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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-23 · 299 added, 188 removed, 443 unchanged (52% of the section changed)

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

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

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

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

Through our wholly-owned subsidiary, Lima One, a leading nationwide originator and servicer of business purpose loans (or BPLs) that we acquired on July 1, 2021, we also originate and service business purpose loans for real estate investors.

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

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We are an internally-managed real estate investment trust.

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

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

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

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

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

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

On April 4, 2022, we effected a one-for-four reverse stock split of its issued and outstanding shares of common stock (the “Reverse Stock Split”).

Accordingly, all share and per share data included in the consolidated financial statements and applicable disclosures have been adjusted retroactively to reflect the impact of the Reverse Stock Split.

For all periods presented, all share and per share data have been adjusted on a retroactive basis to reflect the effect of the Reverse Stock Split.

At December 31, 2022, we had total assets of $9.1 billion, of which $7.5 billion, or 83%, represented residential whole loans.

Our residential whole loans include primarily:

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

In addition, at December 31, 2022, we had $333.4 million in investments in Securities, at fair value, including Agency MBS, MSR-related assets, CRT securities and Non-Agency MBS.

Our remaining investment-related assets, which represent approximately 3% of our total assets at December 31, 2022, were primarily comprised of REO, capital contributions made to loan origination partners, other interest-earning assets, and loan-related receivables.

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

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

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

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

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

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

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

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

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

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

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

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

(ii) the value of certain of our residential mortgage assets and securitized debt to decline;

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

(iv) prepayments on our assets to decline, thereby slowing the amortization of purchase premiums and the accretion of our purchase discounts, and slowing our ability to redeploy capital to generally higher yielding investments;

and (v) the value of our derivative hedging instruments, if any, and, correspondingly, our stockholders’ equity to increase.

and (v) the value of our derivative hedging

instruments, if any, to increase.

Conversely, decreases in interest rates, in general, may over time cause:

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

(ii) the value

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

(ii) the value of certain of our residential mortgage assets and securitized debt, to increase;

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

(iv) prepayments on our assets to increase, thereby accelerating the amortization of purchase premiums and the accretion of our purchase discounts, and accelerating the redeployment of our capital to generally lower yielding investments;

and (v) the value of our derivative hedging instruments, if any, and, correspondingly, our stockholders’ equity to decrease.

and (v) the value of our derivative hedging instruments, if any, to decrease.

Further, changes in credit spreads will also impact the valuation of our residential whole loans and securitized debt, which could result in volatility in GAAP earnings.

In addition, our borrowing costs and credit lines are further affected by the type of collateral we pledge and general conditions in the credit market.

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

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

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

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

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

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

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

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

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

Our residential mortgage investments have longer-term contractual maturities than our non-securitization related financing liabilities, and the interest rates we pay on our non-securitization related financings will typically change at a faster pace than the interest rates we earn on our investments.

In order to reduce this interest rate risk exposure, we may enter into derivative instruments, which currently include Swaps.

Recent Market Conditions and Our Strategy

2022 was extremely challenging for fixed income investors, and exceptionally so for mortgage investors, including us, and was characterized by higher interest rates across the yield curve as well as wider mortgage and credit spreads.

We addressed these challenges by prioritizing liquidity and active portfolio management, including increasing our use of interest rate swaps to hedge exposure to higher interest rates and using loan securitizations to generate securitized debt to replace floating rate recourse mark-to-market financing with fixed rate non-recourse, non-mark-to-market financing.

These securitizations provide longer term, non-recourse, non-mark-to-market financing.

While continued interest rate volatility and generally wider spreads on securitized mortgage assets pressured mortgage loan pricing, we believe that our active portfolio and risk management measures partially mitigated the impact of the interest rate environment.

Subsequent to year-end, we have completed an additional three securitizations thus far in 2023 totaling $668.2 million, further reducing our use of shorter-term, recourse, mark-to-market financing.

2022 Portfolio Activity and impact on financial results

At December 31, 2022, our residential mortgage asset portfolio, which includes residential whole loans and REO, and Securities, at fair value, was approximately $8.0 billion compared to $8.3 billion at December 31, 2021.

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

(2) Includes draws on previously originated Rehabilitation loans.

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

(2) Includes draws on previously originated Transitional loans.

(3) Primarily includes the impact of transactions that resulted in the sale of previously non-securitized Agency Eligible Investor loans and deconsolidation of Agency Eligible Investor loan securitizations, changes in fair value and changes in the allowance for credit losses.

At December 31, 2022, our total recorded investment in residential whole loans and REO was $7.6 billion, or 95.8% of our residential mortgage asset portfolio.

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

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

Of this amount, $6.3 billion are Purchased Performing Loans, $448.9 million are Purchased Credit Deteriorated Loans and $796.1 million are Purchased Non-performing Loans.

Loan acquisition activity of $3.1 billion during 2022 include d $2.0 billion of b usiness purpose loans (including draws on Transitional loans) and $1.1 billion of Non-QM loans, which were offset by portfolio run-off and asset valuation declines .

In addition, near the end of the fourth quarter, we reached an agreement to sell to a third party the majority of our holdings of Agency Eligible Investor loans that were not previously securitized and transferred to a different third party certain contractual redemption rights in connection with previously securitized Agency Eligible Investor loans, resulting in the de-consolidation of the securitization trusts that hold these loans.

As a result of these transactions, our portfolio of Agency Eligible Investor loans decreased by approximately $780 million.

Further, the debt issued to third parties by these securitizations is no longer reported on our balance sheet at December 31, 2022.

