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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-23 · 270 added, 295 removed, 361 unchanged (61% of the section changed)

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The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K.

We are an internally-managed REIT primarily engaged in the business of investing, on a leveraged basis, in residential mortgage assets, including residential whole loans, residential mortgage securities and MSR-related assets.

We are a specialty finance company that invests in and finances residential mortgage assets.

We invest, on a leveraged basis, in residential whole loans, residential mortgage-backed securities, MSR-related assets and other real estate assets.

Through certain of our subsidiaries, we also originate and service business purpose loans for real estate investors.

Our principal business objective is to deliver shareholder value through the generation of distributable income and through asset performance linked to residential mortgage credit fundamentals.

We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return.

As previously disclosed, as a result of the market disruptions experienced related to the unprecedented conditions arising in connection with the onset of the COVID-19 pandemic in early 2020, during the first and second quarters of 2020 we engaged in asset sales and took other actions that significantly changed our asset composition.

In particular, we sold all of our Agency and Legacy Non-Agency MBS investments, and substantially reduced our investments in MSR-related assets, RPL/NPL MBS and CRT securities.

As a result of these actions, our primary investment assets as of December 31, 2020, are comprised of our residential whole loans.

During the second quarter, to further help stabilize our financial position and liquidity, we entered into a $500 million senior secured credit agreement.

In addition, during the second quarter, in conjunction with our previously disclosed exit from forbearance arrangements with lenders, we entered into several new asset-backed financing arrangements and renegotiated financing arrangements for certain assets with existing lenders, which together resulted in us essentially refinancing the majority of our investment portfolio.

During the third and fourth quarters of 2020, we continued to make significant progress on initiatives to lower the cost of financing our investments with more durable forms of borrowing.

For example, we completed a $390 million securitization transaction of Non-QM assets in early September, which generated $92.7 million of additional liquidity and lowered the funding rate for the associated assets by approximately 165 basis points.

In addition, during the fourth quarter we completed two Non-QM securitizations totaling $951.6 million, which generated $214.6 million of additional liquidity and lowered the funding rate for the associated assets by approximately 193 basis points.

Additionally, during the fourth quarter we undertook steps to reduce our exposure to higher cost forms of financing that we had obtained in connection with our exit from forbearance in the second quarter.

On October 9, 2020, we repaid $400 million of the principal outstanding on the senior secured loan, and the remaining balance of this facility of $81.25 million was repaid on October 30, 2020.

The repayments were made without penalty or yield maintenance.

Subsequent to the end of the fourth quarter, we completed a securitization solely consisting of $217.5 million of Business Purpose Rental Loans, generating approximately $48.4 million of additional liquidity.

As the weighted average coupon of the bonds sold was approximately 1.06%, this transaction is expected to lower the funding rate of the underlying assets by more than 150 basis points.

In addition, on January 6, 2021, we redeemed all of our outstanding $100 million aggregate principal amount of 8.00% Senior Notes Due 2042.

In connection with this redemption, we recorded in our fourth quarter interest expense a non-cash charge of approximately $3.1 million representing remaining unamortized deferred expenses incurred when the Senior Notes were originally issued in 2012.

At December 31, 2020, we had total assets of approximately $6.9 billion, of which $5.3 billion, or 77%, represented residential whole loans acquired through interests in certain trusts established to acquire the loans.

We are an internally-managed real estate investment trust.

At December 31, 2021, we had total assets of approximately $9.1 billion, of which $7.9 billion, or 87%, represented residential whole loans acquired through interests in certain trusts established to acquire the loans or originated by Lima One.

Our Purchased Performing Loans, which as of December 31, 2021 comprised approximately 80% of our residential whole loans, include:

(i) loans to finance (or refinance) one-to four-family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (or Non-QM loans), (ii) short-term business purpose loans collateralized by residential properties made to non-occupant borrowers who intend to rehabilitate and sell the property for a profit (or Rehabilitation loans or Fix and Flip loans), (iii) loans to finance (or refinance) non-owner occupied one-to four-family residential properties that are rented to one or more tenants (or Single-family rental loans), and (iv) previously originated loans secured by residential real estate that is generally owner occupied (or Seasoned performing loans).

In addition, at December 31, 2020, we had approximately $161.0 million in investments in residential mortgage securities, which represented approximately 2% of our total assets.

At such date, our portfolio included $104.2 million of CRT securities and $56.8 million of Non-Agency MBS which were primarily comprised of RPL/NPL MBS.

At December 31, 2020, our investments in MSR-related assets were $239.0 million, or 3% of our total assets.

(i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (or Non-QM loans), (ii) short-term business purpose loans collateralized by residential properties made to non-occupant borrowers who intend to rehabilitate and sell the property for a profit (or Rehabilitation loans or Fix and Flip loans), (iii) loans to finance (or refinance) non-owner occupied one-to-four family residential properties that are rented to one or more tenants (or Single-family rental loans), (iv) loans on investor properties that conform to the standards for purchase by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (or Agency eligible investor loans), and (v) previously originated loans secured by residential real estate that is generally owner occupied (or Seasoned performing loans).

In addition, at December 31, 2021, we had approximately $256.7 million in investments in Securities, at fair value, which represented approximately 3% of our total assets.

At such date, our Securities, at fair value included MSR-related assets and CRT securities.

Our MSR-related assets include term notes whose cash flows are considered to be largely dependent on MSR collateral and loan participations to provide financing to mortgage originators that own MSRs.

Our remaining investment-related assets, which represent approximately 5% of our total assets at December 31, 2020, were primarily comprised of REO, capital contributions made to loan origination partners and MBS and loan-related receivables.

Our remaining investment-related assets, which represent approximately 4% of our total assets at December 31, 2021, were primarily comprised of REO, capital contributions made to loan origination partners, other interest-earning assets, and loan-related receivables.

The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income and the market value of our assets, which is driven by numerous factors, including the supply and demand for residential mortgage assets in the marketplace, the terms and availability of adequate financing, general economic and real estate conditions (both on a national and local level), the impact of government actions in the real estate and mortgage sector, and the credit performance of our credit sensitive residential mortgage assets.

Changes in these factors, or uncertainty in the market regarding the potential for changes in these factors, can result in significant changes in the value and/or performance of our investment portfolio.

Further, our GAAP results may be impacted by market volatility, resulting in changes in market values of certain financial instruments for which changes in fair value are recorded in net income each period, such as CRT securities, and certain residential whole loans.

Further, our GAAP results may be impacted by market volatility, resulting in changes in market values of certain financial instruments for which changes in fair value are recorded in net income each period, such as certain residential whole loans and CRT securities.

Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense) and prepayment speeds, the behavior of which involves various risks and uncertainties.

Interest rates and conditional prepayment rates (or CPRs) (which measure the amount of unscheduled principal prepayment on an asset as a percentage of the asset balance), vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.

With the adoption in January 2020 of new accounting standards for the measurement and recognition of credit losses, and given the extent of current and anticipated future investments in residential whole loans, our financial results are impacted by estimates of credit losses that are required to be recorded when loans that are not accounted for at fair value through net income are acquired or originated, as well as changes in these credit loss estimates that will be required to be made periodically.

Interest rates and CPRs (which is an annualized measure of the amount of unscheduled principal prepayments on an asset as a percentage of the asset balance), vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.

Our financial results are impacted by estimates of credit losses that are required to be recorded when loans that are not accounted for at fair value through net income are acquired or originated, as well as changes in these credit loss estimates that will be required to be made periodically.

With respect to our business operations, increases in interest rates, in general, may over time cause:

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(i) the interest expense associated with our borrowings to decrease;

(ii) the value of certain of our residential mortgage assets and, correspondingly, our stockholders’ equity to increase;

(ii) the value

of certain of our residential mortgage assets and, correspondingly, our stockholders’ equity to increase;

(iii) coupons on our adjustable-rate assets, on a delayed basis, to lower interest rates;

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With respect to investments in Purchased Performing Loans, we believe that sound underwriting standards, including low LTVs at origination, significantly mitigate our risk of loss.

Further, we believe the discounted purchase prices paid on certain non-performing and Purchased Credit Deteriorated Loans mitigate our risk of loss in the event that, as we expect on most such investments, we receive less than 100% of the par value of these investments.

(see Part I, Item 1A., “Risk Factors - Credit and Other Risks Related to our Investments” and Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” of this Annual Report on Form 10-K.)

Conversely, discounts arise when we acquire an MBS at a price below the aggregate principal balance of the mortgages securing the MBS or when we acquire residential whole loans at a price below their aggregate principal balance.

Further, we believe the discounted purchase prices paid on Purchased Non-performing and Purchased Credit Deteriorated Loans mitigate our risk of loss in the event that, as we expect on most such investments, we receive less than 100% of the par value of these investments.

Premiums arise when we acquire an MBS at a price in excess of the aggregate principal balance of the mortgages securing the MBS (i.e., par value) or when we acquire residential whole loans at a price in excess of their aggregate principal balance Conversely, discounts arise when we acquire an MBS at a price below the aggregate principal balance of the mortgages securing the MBS or when we acquire residential whole loans at a price below their aggregate principal balance.

Accretable purchase discounts on these investments are accreted to interest income.

Purchase premiums, which are primarily carried on certain of our CRT securities and Non-QM loans, are amortized against interest income over the life of the investment using the effective yield method, adjusted for actual prepayment activity.

Premiums paid to purchase loans, primarily on certain of our Non-QM loans, business purpose loans and Agency eligible investor loans, are amortized against interest income over the life of the investment using the effective yield method, adjusted for actual prepayment activity.

An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the interest income earned on these assets.

CPR levels are impacted by, among other things, conditions in the housing market, new regulations, government and private sector initiatives, interest rates, availability of credit to home borrowers, underwriting standards and the economy in general.

In particular, CPR reflects the conditional repayment rate (or CRR), which measures voluntary prepayments of a loan, and the conditional default rate (or CDR), which measures involuntary prepayments resulting from defaults.

In particular, CPR reflects the conditional prepayment rate, which measures voluntary prepayments of a loan, and the conditional default rate (or CDR) measures involuntary prepayments resulting from defaults.

