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Item 1A. Risk Factors

2023-02-16 compared with 2022-02-18 · 146 added, 126 removed, 565 unchanged (32% of the section changed)

prohibit or condition terms, acts or practices relating to residential mortgage loans that the CFPB finds abusive, unfair, deceptive or predatory, as well as to take other actions that the CFPB finds are necessary or proper to ensure responsible affordable mortgage credit remains available to consumers.

September 2019, FHFA and the U.S.

Treasury Department agreed to modifications to the Preferred Stock Purchase Agreements that will permit Fannie Mae and Freddie Mac to maintain capital reserves of $25 billion and $20 billion, respectively.

Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S.

Treasury suggested that the guarantee payment structure of Fannie Mae and Freddie Mac in the U.S.

housing finance market should be re-examined.

The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could be eliminated or considerably limited relative to historical measurements.

Treasury could also stop providing credit support to Fannie Mae and Freddie Mac in the future.

Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitutes an Agency mortgage-backed security and could have broad adverse market implications.

While the likelihood that major mortgage finance system reform will be enacted in the short term remains uncertain, it is possible that the adoption of any such reforms could adversely affect the types of assets we can buy, the costs of these assets and our business operations.

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

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

If Fannie Mae or Freddie Mac was eliminated, or their structures were to change in a material manner that is not compatible with our business model, we would not be able to acquire Agency mortgage-backed securities from these entities, which could adversely affect our business operations.

We may be subject to liability for potential violations of truth-in-lending or other similar consumer protection laws and regulations.

Federal consumer protection laws and regulations regulate residential mortgage loan underwriting and originators’ lending processes, standards, and disclosures to borrowers.

These laws and regulations include, among others, the Consumer Financial Protection Bureau’s (“CFPB”) “ability-to-repay” and “qualified mortgage” regulations.

In addition, there are various other federal, state, and local laws and regulations that are intended to discourage predatory lending practices by residential mortgage loan originators.

For example, the federal Home Ownership and Equity Protection Act of 1994 (“HOEPA”) which was expanded under the Dodd Frank Act, prohibits inclusion of certain provisions in residential mortgage loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination.

The Dodd-Frank Act grants enforcement authority and broad discretionary regulatory authority to the CFPB to prohibit or condition terms, acts or practices relating to residential mortgage loans that the CFPB finds abusive, unfair, deceptive or predatory, as well as to take other actions that the CFPB finds are necessary or proper to ensure responsible affordable mortgage credit remains available to consumers.

The Dodd-Frank Act also affects the securitization of mortgages (and other assets) with requirements for risk retention by securitizers and requirements for regulating rating agencies.

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On December 10, 2020, the Consumer Financial Protection Bureau adopted a set of “bright-line” loan pricing thresholds to replace the previous qualified mortgage 43% debt-to-income threshold calculated in accordance with “Appendix Q”.

The Consumer Financial Protection Bureau also created a new category of a qualified mortgage, referred to as a “Seasoned QM”, which consists of first-lien, fixed rate loans that met certain performance requirements over a seasoning period of at least 36 months, are held in portfolio until the end of the seasoning period by the originating creditor or first purchaser, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements.

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36 months, are held in portfolio until the end of the seasoning period by the originating creditor or first purchaser, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements.

At this time, however, there can be no assurance what impact the final rules will have on the mortgage market and the “ability-to-repay” rules.

Furthermore, the temporary qualified mortgage provision applicable to certain mortgage loans eligible for purchase or guarantee by the GSEs under the ability-to-repay, commonly referred to as the “GSE patch,” is scheduled to expire on the earlier of (i) the mandatory compliance date of the final rule amending the general qualified mortgage definition described above (which is July 1, 2021) or (ii) the date that the GSEs exit conservatorship.

We cannot predict the impact of its expiration on the mortgage market.

On April 27, 2021, the CFPB issued a final rule extending the mandatory compliance date of the General Qualified Mortgage Rule to October 1, 2022.

It similarly extends expiration of the GSE patch to October 1, 2022 or the date the applicable GSE exits conservatorship, whichever happens first.

