1、TABLE OF CONTENTSUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31,2017ORooTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE A
2、CT OF 1934For the transition period from to Commission File Number:001-36099CHERRY HILL MORTGAGE INVESTMENTCORPORATION(Exact name of registrant as specified in its charter)Maryland46-1315605(State or other jurisdiction of incorporation or organization)(I.R.S.Employer Identification No.)1451 Route 34
3、,Suite 303Farmingdale,New Jersey07727(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 ClassName of Each Exchange on Which RegisteredCommon Stock,$0.01 par value8.20
4、%Series A Cumulative Redeemable Preferred Stock,$0.01par valueNew York Stock ExchangeNew York Stock ExchangeSecurities registered pursuant to Section 12(g)of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.Yes o No Ind
5、icate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)of the Exchange Act.Yes o No Indicate 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 of1934 during the
6、preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to suchfiling requirements for the past 90 days.Yes No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,if any,
7、every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for suchshorter period that the registrant was required to submit and post such files).Yes No oIndicate by check mark if disclosure of delin
8、quent filers pursuant to Item 405 of Regulation S-K(229.405 of this chapter)is not containedherein,and will not be contained,to the best of registrants knowledge,in definitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.In
9、dicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,smaller reporting company,oran emerging growth company.See the definitions of“large accelerated filer,”“accelerated filer,”“smaller reporting company,”and“emerging growthcompany”in R
10、ule 12b-2 of the Exchange Act.Large accelerated fileroAccelerated filerNon-accelerated filero(Do not check if a smaller reporting company)Smaller reporting companyoEmerging growth company If an emerging growth company,indicate by check mark if the registrant has elected not to use the extended trans
11、ition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a)of the Exchange Act.oIndicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes o No The aggregate market value of the registrant
12、s common stock,$0.01 par value per share,at June 30,2017,held by those persons deemed by theregistrant to be non-affiliates(based upon the closing sale price of the common stock on the New York Stock Exchange on June 30,2017)wasapproximately$214.6 million.Shares of the registrants common stock held
13、by each executive officer and director and by each entity or person that,tothe registrants knowledge,owned 10%or more of the registrants outstanding common stock as of June 30,2017,have been excluded from thisnumber in that these persons may be deemed affiliates of the registrant.The determination o
14、f affiliate status for this purpose is not necessarily aconclusive determination for other purposes.On March 16,2018,the registrant had a total of 12,721,464 shares of common stock,$0.01 par value,outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrants Definitive Proxy Statement o
15、n Schedule 14A relating to its 2018 Annual Meeting of Stockholders,to be filed with theSecurities and Exchange Commission by no later than April 30,2018,are incorporated by reference into Part III,Items 10 through 14,inclusive,of thisAnnual Report on Form 10-K as indicated herein.TABLE OF CONTENTSTA
16、BLE OF CONTENTS PagePART I 1 Item 1.Business 1 Item 1A.Risk Factors 6 Item 1B.Unresolved Staff Comments 30 Item 2.Properties 30 Item 3.Legal Proceedings 31 Item 4.Mine Safety Disclosures 31 PART II 32 Item 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equ
17、itySecurities 32 Item 6.Selected Financial Data 35 Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations 37 Item 7A.Quantitative and Qualitative Disclosures about Market Risk 56 Item 8.Consolidated Financial Statements and Supplementary Data 61 Item 9.Changes in
18、 and Disagreements with Accountants on Accounting and Financial Disclosure 99 Item 9A.Controls and Procedures 99 Item 9B.Other Information 100 PART III 101 Item 10.Directors,Executive Officers and Corporate Governance 101 Item 11.Executive Compensation 101 Item 12.Security Ownership of Certain Benef
19、icial Owners and Management and Related Stockholder Matters 101 Item 13.Certain Relationships and Related Transactions and Director Independence 101 Item 14.Principal Accountant Fees and Services 101 PART IV 102 Item 15.Exhibits 102 TABLE OF CONTENTSGLOSSARYThis glossary defines some of the terms th
20、at we use elsewhere in this Annual Report on Form 10-K and is not a complete list ofall of the defined terms used herein.In this Annual Report on Form 10-K,unless specifically stated otherwise or the contextotherwise indicates,references to“we,”“us,”“our,”the“Company”or“CHMI”refer to Cherry Hill Mor
21、tgage InvestmentCorporation,a Maryland corporation,together with its consolidated subsidiaries;references to the“Manager”refer to Cherry HillMortgage Management,LLC,a Delaware limited liability company;and references to the“Operating Partnership”refer to CherryHill Operating Partnership,LP,a Delawar
22、e limited partnership.“Agency”means a U.S.Government agency,such as Ginnie Mae,or a GSE.“Agency RMBS”means RMBS issued by an Agency or for which an Agency guarantees payments of principal and interest on thesecurities.“ASC”means an Accounting Standards Codification.“ARM”means an adjustable-rate resi
23、dential mortgage loan.“CFTC”means the U.S.Commodity Futures Trading Commission.“CMO”means a collateralized mortgage obligation.CMOs are structured debt instruments representing interests in specifiedpools of mortgage loans subdivided into multiple classes,or tranches,of securities,with each tranche
24、having different maturities orrisk profiles.“credit enhancement”means techniques to improve the credit ratings of securities,including overcollateralization,creatingretained spread,creating subordinated tranches and insurance.“Excess MSR”means an interest in an MSR,representing a portion of the inte
25、rest payment collected from a pool of mortgageloans,net of a basic servicing fee paid to the mortgage servicer.“Fannie Mae”means the Federal National Mortgage Association.“FHA”means the Federal Housing Administration.“Freddie Mac”means the Federal Home Loan Mortgage Corporation.“FRM”means a fixed-ra
26、te residential mortgage loan.“Ginnie Mae”means the Government National Mortgage Association,a wholly-owned corporate instrumentality of the UnitedStates of America within HUD.“GSE”means a government-sponsored enterprise.When we refer to GSEs,we mean Fannie Mae or Freddie Mac.“HUD”means the U.S.Depar
27、tment 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(typicallythree,five,seven or ten years)and thereafter adjusts to an increment over a specified interest rate index.“inverse IO”means an inverse
28、interest-only security,which is a type of stripped security.These debt securities receive noprincipal payments and have a coupon 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 portio
29、n of the interest on theunderlying assets.“MBS”means mortgage-backed securities.“MSR”means a mortgage servicing right.An MSR provides a mortgage servicer with the right to service a mortgage loan or a poolof mortgages in exchange for a portion of the interest payments made on the mortgage or the und
30、erlying mortgages.An MSR ismade up of two components:a basic servicing fee and an Excess MSR.The basic servicing fee is the amount of compensation forthe performance of servicing duties.“mortgage loan”means a loan secured by real estate together with the right to receive the payment of principal and
31、 interest on theloan(including the servicing fee).iTABLE OF CONTENTS“non-Agency RMBS”means RMBS that are not issued or guaranteed by an Agency,including investment grade(AAA throughBBB rated)and non-investment grade(BB rated through unrated)classes.“non-conforming loan”means a residential mortgage l
32、oan that does not conform to the Agency underwriting guidelines and doesnot meet the funding criteria of Fannie Mae and Freddie Mac.“non-QM loan”means a mortgage loan that does not satisfy the requirements for a qualified mortgage.“prime mortgage loan”means a mortgage loan that generally conforms to
33、 GSE underwriting guidelines or is a non-QM loan witha FICO score generally above 700.“qualified mortgage”means a mortgage that complies with the ability to repay rule and related requirements in Regulation Z.“REIT”means a real estate investment trust.“residential mortgage pass-through certificate”i
34、s a MBS that represents an interest in a“pool”of mortgage loans secured byresidential real property where payments of both interest and principal(including principal prepayments)on the underlyingresidential mortgage loans are made monthly to holders of the security,in effect“passing through”monthly
35、payments made by theindividual borrowers on the mortgage loans that underlie the security,net of fees paid to the issuer/guarantor and servicer.“RMBS”means a residential MBS.“Servicing Related Assets”means Excess MSRs and MSRs.“SIFMA”means the Securities Industry and Financial Markets Association.“s
36、tripped security”is an RMBS structured with two or more classes that receives different distributions of principal or interest on apool of RMBS.Stripped securities include IOs and inverse IOs.“TBA”means a forward-settling Agency RMBS where the pool is“to-be-announced.”In a TBA,a buyer will agree to
37、purchase,forfuture delivery,Agency RMBS with certain principal and interest terms and certain types of underlying collateral,but theparticular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date.“TRS”means a taxable REIT subsidiary.“UPB”means unpaid principal b
38、alance.“U.S.Treasury”means the U.S.Department of Treasury.“VA”means the Department of Veterans Affairs.“VA mortgage loan”means a mortgage loan that is partially guaranteed by the VA in accordance with its regulations.iiTABLE OF CONTENTSFORWARD-LOOKING INFORMATIONWe make forward-looking statements in
39、 this Annual Report on Form 10-K within the meaning of Section 27A of the SecuritiesAct of 1933,as amended(the“Securities Act”),and Section 21E of the Securities Exchange Act of 1934,as amended(the“Exchange Act”).For these statements,we claim the protections of the safe harbor for forward-looking st
40、atements contained insuch Sections.Forward-looking statements are subject to substantial risks and uncertainties,many of which are difficult to predictand are generally beyond our control.These forward-looking statements include information about possible or assumed futureresults of our business,fin
41、ancial condition,liquidity,results of operations,plans and objectives.When we use the words“believe,”“expect,”“anticipate,”“estimate,”“plan,”“continue,”“intend,”“should,”“could,”“would,”“may,”“potential”or the negative ofthese terms or other comparable terminology,we intend to identify forward-looki
42、ng statements.Statements regarding the followingsubjects,among others,may be forward-looking:the Companys investment objectives and business strategy;the Companys ability to raise capital through the sale of its equity and debt securities and to invest the net proceeds ofany such offering in the tar
43、get assets identified at the time of the offering;the Companys ability to obtain future financing arrangements and refinance existing financing arrangements as theymature;the Companys expected leverage;the Companys expected investments;the Companys ability to acquire servicing-related assets and mor
44、tgage and real estate-related securities;estimates and statements relating to,and the Companys ability to make,future distributions to holders of the Companyssecurities;the Companys ability to compete in the marketplace;market,industry and economic trends;recent market developments and actions taken
45、 and to be taken by the U.S.Government,the U.S.Treasury and the Boardof Governors of the Federal Reserve System,Fannie Mae,Freddie Mac,Ginnie Mae and the U.S.Securities and ExchangeCommission(“SEC”);mortgage loan modification programs and future legislative actions;the Companys ability to maintain i
46、ts qualification as a REIT under the Internal Revenue Code of 1986,as amended(the“Code”),and limitations on the Companys business due to compliance with requirements for maintaining itsqualification as a REIT under the Code;the Companys ability to maintain its exclusion from regulation as an investm
