1、Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549 FORM 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 31,2013OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
2、ACTOF 1934For the transition period from to Commission File Number:001-35246 CHERRY HILL MORTGAGE INVESTMENTCORPORATION(Exact name of registrant as specified in its charter)Maryland 46-1315605(State or other jurisdiction ofincorporation or organization)(I.R.S.EmployerIdentification No.)301 Harper Dr
3、ive,Suite 110Moorestown,New Jersey 08057(Address of principal executive offices)(Zip Code)(877)870 7005(Registrants telephone number,including area code)Securities registered pursuant to Section 12(b)of the Act:Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock,$0.01 par value
4、 New York Stock ExchangeSecurities registered pursuant to Section 12(g)of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.Yes No xIndicate by check mark if the registrant is not required to file reports pursuant to Se
5、ction 13 or Section 15(d)of the Exchange Act.Yes No xIndicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934during the preceding 12 months(or for such shorter period that the registrant was required to fi
6、le such reports),and(2)has been subject to such filingrequirements for the past 90 days.Yes x No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,if any,every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405
7、of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorterperiod that the registrant was required to submit and post such files).Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(229.405 of this chapter)is not
8、contained herein,and will not be contained,to the best of registrants knowledge,in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K.Yes x No Indicate by check mark whether the registrant is a large accelerated filer,
9、an accelerated filer,a non-accelerated filer or a smaller reporting company.Seethe definitions of“large accelerated filer,”“accelerated filer”and“smaller reporting company”in Rule 12b-2 of the Exchange Act.Large accelerated filer Accelerated filer Non-accelerated filer x (Do not check if a smaller r
10、eporting company)Smaller reporting company Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No xAs of June 30,2013,the last business day of the registrants most recently completed second fiscal quarter,the registrants common stock was
11、 not listedon any exchange or over-the counter market.The registrants common stock began trading on the New York Stock Exchange on October 4,2013.On March 25,2014,the registrant had a total of 7,509,543 shares of common stock,$0.01 par value,outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of
12、 the registrants Definitive Proxy Statement on Schedule 14A for the 2014 Annual Meeting of Stockholders scheduled to be held on or aboutJune 10,2014 are incorporated by reference into Part III of this Annual Report on Form 10-K.Table of ContentsTABLE OF CONTENTS Page PART I Item 1.Business 1 Item 1A
13、.Risk Factors 9 Item 1B.Unresolved Staff Comments 41 Item 2.Properties 41 Item 3.Legal Proceedings 41 Item 4.Mine Safety Disclosures 41 PART II Item 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities 42 Item 6.Selected Financial Data 43 Item
14、7.Managements Discussion and Analysis of Financial Condition and Results of Operations.45 Item 7A.Quantitative and Qualitative Disclosures about Market Risk 60 Item 8.Consolidated Financial Statements and Supplementary Data 63 Item 9.Changes in and Disagreements with Accountants on Accounting and Fi
15、nancial Disclosure.93 Item 9A.Controls and Procedures.93 Item 9B.Other Information.94 PART III Item 10.Directors,Executive Officers and Corporate Governance.95 Item 11.Executive Compensation.95 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.95
16、Item 13.Certain Relationships and Related Transactions and Director Independence.95 Item 14.Principal Accountant Fees and Services.95 PART IV Item 15.Exhibits.96 iTable of ContentsIn this Annual Report on Form 10-K,unless specifically stated otherwise or the context otherwise indicates,references to
17、“we,”“us,”“our,”the“Company”or“CHMI”refer to Cherry Hill Mortgage Investment Corporation,a Maryland corporation,together with its consolidatedsubsidiaries;references to the“Manager”or to“CHMM”refer to Cherry Hill Mortgage Management,LLC,a Delaware limited liability company;and references to the“Oper
18、ating Partnership”refer to Cherry Hill Operating Partnership,L.P.,a Delaware limited partnership.GLOSSARYThis glossary defines some of the terms that we use elsewhere in this Annual Report and is not a complete list of all of the defined terms usedherein.“Agency”means a U.S.Government agency,such as
19、 Ginnie Mae,or a GSE.“Agency RMBS”means residential mortgage-backed securities issued by an Agency or for which an Agency guarantees payments of principal and interest onthe securities.“ARM”means an adjustable-rate residential mortgage loan.“CFTC”means the U.S.Commodity Futures Trading Commission.“C
20、MO”means a collateralized mortgage obligation.CMOs are structured instruments representing interests in specified mortgage loan collateral.CMOsecuritizations consist of multiple classes,or tranches,of securities,with each tranche having specified characteristics,based on the rules described in these
21、curitization documents governing the division of the monthly principal and interest distributions,including prepayments,from the underlying mortgagecollateral among the various tranches.“conforming loan”means a residential mortgage loan that conforms to the Agency underwriting guidelines and meets t
22、he funding criteria of Fannie Mae andFreddie Mac.“credit enhancement”means techniques to improve the credit ratings of securities,including overcollateralization,creating retained spread,creatingsubordinated tranches and insurance.“Excess MSR”means an interest in an MSR,representing a portion of the
23、 interest payment collected from a pool of mortgage loans,net of a basic servicingfee paid to the mortgage servicer.“Fannie Mae”means the Federal National Mortgage Association.“FDIC”means the Federal Deposit Insurance Corporation.“FHA”means the Federal Housing Administration.“FHFA”means the U.S.Fede
24、ral Housing Finance Agency.“FHA mortgage loan”means a mortgage loan that is insured by FHA.“Freddie Mac”means the Federal Home Loan Mortgage Corporation.“FRM”means a fixed-rate residential mortgage loan.“Ginnie Mae”means the Government National Mortgage Association,a wholly-owned corporate instrumen
25、tality of the United States of America withinHUD.“GSE”means a government-sponsored enterprise.When we refer to GSEs,we mean Fannie Mae or Freddie Mac.“HAMP”means the Home Affordable Modification Program.“HARP”means the Home Affordable Refinance Program.iTable of Contents“HUD”means the U.S.Department
26、 of Housing and Urban Development.“hybrid ARM”means a residential mortgage loan that has an interest rate that is fixed for a specified period of time(typically three,five,seven or ten years)and thereafter adjusts to an increment over a specified interest rate index.“inverse IO”means an inverse inte
27、rest-only security,which is a type of stripped security.These debt securities receive no principal payments and have acoupon rate which has an inverse relationship to its reference index.“IO”means an interest-only security,which is a type of stripped security.IO strips receive a specified portion of
28、 the interest on the underlying assets.“jumbo mortgage loan”means a residential mortgage loan with an original principal balance in excess of the statutory conforming limit for GSE mortgageloans.“MBS”means mortgage-backed securities.“MSR”means a mortgage servicing right.An MSR provides a mortgage se
29、rvicer with the right to service a mortgage loan or a pool of mortgages in exchangefor a portion of the interest payments made on the mortgage or the underlying mortgages.An MSR is made up of two components:a basic servicing fee and anExcess MSR.The basic servicing fee is the amount of compensation
30、for the performance of servicing duties.“mortgage loan”means a loan secured by real estate with a right to receive the payment of principal and interest on the loan(including the servicing fee).“non-Agency RMBS”means RMBS that are not issued or guaranteed by an Agency,including investment grade(AAA
31、through BBB rated)and non-investment grade(BB rated through unrated)classes.“prime jumbo mortgage loan”means a mortgage loan that generally conforms to GSE underwriting guidelines,except that the mortgage balance exceeds thestatutory conforming limit for a GSE mortgage loan.“REMIC”means a real estat
32、e mortgage investment conduit.“residential mortgage pass-through certificate”is a security that represents an interest in a“pool”of mortgage loans secured by residential real propertywhere payments of both interest and principal(including principal prepayments)on the underlying residential mortgage
33、loans are made monthly to holders ofthe security,in effect“passing through”monthly payments made by the individual borrowers on the mortgage loans that underlie the security,net of fees paidto the issuer/guarantor and servicer.“RMBS”means a residential mortgage-backed security.“SIFMA”means the Secur
34、ities Industry and Financial Markets Association.“stripped security”is an RMBS structured with two or more classes that receives different distributions of principal or interest on a pool of Agency RMBS.Stripped securities include IOs and inverse IOs,each of which we may invest in subject to qualify
35、ing as a REIT.“TBA”means a forward-settling Agency RMBS where the pool is“to-be-announced.”In a TBA,a buyer will agree to purchase,for future delivery,AgencyRMBS with certain principal and interest terms and certain types of underlying collateral,but the particular Agency RMBS to be delivered is not
36、 identifieduntil shortly before the TBA settlement date.“TRS”means a taxable REIT subsidiary.“UPB”means unpaid principal balance.“U.S.Treasury”means the U.S.Department of Treasury.“VA”means the Department of Veterans Affairs.iiTable of Contents“VA mortgage loan”means a mortgage loan that is partiall
37、y guaranteed by the VA in accordance with its regulations.“whole loan”is a direct investment in a whole residential mortgage loan as opposed to an investment in RMBS,CMO or other structured product that isbacked by such a loan.iiiTable of ContentsFORWARD-LOOKING INFORMATIONThe Company makes forward-
38、looking statements in this Annual Report on Form 10-K within the meaning of Section 27A of the Securities Act of1933,as amended(the“Securities Act”),and Section 21E of the Securities Exchange Act of 1934,as amended(the“Exchange Act”).For these statements,theCompany claims the protections of the safe
39、 harbor for forward-looking statements contained in such Sections.Forward-looking statements are subject tosubstantial risks and uncertainties,many of which are difficult to predict and are generally beyond the Companys control.These forward-looking statementsinclude information about possible or as
40、sumed future results of the Companys business,financial condition,liquidity,results of operations,plans andobjectives.When the Company uses the words“believe,”“expect,”“anticipate,”“estimate,”“plan,”“continue,”“intend,”“should,”“could,“would,”“may,”“potential”or the negative of these terms or other
41、comparable terminology,the Company intends to identify forward-looking statements.Statementsregarding the following subjects,among others,may be forward-looking:the Companys investment objectives and business strategy;the Companys ability to obtain future financing arrangements;the Companys expected
42、 leverage;the Companys expected investments;estimates or statements relating to,and the Companys ability to make,future distributions;the Companys ability to compete in the marketplace;market,industry and economic trends;recent market developments and actions taken and to be taken by the U.S.Governm
43、ent,the U.S.Treasury and the Board of Governors ofthe Federal Reserve System,the FDIC,Fannie Mae,Freddie Mac,Ginnie Mae and the U.S.Securities and Exchange Commission(“SEC”);mortgage loan modification programs and future legislative actions;the Companys ability to maintain its qualification as a rea