The impact of the expiration of the patch on the mortgage market is still unclear.

Various regulatory measures enacted in response to the COVID-19 pandemic affect mortgage servicing and could have a material adverse effect on our business and financial results.

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On November 10, 2021, the Board of Governors of the Federal Reserve, the CFPB, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the state financial regulators (collectively, agencies) announced that they were discontinuing the more flexible supervisory approach announced in April 2020, concluding that servicers have had sufficient time to adjust their operations by, among other things, taking steps to work with consumers affected by the COVID-19 pandemic and developing more robust business continuity and remote work capabilities.

CFPB’s December 2021 Supervisory Highlights shows, among other things, that CFPB is prioritizing compliance with Regulation Z and Regulation X, as well as unfair and deceptive acts or

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practices prohibited by the CFPA.

This enhanced scrutiny is likely to continue to increase the economic and compliance costs for participants in the mortgage and securitization industries, including us.

We may not be able to maintain compliance with laws and regulations applicable to our Residential Credit or MSR businesses.

CFPB’s December 2021 Supervisory Highlights shows, among other things, that CFPB is prioritizing compliance with Regulation Z and Regulation X, as well as unfair and deceptive acts or practices prohibited by the CFPA.

The Fall 2022 Supervisory Highlights report published by the CFPB illustrated enhanced scrutiny continued throughout the first half of 2022 and, while some COVID-related provisions sunset in October, its approach is likely to continue to increase the economic and compliance costs for participants in the mortgage and securitization industries, including us, as its examinations remain focused on credit reporting, mortgage servicing fees charged to consumers, and proper handling of COVID-19 protections.

We may not be able to maintain compliance with laws and regulations applicable to our Residential Credit or MSR businesses, including through the manner in which we oversee the compliance obligations of our third-party service providers.

While we are not required to obtain licenses to purchase mortgage-backed securities, the purchase of residential mortgage loans and certain business purpose mortgage loans in the secondary market may, in some circumstances, require us to maintain various state licenses.

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Our failure to obtain or maintain required licenses or our failure to comply with regulatory requirements that are applicable to our business of acquiring mortgage loans may restrict our residential credit business and investment options and could harm our business and expose us to penalties or other claims.

Although we utilize unaffiliated servicing companies to carry out the actual servicing of MSR and the loans we purchase together with the related MSR (including all direct interface with the borrowers), we are ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that the loans and MSR are serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation.

To manage this risk, we have a robust oversight process that monitors the activities of the third-party servicers.

This oversight process is also subject to regulatory requirements and expectations that we are expected to meet.

Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business.

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We are subject to regulation by laws at the local, state and federal level, including securities and tax laws and financial accounting and reporting standards.

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Our registered investment adviser subsidiary is subject to periodic SEC examinations and other requirements under the Investment Advisers Act and related regulations primarily intended to benefit advisory clients.

These additional

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requirements relate to, among other things, maintaining an effective and comprehensive compliance program, recordkeeping and reporting requirements and disclosure requirements.

These additional requirements relate to, among other things, maintaining an effective and comprehensive compliance program, recordkeeping and reporting requirements and disclosure requirements.

The Investment Advisers Act generally grants the SEC broad administrative powers, including the power to limit or restrict an investment adviser from conducting advisory activities in the event it fails to comply with federal securities laws.

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This interpretation was promulgated by the SEC staff in a no-action letter in the 1980s, was reaffirmed by the SEC in 1992 and has been commonly relied upon by mortgage REITs.

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On August 31, 2011, the SEC issued a concept release titled “Companies Engaged in the Business of Acquiring Mortgages and Mortgage-Related Instruments” (SEC Release No.

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If any Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to regular U.S.

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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 maintain our qualification as a REIT unless we could avail ourselves of certain relief provisions.

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A REIT would be required to pay a penalty of $50,000, however, in the case of each failure.

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Our distribution requirements could adversely affect our ability to execute our business plan.

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In such circumstances we may make distributions according to our business plan that are within our wherewithal from an economic or cash management perspective, but that are labeled as return of capital for tax reporting purposes, as they are in excess of taxable income in that period.

