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Item 1A. Risk Factors

2025-02-21 compared with 2024-02-22 · 155 added, 151 removed, 327 unchanged (48% of the section changed)

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

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 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 due to actual or expected monetary policy actions by U.S.

and foreign central banks, increased market volatility, increased available supply of Agency RMBS, a decline in market liquidity and changes in investor return requirements and sentiment.

When the differential between the market yield on our assets and our interest rate hedges widens, our tangible net book value will typically decline, a dynamic we refer to as "spread risk." As a levered investor primarily in fixed-rate Agency RMBS, spread risk is an inherent component of our business.

Although we use hedging instruments in an effort 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 actual or expected monetary policy actions by U.S.

and foreign central banks;

legislative, regulatory or other administrative actions affecting the Agency RMBS market;

changes in fiscal policy and rising federal budget deficits;

increased market volatility;

reduced market liquidity;

higher Agency RMBS supply;

and shifts in investor return requirements and sentiment.

Interest rate and spread volatility represent significant risks to our business, potentially affecting our liquidity, increasing our costs, and impacting our ability to manage risks effectively.

Interest rate and spread volatility can have profound impacts on our business, financial condition, and operating results in several ways.

Such volatility amplifies market-based risks, affecting asset and liability values and potentially leading to less earnings stability.

Volatility increases our exposure to margin calls, including higher risk-based margin requirements, typically requiring us to post additional collateral, which could reduce our unencumbered liquidity and limit resources available for operational needs and further margin requirements.

The complexity and cost of hedging against interest rate fluctuations also rises with volatility, potentially impacting our profitability.

Volatility can also reduce liquidity in the mortgage market as mortgage investors reduce their exposure to this risk, making it more challenging to buy or sell assets without affecting their market price.

Volatility may also reduce the effectiveness and accuracy of the predictive models that we use to aid in our decision-making and risk management.

In summary, interest rate and spread volatility represent significant risks to our business, potentially affecting our liquidity, increasing our costs, and impacting our ability to manage risks effectively.

We continuously monitor these conditions and adjust our strategies accordingly, but there is no guarantee that these measures will be sufficient to mitigate the adverse effects of volatility on our operations and financial results.

Interest rate and spread volatility can materially and adversely impact our business, financial condition, and operating results.

Elevated volatility amplifies market risks that affect the value of our assets and liabilities and can reduce earnings stability.

Increased volatility also heightens our exposure to margin calls, including higher risk-based margin requirements,

which may require us to post additional collateral, thereby reducing our unencumbered liquidity, limiting resources available for operational needs and further margin obligations.

Volatility further increases the complexity and cost of hedging against interest rate fluctuations, which can adversely affect our profitability.

In addition, heightened volatility may reduce liquidity in the mortgage market as investors scale back exposure to mitigate risk, making it more difficult to buy or sell assets without significantly impacting market prices.

Volatility may also diminish the effectiveness and accuracy of the predictive models we rely on for decision-making and risk management.

Sustained interest rate and spread volatility has the potential to materially impact our liquidity, increase our costs, and impair our ability to manage risk effectively.

While we actively monitor market conditions and adjust our strategies in response, there is no assurance that these measures will be sufficient to offset the negative effects of volatility on our business, operations, and financial results.

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

The Federal Reserve's (the “Fed”) 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.

This scenario results in an increase in our tangible net book value, although 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, reducing our tangible net book value, while increasing the return potential on new asset purchases.

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.

This included a significant increase in its Agency RMBS holdings, to nearly a third of all outstanding Agency RMBS by the time the Fed announced its intention to end QE and commence monetary tightening by, among other actions, gradually reducing its holdings of Agency RMBS over time by not reinvesting proceeds of principal repayments, subject to monthly caps.

Since the beginning of the Fed's current monetary tightening cycle in 2022, through fiscal year-end 2023, the Fed has reduced its Agency RMBS holdings by approximately $300 billion through mortgage prepayment activity.