44、l estate investment trust(“REIT”)under the Internal Revenue Code of 1986,asamended(the“Code”);the Companys ability to maintain its exemption from qualification under the Investment Company Act of 1940,as amended(the“Investment Company Act”);projected capital and operating expenditures;availability o
45、f investment opportunities in mortgage-related,real estate-related and othersecurities;availability of qualified personnel;prepayment rates;and projected default rates.The Companys beliefs,assumptions and expectations can change as a result of many possible events or factors,not all of which are kno
46、wn to itor are within its control.If any such change occurs,the Companys business,financial condition,liquidity and results of operations may vary materiallyfrom those expressed in,or implied by,the Companys forward-looking statements.These risks,along with,among others,the following factors,could c
47、auseactual results to vary from the Companys forward-looking statements:the factors referenced in this Annual Report on Form 10-K,including those set forth under“Item 1.Business”and“Item 1A.RiskFactors”;the Companys limited operating history;general volatility of the capital markets;changes in the C
48、ompanys investment objectives and business strategy;availability,terms and deployment of capital;ivTable of Contents availability of suitable investment opportunities;the Companys dependence on its external manager,CHMM,and the Companys ability to find a suitable replacement if the Company orthe Man
49、ager were to terminate the management agreement the Company has entered into with the Manager;changes in the Companys assets,interest rates or the general economy;increased rates of default and/or decreased recovery rates on the Companys investments;changes in interest rates,interest rate spreads,th
50、e yield curve,prepayment rates or recapture rates;limitations on the Companys business due to compliance with the REIT requirements;and the degree and nature of the Companys competition,including competition for its targeted assets.Although the Company believes that the expectations reflected in the
51、 forward-looking statements are reasonable,it cannot guarantee future results,levels of activity,performance or achievements.These forward-looking statements apply only as of the date of this Annual Report on Form 10-K.TheCompany is not obligated,and does not intend,to update or revise any forward-l
52、ooking statements,whether as a result of new information,future events orotherwise.See Item 1A,“Risk Factors”of this Annual Report on Form 10-K.vTable of ContentsPART I Item 1.BusinessCherry Hill Mortgage Investment Corporation is a newly-listed public residential real estate finance company focused
53、 on acquiring,investing inand managing residential mortgage assets in the United States.We were incorporated in Maryland on October 31,2012,and we commenced operations onOctober 9,2013 following the completion of our initial public offering(“IPO”)and a concurrent private placement.Our common stock h
54、as been listed andtraded on the New York Stock Exchange under the symbol“CHMI”since October 4,2013.We are externally managed by Cherry Hill Mortgage Management,LLC,an SEC-registered investment adviser and an affiliate of Freedom Mortgage Corporation.We operate so as to qualify to be taxed as a REIT
55、under the Code.To qualify as a REIT,we must distribute annually to our stockholders anamount at least equal to 90%of our REIT taxable income,determined without regard to the deduction for dividends paid and excluding any net capitalgain.We currently expect to distribute substantially all of our REIT
56、 taxable income to our stockholders.We will be subject to income tax on our taxable incomethat is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates.Income as computedfor purposes of the foregoing tax rules will no
57、t necessarily correspond to our income as determined for financial reporting purposes.Our principal objective is to generate attractive current yields and risk-adjusted total returns for our stockholders over the long term,primarilythrough dividend distributions and secondarily through capital appre
58、ciation.We intend to attain this objective by selectively constructing and activelymanaging a targeted portfolio of Excess MSRs,Agency RMBS,prime jumbo mortgage loans and other cashflowing residential mortgage assets.We operate ourbusiness through the following segments:(i)investments in Excess MSRs
59、;and(ii)RMBS.For information regarding the segments in which we operate,see“Item 8.Consolidated Financial Statements and Supplementary Data Note 3 Segment Reporting.”Our Targeted Asset ClassesOur targeted asset classes currently include:Excess MSRs;Agency RMBS,including residential mortgage pass-thr
60、ough certificates,CMOs(IOs and inverse IOs)and TBAs;and prime jumbo mortgage loans.Our StrategyOur strategy,which we expect could change as market conditions warrant,involves:allocating a majority of our equity capital to the acquisition of Excess MSRs through:flow or bulk purchases from Freedom Mor
61、tgage pursuant to the terms of our strategic alliance agreements;and flow or bulk purchases from third-party servicers other than Freedom Mortgage;acquiring Agency RMBS on a leveraged basis;over time,as the market for prime jumbo mortgage loans grows,purchasing these assets from,or potentially in pa
62、rtnership with,FreedomMortgage;and opportunistically mitigating our prepayment,interest rate and,to a lesser extent,credit risk by using recapture agreements and a variety ofhedging instruments.1Table of ContentsExcess MSR Strategy.We intend to capitalize on our relationship with Freedom Mortgage to
63、 acquire Excess MSRs on a flow and bulk basis.Weexpect to co-invest in such Excess MSRs with Freedom Mortgage on terms and according to protocols approved by our independent directors.We also intend toacquire Excess MSRs through flow or bulk purchases of these assets from servicers other than Freedo
64、m Mortgage.Agency RMBS Strategy.Our Agency RMBS strategy focuses primarily on the acquisition and ownership of whole-pool,residential mortgagepass-through certificates.However,we may from time to time invest in CMOs,including IOs and inverse IOs.If we decide to invest in IOs,or inverse IOs.Weanticip
65、ate doing so primarily to take advantage of particularly attractive prepayment-related or structural opportunities in the Agency RMBS markets.Inaddition to investing in specific pools of Agency RMBS,we utilize forward-settling purchases and sales of Agency RMBS where the underlying pools ofmortgage
66、loans are“to-be-announced”(TBAs).Pursuant to these TBA transactions,we agree to purchase or sell,for future delivery,Agency RMBS withcertain principal and interest terms and certain types of underlying collateral,but the particular Agency RMBS to be delivered is not identified until shortlybefore th
67、e TBA settlement date.Our ability to engage in TBA transactions may be limited by the gross income and asset tests applicable to REITs.Prime Jumbo Mortgage Loan Strategy.We believe that the market for non-conforming loans including,in particular,prime jumbo mortgageloans,will grow.We further believe
68、 that as the U.S.Government reduces the loan balance threshold for conforming mortgage loans,which was raised duringthe recent financial crisis,there will be an even greater need for lenders to provide credit in the non-conforming loan market.As a result,we expect our portfolioto include this asset
69、class over time.Based on current market conditions,we do not expect this asset class to be a significant part of our portfolio until at least2015,if at all.The prime jumbo mortgage loans we intend to acquire may be ARMs,hybrid ARMs or FRMs with original terms to maturity of not more than30 years and
70、 will be either fully amortizing or interest-only for up to ten years,and fully amortizing thereafter.We currently do not intend to originate primejumbo mortgage loans or provide other types of financing directly to the owners of residential real estate.We intend to acquire prime jumbo mortgage loan
71、s thatare underwritten to our specifications.We may acquire prime jumbo mortgage loans underwritten to our specifications from Freedom Mortgage or otheroriginators.To the extent Freedom Mortgage originates prime jumbo mortgage loans that satisfy our investment parameters and guidelines,we expect to
72、negotiatean arrangement with Freedom Mortgage so we have the right to purchase such loans.Any such arrangement will be subject to the review and approval ourindependent directors.We may acquire prime jumbo mortgage loans for our portfolio with the intention of either holding them in our residential
73、mortgage loanportfolio or securitizing them and retaining them in our portfolio as securitized mortgage loans.Other Residential Mortgage Asset Strategy.From time to time and as market conditions warrant,we may acquire other residential mortgageassets,including MSRs and non-Agency RMBS.We currently d
74、o not intend to acquire subprime or Alt-A mortgage loans.In the future,subject to the receiptof appropriate licensing and Agency approvals,we may pursue flow and bulk acquisitions of MSRs through our TRS,Cherry Hill TRS,LLC.Our ability toacquire MSRs will be subject to the applicable REIT qualificat
75、ion tests.We likely will have to hold any MSRs through our TRS,which will be subject tocorporate income tax.The tax liability of our TRS(if it holds MSRs)would negatively impact our returns from those assets.In addition,non-Agency RMBS,if we decide to purchase them,are subject to risk of default,amo
76、ng other risks,and could result in greater losses.Our strategy is adaptable to changing market environments,subject to compliance with the income and other tests that we must satisfy to qualifyas a REIT and maintain our exclusion from regulation as an investment company under the Investment Company
77、Act.As a result,although we currentlyintend to focus on the acquisition and management of Excess MSR assets and Agency RMBS,our acquisition and management decisions will depend onprevailing market conditions and our targeted asset classes and strategy may vary over time in response to market conditi
78、ons.2Table of ContentsOur ManagerWe are externally managed by our Manager.We have entered into a management agreement with our Manager,pursuant to which our Manager isresponsible for our investment strategies and decisions and our day-to-day operations,subject to the supervision and oversight of our
79、 board of directors.Mr.Middleman,our non-executive Chairman of the Board,is the sole member of our Manager.Freedom Mortgage and its employees support our Manager inproviding services to us pursuant to the terms of a services agreement that has been entered into by our Manager and Freedom Mortgage.We
80、 rely on ourManager and Freedom Mortgage to provide or obtain on our behalf the personnel and services necessary for us to conduct our business,and we have noemployees or facilities of our own.Our executive officers and the officers and employees of our Manager are also officers or employees of Free
81、dom Mortgage,and we will compete with Freedom Mortgage for access to these individuals.The executive offices of our Manager are located at 907 Pleasant Valley Ave.,Mount Laurel,New Jersey 08054,and the telephone number of our Managers executive offices is(877)870-7005.Our Manager has established an
82、Investment Committee to monitor our investment policies,portfolio holdings,financing and hedging strategiesand compliance with our investment guidelines.The official members of our Managers Investment Committee are Mr.Middleman,our Chairman;Mr.Lown,our President and Chief Investment Officer;and Mr.L
83、evine,our Chief Financial Officer,Treasurer and Secretary.The Managers Investment Committee alsoincludes three ex-officio members from the Managers management team.Our Manager is registered as an investment adviser under the Investment Advisers Act of 1940,as amended,or the Advisers Act,and is subje
84、ctto the regulatory oversight of the Investment Management Division of the SEC.Our Investment Guidelines;Transactions with Freedom MortgageOur board of directors adopted the following guidelines for our assets and borrowings:No investment will be made if it causes us to fail to qualify as a REIT und
85、er the Code.No investment will be made if it causes us to be regulated as an investment company under the Investment Company Act.We will not enter into principal transactions or split price executions with Freedom Mortgage or any of its affiliates unless such transactionis otherwise in accordance wi
