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Item 1A. Risk Factors

2023-02-27 compared with 2022-02-23 · 142 added, 135 removed, 336 unchanged (45% of the section changed)

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

Our risk factors discussed below are classified among:

• risks related to our investment and portfolio management activities;

• risks related to our financing and hedging activities;

• risks related to our business operations;

• legislative and regulatory risks;

• risks related to our common stock.

Risks Related to Our Investment and Portfolio Management Activities

Spread risk is inherent to our business as a levered investor in Agency RMBS.

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

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

We refer to this as "spread risk".

As a levered investor primarily in fixed-rate Agency RMBS, spread risk is an inherent component of our investment strategy.

As a levered investor primarily in fixed-rate Agency RMBS, spread risk is an inherent component of our business.

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 also occur independent of moves in interest rates.

For example, actions by the Federal Reserve to taper its purchases of Agency RMBS and to reduce its balance sheet will likely result in materially wider spreads.

Spreads may widen due to numerous factors, including due to actual or expected monetary policy actions by U.S.

and foreign central banks, increased market volatility, a decline in market liquidity and changes in investor return requirements and sentiment.

The Fed’s participation in the Agency mortgage market could have an adverse effect on our Agency RMBS investments.

Since the onset of the COVID-19 financial crisis in March 2020, the Federal Reserve and the U.S.

Government have provided unprecedented amounts of monetary and fiscal stimulus in support of sustained economic growth.

As part of its monetary policy response, the Fed doubled the size of its balance sheet from the start of the crisis to nearly $9 trillion as of December 31, 2021, through the acquisition of U.S.

Treasuries and Agency RMBS.

As of December 31, 2021, the Fed’s holdings of Agency RMBS totaled $2.6 trillion, representing nearly a third of all outstanding Agency RMBS.

During the fourth quarter of 2021, with inflation well above the Fed’s 2% long-run target and the unemployment rate at levels indicative of maximum employment, the Fed began to shift towards a normalization of monetary policy, starting with its reduction in the amount of monthly asset purchases, which are expected to be completed March 2022.

The Fed also signaled its intent to begin to reduce the size of its balance sheet and has suggested that its asset holdings may decline sooner and at a faster pace than in the 2016-2020 time period following the prior quantitative easing cycle.

Accordingly, we expect the Fed to announce the passive contraction of its balance sheet by reducing reinvestments of proceeds from maturing U.S.

Treasury securities and Agency RMBS portfolio repayments by a predetermined amount comparatively soon after commencing increases in the Federal Funds interest rate.

As part of the Fed's overall monetary policy, it has participated in the Agency mortgage market since first conducting large scale asset purchases during the Great Financial Crisis in 2008.

The Fed’s participation in the mortgage market can materially impact the available supply, price and returns on Agency RMBS.

Thus, given the Fed's historic participation and the current scale of its balance sheet holdings, the effects of a shift in monetary policy may be material and difficult to predict, and we may be unable to mitigate potentially adverse effects on our portfolio and financial condition.

Furthermore, despite its stated preference for a passive balance sheet reduction, there is no guarantee the Fed will not conduct outright sales of Agency RMBS in the secondary market.

The Fed could also reduce or cease altogether monthly reinvestments, which could significantly increase the pace of their balance sheet reduction and lead to wider RMBS spreads to benchmark interest rates.

Spread widening is an inherent risk we take as a levered Agency mortgage investor, and our hedges are not designed to protect against this risk.

To mitigate some of the impact of spread widening, we may reduce our leverage below our normal operating levels, which may reduce our earnings potential relative to higher leverage operations.

The ongoing effects of Covid-19 on economic conditions and our business are uncertain

COVID-19 has resulted in, and may continue to result in, significant disruption of the global financial markets.

The Pandemic may lead to a deterioration of economic and financial conditions, including periods of extreme market volatility, illiquidity and adverse dislocations, potentially leading to an economic downturn, and/or a recession, at a domestic or global scale, which could materially affect our business.

There may also be unintended adverse consequences resulting from the magnitude of measures and actions taken by policymakers as a result of the Pandemic that could negatively impact our business and have lasting effects, which are difficult to predict.

With only 50 employees, we may also experience the absence of critical personnel should our employees contract COVID-19.