CPRs on our residential mortgage securities and whole loans may differ significantly.

For the year ended December 31, 2020, the weighted average CPR on our Non-QM loan portfolio was 22.5%.

For the year ended December 31, 2021, the average CPRs on certain of our loan portfolios were:

35.3% for Non-QM loans, 24.2% for Single-family rental loans, 17.4% for Purchased Credit Deteriorated loans, and 16.3% for Purchased Non-Performing loans.

It is generally our business strategy to hold our residential mortgage assets as long-term investments.

On at least a quarterly basis, excluding investments for which the fair value option has been elected or for which specialized loan accounting is otherwise applied, we assess our ability and intent to continue to hold each asset and, as part of this process, we monitor our residential mortgage securities and MSR-related assets that are designated as AFS for impairment.

On at least a quarterly basis, excluding investments for which the fair value option has been elected or for which specialized loan accounting is otherwise applied, we assess our ability and intent to continue to hold each asset and, as part of this process, we monitor our investments in securities that are designated as AFS for impairment.

A change in our ability and/or intent to continue to hold any of these securities that are in an unrealized loss position, or a deterioration in the underlying characteristics of these securities, could result in our recognizing future impairment charges or a loss upon the sale of any such security.

Our residential mortgage investments have longer-term contractual maturities than our financing liabilities.

Our residential mortgage investments have longer-term contractual maturities than our non-securitization related financing liabilities.

Even though the majority of our investments have interest rates that adjust over time based on short-term changes in corresponding interest rate indices (typically following an initial fixed-rate period for our Hybrids), the interest rates we pay on our borrowings will typically change at a faster pace than the interest rates we earn on our investments.

In order to reduce this interest rate risk exposure, we may enter into derivative instruments, which in the past have generally been comprised of Swaps.

The majority of our Swap derivative instruments have generally been designated as cash-flow hedges against a portion of our then current and forecasted LIBOR-based repurchase agreements.

Following the significant interest rate decreases that occurred late in the first quarter of 2020, we unwound all of our Swap transactions at the end of the first quarter.

In order to reduce this interest rate risk exposure, we may enter into derivative instruments, which currently include Swaps and short positions in to be announced (or TBA) securities.

Recent Market Conditions and Our Strategy

At December 31, 2020, our residential mortgage asset portfolio, which includes residential whole loans and REO, residential mortgage securities and MSR-related assets, was approximately $6.0 billion compared to $13.1 billion at December 31, 2019.

As previously disclosed, we engaged in asset sales and took other actions during 2020 related to the impact of the unprecedented conditions created by the COVID-19 pandemic, that significantly changed our asset composition.

As a result of these actions, our primary investment asset as of December 31, 2020 is our residential whole loan portfolio.

At December 31, 2021, our residential mortgage asset portfolio, which includes residential whole loans and REO, and Securities, at fair value, was approximately $8.3 billion compared to $6.0 billion at December 31, 2020.

The following table presents the activity for our residential mortgage asset portfolio for the year ended December 31, 2021:

(In Millions) December 31, 2020 Runoff (1)

Acquisitions Sales Other (2)

Acquisitions (2)

December 31, 2021 Change

Residential whole loans and REO $ 5,575 $ (2,167) $ 4,593 $ 68 $ 8,069 $ 2,494

MSR-related assets 1,217 (77) 4 (683) (222) 239 (978)

Residential mortgage securities 3,984 (558) 160 (3,000) (425) 161 (3,823)

Securities, at fair value 400 (157) — 14 257 (143)

Totals $ 5,975 $ (2,324) $ 4,593 $ 82 $ 8,326 $ 2,351

(1) Primarily includes principal repayments, cash collections on Purchased Credit Deteriorated Loans and sales of REO.

(2) Primarily includes changes in fair value and adjustments to record lower of cost or estimated fair value adjustments on REO .

(1) Primarily includes principal repayments and sales of REO.

(2) Includes draws on previously originated Rehabilitation loans.

(3) Primarily includes changes in fair value and changes in the allowance for credit losses.

At December 31, 2021, our total recorded investment in residential whole loans and REO was $8.1 billion, or 96.9% of our residential mortgage asset portfolio.

Of this amount, (i) $4.2 billion is presented as Residential whole loans, at carrying value (of which $3.5 billion were Purchased Performing Loans and $673.7 million were Purchased Credit Deteriorated Loans), and (ii) $1.2 billion is presented as Residential whole loans, at fair value, in our consolidated balance sheets.

For the year ended December 31, 2020, we recognized approximately $258.8 million of income on Residential whole loans, at carrying value in Interest Income on our consolidated statements of operations, representing an effective yield of 4.91% (excluding servicing costs), with Purchased Performing Loans generating an effective yield of 4.90% and Purchased Credit Deteriorated Loans generating an effective yield of 4.99%.

In addition, we recorded a net gain on residential whole loans measured at fair value through earnings of $94.2 million in Other Income, net in our consolidated statements of operations for the year ended December 31, 2020.

At December 31, 2020 and 2019, we had REO with an aggregate carrying value $249.7 million and $411.7 million, respectively, which is included in Other assets on our consolidated balance sheets.

During 2020, we sold Non-QM loans with an amortized cost of $1.8 billion, realizing losses of $273.0 million and sold Residential whole loans, at fair value with an aggregate unpaid principal balance of $24.1 million, realizing net losses of $0.8 million.

During 2020, economic conditions were negatively impacted by the unprecedented conditions resulting from the COVID-19 pandemic.

In response to the financial impact of the COVID-19 pandemic on borrowers, and in compliance with various federal and state guidelines, starting in the first quarter of 2020 we offered short-term relief to certain borrowers who were contractually current at the time the pandemic started to impact the economy.

Of this amount, $6.3 billion are Purchased Performing Loans, $525.0 million are Purchased Credit Deteriorated Loans and $1.1 billion are Purchased Non-performing Loans.

Loan acquisition activity of $4.6 billion during 2021 included $2.2 billion of Non-QM loans, $1.3 billion of business purpose loans (including draws on Rehabilitation loans), and $1.1 billion of Agency eligible investor loans.

During 2021, we recognized approximately $303.5 million of residential whole loan interest income on our consolidated statements of operations, representing an effective yield of 5.26%, with Purchased Performing Loans generating an effective yield of 4.35%, Purchased Credit Deteriorated Loans generating an effective yield of 6.56% and Purchased Non-performing Loans generating an effective yield of 8.39%.

In addition, all of our Purchased Non-performing Loans and certain of our Purchased Performing Loans are measured at fair value as a result of the election of the fair value option at acquisition.

Included in earnings in other income, net are net gains on these loans of $16.7 million for the year ended December 31, 2021.

At December 31, 2021 and 2020, we had REO with an aggregate carrying value of $156.2 million and $249.7 million, respectively, which is included in Other assets on our consolidated balance sheets.

In response to the financial impact of COVID-19 on borrowers, and in compliance with various federal and state guidelines, starting in the first quarter of 2020, we offered short-term relief to certain borrowers who were contractually current at the time the pandemic started to impact the economy.

Under the terms of such plans, for certain borrowers a deferral plan was entered into where missed payments were deferred to the maturity of the related loan, with a corresponding change to the loan’s next payment due date.

In addition, certain borrowers were granted up to a seven-month

“zero pay” forbearance with payments required to resume at the conclusion of the plan.

In addition, certain borrowers were granted up to a seven-month “zero pay” forbearance with payments required to resume at the conclusion of the plan.

For these borrowers, delinquent payments were permitted to be placed on specified repayment plans.

While the majority of the borrowers granted relief have resumed making payments at the conclusion of such deferral and forbearance periods, certain borrowers, particularly in our Non-QM loan portfolio, continue to be impacted financially by the COVID-19 pandemic and have not yet resumed payments.

When these borrowers became more than 90 days delinquent on payments, any interest income receivable related to the associated loans was reversed in accordance with our non-accrual policies.

At December 31, 2020, Non-QM loans with an amortized cost of $148.4 million, or 6.4% of the portfolio, were more than 90 days delinquent.

For these and other borrowers that have been impacted by the COVID-19 pandemic, we are continuing to evaluate loss mitigation options with respect to these loans, including forbearance, repayment plans, loan modification and foreclosure.

In addition, at December 31, 2020, Rehabilitation Loans to fix and flip borrowers with an amortized cost of $136,3 million, or 23.4% of the portfolio were more than 90 days delinquent.

At December 31, 2021, Non-QM loans with an unpaid principal balance of $94.8 million, or 2.8% of the portfolio, were more than 90 days delinquent.

For these and other borrowers that have been impacted by COVID-19, we are continuing to evaluate loss mitigation options with respect to these loans, including forbearance, repayment plans, loan modification and foreclosure.

In addition, at December 31, 2021, Rehabilitation Loans with an unpaid principal balance of $103.0 million, or 14.1% of the portfolio, were more than 90 days delinquent.

Because rehabilitation loans are shorter term and repayment is usually dependent on completion of the rehabilitation project and sale of the property, the strategy to resolve delinquent rehabilitation loans differs from owner occupied loans.

Consequently, forbearance and repayment plans are offered less frequently.

However, we seek to work with delinquent fix and flip borrowers whose projects are close to completion or are listed for sale in order to provide the borrower the opportunity to sell the property and repay our loan.

In circumstances where the borrower is not able to complete the project or we are not able to work with the borrower to our mutual benefit, foreclosure or other forms of resolution are pursued.

During 2020, we sold our remaining investments in Agency MBS for $1.5 billion, realizing losses of $19.3 million, and disposed of all of our Legacy Non-Agency MBS for $1.1 billion, realizing gains of $168.2 million.

As of December 31, 2020, our RPL/NPL MBS portfolio totaled $53.9 million.

During 2020, we sold $200.7 million of these securities, realizing a loss of $60.2 million.

The net yield on our RPL/NPL MBS portfolio was 5.64% for 2020, compared to 5.04% for 2019.

In addition, our investments in MSR-related assets at December 31, 2020 totaled $239.0 million.

During the three months ended March 31, 2020, we recognized an impairment loss related to our term notes backed by MSR collateral of $280.8 million based on our intent to sell, or the likelihood we would be required to sell, such notes.