86、th our investment guidelines and the management agreement between us and our Manager and the terms ofsuch transaction are at least as favorable to us as to Freedom Mortgage or its affiliate.Any proposed material investment that is outside our targeted asset classes must be approved by at least a maj
87、ority of our independentdirectors.Our Manager makes the determinations as to the percentage of assets that are invested in each of our targeted asset classes,consistent with ourinvestment guidelines.Our Managers acquisition decisions depend on prevailing market conditions and may change over time in
88、 response to opportunitiesavailable in different interest rate,economic and credit environments.In addition,our investment guidelines may be changed from time to time by our board ofdirectors without the approval of our stockholders.Changes to our investment guidelines may include,without limitation
89、,modification or expansion of thetypes of assets which we may acquire.To the extent that our board of directors approves material changes to our investment guidelines,we will informstockholders of such changes through disclosure in our periodic reports and other filings required under the Exchange A
90、ct.Our Managers Investment Committee,which is comprised of members of our senior management team,reviews our compliance with ourguidelines periodically and our board of directors receives a report each quarter in conjunction with its review of our quarterly results.The nominating andcorporate govern
91、ance committee,of which all of our independent directors are members,reviews the material terms of any transaction between us and FreedomMortgage,including the pricing terms,to determine if the terms of those transactions are fair and reasonable.In particular,prior to entering into any suchtransacti
92、on with Freedom Mortgage,the nominating and corporate governance committee reviews and approves any flow parameters and flow or bulkagreements to purchase Excess MSRs from Freedom Mortgage.This Committee will also be responsible for reviewing and approving any agreements pursuantto which we will acq
93、uire prime jumbo mortgage loans or other loans originated by Freedom Mortgage.We also retain two independent valuation services toassist our management and our independent directors in making pricing determinations on Excess MSRs and other assets we purchase from FreedomMortgage.3Table of ContentsOu
94、r Financing Strategies and Use of LeverageWe finance our Agency RMBS with what we believe to be a prudent amount of leverage,which will vary from time to time based upon theparticular characteristics of our portfolio,availability of financing and market conditions.Our borrowings consist of repurchas
95、e transactions under masterrepurchase agreements.These agreements represent uncommitted financing provided by the counterparties.Our repurchase transactions are collateralized byour Agency RMBS.In a repurchase transaction,we sell an asset to a counterparty at a discounted value,or the loan amount,an
96、d simultaneously agree torepurchase the same asset from such counterparty at a price equal to the loan amount plus an interest factor.Despite being legally structured as sales andsubsequent repurchases,repurchase transactions are generally accounted for as debt secured by the underlying assets.Durin
97、g the term of a repurchasetransaction,we generally receive the income and other payments distributed with respect to the underlying assets and pay interest to the counterparty.While theproceeds of our repurchase financings often will be used to purchase additional Agency RMBS subject to the same mas
98、ter repurchase agreement,our financingarrangements are not expected to restrict our ability to use proceeds from these arrangements to support our other liquidity needs.Our master repurchaseagreements are documented under the standard form master repurchase agreement published by SIFMA,and although
99、we do not currently leverage ourinvestments in Excess MSRs,we intend to explore the use of leverage if it becomes available on attractive terms and conditions.We have entered into repurchase agreements with 11 counterparties as of December 31,2013.From time to time we expect to negotiate and enterin
100、to additional master repurchase agreements with other counterparties that could produce opportunities to acquire certain Agency RMBS that may not beavailable from our existing counterparties.We may utilize other types of borrowings in the future,including term facilities or other more complex financ
101、ingstructures.Additionally,we may take advantage of available borrowings,if any,under new programs established by the U.S.Government to finance ourassets.We also may raise capital by issuing unsecured debt,preferred or common stock or trust preferred securities.Interest Rate HedgingWe opportunistica
102、lly manage our interest rate risk by using various hedging strategies.Subject to qualifying and maintaining our qualification asa REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act,we may utilize certain derivativefinancial instruments and ot
103、her hedging instruments to mitigate interest rate risk we expect to arise from our repurchase agreement financings associated withour Agency RMBS.The interest rate hedging instruments that we currently use include:interest rate swaps,TBAs and swaptions.See“Item 8.ConsolidatedFinancial Statements and
104、 Supplementary DataNote 2Basis of Presentation and Significant Accounting PoliciesDerivatives and Hedging Activities.”4Table of ContentsPolicies with Respect to Certain Other ActivitiesIf our board of directors determines that additional funding is required,we may raise such funds through additional
105、 offerings of equity or debtsecurities,the retention of cash flow and other funds from debt financing,including repurchase transactions,or a combination of these methods.In the eventthat our board of directors determines to raise additional equity capital,it has the authority,without stockholder app
106、roval,to issue additional shares ofcommon stock or preferred stock in any manner and on such terms and for such consideration as it deems appropriate,at any time.We may in the future,offer equity or debt securities in exchange for assets.We will engage in the purchase and sale of assets.We have not
107、in the past and will not in the futureunderwrite the securities of other companies.Our board of directors may change any of these policies without prior notice to you or a vote of our stockholders.CompetitionWe compete with other mortgage REITs,specialty finance companies,savings and loan associatio
108、ns,banks,mortgage bankers,insurancecompanies,mutual funds,institutional investors,investment banking firms,financial institutions,governmental bodies and other entities for investmentopportunities in general and Excess MSRs specifically.See Item 1A,“Risk Factors We operate in a highly competitive ma
109、rket.”In the face of this competition,through our Manager,we have access to Freedom Mortgages professionals and their industry expertise,whichmay provide us with a competitive advantage and help us assess risks and determine appropriate pricing for certain potential assets.In addition,we believethat
110、 these relationships enable us to compete more effectively for attractive asset acquisition opportunities.However,we may not be able to achieve ourbusiness goals or expectations due to the competitive risks that we face.5Table of ContentsEmployeesWe do not have any employees.All of our executive off
111、icers are employees of Freedom Mortgage.Our Tax StatusWe will elect and intend to qualify to be taxed as a REIT commencing with our short taxable year ended December 31,2013.Provided that wequalify and maintain our qualification as a REIT,we generally will not be subject to U.S.federal income tax on
112、 our REIT taxable income that is currentlydistributed to our stockholders.REITs are subject to a number of organizational and operational requirements,including a requirement that they currentlydistribute at least 90%of their annual REIT taxable income excluding net capital gains.We cannot assure yo
113、u that we will be able to comply with suchrequirements in the future.Failure to qualify as a REIT in any taxable year would cause us to be subject to U.S.federal income tax on our taxable income atregular corporate rates(and any applicable state and local taxes).Even if we qualify for taxation as a
114、REIT,we may be subject to certain federal,state,localand non-U.S.taxes on our income.For example,the income generated by our TRS will be subject to U.S.federal,state and local income tax.See“Item 1A.Risk Factors U.S.Federal Income Tax Risks”for additional tax status information.Our Exclusion from Re
115、gulation as an Investment CompanyWe are organized as a holding company and conduct business primarily through our subsidiaries.We believe we have conducted and intend toconduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the I
116、nvestment Company Act.Section 3(a)(1)(A)of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engagedprimarily in the business of investing,reinvesting or trading in securities.Section 3(a)(1)(C)of the Investment Company Act defines an investm
117、ent companyas 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 toacquire investment securities having a value exceeding 40%of the value of the issuers total assets(exclusive of U.S.Government securi
118、ties and cash items)onan unconsolidated basis,which we refer to as the 40%test.Excluded from the term“investment securities,”among other things,are U.S.Governmentsecurities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the ex
119、clusion from thedefinition of investment company set forth in Section 3(c)(1)or Section 3(c)(7)of the Investment Company Act.We believe neither we nor our operating partnership is considered an investment company under Section 3(a)(1)(A)of the Investment CompanyAct because neither we nor our operati
120、ng partnership engage primarily or hold ourselves out as being engaged primarily in the business of investing,reinvesting or trading in securities.Rather,through our operating partnerships wholly-owned or majority-owned subsidiaries,we and our operatingpartnership are primarily engaged in the non-in
121、vestment company businesses of these subsidiaries,namely the business of purchasing or otherwise acquiringmortgages and other interests in real estate.6Table of ContentsWe rely upon certain exemptions from registration as an investment company under the Investment Company Act including,in the case o
122、f oursubsidiary,Cherry Hill QRS I,LLC,Section 3(c)(5)(C)of the Investment Company Act.Section 3(c)(5)(C),as interpreted by the staff of the SEC,requiresan entity to invest at least 55%of its assets in“mortgages and other liens on and interests in real estate,”which we refer to as“qualifying real est
123、ate interests,”and at least 80%of its assets in qualifying real estate interests plus“real estate-related assets.”In satisfying the 55%requirement,the entity may treatsecurities issued with respect to an underlying pool of mortgage loans in which it holds all of the certificates issued by the pool a
124、s qualifying real estateinterests.We treat the Agency whole-pool pass-through securities in which we have invested as qualifying real estate interests for purposes of the 55%requirement.The Excess MSRs we have acquired are,and the Agency CMOs we may acquire will,not be treated as qualifying real est
125、ate interests forpurposes of the 55%requirement,but as real estate-related assets that qualify for the 80%test.In addition,Cherry Hill QRS I,LLC will treat its investmentin Cherry Hill QRS II,LLC as a real estate-related asset because substantially all of the assets held by Cherry Hill QRS II,LLC wi
126、ll be real estate-relatedassets.We monitor our compliance with the 40%Test and the holdings of our subsidiaries to ensure that each of our subsidiaries is in compliance withan applicable exemption or exclusion from registration as an investment company under the Investment Company Act.In the event t
127、hat we,or our operatingpartnership,were to acquire assets that could make either entity fall within the definition of investment company under Section 3(a)(1)(A)or Section 3(a)(1)(C)of the Investment Company Act,we believe that we would still qualify for an exclusion from registration pursuant to Se