47、ent company under the InvestmentCompany Act of 1940,as amended(the“Investment Company Act”);projected capital and operating expenditures;availability of qualified personnel;andprojected prepayment and/or default rates.iiiTABLE OF CONTENTSThe Companys beliefs,assumptions and expectations can change a
48、s a result of many possible events or factors,not all ofwhich are known to it or are within its control.If any such change occurs,the Companys business,financial condition,liquidityand results of operations may vary materially from those expressed in,or implied by,the Companys forward-looking statem
49、ents.These risks,along with,among others,the following factors,could cause actual 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“Item1A.Risk Factors”;general volatility of the
50、capital markets;changes in the Companys investment objectives and business strategy;availability,terms and deployment of capital;availability of suitable investment opportunities;the Companys dependence on the Manager and the Companys ability to find a suitable replacement if the Company orthe Manag
51、er 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,the
52、yield curve,prepayment rates or recapture rates;limitations on the Companys business due to compliance with requirements for maintaining its qualification as a REITunder the Code and its exclusion from regulation as an investment company under the Investment Company Act;the degree and nature of the
53、Companys competition,including competition for the residential mortgage assets in whichthe Company invests;andother risks associated with acquiring,investing in and managing residential mortgage assets.Although the Company believes that the expectations reflected in the forward-looking statements ar
54、e reasonable,it cannotguarantee future results,levels of activity,performance or achievements.These forward-looking statements apply only as of thedate of this Annual Report on Form 10-K.The Company is not obligated,and does not intend,to update or revise any forward-looking statements,whether as a
55、result of new information,future events or otherwise.See“Item 1A.Risk Factors”of this AnnualReport on Form 10-K.ivTABLE OF CONTENTSPART IItem 1.BusinessCherry Hill Mortgage Investment Corporation is a publicly traded residential real estate finance company focused onacquiring,investing in and managi
56、ng residential mortgage assets in the United States.We were incorporated in Maryland onOctober 31,2012,and we commenced operations on October 9,2013,following the completion of our initial public offering(“IPO”)and a concurrent private placement.Our common stock is listed and traded on the New York
57、Stock Exchange under thesymbol“CHMI.”We are externally managed by Cherry Hill Mortgage Management,LLC,an SEC-registered investment adviserestablished by Stanley Middleman.Our Manager is a party to a services agreement with Freedom Mortgage Corporation(“FreedomMortgage”),which is owned and controlled
58、 by Mr.Middleman.Our Manager is owned by a“blind trust”for the benefit of Mr.Middleman.We operate so as to continue to qualify to be taxed as a REIT under the Code.To qualify as a REIT,we must distributeannually to our stockholders an amount at least equal to 90%of our REIT taxable income,determined
59、 without regard to thededuction for dividends paid and excluding any net capital gain.We currently expect to distribute substantially all of our REITtaxable income to our stockholders.We will be subject to income tax on our taxable income that is not distributed and to an excisetax to the extent tha
60、t certain percentages of our taxable income are not distributed by specified dates.CHMI Solutions,Inc.(“Solutions”),our TRS,and its wholly owned subsidiary,Aurora Financial Group,Inc.(“Aurora”),are subject to regular corporateU.S.federal,state and local income taxes on their taxable income.Our princ
61、ipal objective is to generate attractive current yields and risk-adjusted total returns for our stockholders over the longterm,primarily through dividend distributions and secondarily through capital appreciation.We attempt to attain this objective byselectively constructing and actively managing a
62、portfolio of Servicing Related Assets and RMBS.Subject to market conditions,we may also invest in prime residential mortgage loans and other cash flowing residential mortgage assets.We operate our business through the following segments:(i)investments in RMBS;(ii)investments in Servicing RelatedAsse
63、ts;and(iii)“All Other.”For information regarding the segments in which we operate,see“Item 8.Consolidated FinancialStatements and Supplementary DataNote 3Segment Reporting.”Our Targeted Asset ClassesOur primary targeted asset classes currently include:RMBS,including Agency RMBS,residential mortgage
64、pass-through certificates,CMOs(IOs and inverse IOs)and TBAs;andServicing Related Assets consisting of MSRs and Excess MSRs.Our StrategyOur strategy,which may change due to the availability and terms of capital and as market conditions warrant,involves:allocating a substantial portion of our equity c
65、apital to the acquisition of Servicing Related Assets through bulk and flowpurchases;the creation of intercompany Excess MSRs from MSRs acquired by our mortgage servicing subsidiary,Aurora;acquiring RMBS on a leveraged basis;andopportunistically mitigating our prepayment and interest rate and,to a l
66、esser extent,credit risk by using a variety ofhedging instruments and,where applicable and available,recapture agreements.Servicing Related Asset Strategy.We currently expect that the primary method by which we will invest in Excess MSRs willbe through the creation of intercompany Excess MSRs from M
67、SRs acquired by Aurora.We plan to acquire MSRs from servicers,which may include Freedom Mortgage,on a bulk and/or flow purchase basis on terms to be negotiated in the future.1TABLE OF CONTENTSOur ability to acquire MSRs is subject to the applicable REIT qualification tests.We have to hold our MSRs t
68、hrough Aurora,which is subject to corporate income tax.In certain cases,we will create Excess MSRs from those MSRs which will be transferred toone of our subsidiaries which function as qualified REIT subsidiaries.These intercompany transfers are eliminated in consolidationfor financial statement pur
69、poses.The portion of the interest payments represented by the Excess MSRs will not be subject to anentity level tax as long as we comply with the REIT qualification tests.The tax liability of Aurora negatively impacts our returnsfrom the MSRs that it holds.In addition,our investments in MSRs will ex
70、pose us to default risk and the potential for credit losses.We do not directly service the mortgage loans underlying the MSRs we acquire;rather,we contract with third-partysubservicers to handle servicing functions for the loans underlying the MSRs.RMBS Strategy.Our RMBS strategy focuses primarily o
71、n the acquisition and ownership of Agency RMBS that are whole-pool,residential mortgage pass-through certificates.However,from time to time,we invest in CMOs,including IOs and inverse IOs,primarily to take advantage of particularly attractive prepayment-related or structural opportunities in the RMB
72、S markets.Inaddition to investing in specific pools of Agency RMBS,we utilize forward-settling purchases and sales of Agency RMBS wherethe underlying pools of mortgage loans are“to-be-announced”(“TBA”s).Pursuant to these TBA transactions,we agree to purchaseor sell,for future delivery,Agency RMBS wi
73、th certain principal and interest terms and certain types of underlying collateral,butthe particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date.Generally,we do nottake delivery of the specified pool but instead enter into an offsetting transaction befo
74、re the date when we would be required totake delivery.Our ability to engage in TBA transactions is limited by the gross income and asset tests applicable to REITs.Our RMBS strategy includes selective investments in GSE risk-sharing securities.GSE risk-sharing securities are generalobligations of Fan
75、nie Mae and Freddie Mac that provide credit protection with respect to defaults on reference pools of loans.Wecurrently expect to expand our participation in that market.However,the extent of our investments in GSE risk-sharing securities islimited by the gross income and asset tests applicable to R
76、EITs.We also may invest opportunistically in legacy non-AgencyRMBS issued during or after 2010.To date,the GSE risk-sharing securities are the only non-Agency RMBS in which we haveinvested.If and when market conditions permit us to execute our prime mortgage loan acquisition and financing strategy,w
77、eexpect that we will retain certain bonds collateralized by the prime mortgage loans we securitize.We also may selectively investacross the entire capital structure of non-Agency RMBS that are newly issued by third parties.Non-Agency RMBS are subject torisk of default,among other risks,and could res
78、ult in greater losses.Prime Mortgage Loans.We believe that the market for non-conforming loans including,in particular,prime non-conformingmortgage loans,will grow.While our interest in this asset class is undiminished,we do not currently anticipate that either marketconditions or available long-ter
79、m financing will result in our execution of this strategy in 2018.The prime mortgage loans may beARMs,hybrid ARMs or FRMs with original terms to maturity of not more than 30 years and will be either fully amortizing orinterest-only for up to ten years,and fully amortizing thereafter.We expect that t
80、hese loans may include both qualified mortgagesand,if and when market conditions permit,non-QM loans.Our overall strategy,and each category of assets within that strategy,is adaptable to changing market environments,subject tocompliance with the income and other tests that we must satisfy to maintai
81、n our qualification as a REIT and maintain our exclusionfrom regulation as an investment company under the Investment Company Act.As a result,our acquisition and managementdecisions will depend on prevailing market conditions,and our targeted asset classes and strategy may vary over time in response
82、to market conditions.Our ManagerWe are externally managed by our Manager and,with the exception of Aurora,our licensed mortgage servicing subsidiary,which has a nominal amount of employees,we have no employees.We have entered into a management agreement with ourManager,pursuant to which our Manager
83、is responsible for our investment strategies and decisions and our day-to-day operations,subject to the supervision and oversight of our board of directors.Our Manager is a Delaware limited liability company originallyestablished by Mr.Middleman.The2TABLE OF CONTENTSManager is party to a services ag
84、reement with Freedom Mortgage,which is owned and controlled by Mr.Middleman.The solemember of the Manager is a blind trust for the benefit of Mr.Middleman.We rely on our Manager to provide or obtain on ourbehalf the personnel and services necessary for us to conduct our business.The executive office
85、s of our Manager are located at 907 Pleasant Valley Ave.,Mount Laurel,New Jersey 08054,and thetelephone number of our Managers executive offices is(877)870-7005.We have an Investment Committee to monitor our investment policies,portfolio holdings,financing and hedging strategiesand compliance with o
86、ur investment guidelines.The members of our Investment Committee are Mr.Lown,our President and ChiefExecutive Officer;Mr.Evans,our Chief Investment Officer;Mr.Levine,our Chief Financial Officer,Treasurer and Secretary;andthe MSR portfolio manager.Our Manager is registered as an investment adviser un
87、der the Investment Advisers Act of 1940,as amended,and is subject tothe regulatory oversight of the Investment Management Division of the SEC.Our Investment Guidelines;Transactions with Freedom MortgageThe investment guidelines for our assets and borrowings are as follows:No investment will be made
88、if it causes us to fail to qualify as a REIT under 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 affiliatesunles
89、s such transaction is otherwise in accordance with our investment guidelines and the management agreementbetween us and our Manager and the terms of such transaction are at least as favorable to us as to Freedom Mortgage or itsaffiliate.Any proposed material investment that is outside our targeted a
