Two Harbors Investment Corp. (TWO) 2023年年度報告「AMEX」.pdf

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1、UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended:December 31,2023ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934Commission

2、 File Number 001-34506TWO HARBORS INVESTMENT CORP.(Exact Name of Registrant as Specified in Its Charter)Maryland 27-0312904(State or Other Jurisdiction ofIncorporation or Organization)(I.R.S.EmployerIdentification No.)1601 Utica Avenue South,Suite 900St.Louis Park,Minnesota55416(Address of Principal

3、 Executive Offices)(Zip Code)(612)453-4100(Registrants Telephone Number,Including Area Code)Securities Registered Pursuant to Section 12(b)of the Act:Title of Each Class:Trading Symbol(s)Name of Exchange on Which Registered:Common Stock,par value$0.01 per shareTWONew York Stock Exchange8.125%Series

4、A Cumulative Redeemable Preferred StockTWO PRANew York Stock Exchange7.625%Series B Cumulative Redeemable Preferred StockTWO PRBNew York Stock Exchange7.25%Series C Cumulative Redeemable Preferred StockTWO PRCNew York Stock ExchangeSecurities registered pursuant to Section 12(g)of the Act:NoneIndica

5、te by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)of the Act.Yes No Indicate by check mark whether the registrant(1)has

6、 filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for the past 90 days.Yes No Indicate

7、 by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes

8、No Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,smaller reporting company,or an emerging growthcompany.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growth compan

9、y”in Rule 12b-2 of the Exchange Act.Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth companyIf an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or

10、revised financialaccounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by check mark whether the registrant has filed a report on and attestation to its managements assessment of the effectiveness of its internal control over financialreporting under Section 404(b)of th

11、e Sarbanes-Oxley Act(15 U.S.C.7262(b)by the registered public accounting firm that prepared or issued its audit report.If securities are registered pursuant to Section 12(b)of the Act,indicate by check mark whether the financial statements of the registrant included in the filing reflect thecorrecti

12、on of an error to previously issued financial statements.Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of theregistrants executive officers during the relevant recovery period pursuant

13、to 240.10D-1(b).Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Act).Yes No As of June 30,2023,the aggregate market value of the registrants common stock held by non-affiliates of the registrant was approximately$1.3 billion based on the closingsale p

14、rice as reported on the NYSE on that date.As of February 12,2024,there were 103,427,329 shares of common stock,par value$0.01 per share,issued and outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrants definitive Proxy Statement for the 2024 Annual Meeting of Stockholders,which w

15、ill be filed with the Securities and Exchange Commission underRegulation 14A within 120 days after the end of registrants fiscal year covered by this Annual Report,are incorporated by reference into Part III.TWO HARBORS INVESTMENT CORP.2023 ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTSPagePART IItem 1

16、.Business1Item 1A.Risk Factors8Item 1B.Unresolved Staff Comments22Item 1C.Cybersecurity22Item 2.Properties23Item 3.Legal Proceedings24Item 4.Mine Safety Disclosures24PART IIItem 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities25Item 6.Reser

17、ved27Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations27Item 7A.Quantitative and Qualitative Disclosures About Market Risk49Item 8.Financial Statements and Supplementary Data54Item 9.Changes in and Disagreements with Accountants on Accounting and Financial D

18、isclosure110Item 9A.Controls and Procedures110Item 9B.Other Information113Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections113PART IIIItem 10.Directors,Executive Officers and Corporate Governance114Item 11.Executive Compensation114Item 12.Security Ownership of Certain Benef

19、icial Owners and Management and Related Stockholder Matters114Item 13.Certain Relationships and Related Transactions,and Director Independence114Item 14.Principal Accounting Fees and Services114PART IVItem 15.Exhibits,Financial Statement Schedules115Item 16.Form 10-K Summary115Signatures118iCAUTIONA

20、RY NOTE REGARDING FORWARD LOOKING STATEMENTSThis Annual Report on Form 10-K contains,or incorporates by reference,not only historical information,but also forward-looking statements within the meaning of Section27A of the Securities Act of 1933,as amended,or the Securities Act,and Section 21E of the

21、 Securities Exchange Act of 1934,or the Exchange Act,and that are subject to thesafe harbors created by such sections.Forward-looking statements involve numerous risks and uncertainties.Our actual results may differ from our beliefs,expectations,estimates,and projections and,consequently,you should

22、not rely on these forward-looking statements as predictions of future events.Forward-looking statements are nothistorical in nature and can be identified by words such as“anticipate,”“estimate,”“will,”“should,”“expect,”“target,”“believe,”“intend,”“seek,”“plan,”“goals,”“future,”“likely,”“may,”and sim

23、ilar expressions or their negative forms,or by references to strategy,plans,or intentions.These forward-looking statements are subject to risks anduncertainties,including,among other things,those described in this Annual Report on Form 10-K under the caption“Risk Factors.”Other risks,uncertainties,a

24、nd factors thatcould cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the Securities andExchange Commission,or the SEC,including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.Forward

25、-looking statements speak only as of the date theyare made,and we undertake no obligation to update or revise any such forward-looking statements,whether as a result of new information,future events,or otherwise.Important factors,among others,that may affect our actual results include:changes in int

26、erest rates and the market value of our target assets;changes in prepayment rates of mortgages underlying our target assets;the state of the credit markets and other general economic conditions,particularly as they affect the price of earning assets,the credit status of borrowers and homeprices;legi

27、slative and regulatory actions affecting our business;the availability and cost of our target assets;the availability and cost of financing for our target assets,including repurchase agreement financing,revolving credit facilities,term notes and convertible notes;the impact of any increases in payme

28、nt delinquencies and defaults on the mortgages comprising and underlying our target assets,including additional servicing costs andservicing advance obligations on the MSR assets we own;changes in liquidity in the market for real estate securities,the re-pricing of credit risk in the capital markets

29、,inaccurate ratings of securities by rating agencies,ratingagency downgrades of securities,and increases in the supply of real estate securities available-for-sale;changes in the values of securities we own and the impact of adjustments reflecting those changes on our consolidated statements of comp

30、rehensive loss and balancesheets,including our stockholders equity;our ability to generate cash flow from our target assets;our ability to effectively execute and realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue;our ability to recognize the b

31、enefits of our acquisition of RoundPoint Mortgage Servicing LLC and to manage the risks associated with operating a mortgage loanservicer;our decision to terminate our Management Agreement with PRCM Advisers LLC and the ongoing litigation related to such termination;changes in the competitive landsc

32、ape within our industry,including changes that may affect our ability to attract and retain personnel;our exposure to legal and regulatory claims,penalties or enforcement activities,including those arising from our ownership and management of MSR and priorsecuritization transactions;our exposure to

33、counterparties involved in our MSR business and prior securitization transactions and our ability to enforce representations and warranties made bythem;our ability to acquire MSR and successfully operate our seller-servicer subsidiaries and oversee the activities of our subservicers;our ability to m

34、anage various operational and regulatory risks associated with our business;interruptions in or impairments to our communications and information technology systems;our ability to maintain appropriate internal controls over financial reporting;our ability to establish,adjust and maintain appropriate

35、 hedges for the risks in our portfolio;our ability to maintain our REIT qualification for U.S.federal income tax purposes;andlimitations imposed on our business due to our REIT status and our status as exempt from registration under the 1940 Act.iiTable of ContentsPART IItem 1.BusinessOverviewTwo Ha

36、rbors Investment Corp.is a Maryland corporation founded in 2009 that invests in,finances and manages mortgage servicing rights,or MSR,Agency residentialmortgage-backed securities,or Agency RMBS,and,through our operational platform,RoundPoint Mortgage Servicing LLC,or RoundPoint,is one of the largest

37、 servicers ofconventional loans in the country.We are structured as an internally-managed real estate investment trust,or REIT,and our common stock is listed on the New York StockExchange,or NYSE,under the symbol“TWO”.The terms“Two Harbors,”“we,”“our,”“us”and the“company”refer to Two Harbors Investm

38、ent Corp.and its subsidiaries as aconsolidated entity.We seek to leverage our core competencies of understanding and managing interest rate and prepayment risk to invest in our portfolio of MSR and Agency RMBS.Ourobjective is to deliver stable performance across changing market environments,and we a

39、re acutely focused on creating sustainable stockholder value over the long term.Effective September 30,2023,one of our wholly owned subsidiaries,Matrix Financial Services Corporation,or Matrix,acquired RoundPoint from Freedom MortgageCorporation after the completion of customary closing conditions a

40、nd receiving the required regulatory and GSE approvals.Upon closing,all servicing and origination licensesand operational capabilities remained with RoundPoint,and RoundPoint became a wholly owned subsidiary of Matrix.Management believes this acquisition will add value forstakeholders of Two Harbors

41、 through cost savings achieved by bringing the servicing of our MSR portfolio in-house,greater control over our MSR portfolio and the associatedcash flows,and the ability to participate more fully in the mortgage finance space as opportunities arise.We have elected to be treated as a REIT for U.S.fe

42、deral income tax purposes.To qualify as a REIT,we are required to meet certain investment and operating tests and annualdistribution requirements.We generally will not be subject to U.S.federal income taxes on our taxable income to the extent that we annually distribute all of our net taxableincome

43、to stockholders,do not participate in prohibited transactions and maintain our intended qualification as a REIT.However,certain activities that we may perform maycause us to earn income which will not be qualifying income for REIT purposes.We have designated certain of our subsidiaries as taxable RE

44、IT subsidiaries,or TRSs,as definedin the Code,to engage in such activities,and we may form additional TRSs in the future.We also operate our business in a manner that will permit us to maintain our exemptionfrom registration under the Investment Company Act of 1940,as amended,or the 1940 Act.Our Bus