128、ction 3(c)(5)(C).Qualification for exclusion from registration under the Investment Company Act limits our ability to make certain investments.In addition,complying with the tests for exclusion from registration could restrict the time at which we can acquire and sell assets.To the extent that the S
129、EC or its staffprovides more specific guidance regarding any of the matters bearing upon such exclusions,we may be required to adjust our strategy accordingly.Anyadditional guidance from the SEC or its staff could provide additional flexibility to us,or it could further inhibit our ability to pursue
130、 the strategies we havechosen.7Table of ContentsWebsite;Access to ReportsWe maintain a website at .We are providing the address to our website solely for the information of investors.The informationon our website is not a part of,nor is it incorporated by reference into this report.Through our websi
131、te,we make available,free of charge,our annual proxystatement,annual reports on Form 10-K,quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports filed or furnishedpursuant to Section 13(a)or 15(d)of the Securities Exchange Act of 1934,as amended,or the Exchange Ac
132、t,as soon as reasonably practicable after weelectronically file such material with,or furnish them to,the SEC.The SEC maintains a website that contains these reports at www.sec.gov.Corporate InformationOur principal executive offices are located at 301 Harper Drive,Suite 110,Moorestown,New Jersey,08
133、057.Our telephone number is(877)870-7005 and our website is .The offices of our Manager are located at 907 Pleasant Valley Ave.,Mount Laurel,New Jersey,08054.Information available on or accessible through our website and Freedom Mortgages website is not incorporated into this Annual Report on form 1
134、0-K.8Table of ContentsItem 1A.Risk FactorsThe Companys business and operations are subject to a number of risks and uncertainties,the occurrence of which could adversely affectits business,financial condition,results of operations and ability to make distributions to stockholders and could cause the
135、 value of the Companyscapital stock to decline.Please refer to the section entitled“Forward-Looking Statements.”Risks Related To Our BusinessWe have limited operating history and may not be able to operate our business successfully or generate sufficient revenue to make or sustaindistributions to ou
136、r stockholders.We commenced operations on October 9,2013 and we have limited operating history.We cannot assure you that we will be able to operate ourbusiness successfully or implement our operating policies and strategies.There can be no assurance that we will be able to generate sufficient return
137、s to payour operating expenses and make satisfactory distributions to our stockholders.The results of our operations depend on several factors,including theavailability of opportunities for the acquisition of target assets,the level and volatility of interest rates,the availability of adequate short
138、 and long-termfinancing,conditions in the financial markets and general economic conditions.Difficult conditions in the mortgage and residential real estate markets as well as general market concerns may adversely affect the value of theassets in which we invest and these conditions may persist for
139、the foreseeable future.Our business is materially affected by conditions in the residential mortgage market,the residential real estate market,the financial markets andthe economy in general.In particular,the residential mortgage market in the United States has experienced a variety of difficulties
140、and changed economicconditions,including defaults,credit losses and liquidity concerns.Certain commercial banks,investment banks and insurance companies have announcedextensive losses from exposure to the residential mortgage market.These factors have impacted investor perception of the risk associa
141、ted with RMBS,otherreal estate-related securities and various other asset classes in which we may invest.As a result,values of our target assets have experienced volatility.Deterioration of the mortgage market and investor perception of the risks associated with RMBS and other residential mortgage a
142、ssets that we acquire couldmaterially adversely affect our business,financial condition and results of operations and our ability to make distributions to our stockholders.We are dependent on mortgage servicers to service the mortgage loans underlying the Excess MSRs that we have acquired.Our invest
143、ments in Excess MSRs are dependent on the mortgage servicer to perform its servicing obligations.As a result,we could be materiallyand adversely affected if the servicer is terminated by the applicable Agency.The duties and obligations of mortgage servicers are defined through contractualagreements,
144、which generally provide for the possibility for termination of the servicer in the absolute discretion of the GSE or Ginnie Mae as applicable.In theevent of such termination by the applicable Agency with respect to a particular servicer,the related Excess MSRs could potentially lose all value on a g
145、oingforward basis.Moreover,the termination of a servicer could take effect across all mortgages being serviced by that servicer.Therefore,to the extent we makemultiple investments relating to mortgages serviced by the same servicer,such as our initial portfolio of Excess MSRs which are entirely serv
146、iced by FreedomMortgage,all such investments could lose all their value in the event of the termination of the servicer.In addition,many servicers also rely on subservicingarrangements with third parties and the failure of subservicers to adequately perform their services may negatively impact the s
147、ervicer and,as a result,theperformance of our Excess MSRs.We may not have recourse to the servicer if the subservicer fails to perform.We could also be materially and adversely affected if the servicer is unable to adequately service the underlying mortgage loans due to:its failure to comply with ap
148、plicable laws and regulation;its failure to perform its loss mitigation obligations;9Table of Contents a downgrade in its servicer rating;its failure to perform adequately in its external audits;a failure in or poor performance of its operational systems or infrastructure;regulatory scrutiny regardi
149、ng foreclosure processes lengthening foreclosure timelines;the transfer of servicing to another party;or any other reason.Favorable ratings from third-party rating agencies such as Standard&Poors,Moodys and Fitch are important to the conduct of a mortgageservicers loan servicing business and a downg
150、rade in a mortgage servicers ratings could have an adverse effect on us and the value of our Excess MSRs.Amortgage servicers failure to maintain favorable or specified ratings may cause their termination as a servicer.MSRs are subject to numerous federal,state and local laws and regulations and may
151、be subject to various judicial and administrative decisionsimposing various requirements and restrictions on the servicers business.If Freedom Mortgage or any servicer from whom we acquire Excess MSRs actuallyor allegedly failed to comply with applicable laws,rules or regulations,the servicer could
152、be exposed to fines,penalties or other costs or the servicer could beterminated as the servicer and the MSRs to which our Excess MSRs relate would be eliminated and lose all value,which could have a material adverse effecton the associated Excess MSR,our business,financial condition,results of opera
153、tions or cash flows.If these laws,regulations and decisions change,wecould be exposed to similar fines,penalties or costs.In addition,a bankruptcy by any mortgage servicer that services the mortgage loans underlying any Excess MSRs that we have acquired or mayacquire in the future could result in:th
154、e validity and priority of our ownership of the Excess MSRs being challenged in a bankruptcy proceeding;payments made by such servicer to us,or obligations incurred by it,being voided by a court under federal or state preference laws orfederal or state fraudulent conveyance laws;a re-characterizatio
155、n of any sale of the Excess MSRs or other assets to us as a pledge of such assets in a bankruptcy proceeding;or any agreement pursuant to which we acquired the Excess MSRs being rejected in a bankruptcy proceeding.Any of the foregoing events could have a material and adverse effect on us.Moreover,ou
156、r business model heavily relies upon our strategic alliancewith Freedom Mortgage and our Excess MSRs we have acquired through our relationship with Freedom Mortgage.To the extent Freedom Mortgage loses itsability to serve as a servicer for Fannie Mae or its status as a Ginnie Mae-approved issuer is
157、terminated,we could face significant adverse consequences.Similarly,if Freedom Mortgage is unable to successfully execute its business strategy or no longer maintains its financial viability,our business strategywould be materially adversely affected and our results of operations would suffer.Govern
158、mental investigations or examinations,or private lawsuits,including purported class action lawsuits,involving Freedom Mortgage couldhave a material adverse effect on Freedom Mortgage and its ability to perform its obligations under our strategic alliance agreements.Freedom Mortgage is routinely invo
159、lved in legal proceedings concerning matters that arise in the ordinary course of its business.An adverse resultin governmental investigations or examinations,or private lawsuits,including purported class action lawsuits,could have a material adverse effect onFreedom Mortgages financial results.Thes
160、e legal proceedings can range from private actions involving a single plaintiff to class action lawsuits withpotentially thousands of class members.Participants in the mortgage industry,including Freedom Mortgage,are also routinely subject to governmentinvestigations and inquiries.An adverse result
161、in governmental investigations or examinations,or private lawsuits,including purported class action lawsuits,could have a material adverse effect on Freedom Mortgages financial results.Litigation and other proceedings may require that Freedom Mortgage paysettlement 10Table of Contentscosts,legal fee
162、s,damages,penalties or other charges,which could adversely affect its financial results.In particular,ongoing and other legal proceedingsbrought under state consumer protection statutes may result in a separate fine for each violation of the statute,which,particularly in the case of class actionlaws
163、uits,could result in damages substantially in excess of the amounts earned from the underlying activities and that could have a material adverse effect onFreedom Mortgages liquidity and financial position.Freedom Mortgage has advised us that it does not believe that it is currently subject to any le
164、gal proceedings or government investigations thatwould reasonably be expected to have a material adverse effect on Freedom Mortgage or on us,but it is possible that one or more such legal proceedings orinvestigations could evolve into a material legal proceeding in the future.For example,Freedom Mor
165、tgage has informed us that,in February 2013,it received asubpoena from the Office of the Inspector General for the U.S.Department of Housing and Urban Development,or the HUD OIG,in which the HUD OIGrequested that Freedom Mortgage provide the HUD OIG with documents and records concerning Freedom Mort
166、gages quality control and training policies andprocedures relating to its FHA loan origination activities.The HUD OIG acts under the oversight of the U.S.Department of Justice.It is our understanding thatseveral other FHA approved mortgage originators have received similar requests.Freedom Mortgage
167、has informed us that,in March 2013,it provided allinformation that was readily available and continues to work with HUD OIG to further clarify the scope of the remaining information that was initiallyrequested.In September 2013,the HUD OIG requested documents not previously requested from Freedom Mo
168、rtgage,and we have been advised by FreedomMortgage that it is in the process of providing those documents to the HUD OIG and continuing to cooperate with the HUD OIG.Freedom Mortgage hasinformed us that the HUD OIG has not communicated to Freedom Mortgage any allegations of wrongdoing or other findi
169、ngs.However,we cannot assure youthat the HUD OIG will not do so in the future,and any such allegations or findings could result in Freedom Mortgage being required to pay settlement costs,legal fees,damages,penalties or other charges,which could adversely affect its financial results and its business
170、 operations,which in turn could impact itsability to perform under the strategic alliance agreements with us or may otherwise negatively impact its ability to act as our partner.Our ability to invest in,and dispose of,our investments in Excess MSRs may be subject to the receipt of third-party consen
171、ts.The Agencies may require that we submit ourselves to costly or burdensome conditions as a prerequisite to their consent to our investments inExcess MSRs.These conditions may diminish or eliminate the investment potential of certain Excess MSRs by making such investments too expensive for usor by
172、severely limiting the potential returns available from Excess MSRs.Moreover,we have not received and do not expect to receive any assurances from theAgencies that their conditions for the disposition of an investment in Excess MSRs,including the investment in our Excess MSRs in the initial pools wil
173、l notchange.Therefore the potential costs,issues or restrictions associated with receiving such Agencys consent for any such dispositions by us cannot bedetermined with any certainty.To the extent we are unable to dispose of Excess MSRs in our portfolio when we determine it would be beneficial to do
174、 so,ourresults of operations may be adversely impacted.Acknowledgement agreements with Ginnie Mae,Fannie Mae or Freddie Mac could expose us to potential liability in the event of a paymentdefault.In order to acquire Excess MSRs related to FHA and VA mortgage loans that have been pooled into securiti
175、es guaranteed by Ginnie Mae,we mustenter into an acknowledgment agreement with Ginnie Mae and the Ginnie Mae-approved issuer/servicer for the mortgage loans if we want to have Ginnie Maeacknowledge our interest in the relevant mortgage loans.Under that agreement,if the issuer/servicer fails to make
176、a required payment to the holders of theGinnie Mae-guaranteed Agency RMBS,we would be obligated to make that payment even though the payment may relate to loans for which we do not ownany Excess MSRs.Our failure to make that payment could result in liability to Ginnie Mae for any losses or claims th
177、at it suffers as a result.In addition,under anacknowledgment agreement with Fannie Mae or Freddie Mac,we could be exposed to potential liability in the event of a payment default by an approvedseller/servicer.However,the amount of the potential liability to Fannie Mae or Freddie Mac would be limited
178、 to the mortgage loans in the servicing portfolioidentified in the acknowledgment agreement.11Table of ContentsGiven the size of Freedom Mortgages portfolio of FHA and VA loans that have been pooled into Ginnie Mae-guaranteed Agency RMBS,it isunlikely that we would be able to satisfy that obligation
179、 under the acknowledgment agreement should Freedom Mortgage fail to make a required payment.Inthat case we would be subject to claims for losses by Ginnie Mae which would have a material and adverse effect on our financial condition and operations,and our ability to enter into acknowledgement agreem
180、ents in the future and to acquire Excess MSRs related to FHA and VA mortgage loans would be adverselyaffected.The only remedy related to the servicing permitted under the acknowledgment agreement is to request Ginnie Mae to transfer the servicing to anotherGinnie Mae-approved issuer/servicer which w
181、ould terminate our interest in the related Excess MSRs.The termination of our Excess MSRs could have amaterial adverse effect on our financial condition,results of operations and ability to make distributions to our stockholders.We have entered into an acknowledgement agreement with Ginnie Mae and F
182、reedom Mortgage in connection with the acquisition of our initialportfolio of Excess MSRs.The value of our Excess MSRs may vary substantially with changes in interest rates.The values of Excess MSRs are highly sensitive to changes in interest rates.The value of Excess MSRs typically increases when i
183、nterest rates riseand decrease when interest rates decline due to the effect those changes in interest rates have on prepayment estimates.Subject to qualifying and maintainingour qualification as a REIT,we may pursue various hedging strategies to seek to reduce our exposure to adverse changes in int
184、erest rates.Our hedging activitywill vary in scope based on the level and volatility of interest rates,the type of assets held and other changing market conditions.Interest rate hedging may failto protect or could adversely affect us.To the extent we do not utilize derivatives to hedge against chang
185、es in the fair value of Excess MSRs,our balance sheet,results of operations and cash flows would be susceptible to significant volatility due to changes in the fair value of,or cash flows from,Excess MSRs asinterest rates change.12Table of ContentsIf delinquencies increase,the value of our Excess MS
186、Rs may decline significantly.Delinquency rates have a significant impact on the value of Excess MSRs.An increase in delinquencies will generally result in lower revenuebecause typically servicers will only collect servicing fees from GSEs or mortgage owners for performing loans.Our expectation of de
187、linquencies is asignificant assumption underlying the cash flow projections on the related pools of mortgage loans.If delinquencies are significantly greater than expected,theestimated fair value of the Excess MSRs could be diminished.As a result,we could suffer a loss.Prepayment rates can change,ad
188、versely affecting the performance of our assets.The frequency at which prepayments(including voluntary prepayments by borrowers,loan buyouts and liquidations due to defaults andforeclosures)occur on mortgage loans underlying Excess MSRs and Agency RMBS is affected by a variety of factors,including t
189、he prevailing level of interestrates as well as economic,demographic,tax,social,legal,and other factors.Generally,borrowers tend to prepay their mortgages when prevailing mortgagerates fall below the interest rates on their mortgage loans.If borrowers prepay their mortgage loans at rates that are fa
190、ster or slower than expected,it mayadversely affect our profitability.We will record Excess MSRs on our balance sheet at fair value,and changes in their fair value will be reflected in our consolidated results ofoperations.The determination of the fair value of Excess MSRs requires our management to
191、 make numerous estimates and assumptions that could materiallydiffer from actual results.Such estimates and assumptions include,among other things,prepayment rates,as well as estimates of the future cash flows fromthe Excess MSRs,interest rates,delinquencies and foreclosure rates of the underlying m
192、ortgage loans.The ultimate realization of the value of Excess MSRs,which are measured at fair value on a recurring basis,may be materially different than the fair values of such Excess MSRs as may be reflected in ourconsolidated financial statements as of any particular date.The use of different est
193、imates or assumptions in connection with the valuation of these assets couldproduce materially different fair values for such assets.Our failure to make accurate assumptions regarding prepayment rates or the other factors examined indetermining fair value could cause the fair value of our Excess MSR
194、s to materially vary,which could have a material adverse effect on our financial position,results of operations and cash flows.If the fair value of our Excess MSRs decreases,we would be required to record a non-cash charge,which would have anegative impact on our financial results.Furthermore,a sign
195、ificant increase in prepayment speeds could materially reduce the ultimate cash flows we receivefrom Excess MSRs,and we could ultimately receive substantially less than what we paid for such assets.Voluntary prepayment rates generally increase when interest rates fall and decrease when interest rate
196、s rise,but changes in prepayment rates aredifficult to predict.Prepayments can also occur when borrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physicalrelocation or when borrowers default on their mortgages and the mortgages are prepaid from the proceeds of
197、a foreclosure sale of the property.Fannie Mae andFreddie Mac will generally,among other conditions,purchase mortgages that are 120 days or more delinquent from mortgage-backed securities trusts when thecost of guaranteed payments to security holders,including advances of interest at the security cou
198、pon rate,exceeds the cost of holding the nonperforming loansin their portfolios.Ginnie Mae provides the 13Table of Contentsissuer the option to buy 90 days or more delinquent loans out of the mortgage-backed securities that it services,which may also contribute to an increase inprepayment rates.Cons
199、equently,prepayment rates also may be affected by conditions in the housing and financial markets,which may result in increaseddelinquencies on mortgage loans.Additionally,changes in the government-sponsored entities decisions as to when to repurchase delinquent loans canmaterially impact prepayment
200、 rates.With respect to our Excess MSRs,voluntary and involuntary prepayments eliminate the Excess MSR on the mortgage loans being prepaid.Inrecent years,Freedom Mortgage has experienced relatively high rates of recapture on voluntary prepayments.There can be no assurance that Freedom Mortgagewill co
201、ntinue to successfully enjoy the levels of recapture it has historically had,particularly as interest rate environments change.In addition,although weexpect Freedom Mortgage to replace the Excess MSRs on loans in the pools that are refinanced by Freedom Mortgage,there can be no assurance that Freedo
202、mMortgage will enter into recapture agreements with us in the future or that it will be successful in replacing any Excess MSRs,which would negatively impactour cash flows.When we purchase Excess MSRs,we base the price we pay and the rate of amortization of those assets on,among other things,our pro
203、jectionof the cash flows from the pool of mortgage loans underlying the related MSRs.Our expectation of prepayment speeds and recapture rates is a significantassumption underling our cash flow projections and if prepayment speeds are significantly greater than expected or recapture rates significant
204、ly lower thanexpected,the carrying value of our Excess MSRs would change.14Table of ContentsInterest rate mismatches between our assets and any borrowings used to fund purchases of our assets may reduce our income during periods ofchanging interest rates.Some of our assets will be fixed-rate securit
205、ies or have a fixed rate component(such as RMBS backed by hybrid ARMs).This means that theinterest we earn on these assets will not vary over time based upon changes in a short-term interest rate index.Although the interest we earn on our RMBSbacked by ARMs generally will adjust for changing interes
206、t rates,such interest rate adjustments may not occur as quickly as the interest rate adjustments toany related borrowings,and such interest rate adjustments will generally be subject to interest rate caps,which potentially could cause such RMBS to acquiremany of the characteristics of fixed-rate sec
207、urities if interest rates were to rise above the cap levels.We generally fund our fixed-rate target assets with short-termborrowings.Therefore,there will be an interest rate mismatch between our assets and liabilities.Although we hedge to minimize interest rate exposure,the useof interest rate hedge
208、s also introduces the risk of other interest rate mismatches and exposures.During periods of changing interest rates,these mismatchescould cause our business,financial condition and results of operations and ability to make distributions to our stockholders to be materially adverselyaffected.Ordinar
209、ily,short-term interest rates are lower than long-term interest rates.If short-term interest rates rise disproportionately relative to long-terminterest rates(a flattening of the yield curve),our borrowing costs may increase more rapidly than the interest income earned on our assets.Because we expec