Although the Fed currently favors a gradual reduction of its balance sheet through prepayment activity, subject to monthly caps, there is no guarantee that it will not conduct outright asset sales in the future or alter its monthly caps.

If the Fed were to conduct assets sales or allow a more rapid unwinding of its balance sheet than anticipated, Agency RMBS markets could experience 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.

The Federal Reserve’s (the "Fed") participation in the Agency RMBS market can materially impact mortgage market conditions, affecting supply, pricing, and returns.

Asset purchases by the Fed generally drive Agency RMBS values higher and tighten mortgage spreads, which increases our tangible net book value but reduces the return potential on new investments.

Conversely, actual or anticipated reductions in the amount of its Agency RMBS holdings typically lead to lower values and wider spreads, thereby lowering our tangible net book value while improving the return potential on new acquisitions.

The Fed first implemented large-scale asset purchases, known as quantitative easing ("QE"), during the 2008-2009 financial crisis to stabilize markets and support economic recovery.

In response to the COVID-19 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 Agency RMBS holdings rising to nearly one-third of all outstanding Agency RMBS.

Since 2022, the Fed has reduced these holdings by approximately $500 billion through prepayment runoff.

While the Fed currently favors gradual balance sheet reduction through prepayment runoff, there is no assurance that it will not undertake asset sales.

A faster-than-expected unwinding of Fed holdings could increase market volatility, reduce liquidity, and widen RMBS spreads, materially impacting our tangible net book value and financial condition.

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;

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.

We employ an active management strategy, meaning our investment portfolio composition, leverage ratio, and hedge positions will fluctuate based on our assessment of market conditions.

We may realize significant gains or losses when selling investments or adjusting hedge positions that we no longer believe offer attractive risk-adjusted returns or when reallocating to perceived better opportunities.

However, our market assessments may be incorrect, leading to portfolio, leverage, or hedge decisions that underperform a more static strategy.

Additionally, due to our active approach, investors may not be able to assess changes in our financial position solely by tracking 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.

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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.

It could also 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.

The value of our assets is influenced by multiple factors.

The value of our long-term fixed rate securities is particularly impacted by fluctuations in longer-term interest rates.

Additionally, market liquidity can significantly impact asset values, where a decrease in liquidity can lead to a decline in asset values and increased price volatility.

Factors that can reduce market liquidity include shifts in macro-economic conditions, market uncertainties, changes in investor sentiment, a decline in or negative global money flows to the U.S.

fixed income markets, and regulatory capital requirements that constrain the market-making or funding capabilities of banks and financial institutions.

Fed monetary policy and the pace of its balance sheet reduction could also negatively impact asset values and market liquidity, especially if this unwinding process occurs more rapidly than anticipated.

In particular, the value of our long-term fixed-rate securities is highly sensitive to fluctuations in longer-term interest rates.

Additionally, market liquidity can significantly impact asset values, as reduced liquidity may lead to price declines and increased volatility.

Several factors can negatively impact market liquidity, including shifts in macro-economic conditions, market uncertainties, changes in investor sentiment, reduced or negative global money flows into U.S.

fixed income markets, and regulatory capital requirements that constrain the market-making or funding capacity of banks and financial institutions.

Liquidity could also be affected by the Fed’s monetary policy, particularly if balance sheet reduction occurs more rapidly than expected, as well as by legislative, regulatory or other administrative actions that affect the Agency RMBS market or changes in fiscal policy that increase the federal budget deficit.

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

Our investment portfolio includes securities backed by pools of mortgage loans, which receive payments related to the underlying mortgage loans.

Our investment portfolio largely consists of securities backed by pools of mortgage loans, which receive payments related to the underlying mortgage loans.

When borrowers prepay their mortgage loans at rates faster or slower than anticipated, it exposes us to prepayment or extension risk.

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At the same time, the market value of our assets could decline, while most of our hedging instruments would not receive any incremental offsetting gains.

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.