During 2022, we recognized approximately $441.2 million of residential whole loan interest income on our consolidated statements of operations, representing an effective yield of 5.19%, with Purchased Performing Loans generating an effective yield of 4.56%, Purchased Credit Deteriorated Loans generating an effective yield of 6.69% and Purchased Non-performing Loans generating an effective yield of 10.03%.

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

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

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

Included in earnings in Other income, net are net losses on these loans of $866.8 million for the year ended December 31, 2022.

At December 31, 2022 and 2021, we had REO with an aggregate carrying value of $130.6 million and $156.2 million, respectively, which is included in Other assets on our consolidated balance sheets.

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

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

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

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

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

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

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

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

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

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

Consequently, forbearance and repayment plans are offered less frequently.

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

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

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

At December 31, 2022, we held $333.4 million of Securities, at fair value, including $131.7 million of Agency MBS, $97.9 million of MSR-related assets, $79.2 million of CRT securities and $24.6 million of Non-Agency MBS securities recorded in connection with the deconsolidation of Agency Eligible Investor loan securitizations.

The net yield on our Securities, at fair value was 14.67% for 2022, compared to 22.95% for 2021.

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

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

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

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

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

The decrease in the net yield on our Securities, at fair value portfolio primarily reflects higher accretion income recognized in the prior year period due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020 and the redemption of a Non-Agency MBS that had been previously purchased at a discount.

For the year ended December 31, 2022, we recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $2.6 million.

The reversal of provision recorded in 2022 primarily reflects portfolio run-off, partially

offset by adjustments to lower future estimates of prepayment speeds given recent and expected future increases in interest rates.

The total allowance for credit losses recorded on residential whole loans held at carrying value at December 31, 2022 was $35.3 million.

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

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

In addition, during the year we recorded an impairment charge in earnings of $28.6 million against the carrying value of our investment in one loan origination partner, bringing the net carrying value of this investment to zero.

These investments, which were legally structured as preferred equity interests, are nonetheless accounted for by the Company as debt instruments, based on an evaluation of the Company’s rights and obligations under the terms of the agreements.

During 2022, we completed nine securitizations with unpaid principal balance (or UPB) of loans sold of $2.7 billion.

This included $1.5 billion of Non-QM loans, $707.3 million of Single-family rental loans, $336.1 million of re-performing loans and $251.5 million of Transitional loans.

These securitizations provided longer term, non-recourse, non-mark-to-market financing.

Subsequent to the fourth quarter, we have completed three additional securitizations totaling $668.2 million, further reducing our use of shorter-term recourse, mark-to-market financing.

During 2022, interest rates increased and credit spreads widened further, impacting the values of the majority of our residential whole loan portfolios and associated financing liabilities and hedges, which resulted in significant mark-to-market losses in our GAAP financial results.

We continue to closely follow the actions of the Federal Reserve and the pace at which it has and is expected to further increase interest rates and the impact such rate increases would be expected to have on levels of inflation, the overall economic environment and our business.

Our GAAP book value per common share was $14.87 as of December 31, 2022.

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

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

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

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

Completion of Lima One Acquisition:

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

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

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

Book value per common share decreased from $19.12 as of December 31, 2021.

Economic book value per common share, a non-GAAP financial measure of our financial position that adjusts GAAP book value by the amount of unrealized mark-to-market gains or losses on our residential whole loans and securitized debt held at carrying value, was $15.55 as of December 31, 2022, a decrease from $20.58 as of December 31, 2021.

Decreases in GAAP and Economic book value during 2022 primarily reflect declines in the fair value of our Residential whole loan portfolios due to increased interest rates and widening spreads, partially offset by increases in the value of interest rate swaps and securitized debt.

For additional information regarding the calculation of Economic book value per share, including a reconciliation to GAAP book value per share, refer to “Reconciliation of GAAP and Non-GAAP Financial Measures” below.

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

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Fair Value/Carrying Value $ 6,274 $ 449 $ 796 $ 333 $ 131 $ 675 $ 8,658

Receivable/(Payable) for Unsettled Transactions 276 — — (132) — — 144

Financing Agreements with Non-mark-to-market Collateral Provisions (862) (37) (96) — (9) — (1,004)

Financing Agreements with Mark-to-market Collateral Provisions (1,893) (89) (113) (112) (16) — (2,223)

Less Securitized Debt (2,103) (195) (331) — (21) — (2,650)

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

Securitized Debt (2,758) (249) (334) — (17) — (3,358)

Convertible Senior Notes — — — — — (228) (228)

Net Equity Allocated $ 1,037 $ 74 $ 253 $ 89 $ 89 $ 447 $ 1,989

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5.3 x 5.1 x 2.1 x 2.7 x 0.5 x 3.5 x

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

(1) Includes $3.4 billion of Non-QM loans, $1.4 billion of Transitional loans, $1.4 billion of Single-family rental loans, $82.9 million of Seasoned performing loans, and $51.1 million of Agency eligible investor loans.

At December 31, 2022, the total fair value of these loans is estimated to be approximately $6.2 billion.

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(3) Includes $334.2 million of cash and cash equivalents, $159.9 million of restricted cash, and $28.3 million of capital contributions made to loan origination partners, as well as other assets and other liabilities.

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

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

Residential Whole Loans

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Total $ 5,570,516 $ 469,308 $ 793,329

(1) Includes loans on which borrowers have defaulted and are not making payments of principal and/or interest as of December 31, 2021.

(1) Excludes an allowance for credit losses of $13.9 million at December 31, 2022.

