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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2025-02-20 compared with 2024-02-22 · 48 added, 44 removed, 109 unchanged (46% of the section changed)

18 unchanged sentences

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

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

The fair value of our Business purpose and Non-QM loans is typically dependent on the value of the underlying real estate collateral, as well as the level of interest rates.

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

Given the short duration of our Transitional loans, we believe the fair value of these loans exhibits little sensitivity to changes in interest rates.

We estimate the duration of these Purchased Performing Loans held at carrying value using management’s assumptions.

Given the short duration of our Single-family and Multifamily transitional loans, we believe the fair value of these loans exhibits little sensitivity to changes in interest rates.

We estimate the duration of these Business purpose and Non-QM loans using management’s assumptions.

The fair value of our non-performing residential whole loans is typically dependent on the value of the underlying real estate collateral and the time required for collateral liquidation.

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

The information presented in the following “Shock Table” projects the potential impact of sudden parallel changes in interest rates on our net interest income and portfolio value, including the impact of Swaps and securitized debt and other fixed rate debt, based on the assets in our investment portfolio at December 31, 2023 and 2022.

All changes in income and value are measured as the percentage change from the projected net interest income and portfolio value under the base interest rate scenario at December 31, 2023 and 2022.

The information presented in the following “Shock Table” projects the potential impact of sudden parallel changes in interest rates on our portfolio value, including the impact of Swaps and securitized debt and other fixed rate debt, based on the assets in our investment portfolio at December 31, 2024 and 2023.

All changes in value are measured as the percentage change from the projected portfolio value under the base interest rate scenario at December 31, 2024 and 2023.

December 31, 2024

Change in Interest Rates Change in

Estimated Net Portfolio

Change in Net

Change in Interest Rates Change in Estimated Net Portfolio Value (1)(2)

Percentage Change in Net Portfolio Value

Percentage Change in Total Stockholders’ Equity

(Dollars in Thousands)

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December 31, 2023

Change in Interest Rates Change in

Estimated Net Portfolio

Change in Net

Change in Interest Rates Change in Estimated Net Portfolio Value (1)(2)

Percentage Change in Net Portfolio Value

Percentage Change in Total Stockholders’ Equity

(Dollars in Thousands)

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(2) Change in estimated net portfolio value includes the effect of our interest rate swaps, securitized debt, and other fixed rate debt.

(3) Includes the impact of the net carry on our Swaps.

Certain assumptions have been made in connection with the calculation of the information set forth in the Shock Table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes.

The base interest rate scenario assumes interest rates at December 31, 2024 and 2023.

The analysis presented

utilizes assumptions and estimates based on management’s judgment and experience.

The analysis presented utilizes assumptions and estimates based on management’s judgment and experience.

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

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

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

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

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

The cash flows associated with our portfolio for each rate shock are calculated based on assumptions, including, but not limited to, prepayment speeds, yield on replacement assets, the slope of the yield curve and composition of our portfolio.

Assumptions made with respect to the interest rate sensitive liabilities include anticipated interest rates, collateral requirements as a percent of repurchase agreement financings, and the amounts and terms of borrowing.

At December 31, 2023 and 2022, we applied a floor of 0% for all anticipated interest rates included in our assumptions.

Because the presence of this floor could limit the potential impact of an interest rate decrease in certain rate environments, hypothetical interest rate shock decreases below the assumed floor could cause changes in the fair value of our financial instruments and our net interest income in excess of the amounts assumed.

At December 31, 2024, the impact on portfolio value was approximated using estimated net effective duration (i.e., the price sensitivity to changes in interest rates), including the effect of securitized and other fixed rate debt, of 1.02, which is the weighted average of 3.48 for our Residential whole loans, 3.72 for our Securities investments, (2.66) for our derivative and other hedging transactions and securitized and other fixed rate debt, and 0.00 for our Other assets and cash and cash equivalents.

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Estimated convexity (i.e., the approximate change in duration relative to the change in interest rates) of the portfolio was (0.49), which is the weighted average of (0.50) for our Residential whole loans, zero for our derivative and other hedging transactions and securitized and other fixed rate debt, (1.08) for our Securities investments, and zero for our Other assets and cash and cash equivalents.

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

Our asset/liability structure is generally such that an increase in interest rates would be expected to result in a decrease in net interest income, as our borrowings are generally shorter in term than our interest-earning assets.

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

Although we do not believe we are exposed to credit risk in our Agency MBS portfolio, we are exposed to credit risk through our credit sensitive residential mortgage investments, in particular residential whole loans and certain of our securities investments.

