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Summary Risk Factors
+Added: Risks Related to Our Business and Industry
+Added: • Economic developments and other factors that are out of our control may adversely affect our business operations.
Credit and Other Risks Related to Our Investments
−Removed: • Our investments in residential whole loans, residential mortgage securities and MSR-related assets involve credit risk, which could materially adversely affect our results of operations.
+Added: • We may change our investment strategy, operating policies and/or asset allocations without stockholder consent.
+Added: • Our investments in residential mortgage and other assets involve credit risk.
• Our investments are subject to changes in credit spreads and other risks.
−Removed: • A significant portion of our residential whole loans and residential mortgage securities are secured by properties in a small number of geographic areas and may be disproportionately affected by economic or housing downturns, our competition, natural disasters, terrorist events, pandemics, regulatory changes, adverse climate changes or other adverse events specific to those markets.
−Removed: • We are subject to counterparty risk and may be unable to seek indemnity or require counterparties to repurchase residential whole loans if they breach representations and warranties, which could cause us to suffer losses.
−Removed: • The due diligence we undertake on potential investments may be limited and/or not reveal all of the risks associated with such investments and may not reveal other weaknesses in such assets, which could lead to losses.
+Added: • A significant portion of our residential whole loans and residential mortgage securities are secured by properties in a small number of geographic areas and may be disproportionately affected by adverse climate changes or other adverse events specific to those markets.
+Added: • We are subject to counterparty risk and may be unable to seek indemnity or require counterparties to repurchase residential whole loans if they breach representations and warranties.
+Added: • The due diligence we undertake on potential investments may be limited and/or not reveal all of the risks associated with such investments and may not reveal other weaknesses in such assets.
• We have experienced and may experience in the future increased volatility in our U.S.
−Removed: generally accepted accounting principles (or GAAP) results of operations due in part to the increasing contribution to financial results of assets and liabilities accounted for under the fair value option.
−Removed: • We have experienced, and may in the future experience, declines in the market value of certain of our investment securities resulting in our recording impairments, which have had, and may in the future have, an adverse effect on our results of operations and financial condition.
+Added: generally accepted accounting principles (or GAAP) results of operations.
+Added: • We have experienced, and may in the future experience, declines in the market value of certain of our investments securities resulting in our recording impairments and other losses.
• The use of models in connection with the valuation of our assets subjects us to potential risks in the event that such models are incorrect, misleading or based on incomplete information.
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• Our investments in residential whole loans are difficult to value and are dependent upon the borrower’s ability to service or refinance their debt.
−Removed: The inability of the borrower to do so could materially and adversely affect our liquidity and results of operations.
−Removed: • Mortgage loan modification and refinancing programs and future legislative action may materially adversely affect the value of, and the returns on, our MBS and residential whole loan investments.
−Removed: • We may be adversely affected by risks affecting borrowers or the asset or property types in which certain of our investments may be concentrated at any given time, as well as from unfavorable changes in the related geographic regions.
−Removed: • Our investments in residential whole loans subject us to servicing-related risks, including those associated with foreclosure and liquidation.
−Removed: • The expanding body of federal, state and local regulations and investigations of originators and servicers may increase costs of compliance and the risks of noncompliance, and may adversely affect servicers’ ability to perform their servicing obligations.
+Added: • We may be adversely affected by risks affecting borrowers or the asset or property types in which our investments may be concentrated, as well as from unfavorable changes in the related geographic regions.
+Added: • Our investments in residential whole loans subject us to servicing-related risks, including foreclosure and liquidation.
+Added: • The expanding body of federal, state and local regulations and investigations of originators and servicers may increase costs of compliance and the risks of noncompliance.
• Our ability to sell REO on terms acceptable to us or at all may be limited.
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• Our investments in mortgage loan originators expose us to additional risks.
−Removed: • We may fail to realize the anticipated benefits of the Lima One acquisition.
Prepayment and Reinvestment Risk
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Risks Related to Our Use of Leverage
−Removed: • Our business strategy involves the use of leverage, and we may not achieve what we believe to be optimal levels of leverage or we may become overleveraged, which may materially adversely affect our liquidity, results of operations or financial condition.
+Added: • Our business strategy involves the use of leverage, and we may not achieve what we believe to be optimal levels of leverage or we may become overleveraged.
• An increase in our borrowing costs relative to the interest we receive on our investments may materially adversely affect our profitability.
−Removed: • The discontinuation of the London Interbank Offered Rate (or LIBOR) may affect our financial results.
−Removed: • Certain of our current lenders require, and future lenders may require, that we enter into restrictive covenants relating to our operations.
−Removed: • The use of non-recourse long-term financing structures expose us to risks, which could result in losses to us.
+Added: • The impact of inflation may adversely affect our financial performance.
+Added: • Our current and future lenders may require that we enter into restrictive covenants relating to our operations.
+Added: • Reliance on certain types of financing structures expose us to risks.
+Added: Cybersecurity Risks
+Added: • Maintaining cybersecurity and data security is important to our business and a breach of our cybersecurity or data security could result in serious harm to our reputation.
+Added: • We are dependent on information systems and their failure could significantly disrupt our business.
Risks Associated with Adverse Developments in the Mortgage Finance and Credit Markets and Financial Markets Generally
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• Actions by the U.S.
−Removed: Government designed to stabilize or reform the financial markets may not achieve their intended effect or otherwise benefit our business, and could materially adversely affect our business.
+Added: Government designed to stabilize or reform the financial markets may not achieve their intended effect or otherwise benefit our business.
+Added: Regulatory Risks and Risks Related to the Investment Company Act of 1940
+Added: • Our business is subject to extensive regulation.
+Added: • Certain jurisdictions require licenses to purchase, hold, enforce or sell residential mortgage loans.
+Added: • Maintaining our exemption from registration under the Investment Company Act significantly limits our operations.
Risks Related to Our Use of Hedging Strategies
• Our use of hedging strategies to mitigate our interest rate exposure may not be effective.
−Removed: • We may enter into hedging instruments that could expose us to contingent liabilities in the future, which could materially adversely affect our results of operations.
−Removed: • The characteristics of hedging instruments present various concerns, including illiquidity, enforceability, and counterparty risks, which could adversely affect our business and results of operations.
+Added: • We may enter into hedging instruments that could expose us to contingent liabilities in the future.
+Added: • The characteristics of hedging instruments present various concerns, including illiquidity, enforceability, and counterparty risks.
Risks Related to Our Taxation as a REIT and the Taxation of Our Assets
−Removed: • If we fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.
+Added: • If we fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability.
• If our foreign TRS is subject to U.S.
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• Our use of TRSs may cause us to fail to qualify as a REIT.
−Removed: • We have not established a minimum dividend payment level, and there is no guarantee that we will maintain current dividend payment levels or pay dividends in the future.
−Removed: • Our reported GAAP net income may differ from the amount of REIT taxable income and dividend distribution requirements and, therefore, our GAAP results may not be an accurate indicator of future taxable income and dividend distributions.
+Added: • We have not established a minimum dividend payment level.
+Added: • Our reported GAAP net income may differ from the amount of REIT taxable income and dividend distribution requirements.
• The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to remain qualified as a REIT.
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• Provisions of Maryland law and other provisions of our organizational documents may limit the ability of a third-party to acquire control of the Company.
−Removed: • Future offerings of debt securities, which would rank senior to our common stock upon liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.
−Removed: 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, the market value of our assets and collateral, which is driven by numerous factors, including the supply and demand for residential mortgage assets in the marketplace, our ability to source new investments at appropriate yields, 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, especially in the real estate and mortgage sector, our competition, and the credit performance of our credit sensitive residential mortgage assets.
+Added: • Future offerings of debt securities and equity securities may adversely affect the market price of our common stock.
+Added: Other Business Risks
+Added: • The COVID-19 pandemic has adversely affected our business, financial condition, liquidity and results of operations.
+Added: • We are dependent on our executive officers and other key personnel for our success.
+Added: • We operate in a highly competitive market for investment opportunities.
+Added: Risks Related to Our Business and Industry
+Added: General economic developments and trends and the performance of the housing, real estate, mortgage finance, broader financial markets and other factors that are out of our control may adversely affect our business operations.
+Added: The results of our business operations are affected by many factors, a number of which are beyond our control, and primarily depend on, among other things, the level of our net interest income, the market value of our assets and collateral, which is driven by numerous factors, including the supply and demand for residential mortgage assets in the marketplace, our ability to source new investments at appropriate yields, 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, especially in the real estate and mortgage sector, our competition, and the credit performance of our credit sensitive residential mortgage assets.
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), market credit spreads, borrowing costs (i.e., our interest expense), delinquencies, defaults and prepayment speeds on our investments, the behavior of which involves various risks and uncertainties.
−Removed: Interest rates and conditional prepayment rates (or CPRs) (which are a measure the amount of unscheduled principal prepayment on a loan or security) 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.
−Removed: Our operating results also depend upon our ability to effectively manage the risks associated with our business operations, including interest rate, prepayment, financing, liquidity, and credit risks, while maintaining our qualification as a REIT.
−Removed: The COVID-19 pandemic has adversely affected our business, financial condition, liquidity and results of operations, and may continue to do so.
−Removed: The COVID-19 pandemic has negatively affected our business, and we believe it may continue to do so.
−Removed: The early 2020 outbreak caused significant volatility and disruption in the financial markets both in the United States and globally, and periods of market volatility and disruption have continued to occur at various times since the initial outbreak, in particular when new variants of the virus that causes COVID-19 appear and increases in the number of new cases, hospitalizations or deaths occur.
−Removed: If COVID-19, or another highly infectious or contagious disease, continues to spread or otherwise remain at high levels, or the response (including vaccines) to contain it is unsuccessful, we could continue to, or once again begin to, experience material adverse effects on our business, financial condition, liquidity, and results of operations.
−Removed: The extent of such effects will depend on future developments which are highly uncertain and cannot be predicted, including the geographic spread of COVID-19, or another highly infectious or contagious disease, the overall severity of the disease, the development and characteristics of variants (including variants not yet identified) of the disease, the duration of the outbreak, the effectiveness and acceptance of vaccines, the measures taken by various governmental authorities in response to the outbreak (such as quarantines and travel restrictions) and the possible impacts on the global economy.
−Removed: The continued spread of COVID-19 and health related concerns could also negatively impact the availability of key personnel who are necessary to conduct our business.
−Removed: federal government and many state and local governments adopted a number of emergency measures and recommendations in response to the COVID-19 pandemic, including imposing travel bans, “shelter in place” restrictions and curfews, cancelling events, banning large gatherings, closing non-essential businesses, mandating vaccinations and generally promoting social distancing (including in the workplace, which has resulted in a significant increase in employees working remotely).
−Removed: Although many of these measures and recommendations have been lifted or suspended, some continue to remain in place, and the suspended measures could be reimposed in the event of an increase in transmis sion of the virus.
−Removed: Across the country, moratoriums were put in place in certain states to stop evictions and foreclosures and some remain in place or could be reimposed.
−Removed: In an effort to lessen the financial burden created by the COVID-19 pandemic and various states have even promulgated guidance to regulated servicers requiring them to formulate policies to assist mortgagors in need as a result of the COVID-19 pandemic.
−Removed: A number of states have enacted laws which impose significant limits on the default remedies of lenders secured by real property.
−Removed: While some states have begun a phased relaxation of certain of these measures, certain restrictions on economic activity remain in place, and others may be reintroduced.
−Removed: Although it cannot be predicted, additional policy action at the federal, state and local level is possible.