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Weighted average yield (1)

9.96 % 10.52 %

Weighted average time to maturity 19.0 Years 18.5 years

Non-Agency MBS

Face/Par 29,858 $ —

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Weighted average yield (2)

Weighted average time to maturity N/A 28.7 years

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

Weighted average time to maturity 28.8 Years —

Face/Par $ 131,165 $ —

Fair Value 131,700 —

Amortized Cost 132,025 —

Weighted average yield (2)

Weighted average time to maturity 30.0 Years —

(1) Weighted average yield is annualized interest income divided by average amortized cost.

(2) These securities were acquired at the end of the reporting period and, therefore, no interest income was recorded with respect to these securities in 2022.

Tax Considerations

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We estimate that for 2022, our REIT taxable income was approximately $28.3 million.

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

Key differences between GAAP net income and REIT Taxable Income

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

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

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

We estimate that for 2022, our net TRS taxable loss will be $171.5 million.

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

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

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

A TRS may carry forward its net taxable losses indefinitely as net operating losses to offset up to 80% of its taxable income in future tax years, but REIT taxable income generally does not include the net taxable loss of a TRS unless the TRS liquidates for tax purposes.

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

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In this section, we discuss the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021.

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

For a discussion related to our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Year Ended December 31, 2021, which was filed with the SEC on February 23, 2022, and is available on the SEC’s website at www.sec.gov and on our website at www.mfafinancial.com.

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

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

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

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

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

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

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

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

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

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

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

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

The following table summarizes the changes in our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021.

(In Thousands) December 31, 2022 December 31, 2021 YoY Change

Interest Income:

Residential whole loans $ 441,223 $ 303,468 $ 137,755

Securities, at fair value 28,921 56,690 (27,769)

Other interest-earning assets 7,437 1,800 5,637

Cash and cash equivalent investments 4,838 344 4,494

Interest Income $ 482,419 $ 362,302 $ 120,117

Interest Expense:

Asset-backed and other collateralized financing arrangements $ 243,083 $ 104,597 $ 138,486

Other interest expense 15,760 15,788 (28)

Interest Expense $ 258,843 $ 120,385 $ 138,458

Net Interest Income $ 223,576 $ 241,917 $ (18,341)

Reversal of Provision/(Provision) for Credit Losses on Residential Whole Loans $ 2,646 $ 44,863 $ (42,217)

Provision for Credit Losses on Other Assets (28,579) — (28,579)

Net Interest Income after (Provision)/Reversal of Provision for Credit Losses $ 197,643 $ 286,780 $ (89,137)

Other (Loss)/Income, net:

Net (loss)/gain on residential whole loans measured at fair value through earnings $ (866,762) $ 16,243 $ (883,005)

Impairment and other net (loss)/gain on securities and other portfolio investments (25,067) 74,496 (99,563)

Net gain on real estate owned 25,379 22,838 2,541

Net gain/(loss) on derivatives used for risk management purposes 255,179 1,426 253,753

Net gain/(loss) on securitized debt measured at fair value through earnings 290,639 15,027 275,612

Lima One - origination, servicing and other fee income 46,745 22,600 24,145

Other, net $ 9,297 $ 12,473 $ (3,176)

Other (Loss)/Income, net $ (264,590) $ 165,103 $ (429,693)

Operating and Other Expense:

Compensation and benefits $ 76,728 $ 53,817 $ 22,911

Other general and administrative expense 35,812 31,729 4,083

Loan servicing, financing and other related costs 42,894 30,867 12,027

Amortization of intangible assets 9,200 6,600 2,600

Operating and Other Expense $ 164,634 $ 123,013 $ 41,621

Net (Loss)/Income $ (231,581) $ 328,870 $ (560,451)

Less Preferred Stock Dividend Requirement $ 32,875 $ 32,875 $ —

Net (Loss)/Income Available to Common Stock and Participating Securities $ (264,456) $ 295,995 $ (560,451)

Basic (Loss)/Earnings per Common Share $ (2.57) $ 2.66 $ (5.23)

Diluted (Loss)/Earnings per Common Share $ (2.57) $ 2.63 $ (5.20)

For 2022, we had a net loss available to our common stock and participating securities of ($264.5) million, or ($2.57) per basic and diluted common share, compared to net income available to common stock and participating securities for 2021 of $296.0 million, or $2.66 per basic common share and $2.63 per diluted common share.

This decrease in net income available to common stock and participating securities primarily reflects lower Other income, which declined by $429.7 million to a net loss of $264.6 million for the current year period, compared to net income of $165.1 million in the prior year period.

The decrease was primarily driven by mark-to-market losses in the current year period on our residential whole loans that are measured at fair value through earnings, partially offset by net gains on securitized debt measured at fair value through earnings as well as on derivatives used for risk management purposes.

These net losses on portfolio investments were also partially offset by higher

Origination, Servicing and Other Fee income at Lima One and net REO related gains.

In addition, Other income also includes losses of $25.1 million, primarily related to mark-to-market adjustments on an equity investment in a loan origination partner, while the prior year period includes $38.9 million of gains recorded in connection with Lima One purchase accounting and a gain of $34.0 million from the reversal of prior period impairments.

The prior year period also included a $42.2 million larger net reversal of the Provision for Credit Losses on Residential Whole Loans held at carrying value.

The reversals recorded in both the current and prior periods primarily reflect run-off of loans held at carrying value and adjustments to certain macro-economic and loan prepayment speed assumptions used in our credit loss forecasts.

However, the current period reversal is lower than the prior year period as the impact of lower loan balances was partially offset by adjustments to lower future estimates of prepayment speeds given recent and expected future increases in market interest rates.

The larger prior year reversal reflects a greater impact of adjustments to macro-economic assumptions consistent with revised economic forecasts as the U.S economy continued to recover from the impact of the COVID-19 pandemic.