Later in 2020, we sold $711.7 million of term notes backed by MSR-related collateral, realizing a gain of $28.7 million.

The net yield on our MSR-related assets was 7.26% for 2020, compared to 5.19% for 2019.

Our investments in CRT securities totaled $104.2 million at December 31, 2020.

During 2020, we sold $243.0 million of CRT securities, realizing a loss of $27.0 million.

We adopted the new accounting standard addressing the measurement of credit losses on financial instruments (CECL) on January 1, 2020.

However, we seek to work with delinquent rehabilitation loan borrowers whose projects are close to completion or are listed for sale in order to provide the borrower the opportunity to sell the property and repay our loan.

In circumstances where the borrower is not able to complete the project or we are not able to work with the borrower to our mutual benefit, we pursue foreclosure or other forms of resolution.

At December 31, 2021, our Securities, at fair value totaled $256.7 million and included $153.8 million of MSR-related assets and $102.9 million of CRT securities.

The net yield on our Securities, at fair value was 22.95% for 2021, compared to 6.16% for 2020.

The increase in the net yield on our Securities, at fair value portfolio primarily reflects accretion income of approximately $20.5 million recognized during 2021 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020, and $8.1 million of accretion recognized during 2021 on the redemption of a Non-Agency MBS security that had been previously purchased at a discount.

We adopted the accounting standard addressing the measurement of credit losses on financial instruments (CECL) on January 1, 2020 for loans on which we do not elect the fair value option at the time of acquisition.

CECL requires that reserves for credit losses be estimated at the reporting date based on expected cash flows for the life of the loan or financial asset, including anticipated prepayments and reasonable and supportable forecasts of future economic conditions.

For 2020, we recorded a provision for credit losses on residential whole loans held at carrying value of $13.4 million.

For 2021, we recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $44.9 million.

The reversal for the period primarily reflects run-off of loans held at carrying value and adjustments to certain macroeconomic and loan prepayment speed assumptions used in our credit loss forecasts.

The total allowance for credit losses recorded on residential whole loans held at carrying value at December 31, 2021 was $39.4 million.

In addition, as of December 31, 2020, CECL reserves for credit losses totaling approximately $1.2 million were recorded related to undrawn commitments on loans held at carrying value.

Further, we recorded an allowance for credit losses on other financial instruments of $9.0 million as of December 31, 2020.

We did not record a provision for credit losses on other financial instruments for 2019.

In addition, as of December 31, 2021, CECL reserves for credit losses totaling approximately $205,000 were recorded related to undrawn commitments on loans held at carrying value.

During 2021, we continued to execute on our strategy of entering into more durable forms of financing by completing eight securitizations consisting of $2.6 billion of residential whole loans.

Our GAAP book value per common share was $4.78 as of December 31, 2021.

Book value per common share decreased from $7.04 as of December 31, 2019.

Economic book value per common share, a non-GAAP financial measure of our financial position that adjusts GAAP book value by the amount of unrealized mark-to-market gains on our residential whole loans held at carrying value, was $4.92 at December 31, 2020, a decrease from $7.44 as of December 31, 2019.

The decrease in GAAP and Economic book value during 2020 primarily reflects the net loss recorded for the year, the net reduction in amounts recorded in shareholders equity related to AFS securities and derivative hedging transactions, the impact of dividends distributions and the combined impact of the transactions that occurred in the fourth quarter that resulted in the repurchase and the exercise of warrants issued in connection with the senior secured term loan.

Book value per common share increased from $4.54 as of December 31, 2020.

Economic book value per common share, a non-GAAP financial measure of our financial position that adjusts GAAP book value by the amount of unrealized mark-to-market gains on our residential whole loans and securitized debt held at carrying value, was $5.15 as of December 31, 2021, an increase from $4.91 as of December 31, 2020.

Increases in GAAP and Economic book value during 2021 reflect GAAP earnings in excess of dividends declared and fair value increases for our Residential whole loans at carrying value.

For additional information regarding the calculation of Economic book value per share, including a reconciliation to GAAP book value per share, refer to page 58 under the heading “Economic Book Value.”

Completion of Lima One Acquisition:

On July 1, 2021, we completed the previously announced acquisition from affiliates of Magnetar Capital of their ownership interests in Lima One.

In connection with this transaction, we also acquired from certain members of Lima One management their ownership interests in the company.

We now own 100% of Lima One, and the financial results of Lima One are included in our consolidated financial results from the date of the transaction closing.

For more information regarding market factors which impact our portfolio, see Part I, Item 1A.

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ASSET ALLOCATION

(Dollars in Millions) Residential Whole Loans, at Carrying Value (1)

Residential Whole Loans, at Fair Value Residential Mortgage Securities MSR-Related Assets Other,

(Dollars in Millions) Purchased Performing Loans (1)

Purchased Credit Deteriorated Loans (2)

Purchased Non-Performing Loans Securities, at fair value Real Estate Owned Other,

Fair Value/Carrying Value $ 6,316 $ 525 $ 1,072 $ 257 $ 156 $ 595 $ 8,921

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Less Convertible Senior Notes — — — — — (226) (226)

Less Senior Notes — — — — (100) (100)

Net Equity Allocated $ 1,472 $ 104 $ 388 $ 98 $ 112 $ 369 $ 2,543

Debt/Net Equity Ratio (4)

2.7 x 1.9 x 1.2 x 1.1 x 1.7 x

(1) Includes $2.3 billion of Non-QM loans, $563.4 million of Rehabilitation loans, $442.5 million of Single-family rental loans, $136.2 million of Seasoned performing loans, and $630.3 million of Purchased Credit Deteriorated Loans.

3.3 x 4.0 x 1.8 x 1.6 x 0.4 x 2.5 x

(1) Includes $3.5 billion of Non-QM loans, $728.0 million of Rehabilitation loans, $949.8 million of Single-family rental loans, $102.0 million of Seasoned performing loans, and $1.1 billion of Agency eligible investor loans.

At December 31, 2021, the total fair value of these loans is estimated to be approximately $6.4 billion.

(2) Includes $814.4 million of cash and cash equivalents, $7.2 million of restricted cash, $249.7 million of real estate owned, and $47.1 million of capital contributions made to loan origination partners, as well as other assets and other liabilities.

(2) At December 31, 2021, the total fair value of these loans is estimated to be approximately $624.0 million.

(3) Includes $304.7 million of cash and cash equivalents, $99.8 million of restricted cash, and $71.7 million of capital contributions made to loan origination partners, as well as other assets and other liabilities.

(4) Total Debt/Net Equity ratio represents the sum of borrowings under our financing agreements noted above as a multiple of net equity allocated.

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Amounts presented do not reflect estimates of prepayments or scheduled amortization.

(In Thousands) Purchased Performing Loans (1)

Purchased Credit Deteriorated Loans (2)

Residential Whole Loans,

at Fair Value

(In Thousands) Purchased

Performing Loans (1)

Purchased Credit

Deteriorated Loans (2)

Purchased Non-Performing Loans

Within one year $ 431,173 $ 1,109 $ 4,066

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Over one to five years 331,900 2,861 3,812

53,638 3,783 5,203

Over five years 5,569,332 543,802 1,064,392

2,916,601 669,562 1,207,691

Total due after one year $ 5,901,232 $ 546,663 $ 1,068,204

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The following table presents, at December 31, 2021, the dollar amount of certain of our residential whole loans, contractually maturing after one year, and indicates whether the loans have fixed interest rates or adjustable interest rates:

(In Thousands) Purchased Performing Loans (1)(2)

Purchased Credit Deteriorated Loans (1)(3)

Residential Whole Loans

at Fair Value (1)

(In Thousands) Purchased

Performing Loans (1)(2)

Purchased Credit

Deteriorated Loans (1)(3)

Purchased Non-Performing Loans (1)

Interest rates:

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For additional information regarding our residential whole loan portfolios, see Note 3 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.

Residential Mortgage Securities

Non-Agency MBS

The following table presents information with respect to our Non-Agency MBS at December 31, 2020 and 2019.

During the three months ended June 30, 2020, we disposed of substantially all of our investments in Legacy Non-Agency MBS:

(In Thousands) 2020 2019

Non-Agency MBS

Securities, at Fair Value

The following table presents information with respect to our Securities, at fair value at December 31, 2021 and December 31, 2020:

(Dollars in Thousands) December 31, 2021 December 31, 2020

MSR-Related Assets

Face/Par $ 154,350 $ 249,769

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Amortized Cost 121,376 184,908

Weighted average yield (1)

10.30 % 12.30 %

Weighted average time to maturity 1.7 years 8.7 years

CRT Securities

At December 31, 2020, our total investment in CRT securities was $104.2 million, with a net unrealized gain of $18.0 million, a weighted average yield of 7.36% and a weighted average time to maturity of 18.5 years.

At December 31, 2019, our total investment in CRT securities was $255.4 million, with a net unrealized gain of $6.2 million, a weighted average yield of 4.18% and weighted average time to maturity of 10.3 years.

During the six months ended June 30, 2020, we disposed of all of our Agency MBS.

At December 31, 2019, our total investment in Agency MBS was $1.7 billion, with a net unrealized loss of $3.4 million and a weighted average coupon of 3.83%.

MSR-Related Assets

At December 31, 2020 and 2019, we had $239.0 million and $1.2 billion, respectively, of term notes issued by SPVs that have acquired the rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs.

At December 31, 2020, these term notes had an amortized cost of $184.9 million, gross unrealized gains of approximately $54.0 million, a weighted average yield of 12.30% and a weighted average term to maturity of 9.2 years.

At December 31, 2019, these term notes had an amortized cost of $1.2 billion, gross unrealized gains of $5.2 million, a weighted average yield of 4.75% and a weighted average term to maturity of 5.3 years.

We have participated in a loan where we committed to lend $32.6 million of which no amount was drawn at December 31, 2020.

The facility expires in August, 2021.