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

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

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, those described in this Annual Report or under our current guidelines.

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.

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 Federal Reserve (the "Fed") first used large-scale asset purchases of U.S.

Treasury securities and Agency RMBS, known as quantitative easing, or QE, during the 2008-2009 global financial crisis in an attempt to stabilize financial markets

and stimulate a sustained economic recovery.

In its most recent QE round, resulting from the Covid-19 financial crisis, the Fed’s balance sheet more than doubled from $4.2 trillion in March 2020 to $8.9 trillion in May 2022, with its holdings of Agency RMBS increasing to nearly a third of all outstanding Agency RMBS, when it announced that it would begin to reduce its holdings over time by not reinvesting proceeds of principal repayments, subject to monthly caps.

The Fed's participation in the Agency RMBS market can have a material impact on the mortgage market, altering the available supply, price and returns on Agency RMBS.

Its involvement in the mortgage market can result in increased market volatility and amplify the effects of market related risks on our financial condition.

Generally, when the Fed conducts large-scale asset purchases, Agency RMBS values increase and mortgage spreads tighten, benefiting our tangible net book value, while the return potential on new asset purchases typically declines.

Conversely, actual or anticipated reductions of Fed asset purchases or its outright sale of assets, would generally be expected to result in a decline in asset values and wider mortgage spreads to benchmark interest rates, negatively impacting our tangible net book value, while the return potential on new asset purchases would typically increase.

Although the Fed has stated its preference for a passive reduction of its balance sheet through mortgage prepayment activity, there is no guarantee that it will not conduct outright asset sales in the future.

Assets sales, or a more rapid unwinding of its balance sheet than anticipated, could result in increased market volatility, reduced liquidity and an increase in Agency RMBS spreads to benchmark interest rates, causing a material decline in our tangible net book and negatively impacting our financial position.

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 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.

We employ an active management strategy;

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

We may realize 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 also be incorrect in our assessment of market conditions and select an investment portfolio, leverage levels and terms, and hedge composition that 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.

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 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 agreements already in place.

Our investment securities are reported at fair value on our consolidated balance sheet, with changes in fair value reported in net income or other comprehensive income.

Therefore, a decline in the fair value of our assets reduces our total comprehensive income and adversely affects our financial position.

We use our investments as collateral for our financing arrangements and certain hedge transactions;

consequently, a decline in fair value, or perceived market uncertainty about the value of our assets, could reduce the amount of our unencumbered assets, subject us to margin calls and could make it more difficult for us to maintain our compliance with the terms of our financing agreements, and it could reduce our ability to purchase additional investments or to renew or replace our existing borrowings as they mature.

As a result, we could be required to sell assets at adverse prices and our ability to maintain or grow our total comprehensive income could be reduced.

Asset values can decline for a variety of reasons.

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

If interest rates or other market conditions result in a decline in the fair value of our assets, we would be subject to margin calls on our existing agreements and it would decrease the amount we may borrow to purchase additional investments.

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.

A decline in market liquidity can also have a significant impact on asset values and increase price volatility.

Numerous factors can reduce market liquidity, including macro-economic conditions, market uncertainty, changes in investor sentiment resulting in redemptions from fixed income funds, a decline in global money flows into U.S.

fixed income markets, and regulatory capital requirements that limit banks' and other financial institutions' ability to act as market makers.

Fed monetary policy and the unwinding of its balance sheet could also have a negative impact on asset values and market liquidity, especially if the unwinding occurs more rapidly than anticipated.

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

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This situation may also cause the market value of our assets to decline, while most of our hedging instruments would not receive any incremental offsetting gains.

To the extent that actual prepayment speeds differ from our expectations, our operating results could be adversely affected, and we could be forced to sell assets to maintain adequate liquidity, which could cause us to incur realized losses.

To the extent that actual rates of prepayment differ from our expectations, our operating results could be adversely affected, and we could be forced to sell assets to maintain adequate liquidity, which could cause us to incur realized losses.

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.

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However, unprecedented events, market dislocations, advances in origination channel technologies and other factors may impair the usefulness of these historical correlations or render them completely invalid, reducing our ability to accurately predict future prepayment activity.

Other factors beyond interest rates also impact the rate of prepayments and may be difficult to predict.

For example, Government programs or changes to GSE policies designed to increase the availability of credit to homeowners, 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.

