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• Our Manager’s due diligence of potential investments may be insufficient, which could lead to investment losses.
−Removed: • Our Manager’s investment models may be incorrect either due to inaccurate models or incorrect third-party data, which could lead to investment losses.
+Added: • Our Manager’s investment models may be incorrect which could lead to investment losses.
• We operate in a highly competitive market.
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• Failure of the U.S.
−Removed: federal government to manage its fiscal matters or to raise or further suspend the debt ceiling, and changes in the amount of federal debt, may negatively impact the economic environment and adversely impact our results of operations.
+Added: federal government to avoid a government shutdown may negatively impact the economic environment and adversely impact our results of operations.
• We may be adversely affected by risks affecting borrowers or the asset or property types in which our investments may be concentrated at any given time, as well as from climate change or other unfavorable changes in the related geographic regions.
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• An economic slowdown or a deterioration of the housing market could increase both interest expense on servicing advances and operating expenses and could cause a reduction in income from, and the value of, Arc Home’s servicing portfolio.
+Added: • We may fail to realize all of the expected benefits of the WMC acquisition.
Risks Related to our Investments
• Our investments in non-agency residential mortgage loans, including Non-QM Loans in particular, subject us to legal, regulatory and other risks.
−Removed: • We invest in GSE Non-Owner Occupied Loans, which expose us to an increased risk of loss.
+Added: • We invest in Agency-Eligible Loans, which expose us to an increased risk of loss.
• Changes in prepayment rates may adversely affect the return on our investments.
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Additionally, the principal and interest payments on Non-Agency RMBS are not guaranteed by any entity, including any government entity or GSE, and therefore are subject to increased risks, including credit risk.
+Added: Risks Related to Legacy WMC Commercial Investments
+Added: • Commercial real estate-related investments that are secured by commercial real property, which were acquired by us in the WMC acquisition, are subject to delinquency, foreclosure and loss, which could result in losses to us.
Risks Related to U.S.
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Risks Related to Financing Activities
+Added: • We have a material amount of corporate indebtedness, which could have significant effects on our business.
• Our business strategy involves the use of leverage, and we may become overleveraged or not achieve what we believe is optimal leverage, which may materially adversely affect our liquidity, results of operations or financial condition.
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• The Federal Reserve's actions and statements regarding monetary policy and the management of its balance sheet can affect the fixed income and mortgage finance markets in ways that could adversely affect our future business and financial results and the value of, and returns on, real estate-related investments and other assets we own or may acquire.
−Removed: • The replacement of LIBOR with SOFR-based rates or other alternative reference rates may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.
Risks Related to our Management and our Relationships with our Manager and its Affiliates
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• Our Manager's fee structure may not create proper incentives or may induce our Manager and its affiliates to make riskier or more speculative investments, which increase the risk of our portfolio.
−Removed: • Our Manager will not be liable to us for any acts or omissions performed in accordance with the Management Agreement, including with respect to the performance of our investments.
+Added: • Our Manager will not be liable to us for any acts or omissions performed in accordance with our management agreement.
• Termination of our management agreement would be costly and, in certain cases, not permitted.
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Risks Related to our Organization and Strategy
−Removed: • Loss of our exemption from regulation under the Investment Company Act would impose significant limits on our operations, which would negatively affect the value of shares of our common stock and our ability to distribute cash to our stockholders.
+Added: • Loss of our exemption from regulation under the Investment Company Act would impose significant limits on our operations, which would negatively affect the value of shares of our common stock and our ability to make distributions.
• Certain provisions of Maryland law could inhibit a change in our control.
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• Investing in our common stock may involve a high degree of risk.
−Removed: Investors in our common stock may experience losses, volatility, and poor liquidity, and we may reduce our dividends in a variety of circumstances.
+Added: Investors in our common stock may experience losses, volatility, and poor liquidity, and we may reduce or not pay our dividends at all in a variety of circumstances.
Risks Related to our Company, Business, and Operations
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Further, the success of our investment strategy is highly dependent upon our ability to finance our target assets through non-recourse, non-mark-to-market securitization transactions.
−Removed: During 2022, market conditions for securitizations grew increasingly challenging with market spreads widening to unprecedented levels.
−Removed: While there have been signs of improvement in the securitization markets in 2023, there is no guarantee that conditions will continue to improve.
+Added: Although market conditions for securitizations improved slightly in 2023 over the unprecedented spread level widening experienced in 2022, there is no guarantee that conditions will continue to improve.
Prior to executing a securitization transaction, we typically acquire assets with warehouse financing subject to margin calls which typically are associated with a higher level of risk than other non-recourse, non-mark-to-market financing.
−Removed: In executing securitization transactions, we rely on third-party service providers, including custodians, rating agencies, servicers, and due diligence firms, to support the
−Removed: completion of such transactions in a timely and efficient manner.
+Added: In executing securitization transactions, we rely on third-party service providers, including custodians, rating agencies, servicers, and due diligence firms, to support the completion of such transactions in a timely and efficient manner.
These third-party service providers may not have sufficient resources to dedicate the appropriate time and attention needed for securitization transactions conducted by us and our competitors.
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From time to time, tensions between countries may erupt into warfare and may adversely affect neighboring countries and those who conduct trade or foreign relations with those affected regions.
−Removed: Such acts of war may cause widespread and lingering damage on a global scale, including, but not limited to, (i) safety and cyber security, (ii) the economy, and (iii) global relations.
−Removed: In February 2022, Russia invaded Ukraine following years of strained diplomatic relations between the two countries, which was heightened in 2021 when Russia amassed large numbers of military ground forces and support personnel on the Ukraine-Russia border.
−Removed: In response to the invasion and ensuing war, many countries, including the U.S., imposed significant economic and other sanctions against Russia.
−Removed: The war has created the largest refugee crisis in Europe since World War II and has inflicted significant damage to Ukraine’s infrastructure and economy.
−Removed: Both countries’ economies may be significantly affected, which may also adversely impact the global economy, including the U.S.
−Removed: The humanitarian crisis that has resulted from the war is likely to have pronounced and enduring impact on Ukraine, as well as a significant impact to neighboring countries that have accepted refugees.
+Added: Such acts of war may cause widespread and lingering damage on a global scale, including, but not limited to, (i) safety and cybersecurity, (ii) the economy, and (iii) global relations.
+Added: The wars between Russia and Ukraine and Hamas and Israel have and will continue to result in instability and adversely affect the global economy or specific markets.
+Added: In addition, these geopolitical tensions can cause an increase in volatility in commodity and energy prices, creating supply chain issues, and causing instability in financial markets.
+Added: Sanctions imposed by the United States and other countries in response to such conflict could further adversely impact the financial markets and the global economy, and any economic countermeasures by the affected countries or others, could exacerbate market and economic instability.
Further, Russia has launched an onslaught of cyberwarfare against Ukraine as part of its ongoing invasion, targeting the country’s critical infrastructure, government agencies, media organizations, and related think tanks in the U.S.
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Disruption, instability, volatility, and decline in economic activity, regardless of where it occurs, whether caused by acts of war, other acts of aggression, or terrorism, could in turn also cause higher interest rates, inflation or general economic uncertainty, which could negatively impact borrowers of our loans or underlying our investments , service providers, or otherwise adversely impact the value of our assets .
−Removed: In addition, during 2020, we experienced a significant amount of realized and unrealized losses on our assets as a result of the volatile conditions created by the COVID-19 pandemic.
−Removed: Similarly disruptive exogenous events may occur in the future.
−Removed: The subsequent disposition or sale of such impacted assets could further affect our future losses or gains, as they are based on the
−Removed: difference between the sale price received and adjusted amortized cost of such assets at the time of sale.
+Added: The subsequent disposition or sale of such impacted assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale.
These risks may be more pronounced for investments with significant credit risk, as discussed above.
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A residential mortgage loan is directly exposed to losses resulting from a default by the borrower.
−Removed: Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower, and the priority and enforceability of the lien will significantly impact the value of such mortgage loan.
+Added: Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower, and the priority and enforceability of the lien
+Added: will significantly impact the value of such mortgage loan.
In the event of a foreclosure, we may assume direct ownership of the underlying real estate.
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and personal events affecting borrowers, such as reduction in income and job loss.
−Removed: Recent concerns about the real estate market, rising interest rates, inflation, energy costs and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and markets going forward.
+Added: Lingering concerns about the real estate market, interest rate levels remaining higher for longer, inflation, energy costs and geopolitical issues may contribute to increased volatility and uncertainty about the economy and markets.
All of the risks discussed above could negatively impact the value of our investments and have a material adverse effect on our business.
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In addition, before the Sunset Date, we may not engage in any hedging transactions if payments on the hedge instrument are materially related to the Required Credit Risk and the hedge position would limit our financial exposure to the Required Credit Risk.
−Removed: Also, we may not pledge our interest in any Required Credit Risk as collateral for any financing unless such financing is full recourse to us.
−Removed: If we pledge our interest in Required Credit Risk as collateral on financing that is full recourse to us and the lender takes possession of the underlying collateral, we may not be in compliance with the Risk Retention Rules and it is uncertain as to what the consequences may be.
+Added: Also, we may not pledge our interest in any Required
+Added: Credit Risk as collateral for any financing unless such financing is full recourse to us.
+Added: If we pledge our interest in Required Credit Risk as collateral on financing that is full recourse to us, which we generally seek to do, and the lender takes possession of the underlying collateral, we may not be in compliance with the Risk Retention Rules and it is uncertain as to what the consequences may be.
Our Required Credit Risk could subject us to the first losses on our securitizations and is illiquid, which may make it more difficult to meet our liquidity needs, which may materially and adversely affect our business and financing condition.
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In addition, the predictive models used by our Manager may differ substantially from those models used by other market participants, with the result that valuations based on these predictive models may be substantially higher or lower for certain investments than actual market prices.
−Removed: Furthermore, since predictive models are usually constructed based on historical data supplied by third-parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data and the ability of these historical models accurately to reflect future periods.
+Added: Furthermore, since predictive models are usually constructed based on historical data supplied by third-
+Added: parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data and the ability of these historical models accurately to reflect future periods.
All valuation models rely on correct market data inputs.
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The outbreak of highly infectious or contagious diseases could adversely impact or cause disruption to our financial condition and results of operations.
−Removed: Further, the COVID-19 pandemic has had and may continue to have a material adverse effect on our business.
and other countries have experienced, and may experience in the future, outbreaks of contagious diseases that affect public health and public perception of health risk.
−Removed: In March 2020, the World Health Organization declared COVID-19 a pandemic, resulting in federal, state and local governments and private entities mandating various restrictions quarantines, curfews, “stay-at-home” or “shelter in place” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
−Removed: While government restrictions eased throughout 2022 and have continued to ease in 2023, and people have largely resumed pre-pandemic activities, the effects of COVID-19 continue to linger in the U.S.
−Removed: and global economies.
−Removed: The COVID-19 pandemic has disrupted global supply chains, contributed to increased inflation, increased rates of unemployment and adversely impacted many industries.
−Removed: Future disruptions and governmental actions, due to COVID-19 or a different epidemic or pandemic, combined with any associated economic and/or social instability or distress, may have an adverse impact on our results of operations, financial condition and cash available for distribution.
