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 31,2015ORooTRANSITION 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:001-35246CHERRY 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.)301 Harper Dr
3、ive,Suite 110Moorestown,New Jersey08057(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 valueNe
4、w 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 Indicate by check mark if the registrant is not required to file reports pursuant to Secti
5、on 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 preceding 12 months(or for such shorter period that the registrant was required to file
6、 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,every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of
7、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 delinquent filers pursuant to Item 405 of Regulation S-K(229.405 of this chapter)is not cont
8、ainedherein,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.oIndicate by check mark whether the registrant is a large accelerated filer,an accelerate
9、d filer,a non-accelerated filer or a smaller reportingcompany.See the definitions of“large accelerated filer,”“accelerated filer”and“smaller reporting company”in Rule 12b-2 of the Exchange Act.Large accelerated fileroAccelerated filerNon-accelerated filero(Do not check if a smaller reporting company
10、)Smaller reporting companyoIndicate 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 registrants common stock,$0.01 par value per share,at June 30,2015,held by those persons deemed by theregistrant to be
11、non-affiliates(based upon the closing sale price of the common stock on the New York Stock Exchange on June 30,2015)wasapproximately$105.6 million.Shares of the registrants common stock held by each executive officer and director and by each entity or person that,tothe registrants knowledge,owned 10
12、%or more of the registrants outstanding common stock as of June 30,2015,have been excluded from thisnumber in that these persons may be deemed affiliates of the registrant.The determination of affiliate status for this purpose is not necessarily aconclusive determination for other purposes.On March
13、15,2016,the registrant had a total of 7,519,038 shares of common stock,$0.01 par value,outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrants Definitive Proxy Statement on Schedule 14A relating to its 2016 Annual Meeting of Stockholders,to be filed with theSecurities and Exchange
14、 Commission by no later than April 29,2016,are incorporated by reference into Part III,Items 10 through 14,inclusive,of thisAnnual Report on Form 10-K as indicated herein.TABLE OF CONTENTSTABLE OF CONTENTS PagePART I 1 Item 1.Business 1 Item 1A.Risk Factors 6 Item 1B.Unresolved Staff Comments 27 Ite
15、m 2.Properties 27 Item 3.Legal Proceedings 27 Item 4.Mine Safety Disclosures 27 PART II 28 Item 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of EquitySecurities 28 Item 6.Selected Financial Data 31 Item 7.Managements Discussion and Analysis of Financial Con
16、dition and Results of Operations 32 Item 7A.Quantitative and Qualitative Disclosures about Market Risk 52 Item 8.Consolidated Financial Statements and Supplementary Data 57 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 97 Item 9A.Controls and Procedures
17、98 Item 9B.Other Information 98 PART III 99 Item 10.Directors,Executive Officers and Corporate Governance 99 Item 11.Executive Compensation 99 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 99 Item 13.Certain Relationships and Related Transacti
18、ons and Director Independence 99 Item 14.Principal Accountant Fees and Services 99 PART IV 100 Item 15.Exhibits 100 TABLE OF CONTENTSGLOSSARYThis glossary defines some of the terms that we use elsewhere in this Annual Report and is not a complete list of all of thedefined terms used herein.In this A
19、nnual Report on Form 10-K,unless specifically stated otherwise or the context otherwiseindicates,references to“we,”“us,”“our,”the“Company”or“CHMI”refer to Cherry Hill Mortgage Investment Corporation,aMaryland corporation,together with its consolidated subsidiaries;references to the“Manager”or to“CHM
20、M”refer to Cherry HillMortgage Management,LLC,a Delaware limited liability company;and references to the“Operating Partnership”refer to CherryHill Operating Partnership,L.P.,a Delaware limited partnership.“Agency”means a U.S.Government agency,such as Ginnie Mae,or a GSE.“Agency RMBS”means RMBS issue
21、d 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 residential mortgage loan.“CFTC”means the U.S.Commodity Futures Trading Commission.“CMO”means a collateralized mortgage o
22、bligation.CMOs are structured debt instruments representing interests in specified poolof mortgage loans into multiple classes,or tranches,of securities,with each tranche having different maturities or risk profiles.“credit enhancement”means techniques to improve the credit ratings of securities,inc
23、luding overcollateralization,creatingretained spread,creating subordinated tranches and insurance.“Excess MSR”means an interest in an MSR,representing a portion of the interest payment collected from a pool of mortgageloans,net of a basic servicing fee paid to the mortgage servicer.“Fannie Mae”means
24、 the Federal National Mortgage Association.“FHA”means the Federal Housing Administration.“FHFA”means the U.S.Federal Housing Finance Agency.“FHA mortgage loan”means a mortgage loan that is insured by FHA.“Freddie Mac”means the Federal Home Loan Mortgage Corporation.“FRM”means a fixed-rate residentia
25、l 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.Department of Hous
26、ing 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 interest-only
27、 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 portion of the inte
28、rest 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 underlying mortg
29、ages.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.iTABLE OF CONTENTS“mortgage loan”means a loan secured by real estate with a right to receive the payment of principal and inter
30、est on the loan(including the servicing fee).“non-Agency RMBS”means RMBS that are not issued or guaranteed by an Agency,including investment grade(AAA throughBBB rated)and non-investment grade(BB rated through unrated)classes.“non-conforming loan”means a residential mortgage loan that does not confo
31、rm 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 GSE underwriting guide
32、lines 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”is a MBS that represents
33、 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 payments made by theind
34、ividual 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.“stripped security”is an
35、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 purchase,forfuture deli
36、very,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 balance.“U.S.Treasury”me
37、ans 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 this Annual Report on
38、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 statements contained insu
39、ch 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,financial condition,liquid
40、ity,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-looking statements.Statement
41、s 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;the Companys ability to obtain future financing arrangements and refinance existing
42、financing arrangements as theymature;the Companys expected leverage;the Companys expected investments;the Companys ability to execute its prime mortgage loan strategy and its ability to finance this asset class;the Companys ability to acquire Servicing Related Assets;estimates or statements relating
43、 to,and the Companys ability to make,future distributions;the Companys ability to compete in the marketplace;market,industry and economic trends;recent market developments and actions taken and to be taken by the U.S.Government,the U.S.Treasury and the Boardof Governors of the Federal Reserve System
44、,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 its qualification as a REIT under the Internal Revenue Code of 1986,as amended(the“Code”);the Companys ability t
45、o maintain its exclusion from registration as an investment company under the InvestmentCompany Act of 1940,as amended(the“Investment Company Act”);projected capital and operating expenditures;availability of investment opportunities in mortgage-related,real estate-related and other securities;avail
46、ability of qualified personnel;prepayment rates;andprojected default rates.iiiTABLE OF CONTENTSThe Companys beliefs,assumptions and expectations can change as 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
47、business,financial condition,liquidityand results of operations may vary materially from those expressed in,or implied by,the Companys forward-looking statements.These risks,along with,among others,the following factors,could cause actual results to vary from the Companys forward-looking statements:
48、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 capital markets;changes in the Companys investment objectives and business strategy;availability,terms and deployment of capital;availability o