To the extent that actual prepayment rates 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.

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

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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, 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.

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

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;

(iii) collateral or bond historical performance (such as historical prepayments, defaults, cash flows, etc.) may be incorrectly reported, or subject to interpretation (e.g., different issuers may report delinquency statistics based on different definitions of what constitutes a delinquent loan);

(iii) collateral or

bond historical performance (such as historical prepayments, defaults, cash flows, etc.) may be incorrectly reported, or subject to interpretation (e.g., different issuers may report delinquency statistics based on different definitions of what constitutes a delinquent loan);

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.

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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.

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 investment losses.

Investments in credit-oriented securities, such as CRT securities and non-Agency MBS, where repayment of principal and interest is not guaranteed by a GSE or U.S.

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The ability to repay is primarily influenced by the borrower's income and assets.

Factors such as loss of employment, divorce, illness, acts of God, acts of war or terrorism, adverse changes in economic and

market conditions, declining home values, changes in laws and regulations, changes in fiscal policies and zoning ordinances, environmental hazards such as mold, and property losses (insured or not) can impede repayment.

Factors such as loss of employment, divorce, illness, acts of God, acts of war or terrorism, adverse changes in economic and market conditions, declining home values, changes in laws and regulations, changes in fiscal policies and zoning ordinances, environmental hazards such as mold, and property losses (insured or not) can impede repayment.

CMBS are backed by commercial loans, secured by multifamily or other commercial properties.

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

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

However, this insurance may not cover some or all of our potential loss if a loan defaults.

This may occur, for example, because it is frequently structured to absorb only a portion of the loss;

the insurance provider rescinds or denies coverage;

or the insurer's failure to satisfy its obligations under the insurance contract, whether due to breach of contract or to an insurer's insolvency.

Certain mortgage loans referenced by our CRT securities or underlying our non-Agency RMBS may have private mortgage insurance;

however, coverage is not guaranteed.

Insurance may not fully protect against losses in the event of a loan default due to several factors, including coverage limits that absorb only a portion of the loss, the insurer rescinding or denying a claim, or the insurer failing to meet its obligations—whether due to breach of contract or insolvency.

As a result, we may still incur losses despite the presence of mortgage insurance.

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 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.

A significant portion of the fair value of CRT and non-Agency securities, as well as other credit risk-oriented investments, is typically driven by the credit spread—the difference between the value of a credit instrument and a comparable financial instrument with similar interest rate exposure but 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 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.

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

Credit spreads typically widen during periods of market uncertainty or actual or anticipated economic deterioration.

They may also widen due to actual or anticipated rating downgrades of the securities or similar instruments.

Hedging fair value changes related to credit spreads is often inefficient, and our hedging strategies are generally not designed to mitigate credit spread risk.

As a result, fluctuations in credit spreads could negatively impact our profitability and financial condition.

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.

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

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.

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.

We may seek assets with specific attributes that influence their prepayment behavior under certain market conditions or that 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, their regulator—the Federal Housing Finance Administration ("FHFA")—or other governmental agencies, such as policies impacting origination and pooling practices, as well as by legislative, regulatory or other administrative actions related to the GSEs’ government-like status or changes to their Federal conservatorships.

As a result, our target assets may not be available in sufficient supply or 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, which 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 enough target assets, we may be unable to achieve our investment objectives or 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.

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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.

We utilize TBA dollar roll transactions, which represent a form of off-balance sheet financing and increase our "at risk" leverage, as an alternate means of investing in and financing 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, such as changes in the pace or manner of the Fed’s runoff of its portfolio of Agency RMBS or, if they occur, the Fed’s purchases or 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.

An inability or unwillingness to continue rolling 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.

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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).

Further, the specific securities that we receive may include few, if any, "whole pool" securities, which could inhibit our ability to remain exempt from 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 causing us to incur significant losses.

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

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.

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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.

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.

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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.

Furthermore, 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 the date we receive the principal payment.

Our derivative agreements also subject us to margin calls.