90、sset classes must be approved by at least a majority of ourindependent directors.Our Manager makes the determinations as to the percentage of assets that are invested in each of our targeted asset classes,consistent with our investment guidelines.Our Managers acquisition decisions depend on prevaili
91、ng market conditions and maychange over time in response to opportunities available in different interest rate,economic and credit environments.In addition,our investment guidelines may be changed from time to time by our board of directors without the approval of our stockholders.Changes to our inv
92、estment guidelines may include,without limitation,modification or expansion of the types of assets which wemay acquire.Our board of directors receives a report of our investments each quarter in conjunction with its review of our quarterly results.The Nominating and Corporate Governance Committee,wh
93、ich is comprised solely of our independent directors,reviews thematerial terms of any transaction between us and Freedom Mortgage,including the pricing terms,to determine if the terms of thosetransactions are fair and reasonable.We also retain two independent valuation services to assist our managem
94、ent and ourindependent directors in making pricing determinations on any Servicing Related Assets we may purchase from FreedomMortgage.In 2013 and 2014,we acquired Excess MSRs from Freedom Mortgage and entered into recapture agreements with FreedomMortgage.For reporting purposes,these Excess MSRs we
95、re aggregated into three pools:Excess MSR Pool 1,Excess MSR Pool 2and Excess MSR Pool 2014.On November 15,2016,we sold the Excess MSRs in Excess MSR Pool 1 and the Excess MSRs inExcess MSR Pool 2014 to Freedom Mortgage.We sold the Excess MSRs in Excess MSR Pool 2 to Freedom Mortgage on February1,201
96、7.In connection with the sale of the Excess MSRs in Excess MSR Pool 2 to Freedom Mortgage,Freedom Mortgagetransferred to Aurora Ginnie Mae MSRs on mortgage loans that had an aggregate UPB of approximately$4.5 billion as of January31,2017.In connection with these sales,we repaid the outstanding borro
97、wings drawn on our$25 million term loan with NexBankSSB(the“NexBank term loan”).In addition,the Acknowledgment Agreement that we and Freedom Mortgage entered into withGinnie Mae at the time of our IPO was terminated.In connection with the sale transactions,Freedom Mortgage made 12 monthlyyield maint
98、enance payments aggregating$3.0 million to the Company from December 2016 to November 2017.3TABLE OF CONTENTSOur Financing Strategies and Use of LeverageWe finance our RMBS with what we believe to be a prudent amount of leverage,which will vary from time to time based uponthe particular characterist
99、ics of our portfolio,availability of financing and market conditions.Our borrowings for RMBS consist ofrepurchase transactions under master repurchase agreements.These agreements represent uncommitted financing provided by thecounterparties.Our repurchase transactions are collateralized by our RMBS.
100、In a repurchase transaction,we sell an asset to acounterparty at a discounted value,or the loan amount,and simultaneously agree to repurchase the same asset from suchcounterparty at a price equal to the loan amount plus an interest factor.Despite being legally structured as sales and subsequentrepur
101、chases,repurchase transactions are generally accounted for as debt secured by the underlying assets.During the term of arepurchase transaction,we generally receive the income and other payments distributed with respect to the underlying assets.While the proceeds of our repurchase financings often wi
102、ll be used to purchase additional RMBS subject to the same masterrepurchase agreement,our repurchase financing arrangements do not restrict our ability to use proceeds from these arrangements tosupport our other liquidity needs.Our master repurchase agreements are documented under the standard form
103、master repurchaseagreement published by SIFMA.We have entered into repurchase agreements with 30 counterparties as of December 31,2017.From time to time,we expect tonegotiate and enter into additional master repurchase agreements with other counterparties that could produce opportunities toacquire c
104、ertain RMBS that may not be available from our existing counterparties.See“Item 7.Managements Discussion andAnalysis of Financial Condition and Results of OperationsLiquidity and Capital Resources”in this Annual Report on Form 10-K.Aurora has entered into two separate MSR financing facilities,one of
105、 which is a term loan for$20.0 million and secured by allGinnie Mae MSRs owned by Aurora and one of which is a revolving loan for up to$25.0 million and secured by all Fannie MaeMSRs owned by Aurora.See“Item 8.Consolidated Financial Statements and Supplementary DataNote 12Notes Payable.”Wemay utiliz
106、e other types of borrowings in the future,including corporate debt,securitization,or other more complex financingstructures.Additionally,we may take advantage of available borrowings,if any,under new programs established by the U.S.Government to finance our assets.We also may raise capital by issuin
107、g unsecured debt or preferred or common stock.Interest Risk HedgingSubject to maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment companyunder the Investment Company Act,we use certain derivative financial instruments and other hedging instruments t
108、o mitigateinterest rate risk we expect to arise from our repurchase agreement financings associated with our RMBS.We also attempt tomitigate duration and basis risk arising from our RMBS portfolio.The interest rate hedging instruments that we currently useinclude:interest rate swaps,TBAs and swaptio
109、ns.Our overall hedging strategy takes into account the natural hedging effect of ourServicing Related Assets,which tend to increase in value as interest rates rise.See“Item 8.Consolidated Financial Statements andSupplementary DataNote 2Basis of Presentation and Significant Accounting PoliciesDerivat
110、ives and Hedging Activities.”Policies with Respect to Certain Other ActivitiesIf our board of directors determines that additional funding is required,we may raise such funds through additional offeringsof equity or debt securities,the retention of cash flow and other funds from debt financing,or a
111、combination of these methods.Inthe event that our board of directors determines to raise additional equity capital,it has the authority,without stockholderapproval,to issue additional shares of common stock or preferred stock in any manner and on such terms and for suchconsideration as it deems appr
112、opriate,at any time.We may,in the future,offer equity or debt securities in exchange for assets.Wehave not in the past and will not in the future underwrite the securities of other companies.Our board of directors may change anyof these policies without prior notice to you or a vote of our stockhold
113、ers.CompetitionWe compete with other mortgage REITs,specialty finance companies,savings and loan associations,banks,mortgagebankers,insurance companies,mutual funds,institutional investors,investment banking firms,financial institutions,governmentalbodies and other entities for investment opportunit
114、ies in general.See“Item 1A.Risk FactorsWe operate in a highly competitivemarket.”4TABLE OF CONTENTSEmployeesWe do not have any employees other than those of our licensed mortgage servicing subsidiary,Aurora,which has fouremployees.Our Tax StatusWe have elected to be taxed as a REIT under the Code.Pr
115、ovided that we maintain our qualification as a REIT,we generallywill not be subject to U.S.federal income tax on our REIT taxable income that is currently distributed to our stockholders.REITsare subject to a number of organizational and operational requirements,including a requirement that they cur
116、rently distribute atleast 90%of their annual REIT taxable income excluding net capital gains.We cannot assure you that we will be able to complywith such requirements in the future.Failure to qualify as a REIT in any taxable year would cause us to be subject to U.S.federalincome tax on our taxable i
117、ncome at regular corporate rates(and any applicable state and local taxes).Even if we qualify fortaxation as a REIT,we may be subject to certain federal,state,local and non-U.S.taxes on our income.For example,the incomegenerated by our TRS and its subsidiary,Aurora,is subject to U.S.federal,state an
118、d local income tax.See“Item 1A.Risk FactorsU.S.Federal Income Tax Risks”for additional tax status information.Our Exclusion from Regulation as an Investment CompanyWe are organized as a holding company and conduct business primarily through our subsidiaries.We believe we haveconducted and intend to
119、conduct our operations so that neither we nor any of our subsidiaries are required to register as aninvestment company under the Investment 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 asbeing engaged primarily in
120、 the business of investing,reinvesting or trading in securities.Section 3(a)(1)(C)of the InvestmentCompany Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing,reinvesting,owning,holding or trading in securities and owns or proposes to ac
121、quire investment securities having a valueexceeding 40%of the value of the issuers total assets(exclusive of U.S.Government securities and cash items)on anunconsolidated basis,which we refer to as the 40%test.Excluded from the term“investment securities,”among other things,areU.S.Government securiti
122、es and securities issued by majority-owned subsidiaries that are not themselves investment companies andare not relying on the exclusion from the definition of investment company set forth in Section 3(c)(1)or Section 3(c)(7)of theInvestment Company Act.We believe neither we nor our Operating Partne
123、rship is considered an investment company under Section 3(a)(1)(A)of theInvestment Company Act because neither we nor our Operating Partnership engage primarily or hold ourselves out as beingengaged primarily in the business of investing,reinvesting or trading in securities.Rather,through our Operat
124、ing Partnershipswholly-owned or majority-owned subsidiaries,we and our Operating Partnership are primarily engaged in the non-investmentcompany businesses of these subsidiaries,namely the business of purchasing or otherwise acquiring mortgages and other interestsin real estate.We rely upon certain e
125、xemptions from registration as an investment company under the Investment Company Act,including,in the case of our subsidiary,Cherry Hill QRS I,LLC,Section 3(c)(5)(C)of the Investment Company Act.Section 3(c)(5)(C),asinterpreted by the staff of the SEC,requires an entity to invest at least 55%of its
126、 assets in“mortgages and other liens on andinterests in real estate,”which we refer to as“qualifying real estate interests,”and at least 80%of its assets in qualifying real estateinterests plus“real estate-related assets.”In satisfying the 55%requirement,the entity may treat securities issued with r
127、espect to anunderlying pool of mortgage loans in which it holds all of the certificates issued by the pool as qualifying real estate interests.Wetreat the Agency whole-pool pass-through securities in which we have invested as qualifying real estate interests for purposes ofthe 55%requirement.The Ser
128、vicing Related Assets and Agency CMOs we have acquired are not treated as qualifying real estateinterests for purposes of the 55%requirement,but are treated as real estate-related assets that qualify for the 80%test.In addition,Cherry Hill QRS I,LLC will treat its investments in Cherry Hill QRS II,L
129、LC,Cherry Hill QRS III,LLC and Cherry Hill QRS IV,LLC(“QRS IV”)as real estate-related assets because substantially all of the assets held by those subsidiaries are real estate-relatedassets.We monitor our compliance with the 40%test and the holdings of our subsidiaries to ensure that each of our sub
130、sidiaries is incompliance with an applicable exemption or exclusion from registration as an investment5TABLE OF CONTENTScompany under the Investment Company Act.In the event that we or our Operating Partnership were to acquire assets that couldmake either entity fall within the definition of an inve
131、stment company under Section 3(a)(1)(A)or Section 3(a)(1)(C)of theInvestment Company Act,we believe that we would still qualify for an exclusion from registration pursuant to Section 3(c)(5)(C).Qualification for exclusion from registration under the Investment Company Act limits our ability to make