49、f suitable investment opportunities;the Companys dependence on its external manager,Cherry Hill Mortgage Management,LLC(“the Manager”),and theCompanys ability to find a suitable replacement if the Company or the Manager were to terminate the managementagreement the Company has entered into with the
50、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 yield curve,prepayment rates or recapture rates;limitations on the Companys business
51、 due to compliance with requirements for maintaining its qualification as a REITunder the Code and its exclusion from registration as an investment company under the Investment Company Act;andthe degree and nature of the Companys competition,including competition for its targeted assets.Although the
52、 Company believes that the expectations reflected in the forward-looking statements are 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 obligate
53、d,and does not intend,to update or revise any forward-looking statements,whether as a 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 trad
54、ed residential real estate finance company focused onacquiring,investing in and managing 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
55、 a concurrent private placement.Our common stock is listed and traded on the New York Stock Exchange under thesymbol“CHMI.”We are externally managed by Cherry Hill Mortgage Management,LLC,an SEC-registered investment adviserand an affiliate of Freedom Mortgage Corporation,(“Freedom Mortgage”).We ope
56、rate so as to qualify to be taxed as a REIT under the Code.To qualify as a REIT,we must distribute annually to ourstockholders an amount at least equal to 90%of our REIT taxable income,determined without regard to the deduction fordividends paid and excluding any net capital gain.We currently expect
57、 to distribute substantially all of our REIT taxable incometo our stockholders.We will be subject to income tax on our taxable income that is not distributed and to an excise tax to theextent that certain percentages of our taxable income are not distributed by specified dates.Our TRS and CHMI Solut
58、ions,Inc.(“Solutions”)are subject to regular corporate U.S.federal,state and local income taxes on their taxable income.Our principal objective is to generate attractive current yields and risk-adjusted total returns for our stockholders over the longterm,primarily through dividend distributions and
59、 secondarily through capital appreciation.We intend to attain this objective,subject to market conditions and availability and terms of financing,by selectively constructing and actively managing a targetedportfolio of Servicing Related Assets,RMBS,prime mortgage loans and other cashflowing resident
60、ial mortgage assets.We operate our business through the following segments:(i)investments in Servicing Related Assets;and(ii)RMBS.Forinformation regarding the segments in which we operate,see“Item 8.Consolidated Financial Statements and Supplementary DataNote 3Segment Reporting.”Our Targeted Asset C
61、lassesOur targeted asset classes currently include:Servicing Related Assets consisting of MSRs and Excess MSRs;RMBS,including Agency RMBS,residential mortgage pass-through certificates,CMOs(IOs and inverse IOs)and TBAs;andprime mortgage loans.Our StrategyOur strategy,which may change due to the avai
62、lability and terms of capital and as market conditions warrant,involves:allocating a substantial portion of our equity capital to the acquisition of Servicing Related Assets through bulk orpossibly flow purchases:the creation of Excess MSRs from MSRs acquired by our mortgage servicing subsidiary,Aur
63、ora;acquiring RMBS on a leveraged basis;over time,as the market for prime mortgage loans grows,purchasing these assets from originators which may includeFreedom Mortgage;andopportunistically mitigating our prepayment,interest rate and,to a lesser extent,credit risk by using a variety of hedginginstr
64、uments 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 Excess MSRs from MSRs acquired by Aurora.We plan to acquire MSRs from servicers,which mayi
65、nclude Freedom Mortgage,primarily on a bulk purchase basis but may also enter into flow arrangements on terms to be negotiatedin the future.We also may generate MSRs through the purchase of prime mortgage loans.1TABLE OF CONTENTSOur ability to acquire MSRs is subject to the applicable REIT qualifica
66、tion tests.We have to hold our MSRs through 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.The portion of the interest payments represented b
67、y theExcess MSRs will not be subject to an entity level tax as long as we comply with the REIT qualification tests.The tax liability ofAurora negatively impacts our returns from the MSRs that it holds.In addition,unlike our investments in Excess MSRs,ourinvestments in MSRs will expose us to default
68、risk and the potential for credit losses.We do not directly servicing the mortgage loans underlying the MSRs we acquire;rather,we contract with third-partysubservicers,including Freedom Mortgage,to handle servicing functions for the loans underlying the MSRs.RMBS Strategy.Our RMBS strategy focuses p
69、rimarily on 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 IOsprimarily to take advantage of particularly attractive prepayment-related or structural opportunities i
70、n the RMBS 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,Agenc
71、y RMBS with 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.Our ability to engage inTBA transactions is limited by the gross income and asset tests applicable
72、to REITs.Our RMBS strategy includes selective investments in non-Agency RMBS,including GSE risk-sharing securities.GSE risk-sharing securities are general obligations of Fannie Mae and Freddie Mac that provide credit protection with respect to defaults onreference pools of loans.We currently expect
73、to expand our participation in that market.However,the extent of our investments inGSE risk-sharing securities is limited by the gross income and asset tests applicable to REITs.We also intend to investopportunistically in legacy non-Agency RMBS issued during or after 2010.To date,the GSE risk-shari
74、ng securities are the onlynon-Agency RMBS in which we have invested.If and when market conditions permit us to execute our prime mortgage loanacquisition and financing strategy,we expect that we will retain certain bonds collateralized by the prime mortgage loans wesecuritize.We also may selectively
75、 invest across the entire capital structure of non-Agency RMBS that are newly issued by thirdparties.Non-Agency RMBS are subject to risk of default,among other risks,and could result in greater losses.Prime Mortgage Loan Strategy.We believe that the market for non-conforming loans including,in parti
76、cular,prime non-conforming mortgage loans,will grow.While our interest in this asset class is undiminished,we do not currently anticipate thateither market conditions or available long-term financing will result in our execution of this strategy in 2016.The prime mortgageloans may be ARMs,hybrid ARM
77、s or FRMs with original terms to maturity of not more than 30 years and will be either fullyamortizing or interest-only for up to ten years,and fully amortizing thereafter.We expect that these loans may include bothqualified mortgages and,if and when market conditions permit,non-QM loans.Our strateg
78、y is adaptable to changing market environments,subject to compliance with the income and other tests that wemust satisfy to maintain our qualification as a REIT and maintain our exclusion from regulation as an investment company underthe Investment Company Act.As a result,our acquisition and managem
79、ent decisions will depend on prevailing market conditions,and our targeted asset classes and strategy may vary over time in response to market conditions.Our ManagerWe are externally managed by our Manager.We have entered into a management agreement with our Manager,pursuant towhich our Manager is r
80、esponsible for our investment strategies and decisions and our day-to-day operations,subject to thesupervision and oversight of our board of directors.Mr.Middleman,our non-executive Chairman of the Board,is the sole memberof our Manager.Freedom Mortgage and its employees support our Manager in provi
81、ding services to us pursuant to the terms of aservices agreement that has been entered into by our Manager and Freedom Mortgage.We rely on our Manager and FreedomMortgage to provide or obtain on our behalf the personnel and services necessary for us to conduct our business.Our executive2TABLE OF CON
82、TENTSofficers and the officers and employees of our Manager are also officers and employees of Freedom Mortgage,and we will competewith Freedom Mortgage for access to these individuals.The executive offices of our Manager are located at 907 Pleasant ValleyAve.,Mount Laurel,New Jersey 08054,and the t
83、elephone number of our Managers executive offices is(877)870-7005.Our Manager has established an Investment Committee to monitor our investment policies,portfolio holdings,financing andhedging strategies and compliance with our investment guidelines.The members of our Managers Investment Committee a
84、re Mr.Lown,our President and Chief Investment Officer;Mr.Levine,our Chief Financial Officer,Treasurer and Secretary;and theManagers two portfolio managers and head of risk/operations.Our Manager is registered as an investment adviser under the Investment Advisers Act of 1940,as amended,or the Advise