Face/Par $ 99,999 $ 104,031

Fair Value 102,914 104,234

Amortized Cost 86,643 86,214

Weighted average yield 10.52 % 7.37 %

Weighted average time to maturity 18.5 Years 19.7 years

Face/Par $ — $ 54,998

Fair Value — 53,946

Amortized Cost — 46,862

Weighted average yield — % 7.55 %

Weighted average time to maturity N/A 28.7 years

(1) Weighted average yield is annualized interest income divided by average amortized cost for MSR-related assets held at December 31, 2021.

Tax Considerations

Current period estimated taxable income

We estimate that for 2020, our taxable loss was approximately $3.9 million.

We estimate that for 2021, our REIT taxable income was approximately $72.2 million.

We have until the filing of our 2021 tax return (due not later than October 17, 2022) to declare the distribution of any 2021 REIT taxable income not previously distributed.

Key differences between GAAP net income and REIT Taxable Income

Residential Whole Loans and Residential Mortgage Securities

The determination of taxable income attributable to residential whole loans and Non-Agency MBS is dependent on a number of factors, including timing of principal and interest payments, defaults, loss mitigation efforts and loss severities.

Potential timing differences arise with respect to the accretion of discount and amortization of premium into income as well as the recognition of realized losses for tax purposes as compared to GAAP.

a) impairments generally are not recognized by us for income tax purposes until the asset is written-off or sold;

b) capital losses may only be recognized by us to the extent of its capital gains;

capital losses in excess of capital gains generally are carried over by us for potential offset against its future capital gains and c) tax hedge losses resulting from the termination of interest rate swaps by us generally are amortized over the remaining term of the swap.

In estimating taxable income for such investments during the year, management considers estimates of the amount of discount and premium expected to be accreted.

Residential Whole Loans and Securities

The determination of taxable income attributable to residential whole loans and securities is dependent on a number of factors, including principal payments, defaults, loss mitigation efforts and loss severities.

In estimating taxable income for such investments during the year, management considers estimates of the amount of discount expected to be accreted.

Such estimates require significant judgment and actual results may differ from these estimates.

Moreover, the deductibility of realized losses and their effect on discount accretion and premium amortization are analyzed on an asset-by-asset basis and, while they will result in a reduction of taxable income, this reduction tends to occur gradually and, primarily for Non-Agency MBS, in periods after the realized losses are reported.

In addition, for securitization and resecuritization transactions that were treated as a sale of the underlying residential whole loans or MBS for tax purposes, taxable gain or loss, if any, resulting from the unwind of such transactions is not recognized in GAAP net income.

Use of fair value accounting for certain residential whole loans and residential mortgage securities for GAAP, but not for tax, gives rise to potential timing differences.

In addition, for tax purposes the residential whole loans contributed to a variable interest entity (or VIE) used to facilitate our second quarter 2017 and fourth quarter 2020 loan securitization transactions were deemed to be sold for tax purposes, but not for GAAP reporting purposes.

Our total Non-Agency MBS portfolio for tax differs from our portfolio reported for GAAP primarily due to the fact that for tax purposes:

(i) certain of the MBS contributed to the VIEs used to facilitate MBS resecuritization transactions were deemed to be sold;

and (ii) the tax basis of underlying MBS considered to be reacquired in connection with the unwind of such transactions became the fair value of such securities at the time of the unwind.

For GAAP reporting purposes the underlying MBS that were included in these MBS resecuritization transactions were not considered to be sold.

Consequently, our REIT taxable income calculated in a given period may differ significantly from our GAAP net income.

Securitization transactions result in differences between GAAP net income and REIT Taxable Income

For tax purposes, depending on the transaction structure, a securitization and/or resecuritization transaction may be treated either as a sale or a financing of the underlying collateral.

As a result, the income recognized from securitization and resecuritization transactions may differ for tax and GAAP purposes.

For tax purposes, we own or may in the future acquire interests in securitization and /or resecuritization trusts, in which several of the classes of securities are or will be issued with original issue discount (or OID).

As the holder of the retained interests in the trust, we generally will be required to include OID in our current gross interest income over the term of the applicable securities as the OID accrues.

Potential timing differences can arise with respect to the accretion of discount and amortization of premium into income as well as the recognition of gain or loss for tax purposes as compared to GAAP.

a) while our REIT uses fair value accounting for GAAP in some instances, it generally is not used for purposes of determining taxable income;

b) impairments generally are not recognized by us for income tax purposes until the asset is written-off or sold;

c) capital losses may only be recognized by us to the extent of its capital gains;

capital losses in excess of capital gains generally are carried over

by us for potential offset against future capital gains;

and d) tax hedge gains and losses resulting from the termination of interest rate swaps by us generally are amortized over the remaining term of the swap.

Securitization

Generally, securitization transactions for GAAP and tax can be characterized as either sales or financings, depending on transaction type, structure and available elections.

For GAAP purposes, our securitizations have been treated as on-balance sheet financing transactions.

For tax purposes, they have been characterized as both financing and sale transactions.

Where a securitization has been characterized as a sale, gain or loss is recognized for tax purposes.

In addition, we own or may in the future acquire interests in securitization and/or re-securitization trusts, in which several of the classes of securities are or will be issued with original issue discount (or OID).

As the holder of the retained interests in the trust, for tax purposes we generally will be required to include OID in our current gross interest income over the term of the applicable securities as the OID accrues.

The rate at which the OID is recognized into taxable income is calculated using a constant rate of yield to maturity, with realized losses impacting the amount of OID recognized in REIT taxable income once they are actually incurred.

For tax purposes, REIT taxable income may be recognized in excess of economic income (i.e., OID) or in advance of the corresponding cash flow from these assets, thereby affecting our dividend distribution requirement to stockholders.

In addition, for securitization and/or resecuritization transactions that were treated as a sale of the underlying collateral for tax purposes, the unwinding of any such transaction will likely result in a taxable gain or loss that is likely not recognized in GAAP net income since securitization and resecuritization transactions are typically accounted for as financing transactions for GAAP purposes.

The tax basis of underlying residential

whole loans or MBS re-acquired in connection with the unwind of such transactions becomes the fair market value of such assets at the time of the unwind.

Taxable income of consolidated TRS subsidiaries is included in GAAP income, but may not be included in REIT Taxable Income

Net income generated by our TRS subsidiaries is included in consolidated GAAP net income, but may not be included in REIT taxable income in the same period.

Net income of U.S.

domiciled TRS subsidiaries is included in REIT taxable income when distributed by the TRS.

Net income of foreign domiciled TRS subsidiaries is included in REIT taxable income as if distributed to the REIT in the taxable year it is earned by the foreign domiciled TRS.

REIT taxable income may be recognized in excess of economic income (i.e., OID) or in advance of the corresponding cash flow from these assets, thereby affecting our dividend distribution requirement to stockholders.

For securitization and/or re-securitization transactions that were treated as a sale of the underlying collateral for tax purposes, the unwinding of any such transaction will likely result in taxable income or loss.

Given that securitization and re-securitization transactions are typically accounted for as financing transactions for GAAP purposes, such income or loss is not likely to be recognized for GAAP.

As a result, the income recognized from securitization and re-securitization transactions may differ for tax and GAAP purposes.

Whether our investments are held by our REIT or one of its Taxable REIT Subsidiaries (TRS)

We estimate that for 2021, our gross TRS taxable income will be $79.8 million and that we will utilize $72.7 million of net operating loss;

resulting in net TRS taxable income of $7.1 million Net income generated by our TRS subsidiaries is included in consolidated GAAP net income, but may not be included in REIT taxable income in the same period.

REIT taxable income generally does not include taxable income of the TRS unless and until it is distributed to the REIT.

For example, because our securitization transactions that are treated as a sale for tax purposes are undertaken by a domestic TRS, any gain or loss recognized on the sale is not included in our REIT taxable income until it is distributed by the TRS.

Similarly, the income earned from loans, securities, REO and other investments held by our domestic TRS is excluded from REIT taxable income until it is distributed by the TRS.

Net income of our foreign domiciled TRS subsidiaries is included in REIT taxable income as if distributed to the REIT in the taxable year it is earned by the foreign domiciled TRS.

Consequently, our REIT taxable income calculated in a given period may differ significantly from our GAAP net income.

Results of Operations

In this section, we discuss the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020.

For a discussion related to our results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operation s” in our Annual Report on Form 10-K for the Year Ended December 31, 2019, which was filed with the SEC on February 21, 2020, and is available on the SEC’s website at www.sec.gov and on our website at www.mfafinancial.com.

For a discussion related to our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Year Ended December 31, 2020, which was filed with the SEC on February 23, 2021, and is available on the SEC’s website at www.sec.gov and on our website at www.mfafinancial.com.

Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020

For 2020, we had a net loss available to our common stock and participating securities of $709.2 million, or $1.57 per basic and diluted common share, compared to net income available to common stock and participating securities for 2019 of $363.1 million, or $0.80 per basic and $0.79 per diluted common share.

Following the unprecedented disruption in residential mortgage markets due to concerns related to the COVID-19 pandemic that was experienced late in the first quarter and into the second quarter of 2020, management was focused on taking actions to bolster and stabilize our balance sheet, improve our liquidity position and renegotiate the financing associated with our remaining investments.

The actions included disposing our Agency and Legacy Non-Agency MBS portfolios, substantially reducing our investments in MSR-related assets, RPL/NPL MBS and CRT securities and sales of certain residential whole loans.

These disposals resulted in net realized losses for the year totaling $188.9 million.

Further, we recorded impairment losses on certain residential mortgage securities and MSR-related assets of $344.4 million.

We also recorded impairment losses on other assets of $72.4 million, primarily related to write-downs of the carrying values of investments in certain loan originators.

In addition, as we had entered into forbearance agreements with the majority of our remaining lenders that were in place for most of the second quarter, our financing costs were dramatically increased during this period.

The combination of the impact of asset sales and higher financing costs during the forbearance period resulted in the significant reduction in net interest income from our investments.

During the year ended December 31, 2020, we also incurred unusually high professional services and other costs in connection with negotiating forbearance arrangements with our lenders, entering into new financing arrangements and reinstating prior financing arrangements on the exit from forbearance.

Finally, we recorded losses totaling $57.0 million on terminated Swaps that had previously been designated as hedges for accounting purposes, expenses totaling $25.3 million on the early payment of a senior secured credit agreement and $10.5 million of net unrealized losses on residential mortgage securities measured at fair value through earnings.