−Removed: The COVID-19 pandemic (and any future COVID-19 outbreaks) and resulting emergency measures have led (and may continue to lead) to significant disruptions in the global supply chain, global capital markets, the economy of the United States and the economies of other nations.
−Removed: Concern about the potential effects of the COVID-19 pandemic and the effectiveness of measures put in place by governmental bodies and reserve banks at various levels as well as by private enterprises to contain or mitigate its spread has adversely affected economic conditions and capital markets globally, and has led to significant volatility in global financial markets.
−Removed: There can be no assurance that the containment
−Removed: measures or other measures implemented from time to time will be successful in limiting the spread of the virus and what effect those measures will have on the economy.
−Removed: While many economic activities have to some extent returned to normal in certain jurisdictions, whether and when and to what extent many activities will return remains uncertain, and may vary substantially depending on the location and the type of activity.
−Removed: There may be further disruption and volatility in the credit markets and the reduction of economic activity in severely affected sectors in the United States and/or globally.
−Removed: Governments have adopted, and we expect may continue to adopt, policies, laws and plans intended to address the COVID-19 pandemic and adverse developments in the credit, financial and mortgage markets.
−Removed: We cannot predict the ultimate effect that any policies, laws and plans adopted in response to the COVID-19 pandemic will have on us.
−Removed: Any significant decrease in economic activity or resulting decline in the housing market could have an adverse effect on our investments in mortgage real estate assets.
−Removed: Furthermore, the COVID-19 pandemic has created an uncertain and volatile interest rate environment and general fixed income patterns have deviated widely from historical trends, all of which could adversely affect our business.
−Removed: With respect to prepayments, given the combination of low interest rates, government stimulus, inflation and fluctuating unemployment, as well as other disruptions related to the COVID-19 pandemic, it has become more difficult to predict prepayment levels for the securities in our portfolio.
−Removed: As a result, actual prepayment results may be materially different from our estimates.
−Removed: With respect to our hedging activities, given recent market uncertainty, the spread between MBS, hedges and benchmark rates widened significantly.
−Removed: It is uncertain when normal market correlations will resume in the fixed income markets.
−Removed: Further, in light of the COVID-19 pandemic’s impact on the overall economy, such as changes in consumer behavior related to loans as well as government policies and pronouncements, borrowers may experience difficulties meeting their obligations or seek to forbear payment on or refinance their mortgage loans to avail themselves of lower rates, which may adversely affect our result of operations (particularly as related to assets we own that expose us to credit risk, as discussed below).
−Removed: Thus, the credit risk profile on our assets may be more pronounced in the mortgage, housing and related sectors, as a result of the COVID-19 pandemic.
+Added: Interest rates and conditional prepayment rates (or CPRs) (which are a measure the amount of unscheduled principal prepayment on a loan or security) vary according to the type of investment, conditions in the financial markets, fiscal and monetary policies and domestic and international economic and political conditions, competition and other factors, none of which can be predicted with any certainty or is within our control.
+Added: Therefore, a period of rising interest rates and flattening or inverted yield curves, such as the conditions experienced during 2022, which have continued in 2023, presents particular challenges on our net interest income and our operations more generally.
+Added: Our operating results also depend on our ability to effectively manage the risks associated with our business operations, including interest rate, prepayment, financing, liquidity and credit risks, while maintaining our qualification as a REIT.
+Added: Credit and Other Risks Related to Our Investments
We may change our investment strategy, operating policies and/or asset allocations without stockholder consent, which could materially adversely affect our results of operations.
−Removed: We may change our investment strategy, operating policies and/or asset allocation with respect to investments, acquisitions, leverage, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our stockholders which would result in an investment portfolio with a different risk profile (including an investment portfolio that may be more concentrated in a particular class of asset).
−Removed: For example, related to the impact of the unprecedented conditions created by the COVID-19 pandemic, during 2020 we sold all of our MBS and substantially reduced our investments in MSR-related assets and CRT securities, resulting in our residential whole loans becoming by far our largest asset.
+Added: We may change our investment strategy, operating policies and/or asset allocation with respect to investments, acquisitions, leverage, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile (including an investment portfolio that may be more concentrated in a particular class of asset).
+Added: For example, related to the impact of the unprecedented conditions created by the COVID-19 pandemic, during early 2020 we sold substantially all of our MBS and substantially reduced our investments in MSR-related assets and CRT securities, resulting in our residential whole loans becoming by far our largest asset.
A change in our investment strategy may increase our exposure to various risks, including but not limited to:
−Removed: interest rate risk, credit risk, default risk, liquidity risk, financing risk, legal or regulatory risk, and/or real estate market fluctuations.
−Removed: Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those of our historical investments.
+Added: interest rate
+Added: risk, credit risk, default risk, liquidity risk, financing risk, legal or regulatory risk, and/or real estate market fluctuations.
+Added: Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those in which we have historically invested.
These changes could materially adversely affect our financial condition, results of operations, the market price of our common stock or our ability to pay dividends or make distributions.
−Removed: Maintaining cybersecurity and data security is important to our business and a breach of our cybersecurity or data security could result in serious harm to our reputation and have a material adverse impact on our business and financial results.
−Removed: When we acquire or originate real estate mortgage loans, we come into possession of borrower non-public personal information that an identity thief could utilize in engaging in fraudulent activity or theft.
−Removed: We may share this information with third parties, such as loan sub-servicers, outside vendors, third parties interested in acquiring such loans from us, or lenders extending credit to us collateralized by such loans.
−Removed: We have acquired more than 30,000 residential mortgage loans since 2014, and our Lima One subsidiary, which we acquired in July 2021, has originated several thousand mortgage loans since its founding in 2011.
−Removed: While we have security measures in place to protect this information and prevent security breaches, these security measures may be compromised as a result of third-party action, including intentional misconduct by computer hackers, cyber-attacks, "phishing" attacks, service provider or vendor error, or malfeasance or other intentional or unintentional acts by third parties and bad actors, including third-party service providers.
−Removed: Furthermore, borrower data, including personally identifiable information, may be lost, exposed, or subject to unauthorized access or use as a result of accidents, errors, or malfeasance by our employees, independent contractors, or others working with us or on our behalf.
−Removed: Our servers and systems, and those of our
−Removed: service providers, may be vulnerable to computer malware, break-ins, denial-of-service attacks, and similar disruptions from unauthorized tampering with our computer systems, which could result in someone obtaining unauthorized access to borrowers’ data or our data, including other confidential business information.
−Removed: In the past, we have experienced unauthorized access to certain data and information.
−Removed: Our response was to take immediate steps to investigate and address the unauthorized access, and past unauthorized access has not had, and is not expected to have, a material adverse effect on our business and financial results.
−Removed: We have further developed and enhanced our cybersecurity systems and processes that are intended to protect this type of data and information;
−Removed: however, they may not be effective in preventing unauthorized access in the future.
−Removed: While past unauthorized access has been immaterial to our business and financial results, there can be no assurance of a similar result in the future.
−Removed: Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.
−Removed: We may also experience security breaches that may remain undetected for an extended period.
−Removed: We may be liable for losses suffered by individuals whose identities are stolen as a result of a breach of the security of the systems that we or third-parties and service providers of ours store this information on, and any such liability could be material.
−Removed: Even if we are not liable for such losses, any breach of these systems could expose us to material costs in notifying affected individuals and providing credit monitoring services to them, as well as regulatory fines or penalties.
−Removed: In addition, any breach of these systems could disrupt our normal business operations and expose us to reputational damage and lost business, revenues, and profits.
−Removed: Any insurance we maintain against the risk of this type of loss may not be sufficient to cover actual losses, or may not apply to the circumstances relating to any particular breach.
−Removed: Security breaches could also significantly damage our reputation with existing and prospective loan sellers, borrowers, and third parties with whom we do business.
−Removed: Any publicized security problems affecting our businesses and/or those of such third parties may negatively impact the market perception of our products and discourage market participants from doing business with us.
−Removed: These risks may increase in the future as we continue to increase our reliance on the internet and use of web-based product offerings and on the use of cybersecurity.
−Removed: We are dependent on information systems and their failure (including in connection with cyber-attacks) could significantly disrupt our business.
−Removed: Our business is highly dependent on our information and communications systems, including systems containing or using open source software..
−Removed: Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on operating results, the market price of our common stock and other securities and our ability to pay dividends to our stockholders.
−Removed: Our use of open source software poses particular risk, including potential security vulnerabilities, licensing compliance issues and quality issues.
−Removed: In addition, we also face the risk of operational failure, termination or capacity constraints of any of the third-parties with which we do business or that facilitate our business activities, including clearing agents or other financial intermediaries we use to facilitate our securities transactions as well as the servicers of our loans.
−Removed: Computer malware, viruses, hacking and phishing and cyber-attacks have become more prevalent in our industry and may occur on our systems in the future.
−Removed: Additionally, due to the transition to remote working environments as a result of the COVID-19 pandemic, there is an elevated risk of such events occurring.
−Removed: Although we have not detected a material cybersecurity breach to date, there can be no assurance that we are or will be fully protected against cyber risks and security breaches and not be vulnerable to new and evolving threats to our information technology systems.
−Removed: We rely heavily on financial, accounting and other data processing systems.
−Removed: It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of our networks or systems (or networks or systems of, among other third-parties, our lenders and servicers) or any failure to maintain performance, reliability and security of our technical infrastructure.
−Removed: As a result, any such computer malware, viruses, hacking, phishing and cyber-attacks may negatively affect our operations.
−Removed: Credit and Other Risks Related to Our Investments
Our investments in residential whole loans, residential mortgage securities and MSR-related assets involve credit risk, which could materially adversely affect our results of operations.
−Removed: Investors in residential mortgage assets assume the risk that the related borrowers may default on their obligations to make full and timely payments of principal and interest.
−Removed: Under our investment policy, we may invest in residential whole loans, residential mortgage securities, MSR-related assets and other investment assets of that may be considered to be lower
−Removed: credit quality.
−Removed: In general, these investments are less exposed to credit risk than Agency MBS because the former are not guaranteed as to principal or interest by the U.S.
+Added: Investors in residential mortgage assets assume the risk that the underlying borrowers may default on their obligations to make full and timely payments of principal and interest.
+Added: Under our investment policy, we may invest in residential whole loans, residential mortgage securities, MSR-related assets and other investment assets that may be considered to be lower credit quality.
+Added: In general, these investments are more exposed to credit risk than Agency MBS because the former are not guaranteed as to principal or interest by the U.S.
Government, any federal agency or any federally chartered corporation.
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Accordingly, defaults in the payment of principal and/or interest on our residential whole loans, residential mortgage securities, MSR-related assets and other investment assets of less-than-high credit quality could result in our incurring losses of income from, and/or losses in market value relating to, these assets, which could materially adversely affect our results of operations.
−Removed: This risk may be more pronounced during times of market volatility and negative economic conditions, such as those being experienced in connection with the COVID-19 pandemic.
+Added: This risk may be more pronounced during times of market volatility and negative economic conditions, such as those that were experienced in connection with the onset of the COVID-19 pandemic in early 2020.
Our portfolio of residential whole loans is by far our largest asset class and represented approximately 83% of our total assets as of December 31, 2022.
We expect that our investment portfolio in residential whole loans will continue to increase during 2023.
−Removed: As a holder of residential whole loans, we are subject to the risk that the related borrowers may default or have defaulted on their obligations to make full and timely payments of principal and interest.
+Added: As an investor in residential whole loans, we are subject to the risk that the underlying borrowers may default or have defaulted on their obligations to make full and timely payments of principal and interest.