85、rsAct,and is subject to the 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 if it causes us to fail to qualify as a REIT
86、 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 affiliatesunless such transaction is otherwise in accordanc
87、e 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 asset classes must be approved by at least a
88、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 prevailing market conditions and maychange over time
89、 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 investment guidelines may include,without limit
90、ation,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,which is comprised of all of our independent d
91、irectors,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.This committee will also be responsible for reviewing and approving any agreements pursuantto which we will acquire
92、 prime mortgage loans or MSRs from Freedom Mortgage.We also retain two independent valuationservices to assist our management and our independent directors in making pricing determinations on Servicing Related Assets andother assets we purchase from Freedom Mortgage.Our Financing Strategies and Use
93、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 characteristics of our portfolio,availability of financing and market conditions.Our borrowings for RMBS consist ofrepurchase transactions under master re
94、purchase agreements.These agreements represent uncommitted financing provided by thecounterparties.Our repurchase transactions are collateralized by our RMBS.In a repurchase transaction,we sell an asset to acounterparty at a discounted value,or the loan amount,and simultaneously agree to repurchase
95、the same asset from suchcounterparty at a price equal to the loan amount plus an interest factor.Despite being legally structured as sales and subsequentrepurchases,repurchase transactions are generally accounted for as debt secured by the underlying assets.During the term of arepurchase transaction
96、,we generally receive the income and other payments distributed with respect to the underlying assets andpay interest to the counterparty.While the proceeds of our repurchase financings often will be used to purchase additional RMBSsubject to the same master repurchase agreement,our financing3TABLE
97、OF CONTENTSarrangements are not expected to restrict our ability to use proceeds from these arrangements to support our other liquidity needs.Our master repurchase agreements are documented under the standard form master repurchase agreement published by SIFMA.We have entered into repurchase agreeme
98、nts with 18 counterparties as of December 31,2015.From time to time we expect tonegotiate and enter into additional master repurchase agreements with other counterparties that could produce opportunities toacquire certain RMBS that may not be available from our existing counterparties.See“Item 7.Man
99、agements Discussion andAnalysisLiquidity and Capital Resources”in this Annual Report on Form 10-K.During the second half of 2015,we also obtained financing for our RMBS from the Federal Home Loan Bank of Indianapolis,or the FHLBI.However,additional funding is no longer available to us.See“Item 7.Man
100、agements Discussion and AnalysisLiquidity and Capital Resources.”We have pledged our Excess MSRs from Freedom Mortgage to secure a term loan.See“Item 8.Consolidated FinancialStatements and Supplementary DataNote 13Notes Payable”.We also intend to obtain financing for any MSRs that we mayacquire.Exec
101、ution of our prime mortgage loan strategy is dependent on obtaining financing on attractive terms.Long-termfinancing for this asset class may not be available on attractive terms or at all due to the unavailability of financing from theFHLBI.We may utilize other types of borrowings in the future,inc
102、luding term facilities,securitization,or other more complexfinancing structures.Additionally,we may take advantage of available borrowings,if any,under new programs established by theU.S.Government to finance our assets.We also may raise capital by issuing unsecured debt or preferred or common stock
103、.Interest Rate HedgingWe opportunistically manage our interest rate risk by using various hedging strategies.Subject to maintaining ourqualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment CompanyAct,we use certain derivative financial in
104、struments and other hedging instruments to mitigate interest rate risk we expect to arisefrom our repurchase agreement financings associated with our RMBS.The interest rate hedging instruments that we currently useinclude:interest rate swaps,TBAs and swaptions.Our overall hedging strategy takes into
105、 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 PoliciesDerivatives and Hedging Activities.”Policies with
106、 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 combination of these methods.Inthe event t
107、hat 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 appropriate,at any time.We may,in the future,o
108、ffer 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 stockholders.CompetitionWe compete with other mortg
109、age 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 opportunities in general.See Item 1A,“Risk FactorsWe
110、 operate in a highly competitivemarket.”EmployeesAll of our executive officers are employees of Freedom Mortgage.Other than Aurora,which has three employees,we do nothave any employees.4TABLE OF CONTENTSOur Tax StatusWe have elected to be taxed as a REIT under the Code.Provided that we maintain our
111、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 currently distribute atleast 90
112、%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 income at regular corporate r
113、ates(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 TRSs,including Aurora,is subject to U.S.federal,state and local income tax.See“Item 1A.Risk
114、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 conduct our operations so that neith
115、er 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 the business of investing,reinvesti
116、ng 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 acquire investment securities having a
117、 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 securities and securities issued by majority
118、-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 partnership is considered an investment co
119、mpany 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 operating partnershipswholly-owned or majo
120、rity-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 exemptions from registration as an in
121、vestment 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 assets in“mortgages and other liens
122、 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 respect to anunderlying pool of mortg
123、age 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 Excess MSRs and Agency CMOs we have acq
124、uired are not treated as qualifying real estate interests forpurposes of the 55%requirement,but are treated as real estate-related assets that qualify for the 80%test.In addition,Cherry HillQRS I,LLC will treat its investments in Cherry Hill QRS II,LLC and Cherry Hill QRS III,LLC as real estate-rela
125、ted assets becausesubstantially all of the assets held by those subsidiaries will be real estate-related assets.We monitor our compliance with the 40%Test and the holdings of our subsidiaries to ensure that each of our subsidiaries is incompliance with an applicable exemption or exclusion from regis
126、tration as an investment company under the InvestmentCompany Act.In the event that we,or our operating partnership,were to acquire assets that could make either entity fall within thedefinition of investment company under Section 3(a)(1)(A)or Section 3(a)(1)(C)of the Investment Company Act,we believ
127、e thatwe would still qualify for an exclusion from registration pursuant to Section 3(c)(5)(C).5TABLE OF CONTENTSQualification for exclusion from registration under the Investment Company Act limits our ability to make certaininvestments.In addition,complying with the tests for exclusion from regist
128、ration 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 to adjust our strategy accordingly.Any additional guidance from the SEC or its sta
129、ff couldprovide additional flexibility to us,or it could further 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 information on our website is not a p
130、art 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 furnished pursuant to Section 13
131、(a)or 15(d)of the SecuritiesExchange Act of 1934,as amended,or the Exchange Act,as soon as reasonably practicable after we electronically file suchmaterial with,or furnish it to,the SEC.The SEC maintains a website that contains these reports at www.sec.gov.Corporate InformationOur principal executiv
132、e offices are located at 301 Harper Drive,Suite 110,Moorestown,New Jersey,08057.Our telephonenumber is(877)870-7005 and our website is .The offices of our Manager are located at 907 Pleasant ValleyAve.,Mount Laurel,New Jersey,08054.Information available on or accessible through our website and Freed