45、inessOur Investment StrategyOur objective is to deliver stable performance across changing market environments,and we are acutely focused on creating sustainable stockholder value over the long term.We intend to achieve this objective by constructing a well-balanced portfolio consisting of MSR,Agenc

46、y RMBS,and other financial assets,with a focus on managing variousassociated risks,including interest rate,prepayment,credit,mortgage spread and financing risk.The preservation of book value is of paramount importance to our ability togenerate total return on an ongoing basis.We make investment deci

47、sions based on a rigorous asset selection process that takes into consideration a variety of factors,including expected cash yield,risk-adjustedreturns,current and projected credit fundamentals,current and projected macroeconomic considerations,current and projected supply and demand,credit and mark

48、et riskconcentration limits,liquidity,cost of financing and financing availability.It is our intention to select our assets in such a way as to maintain our REIT qualification and ourexemption from registration under the 1940 Act.1Table of ContentsOur Target AssetsOur portfolio includes assets that

49、are primarily sensitive to changes in interest rates,prepayments and mortgage spreads,including but not limited to Agency RMBS,MSR andrelated hedging transactions.These assets have minimal exposure to the underlying credit performance of the investments.Our portfolio is managed as a whole and our re

50、sourcesare allocated and financial performance is assessed on a consolidated basis.Our target asset classes are as follows:Agency RMBSAgency RMBS,meaning RMBS whose principal and interest payments are guaranteed by a U.S.government agency,such as the GovernmentNational Mortgage Association(or Ginnie

51、 Mae),or a U.S.government sponsored enterprise,or GSE,such as the Federal National MortgageAssociation(or Fannie Mae)or the Federal Home Loan Mortgage Corporation(or Freddie Mac),collateralized by fixed rate mortgage loans,adjustable-rate mortgage(or ARM)loans or hybrid mortgage loans,or derivatives

52、 thereof,including:mortgage pass-through certificates;collateralized mortgage obligations;uniform mortgage-backed securities;Freddie Mac gold certificates;Fannie Mae certificates;Ginnie Mae certificates;“to-be-announced”forward contracts,or TBAs,which are pools of mortgages with specific investment

53、terms to be issued by Ginnie Mae,Fannie Mae or Freddie Mac at a future date;andinterest-only and inverse interest-only securities.MSRThe right to control the servicing of residential mortgage loans,receive the servicing income therefrom and the obligation to service the loans inaccordance with appli

54、cable laws and requirements.Other assets may include financial and mortgage-related assets other than our target assets,including non-Agency securities(securities that are not issued or guaranteed byGinnie Mae,Fannie Mae or Freddie Mac),other Agency securities and certain non-hedging transactions th

55、at may produce non-qualifying income for purposes of REIT grossincome tests.Our Investment ActivitiesOur Agency RMBS portfolio is comprised primarily of fixed rate mortgage-backed securities backed by single-family and multi-family mortgage loans.All of our principaland interest Agency RMBS are Fann

56、ie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations,or Ginnie Mae mortgage pass-throughcertificates,which are backed by the guarantee of the U.S.government.The majority of these securities consist of whole pools in which we own all of the investment intere

57、sts inthe securities.One of our wholly owned subsidiaries,Matrix Financial Services Corporation,or Matrix,holds the requisite approvals from Fannie Mae and Freddie Mac to own and manageMSR,which represent a contractual right to control the servicing of a mortgage loan,the obligation to service the l

58、oan in accordance with applicable laws and requirements andthe right to collect a fee for the performance of servicing activities,such as collecting principal and interest from a borrower and distributing those payments to the owner of theloan.We acquire MSR from high-quality originators through flo

59、w and bulk purchases.On October 1,2023,we began directly servicing the majority of the mortgage loansunderlying our MSR through our newly acquired subsidiary,RoundPoint.We also contract with appropriately licensed third-party subservicers to handle servicing functions inthe name of the subservicer f

60、or a portion of the loans underlying our MSR,although we expect our use of third-party subservicers will decline to minimal levels in 2024 as wecontinue to transfer the servicing of our MSR portfolio to RoundPoint.As the servicer of record on our MSR portfolio,we remain accountable to the GSEs for a

61、ll servicingmatters and,accordingly,provide substantial oversight of each of our subservicers.We believe MSR are a natural fit for our portfolio over the long term.Our MSR businessleverages our core competencies in prepayment and interest rate risk analytics and the MSR assets may provide offsetting

62、 risks to our Agency RMBS,hedging both interest rateand mortgage spread risk.In making our capital allocation decisions,we take into consideration a number of factors,including the opportunities available in the marketplace,the cost and availability offinancing,and the cost of hedging interest rate,

63、prepayment,credit and other portfolio risks.In the ordinary course of business,we make investment decisions and allocate capitalin accordance with our views on the changing risk/reward dynamics in the market and in our portfolio.Going forward,we expect our capital to be fully allocated to our strate

64、gyof pairing Agency RMBS and MSR.We have expertise in mortgage credit and may choose to invest again in those assets should the opportunity arise.2Table of ContentsOur Investment GuidelinesOur board of directors has approved the following investment guidelines:no investment shall be made that would

65、cause us to fail to qualify as a REIT for U.S.federal income tax purposes;no investment shall be made that would cause us to be regulated as an investment company under the 1940 Act;we will primarily invest within our target assets,consisting primarily of Agency RMBS,non-Agency securities,residentia

66、l mortgage loans,MSR and certain types ofcommercial real estate assets;approximately 5%to 10%of our portfolio may include other financial assets;anduntil appropriate investments can be identified,we will invest available cash in interest-bearing and short-term investments that are consistent with(i)

67、our intention toqualify as a REIT and(ii)our exemption from investment company status under the 1940 Act.These investment guidelines may be changed from time to time by our board of directors in its discretion without the approval of our stockholders.Within the constraints of the foregoing investmen

68、t guidelines,we have broad authority to select,finance and manage our investment portfolio.As a general matter,ourinvestment strategy is designed to enable us to:build an investment portfolio consisting of Agency RMBS,MSR and other financial assets that will generate attractive returns while having

69、a moderate risk profile;manage financing,interest,prepayment rate,credit and similar risks;capitalize on discrepancies in the relative valuations in the mortgage and housing markets;andprovide regular quarterly dividend distributions to stockholders.Within the requirements of the investment guidelin

70、es,we make determinations as to the percentage of our assets that will be invested in each of our target assets.Ourinvestment decisions depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate,economic and creditenvironments.As

71、 a result,we cannot predict the percentage of our assets that will be invested in any of our target asset classes at any given time.We believe that thediversification of our portfolio of assets and the flexibility of our strategy,combined with the expertise of our investment team,will enable us to d

72、eliver stable performance undera variety of market conditions and economic cycles.Financing StrategyWe deploy moderate leverage to fund the acquisition of our target assets and increase potential returns to our stockholders.We are not required to maintain any particularleverage ratio.The amount of l

73、everage we deploy for particular investments in our target assets depends upon a variety of factors,including without limitation:general economic,political and financial market conditions;the anticipated liquidity and price volatility of our assets;the gap between the duration of assets and liabilit

74、ies,including hedges;theavailability and cost of financing our assets;our opinion of the credit worthiness of financing counterparties;the health of the U.S.residential mortgage and housing markets;ouroutlook for the level,slope and volatility of interest rates;the credit quality of the loans underl

75、ying our target assets;the rating assigned to securities;and our outlook for assetspreads relative to the Secured Overnight Financing Rate,or SOFR,curve,the Overnight Index Swap Rate,or OIS,the U.S.federal funds rate,and other benchmark rate curves.Our primary financing sources for Agency RMBS are r

76、epurchase agreements.Repurchase agreements are financings pursuant to which one party,the seller/borrower,sellsassets to the repurchase agreement counterparty,the buyer/lender,for an agreed price with the obligation to repurchase the assets from the buyer at a future date and at a pricedifferent tha

77、n the original purchase price,with the difference representing the borrowing rate(typically based on an index plus a spread consistent with those demanded in themarket).The amount of financing available under a repurchase agreement is limited to a specified percentage of the estimated market value o

78、f the assets.The difference betweenthe sale price and repurchase price is the interest expense of financing under a repurchase agreement.Under repurchase agreement financing arrangements,if the value of thecollateral decreases,the buyer could require the seller to provide additional cash collateral

79、to re-establish the ratio of value of the collateral to the amount of borrowing(i.e.,amargin call).In the current economic climate,lenders under repurchase agreements generally advance approximately 95%to 97%of the market value of the Agency RMBSfinanced(a discount from market value,generally referr

80、ed to as a haircut,of 3%to 5%).3Table of ContentsTo finance MSR assets and related servicing advance obligations,we may enter into repurchase agreements,revolving credit facilities and securitization transactionscollateralized by the value of the MSR and/or servicing advances pledged and with borrow

81、ing rates typically based on an index plus a spread consistent with those demanded inthe market.If the value of our MSR and/or servicing advances pledged as collateral for the agreements decreases,the respective lender could require us to provide additionalcollateral or cash as collateral to re-esta

82、blish the ratio of value of the collateral to the amount of the debt outstanding.Due to certain GSE requirements,we may be restricted as tothe frequency in which we are able to pledge additional MSR and/or servicing advance collateral to counterparties.As a result,we may choose to over-collateralize

83、 certainfinancing arrangements in order to avoid having to provide cash as additional collateral.Lenders generally advance approximately 60%to 70%of the market value of the MSRfinanced(i.e.,a haircut of 30%to 40%)and 80%to 95%of the value of servicing advances financed(i.e.,a haircut of 5%to 20%),de