132、certaininvestments.In addition,complying with the tests for exclusion from registration could restrict the time at which we can acquireand sell assets.To the extent that the SEC or its staff provides more specific guidance regarding any of the matters bearing uponsuch exclusions,we may be required t
133、o adjust our strategy accordingly.Any additional guidance from the SEC or its staff couldfurther inhibit our ability to pursue the strategies we have chosen.Website Access to ReportsWe maintain a website at .We are providing the address to our website solely for the information ofinvestors.The infor
134、mation on our website is not a part of,nor is it incorporated by reference,into this report.Through our website,we make available,free of charge,our annual proxy statement,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
135、furnished pursuant to Section 13(a)or 15(d)of the ExchangeAct as soon as reasonably practicable after we electronically file such material with,or furnish it to,the SEC.The SEC maintains awebsite that contains these reports at www.sec.gov.Corporate InformationOur principal executive offices are loca
136、ted at 1451 Route 34,Suite 303,Farmingdale,New Jersey 07727.Our telephonenumber is(877)870-7005.The offices of our Manager are located at 907 Pleasant Valley Ave.,Mount Laurel,New Jersey,08054.Item 1A.Risk FactorsThe Companys business and operations are subject to a number of risks and uncertainties
137、,the occurrence of which couldadversely affect its business,financial condition,results of operations and ability to make distributions to stockholders and couldcause the value of the Companys capital stock to decline.Please refer to the section entitled“Forward-Looking Information.”Risks Related to
138、 Our BusinessWe may not be able to continue to operate our business successfully or generate sufficient revenue to make or sustaindistributions to our stockholders.We commenced operations on October 9,2013.We cannot assure you that we will be able to continue to operate our businesssuccessfully or i
139、mplement our strategies.There can be no assurance that we will be able to continue to generate sufficient returns topay our operating expenses and make satisfactory distributions to our stockholders.The results of our operations depend on severalfactors,including the availability of opportunities fo
140、r the acquisition of target assets,the level and volatility of interest rates,theavailability of adequate short and long-term financing,conditions in the financial markets and general economic conditions.Difficult conditions in the mortgage and residential real estate markets as well as general mark
141、et concerns may adversely affectthe value of the assets in which we invest,and these conditions may persist for the foreseeable future.Our business is materially affected by conditions in the residential mortgage market,the residential real estate market,thefinancial markets and the economy in gener
142、al.In particular,the residential mortgage market in the United States has experienced avariety of difficulties and changed economic conditions,including defaults,credit losses and liquidity concerns.Over the pastseveral years,certain commercial banks,investment banks and insurance companies have ann
143、ounced extensive losses fromexposure to the residential mortgage market.These factors have impacted investor perception of the risk associated with RMBS,other real estate-related securities and various other asset classes in which we may invest.As a result,values of our target assetshave experienced
144、6TABLE OF CONTENTSvolatility.Deterioration of the mortgage market and investor perception of the risks associated with RMBS and other residentialmortgage assets that we acquire could materially adversely affect our business,financial condition and results of operations andour ability to make distrib
145、utions to our stockholders.We are dependent on mortgage servicers and subservicers to service the mortgage loans relating to our Servicing Related Assets.Our investments in Servicing Related Assets are dependent on the entity performing the actual servicing of the mortgageloans,called the mortgage s
146、ervicer,to perform its servicing obligations.As a result,we could be materially and adversely affectedif a mortgage servicer is terminated by the applicable Agency.The duties and obligations of mortgage servicers are definedthrough contractual agreements,which generally provide for the possibility f
147、or termination of the mortgage servicer in the absolutediscretion of the applicable Agency.In addition,the termination of a mortgage servicer could take effect across all mortgagesbeing serviced by that mortgage servicer.We have three mortgage servicers for the MSRs held by Aurora,one of which is Fr
148、eedomMortgage.We could also be materially and adversely affected if a mortgage servicer is unable to adequately service the underlyingmortgage loans due to the following reasons,among others:its failure to comply with applicable laws and regulation;its failure to perform its loss mitigation obligati
149、ons;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 or legal scrutiny,enforcement proceedings,consent orders or similar actions regarding any aspect of itsoperations,i
150、ncluding,but not limited to,servicing practices and foreclosure processes lengthening foreclosure timelines;orthe transfer of servicing to another party.MSRs are subject to numerous federal,state and local laws and regulations and may be subject to various judicial andadministrative decisions imposi
151、ng various requirements and restrictions on the servicers business.If any mortgage servicer that weuse actually or allegedly fails to comply with applicable laws,rules or regulations,that mortgage servicer could be exposed tofines,penalties or other costs,or the mortgage servicer could be terminated
152、 by the applicable Agency.If these laws,regulations anddecisions change,we could be exposed to similar fines,penalties or costs.In addition,if a mortgage servicer that we useexperiences any of the failures or regulatory scrutiny described above,then we could become subject to heightened regulatory o
153、rlegal scrutiny by virtue of being a counterparty of these entities.Such scrutiny could result in our incurring meaningful additionalcosts or fines or being subject to material operational requirements or restrictions,each of which could adversely affect ourbusiness and results of operations.In addi
154、tion,a bankruptcy by any mortgage servicer that services the mortgage loans for us could result in:payments made by such mortgage servicer to us,or obligations incurred by it,being voided by a court under federal orstate preference laws or federal or state fraudulent conveyance laws;orany agreement
155、between us and the mortgage servicer being rejected in a bankruptcy proceeding.Because we do not and in the future may not have the employees,servicing platforms,or technical resources necessary toservice mortgage loans,upon a discontinuance or bankruptcy of any mortgage servicer that we use,we woul
156、d need to engage analternate mortgage servicer,which may not be readily available on acceptable terms or at all.Any of the foregoing events could have a material and adverse effect on us.The performance of loans underlying our MSRs may be adversely affected by the performance of the related mortgage
157、 servicer.The performance of the loans underlying our MSRs is subject to risks associated with inadequate or untimely servicing.If ourmortgage servicers commit a material breach of their obligations as a servicer,we may7TABLE OF CONTENTSbe subject to damages if the breach is not cured within a speci
158、fied period of time following notice.Poor performance by a mortgageservicer may result in greater than expected delinquencies and foreclosures and losses on the mortgage loans underlying our MSRs.A substantial increase in our delinquency or foreclosure rate or the inability to process claims could a
159、dversely affect our ability toaccess the capital and secondary markets for our financing needs.Our ability to invest in,and dispose of,our investments in Servicing Related Assets may be subject to the receipt of third-partyconsents.The Agencies may require that we submit ourselves to costly or burde
160、nsome conditions as a prerequisite to their consent toour investments in Servicing Related Assets.These conditions may diminish or eliminate the investment potential of certain ofthose assets by making such investments too expensive for us or by severely limiting the potential returns available or o
161、therwiseimposing unacceptable conditions.The potential costs,issues or restrictions associated with receiving any such Agencys consentfor any such acquisitions or dispositions by us cannot be determined with any certainty.To the extent we are unable to acquire ordispose of Servicing Related Assets w
162、hen we determine it would be beneficial to do so,our results of operations may be adverselyimpacted.The value of our Servicing Related Assets may vary substantially with changes in interest rates.The values of Servicing Related Assets are highly sensitive to changes in interest rates.The value of Se
163、rvicing Related Assetstypically increases when interest rates rise and decreases when interest rates decline due to the effect those changes in interest rateshave on prepayment estimates.Subject to qualifying and maintaining our qualification as a REIT,we may pursue various hedgingstrategies to seek
164、 to reduce our exposure to adverse changes in interest rates.Our hedging activity will vary in scope based on thelevel and volatility of interest rates,the type of assets held and other changing market conditions.Interest rate hedging may fail toprotect or could adversely affect us.To the extent we
165、do not utilize derivatives to hedge against changes in the fair value of ourServicing Related Assets,our balance sheet,results of operations and cash flows would be susceptible to significant volatility dueto changes in the fair value of,or cash flows from,those assets as interest rates change.If de
166、linquencies increase,the value of our Servicing Related Assets may decline significantly.Delinquency rates have a significant impact on the value of our Servicing Related Assets.An increase in delinquencies willgenerally result in lower revenue because,typically,servicers will only collect servicing
167、 fees from GSEs or mortgage owners forperforming loans.Our expectation of delinquencies is a significant assumption underlying the cash flow projections on the relatedpools of mortgage loans.If delinquencies are significantly greater than expected,the actual fair value of the Servicing RelatedAssets
168、 could be diminished.As a result,we could suffer a loss.Prepayment rates can change,adversely affecting the performance of our assets.The frequency at which prepayments(including voluntary prepayments by borrowers,loan buyouts and liquidations due todefaults and foreclosures)occur on mortgage loans
169、is affected by a variety of factors,including the prevailing level of interest ratesas well as economic,demographic,tax,social,legal,and other factors.Generally,borrowers tend to prepay their mortgage loanswhen prevailing mortgage rates fall below the interest rates on their mortgage loans.If borrow
170、ers prepay their mortgage loans atrates that are faster or slower than expected,it may adversely affect our results.We record our Servicing Related Assets on our balance sheet at fair value,and changes in their fair value are reflected in ourconsolidated results of operations.The determination of th
171、e fair value of Servicing Related Assets requires our management tomake numerous estimates and assumptions that could materially differ from actual results.Such estimates and assumptions include,among other things,prepayment rates,as well as estimates of the future cash flows from the Servicing Rela
172、ted Assets,interest rates,delinquencies and foreclosure rates of the underlying mortgage loans.The ultimate realization of the value of the ServicingRelated Assets,which are measured at fair value on a recurring basis,may be materially different than the fair values of such assetsas may be reflected
173、 in our consolidated financial statements as of any particular date.The use of different estimates or assumptionsin connection with the valuation of these assets could produce materially different fair values for such assets.Our failure to makeaccurate assumptions regarding prepayment rates or the o
