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TWO HARBORS INVESTMENT CORP.

TWO HARBORS INVESTMENT CORP.TWO決算レポート

NYSE · 金融 · 不動産投資信託

Clean Harbors, Inc., headquartered in Norwell, Massachusetts, is a provider of waste management and industrial services for commercial customers, specializing in the collection, transportation, treatment and disposal of hazardous waste, but also offering services for non-hazardous waste. The company has 870 operating locations in 630 properties in the U.S. and Canada including a network of over 100 waste disposal facilities such as incinerators, landfills, treatment, storage and disposal faci...

What changed in TWO HARBORS INVESTMENT CORP.'s 10-K — 2022 vs 2023

Top changes in TWO HARBORS INVESTMENT CORP.'s 2023 10-K

355 paragraphs added · 358 removed · 261 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

43 edited+23 added−22 removed51 unchanged
We intend to achieve this objective by constructing a well-balanced portfolio consisting of Agency RMBS, MSR and other financial assets, with a focus on managing various associated risks, including interest rate, prepayment, credit, mortgage spread and financing risk. The preservation of book value is of paramount importance to our ability to generate total return on an ongoing basis.
We intend to achieve this objective by constructing a well-balanced portfolio consisting of MSR, Agency RMBS, and other financial assets, with a focus on managing various associated risks, including interest rate, prepayment, credit, mortgage spread and financing risk. The preservation of book value is of paramount importance to our ability to generate total return on an ongoing basis.
Any business conducted through our subsidiaries will be conducted in such a manner as to ensure that we do not meet the definition of “investment company” because less than 40% of the value of our total assets on an unconsolidated basis would consist of “investment securities.” To avoid registration as an investment company, certain of our subsidiaries rely on certain exemptions from the 1940 Act, including Section 3(c)(5)(C), which exempts entities that are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Under the SEC staff’s current guidance, to qualify for this exemption, we must maintain (i) at least 55% of our assets in qualifying interests (referred to as the 55% Test) and (ii) at least 80% of our assets in qualifying interest plus other real estate related assets (referred to as the 80% Test).
Any business conducted through our subsidiaries will be conducted in such a manner as to ensure that we do not meet the definition of “investment company” because less than 40% of the value of our total assets on an unconsolidated basis would consist of “investment securities.” To avoid registration as an investment company, certain of our subsidiaries rely on certain exemptions from the 1940 Act, including Section 3(c)(5)(C), which exempts entities that are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Under the SEC staff’s current guidance, to qualify for this exemption, we must maintain (i) at least 55% of our assets in qualifying interests (referred to as the 55% Test) and (ii) at least 80% of our assets in qualifying interests plus other real estate related assets (referred to as the 80% Test).
This particularly applies to borrowing agreements with maturities or interest rate resets of less than six months. Typically, the interest receivable terms ( i.e. , LIBOR, OIS or SOFR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related borrowing agreement from floating to fixed.
This particularly applies to borrowing agreements with maturities or interest rate resets of less than six months. Typically, the interest receivable terms ( i.e. , OIS or SOFR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related borrowing agreement from floating to fixed.
Other assets may include financial and mortgage-related assets other than our target assets, including non-Agency securities (securities that are not issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac) and certain non-hedging transactions that may produce non-qualifying income for purposes of the REIT gross income tests.
Other assets may include financial and mortgage-related assets other than our target assets, including non-Agency securities (securities that are not issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac), other Agency securities and certain non-hedging transactions that may produce non-qualifying income for purposes of REIT gross income tests.
We have implemented and will continue to implement policies, procedures and, as applicable, information technology systems in order to ensure ongoing compliance with the laws, rules and regulations applicable to our business. We have incurred and expect to incur ongoing operational costs to comply with such laws, rules and regulations.
We have implemented and will continue to implement policies, procedures and, as applicable, information technology systems in order to ensure ongoing compliance with the laws, rules and regulations applicable to our business. We have incurred and expect to incur significant ongoing operational costs to comply with such laws, rules and regulations.
Our MSR business leverages our core competencies in prepayment and credit risk analytics and the MSR assets may provide offsetting risks to our Agency RMBS, hedging both interest rate and mortgage spread risk.
Our MSR business leverages our core competencies in prepayment and interest rate risk analytics and the MSR assets may provide offsetting risks to our Agency RMBS, hedging both interest rate and mortgage spread risk.
As the servicer of record, however, we remain accountable to the GSEs for all servicing matters and, accordingly, provide substantial oversight of each of our subservicers. We believe MSR are a natural fit for our portfolio over the long term.
As the servicer of record on our MSR portfolio, we remain accountable to the GSEs for all servicing matters and, accordingly, provide substantial oversight of each of our subservicers. We believe MSR are a natural fit for our portfolio over the long term.
We are committed to supporting the engagement and leadership of a diverse workforce, with over 50% in aggregate identifying as either female or racially/ethnically diverse and providing opportunities for collaboration, development and career growth.
We are committed to supporting the engagement and leadership of a diverse workforce, with over 60% in aggregate identifying as either female or racially/ethnically diverse, and providing opportunities for collaboration, development and career growth.
We conduct an annual pulse survey which provides valuable insights from employees on topics involving culture, diversity and inclusion, education, benefits and engagement, and pride ourselves on having a strong participation rate. We also offer a flexible work environment, providing employees the opportunity to balance their professional obligations with that of their personal. Charitable Partnerships.
We regularly conduct a pulse survey which provides valuable insights from employees on topics involving culture, diversity and inclusion, education, benefits and engagement, and pride ourselves on having a strong participation rate. We also offer a flexible work environment, providing employees the opportunity to balance their professional obligations with that of their personal. Charitable Partnerships.
In addition, we match dollar-for-dollar the cash donations made by our employees to our charitable partnerships. Operating and Regulatory Structure Our business is subject to extensive regulation by U.S. federal and state governmental authorities, and self-regulatory organizations. We are required to comply with numerous federal and state laws, including those described below.