84、pending on the type of advance(e.g.,corporate,escrow).One of our subsidiary trust entities,MSR Issuer Trust,was formed for the purpose of financing MSR through securitization,pursuant to which,through two of our whollyowned subsidiaries,MSR is pledged to MSR Issuer Trust and in return,MSR Issuer Tru

85、st issues term notes to qualified institutional buyers and a variable funding note,or VFN,to one of the subsidiaries,in each case secured on a pari passu basis.In connection with the transaction,we also entered into a repurchase facility that is secured by the VFNissued in connection with the MSR se

86、curitization transaction,which is collateralized by our MSR.A significant decrease in the advance rate or an increase in the haircut could result in us having to sell assets in order to meet additional margin requirements by the lender.Weexpect to mitigate our risk of margin calls under financing ar

87、rangements by deploying leverage at an amount that is below what could be used under current advance rates.In order to reduce our exposure to risks associated with lender counterparty concentration,we generally seek to diversify our exposure by entering into repurchase agreementswith multiple counte

88、rparties.At December 31,2023,we had$8.0 billion of outstanding balances under repurchase agreements with 19 counterparties,with a maximum netexposure(the difference between the amount loaned to us,including interest payable,and the value of the assets pledged by us as collateral,including accrued in

89、terest receivableon such assets)to any single lender of$67.2 million,or 3.1%of stockholders equity.Interest Rate Hedging and Risk Management StrategyWe may enter into a variety of derivative and non-derivative instruments to economically hedge interest rate risk or“duration mismatch(or gap)”by adjus

90、ting the duration ofour floating-rate borrowings into fixed-rate borrowings to more closely match the duration of our assets.This particularly applies to borrowing agreements with maturities orinterest rate resets of less than six months.Typically,the interest receivable terms(i.e.,OIS or SOFR)of ce

91、rtain derivatives match the terms of the underlying debt,resulting in aneffective conversion of the rate of the related borrowing agreement from floating to fixed.The objective is to manage the cash flows associated with current and anticipatedinterest payments on borrowings,as well as the ability t

92、o roll or refinance borrowings at the desired amount by adjusting the duration.To help manage the adverse impact ofinterest rate changes on the value of our portfolio as well as our cash flows,we may,at times,enter into various forward contracts,including short securities,TBAs,options,futures,swaps,

93、caps,credit default swaps and total return swaps.In executing on our current interest rate risk management strategy,we have entered into TBAs,interest rate swapand swaption agreements,futures and options on futures.In addition,because MSR are negative duration assets,they may provide a hedge to inte

94、rest rate exposure on ourAgency RMBS portfolio.In hedging interest rate risk,we seek to reduce the risk of losses on the value of our investments that may result from changes in interest rates in thebroader markets,improve risk-adjusted returns and,where possible,obtain a favorable spread between th

95、e yield on our assets and the cost of our financing.Servicing OperationsAs a result of our acquisition of RoundPoint,we began directly servicing a portion of the mortgage loans underlying our MSR assets as well as mortgage loans underlyingMSR owned by third parties.These servicing activities consist

96、 of collecting loan payments,remitting principal and interest payments to investors,managing escrow funds for thepayment of mortgage-related expenses,such as taxes and insurance,performing loss mitigation activities on behalf of investors and otherwise administering our mortgage loanservicing portfo

97、lio in compliance with applicable laws and requirements.Servicing Owned MSR.Where we own the right to service loans,we recognize the MSR assets in our consolidated financial statements.We primarily generate recurringrevenue through contractual servicing fees and interest income on custodial deposits

98、.As the MSR owner,we are obligated to make servicing advances to fund scheduledprincipal,interest,tax and insurance payments when the mortgage loan borrower has failed to make the scheduled payments and to cover foreclosure costs and various otheritems that are required to preserve the assets being

99、serviced.As the MSR owner,we also generally have the right to solicit our customers for refinance opportunities.Subservicing.We are a subservicer,which means we service loans on behalf of third party clients who own the underlying MSR.Since we do not own the right to servicethose loans,we do not rec

100、ognize an MSR asset for those loans in our consolidated financial statements.We primarily generate servicing revenue based upon a stated fee per loanper month that varies depending upon the loans delinquency status,and we may earn other fees including late payment,modification,and other ancillary fe

101、es.As a subservicer,we may be obligated to make servicing advances;however,advances are generally limited,with recoveries typically following within 30 days.Additionally,our exposure toforeclosure-related costs and losses is generally limited in our subservicing relationships given those risks are r

102、etained by the owner of the MSR.4Table of ContentsHuman CapitalWe believe that our people are the foundation of our success.We are dedicated to providing human capital management best practices that evolve with the needs of ourbusiness and our people.We are committed to attracting and retaining the

103、industrys top talent by providing competitive wages and benefits and cultivating a workplaceenvironment in which all of our employees can thrive and contribute.As of December 31,2023,we had 466 full time equivalent employees.We have four office locations in:Minneapolis,Minnesota;Fort Mill,South Caro

104、lina;Dallas,Texas;and New York,New York.Compensation and Benefits.We use market data to benchmark and guide our compensation practices to ensure that our compensation program is industry standard,competitive and rewarding,while at the same time aligning the interests of our employees with those of o

105、ur stockholders.In addition to competitive wages and salaries,ourcompensation programs are designed to attract and retain talented professionals with diverse and unique talents.Our overall package includes cash bonus and equity incentivecompensation opportunities,a 401(k)plan and profit-sharing cont

106、ribution,competitive health benefits,health savings accounts,generous paid time off,short-and long-termdisability insurance,paid parental leave and various other leave options,life-planning,financial and legal resources,emotional well-being support and other voluntarysupplemental benefits.Employee D

107、evelopment and Talent Management.We believe in attracting,developing and retaining the best talent through leadership development training,talentmanagement,career planning and other development opportunities through our educational programming.Employees receive regular business and compliance traini

108、ng toreinforce our culture of compliance and further enhance their career development.We encourage collaboration and teamwork to ensure mutual understanding of responsibilities,priorities and expectations.Succession planning is also a critical component of our business operations.We have established

109、 a talent management program that includes careerdevelopment and ongoing evaluations of the depth of our leadership,focused on assessing succession planning needs and opportunities.Health,Safety and Well-being.We sponsor a number of programs and events that emphasize the health and well-being of our

110、 employees,including relational,financial,emotional and physical.We promote a culture of health and well-being through employee assistance program services,comprehensive health care benefits and resources forpreventative health,such as reduced-fee health club memberships.Workplace Culture.We strive

111、to foster a workplace culture where every individual on our team brings their unique perspectives,abilities and experiences which contribute todriving our organizational value.We are committed to supporting the engagement and leadership of a diverse workforce,with over 60%in aggregate identifying as

112、 either femaleor racially/ethnically diverse,and providing opportunities for collaboration,development and career growth.We regularly conduct a pulse survey which provides valuableinsights from employees on topics involving culture,diversity and inclusion,education,benefits and engagement,and pride

113、ourselves on having a strong participation rate.Wealso offer a flexible work environment,providing employees the opportunity to balance their professional obligations with that of their personal.Charitable Partnerships.We are committed to strengthening our local communities through the support of ch

114、aritable organizations allied with the housing sector,and inparticular those that provide housing support to families and children in need.Examples of our support include partnerships with AEON,Simpson Housing and Habitat forHumanity.In addition,we match dollar-for-dollar,up to a cap,the cash donati

115、ons made by our employees to our charitable partnerships.Operating and Regulatory StructureOur business is subject to extensive regulation by U.S.federal and state governmental authorities,and self-regulatory organizations.We are required to comply with numerousfederal and state laws,including those

116、 described below.The laws,rules and regulations comprising this regulatory framework change frequently,as can the interpretation andenforcement of existing laws,rules and regulations.Some of the laws,rules and regulations to which we are subject are intended primarily to safeguard and protect consum

117、ers,rather than stockholders or creditors.On occasion,we may receive requests from U.S.federal and state agencies for records,documents and information regarding our policies,procedures and practices regarding our business activities.We incur significant ongoing costs to comply with these regulation

118、s.REIT QualificationWe elected to be taxed as a REIT under the Code,commencing with our taxable period ended December 31,2009.Our qualification as a REIT depends upon our ability tomeet on a continuing basis,through actual investment and operating results,various complex requirements under the Code

119、relating to,among other things,the sources of ourgross income,the composition and value of our assets,our distribution levels and the diversity of ownership of our shares.We believe that we are organized in conformity withthe requirements for qualification and taxation as a REIT under the Code,and w

120、e conduct our operations in a manner which will enable us to continue to meet the requirementsfor qualification and taxation as a REIT.Certain activities that we may perform may cause us to earn income that will not be qualifying income for REIT purposes.We havedesignated certain of our subsidiaries

121、 as TRSs to engage in such activities,and we may in the future form additional TRSs.5Table of ContentsAs long as we continue to qualify as a REIT,we generally will not be subject to U.S.federal income tax on the REIT taxable income we distribute currently to ourstockholders.If we fail to qualify as

122、a REIT in any taxable year and do not qualify for certain statutory relief provisions,we will be subject to U.S.federal income tax at regularcorporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualifica

123、tion.Even if wequalify for taxation as a REIT,we may be subject to certain U.S.federal,state and local taxes on our income or property.Investment Company Act of 1940We conduct our operations so that we are not required to register as an investment company under the 1940 Act.If we were to fall within

124、 the definition of an investmentcompany,we would be unable to conduct our business as described in this Annual Report on Form 10-K.Section 3(a)(1)(A)of the 1940 Act defines an investment company as any issuer that“is or holds itself out as being engaged primarily in the business of investing,reinves