In addition, in the current year period we recorded a Provision for Credit Losses on Other Assets of $28.6 million, reflecting an impairment charge against the carrying value of our investment in one loan origination partner, bringing the net carrying value of this investment to zero.

Finally, Operating and other expenses were $41.6 million higher during the year ended December 31, 2022, compared to the prior year period, as they primarily reflect operating expenses of Lima One, higher securitization related expenses as well as higher amortization of Intangible Assets associated with the Lima One acquisition.

We completed the acquisition of Lima One on July 1, 2021, and accordingly began consolidating Lima One’s financial results beginning on that date.

Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.

Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid.

Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense), the level of loan delinquencies, which may result in changes in the amount of non-accrual loans, and prepayment speeds on our investments.

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

The changes in average interest-earning assets and average interest-bearing liabilities and their related yields and costs are discussed in greater detail below under “Interest Income” and “Interest Expense.”

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

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

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

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

but were outstanding during all of 2020.

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

For 2022, our net interest spread and margin (including the impact of swaps) were 1.74% and 2.52%, respectively, compared to a net interest spread and margin (including the impact of swaps) of 2.79% and 3.57%, respectively, for 2021.

Our net interest income decreased by $18.3 million, or 7.6%, to $223.6 million from $241.9 million for 2021.

For 2022, net interest income includes lower net interest income for our Securities, at fair value portfolio of approximately $29.4 million compared to 2021, primarily due to higher accretion income recognized in the prior year period due to the impact of the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020 and the redemption of a Non-Agency MBS that had been previously purchased at a discount and the lower average amount invested in these assets.

Net interest income also includes higher net interest income from our residential whole loan portfolio of approximately $1.3 million compared to 2021, primarily due to higher amounts invested in these assets partially offset by an increase in our average collateralized financing agreement borrowings and lower yields earned on these assets.

Further, we earned an additional $10.1 million from our investments in other interest earning assets and cash during 2022 as compared to the prior year period.

Analysis of Net Interest Income

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Total interest-earning assets 9,274,968 482,419 5.20 6,750,262 362,302 5.37

Total non-interest-earning assets 669,455 657,551

Total assets $ 7,419,717 $ 9,119,996

Liabilities and stockholders’ equity:

Interest-bearing liabilities:

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Senior Notes — — — 1,096 120 8.31

1,096 120 8.31 96,894 11,138 8.31

Senior secured credit agreement — — — 147,643 16,241 11.00

Total interest-bearing liabilities 7,194,981 258,843 3.60 4,694,841 120,385 2.56

Total non-interest-bearing liabilities 169,399 127,349

Total liabilities 4,864,240 6,389,059

Stockholders’ equity 2,555,477 2,730,937

Total liabilities and stockholders’ equity $ 7,419,717 $ 9,119,996

Net interest income/net interest rate spread (7)

223,576 1.60 241,917 2.81

Impact of net swap carry (8)

10,042 0.14 (669) (0.02)

Net interest rate spread (including the impact of Swaps) $ 233,618 1.74 % $ 241,248 2.79 %

Net interest-earning assets/net interest margin (9)

$ 2,079,987 2.52 % $ 2,055,421 3.57 %

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

(1) Yields presented throughout this Annual Report on Form 10-K are calculated using average amortized cost data for residential whole loans and securities, which excludes unrealized gains and losses.

For GAAP reporting purposes, purchases and sales are reported on the trade date.

1 unchanged sentence

(2) The net yield of 14.67% includes $7.8 million of accretion income recognized in 2022 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020.

Excluding this accretion, the yield reported would have been 10.73%.

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

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

2 unchanged sentences

(5) Collateralized financing agreements include the following:

Secured term notes, Non-mark-to-market term-asset based financing, and repurchase agreements.

mark-to-market asset based financing and non-mark-to-market asset based financing.

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

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

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

(7) Interest expense for 2020 includes a non-cash charge of $3.1 million recorded in the connection with the redemption of these notes that was completed early in 2021.

The yield presented for the period excludes the impact of that charge.

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

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

(8) Reflects the impact of positive or negative swap carry.

Positive swap carry results when income from the receive leg of a swap is greater than the expense on the pay leg.

Negative swap carry results when income from the receive leg is less than the expense on the pay leg.

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

Rate/Volume Analysis

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Other interest-earning assets 4,921 716 5,637

Total net change in income from interest-earning assets $ (162,879) $ 92,349 $ (70,530)

Total net change in income of interest-earning assets $ 136,688 $ (16,571) $ 120,117

Interest-bearing liabilities:

2 unchanged sentences

REO financing agreements 185 366 551

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

Securitized debt 40,088 26,579 66,667

Convertible Senior Notes and Senior Notes (28) — (28)

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

Total net change in expense of interest-bearing liabilities $ 71,863 $ 66,595 $ 138,458

13 unchanged sentences

March 31, 2021 2.31 3.29

(1) Reflects the difference between the yield on average interest-earning assets and average cost of funds.

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

(1) Reflects the difference between the yield on average interest-earning assets and average cost of funds (including net swap expense).

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

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

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Net Interest Spread 1.34 % 1.15 % 0.92 % 1.44 % 1.88 % 2.42 % 2.36 % 1.95 %

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

Purchased Credit Deteriorated Loans

4 unchanged sentences

Net Interest Spread 4.46 % 3.77 % 3.68 % 3.91 % 4.83 % 4.90 % 4.78 % 2.14 %

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

Purchased Non-Performing Loans

4 unchanged sentences

Net Interest Spread 8.14 % 6.98 % 6.06 % 6.73 % 7.30 % 6.38 % 5.27 % 3.72 %

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

Total Residential Whole Loans

4 unchanged sentences

Net Interest Spread 2.06 % 1.81 % 1.57 % 2.15 % 2.80 % 3.32 % 3.23 % 2.33 %

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

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

Excludes servicing costs.