In addition, we match dollar-for-dollar, up to a cap, the cash donations made by our employees to our charitable partnerships. Operating and Regulatory Structure Our business is subject to extensive regulation by U.S. federal and state governmental authorities, and self-regulatory organizations. We are required to comply with numerous federal and state laws, including those described below.
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income or property. 6 Table of Contents Investment Company Act of 1940 We conduct our operations so that we are not required to register as an investment company under the 1940 Act.
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income or property. Investment Company Act of 1940 We conduct our operations so that we are not required to register as an investment company under the 1940 Act.
It is our intention to select our assets in such a way as to maintain our REIT qualification and our exemption from registration under the 1940 Act. Our Target Assets Our portfolio includes assets that are primarily sensitive to changes in interest rates, prepayments and mortgage spreads, including but not limited to Agency RMBS, MSR and related hedging transactions.
It is our intention to select our assets in such a way as to maintain our REIT qualification and our exemption from registration under the 1940 Act. 1 Table of Contents Our Target Assets Our portfolio includes assets that are primarily sensitive to changes in interest rates, prepayments and mortgage spreads, including but not limited to Agency RMBS, MSR and related hedging transactions.
Our investment team makes investment decisions based on a rigorous asset selection process that takes into consideration a variety of factors, including expected cash yield, risk-adjusted returns, current and projected credit fundamentals, current and projected macroeconomic considerations, current and projected supply and demand, credit and market risk concentration limits, liquidity, cost of financing and financing availability.
We make investment decisions based on a rigorous asset selection process that takes into consideration a variety of factors, including expected cash yield, risk-adjusted returns, current and projected credit fundamentals, current and projected macroeconomic considerations, current and projected supply and demand, credit and market risk concentration limits, liquidity, cost of financing and financing availability.
Our Investment Guidelines Our board of directors has approved the following investment guidelines: • no investment shall be made that would cause us to fail to qualify as a REIT for U.S. federal income tax purposes; • no investment shall be made that would cause us to be regulated as an investment company under the 1940 Act; • we will primarily invest within our target assets, consisting primarily of Agency RMBS, non-Agency securities, residential mortgage loans, MSR and certain types of commercial real estate assets; approximately 5% to 10% of our portfolio may include other financial assets; and • until appropriate investments can be identified, we will invest available cash in interest-bearing and short-term investments that are consistent with (i) our intention to qualify as a REIT and (ii) our exemption from investment company status under the 1940 Act.
We have expertise in mortgage credit and may choose to invest again in those assets should the opportunity arise. 2 Table of Contents Our Investment Guidelines Our board of directors has approved the following investment guidelines: • no investment shall be made that would cause us to fail to qualify as a REIT for U.S. federal income tax purposes; • no investment shall be made that would cause us to be regulated as an investment company under the 1940 Act; • we will primarily invest within our target assets, consisting primarily of Agency RMBS, non-Agency securities, residential mortgage loans, MSR and certain types of commercial real estate assets; approximately 5% to 10% of our portfolio may include other financial assets; and • until appropriate investments can be identified, we will invest available cash in interest-bearing and short-term investments that are consistent with (i) our intention to qualify as a REIT and (ii) our exemption from investment company status under the 1940 Act.
The amount of leverage we deploy for particular investments in our target assets depends upon a variety of factors, including without limitation: general economic, political and financial market conditions; the anticipated liquidity and price volatility of our assets; the gap between the duration of assets and liabilities, including hedges; the availability and cost of financing our assets; our opinion of the credit worthiness of financing counterparties; the health of the U.S. residential mortgage and housing markets; our outlook for the level, slope and volatility of interest rates; the credit quality of the loans underlying our target assets; the rating assigned to securities; and our outlook for asset spreads relative to the London Interbank Offered Rate, or LIBOR, curve, the Secured Overnight Financing Rate, or SOFR, curve, the Overnight Index Swap Rate, or OIS, the U.S. federal funds rate, and other benchmark rate curves. 4 Table of Contents Our primary financing sources for Agency RMBS are repurchase agreements.
The amount of leverage we deploy for particular investments in our target assets depends upon a variety of factors, including without limitation: general economic, political and financial market conditions; the anticipated liquidity and price volatility of our assets; the gap between the duration of assets and liabilities, including hedges; the availability and cost of financing our assets; our opinion of the credit worthiness of financing counterparties; the health of the U.S. residential mortgage and housing markets; our outlook for the level, slope and volatility of interest rates; the credit quality of the loans underlying our target assets; the rating assigned to securities; and our outlook for asset spreads relative to the Secured Overnight Financing Rate, or SOFR, curve, the Overnight Index Swap Rate, or OIS, the U.S. federal funds rate, and other benchmark rate curves.
At December 31, 2022, we had $8.6 billion of outstanding balances under repurchase agreements with 20 counterparties, with a maximum net exposure (the difference between the amount loaned to us, including interest payable, and the value of the assets pledged by us as collateral, including accrued interest receivable on such assets) to any single lender of $158.3 million, or 7.2% of stockholders’ equity.
At December 31, 2023, we had $8.0 billion of outstanding balances under repurchase agreements with 19 counterparties, with a maximum net exposure (the difference between the amount loaned to us, including interest payable, and the value of the assets pledged by us as collateral, including accrued interest receivable on such assets) to any single lender of $67.2 million, or 3.1% of stockholders’ equity.
We believe that the diversification of our portfolio of assets and the flexibility of our strategy, combined with the expertise of our investment team, will enable us to achieve attractive risk-adjusted total return under a variety of market conditions and economic cycles.
We believe that the diversification of our portfolio of assets and the flexibility of our strategy, combined with the expertise of our investment team, will enable us to deliver stable performance under a variety of market conditions and economic cycles.