A number of factors impact a borrower’s ability to repay including, among other things, changes in employment status, changes in interest rates or the availability of credit, and changes in real estate values.
In addition to the credit risk associated with these assets, residential whole loans are less liquid than certain of our other credit sensitive assets, which may make them more difficult to dispose of if the need or desire arises.
−Removed: For example, upon the onset of the volatility created by the COVID-19 pandemic, we were unable to efficiently liquidate residential whole loans to raise liquidity.
−Removed: If actual results are different from our assumptions in determining the prices paid to acquire such loans, particularly if the market value of the underlying properties decreases significantly subsequent to purchase, we may incur significant losses, which could materially adversely affect our results of operations.
+Added: For example, upon the onset of the volatility triggered in early 2020 by the COVID-19 pandemic, we were unable to efficiently and expeditiously liquidate residential whole loans to meet our liquidity needs.
+Added: In addition, if actual results are different from our assumptions in determining the prices paid to acquire such loans, particularly if the market value of the underlying properties decreases significantly subsequent to purchase, we may incur significant losses, which could materially adversely affect our results of operations.
Our investments are subject to changes in credit spreads and other risks.
−Removed: Credit spreads, which at times can be very volatile and react to various macroeconomic events or conditions, measure the additional yield demanded on securities by the market based on their perceived credit relative to a specific benchmark.
−Removed: Fixed rate securities are valued based on a market credit spread over the rate payable on fixed rate U.S.
+Added: Credit spreads, which at times can be highly volatile and react to various macroeconomic events or conditions, measure the additional yield demanded on securities by the market based on their perceived credit risk/credit quality relative to a specific benchmark.
+Added: Fixed rate securities are valued based on a market credit spread above the rate payable on fixed rate U.S.
Treasuries of like maturity.
−Removed: Floating rate securities are generally valued based on a market credit spread over LIBOR (which is under reform and may be replaced, as discussed below).
−Removed: Excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these securities, resulting in the use of a higher, or “wider,” spread over the benchmark rate to value such securities.
+Added: Floating rate securities are generally valued based on a market credit spread over LIBOR (which is being phased out and will cease on June 30, 2023, as discussed below under the Risk Factor captioned “Risks Related to Our Use of Leverage - The discontinuation of LIBOR may affect our financial results.”) or another benchmark lending rate such as the Secured Overnight Funding Rate (or SOFR).
+Added: Excessive supply of these securities combined with reduced demand for them from investors will generally cause the market to require a higher yield on these securities, resulting in the use of a higher, or “wider,” spread over the benchmark rate to value such securities.
Under such conditions, the value of our MBS portfolio would tend to decline.
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Such changes in the market value of our investments may affect our net equity, net income or cash flow directly through their impact on portfolio unrealized gains or losses, and therefore our ability to realize gains on such investments, or indirectly through their impact on our ability to borrow and access capital.
−Removed: This risk may be more pronounced during times of market volatility and negative economic conditions, such as those being experienced in connection with the COVID-19 pandemic.
+Added: This risk may be more pronounced during times of market volatility and negative economic conditions, such as those that were experienced in connection with the onset of the COVID-19 pandemic in early 2020 or in an economic recession.
+Added: We may be adversely affected by risks affecting borrowers or the asset or property types in which certain of our investments may be concentrated at any given time, as well as from unfavorable changes in the related geographic regions.
+Added: We are not required to limit our assets in terms of geographic location, diversification or concentration, except that we concentrate in residential mortgage-related investments.
+Added: Accordingly, our investment portfolio may be concentrated by geography (see below), asset type (as is the case currently, as residential whole loans are by far our most concentrated asset type), property type and/or borrower, increasing the risk of loss to us if the particular concentration in our portfolio is subject to greater risks or is undergoing adverse developments.
+Added: In addition, adverse conditions in the areas where the properties securing or otherwise underlying our investments are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of our investments.
+Added: A material decline in the demand for real estate in these areas may materially and adversely affect us.
+Added: Lack of diversification can increase the correlation of non-performance and foreclosure risks to these investments.
A significant portion of our residential whole loans and residential mortgage securities are secured by properties in a small number of geographic areas and may be disproportionately affected by economic or housing downturns, our competition, natural disasters, terrorist events, pandemics, regulatory changes, adverse climate changes or other adverse events specific to those markets.
A significant number of the mortgages underlying our residential whole loans and residential mortgage securities are concentrated in certain geographic areas.
−Removed: For example, we have significant exposure in California, Florida, New York, New Jersey and Texas.
−Removed: (For a discussion of the percentage of these assets in these states, see “Credit Risk” included under Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in this Annual Report on Form 10-K.) Certain markets within these states (particularly in California and Florida) have experienced significant decreases in residential home values from time to time.
+Added: For example, we have significant exposure in California, Florida, Texas, New York and Georgia.
+Added: (For a discussion of the percentage of these assets in these states, see “Credit Risk” included under Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in this Annual Report on Form 10-K.) Certain markets within these states (particularly in California and Florida) have experienced significant decreases in residential home values in the past and may do so from time to time in the future.
Any event that adversely affects the economy or real estate market in any of these states could have a disproportionately adverse effect on our residential whole loan and residential mortgage securities.
−Removed: In general, any material decline in the economy or significant problems in a particular real estate market would likely cause a decline in the value of residential properties securing the mortgages in that market, thereby increasing the risk of delinquency, default and foreclosure of residential whole loans and the loans underlying our residential mortgage securities and the risk of loss upon liquidation of these assets.
+Added: In general, any material decline in the economy or significant problems in a particular real estate market (including from a rise in unemployment) would likely cause a decline in the value of residential properties securing the mortgages in that market, thereby increasing the risk of delinquency, default and foreclosure of residential whole loans and the loans underlying our residential mortgage securities and the risk of loss upon liquidation of these assets.
This could, in turn, have a material adverse effect on our credit loss experience on residential mortgage investments in the affected market if higher-than-expected rates of default and/or higher-than-expected loss severities on our investments in residential whole loans and residential mortgage securities were to occur.
In addition, the occurrence of a natural disaster (such as an earthquake, tornado, hurricane, flood, mudslide or wildfires), pandemic, terrorist attack or a significant adverse climate change, including potential rises in sea-levels, may cause a sudden decrease in the value of real estate in the area or areas affected and would likely reduce the value of the properties securing the mortgages collateralizing our residential whole loans or residential mortgage securities.
−Removed: Because certain natural disasters are not typically covered by the standard hazard insurance policies maintained by borrowers (such as hurricanes, earthquakes or certain flooding), or the proceeds payable for losses covered by any such policy are not sufficient to make the related repairs, the affected borrowers may have to pay for any repairs themselves.
+Added: Because certain natural disasters are not typically covered by the standard hazard insurance policies maintained by borrowers (such as hurricanes, earthquakes or certain flooding), or the proceeds payable for losses covered by any such policy are not sufficient to make the related repairs, the affected borrowers may be required to pay for any repairs themselves.
Under these circumstances, borrowers may decide not to repair the damaged property or may stop paying the mortgage, either of which could cause defaults and credit loss severities to increase.
−Removed: The risks discussed above may be more pronounced during times of market volatility and negative economic conditions, such as those experienced in connection with the COVID-19 pandemic.
Changes in governmental laws and regulations, enforcement priorities, fiscal policies, property taxes and zoning ordinances can also have a negative impact on property values, which could result in borrowers’ deciding to stop paying their mortgages.
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We are subject to counterparty risk and may be unable to seek indemnity or require counterparties to repurchase residential whole loans if they breach representations and warranties, which could cause us to suffer losses.
−Removed: In connection with our residential whole loan investments, we typically enter into a loan purchase agreement, as buyer, of the loans from a seller.
+Added: In connection with our residential whole loan investments, we typically enter into a loan purchase agreement with a seller.
When we invest in certain mortgage loans, sellers may make representations and warranties about such loans that are very limited both in scope and duration.
Residential mortgage loan purchase agreements may entitle the purchaser of the loans to seek indemnity or demand repurchase or substitution of the loans in the event the seller of the loans breaches a representation or warranty given to the purchaser.
−Removed: However, there can be no assurance that a mortgage loan purchase agreement will contain appropriate representations and warranties, that we or the trust that purchases the mortgage loans would be able to enforce a contractual right to repurchase or substitution, or that the seller of the loans will remain solvent or otherwise be able to honor its obligations under its mortgage loan purchase agreements.
+Added: However, there can be no assurance that a mortgage loan purchase agreement will contain appropriate representations and warranties, that we or the trustee that takes title to the mortgage loans would be able to enforce a contractual right to repurchase or substitution, or that the seller of the loans will remain solvent or otherwise be able to honor its obligations under its mortgage loan purchase agreements.
The inability to obtain or enforce an indemnity or require repurchase of a significant number of loans could require us to absorb the associated losses, and adversely affect our results of operations, financial condition and business.
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Before making an investment, we typically conduct (either directly or using third-parties) certain due diligence.
−Removed: There can be no assurance that we will conduct any specific level of due diligence, or that, among other things, our due diligence processes will uncover all relevant facts, which could result in losses on these assets to the extent we ultimately acquire them, which, in turn, could adversely affect our results of operations, financial condition and business.
+Added: There can be no assurance that we will conduct any specific level of due diligence, or that, among other things, our due diligence processes will uncover all relevant facts, which could result in losses on these assets to the extent we ultimately invest in them, which, in turn, could adversely affect our results of operations, financial condition and business.
We have experienced and may experience in the future increased volatility in our GAAP results of operations due in part to the increasing contribution to financial results of assets and liabilities accounted for under the fair value option.
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Changes in the fair value of assets, and a portion of the changes in the fair value of liabilities, accounted for using the fair value option are recorded in our consolidated statements of operations each period, which may result in volatility in our financial results.
−Removed: For example, we experienced such volatility particularly during the first and second quarters of 2020, at the height of the COVID-19-related market dislocations.
−Removed: There can be no assurance that such volatility in periodic financial results will not occur during 2022 or in future periods.
−Removed: We have experienced, and may in the future experience, declines in the market value of certain of our investment securities resulting in our recording impairments, which have had, and may in the future have, an adverse effect on our results of operations and financial condition.
−Removed: A decline in the market value of our residential mortgage securities that are accounted for as available-for-sale (or AFS) may require us to recognize impairment against such assets under GAAP.
−Removed: When the fair value of an AFS security is less than its amortized cost at the balance sheet date, the security is considered impaired.
−Removed: If we intend to sell an impaired security, or it is more likely than not that we will be required to sell the impaired security before any anticipated recovery, then we must recognize charges to earnings equal to the entire difference between the investment’s amortized cost and its fair value at the
−Removed: balance sheet date.
−Removed: If we do not expect to sell an impaired security, only the portion of the impairment related to credit losses is recognized through charges to earnings with the remainder recognized through accumulated other comprehensive income/(loss) (or AOCI) on our consolidated balance sheets.
−Removed: Impairments recognized through other comprehensive income/(loss) (or OCI) do not impact earnings.
−Removed: Following the recognition of an impairment through earnings, a valuation allowance will be established for the security.
−Removed: The determination as to the amount of credit impairment recognized in earnings is subjective, as such determination is based on factual information available at the time of assessment as well as on our estimates of the future performance and cash flow projections.
−Removed: As a result, the timing and amount of impairments recognized in earnings constitute material estimates that are susceptible to significant change.
+Added: There can be no assurance that such volatility in periodic financial results will not occur in future periods.
The use of models in connection with the valuation and credit losses of our assets subjects us to potential risks in the event that such models are incorrect, misleading or based on incomplete information.