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

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

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

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

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

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

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

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

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

Cost of funding shown in the table above for the quarterly periods ended December 31, 2022, September 30, 2022, June 30, 2022, March 31, 2022 and December 31, 2021 include the impact of the net carry (the difference between swap interest income received and swap interest expense paid) on our Swaps.

While we have not elected hedge accounting treatment for Swaps, and accordingly, net carry is not presented in interest expense in our consolidated statement of operations, we believe it is appropriate to allocate net carry to the cost of funding to reflect the economic impact of our Swaps on the funding costs shown in the table above.

For the quarter ended December 31, 2022, this decreased the overall funding cost by 89 basis points for our Residential whole loans, 87 basis points for our Purchased Performing Loans, 141 basis points for our Purchased Credit Deteriorated Loans, and 76 basis points for our Purchased Non-Performing Loans.

For the quarter ended September 30, 2022, this decreased the overall funding cost by 20 basis points for our Residential whole loans, 19 basis points for our Purchased Performing Loans, 43 basis points for our Purchased Credit Deteriorated Loans, and 24 basis points for our Purchased Non-Performing Loans.

For the quarter ended June 30, 2022, this increased the overall funding cost by 25 basis points for our Residential whole loans, 23 basis points for our Purchased Performing Loans, 43 basis points for our Purchased Credit Deteriorated Loans, and 29 basis points for our Purchased Non-Performing Loans.

For the quarter ended March 31, 2022, this increased the overall funding cost by 35 basis points for our Residential whole loans, 33 basis points for our Purchased Performing Loans, 56 basis points for our Purchased Credit Deteriorated Loans, and 39 basis points for our Purchased Non-Performing Loans.

For the quarter ended December 31, 2021, this increased the overall funding cost by 5 basis points for our Residential whole loans, 5 basis points for our Purchased Performing Loans, 9 basis points for our Purchased Credit Deteriorated Loans, and 2 basis points for our Purchased Non-Performing Loans.

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

Securities, at fair value

Quarter Ended Net

Quarter Ended Net Yield (1)(2)

December 31, 2022 30.33 % 5.47 % 24.86 %

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

(2) For the quarter ended December 31, 2022, the net yield of 30.33% includes $7.8 million of accretion income recognized in 2022 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020.

Excluding this accretion, the yield reported would have been 11.87%.

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

7 unchanged sentences

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

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

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

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

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

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

Interest Income

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

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

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

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

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

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

Interest income on our residential whole loans increased by $137.8 million, or 45.4%, for 2022, to $441.2 million compared to $303.5 million for 2021.

This increase primarily reflects a $2.7 billion increase in the average balance of this portfolio to $8.5 billion for 2022 from $5.8 billion for 2021, partially offset by an decrease in the yield to 5.19% for 2022 from 5.26% for 2021.

Interest income on our securities portfolio decreased $27.8 million to $28.9 million for 2022 from $56.7 million for 2021.

This decrease primarily reflects a decrease in the net yield to 14.67% for 2022, compared to 22.95% for 2021 and a decrease in the average amortized cost of the portfolio of $49.8 million.

The decrease in the net yield on our securities portfolio primarily reflects higher accretion income recognized in 2021 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020;

and the redemption of a Non-Agency MBS that had been previously purchased at a discount.

Interest Expense

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

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

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

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

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

Our interest expense for 2022 increased by $138.5 million, or 115.0%, to $258.8 million, from $120.4 million for 2021.

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

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

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

For 2022, we recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $2.6 million compared to a reversal of provision of $44.9 million for 2021.

The reversals recorded in both the current and prior

periods primarily reflect run-off of loans held at carrying value and adjustments to certain macro-economic and loan prepayment speed assumptions used in our credit loss forecasts.

The current period reversal reflects lower loan balances, partially offset by adjustments to lower future estimates of prepayment speeds given recent and expected future increases in market interest rates.

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

Other Income, net

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

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

Provision for Credit Losses on Other Assets

For 2022, we recorded a provision for credit losses on Other Assets of $28.6 million reflecting an impairment charge against the carrying value of our investment in one loan origination partner, bringing the net carrying value of this investment to zero.

Other (Loss)/Income, net

For 2022, Other Loss, net was $264.6 million compared to Other Income, net of $165.1 million for 2021.

The components of Other (Loss)/Income, net for 2022 and 2021 are summarized in the table below:

For the Year Ended December 31,

(In Thousands) 2022 2021

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

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

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

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

Net (loss)/gain on residential whole loans measured at fair value through earnings $ (866,762) $ 16,243

Impairment and other net (loss)/gain on securities and other portfolio investments (25,067) 74,496

Net gain on real estate owned 25,379 22,838

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

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

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

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

Other 23,963 (28,544)

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

Net gain/(loss) on derivatives used for risk management purposes 255,179 1,426

Net gain/(loss) on securitized debt measured at fair value through earnings 290,639 15,027

Lima One - origination, servicing and other fee income 46,745 22,600

Other, net 9,297 12,473

Other (Loss)/Income, net $ (264,590) $ 165,103

Operating and Other Expense

During 2022, we had compensation and benefits and other general and administrative expenses of $112.5 million, compared to $85.5 million for 2021.

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

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

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

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

Compensation and benefits expense increased $22.9 million to $76.7 million for 2022, compared to $53.8 million for 2021 primarily reflecting the impact of including Lima One compensation expense in our financial results, higher salary expense and an increase in long-term incentive compensation partially offset by a reduction in annual bonus compensation for the current period.