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Distributions to tax-exempt investors may be classified as unrelated business taxable income.

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• a portion of the distributions paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as unrelated business taxable income.

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We may choose to pay dividends in our own stock.

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Our TRSs will pay corporate income tax on their taxable income, and their after-tax net income will be available for distribution to us.

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Moreover, the annual gross income tests that must be satisfied to maintain our REIT qualification may limit the amount of dividends that we can receive from our TRSs.

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We may not be able to avoid application of these taxes.

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Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

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These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

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Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

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The REIT provisions of the Code could substantially limit our ability to hedge our liabilities.

Any income from a properly designated hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets generally does not constitute “gross income” for purposes of the 75% or 95% gross income tests.

Any income from a properly designated hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be

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made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets generally does not constitute “gross income” for purposes of the 75% or 95% gross income tests.

To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests.

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The failure of a mezzanine loan or similar debt to qualify as a real estate asset could adversely affect our ability to qualify as a REIT.

As of Q3 2021, we have disposed our interest in mezzanine loans and similar debt (including preferred equity investments that we treat as mezzanine loans for U.S.

federal income tax purposes) through our prior commercial real estate business, for which the IRS has provided a safe harbor but not rules of substantive law.

From time to time, we have invested and may in the future invest in mezzanine loans and similar debt (including preferred equity investments that we treat as mezzanine loans for U.S.

federal income tax purposes), for which the IRS has provided a safe harbor but not rules of substantive law.

Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test.

We acquired mezzanine loans or similar debt that may not have met all of the requirements of this safe harbor.

In the event we owned a mezzanine loan or similar debt that does not meet the safe harbor, the IRS could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests and, if such a challenge were sustained, we could retroactively fail to maintain our qualification as a REIT.

The mezzanine loans or similar debt that we may acquire may not have met all of the requirements of this safe harbor.

Qualifying as a REIT involves highly technical and complex provisions of the Code.

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federal income tax purposes.

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The tax on prohibited transactions limits our ability to engage in certain transactions.

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federal income tax purposes.

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).

If we enter into such a transaction in the future,

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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).

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.

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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 lease of qualified healthcare properties to a TRS is subject to special requirements.

We lease certain qualified healthcare properties we acquired from MTGE Investment Corp.

(“MTGE”) to a TRS, which hires a manager to manage the healthcare operations at these properties.

The lease revenues from this structure are treated as rents from real property if (1) they are paid pursuant to an arms-length lease of a qualified healthcare property with a TRS and (2) the manager qualifies as an “eligible independent contractor,” as defined in the Code.

If any of these conditions is not satisfied, then the rents may not be treated as revenues from real property for purposes of the REIT gross income tests.

Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.

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While there is no direct authority with respect to the qualification of TBAs as real estate assets or U.S.

Government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test, we treat our TBAs as qualifying assets for purposes of the REIT asset tests, and we treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion of counsel substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of real estate assets, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of our

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TBAs should be treated as gain from the sale or disposition of an interest in mortgages on real property.

Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions.

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Treasury, which results in statutory changes as well as frequent revisions to regulations and interpretations.

Several recent proposals have been made that would make substantial changes to the U.S.

federal income tax laws generally.

We cannot predict whether any of these proposed changes will become law.

Future revisions in federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us.

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Counterparty Risks

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Financial services institutions are interrelated as a result of trading, clearing, counterparty, borrower, or other relationships.

We have exposure to many different counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other financial institutions.

Many of these transactions expose us to credit or counterparty risk in the event of default of our counterparty or, in certain instances, our counterparty’s customers.

Such credit risk could be heightened in respect of our European counterparties due to continuing uncertainty in the global finance market, including Brexit.

There is no assurance that any such losses would not materially and adversely impact our revenues, financial condition and earnings.

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The inability to obtain or enforce an indemnity or require repurchase of a significant number of loans could adversely affect our results of operations, financial condition and business.