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Depending on the complexity and illiquidity of an asset, valuations of the same asset can vary substantially from one dealer or pricing service to another.
−Removed: Wide disparity in asset valuations may be more pronounced during periods when market participants are engaged in distressed sales, as was experienced in the early stage of the COVID-19 related market volatility.
+Added: Wide disparity in asset valuations may be more pronounced during periods when market participants are engaged in distressed sales.
Our results of operations, financial condition and business could be materially adversely affected if our fair value determinations of these assets are materially higher than could actually be realized in the market.
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An RPL could become a NPL, which could reduce our earnings.
−Removed: Our investments in residential whole loans may require us to engage in workout negotiations, restructuring and/or the possibility of foreclosure.
+Added: Our investments in residential whole loans may require us to work with our
+Added: designated third-party mortgage loan servicers to the extent that they engage in workout negotiations or a restructuring with a borrower and/or the possibility of foreclosure.
These processes may be lengthy and expensive.
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However, there may be impediments to executing a refinancing strategy for NPLs and RPLs.
−Removed: For example during 2020, many mortgage lenders adjusted their loan programs and underwriting standards, which reduced the
−Removed: availability of mortgage credit to certain borrowers.
+Added: For example, during 2020, many mortgage lenders adjusted their loan programs and underwriting standards, which reduced the availability of mortgage credit to certain borrowers.
This resulted in reduced availability of financing alternatives for borrowers seeking to refinance their mortgage loans.
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Government, through the Federal Reserve, the U.S.
−Removed: Treasury Department, the FHA, the CFPB, and other agencies have in the past implemented, and may in the future implement, a number of federal programs designed to assist homeowners and help them avoid residential mortgage loan foreclosures, reduce or forgive certain mortgage payments, or otherwise mitigate losses for homeowners.
+Added: Treasury Department, the Federal Housing Administration (FHA), the CFPB, and other agencies have in the past implemented, and may in the future implement, a number of federal programs designed to help homeowners avoid residential mortgage loan foreclosures, reduce or forgive certain mortgage payments, or otherwise mitigate losses for homeowners.
In addition, Fannie Mae and Freddie Mac implemented their Flex Modification foreclosure prevention program, developed at the direction of the FHFA.
−Removed: Federal loss mitigation programs, as well as proprietary loss mitigation programs offered by investors and servicers, may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans (through forbearance and/or forgiveness) and/or the rate of interest payable on the loans, or to extend the payment terms of the loans.
−Removed: Especially with respect to our Non-Agency MBS and residential whole loan investments, loan modifications with respect to a given underlying loan, including, but not limited to, those related to principal payment deferrals, forbearance agreements, forgiveness and coupon reduction, could negatively impact the realized yields and cash flows on such investments.
+Added: Federal loss mitigation programs, as well as private loss mitigation programs offered by investors and servicers, may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans (through forbearance and/or forgiveness) and/or the rate of interest payable on the loans, or to extend the payment terms of the loans.
+Added: Especially with respect to residential whole loan investments, loan modifications with respect to a given underlying loan, including, but not limited to, those related to principal payment deferrals, forbearance agreements, forgiveness and coupon reduction, could negatively impact the realized yields and cash flows on such investments.
These loan modification programs, future legislative or regulatory actions, including possible amendments to the bankruptcy laws, that result in the modification of outstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans with Fannie Mae, Freddie Mac or Ginnie Mae, may materially adversely affect the value of, and the returns on, these assets.
See the Risk Factor captioned “Risks Associated with Adverse Developments in the Mortgage Finance and Credit Markets and Financial Markets Generally - Actions by the U.S.
−Removed: Government designed to stabilize or reform the financial markets may not achieve their intended effect or otherwise benefit our business, and could materially adversely affect our business” in this Form 10-K.
+Added: Government designed to stabilize or reform the financial markets may not achieve their intended effect or otherwise benefit our business, and could materially adversely affect our business.”
The Biden administration and Congress may propose and adopt changes in federal policies that have significant impacts on the legal and regulatory framework affecting the mortgage industry.
These changes, including personnel changes at the applicable regulatory agencies, may alter the nature and scope of oversight affecting the mortgage finance industry generally and particularly the future role of Fannie Mae and Freddie Mac.
−Removed: We may be adversely affected by risks affecting borrowers or the asset or property types in which certain of our investments may be concentrated at any given time, as well as from unfavorable changes in the related geographic regions.
−Removed: We are not required to limit our assets in terms of geographic location, diversification or concentration, except that we concentrate in residential mortgage-related investments.
−Removed: Accordingly, our investment portfolio may be concentrated by geography (see the Risk Factor captioned “Credit and Other Risks Related to Our Investments - A significant portion of our residential whole loans and residential mortgage securities are secured by properties in a small number of geographic areas and may be disproportionately affected by economic or housing downturns, our competition, natural disasters, terrorist events, pandemics, regulatory changes, adverse climate changes or other adverse events specific to those markets” in this Form 10-K), asset type (as is the case currently, as residential whole loans are by far our most concentrated asset type), property type and/or borrower, increasing the risk of loss to us if the particular concentration in our portfolio is subject to greater risks or is undergoing adverse developments.
−Removed: In addition, adverse conditions in the areas where the properties securing or otherwise underlying our investments are located (including business layoffs or downsizing, industry slowdowns, such as those experienced due to the COVID-19 pandemic, changing demographics and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of our investments.
−Removed: A material decline in the demand for real estate in these areas may materially and adversely affect us.
−Removed: Lack of diversification can increase the correlation of non-performance and foreclosure risks to these investments.
Our investments in residential whole loans subject us to servicing-related risks, including those associated with foreclosure and liquidation.
We rely on third-party servicers to service and manage the mortgages underlying our residential whole loans.
+Added: We do not interface with borrowers under the mortgage loans in which we invest or otherwise service the mortgage loans in which we invest.
The ultimate returns generated by these investments may depend on the quality of the servicer.
−Removed: If a servicer is not vigilant in seeing that borrowers make their required monthly payments, borrowers may be less likely to make these payments, resulting in a higher frequency of default.
+Added: If a third-party servicer is not vigilant in seeing that borrowers make their required monthly payments, borrowers may be less likely to make these payments, resulting in a higher frequency of default.
If a servicer takes longer to liquidate non-performing mortgages, our losses related to those loans may be higher than originally anticipated.
−Removed: Any failure by servicers to service these mortgages and/or to competently manage
−Removed: and dispose of REO properties could negatively impact the value of these investments and our financial performance.
−Removed: In addition, while we have contracted with third-party servicers to carry out the actual servicing of the loans (including all direct interface with the borrowers), for loans that we purchase together with the related servicing rights, we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that the loans are serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation.
+Added: Any failure by servicers to service these mortgages and/or to competently manage and dispose of REO properties could negatively impact the value of these investments and our financial performance.
+Added: In addition, while we have contracted with third-party servicers to carry out the actual servicing of the loans (including all direct interface with the borrowers), for loans that we acquire together with the related servicing rights, we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that the loans are serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation.
(See the Risk Factor captioned “Regulatory Risk and Risks Related to the Investment Company Act of 1940 - Our business is subject to extensive regulation”.) In light of the current regulatory environment, such exposure could be significant even though we might have contractual claims against our servicers for any failure to service the loans to the required standard.
−Removed: The COVID-19 pandemic and the resulting economic disruption it has caused may result in liquidity pressures on servicers and other third-party vendors that we rely upon.
−Removed: For instance, as a result of an increase in mortgagors requesting relief in the form of forbearance plans and/or other loss mitigation, servicers and other parties responsible in capital markets securitization transactions for funding advances with respect to delinquent mortgagor payments of principal and interest may begin to experience financial difficulties if mortgagors do not make monthly payments as a result of the COVID-19 pandemic.
+Added: Weak or deteriorating economic conditions may result in liquidity pressures on servicers and other third-party vendors that we rely upon.
+Added: For instance, as a result of an increase in mortgagors requesting relief in the form of forbearance plans and/or other loss mitigation, servicers and other parties responsible in capital markets securitization transactions for funding advances with respect to delinquent mortgagor payments of principal and interest may begin to experience financial difficulties if mortgagors do not make monthly payments.
The negative impact on the business and operations of such servicers or other parties responsible for funding such advances could be significant.
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Due to the COVID-19 pandemic, there were various federal, state, and local laws, regulations, orders, and ordinances limiting foreclosure and eviction remedies.
−Removed: On August 26, 2021, the United States Supreme Court declared unconstitutional an executive order issued by the Centers for Disease Control and Prevention (or CDC) and so it is no longer in effect.
−Removed: The Supreme Court’s ruling does not affect or preclude state and local jurisdictions from issuing orders stopping or limiting evictions and foreclosures in an effort to lessen the financial burden created by COVID-19 in their jurisdictions, and certain jurisdictions have pursued, and may continue to pursue, such limitations.
+Added: On August 26, 2021, the United States Supreme Court declared unconstitutional an executive order issued by the CDC, which created a moratorium on foreclosure proceedings.
+Added: As a result of the Supreme Court’s ruling, the federal foreclosure moratorium is no longer in effect.
+Added: The Supreme Court’s ruling does not affect or preclude state and local jurisdictions from issuing orders stopping or limiting evictions and foreclosures in an effort to lessen the financial burden created by COVID-19 in their jurisdictions, and moratoriums were imposed in certain jurisdictions.
Any such limitations could adversely impact the cash flow on those investments.
The expanding body of federal, state and local regulations and investigations of mortgage loan originators and servicers may increase costs of compliance and the risks of noncompliance, and may adversely affect servicers’ ability to perform their servicing obligations.
−Removed: We work with and rely on third-party servicers to service the residential mortgage loans that we acquire through consolidated trusts.
+Added: We work with and rely on third-party servicers to service the residential mortgage loans that we invest in through consolidated trusts.
The mortgages underlying the MBS that we acquire are also serviced by third-party servicers that have been hired by the bond issuers.
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Federal laws and regulations have also been proposed or adopted which, among other things, could hinder the ability of a servicer to foreclose promptly on defaulted residential loans, and which could result in assignees being held responsible for violations in the residential loan origination process.
−Removed: For example, due to regulations arising from the COVID-19 pandemic, there was a federal moratorium against evictions in place until at least August 26, 2021, which limited foreclosure and eviction remedies.
+Added: For example, due to regulations arising from the COVID-19 pandemic, the CDC issued a federal moratorium against evictions in September 2020, which limited foreclosure and eviction remedies until it was struck down by the Supreme Court in August 2021.
In addition, mortgage lenders and third-party servicers have voluntarily, pursuant to federal, state or local regulation, or as part of settlements with law enforcement authorities, established loan modification programs relating to loans they hold or service.
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Mortgage servicers may be incented by the federal government to pursue such loan modifications, as well as forbearance plans and other actions intended to prevent foreclosure, even if such loan modifications and other actions are not in the best interests of the beneficial owners of the mortgages.
−Removed: consequence of the foregoing matters, our business, financial condition, results of operations and ability to pay dividends, if any, to our stockholders may be adversely affected.
+Added: As a consequence of the foregoing matters, our business, financial condition, results of operations and ability to pay dividends, if any, to our stockholders may be adversely affected.
Our ability to sell REO on terms acceptable to us or at all may be limited.
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We also cannot predict the length of time needed to find a willing purchaser and to close the sale of an REO.
−Removed: In certain circumstances, we may be required to expend cash to correct defects, pay expenses or to make improvements before a property can be sold, and we cannot assure that we will have cash available to make these payments.