125、tingor trading in securities.”Section 3(a)(1)(C)of the 1940 Act also defines an investment company as any issuer that“is engaged or proposes to engage in the business of investing,reinvesting,owning,holding or trading in securities and owns or proposes to acquire investment securities having a value

126、 exceeding 40%of the value of the issuers total assets(exclusive of U.S.government securities and cash items)on an unconsolidated basis.”Excluded from the term“investment securities,”among other things,are U.S.governmentsecurities and securities issued by majority-owned subsidiaries that are not the

127、mselves investment companies and are not relying on the exclusion from the definition ofinvestment company set forth in Section 3(c)(1)or Section 3(c)(7)of the 1940 Act.We are organized as a holding company that conducts business primarily through our subsidiaries.Any business conducted through our

128、subsidiaries will be conducted in sucha manner as to ensure that we do not meet the definition of“investment company”because less than 40%of the value of our total assets on an unconsolidated basis would consistof“investment securities.”To avoid registration as an investment company,certain of our s

129、ubsidiaries rely on certain exemptions from the 1940 Act,including Section 3(c)(5)(C),which exempts entitiesthat are“primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.”Under the SEC staffs currentguidance,to qualify for t

130、his exemption,we must maintain(i)at least 55%of our assets in qualifying interests(referred to as the 55%Test)and(ii)at least 80%of our assets inqualifying interests plus other real estate related assets(referred to as the 80%Test).Qualifying interests for this purpose include mortgage loans and oth

131、er assets,such as wholepool Agency and non-Agency RMBS,which are considered the functional equivalent of mortgage loans for the purposes of the 1940 Act.We expect each of our subsidiaries thatmay rely on Section 3(c)(5)(C)to invest at least 55%of its assets in qualifying interests in accordance with

132、 SEC staff guidance,and an additional 25%of its assets in eitherqualifying interests or other types of real estate related assets that do not constitute qualifying interests.We believe that we conduct our business so that we are exempt from the1940 Act under Section 3(c)(5)(C),but rapid changes in t

133、he values of our assets could disrupt prior efforts to conduct our business to meet the 55%Test and the 80%Test.Ourefforts to comply with the 55%Test and the 80%Test could require us to acquire or dispose of certain assets at unfavorable prices and limit our ability to pursue certaininvestment oppor

134、tunities.Mortgage Industry RegulationAs an owner of MSR and servicer of residential mortgage loans,we must comply with various federal and state laws,rules and regulations.These rules generally focus onconsumer protection and include,among others,rules promulgated under the Dodd-Frank Wall Street Re

135、form and Consumer Protection Act,or the Dodd-Frank Act,and theGramm-Leach-Bliley Financial Modernization Act of 1999,or the Gramm-Leach-Bliley Act.We are also required to maintain qualifications,registrations and licenses in certainstates in order to own and service certain of our assets.These requi

136、rements can and do change as statutes and regulations are enacted,promulgated or amended,or as regulatoryguidance or interpretations evolve or change,and the trend in recent years among federal and state lawmakers and regulators has been toward increasing laws,regulations andinvestigative proceeding

137、s in relation to the mortgage industry generally.6Table of ContentsThe Dodd-Frank Act significantly changed the regulation of financial institutions and the financial services industry,including the mortgage industry.The Dodd-Frank Acttasked many agencies with issuing a variety of new regulations,in

138、cluding rules related to mortgage origination,mortgage servicing,securitization transactions and derivatives.The Dodd-Frank Act also created the Consumer Financial Protection Bureau,or the CFPB,which has broad rulemaking authority with respect to many of the federal consumerprotection laws applicabl

139、e to the mortgage industry.In addition to its rulemaking authority,the CFPB has supervision,examination and enforcement authority over consumerfinancial products and services by certain non-depository institutions,including our company.The CFPB has issued a series of rules and related guidance as pa

140、rt of ongoingefforts to enhance consumer protections and create uniform standards for the mortgage lending and servicing industries.These rules include requirements addressing how lendersmust evaluate a consumers ability to repay a mortgage loan,specific disclosures and communications that must be m

141、ade to consumers at various stages in the mortgage lendingand servicing processes,and specific actions servicers must take at various stages in a loans life cycle,including providing assistance to consumers who encounter financialhardship and struggle to make their mortgage payment.These rules have

142、led to increased costs to originate and service loans across the mortgage industry,greater regulatoryscrutiny of originators,servicers and other mortgage industry participants from federal and state regulators and increased litigation and complaints against these participants fromboth consumers and

143、government officials.The Gramm-Leach-Bliley Act imposes obligations on us to safeguard the information we maintain on mortgage loan borrowers and imposes restrictions on our ability to sharethat information with third parties and affiliates.In addition,a growing number of states have passed or enhan

144、ced laws to further protect borrower information,including lawsthat regulate the use and storage of personally identifiable information,require notifications to borrowers if the security of their personal information is breached,or require us toencrypt personal information when it is transmitted and

145、 stored electronically.These evolving federal and state laws require the ongoing review of our operations,increase ourcompliance costs,and affect our ability to use and share information with third parties as part of our business.We have implemented and will continue to implement policies,procedures

146、 and,as applicable,information technology systems in order to ensure ongoing compliance with thelaws,rules and regulations applicable to our business.We have incurred and expect to incur significant ongoing operational costs to comply with such laws,rules and regulations.CompetitionOur comprehensive

147、 income depends,in large part,on our ability to acquire assets at favorable spreads over our borrowing costs.In acquiring our target assets,we competewith other REITs,specialty finance companies,savings and loan associations,banks,mortgage bankers,insurance companies,mutual funds,institutional inves

148、tors,investmentbanking firms,financial institutions,governmental agencies,mortgage loan servicers,asset management firms and other entities.Some of these entities may not be subject to thesame regulatory constraints that we are(e.g.,REIT compliance or maintaining an exemption under the 1940 Act).Man

149、y of our competitors are significantly larger than us,haveaccess to greater capital and other resources and may have other advantages over us.In addition,some of our competitors may have higher risk tolerances or different riskassessments,which could allow them to consider a wider variety of investm

150、ents and establish different counterparty relationships than us.Further,we may from time-to-time facecompetition from government agencies,such as the Federal Reserve,in connection with initiatives designed to stimulate the U.S.economy or the mortgage market.Marketconditions may from time to time att

151、ract more competitors for certain of our target assets,which will not only affect the supply of assets but may also increase the competition forsources of financing for these assets.An increase in the competition for sources of funding could adversely affect the availability and cost of financing,an

152、d thereby adverselyaffect our financial results.As we grow our subservicing business,we will also compete with bank and non-bank servicers for third-party subservicing clients.The subservicing market in which weoperate is highly competitive and we face competition related to the pricing and services

153、 we offer.We intend to compete by delivering meaningful value to homeowners throughbuilding lasting relationships by treating our customers with respect and professionalism,and through being a single-source solution for our customers to better manage andprotect their homes,families and assets.For ou

154、r MSR third-party subservicing clients,we believe we can successfully compete because we offer experience and expertise inMSR investing,with institutional quality controls and a strong compliance focus,and we are well-capitalized to withstand todays evolving risks and to invest in necessaryinfrastru

155、cture to support our business.Our inability to attract subservicing clients may adversely impact our ability to grow our servicing platform,which could in turn result inan inability to achieve economies of scale,reduce costs and adversely affect our financial results.Available InformationOur website

156、 can be found at .We make available,free of charge on our website,our annual report on Form 10-K,quarterly reports on Form10-Q,current reports on Form 8-K,and any amendments to those reports,as are filed or furnished pursuant to Section 13(a)or 15(d)of the Exchange Act,as well as our proxystatement

157、with respect to our annual meeting of stockholders,as soon as reasonably practicable after we electronically file such material with,or furnish it to,the SEC.OurExchange Act reports filed with,or furnished to,the SEC are also available at the SECs website at www.sec.gov.The content of any website re

158、ferred to in this Annual Report onForm 10-K is not incorporated by reference into this Form 10-K unless expressly noted.7Table of ContentsWe also make available,free of charge,the charters for our Audit Committee,Compensation Committee,Nominating and Corporate Governance Committee and RiskOversight

159、Committee,as well as our Corporate Governance Guidelines,Code of Business Conduct and Ethics,Whistleblowing Procedures and Stockholder CommunicationsPolicy.Within the time period required by the SEC and the NYSE,we will post on our website any amendment to the Code of Ethics and any waiver applicabl

160、e to any executiveofficer,director or senior officer(as defined in the Code of Ethics).Our Investor Relations Department can be contacted at:Two Harbors Investment Corp.Attn:Investor Relations1601 Utica Ave.S.,Suite 900St.Louis Park,MN 55416(612)453-Item 1A.Risk FactorsThe following is a summary of

161、the significant risk factors known to us that we believe could have a material adverse effect on our business,financial condition and results ofoperations.In addition to understanding the key risks described below,investors should understand that it is not possible to predict or identify all risk fa

162、ctors and,consequently,the following is not a complete discussion of all potential risks or uncertainties.Risks Related to Our Business and OperationsDifficult conditions in the residential mortgage and real estate markets,the financial markets and the economy generally may adversely impact our busi

163、ness,results ofoperations and financial condition.Our results of operations are materially affected by conditions in the residential mortgage and real estate markets,the financial markets and the economy generally.In pastyears,concerns about the COVID-19 pandemic,unemployment,the availability and co

164、st of credit,rising government debt levels,inflation,energy costs,global supply chaindisruptions,climate change,global economic lethargy,warfare,geopolitical unrest across various regions worldwide,European sovereign debt issues,U.S.budget debates,federal government shutdowns and international trade