Our other general and administrative expenses increased by $4.1 million to $35.8 million for 2022 compared to $31.7 million for 2021, primarily reflecting the impact of including Lima One expenses in our financial results, increased information technology costs, higher professional services costs, and higher office lease costs associated with our corporate headquarters, partially offset by lower costs associated with deferred compensation to Directors in the current year period, which were impacted by changes in our stock price.

The prior period also included higher expense for corporate income taxes related to activity in our taxable REIT subsidiaries and costs associated with terminating certain financing facilities that were replaced with securitization financing, which did not re-occur this period.

Operating and Other Expense during 2022 also includes $42.9 million of loan servicing and other related operating expenses related to our residential whole loan activities.

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

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

These expenses increased compared to 2021 by approximately $12.0 million, or 39.0%, primarily due to higher expenses recognized related to loan securitization activities and higher diligence and other costs associated with acquiring loans, partially offset by lower servicing fees and non-recoverable advances on our REO and Purchased Credit Deteriorated loans.

In addition, Other expenses for 2022 and 2021 also includes $9.2 million and $6.6 million, respectively, of amortization related to intangible assets recognized as part of the purchase accounting for the Lima One acquisition.

Selected Financial Ratios

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Stockholders’

Equity (2)(3)

Total Average

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Average Assets (4)

Ratio (5) Leverage Multiple (6)

Economic Book Value per Share of Common Stock (8)

Leverage Multiple (5) Recourse Leverage Multiple (6)

December 31, 2022 (0.02) % 1.32 % — 21.59 % 3.5 1.8

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(1) Reflects annualized net income available to common stock and participating securities divided by average total assets.

For the quarters ended December 31, 2022, September 30, 2022, June 30, 2022 and March 31, 2022, the amounts calculated reflect the quarterly net income available to common stock and participating securities divided by average total assets.

(2) Reflects annualized net income divided by average total stockholders’ equity.

(3) For the quarter ended March 31, 2020, the amount calculated reflects the quarterly net income divided by average total stockholders’ equity.

(4) Reflects total average stockholders’ equity divided by total average assets.

For the quarters ended December 31, 2022, September 30, 2022, June 30, 2022 and March 31, 2022, the amounts calculated reflect the quarterly net income divided by average total stockholders’ equity.

(3) Reflects dividends declared per share of common stock divided by earnings per share.

The ratio has not been calculated for periods where earnings per share is negative as the calculations are not meaningful.

(4) Reflects total average stockholders’ equity divided by total average assets.

(5) Represents the sum of our borrowings under financing agreements and payable for unsettled purchases divided by stockholders’ equity.

(7) Reflects total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.

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

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

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

Economic Book Value

(6) Represents the sum of our borrowings under financing agreements (excluding securitized debt) and payable for unsettled purchases divided by stockholders’ equity.

Reconciliation of GAAP and Non-GAAP Financial Measures

Reconciliation of GAAP Net Income to non-GAAP Distributable Earnings

“Distributable earnings” is a non-GAAP financial measure of our operating performance, within the meaning of Regulation G and Item 10(e) of Regulation S-K, as promulgated by the Securities and Exchange Commission.

Distributable earnings is determined by adjusting GAAP net income/(loss) by removing certain unrealized gains and losses, primarily on residential mortgage investments, associated debt, and hedges that are, in each case, accounted for at fair value through earnings, certain realized gains and losses, as well as certain non-cash expenses and securitization-related transaction costs.

Management believes that the adjustments made to GAAP earnings result in the removal of (i) income or expenses that are not reflective of the longer term performance of our investment portfolio, (ii) certain non-cash expenses, and (iii) expense items required to be recognized solely due to the election of the fair value option on certain related residential mortgage assets and associated liabilities.

Distributable earnings is one of the factors that our Board of Directors considers when evaluating distributions to our shareholders.

Accordingly, we believe that the adjustments to compute Distributable earnings specified below provide investors and analysts with additional information to evaluate our financial results.

Distributable earnings should be used in conjunction with results presented in accordance with GAAP.

Distributable earnings does not represent and should not be considered as a substitute for net income or cash flows from operating activities, each as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The following table provides a reconciliation of our GAAP net (loss)/income used in the calculation of basic EPS to our non-GAAP Distributable earnings for the quarterly periods below:

Quarter Ended

(In Thousands, Except Per Share Amounts) December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021

GAAP Net income/(loss) used in the calculation of basic EPS $ (1,647) $ (63,410) $ (108,760) $ (91,266) $ 35,734 $ 123,858 $ 58,290 $ 77,029

Unrealized and realized gains and losses on:

Residential whole loans held at fair value 68,828 291,818 218,181 287,935 42,564 (20,494) (6,226) (32,088)

Securities held at fair value 383 (1,549) 1,459 2,934 364 (494) (1,374) (100)

Interest rate swaps 12,725 (108,917) (31,767) (80,753) (71) — — —

Securitized debt held at fair value (44,988) (100,767) (84,348) (62,855) (6,137) (857) 232 (7,629)

Investments in loan origination partners 8,526 2,031 39,162 780 (23,956) (48,933) — —

Expense items:

Amortization of intangible assets 1,300 1,300 3,300 3,300 3,300 3,300 — —

Equity based compensation 2,480 2,673 3,540 2,645 2,306 2,306 2,744 1,688

Securitization-related transaction costs 1,744 5,014 6,399 3,233 5,178 — — 2

Total adjustments 50,998 91,603 155,926 157,219 23,548 (65,172) (4,624) (38,127)

Distributable earnings $ 49,351 $ 28,193 $ 47,166 $ 65,953 $ 59,282 $ 58,686 $ 53,666 $ 38,902