We are exposed to credit risk through our credit sensitive residential mortgage investments, in particular residential whole loans and certain of our securities investments.

We do not believe we are exposed to credit risk in our Agency MBS portfolio.

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

1 unchanged sentence

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

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

Given the extent of home price appreciation that has occurred since the majority of our Purchased Performing Loans were acquired or originated, we estimate that current LTVs have decreased significantly, further mitigating the risk of material credit losses on this portfolio.

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

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

of the borrower and the value of the collateral securing the loan.

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

Given the extent of home price appreciation that has occurred since the majority of our loans collateralized by single-family homes were acquired or originated, we estimate that current LTVs have decreased significantly, further mitigating the risk of material credit losses on this portfolio.

As a result of higher capitalization rates and an increasing supply of multifamily units in certain markets, we estimate that current LTVs on certain of our Multifamily transitional loans may have increased since origination, increasing the risk of credit losses on this portfolio.

Our investment process for Legacy RPL/NPL loans is focused on quantifying and pricing credit risk.

Legacy RPL/NPL loans are acquired at purchase prices that are generally discounted to the contractual loan balances based on a number of factors, including the impaired credit history of the borrower and the value of the collateral securing the loan.

In addition, as we generally own the mortgage-servicing rights associated with these loans, our process is also focused on selecting a sub-servicer with the appropriate expertise to mitigate losses and maximize our overall return.

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The following table presents certain information about our Residential whole loans at December 31, 2024:

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

Single-family transitional loans

Multifamily transitional loans

Single-family rental loans

Legacy RPL/NPL loans

Loans with an LTV:

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Loans with an LTV:

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

Loans with an LTV:

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

Amortized cost $ 1,028,009 $ 80,179 $ 922,736 $ 55,326 $ 1,400,054 $ 23,277 $ 4,297,995 $ 223,090 $ 881,384 $ 119,911

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Loans 90+ days delinquent UPB

$ 69,044 $ 30,963 $ 53,613 $ 32,011 $ 29,872 $ 19,415 $ 103,638 $ 15,202 $ 165,673 $ 50,587

(1) Weighted average is calculated based on the interest bearing principal balance of each loan within the related category.

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(2) LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date.

For Transitional loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available.

For certain Transitional loans, totaling $551.3 million, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation.

For Single-family and Multifamily transitional loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available.

For certain Single-family transitional loans, totaling $445.6 million, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation.

The LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 73%.

For certain Multifamily transitional loans, totaling $252.1 million, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation.

The LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 69%.

Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots for which the LTV ratio is not meaningful.

The following table presents the five largest geographic concentrations by state of our residential whole loan portfolio at December 31, 2023:

Property Location Percent of Interest-Bearing Unpaid Principal Balance

California 27.1 %

Florida 12.6 %

Georgia 5.3 %

New York 5.0 %

The following table presents the five largest geographic concentrations by state of certain of our residential whole loan portfolio and in total at December 31, 2024:

Business purpose loans Non-QM loans Legacy RPL/NPL loans All Loans

Rank State Percent of UPB

State Percent of UPB

1 FL 11.4% CA 48.3% CA 22.1% CA 27.5%

2 TX 10.8% FL 17.5% NY 16.4% FL 13.7%

3 GA 9.0% TX 5.2% FL 7.4% TX 7.0%

4 NY 6.4% AZ 3.1% NJ 7.1% NY 5.4%

5 NC 5.9% WA 2.5% MD 5.1% GA 4.5%

CRT securities

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Our sources of liquidity do not include restricted cash.

In addition, at December 31, 2023, we had $13.8 million of unencumbered residential whole loans.

In addition, at December 31, 2024, we had unencumbered residential whole loans and Agency MBS of $87.8 million and $75.0 million, respectively.

PREPAYMENT RISK

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.

Premiums arise when we acquire an MBS or loan at a price in excess of their unpaid principal balance.

Conversely, discounts arise when we acquire an MBS or loan at a price below below their unpaid principal balance.

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

Purchase premiums, which are primarily carried on our Purchased Performing Loans (excluding Transitional loans that are typically purchased at par), are amortized against interest income over the life of the investment using the effective yield method, adjusted for actual prepayment activity.

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

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

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

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

Fees payable by borrowers on the early repayment of certain of our Business purpose and Non-QM loans serve to mitigate the impact on our income of higher prepayment rates.

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

2 unchanged sentences

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

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk