What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-02-23 compared with 2021-02-23 · 44 added, 46 removed, 125 unchanged (42% of the section changed)

6 unchanged sentences

INTEREST RATE RISK

We generally acquire interest-rate sensitive assets and fund them with interest-rate sensitive liabilities, a portion of which are typically hedged with Swaps.

We are exposed to interest rate risk on our residential mortgage assets, as well as on our liabilities.

1 unchanged sentence

In general, when interest rates change, borrowing costs on our financing agreements will change more quickly than the yield on our assets.

In a rising interest rate environment, the borrowing costs of our repurchase agreements may increase faster than the interest income on our assets, thereby reducing our net income.

In order to mitigate compression in net income based on such interest rate movements, we may use Swaps to lock in a portion of the net interest spread between assets and liabilities.

In a rising interest rate environment, the borrowing costs may increase faster than the interest income on our assets, thereby reducing our net income.

In order to mitigate compression in net income based on such interest rate movements, we may use Swaps or other derivatives to lock in a portion of the net interest spread between assets and liabilities or otherwise hedge interest rate risk.

When interest rates change, the fair value of our residential mortgage assets could change at a different rate than the fair value of our liabilities.

1 unchanged sentence

Duration is the approximate percentage change in fair value for a 100 basis point parallel shift in the yield curve.

In general, our assets have higher duration than our liabilities and in order to reduce this exposure we use Swaps to reduce the gap in duration between our assets and liabilities.

The fair value of our re-performing residential whole loans is dependent on the value of the underlying real estate collateral, past and expected delinquency status of the borrower as well as the level of interest rates.

For certain residential whole loans that were purchased as re-performing loans, because the borrower is not delinquent on their mortgage payments but is less likely to prepay the loan due to weak credit history and/or high LTV, we believe these loans exhibit positive duration.

We estimate the duration of our re-performing residential whole loans using management’s assumptions.

The fair value of our Non-QM loans and Single-family rental loans are typically dependent on the value of the underlying real estate collateral, as well as the level of interest rates.

In general, our assets have higher duration than our liabilities, and in order to reduce this exposure, we have historically used Swaps and other derivatives to reduce the gap in duration between our assets and liabilities.

The fair value of our re-performing and non-performing residential whole loans is in part dependent on the value of the underlying real estate collateral, past and expected delinquency status of the borrower as well as the level of interest rates.

For certain loans that were re-performing or non-performing when purchased and where the borrower has brought the loan current, but nonetheless may be less likely to prepay due to weak credit history and/or high LTV, we believe these loans exhibit positive duration.

We estimate the duration of these residential whole loans using management’s assumptions.

The fair value of our Purchased Performing Loans is typically dependent on the value of the underlying real estate collateral, as well as the level of interest rates.

Because these loans are primarily newly or recently originated performing loans, we believe these investments exhibit positive duration.

4 unchanged sentences

We estimate the duration of our non-performing residential whole loans using management’s assumptions.

The interest rates for the vast majority of our investments, financings and hedging transactions are either explicitly or indirectly based on LIBOR.

We use derivative financial instruments, including Swaps, as part of our overall interest rate risk management strategy.

Such instruments are used to economically hedge against future interest rate increases on our financing transactions.

While use of such derivatives does not extend the maturities of our borrowings under repurchase agreements, they do, in effect, lock in a fixed rate of interest over their term for a corresponding amount of our repurchase agreement financings that are hedged, or otherwise act as a hedge against changes in interest rates.

Additionally, we have entered into short positions in TBA securities to economically hedge interest rate and other market risks arising from our investments in Agency eligible investor loans.

The interest rates for the vast majority of our investments, financings and certain of our hedging transactions are either explicitly or indirectly based on LIBOR.

On March 5, 2021, the United Kingdom Financial Conduct Authority (or FCA) which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023.

The FCA’s announcement coincides with the March 5, 2021 announcement of LIBOR’s administrator, the ICE Benchmark Administration Limited (or IBA), indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023.

At present, it is not possible to predict the effect of such change, including the establishment of potential alternative reference rates, on the economy or markets we are active in either currently or in the future, or on any of our assets or liabilities whose interest rates are based on LIBOR.

1 unchanged sentence

However, we expect that in the near term, we will work closely with the Trustee companies and/or other entities that are involved in calculating the interest rates for our residential mortgage securities and securitized debt, our loan servicers for our hybrid and floating rate loans, and with the various counterparties to our financing and hedging transactions in order to determine what changes, if any, are required to be made to existing agreements for these transactions.