Our target asset classes are as follows: Agency RMBS Agency RMBS collateralized by fixed rate mortgage loans, adjustable-rate mortgage (or ARM) loans or hybrid mortgage loans, or derivatives thereof, including: • mortgage pass-through certificates; • collateralized mortgage obligations; • uniform mortgage-backed securities; • Freddie Mac gold certificates; • Fannie Mae certificates; • Ginnie Mae certificates; • “to-be-announced” forward contracts, or TBAs, which are pools of mortgages with specific investment terms to be issued by Ginnie Mae, Fannie Mae or Freddie Mac at a future date; and • interest-only and inverse interest-only securities.
Our target asset classes are as follows: Agency RMBS Agency RMBS, meaning RMBS whose principal and interest payments are guaranteed by a U.S. government agency, such as the Government National Mortgage Association (or Ginnie Mae), or a U.S. government sponsored enterprise, or GSE, such as the Federal National Mortgage Association (or Fannie Mae) or the Federal Home Loan Mortgage Corporation (or Freddie Mac), collateralized by fixed rate mortgage loans, adjustable-rate mortgage (or ARM) loans or hybrid mortgage loans, or derivatives thereof, including: • mortgage pass-through certificates; • collateralized mortgage obligations; • uniform mortgage-backed securities; • Freddie Mac gold certificates; • Fannie Mae certificates; • Ginnie Mae certificates; • “to-be-announced” forward contracts, or TBAs, which are pools of mortgages with specific investment terms to be issued by Ginnie Mae, Fannie Mae or Freddie Mac at a future date; and • interest-only and inverse interest-only securities.
These requirements can and do change as statutes and regulations are enacted, promulgated or amended, or as regulatory guidance or interpretations evolve or change, and the trend in recent years among federal and state lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings in relation to the mortgage industry generally.
These requirements can and do change as statutes and regulations are enacted, promulgated or amended, or as regulatory guidance or interpretations evolve or change, and the trend in recent years among federal and state lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings in relation to the mortgage industry generally. 6 Table of Contents The Dodd-Frank Act significantly changed the regulation of financial institutions and the financial services industry, including the mortgage industry.
We use market data to benchmark and guide our compensation practices to ensure that our compensation program is industry standard, competitive and rewarding, while at the same time aligning the interests of our employees with those of our stockholders. In addition to competitive wages and salaries, our compensation programs are designed to attract and retain talented professionals.
We use market data to benchmark and guide our compensation practices to ensure that our compensation program is industry standard, competitive and rewarding, while at the same time aligning the interests of our employees with those of our stockholders.
We are committed to attracting and retaining the industry’s top talent by providing competitive wages and benefits and cultivating a workplace environment in which all of our employees can thrive and contribute.
We are dedicated to providing human capital management best practices that evolve with the needs of our business and our people. We are committed to attracting and retaining the industry’s top talent by providing competitive wages and benefits and cultivating a workplace environment in which all of our employees can thrive and contribute.
The majority of these securities consist of whole pools in which we own all of the investment interests in the securities. 3 Table of Contents One of our wholly owned subsidiaries holds the requisite approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent a contractual right to control the servicing of a mortgage loan, the obligation to service the loan in accordance with relevant standards and the right to collect a fee for the performance of servicing activities, such as collecting principal and interest from a borrower and distributing those payments to the owner of the loan.
One of our wholly owned subsidiaries, Matrix Financial Services Corporation, or Matrix, holds the requisite approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent a contractual right to control the servicing of a mortgage loan, the obligation to service the loan in accordance with applicable laws and requirements and the right to collect a fee for the performance of servicing activities, such as collecting principal and interest from a borrower and distributing those payments to the owner of the loan.
Our overall package includes cash bonus and equity incentive compensation opportunities, a 401(k) plan and profit-sharing contribution, employer-paid health benefits, health savings and dependent care flexible spending accounts, generous paid time off, short- and long-term disability insurance, a variety of personal and family leave options, life-planning financial and legal resources, and other voluntary supplemental benefits. Professional Development .
Our overall package includes cash bonus and equity incentive compensation opportunities, a 401(k) plan and profit-sharing contribution, competitive health benefits, health savings accounts, generous paid time off, short- and long-term disability insurance, paid parental leave and various other leave options, life-planning, financial and legal resources, emotional well-being support and other voluntary supplemental benefits. Employee Development and Talent Management.
To finance MSR assets and related servicing advance obligations, we may enter into repurchase agreements, revolving credit facilities and securitization transactions collateralized by the value of the MSR and/or servicing advances pledged and with borrowing rates typically based on an index plus a spread consistent with those demanded in the market.
In the current economic climate, lenders under repurchase agreements generally advance approximately 95% to 97% of the market value of the Agency RMBS financed (a discount from market value, generally referred to as a haircut, of 3% to 5%). 3 Table of Contents To finance MSR assets and related servicing advance obligations, we may enter into repurchase agreements, revolving credit facilities and securitization transactions collateralized by the value of the MSR and/or servicing advances pledged and with borrowing rates typically based on an index plus a spread consistent with those demanded in the market.
These rules generally focus on consumer protection and include, among others, rules promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and the Gramm-Leach-Bliley Financial Modernization Act of 1999, or the Gramm-Leach-Bliley Act. We are also required to maintain qualifications, registrations and licenses in certain states in order to own certain of our assets.
These rules generally focus on consumer protection and include, among others, rules promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and the Gramm-Leach-Bliley Financial Modernization Act of 1999, or the Gramm-Leach-Bliley Act.
We promote a culture of health and well-being through employee assistance program services, comprehensive health care benefits and resources for preventative health, such as reduced-fee health club memberships.
We sponsor a number of programs and events that emphasize the health and well-being of our employees, including relational, financial, emotional and physical. We promote a culture of health and well-being through employee assistance program services, comprehensive health care benefits and resources for preventative health, such as reduced-fee health club memberships. Workplace Culture .
Our efforts to comply with the 55% Test and the 80% Test could require us to acquire or dispose of certain assets at unfavorable prices and limit our ability to pursue certain investment opportunities.
Our efforts to comply with the 55% Test and the 80% Test could require us to acquire or dispose of certain assets at unfavorable prices and limit our ability to pursue certain investment opportunities. Mortgage Industry Regulation As an owner of MSR and servicer of residential mortgage loans, we must comply with various federal and state laws, rules and regulations.
In addition, we established enhanced safety measures and precautions in both of our offices as recommended by the federal, state and our local agencies. Workplace Culture . We strive to foster a workplace culture where every individual on our team brings their unique perspectives, abilities and experiences which contribute to driving our organizational value.
We strive to foster a workplace culture where every individual on our team brings their unique perspectives, abilities and experiences which contribute to driving our organizational value.
As long as we continue to qualify as a REIT, we generally will not be subject to U.S. federal income tax on the REIT taxable income we distribute currently to our stockholders.
We have designated certain of our subsidiaries as TRSs to engage in such activities, and we may in the future form additional TRSs. 5 Table of Contents As long as we continue to qualify as a REIT, we generally will not be subject to U.S. federal income tax on the REIT taxable income we distribute currently to our stockholders.
We also operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act. Our team of investment professionals has broad experience in managing our target assets and has demonstrated the ability to generate attractive risk-adjusted returns under different market conditions and cycles.
We also operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act.
The CFPB has issued a series of rules and related guidance as part of ongoing efforts to enhance consumer protections and create uniform standards for the mortgage lending and servicing industries.
In addition to its rulemaking authority, the CFPB has supervision, examination and enforcement authority over consumer financial products and services by certain non-depository institutions, including our company. The CFPB has issued a series of rules and related guidance as part of ongoing efforts to enhance consumer protections and create uniform standards for the mortgage lending and servicing industries.
These rules have led to increased costs to originate and service loans across the mortgage industry, greater regulatory scrutiny of originators, servicers and other mortgage industry participants from federal and state regulators and increased litigation and complaints against these participants from both consumers and government officials. 7 Table of Contents The Gramm-Leach-Bliley Act imposes obligations on us to safeguard the information we maintain on mortgage loan borrowers and imposes restrictions on our ability to share that information with third parties and affiliates.
These rules have led to increased costs to originate and service loans across the mortgage industry, greater regulatory scrutiny of originators, servicers and other mortgage industry participants from federal and state regulators and increased litigation and complaints against these participants from both consumers and government officials.
The Dodd-Frank Act significantly changed the regulation of financial institutions and the financial services industry, including the mortgage industry. The Dodd-Frank Act tasked many agencies with issuing a variety of new regulations, including rules related to mortgage origination, mortgage servicing, securitization transactions and derivatives.
The Dodd-Frank Act tasked many agencies with issuing a variety of new regulations, including rules related to mortgage origination, mortgage servicing, securitization transactions and derivatives. The Dodd-Frank Act also created the Consumer Financial Protection Bureau, or the CFPB, which has broad rulemaking authority with respect to many of the federal consumer protection laws applicable to the mortgage industry.
We also make available, free of charge, the charters for our Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Risk Oversight Committee, as well as our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Whistleblowing Procedures and Stockholder Communications Policy.
The content of any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted. 7 Table of Contents We also make available, free of charge, the charters for our Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Risk Oversight Committee, as well as our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Whistleblowing Procedures and Stockholder Communications Policy.
Certain activities that we may perform may cause us to earn income that will not be qualifying income for REIT purposes. We have designated certain of our subsidiaries as TRSs to engage in such activities, and we may in the future form additional TRSs.
Certain activities that we may perform may cause us to earn income that will not be qualifying income for REIT purposes.
We operate as a real estate investment trust, or REIT, as defined under the Internal Revenue Code of 1986, as amended, or the Code. The terms “Two Harbors,” “we,” “our,” “us” and the “company” refer to Two Harbors Investment Corp. and its subsidiaries as a consolidated entity.
We are structured as an internally-managed real estate investment trust, or REIT, and our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “TWO”. The terms “Two Harbors,” “we,” “our,” “us” and the “company” refer to Two Harbors Investment Corp. and its subsidiaries as a consolidated entity.
MSR The right to control the servicing of residential mortgage loans, receive the servicing income therefrom and the obligation to service the loans in accordance with relevant standards; the actual servicing functions are outsourced to appropriately licensed third-party subservicers, which service the loans in their own names.
MSR The right to control the servicing of residential mortgage loans, receive the servicing income therefrom and the obligation to service the loans in accordance with applicable laws and requirements.
As of December 31, 2022, we had 97 full time equivalent employees based out of our two office locations in Minneapolis, Minnesota and New York, New York. 5 Table of Contents Compensation and Benefits.
As of December 31, 2023, we had 466 full time equivalent employees. We have four office locations in: Minneapolis, Minnesota; Fort Mill, South Carolina; Dallas, Texas; and New York, New York. Compensation and Benefits.
Our Exchange Act reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov . The content of any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
Our Exchange Act reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov .
We do not directly service the mortgage loans underlying the MSR we acquire; rather, we contract with appropriately licensed third-party subservicers to handle substantially all servicing functions in the name of the subservicer for the loans underlying our MSR.
We also contract with appropriately licensed third-party subservicers to handle servicing functions in the name of the subservicer for a portion of the loans underlying our MSR, although we expect our use of third-party subservicers will decline to minimal levels in 2024 as we continue to transfer the servicing of our MSR portfolio to RoundPoint.
An increase in the competition for sources of funding could adversely affect the availability and cost of financing, and thereby adversely affect our financial results. Available Information Our website can be found at www.twoharborsinvestment.com .
An increase in the competition for sources of funding could adversely affect the availability and cost of financing, and thereby adversely affect our financial results. As we grow our subservicing business, we will also compete with bank and non-bank servicers for third-party subservicing clients.
Item 1. Business Overview Two Harbors Investment Corp. is a Maryland corporation focused on investing in, financing and managing Agency residential mortgage-backed securities, or Agency RMBS, mortgage servicing rights, or MSR, and other financial assets, which we collectively refer to as our target assets.