165、 disputes,have from time to time contributed to increased volatility and uncertainty in the economy and financial markets.Adverse developments with respect to any of these markets may have an impact on new demand for homes and on homeowners ability to make their mortgage payments,whichmay compress h

166、ome ownership rates and weigh heavily on future home price performance.There is a strong correlation between home price growth rates(or losses)andmortgage loan delinquencies.Any stagnation in or deterioration of the residential mortgage or real estate markets may limit our ability to acquire our tar

167、get assets on attractiveterms or cause us to experience losses related to our assets.Our business model depends in part upon the continuing viability of Fannie Mae and Freddie Mac,or similar institutions,and any changes to their structure orcreditworthiness could have an adverse impact on us.We purc

168、hase Agency RMBS that are protected from the risk of default on the underlying mortgages by guarantees from Fannie Mae,Freddie Mac or,in the case of GinnieMae securities,the U.S.government.In 2008,the U.S.government and U.S.Treasury undertook a series of actions designed to stabilize these GSEs,incl

169、uding placing them intoa federal conservatorship.In December 2009,the U.S.government committed virtually unlimited capital to ensure the continued existence of Fannie Mae and Freddie Mac.There is no assurance that such capital will continue to be available or that the GSEs will honor their guarantee

170、s or other obligations.If these GSEs fail to honor their guarantees,the value of any Agency RMBS guaranteed by the GSEs that we hold would decline.The continued flow of residential mortgage-backed securities from the GSEs is essential to the operation of the mortgage markets in their current form.A

171、number oflegislative proposals have been introduced in the past that would phase out or reform the GSEs.It is not possible to predict the scope and nature of the actions that the U.S.government could ultimately take with respect to the GSEs.Although any phase out or reform would likely take several

172、years to implement,if the structure of Fannie Mae orFreddie Mac were altered,or if they were eliminated altogether,the amount and type of Agency RMBS and other mortgage-related assets available for investment would besignificantly affected.A reduction in supply of Agency RMBS and other mortgage-rela

173、ted assets would result in increased competition for those assets and likely lead to asignificant increase in the price for our target assets.Additionally,market uncertainty with respect to the treatment of the GSEs could have the effect of reducing the actual orperceived quality of,and therefore th

174、e market value for,the Agency RMBS that we currently hold in our portfolio.8Table of ContentsWe operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations.We operate in a highly regulated environment and are subject to the rules,regul

175、ations,approvals,licensing,reporting and examination requirements of various federal,stateand local authorities.Any change in applicable federal,state or local laws,rules and regulations,or the interpretation or enforcement thereof,could have a substantial impact onour assets,operating expenses,busi

176、ness strategies and results of operations.Our inability or failure to comply with the rules,regulations or reporting requirements,to obtain ormaintain approvals and licenses applicable to our businesses,or to satisfy annual or periodic examinations may impact our ability to do business and expose us

177、 to fines,penaltiesor other claims and,as a result,could harm our business.Federal and state regulation of the mortgage industry is complex and constantly evolving,and changes to applicable rules,regulations and guidance may adversely impactour business.As a licensed servicer and owner of MSR,we are

178、 required to comply with numerous federal,state and local laws and regulations that control the manner in which we conductour business and operations.These requirements include,among other things,the Dodd-Frank Act,the Gramm-Leach-Bliley Act and the CARES Act.In addition,given we arenot a federally

179、chartered depository institution,we must comply with applicable state licensing and compliance requirements in all jurisdictions in which we operate.Theserequirements can and do change as statutes and regulations are enacted,promulgated or amended,or as regulatory guidance or interpretations evolve

180、or change.The Dodd-Frank Act and its implementing regulations,as well as other federal and state rules,regulations and guidance that govern mortgage servicing,combine to create acomplex and constantly evolving regulatory environment,and the failure to comply with these requirements may result in fin

181、es or the suspension or revocation of thequalifications,registrations and licenses necessary to operate as a servicer and owner of MSR.New or modified regulations at the federal or state level to address concerns on avariety of fronts,including potential impacts from climate change,fair and equitabl

182、e access to housing and consumer data privacy and security concerns,could increase ouroperational expenses or otherwise enhance regulatory supervision and enforcement efforts.Ongoing efforts to enhance cooperation between federal and state regulators couldalso contribute to increased industry scruti

183、ny.We expect to continue to incur the operational and system costs necessary to maintain the processes that are needed to ensure our compliance with applicable rules andregulations as well as to monitor compliance by our business partners.Additional rules and regulations implemented by the CFPB and

184、state regulators,as well as any changes toexisting rules,could lead to changes in the way we conduct our business and increased costs of compliance.We operate in a highly competitive market and we may not be able to compete successfully.We operate in a highly competitive market.Our profitability dep

185、ends,in large part,on our ability to acquire a sufficient supply of our target assets at favorable prices.Inacquiring assets,we compete with a variety of investors,including other mortgage REITs,specialty finance companies,public and private investment funds,asset managers,commercial and investment

186、banks,broker-dealers,commercial finance and insurance companies,the GSEs,mortgage servicers and other financial institutions.In addition,theFederal Reserve has in the past committed to purchase unlimited amounts of Agency RMBS and other assets in order to stabilize the financial markets.Many of our

187、competitorsare substantially larger and may have greater financial,technical,marketing and other resources than we do.Competition for our target assets may lead to the price of such assetsincreasing and their availability decreasing,which may limit our ability to generate desired returns,reduce our

188、earnings and,in turn,decrease the cash available for distribution toour stockholders.In addition,as we seek to grow our subservicing business,we will compete with bank and non-bank servicers for third-party subservicing clients.The subservicing market ishighly competitive,and we expect to face compe

189、tition related to the pricing and services we offer.There can be no assurance that we will be able to attract and retainsubservicing clients,which may adversely impact our ability to grow our servicing platform and achieve economies of scale.Our business could suffer if we fail to attract and retain

190、 a skilled management team and workforce.We operate in a specialized and highly regulated industry and our success is dependent upon the efforts,experience,diligence,skill and deep knowledge of our industry andoperations of our executive officers and our employees.Competition for employee talent can

191、 be significant,and the companies with which we compete for employees may havegreater resources than we do and may be able to offer more attractive terms of employment.The departure of an executive officer,key employee or a significant and suddenturnover of employees in a key operational area of our

192、 company could have a material adverse effect on our ability to conduct our operations and to comply with contractual andregulatory obligations,which could adversely impact our business,results of operations and financial condition.9Table of ContentsWe may change any of our strategies,policies or pr

193、ocedures without stockholder consent.We may change any of our strategies,policies or procedures with respect to investments,asset allocation,growth,operations,indebtedness,financing strategy anddistributions at any time without the consent of stockholders.Changes in strategy could also result in the

194、 elimination of certain investments and business activities that we nolonger view as attractive or in alignment with our business model.Shifts in strategy may increase our exposure to credit risk,interest rate risk,financing risk,default risk,regulatory risk and real estate market fluctuations.We al

195、so cannot assure you that we will be able to effectively execute on or realize the potential benefits of changes in strategy.Any such changes could adversely affect our financial condition,risk profile,results of operations,the market price of our common stock and our ability to make distributions t

196、ostockholders.Our risk management policies and procedures may not be effective.We have established and maintain various risk management policies and procedures designed to identify,monitor and mitigate financial risks,such as credit risk,interest raterisk,prepayment risk and liquidity risk,as well a

197、s operational and compliance risks related to our business,assets and liabilities.These policies and procedures may notsufficiently identify all of the risks to which we are or may become exposed or mitigate the risks we have identified.Any expansion of our business activities,such as our recentacqu

198、isition of RoundPoint,may result in our being exposed to risks to which we have not previously been exposed or may increase our exposure to certain types of risks.Alternatively,any narrowing of our business activities may increase the concentration of our exposure to certain types of risk.Any failur

199、e to effectively identify and mitigate therisks to which we are exposed could have an adverse effect on our business,results of operations and financial condition.Maintaining our exemptions from registration as an investment company under the 1940 Act imposes limits on our operations.We intend to co

200、nduct our operations so as not to become required to register as an investment company under the 1940 Act.Section 3(a)(1)(A)of the 1940 Act defines aninvestment company as any issuer that is or holds itself out as being engaged primarily in the business of investing,reinvesting or trading in securit

201、ies.We are organized as aholding company that conducts its businesses primarily through our subsidiaries.We intend to conduct the operations of Two Harbors and its subsidiaries so that they do notcome within the definition of an investment company,either because less than 40%of the value of their to

202、tal assets on an unconsolidated basis will consist of“investmentsecurities”or because they meet certain other exceptions or exemptions set forth in the 1940 Act based on the nature of their business purpose and activities.Certain of our subsidiaries may rely upon the exemption set forth in Section 3

203、(c)(5)(C)of the 1940 Act,which is available for entities“primarily engaged in the business ofpurchasing or otherwise acquiring mortgages and other liens on and interests in real estate.”This exemption generally means that at least 55%of each such subsidiarys portfoliomust be comprised of qualifying

204、assets and at least 80%of its portfolio must be comprised of qualifying assets and real estate-related assets under the 1940 Act.Qualifying assetsfor this purpose include mortgage loans and other assets,such as whole pool Agency and non-Agency RMBS,which are considered the functional equivalent of m

205、ortgage loansfor the purposes of the 1940 Act.We expect each of our subsidiaries relying on Section 3(c)(5)(C)to invest at least 55%of its assets in whole pool Agency RMBS and otherinterests in real estate that constitute qualifying assets in accordance with SEC staff guidance and an additional 25%o

206、f its assets in either qualifying assets and other types of realestate related assets that do not constitute qualifying assets.As a result of the foregoing restrictions,we may be limited in our ability to make or dispose of certain investments.To the extent the SEC publishes new or different guidanc