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Investment and Market Related Risks

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• While we have executed recapture agreements with our subservicers to attempt to retain the MSR investment resulting from a refinance transaction, the effectiveness of these efforts is impacted by borrower, subservicer, and unaffiliated lender behavior.

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• Servicers are responsible for advancing the payment of principal, interest, and escrow items on mortgage loans when those payments are not timely made by the borrower (including during periods of forbearance) and the timing and amount of recovery of those advances is unpredictable.

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If we are not able to successfully manage these and other risks related to investing in MSR, it may adversely affect the value of our MSR-related assets.

Actions by the Federal Reserve may affect the price and returns of our assets.

The Federal Reserve owns approximately $2.6 trillion of Agency mortgage-backed securities as of December 31, 2021.

Certain actions taken by the U.S.

government, including the Federal Reserve, may have a negative a impact on our results.

For example, rising short-term interest rates as the Federal Reserve lifts its monetary policy rate to slow the currently elevated rate of inflation may have a negative impact on our results.

Meanwhile, any potential future reduction of the Federal Reserve’s balance sheet might lead to higher interest rate volatility and wider mortgage-backed security spreads that could negatively impact Annaly’s portfolio.

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We invest in securities that are subject to mortgage credit risk.

We invest in securities in the credit risk transfer CRT sector.

The CRT sector is comprised of the risk sharing transactions issued by Fannie Mae (“CAS”) and Freddie Mac (“STACR”), and similarly structured transactions arranged by third party market participants.

The securities issued in the CRT sector are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors.

The holder of the securities in the CRT sector has the risk that the borrowers may default on their obligations to make full and timely payments of principal and interest.

Investments in securities in the CRT sector could cause us to incur losses of income from, and/or losses in market value relating to, these assets if there are defaults of principal and/or interest on the pool of mortgages referenced in the transaction.

The holder of the CRT may also bear the risk of the default of the issuer of the security.

A prolonged economic slowdown or declining real estate values could impair the assets we may own.

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Delinquencies and defaults on mortgage loans for which we own the servicing rights will adversely affect the amount of servicing fee income we receive and may result in increased servicing costs and operational risks due to the increased complexity of servicing delinquent and defaulted mortgage loans.

An increase in interest rates may adversely affect the market value of our interest earning assets and, therefore, also our book value.

Increases in interest rates may negatively affect the market value of our interest earning assets because in a period of rising interest rates, the value of certain interest earning assets may fall and reduce our book value.

For example, our fixed-rate interest earning assets are generally negatively affected by increases in interest rates because in a period of rising rates, the coupon we earn on our fixed-rate interest earning assets would not change.

Our book value would be reduced by the amount of a decline in the market value of our interest earning assets.

Actions by the Federal Reserve may affect the price and returns of our assets.

The Federal Reserve (the “Fed”) owns approximately $2.6 trillion of Agency mortgage-backed securities as of December 31, 2022.

Certain actions taken by the U.S.

government, including the Fed, may have a negative a impact on our results.

For example, rising short-term interest rates as the Fed lifts its monetary policy rate to slow the currently elevated rate of inflation may have a negative impact on our results.

Meanwhile, any potential future reduction of the Fed’s balance sheet might lead to higher interest rate volatility and wider mortgage-backed security spreads that could negatively impact Annaly’s portfolio.

We invest in securities that are subject to mortgage credit risk.

We invest in securities in the credit risk transfer CRT sector.

The securities issued in the CRT sector are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors.

The holder of the securities in the CRT sector has the risk that the borrowers may default on their obligations to make full and timely payments of principal and interest.

Investments in securities in the CRT sector could cause us to incur losses of income from, and/or losses in market value relating to, these assets if there are

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defaults of principal and/or interest on the pool of mortgages referenced in the transaction.

The holder of the CRT may also bear the risk of the default of the issuer of the security.

Geographic concentration exposes investors to greater risk of default and loss.

Repayments by borrowers and the market value of the related assets could be affected by economic conditions generally or specific to geographic areas or regions of the United States, and concentrations of mortgaged residential properties in particular geographic areas may increase the risk that adverse economic or other developments (including events or conditions related to the COVID-19 pandemic) or natural or man-made disasters affecting a particular region of the country could increase the frequency and severity of losses on mortgage loans or other real estate debt secured by those properties.

Repayments by borrowers and the market value of the related assets could be affected by economic conditions generally or specific to geographic areas or regions of the United States, and concentrations of mortgaged residential properties in particular geographic areas may increase the risk that adverse economic or other developments or natural or man-made disasters affecting a particular region of the country could increase the frequency and severity of losses on mortgage loans or other real estate debt secured by those properties.

From time to time, regions of the United States experience significant real estate downturns when others do not.

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There can be no assurance that the economies in such impacted areas will recover sufficiently to support income producing real estate at pre-event levels or that the costs of the related clean-up will not have a material adverse effect on the local or national economy.

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Inadequate property insurance coverage could have an adverse impact on our operating results.

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In some states, foreclosure actions can take several years or more to litigate.

At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the resolution of our claims.

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any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the resolution of our claims.

Foreclosure may create a negative public perception of the related property, resulting in a diminution of its value.

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Any such reductions could materially and adversely affect the value of the residential mortgage loans in which we invest.

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.

In addition, across the country, moratoriums are or were in place in certain states to stop evictions and foreclosures in an effort to lessen the financial burden created by the COVID-19 pandemic and various states have even promulgated guidance to regulated servicers requiring them to formulate policies to assist mortgagors in need as a result of the COVID-19 pandemic.

It is anticipated that other forbearance programs, foreclosure moratoriums or other programs or mandates will be imposed or extended, including those that will impact mortgage related assets.

Continued moratoriums on foreclosures may significantly impair the servicer’s abilities or our ability to pursue loss mitigation strategies in a timely and effective manner.

Whether or not we have participated in the negotiation of the terms of a loan, there can be no assurance as to the adequacy of the protection of the terms of the loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests.

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Whole loan mortgages are also subject to “special hazard” risk (property damage caused by hazards, such as earthquakes or environmental hazards, not covered by standard property insurance policies), and to bankruptcy risk (reduction in a borrower’s mortgage debt by a bankruptcy court).

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which could have a material adverse effect on our results of operations, financial condition and our ability to make distributions to our stockholders.

In addition, claims may be assessed against us on account of our position as mortgage holder or property owner, as applicable, including responsibility for tax payments, environmental hazards and other liabilities, which could have a material adverse effect on our results of operations, financial condition and our ability to make distributions to our stockholders.

We may be required to repurchase residential mortgage loans or indemnify investors if we breach representations and warranties.

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If we foreclose on and come to own property, our financial performance and returns to investors could suffer.

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Proposals to acquire mortgage loans by eminent domain may adversely affect the value of our assets.

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There is also no certainty as to whether any such action without the consent of investors would face legal challenge, and, if so, the outcome of any such challenge.

Our investments in corporate loans and debt securities for middle market companies carry risks.

We invest a percentage of our assets directly in the ownership of corporate loans and debt securities for middle market companies.

Non-investment grade or unrated loans to middle market businesses may carry more inherent risks than loans to larger, investment grade publicly traded entities.

These middle market companies generally have less access to public capital markets, and generally have higher financing costs.

Such companies, particularly in an economic slowdown or recession, may be in a weaker financial position, may need more capital to expand or compete, and may be unable to obtain financing from their respective private capital providers, public capital markets or from traditional sources, such as commercial banks.

In an economic downturn, middle market loan obligors, which may be highly leveraged, may be unable to meet their debt service requirements.

Middle market businesses may have narrower product lines, be more vulnerable to exogenous events and maintain smaller market shares than large businesses.

Therefore, they may be more vulnerable to competitors’ actions and

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market conditions, as well as general economic downturns.

Middle market businesses may have more difficulties implementing enterprise resource plans and may face greater challenges integrating acquisitions than large businesses.

These businesses may also experience variations in operating results.

The success of a middle market company may depend on the management talents and efforts of one or two persons or a small group of persons.