The information presented in the following “Shock Tables” projects the potential impact of sudden parallel changes in interest rates on our net interest income and portfolio value, including the impact of Swaps (if any), over the next 12 months based on the assets in our investment portfolio at December 31, 2020 and 2019.

The information presented in the following “Shock Table” projects the potential impact of sudden parallel changes in interest rates on our net interest income and portfolio value, including the impact of Swaps and short positions in TBA securities (if any), over the next 12 months based on the assets in our investment portfolio at December 31, 2021 and 2020.

All changes in income and value are measured as the percentage change from the projected net interest income and portfolio value under the base interest rate scenario at December 31, 2021 and 2020.

2 unchanged sentences

of Assets (1)

Value Securitized and Other Fixed Rate Debt Estimated

Value of Securitized and Other Fixed Rate Debt Estimated

Instruments Change in

Estimated Value Percentage

Value Percentage

Change in Net

9 unchanged sentences

of Assets (1)

Value of Swaps Estimated

Value of Securitized and Other Fixed Rate Debt Estimated

Instruments Change in

Estimated Value Percentage

Value Percentage

Change in Net

11 unchanged sentences

Furthermore, while we generally expect to retain the majority of our assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially change our interest rate risk profile.

It should be specifically noted that the information set forth in the above table and all related disclosure constitute forward-looking statements within the meaning of Section 27A of the 1933 Act and Section 21E of the 1934 Act.

It should be specifically noted that the information set forth in the above tables and all related disclosure constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.

Actual results could differ significantly from those estimated in the Shock Table above.

The Shock Table quantifies the potential changes in net interest income and portfolio value, which includes the value of our Swaps (if any) and securitized and other fixed rate date (which are carried at fair value), should interest rates immediately change (i.e., are shocked).

The Shock Table quantifies the potential changes in net interest income and portfolio value, which includes the value of our derivative and other hedging transactions (if any) and securitized and other fixed rate debt (which are carried at fair value), should interest rates immediately change (i.e., are shocked).

The Shock Table presents the estimated impact of interest rates instantaneously rising 50 and 100 basis points, and falling 50 and 100 basis points.

3 unchanged sentences

Due to this floor, it is anticipated that any hypothetical interest rate shock decrease would have a limited positive impact on our funding costs;

however, because prepayments speeds are unaffected by this floor, it is expected that any increase in our prepayment speeds (occurring as a result of any interest rate shock decrease or otherwise) could result in an acceleration of premium amortization on our Agency MBS and discount accretion on our Non-Agency MBS and in the reinvestment of principal repayments in lower yielding assets.

As a result, because the presence of this floor limits the positive impact of

interest rate decrease on our funding costs, hypothetical interest rate shock decreases could cause a decline in the fair value of our financial instruments and our net interest income.

however, because prepayments speeds are unaffected by this floor, it is expected that any increase in our prepayment speeds (occurring as a result of any interest rate shock decrease or otherwise) could result in an acceleration of premium amortization on assets purchased at a premium and discount accretion on

assets purchased at a discount and in the reinvestment of principal repayments in lower yielding assets.

As a result, because the presence of this floor limits the positive impact of interest rate decrease on our funding costs, hypothetical interest rate shock decreases could cause a decline in the fair value of our financial instruments and our net interest income.

At December 31, 2021, the impact on portfolio value was approximated using estimated net effective duration (i.e., the price sensitivity to changes in interest rates), including the effect of securitized and other fixed rate debt, of 1.32, which is the weighted average of 3.06 for our Residential whole loans, 0.13 for our Securities investments, (3.22) for our derivative and other hedging transactions and securitized and other fixed rate debt, and 0.06 for our Other assets and cash and cash equivalents.

Estimated convexity (i.e., the approximate change in duration relative to the change in interest rates) of the portfolio was (0.92), which is the weighted average of (1.09) for our Residential whole loans, 0.14 for our derivative and other hedging transactions and securitized and other fixed rate debt, zero for our Securities, and zero for our Other assets and cash and cash equivalents.

At December 31, 2020, the impact on portfolio value was approximated using estimated net effective duration (i.e., the price sensitivity to changes in interest rates), including the effect of securitized and other fixed rate debt, of 1.43, which is the weighted average of 2.42 for our Residential whole loans, 0.75 for our Non-Agency investments, (2.11) for our securitized debt and other fixed rate debt, and 0.06 for our Other assets and cash and cash equivalents.