These losses were partially offset by $94.2 million in net gains on our residential whole loans measured at fair value through earnings.

Further, we recorded a provision for credit losses on residential whole loans held at carrying value and other financial instruments of $22.4 million, which includes a provision for credit losses on undrawn commitments of $1.2 million, during the year ended December 31, 2020.

For 2021, we had a net income available to our common stock and participating securities of $296.0 million, or $0.67 per basic common share and $0.66 diluted common share, compared to a net loss available to common stock and participating securities for 2020 of $709.2 million, or $1.57 per basic and diluted common share.

The prior period results were significantly impacted by the unprecedented disruption in residential mortgage markets due to concerns related to COVID-19 that required management to take actions to bolster and stabilize our balance sheet, improve our liquidity position and renegotiate the financing associated with our remaining investments.

The actions included disposing our Agency and Legacy Non-Agency MBS portfolios, substantially reducing our investments in MSR-related assets and CRT securities, and sales of certain residential whole loans.

In addition, as we had entered into forbearance agreements with the majority of our remaining lenders that were in place for most of the second quarter of 2020, our financing costs were dramatically increased during this period.

Asset disposals resulted in net realized losses for the year ended December 31, 2020 totaling $188.8 million.

Further, during the year ended December 31, 2020, we recorded impairment losses on certain residential mortgage securities and other assets of $425.1 million, recorded losses totaling $57.0 million on terminated Swaps that had previously been designated as hedges for accounting purposes, expenses totaling $25.3 million on the early payment of a senior secured credit agreement and $10.5 million of net unrealized losses on residential mortgage securities measured at fair value through earnings.

These losses were partially offset by $20.8 million in net gains on residential whole loans measured at fair value through earnings.

During the year ended December 31, 2020, we also recorded a provision for credit losses on residential whole loans and other financial assets of $22.4 million and incurred $44.4 million of professional services and other costs in connection with negotiating and exiting forbearance arrangements with our lenders.

Accordingly, the increase in net income available to common stock and participating securities in 2021 over 2020 primarily reflects higher Other income, which in 2021 includes $38.9 million of gains recorded in connection with Lima One purchase accounting and a gain of $34.0 million from the reversal of prior period impairments, while the prior period was characterized by the significant losses discussed above.

In addition, Net Interest Income was also significantly higher in 2021, as funding costs significantly decreased in the period after we exited forbearance and due to the increased use of securitization funding.

Further, the current period results include a net reversal of provision for credit losses on residential whole loans held at carrying value, compared to a net provision in the prior year and lower operating and other expenses as the prior year period included significant professional services costs associated with restructuring and our forbearance agreements.

Net Interest Income

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For 2021, our net interest spread and margin were 2.81% and 3.58%, respectively, compared to a net interest spread and margin of 0.87% and 1.94%, respectively, for 2020.

Our net interest income decreased by $158.7 million, or 63.66%, to $90.6 million from $249.4 million for 2019.

For 2020, net interest income for our residential mortgage securities and MSR-related asset portfolios decreased by approximately $118.5 million compared to 2019, primarily due to lower average amounts invested in these securities due to portfolio sales in the current period.

Net interest income also includes lower net interest income from residential whole loans held at carrying value of approximately $23.0 million for 2020 compared to 2019 primarily due to lower yields earned on these assets and higher funding costs as a result of entering into forbearance agreements.

In addition, we also incurred approximately $16.2 million in interest expense related to the senior secured credit agreement we entered into during the second quarter of 2020 and approximately $6.6 million higher interest expense on our Convertible Senior Notes issued in June 2019.

Net interest income for 2020 also includes $38.1 million of interest expense associated with residential whole loans held at fair value, reflecting a $6.8 million decrease in borrowing costs related to these investments compared to 2019.

Coupon interest income received from residential whole loans held at fair value is presented as a component of the total income earned on these investments and therefore is included in Other Income, net rather than net interest income.

On January 6, 2021, we completed the redemption of our Senior Notes.

In connection with this redemption, we recorded in our 2020 interest expense a non-cash charge of approximately $3.1 million representing remaining unamortized deferred expenses incurred when the Senior Notes were originally issued.

Our net interest income increased by $77.8 million, or 47.4%, to $241.9 million from $164.1 million for 2020.

For 2021, net interest income includes higher net interest income from our residential whole loan portfolio of approximately $57.2 million compared to 2020, primarily due to lower financing costs and higher yields, partially offset by lower average balances invested in these assets.

In addition, interest expense for 2021 included $6.0 million of interest expense related to 8.00% Senior Notes due 2042 (or Senior Notes) that were redeemed in January of 2021

but were outstanding during all of 2020.

Net interest income for our Securities, at fair value portfolio increased by approximately $1.9 million compared to 2020, primarily due to a higher yield earned on these assets due to the early redemption at par of several securities during the current year period and lower financing costs, offset by lower average amounts invested in these securities due to portfolio sales in the first and second quarters of 2020.

Analysis of Net Interest Income

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For the Year Ended December 31,

Average Balance Interest Average

Yield/Cost Average Balance Interest Average Yield/Cost

Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost

(Dollars in Thousands)

Interest-earning assets:

Residential whole loans, at carrying value (1)

$ 5,267,932 $ 258,764 4.91 % $ 4,372,653 $ 243,980 5.58 %

Agency MBS (2)

390,876 8,852 2.26 2,220,246 55,901 2.52

Legacy Non-Agency MBS (2)

267,417 28,828 10.78 1,265,843 146,646 11.58

RPL/NPL MBS (2)

158,432 8,936 5.64 1,059,046 53,424 5.04

Total MBS 816,725 46,616 5.71 4,545,135 255,971 5.63

CRT securities (2)

151,133 7,521 4.98 384,583 18,583 4.83

MSR-related assets (2)

Residential whole loans $ 5,767,655 $ 303,468 5.26 % $ 6,395,581 $ 332,212 5.19 %

Securities, at fair value (1)(2)

246,978 56,690 22.95 1,461,819 90,094 6.16

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$ 2,055,421 3.58 % $ 2,200,735 1.94 %

(1) Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.

(1) Yields presented throughout this Annual Report on Form 10-K are calculated using average amortized cost data for securities which excludes unrealized gains and losses and includes principal payments receivable on securities.

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Average amortized cost data used to determine yields is calculated based on the settlement date of the associated purchase or sale as interest income is not earned on purchased assets and continues to be earned on sold assets until settlement date.

(2) The net yield of 22.95% includes $20.5 million of accretion income recognized in 2021, due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020;

and $8.1 million of accretion recognized during 2021 on the redemption of a Non-Agency MBS security that was purchased at a discount.

Excluding this accretion, the yield reported would have been 11.38%.

(3) Includes average interest-earning cash, cash equivalents and restricted cash.

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For additional information, see Note 6, included under Item 8 of this Annual Report on Form 10-K.

(5) Average cost of repurchase agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.

(5) Average cost of repurchase agreements in the prior year period includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.

(6) Includes both Securitized debt, at carrying value and Securitized debt, at fair value.

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(8) Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.

(9) Net interest margin reflects annualized net interest income divided by average interest-earning assets.

(9) Net interest margin reflects net interest income divided by average interest-earning assets.

Rate/Volume Analysis

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Interest-earning assets:

Residential whole loans, at carrying value (1)

$ 46,182 $ (31,398) $ 14,784

Residential mortgage securities (168,639) (51,778) (220,417)

MSR-related assets (32,978) 16,288 (16,690)

Residential whole loans $ (33,145) $ 4,401 $ (28,744)

Securities, at fair value (122,502) 89,098 (33,404)

Cash and cash equivalents 193 (525) (332)

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Interest-bearing liabilities:

Residential whole loan at carrying value financing agreements $ 25,863 $ 9,216 $ 35,079

Residential whole loan at fair value financing agreements (4,697) 909 (3,788)

Residential mortgage securities repurchase agreements (100,010) (6,427) (106,437)

MSR-related assets repurchased agreements (14,176) 2,049 (12,127)

Residential whole loan financing agreements $ (49,043) $ (49,240) $ (98,283)

Securities, at fair value repurchase agreements (23,786) (11,471) (35,257)

REO financing agreements 471 — 471

Other repurchase agreements (607) (607) (1,214)

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Senior secured credit agreement (8,121) (8,120) (16,241)

Total net change in expense from interest-bearing liabilities (63,576) (22) (63,598)

Total net change in expense of interest-bearing liabilities $ (64,399) $ (83,974) $ (148,373)

Net change in net interest income $ (98,480) $ 176,323 $ 77,843

(1) Excludes residential whole loans held at fair value which are reported as a component of non-interest-earning assets.

The following table presents certain quarterly information regarding our net interest spread and net interest margin for the quarterly periods presented:

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(2) Reflects annualized net interest income divided by average interest-earning assets.

The following table presents the components of the net interest spread earned on our Residential whole loans, at carrying value for the quarterly periods presented:

Purchased Performing Loans Purchased Credit Deteriorated Loans Total Residential Whole Loans, at Carrying Value

Quarter Ended Net

December 31, 2020 4.57 % 2.77 % 1.80 % 5.16 % 3.02 % 2.14 % 4.66 % 2.81 % 1.85 %

September 30, 2020 4.58 3.42 1.16 4.89 3.22 1.67 4.63 3.39 1.24

June 30, 2020 5.17 6.34 (1.17) 5.07 6.03 (0.96) 5.15 6.30 (1.15)

March 31, 2020 5.10 3.44 1.66 4.84 3.39 1.45 5.07 3.43 1.64

December 31, 2019 5.24 3.61 1.63 5.79 3.51 2.28 5.31 3.59 1.72

September 30, 2019 5.55 3.92 1.63 5.76 3.79 1.97 5.58 3.90 1.68

June 30, 2019 5.71 4.22 1.49 5.75 3.98 1.77 5.72 4.17 1.55

March 31, 2019 5.93 4.27 1.66 5.77 4.06 1.71 5.89 4.21 1.68

(1) Reflects annualized interest income on Residential whole loans, at carrying value divided by average amortized cost of Residential whole loans, at carrying value.