+Added: In certain circumstances, we may be required to expend
+Added: cash to correct defects, pay expenses or to make improvements before a property can be sold, and we cannot assure that we will have cash available to make these payments.
As a result, our ownership of REOs could materially and adversely affect our liquidity and results of operations.
+Added: We have experienced, and may in the future experience, declines in the market value of certain of our investment securities resulting in our recording impairments, which have had, and may in the future have, an adverse effect on our results of operations and financial condition.
+Added: A decline in the market value of our residential mortgage securities that are accounted for as available-for-sale (or AFS) may require us to recognize impairment against such assets under GAAP.
+Added: When the fair value of an AFS security is less than its amortized cost at the balance sheet date, the security is considered impaired.
+Added: If we intend to sell an impaired security, or it is more likely than not that we will be required to sell the impaired security before any anticipated recovery, then we must recognize charges to earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date.
+Added: If we do not expect to sell an impaired security, only the portion of the impairment related to credit losses is recognized through charges to earnings with the remainder recognized through accumulated other comprehensive income/(loss) (or AOCI) on our consolidated balance sheets.
+Added: Impairments recognized through other comprehensive income/(loss) (or OCI) do not impact earnings.
+Added: Following the recognition of an impairment through earnings, a valuation allowance will be established for the security.
+Added: The determination as to the amount of credit impairment recognized in earnings is subjective, as such determination is based on factual information available at the time of assessment as well as on our estimates of the future performance and cash flow projections.
+Added: As a result, the timing and amount of impairments recognized in earnings constitute material estimates that are susceptible to significant change.
Our investments in MSR-related assets expose us to additional risks.
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Generally, we have the right to receive certain cash flows from the owner of the MSRs that are generated from the servicing fees and/or excess servicing spread associated with the MSRs.
−Removed: While we do not directly own MSRs, our investments in MSR-related assets indirectly expose us to risks associated with MSRs, such as the illiquidity of MSRs, the risks associated with servicing MSRs (that include, for example, significant regulatory risks and costs) and the ability of the owner to successfully manage its MSR portfolio.
+Added: While we do not own MSRs, our investments in MSR-related assets indirectly expose us to risks associated with MSRs, such as the illiquidity of MSRs, the risks associated with servicing MSRs (that include, for example, significant regulatory risks and costs) and the ability of the owner to successfully manage its MSR portfolio.
Furthermore, the value of MSRs is highly sensitive to changes in prepayment rates.
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In the event one or more of the loan originators in which we have made investments should experience a significant decline in its business and operations or otherwise not be able to respond adequately to managerial, compliance or operational challenges that it may encounter, we may be required to write-down all or a portion of the applicable investment, which could have a material adverse impact on our results of operations.
−Removed: We may fail to realize the anticipated benefits of the Lima One acquisition.
−Removed: On July 1, 2021, we completed our acquisition of Lima One.
−Removed: The long-term success of the acquisition will depend on, among other things, our ability to continue to combine the businesses in a manner that facilitates growth opportunities (in particular, growth in our business purpose loan portfolio).
−Removed: Ultimately, we might not successfully combine the businesses in a manner that permits the benefits of the acquisition to be realized, including any anticipated growth.
−Removed: If we are not able to successfully achieve these objectives, the anticipated benefits of the acquisition may not be realized fully, or at all, or may take longer to realize than expected and the value of our common stock may be adversely impacted.
−Removed: In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized.
−Removed: Actual growth (particularly as related to our business purpose loan portfolio), if achieved, may be lower than what we expect and may take longer to achieve than anticipated.
−Removed: Additionally, at times the attention of our management may be focused on the integration of the businesses and diverted from day-to-day business operations or other opportunities that may have been beneficial to us.
Business purpose loans involve a high degree of business and financial risk.
−Removed: Our operations and activities include business purpose loans originated by Lima One.
−Removed: These business purpose loans include short-term loans that are collateralized by 1-4 family residential properties and made to non-occupant borrowers who intend to rehabilitate and sell the property for a profit, as well as long-term mortgage loans made to investors who intend to rent such properties to generate income.
−Removed: Such a borrower’s ability to repay its loan may be adversely impacted by numerous factors, including negative local or more general economic conditions and, in the case of rehabilitation loans, the borrower’s ability to complete the rehabilitation successfully, on budget and on time.
+Added: Our operations and activities include business purpose loans originated and serviced by Lima One.
+Added: These business purpose loans include short-term loans that are collateralized by residential and multi-family properties made to non-occupant borrowers that intend to rehabilitate and sell the property for a profit (Transitional loans), as well as long-term mortgage loans made to investors who intend to rent such properties to generate income.
+Added: Such a borrower’s ability to repay its loan may be adversely impacted by numerous factors, including negative local or more general economic conditions and, in the case of Transitional loans, the borrower’s ability to complete the rehabilitation successfully, on budget and on time.
In addition, in the case of mortgage loans secured by rental properties, if tenants who rent their residence from a business purpose loan borrower are unable to make rental payments, are unwilling to make rental payments, or a waiver of the requirement to make rental payments on a timely basis, or at all, is available under the terms of any applicable forbearance or waiver agreement or program (which rental payment forbearance or waiver program may be available as a result of a government-sponsored or government-imposed program or under any such agreement or program a landlord may otherwise offer to tenants), then the value of business purpose loans we own will likely be impaired, potentially materially.
Accordingly, deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in the collateral for the loan.
−Removed: Additionally, as rehabilitation mortgage loans involve properties in transition, they may involve a greater risk of loss than traditional mortgage loans.
+Added: Additionally, as Transitional loans involve properties in transition, they may involve a greater risk of loss than traditional mortgage loans.
This type of loan is typically used for acquiring and rehabilitating or improving the quality of single-family residential investment properties and generally serves as an interim financing solution for borrowers and/or properties prior to the borrower selling the property or stabilizing the property and obtaining long-term permanent financing.
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In addition, borrowers may use the proceeds of a conventional mortgage to repay a mortgage loan of this type.
−Removed: These loans therefore are subject to risks of a borrower’s inability to obtain permanent financing to repay the rehabilitation loan.
−Removed: Similar to other mortgage loans that we hold for investment, business purpose loans are also subject to risks of borrower defaults, bankruptcies, fraud and other losses.
+Added: These loans therefore are subject to risks of a borrower’s inability to obtain permanent financing to repay the Transitional loan.
+Added: Similar to other mortgage loans in which we invest, business purpose loans are also subject to risks of borrower defaults, bankruptcies, fraud and other losses.
Accordingly, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount and unpaid interest of the loan.
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If general interest rates decline at the same time, we would likely not be able to reinvest the proceeds of the prepayments that we receive in assets yielding as much as those yields on the assets that were prepaid.
−Removed: With respect to certain residential mortgage assets, we have, at times, purchased assets that have a higher coupon rate than the prevailing market interest rates.
−Removed: In exchange for a higher coupon rate, we typically pay a premium over par value to acquire such assets.
−Removed: In accordance with GAAP, we amortize premiums over the life of the related asset.
−Removed: If the underlying mortgage loans securing these assets prepay at a more rapid rate than anticipated, we will be required to amortize the related premiums on an accelerated basis, which could adversely affect our profitability.
Risks Related to Our Use of Leverage
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Such losses could be significant as a result of our leveraged structure.
−Removed: The risks associated with leverage are more acute during periods of economic slowdown or recession, which the U.S.
−Removed: economy experienced in connection with the conditions created by the COVID-19 pandemic.
+Added: The risks associated with leverage are more acute during periods of economic slowdown or recession.
The use of leverage to finance our residential mortgage investments involves a number of other risks, including, among other things, the following:
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A decline in the market value of our residential mortgage investments may limit our ability to borrow against such assets or result in lenders initiating margin calls, which require a pledge of additional collateral or cash to re-establish the required ratio of borrowing to collateral value, under our repurchase agreements.
−Removed: For example, during the initial stages of the COVID-19 pandemic and related market dislocations, we experienced significantly higher margin calls and
−Removed: haircuts with respect to our repurchase agreements.
+Added: For example, during the initial stages of the COVID-19 pandemic and related market dislocations, we experienced significantly higher margin calls and lender demanded higher “haircuts” (i.e., the difference between the value of the collateral and the amount lent to the borrower) with respect to our repurchase agreements.
Posting additional collateral or cash to support our credit will reduce our liquidity and limit our ability to leverage our assets, which could materially adversely affect our business.
As a result, we could be forced to sell a portion of our assets, including MBS in an unrealized loss position, in order to maintain liquidity.
−Removed: • Adverse developments involving major financial institutions or involving one of our lenders could result in a rapid reduction in our ability to borrow and materially adversely affect our business, profitability and liquidity.
+Added: • Adverse developments involving major financial institutions or involving one of our lenders could result in a rapid reduction in our ability to borrow and materially adversely affect our liquidity and profitability.
A material adverse development involving one or more major financial institutions or the financial markets in general could result in our lenders reducing our access to funds available under our repurchase agreements or terminating such repurchase agreements altogether.
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Furthermore, if a number of our lenders became unwilling or unable to continue to provide us with financing, we could be forced to sell assets , including MBS in an unrealized loss position, in order to maintain liquidity.
−Removed: Forced sales, particularly under adverse market conditions, may result in lower sales prices than ordinary market sales made in the normal course of business.
+Added: Forced sales, particularly under adverse market conditions,
+Added: may result in lower sales prices than ordinary market sales made in the normal course of business.
If our residential mortgage investments were liquidated at prices below our amortized cost (i.e., the cost basis) of such assets, we would incur losses, which could adversely affect our earnings.
We and many other mortgage REITs experienced these conditions in 2020 in connection with the conditions created by the COVID-19 pandemic.
−Removed: In addition, any uncertainty in the global finance market or weak economic conditions in Europe could cause the conditions described above to have a more pronounced effect on our European counterparties.
+Added: In addition, any uncertainty in the global finance market or weak economic conditions in Europe could cause the conditions described above to have a more pronounced effect on our European lending counterparties.
• Our profitability may be materially adversely affected by a reduction in our leverage.
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At December 31, 2022, we had greater than 5% stockholders’ equity at risk to the following financing agreement counterparties:
−Removed: Credit Suisse (approximately 21.9%), Barclay’s Bank (approximately 21.1%) and Wells Fargo (approximately 9.9%).
+Added: Barclay’s Bank (approximately 15.6%), Wells Fargo (approximately 11.8%) and Credit Suisse (approximately 9.7%).
In addition, generally, if we default on one of our obligations under a repurchase transaction with a particular lender, that lender can elect to terminate the transaction and cease entering into additional repurchase transactions with us.
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In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as an unsecured creditor.
−Removed: In addition, if the lender is a
−Removed: broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act of 1950, our ability to exercise our rights to recover our securities under a repurchase agreement or to be compensated for any damages resulting from the lender’s insolvency may be further limited by those statutes.
+Added: In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act of 1950, our ability to exercise our rights to recover our securities under a repurchase agreement or to be compensated for any damages resulting from the lender’s insolvency may be further limited by those statutes.
These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur.
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Because the terms of our repurchase transactions typically range from one to six months at inception, the interest rates on our borrowings generally adjust more frequently (as new repurchase transactions are entered into upon the maturity of existing repurchase transactions) than the interest rates on our investments.
−Removed: During a period of rising interest rates, our borrowing costs generally will increase at a faster pace than our interest earnings on the leveraged portion of our investment portfolio, which could result in a decline in our net interest spread and net interest margin.