174、ther factors8TABLE OF CONTENTSexamined in determining fair value could cause the fair value of our Servicing Related Assets to materially vary,which could havea material adverse effect on our financial position,results of operations and cash flows.If the fair value of our Servicing RelatedAssets dec
175、reases,we would be required to record a non-cash charge,which would have a negative impact on our financial results.Furthermore,a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from theServicing Related Assets,and we could ultimately receive subs
176、tantially less than what we paid for such assets.Prepayment rates also affect the fair values of our RMBS.Voluntary prepayment rates generally increase when interest ratesfall and decrease when interest rates rise,but changes in prepayment rates are difficult to predict.Prepayments can also occur wh
177、enborrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physical relocation or when borrowersdefault on their mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property.Fannie Mae andFreddie Mac will generally purchase mortgage
178、s that are 120 days or more delinquent from mortgage-backed securities trusts whenthe cost of guaranteed payments to security holders,including advances of interest at the security coupon rate,exceeds the cost ofholding the nonperforming loans in their portfolios.Ginnie Mae provides the issuer the o
179、ption to buy loans that are 90 days ormore delinquent out of the mortgage-backed securities that it services,which may also contribute to an increase in prepaymentrates.Consequently,prepayment rates also may be affected by conditions in the housing and financial markets,which may result inincreased
180、delinquencies on mortgage loans.Additionally,changes in the GSEs decisions as to when to repurchase delinquent loanscan materially impact prepayment rates.Interest rate mismatches between our assets and any borrowings used to fund purchases of our assets may reduce our incomeduring periods of changi
181、ng interest rates.Some of our assets will be fixed-rate securities or have a fixed rate component(such as RMBS backed by hybrid ARMs).Thismeans that the interest we earn on these assets will not vary over time based upon changes in a short-term interest rate index.Although the interest we would earn
182、 on any RMBS backed by ARMs generally will adjust for changing interest rates,such interestrate adjustments may not occur as quickly as the interest rate adjustments to any related borrowings,and such interest rateadjustments will generally be subject to interest rate caps,which potentially could ca
183、use such RMBS to acquire many of thecharacteristics of fixed-rate securities if interest rates were to rise above the cap levels.We generally fund our fixed-rate targetassets with short-term borrowings.Therefore,there will be an interest rate mismatch between our assets and liabilities.Although wehe
184、dge to minimize interest rate exposure,the use of interest rate hedges also introduces the risk of other interest rate mismatchesand exposures.During periods of changing interest rates,these mismatches could cause our business,financial condition andresults of operations and ability to make distribu
185、tions to our stockholders to be materially adversely affected.Ordinarily,short-term interest rates are lower than long-term interest rates.If short-term interest rates rise disproportionatelyrelative to long-term interest rates(a flattening of the yield curve),our borrowing costs may increase more r
186、apidly than the interestincome earned on our assets.Because we expect that our investments in RMBS,on average,will bear interest based on longer-termrates than our borrowings,a flattening of the yield curve would tend to decrease our net income and the market value of our assets.Additionally,to the
187、extent cash flows from RMBS are reinvested in new RMBS,the spread between the yields of the new RMBSand available borrowing rates may decline,which could reduce our net interest margin or result in losses.Any one of the foregoingrisks could materially adversely affect our business,financial conditio
188、n and results of operations and our ability to paydistributions to our stockholders.It is also possible that short-term interest rates may exceed long-term interest rates,in which eventour borrowing costs may exceed our interest income and we could incur operating losses.We cannot predict the impact
189、 future actions by regulators or U.S.government bodies,including the U.S.Federal Reserve,willhave on our business,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 participantin,and its actions si
190、gnificantly impact,the residential mortgage market.For example,quantitative easing,a program implementedby the U.S.Federal Reserve to keep long-term interest rates low and stimulate the U.S.economy,has had the effect of reducing thedifference between short-term and long-term interest rates.As a resu
191、lt of the reduction in long-term interest rates,prepaymentspeeds increased.The U.S.Federal Reserves purchases of Agency RMBS have resulted in a narrowing of the spread earned byAgency9TABLE OF CONTENTSRMBS investors.While the U.S.Federal Reserve has discontinued quantitative easing,the effects on th
192、e Agency RMBS markethave not completely dissipated as the U.S.Federal Reserve continues to reinvest paydowns of its holdings in Agency RMBS.TheU.S Federal Reserve has announced that it expects to cease reinvesting paydowns in April 2018.We cannot predict or control theimpact future actions by regula
193、tors or U.S.government bodies such as the U.S.Federal Reserve will have on our business.Accordingly,future actions by regulators or U.S.government bodies,including the U.S.Federal Reserve,could have a material andadverse effect on our business,financial condition and results of operations and our ab
194、ility to pay distributions to our stockholders.Interest rate caps on the ARMs and hybrid ARMs that may back our RMBS may reduce our net interest margin during periods ofrising interest rates.ARMs and hybrid ARMs are typically subject to periodic and lifetime interest rate caps.Periodic interest rate
195、 caps limit theamount an interest rate can increase during any given period.Lifetime interest rate caps limit the amount an interest rate canincrease through the maturity of the loan.We generally fund our RMBS with borrowings that typically are not subject to similarrestrictions.Accordingly,in a per
196、iod of rapidly increasing interest rates,our financing costs could increase without limitationwhile caps could limit the interest we earn on the ARMs and hybrid ARMs that will back our RMBS.This problem is magnified forARMs and hybrid ARMs that are not fully indexed because such periodic interest ra
197、te caps prevent the coupon on the securityfrom fully reaching the specified rate in one reset.Further,some ARMs and hybrid ARMs may be subject to periodic payment capsthat result in a portion of the interest being deferred and added to the principal outstanding.As a result,we may receive less cashin
198、come on RMBS backed by ARMs and hybrid ARMs than necessary to pay interest on our related borrowings.Interest rate capson RMBS backed by ARMs and hybrid ARMs could reduce our net interest margin if interest rates were to increase beyond thelevel of the caps,which could materially adversely affect ou
199、r business,financial condition and results of operations and our abilityto pay distributions to our stockholders.Our Manager relies on analytical models and other data to analyze potential asset acquisition and disposition opportunities andto manage our portfolio.These models are based on assumption
200、s and the results may differ significantly from actual experience.Our Manager relies on analytical models and information and data supplied by third parties.These models and data may beused to value assets or potential asset acquisitions and dispositions and also in connection with our asset managem
201、ent activities.Ifthese models and data prove to be incorrect,misleading or incomplete,any decisions made in reliance thereon could expose us topotential risks.In addition,models are only as accurate as the assumptions that go into building the models.Our Managers use ofmodels and data may induce it
202、to purchase certain assets at prices that are too high,sell certain other assets at prices that are toolow or miss favorable opportunities altogether.Similarly,any hedging activities that are based on faulty models and data mayprove to be unsuccessful.Some models,such as prepayment models or mortgag
203、e default models,may be predictive in nature.The use of predictivemodels has inherent risks.For example,such models may incorrectly forecast future behavior,leading to potential losses.Inaddition,the predictive models used by our Manager may differ substantially from those models used by other marke
204、t participants,with the result that valuations based on these predictive models may be substantially higher or lower for certain assets than actualmarket prices.Furthermore,because predictive models are usually constructed based on historical data supplied by third parties,the success of relying on
205、such models may depend heavily on the accuracy and reliability of the supplied historical data,and,inthe case of predicting performance in scenarios with little or no historical precedent(such as extreme broad-based declines in homeprices,or deep economic recessions or depressions),such models must
206、employ greater degrees of extrapolation,and are thereforemore speculative and of more limited reliability.All valuation models rely on correct market data inputs.If incorrect market data is entered into even a well-founded valuationmodel,the resulting valuations will be incorrect.However,even if mar
207、ket data is input correctly,“model prices”will often differsubstantially from market prices,especially for securities with complex characteristics or whose values are particularly sensitive tovarious factors.If our market data inputs are incorrect or our model prices differ substantially from market
208、 prices,our business,financial condition and results of operations and our ability to make distributions to our stockholders could be materiallyadversely affected.10TABLE OF CONTENTSValuations of some of our assets will be inherently uncertain,may be based on estimates,may fluctuate over short perio
209、ds of timeand may differ from 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 valuations provided by third-party dealersand pricing services,we value assets based upon our judgment,and s
210、uch valuations may differ from those provided by third-partydealers and pricing services.Valuations of certain assets are often difficult to obtain or unreliable.Depending on the complexityand illiquidity of an asset,valuations of the same asset can vary substantially from one dealer or pricing serv
211、ice to another.Thevaluation process has been particularly difficult recently because market events have made valuations of certain assetsunpredictable,and the disparity of valuations provided by third-party dealers has widened.Our business,financial condition andresults of operations and our ability
212、 to make distributions to our stockholders could be materially adversely affected if our fairvalue determinations of these assets are materially higher than actual market values.An increase in interest rates may cause a decrease in the volume of certain of our target assets,which could adversely aff
213、ect ourability to acquire target assets that satisfy our investment objectives and to make distributions to our stockholders.Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing.A reduction in thevolume of mortgage loans originated may affect the v
214、olume of target assets available to us,which could adversely affect our abilityto acquire assets that satisfy our investment objectives.Rising interest rates may also cause our target assets that were issued priorto an interest rate increase to provide yields that are below prevailing market interes
215、t rates.If rising interest rates cause us to beunable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost,our ability to satisfy ourinvestment objectives and to make distributions to our stockholders could be materially adversely affected.The lack of liq
216、uidity of our assets may adversely affect our business,including our ability to sell our assets.Mortgage-related assets generally experience periods of illiquidity,including the period of delinquencies and defaults withrespect to residential and commercial mortgage loans during the financial crisis.