Item 1. Business Overview Two Harbors Investment Corp. is a Maryland corporation founded in 2009 that invests in, finances and manages mortgage servicing rights, or MSR, Agency residential mortgage-backed securities, or Agency RMBS, and, through our operational platform, RoundPoint Mortgage Servicing LLC, or RoundPoint, is one of the largest servicers of conventional loans in the country.
We encourage the professional development of our people through regular leadership development training, talent management and tuition reimbursement programs. We also offer a wide variety of educational opportunities through our educational platforms, Two Harbors University and a learning management system. We encourage collaboration and teamwork to ensure mutual understanding of responsibilities, priorities and expectations.
We believe in attracting, developing and retaining the best talent through leadership development training, talent management, career planning and other development opportunities through our educational programming. Employees receive regular business and compliance training to reinforce our culture of compliance and further enhance their career development. We encourage collaboration and teamwork to ensure mutual understanding of responsibilities, priorities and expectations.
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We were incorporated on May 21, 2009 and commenced operations as a publicly traded company on October 28, 2009, upon completion of a merger with Capitol Acquisition Corp., or Capitol, which became our wholly owned indirect subsidiary as a result of the merger. Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “TWO”.
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We seek to leverage our core competencies of understanding and managing interest rate and prepayment risk to invest in our portfolio of MSR and Agency RMBS. Our objective is to deliver stable performance across changing market environments, and we are acutely focused on creating sustainable stockholder value over the long term.
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Our objective is to provide attractive risk-adjusted total return to our stockholders over the long term, primarily through dividends and secondarily through capital appreciation.
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Effective September 30, 2023, one of our wholly owned subsidiaries, Matrix Financial Services Corporation, or Matrix, acquired RoundPoint from Freedom Mortgage Corporation after the completion of customary closing conditions and receiving the required regulatory and GSE approvals. Upon closing, all servicing and origination licenses and operational capabilities remained with RoundPoint, and RoundPoint became a wholly owned subsidiary of Matrix.
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We acquire and manage an investment portfolio of our target assets, which include the following: • Agency RMBS, meaning RMBS whose principal and interest payments are guaranteed by a U.S. government agency, such as the Government National Mortgage Association (or Ginnie Mae), or a U.S. government sponsored enterprise, or GSE, such as the Federal National Mortgage Association (or Fannie Mae) or the Federal Home Loan Mortgage Corporation (or Freddie Mac); • MSR; and • Other financial assets comprising approximately 5% to 10% of the portfolio.
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Management believes this acquisition will add value for stakeholders of Two Harbors through cost savings achieved by bringing the servicing of our MSR portfolio in-house, greater control over our MSR portfolio and the associated cash flows, and the ability to participate more fully in the mortgage finance space as opportunities arise.
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We seek to deploy moderate leverage as part of our investment strategy. We generally finance our Agency RMBS through short- and long-term borrowings structured as repurchase agreements. We also finance our MSR through revolving credit facilities, repurchase agreements, term notes payable and convertible senior notes .
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Our Business Our Investment Strategy Our objective is to deliver stable performance across changing market environments, and we are acutely focused on creating sustainable stockholder value over the long term.
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We have extensive long-term relationships with financial intermediaries, including prime brokers, investment banks, broker-dealers and asset custodians. We believe these relationships enhance our ability to source, finance, protect and hedge our investments and, thus, enable us to succeed in various credit and interest rate environments. We also benefit from our risk management, accounting, operations, legal, compliance and information technology teams.
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The majority of these securities consist of whole pools in which we own all of the investment interests in the securities.
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On August 2, 2022, Matrix Financial Services Corporation, or Matrix, one of our wholly owned subsidiaries, entered into a definitive stock purchase agreement to acquire RoundPoint Mortgage Servicing Corporation, or RoundPoint, from Freedom Mortgage Corporation.
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We acquire MSR from high-quality originators through flow and bulk purchases. On October 1, 2023, we began directly servicing the majority of the mortgage loans underlying our MSR through our newly acquired subsidiary, RoundPoint.
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In connection with the acquisition, Matrix has agreed to pay a purchase price upon closing in an amount equal to the tangible net book value of RoundPoint, plus a premium amount of $10.5 million, subject to certain additional post-closing adjustments. In connection with the transaction, RoundPoint will divest its retail origination business as well as its RPX servicing exchange platform.
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Our primary financing sources for Agency RMBS are repurchase agreements.
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Matrix also agreed to engage RoundPoint as a subservicer prior to the closing date and began transferring loans to RoundPoint in the fourth quarter of 2022. Upon closing, all servicing licenses and operational capabilities will remain with RoundPoint, and RoundPoint will become a wholly owned subsidiary of Matrix.
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Servicing Operations As a result of our acquisition of RoundPoint, we began directly servicing a portion of the mortgage loans underlying our MSR assets as well as mortgage loans underlying MSR owned by third parties.
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The parties expect to close the transaction in 2023, subject to the satisfaction of customary closing conditions and the receipt of required regulatory and GSE approvals. 1 Table of Contents Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains, or incorporates by reference, not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, and that are subject to the safe harbors created by such sections.
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These servicing activities consist of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses, such as taxes and insurance, performing loss mitigation activities on behalf of investors and otherwise administering our mortgage loan servicing portfolio in compliance with applicable laws and requirements. Servicing Owned MSR .
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Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events.
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Where we own the right to service loans, we recognize the MSR assets in our consolidated financial statements. We primarily generate recurring revenue through contractual servicing fees and interest income on custodial deposits.
Removed
Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “target,” “believe,” “intend,” “seek,” “plan,” “goals,” “future,” “likely,” “may,” and similar expressions or their negative forms, or by references to strategy, plans, or intentions.
Added
As the MSR owner, we are obligated to make servicing advances to fund scheduled principal, interest, tax and insurance payments when the mortgage loan borrower has failed to make the scheduled payments and to cover foreclosure costs and various other items that are required to preserve the assets being serviced.