Fannie Mae and Freddie Mac typically repurchase mortgages that are 120 days or more delinquent from RMBS trusts.

However, during COVID-19, as a result of the GSEs granting qualified borrowers forbearance for a period of up to 18 months, they temporarily extended the timeline for repurchasing otherwise delinquent loans that are in forbearance.

Thus, to the extent that the number of delinquencies and loan modifications increase as a result of exiting forbearance or due to other factors, the amount of loans bought out from RMBS trusts may increase prepayments on our investment portfolio.

Other factors beyond interest rates also impact the rate of prepayments and may be difficult to predict, such as housing turnover, lending conditions and the availability of credit to homeowners, and GSE buyouts of delinquent loans from the underlying mortgage pool.

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.

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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 unanticipated and/or unprecedented financial or economic events, such as during the ongoing Pandemic.

A shift in Fed policy from a period of historic quantitative easing during 2020 and 2021 to a period of quantitative tightening and balance sheet normalization could also trigger significant volatility and reduce the predictive nature of our analytical models.

We are at greater risk of this occurring during periods of high volatility or unanticipated and/or unprecedented financial or economic events, including any actual or anticipated shifts in Fed policy resulting from these events.

Consequently, actual results could differ materially from our projections.

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

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 input 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 one or more scenarios, or may be modeled based on simplifying assumptions that lead to errors;

Analytical models and third-party data used to analyze credit sensitive assets also expose us to the risk that the (i) collateral cash flows and/or liability structures may be incorrectly modeled, 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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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.

Consequently, if we were to sell an asset, particularly through 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, that are designed to synthetically transfer mortgage credit risk from the issuing

entity to private investors.

The transactions are structured as 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.

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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, disease, floods, hurricanes and certain climate risks) than properties in other parts of the country;

Additionally, assets in certain regional areas may be more susceptible to certain hazards (such as earthquakes, widespread fires, rising sea levels, disease, floods, drought, hurricanes and certain climate risks) than properties in other areas;

for example, assets located in coastal states may be more susceptible to hurricanes or sea level rise than properties in other parts of the country.

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We may seek assets with 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.

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.

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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.

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

We may also amend or revise our other operational policies, including our policies with respect to our REIT qualification, acquisitions, dispositions, operations, indebtedness and distributions without a vote of, or notice to, our stockholders.

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.

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

We expect our leverage to vary with market conditions and our assessment of the tradeoffs between risk and return on 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 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.

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

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

Leverage, which is fundamental to our investment strategy, creates significant risks and amplifies our risk exposure to higher borrowing costs, changes in underlying asset values and other market factors.

Leverage also exposes us to the risk of margin calls and defaults under our funding agreements, which may result in forced sales of assets in adverse market conditions.

The risks associated with leverage are more acute during volatile market environments and periods of reduced market liquidity.

Because of our leverage, we may incur substantial losses.

We may be unable to procure or renew funding on favorable terms, or at all.

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

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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;

• lender requirements of additional collateral to cover our borrowings, which we may be unable to deliver;

• lender exits from the market or unwillingness 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.

• disruptions in the repo market generally or the infrastructure that supports it;

• higher short-term interest rates;

• a decline in the market value of our investments available to collateralize borrowings;

• increases in the "haircut" lenders require on the value of our assets under repurchase agreements, resulting in higher collateral requirements;

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

• an exit by lenders from the market;

• circumstances that could result in 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;

• the inability of our wholly-owned captive broker-dealer to continually meet FINRA and FICC regulatory and membership requirements, which may change over time.

The FICC continually assesses potential changes to rules governing the calculation of margin and minimum margin requirements.

Increases in FICC margin requirements would have the effect of reducing our unencumbered assets and could potentially limit our ability to utilize triparty repo funding accessed through the FICC's GCF Repo service, which represents a significant portion of our total borrowing capacity.

Increases in FICC margin requirements would have the effect of reducing our unencumbered assets and could potentially limit our ability to utilize tri-party repo funding accessed 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.

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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.

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.

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 the 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).

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

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

Our funding and derivative agreements require that we maintain certain levels of collateral with our counterparties and may result in margin calls initiated against us if, for example, the value of our collateral declines.

A margin call means that the counterparty requires us to pledge additional collateral to re-establish the required collateral level to protect them from loss in

the event we default on our obligations.

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.

If we fail to meet the margin call, we would be in default, and our counterparty could terminate outstanding transactions, require us to settle our entire obligation under the agreement and enforce their interests against existing collateral.

Furthermore, we may also be subject to certain cross-default and acceleration rights, such that if we were to fail to meet a margin call under one agreement that failure could lead to defaults, accelerations, or other adverse events under other agreements, as well.

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

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

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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 repurchase agreements and agreements governing certain derivative instruments may contain financial and nonfinancial covenants subjecting us to the risk of default.

Our bilateral repurchase agreements and certain derivative agreements require that we comply with certain financial and non-financial covenants.

Our more restrictive financial covenants typically limit declines in our stockholders’ equity for any given quarter, calendar year, or 12-month period and limit our leverage to a maximum amount.

Compliance with these covenants depends on market factors and the strength of our business and operating results.

In addition, our agreements typically require, among other things, that we maintain our status as a publicly listed REIT and to be exempted from the provisions of the 1940 Act.

Various risks, uncertainties and events beyond our control, including significant fluctuations in interest rates, market volatility and changes in market conditions, could affect our ability to comply with these covenants.

Unless we were able to negotiate a waiver or forbearance of such covenants, failure to comply with them could result in an event of default and generally would give the counterparty the right to exercise certain other remedies under the agreement, including termination of one or more repo or hedging transactions, acceleration of all amounts owed under an agreement, and the right to sell the collateral held by that counterparty.

Any waiver or forbearance, if granted, could carry additional conditions that may be unfavorable to us.

Additionally, certain of our agreements contain cross-default, cross-acceleration or similar provisions, such that if we were to violate a covenant under one agreement, that violation could lead to defaults, accelerations, or other adverse events under other agreements, as well.

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

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

Bankruptcy Code, the effect of which, among other things, would be to allow the counterparty under the applicable 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 an insolvency or bankruptcy of one of our repurchase agreement or derivative counterparties, the counterparty may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the counterparty for damages may be treated simply as an unsecured creditor.

In addition, if the counterparty 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 our agreements or to be compensated for any damages resulting from the counterparty'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 funding and derivative agreement counterparties may not fulfill their obligations to us as and when due.

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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.

Most of the swaps and futures transactions 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.

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

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.

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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 LIBOR-based financial instruments.

The stated dividend rate of each series of our outstanding fixed-to-floating rate cumulative redeemable preferred stock is indexed to three-month USD LIBOR following the applicable fixed rate period.

In addition, we also have certain investments that reference USD LIBOR.

The stated dividend rate of each series of our outstanding fixed-to-floating rate cumulative redeemable preferred stock is indexed to three-month USD LIBOR following the applicable fixed rate period (“LIBOR Based Preferred Stock”).

In addition, we also have certain investments that reference USD LIBOR (“LIBOR Based Investments”).

The United Kingdom Financial Conduct Authority, or FCA, which regulates LIBOR, has announced that the USD LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023.

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These announcements mean that our LIBOR-based floating rate instruments outstanding beyond June 30, 2023 will need to be converted to alternative interest rates.

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.

Our LIBOR Based Preferred Stock and our LIBOR Based Investments typically contain various mechanisms to address circumstances where LIBOR becomes unavailable (so-called fallback language), but certain of these instruments do not contain fallback language specific to the permanent discontinuation of LIBOR.

Holders of depositary shares of our LIBOR Based Preferred Stock should refer to the relevant prospectus for each series to understand the LIBOR-cessation provisions applicable to it.

In 2022, Congress enacted the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) to provide a uniform, nationwide solution for replacing references to LIBOR in LIBOR based floating rate instruments.

The LIBOR Act and Federal Reserve rules promulgated pursuant to it create default rules that apply to fallback provisions of these instruments, and pursuant to the LIBOR Act, the Federal Reserve has adopted replacement benchmark rates for LIBOR contracts of various periods based on the Secured Overnight Financing Rate (“SOFR”) plus specified tenor spread adjustments (the “LIBOR Act Replacement Benchmark”).

These default rules will vary among LIBOR based instruments depending on the type of fallback language in them.