210、tthat our investments in Agency RMBS,on average,will bear interest based on longer-term rates than our borrowings,a flattening of the yield curve would tendto decrease our net income and the market value of our assets.Additionally,to the extent cash flows from RMBS are reinvested in new RMBS,the spr
211、eadbetween the yields of the new RMBS and available borrowing rates may decline,which could reduce our net interest margin or result in losses.Any one of theforegoing risks could materially adversely affect our business,financial condition and results of operations and our ability to pay distributio
212、ns to ourstockholders.It is also possible that short-term interest rates may exceed long-term interest rates,in which event our borrowing costs may exceed our interestincome and we could incur operating losses.We cannot predict the impact future actions by regulators or U.S.government bodies,includi
213、ng the U.S.Federal Reserve,will have on ourbusiness,and any such actions may negatively impact us.Regulators and U.S.government bodies have a major impact on our business.The U.S.Federal Reserve is a major participant in,and its actionssignificantly impact,the residential mortgage market.For example
214、,quantitative easing,a program implemented by the U.S.Federal Reserve to keep long-terminterest rates low and stimulate the U.S.economy,has had the effect of reducing the difference between short-term and long-term interest rates.As a result ofthe reduction in long-term interest rates,prepayment spe
215、eds increased.Its purchases of Agency RMBS has resulted in a narrowing of the spread earned byAgency RMBS investors.While tapering of quantitative easing has commenced,no assurance can be given as to when the U.S.Federal Reserve willdiscontinue quantitative easing.We cannot predict or control the im
216、pact future actions by regulators or U.S.government bodies such as the U.S.FederalReserve will have on our business.Accordingly,future actions by regulators or U.S.government bodies,including the U.S.Federal Reserve,could have amaterial and adverse effect on our business,financial condition and resu
217、lts of operations and our ability to pay distributions to our stockholders.15Table of ContentsInterest rate caps on the ARMs and hybrid ARMs that may back our RMBS may reduce our net interest margin during periods of rising interestrates.ARMs and hybrid ARMs are typically subject to periodic and lif
218、etime interest rate caps.Periodic interest rate caps limit the amount an interest ratecan increase during any given period.Lifetime interest rate caps limit the amount an interest rate can increase through the maturity of the loan.We generallyfund our RMBS with borrowings that typically are not subj
219、ect to similar restrictions.Accordingly,in a period of rapidly increasing interest rates,ourfinancing costs could increase without limitation while caps could limit the interest we earn on the ARMs and hybrid ARMs that will back our RMBS.Thisproblem is magnified for ARMs and hybrid ARMs that are not
220、 fully indexed because such periodic interest rate caps prevent the coupon on the security fromfully reaching the specified rate in one reset.Further,some ARMs and hybrid ARMs may be subject to periodic payment caps that result in a portion of theinterest being deferred and added to the principal ou
221、tstanding.As a result,we may receive less cash income on RMBS backed by ARMs and hybrid ARMsthan necessary to pay interest on our related borrowings.Interest rate caps on RMBS backed by ARMs and hybrid ARMs could reduce our net interest marginif interest rates were to increase beyond the level of th
222、e caps,which could materially adversely affect our business,financial condition and results ofoperations and our ability to pay distributions to our stockholders.Our Manager relies on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage
223、ourportfolio.These models could cause us to purchase assets that do not meet our expectations or to make asset management decisions that are not inline with our strategy.Our Manager relies on analytical models and information and data supplied by third parties.These models and data may be used to va
224、lue assetsor potential asset acquisitions and dispositions and also in connection with our asset management activities.If these models and data prove to be incorrect,misleading or incomplete,any decisions made in reliance thereon could expose us to potential risks.In addition,models are only as accu
225、rate as theassumptions that go into building the models.Our Managers use of models and data may induce it to purchase certain assets at prices that are too high,sellcertain other assets at prices that are too low or miss favorable opportunities altogether.Similarly,any hedging activities that are ba
226、sed on faulty models anddata may prove to be unsuccessful.Some models,such as prepayment models or mortgage default models,may be predictive in nature.The use of predictive models has inherentrisks.For example,such models may incorrectly forecast future behavior,leading to potential losses.In additi
227、on,the predictive models used by our Managermay differ substantially from those models 16Table of Contentsused by other market participants,with the result that valuations based on these predictive models may be substantially higher or lower for certain assets thanactual market prices.Furthermore,be
228、cause predictive models are usually constructed based on historical data supplied by third parties,the success of relyingon such models may depend heavily on the accuracy and reliability of the supplied historical data,and,in the case of predicting performance in scenarioswith little or no historica
229、l precedent(such as extreme broad-based declines in home prices,or deep economic recessions or depressions),such models mustemploy greater degrees of extrapolation,and are therefore more speculative and of more limited reliability.All valuation models rely on correct market data inputs.If incorrect
230、market data is entered into even a well-founded valuation model,the resultingvaluations will be incorrect.However,even if market data is input correctly,“model prices”will often differ substantially from market prices,especially forsecurities with complex characteristics or whose values are particul
231、arly sensitive to various factors.If our market data inputs are incorrect or our model pricesdiffer substantially from market prices,our business,financial condition and results of operations and our ability to make distributions to our stockholderscould be materially adversely affected.Valuations o
232、f some of our assets will be inherently uncertain,may be based on estimates,may fluctuate over short periods of time and may differfrom the values that would have been used if a ready market for these assets existed.While in many cases our determination of the fair value of our assets is based on va
233、luations provided by third-party dealers and pricing services,we value assets based upon our judgment,and such valuations may differ from those provided by third-party dealers and pricing services.Valuations ofcertain assets are often difficult to obtain or unreliable.In general,dealers and pricing
234、services heavily disclaim their valuations.Additionally,dealers generallyclaim to furnish valuations only as an accommodation and without special compensation,and so they disclaim any and all liability for any direct,incidentalor consequential damages arising out of any inaccuracy or incompleteness
235、in valuations,including any act of negligence or breach of any warranty.Dependingon the complexity and illiquidity of an asset,valuations of the same asset can vary substantially from one dealer or pricing service to another.The valuationprocess has been particularly difficult recently because marke
236、t events have made valuations of certain assets unpredictable,and the disparity of valuationsprovided by third-party dealers has widened.Our business,financial condition and results of operations and our ability to make distributions to our stockholders could be materiallyadversely affected if our f
237、air value determinations of these assets are materially higher than actual market values.17Table of ContentsAn increase in interest rates may cause a decrease in the volume of certain of our target assets,which could adversely affect our ability to acquiretarget assets that satisfy our investment ob
238、jectives and to generate income and pay dividends.Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing.A reduction in the volume of mortgageloans originated may affect the volume of target assets available to us,which could adversely affect our abi
239、lity to acquire assets that satisfy our investmentobjectives.Rising interest rates may also cause our target assets that were issued prior to an interest rate increase to provide yields that are below prevailingmarket interest rates.If rising interest rates cause us to be unable to acquire a suffici
240、ent volume of our target assets with a yield that is above our borrowingcost,our ability to satisfy our investment objectives and to generate income and pay dividends may be materially and adversely affected.The lack of liquidity of our assets may adversely affect our business,including our ability
241、to sell our assets.Excess MSRs are highly illiquid and subject to numerous restrictions on transfers.The duties and obligations of mortgage servicers are definedthrough contractual agreements.These contracts generally require that holders of Excess MSRs obtain consent from the servicer,and may requi
242、re third partyconsent,prior to any change of ownership of such Excess MSRs.Such approval may be withheld for any reason or no reason in the discretion of the thirdparty.Additionally,investments in Excess MSRs are a new type of transaction,and there have been extremely few investment products that pu
243、rsue a similarinvestment strategy.Accordingly,the risks associated with the transaction and structure are not fully known to buyers or sellers.As a result of the foregoing,there is a significant risk that we will be unable to locate a buyer if we wish to sell an Excess MSR.Therefore,we cannot provid
244、e any assurance that we willobtain any return or any benefit of any kind from any disposition of Excess MSRs.In addition,mortgage-related assets generally experience periods of illiquidity,including the recent period of delinquencies and defaults withrespect to residential and commercial mortgage lo
245、ans.In addition,validating third-party pricing for illiquid assets may be more subjective than with respect tomore liquid assets.Any illiquidity of our assets makes it difficult for us to sell such assets if the need or desire arises.In addition,if we are required toliquidate all or a portion of our
246、 portfolio quickly,we may realize significantly less than the value at which we previously recorded our assets.We may alsoface other restrictions on our ability to liquidate any assets for which we or our Manager has or could be attributed with material non-public information.If weare unable to sell
247、 our assets at favorable prices or at all,it could materially adversely affect our business,financial condition and results of operations and ourability to make distributions to our stockholders.Assets that are illiquid are more difficult to finance,and to the extent that we use leverage to finance
248、assetsthat become illiquid we may lose that leverage or have it reduced.Assets tend to become less liquid during times of financial stress,which is often the time thatliquidity is most needed.As a result,our ability to sell assets or vary our portfolio in response to changes in economic and other co
249、nditions may be limited byliquidity constraints,which could adversely affect our results of operations and financial condition.18Table of ContentsWe use leverage in executing our business strategy,which may adversely affect the return on our assets and may reduce cash available fordistribution to ou
250、r stockholders,as well as increase losses when economic conditions are unfavorable.We use leverage to finance our investments in certain of our target assets and to enhance our financial returns.Our primary source of leverage isshort-term borrowings under master repurchase agreements collateralized