207、ewith respect to these matters,we may be required to adjust our strategy accordingly.Although we monitor the portfolios of our subsidiaries that may rely on the Section 3(c)(5)(C)exemption periodically,there can be no assurance that such subsidiaries will be able to maintain this exemption.Loss of o

208、ur 1940 Act exemptions would adversely affect us,the market price of shares of our common stock and our ability to distribute dividends,and could result in thetermination of certain of our financing or other agreements.As described above,we intend to conduct operations so that we are not required to

209、 register as an investment company under the 1940 Act.Although we monitor our portfolioand our activities periodically,there can be no assurance that we will be able to maintain our exemption from investment company registration under the 1940 Act.Furthermore,any modifications to the 1940 Act exempt

210、ion rules or interpretations may require us to change our business and operations in order for us to continue to rely on such exemption.If we were no longer able to qualify for exemptions from registration under the 1940 Act,we could be required to restructure our activities or the activities of our

211、 subsidiaries,including effecting sales of assets in a manner that,or at a time when,we would not otherwise choose,which could negatively affect the value of our common stock,thesustainability of our business model,and our ability to make distributions.Such sales could occur during adverse market co

212、nditions,and we could be forced to accept pricesbelow that which we believe are appropriate.The loss of our 1940 Act exemptions may also result in a default under or permit certain of our counterparties to terminate the manyrepurchase agreements,financing facilities or other agreements we have in pl

213、ace.10Table of ContentsThe lack of liquidity of our assets may adversely affect our business,including our ability to value,finance and sell our assets.We have and may in the future acquire assets or other instruments with limited or no liquidity,including securities,MSR and other instruments that a

214、re not publicly traded.Market conditions could also significantly and negatively affect the liquidity of our assets.It may be difficult or impossible to obtain third-party pricing on such illiquid assetsand validating third-party pricing for illiquid assets may be more subjective than more liquid as

215、sets.Illiquid assets typically experience greater price volatility,as a ready marketmay not exist for such assets,and such assets can be more difficult to value.Any illiquidity in our assets may make it difficult for us to sell such assets if the need or desire arises.The ability to quickly sell cer

216、tain of our target assets,such as certainsecurities and MSR,may be constrained by a number of factors,including a small number of willing buyers,lack of transparency as to current market terms and price,and timedelays resulting from the buyers desire to conduct due diligence on the assets,negotiatio

217、n of a purchase and sale agreement,compliance with any applicable contractual orregulatory requirements,and for certain assets like MSR,operational and compliance considerations.Consequently,even if we identify a buyer for certain of our securities andMSR,there is no assurance that we would be able

218、to sell such assets in a timely manner if the need or desire arises.Assets that are illiquid are typically more difficult and costly to finance.As a result,we may be required to finance the assets at unattractive rates or hold them on our balancesheet without the use of leverage.Assets tend to becom

219、e less liquid during times of financial stress,which is often the time that liquidity is most needed.To the extent that we useleverage to finance assets that later become illiquid,we may lose that leverage if the financing counterparty determines that the collateral is no longer sufficient to secure

220、 thefinancing,or the counterparty could reduce the amount of money that it is willing to lend against the asset.We use leverage in executing our business strategy,which may adversely affect the return on our assets and may reduce cash available for distribution to our stockholders,as well as increas

221、e losses when economic conditions are unfavorable.We use leverage to finance many of our investments and to enhance our financial returns.Through the use of leverage,we may acquire positions with market exposuresignificantly greater than the amount of capital committed to the transaction.It is not u

222、ncommon for investors in Agency RMBS to obtain leverage equal to ten or more timesequity through the use of repurchase agreement financing.Subject to market conditions,we anticipate that we may deploy,on a debt-to-equity basis,up to ten times leverage onour Agency RMBS;however,there is no specific l

223、imit on the amount of leverage that we may use.Leverage will magnify both the gains and the losses of our positions.Leverage will increase our returns as long as we earn a greater return on investments purchased withborrowed funds than our cost of borrowing such funds.However,if we use leverage to a

224、cquire an asset and the value of the asset decreases,the leverage will increase our losses.Even if the asset increases in value,if the asset fails to earn a return that equals or exceeds our cost of borrowing,leverage will decrease our returns.We may be required to post large amounts of cash as coll

225、ateral or margin to secure our leveraged positions,including on our MSR financing facilities.In the event of asudden,precipitous drop in value of our financed assets,we might not be able to liquidate assets quickly enough to repay our borrowings,further magnifying losses.Even a smalldecrease in the

226、value of a leveraged asset may require us to post additional margin or cash collateral.This may adversely affect our financial condition and results of operationsand decrease the cash available to us for distributions to stockholders.We depend on repurchase agreements and other credit facilities to

227、execute our business plan and any limitation on our ability to access funding through these sources couldhave a material adverse effect on our business,results of operations and financial condition.Our ability to purchase and hold assets is affected by our ability to secure repurchase agreements and

228、 other credit facilities on acceptable terms.We currently have repurchaseagreements,revolving credit facilities and other credit facilities in place with numerous counterparties,but we can provide no assurance that lenders will continue to provide uswith sufficient financing through the repurchase m

229、arkets or otherwise.In addition,with respect to MSR financing,there can be no assurance that the GSEs will consent to suchtransactions or consent on terms consistent with prior MSR financing transactions.Because repurchase agreements and similar credit facilities are generally short-termcommitments

230、of capital,changing conditions in the financing markets may make it more difficult for us to secure continued financing during times of market stress.Our ability to efficiently access financing through our repurchase agreements or otherwise may be adversely impacted by counterparty requirements rega

231、rding the type ofassets that may be sold and the timing and process for such sales.Counterparty review and approval processes may delay the timing in which funding may be provided,orpreclude funding altogether.For MSR,delays may also occur due to the need to obtain GSE approval of the collateral to

232、be posted or the need for third-party valuations of theMSR collateral.Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings,based on,among otherfactors,the regulatory environment and their management of perceive

233、d risk.11Table of ContentsChanges in the financing markets could adversely affect the marketability of the assets in which we invest,and this could negatively affect the value of our assets.If ourlenders are unwilling or unable to provide us with financing,or if the financing is only available on te

234、rms that are uneconomical or otherwise not satisfactory to us,we could beforced to sell assets when prices are depressed.The amount of financing we receive under our repurchase agreements,revolving credit facilities or other credit facilities will bedirectly related to the lenders valuation of the a

235、ssets that secure the outstanding borrowings.If a lender determines that the value of the assets has decreased,it typically has theright to initiate a margin call,requiring us to transfer additional assets to such lender,or repay a portion of the outstanding borrowings.We may be forced to sell asset

236、s atsignificantly depressed prices to meet margin calls and to maintain liquidity at levels satisfactory to the counterparty,which could cause us to incur losses.Moreover,to the extentthat we are forced to sell assets because of the availability of financing or changes in market conditions,other mar

237、ket participants may face similar pressures,which couldexacerbate a difficult market environment and result in significantly greater losses on the sale of such assets.In an extreme case of market duress,a market may not exist forcertain of our assets at any price.Although we generally seek to reduce

238、 our exposure to lender concentration-related risk by entering into financing relationships with multiple counterparties,we are notrequired to observe specific diversification criteria,except as may be set forth in the investment guidelines adopted by our board of directors.To the extent that the nu

239、mber of ornet exposure under our lending arrangements may become concentrated with one or more lenders,the adverse impacts of defaults or terminations by such lenders may besignificantly greater.Our inability to meet certain financial covenants related to our repurchase agreements,revolving credit f

240、acilities or other credit facilities could adversely affect our financialcondition,results of operations and cash flows.In connection with certain of our repurchase agreements,revolving credit facilities and other credit facilities,we are required to comply with certain financial covenants,themost r

241、estrictive of which are disclosed within Item 7,“Managements Discussion and Analysis of Financial Conditions and Results of Operations”of this Annual Report on Form10-K.Compliance with these financial covenants will depend on market factors and the strength of our business and operating results.Fail

242、ure to comply with our financialcovenants could result in an event of default,termination of the lending facility,acceleration of all amounts owing under the lending facility,and may give the counterparty theright to exercise certain other remedies under the lending agreement,including without limit

243、ation the sale of the asset subject to repurchase at the time of default,unless thecounterparty granted a waiver.In addition,we may be subject to cross-default provisions under certain financing facilities that could cause an event of default under suchfinancing facilities to be triggered by events

244、of default under other financing arrangements.If a counterparty to a repurchase agreement defaults on its obligation to resell the underlying security back to us at the end of the repurchase agreement term,or if wedefault on our obligations under the repurchase agreement,we may incur losses.When we

245、enter into repurchase agreements,we sell the assets to lenders and receive cash from the lenders.The lenders are obligated to resell the same assets back to us at theend of the term of the repurchase agreement.Because the cash that we receive from the lender when we initially sell the assets to the

246、lender is less than the value of those assets(the difference being the“haircut”),if the lender defaults on its obligation to resell the same assets back to us,we would incur a loss on the repurchase agreement equal to theamount of the haircut(assuming there was no change in the value of the securiti

247、es).Further,if we default on our obligations under a repurchase agreement,the lender will be ableto terminate the repurchase agreement and may cease entering into any other repurchase agreements with us.If a default occurs under any of our repurchase agreements and alender terminates one or more of

248、its repurchase agreements,we may need to enter into replacement repurchase agreements with different lenders.There can be no assurance thatwe will be successful in entering into such replacement repurchase agreements on the same terms as the repurchase agreements that were terminated or at all.Our r