217、In addition,validating third-party pricing forilliquid assets may be more subjective than with respect to more liquid assets.Any illiquidity of our assets makes it difficult for usto sell such assets if the need or desire arises.In addition,if we are required to liquidate all or a portion of our por
218、tfolio quickly,wemay realize significantly less than the value at which we previously recorded our assets.Assets that are illiquid are more difficult tofinance,and to the extent that we use leverage to finance assets that become illiquid we may lose that leverage or have it reduced.Assets tend to be
219、come less liquid during times of financial stress,which is often the time that liquidity is most needed.As a result,our ability to sell assets or vary our portfolio in response to changes in economic and other conditions may be limited by liquidityconstraints,which could adversely affect our results
220、 of operations and financial condition.We use leverage in executing our business strategy,which may adversely affect the return on our assets and may reduce cashavailable for distribution to our stockholders,as well as increase losses when economic conditions are unfavorable.We use leverage to finan
221、ce our investments in certain of our target assets and to enhance our financial returns.Our primarysource of leverage is short-term borrowings under master repurchase agreements collateralized by our RMBS assets.Other sourcesof leverage include MSR financings and,in the future,may include other cred
222、it facilities.Through the use of leverage,we acquire positions with market exposure significantly greater than the amount of capitalcommitted to the transaction.Although we are not required to maintain any particular minimum or maximum target debt-to-equityleverage ratio with respect to our RMBS ass
223、ets,the amount of leverage we may employ for this asset class will depend upon theavailability of particular types of financing and our Managers assessment of the credit,liquidity,price volatility,financingcounterparty risk and other factors.Our Manager has discretion,without the need for further ap
224、proval by our board of directors,tochange the amount of leverage we utilize for our RMBS.We do not have a targeted debt-to-equity ratio for our RMBS.We useleverage for the primary purpose of financing our RMBS portfolio and not for the purpose of speculating on changes in interestrates.We may,howeve
225、r,be limited or restricted in the amount of leverage we may employ by the terms and provisions of anyfinancing or other agreements that we may enter into in the future,and we are subject to margin calls as a result of our financingactivity.11TABLE OF CONTENTSOur ability to achieve our investment and
226、 leverage objectives depends on our ability to borrow money in sufficient amountsand on favorable terms.In particular,our ability to execute on our prime mortgage loan strategy and our ability to build asignificant servicing portfolio is dependent on obtaining sufficient financing on attractive term
227、s.In addition,we must be able torenew or replace our maturing borrowings on a continuous basis.In recent years,investors and financial institutions that lend in thesecurities repurchase market have tightened lending standards in response to the difficulties and changed economic conditions thathave m
228、aterially adversely affected the RMBS market.These market disruptions have been most pronounced in the non-AgencyRMBS market,but the impact has also extended to Agency RMBS,which has made the value of these assets unstable andrelatively illiquid compared to prior periods.This could potentially incre
229、ase our financing costs and reduce our liquidity.Inaddition,because we rely on short-term financing,we are exposed to changes in the availability of financing which may make itmore difficult for us to secure continued financing.Leverage magnifies both the gains and the losses of our positions.Levera
230、ge increases our returns as long as we earn a greaterreturn on investments purchased with borrowed funds than our cost of borrowing such funds.However,if we use leverage toacquire an asset and the value of the asset decreases,the leverage may increase our loss.Even if the asset increases in value,if
231、 theasset fails to earn a return that equals or exceeds our cost of borrowing,the leverage will decrease our returns.We are required to post large amounts of cash as collateral or margin to secure our leveraged RMBS positions.In the event of asudden,precipitous drop in value of our financed assets,w
232、e might not be able to liquidate assets quickly enough to repay ourborrowings,further magnifying losses.Even a small decrease in the value of a leveraged asset may require us to post additionalmargin or cash collateral.Our debt service payments and posting of margin or cash collateral will reduce ca
233、sh flow available fordistribution to stockholders.We may not be able to meet our debt service obligations.To the extent that we cannot meet our debtservice 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 liquida
234、te qualifying real estate assets to repay debts,our compliance with the REITrules regarding our assets and our sources of income could be negatively affected,which could jeopardize our qualification as aREIT.Failing to qualify as a REIT would cause us to be subject to U.S.federal income tax(and any
235、applicable state and localtaxes)on all of our income and decrease profitability and cash available for distributions to stockholders.Adverse market developments generally will cause our lenders to require us to pledge cash as additional collateral.If our assetswere insufficient to meet these collate
236、ral requirements,we might be compelled to liquidate particular assets at inopportune timesand at unfavorable prices.Adverse market developments,including a sharp or prolonged rise in interest rates,a change in prepayment rates or increasingmarket concern about the value or liquidity of one or more t
237、ypes of our target assets,might reduce the market value of ourportfolio,which generally will cause our lenders to initiate margin calls.A margin call means that the lender requires us to pledgecash as additional collateral to re-establish the ratio of the value of the collateral to the amount of the
238、 borrowing.If we are unableto satisfy margin calls,our lenders may foreclose on our collateral.The liquidation of collateral may jeopardize our ability toqualify 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 stateand local taxes)
239、on all of our income and decrease profitability and cash available for distribution to our stockholders.Our use of repurchase transactions gives our lenders greater rights in the event that we file for bankruptcy,which may make itdifficult for us to recover our collateral in the event of a bankruptc
240、y filing.Our borrowings under master repurchase agreements are intended to qualify for special treatment under the bankruptcy code,giving our lenders the ability to void the automatic stay provisions of the bankruptcy code and take possession of and liquidatecollateral pledged in our repurchase tran
241、sactions without delay if we file for bankruptcy.Furthermore,the special treatment ofrepurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that any ofour lenders files for bankruptcy.Thus,the use of repurchase transactions exposes our
242、 pledged assets to risk in the event of abankruptcy filing by either our lenders or us.12TABLE OF CONTENTSIf our lenders default on their obligations to resell the RMBS back to us at the end of the repurchase transaction term,the valueof the RMBS has declined by the end of the repurchase transaction
243、 term or we default on our obligations under the repurchasetransaction,we will lose money on these transactions,which,in turn,may materially adversely affect our business,financialcondition and results of operations and our ability to pay distributions to our stockholders.When we engage in a repurch
244、ase transaction,we initially sell securities to the financial institution in exchange for cash,andour counterparty is obligated to resell the securities to us at the end of the term of the transaction,which is typically from 30 to 180days,but which may be up to 364 days or more.The cash we receive w
245、hen we initially sell the securities is less than the value ofthose securities.This difference is referred to as the haircut.If these haircuts are increased,we will be required to post additionalcash collateral for our RMBS.If our counterparty defaults on its obligation to resell the securities to u
246、s,we would incur a loss onthe transaction equal to the amount of the haircut(assuming there was no change in the value of the securities).See“Item 7.Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources”forinformation regarding borrowings
247、 under the Companys repurchase agreements.If we default on one of our obligations under a repurchase transaction,the counterparty can terminate the transaction andcease entering into any other repurchase transactions with us.Such a default also would constitute a default under many of ourfinancing a
248、greements with other counterparties.In that case,there is no assurance we would be able to establish a suitablereplacement facility on acceptable terms or at all.Hedging against interest rate changes and other risks may materially adversely affect our business,financial condition andresults of opera
249、tions and our ability to make distributions to our stockholders.Subject to maintaining our qualification as a REIT and exemption from registration under the Investment Company Act,wepursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates.Our hedging acti
250、vity varies inscope based on the level and volatility of interest rates,the types of liabilities and assets held and other changing marketconditions.Interest rate hedging may fail to protect or could adversely affect us because,among other things:interest rate hedging can be expensive,particularly d
251、uring 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 may not match the duration of the related assets or liabilities being hedged;to the extent hedging trans
252、actions do not satisfy certain provisions of the Code,and are not made through a TRS,theamount of income that a REIT may earn from hedging transactions to offset interest rate losses is limited by U.S.federaltax provisions governing REITs;the value of derivatives used for hedging may be adjusted fro
253、m time to time in accordance with accounting rules toreflect changes in fair value.Downward adjustments or“mark-to-market losses”would reduce our total stockholdersequity;the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that itimpairs our ab
254、ility to sell or assign our side of the hedging transaction;andthe hedging counterparty owing money in the hedging transaction may default on its obligation to pay.Our hedging transactions,which are intended to limit losses,may actually adversely affect our earnings,which could reduceour cash availa
255、ble for distribution to our stockholders.Changes in regulations relating to swaps activities may cause us to limit our swaps activity or subject us and our Manager toadditional disclosure,recordkeeping,and other regulatory requirements.The enforceability of agreements underlying hedging transactions