Estimated convexity (i.e., the approximate change in duration relative to the change in interest rates) of the portfolio was (0.67), which is the weighted average of (0.85) for our Residential whole loans, zero for our securitized and other fixed rate debt, zero for our Non-Agency MBS, and zero for our Other assets and cash and cash equivalents.

At December 31, 2019, the impact on portfolio value was an approximated using estimated net effective duration (i.e., the price sensitivity to changes in interest rates), including the effect of Swaps and securitized debt and other fixed rate debt, of 1.36, which is the weighted average of 1.50 for our Agency MBS, 0.94 for our Non-Agency investments, 2.35 for our Residential whole loans, (1.32) for our Swaps and securitized debt and other fixed rate debt, and 0.18 for our Other assets and cash and cash equivalents.

Estimated convexity (i.e., the approximate change in duration relative to the change in interest rates) of the portfolio was (0.61), which is the weighted average of (0.61) for our Agency MBS, zero for our Swaps and securitized debt and other fixed rate debt, (0.12) for our Non-Agency MBS, (0.89) for our Residential whole loans, and zero for our Other assets and cash and cash equivalents.

The impact on our net interest income is driven mainly by the difference between portfolio yield and cost of funding of our repurchase agreements.

1 unchanged sentence

When interest rates are shocked, prepayment assumptions are adjusted based on management’s expectations along with the results from the prepayment model.

We are exposed to credit risk through our credit sensitive residential mortgage investments, in particular residential whole loans and CRT securities and to a lesser extent our investments in RPL/NPL MBS and MSR-related assets.

As discussed above, during 2020 we engaged in asset sales and took other actions that significantly changed our asset composition.

As a result, our primary credit risk currently relates to our residential whole loans.

Our primary credit risk currently relates to our residential whole loans.

Our exposure to credit risk from our credit sensitive investments is discussed in more detail below:

1 unchanged sentence

We are exposed to credit risk from our investments in residential whole loans.

(See Part I, Item 1A., “Risk Factors - Credit and Other Risks Related to our Investments” of this Annual Report on Form 10-K).

Our investment process for non-performing and Purchased Credit Deteriorated Loans is focused on quantifying and pricing credit risk.

Our investment process for Purchased Non-performing and Purchased Credit Deteriorated Loans is focused on quantifying and pricing credit risk.

Non-Performing and Purchased Credit Deteriorated Loans are acquired at purchase prices that are generally discounted to the contractual loan balances based on a number of factors, including the impaired credit history of the borrower and the value of the collateral securing the loan.

2 unchanged sentences

To the extent that delinquencies and defaults on these loans are higher than our expectation at the time the loans were purchased, the discounted purchase price at which the asset is acquired is intended to provide a level of protection against financial loss.

Credit risk on Purchased Performing Loans is mitigated through our process to underwrite the loan before it is purchased and includes an assessment of the borrower’s financial condition and ability to repay the loan, nature of the collateral and relatively low LTV, including after-repair LTV for the majority of our Rehabilitation loans.

The following table presents certain information about our Residential whole loans, at carrying value at December 31, 2020:

Purchased Performing Loans Purchased Credit Deteriorated Loans

Credit risk on Purchased Performing Loans is mitigated through our process to underwrite the loan before it is acquired and/or originated and includes an assessment of the borrower’s financial condition and ability to repay the loan, nature of the collateral and relatively low LTV, including after-repair LTV for the majority of our Rehabilitation loans.

The following table presents certain information about our Residential whole loans at December 31, 2021:

Purchased Performing Loans Purchased Credit Deteriorated Loans Purchased Non-Performing Loans

Loans with an LTV:

(Dollars in Thousands) 80% or Below Above 80% 80% or Below Above 80% Total

Loans with an LTV:

(Dollars in Thousands) 80% or Below Above 80% 80% or Below Above 80% 80% or Below Above 80% Total

Amortized cost $ 6,139,112 $ 205,281 $ 405,221 $ 142,551 $ 630,097 $ 240,356 $ 7,762,618

20 unchanged sentences

New Jersey 4.4 %

These securities are backed by re-performing and non-performing loans, were purchased primarily at prices around par and represent the senior and mezzanine tranches of the related securitizations.

