What changed in this filing

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Item 1. Business

2025-02-20 compared with 2024-02-22 · 37 added, 64 removed, 61 unchanged (62% of the section changed)

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Our targeted investments include principally the following:

• Residential whole loans, including Purchased Performing Loans, Purchased Credit Deteriorated and Purchased Non-performing Loans, which we acquire and hold through certain trusts that are consolidated on our balance sheet for financial reporting purposes.

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

• Residential whole loans, including Non-QM loans, Business purpose loans, and Legacy RPL/NPL loans, which we acquire and hold through certain trusts that are consolidated on our balance sheet for financial reporting purposes.

Through our wholly-owned subsidiary, Lima One Capital, LLC (together with its parent company, Lima One Holdings, LLC, “Lima One”), a leading nationwide originator and servicer of Business purpose loans (or BPLs), which we acquired on July 1, 2021, we originate and service BPLs for real estate investors.

We also own real estate (or REO), which is typically acquired as a result of the foreclosure or other liquidation of delinquent whole loans in connection with our loan investment activities.

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We are an internally-managed real estate investment trust (or REIT).

2023 was another challenging year for fixed income, as investors faced significant volatility as markets balanced aggressive monetary policy tightening, inflationary pressures, and increasing geopolitical uncertainty along with resilient macroeconomic data, the probability of a recession, and expectations regarding the timing of a potential monetary policy shift.

We addressed these challenges by prioritizing liquidity, prudently hedging our exposure to interest rates, and using loan securitizations to replace floating rate recourse mark-to-market financing with fixed rate non-recourse, non-mark-to-market financing.

Despite the continued interest rate volatility, we believe the successful execution of our strategy allowed us to add to our target asset classes at attractive yields and deliver positive returns in challenging conditions.

2024 was a volatile year with mixed results for fixed income products, including the residential mortgage assets that we invest in and finance.

Investors continued to adjust to volatile conditions resulting from a number of macroeconomic challenges, including:

monetary policy;

the Federal Reserve’s first interest rate cut in four years, and the ongoing uncertainty as to the timing and extent of future rate cuts in light of ongoing inflationary challenges and generally resilient macroeconomic data;

geopolitical uncertainty both in the U.S.

uncertainly with respect to U.S.

policy in light of the new U.S.

Presidential administration;

and the potential for recession.

We sought to address these challenges by continuing to prioritize liquidity, prudently hedging our exposure to interest rates, and using loan securitizations to replace floating rate recourse mark-to-market financing with fixed rate non-recourse, non-mark-to-market financing.

We were incorporated in Maryland on July 24, 1997 and began operations on April 10, 1998.

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$8.8 billion, or approximately 83%, of residential whole loans (compared to $9.0 billion, or 90%, at December 31, 2023);

$746.1 million, or 7%, of residential mortgage securities (compared to $333.4 million, or 4%, at December 31, 2022);

$1.5 billion, or 14%, of residential mortgage securities (compared to $746.1 million, or 7%, at December 31, 2023);

and $299.5 million, or 3%, of remaining

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Residential Whole Loans

During 2023, we continued to acquire residential whole loans, primarily Purchased Performing Loans, with approximately two-thirds of acquisitions reflecting loans originated by Lima One.

Our Purchased Performing Loan portfolio includes:

(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 (“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 refinance or sell the properties (“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 (“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”) (“Agency eligible investor loans”);

and (v) previously originated loans secured by residential real estate that is generally owner occupied (“Seasoned performing loans”).

We acquire and hold our non-business purpose loans and certain of our Transitional loans and Single-family rental loans through certain trusts that are consolidated on our balance sheet for financial reporting purposes.

In addition, during 2023, we continued to manage our Purchased Non-performing residential whole loan and Purchased Credit Deteriorated Loan portfolios.

During 2024, we continued to acquire or originate residential whole loans, with the majority of our additions for the year originated by Lima One.