−Removed: In particular, the COVID-19 pandemic impacted, and may in the future impact, our financing strategy and liquidity.
+Added: The outbreak or spread of any highly infectious or contagious disease could result in federal, state and local governments and private entities mandating various restrictions quarantines, curfews, “stay-at-home” or “shelter in place” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations, any of which could adversely impact our Manager's ability to successfully operate our business.
+Added: In addition, outbreaks or pandemics have and may continue to disrupt global supply chains, contribute to increased inflation, increase rates of unemployment and adversely impact many industries.
+Added: Future disruptions and governmental actions, due to an outbreak of any highly infectious or contagious disease, combined with any associated economic and/or social instability or distress, may have an adverse impact on our results of operations, financial condition and cash available for distribution.
+Added: In particular, the outbreak or spread of any highly infectious or contagious disease may impact our financing strategy and liquidity.
We finance many of the mortgage loans and real estate related securities we acquire with borrowings under repurchase facilities and other financing arrangements and, as market conditions permit, refinance these assets through securitization transactions.
−Removed: During the first and second quarters of 2020 with the onset of the pandemic, we experienced significant declines in the value of our assets financed through repurchase facilities and other financing arrangements as well as adverse developments with respect to the cost and terms of such financing, and received margin calls, default notices and deficiency letters from certain of our financing counterparties well in excess of historical norms.
−Removed: We were able to resolve these deficiencies and related matters with lenders during 2020, but at significant expense and the size of our investment portfolio and market capitalization decreased substantially as a result of satisfying margin calls and defaults.
−Removed: If as a result of the COVID-19 pandemic or another pandemic in the future, the financing markets were to experience another period of extreme volatility and illiquidity, we may be forced to sell our mortgage loans, real estate related securities and other assets that secure our repurchase and other financing arrangements on less favorable terms to us than might otherwise be available in a regularly functioning market and such actions could result in deficiency judgments and other claims against us.
+Added: If as a result of an outbreak or pandemic, the financing markets were to experience another period of extreme volatility and illiquidity, we may be forced to sell our mortgage loans, real estate related securities and other assets that secure our repurchase facilities and other financing arrangements on less favorable terms to us than might otherwise be available in a regularly functioning market and such actions could result in deficiency judgments and other claims against us.
These conditions would have a materially negative effect on our results of operations, and, in turn, cash available for distribution to our stockholders and on the value of our assets.
−Removed: The full extent of the impact and effects resulting from the COVID-19 pandemic, or any future pandemic, will depend on future developments, including, among other factors, how rapidly variants develop, availability, acceptance and effectiveness of vaccines along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economic slowdown.
−Removed: COVID-19 or any future pandemic, and resulting impacts on the financial, economic and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.
−Removed: Moreover, the risk factors discussed in this "Risk Factors" section are likely to also be impacted directly or indirectly by the impact of the COVID-19 pandemic or another pandemic.
+Added: For example, in 2020 with the onset of the COVID-19 pandemic, we experienced significant declines in the value of our assets financed through repurchase facilities and other financing arrangements as well as adverse developments with respect to the cost and terms of such financing, and received margin calls, default notices and deficiency letters from certain of our financing counterparties well in excess of historical norms.
+Added: We were able to resolve these deficiencies and related matters with lenders during 2020, but at significant expense and the size of our investment portfolio and market capitalization decreased substantially as a result of satisfying margin calls and defaults.
+Added: Any outbreak or pandemic, and the resulting impacts on the financial, economic and capital markets environment, and future developments in these and other areas may result in material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.
+Added: Moreover, the risk factors discussed in this "Risk Factors" section are likely to also be impacted directly or indirectly by the impact of an outbreak or pandemic.
Increases in interest rates could adversely affect the value of our investments and cause our interest expense to increase, which could negatively affect our profitability and our ability to make distributions.
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An investment in such assets will generally decline in value if interest rates increase, particularly long-term interest rates.
−Removed: Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders.
+Added: Declines in market value may
+Added: ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders.
The relationship between short-term and longer-term interest rates is often referred to as the "yield curve." Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
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As a result, interest rate fluctuations can cause significant losses, reductions in income, and could materially and adversely affect us.
−Removed: In addition, in periods of rising interest rates, such as what we are currently experiencing, there is generally reduced demand for mortgage loans due to the higher cost of borrowing.
+Added: In addition, in periods of higher interest rates, such as what we are currently experiencing, there is generally reduced demand for mortgage loans due to the higher cost of borrowing.
A reduction in the volume of mortgage loans originated has and may continue to affect the volume of target assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment objectives.
−Removed: If rising interest rates cause us to be unable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, it could materially and adversely affect us.
+Added: If interest rates continue to remain high or increase further and cause us to be unable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, it could materially and adversely affect us.
Failure of the U.S.
−Removed: federal government to manage its fiscal matters or to raise or further suspend the debt ceiling, and changes in the amount of federal debt, may negatively impact the economic environment and adversely impact our results of operations.
−Removed: federal government has established a limit on the level of federal debt that the U.S.
−Removed: federal government can have outstanding, often referred to as the debt ceiling.
−Removed: Congress has authority to raise or suspend the debt ceiling and to approve the funding of U.S.
−Removed: federal government operations within the debt ceiling, and has done both frequently in the past, often on a relatively short-term basis.
−Removed: On January 19, 2023, the U.S.
−Removed: reached its borrowing limit and currently faces risk of defaulting on its debt.
−Removed: Generally, if effective legislation to manage the level of federal debt is not enacted and the debt ceiling is reached in any given year, the federal government may suspend its investments for certain government accounts, among other available options, in order to prioritize payments on its obligations.
−Removed: It is anticipated that the U.S.
−Removed: federal government will be able to fund its operations through approximately mid-2023.
−Removed: However, contention among policymakers, among other factors, may hinder the enactment of policies to further increase the borrowing limit or address its debt balance timely.
+Added: federal government to avoid a government shutdown may negatively impact the economic environment and adversely impact our results of operations.
+Added: Congressional disagreement over the federal budget and the maximum amount of debt the federal government is permitted to have outstanding (commonly referred to as the "debt ceiling") has previously caused the U.S.
+Added: federal government to shut down for periods of time.
+Added: Generally, if effective legislation to fund government operations and manage the level of federal debt is not enacted, the federal government may suspend its investments for certain government accounts, among other available options, in order to prioritize payments on its obligations.
A failure by the U.S.
−Removed: Congress to raise the debt limit would increase the risk of default by the U.S.
+Added: Congress to pass spending bills or address the debt ceiling at any point in the future would increase the risk of default by the U.S.
on its obligations, the risk of a lowering of the U.S.
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and globally.
+Added: Twice in the past decade, by the appropriations legislation deadline Congress failed to pass a new appropriations bill or continuing resolution to temporarily extend funding, resulting in U.S.
+Added: government shutdowns that caused federal agencies to halt non-essential operations.
+Added: Current funding measures will fund only certain government programs through September 30, 2024, and if lawmakers cannot pass a continuing resolution or a new federal budget by such time, another federal government shutdown could begin.
If economic conditions severely deteriorate as a result of U.S.
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In addition, as of December 31, 2023, 10% of the total fair value of our residential mortgage loan portfolio, was secured by properties located in Florida, which are particularly susceptible to natural disasters such as hurricanes and floods.
+Added: In addition, the effects of climate change have made, and may continue to make, certain types of insurance, such as flood insurance, increasingly difficult and/or expensive to obtain in these and certain other areas.
A material decline in the demand for and value of real estate in these areas may materially and adversely affect us.
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Government mandates, standards and regulations enacted in response to these projected impacts of climate change could result in restrictions on land development in certain areas or increased energy, transportation and raw material costs.
−Removed: These concerns have also resulted in increasing governmental and societal attention to ESG matters, including expanding mandatory and voluntary reporting, diligence, and disclosure on topics such as climate change, waste production, water usage, human capital, labor, and risk oversight, could expand the nature, scope, and complexity of matters that we are required to
−Removed: control, assess, and report.
+Added: These concerns have also resulted in increasing governmental and societal attention to ESG matters, including expanding mandatory and voluntary reporting, diligence, and disclosure on topics such as climate change, waste production, water usage, human capital, labor, and risk oversight, could expand the nature, scope, and complexity of matters that we are required to control, assess, and report.
These and other rapidly changing laws, regulations, policies and related interpretations, as well as increased enforcement actions by various governmental and regulatory agencies, may create challenges for us, including our compliance and ethics programs, may alter the environment in which we do business and may increase the ongoing costs of compliance, which could adversely impact our results of operations and cash flows.
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Computer malware, viruses, computer hacking, phishing attacks, ransomware, and other electronic security breaches have become more frequent and more sophisticated.
−Removed: The result of these incidents may include disrupted operations, delays or other problems in our securities trading activities, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our investor relationships and reputation, any or all of which could have a material adverse effect on our results of operations and cash flows and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.
+Added: The result of these incidents may include disrupted operations, delays or other problems in our securities trading activities, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our investor relationships and reputation, any or all of which could have a material adverse effect on
+Added: our results of operations and cash flows and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.
As our reliance on technology has increased, so have the risks posed to our information systems, including those provided by the Manager and third-party service providers (including, without limitation, affiliates and third parties with which we and our Manager do business, such as Arc Home and other mortgage originators, due diligence firms, pricing vendors and servicers, or that facilitate our business activities, including clearing agents or other financial intermediaries we use to facilitate our securitization transactions).
If such parties' respective systems experience failure, interruption, cyber-attacks, or security breaches, we may in turn face risks of operational failure, termination or capacity constraints.
−Removed: The acquisition of mortgage loans entails us, the Manager and third-party service providers coming into possession of borrower non-public personal information, and we may be liable for losses suffered by individuals whose personal information is stolen as a result of a breach of the security of the systems on which we, our Manager or third-party service providers of ours store this information, or as a result of other mismanagement of such information, and any such liability could be material.
+Added: The acquisition of mortgage loans entails us, the Manager and third-party service providers coming into possession of borrower non-public personal information, and we may be liable for losses suffered by individuals whose personal information is stolen or compromised as a result of a breach of the security of the systems on which we, our Manager or third-party service providers of ours store this information, or as a result of other mismanagement of such information, and any such liability could be material.
Even if we are not liable for such losses, any breach of these systems could expose us to material costs in notifying affected individuals or other parties and providing credit monitoring services, as well as to regulatory fines or penalties.
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Even with all reasonable security efforts, not every breach can be prevented or even detected.
−Removed: Further, in response to the outbreak of the COVID-19 pandemic, the majority of our Manager's personnel worked remotely at least a few days a week and may in the future return to working remotely, which may increase the risk of cyber-security incidents and cyber-attacks.
+Added: Further, should the majority of our Manager's personnel return to working remotely in the future, the risk of cybersecurity incidents and cyber-attacks may increase.
The failure of servicers to effectively service the mortgage loans in our portfolio and the MSRs in Arc Home's portfolio may materially and adversely affect us, and market disruptions may make it more difficult for the loan servicers to perform a variety of services for us, which may adversely impact our business and financial results.
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Additionally, servicers can perform loan modifications, which could potentially impact the value of our securities.
+Added: The failure of servicers to effectively service the mortgage loans underlying the securities in our investment portfolio could negatively impact the value of our investments and our performance.
The laws and regulations governing mortgage servicing are continually evolving and regulators have identified mortgage loan servicing as a current enforcement priority.
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The servicer's failure to comply with these obligations could expose us to regulatory scrutiny and litigation risk.
−Removed: If a third-party servicer fails to perform its duties under the securitization documents or its contractual duties to us, this may result in a material increase in delinquencies or losses on the RMBS or mortgage loans we own or the MSRs Arc Home owns or in a fine or adverse finding from a regulatory authority if the ownership of loans is tied to the servicing of those loans.
+Added: If a third-party servicer fails to perform its duties under the securitization documents or its contractual duties to us, this may result in a material increase in delinquencies or losses on the RMBS or mortgage loans we own or the MSRs Arc Home owns or in a fine or adverse finding from a regulatory authority if the ownership of loans is tied to
+Added: the servicing of those loans.
Any such servicing failures and resulting delinquencies or losses may impact the value of the RMBS, mortgage loans or MSRs, and we may incur losses on our investment.
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Market disruptions on servicing activities .
−Removed: The economic and market disruptions, including those directly or indirectly caused by COVID-19, have adversely impacted and may continue to adversely impact the financial condition of the borrowers of our residential mortgage loans and the loans that underlie our RMBS investments.
−Removed: If the current economic conditions worsen, the number of borrowers who request a payment deferral or forbearance arrangement or become delinquent or default on their financial obligations may increase significantly, and such increase may place greater stress on the servicers’ finances and human capital, which may make it more difficult for these servicers to successfully service these loans.
+Added: The economic and market disruptions, including those directly or indirectly caused by a pandemic or cyber attack, may adversely impact the financial condition of the borrowers of our residential mortgage loans and the loans that underlie our RMBS investments.
+Added: If the current economic conditions worsen or servicers experience a system shutdown for a prolonged period of time, the number of borrowers who request a payment deferral or forbearance arrangement or become delinquent or default on their financial obligations may increase significantly, and such increase may place greater stress on the servicers’ finances and human capital, which may make it more difficult for these servicers to successfully service these loans.
In addition, many loan servicing activities are not permitted to be done through a remote work setting.
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Market disruptions on servicer liquidity .
−Removed: The economic and market disruptions, including those directly or indirectly caused by COVID-19, have resulted and may continue to result in liquidity pressures on servicers and other third-party vendors that we rely upon.
−Removed: For instance, as a result of an increase in mortgagors requesting relief in the form of forbearance plans and/or other loss mitigation, servicers and other parties responsible in capital markets securitization transactions for funding advances with respect to delinquent mortgagor payments of principal and interest may begin to experience financial difficulties if mortgagors do not make monthly payments.
+Added: The economic and market disruptions, including those directly or indirectly caused by a pandemic or cyber attack, may result in liquidity pressures on servicers and other third-party vendors that we rely upon.
+Added: For instance, as a result of an increase in mortgagors requesting relief in the form of forbearance plans and/or other loss mitigation or an inability to make payments due to a system shutdown, servicers and other parties responsible in capital markets securitization transactions for funding advances with respect to delinquent mortgagor payments of principal and interest may begin to experience financial difficulties if mortgagors do not make monthly payments.
The negative impact on the business and operations of such servicers or other parties responsible for funding such advances could be significant.
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We expect to acquire a portion of our target newly originated non-agency loans from Arc Home.
−Removed: If Arc Home is unable to originate loans in one or more jurisdictions as a result of regulatory issues or otherwise, it may result in fewer investment opportunities for us or in opportunities that are less geographically diversified.
+Added: If Arc Home is unable to originate loans in one or more jurisdictions as a result of regulatory issues or otherwise, it may
+Added: result in fewer investment opportunities for us or in opportunities that are less geographically diversified.
Further, any such regulatory issues for Arc Home could result in damage to our or our Manager's reputation in the market and impact Arc Home's ability to continue to source a desired volume of non-agency loan originations.
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Adverse economic conditions could also negatively impact Arc Home's lending businesses.
−Removed: For example, during 2022 following the Federal Reserve's rapid interest rate hikes, total U.S.
−Removed: residential mortgage originations volume, including origination volumes at Arc Home, decreased substantially and may continue to decrease if interest rates continue to increase as anticipated.
+Added: For example, since 2022 following the Federal Reserve's rapid interest rate hikes, total U.S.
+Added: residential mortgage originations volume, including origination volumes at Arc Home, decreased substantially and has continued to remain low as interest rates continued to rise in 2023.
+Added: While the financial markets are anticipating interest rate decreases in 2024, the Federal Reserve could determine to leave rates at current levels or even increase rates further should inflation remain elevated.
Moreover, adverse economic conditions accompanied by declining home prices generally reduce the level of new mortgage loan originations and refinancing activity, since borrowers often use increases in the value of their existing properties to support the purchase of, or investment in, additional properties.
Borrowers may also be less able to make payments on loans in a weakened economy.
−Removed: The risks associated with an economic slowdown or a deterioration of the housing or lending markets are more pronounced due to the conditions created by the COVID-19 pandemic.
+Added: The risks associated with an economic slowdown or a deterioration of the housing or lending markets are more pronounced due to the conditions created by an outbreak of infectious disease or pandemic.
Any of the foregoing could adversely affect Arc Home’s business, which in turn would have a negative impact on our results.
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These requirements can and do change as statutes and regulations are enacted, promulgated, amended, and interpreted, and the recent trends among federal and state lawmakers and regulators have been toward increasing laws, regulations, and investigative proceedings concerning the mortgage industry generally.
−Removed: Although we believe that we have structured our operations and investments to comply with existing legal and regulatory requirements and interpretations, changes in regulatory and legal requirements, including changes in their interpretation and enforcement by lawmakers and regulators, could materially and adversely affect our business and our financial condition, liquidity, and results of operations.
+Added: Although we believe that we have structured our
+Added: operations and investments to comply with existing legal and regulatory requirements and interpretations, changes in regulatory and legal requirements, including changes in their interpretation and enforcement by lawmakers and regulators, could materially and adversely affect our business and our financial condition, liquidity, and results of operations.
+Added: We may fail to realize all of the expected benefits of the WMC acquisition or those benefits may take longer to realize than expected.
+Added: The full benefits of the WMC acquisition may not be realized by us as expected or may not be achieved within the anticipated time-frame, or at all.
+Added: Failure to achieve the anticipated benefits of the WMC acquisition could adversely affect our results of operations or cash flows, cause dilution to our earnings per share or book value per share, decrease or delay the expected accretive effect of the WMC acquisition, and negatively impact the trading price of the notes.
+Added: In addition, we may be required to devote significant attention and resources to successfully integrate the WMC portfolio and operating business into our existing structure.
+Added: This integration process may disrupt our business and, if ineffective, would limit the anticipated benefits of the WMC acquisition and could adversely affect our business.
+Added: We have incurred, and may continue to incur, direct and indirect costs as a result of the WMC acquisition.
+Added: We incurred substantial expenses in connection with and as a result of completing the WMC acquisition, and we may incur additional expenses in connection with combining the businesses, operations, policies and procedures of the two companies, including expenses related to litigation that may result in significant costs and divert management's attention and resources.
+Added: Factors beyond our control could affect the total amount or timing of these expenses, many of which, by their nature, are difficult to estimate accurately.
Risks Related to our Investments
11 unchanged sentences
a safe harbor and a rebuttable presumption for higher priced loans.
−Removed: The "safe harbor" under the ATR Rules applies to a covered transaction that meets the definition of "qualified mortgage" and is not a "higher-priced covered transaction." For any covered transaction that meets the definition of a "qualified mortgage" and is not a "higher-priced covered transaction," the creditor or assignee will be deemed to have complied with the ability-to-repay requirement and, accordingly, will be conclusively presumed to have made a good faith and reasonable determination of the consumer’s ability to
+Added: The "safe harbor" under the ATR Rules applies to a covered transaction that meets the definition of "qualified mortgage" and is not a "higher-priced covered transaction." For any covered transaction that meets the definition of a "qualified mortgage" and is not a "higher-priced covered transaction," the creditor or assignee will be deemed to have complied with the ability-to-repay requirement and, accordingly, will be conclusively presumed to have made a good faith and reasonable determination of the consumer’s ability to repay.
Creditors or assignees will have the benefit of a rebuttable presumption of compliance with the applicable ATR Rules if they have complied with the qualified mortgage characteristics of the ATR Rules other than the residential mortgage loan being higher-priced in excess of certain thresholds.
On December 10, 2020, the CFPB issued a final rule that adopts a set of “bright-line” loan pricing thresholds to replace the previous General Qualified Mortgage 43% debt-to-income threshold calculated in accordance with "Appendix Q" and removes Appendix Q (the "General QM Final Rule").
−Removed: The effective date of the General QM Final Rule is March 1, 2021, but the mandatory compliance date originally established as July 1, 2021 was delayed to October 1, 2022.
−Removed: On December 10, 2020, the CFPB also issued a final rule that creates a new category of a qualified mortgage, referred to as a "Seasoned QM" (the "Seasoned QM Final Rule").
−Removed: A loan is eligible to become a Seasoned QM if it is a first-lien, fixed rate loan that meets certain performance requirements over a seasoning period of 36 months, is held in portfolio until the end of the seasoning period by the originating creditor or first purchaser, complies with general restrictions on product features and points and fees, and meets certain underwriting requirements.
−Removed: The effective date for the Seasoned QM Final Rule was March 1, 2021.
−Removed: At this time, however, it is unclear what impact these final rules will have on the mortgage market and the “ability-to-repay” rules.
+Added: Effective March 1, 2021, the General
+Added: QM Final Rule provided certain changes to the definition of general qualified mortgage loans and the "Seasoned QM Final Rule" creates a new category of a qualified mortgage, referred to as a "Seasoned QM." A loan is eligible to become a Seasoned QM if it is a first-lien, fixed rate loan that meets certain performance requirements over a seasoning period of 36 months, is held in portfolio until the end of the seasoning period by the originating creditor or first purchaser, complies with general restrictions on product features and points and fees, and meets certain underwriting requirements.
+Added: These amendments and changes to the necessary policies and procedures to demonstrate compliance with these requirements for loans sold in the secondary market may increase the economic and compliance costs for participants in the mortgage origination and securitization industries, including us.
Non-QM Loans are among the loan products we acquire.
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In addition, the market value of investments subject to prepayment may, because of the risk of prepayment, benefit less than other fixed-income securities from declining interest rates.
−Removed: Conversely, in periods of rising interest rates, prepayments on investments, where contractually permitted, generally decrease, in which case we would not have the prepayment proceeds available to invest in comparable assets at higher yields and our cost to finance such assets would likely increase.
+Added: Conversely, in periods of rising interest rates, prepayments on investments, where contractually
+Added: permitted, generally decrease, in which case we would not have the prepayment proceeds available to invest in comparable assets at higher yields and our cost to finance such assets would likely increase.
Under certain interest rate and prepayment scenarios, we may fail to recoup fully our cost of certain investments.
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Within a securitization of residential mortgage loans, various securities are created, each of which has varying degrees of credit risk.
−Removed: We anticipate that our investments in Non-Agency RMBS will be concentrated in lower-rated and unrated securities in which we are exposed to the first loss on the residential mortgage loans held by the securitization vehicle, which will subject to us to the most concentrated credit risk associated with the underlying residential mortgage loans.
+Added: We anticipate that our investments in Non-Agency RMBS will be concentrated in lower-rated and unrated securities in which we are exposed to the first loss on the residential mortgage loans held by the securitization vehicle, which will subject us to the most concentrated credit risk associated with the underlying residential mortgage loans.
Additionally, the principal and interest on Non-Agency RMBS, unlike those on Agency RMBS, are not guaranteed by GSEs such as Fannie Mae and Freddie Mac or, in the case of Ginnie Mae, the U.S.
2 unchanged sentences
The ability of a borrower to repay a loan secured by a residential property is dependent upon the income or assets of the borrower.
−Removed: A number of factors, including, but not limited to, a general economic downturn, unemployment, acts of God, terrorism, social unrest and civil disturbances, may impair the borrower's ability to repay its mortgage loan.
+Added: A number of factors, including, but not limited to, a general economic downturn, unemployment, energy costs, acts of God, war or other geopolitical conflict, terrorism, inflation, social unrest and civil disturbances, may impair the borrower's ability to repay its mortgage loan.
+Added: In addition, recent increases in mortgage rates have generally not led to lower housing costs (including due to a possible "lock-in" effect), which has led to significantly lower home affordability and thus adversely impacted the cost of owning a home, which could lead to an increase in defaults on the mortgage loans underlying many of our investments.
In periods following home price declines, "strategic defaults" (decisions by borrowers to default on their mortgage loans despite having the ability to pay) also may become more prevalent.
−Removed: In the event of defaults under residential mortgage loans backing any of our Non-Agency RMBS, we will bear a risk
−Removed: of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the residential mortgage loan.
+Added: In the event of defaults under residential mortgage loans backing any of our Non-Agency RMBS, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the residential mortgage loan.
Moreover, in the event of the bankruptcy of a residential mortgage loan borrower, the residential mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the residential mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.
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In certain instances, second lien investments may include home equity lines of credit, which may subject us to future funding obligations, which could have an adverse impact on our liquidity.
+Added: Risks Related to Legacy WMC Commercial Investments
+Added: Commercial real estate-related investments that are secured by commercial real property, which were acquired by us in the WMC acquisition, are subject to delinquency, foreclosure and loss, which could result in losses to us.
+Added: In connection with the WMC acquisition, we acquired commercial mortgage loans and CMBS with an aggregate fair value of $122.7 million as of December 31, 2023.
+Added: CMBS may be secured by a single commercial mortgage loan or a pool of commercial mortgage loans.
+Added: Commercial real estate debt instruments (e.g., mortgages and mezzanine loans) that are secured by commercial property are subject to risks of delinquency and foreclosure and risks of loss that are arguably greater than similar risks associated with a pool of loans secured by single-family residential properties.
+Added: The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower.
+Added: If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired.
+Added: Net operating income of an income-producing property can be affected by a number of factors that include:
+Added: • overall macroeconomic conditions in the area in which the properties underlying the mortgages are located;
+Added: • tenant mix and the success of tenant businesses;
+Added: • property location, condition and management decisions;
+Added: • competition from comparable types of properties;
+Added: • changes in law that increase operating expenses or limit rents that may be charged.
+Added: In addition, we are exposed to the risk of judicial proceedings with our borrowers and entities we invest in, including bankruptcy or other litigation, as a strategy to avoid foreclosure or enforcement of other rights by us as a lender or investor.
+Added: In the event that any of the properties or entities underlying or collateralizing our loans or investments experiences any of the foregoing events or occurrences, the value of, and return on, such investments could be reduced, which would adversely affect our results of operations and financial condition.
+Added: If our Manager overestimates the loss-adjusted yields of our CMBS investments, we may experience losses.
+Added: Our Manager will analyze any CMBS investments we may acquire based on loss-adjusted yields, taking into account estimated future losses on the mortgage loans included in the securitization's pool of loans, and the estimated impact of these losses on expected future cash flows.
+Added: Our Manager's loss estimates may not prove accurate, as actual results may vary from estimates.
+Added: In the event that our Manager underestimates the pool level losses relative to the price we pay for a particular CMBS investment, we may experience losses with respect to such investment.
+Added: If we do not control the special servicing of the mortgage loans included in the CMBS in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests.
+Added: With respect to CMBS in which we invest, overall control over the special servicing of the related underlying mortgage loans will be held by a "directing certificate holder" or a "controlling class representative," which is appointed by the holders of the
+Added: most subordinate class of CMBS in such series.
+Added: We may not have the right to appoint the directing certificate holder.
+Added: In connection with the servicing of the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificate holder, take actions with respect to the specially serviced mortgage loans that could adversely affect our interests.
Risks Related to U.S.
5 unchanged sentences
Treasury undertook a series of actions to stabilize financial markets, generally, and Fannie Mae and Freddie Mac, in particular.
−Removed: On September 7, 2008, in response to the deterioration in the financial condition of Fannie Mae and Freddie Mac, the FHFA placed Fannie Mae and Freddie Mac into conservatorship, which is a statutory process pursuant to which the FHFA operates Fannie Mae and Freddie Mac as conservator in an effort to stabilize the entities.
+Added: On September 7, 2008, in response to the deterioration in the financial condition of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency ("FHFA") placed Fannie Mae and Freddie Mac into conservatorship, which is a statutory process pursuant to which the FHFA operates Fannie Mae and Freddie Mac as conservator in an effort to stabilize the entities.
The appointment of the FHFA as conservator of both Fannie Mae and Freddie Mac allows the FHFA to control the actions of the two GSEs.
24 unchanged sentences
All the Agency RMBS in which we invest depend on a steady stream of payments on the mortgages underlying the securities.
−Removed: As conservator of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency ("FHFA") may disaffirm or repudiate (subject to certain limitations for qualified financial contracts) contracts that Freddie Mac or Fannie Mae entered into prior to the FHFA’s appointment as conservator if it determines, in its sole discretion, that performance of the contract is burdensome and that disaffirmation or repudiation of the contract promotes the orderly administration of its affairs.
+Added: As conservator of Fannie Mae and Freddie Mac, the FHFA may disaffirm or repudiate (subject to certain limitations for qualified financial contracts) contracts that Freddie Mac or Fannie Mae entered into prior to the FHFA’s appointment as conservator if it determines, in its sole discretion, that performance of the contract is burdensome and that disaffirmation or repudiation of the contract promotes the orderly administration of its affairs.
The Housing and Economic Recovery Act of 2008, or HERA, requires the FHFA to exercise its right to disaffirm or repudiate most contracts within a reasonable period of time after its appointment as conservator.
14 unchanged sentences
These loan modification, loss mitigation and refinance programs may adversely affect the value of, and the returns on, mortgage-backed securities and residential mortgage loans that we own or may purchase.
−Removed: In addition, the CARES Act includes programs related to mortgage loan forbearance and loan modification to qualifying borrowers who have difficulty making their loan payments, and the FHA and FHFA have implemented a number of federal programs designed to assist homeowners, including foreclosure moratoriums.
−Removed: It is anticipated that as a result of financial difficulties due to the COVID-19 pandemic, borrowers will continue to request forbearance or other relief with respect to their mortgage payments.
−Removed: Further, across the country, moratoriums were imposed in certain states to stop evictions and foreclosures in an effort to lessen the financial burden created by the COVID-19 pandemic.
−Removed: It is anticipated that other forbearance programs, foreclosure moratoriums or other programs or mandates may be imposed or extended, including those that will impact mortgage related assets.
+Added: In the event of a future outbreak or pandemic, it is anticipated that other forbearance programs, foreclosure moratoriums or other programs or mandates may be imposed, including those that will impact mortgage related assets.
These forbearance and foreclosure moratorium programs may adversely affect the value of, and the returns on, mortgage-backed securities and residential mortgage loans that we own or may purchase.
Risks Related to Financing Activities
+Added: We have a material amount of corporate indebtedness, which could have significant effects on our business.
+Added: As of December 31, 2023, we had $86.25 million aggregate principal amount of senior unsecured indebtedness, represented by the Legacy WMC Convertible Notes, which were assumed by one of our subsidiaries, and guaranteed by the Company, in the WMC acquisition.
+Added: In addition, in January 2024, we issued an aggregate of $34.5 million in 9.500% Senior Notes due 2029 and, as of the date of this Annual Report, we have used approximately $7.1 million of the proceeds from such issuance to repurchase a portion of the Legacy WMC Convertible Notes.
+Added: As a result, as of the date of this Annual Report, we had approximately $79.12 million aggregate principal amount of Legacy WMC Convertible Notes outstanding, which can be redeemed at our option on or after June 15, 2024, and mature on September 15, 2024.
+Added: There can be no assurances we will be able to refinance our corporate indebtedness, including the remaining Legacy WMC Convertible Notes, (1) on commercially reasonable terms, (2) on terms, including with respect to interest rates, as favorable as our current debt, or (3) at all.
+Added: If we are unable to generate cash flow from operations in the future sufficient to address the maturity of our corporate indebtedness, we may be required to adopt one or more alternatives, such as selling assets at inopportune times, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive.
+Added: Our ability to restructure or refinance our indebtedness will depend on the capital markets and our financial condition at such time.
+Added: Economic conditions and the credit markets have historically experienced, and may continue to experience, periods of volatility, uncertainty, or weakness that could impact the availability or cost of debt financing.
+Added: Any refinancing of our corporate unsecured indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
+Added: Our inability to generate sufficient cash flow to satisfy our debt service requirements or to refinance our obligations on commercially reasonable terms may adversely affect our cash flows, ability to make distributions to our stockholders, financial condition, and results of operations.
+Added: In addition, we may consider making strategic investments, and we may elect to finance these endeavors by incurring additional indebtedness.
+Added: The amount of such indebtedness could have material adverse consequences for us, including:
+Added: • hindering our ability to adjust to changing market, industry or economic conditions;
+Added: limiting our ability to access the capital markets to raise additional equity or refinance maturing debt on favorable terms or to fund acquisitions or emerging businesses;
+Added: • limiting the amount of cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses;
+Added: • limiting our ability to deduct interest under Section 163(j) of the Code;
+Added: • making us more vulnerable to economic or industry downturns, including interest rate increases;
+Added: • placing us at a competitive disadvantage compared to less leveraged competitors.
+Added: Moreover, we may be required to raise substantial additional capital to execute our business strategy.
+Added: Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control.
+Added: If we are unable to obtain additional financing, our credit ratings could be adversely affected, which could raise our borrowing costs and limit our future access to capital and our ability to satisfy our obligations under our indebtedness.
Our business strategy involves the use of leverage, and we may become overleveraged or not achieve what we believe is optimal leverage, which may materially adversely affect our liquidity, results of operations or financial condition.
1 unchanged sentence
Pursuant to our leverage strategy, we borrow against a substantial portion of the market value of our mortgage investments and use the borrowed funds to finance our investment portfolio and the acquisition of additional investment assets.
−Removed: The risks associated with leverage are more acute during periods of market volatility and disruption and economic slowdown or recession, which the U.S.
−Removed: economy is currently experiencing.
+Added: The risks associated with leverage are more acute during periods of market volatility and disruption and economic slowdown or recession.
We may not be able to achieve our desired leverage ratio for a number of reasons, including if:
18 unchanged sentences
The terms we receive on such financings are influenced by the demand for similar funding by our competitors, including other REITs, specialty finance companies and other financial entities.
−Removed: Many of our competitors are significantly larger than us, have greater financial resources and significantly
−Removed: larger balance sheets than we do.
+Added: Many of our competitors are significantly larger than us, have greater financial resources and significantly larger balance sheets than we do.
Any sizable interest rate shock or disruption in secondary mortgage markets resulting in the failure of one or more of our largest competitors may have a materially adverse effect on our ability to access or maintain short-term financing for our target assets.
2 unchanged sentences
We depend upon a limited number of financing counterparties to fund our investments.
−Removed: The aggregate number of our financing counterparties was six as of December 31, 2022.
+Added: The aggregate number of our financing counterparties was seven as of December 31, 2023.
The limited number of financing counterparties may reduce our ability to obtain financing on favorable terms and increases our counterparty credit risk.
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In addition, conditions in the capital markets may make the issuance of any such securitization less attractive to us even when we do have sufficient eligible assets or securities.
−Removed: While we would generally intend to retain a portion of the interests issued under such securitizations and, therefore, still have exposure to any investments included in such securitizations, our inability to enter into such securitizations may increase our overall exposure to risks associated with direct ownership of such investments, including the risk of default.
+Added: While we generally intend to retain a portion of the interests issued under such securitizations and, therefore, still have exposure to any investments included in such securitizations, our inability to enter into such securitizations may increase our overall exposure to risks associated with direct ownership of such investments, including the risk of default.
If we are unable to obtain and renew short-term repurchase agreements or to consummate securitizations to finance the selected investments on a long-term basis, we may be required to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price.
6 unchanged sentences
Further, we may have limited or no recourse against the seller from whom we purchased the loans.
−Removed: Such recourse may be limited due to a variety of factors, including the absence of a
−Removed: representation or warranty from the seller corresponding to the representation provided by us or the contractual expiration thereof.
+Added: Such recourse may be limited due to a variety of factors, including the absence of a representation or warranty from the seller corresponding to the representation provided by us or the contractual expiration thereof.
In certain instances, we rely on the seller to directly make representations and warranties regarding loans in a securitization.
15 unchanged sentences
If we fail to meet or satisfy any covenant, supplemental term or representation and warranty, an event of default could be declared under these agreements and our lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral, enforce their respective interests against existing collateral pledged under such agreements and restrict our ability to make additional borrowings.
−Removed: Certain financing agreements may contain cross-default and cross-acceleration provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default.
+Added: Certain financing agreements may contain cross-default and
+Added: cross-acceleration provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default.
A default also could significantly limit our financing alternatives, which could cause us to curtail our investment activities or dispose of assets when we otherwise would not choose to do so.
7 unchanged sentences
Because the cash we receive from lenders when we initially sell or deliver the assets to the lender is less than the value of those assets (this difference is the haircut), if the lender defaults on its obligation to resell or return the same assets back to us (whether due to insolvency of the lender or otherwise) we may incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities).
−Removed: On December 31, 2022, we had greater than 5% stockholders' equity at risk on a GAAP basis and non-GAAP basis with three repurchase agreement counterparties:
−Removed: Credit Suisse AG, Cayman Islands Branch, BofA Securities, Inc., and Barclays Capital Inc.
+Added: On December 31, 2023, we had greater than 5% stockholders' equity at risk on a GAAP basis and non-GAAP basis with four repurchase agreement counterparties including Barclays Capital Inc., BofA Securities, Inc., Goldman Sachs Bank USA, and JP Morgan Securities, LLC.
+Added: Additionally, the Company had greater than 5% stockholders' equity at risk related to financing arrangements obtained on certain retained interests in securitizations held in a trust that issued certificates to various third-party investors.
Our rights under our repurchase agreements may be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under the financing arrangements, which may allow our lenders to repudiate our financing arrangements.
1 unchanged sentence
Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreements to avoid the automatic stay provisions of the U.S.
−Removed: Bankruptcy Code and to foreclose on the pledged collateral
−Removed: without delay, impacting our legal title and the right to proceeds.
+Added: Bankruptcy Code and to foreclose on the pledged collateral without delay, impacting our legal title and the right to proceeds.
In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as that of an unsecured creditor.
2 unchanged sentences
Pursuant to the terms of borrowings under our financing arrangements, we are subject to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.
−Removed: We enter into financing arrangements to finance the acquisition of our target assets.
−Removed: Pursuant to the terms of borrowings under our financing arrangements, a decline in the value of the collateral may result in our lenders initiating margin calls.
+Added: We enter into repurchase agreements or similar financing arrangements to finance the acquisition of our target assets.
+Added: Pursuant to the terms of borrowings under such financing arrangements, a decline in the value of the collateral may result in our lenders initiating margin calls.
A margin call requires us to pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of the borrowing.
6 unchanged sentences
Because of the leverage we expect to have, we may incur substantial losses upon the threat or occurrence of a margin call.
−Removed: The risks associated with leverage are more acute during periods of economic slowdown or recession, which the U.S.
−Removed: economy has experienced and may continue to experience in connection with the conditions created by the COVID-19 pandemic.
+Added: The risks associated with leverage are more acute during periods of economic slowdown, recession, or an outbreak of a highly infectious disease or pandemic, which the U.S.
+Added: economy has experienced and may experience in the future.
The Federal Reserve’s actions and statements regarding monetary policy and the management of its balance sheet can affect the fixed income and mortgage finance markets in ways that could adversely affect our future business and financial results and the value of, and returns on, real estate-related investments and other assets we own or may acquire.
Actions taken by the Federal Reserve to set or adjust monetary policy or to manage the overall size and composition of its balance sheet, and statements it makes regarding the foregoing, may affect the expectations and outlooks of market participants in ways that disrupt our business and adversely affect the value of, and returns on, our portfolio of real-estate related investments and the pipeline of mortgage loans we own or may originate or acquire.
−Removed: In March 2022, in an attempt to curb the inflation rate, the Federal Reserve raised its benchmark federal funds rate by 0.25% to a range between 0.25% and 0.50%, the first increase since December 2018.
−Removed: In addition, through a series of rapid federal funds rate increases in May 2022, June 2022, July 2022, September 2022, November 2022, December 2022 and February 2023, the Federal Reserve increased the federal funds rate to a range between 4.50% and 4.75%.
−Removed: Further, the Federal Reserve confirmed its plan to reduce its balance sheet at a rapid pace beginning in May 2022, effectively concluding the nearly 15-year-long quantitative easing era (in which the Federal Reserve effectively increased liquidity to consumers and businesses) and launching a reverse process known as quantitative tightening.
−Removed: In addition, the Federal Reserve has indicated that it expects continued increases in interest rates in 2023 and 2024.
−Removed: These conditions have resulted in an inversion of the yield curve, which may be a signal that we are entering into a recessionary period.
−Removed: To the extent benchmark interest rates rise or the yield curve flattens further as a result of the Federal Reserve’s policy actions or statements, one of the immediate potential impacts on our business would be a reduction in the overall value of the pool of mortgage loans that we own and the overall value of the pipeline of mortgage loans that we have identified for origination or purchase.
+Added: For example, to control the rate of inflation, the Federal Reserve launched a reverse process known as quantitative tightening and raised its benchmark federal funds rate from nearly zero in March 2022 to a range between 5.25% and 5.50%, as of December 31, 2023.
+Added: These conditions have resulted in an inversion of the yield curve, which can be a signal that we are entering into a recessionary period.
+Added: Although the economy has remained relatively strong and there are expectations that the Federal Reserve will begin reducing the federal funds rate in 2024, these expectations might not materialize.
+Added: To the extent benchmark interest rates continue to rise or the yield curve flattens further as a result of the Federal Reserve’s policy actions or statements, one of the immediate potential impacts on our business would be a reduction in the overall value of the pool of mortgage loans that we own and the overall value of the pipeline of mortgage loans that we have identified for origination or purchase.
Rising benchmark interest rates also generally have a negative impact on the overall cost of short- and long-term borrowings we use to finance our acquisitions and holdings of mortgage loans, including as a result of the requirement to post additional margin (or collateral) to lenders to offset any associated decline in value of the mortgage loans we finance with short-term borrowings subject to market value-based margin calls.
1 unchanged sentence
In addition, any inability to fund originations or acquisitions of mortgage loans could damage our reputation as a reliable counterparty in the mortgage finance markets.
−Removed: To the extent benchmark interest rates rise or the yield curve flattens further as a result of the Federal Reserve’s policy actions or statements, it would also likely impact the volume of residential mortgage loans available for purchase in the marketplace and our ability to compete to acquire residential mortgage loans as part of our residential mortgage banking activities.
+Added: In addition, benchmark interest rates rising or the yield curve flattening would also likely impact the volume of residential mortgage loans available for purchase in the marketplace and our ability to compete to acquire residential mortgage loans as part of our residential mortgage banking activities.
These impacts could result from, among other things, a lower overall volume of mortgage refinance activity by mortgage borrowers and an increased level of competition from large commercial banks that may operate with a lower cost of capital than we do, including as a result of Federal Reserve monetary policies that impact banks more favorably than us and other non-bank institutions.
These and other impacts of developments of the type described above may have a negative impact on our business and results of operations and we cannot accurately predict the full extent of these impacts or for how long they may persist.
−Removed: The replacement of LIBOR with SOFR-based rates or other alternative reference rates may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.
−Removed: The interest rates on our repurchase agreements, as well as adjustable-rate mortgage loans in our securitizations, are generally based on LIBOR.
−Removed: The cessation of LIBOR will occur on June 30, 2023.
−Removed: Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
−Removed: CME Term SOFR is a forward-looking term rate based on SOFR that, when added to a spread adjustment, is recommended by the Alternative Reference Rates Committee as a LIBOR replacement in certain cash products.
−Removed: CME Term SOFR, plus the statutory spread adjustment, has also been selected by the Board of Governors of the Federal Reserve as the benchmark replacement applicable to many products that will transition away from LIBOR automatically under the Adjustable Interest Rate (LIBOR) Act.
−Removed: The transition to SOFR, Term SOFR or another alternative reference rate may present challenges, which could make it difficult for financial institutions to offer SOFR-based debt products, including but not limited to, the determination of the spread adjustment required to convert LIBOR to SOFR, and that such transition may require substantial negotiations with counterparties.
−Removed: There is no guarantee that the transition from LIBOR to SOFR or SOFR-based rates will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could affect our interest expense and earnings and may have an adverse effect on our business, results of operations, financial condition, and stock price.
−Removed: The impact of any basis risk difference between LIBOR and SOFR or Term SOFR may negatively affect our net interest margin.
−Removed: Any of these alternative methods may result in interest rates that are higher than if LIBOR Rate was available in its current form, which would increase our borrowing costs, and could have a material adverse effect on our net interest margin.
−Removed: In addition, the manner and timing of the shift is currently unknown.
−Removed: It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time, and it is possible that not all of our assets and liabilities will transition to the same alternative reference rate, in each case increasing the difficulty of hedging.
−Removed: We and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging, and risk management.
−Removed: The process of transition involves operational risks.
−Removed: Certain financial instruments will not be eligible for any legislative or regulatory fallback solution and thus will need to be amended through negotiation of the counterparties.
−Removed: Holders of our fixed-to-floating preferred shares should refer to the relevant prospectus to understand the USD-LIBOR cessation provisions applicable to that class.
−Removed: We do not currently intend to amend any of our fixed-to-floating preferred shares to change the existing USD-LIBOR cessation fallbacks.
−Removed: Our fixed-to-floating preferred shares become callable at the same time they begin to pay a USD-LIBOR-based rate.
−Removed: Should we choose to call our fixed-to-floating preferred shares in order to avoid a dispute over the results of the USD-LIBOR fallbacks, we may be forced to raise additional funds at an unfavorable time.
+Added: Further, as of December 31, 2023, we have $93.2 million of 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock"), which will transition to a floating rate on September 15, 2024.
+Added: A continued increase in interest rates will increase the cost of the Series C Preferred Stock, refinancing of our existing borrowings or the issuance of new variable rate debt.
Risks Related to our Management and our Relationship with our Manager and its Affiliates
We are dependent upon our Manager, its affiliates and their key personnel and may not find a suitable replacement if the management agreement with our Manager is terminated or such key personnel are no longer available to us, which would materially and adversely affect us.
−Removed: In accordance with our management agreement, we are externally managed and advised by our Manager, and all of our officers are employees of Angelo Gordon or its affiliates.
+Added: In accordance with our management agreement, we are externally managed and advised by our Manager, and all of our officers are employees of TPG Angelo Gordon or its affiliates.
We have no separate facilities, and we have no employees.
−Removed: Pursuant to our management agreement, our Manager is obligated to supply us with our senior management team, and the members of that team may have conflicts in allocating their time and services between us and other entities or accounts managed by our Manager and its affiliates, now or in the future, including other Angelo Gordon funds.
+Added: Pursuant to our management agreement, our Manager is obligated to supply us with our senior management team, and the members of that team may have conflicts in allocating their time and services between us and other entities or accounts managed by our Manager and its affiliates, now or in the future, including other TPG Angelo Gordon funds.
Substantially all of our investment, financing and risk management decisions are made by our Manager and not by us, and our Manager also has significant discretion as to the implementation of our operating policies and strategies.
−Removed: Furthermore, our Manager has the sole discretion to hire and fire employees, and our Board of Directors and stockholders have no authority over the individual employees of our Manager or Angelo Gordon, although our Board of Directors does have direct authority over our officers who are supplied by our Manager.
−Removed: Accordingly, we are completely reliant upon, and our success depends exclusively on, our Manager’s personnel, services, resources, facilities, relationships and contacts.
+Added: Furthermore, our Manager has the sole discretion to hire and fire employees, and our Board of Directors and stockholders have no authority over the individual employees of our Manager or TPG Angelo Gordon, although our Board of Directors does have direct authority over our officers who are supplied by our Manager.
+Added: Accordingly, we are completely reliant upon, and our
+Added: success depends exclusively on, our Manager’s personnel, services, resources, facilities, relationships and contacts.
No assurance can be given that our Manager will act in our best interests with respect to the allocation of personnel, services and resources to our business.
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The failure of any of our Manager’s key personnel to service our business with the requisite time and dedication, or the departure of such personnel from our Manager, or the failure of our Manager to attract and retain key personnel, would materially and adversely affect our ability to execute our business plan.
−Removed: Further, when there are turbulent conditions in the real estate industry, distress in the credit markets or other times when we will need focused support and assistance from our Manager, the attention of our Manager’s personnel and executive officers and the resources of Angelo Gordon will also be required by the other funds and accounts managed by our Manager and its affiliates, placing our Manager’s resources in high demand.
+Added: Further, when there are turbulent conditions in the real estate industry, distress in the credit markets or other times when we will need focused support and assistance from our Manager, the attention of our Manager’s personnel and executive officers and the resources of TPG Angelo Gordon will also be required by the other funds and accounts managed by our Manager and its affiliates, placing our Manager’s resources in high demand.
In such situations, we may not receive the level of support and assistance that we may receive if we were internally managed or if our Manager and its affiliates did not act as a manager for other entities.
If the management agreement is terminated and a suitable replacement for our Manager is not secured in a timely manner or at all, we would likely be unable to execute our business plan, which would materially and adversely affect us.
+Added: Moreover, in November 2023, TPG completed its acquisition of TPG Angelo Gordon, the direct parent company of our Manager.
+Added: As a result of the acquisition, TPG Angelo Gordon operates its business as a new platform within TPG, which is a publicly traded company.
+Added: In addition, as a result of the acquisition, our Manager became an indirect subsidiary of TPG.
+Added: Uncertainty about the effect of the acquisition of TPG Angelo Gordon with TPG on employees, clients and business of TPG Angelo Gordon, as well as time and attention required by our management team and other personnel of our Manager to integration and other matters related to the acquisition, may have an adverse effect on TPG Angelo Gordon and subsequently on us and the other funds managed by TPG Angelo Gordon.
+Added: Retention and motivation of certain employees may be challenging due to the uncertainty and difficulty of integration or a desire not to remain with TPG Angelo Gordon.
+Added: As a result of the foregoing, management of our company may be adversely affected.
+Added: Further, the completion of the acquisition may give rise to additional conflicts of interest and competition for investment opportunities among us, other TPG Angelo Gordon funds and TPG funds.
The management agreement was not negotiated on an arm’s length basis and the terms, including the fees payable to our Manager, may not be as favorable to us as if the agreement was negotiated with unaffiliated third-parties.
−Removed: All of our officers and our non-independent directors are employees of Angelo Gordon or its affiliates.
+Added: All of our officers and our non-independent directors are employees of TPG Angelo Gordon or its affiliates.
The management agreement was negotiated between related parties, and we did not have the benefit of arm’s length negotiations of the type normally conducted with an unaffiliated third-party and the terms, including the fees payable to our Manager, may not be as favorable to us.
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Our governance and operational structure could result in conflicts of interest.
−Removed: Our Manager is managed by Angelo Gordon, whose interests may not always be aligned with ours or our Manager’s.
−Removed: The employees of Angelo Gordon that devote time to managing our business may have conflicting interests between us and Angelo Gordon when managing our business.
−Removed: Angelo Gordon may decide to sell or transfer an equity interest in the Manager, which could increase the potential conflicts.
+Added: Our Manager is managed by TPG Angelo Gordon, whose interests may not always be aligned with ours or our Manager’s.
+Added: The employees of TPG Angelo Gordon that devote time to managing our business may have conflicting interests between us and TPG Angelo Gordon when managing our business.
+Added: TPG Angelo Gordon may decide to sell or transfer an equity interest in the Manager, which could increase the potential conflicts.
+Added: For example, TPG Angelo Gordon, including our Manager, was acquired by TPG in November 2023.
+Added: Following the acquisition, an information barrier was created between the historical TPG business and TPG Angelo Gordon, including our Manager.
+Added: While information barriers are designed to restrict the flow of information between certain businesses, such barriers may be breached, inadvertently or otherwise, including with respect to information regarding certain investment opportunities, deal pipelines and strategy, which could result in greater restrictions to our and other TPG Angelo Gordon funds' investment activities.
There are conflicts of interest inherent in our relationship with our Manager insofar as our Manager and its affiliates invest in real estate and other securities and loans, and whose investment objectives overlap with our investment objectives.
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To the extent such other investment vehicles acquire or divest of the same target assets as us, the scope of opportunities otherwise available to us may be adversely affected and/or reduced.
−Removed: We have broad investment guidelines, and we have co-invested and may co-invest with Angelo Gordon funds in a variety of investments.
+Added: We have broad investment guidelines, and we have co-invested and may co-invest with TPG Angelo Gordon funds in a variety of investments.
We also may invest in securities that are senior or junior to securities owned by funds managed by our Manager or its affiliates.
There can be no assurance that any procedural protection will be sufficient to assure that these transactions will be made on terms that will be at least as favorable to us as those that would have been obtained in an arm’s length transaction.
−Removed: We are subject to Angelo Gordon’s investment allocation policy, which specifically addresses some of the conflicts relating to our investment opportunities.
+Added: We are subject to TPG Angelo Gordon’s investment allocation policy, which specifically addresses some of the conflicts relating to our investment opportunities.
However, there is no assurance that this policy will be adequate to address all of the conflicts that may arise, or address such conflicts in a manner that results in the allocation of a particular investment opportunity to us or is otherwise favorable to us.
−Removed: Our Manager and Angelo Gordon and their respective employees also may have ongoing relationships with the obligors of investments or the clients’ counterparties and they or their clients may own equity or other securities or obligations issued by such parties.
−Removed: In addition, Angelo Gordon, either for its own accounts or for the accounts of other clients, may hold securities or
−Removed: obligations that are senior to, or have interests different from or adverse to, the securities or obligations that are acquired for us.
−Removed: Employees of our Manager and its affiliates may also invest in other entities managed by other Angelo Gordon entities which are eligible to purchase target assets.
+Added: Our Manager and TPG Angelo Gordon and their respective employees also may have ongoing relationships with the obligors of investments or the clients’ counterparties and they or their clients may own equity or other securities or obligations issued by such parties.
+Added: In addition, TPG Angelo Gordon, either for its own accounts or for the accounts of other clients, may hold securities or obligations that are senior to, or have interests different from or adverse to, the securities or obligations that are acquired for us.
+Added: Employees of our Manager and its affiliates may also invest in other entities managed by other TPG Angelo Gordon entities which are eligible to purchase target assets.
See Part I, Item 1 "Business - Investment Policies" for additional information related to target assets.
−Removed: Angelo Gordon or our Manager and their respective employees may make investment decisions for us that may be different from those undertaken for their personal accounts or on behalf of other clients (including the timing and nature of the action taken).
−Removed: Angelo Gordon and its affiliates may at certain times simultaneously seek to purchase or sell the same or similar investments for clients or for themselves.
−Removed: Likewise, our Manager may on our behalf purchase or sell an investment in which another Angelo Gordon client or affiliate is already invested or has co-invested.
−Removed: Such transactions may differ across Angelo Gordon clients or affiliates.
+Added: TPG Angelo Gordon or our Manager and their respective employees may make investment decisions for us that may be different from those undertaken for their personal accounts or on behalf of other clients (including the timing and nature of the action taken).
+Added: TPG Angelo Gordon and its affiliates may at certain times simultaneously seek to purchase or sell the same or similar investments for clients or for themselves.