Removed
These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in this Annual Report on Form 10-K under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the Securities and Exchange Commission, or the SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Added
As the MSR owner, we also generally have the right to solicit our customers for refinance opportunities. Subservicing . We are a subservicer, which means we service loans on behalf of third party clients who own the underlying MSR.
Removed
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise any such forward-looking statements, whether as a result of new information, future events, or otherwise.
Added
Since we do not own the right to service those loans, we do not recognize an MSR asset for those loans in our consolidated financial statements.
Removed
Important factors, among others, that may affect our actual results include: • changes in interest rates and the market value of our target assets; • changes in prepayment rates of mortgages underlying our target assets; • the state of the credit markets and other general economic conditions, particularly as they affect the price of earning assets, the credit status of borrowers and home prices; • legislative and regulatory actions affecting our business; • the availability and cost of our target assets; • the availability and cost of financing for our target assets, including repurchase agreement financing, revolving credit facilities, term notes and convertible notes; • the impact of any increases in payment delinquencies and defaults on the mortgages comprising and underlying our target assets, including additional servicing costs and servicing advance obligations on the MSR assets we own; • changes in liquidity in the market for real estate securities, the re-pricing of credit risk in the capital markets, inaccurate ratings of securities by rating agencies, rating agency downgrades of securities, and increases in the supply of real estate securities available-for-sale; • changes in the values of securities we own and the impact of adjustments reflecting those changes on our consolidated statements of comprehensive loss and balance sheets, including our stockholders’ equity; • our ability to generate cash flow from our target assets; • our ability to effectively execute and realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue; • our ability to recognize the benefits of our pending acquisition of RoundPoint Mortgage Servicing Corporation; • our decision to terminate our Management Agreement with PRCM Advisers LLC and the ongoing litigation related to such termination; • changes in the competitive landscape within our industry, including changes that may affect our ability to attract and retain personnel; • our exposure to legal and regulatory claims, penalties or enforcement activities, including those arising from our ownership and management of MSR and prior securitization transactions; • our exposure to counterparties involved in our MSR business and prior securitization transactions and our ability to enforce representations and warranties made by them; • our ability to acquire MSR and successfully operate our seller-servicer subsidiary and oversee the activities of our subservicers; • our ability to manage various operational and regulatory risks associated with our business; • interruptions in or impairments to our communications and information technology systems; • our ability to maintain appropriate internal controls over financial reporting; • our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; • our ability to maintain our REIT qualification for U.S. federal income tax purposes; and • limitations imposed on our business due to our REIT status and our status as exempt from registration under the 1940 Act. 2 Table of Contents This Annual Report on Form 10-K may contain statistics and other data that, in some cases, have been obtained or compiled from information made available by mortgage loan servicers and other third-party service providers.
Added
We primarily generate servicing revenue based upon a stated fee per loan per month that varies depending upon the loan’s delinquency status, and we may earn other fees including late payment, modification, and other ancillary fees. As a subservicer, we may be obligated to make servicing advances; however, advances are generally limited, with recoveries typically following within 30 days.
Removed
Our Business Our Investment Strategy Our investment objective is to provide attractive risk-adjusted total return to our stockholders over the long term, primarily through dividends and secondarily through capital appreciation.
Added
Additionally, our exposure to foreclosure-related costs and losses is generally limited in our subservicing relationships given those risks are retained by the owner of the MSR. 4 Table of Contents Human Capital We believe that our people are the foundation of our success.
Removed
We have expertise in mortgage credit and may choose to invest again in those assets should the opportunity arise.
Added
In addition to competitive wages and salaries, our compensation programs are designed to attract and retain talented professionals with diverse and unique talents.
Removed
In the current economic climate, lenders under repurchase agreements generally advance approximately 95% to 97% of the market value of the Agency RMBS financed (a discount from market value, generally referred to as a haircut, of 3% to 5%).
Added
Succession planning is also a critical component of our business operations. We have established a talent management program that includes career development and ongoing evaluations of the depth of our leadership, focused on assessing succession planning needs and opportunities. Health, Safety and Well-being.
Removed
Human Capital We believe that our people are the foundation of our success. We are dedicated to providing human capital management best practices that evolve with the needs of our business and our people.
Added
We are also required to maintain qualifications, registrations and licenses in certain states in order to own and service certain of our assets.
Removed
We thoughtfully plan for our collective success by aligning individual employee and company goals. Health, Safety and Well-being . We sponsor a number of programs and events that emphasize the health and well-being of our employees, including relational, financial, emotional and physical.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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We depend on repurchase agreements and other credit facilities to execute our business plan and any limitation on our ability to access funding through these sources could have a material adverse effect on our results of operations, financial condition and business.
We depend on repurchase agreements and other credit facilities to execute our business plan and any limitation on our ability to access funding through these sources could have a material adverse effect on our business, results of operations and financial condition.
Any failure to procure adequate financing to settle our obligations or meet margin calls under our TBA contracts could result in defaults or force us to sell assets under adverse market conditions or through foreclosure and adversely affect our financial condition and results of operations.
Any failure to procure adequate financing to settle our obligations or meet margin calls under our TBA contracts could result in defaults or force us to sell assets under adverse market conditions or through foreclosure and adversely affect our results of operations and financial condition.
As a result of the foregoing restrictions, we are limited in our ability to make or dispose of certain investments. To the extent the SEC publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly.
As a result of the foregoing restrictions, we may be limited in our ability to make or dispose of certain investments. To the extent the SEC publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly.
To meet these tests, we may be required to forego investments we might otherwise make. We may be required to make distributions to stockholders at disadvantageous times. Thus, compliance with the REIT requirements may hinder our investment performance. Complying with REIT requirements may force us to liquidate otherwise profitable assets.
To meet these tests, we may be required to forego investments we might otherwise make. We also may be required to make distributions to stockholders at disadvantageous times. Thus, compliance with the REIT requirements may hinder our investment performance. Complying with REIT requirements may force us to liquidate otherwise profitable assets.