251、by our Agency RMBS assets.Other sources of leverage in the future may includecredit facilities,including term loans and revolving credit facilities.Through the use of leverage,we acquire positions with market exposure significantly greater than the amount of capital committed to thetransaction.Altho
252、ugh we are not required to maintain any particular minimum or 19Table of Contentsmaximum target debt-to-equity leverage ratio with respect to our Agency RMBS assets,the amount of leverage we may employ for this asset class will dependupon the availability of particular types of financing and our Man
253、agers assessment of the credit,liquidity,price volatility,financing counterparty risk andother factors.Our Manager has discretion,without the need for further approval by our board of directors,to change the amount of leverage we utilize for ourAgency RMBS.We do not have a targeted debt-to-equity ra
254、tio for our Agency RMBS.We use leverage for the primary purpose of financing our AgencyRMBS portfolio and not for the purpose of speculating on changes in interest rates.We may,however,be limited or restricted in the amount of leverage we mayemploy by the terms and provisions of any financing or oth
255、er agreements that we may enter into in the future,and we are subject to margin calls as a result ofour financing activity.In the future,we expect to acquire prime jumbo mortgage loans and we may acquire non-Agency RMBS.We anticipate evaluatingleverage policies for these assets when,if ever,we begin
256、 to acquire them.Our ability to achieve our investment and leverage objectives depends on our ability to borrow money in sufficient amounts and on favorableterms.In addition,we must be able to renew or replace our maturing borrowings on a continuous basis.In recent years,investors and financial inst
257、itutionsthat lend in the securities repurchase market have tightened lending standards in response to the difficulties and changed economic conditions that havematerially adversely affected the RMBS market.These market disruptions have been most pronounced in the non-Agency RMBS market,and the impac
258、t hasalso extended to Agency RMBS,which has made the value of these assets unstable and relatively illiquid compared to prior periods.This could potentiallyincrease our financing costs and reduce our liquidity.In addition,because we rely on short-term financing,we are exposed to changes in the avail
259、ability offinancing which may make it more difficult for us to secure continued financing.Leverage magnifies both the gains and the losses of our positions.Leverage increases our returns as long as we earn a greater return on investmentspurchased with borrowed funds than our cost of borrowing such f
260、unds.However,if we use leverage to acquire an asset and the value of the asset decreases,the leverage may increase our loss.Even if the asset increases in value,if the asset fails to earn a return that equals or exceeds our cost of borrowing,theleverage will decrease our returns.We are required to p
261、ost large amounts of cash as collateral or margin to secure our leveraged positions.In the event of a sudden,precipitous dropin 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 value of
262、a leveraged asset may require us to post additional margin or cash collateral.Our debt service payments and posting of margin or cashcollateral will reduce cash flow available for distribution to stockholders.We may not be able to meet our debt service obligations.To the extent that we cannotmeet ou
263、r debt service obligations,we risk the loss of some or all of our assets to sale to satisfy our debt obligations.To the extent we might be compelled to liquidate qualifying real estate assets to repay debts,our compliance with the REIT rules regarding ourassets and our sources of income could be neg
264、atively affected,which could jeopardize our qualification as a REIT.Failing to qualify as a REIT would causeus to be subject to U.S.federal income tax(and any applicable state and local taxes)on all of our income and decrease profitability and cash available fordistributions to stockholders.20Table
265、of ContentsAdverse market developments generally will cause our lenders to require us to pledge additional assets as collateral.If our assets were insufficientto meet these collateral requirements,we might be compelled to liquidate particular assets at inopportune times and at unfavorable prices.Adv
266、erse market developments,including a sharp or prolonged rise in interest rates,a change in prepayment rates or increasing market concernabout the value or liquidity of one or more types of our target assets,might reduce the market value of our portfolio,which generally will cause our lenders toiniti
267、ate margin calls.A margin call means that the lender requires us to pledge additional collateral to re-establish the ratio of the value of the collateral to theamount of the borrowing.If we are unable to satisfy margin calls,our lenders may foreclose on our collateral.The liquidation of collateral m
268、ay jeopardize ourability to qualify as a REIT.Our failure to qualify as a REIT would cause us to be subject to U.S.federal income tax(and any applicable state and local taxes)on all of our income and decrease profitability and cash available for distribution to our stockholders.Our use of repurchase
269、 transactions give our lenders greater rights in the event that either we or any of our lenders file for bankruptcy,whichmay make it difficult for us to recover our collateral in the event of a bankruptcy filing.Our borrowings under master repurchase agreements are intended to qualify for special tr
270、eatment under the bankruptcy code,giving our lendersthe ability to void the automatic stay provisions of the bankruptcy code and take possession of and liquidate collateral pledged in our repurchase transactionswithout delay if we file for bankruptcy.Furthermore,21Table of Contentsthe special treatm
271、ent of repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that any of ourlenders files for bankruptcy.Thus,the use of repurchase transactions exposes our pledged assets to risk in the event of a bankruptcy filing by either ourlende
272、rs or us.If our lenders default on their obligations to resell the RMBS back to us at the end of the repurchase transaction term,the value of the RMBS hasdeclined by the end of the repurchase transaction term or we default on our obligations under the repurchase transaction,we will lose money onthes
273、e transactions,which,in turn,may materially adversely affect our business,financial condition and results of operations and our ability topay distributions to our stockholders.When we engage in a repurchase transaction,we initially sell securities to the financial institution in exchange for cash an
274、d our counterparty isobligated to resell the securities to us at the end of the term of the transaction,which is typically from 30 to 180 days,but which may be up to 364 days ormore.The cash we will receive when we initially sell the securities is less than the value of those securities.This differe
275、nce is referred to as the haircut.If thesehaircuts are increased we will be required to post additional cash collateral for our Agency RMBS.If our counterparty defaults on its obligation to resell thesecurities to us,we would incur a loss on the transaction equal to the amount of the haircut(assumin
276、g there was no change in the value of the securities).If we default on one of our obligations under a repurchase transaction,the counterparty can terminate the transaction and cease entering into anyother repurchase transactions with us.In that case,we would likely need to establish a replacement re
277、purchase facility with another financial institution inorder to continue to leverage our portfolio and carry out our investment strategy.There is no assurance we would be able to establish a suitable replacementfacility on acceptable terms or at all.Hedging against interest rate changes and other ri
278、sks may materially adversely affect our business,financial condition and results of operationsand our ability to make distributions to our stockholders.Subject to qualifying and maintaining our qualification as a REIT and exemption from registration under the Investment Company Act,wepursue various
279、hedging strategies to seek to reduce our exposure to adverse changes in interest rates.Our hedging activity varies in scope based on the level andvolatility of interest rates,the types of liabilities and assets held and other changing market conditions.Interest rate hedging may fail to protect or co
280、uldadversely affect us because,among other things:interest rate hedging can be expensive,particularly during periods of rising and volatile interest rates;available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;the duration of the hedge m
281、ay not match the duration of the related assets or liabilities being hedged;to the extent hedging transactions do not satisfy certain provisions of the Code,and are not made through a TRS,the amount of incomethat a REIT may earn from hedging transactions to offset interest rate losses is limited by
282、U.S.federal tax provisions governing REITs;the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fairvalue.Downward adjustments or“mark-to-market losses,”would reduce our stockholders equity;the credit quality of the hed
283、ging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability tosell or assign our side of the hedging transaction;and the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.Our hedging transactions,which are
284、intended to limit losses,may actually adversely affect our earnings,which could reduce our cash availablefor distribution to our stockholders.22Table of ContentsOur use of certain hedging techniques may expose us to counterparty risks.If an interest rate swap counterparty cannot perform under the te
285、rms of the interest rate swap,we may not receive payments due under that swap,and thus,we may lose any unrealized gain associated with the interest rate swap.The hedged liability could cease to be hedged by the interest rate swap.Additionally,we may also risk the loss of any collateral we have pledg
286、ed to secure our obligations under the interest rate swap if the counterparty becomesinsolvent or files for bankruptcy.If we are required to sell our derivatives under these circumstances,we may incur losses.Similarly,if an interest rate capcounterparty fails to perform under the terms of the intere
287、st rate cap agreement,in addition to not receiving payments due under that agreement that would off-set our interest expense,we could also incur a loss for all remaining unamortized premium paid for that agreement.To the extent our hedges are cleared throughan exchange,our risk is mitigated.Changes
288、in regulations relating to swaps activities may cause us to limit our swaps activity or subject us and our Manager to additionaldisclosure,recordkeeping,and other regulatory requirements.The enforceability of agreements underlying hedging transactions may depend on compliance with applicable statuto
289、ry and commodity and otherregulatory requirements and,depending on the identity of the counterparty,applicable international requirements.Recently,new regulations have beenpromulgated by U.S.and foreign regulators attempting to strengthen oversight of derivative contracts.Any actions taken by regula
290、tors could constrain ourstrategy and could increase our costs,either of which could materially and adversely affect our business,financial condition and results of operations and ourability to make distributions to our stockholders.In particular,the 23Table of ContentsDodd-Frank Act requires most de
291、rivatives to be executed on a regulated market and cleared through a central counterparty,which has resulted in increasedmargin requirements and costs.On December 7,2012,the CFTC issued a no-action letter that provides mortgage REITs relief from such registration,or theMREIT No-Action Letter,if they
292、 meet certain conditions and submit a claim for such no-action relief.We believe we meet the conditions set forth in theMREIT No-Action Letter and we have filed our claim with the CFTC to perfect the use of the no-action relief from registration.However,if in the future we donot meet the conditions
293、set forth in the MREIT No-Action Letter or the relief provided by the MREIT No-Action Letter becomes unavailable for any otherreason,we may need to seek to obtain another exemption from registration or our Manager may be required to register as a“commodity pool operator”with theCFTC.If our Manager i