The death, disability or resignation of one or more of these persons may have a material adverse impact on such middle market company and its ability to repay its obligations.

A deterioration in the value of our investments in corporate loans and debt securities for middle market companies could have an adverse impact on our results of operations.

Subordinated tranches of non-Agency mortgage-backed securities are subordinate in right of payment to more senior securities.

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As a result, such subordinated interests generally are not actively traded and may not be liquid investments.

An increase in interest rates may adversely affect the market value of our interest earning assets and, therefore, also our book value.

Our book value would be reduced by the amount of a decline in the market value of our interest earning assets.

Our hedging strategies may be costly, and may not hedge our risks as intended.

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There can be no assurance that climate change and severe weather will not have a material adverse effect on our financial performance.

Operational Risks

Operational and Cybersecurity Risks

Inaccurate models or the data used by models may expose us to risk.

Given our strategies and the complexity of the valuation of our assets, we must rely heavily on analytical models (both proprietary models developed by us and those supplied by third parties) and information and data supplied by our third party vendors and servicers.

Models and data are used to value assets or potential asset purchases and also in connection with hedging

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Models and data are used to value assets or potential asset purchases and also in connection with hedging our assets.

When models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks.

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These risks include, but are not limited to, the following:

(i) collateral cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on simplifying assumptions that lead to errors;

(i) collateral cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled

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based on simplifying assumptions that lead to errors;

(ii) information about collateral may be incorrect, incomplete, or misleading;

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Additionally, such models may be more prone to inaccuracies in light of the unprecedented conditions created by the COVID-19 pandemic.

In particular, the economic, financial and related impacts of COVID-19 are and will be very difficult to model (including as related to the housing and mortgage markets), as the catalyst for these conditions (i.e., a global pandemic) is an event that is unparalleled in modern history and therefore is subject to wide variables, assumptions and inputs.

In particular, the economic, financial and related impacts of COVID-19 have been very difficult to model (including as related to the housing and mortgage markets), as the catalyst for these conditions (i.e., a global pandemic) is an event that is unparalleled in modern history and therefore is subject to wide variables, assumptions and inputs.

Therefore, historical data used in analytical models may be less reliable in predicting future conditions.

Further, the conditions created by COVID-19 have increased volatility across asset classes.

Further, the conditions created by COVID-19 increased volatility across asset classes.

Extreme volatility in any asset class, including real estate and mortgage-related assets, increases the likelihood of analytical models being inaccurate as market participants attempt to value assets that have frequent, significant swings in pricing.

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The expected transition away from LIBOR may require changes to models, may change the underlying economic relationships being modeled, and may require the models to be run with less historical data than is currently available for LIBOR.

We may incorrectly value LIBOR-based instruments because our models do not currently account for LIBOR cessation.

All valuation models rely on correct market data inputs.

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However, even if market data is inputted correctly, “model prices” will often differ substantially from market prices, especially for securities with complex characteristics, such as derivative instruments or structured notes.

We are highly dependent on information systems.

We are highly dependent on information systems that may expose us to cybersecurity risks.

Our business is highly dependent on communications and information systems.

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If one of those third parties experiences a system failure or cybersecurity incident, we may not have access to that information or may not have confidence in its accuracy.

We may face increased costs as we continue to evolve our cyber defenses in order to contend with changing risks.

We may face increased costs as we continue to evolve our cyber defenses in order to contend with changing risks, and possible increased costs of complying with cyber laws and regulations.

These costs and losses associated with these risks are difficult to predict and quantify, but could have a significant adverse effect on our operating results.

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and international information privacy and security regulations.

In addition, due to the transition to remote working

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environments as a result of the COVID-19 pandemic, there is an elevated risk of such events occurring.

Computer malware, viruses, computer hacking and phishing attacks have become more prevalent in our industry and we are from time to time subject to such attempted attacks.

Computer malware, viruses, computer hacking and phishing attacks have become more prevalent in our industry and we are subject to such attempted attacks.

We rely heavily on our financial, accounting and other data processing systems.

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We may be held responsible if certain third parties that facilitate our business activities experience a breach.