While we dispute and intend to vigorously defend against the claims set forth in the complaint, it is possible that the results of the litigation with PRCM Advisers may adversely affect our business, results of operations, and/or financial condition.
While we dispute and intend to vigorously defend against the claims set forth in the complaint, it is possible that the results of the litigation with PRCM Advisers may adversely affect our business, results of operations and financial condition.
Government and regulatory scrutiny of the measures taken by companies to protect against cybersecurity attacks has resulted in heightened cybersecurity requirements and additional regulatory oversight. Any of the foregoing may adversely impact our results of operations and financial condition.
Government and regulatory scrutiny of the measures taken by companies to protect against cybersecurity attacks has resulted in heightened cybersecurity requirements and additional regulatory oversight. Any of the foregoing issues may adversely impact our results of operations and financial condition.
We have established and maintain risk management policies and procedures designed to identify, monitor and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk and liquidity risk, as well as operational and compliance risks related to our business, assets and liabilities.
We have established and maintain various risk management policies and procedures designed to identify, monitor and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk and liquidity risk, as well as operational and compliance risks related to our business, assets and liabilities.
Despite these security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen.
Despite these security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee or service provider error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen.
Additionally, market uncertainty with respect to the treatment of the GSEs could have the effect of reducing the actual or perceived quality of, and therefore the market value for, the Agency RMBS that we currently hold in our portfolio. We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations.
Additionally, market uncertainty with respect to the treatment of the GSEs could have the effect of reducing the actual or perceived quality of, and therefore the market value for, the Agency RMBS that we currently hold in our portfolio. 8 Table of Contents We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations.
New or modified regulations at the federal or state level to address concerns on a variety of fronts, including impacts from the COVID-19 pandemic, potential impacts from climate change, fair and equitable access to housing and consumer data privacy and security concerns, could increase our operational expenses or otherwise enhance regulatory supervision and enforcement efforts .
New or modified regulations at the federal or state level to address concerns on a variety of fronts, including potential impacts from climate change, fair and equitable access to housing and consumer data privacy and security concerns, could increase our operational expenses or otherwise enhance regulatory supervision and enforcement efforts .
In the ordinary course of our business, we may store sensitive data, including our proprietary business information and that of our business partners, and personally identifiable information of mortgage borrowers, on our networks. The secure maintenance and transmission of this information is critical to our operations. Computer malware, viruses, ransomware and phishing attacks remain widespread and are increasingly sophisticated.
In the ordinary course of our business, we store sensitive data, including our proprietary business information and that of our business partners, and non-public personally identifiable information of mortgage borrowers, on our networks. The secure maintenance and transmission of this information is critical to our operations. Computer malware, viruses, ransomware and phishing attacks remain widespread and are increasingly sophisticated.
Any significant increase in required servicing advances, material delays in our receipt of advance reimbursements or the ineligibility of advances for reimbursement could have an adverse impact on our financial condition and cash flows. 18 Table of Contents Risks Related to Our Organization and Structure Certain provisions of Maryland law could inhibit changes in control.
Any significant increase in required servicing advances, material delays in our receipt of advance reimbursements or the ineligibility of advances for reimbursement could have an adverse impact on our financial condition and cash flows. Risks Related to Our Organization and Structure Certain provisions of Maryland law could inhibit changes in control.
As a result, we may be required to liquidate otherwise profitable assets prematurely, which could reduce our return on assets, which could adversely affect our results of operations and financial condition. Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax exempt investors.
As a result, we may be required to liquidate otherwise profitable assets prematurely, which could reduce our return on assets, which could adversely affect our results of operations and financial condition. 20 Table of Contents Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax exempt investors.
Ongoing efforts to enhance cooperation between federal and state regulators could also contribute to increased industry scrutiny. We expect to continue to incur the operational and system costs necessary to maintain processes to ensure our compliance with applicable rules and regulations as well as to monitor compliance by our business partners.
Ongoing efforts to enhance cooperation between federal and state regulators could also contribute to increased industry scrutiny. We expect to continue to incur the operational and system costs necessary to maintain the processes that are needed to ensure our compliance with applicable rules and regulations as well as to monitor compliance by our business partners.
Failure to meet such guidelines and conditions could result in the unilateral termination of our subsidiary’s approved status by one or more GSEs or result in the acceleration and termination of our MSR financing facilities.
Failure to meet such guidelines and conditions could result in the unilateral termination of our subsidiaries’ approved status by one or more GSEs or result in the acceleration and termination of our MSR financing facilities.
Any failure to effectively identify and mitigate the risks to which we are exposed could have an adverse effect on our business, results of operations and financial condition. 10 Table of Contents Maintaining our exemptions from registration as an investment company under the 1940 Act imposes limits on our operations.
Any failure to effectively identify and mitigate the risks to which we are exposed could have an adverse effect on our business, results of operations and financial condition. Maintaining our exemptions from registration as an investment company under the 1940 Act imposes limits on our operations.
As part of these indemnification obligations, we may be obligated to fund the defense costs incurred by our directors and officers. 19 Table of Contents Our amended and restated bylaws designate certain Maryland courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders.
As part of these indemnification obligations, we may be obligated to fund the defense costs incurred by our directors and officers. Our amended and restated bylaws designate certain Maryland courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders.
Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their holdings. We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.
Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their holdings. 19 Table of Contents We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.
In the event the information technology networks and infrastructure of our third-party service providers is breached, we may be liable for losses suffered by individuals whose personal information is stolen as a result of such breach and any such liability could be material.
In the event the information technology networks and infrastructure of a third-party service provider is breached, we may be liable for losses suffered by individuals whose personal information is stolen as a result of such breach and any such liability could be material.
These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur. The impairment or negative performance of other financial institutions could adversely affect us.
These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur. 12 Table of Contents The impairment or negative performance of other financial institutions could adversely affect us.