133、om Mortgageswebsite is not incorporated into this Annual Report on form 10-K.Item 1A.Risk FactorsThe Companys business and operations are subject to a number of risks and uncertainties,the occurrence of which couldadversely affect its business,financial condition,results of operations and ability to
134、 make distributions to stockholders and couldcause the value of the Companys capital stock to decline.Please refer to the section entitled“Forward-Looking Statements.”Risks Related To Our BusinessWe may not be able to continue to operate our business successfully or generate sufficient revenue to ma
135、ke 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 implement our strategies.There can be no assurance that we will be able to continue to generate sufficient returns top
136、ay our operating expenses and make satisfactory distributions to our stockholders.The results of our operations depend on severalfactors,including the availability of opportunities for the acquisition of target assets,the level and volatility of interest rates,theavailability of adequate short and l
137、ong-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 market concerns may adversely affectthe value of the assets in which we invest,and these conditions may persist for the f
138、oreseeable future.Our business is materially affected by conditions in the residential mortgage market,the residential real estate market,thefinancial markets and the economy in general.In particular,the residential mortgage market in the United States has experienced avariety of difficulties and ch
139、anged economic conditions,including defaults,credit losses and liquidity concerns.Over the pastseveral years,certain commercial banks,investment banks and insurance companies have announced extensive losses fromexposure to the residential mortgage market.These factors have impacted investor percepti
140、on 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 volatility.Deterioration of the mortgage market and investor perception of the risks associated with RMBS andother r
141、esidential mortgage assets that we acquire could materially adversely affect our business,financial condition and results ofoperations and our ability to make distributions to our stockholders.We are dependent on mortgage servicers and subservicers to service the mortgage loans relating to our Servi
142、cing Related Assets.Our investments in Servicing Related Assets are dependent on the entity performing the actual servicing of the mortgageloans,called the mortgage servicer,to perform its servicing obligations.As a result,we could be6TABLE OF CONTENTSmaterially and adversely affected if the mortgag
143、e servicer is terminated by the applicable Agency.The duties and obligations ofmortgage servicers are defined through contractual agreements,which generally provide for the possibility for termination of themortgage servicer in the absolute discretion of the applicable Agency.In the event of such te
144、rmination with respect to a particularmortgage servicer,the related Excess MSRs could potentially lose all value on a going forward basis.Moreover,the termination ofa mortgage servicer could take effect across all mortgages being serviced by that mortgage servicer.Therefore,to the extent wemake mult
145、iple investments relating to mortgages serviced by the same mortgage servicer,such as our initial portfolio of ExcessMSRs which are entirely serviced by Freedom Mortgage,all such investments could lose all their value in the event of thetermination of the mortgage servicer.Freedom Mortgage also acts
146、 as the mortgage servicer for the MSRs held by Aurora.We could also be materially and adversely affected if the mortgage servicer is unable to adequately service the underlyingmortgage loans due to:its failure to comply with applicable laws and regulation;its failure to perform its loss mitigation o
147、bligations;a downgrade in its servicer rating;its failure to perform adequately in its external audits;a failure in or poor performance of its operational systems or infrastructure;regulatory scrutiny regarding foreclosure processes lengthening foreclosure timelines;the transfer of servicing to anot
148、her party;orany other reason.MSRs are subject to numerous federal,state and local laws and regulations and may be subject to various judicial andadministrative decisions imposing various requirements and restrictions on the servicers business.If Freedom Mortgage or anyother mortgage servicer that we
149、 may use actually or allegedly failed to comply with applicable laws,rules or regulations,themortgagor servicer could be exposed to fines,penalties or other costs,or the mortgage servicer could be terminated as the servicerand the MSRs to which our Excess MSRs relate would be eliminated and lose all
150、 value,which could have a material adverse effecton the associated Excess MSR,our business,financial condition,results of operations or cash flows.If these laws,regulations anddecisions change,we could be exposed to similar fines,penalties or costs.In addition,a bankruptcy by any mortgage servicer t
151、hat services the mortgage loans for us could result in:the validity and priority of our ownership of the Excess MSRs being challenged in a bankruptcy proceeding;payments made by such mortgage servicer to us,or obligations incurred by it,being voided by a court under federal orstate preference laws o
152、r federal or state fraudulent conveyance laws;a re-characterization of any sale of the Excess MSRs or other assets to us by such mortgage servicer as a pledge of suchassets in a bankruptcy proceeding;orany agreement between us and the mortgage servicer being rejected in a bankruptcy proceeding.Any o
153、f the foregoing events could have a material and adverse effect on us.Governmental investigations or examinations,or private lawsuits,including purported class action lawsuits,involving FreedomMortgage could have a material adverse effect on Freedom Mortgage and its ability to perform its obligation
154、s under ourstrategic alliance agreements.Freedom Mortgage is routinely involved in legal proceedings concerning matters that arise in the ordinary course of itsbusiness.An adverse result in governmental investigations or examinations,or private lawsuits,including purported class actionlawsuits,could
155、 have a material adverse effect on Freedom Mortgages financial results.These legal proceedings can range fromprivate actions involving a single plaintiff to class action lawsuits with potentially thousands of class members.Participants in themortgage industry,including Freedom Mortgage,are also rout
156、inely subject to government investigations and inquiries.An adverseresult in governmental investigations or examinations,or private lawsuits,including purported class action lawsuits,could7TABLE OF CONTENTShave a material adverse effect on Freedom Mortgages financial results.Litigation and other pro
157、ceedings may require that FreedomMortgage pay settlement costs,legal fees,damages,penalties or other charges,which could adversely affect its financial results.Inparticular,ongoing and other legal proceedings brought under state consumer protection statutes may result in a separate fine foreach viol
158、ation of the statute,which,particularly in the case of class action lawsuits,could result in damages substantially in excessof the amounts earned from the underlying activities and that could have a material adverse effect on Freedom Mortgagesliquidity and financial position.Freedom Mortgage has inf
159、ormed us that,in February 2013,it received a subpoena from the Office of the Inspector General forthe U.S.Department of Housing and Urban Development,or the HUD OIG,in which the HUD OIG requested that FreedomMortgage provide the HUD OIG with documents and records concerning Freedom Mortgages quality
160、 control and training policiesand procedures relating to its FHA mortgage loan origination activities.The HUD OIG acts under the oversight of the U.S.Department of Justice.It is our understanding that several other FHA approved mortgage originators have received similar requests.Freedom Mortgage has
161、 informed us that it has cooperated fully with the investigation of the HUD OIG.Freedom Mortgage hasfurther informed us that there is a pending settlement by and between Freedom Mortgage and the U.S.Department of Justiceregarding claims arising under the False Claims Act.The settlement is expected t
162、o be between$100 and$120 million and isexpected to involve a down payment in the approximate amount of$26 million with the balance to be paid in 48 monthlyinstallments thereafter.Freedom Mortgage does not expect the settlement to have a material adverse effect on it.FreedomMortgage expects the settl
163、ement agreement to be concluded in early second quarter.However,we are not a party to thesenegotiations or proceedings,and we cannot assure you that the settlement will be concluded on the anticipated terms,within theexpected time period or at all.Our ability to invest in,and dispose of,our investme
164、nts in Servicing Related Assets may be subject to the receipt of third-partyconsents.The Agencies may require that we submit ourselves to costly or burdensome conditions as a prerequisite to their consent toour investments in Servicing Related Assets.These conditions may diminish or eliminate the in
165、vestment potential of certain ofthose assets by making such investments too expensive for us or by severely limiting the potential returns available or otherwiseimposing unacceptable conditions.The potential costs,issues or restrictions associated with receiving such Agencys consent forany such disp
166、ositions by us cannot be determined with any certainty.For example,it remains unclear as to whether the Companywill be able to obtain the consent of Ginnie Mae to the change in control of Aurora which precludes us from servicing mortgageloans that have been securitized through Ginnie Mae.To the exte
167、nt we are unable to acquire or dispose of Servicing Related Assetswhen we determine it would be beneficial to do so,our results of operations may be adversely impacted.Acknowledgement agreements with Ginnie Mae,Fannie Mae or Freddie Mac could expose us to potential liability in the eventof a payment
168、 default.We have entered into an acknowledgement agreement with Ginnie Mae and Freedom Mortgage in connection with theacquisition of our initial portfolio of Excess MSRs.Under that agreement,if Freedom Mortgage,the Ginnie Mae-approved issuerand servicer,fails to make a required payment to the holder
169、s of the Ginnie Mae-guaranteed RMBS,we would be obligated to makethat payment even though the payment may relate to loans for which we do not own any Excess MSRs.Our failure to make that payment could result in liability to Ginnie Mae for any losses or claims that it suffers as a result.Inaddition,i
170、f we enter into an acknowledgment agreement with Fannie Mae or Freddie Mac,we could be exposed to potentialliability in the event of a payment default by an approved seller/servicer.However,the amount of the potential liability to FannieMae or Freddie Mac would be limited to the mortgage loans in th
171、e servicing portfolio identified in the acknowledgmentagreement.Given the size of Freedom Mortgages portfolio of FHA and VA loans that have been pooled into Ginnie Mae-guaranteedRMBS,it is unlikely that we would be able to satisfy that obligation under the acknowledgment agreement should FreedomMort
172、gage fail to make a required payment.In that case we would be subject to claims for losses by Ginnie Mae which would have amaterial and adverse effect on our financial condition and operations.Furthermore,our ability to enter into acknowledgementagreements in the future and to acquire8TABLE OF CONTE
173、NTSExcess MSRs related to FHA and VA mortgage loans could be adversely affected.The only remedy related to the servicingpermitted under the acknowledgment agreement is to request Ginnie Mae to transfer the servicing to another Ginnie Mae-approvedissuer/servicer which would terminate our interest in
174、the related Excess MSRs.The termination of our Excess MSRs could have amaterial adverse effect on our financial condition,results of operations and ability to make distributions to our stockholders.Any lenders providing MSR financing to Aurora will likely require Aurora to enter into an acknowledgem
175、ent agreement withFannie Mae or Freddie Mac,as applicable,that may impose significant additional obligations on the Company.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 intere
176、st rates.The value of Servicing 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 h
177、edgingstrategies to seek 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 aff
178、ect us.To the extent we 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 int
179、erest rates change.If delinquencies 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 wil
180、l only collect servicing 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 estimated fair value of
181、the Servicing RelatedAssets 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 foreclosur
182、es)occur on mortgage loans 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 mortgages whenprevailing mortgage rates fall below the interest rates on their mo
183、rtgage loans.If borrowers prepay their mortgage loans at rates thatare faster or slower than expected,it may adversely affect our profitability.We record our Servicing Related Assets on our balance sheet at fair value,and changes in their fair value is reflected in ourconsolidated results of operati
184、ons.The determination of the 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 fl
185、ows from the Servicing Related 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 suc
186、h assetsas may be reflected 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 regardin
187、g prepayment rates or the other factors examined in determining fair value could cause the fair valueof our Servicing Related Assets to materially vary,which could have a material adverse effect on our financial position,results ofoperations and cash flows.If the fair value of our Servicing Related
188、Assets decreases,we would be required to record a non-cashcharge,which would have a negative impact on our financial results.Furthermore,a significant increase in prepayment speedscould materially reduce the ultimate cash flows we receive from the Servicing Related Assets,and we could ultimately rec
189、eivesubstantially less than what we paid for such assets.Voluntary prepayment rates generally increase when interest rates fall and decrease when interest rates rise,but changes inprepayment rates are difficult to predict.Prepayments can also occur when borrowers sell the9TABLE OF CONTENTSproperty a
190、nd use the sale proceeds to prepay the mortgage as part of a physical relocation or when borrowers default on theirmortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property.Fannie Mae and Freddie Mac willgenerally,among other conditions,purchase mortgages that a
191、re 120 days or more delinquent from mortgage-backed securitiestrusts when the cost of guaranteed payments to security holders,including advances of interest at the security coupon rate,exceedsthe cost of holding the nonperforming loans in their portfolios.Ginnie Mae provides the issuer the option to
192、 buy 90 days or moredelinquent loans 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 delinquencies on
193、mortgage loans.Additionally,changes in the government-sponsored entities decisions as to when torepurchase delinquent loans can materially impact prepayment rates.With respect to our Excess MSRs,voluntary and involuntary prepayments eliminate the Excess MSR on the mortgage loansbeing prepaid.In rece
194、nt years,Freedom Mortgage has experienced relatively high levels of recapture on voluntary prepayments.There can be no assurance that Freedom Mortgage will continue to successfully enjoy the levels of recapture it has historically had,particularly as interest rate environments change.In addition,alt
195、hough we expect Freedom Mortgage to replace the Excess MSRson loans in the pools that are refinanced by Freedom Mortgage,there can be no assurance that Freedom Mortgage will enter intorecapture agreements with us in the future or that it will be successful in replacing any Excess MSRs,which would ne
196、gativelyimpact our cash flows.When we purchase Excess MSRs,we base the price we pay and the rate of amortization of those assets on,among other things,our projection of the cash flows from the pool of mortgage loans underlying the related MSRs.Ourexpectation of prepayment speeds and recapture rates
197、is a significant assumption factored into our cash flow projections,and ifprepayment speeds are significantly greater than expected or recapture rates significantly lower than expected,the carrying valueof our Excess MSRs would change.Interest rate mismatches between our assets and any borrowings us
198、ed to fund purchases of our assets may reduce our incomeduring periods of changing 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
199、 changes in a short-term interest rate index.Although the interest we would earn 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 rateadjust
200、ments will generally be subject to interest rate caps,which potentially could cause 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 wi
201、ll be an interest rate mismatch between our assets and liabilities.Although wehedge 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 bu
202、siness,financial condition andresults of operations and ability to make distributions 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 interes
203、t rates(a flattening of the yield curve),our borrowing costs may increase more rapidly 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
204、 decrease our net income and the market value of our assets.Additionally,to the extent cash flows from RMBS are reinvested in new RMBS,the 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
205、foregoingrisks could materially adversely affect our business,financial condition 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
206、interest income and we could incur operating losses.We cannot predict the impact 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
207、our business.The U.S.Federal Reserve is a major participantin,and its actions significantly impact,the residential mortgage market.For example,quantitative easing,a program implementedby the U.S.Federal Reserve to keep long-term interest rates low and10TABLE OF CONTENTSstimulate the U.S.economy,has