The following table presents the components of the net interest spread earned on our Residential whole loans for the quarterly periods presented:

Quarter Ended

December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020

Purchased Performing Loans

Net Yield (1)

4.12 % 4.56 % 4.45 % 4.41 % 4.57 % 4.58 % 5.17 % 5.10 %

Cost of Funding (2)

2.19 % 2.14 % 2.09 % 2.46 % 2.77 % 3.42 % 6.34 % 3.59 %

Net Interest Spread (3)

1.93 % 2.42 % 2.36 % 1.95 % 1.80 % 1.16 % (1.17) % 1.51 %

Purchased Credit Deteriorated Loans

Net Yield (1)

7.15 % 7.08 % 7.17 % 5.00 % 5.16 % 4.89 % 5.07 % 4.84 %

Cost of Funding (2)

2.23 % 2.18 % 2.39 % 2.86 % 3.02 % 3.22 % 6.03 % 3.39 %

Net Interest Spread (3)

4.92 % 4.90 % 4.78 % 2.14 % 2.14 % 1.67 % (0.96) % 1.45 %

Purchased Non-Performing Loans

Net Yield (1)

9.83 % 8.81 % 7.98 % 7.13 % 7.06 % 5.99 % 5.42 % 7.54 %

Cost of Funding (2)

2.51 % 2.43 % 2.71 % 3.41 % 3.57 % 3.78 % 5.55 % 3.60 %

Net Interest Spread (3)

7.32 % 6.38 % 5.27 % 3.72 % 3.49 % 2.21 % (0.13) % 3.94 %

Total Residential Whole Loans

Net Yield (1)

5.08 % 5.52 % 5.48 % 5.03 % 5.13 % 4.89 % 5.20 % 5.45 %

Cost of Funding (2)

2.23 % 2.20 % 2.25 % 2.70 % 2.97 % 3.47 % 6.15 % 3.58 %

Net Interest Spread (3)

2.85 % 3.32 % 3.23 % 2.33 % 2.16 % 1.42 % (0.95) % 1.87 %

(1) Reflects annualized interest income on Residential whole loans divided by average amortized cost of Residential whole loans.

Excludes servicing costs.

(2) Reflects annualized interest expense divided by average balance of repurchase agreements and securitized debt.

Total Residential whole loans, at carrying value cost of funding include, 3, 5, 3, 5 and 6 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, respectively.

(2) Reflects annualized interest expense divided by average balance of repurchase agreements, agreements with non-mark-to-market collateral provisions, and securitized debt.

Total Residential whole loans cost of funding includes six basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarter ended March 31, 2020.

Cost of funding for the quarter ended June 30, 2020 includes the impact of amortization of $12.5 million of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes.

The amortization of these losses increased the funding cost by 116 basis points for Purchased Performing Loans, 107 basis points for Purchased Credit Deteriorated Loans, and 115 basis points for total Residential whole loans, at carrying value during the quarter ended June 30, 2020.

The amortization of these losses increased the funding cost by 116 basis points for Purchased Performing Loans, 107 basis points for Purchased Credit Deteriorated Loans, 77 basis points for Purchased Non-performing Loans, and 108 basis points for total Residential whole loans during the quarter ended June 30, 2020.

At June 30, 2020, following the closing of certain financing transactions and our exit from forbearance arrangements, and an evaluation of our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring.

In addition, cost of funding for the quarter ended June 30, 2020 is significantly higher than prior periods as it reflects default interest and/or higher rates charged by lenders while we were under a forbearance agreement.

In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.

(3) Reflects the difference between the net yield on average Residential whole loans, at carrying value and average cost of funds on Residential whole loans, at carrying value.

In addition, cost of funding for the quarter ended June 30, 2020 was significantly higher than for prior periods as it reflects default interest and/or higher rates charged by lenders while we were under a forbearance agreement.

During the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.

(3) Reflects the difference between the net yield on average Residential whole loans and average cost of funds on Residential whole loans.

The following table presents the components of the net interest spread earned on our residential mortgage securities and MSR-related assets for the quarterly periods presented:

Residential Mortgage Securities MSR-Related Assets

Securities, at fair value

Quarter Ended Net

Funding Net Interest

December 31, 2021 26.28 % 1.50 % 24.78 %

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March 31, 2020 5.22 2.53 2.69

(1) Reflects annualized interest income on divided by average amortized cost.

(1) Reflects annualized interest income divided by average amortized cost.

Impairment charges recorded on MSR-related assets resulted in a lower amortized cost basis which impacted the calculation of net yields in subsequent periods.

(2) Reflects annualized interest expense divided by average balance of repurchase agreements, including the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration and securitized debt.

Agency MBS cost of funding includes 78, 36, 1, (9) and (13) basis points and Legacy Non-Agency MBS cost of funding includes 52, 24, 1, (14) and (20) basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, respectively.

Cost of funding for the quarter ended June 30, 2020 includes the impact of amortization of $278,000 of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes.

The amortization of these losses increased the funding cost by 174 basis points for total RPL/NPL MBS during the quarter ended June 30, 2020.

(2) For the quarter ended December 31, 2021, the net yield of 26.28% includes $8.1 million of accretion income recognized on the redemption at par of an MSR-related asset that had been held at amortized cost basis below par due to an impairment charge during the first quarter of 2020.

Excluding this accretion, the yield reported would have been 11.37%.

For the quarter ended September 30, 2021, the net yield of 18.78% includes $4.0 million of accretion income recognized on the redemption at par of an MSR-related asset that had been held at amortized cost basis below par due to an impairment charge during the first quarter of 2020.

Excluding this accretion, the yield reported would have been 11.63%.

For the quarter ended June 30, 2021, the net yield of 24.57% includes $8.4 million of accretion income recognized on the redemption at par of an MSR-related asset that had been held at amortized cost basis below par due to an impairment charge recorded in the first quarter of 2020.

Excluding this accretion, the yield reported would have been 11.13%.

For the quarter ended March 31, 2021, the net yield of 22.25% includes $8.1 million of accretion income recognized on the redemption of an RPL/NPL MBS security that was previously purchased at a discount.

Excluding this accretion, the yield reported would have been 11.26%.

(3) Reflects annualized interest expense divided by average balance of repurchase agreements.

Securities, at fair value cost of funding includes 26 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarter ended March 31, 2020.

Cost of funding for the quarter ended June 30, 2020 includes the impact of amortization of $1.7 million of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes.

The amortization of these losses increased the funding cost by 109 basis points for total Securities, at fair value during the quarter ended June 30, 2020.

(3) Reflects the difference between the net yield on average and average cost of funds.

(4) Reflects the difference between the net yield on average Securities, at fair value, and average cost of funds on Securities, at fair value.

Interest Income

Interest income on our residential whole loans held at carrying value increased by $14.8 million, or 6.1%, for 2020 to $258.8 million compared to $244.0 million for 2019.

This increase primarily reflects a $895.3 million increase in the average balance of this portfolio to $5.3 billion for 2020 from $4.4 billion for 2019, partially offset by a decrease in the yield (excluding servicing costs) to 4.91% for 2020 from 5.58% for 2019.

Due to previously discussed asset sales and impairment charges, the average amortized cost of our residential mortgage securities portfolio decreased $4.0 billion to $1.0 billion for 2020 from $4.9 billion for 2019 and interest income on our residential mortgage securities portfolio decreased $220.4 million to $54.1 million for 2020 from $274.6 million for 2019.

Interest income on our MSR-related assets decreased by $16.7 million to $36.0 million for 2020 compared to $52.6 million for 2019.

This decrease primarily reflects a $519.4 million decrease in the average balance of these investments for 2020 to $495.6 million compared to $1.0 billion for 2019, partially offset by an increase in the yield to 7.26% for 2020 from 5.19% for 2019.

The yield increased primarily due to the impact of impairment charges recorded during 2020 on the amortized cost of these assets.

Interest income on our residential whole loans decreased by $28.7 million, or 8.7%, for 2021, to $303.5 million compared to $332.2 million for 2020.

This decrease primarily reflects a $627.9 million decrease in the average balance of this portfolio to $5.8 billion for 2021 from $6.4 billion for 2020, partially offset by an increase in the yield to 5.26% for 2021 from 5.19% for 2020.

Due to the previously discussed asset sales and impairment charges that primarily occurred late in the first quarter of 2020 to early in the second quarter of 2020, as well as further asset disposals and redemptions that have occurred later in 2020 and throughout 2021, the average amortized cost of our Securities, at fair value portfolio decreased $1.2 billion to $247.0 million for 2021 from $1.5 billion for 2020, and interest income on our Securities, at fair value portfolio decreased $33.4 million to $56.7 million for 2021 from $90.1 million for 2020.

The net yield on our Securities, at fair value was 22.95% for 2021, compared to 6.16% for 2020.

The increase in the net yield on our Securities, at fair value portfolio primarily reflects approximately $20.5 million of accretion income recognized in 2021 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020;

and $8.1 million of accretion recognized in 2021 due to the redemption of a Non-Agency MBS that had been previously purchased at a discount.

Interest Expense

Our interest expense for 2021 decreased by $148.4 million, or 55.2%, to $120.4 million, from $268.8 million for 2020.

This decrease primarily reflects a decrease in our average repurchase agreement borrowings to finance our residential mortgage securities portfolio, MSR-related assets and residential whole loans held at fair value partially offset by an increase in our average borrowings to finance residential whole loans held at carrying value and an increase in financing rates on our financing agreements.

In addition in 2020, we incurred interest expense of approximately $16.2 million related to the senior secured credit agreement we entered into during the second quarter of 2020 and higher interest expense of $6.6 million on our Convertible Senior Notes issued in June 2019.

On January 6, 2021, we completed the redemption of our Senior Notes.

The effective interest rate paid on our borrowings increased to 4.24% for 2020, from 3.52% for 2019.

Provision for Credit Losses on Residential Whole Loans Held at Carrying Value and other financial instruments

For 2020, we recorded a provision for credit losses on residential whole loans held at carrying value of $13.4 million (which includes a provision for credit losses on undrawn commitments of $1.2 million) compared to a provision of $2.6 million for 2019.