+Added: Likewise, our Manager may on our behalf purchase or sell an investment in which another TPG Angelo Gordon client or affiliate is already invested or has co-invested.
+Added: Such transactions may differ across TPG Angelo Gordon clients or affiliates.
These instances may result in conflicts of interest, which may adversely affect our operations.
Some of our officers may hold executive or management positions with other entities managed by affiliates of our Manager, and some of our officers and directors may own equity interests or limited partnership interests in such entities.
−Removed: The owners of the Manager or its affiliates may be entitled to receive profit from the management fee we pay to our Manager either in the form of distributions by our Manager or increased value of their ownership interests (whether direct or indirect) in the Manager.
Such ownership may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for such entities than they do for us.
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For example, in 2021, we repositioned our investment strategy to focus primarily on opportunities within the non-agency residential mortgage market.
−Removed: A change in our investment strategies and policies and target asset classes may increase our exposure to interest rate risk, default risk and real estate market fluctuations, which could adversely affect the market value of our common stock and our ability to make distributions to our stockholders.
+Added: A change in our investment strategies and
+Added: policies and target asset classes may increase our exposure to interest rate risk, default risk and real estate market fluctuations, which could adversely affect the market value of our common stock and our ability to make distributions to our stockholders.
Our Manager is authorized to follow very broad investment policies and, therefore, has great latitude in determining the types of assets that are proper investments for us, the financing related to such assets, the allocations among asset classes and individual investment decisions.
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The compensation payable to our Manager will increase as a result of any future issuances of our equity securities, even if the issuances are dilutive to existing stockholders.
−Removed: In addition, beginning with the 2023 calendar year, our Manager has the ability to earn an incentive fee that is based, in large part, upon our achievement of targeted levels of adjusted net income, as calculated in accordance with the management agreement.
+Added: In addition, our Manager has the ability to earn an incentive fee that is based, in large part, upon our achievement of targeted levels of adjusted net income, as calculated in accordance with the management agreement.
In evaluating asset acquisition and other management strategies, the opportunity to earn an incentive fee based on adjusted net income may lead our Manager to place undue emphasis on the maximization of adjusted net income at the expense of other criteria, such as preservation of capital, maintaining liquidity, and/or management of credit risk or market risk, in order to achieve a higher incentive fee.
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We may not terminate or elect not to renew the management agreement, even in the event of our Manager’s poor performance, without having to pay substantial termination fees.
−Removed: Upon any such termination without cause, the management agreement provides that we will pay our Manager a termination fee equal to three times the average annual base management fee earned by our Manager during the 24-month period prior to termination, calculated as of the end of the most recently completed fiscal
+Added: Upon any such termination without cause, the management agreement provides that we will pay our Manager a termination fee equal to three times the average annual base management fee earned by our Manager during the 24-month period prior to termination, calculated as of the end of the most recently completed fiscal quarter.
While under certain circumstances the obligation to make such a payment might not be enforceable, this provision may increase the cost to us of terminating the management agreement and adversely affect our ability to terminate the management agreement without cause.
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The terms of the asset management agreement with the Asset Manager may not be as favorable to us as if the agreement was negotiated with unaffiliated third-parties.
−Removed: In connection with our investments in Non-QM Loans, GSE Non-Owner Occupied Loans, residential mortgage loans, and Re/Non-Performing Loans, we engage asset managers to provide advisory, consultation, asset management and other services to help our third-party servicers formulate and implement strategic plans to manage, collect and dispose of loans in a manner that is reasonably expected to maximize the amount of proceeds from each loan.
−Removed: We engaged the Asset Manager, an affiliate of the Manager and direct subsidiary of Angelo Gordon, as the asset manager for certain of our non-agency loans, agency loans, residential mortgage loans and Re/Non-Performing Loans.
−Removed: We pay separate arm’s-length asset management fees as assessed and confirmed by a third-party valuation firm for (i) Non-QM Loans, (ii) non-performing loans and (iii) re-performing loans, in each case, to the Asset Manager.
+Added: In connection with our investments in Non-QM Loans, Agency-Eligible Loans, residential mortgage loans, and Re/Non-Performing Loans, we engage asset managers to provide advisory, consultation, asset management and other services to help our third-party servicers formulate and implement strategic plans to manage, collect and dispose of loans in a manner that is reasonably expected to maximize the amount of proceeds from each loan.
+Added: We engaged the Asset Manager, an affiliate of the Manager and direct subsidiary of TPG Angelo Gordon, as the asset manager for certain of our non-agency loans, agency loans, residential mortgage loans and Re/Non-Performing Loans.
+Added: We pay separate arm’s length asset management fees as assessed and confirmed by a third-party valuation firm for certain of our Non-Agency Loans, NPL/RPL and other residential loan products to the Asset Manager.
The asset management agreement was negotiated between related parties, and we did not have the benefit of arm’s length negotiations as we normally would with unaffiliated third-parties.
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Although we intend to operate so that we will maintain our qualification as a REIT, no assurance can be given that we will so qualify for any particular year.
−Removed: We also own an interest in an entity that has elected to be taxed as a REIT under the U.S.
−Removed: federal income tax laws, or a "Subsidiary REIT." The Subsidiary REIT is subject to the same REIT requirements that are applicable to us.
−Removed: If the Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to regular U.S.
−Removed: federal, state and local corporate income tax, (ii) our interest in such Subsidiary REIT would cease to be a qualifying asset for purposes of the REIT asset tests, and (iii) it is possible that we would fail certain of the REIT asset tests, in which event we also would fail to
−Removed: qualify as a REIT unless we could avail ourselves of certain relief provisions.
−Removed: While we believe that the Subsidiary REIT has qualified as a REIT under the Code, we have joined the Subsidiary REIT in filing a "protective" TRS election under Section 856(l) of the Code.
−Removed: We cannot assure you that such "protective" TRS election would be effective to avoid adverse consequences to us.
−Removed: Moreover, even if the "protective" election were to be effective, we cannot assure you that we would not fail to satisfy the requirement that not more than 20% of the value of our total assets may be represented by the securities of one or more taxable REIT subsidiaries ("TRS").
+Added: We also own interests in one or more entities that have elected to be taxed as a REIT under the U.S.
+Added: federal income tax laws, or a "Subsidiary REIT." Each Subsidiary REIT is subject to the same REIT requirements that are applicable to us.
+Added: If a Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to regular U.S.
+Added: federal, state and local corporate income tax, (ii) our interest in such Subsidiary REIT would cease to be a qualifying asset for purposes of the REIT asset tests, and (iii) it is possible that we would fail certain of the REIT asset tests, in which event we also would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions.
+Added: While we believe that each Subsidiary REIT has qualified as a REIT under the Code, we have joined each Subsidiary REIT in filing a "protective" TRS election under Section 856(l) of the Code.
+Added: We cannot assure you that each such "protective" TRS election would be effective to avoid adverse consequences to us.
+Added: Moreover, even if a "protective" election were to be effective, we cannot assure you that we would not fail to satisfy the requirement that not more than 20% of the value of our total assets may be represented by the securities of one or more TRSs.
If we fail to qualify as a REIT in any calendar year, we would be required to pay U.S.
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We intend to make distributions to our stockholders to comply with the requirements of the Code and to avoid paying corporate income tax.
−Removed: However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the distribution requirements of the Code.
+Added: However, differences in timing between the recognition of taxable income and the actual
+Added: receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the distribution requirements of the Code.
We may find it difficult or impossible to meet distribution requirements in certain circumstances.
1 unchanged sentence
For example, we may be required to accrue interest and discount income on mortgage loans, mortgage-backed securities, and other types of debt securities or interests in debt securities before we receive any payment of interest or principal on such assets.
+Added: To the extent that we buy back our debt at prices lower than par, we may recognize taxable income without a corresponding receipt of cash.
We may also acquire distressed debt investments that may be subsequently modified by agreement with the borrower.
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(i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable distribution of our shares as part of a distribution in which stockholders may elect to receive shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with REIT requirements.
−Removed: Moreover, if our only feasible alternative were to make a taxable distribution of our shares to comply with the REIT
−Removed: distribution requirements for any taxable year and the value of our shares was not sufficient at such time to make a distribution to our stockholders in an amount at least equal to the minimum amount required to comply with such REIT distribution requirements, we would generally fail to qualify as a REIT for such taxable year and would be precluded from being taxed as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.
+Added: Moreover, if our only feasible alternative were to make a taxable distribution of our shares to comply with the REIT distribution requirements for any taxable year and the value of our shares was not sufficient at such time to make a distribution to our stockholders in an amount at least equal to the minimum amount required to comply with such REIT distribution requirements, we would generally fail to qualify as a REIT for such taxable year and would be precluded from being taxed as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.
Even if we qualify as a REIT, we may face tax liabilities that reduce our cash flow.
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A domestic TRS will pay federal, state and local income tax at regular corporate rates on any income that it earns.
−Removed: In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation, and in certain circumstances, the ability of our TRSs to deduct net business interest expenses generally may be limited.
+Added: In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation, and in certain circumstances, the ability of
+Added: our TRSs to deduct net business interest expenses generally may be limited.
The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm's-length basis.
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As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous to us and could result in greater risks associated with interest rate fluctuations or other changes than we would otherwise be able to mitigate.
−Removed: Certain financing activities may subject us to U.S.
−Removed: federal income tax and could have negative tax consequences for our stockholders.
−Removed: We may enter into securitization transactions and other financing transactions that could result in us, or a portion of our assets, being treated as a taxable mortgage pool for U.S.
−Removed: federal income tax purposes.
−Removed: If we enter into such a transaction in the future, we could be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool, referred to as "excess inclusion income," that is allocable to the percentage of our shares held in record name by disqualified organizations (generally tax-exempt entities that are exempt from the tax on unrelated business taxable income, such as state pension plans and charitable remainder trusts and government entities).
−Removed: In that case, we could reduce distributions to such stockholders by the amount of tax paid by us that is attributable to such stockholder's ownership.
−Removed: If we were to realize excess inclusion income, IRS guidance indicates that the excess inclusion income would be allocated among our stockholders in proportion to the dividends paid.
−Removed: Excess inclusion income cannot be offset by losses of a stockholder.
−Removed: If the stockholder is a tax-exempt entity and not a disqualified organization, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Code.
−Removed: If the stockholder is a foreign person, it would be subject to U.S.
−Removed: federal income tax at the maximum tax rate and withholding will be required on this income without reduction or exemption pursuant to any otherwise applicable income tax treaty.
The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for U.S.
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Further, any transfer of our shares that would result in our shares being held by fewer than 100 persons will be void ab initio .
+Added: We could face adverse tax consequences if WMC failed to qualify as a REIT prior to the Merger.
+Added: In connection with the closing of the Merger, we received an opinion of counsel to the effect that WMC qualified as a REIT for U.S.
+Added: federal income tax purposes through the time of the Merger.
+Added: However, we did not request a ruling from the IRS that WMC qualified as a REIT.
+Added: Notwithstanding the opinion of counsel, if the IRS successfully challenged WMC's REIT status prior to the Merger, we could face adverse tax consequences, including:
+Added: • succeeding to WMC's liability for U.S.