249、ights under our repurchase agreements are subject to the effects of bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under therepurchase agreements.In the event of our insolvency or bankruptcy,certain repurchase agreements may qualify for special treatment under the

250、U.S.Bankruptcy Code,the effect of which,amongother things,would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S.Bankruptcy Code and to foreclose on thecollateral agreement without delay.In the event of the insolvency or bankruptcy of

251、 a lender during the term of a repurchase agreement,the lender may be permitted,underapplicable insolvency laws,to repudiate the contract,and our claim against the lender for damages may be treated simply as an unsecured creditor claim.In addition,if the lenderis a broker or dealer subject to the Se

252、curities Investor Protection Act of 1970,or an insured depository institution subject to the Federal Deposit Insurance Act,our ability toexercise our rights to recover our assets under a repurchase agreement or to be compensated for any damages resulting from the lenders insolvency may be further li

253、mited bythose statutes.These claims would be subject to significant delay and,if and when received,may be substantially less than the damages we actually incur.12Table of ContentsThe impairment or negative performance of other financial institutions could adversely affect us.We have exposure to and

254、routinely execute transactions with numerous counterparties in the financial services industry,including broker-dealers,commercial banks,investment banks,investment funds and other institutions.The operations of U.S.and global financial services institutions are highly interconnected and a decline i

255、n the financialcondition of one or more financial services institutions may expose us to credit losses or defaults,limit our access to liquidity or otherwise disrupt the operation of our businesses.While we regularly assess our exposure to different counterparties,the performance and financial stren

256、gth of specific institutions are subject to rapid change,the timing andextent of which cannot be known.We may not have the ability to raise funds necessary to pay principal amounts owed upon maturity of our outstanding convertible senior notes or to purchase such notesupon a fundamental change.We ha

257、ve issued and outstanding$271.9 million aggregate principal amount of 6.25%convertible senior notes due January 2026.To the extent these notes are not convertedinto common stock by the noteholders prior to their maturity date,we will be obligated to repay the principal amount of all outstanding note

258、s upon maturity.In addition,if afundamental change occurs(as described in the supplemental indenture governing the notes),noteholders have the right to require us to purchase for cash any or all of their notes.We may not have sufficient funds available at the time we are required to repay principal

259、amounts or to purchase the notes upon a fundamental change,and we may not be able toraise additional capital or arrange necessary financing in order to make such payments on terms that are acceptable to us,if at all.An increase in our borrowing costs relative to the interest that we receive on our l

260、everaged assets may adversely affect our profitability.As our repurchase agreements and other short-term borrowings mature,we must enter into new borrowings,find other sources of liquidity or sell assets.An increase in short-term interest rates at the time that we seek to enter into new borrowings w

261、ould reduce the spread between the returns on our assets and the cost of our borrowings.This wouldadversely affect the returns on our assets,which might reduce earnings and,in turn,cash available for distribution to stockholders.We are highly dependent on information technology,and system failures o

262、r security breaches could disrupt our business.Our business is highly dependent on information technology and our ability to process,record and monitor many complex transactions and large amounts of data efficientlyand accurately.In the ordinary course of our business,we store sensitive data,includi

263、ng our proprietary business information and that of our business partners,and non-publicpersonally identifiable information of mortgage borrowers,on our networks.The secure maintenance and transmission of this information is critical to our operations.Computermalware,viruses,ransomware and phishing

264、attacks remain widespread and are increasingly sophisticated.We are from time to time the target of attempted cyber threats.Wecontinuously monitor and develop our information technology networks and infrastructure to prevent,detect,address and mitigate the risk of unauthorized access,misuse,computer

265、 viruses and other events that could have a security impact.Despite these security measures,our information technology and infrastructure may be vulnerable to attacksby hackers or breached due to employee or service provider error,malfeasance or other disruptions.Any such breach could compromise our

266、 networks and the information storedthere could be accessed,publicly disclosed,lost or stolen.Any such access,disclosure or other loss of information could result in legal claims or proceedings,liability under lawsthat protect the privacy of personal information,regulatory penalties,disruption to ou

267、r operations,or disruption to our trading activities or damage our reputation,which couldhave a material adverse effect on our financial results and negatively affect the market price of our common stock and our ability to pay dividends to stockholders.The resources required to protect our informati

268、on technology and infrastructure,and to comply with the laws and regulations related to data and privacy protection,arecontinuously evolving.Even in circumstances where we are able to successfully protect such technology and infrastructure from attacks,we may incur significant expenses inconnection

269、with our responses to such attacks.Government and regulatory scrutiny of the measures taken by companies to protect against cybersecurity attacks has resulted inheightened cybersecurity requirements and additional regulatory oversight.Any of the foregoing issues may adversely impact our results of o

270、perations and financial condition.We enter into hedging transactions that expose us to contingent liabilities in the future,which may adversely affect our financial results or cash available for distribution tostockholders.We engage in transactions intended to hedge against various risks to our port

271、folio,including the exposure to changes in interest rates.The extent of our hedging activity variesin scope based on,among other things,the level and volatility of interest rates,the type of assets held and other market conditions.Although these transactions are intended toreduce our exposure to var

272、ious risks,hedging may fail to adequately protect or could adversely affect us because,among other things:available hedges may not corresponddirectly with the risks for which protection is sought;the duration of the hedge may not match the duration of the related liability;the amount of income that

273、a REIT may earnfrom certain hedging transactions is limited by U.S.federal income tax provisions;the credit quality of a hedging counterparty may be downgraded to such an extent that itimpairs our ability to sell or assign our side of the hedging transaction;and the hedging counterparty may default

274、on its obligations.13Table of ContentsSubject to maintaining our qualification as a REIT and satisfying the criteria for no-action relief from the Commodity Futures Trading Commissions commodity pooloperator registration rules,there are no current limitations on the hedging transactions that we may

275、undertake.Our hedging transactions could require us to fund large cashpayments in certain circumstances(e.g.,the early termination of the hedging instrument caused by an event of default or other early termination event,or a demand by acounterparty that we make increased margin payments).Our ability

276、 to fund these obligations will depend on the liquidity of our assets and our access to capital at the time.Theneed to fund these obligations could adversely affect our financial condition.Further,hedging transactions,which are intended to limit losses,may actually result in losses,whichwould advers

277、ely affect our earnings and could in turn reduce cash available for distribution to stockholders.Our financial results may experience greater fluctuations due to our decision not to elect hedge accounting treatment on our derivative instruments.We have elected to not qualify for hedge accounting tre

278、atment under Accounting Standards Codification(ASC)815,Derivatives and Hedging,or ASC 815,for our currentderivative instruments.The economics of our derivative hedging transactions are not affected by this election;however,our earnings(losses)for U.S.generally acceptedaccounting principles,or U.S.GA

279、AP,purposes may be subject to greater fluctuations from period to period as a result of this accounting treatment for changes in fair value ofderivative instruments or for the accounting of the underlying hedged assets or liabilities in our financial statements,as it does not necessarily align with

280、the accounting used forderivative instruments.The acquisition of RoundPoint directly exposes us to risks associated with mortgage servicing and any new services or business activities we may pursue could result in ourexposure to new or increased risks.As a result of our acquisition of RoundPoint,we

281、began directly servicing a portion of the mortgage loans underlying our MSR assets as well as mortgage loans underlyingMSR owned by third parties.The ownership of an entity that is directly engaged in mortgage loan servicing operations exposes us to risks inherent in mortgage loan servicingmore dire

282、ctly than engaging third-party mortgage loan servicers.Such risks include but are not limited to:legal or regulatory actions resulting from a failure to comply withapplicable laws,rules and regulations;adverse impacts resulting from a failure to comply with rules and guidelines established by the GS

283、Es,which could limit our ability toconduct business with them;impacts of payment delinquencies and mortgage defaults,including any additional servicing costs or servicing advance obligations we may incur;information technology system failures or data security breaches;failure to maintain the size an

284、d scale of our MSR and servicing portfolios;the termination of subservicingrelationships if we fail to meet our servicing obligations to our clients;and any downgrade in our servicer ratings.Any of the foregoing risks could have a material adverse effecton our business,financial condition,results of

285、 operations and liquidity.We believe the operation and integration of RoundPoint as a part of our business will result in incremental pre-tax earnings,greater control over our MSR portfolio and long-term opportunities to expand upon and leverage RoundPoints operational capabilities to pursue additio

286、nal business opportunities.However,it is possible that the full benefits ofthe acquisition of RoundPoint may not be realized as expected or may not be achieved within our anticipated time frame,or at all.We are subject to risks associated with the use of third-party service providers.We have engaged

287、 numerous third parties to provide us with financial,technology and other services to support our servicing operations,as well as for general corporatepurposes.If a service providers activities do not comply with the applicable legal,regulatory or contractual requirements,we could be exposed to liab

288、ility as the servicer,whichcould negatively impact our relationships with our servicing customers or regulators,among others.In addition,if our current service providers were to stop providing services tous on acceptable terms,including as a result of one or more bankruptcies due to poor economic co

289、nditions,we may be unable to procure alternative services from other serviceproviders in a timely and efficient manner and on acceptable terms,or at all.If a service provider fails to comply with applicable legal or regulatory requirements on our behalf,or provide to us the services we are contractu

290、ally owed,we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business,financial condition and results of operations.In addition,in connection with our servicing activities and ownership of MSR,we possess non-public personally identifiable in

291、formation that is shared with third-partyservice providers as required or permitted by law.In the event the information technology networks and infrastructure of a third-party service provider is breached,we may beliable for losses suffered by individuals whose personal information is stolen as a re

292、sult of such breach and any such liability could be material.Even if we are not liable for suchlosses,any breach of these third-party systems could expose us to material costs related to notifying affected individuals or other parties and providing credit monitoring services,as well as to regulatory