The majority of these securities are structured with significant credit enhancement (typically approximately 50%) and the subordinate tranches absorb all credit losses (until those tranches are extinguished) and typically receive no cash flow (interest or principal) until the senior tranche is paid off.

Prior to purchase, we analyze the deal structure in order to assess the associated credit risk.

Subsequent to purchase, the ongoing credit risk associated with the deal is evaluated by analyzing the extent to which actual credit losses occur that result in a reduction in the amount of subordination enjoyed by our bond.

CRT Securities

We are exposed to potential credit losses from our investments in CRT securities issued by or sponsored by Fannie Mae and Freddie Mac.

While CRT securities are issued by or sponsored by these GSEs, payment of principal on these securities is not guaranteed.

As an investor in a CRT security, we may incur a loss if losses on the mortgage loans in the reference pool exceed the credit enhancement on the underlying CRT security owned by us or if an actual pool of loans experience losses.

We assess the credit risk associated with our investments in CRT securities by assessing the current and expected future performance of the associated loan pool.

MSR-Related Assets

3 unchanged sentences

In addition, credit support is also provided by a corporate guarantee from the ultimate parent or sponsor of the SPV that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the underlying MSRs be insufficient.

CRT Securities

We are exposed to potential credit losses from our investments in CRT securities issued by or sponsored by Fannie Mae and Freddie Mac.

While CRT securities are issued by or sponsored by these GSEs, payment of principal on these securities is not guaranteed.

We assess the credit risk associated with our investments in CRT securities by assessing the current and expected future performance of the associated loan pool.

Credit Spread Risk

7 unchanged sentences

The primary liquidity risk we face arises from financing long-maturity assets with shorter-term borrowings primarily in the form of repurchase agreement financings.

This risk was particularly pronounced during the first quarter of 2020, as conditions created by the COVID-19 pandemic resulted in us receiving an unusually high number of margin calls, negatively impacting our overall liquidity and ultimately leading us to enter into the forbearance agreements.

During the period that our lenders granted us forbearance, we renegotiated several of our repurchase financing facilities and entered into new financing agreements that either did not have mark-to-market collateral maintenance provisions or included collateral maintenance provisions that would only require to post additional collateral in the event of very large changes in the value of the underlying collateral.

In addition, subsequent to our exit from forbearance, we have increased our use of non-recourse financing in the form of loan securitization.

As a result, at December 31, 2020, only 30.9% of our financing agreements are shorter term repurchase agreements that contain mark-to-mark collateral provisions.

This risk was particularly pronounced during the first quarter of 2020, as conditions created by COVID-19 resulted in us receiving an unusually high number of margin calls, negatively impacting our overall liquidity and ultimately leading us to enter into forbearance agreements.

We pledge residential mortgage assets and cash to secure our financing agreements.

6 unchanged sentences

In addition, at December 31, 2021, we had $280.2 million of unencumbered residential whole loans.

Further, we believe that we have unused capacity in certain borrowing lines, given that the amount currently borrowed is less than the maximum advance rate permitted by the facility.

Further, we believe that we have unused capacity of approximately $350 million in certain borrowing lines, given that the amount currently borrowed is less than the maximum advance rate permitted by the facility.

This unused capacity serves to act as a buffer against potential margin calls on certain pledged assets in the events that asset prices do not decline by more than a specified amount.

3 unchanged sentences

Premiums paid are amortized against interest income and accretable purchase discounts on these investments are accreted to interest income.

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

Purchase premiums, which are primarily carried on our Purchased Performing Loans (excluding Rehabilitation loans that are typically purchased at par), 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.

Generally, if prepayments on Non-Agency MBS and residential whole loans purchased at significant discounts and not accounted for at fair value are less than anticipated, we expect that the income recognized on these assets will be reduced and impairments and/or credit loss reserves may result.

Fees payable by borrowers on the early repayment of certain of our Purchased Performing Loans serve to mitigate the impact on our income of higher prepayment rates.

Generally, if prepayments on residential whole loans purchased at significant discounts and not accounted for at fair value are less than anticipated, we expect that the income recognized on these assets will be reduced and impairments and/or credit loss reserves may result.

In addition, increased prepayments are generally associated with decreasing market interest rates as borrowers are able to refinance their mortgages at lower rates.

2 unchanged sentences

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 7A. Quantitative and Qualitative Disclosures About Market Risk