GAAP (loss)/earnings per basic common share $ (0.02) $ (0.62) $ (1.06) $ (0.86) $ 0.33 $ 1.12 $ 0.53 $ 0.68

Distributable earnings per basic common share $ 0.48 $ 0.28 $ 0.46 $ 0.62 $ 0.54 $ 0.53 $ 0.49 $ 0.34

Weighted average common shares for basic earnings per share 101,800 101,795 102,515 106,568 109,468 110,222 110,383 112,784

Selected Financial Ratios (using Distributable earnings)

The following table presents information regarding certain of our financial ratios at or for the dates presented:

At or for the Quarter Ended Return on

Average Total

Stockholders’

Dividend Payout

December 31, 2022 2.10 % 11.34 % 0.73

September 30, 2022 1.19 6.79 1.57

June 30, 2022 1.99 9.60 0.96

March 31, 2022 2.82 11.90 0.71

December 31, 2021 2.76 10.46 0.81

September 30, 2021 3.13 10.34 0.75

June 30, 2021 3.17 9.80 0.82

March 31, 2021 2.29 7.46 0.88

(1) Reflects annualized Distributable earnings divided by average total assets.

(2) Reflects annualized Distributable earnings before preferred dividends divided by average total stockholders’ equity.

(3) Reflects dividends declared per share of common stock divided by Distributable earnings per share.

Segment Reporting (using Distributable earnings)

The following tables present our non-GAAP Distributable earnings by segment for the periods below:

(Dollars in Thousands) Mortgage-Related Assets Lima One Corporate Total

Year ended December 31, 2022

GAAP Net loss used in the calculation of basic EPS $ (88,913) $ (9,665) $ (166,505) $ (265,083)

Unrealized and realized gains and losses on:

Residential whole loans held at fair value 730,028 136,734 — 866,762

Securities held at fair value 3,227 — — 3,227

Interest rate swaps (174,424) (34,288) — (208,712)

Securitized debt held at fair value (232,194) (60,764) — (292,958)

Investments in loan origination partners — — 50,499 50,499

Expense items:

Amortization of intangible assets — 9,200 — 9,200

Equity based compensation — 164 11,174 11,338

Securitization-related transaction costs — — 16,390 16,390

Total adjustments $ 326,637 $ 51,046 $ 78,063 $ 455,746

Distributable earnings $ 237,724 $ 41,381 $ (88,442) $ 190,663

(Dollars in Thousands) Mortgage-Related Assets Lima One Corporate Total

Year ended December 31, 2021

GAAP Net income/(loss) used in the calculation of basic EPS $ 306,147 $ 20,434 $ (31,630) $ 294,951

Unrealized and realized gains and losses on:

Residential whole loans held at fair value 2,718 (18,962) — (16,244)

Securities held at fair value (1,604) — — (1,604)

Interest rate swaps (51) (20) — (71)

Securitized debt held at fair value (13,958) (433) — (14,391)

Investments in loan origination partners — — (72,889) (72,889)

Expense items:

Amortization of intangible assets — 6,600 — 6,600

Equity based compensation — 71 8,973 9,044

Securitization-related transaction costs — — 5,180 5,180

Total adjustments $ (12,895) $ (12,744) $ (58,736) $ (84,375)

Distributable earnings $ 293,252 $ 7,690 $ (90,366) $ 210,576

Reconciliation of GAAP Book Value per Common Share to non-GAAP Economic Book Value per Common Share

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

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

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

Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for all of our investment activities, irrespective of the accounting model applied for GAAP reporting purposes.

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

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Management believes the policies which more significantly rely on estimates and judgments to be as follows:

Allowance for Credit Losses on Residential Whole Loans

An allowance for credit losses is recorded at acquisition, and maintained on an ongoing basis, for all losses expected over the life of the respective loan.

Any required credit loss allowance would reduce the net carrying value of the loan with a corresponding charge to earnings, and may increase or decrease over time.

Significant judgments are required in determining any allowance for credit loss, including assumptions regarding the loan cash flows expected to be collected, including related economic forecasts, the value of the underlying collateral and our ability to collect on any other forms of security, such as a personal guaranty provided either by the borrower or an affiliate of the borrower.

Fair Value Measurements - Residential Whole Loans

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The following describes the valuation methodologies used for our financial instrument investments categorized as level 3 in the valuation hierarchy, which require the most significant estimates and judgments to be made.

We determine the fair value of our residential whole loans after considering valuations obtained from a third-party who specializes in providing valuations of residential mortgage loans.

We determine the fair value of our residential whole loans after considering valuations obtained from third-parties that specialize in providing valuations of residential mortgage loans.

The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed.

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Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value.

See “Quantitative and Qualitative Disclosures about Market Risk” for further information about the sensitivity of our investment portfolio to changes in market factors, particularly market interest rates.

See Note 13 to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K for information regarding the assumptions used in valuing our residential whole loans.

Residential whole loans, at fair value are recorded on our consolidated balance sheets at fair value and changes in their fair value are recorded through earnings.

We held $5.7 billion and $5.3 billion of residential whole loans, at fair value, at December 31, 2022 and 2021, respectively, which represented 62.9% and 58.0% of our total assets at those dates, respectively.

Residential whole loans, at fair value recorded valuation changes of ($866.8) million, $16.2 million and $16.4 million during the years ended December 31, 2022, 2021, and 2020, respectively.

With respect to Residential whole loans, at carrying value, the fair value for these loans is disclosed in the footnotes to the consolidated financial statements and changes in their fair value do not impact earnings.

We held $1.8 billion and $2.6 billion of residential whole loans, at carrying value, at December 31, 2022 and 2021, respectively, which represented 19.7% and 28.5% of our total assets at those dates, respectively.

Residential whole loans, at carrying value experienced net fair value changes of ($223.7) million, ($20.4) million and ($8.5) million during the years ended December 31, 2022, 2021, and 2020, respectively.

Allowance for Credit Losses on Residential Whole Loans

An allowance for credit losses is recorded at acquisition, and maintained on an ongoing basis, for all losses expected over the life of the respective loan.

Any required credit loss allowance would reduce the net carrying value of the loan with a corresponding charge to earnings, and may increase or decrease over time.

Allowances for credit losses on our residential whole loans, at carrying value recorded at December 31, 2022, 2021, and 2020 were $35.3 million, $39.4 million and $86.8 million, respectively.

For further discussion of the allowance for credit losses during these periods, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Provision for Credit Losses on Residential Whole Loans Held at Carrying Value.”

Recent Accounting Standards to Be Adopted in Future Periods

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There can be no assurance, however, that we will be able to access the capital markets at any particular time or on any particular terms.

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

We have available for issuance an unlimited amount (subject to the terms and limitations of our charter) of common stock, preferred stock, depository shares representing preferred stock, warrants, debt securities, rights and/or units pursuant to our universal shelf registration statement and, at December 31, 2022, we had approximately 2.0 million shares of common stock available for issuance pursuant to our DRSPP shelf registration statement.

During 2022, we issued 80,027 shares of common stock through our DRSPP, raising net proceeds of approximately $1.2 million.

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

During 2022, we repurchased 6,476,746 shares of our common stock through the stock repurchase program at an average cost of $15.80 per share and a total cost of approximately $102.1 million, net of fees and commissions paid to the sales agents of approximately $161,000.

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

As of December 31, 2022, we were permitted to purchase an additional $202.5 million of our common stock under the stock repurchase program.

In February 2023, our Board authorized a repurchase program for our 6.25% Convertible Senior Notes due 2024 (or the Convertible Senior Notes) under which we may repurchase up to $100 million of our Convertible Senior Notes.

The convertible notes repurchase program does not require the purchase of any minimum amount of Convertible Senior Notes.

The timing and extent to which we repurchase our Convertible Senior Notes will depend upon, among other things, market conditions, share price, liquidity, regulatory requirements and other factors, and repurchases may be commenced or suspended at any time without prior notice.

Financing agreements

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As of December 31, 2022, we had $2.2 billion of total unpaid principal balance related to asset-backed financing agreements with mark-to-market collateral provisions and $4.6 billion of total unpaid principal balance related to asset-backed financing agreements that do not include mark-to-market collateral provisions.

Repurchase agreements and other forms of collateralized financing are renewable at the discretion of our lenders and, as such, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time.

Repurchase agreements and other forms of collateralized financing are uncommitted and renewable at the discretion of our lenders and, as such, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time.

The terms of the repurchase transaction borrowings under our master repurchase agreements, as such terms relate to repayment, margin requirements and the segregation of all securities that are the subject of repurchase transactions, generally conform to the terms contained in the standard master repurchase agreement published by the Securities Industry and Financial Markets Association (or SIFMA) or the global master repurchase agreement published by SIFMA and the International Capital Market Association.

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Other non-repurchase agreement financing arrangements also contain provisions governing collateral maintenance.

With respect to margin maintenance requirements for agreements secured by harder to value assets, such as residential whole loans, Non-Agency MBS and MSR-related assets, margin calls are typically determined by our counterparties based on their assessment of changes in the fair value of the underlying collateral and in accordance with the agreed upon haircuts specified in the transaction confirmation with the counterparty.

At December 31, 2022, we had unused financing capacity of approximately $1.2 billion across our financing arrangements for all collateral types.

Margin calls are typically determined by our counterparties based on their assessment of changes in the fair value of the underlying collateral and in accordance with the agreed upon haircuts specified in the transaction confirmation with the counterparty.

We address margin call requests in accordance with the required terms specified in the applicable agreement and such requests are typically satisfied by posting additional cash or collateral on the same business day.

We review margin calls made by counterparties and assess them for reasonableness by comparing the counterparty valuation against our valuation determination.

We review margin calls

made by counterparties and assess them for reasonableness by comparing the counterparty valuation against our valuation determination.

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

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For additional information regarding our various types of financing arrangements, including those with non-mark-to-market terms and the haircuts for those agreements with mark-to-market collateral provisions, see Note 6 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.

At December 31, 2022, we had a total of $3.9 billion of residential whole loans and securities and $16.0 million of restricted cash pledged to our financing counterparties.

We expect that we will continue to pledge residential mortgage assets as part of certain of our ongoing financing arrangements.

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

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

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

Our sources of liquidity do not include restricted cash.

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

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

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

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

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

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

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

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Cash Flows and Liquidity for the Year Ended December 31, 2022

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

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

Our cash, cash equivalents and restricted cash increased by $89.6 million during 2022, reflecting:

$1.1 billion used in our investing activities, $850.2 million provided by our financing activities and $366.1 million provided by our operating activities.

At December 31, 2022, our debt-to-equity multiple was 3.5 times compared to 2.5 times at December 31, 2021.

Our recourse leverage multiple at December 31, 2022 was 1.8 times compared to 1.5 times at December 31, 2021.

At December 31, 2022, we had borrowings under asset-backed financing agreements of $3.2 billion, of which $3.1 billion were secured by residential whole loans, $111.7 million were secured by securities and $25.5 million were secured by REO.

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During 2022, we received $1.9 billion of principal payments on residential whole loans and loan related investments and $134.0 million of proceeds on sales of REO.

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

In addition, during 2022, we received cash of $53.1 million from proceeds from sales and prepayments and scheduled amortization on our securities.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis