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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 Part I.
+Added: For additional discussion of market risk, see Part I.
Item 1 - Risk Factors of our annual report on Form 10-K for the year ended December 31, 2022.
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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: Elevated inflation and the resulting acceleration of monetary policy tightening by the Federal Reserve have impacted and will continue to impact credit spreads.
+Added: Elevated inflation, monetary policy tightening by the FOMC and concerns surrounding the health of the regional banking system have impacted and will continue to impact credit spreads.
Prepayment Risk
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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: Increased inflation expectations, elevated interest rate volatility 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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conversely, in a falling interest rate environment, the estimated fair value of these securities would be expected to increase.
−Removed: 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.
+Added: The COVID-19 pandemic, unprecedented fiscal and monetary policy responses to the COVID-19 pandemic, and the ongoing normalization of such policy responses 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.
−Removed: As a result, if these market conditions persist, margin call risk remains elevated and our operating results and financial condition may be materially impacted.
−Removed: The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net interest income, including net interest paid or received under interest rate swaps, at September 30, 2022 and December 31, 2021, assuming a static portfolio and constant financing and credit spreads.
+Added: When these or similar market conditions are present, margin call risk is elevated and our operating results and financial condition may be materially impacted.
+Added: The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net interest income, including net interest paid or received under interest rate swaps, at March 31, 2023 and December 31, 2022, assuming a static portfolio and constant financing and credit spreads.
When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations.
The analysis presented utilized assumptions, models and estimates of our Manager based on our Manager’s judgment and experience.
−Removed: At September 30, 2022 At December 31, 2021
+Added: At March 31, 2023 At December 31, 2022
Change in Interest Rates Percentage Change in Projected Net Interest Income Percentage Change in Projected Portfolio Value Percentage Change in Projected Net Interest Income Percentage Change in Projected Portfolio Value
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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 interest rate scenarios assume interest rates at September 30, 2022 and December 31, 2021.
+Added: The interest rate scenarios assume interest rates at March 31, 2023 and December 31, 2022.
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.
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These characteristics assist in determining the likelihood and severity of loan loss as well as prepayment and extension expectations.
−Removed: We then perform structural analysis under multiple scenarios to establish likely cash flow profiles and
−Removed: credit enhancement levels relative to collateral performance projections.
+Added: We then perform structural analysis under multiple scenarios to establish likely cash flow profiles and credit enhancement levels relative to collateral performance projections.
This analysis allows us to quantify our opinions of credit quality and fundamental value, which are key drivers of portfolio management decisions.
−Removed: Commercial real estate occupancy and rental rates continue to improve across most property types and residential properties continue to benefit from strong demand and limited housing supply.
−Removed: While loan delinquencies remain elevated, they continue to decline from their post-pandemic peak levels.
−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: Given deteriorating fundamentals and tightening lending conditions, borrowers may experience difficulties meeting their obligations and refinancing loans upon scheduled maturities.
+Added: Loans may 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.
−Removed: Foreign Exchange Rate Risk
−Removed: As of September 30, 2022 we have an investment of €1.6 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.
−Removed: dollars upon consolidation.
−Removed: We have historically sought to hedge our foreign currency exposures by purchasing currency forward contracts.
−Removed: 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.