repurchase agreements was less than 2% of tangible stockholders' equity and related to our derivative agreements was less than 1% of tangible stockholders' equity.
+Added: Excluding central clearing exchanges, as of December 31, 2021, our maximum amount at risk with any counterparty related to our repurchase agreements and derivative agreements was approximately 2% and less than 1%, respectively, of tangible stockholders' equity.
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.