In addition, we recorded a provision for credit losses on other financial instruments of $9.0 million for 2020.

We did not record a provision for credit losses on other financial instruments for 2019.

As previously discussed, on January 1, 2020, we adopted the new accounting standard addressing the measurement of credit losses on financial instruments (CECL).

With respect to our residential whole loans held at carrying value and other financial instruments, CECL requires that reserves for credit losses are estimated at the reporting date based on expected cash flows over the life of the loan or financial instrument, including anticipated prepayments and reasonable and supportable forecasts of future economic conditions.

This decrease primarily reflects a decrease in our average collateralized financing agreement borrowings to finance our residential mortgage asset portfolio and a decrease in financing rates on our financing agreements.

In addition, in the prior year period we incurred interest expense of approximately $16.2 million related to the senior secured credit agreement we entered into during the second quarter of 2020.

Further, 2020 included $11.1 million of interest expense related to our Senior Notes, which were redeemed in the first quarter of 2021.

The effective interest rate paid on our borrowings decreased to 2.56% for 2021, from 4.24% for 2020.

Provision for Credit Losses on Residential Whole Loans Held at Carrying Value

For 2021, we recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $44.9 million (which includes a reversal of provision for credit losses on undrawn commitments of $969,000) compared to a provision of $22.4 million for 2020.

With respect to our residential whole loans held at carrying value, CECL requires that reserves for credit losses are estimated at the reporting date based on expected cash flows over the life of the loan or financial instrument, including anticipated prepayments and reasonable and supportable forecasts of future economic conditions.

Other Income, net

For 2020, Other (Loss)/Income, net decreased by $832.0 million, to a $606.1 million loss, compared to $225.9 million of income for 2019.

The components of Other Income, net for the years ended 2020 and 2019 are summarized in the table below:

For 2021, Other Income/(Loss), net increased by $844.7 million, to $165.1 million compared to a $679.6 million loss for 2020.

The components of Other Income/(Loss), net for 2021 and 2020 are summarized in the table below:

For the Year Ended December 31,

(In Thousands) 2021 2020

Impairment and other losses on securities available-for-sale and other assets $ (425,082) $ (180)

Net realized (loss)/ gain on sales of residential mortgage securities and residential whole loans (188,847) 62,002

Net gain on residential whole loans measured at fair value through earnings $ 16,736 $ 20,765

Transfer from OCI of loss on swaps previously designated as hedges for accounting purposes (57,034) —

Expenses recognized on payoff of Senior secured credit agreement (25,287) —

Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings (10,486) 7,080

Liquidation gains on Purchased Credit Deteriorated Loans and other loan related income 5,945 14,711

Gain on investment in Lima One common equity (Note 15) 38,933 —

Impairment and other gains and losses on securities available-for-sale and other assets 33,956 (425,082)

Lima One - origination, servicing and other fee income 22,600 —

Net gain on real estate owned 22,838 5,391

Net realized loss on sales of securities and residential whole loans — (188,847)

Loss on terminated swaps previously designated as hedges for accounting purposes — (57,034)

Other residential whole loan related income 4,472 4,268

Net unrealized gain/(loss) on securities, at fair value measured at fair value through earnings 1,605 (10,486)

Other 23,963 (28,544)

Total Other (Loss)/Income, net $ (606,121) $ 225,857

Total Other Income/(Loss), net $ 165,103 $ (679,569)

Operating and Other Expense

During 2020, we had compensation and benefits and other general and administrative expenses of $56.7 million, or 2.08% of average equity, compared to $52.6 million, or 1.55% of average equity, for 2019.

Compensation and benefits expense decreased $1.2 million to $31.0 million for 2020, compared to $32.2 million for 2019, primarily reflecting a reduction in annual bonus compensation for the current year period partially offset by a provision for estimated severance costs in connection with a reduction in workforce that occurred in the third quarter of 2020.

Our other general and administrative expenses increased by $5.3 million to $25.7 million for 2020 compared to $20.4 million for 2019, primarily due to higher costs for professional services, corporate insurance, administrative expenses associated with financing arrangements, corporate income tax and the write-off of certain internally developed software and deferred financing costs, partially offset by lower costs associated with deferred compensation to Directors in the current year period, which were impacted by the changes in our stock price.

In addition, during 2020 we also incurred professional service and other costs of $44.4 million related to negotiating forbearance arrangements with our lenders entering into new financing arrangements and reinstating prior financing arrangements on the exit from forbearance.

During 2021, we had compensation and benefits and other general and administrative expenses of $85.5 million, compared to $56.7 million for 2020.

Compensation and benefits expense increased $22.8 million to $53.8 million for 2021, compared to $31.0 million for 2020 primarily reflecting the impact of including Lima One compensation expense in our financial results and an increase in annual bonus compensation for the current year period.

The prior year period also included a provision for estimated severance costs in connection with a reduction in workforce that occurred in the third quarter of 2020.

Our other general and administrative expenses increased by $6.1 million to $31.7 million for 2021 compared to $25.7 million for 2020, primarily reflecting the impact of including Lima One expenses in our financial results, increased information technology costs and higher costs associated with deferred compensation to Directors in the current year period, which were impacted by changes in our stock price.

In addition, during 2020, we also incurred professional service and other costs of $44.4 million related to negotiating and exiting forbearance arrangements with our lenders.

Operating and Other Expense during 2021 also includes $30.9 million of loan servicing and other related operating expenses related to our residential whole loan activities.

These expenses decreased compared to the prior year period by approximately $1.5 million, primarily due to lower servicing fees and non-recoverable advances on our residential whole loan and REO portfolios, partially offset by costs related to loan securitization activities.

These expenses decreased compared to 2020 by approximately $9.5 million, or 23.5%, primarily due to lower servicing fees and non-recoverable advances on our REO portfolio and lower expenses recognized related to loan securitization activities.

In addition, Other expenses for 2021 also includes $6.6 million of amortization related to intangible assets recognized as part of the purchase accounting for the Lima One acquisition.

Selected Financial Ratios

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(8) “Economic book value” is a non-GAAP financial measure of our financial position.

To calculate our Economic book value, our portfolios of Residential whole loans at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these loans.

To calculate our Economic book value, our portfolios of Residential whole loans and securitized debt held at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these loans.

For additional information please refer to page 58 under the heading “Economic Book Value”.

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“Economic book value” is a non-GAAP financial measure of our financial position.

This adjustment is also reflected in the table below in our end of period stockholders’ equity.

Management considers that Economic book value provides investors

with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for all of our residential mortgage investments, irrespective of the accounting model applied for GAAP reporting purposes.

These adjustments are also reflected in the table below in our end of period stockholders’ equity.

Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for all of our residential mortgage investments and certain associated financing arrangements, irrespective of the accounting model applied for GAAP reporting purposes.

Economic book value does not represent and should not be considered as a substitute for Stockholders’ Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

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GAAP Total Stockholders’ Equity $ 2,542.8 $ 2,601.1 $ 2,526.5 $ 2,542.3 $ 2,524.8 $ 2,565.7 $ 2,521.1 $ 2,440.7

$ 2,524.8 $ 2,565.7 $ 2,521.1 $ 2,440.7 $ 3,384.0 $ 3,403.4 $ 3,403.4 $ 3,404.5

Preferred Stock, liquidation preference (475.0) (475.0) (475.0) (475.0) (475.0) (475.0) (475.0) (475.0)

(475.0) (475.0) (475.0) (475.0) (200.0) (200.0) (200.0) (200.0)

GAAP Stockholders’ Equity for book value per common share 2,067.8 2,126.1 2,051.5 2,067.3 2,049.8 2,090.7 2,046.1 1,965.7

2,049.8 2,090.7 2,046.1 1,965.7 3,184.0 3,203.4 3,203.4 3,204.5

Fair value adjustment to Residential whole loans, at carrying value 153.5 198.8 206.2 203.0 173.9 141.1 (25.3) (113.5)

Fair value adjustment to Securitized debt, at carrying value (1)

4.3 (8.0) (8.9) (3.6) (5.1) (3.5) 18.0 51.9

Stockholders’ Equity including fair value adjustment to Residential whole loans, at carrying value (Economic book value)

Stockholders’ Equity including fair value adjustments to Residential whole loans and Securitized debt held at carrying value (Economic book value ) (1)

$ 2,225.6 $ 2,316.9 $ 2,248.8 $ 2,266.7 $ 2,218.6 $ 2,228.3 $ 2,038.8 $ 1,904.1

GAAP book value per common share $ 4.78 $ 4.82 $ 4.65 $ 4.63 $ 4.54 $ 4.61 $ 4.51 $ 4.34

$ 4.54 $ 4.61 $ 4.51 $ 4.34 $ 7.04 $ 7.09 $ 7.11 $ 7.11

Economic book value per common share (1)

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Number of shares of common stock outstanding 432.6 440.9 440.8 446.1 451.7 453.3 453.2 453.1

451.7 453.3 453.2 453.1 452.4 451.7 450.6 450.5

(1) Economic book value per common share for periods prior to December 31, 2021 have been restated to include the impact of fair value changes in securitized debt held at carrying value.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates.

For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price appreciation.

Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset.

Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield.

Certain business purpose loans, primarily rehabilitation loans with an original loan terms of nine to thirteen months, that are performing are valued at their carrying amount given their relatively short term to maturity and expectation of full repayment.

For non-performing rehabilitation loans, adjustments to the carrying value are made to record the loan at estimated fair value based on an evaluation of several factors, including the period the loan has been delinquent, the status of the project and the estimated value of the underlying collateral.

The estimation of cash flows used in pricing models is inherently subjective and imprecise.

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Recent Accounting Standards to Be Adopted in Future Periods

In August 2020, the Financial Accounting Standards Board (or FASB) issued accounting standards update (or ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (or ASU 2020-06).

ASU 2020-06 was issued in order to reduce the complexity associated with recording financial instruments with characteristics of both liabilities and equity by eliminating certain accounting models associated with such instruments and enhancing disclosure requirements.

ASU 2020-06 is effective for us for fiscal years beginning after December 15, 2021.