+Added: During a period of rising interest rates, our borrowing costs generally will increase at a faster pace than our interest income on the leveraged portion of our investment portfolio, which could result in a decline in our net interest spread and net interest margin.
The severity of any such decline would depend on our asset/liability composition (including the impact of hedging transactions) at the time, as well as the magnitude and period over which interest rates increase.
Further, an increase in short-term interest rates could also have a negative impact on the market value of our residential mortgage investments.
−Removed: If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which may negatively impact our distributions to stockholders.
+Added: Interest rates increased significantly in 2022 and may continue increasing in 2023.
+Added: As such, we could experience a decrease in net income or incur a net loss during these periods, which may negatively impact our distributions to stockholders.
The impact of inflation may adversely affect our financial performance.
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The Federal Reserve actually began to taper its bond buying program in November and then doubled the pace of cuts in December 2021.
−Removed: In addition, the recent updated set of Federal Reserve dot projections called for three quarter-point rate hikes in 2022, a significant turnaround in officials’ policy outlook from earlier in the year.
+Added: In addition, the Federal Reserve raised the federal funds rate seven times in 2022, a significant turnaround in officials’ policy outlook of earlier in the year.
+Added: The Federal Reserve has also raised the federal funds rate once thus far in 2023, and markets expect more rate hikes during the remainder of the year.
As the Federal Reserve lifts its federal funds target rate, the margin between short and long-term rates could further compress.
−Removed: Given our reliance on short-term borrowings to generate interest income, if the curve continues to flatten or even invert, or if Federal Reserve finds itself falling behind on inflation and more aggressively tightens that their current projections, our results of operations, financial condition and business could be materially adversely impacted.
+Added: Given our reliance on short-term borrowings to generate interest income and the fact that the yield curve continues to flatten and has even recently inverted, or if the Federal Reserve finds itself continuing to fall behind on inflation and more aggressively tightens its current projections, our results of operations, financial condition and business could be materially adversely impacted.
+Added: For a detailed discussion of the impact of interest rates, see “Interest Rate Risk” included under Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in this Annual Report on Form 10-K.
The discontinuation of LIBOR may affect our financial results.
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Moreover, any adjustable-rate mortgage loans based upon LIBOR will need to convert by that time too.
−Removed: In the United States, the Alternative Reference Rates Committee (or ARRC), a committee of private sector entities with ex-officio official sector members convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate (or SOFR) plus a recommended spread adjustment as LIBOR’s replacement.
+Added: In the United States, the Alternative Reference Rates Committee (or ARRC), a committee of private sector entities with ex-officio official sector members convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate (or SOFR) and in some cases, the forward-looking term rate based on SOFR published by CME Group Benchmark Administration Ltd., (or CME Term SOFR) plus, in each case, a recommended spread adjustment as LIBOR’s replacements.
+Added: The Board of Governors of the Federal Reserve has also named CME Term SOFR as the Board-selected replacement rate for most cash products under the Adjustable Interest Rate (LIBOR) Act of 2021, which governs instruments for which there is no determining person to choose a LIBOR replacement or which have no fallback provisions specifying an alternate replacement rate.
There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities.
−Removed: If our LIBOR-based borrowings are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available, which could have a material adverse effect on our operating results.
−Removed: At December 31, 2021, we had Swaps with an aggregate notional balance of approximately $900.0 million whose interest rates were based on SOFR.
−Removed: Although SOFR is the ARRC's recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher interest costs for us.
+Added: If our LIBOR-based borrowings are converted to SOFR or CME Term SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available, which could have a material adverse effect on our operating results.
+Added: At December 31, 2022, we had Swaps with an aggregate notional balance of approximately $3.2 billion whose interest rates were based on SOFR.
+Added: Although SOFR and CME Term SOFR are the AARC’s recommended replacement rates, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher interest costs for us.
Furthermore, lenders may select alternative rates sooner than June 30, 2023, either in amendments to existing facilities or as we decide to enter into new facilities.
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It is not yet possible to predict the magnitude of LIBOR's end on our borrowing costs and other operations given the remaining uncertainty about which rates will replace LIBOR and the related timing.
+Added: For further discussion on the impact of LIBOR discontinuation, see “Interest Rate Risk” included under Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in this Annual Report on Form 10-K.
Holders of our fixed-to-floating preferred shares should refer to the relevant prospectus to understand the USD-LIBOR cessation provisions applicable to that class.
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federal income tax purposes.
−Removed: The use of non-recourse long-term financing structures expose us to risks, which could result in losses to us.
+Added: Reliance on certain types of financing structures expose us to risks, which could result in losses to us.
We use securitization financing for certain of our residential whole loan investments.
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Further, if we are unable to secure ratings from other agencies, limited investor demand for unrated notes could result in further adverse changes to our liquidity and profitability.
+Added: Cybersecurity Risks
+Added: Maintaining cybersecurity and data security is important to our business and a breach of our cybersecurity or data security could result in serious harm to our reputation and have a material adverse impact on our business and financial results.
+Added: When we acquire or originate real estate mortgage loans, we come into possession of borrower non-public personal information that an identity thief could utilize in engaging in fraudulent activity or theft.
+Added: We may share this information with third parties, such as loan sub-servicers, outside vendors, third parties interested in acquiring such loans from us, or lenders extending credit to us collateralized by such loans.
+Added: We have acquired more than 30,000 residential mortgage loans since 2014, and our Lima One subsidiary, which we acquired in July 2021, has originated several thousand mortgage loans since its founding in 2011.
+Added: While we have security measures in place to protect this information and prevent security breaches, these security measures may be compromised as a result of third-party action, including intentional misconduct by computer hackers, cyber-attacks, "phishing" attacks, service provider or vendor error, or malfeasance or other intentional or unintentional acts by third parties and bad actors, including third-party service providers.
+Added: Furthermore, borrower data, including personally identifiable information, may be lost, exposed, or subject to unauthorized access or use as a result of accidents, errors, or malfeasance by our employees, independent contractors, or others working with us or on our behalf.
+Added: Our servers and systems, and those of our service providers, may be vulnerable to computer malware, break-ins, denial-of-service attacks, and similar disruptions from unauthorized tampering with our computer systems, which could result in someone obtaining unauthorized access to borrowers’ data or our data, including other confidential business information.
+Added: In the past, we have experienced unauthorized access to
+Added: certain data and information.
+Added: Our response was to take immediate steps to investigate and address the unauthorized access, and past unauthorized access has not had, and is not expected to have, a material adverse effect on our business and financial results.
+Added: We have further developed and enhanced our cybersecurity systems and processes that are intended to protect this type of data and information;
+Added: however, they may not be effective in preventing unauthorized access in the future.
+Added: While past unauthorized access has been immaterial to our business and financial results, there can be no assurance of a similar result in the future.
+Added: Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.
+Added: We may also experience security breaches that may remain undetected for an extended period.
+Added: We may be liable for losses suffered by individuals whose identities are stolen as a result of a breach of the security of the systems that we or third-parties and service providers of ours store this information on, and any such liability could be material.
+Added: Even if we are not liable for such losses, any breach of these systems could expose us to material costs in notifying affected individuals and providing credit monitoring services to them, as well as regulatory fines or penalties.
+Added: In addition, any breach of these systems could disrupt our normal business operations and expose us to reputational damage and lost business, revenues, and profits.
+Added: Any insurance we maintain against the risk of this type of loss may not be sufficient to cover actual losses, or may not apply to the circumstances relating to any particular breach.
+Added: Security breaches could also significantly damage our reputation with existing and prospective loan sellers, borrowers, and third parties with whom we do business.
+Added: Any publicized security problems affecting our businesses and/or those of such third parties may negatively impact the market perception of our products and discourage market participants from doing business with us.
+Added: These risks may increase in the future as we continue to increase our reliance on the internet and use of web-based product offerings and on the use of cybersecurity.
+Added: We are dependent on information systems and their failure (including in connection with cyber-attacks) could significantly disrupt our business.
+Added: Our business is highly dependent on our information and communications systems, including systems containing or using open source software.
+Added: Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on operating results, the market price of our common stock and other securities and our ability to pay dividends to our stockholders.
+Added: Our use of open source software poses particular risk, including potential security vulnerabilities, licensing compliance issues and quality issues.
+Added: In addition, we also face the risk of operational failure, termination or capacity constraints of any of the third-parties with which we do business or that facilitate our business activities, including clearing agents or other financial intermediaries we use to facilitate our securities transactions as well as the servicers of our loans.
+Added: Computer malware, viruses, hacking and phishing and cyber-attacks have become more prevalent in our industry and may occur on our systems in the future.
+Added: Additionally, due to the transition to remote working environments as a result of the COVID-19 pandemic, there is an elevated risk of such events occurring.
+Added: Although we have not detected a material cybersecurity breach to date, there can be no assurance that we are or will be fully protected against cyber risks and security breaches and not be vulnerable to new and evolving threats to our information technology systems.
+Added: We rely heavily on financial, accounting and other data processing systems.
+Added: It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of our networks or systems (or networks or systems of, among other third-parties, our lenders and servicers) or any failure to maintain performance, reliability and security of our technical infrastructure.
+Added: As a result, any such computer malware, viruses, hacking, phishing and cyber-attacks may negatively affect our operations.
Risks Associated with Adverse Developments in the Mortgage Finance and Credit Markets and Financial Markets Generally
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Our results of operations are materially affected by conditions in the markets for mortgages and mortgage-related assets, including MBS, as well as the broader financial markets and the economy generally.
−Removed: Significant adverse changes in financial market conditions, such as those experienced in response to the COVID-19 pandemic, leading to the forced sale of large quantities of mortgage-related and other financial assets would result in significant volatility in the market for mortgages and mortgage-related assets and potentially significant losses for ourselves and certain other market participants.
−Removed: In addition, concerns over actual or anticipated low economic growth rates, higher levels of unemployment or uncertainty regarding future U.S.
+Added: Significant adverse changes in financial market conditions leading to the forced sale of large quantities of mortgage-related and other financial assets would result in significant volatility in the market for mortgages and mortgage-related assets and potentially significant losses for ourselves and certain other market participants.
+Added: In addition, concerns over actual or anticipated low economic growth rates, higher levels of
+Added: unemployment or uncertainty regarding future U.S.
monetary policy may contribute to increased interest rate volatility.
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Any illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises.
−Removed: In addition, if we are required to liquidate all or a portion of our portfolio quickly, as frequently occurred during the onset of the COVID-19 pandemic in the first half of 2020, we may realize significantly less than the value at which we have previously recorded our investments.
+Added: In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments.
Further, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we have or could be attributed with material, non-public information regarding such business entity.
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Numerous regulations have been issued pursuant to the Dodd-Frank Act, including regulations regarding mortgage loan servicing, underwriting and loan originator compensation and others could be issued in the future.
−Removed: These requirements can and do change as statutes and regulations are enacted, promulgated, amended, and interpreted, and the recent trends among federal and state lawmakers and regulators have been toward increasing laws, regulations, and investigative procedures concerning the mortgage industry generally.
+Added: These requirements can and do change as statutes and regulations are enacted, promulgated, amended, and interpreted, and the recent trends among federal and state lawmakers and regulators have been toward stricter laws, regulations, and investigative procedures concerning the mortgage industry generally.
As a result, we are unable to fully predict at this time how the Dodd-Frank Act, as well as other laws or regulations that may be adopted in the future, will affect our business, results of operations and financial condition, or the environment for repurchase financing and other forms of borrowing, the investing environment for Agency MBS, Non-Agency MBS and/or residential mortgage loans, origination of business purpose loans secured by 1-4 family residential property, and the securitization industry.