208、had the effect of reducing the difference between short-term and long-term interest rates.As a resultof the reduction in long-term interest rates,prepayment speeds increased.Its purchases of Agency RMBS have resulted in anarrowing of the spread earned by Agency RMBS investors.While the U.S.Federal R
209、eserve has discontinued quantitative easing,the effects on the Agency RMBS market have not completely dissipated as it continues to re-invest paydowns of their holdings inAgency RMBS.We cannot predict or control the impact future actions by regulators or U.S.government bodies such as the U.S.Federal
210、 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 and adverse effect on our business,financial condition and results of operations and ourability to pay distributions to our stockholders.Intere
211、st 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 caps limit theamount an interest rate can increase d
212、uring 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 period of rapidly increasing interest rates,our financin
213、g 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 rate caps prevent the coupon on the securityfrom fully
214、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 cashincome on RMBS backed by ARMs and hybrid ARMs than nece
215、ssary 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 our business,financial condition and results of operati
216、ons 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 assumptions and the results may differ significantly from actua
217、l 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 management activities.Ifthese models and data prove to be in
218、correct,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 to purchase certain assets at prices that are too hig
219、h,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 mortgage default models,may be predictive in nature.The use
220、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 market participants,with the result that valuations based
221、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 such models may depend heavily on the accuracy and re
222、liability 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 employ greater degrees of extrapolation,and are there
223、foremore 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 market data is input correctly,“model prices”will often
224、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 prices,our business,financial condition and results
225、of operations and our ability to make distributions to our stockholders could be materiallyadversely affected.11TABLE OF CONTENTSValuations of some of our assets will be inherently uncertain,may be based on estimates,may fluctuate over short periods of timeand may differ from the values that would h
226、ave 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 such valuations may differ from those provided by thir
227、d-partydealers and pricing services.Valuations of certain assets are often difficult to obtain or unreliable.In general,dealers and pricingservices heavily disclaim their valuations.Additionally,dealers generally claim to furnish valuations only as an accommodationand without special compensation,an
228、d so they disclaim any and all liability for any direct,incidental or consequential damagesarising out of any inaccuracy or incompleteness in valuations,including any act of negligence or breach of any warranty.Depending on the complexity and illiquidity of an asset,valuations of the same asset can
229、vary substantially from one dealer orpricing service to another.The valuation process has been particularly difficult recently because market events have madevaluations of certain assets unpredictable,and the disparity of valuations provided by third-party dealers has widened.Ourbusiness,financial c
230、ondition and results of operations and our ability to make distributions to our stockholders could be materiallyadversely affected if our fair value determinations of these assets are materially higher than actual market values.An increase in interest rates may cause a decrease in the volume of cert
231、ain of our target assets,which could adversely affect 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 thevo
232、lume of mortgage loans originated may affect the volume 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 provi
233、de yields that are below prevailing market interest 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 coul
234、d be materially adversely affected.The lack of liquidity of our assets may adversely affect our business,including our ability to sell our assets.Excess MSRs are highly illiquid and subject to numerous restrictions on transfers.The duties and obligations of mortgageservicers are defined through cont
235、ractual agreements.These contracts generally require that holders of Excess MSRs obtainconsent from the servicer,and may require third party consent,prior to any change of ownership of such Excess MSRs.Suchapproval may be withheld for any reason or no reason in the discretion of the third party.Addi
236、tionally,investments in ExcessMSRs are a relatively recent type of transaction,and there have been extremely few investment products that pursue a similarinvestment strategy.Accordingly,the risks associated with the transaction and structure are not fully known to buyers or sellers.Asa result of the
237、 foregoing,there is a significant risk that we will be unable to locate a buyer if we wish to sell an Excess MSR.Therefore,we cannot provide any assurance that we will obtain any return or any benefit of any kind from any disposition ofExcess MSRs.In addition,mortgage-related assets generally experi
238、ence periods of illiquidity,including the period of delinquencies anddefaults with respect to residential and commercial mortgage loans during the financial crisis.In addition,validating third-partypricing for illiquid assets may be more subjective than with respect to more liquid assets.Any illiqui
239、dity of our assets makes itdifficult for us to sell such assets if the need or desire arises.In addition,if we are required to liquidate all or a portion of ourportfolio quickly,we may realize significantly less than the value at which we previously recorded our assets.We may also faceother restrict
240、ions on our ability to liquidate any assets for which we or our Manager has or could be attributed with material non-public information.If we are unable to sell our assets at favorable prices or at all,it could materially adversely affect our business,financial condition and results of operations an
241、d our ability to make distributions to our stockholders.Assets that are illiquid aremore difficult to finance,and to the extent that we use leverage to finance assets that become illiquid we may lose that leverage orhave it reduced.Assets tend to become less liquid during times of financial stress,w
242、hich is often the time that liquidity is mostneeded.As a result,our ability to sell assets or vary our portfolio in response to changes in economic and other conditions may belimited by liquidity constraints,which could adversely affect our results of operations and financial condition.12TABLE OF CO
243、NTENTSWe 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 finance our investments in certain of
244、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 a term loan and in the future,may include other credit facilities.Through the use of lev
245、erage,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 assets,the amount of leverage we may em
246、ploy 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 approval by our board of directors,toc
247、hange 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,however,be limited or restricted in the am
248、ount 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.Our ability to achieve our investment and leverage objectives depends on our ability to borrow m
249、oney 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 terms.In addition,we must be able torenew or replace our ma
250、turing 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 materially adversely affected the RMBS market.These mark
251、et disruptions have been most pronounced in the non-AgencyRMBS market,and 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 increase our financing costs and reduce our liquidity.Inaddi
252、tion,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.Leverage increases our returns as long as we earn a greaterre
253、turn 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 theasset fails to earn a return that equals or exceeds
254、 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,we might not be able to liquidate assets quickly enough
255、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 cash flow available fordistribution to stockholders.We ma
256、y 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 liquidate qualifying real estate assets to repay debts,our com
257、pliance 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 applicable state and localtaxes)on all of our income an
258、d 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 collateral requirements,we might be compelled to liquidate par
259、ticular 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 types of our target assets,might reduce the market value