Our Residential whole loan portfolio includes 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 (“Non-QM loans”), (ii) short-term business purpose loans collateralized by residential properties made to non-occupant borrowers that generally intend to rehabilitate or construct residential housing and then refinance or sell the properties (“Single-family transitional loans”);

(iii) short-term business purpose loans collateralized by multifamily properties, typically with a loan balance below $10 million, made to non-occupant borrowers that generally intend to rehabilitate or stabilize and then refinance or sell the properties (“Multifamily transitional loans”) (collectively, with Single-family transitional loans, “Transitional loans,” also sometimes referred to as “Rehabilitation loans” or “Fix and Flip loans”), (iv) business purpose loans to finance (or refinance) non-owner occupied one-to-four family residential properties that are rented to one or more tenants (“Single-family rental loans” and, collectively with Transitional loans, “Business purpose loans”), and (v) loans primarily secured by residential real estate that were generally either non-performing or re-performing at acquisition (“Legacy RPL/NPL”).

We acquire and hold our loans primarily through certain trusts that are consolidated on our balance sheet for financial reporting purposes.

Certain Legacy RPL/NPL loans acquired by the Company for which the Company did not elect the fair value option are accounted for as credit deteriorated, as they have experienced a deterioration in credit quality since origination and prior to our purchase and were acquired at discounted prices that reflect, in part, the impaired credit history of the borrower.

Purchased Credit Deteriorated Loans are typically characterized by borrowers who had previously experienced payment delinquencies and the amount owed may have exceeded the value of the property pledged as collateral at the time of acquisition.

The majority of these loans were also acquired at purchase prices that were discounted (often substantially so) to their contractual loan balance to reflect the impaired credit history of the borrower, the loan-to-value ratio (or LTV) of the loan and the coupon rate.

Purchased Non-performing Loans are typically characterized by borrowers who have defaulted on their obligations and/or have payment delinquencies of 60 days or more at the time we acquire the loan.

Certain Legacy RPL/NPL acquired by the Company are accounted for as non-performing loans which are typically characterized by borrowers who have defaulted on their obligations and/or have payment delinquencies of 60 days or more at the time we acquire the loan.

These loans were typically purchased at significantly discounted prices to the contractual loan balance.

We also own REO property as a result of managing the resolution of non-performing loans.

A combination of strong loan portfolio performance, and the efforts of our asset management team, has resulted in a continued reduction in the balances of REO property held during 2023.

The volume of REO properties increased during the year, as a result of higher resolutions of non-performing loans via foreclosure in 2024.

Securities, at Fair Value

We invested in residential mortgage securities, including Agency MBS, Non-Agency MBS, CRT securities and MSR-related assets, which include term notes backed directly or indirectly by MSRs.

During 2023 we opportunistically added $456.7 million of Agency MBS.

We invest in residential mortgage securities, including Agency MBS, Non-Agency MBS, CRT securities and MSR-related assets, which include term notes backed directly or indirectly by MSRs.

During 2024, we opportunistically added $0.9 billion of Agency MBS.

Going forward, we may continue to invest selectively in a range of residential mortgage securities as market opportunities arise.

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Our financing strategy is designed to increase the size of our investment portfolio by borrowing against a substantial portion of the market value of the assets in our portfolio.

We use loan securitizations, term warehouse facilities and shorter term repurchase agreements to finance our holdings of residential mortgage assets.

For our Residential whole loan portfolio, we use loan securitizations, term warehouse facilities and shorter term repurchase agreements to finance our holdings of Residential whole loans.

For our MBS portfolio, we primarily use shorter term repurchase agreements to finance our holdings of Securities.

Going forward, in connection with our current and any future investment in residential whole loans, we expect that our financing strategy will continue to include loan securitization and other forms of structured financing, subject to market conditions.

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EMPLOYEES/HUMAN CAPITAL MANAGEMENT

At December 31, 2023, we had approximately 377 full-time employees, including 317 employees working in our Lima One subsidiary.