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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.

A number of our bilateral repurchase agreements and derivative agreements require that we comply with certain financial and non-financial covenants.

These 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.

In addition, a number of these agreements require, among other things, that we maintain our status as a publicly listed REIT and remain exempt 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.

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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.

We could inaccurately 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.

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The consequences of a cyber-attack may include operational disruption, unauthorized access to sensitive data, regulatory fines, reputational damage, liability to third parties, and financial losses.

The impact of cybersecurity incidents is difficult to predict, and the evolving legal and regulatory environment around data privacy and security could lead to increased costs and stricter compliance requirements.

During an investigation of a cybersecurity incident, or a series of events, it is possible we may not necessarily know the extent of the harm or how to remediate it, which could further adversely impact us, and new regulations may also compel us to disclose information about a material cybersecurity incident before it has been mitigated or resolved, or even fully investigated.

The impact of cybersecurity incidents is difficult to predict, and legal and regulatory requirements around data privacy and security could lead to increased costs and stricter compliance requirements.

During an investigation of a cybersecurity incident, or a series of events, it is possible we may not necessarily know the extent of the harm or how to remediate it, which could further adversely impact us, and we may be compelled to disclose information about a material cybersecurity incident before it has been mitigated or resolved, or even fully investigated.

Furthermore, whether a single or series of cyber events is material is often a matter of judgment rather than quantitative measures and might only be determinable well after the fact.

Despite our efforts to enhance our cybersecurity defenses, we cannot assure complete

protection against all cybersecurity threats.

Despite our efforts to enhance our cybersecurity defenses, we cannot assure complete protection against all cybersecurity threats.

A cybersecurity incident, if one were to occur, could adversely affect our business, results of operations, or financial condition.

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Our failure to qualify as a REIT would have adverse tax consequences.

We believe that we operate in a manner that allows us to qualify as a REIT for U.S.

federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and Treasury Regulations promulgated thereunder.

We plan to continue to meet the requirements for taxation as a REIT.

The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control, and our compliance with the annual REIT income and quarterly asset requirements depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis.

For example, to qualify as a REIT, at least 75% of our gross income must come from real estate sources and 95% of our gross income must come from real estate sources and certain other sources that are itemized in the REIT tax laws.

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.

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).

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

federal and state corporate income tax on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our taxable income.

Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first fail to qualify.

If we fail to qualify as a REIT, we may have to pay significant income taxes and would, therefore, have less money available for investments or for distributions to our stockholders.

This would likely have a significant adverse effect on the value of our equity.

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, 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 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.

We believe we qualify as a REIT for U.S.

federal income tax purposes under Sections 856–860 of the Internal Revenue Code of 1986, as amended, and related Treasury Regulations, and we intend to maintain our REIT status.

The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be entirely within our control.

Qualification and taxation as a REIT also depend on our ability to continually meet requirements imposed on REITs by the Internal Revenue Code, including satisfying certain organizational requirements, an annual distribution requirement, and quarterly asset and annual income tests.

These tests depend on our ability to effectively manage the composition of our income and assets on an ongoing basis.

At least 75% of our gross income must come from real estate sources, and 95% must come from real estate and certain other qualifying sources.

Our ability to satisfy the asset tests depends on determining the characterization and fair market value of our assets, which may not be precisely measurable and lack independent appraisals.

Additionally, the classification of certain instruments as debt or equity for tax purposes may be uncertain, which could impact the application of the REIT asset requirements.

The distribution requirement mandates that we distribute at least 90% of our REIT taxable income to stockholders annually, determined without regard to the dividends paid deduction and excluding net capital gains.

Failure to qualify as a REIT would have significant consequences.

We would lose the ability to deduct dividends paid to stockholders when computing our taxable income and would be subject to U.S.

federal and state corporate income tax as a regular C corporation for any taxable year for which we did not qualify.

This could result in substantial tax liabilities and reduce funds available for investments and distributions, likely adversely impacting our stock value.

Additionally, we would no longer be required to make stockholder distributions.

Unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first fail to qualify.

Relief provisions may be available if we fail to meet the REIT requirements, provided the failure was due to reasonable cause, not willful neglect, and we satisfy other requirements, including completion of applicable IRS filings.

It is not possible to predict if we would be entitled to benefit from such provisions.

Even if we were to qualify for relief, we may still incur penalty taxes.

The penalty for failing an asset test is the greater of $50,000 per failure or the net income from non-qualifying assets that resulted in the failure multiplied by the highest U.S.

federal corporate tax rate.

For failing one or both gross income tests, the penalty equals 100% of the net profit from non-qualifying income that resulted in the failure, as determined under the Internal Revenue Code.

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

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Thus, the potential returns on our investment portfolio may be lower than if we were not subject to such requirements.

Additionally, if we

must liquidate our investments to repay our lenders or to satisfy other obligations, we may be unable to comply with these requirements, potentially jeopardizing our qualification as a REIT.

Additionally, if we must liquidate our investments to repay our lenders or to satisfy other obligations, we may be unable to comply with these requirements, potentially jeopardizing our qualification as a REIT.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

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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 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.

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.

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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.

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 Internal Revenue Code.

Legislative and Regulatory Risks

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.

The payments of principal and interest we receive on our Agency RMBS are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

The guarantees on Agency securities created by Ginnie Mae are explicitly backed by the full faith and credit of the U.S.

Government, whereas the guarantees on Agency securities created by Fannie Mae and Freddie Mac are not.

In September 2008, Fannie Mae and Freddie Mac were placed into the conservatorship of the FHFA.

In addition to the conservatorships, the U.S.

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

Over time, efforts to end the conservatorships and the guarantee-payment structure of Fannie Mae and Freddie Mac have garnered attention from U.S.

Government policymakers.

During the final year of the first Trump Administration, FHFA established new regulatory capital requirements necessary for Fannie Mae and Freddie Mac to exit conservatorship, and 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.

In the final months of 2020 and early 2021, the Director of the FHFA was reported to have considered various actions to bring a prompt end to the conservatorships.

The Biden Administration and the FHFA delayed implementation or reversed many of these initiatives and took steps intended to advance other housing finance policy objectives.

In the final month of the Biden Administration, the FHFA and Department of Treasury further amended the liquidity backstop to, among other things, require the written consent of the Department of Treasury after a period of public notice and opportunity to comment prior to

terminating the conservatorships (other than through receivership) and would further require that Fannie Mae and Freddie Mac achieve sufficient capital levels prior to being released from conservatorship.

Since the 2024 election, speculation has grown that the Trump Administration or Congress would take actions to bring an end to the conservatorships although it is not clear what form any such actions may take or what the timeline would be to implement them, and it is possible that the Department of Treasury and FHFA will further amend the liquidity backstop to eliminate or modify provisions that would otherwise slow or add conditionality to an end to the conservatorships.

These or other administrative and/or legislative actions may be taken that affect the GSEs or the housing finance system, alter the amount or nature of the credit support provided by the U.S.

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 the GSEs, may impact the ability of banks, foreign investors, mutual funds or others to own Agency RMBS, or may otherwise impact the liquidity, size and scope of the Agency RMBS markets.

Actions that would terminate the conservatorships without also providing for sufficiently robust U.S.

government backing to preserve their government-like status or otherwise retain the functionality, scale and efficiency of the primary and secondary mortgage markets as they exist today could re-define what constitutes an Agency security.

This could subject Agency RMBS to greater credit risk, make them more difficult to finance or less liquid, and cause their values to decline, all of which could have broad adverse implications for primary and secondary mortgage markets and our business.

Actions of the U.S.

Government, including the U.S.

Congress, Fed, U.S.

Treasury, FHFA and other governmental and regulatory bodies may adversely affect our business.

Government legislative and administrative actions may have an adverse impact on financial markets for fixed income securities, including Agency RMBS.

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.

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

fiscal policy matters, including the U.S.

dept ceiling and the amount and tenor of U.S.

Treasury debt required to fund the government, 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 bank capital rules and changes to the manner and timing of clearing U.S.

Treasury and Agency RMBS transactions, could adversely affect the availability or terms of financing from our lending counterparties, reduce market liquidity or demand for Agency RMBS, restrict the origination of residential mortgage loans and the formation of new issuances of mortgage-backed securities, or limit the trading activities of certain banking entities and other systemically significant organizations that are important to our business.

In 2023, the FDIC and Fed proposed revisions to bank capital rules that would have applied risk weights (and costs) to Agency RMBS that, if adopted, might have impacted the source, pricing, volume, financing, and nature of Agency RMBS.

Although these proposals are not expected to be finally adopted in their original form, they have not yet been withdrawn, and aspects of them may be re-proposed or adopted in the future.

In addition, SEC regulations that mandate the central clearing of U.S.

Treasury and U.S.

Treasury repurchase agreement ("U.S.

Treasury Repo") transactions will necessitate significant changes to trading operations and have the potential to adversely impact liquidity, funding and efficiency of these markets.

Such changes could adversely affect the cost and other terms or availability of financing and hedging arrangements for our business.

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

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 an SEC 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.

Loss of our exemption from regulation pursuant to the Investment Company Act would adversely affect us.

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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.

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

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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Revisions in Federal tax laws and interpretations thereof could affect or cause us to change our investments and affect the tax considerations of an investment in us.

Actions of the U.S.

Government, including the U.S.

Congress, Fed, U.S.

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

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

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

fiscal policy matters, including the U.S.

dept ceiling and the amount and tenor of U.S.

Additionally, new regulatory requirements, including the imposition of more stringent bank capital rules and changes to the manner and timing of clearing U.S.

Treasury and Agency RMBS transactions, 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.

For example, the Fed and Federal Deposit Insurance Commission have proposed amendments to the capital rules for banks subject to their supervision that would apply risk weights (and costs) to Agency RMBS that may, if adopted as proposed, impact the source, pricing, volume, financing, and nature of Agency RMBS, and the SEC Division of Trading and Markets has adopted regulations requiring the central clearing of U.S.

Treasury and U.S.

Treasury repo transactions that will require significant changes to trading operations and has the potential to adversely impact liquidity, funding and efficiency of these markets, which could adversely impact the cost and other terms or availability of financing and hedging arrangements for our business.

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

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.

The payments of principal and interest we receive on our Agency RMBS are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

The guarantees on Agency securities created by Ginnie Mae are explicitly backed by the full faith and credit of the U.S.

Government, whereas the guarantees on Agency securities created by Fannie Mae and Freddie Mac are not.

In September 2008, Fannie Mae and Freddie Mac were placed into the conservatorship of the FHFA, their federal regulator.

In addition to the conservatorships, the U.S.

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

Over time, efforts to end the conservatorships and the guarantee-payment structure of Fannie Mae and Freddie Mac have garnered attention from the U.S.

During the final year of the Trump Administration, FHFA established new regulatory capital requirements necessary for Fannie Mae and Freddie Mac to exit conservatorship, and the U.S.

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.

Although the FHFA has adopted amendments to GSE regulatory capital requirements, it has also taken steps to implement them, 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.

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.

government guaranty, they could re-define what constitutes an Agency security and subject Agency RMBS to greater credit risk, make them more difficult to finance, and cause their values to decline, all of which could have broad adverse implications for the mortgage markets and our business.

Risks Related to Our Common Stock

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

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.

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.

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Our ability to pay dividends may be adversely affected by the risk factors described herein.

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.

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

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.

Therefore, we may not be able to make distributions in the future or our Board 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.

Any attempt to own or transfer shares of our common or preferred stock more than the ownership limit without the consent of the Board 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.

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.

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