It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of our networks or systems (or the networks or systems of third parties that facilitate our business activities) or any failure to maintain performance, reliability and security of our technical infrastructure, but such computer malware, viruses, and computer hacking and phishing attacks may negatively affect our operations.

It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of our networks or systems (or the networks

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or systems of third parties that facilitate our business activities) or any failure to maintain performance, reliability and security of our technical infrastructure, but such computer malware, viruses, and computer hacking and phishing attacks may negatively affect our operations.

We depend on third-party service providers, including mortgage loan servicers and sub-servicers, for a variety of services related to our business.

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In its capacity as servicer, mortgage servicers operate in a highly litigious industry that subject it to potential lawsuits related to billing and collections practices, modification protocols or foreclosure practices.

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When a residential whole loan we own is foreclosed upon, title to the underlying property would be taken by one of our subsidiaries.

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Finally, at such time as title is taken to a foreclosed property, it may require more extensive rehabilitation than we estimated at acquisition or a previously unknown environmental liability may be discovered that would require expensive and time-consuming remediation.

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The performance of loans underlying our MSR related assets may be adversely affected by the performance of the related mortgage servicer.

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A substantial increase in our delinquency or foreclosure rate or the inability to process claims could adversely affect our ability to access the capital and secondary markets for our financing needs.

Similarly to the way in which we service residential whole loans, we have also contracted, and will continue to contract, with unaffiliated servicing companies to carry out the actual servicing activities (including all direct interface with the borrowers).

However, we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that these activities are performed in accordance with the terms of the related notes and mortgages and applicable laws and regulations.

In light of the current regulatory environment, such exposure could be significant even though we might have contractual claims against our servicers for any failure to service the loans to the required standard.

A default by the mortgage servicer in its capacity as servicer and/or failure of the mortgage servicer to perform its obligations related to any MSR could result in a loss of value of servicing fees and/or excess servicing spread.

Mortgage servicers are subject to extensive federal, state and local laws, regulations and administrative decisions and failure to comply with such regulations can expose the servicer to fines, damages and losses.

In its capacity as servicer, mortgage servicers operate in a highly litigious industry that subject them to potential lawsuits related to billing and collections practices, modification protocols or foreclosure practices.

An increase or decrease in prepayment rates may adversely affect our profitability.

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Our profitability depends, in large part, on our ability to acquire our target assets at attractive prices.

In acquiring our target assets, we compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds, government entities, commercial and investment banks, commercial finance and insurance companies and other financial institutions.

Many of our competitors are substantially larger and have considerably greater financial, technical, technological, marketing and other resources than we do.

Other REITs with investment objectives that overlap with ours may elect to raise significant amounts of capital, which may create additional competition for investment opportunities.

Some competitors may have a lower cost of funds and access to

In acquiring our target assets, we compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds, government entities, commercial and

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funding sources that may not be available to us.

investment banks, commercial finance and insurance companies and other financial institutions.

Many of our competitors are substantially larger and have considerably greater financial, technical, technological, marketing and other resources than we do.

Other REITs with investment objectives that overlap with ours may elect to raise significant amounts of capital, which may create additional competition for investment opportunities.

Some competitors may have a lower cost of funds and access to funding sources that may not be available to us.

Many of our competitors are not subject to the operating constraints associated with REIT compliance or maintenance of an exemption from the Investment Company Act.

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Under our investment policy, we have the ability to acquire non-Agency mortgage-backed securities, residential whole loans, MSR and other investment assets of lower credit quality.

In general, non-Agency mortgage-backed securities carry greater investment risk than Agency mortgage-backed securities because they are not guaranteed as to principal or interest by the U.S.

Government, any federal agency or any federally chartered corporation.

Non-investment grade, non-Agency securities tend to be less liquid, may have a higher risk of default and may be more difficult to value than investment grade bonds.

Higher-than-expected rates of default and/or higher-than-expected loss severities on the mortgages underlying our non-Agency mortgage-backed securities, MSR or on our residential whole loan investments may adversely

In general, non-Agency mortgage-backed securities carry greater investment risk than Agency mortgage-backed securities because they are not guaranteed as to

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affect the value of those assets.

principal or interest by the U.S.