We believe that investing in and fostering a diverse and inclusive workforce is a key pillar in operating our business.

By supporting, recognizing, and investing in the employees, we believe that we are able to attract and retain the highest quality talent.

REGULATORY MATTERS

Congress, the U.S.

Federal Reserve (or Federal Reserve), U.S.

Treasury, Federal Deposit Insurance Corporation (or FDIC), the Securities and Exchange Commission (or SEC) and other governmental and regulatory bodies have taken actions in response to the 2007-2008 financial crisis.

In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (or the Dodd-Frank Act) created a new regulator, an independent bureau housed within the Federal Reserve System known as the Consumer Financial Protection Bureau (or the CFPB).

The CFPB has broad authority over a wide range of consumer financial products and services, including mortgage lending and servicing.

At December 31, 2024, we had approximately 348 employees, including 285 employees working in our Lima One subsidiary.

We believe that investing in and fostering our workforce is a key pillar in operating our business.

By supporting, recognizing, and investing in our employees, we believe that we are able to attract and retain the highest quality talent.

The Consumer Financial Protection Bureau (or the CFPB) has broad authority over a wide range of consumer financial products and services, including mortgage lending and servicing.

One portion of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act (or Mortgage Reform Act), contains underwriting and servicing standards for the mortgage industry, restrictions on compensation for mortgage loan originators, and various other requirements related to mortgage origination and servicing.

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We believe that the Dodd-Frank Act and the regulations promulgated thereunder are likely to continue to increase the economic and compliance costs for participants in the mortgage and securitization industries, including us.

On October 19, 2022, a three-judge panel of the Fifth Circuit Court of Appeals issued an opinion in Community Financial Services Association of America, et al.

Consumer Financial Protection Bureau, et al., concluding that the CFPB’s funding structure unconstitutionally violates the Appropriations Clause of the U.S.

Constitution.

As a result, the Court vacated the payday lending rule that was the subject of challenge.

Although the Fifth Circuit’s decision applies only to the disputed regulation in that case, it may call into question the Bureau’s authority and other rules promulgated during CFPB’s self-funding structure.

On February 27, 2023, the Supreme Court granted the government's petition to review the Fifth Circuit's decision in Community Financial, and the Supreme Court held oral arguments in this matter in October 2023.

On March 23, 2023, the Second Circuit Court of Appeals declined to follow Community Financial, concluding in Consumer Financial Protection Bureau v.

Law Offices of Crystal Moroney that CFPB’s funding structure is constitutional.

It is unclear yet what impact these rulings may have on the mortgage lending markets but they may give rise to uncertainty, particularly in those markets in the Fifth Circuit.

In addition, certain court rulings may call into question the CFPB’s authority and other rules promulgated during CFPB’s self-funding structure.

For example, in October 2022, the Fifth Circuit Court of Appeals issued an opinion in Community Financial Services Association of America, et al.

Consumer Financial Protection Bureau, et al.

, concluding that the CFPB’s funding structure unconstitutionally violates the Appropriations Clause of the U.S.

Constitution, and vacated the payday lending rule that was the subject of challenge.

On May 16, 2024, the Supreme Court reversed the Fifth Circuit's decision in the Community Financial case and upheld the CFPB's funding mechanism as constitutionally permissible.

However, future litigation and court rulings may still cast uncertainty on the CFPB’s authority and funding mechanism.

Any such uncertainty could adversely impact the cash flow on mortgage loans.

In addition to the regulatory actions being implemented under the Dodd-Frank Act, on August 31, 2011, the SEC issued a concept release under which it is reviewing interpretive issues related to Section 3(c)(5)(C) of the Investment Company Act.