Generally, instruments with no fallback language or regulatorily insufficient fallback language must apply the LIBOR Act Replacement Benchmark after June 30, 2023 in lieu of any fallback process set forth in these instruments.

Instruments that expressly identify a non-LIBOR based replacement benchmark will apply that replacement benchmark after June 30, 2023.

Instruments that appoint an administrator to determine a benchmark replacement upon the cessation of LIBOR (other than by reference to LIBOR values (except as necessary to set a spread adjustment) or by conducting a poll or soliciting quotes for interbank lending rates) will apply a replacement benchmark selected by this administrator in accordance with the instrument for periods after June 30, 2023.

However, for instruments with a replacement benchmark set by an administrator, the LIBOR Act encourages selection of the LIBOR Act Replacement Benchmark by providing liability protections and other benefits.

There are significant differences between LIBOR and SOFR.

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Treasury-backed repurchase market.

Switching existing financial instruments from LIBOR to SOFR requires calculations of a fixed spread to account for such

differences, which may not favor all parties equally.

Additionally, certain of our LIBOR-based financial instruments may not contain fallback language specific to the permanent discontinuation of LIBOR.

These factors may result in disputes over the substitute dividend rates on our fixed-to-floating rate preferred stock in effect after the fixed dividend periods end and negatively impact the fair value of our LIBOR-based investments.

Holders of depositary shares of our fixed-to-floating preferred stock should refer to the relevant prospectus for each series to understand the LIBOR-cessation provisions applicable to it.

Each series of preferred stock that is currently outstanding becomes callable at the same time it begins to pay a LIBOR-based rate.

At the later of the end of the fixed-rate term or the cessation of LIBOR, we may set the stated dividend rate in the manner specified by the provisions applicable to such series.

Switching existing financial instruments from LIBOR to SOFR requires calculations of a fixed spread to account for such differences, and this spread (including the spread included in the LIBOR Act Replacement Benchmark) may not favor all parties equally.

Each series of our LIBOR Based Preferred Stock that is currently outstanding becomes callable at the same time it begins to pay a LIBOR-based (or replacement benchmark) rate.

At the later of the end of the fixed-rate term or the cessation of LIBOR, we may set the stated dividend rate in the manner as provided under the LIBOR Act and related regulations.

Alternatively, at our option, we may call the shares of preferred stock.

Application of these LIBOR fallback provisions or calling series of preferred stock may result in our incurring a higher cost of capital or potentially selling assets.

Stockbrokers could also have restrictions on trading our preferred stock.

Application of these LIBOR fallback provisions (as affected by the LIBOR Act and related regulations) or calling series of preferred stock may result in our incurring a higher cost of capital or potentially selling assets.

Risks Related to Our Business Operations

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Additionally, our ability to satisfy the REIT asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals.

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.

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).

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In addition, the tax law would no longer require us to make distributions to our stockholders.

If we fail to satisfy one or more requirements for REIT qualification, we may still qualify as a REIT if there is reasonable cause for the failure and not due to willful neglect and other applicable requirements are met, including completion of applicable IRS filings.

If we fail to satisfy one or more requirements for REIT qualification, we may still qualify as a REIT if there is reasonable cause for the failure, it is not due to willful neglect, and we satisfy other requirements, including completion of applicable IRS filings.

It is not possible to state whether we would be entitled to the benefit of these relief provisions.

If these relief provisions are inapplicable, we will not qualify as a REIT.

Furthermore, if we satisfy the relief provisions and maintain our qualification as a REIT, we may be still subject to a penalty tax.

The amount of the penalty tax would be at least $50,000 per failure, and, in the case of certain asset test failures, would be determined as the amount of net income generated by the assets in question multiplied by the highest U.S.

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, would 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.

If these relief provisions were inapplicable, we would not qualify as a REIT.

Furthermore, even if we satisfy the relief provisions and maintain our qualification as a REIT, we may be still subject to a penalty tax.

The penalty tax for failure to satisfy an asset test would be the greater of $50,000 per failure or an amount equal to the net income generated by the assets that resulted in the failure multiplied by the highest U.S.

federal corporate tax rate in effect at the time of the failure.

The penalty tax for failure to satisfy one or both gross income tests would be an amount equal to 100% of the net profit on the gross income that resulted in the failure calculated in accordance with the Internal Revenue Code.