294、s required to register with the CFTC as a commodity pool operator,our Manager would become subject to additional disclosure,recordkeeping and reporting requirements,which may increase the expenses we reimbursed to our Manager pursuant to the Management Agreement.We may change our investment strategy
295、,investment guidelines and asset allocation without notice or stockholder consent,which may result inriskier investments.In addition,our charter provides that our board of directors may authorize us to revoke or otherwise terminate our REITelection,without the approval of our stockholders.Our board
296、of directors has the authority to change our investment strategy or asset allocation at any time without notice to or consent from ourstockholders.To the extent that our investment strategy changes in the future,we may make investments that are different from,and possibly riskier than,theinvestments
297、 described in this Annual Report and the other documents we file with the SEC from time to time.A change in our investment or leverage strategymay increase our exposure to interest rate and real estate market fluctuations or require us to sell a portion of our existing investments,which could result
298、 ingains or losses and therefore increase our earnings volatility.Decisions to employ additional leverage in executing our investment strategies could increase therisk inherent in our asset acquisition strategy.Furthermore,a change in our asset allocation could result in our allocating assets in a d
299、ifferent manner than asdescribed in this prospectus.In addition,our charter provides that our board of directors may authorize us to revoke or otherwise terminate our REIT election,without theapproval of our stockholders,if it determines that it is no longer in our best interests to qualify as a REI
300、T.These changes could adversely affect our financialcondition,results of operations,the market value of our common stock,and our ability to make distributions to our stockholders.We operate in a highly competitive market.Our profitability depends,in large part,on our ability to acquire targeted asse
301、ts at favorable prices.We compete with a number of entities whenacquiring our targeted assets,including other mortgage REITs,financial companies,public and private funds,commercial and investment banks andresidential and commercial finance companies.We may also compete with the U.S.Federal Reserve a
302、nd the U.S.Treasury to the extent they purchase assets inour targeted asset classes.Many of our competitors are substantially larger and have considerably greater access to capital and other resources than we do.Furthermore,new companies with significant amounts of capital have recently been formed
303、or have raised additional capital,and may continue to be formedand raise additional capital in the future,and these companies may have objectives that overlap with ours,which may create competition for assets we wish toacquire.Some competitors may have a lower cost of funds and access to funding sou
304、rces that are not available to us,such as funding from the U.S.Government.In addition,some of our competitors may have higher risk tolerances or different risk assessments,which could allow them to consider a widervariety of assets to acquire and establish more relationships than us.We also may have
305、 different operating constraints from those of our competitorsincluding,among others,(i)tax-driven constraints such as those arising from our qualification as a REIT,(ii)restraints imposed on us by our attempt tocomply with certain exclusions from the definition of an“investment company”or other exe
306、mptions under the Investment Company Act and(iii)restraints andadditional costs arising from our status as a public company.Furthermore,competition for assets in our targeted asset classes may lead to the price of suchassets increasing,which may further limit our ability to generate desired returns.
307、We cannot assure you that the competitive pressures we face will not have amaterial adverse effect on our business,financial condition and results of operations.Our ability to make distributions to our stockholders depends on our operating results,our financial condition and other factors,and we may
308、 notbe able to make regular cash distributions at a fixed rate or at all under certain circumstances.We intend to make distributions to our stockholders in amounts such that we distribute all or substantially all of our taxable REIT income in eachyear(subject to certain adjustments).This distributio
309、n policy will enable us to avoid 24Table of Contentsbeing subject to U.S.federal income tax on our taxable income that we distribute to our stockholders.However,our ability to make distributions will dependon our earnings,applicable law,our financial condition and such other factors as our board of
310、directors may deem relevant from time to time.We will declareand make distributions to our stockholders only to the extent approved by our board of directors.25Table of ContentsResidential whole mortgage loans are subject to increased risks.We may acquire and manage pools of residential whole mortga
311、ge loans.Residential whole mortgage loans are subject to increased risks of loss.Unlike Agency RMBS,whole mortgage loans generally are not guaranteed by the U.S.Government or any GSE,though in some cases they may benefit fromprivate mortgage insurance.Additionally,by directly acquiring whole mortgag
312、e loans,we do not receive the structural credit enhancements that benefit seniortranches of RMBS.A whole mortgage loan is directly exposed to losses resulting from default.Therefore,the value of the underlying property,thecreditworthiness and financial position of the borrower and the priority and e
313、nforceability of the lien will significantly impact the value of such mortgage.Inthe event of a foreclosure,we may assume direct ownership of the underlying real estate.The liquidation proceeds upon sale of such real estate may not besufficient to recover our cost basis in the loan,and any costs or
314、delays involved in the foreclosure or liquidation process may increase losses.Whole mortgage loans are also subject to“special hazard”risk(property damage caused by hazards,such as earthquakes or environmentalhazards,not covered by standard property insurance policies),and to bankruptcy risk(reducti
315、on in a borrowers mortgage debt by a bankruptcy court).Inaddition,claims may be assessed against us on account of our position as a mortgage holder or property owner,including assignee liability,responsibility fortax payments,environmental hazards and other liabilities.In some cases,these liabilitie
316、s may be“recourse liabilities”or may otherwise lead to losses in excessof the purchase price of the related mortgage or property.Our compliance with the Sarbanes-Oxley Act and SEC rules concerning internal controls will be time-consuming,difficult,and costly.Under Section 404 of the Sarbanes-Oxley A
317、ct and current SEC regulations,we will be required to furnish a report by our management on ourinternal control over financial reporting beginning with our Annual Report on Form 10-K for our fiscal year ending December 31,2014.We will soon begin theprocess of documenting and testing our 26Table of C
318、ontentsinternal control procedures in order to satisfy these requirements,which is likely to result in increased general and administrative expenses and may shiftmanagements time and attention from revenue-generating activities to compliance activities.While we expect to expend significant resources
319、 to complete thisimportant project,we may not be able to achieve our objective on a timely basis.It will be time-consuming,difficult and costly for us to develop andimplement the internal controls,processes and reporting procedures required by the Sarbanes-Oxley Act.Our Manager may need to hire addi
320、tional personnel tomaintain our books and records and prepare our financial statements in accordance with GAAP,and if our Manager is unable to comply with therequirements of the legislation we may not be able to assess our internal controls over financial reporting to be effective in compliance with
321、 the Sarbanes-OxleyAct.Risks Related to our Relationship with our Manager and Freedom MortgageOur Manager has limited experience operating a REIT and we cannot assure you that our Managers past experience will be sufficient tosuccessfully manage our business as a REIT.Our Manager has limited experie
322、nce operating a REIT.The REIT provisions of the Code are complex,and any failure to comply with thoseprovisions in a timely manner could prevent us from qualifying as a REIT or force us to pay unexpected taxes and penalties.In such event,our net incomewould be reduced and we could incur a loss.Our M
323、anager has no prior experience operating a public company and therefore may have difficulty in successfully and profitably operating ourbusiness or complying with regulatory requirements,including the Sarbanes-Oxley Act,which may hinder their ability to achieve our objectives.Our Manager has no prio
324、r experience operating a public company or complying with regulatory requirements,including the Sarbanes-Oxley Act.Our Managers inexperience may hinder our Managers ability to achieve our objectives and we cannot assure you that we will be able to successfully executeour business strategies as a pub
325、lic company,or comply with regulatory requirements applicable to public companies.27Table of ContentsWe are dependent on our Manager and certain key personnel of Freedom Mortgage that are or will be provided to us through our Manager andmay not find a suitable replacement if our Manager terminates t
326、he management agreement or such key personnel are no longer available to us.We do not have any employees of our own.Our officers are employees of Freedom Mortgage.We have no separate facilities and are completelyreliant on our Manager,which has significant discretion as to the implementation of our
327、operating policies and execution of our business strategies and riskmanagement practices.We also depend on our Managers access to the professionals and principals of Freedom Mortgage as well as information and deal flowgenerated by Freedom Mortgage.The employees of Freedom Mortgage identify,evaluate
328、,negotiate,structure,close and monitor our portfolio.The departure ofMessrs.Middleman,Lown or Levine or other senior officers of our Manager,or of a significant number of investment professionals or principals of FreedomMortgage,could have a material adverse effect on our ability to achieve our obje
329、ctives.We can offer no assurance that our Manager will remain our manager or that we will continue to have access to our Managers senior management.We are subject to the risk that our Manager will terminate the management agreement or that we may deem it necessary to terminate the management agreeme
330、ntor prevent certain individuals from performing services for us and that no suitable replacement will be found to manage us.If our management agreement is terminated and no suitable replacement is found to manage us or we are unable to find a suitable replacement on atimely basis,we may not be able
331、 to execute our business plan.In addition,our Manager maintains a contractual as opposed to fiduciary relationship with us.No assurances can be given that our Manager will act in our best interests with respect to the allocation of personnel,services and resources to our business.The failure of any
332、of the key personnel of our Manager to service our business with the requisite time and dedication could materially and adversely affect ourability to execute our business plan.The management fee payable to our Manager is payable regardless of the performance of our portfolio,which may reduce our Ma
333、nagersincentive to devote the time and effort to seeking profitable opportunities for our portfolio.We pay our Manager a management fee,which may be substantial,based on our stockholders equity(as defined in the management agreement)regardless of the performance of our portfolio.The management fee takes into account the net issuance proceeds of both common and preferred stock offerings,as well as
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