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Some states have enacted, or may enact, similar laws or regulations, which in some cases may impose restrictions and requirements greater than those in place under federal laws and regulations.
−Removed: In addition, under the anti-predatory lending laws of some states, the origination of certain residential mortgage loans, including loans that are classified as “high cost” loans under applicable law, must satisfy a net tangible benefits test with respect to the borrower.
+Added: In addition, under the anti-predatory lending laws
+Added: of some states, the origination of certain residential mortgage loans, including loans that are classified as “high cost” loans under applicable law, must satisfy a net tangible benefits test with respect to the borrower.
This test, as well as certain standards set forth in the “ability-to-repay” and “qualified mortgage” regulations, may be highly subjective and open to interpretation.
As a result, a court may determine that a residential mortgage loan did not meet the applicable standard or test even if the originator reasonably believed such standard or test had been satisfied.
−Removed: Failure of residential mortgage loan originators or servicers to
−Removed: comply with federal consumer protection laws and regulations could subject us, or as an assignee or purchaser of these loans (or as an investor in securities backed by these loans), to monetary penalties and defenses to foreclosure, including by recoupment or setoff of damages and costs, which for some violations includes the sum of all finance charges and fees paid by the consumer, and could result in rescission of the affected residential mortgage loans, which could adversely impact our business and financial results.
+Added: Failure of residential mortgage loan originators or servicers to comply with federal consumer protection laws and regulations could subject us, or as an assignee or purchaser of these loans (or as an investor in securities backed by these loans), to monetary penalties and defenses to foreclosure, including by recoupment or setoff of damages and costs, which for some violations includes the sum of all finance charges and fees paid by the consumer, and could result in rescission of the affected residential mortgage loans, which could adversely impact our business and financial results.
Similarly, with respect to any mortgage loan that we originate, any failure by us or servicers to comply with federal or state laws and regulations could subject us, or an assignee or purchaser of these loans (to the extent that we sell them to an investor in securities backed by these loans), to monetary penalties and defenses to foreclosure, including by recoupment or setoff of damages and costs, which for some violations includes the sum of all finance charges and fees paid by the borrower, and could result in rescission of the affected residential mortgage loans, which could adversely impact our business and financial results.
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However, the foreclosure moratorium was extended several times to July 31, 2021 and the forbearance enrollment window was extended through September 30, 2021 by the Department of Housing and Urban Development, Department of Veterans Affairs, the Department of Agriculture and FHFA, which includes mortgages backed by Fannie Mae and Freddie Mac.
−Removed: Although the federal foreclosure moratorium expired, various states and local jurisdictions also imposed foreclosure moratoriums, some of which will still be in effect after the federal moratorium expires.
+Added: Although the federal foreclosure moratorium expired, various states and local jurisdictions also imposed foreclosure moratoriums, some of which remained in effect after the federal moratorium expired.
On July 30, 2021, FHFA announced that Fannie Mae and Freddie Mac were extending the moratorium on single-family real estate owned (REO) evictions until September 30, 2021.
−Removed: The Biden Administration may pass additional stimulus bills, foreclosure relief measures and may reinstate foreclosure and eviction moratoriums that may continue to adversely impact the cash flow on mortgage loans.
−Removed: The CFPB has announced that it is carefully monitoring conditions in the mortgage market and taking steps to minimize avoidable foreclosures and address any compliance failures, including by conducting prioritized assessments, or targeted supervisory reviews, designed to obtain real-time information from mortgage services due to the elevated risk of consumer harm because of the COVID-19 pandemic.
+Added: Federal or state authorities may still enact additional foreclosure relief measures or foreclosure and eviction moratoriums that may continue to adversely impact the cash flow on mortgage loans.
+Added: The CFPB has announced that it is carefully monitoring conditions in the mortgage market and taking steps to minimize avoidable foreclosures and address any compliance failures, including by conducting prioritized assessments, or targeted supervisory reviews, designed to obtain real-time information from mortgage services due to the elevated risk of consumer
+Added: harm because of the COVID-19 pandemic.
On June 28, 2021, the CFPB finalized amendments to the federal mortgage servicing regulations designed support the housing market’s transition to post-pandemic operation.
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The rules cover loans on principal residences, generally exclude small servicers, and took effect on August 31, 2021.
−Removed: On November 10, 2021, the Board of Governors of the Federal Reserve, the CFPB, the FDIC,
−Removed: the National Credit Union Administration, the Office of the Comptroller of the Currency, and the state financial regulators (collectively, agencies) announced that they were discontinuing the more flexible supervisory approach announced in April 2020, concluding that servicers have had sufficient time to adjust their operations by, among other things, taking steps to work with consumers affected by the COVID-19 pandemic and developing more robust business continuity and remote work capabilities.
+Added: On November 10, 2021, the Board of Governors of the Federal Reserve, the CFPB, the FDIC, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the state financial regulators (collectively, agencies) announced that they were discontinuing the more flexible supervisory approach announced in April 2020, concluding that servicers have had sufficient time to adjust their operations by, among other things, taking steps to work with consumers affected by the COVID-19 pandemic and developing more robust business continuity and remote work capabilities.
CFPB’s December 2021 Supervisory Highlights show, among other things, that CFPB is prioritizing compliance with Regulation Z and Regulation X, as well as unfair and deceptive acts or practices prohibited by the CFPB.
+Added: CFPB’s November 2022 Supervisory Highlights shows, among other things, that CFPB’s examinations continue to focus on credit reporting, mortgage servicing fees charged to consumers, and proper handling of COVID-19 protections.
This enhanced scrutiny is likely to continue to increase the economic and compliance costs for participants in the mortgage and securitization industries, including us.
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Our business is subject to extensive regulation.
+Added: We operate in a highly regulated industry and continually changing U.S.
+Added: federal, state and local laws and regulation could materially adversely affect our business, financial condition and results of operations and our ability to pay dividends to our stockholders.
Our business is subject to extensive regulation by federal and state governmental authorities, self-regulatory organizations and securities exchanges.
We are required to comply with numerous federal and state laws.
+Added: We are required to comply with numerous federal and state laws.
+Added: Laws, regulations, rules and judicial and administrative decisions relating to mortgage loans include those pertaining to Real Estate Settlement Procedures Act (or RESPA), equal credit opportunity, fair lending, fair credit reporting, truth in lending, fair debt collection practices, service members protections, compliance with net worth and financial statement delivery requirements, compliance with U.S.
+Added: federal and state disclosure and licensing requirements, the establishment of maximum interest rates, finance charges and other charges, qualified mortgages, secured transactions, payment processing, escrow, loss mitigation, collection, foreclosure, repossession and claims-handling procedures, and other trade practices and privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers.
+Added: Our mortgage loan servicers must also comply with many of these legal requirements.
The laws, rules and regulations comprising this regulatory framework change frequently, as can the interpretation and enforcement of existing laws, rules and regulations.
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We incur significant ongoing costs to comply with these government regulations.
+Added: In particular, the Dodd-Frank Act resulted in a comprehensive overhaul of the financial services industry in the United States and includes, among other things (i) the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation among U.S.
+Added: federal agencies, (ii) the creation of the CFPB, authorized to promulgate and enforce consumer protection regulations relating to financial products and services, including mortgage lending and servicing, and to exercise supervisory authority over participants in mortgage lending and mortgage servicing, (iii) the establishment of strengthened capital and prudential standards for banks and bank holding companies, (iv) enhanced regulation of financial markets, including the derivatives and securitization markets, and (v) amendments to the Truth in Lending Act and RESPA, aimed at improving consumer protections with respect to mortgage originations and mortgage servicing, including disclosures, originator compensation, minimum repayment standards, prepayment considerations, appraisals and loss mitigation and other servicing requirements.
+Added: Unpredictable events, such as the COVID-19 pandemic, may create economic shocks, to which federal, state, and local governments respond with new borrower and tenant rights and protections.
+Added: Certain federal and state regulators continue to consider proposals to apply regulatory prudential standards to nonbank servicers, which may impact how our service providers, including the Servicer, are regulated.
+Added: In addition, the current presidential administration may focus supervision and enforcement tools more aggressively on residential mortgage lenders and servicers, which could result in increased regulatory scrutiny and potentially increased penalties assessed for determinations of non-compliance with applicable requirements.
Although we do not directly service residential mortgage loans (except for business purpose loans originated and serviced by Lima One), we must comply with various federal and state laws, rules and regulations as a result of owning MBS and residential whole loans.
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We cannot predict the impact of its expiration on the mortgage market.
+Added: In addition, actions taken by or proposed to be taken by, among others, FHFA, the U.S.
+Added: Treasury, the Federal Reserve Board or other U.S.
+Added: governmental agencies that are intended to regulate the origination, underwriting guidelines, servicing guidelines, servicing compensation and other aspects of Agency MBS can have indirect and sometimes direct effects on our business and business model, and results of operations and liquidity.
+Added: For example, loan originators and servicers, investors and other participants in the mortgage securities markets may use regulatory guidelines intended for Agency MBS as guidelines or operating procedures in respect of non-Agency MBS.
+Added: In addition, changes in underwriting guidelines for Agency MBS generally affect the supply of similar or complementary non-Agency MBS.
Although we believe that we have structured our operations and investments to comply with existing legal and regulatory requirements and interpretations, changes in regulatory and legal requirements, including changes in their interpretation and enforcement by lawmakers and regulators, could materially and adversely affect our business and our financial condition, liquidity and results of operations.
+Added: Certain jurisdictions require licenses to purchase, hold, enforce or sell residential mortgage loans.
+Added: In the event that any such licensing requirement is applicable and we are not able to obtain such licenses in a timely manner or at all, our ability to implement our business strategy could be adversely affected, which could materially and adversely affect our business.
+Added: Certain jurisdictions require a license to purchase, hold, enforce or sell residential mortgage loans.
+Added: We currently do not hold any such licenses, and there is no assurance that we will be able to obtain them in a timely manner or at all or, if obtained, that we will be able to maintain them.
+Added: In connection with these licenses we would be required to comply with various information reporting and other regulatory requirements to maintain those licenses, and there is no assurance that we will be able to satisfy those requirements on an ongoing basis.
+Added: Our failure to obtain or maintain such licenses or our inability to enter into another regulatory-compliant structure, such as establishing a trust with a federally chartered bank as trustee to purchase and hold the residential mortgage loans, could restrict our ability to invest in loans in these jurisdictions if such licensing requirements are applicable.
+Added: In lieu of obtaining such licenses, we contribute our acquired residential mortgage loans to one or more trusts in which we or our subsidiaries hold beneficial interests;
+Added: title to these residential mortgage loans is held by one or more federally-charted banks as trustee, which may be exempt from state licensing requirements.
+Added: There can be no assurance that the use of the trusts will satisfy an exemption from licensing requirements because regulatory agencies may adopt different interpretations of applicable laws.
+Added: We are aware of one state regulatory agency that has inquired about our use of the trust structure.
+Added: If required, there can be no assurance that we will be able to obtain the requisite licenses in a timely manner or at all, or other necessary jurisdictions, which could limit our ability to invest in residential mortgage loans.
+Added: Our failure to obtain and maintain required licenses may expose us to penalties or other claims and may affect our ability to acquire an adequate and desirable supply of mortgage loans to conduct our securitization program and, as a result, could harm our business.
Maintaining our exemption from registration under the Investment Company Act imposes significant limits on our operations.