260、 of ourportfolio,which generally will cause our lenders to initiate margin calls.A margin13TABLE OF CONTENTScall means that the lender requires us to pledge cash as additional collateral to re-establish the ratio of the value of the collateral tothe amount of the borrowing.If we are unable to satisf
261、y margin calls,our lenders may foreclose on our collateral.The liquidation ofcollateral may jeopardize our ability to qualify as a REIT.Our failure to qualify as a REIT would cause us to be subject to U.S.federal income tax(and any applicable state and local taxes)on all of our income and decrease p
262、rofitability and cash available fordistribution 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 bankruptcy filing.Our borrowings under master
263、 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 transactions without delay if we file fo
264、r 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 pledged assets to risk in the event
265、 of abankruptcy filing by either our lenders or us.If our lenders default on their obligations to resell the RMBS back to us at the end of the repurchase transaction term,the valueof the RMBS has declined by the end of the repurchase transaction term or we default on our obligations under the repurc
266、hasetransaction,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 repurchase transaction,we initially sell securities to the fin
267、ancial 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 when we initially sell the securities is less than the v
268、alue 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 us,we would incur a loss onthe transaction equal to the
269、amount of the haircut(assuming there was no change in the value of the securities).See“Item 7.Managements Discusssion and AnalysisLiquidity and Capital Resources”for information regarding borrowings under theCompanys repurchase agreements.If we default on one of our obligations under a repurchase tr
270、ansaction,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 agreements with other counterparties.In that case,there is no assurance we would be able to establish a
271、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 operations and our ability to make distributions to our stockholders.Subject to maintaining our qualificatio
272、n 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 activity varies inscope based on the level and volatility of interest rates,the types of liabilities and as
273、sets 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 during periods of rising and volatile interest rates;available interest rate hedges may not correspond d
274、irectly 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 transactions do not satisfy certain provisions of the Code,and are not made through a TRS,theamount of incom
275、e 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 from time to time in accordance with accounting rules toreflect changes in fair value.Downward adjustments
276、 or“mark-to-market losses,”would reduce our stockholders equity;14TABLE OF CONTENTSthe credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that itimpairs our ability to sell or assign our side of the hedging transaction;andthe hedging counterparty
277、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 available for distribution to our stockholders.Changes in regulations relating to swaps activi
278、ties 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 may depend on compliance with applicable statutory andcommodity and other regulatory re
279、quirements 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 derivative contracts.Any actions taken by regulators could constrain our strategy and co
280、uld 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 Dodd-Frank Act requires most derivatives to be executed on a regulated marketand cleared t
281、hrough a central counterparty,which has resulted in increased margin requirements and costs.On December 7,2012,the CFTC issued a no-action letter that provides mortgage REITs relief from such registration,or the MREIT No-Action Letter,ifthey meet certain conditions and submit a claim for such no-act
282、ion relief.We believe we meet the conditions set forth in theMREIT No-Action Letter and we have filed our claim with the CFTC to perfect the use of the no-action relief from registration.However,if in the future we do not meet the conditions set forth in the MREIT No-Action Letter or the relief prov
283、ided by theMREIT 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 operator”with the CFTC.If we are required to register with theCFTC as a commodity pool operator,we would b
284、ecome subject to additional disclosure,recordkeeping and reportingrequirements,which may increase the expenses or otherwise limit our ability to conduct our business as contemplated.We may change our investment strategy,investment guidelines and asset allocation without notice or stockholder consent
285、,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 stockholders.Our board of directors has the authority to change our investment strategy or asset allocat
286、ion 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 riskier than,the investments described in this Annual Report and the other documents we file with theSEC from
287、 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 investments,which could result in gains or losses and thereforeincrease our earnings volatility.Decisions to emp
288、loy additional leverage in executing our investment strategies could increase therisk inherent in our asset acquisition strategy.Furthermore,a change in our asset allocation could result in our allocating assets in adifferent manner than as described in this Annual Report.In addition,our charter pro
289、vides 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 interests to qualify as a REIT.These changes could adversely affect our financial condition,results of opera
290、tions,the market value of our common stock,and ourability to make distributions to our stockholders.We operate in a highly competitive market.Our profitability depends,in large part,on our ability to acquire targeted assets at favorable prices.We compete with a numberof entities when acquiring our t
291、argeted assets,including other mortgage REITs,financial companies,public and private funds,commercial and investment banks and residential and commercial finance companies.We may also compete with the U.S.FederalReserve and the U.S.Treasury to the extent they purchase assets in our targeted asset cl
292、asses.Many of our competitors aresubstantially larger and have considerably greater access to capital and other resources than we do.Furthermore,new companieswith significant amounts of capital have recently been formed or have raised additional capital,and may continue to15TABLE OF CONTENTSbe forme
293、d and raise additional capital in the future,and these companies may have objectives that overlap with ours,which maycreate competition for assets we wish to acquire.Some competitors may have a lower cost of funds and access to funding sourcesthat are not available to us.In addition,some of our comp
294、etitors may have higher risk tolerances or different risk assessments,which could allow them to consider a wider variety of assets to acquire and establish more relationships than us.We also may havedifferent operating constraints from those of our competitors including,among others,(i)tax-driven co
295、nstraints such as thosearising from our qualification as a REIT,(ii)restraints imposed on us by our efforts to comply with certain exclusions orexemptions from the definition of an“investment company”and(iii)restraints and additional costs arising from our status as apublic company.Furthermore,compe
296、tition for assets in our targeted asset classes may lead to the price of such assets increasing,which may further limit our ability to generate desired returns.We cannot assure you that the competitive pressures we face will nothave a material adverse effect on our business,financial condition and r
297、esults 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 distributions at a fixed rate or at all under certain circumstances.We intend to continue to make distribu
298、tions to our stockholders in amounts such that we distribute all or substantially all ofour REIT taxable income in each year(subject to certain adjustments).This distribution policy will enable us to avoid beingsubject to U.S.federal income tax on our taxable income that we distribute to our stockho
299、lders.However,our ability to makedistributions will depend on our earnings,applicable law,our financial condition and such other factors as our board of directorsmay deem relevant from time to time.We will declare and make distributions to our stockholders only to the extent approved byour board of
300、directors.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 Agency RMBS,whole mortgage loans generally are not guaranteed by the U.S.Governm
301、ent 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 CMOs.A whole mortgage loan is directlyexposed to losses resulting from defau
302、lt.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.In theevent of a foreclosure,we may assume direct ownership of the underlying real estate.