+Added: federal income taxes at regular corporate rates for the periods in which WMC failed to qualify as a REIT (without regard to the deduction for dividends paid for such periods);
+Added: • succeeding to any built-in gain on WMC's assets, for which we could be liable for U.S.
+Added: federal income tax at regular corporate rates, if we were to recognize such gain in the five-year period following the Merger;
+Added: • succeeding to WMC's E&P accumulated during the periods in which WMC failed to qualify as a REIT, which we would be required to distribute to our shareholders in order to satisfy the REIT 90% distribution requirements and avoid the imposition of any excise tax as a result, we would have less cash available for operations and distributions to our shareholders, which could require us to raise capital on unfavorable terms or pay deficiency dividends.
There may be tax consequences to any modifications to our borrowings, our hedging transactions and other contracts to replace references to LIBOR.
−Removed: The publication of LIBOR rates will be discontinued after June 2023.
−Removed: We are parties to loan agreements with LIBOR-based interest rates and derivatives with LIBOR-based terms used for hedging.
−Removed: We may have to renegotiate such LIBOR-based instruments to replace references to LIBOR.
+Added: The publication of LIBOR rates was discontinued beginning July 1, 2023.
+Added: Other than our Series C Preferred Stock, which adjusts later this year, we have modified our LIBOR-based instruments to replace references to LIBOR.
Under current law, certain modifications of terms of LIBOR-based instruments may have tax consequences, including deemed taxable exchanges of the pre-modification instrument for the modified instrument.
1 unchanged sentence
The IBOR Regulations allow for the treatment of certain modifications to be deemed non-taxable events.
−Removed: We intend to migrate to a post-LIBOR environment without recognizing taxable income from deemed taxable exchanges in excess of our economic income or suffering other adverse tax consequences, but there can be no assurance that we succeed in such efforts.
+Added: We do not believe that we recognized any taxable income as a result of LIBOR migration in excess of our economic income, but there can be no assurance that the IRS would not assert a contrary position.
Risks Related to our Organization and Structure
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Section 3(c)(5)(C) exempts from the definition of "investment company" entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The staff of the SEC generally requires an entity relying on Section 3(c)(5)(C) to invest at least 55% of its portfolio in "qualifying assets" (the “55% test”) and at least another 25% in additional qualifying assets or in "real estate-related" assets (the “25% test”) (with no more than 20% comprised of miscellaneous assets).
−Removed: To the extent that our direct subsidiaries qualify only for either Section 3(c)(1) or 3(c)(7) exemptions from the Investment Company Act, we limit our holdings in those kinds of entities so that, together with other investment securities, we satisfy the 40% test.
−Removed: Although we continuously monitor our and our subsidiaries’ portfolios on an ongoing basis to determine compliance with that test, there can be no assurance that we will be able to maintain the exemptions from registration for us and each of our subsidiaries.
+Added: To the extent that our direct subsidiaries qualify only for either Section 3(c)(1) or 3(c)(7) exemptions from the Investment Company Act, we limit our holdings in those kinds of entities and in other investment securities so that we satisfy the 40% test.
+Added: Although we continuously monitor our and our subsidiaries’ portfolios on an ongoing basis to determine compliance with that test, there can be no assurance that we will be able to maintain the exemptions from registration for us and each of our subsidiaries at all times.
The method we use to classify our and our subsidiaries’ assets for purposes of the Investment Company Act is based in large measure upon no-action positions taken by the SEC staff.
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For example, these restrictions limit our and our subsidiaries’ ability to invest directly in mortgage-related securities that represent less than the entire ownership in a pool of mortgage loans, debt and equity tranches of securitizations, certain real estate companies or assets not related to real estate.
−Removed: If we fail to qualify for these exemptions, or the SEC determines that companies that invest in RMBS are no longer able to rely on these exemptions, we could be required to restructure our activities in a manner that, or at a time when, we would not otherwise choose to do so, or we may be required to register as an investment company under the Investment Company Act.
−Removed: Either of these outcomes could negatively affect the value of shares of our stock and our ability to make distributions to our stockholders.
+Added: If we fail to qualify for these exemptions, or the SEC determines that companies that invest in RMBS are no longer able to rely on these exemptions, we could be required to (a) restructure our activities to avoid being required to register as an investment company, (b) effect sales of certain assets in a manner that, or at a time when, we would not otherwise choose to do so or (c) we may be required to register as an investment company under the Investment Company Act.
+Added: Any of these outcomes could negatively affect the value of shares of our stock and our ability to make distributions to our stockholders.
If we were required to register with the CFTC as a Commodity Pool Operator, it could materially adversely affect our business, financial condition and results of operations.
1 unchanged sentence
Commodity Futures Trading Commission, or the CFTC, was given jurisdiction over the regulation of swaps.
−Removed: Under rules implemented by the CFTC, companies that utilize swaps as part of their business model, including many mortgage REITs, may be deemed to fall within the statutory definition of Commodity Pool Operator, or CPO, and, absent relief from the CFTC’s Division of Swap Dealer and Intermediary Oversight, may be required to register with the CFTC as a CPO.
+Added: Under rules implemented by the CFTC, companies that utilize swaps as part of their business model, including many mortgage REITs, may be deemed to fall within the statutory definition of Commodity Pool Operator, or CPO,
+Added: and, absent relief from the CFTC’s Division of Swap Dealer and Intermediary Oversight, may be required to register with the CFTC as a CPO.
As a result of numerous requests for no-action relief from CPO registration, in December 2012 the CFTC issued no-action relief entitled "No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts," which permits a CPO to receive relief from registration requirements by filing a claim stating that the CPO meets the criteria specified in the no-action letter.
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Investing in our common stock may involve a high degree of risk.
−Removed: Investors in our common stock may experience losses, volatility, and poor liquidity, and we may reduce our dividends in a variety of circumstances.
+Added: Investors in our common stock may experience losses, volatility, and poor liquidity, and we may reduce or stop paying our dividends in a variety of circumstances.
An investment in our common stock may involve a high degree of risk, particularly when compared to other types of investments.
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Investors in our common stock should not rely on our estimates, projections, or predictions, or on management’s beliefs about future events.
−Removed: In particular, the sustainability of our earnings and our cash flows will depend on numerous factors, including our level of business and investment activity, our access to debt and equity financing, the returns we earn, the amount and timing of credit losses,
−Removed: prepayments, the expense of running our business, and other factors, including the risk factors described herein.
+Added: In particular, the sustainability of our earnings and our cash flows will depend on numerous factors, including our level of business and investment activity, our access to debt and equity financing, the returns we earn, the amount and timing of credit losses, prepayments, the expense of running our business, and other factors, including the risk factors described herein.
As a consequence, although we seek to pay a regular common stock dividend that is sustainable, we may reduce our regular dividend rate, or stop paying dividends, in the future for a variety of reasons.
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In addition, if market participants buy shares of common stock, or securities convertible into, or exchangeable for, shares of common stock, in issuances by us in the future, it may reduce or eliminate any purchases of our common stock they might otherwise make in the open market, which in turn could have the effect of reducing the volume of shares of our common stock traded in the marketplace, which could have the effect of reducing the market price and liquidity of our common stock.
−Removed: As of February 22, 2023, our directors, executive officers and our Manager beneficially owned, in the aggregate, approximately 4.9% of our common stock (including approximately 3.5% held by our directors and executive officers).
+Added: As of March 4, 2024, our directors, executive officers and our Manager beneficially owned, in the aggregate, approximately 4.2% of our common stock (including approximately 3.2% held by our directors and executive officers).
Sales of shares of our common stock by our directors and officers are generally required to be publicly reported and are tracked by many market participants as a factor in making their own investment decisions.
As a result, future sales by these individuals or our Manager could negatively affect the market price of our common stock.
+Added: Conversion of the Legacy WMC Convertible Notes may dilute the ownership interest of existing stockholders, which could cause our share price to decline.
+Added: In connection with the WMC acquisition, one of our subsidiaries assumed, and the Company guaranteed the payment of, the $86.25 million in aggregate principal of the Legacy WMC Convertible Notes originally issued by WMC.
+Added: The Legacy WMC Convertible Notes are convertible into, at the Company's election, cash, shares of our common stock, or a combination of both, subject to the satisfaction of certain conditions and during specified periods.
+Added: As a result of the WMC acquisition and pursuant to the terms of the Legacy WMC Convertible Notes, the right to convert each $1,000 principal amount of the Legacy WMC Convertible Notes into shares of WMC Common Stock was changed into the right to convert such principal amount into the shares of our common stock and cash that a holder of 33.7952 (the applicable conversion rate immediately prior to the Effective Time) shares of WMC Common Stock would have been entitled to receive upon consummation of the WMC acquisition (subject to any settlement election by the Company under the Legacy WMC Convertible Notes).
+Added: The conversion rate is subject
+Added: to further adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the Legacy WMC Convertible Notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the supplemental indenture for the Legacy WMC Convertible Notes.
+Added: The Legacy WMC Convertible Notes can be redeemed at the Company's option on or after June 15, 2024, and mature on September 15, 2024, unless earlier converted, redeemed, or repurchased by the holders pursuant to their terms.
+Added: To the extent we issue shares of our common stock upon conversion of the Legacy WMC Convertible Notes, the conversion of some, or all of our Legacy WMC Convertible Notes, will dilute the ownership interests of existing stockholders and the market price of our common stock may be negatively affected.
We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.
We are generally required to distribute to our stockholders at least 90% of our REIT taxable income (excluding net capital gain and without regard to the deduction for dividends paid) each year for us to qualify as a REIT under the Code, which requirement we have historically satisfied through quarterly distributions of all or substantially all of our REIT taxable income in such year, subject to certain adjustments.
−Removed: In the year ended December 31, 2022, we declared $18.2 million of cash dividends on our common stock, representing aggregate dividends of $0.81 per share.
−Removed: However, as a result of the impact of the COVID-19 pandemic on our business, during 2020, we suspended dividends to stockholders beginning in the first quarter 2020 and resumed dividends to stockholders in the fourth quarter 2020.
−Removed: As a result, for 2020, cash dividends declared on our common stock were $1.2 million, representing aggregate dividends of $0.09 per share.
−Removed: Our ability to continue to pay quarterly dividends in the future may be adversely affected by a number of factors, including the risk factors described in this report.
+Added: Our ability to continue to pay quarterly dividends in the future may be adversely affected by a number of factors, including but not limited to, the risk factors described in this report.
Further, we may consider paying future dividends, if at all, in shares of common stock, cash, or a combination of shares of common stock and cash.
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stockholders, we or the applicable withholding agent may be required to withhold U.S.
−Removed: tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in
−Removed: common stock.
+Added: tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock.
In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
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As a result of these and other factors, investors who own our common stock could experience a decrease in the value of their investment, including decreases unrelated to our financial results or prospects.
−Removed: UNRESOLVED STAFF COMMENTS
−Removed: As of December 31, 2022, we did not own any real estate or other physical property materially important to our operations.
−Removed: Our principal executive offices are located at 245 Park Avenue, 26th Floor, New York, New York 10167.
−Removed: Our telephone number is (212) 692-2000.
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.