Section 3(c)(5)(C) excludes from the definition of “investment company” entities that are primarily engaged in, among other things, “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Many companies that engage in the business of acquiring mortgages and mortgage-related instruments seek to rely on existing interpretations of the SEC Staff with respect to Section 3(c)(5)(C) so as not to be deemed an investment company for the purpose of regulation under the Investment Company Act.

In connection with the concept release, the SEC requested comments on, among other things, whether it should reconsider its existing interpretation of Section 3(c)(5)(C).

We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act, and we seek to continue to meet the requirements for this exemption from registration.

To date the SEC has not taken or otherwise announced any further action in connection with the concept release.

In conjunction with our legal department, we closely monitor our compliance with Section 3(c)(5)(C)

within our risk management program.

(For additional discussion of the SEC’s concept release and its potential impact on us, please see Part I, Item 1A.

“Risk Factors” of this Annual Report on Form 10-K.)

The Federal Housing Finance Agency (or FHFA) and both houses of Congress have discussed and considered various measures intended to restructure the U.S.

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A reduction in the ability of mortgage loan originators to access Fannie Mae and Freddie Mac to sell their mortgage loans may adversely affect the mortgage markets generally and adversely affect the ability of mortgagors to refinance their mortgage loans.

In addition, any decline in the value of securities issued by Fannie Mae and Freddie Mac may affect the value of MBS in general.

On October 27, 2021, FHFA announced that it is seeking comment on a proposed rulemaking that would introduce additional public disclosure requirements for the Enterprise Regulatory Capital Framework (or ERCF) for Fannie Mae and Freddie Mac.

As proposed, the rule would implement quarterly quantitative and qualitative disclosure requirements for Fannie Mae and Freddie Mac related to regulatory capital instruments, risk-weighted assets calculated under the ERCF’s standardized approach, and risk management policies and procedures.

This notice of proposed rulemaking suggests the potential for enhanced regulation and reporting obligations in the mortgage and securitization industries, which in turn may further increase the economic and compliance costs for participants in the mortgage and securitization industries, including us.

On February 25, 2022, FHFA announced its final rule amending the ERCF by refining the prescribed leverage buffer amount (leverage buffer) and risk-based capital treatment of retained CRT exposures for Fannie Mae and Freddie Mac.

The final rule largely tracks the proposed rule.

Among other things, the final rule will replace the fixed leverage buffer equal to 1.5% of each of Fannie Mae’s and Freddie Mac’s adjusted total assets with a dynamic leverage buffer equal to 50% of each enterprise’s stability capital buffer;

replace the prudential floor of 10% on the risk weight assigned to any retained CRT exposure with a prudential floor of 5% on the risk weight assigned to any retained CRT exposure;

and remove the requirement that each of Fannie Mae and Freddie Mac must apply an overall effectiveness adjustment to its retained CRT exposures.

The final rule went into effect on May 16, 2022.

On June 1, 2022, FHFA published a Final Rule that supplements the ERCF by requiring Fannie Mae and Freddie Mac to submit annual capital plans to the Agency and provide prior notice for certain capital actions.

The final rule also incorporates the stress capital buffer determination from the ERCF into the capital planning process.

Among other things, the final rule mandates that the each of Fannie Mae’s and Freddie Mac’s capital plans must include:

• An assessment of the expected sources and uses of capital over the planning horizon;

• Estimates of projected revenues, expenses, losses, reserves, and pro forma capital levels under a range of the enterprise's internal scenarios, as well as under FHFA's scenarios;

• A description of all planned capital actions over the planning horizon;

• A discussion of how the enterprise will, under expected and stressful conditions, maintain capital commensurate with the business risks and continue to serve the housing market;

• A discussion of any expected changes to the enterprise's business plan that are likely to have a material impact on the enterprise's capital adequacy or liquidity.

This final rule was effective August 2, 2022.

In addition, any decline in the value of securities issued by Fannie Mae and Freddie Mac may affect the value of our Agency MBS and Residential whole loans in general.

AVAILABLE INFORMATION

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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 1. Business