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While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and we seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
−Removed: For additional discussion of market risk associated with the COVID-19 pandemic, see Item Part I.
+Added: For additional discussion of market risk, see Item Part I.
Item 1A - Risk Factors of this Report.
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Our repurchase agreements are typically short-term in nature and are periodically refinanced at current market rates.
−Removed: We typically mitigate this interest rate risk by utilizing derivative contracts, primarily interest rate swap agreements..
+Added: We typically mitigate this interest rate risk by utilizing derivative contracts, primarily interest rate swap agre ements.
Interest Rate Effect on Net Interest Income
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Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.
+Added: Table of Conten t s
Interest Rate Effects on Fair Value
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Accordingly, changes in actual interest rates may have a material adverse effect on us.
−Removed: We employ a variety of spread risk management techniques that seek to mitigate the influences of spread changes on our book value and our liquidity to help us achieve our investment objectives.
We refer to the difference between interest rates on our investments and interest rates on risk free instruments as spreads.
+Added: We employ a variety of spread risk management techniques that seek to mitigate the influences of spread changes on our book value and our liquidity to help us achieve our investment objectives.
The yield on our investments changes over time due to the level of risk free interest rates, the creditworthiness of the security, and the price of the perceived risk.
The change in the market yield of our interest rate hedges also changes primarily with the level of risk free interest rates.
−Removed: We manage spread risk through careful asset selection, sector allocation, regulating our portfolio value-at-risk, and maintaining adequate liquidity.
+Added: We manage spread risk through careful asset selection, sector allocation, regulating our portfolio value-at-risk, and seeking to maintain adequate liquidity.
Changes in spreads impact our book value and our liquidity and could cause us to sell assets and to change our investment strategy to maintain liquidity and preserve book value.
−Removed: Unprecedented government responses to the COVID-19 pandemic, including fiscal stimulus, monetary policy actions, and various purchase and financing programs have impacted and will continue to impact credit spreads.
+Added: Elevated inflation and the resulting acceleration of monetary policy tightening by the Federal Reserve have impacted and will continue to impact credit spreads.
Prepayment Risk
−Removed: As we receive prepayments of principal on our investments, premiums paid on these investments are amortized against interest income.
+Added: As we receive prepayments of principal on our investments, premiums or discounts on these investments are amortized against interest income.
In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments.
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In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments.
−Removed: Historically low interest rates, high interest rate volatility, uncertainties related to government policies on mortgage finance in response to the COVID-19 pandemic, social distancing, and other factors have made it more difficult to predict prepayment levels for the securities in our portfolio.
+Added: Increased inflation, elevated interest rate volatility and other factors have made it more difficult to predict prepayment levels for the securities in our portfolio.
As a result, it is possible that realized prepayment behavior will be materially different from our expectations.
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The estimated fair value of these securities fluctuates primarily due to changes in interest rates and other factors.
−Removed: Generally, in a rising interest rate environment, the estimated fair value of these securities would be expected to decrease;
+Added: Generally, in a rising interest rate environment, the
+Added: Table of Conten t s
+Added: estimated fair value of these securities would be expected to decrease;
conversely, in a falling interest rate environment, the estimated fair value of these securities would be expected to increase.
−Removed: The COVID-19 pandemic and related preventative measures have caused unprecedented volatility and illiquidity in fixed income markets.
+Added: The COVID-19 pandemic, unprecedented fiscal and monetary policy responses to the COVID-19 pandemic, and the ongoing normalization of such policy responses have caused unprecedented volatility and illiquidity in fixed income markets.
The amount of financing we receive under our repurchase agreements is directly related to our counterparties’ valuation of our assets that collateralize the outstanding repurchase agreement financing.
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Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes.
−Removed: The base interest rate scenarios assume interest rates at December 31, 2021 and 2020.
+Added: The interest rate scenarios assume interest rates at December 31, 2022 and 2021.
Furthermore, while the analysis reflects the estimated impact of interest rate increases and decreases on a static portfolio, we actively manage the size and composition of our investment and swap portfolios, which can result in material changes to our interest rate risk profile.
−Removed: Our scenario analysis assumes a floor of 0% for U.S.
−Removed: Treasury yields.
−Removed: Given the relatively low interest rates at December 31, 2021 and 2020, to be consistent, we also applied a floor of 0% for all related funding costs.
−Removed: Due to this floor, we anticipate that declines in funding costs resulting from a significant interest rate decrease would be limited.
−Removed: At the same time, increases in prepayment speed forecasts resulting from lower rates are also limited by this assumption.
−Removed: For purposes of our calculations, the net interest income projections are determined for each specific security.
−Removed: In contrast, for the market value analysis, this floor may limit the gains in market values in scenarios where the interest rate drops significantly.
+Added: When applicable, our scenario analysis assumes a floor of 0% for U.S.
+Added: Treasury yields and, to be consistent, we also apply a floor of 0% for all related funding costs.
The information set forth in the interest rate sensitivity table above and all related disclosures constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.
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This analysis allows us to quantify our opinions of credit quality and fundamental value, which are key drivers of portfolio management decisions.
−Removed: Amid the COVID-19 vaccine program and progress toward controlling the pandemic, the U.S.
−Removed: economy has strengthened despite elevated case counts largely fueled by the Omicron variant.
−Removed: This pick-up in economic activity has translated to improving employment levels and increased activity in residential and commercial real estate.
−Removed: While loan delinquencies remain elevated, they continue to decline from their post-pandemic peak levels.
−Removed: In particular, multi-family and single-family housing have been aided by government support and generous forbearance practices.
−Removed: Further, stimulative monetary policies have helped support real estate activity and property valuations.
−Removed: Despite these positives, many borrowers continue to experience difficulties meeting their obligations or seek to forbear or further forbear payment on their mortgage loans.
−Removed: As a result, loans may continue to experience elevated delinquency levels and eventual defaults, which could impact the performance of our mortgage-backed securities.
+Added: The pace of commercial real estate fundamental improvement is moderating given accelerating monetary policy tightening by the Federal Reserve.
+Added: Occupancy and rental rates have stabilized and valuations face downward pressure as property borrowing costs remain elevated.
+Added: Meanwhile, residential real estate fundamentals have also deteriorated due to historically low affordability driven by the dramatic rise in mortgage rates throughout 2022.
+Added: Table of Conten t s
+Added: CMBS loan delinquencies increased in the fourth quarter but remain materially lower than COVID-19 peak levels.
+Added: Many borrowers continue to experience difficulties meeting their obligations or seek to forbear or further forbear payment on their mortgage loans.
+Added: Given tightening lending conditions, loans may continue to experience increasing delinquency levels and eventual defaults, which could impact the performance of our mortgage-backed securities.
We also expect credit rating agencies to continue to reassess transactions negatively impacted by these adverse changes, which may result in our investments being downgraded.
Foreign Exchange Rate Risk
−Removed: As of December 31, 2021, we have an investment of €9.2 million in an unconsolidated joint venture whose net assets and results of operations are exposed to foreign currency translation risk when translated in U.S.
+Added: As of December 31, 2022, we have an investment of €43,000 in an unconsolidated joint venture whose net assets and results of operations are exposed to foreign currency translation risk when translated in U.S.
dollars upon consolidation.
We have historically sought to hedge our foreign currency exposures by purchasing currency forward contracts.
−Removed: The unconsolidated venture is in liquidation and plans to sell or settle its remaining investments as expeditiously as possible.
+Added: The unconsolidated joint venture is in liquidation and plans to sell or settle its remaining investments as expeditiously as possible.
Risk Management
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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.