REIT distribution requirements could adversely affect our ability to execute our business plan.

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Our taxable income will typically differ from income prepared in accordance with GAAP due to temporary and permanent differences.

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.

For example, realized 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 remaining 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 net capital losses incurred;

instead, the capital losses 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.

Therefore, it is possible that our taxable income could be in excess of the net cash generated from our operations.

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We may in the future distribute taxable dividends that are payable at least in part in shares of our common stock.

Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the

extent of our current and accumulated earnings and profits for U.S.

Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S.

federal income tax purposes.

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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.

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

Legislative and Regulatory Risks

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The specific real estate related assets that we acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated thereunder.

In satisfying the 55% requirement, we treat Agency RMBS issued with respect to an underlying pool of mortgage loans in which we directly or indirectly hold all the certificates issued by the pool

("whole pool" securities) as qualifying real estate interests based on pronouncements of the SEC staff.

In satisfying the 55% requirement, we treat Agency RMBS issued with respect to an underlying pool of mortgage loans in which we directly or indirectly hold all the certificates issued by the pool ("whole pool" securities) as qualifying real estate interests based on pronouncements of the SEC staff.

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

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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.

Failure to satisfy regulatory requirements of our captive broker-dealer subsidiary could result in our inability to access tri-party repo funding through the FICC’s GCF Repo service and could be harmful to our business operations.

BES is subject to ongoing membership and regulatory requirements as a member of the FICC and FINRA and as a registered broker-dealer that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees.

Additionally, as a self-clearing, registered broker-dealer, BES is subject to minimum net capital requirements.

Our ability to access tri-party repo funding through the FICC's GCF Repo service, which represents a significant portion of our total borrowing capacity, and our ability to conduct self-clearing of our investment and funding activity through BES are reliant on BES' ability to continually meet these regulatory and membership requirements.

If BES were to lose its memberships in FICC and FINRA or its status as a self-clearing registered broker-dealer, we may be unable to find alternative sources of financing on favorable terms and we may experience business interruptions as we attempt to transfer custody and clearing activities to alternative providers that would be harmful to our business.

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.

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Treasury, Federal Housing Finance Administration ("FHFA") and other governmental and regulatory bodies may adversely affect our business.

Government actions may have an adverse impact on the financial markets.

Government legislative and administrative actions may have an adverse impact on the financial markets.

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, should they be imposed, 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.

For example, the actual or anticipated actions or inaction on U.S.

fiscal policy matters, including the U.S.

dept ceiling, could result in a wide range of negative economic effects, including increased financial market and interest rate volatility and wider market spreads

between mortgage assets and benchmark interest rates.

Additionally, new regulatory requirements, including the imposition of more stringent capital rules, could adversely affect the availability or terms of financing from our lending counterparties, reduce market liquidity, 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 new regulatory requirements could materially affect our financial condition or results of operations in an adverse way.

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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.

During 2021, the Biden Administration, and the FHFA, have delayed implementation or reversed some of these initiatives, and have taken steps intended to advance other housing finance policy objectives.

These or future administrative actions may significantly impact the source, pricing, volume and nature of Agency RMBS and other mortgage securities that Fannie Mae and Freddie Mac issue, which may impact the supply of Agency RMBS available in the future.

Since taking office, the Biden Administration and the FHFA have delayed implementation or reversed some of these initiatives and have taken steps intended to advance other housing finance policy objectives.

However, the FHFA has taken steps to implement portions of the regulatory capital requirements, including by permitting the GSEs to charge fees that seek to offset related capital charges on certain Agency RMBS.

These or future administrative actions may significantly impact the source, pricing, volume and nature of Agency RMBS and other mortgage securities that Fannie Mae and Freddie Mac issue.

Further administrative and/or legislative actions may be taken that affect structural GSE and federal housing finance 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.

Such actions 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.

Treasury to Fannie Mae and Freddie Mac, modify the future roles of Fannie Mae and Freddie Mac in housing finance or otherwise impact the value or relative fungibility of Agency RMBS issued by each GSE.

Such actions 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.

To the extent such actions would terminate the conservatorships without also providing for a sufficiently robust U.S.

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Unresolved Staff Comments

We do not own any property.

Our executive offices are in Bethesda, Maryland.

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