Government, any federal agency or any federally chartered corporation.

Non-investment grade, non-Agency securities tend to be less liquid, may have a higher risk of default and may be more difficult to value than investment grade bonds.

Accordingly, defaults in the payment of principal and/or interest on our non-Agency mortgage-backed securities, residential whole loan investments, MSR and other investment assets of lower credit quality would likely result in our incurring losses of income from, and/or losses in market value relating to, these assets.

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• hedging or arbitrage trading activity in our shares of common stock;

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• capital commitments;

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• additions or departures of management personnel;

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• actions by institutional stockholders or activist investors;

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Policy changes could adversely affect our financial condition, results of operations, the market price of our common stock or our ability to pay dividends or distributions.

COVID-19 has affected the U.S.

economy and our business.

COVID-19 has caused significant disruptions to the U.S.

and global economies and has contributed to volatility and negative pressure in financial markets.

The pace, timing and strength of any recovery are still unknown and difficult to predict and, in general, COVID-19 continues to cause a great deal of uncertainty in the U.S.

Throughout the course of the COVID-19 pandemic, the U.S.

federal government, as well as many state and local governments, have adopted a number of emergency measures and recommendations, including moratoriums to stop evictions and foreclosures and guidance to regulated servicers requiring them to formulate policies to assist mortgagors in need as a result of the COVID-19 pandemic.

A number of states have enacted laws which impose significant limits on the default remedies of lenders secured by real property.

While some states have relaxed certain of these measures, substantial restrictions on economic activity remain in place or may be put in place.

Although it cannot be predicted, additional policy action at the federal, state and local level is possible in the future.

The COVID-19 pandemic (and any future COVID-19 or other public health outbreaks) and resulting emergency measures have led (and may continue to lead) to significant disruptions in the global supply chain, global capital markets, the economy of the United States and the economies of other nations.

Concern about the potential effects of the COVID-19 pandemic and the effectiveness of measures being put in place by governmental bodies and reserve banks at various levels as well as by private enterprises to contain or mitigate its spread has adversely affected economic conditions and capital markets globally, and have led to significant volatility in global financial markets.

There can be no assurance that the vaccination efforts, containment measures or other measures implemented from time to time will be successful, including against new strains of COVID-19, and what effect those measures will have on the economy.

Disruption and volatility in the credit markets and the reduction of economic activity in severely affected sectors may occur in the United States and/or globally.

Economic Conditions

The conditions related to COVID-19 discussed above have also adversely affected our business and we expect these conditions to continue to some extent during 2023.

The significant decrease in economic activity could have an adverse effect on the value of our investments in mortgage real estate-related assets, particularly residential real estate assets.

In light of COVID-19’s impact on the overall economy, such as a possible return to rising unemployment levels or changes in consumer behavior

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related to loans as well as government policies and pronouncements, borrowers may experience difficulties meeting their obligations or seek to forbear payment on or refinance their mortgage loans to avail themselves of lower rates.

Elevated levels of delinquency or default would have an adverse impact on the value of our mortgage real estate related-assets.

To the extent current conditions persist or worsen, there may be a negative effect on our results of operations, which may reduce earnings and, in turn, cash available for distribution to our stockholders.

COVID-19 or other public health outbreaks could also negatively impact the availability of key personnel necessary to conduct our business.

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UNRESOLVED STAFF COMMENTS

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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock began trading publicly on October 8, 1997 and is traded on the New York Stock Exchange under the trading symbol “NLY.” As of January 31, 2022, we had 1,460,366,871 shares of common stock issued and outstanding which were held by approximately 548,855 beneficial holders.

Our common stock began trading publicly on October 8, 1997 and is traded on the New York Stock Exchange under the trading symbol “NLY.” As of January 31, 2023, we had 493,615,144 shares of common stock issued and outstanding which were held by approxima tely 566,479 beneficial holders.

The equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.”

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

What changed 10-K

Item 1A. Risk Factors