Early adoption is permitted, but no earlier than in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

We do not expect ASU 2020-06 to have a material impact on our accounting or disclosures.

We are not aware of any recent accounting standards to be adopted in future periods that we expect would materially impact us.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of cash generally consist of borrowings under repurchase agreements and other collateralized financings, payments of principal and interest we receive on our investment portfolio, cash generated from our operating results and, to the extent such transactions are entered into, proceeds from capital market and structured financing transactions.

Our most significant uses of cash are generally to pay principal and interest on our financing transactions, to purchase residential mortgage assets, to make dividend payments on our capital stock, to fund our operations, to meet margin calls and to make other investments that we consider appropriate.

Our most significant uses of cash are generally to pay principal and interest on our financing transactions, to purchase and originate residential mortgage assets, to make dividend payments on our capital stock, to fund our operations, to meet margin calls and to make other investments that we consider appropriate.

We seek to employ a diverse capital raising strategy under which we may issue capital stock and other types of securities.

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We have available for issuance an unlimited amount (subject to the terms and limitations of our charter) of common stock, preferred stock, depository shares representing preferred stock, warrants, debt securities, rights and/or units pursuant to our automatic shelf registration statement and, at December 31, 2021, we had approximately 8.3 million shares of common stock available for issuance pursuant to our DRSPP shelf registration statement.

During 2020, we issued 235,635 shares of common stock through

our DRSPP, raising net proceeds of approximately $1.0 million.

During 2020, we did not sell any shares of common stock through our ATM Program.

On March 2, 2020, we completed the issuance of 11.0 million shares of our Series C Preferred Stock with a par value of $0.01 per share, and a liquidation preference of $25.00 per share plus accrued and unpaid dividends, in an underwritten public offering.

The total net proceeds we received from the offering were approximately $266.0 million, after deducting offering expenses and the underwriting discount.

During the year ended December 31, 2020, we repurchased 14,085,678 shares of our common stock through the stock repurchase program at an average cost of $3.61 per share and a total cost of approximately $50.8 million, net of fees and commissions paid to the sales agent of approximately $141,000.

In addition, as previously discussed, during the year ended December 31, 2020 we repurchased 17,593,576, warrants for $33.7 million that were included in the stock repurchase program.

During 2021, we issued 431,699 shares of common stock through our DRSPP, raising net proceeds of approximately $1.9 million.

During 2021, we did not sell any shares of common stock through our at-the-market equity offering program.

During 2021, we repurchased 20,101,494 shares of our common stock through the stock repurchase program at an average cost of $4.26 per share and a total cost of approximately $85.6 million, net of fees and commissions paid to the sales agents of approximately $201,000.

At December 31, 2021, approximately $80.3 million remained outstanding for future repurchases under the repurchase program.

Financing agreements

Our borrowings under financial agreements include a combination of shorter term and longer arrangements.

Our borrowings under financing agreements include a combination of shorter term and longer arrangements.

Certain of these arrangements are collateralized directly by our residential mortgage investments or otherwise have recourse to us, while securitized debt financing is non-recourse financing.

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When we believe that a margin call is unnecessary because our assessment of collateral value differs from the counterparty valuation, we typically hold discussions with the counterparty and are able to resolve the matter.

In the unlikely event that resolution cannot be reached, we will look to resolve the dispute based on the remedies available to us under the terms of the repurchase agreement, which in some instances may include the engagement of a third party to review collateral valuations.

If this is not successful, we will look to resolve the dispute based on the remedies available to us under the terms of the repurchase agreement, which in some instances may include the engagement of a third-party to review collateral valuations.

For certain other agreements that do not include such provisions, we could resolve the matter by substituting collateral as permitted in accordance with the agreement or otherwise request the counterparty to return the collateral in exchange for cash to unwind the financing.

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Additionally, if one or more of our financing counterparties choose not to provide ongoing funding, our ability to finance our long-maturity assets would decline or otherwise become available on possibly less advantageous terms.

Further, when liquidity tightens, our

counterparties to our short term arrangements with mark-to-market collateral provisions may increase their required collateral cushion (or margin) requirements on new financings, including financings that we roll with the same counterparty, thereby reducing our ability to use leverage.

Further, when liquidity tightens, our counterparties to our short term arrangements with mark-to-market collateral provisions may increase their required collateral cushion (or margin) requirements on new financings, including financings that we roll with the same counterparty, thereby reducing our ability to use leverage.

Access to financing may also be negatively impacted by ongoing volatility in financial markets, thereby potentially adversely impacting our current or future lenders’ ability or willingness to provide us with financing.

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of this Annual Report on Form 10-K and our Consolidated Statements of Cash Flows, included under Item 8 of this Annual Report on Form 10-K.)

At December 31, 2020, we had a total of $4.1 billion of residential whole loans, residential mortgage securities and MSR-related assets and $7.2 million of restricted cash pledged to our financing counterparties.

At December 31, 2021, we had a total of $4.9 billion of residential whole loans and securities and $10.2 million of restricted cash pledged to our financing counterparties.

At December 31, 2021, we had access to various sources of liquidity, including $304.7 million of cash and cash equivalents.

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The table below presents certain information about our borrowings under asset-backed financing agreements and securitized debt:

Asset-backed Financing Securitized Debt

Asset-backed Financing Agreements Securitized Debt

Quarter Ended (1)

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(1) The information presented in the table above excludes $230.0 million of Convertible Senior Notes issued in June 2019 and $100.0 million of Senior Notes issued in April 2012.

The outstanding balance of both the Convertible Senior Notes and Senior Notes have been unchanged since issuance.

The outstanding balance of the Convertible Senior Notes have been unchanged since issuance.

Subsequent to the end of the third quarter of 2020, we repaid in full the outstanding principal balance of the senior secured term loan facility.

Subsequent to the end of the fourth quarter of 2020, we redeemed all of our outstanding Senior Notes.

During the first quarter of 2021, we redeemed all of our outstanding Senior Notes.

Cash Flows and Liquidity for the Year Ended December 31, 2021

Our cash, cash equivalents and restricted cash increased by $686.9 million during the year ended December 31, 2020, reflecting:

$6.4 billion provided by our investing activities, $5.7 billion used in our financing activities and $38.4 million provided by our operating activities.

Our cash, cash equivalents and restricted cash decreased by $417.1 million during 2021, reflecting:

$2.2 billion used in our investing activities, $1.6 billion provided by our financing activities and $120.3 million provided by our operating activities.

At December 31, 2021, our debt-to-equity multiple was 2.5 times compared to 1.7 times at December 31, 2020.

At December 31, 2020, we had borrowings under asset-backed financing agreements of $2.5 billion of which $2.3 billion were secured by residential whole loans, and $213.9 million were secured by residential mortgage securities and MSR-related assets.

At December 31, 2021, we had borrowings under asset-backed financing agreements of $3.5 billion, of which $3.3 billion were secured by residential whole loans, $159.1 million were secured by securities and $23.0 million were secured by REO.

In addition, at December 31, 2021, we had securitized debt of $2.7 billion in connection with our loan securitization transactions.

At December 31, 2019, we had borrowings under asset-backed financing agreements of $9.1 billion, of which $4.7 billion were secured by residential whole loans, $1.6 billion were secured by Agency MBS, $1.1 billion were secured by Legacy Non-Agency MBS, $495.1 million were secured by RPL/NPL MBS, $203.6 million were secured by CRT securities, $962.5 million were secured by MSR-related assets and $57.2 million were secured by other interest-earning assets.

In addition, at December 31, 2019, we had securitized debt of $571.0 million in connection with our loan securitization transactions.

During 2020, $6.4 billion was provided by our investing activities.

We paid $1.5 billion for purchases of residential whole loans, loan related investments and capitalized advances, and purchased $163.7 million of Residential mortgage securities and MSR-related assets.

In addition, during 2020, we received cash of $633.2 million from prepayments and scheduled amortization on our Residential mortgage securities and MSR-related assets, and we sold certain of our investment securities, MSR-related assets, and other assets for $3.8 billion, realizing net gains of $85.0 million.

While we generally intend to hold our MBS and CRT securities as long-term investments, we may sell certain of our securities in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions.

In particular, during 2020, we sold our remaining Agency MBS and Legacy Non-Agency MBS portfolios and substantially reduced our investments in MSR-related assets and CRT securities.

At December 31, 2020, we had borrowings under asset-backed financing agreements of $2.5 billion, of which $2.3 billion were secured by residential whole loans, $213.9 million were secured by securities and $13.7 million were secured by REO.

In addition, at December 31, 2020, we had securitized debt of $1.5 billion in connection with our loan securitization transactions.

During 2021, $2.2 billion was used in our investing activities.

We utilized $4.5 billion for acquisitions of residential whole loans, loan related investments and capitalized advances.

During 2021, we received $2.0 billion of principal payments on residential whole loans and loan related investments and $187.0 million of proceeds on sales of REO.

In connection with our repurchase agreement financing and Swaps (if any), we routinely receive margin calls/reverse margin calls from our counterparties and make margin calls to our counterparties.

In addition, during 2021, we received cash of $157.3 million from prepayments and scheduled amortization on our securities.

In connection with our repurchase agreement financings and Swaps, we routinely receive margin calls/reverse margin calls from our counterparties and make margin calls to our counterparties.

Margin calls and reverse margin calls, which requirements vary over time, may occur daily between us and any of our counterparties when the value of collateral pledged changes from the amount contractually required.

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March 31, 2021 — — — — —

(1) Excludes variation margin payments on the Company’s cleared Swaps which are treated as a legal settlement of the exposure under the Swap contract.

(1) Excludes variation margin payments on our cleared Swaps which are treated as a legal settlement of the exposure under the Swap contract.

We are subject to various financial covenants under our financing agreements, which include minimum liquidity and net worth requirements, net worth decline limitations and maximum debt-to-equity ratios.

We were in compliance with all financial covenants through December 31, 2020.

We were in compliance with all financial covenants as of December 31, 2021.

During 2021, we paid $156.1 million for cash dividends on our common stock and dividend equivalents and paid cash dividends of $32.9 million on our preferred stock.

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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.

What changed 10-K

Item 7. Management’s Discussion and Analysis