303、The liquidation proceeds upon sale of suchreal 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 mortgage loans are also subject to“special hazard”risk(property damage caused by hazar
304、ds,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 against us on account of our position as a mortgageholder or property owner,inclu
305、ding 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 price of therelated mortgage or property.Risks Related to our Relationship with ou
306、r 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 has limited experience operating a REIT.The REIT provisions of the Code are complex
307、,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 incur a loss.Our Manager has limited experience operating a public company or comp
308、lying 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 public company orcomplying with regulatory requirements,including the Sarbanes-O
309、xley Act.Our Managers16TABLE OF CONTENTSinexperience may hinder our Managers ability to achieve our objectives and we cannot assure you that we will be able tosuccessfully execute our business strategies as a public company,or comply with regulatory requirements applicable to publiccompanies.We are
310、dependent on our Manager and certain key personnel of Freedom Mortgage that are or will be provided to us throughour Manager and may not find a suitable replacement if our Manager terminates the management agreement or such keypersonnel are no longer available to us.We do not have any employees of o
311、ur own other than three employees of Aurora.Our officers are employees of FreedomMortgage.We have no separate facilities and are completely reliant on our Manager,which has significant discretion as to theimplementation of our operating policies and execution of our business strategies and risk mana
312、gement practices.We also dependon our Managers access to the professionals and principals of Freedom Mortgage as well as information and deal flow generatedby Freedom Mortgage.The employees of Freedom Mortgage identify,evaluate,negotiate,structure,close and monitor ourportfolio.The departure of Mess
313、rs.Middleman,Lown or Levine or other senior officers of our Manager,or of a significant numberof investment professionals or principals of Freedom Mortgage,could have a material adverse effect on our ability to achieve ourobjectives.We can offer no assurance that our Manager will remain our manager
314、or that we will continue to have access to our Managerssenior management.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 n
315、osuitable replacement will be found to manage us.If our management agreement is terminated and no suitable replacement is found to manage us or we are unable to find asuitable replacement on a timely basis,we may not be able to continue to execute our business strategy.No assurances can begiven that
316、 our Manager will act in our best interests with respect to the allocation of personnel,services and resources to ourbusiness.The failure of any of the key personnel of our Manager to service our business with the requisite time and dedicationcould materially and adversely affect our ability to exec
317、ute our business plan.The management fee payable 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 substa
318、ntial,based on our stockholders equity(as defined 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 partnersh
319、ip.OurManagers entitlement to non-performance-based compensation might reduce its incentive to devote the time and effort of itsprofessionals and Freedom Mortgages professionals to seeking profitable opportunities for our portfolio,which could result in alower performance of our portfolio and materi
320、ally adversely affect our business,financial condition and results of operations.Our Managers investment guidelines are very broad,and our board of directors will not approve each decision made by ourManager to acquire,dispose of,or otherwise manage an asset.Our Manager is authorized to follow very
321、broad guidelines in pursuing our strategy.Our board of directors will periodicallyreview our 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
322、 of directors will relyprimarily on information provided to it by our Manager.Furthermore,our 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
323、 great latitude within the broad guidelines in determining the types of assets it may decide 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
324、 business,financial condition and results of operations and ourability to make distributions to our stockholders.17TABLE OF CONTENTSThere 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
325、stockholders.Our Manager is an affiliate of Freedom Mortgage.Both our Manager and Freedom Mortgage are wholly owned and controlledby Mr.Middleman.We are dependent on our Manager for our day-to-day management and operations.Various potential and actual conflicts ofinterest may arise from the activiti
326、es of Freedom Mortgage and its affiliates by virtue of the fact that our Manager is controlled byMr.Middleman.Our executive officers and the officers of our Manager are also officers or employees of Freedom Mortgage and,with the exception of those officers that are dedicated to us,we compete with Fr
327、eedom Mortgage for access to those individuals.The ability of our Managers officers and personnel,with the exception of those officers that are dedicated to us,to engage in otherbusiness activities,including the management of Freedom Mortgage,may reduce the time our Manager and certain of its office
328、rsand personnel spend managing us.Our management agreement with our Manager and our other agreements with Freedom Mortgage that were executed inconnection with our initial public offering were negotiated between related parties and their respective terms,may not be asfavorable to us as if they were
329、negotiated on an arms-length basis with unaffiliated third parties.Furthermore,we may choose notto enforce,or to enforce less vigorously,our rights under such agreements because of our desire to maintain our ongoingrelationships with Freedom Mortgage and our Manager.In the future,Freedom Mortgage ma
330、y sponsor other vehicles that invest inExcess MSR or prime loans or other investments,and there may be situations where we compete with affiliates of FreedomMortgage for opportunities to acquire Excess MSR or prime mortgage loans or other assets.Freedom Mortgage is a separate anddistinct company wit
331、h its own business interests and will be under no obligation to maintain its current business strategy.To theextent we seek to leverage Freedom Mortgages relationships with third parties to generate future investment opportunities,Freedom Mortgage will be under no obligation to co-invest with us in
332、the future or assist us in generating such opportunities.Freedom Mortgage will be under no obligation,under the terms of the strategic alliance agreement or otherwise,to offer primeloans or other assets other than Excess MSRs and Freedom Mortgage may offer those assets to third parties without offer
333、ing suchassets to us.In addition,there may be conflicts of interest inherent in our relationship with our Manager and its affiliates to the extentFreedom Mortgage or our Manager invests in or creates new vehicles to invest in Excess MSRs or other assets in which we mayinvest or whose investment objectives overlap with our investment objectives.Certain investments appropriate for us may also beappr
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