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We expect that our subsidiaries that invest in residential mortgage loans (whether through a consolidated trust or otherwise) will rely upon the exemption from registration as an investment company under the Investment Company Act pursuant to Section 3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally requires that at least 55% of each of these subsidiaries’ assets be comprised of qualifying real estate assets and at least 80% of each of their portfolios be comprised of qualifying real estate assets and real estate-related assets under the Investment Company Act.
−Removed: Mortgage loans that were fully and exclusively secured by real property are generally qualifying real estate assets for purposes of the exemption.
+Added: Mortgage loans that are fully and exclusively secured by real property are generally qualifying real estate assets for purposes of the exemption.
All or substantially all of our residential mortgage loans are fully and exclusively secured by real property with a loan-to-value ratio of less than 100%.
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To the extent that the SEC staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly.
−Removed: addition, we may be limited in our ability to make certain investments and these limitations could result in us holding assets we might wish to sell or selling assets we might wish to hold.
+Added: In addition, we may be limited in our ability to make certain investments and these limitations could result in us holding assets we might wish to sell or selling assets we might wish to hold.
Certain of our subsidiaries that hold residential mortgage loans through majority owned subsidiaries may rely on the exemption provided by Section 3(c)(6), which excludes from the definition of “investment company” any company primarily engaged, directly or through majority-owned subsidiaries, in a business, among others, described in Section 3(c)(5)(C) of the Investment Company Act (from which not less than 25% of such company’s gross income during its last fiscal year was derived) together with an additional business or additional businesses other than investing, reinvesting, owning, holding or trading in securities.
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federal income tax to the extent we distribute 100% of our REIT taxable income (which is generally our taxable income, computed without regard to the dividends paid deduction, any net income from prohibited transactions, and any net income from foreclosure property) to stockholders within the timeframe permitted under the Code and provided that we comply with certain income, asset ownership and other tests applicable to REITs.
−Removed: We believe that we currently meet all of the REIT requirements and intend to continue to qualify as a REIT under the provisions of the Code.
+Added: We believe that we currently meet all of the REIT requirements and intend to continue to
+Added: qualify as a REIT under the provisions of the Code.
Many of the REIT requirements, however, are highly technical and complex.
The determination of whether we are a REIT requires an analysis of various factual matters and circumstances, some of which may not be totally within our control and some of which involve interpretation.
−Removed: For example, if we are to qualify as a REIT, annually at least 75% of our gross income must come from, among other sources, interest on obligations secured by mortgages on real property or interests in real property, gain from the disposition of real property, including mortgages or interests in real property (other than sales or dispositions of real property, including mortgages on real property, or securities
−Removed: that are treated as mortgages on real property, that we hold primarily for sale to customers in the ordinary course of a trade or business (i.e., prohibited transactions)), dividends or other distributions on, and gains from the disposition of shares in other REITs, commitment fees received for agreements to make real estate loans and certain temporary investment income.
+Added: For example, if we are to qualify as a REIT, annually at least 75% of our gross income must come from, among other sources, interest on obligations secured by mortgages on real property or interests in real property, gain from the disposition of real property, including mortgages or interests in real property (other than sales or dispositions of real property, including mortgages on real property, or securities that are treated as mortgages on real property, that we hold primarily for sale to customers in the ordinary course of a trade or business (i.e., prohibited transactions)), dividends or other distributions on, and gains from the disposition of shares in other REITs, commitment fees received for agreements to make real estate loans and certain temporary investment income.
In addition, the composition of our assets must meet certain requirements at the close of each quarter.
25 unchanged sentences
Also, our ability, or the ability of our subsidiaries, to deduct interest may be limited under Section 163(j) of the Code.
−Removed: To the extent that we generate such non-cash taxable income or have limitations on our deductions in a taxable year, we may have to borrow funds on unfavorable terms, sell investments at disadvantageous prices, distribute amounts that would otherwise be invested in future acquisitions or make a taxable distribution of our stock to make distributions sufficient to maintain our qualification as a REIT or avoid corporate income tax in a particular year.
+Added: To the extent that we generate such non-cash taxable income or have limitations on our deductions in a taxable year, we may have to borrow funds on unfavorable terms, sell investments at
+Added: disadvantageous prices, distribute amounts that would otherwise be invested in future acquisitions or make a taxable distribution of our stock to make distributions sufficient to maintain our qualification as a REIT or avoid corporate income tax in a particular year.
These alternatives could increase our costs or reduce our stockholders’ equity.
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This Credit Reserve is generally not accreted into income for financial statement reporting purposes.
−Removed: For tax purposes, however, we are not permitted to anticipate,
−Removed: or establish a reserve for, credit losses prior to their occurrence.
+Added: For tax purposes, however, we are not permitted to anticipate, or establish a reserve for, credit losses prior to their occurrence.
As a result, discount on securities acquired in the primary or secondary market is included in the determination of taxable income and is not impacted by losses until such losses are incurred.
27 unchanged sentences
In order to maintain our qualification as a REIT, we must comply with a number of requirements under U.S.
−Removed: federal tax law, including that we distribute at least 90% of our REIT taxable income within the timeframe permitted under the Code, which is calculated generally before the dividends paid deduction and excluding net capital gain.
+Added: federal tax law, including that we distribute at least 90% of our REIT taxable income within the timeframe permitted under the Code,
+Added: which is calculated generally before the dividends paid deduction and excluding net capital gain.
Dividends will be declared and paid at the discretion of our Board and will depend on our REIT taxable earnings, our financial results and overall condition, maintenance of our REIT qualification and such other factors as our Board may deem relevant from time to time.
−Removed: We have not established a minimum dividend payment level for our common stock and our ability to pay dividends may be
−Removed: negatively impacted by adverse changes in our operating results.
+Added: We have not established a minimum dividend payment level for our common stock and our ability to pay dividends may be negatively impacted by adverse changes in our operating results.
Therefore, our dividend payment level may fluctuate significantly, and, under some circumstances, we may not pay dividends at all.
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federal income tax purposes, which we are required to include in our taxable income either over time or as principal payments are received, as applicable.
−Removed: If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions.
+Added: we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions.
Some of the debt instruments that we acquire may have been issued with original issue discount.
−Removed: We will be required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future
−Removed: projected payments due on such debt instruments will be made.
+Added: We will be required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such debt instruments will be made.
If such debt instruments turn out not to be fully collectible, an offsetting loss deduction will become available only in the later year that uncollectability is provable.
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With respect to the REIT 75% asset test, Revenue Procedure 2014-51 provides a safe harbor under which the IRS will not challenge a REIT’s treatment of a loan as being a real estate asset in an amount equal to the lesser of (1) the greater of (a) the current value of the real property securing the loan or (b) the fair market value of the real property securing the loan determined as of the date the REIT committed to acquire the loan or (2) the fair market value of the loan on the date of the relevant quarterly REIT asset testing date.
−Removed: This safe harbor, if it applied to us, would help us comply with the REIT asset tests following the acquisition of distressed debt if the value of the real property securing the loan were to subsequently decline.
+Added: This safe harbor, if it applied to us, would help us comply with the REIT asset tests following the acquisition of distressed debt if the value of the real property
+Added: securing the loan were to subsequently decline.
If we did not meet one or more of the REIT asset tests, then we could potentially either lose our REIT status or be required to pay a tax penalty to the IRS.
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Such changes could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us.
−Removed: In addition, several proposals have been made that would make substantial changes to the federal income tax laws generally.
−Removed: We cannot predict whether any of these proposed changes will become law.
We cannot predict the long-term effect of any future law changes on REITs and their stockholders.
5 unchanged sentences
Generally, shares owned by affiliated owners will be aggregated for purposes of the ownership limit.
−Removed: Any transfer of shares of our capital stock or other event that, if effective, would (a) violate the ownership limit, (b) cause us to become “closely held” under Section 856(h) of the Code or (c) would cause our equity stock to be owned by fewer than 100
−Removed: persons, will be void as to that number of shares of capital stock in excess of the ownership limit, causing us to be “closely held” or which would otherwise be owned by the transferee, respectively, and the intended transferee will acquire no rights in such shares.
+Added: Any transfer of shares of our capital stock or other event that, if effective, would (a) violate the ownership limit, (b) cause us to
+Added: become “closely held” under Section 856(h) of the Code or (c) would cause our equity stock to be owned by fewer than 100 persons, will be void as to that number of shares of capital stock in excess of the ownership limit, causing us to be “closely held” or which would otherwise be owned by the transferee, respectively, and the intended transferee will acquire no rights in such shares.
Shares issued or transferred that would cause any stockholder to own more than the ownership limit or cause us to become “closely held” under Section 856(h) of the Code will automatically be converted into an equal number of shares of excess stock.
15 unchanged sentences
Upon liquidation, holders of our debt securities and shares of preferred stock, if any, and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock.
−Removed: Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both.
+Added: Additional equity
+Added: offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both.
Preferred stock could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of our common stock.
11 unchanged sentences
In addition, future issuances of our common stock may be dilutive to existing stockholders.
−Removed: The declaration, amount and payment of future cash dividends on shares of our common stock are subject to uncertainty due to disruption in the mortgage, housing or related sectors, such as market conditions related to COVID-19.
+Added: The declaration, amount and payment of future cash dividends on shares of our common stock are subject to uncertainty due to disruption in the mortgage, housing or related sectors.
The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our Board.
From time to time, our Board may adjust our quarterly cash dividend on our shares of our common stock from prior quarters.
−Removed: The payment of dividends may be more uncertain during severe market disruption in the mortgage, housing or related sectors, such as those experienced as a result of the COVID-19 pandemic.
+Added: The payment of dividends may be more uncertain during severe market disruption in the mortgage, housing or related sectors.
Other Business Risks
+Added: The COVID-19 pandemic has adversely affected our business, financial condition, liquidity and results of operations, and may continue to do so.
+Added: The COVID-19 pandemic has negatively affected our business, and it may continue to do so.
+Added: The early 2020 outbreak caused significant volatility and disruption in the financial markets both in the United States and globally, and periods of market volatility and disruption have continued to occur at various times since the initial outbreak, in particular when new variants of the virus that causes COVID-19 appear and result in an increase in the number of new cases, hospitalizations or deaths.
+Added: If COVID-19, or another highly infectious or contagious disease, continues to spread or otherwise remain at high levels, or the response (including vaccines) to contain it is unsuccessful, we could continue to, or once again begin to, experience material adverse effects on our business, financial condition, liquidity, and results of operations.
+Added: The extent of such effects will depend on future developments which are highly uncertain and cannot be predicted, including the geographic spread of COVID-19, or another highly infectious or contagious disease, the overall severity of the disease, the development and characteristics of variants (including variants not yet identified) of the disease, the duration of the outbreak, the effectiveness and acceptance of vaccines, the measures taken by various governmental authorities in response to the outbreak (such as quarantines and travel restrictions) and the possible impacts on the global economy.
+Added: The continued spread of COVID-19 and health related concerns could also negatively impact the availability of key personnel who are necessary to conduct our business.
+Added: In addition, governments have adopted policies, laws and plans intended to address the COVID-19 pandemic and adverse developments in the credit, financial and mortgage markets.
+Added: We cannot predict the ultimate effect that any policies, laws and plans adopted in response to the COVID-19 pandemic will have on us.
We are dependent on our executive officers and other key personnel for our success, the loss of any of whom may materially adversely affect our business.
10 unchanged sentences
Furthermore, government or regulatory action and competition for investment securities of the types and classes which we acquire may lead to the price of such assets increasing, which may further limit our ability to generate desired returns.
−Removed: We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial
−Removed: condition and results of operations.
+Added: We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.
Also, as a result of this competition, desirable investments may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives.
1 unchanged sentence
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.