256、 may depend on compliance with applicable statutory andcommodity and other regulatory requirements and,depending on the identity of the counterparty,applicable internationalrequirements.Recently,new regulations have been promulgated by U.S.and foreign regulators attempting to strengthen oversightof
257、derivative contracts.Any actions taken by regulators could constrain our strategy and could increase our costs,either of whichcould materially and adversely affect our business,financial condition and results of operations and our ability to makedistributions to our stockholders.In particular,the Do
258、dd-Frank Act requires most derivatives to be executed on a regulated marketand cleared through a central counterparty,which has resulted in increased margin requirements and costs.On13TABLE OF CONTENTSDecember 7,2012,the CFTC issued a no-action letter that provides mortgage REITs relief from such re
259、gistration,or the MREITNo-Action Letter,if they meet certain conditions and submit a claim for such no-action relief.We believe we meet the conditionsset forth in the MREIT No-Action Letter,and we have filed our claim with the CFTC to perfect the use of the no-action relief fromregistration.However,
260、if in the future we do not meet the conditions set forth in the MREIT No-Action Letter or the relief providedby the MREIT No-Action Letter becomes unavailable for any other reason,we may need to seek to obtain another exemption fromregistration or we may be required to register as a“commodity pool o
261、perator”with the CFTC.If we are required to register with theCFTC as a commodity pool operator,we would become subject to additional disclosure,recordkeeping and reportingrequirements,which may increase our expenses or otherwise limit our ability to conduct our business as contemplated.We may change
262、 our investment strategy,investment guidelines and asset allocation without notice or stockholder consent,whichmay result in riskier investments.In addition,our charter provides that our board of directors may authorize us to revoke orotherwise terminate our REIT election,without the approval of our
263、 stockholders.Our board of directors has the authority to change our investment strategy or asset allocation at any time without notice to orconsent from our stockholders.To the extent that our investment strategy changes in the future,we may make investments that aredifferent from,and possibly risk
264、ier than,the investments described in this Annual Report and the other documents we file with theSEC from time to time.A change in our investment or leverage strategy may increase our exposure to interest rate and real estatemarket fluctuations or require us to sell a portion of our existing investm
265、ents,which could result in gains or losses and thereforeincrease 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 a
266、llocating assets in adifferent manner than as described in this Annual Report.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,if it determines that it is no longer in our best int
267、erests to qualify as a REIT.These changes could adversely affect our financial condition,results of operations,the market value of our common or preferredstock,and our ability to make distributions to our stockholders.We operate in a highly competitive market.Our profitability depends,in large part,
268、on our ability to acquire targeted assets at favorable prices.We compete with a numberof entities when acquiring our targeted assets,including other mortgage REITs,financial companies,public and private funds,commercial and investment banks and residential and commercial finance companies.We may als
269、o compete with the U.S.FederalReserve and the U.S.Treasury to the extent they purchase assets in our targeted asset classes.Many of our competitors aresubstantially larger and have considerably greater access to capital and other resources than we do.Furthermore,new companieswith significant amounts
270、 of capital have recently been formed or have raised additional capital,and may continue to be formed andraise additional capital in the future,and these companies may have objectives that overlap with ours,which may createcompetition for assets we wish to acquire.Some competitors may have a lower c
271、ost of funds and access to funding sources that arenot available to us.In addition,some of our competitors may have higher risk tolerances or different risk assessments,which couldallow them to consider a wider variety of assets to acquire and establish more relationships than us.We also may have di
272、fferentoperating constraints from those of our competitors including,among others,(i)tax-driven constraints such as those arising fromour qualification as a REIT,(ii)restraints imposed on us by our efforts to comply with certain exclusions or exemptions from thedefinition of an“investment company”an
273、d(iii)restraints and additional costs arising from our status as a public company.Furthermore,competition for assets in our targeted asset classes may lead to the price of such assets increasing,which may furtherlimit our ability to generate desired returns.We cannot assure you that the competitive
274、pressures we face will not have a materialadverse 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 not be able to make regular cash distribu
275、tions at a fixed rate or at all under certain circumstances.We intend to continue to distribute to our stockholders all or substantially all of our REIT taxable income in each year(subject to certain adjustments).This distribution policy will enable us to avoid being subject to U.S.14TABLE OF CONTEN
276、TSfederal income tax on our taxable income that we distribute to our stockholders.However,our ability to make distributions willdepend on our earnings,applicable law,our financial condition and such other factors as our board of directors may deem relevantfrom time to time.We will declare and make d
277、istributions to our stockholders only to the extent approved by our board ofdirectors.Residential whole mortgage loans are subject to increased risks.We may acquire and manage pools of residential whole mortgage loans.Residential whole mortgage loans are subject toincreased risks of loss.Unlike Agen
278、cy RMBS,whole mortgage loans generally are not guaranteed by the U.S.Government or anyGSE,though in some cases they may benefit from private mortgage insurance.Additionally,by directly acquiring whole mortgageloans,we do not receive the structural credit enhancements that benefit senior tranches of
279、CMOs.A whole mortgage loan is directlyexposed to losses resulting from default.Therefore,the value of the underlying property,the creditworthiness and financialposition of the borrower and the priority and enforceability of the lien will significantly impact the value of such mortgage loan.Inthe eve
280、nt of a foreclosure,we may assume direct ownership of the underlying real estate.The liquidation proceeds upon sale ofsuch real estate may not be sufficient to recover our cost basis in the loan,and any costs or delays involved in the foreclosure orliquidation process may increase losses.Whole mortg
281、age loans are also subject to“special hazard”risk(property damage caused by hazards,such as earthquakes orenvironmental hazards,not covered by standard property insurance policies),and to bankruptcy risk(reduction in a borrowersmortgage debt by a bankruptcy court).In addition,claims may be assessed
282、against us on account of our position as a mortgageholder or property owner,including assignee liability,responsibility for tax payments,environmental hazards and other liabilities.In some cases,these liabilities may be“recourse liabilities”or may otherwise lead to losses in excess of the purchase p
283、rice of therelated mortgage or property.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 besufficient to successfully manage our business as a REIT.Our Manager ha
284、s limited experience operating a REIT.The REIT provisions of the Code are complex,and any failure tocomply with those provisions in a timely manner could prevent us from qualifying as a REIT or force us to pay unexpected taxesand penalties.In such event,our net income would be reduced,and we could i
285、ncur a loss.Our Manager has limited experience operating a public company or complying with regulatory requirements,including theSarbanes-Oxley Act,which may hinder its ability to achieve our objectives.Prior to our commencement of operations in October 2013,our Manager had no experience operating a
286、 public company orcomplying with regulatory requirements,including the Sarbanes-Oxley Act.Our Managers inexperience may hinder ourManagers ability to achieve our objectives,and we cannot assure you that we will be able to successfully execute our businessstrategies as a public company or comply with
287、 regulatory requirements applicable to public companies.We are dependent on our Manager and certain key personnel that are or will be provided to us through our Manager and maynot find a suitable replacement if our Manager terminates the management agreement or such key personnel are no longeravaila
288、ble to us.We do not have any employees of our own other than four employees of our licensed mortgage servicing subsidiary,Aurora.We are completely reliant on our Manager,which has significant discretion as to the implementation of our operating policies andexecution of our business strategies and ri
289、sk management practices.The departure of Messrs.Lown or Levine or other seniorofficers could have a material adverse effect on our ability to achieve our objectives.We can offer no assurance that our Manager will remain our manager or that we will continue to have access to our Managerssenior manage
290、ment.We are subject to the risk that our Manager will terminate the management agreement or that we may deem itnecessary to terminate the management agreement or prevent certain individuals from performing services for us and that nosuitable replacement will be found to manage us.If our management a
291、greement is terminated and no suitable replacement is found to manage us or we are unable to find asuitable replacement on a timely basis,we may not be able to continue to execute our business15TABLE OF CONTENTSstrategy.No assurances can be given that our Manager will act in our best interests with
292、respect to the allocation of personnel,services and resources to our business.The failure of any of the key personnel of our Manager to service our business with therequisite time and dedication could materially and adversely affect our ability to execute our business plan.The management fee payable
293、 to our Manager is payable regardless of the performance of our portfolio,which may reduce ourManagers incentive 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 define
294、d in themanagement agreement)regardless of the performance of our portfolio.The management fee takes into account the net issuanceproceeds of both common and preferred stock offerings,as well as issuances of equity securities by our Operating Partnership.OurManagers entitlement to non-performance-ba
295、sed compensation might reduce its incentive to devote the time and effort of itsprofessionals to seeking profitable opportunities for our portfolio,which could result in a lower performance of our portfolio andmaterially adversely affect our business,financial condition and results of operations.Our
296、 investment guidelines are very broad,and our board of directors will not approve each decision made by our Manager toacquire,dispose of,or otherwise manage an asset.Our Manager is authorized to follow very broad guidelines in pursuing our strategy.Our board of directors will periodicallyreview our