293、 fines or penalties.14Table of ContentsOur ability to own and manage MSR and service mortgage loans is subject to terms and conditions established by the GSEs,which are subject to change.Our subsidiaries continued approval from the GSEs to own and manage MSR and service mortgage loans is subject to

294、compliance with each of their respective selling andservicing guidelines,minimum capital requirements and other conditions they may impose from time to time at their discretion.Failure to meet such guidelines and conditionscould result in the unilateral termination of our subsidiaries approved statu

295、s by one or more GSEs or result in the acceleration and termination of our MSR financing facilities.Inaddition,the implementation of more restrictive or operationally intensive guidance may increase the costs associated with owning and managing MSR,our ability to financeMSR and our ability to genera

296、te revenue from servicing mortgage loans.We are subject to risks related to previous mortgage loan servicers.We service mortgage loans under requirements set forth by regulatory agencies and GSEs.Failure to meet these applicable requirements can result in the assessment of finesand loss of reimburse

297、ment of loan related advances,expenses,interest and servicing fees.When the servicing of a portfolio is assumed either through the purchase of servicingrights or through a subservicing arrangement,various loans in the acquired portfolio may have been previously serviced in a manner that could interf

298、ere with our ability to meetcertain applicable requirements.If not remediated by a prior servicer,such events may lead to the eventual realization of a loss to us.The recovery process against a prior servicercan be prolonged and amounts ultimately recovered from prior servicers may differ from our e

299、stimated recoveries recorded based on the prior servicers interpretation ofresponsibility for loss,which could lead to our realization of additional losses.Our securitization activities expose us to risk of litigation,which may materially and adversely affect our business and financial condition.In

300、connection with our securitization transactions,we prepare disclosure documentation,including term sheets and offering memorandums,which contain disclosuresregarding the securitization transactions and the assets securitized.If our disclosure documentation is alleged or found to contain inaccuracies

301、 or omissions,we may be liableunder federal securities laws,state securities laws or other applicable laws for damages to third parties that invest in these securitization transactions,including in circumstancesin which we relied on a third party in preparing accurate disclosures,or we may incur oth

302、er expenses and costs in connection with disputing these allegations or settling claims.We may be subject to representation and warranty risk in our capacity as an owner of MSR as well as in connection with our prior securitization transactions and our salesof MSR and other assets.The MSR we acquire

303、 may be subject to existing representations and warranties made to the applicable investor(including,without limitation,the GSEs)regarding,amongother things,the origination and prior servicing of those mortgage loans,as well as future servicing practices following our acquisition of such MSR.If such

304、 representations andwarranties are inaccurate,we may be obligated to repurchase certain mortgage loans or indemnify the applicable investor for any losses suffered as a result of the origination orprior servicing of the mortgage loans.As such,the applicable investor will have direct recourse to us f

305、or such origination and/or prior servicing issues.In connection with our prior securitization transactions and with the sales of our MSR and other assets from time to time,we may have been or may be required to makerepresentations and warranties to the purchasers of the assets regarding certain char

306、acteristics of those assets.If our representations and warranties are inaccurate,we may beobligated to repurchase the assets or indemnify the applicable purchaser,which may result in a loss.Even if we obtain representations and warranties from the parties from whomwe acquired the asset,as applicable

307、,they may not correspond with the representations and warranties we make or may otherwise not protect us from losses.Additionally,the loanoriginator or other parties from whom we acquired the MSR may be insolvent or otherwise unable to honor their respective indemnification or repurchase obligations

308、 forbreaches of representation and warranties.15Table of ContentsLegal matters related to the termination of our Management Agreement with PRCM Advisers may adversely affect our business,results of operations,and/or financialcondition.On August 14,2020,our Management Agreement with PRCM Advisers ter

309、minated and we thereafter became a self-managed company.In connection with the termination ofour Management Agreement,PRCM Advisers filed a complaint in federal court that alleges,among other things,the misappropriation of trade secrets in violation of both theDefend Trade Secrets Act and New York c

310、ommon law,breach of contract,breach of the implied covenant of good faith and fair dealing,unfair competition and businesspractices,unjust enrichment,conversion,and tortious interference with contract.The complaint seeks,among other things,an order enjoining the company from making any useof or disc

311、losing PRCM Advisers trade secret,proprietary,or confidential information;damages in an amount to be determined at a hearing and/or trial;disgorgement of thecompanys wrongfully obtained profits;and fees and costs incurred by PRCM Advisers in pursuing the action.Our board of directors believes the co

312、mplaint is without merit andthat the company has complied with the terms of the Management Agreement.However,the results of litigation are inherently uncertain.It is possible that a court could enjoin usfrom using certain intellectual property.In addition,any damages or costs and fees that may be aw

313、arded to PRCM Advisers related to the litigation may be significant.While wedispute and intend to vigorously defend against the claims set forth in the complaint,it is possible that the results of the litigation with PRCM Advisers may adversely affect ourbusiness,results of operations and financial

314、condition.Risks Related To Our AssetsDeclines in the market values of our assets may adversely affect our results of operations and financial condition.A substantial portion of our assets are classified for accounting purposes as“available-for-sale.”Changes in the market values of those assets will

315、be directly charged orcredited to stockholders equity.As a result,a decline in values may result in connection with factors that are out of our control and adversely affect our book value.Moreover,ifthe decline in value of an available-for-sale security is other than temporary,such decline will redu

316、ce our earnings.In addition,some of the assets in our portfolio are not publicly traded.The fair value of securities and other assets that are not publicly traded may not be readily determinable.We value these assets quarterly at fair value,as determined in accordance with ASC 820,Fair Value Measure

317、ments and Disclosures,which may include unobservable inputs.Because such valuations are subjective,the fair value of certain of our assets may fluctuate over short periods of time and our determinations of fair value may differ materiallyfrom the values that would have been used if a ready market fo

318、r these securities existed.We may be adversely affected if our determinations regarding the fair value of theseassets are materially higher than the values that we ultimately realize upon their disposal.Changes in mortgage prepayment rates may adversely affect the value of our assets.The value of ou

319、r assets is affected by prepayment rates on mortgage loans,and our investment strategy includes making investments based on our expectations regardingprepayment rates.A prepayment rate is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loa

320、ns are otherwisebrought current,modified,liquidated or charged off.With respect to our securities portfolio,typically the value of a mortgage-backed security includes market assumptionsregarding the speed at which the underlying mortgages will be prepaid.Faster than expected prepayments could advers

321、ely affect our profitability,including in the followingways:We may purchase securities that have a higher interest rate than the market interest rate at the time.In exchange for this higher interest rate,we may pay a premium overthe par value to acquire the security.In accordance with U.S.GAAP,we ma

322、y amortize this premium over the estimated term of the security.If the security is prepaid inwhole or in part prior to its maturity date,however,we may be required to expense the premium that was prepaid at the time of the prepayment.A substantial portion of our adjustable-rate Agency RMBS may bear

323、interest rates that are lower than their fully indexed rates,which are equivalent to the applicableindex rate plus a margin.If an adjustable-rate security is prepaid prior to or soon after the time of adjustment to a fully-indexed rate,we will have held that securitywhile it was least profitable and

324、 lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life.If we are unable to acquire new Agency RMBS similar to the prepaid security,our financial condition,results of operations and cash flows could suffer.Changes in prepayment rates also significa

325、ntly affect the value of MSR because such rights are priced on an assumption of a stable repayment rate.If the prepayment rate issignificantly greater than expected,the fair value of the MSR could decline and we may be required to record a non-cash charge,which would have a negative impact on ourfin

326、ancial results.Furthermore,a significant increase in the prepayment rate could materially reduce the ultimate cash flows we receive from MSR,and we could ultimatelyreceive substantially less than what we paid for such assets.16Table of ContentsPrepayment rates may be affected by a number of factors

327、including mortgage rates,the availability of mortgage credit,the relative economic vitality of the area in which therelated properties are located,the remaining life of the loans,the size of the remaining loans,the servicing of mortgage loans,changes in tax laws,other opportunities forinvestment,hom

328、eowner mobility and other economic,social,geographic,demographic and legal factors.Consequently,prepayment rates cannot be predicted with certainty.Ifwe make erroneous assumptions regarding prepayment rates in connection with our investment decisions,we may experience significant losses.Our delayed

329、delivery transactions,including TBAs,subject us to certain risks,including price risks and counterparty risks.We may purchase Agency RMBS through delayed delivery transactions,including TBAs.In a delayed delivery transaction,we enter into a forward purchase agreement with acounterparty to purchase e

330、ither(i)an identified Agency RMBS,or(ii)a to-be-issued(or“to-be-announced”)Agency RMBS with certain terms.As with any forward purchasecontract,the value of the underlying Agency RMBS may decrease between the contract date and the settlement date.Furthermore,a transaction counterparty may fail to del

331、iverthe underlying Agency RMBS at the settlement date.It may be uneconomical to roll our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts,which could negatively affect our financialcondition and results of operations.We utilize TBA dollar roll transactions a

332、s a means of investing in and financing Agency RMBS.TBA contracts enable us to purchase or sell,for future delivery,AgencyRMBS with certain principal and interest terms and certain types of collateral,but the specific securities to be delivered are not identified until shortly before the TBA settlem

333、entdate.Prior to settlement of the TBA contract we may choose to move the settlement of the securities to a later date by entering into an offsetting position(referred to as a“pairoff”),net settling the paired off positions for cash,and simultaneously purchasing a similar TBA contact for a later settlement date,collectively referred to as a“dollar roll.”TheAgency RMBS purchased for a forward settl