297、portfolio and asset-management decisions.However,it generally will not review all of our proposed acquisitions,dispositions and other management decisions.In addition,in conducting periodic reviews,our board of directors will relyprimarily on information provided to it by our Manager.Furthermore,our
298、 Manager may arrange for us to use complex strategies orto enter into complex transactions that may be difficult or impossible to unwind by the time they are reviewed by our board ofdirectors.Our Manager has great latitude within the broad guidelines in determining the types of assets it may decide
299、are proper forus to acquire and other decisions with respect to the management of those assets subject to our maintaining our qualification as aREIT.Poor decisions could have a material adverse effect on our business,financial condition and results of operations and ourability to make distributions
300、to our stockholders.There will be conflicts of interest in our relationships with our Manager and Freedom Mortgage,which could result in decisionsthat are not in the best interests of our stockholders.Our Manager is a Delaware limited liability company established by Mr.Middleman.The Manager is a pa
301、rty to a servicesagreement with Freedom Mortgage,which is wholly owned and controlled by Mr.Middleman.The Manager is owned by a“blindtrust”for the benefit of Mr.Middleman.We are dependent on our Manager for our day-to-day management and operations.In turn,the Manager is dependent on theperformance o
302、f Freedom Mortgage under the services agreement.Various potential and actual conflicts of interest may arise fromthe activities of Freedom Mortgage and its affiliates by virtue of this relationship.The ability of our Managers officers andpersonnel,with the exception of those officers that are dedica
303、ted to us,to engage in other business activities may reduce the timeour Manager and certain of its officers and personnel spend managing us.Our management agreement with our Manager was negotiated between related parties,and its terms may not be as favorable tous as if it had been negotiated on an a
304、rms-length basis with an unrelated third party.Furthermore,we may choose not to enforce,orto enforce less vigorously,our rights under this or other agreements with Freedom Mortgage because of our desire to maintain ourongoing relationships with Freedom Mortgage and our Manager.In the future,Freedom
305、Mortgage may sponsor other vehicles thatinvest in Excess MSRs or prime loans or other investments,and there may be situations where we compete with Freedom Mortgageor its affiliates for opportunities to acquire MSRs or prime mortgage loans or other assets.Freedom Mortgage is a separate anddistinct c
306、ompany with its own business interests and will be under no obligation to maintain its current business strategy.FreedomMortgage will be under no obligation to offer MSRs or other assets to us,and Freedom Mortgage may offer those assets to thirdparties without offering such assets to us.In addition,
307、there may be conflicts of interest inherent in our relationship with Freedom Mortgage through our Manager to theextent Freedom Mortgage or our Manager invests in or creates new vehicles to invest in assets in which we may invest or whoseinvestment objectives overlap with our investment objectives.Ce
308、rtain16TABLE OF CONTENTSinvestments appropriate for us may also be appropriate for one or more of these other investment vehicles.Members of our board ofdirectors may serve as officers and/or directors of these other entities.In addition,in the future,our Manager or its affiliates mayhave investment
309、s in and/or earn fees from such other investment vehicles that are higher than their economic interests in us andwhich may therefore create an incentive to allocate investments to such other investment vehicles.Our management agreement with our Manager generally does not limit or restrict our Manage
310、r or its affiliates from engagingin any business or managing other pooled investment vehicles that invest in investments that meet our investment objectives,except that under our management agreement neither our Manager nor any entity controlled by or under common control with ourManager is permitte
311、d to raise or sponsor any new pooled investment vehicle whose investment policies,guidelines or plans targetas its primary investment category investments in Excess MSRs.The ability of our Manager and its officers and employees to engage in other business activities,subject to the terms of ourmanage
312、ment agreement with our Manager,may reduce the amount of time our Manager,its officers or other employees spendmanaging us.In addition,we may engage(subject to our investment guidelines)in material transactions with Freedom Mortgage orour Manager,including,but not limited to,certain financing arrang
313、ements,co-investments in,or purchases of,MSRs or otherassets,that present an actual,potential or perceived conflict of interest.It is possible that actual,potential or perceived conflictscould give rise to investor dissatisfaction,litigation or regulatory enforcement actions.Appropriately dealing wi
314、th conflicts ofinterest is complex and difficult,and our reputation could be damaged if we fail,or appear to fail,to deal appropriately with one ormore potential,actual or perceived conflicts of interest.Regulatory scrutiny of,or litigation in connection with,conflicts ofinterest could have a materi
315、al adverse effect on our reputation,which could materially adversely affect our business in a number ofways,including causing an inability to raise additional funds,a reluctance of counterparties to do business with us,a decrease inthe prices of our common or preferred securities and a resulting inc
316、reased risk of litigation and regulatory enforcement actions.The management agreement with our Manager was not negotiated on an arms-length basis and may not be as favorable to us asif it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.The management
317、 agreement that we have entered into with our Manager was negotiated between related parties,and its terms,including fees payable,may not be as favorable to us as if it had been negotiated with an unaffiliated third party.Various potentialand actual conflicts of interest may arise from the activitie
318、s of Freedom Mortgage and its affiliates.Termination of our management agreement without cause is subject to several conditions which may make such a terminationdifficult and a significant termination fee could be payable by us.That fee will increase the effective cost to us of terminating themanage
319、ment agreement,thereby adversely affecting our ability to terminate our Manager without cause.Pursuant to the management agreement,our Manager will not assume any responsibility other than to render the servicescalled for thereunder and will not be responsible for any action of our board of director
320、s in following or declining to follow theManagers advice or recommendations.Under the terms of the management agreement,our Manager,Freedom Mortgage,and theiraffiliates and each of their officers,directors,trustees,members,stockholders,partners,managers,Investment Committee members,employees,agents,
321、successors and assigns,will not be liable to us for acts or omissions performed in accordance with and pursuantto the management agreement,except because of acts constituting bad faith,willful misconduct,gross negligence,fraud or recklessdisregard of their duties under the management agreement.In ad
322、dition,we will indemnify our Manager,Freedom Mortgage,andtheir affiliates and each of their officers,directors,trustees,members,stockholders,partners,managers,Investment Committeemembers,employees,agents,successors and assigns,with respect to all expenses,losses,damages,liabilities,demands,charges a
323、ndclaims arising from acts of our Manager not constituting bad faith,willful misconduct,gross negligence,fraud or reckless disregardof duties,performed in good faith in accordance with and pursuant to the management agreement.If our Manager ceases to be our Manager pursuant to the management agreeme
324、nt,our lenders and our derivative counterpartiesmay cease doing business with us.If our Manager ceases to be our Manager,it would constitute an event of default or early termination event under many of ourfinancing and hedging agreements,upon which our counterparties would have the right to17TABLE O
325、F CONTENTSterminate their agreements with us.If our Manager ceases to be our Manager for any reason,including upon the non-renewal of ourmanagement agreement,and we are unable to obtain financing or enter into or maintain derivative transactions,our business,financial condition and results of operat
326、ions and our ability to make distributions to our stockholders may be materially adverselyaffected.Risks Related to Our Organizational StructureMaintenance of our exclusion from regulation as an investment company under the Investment Company Act imposes significantlimitations on our operations.We i
327、ntend to continue to conduct our operations so that neither we nor any of our subsidiaries is required to register as aninvestment company under the Investment Company Act.We conduct our business primarily through our Operating Partnershipand its wholly-owned subsidiaries.The securities issued by ou
328、r subsidiaries that are excluded from the definition of“investmentcompany”under Section 3(c)(7)of the Investment Company Act,together with other investment securities we may own,cannotexceed 40%of the value of all of our assets(excluding U.S.Government securities and cash)on an unconsolidated basis.
329、Thisrequirement limits the types of businesses in which we may engage and the assets we may hold.Certain of our subsidiaries rely onthe exclusion provided by Section 3(c)(5)(C)under the Investment Company Act which is designed for entities primarily engagedin the business of“purchasing or otherwise
330、acquiring mortgages and other liens on and interests in real estate.”This exclusiongenerally requires that at least 55%of the entitys assets on an unconsolidated basis consist of qualifying real estate interests and atleast 80%of the entitys assets consist of qualifying real estate interests or real
331、 estate-related assets.These requirements limit theassets those subsidiaries can own and the timing of sales and purchases of those assets.To classify the assets held by our subsidiaries as qualifying real estate interests or real estate-related assets,we rely on no-action letters and other guidance
332、 published by the SEC staff regarding those kinds of assets,as well as upon our analyses(inconsultation with outside counsel)of guidance published with respect to other types of assets.There can be no assurance that thelaws and regulations governing the Investment Company Act status of companies sim
333、ilar to ours,or the guidance from the SEC orits staff regarding the treatment of assets as qualifying real estate interests or real estate-related assets,will not change in a mannerthat adversely affects our operations.To the extent that the SEC staff provides more specific guidance regarding any of the mattersbearing upon our exemption from the need to register under the Investment Company Act,we
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