We may be adversely affected if our determinations regarding the fair value of these assets are materially higher than the values that we ultimately realize upon their disposal. 16 Table of Contents Changes in mortgage prepayment rates may adversely affect the value of our assets.
We may be adversely affected if our determinations regarding the fair value of these assets are materially higher than the values that we ultimately realize upon their disposal. Changes in mortgage prepayment rates may adversely affect the value of our assets.
We may not have the ability to raise funds necessary to pay principal amounts owed upon maturity of our outstanding convertible senior notes or to purchase such notes upon a fundamental change. We have issued and outstanding $287.5 million aggregate principal amount of 6.25% convertible senior notes due January 2026.
We may not have the ability to raise funds necessary to pay principal amounts owed upon maturity of our outstanding convertible senior notes or to purchase such notes upon a fundamental change. We have issued and outstanding $271.9 million aggregate principal amount of 6.25% convertible senior notes due January 2026.
Failure to comply with our financial covenants could result in an event of default, termination of the lending facility, acceleration of all amounts owing under the lending facility, and may give the counterparty the right to exercise certain other remedies under the lending agreement, including without limitation the sale of the asset subject to repurchase at the time of default, unless we were able to negotiate a waiver.
Failure to comply with our financial covenants could result in an event of default, termination of the lending facility, acceleration of all amounts owing under the lending facility, and may give the counterparty the right to exercise certain other remedies under the lending agreement, including without limitation the sale of the asset subject to repurchase at the time of default, unless the counterparty granted a waiver.
The resources required to protect our information technology and infrastructure, and to comply with the laws and regulations related to data and privacy protection, are subject to uncertainty. Even in circumstances where we are able to successfully protect such technology and infrastructure from attacks, we may incur significant expenses in connection with our responses to such attacks.
The resources required to protect our information technology and infrastructure, and to comply with the laws and regulations related to data and privacy protection, are continuously evolving. Even in circumstances where we are able to successfully protect such technology and infrastructure from attacks, we may incur significant expenses in connection with our responses to such attacks.
The Dodd-Frank Act and its implementing regulations, as well as other federal and state rules, regulations and guidance that govern mortgage servicing, combine to create a complex and constantly evolving regulatory environment, and the failure by us, or our subservicers, to comply with these requirements may result in fines or the suspension or revocation of the qualifications, registrations and licenses necessary to operate as an owner of MSR.
The Dodd-Frank Act and its implementing regulations, as well as other federal and state rules, regulations and guidance that govern mortgage servicing, combine to create a complex and constantly evolving regulatory environment, and the failure to comply with these requirements may result in fines or the suspension or revocation of the qualifications, registrations and licenses necessary to operate as a servicer and owner of MSR.
If these GSEs fail to honor their guarantees, the value of any Agency RMBS guaranteed by the GSEs that we hold would decline. The continued flow of residential mortgage-backed securities from the GSEs is essential to the operation of the mortgage markets in their current form, and crucial to our business model.
If these GSEs fail to honor their guarantees, the value of any Agency RMBS guaranteed by the GSEs that we hold would decline. The continued flow of residential mortgage-backed securities from the GSEs is essential to the operation of the mortgage markets in their current form.
In addition, pursuant to the margin provisions established by the Mortgage-Backed Securities Division (MBSD) of the FICC, we are subject to margin calls on our TBA contracts. Further, our prime brokerage agreements may require us to post additional margin above the levels established by the MBSD.
In addition, pursuant to the margin provisions established by the Mortgage-Backed Securities Division, or MBSD, of the Fixed Income Clearing Corporation, or FICC, we are subject to margin calls on our TBA contracts. Further, our prime brokerage agreements may require us to post additional margin above the levels established by the MBSD.
A number of legislative proposals have been introduced in recent years that would phase out or reform the GSEs. It is not possible to predict the scope and nature of the actions that the U.S. government will ultimately take with respect to the GSEs.
A number of legislative proposals have been introduced in the past that would phase out or reform the GSEs. It is not possible to predict the scope and nature of the actions that the U.S. government could ultimately take with respect to the GSEs.
If (i) all or a portion of our assets are subject to the rules relating to taxable mortgage pools, (ii) we are a “pension held REIT,” (iii) a tax exempt stockholder has incurred debt to purchase or hold our common stock, or (iv) we purchase residual REMIC interests that generate “excess inclusion income,” then a portion of the distributions to and, in the case of a stockholder described in clause (iii), gains realized on the sale of common stock by such tax exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code. 21 Table of Contents Complying with REIT requirements may limit our ability to hedge effectively.
If (i) all or a portion of our assets are subject to the rules relating to taxable mortgage pools, (ii) we are a “pension held REIT,” (iii) a tax exempt stockholder has incurred debt to purchase or hold our common stock, or (iv) we purchase residual REMIC interests that generate “excess inclusion income,” then a portion of the distributions to and, in the case of a stockholder described in clause (iii), gains realized on the sale of common stock by such tax exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.
Our subsidiary’s continued approval from the GSEs to own and manage MSR is subject to compliance with each of their respective selling and servicing guidelines, minimum capital requirements and other conditions they may impose from time to time at their discretion.
Our subsidiaries’ continued approval from the GSEs to own and manage MSR and service mortgage loans is subject to compliance with each of their respective selling and servicing guidelines, minimum capital requirements and other conditions they may impose from time to time at their discretion.
If such representations and warranties are inaccurate, we may be obligated to repurchase certain mortgage loans or indemnify the applicable investor for any losses suffered as a result of the origination or prior servicing of the mortgage loans.
If such representations and warranties are inaccurate, we may be obligated to repurchase certain mortgage loans or indemnify the applicable investor for any losses suffered as a result of the origination or prior servicing of the mortgage loans. As such, the applicable investor will have direct recourse to us for such origination and/or prior servicing issues.
For MSR, delays may also occur due to the need to obtain GSE approval of the collateral to be posted, the need for third-party valuations of the MSR collateral or the agreement of the relevant subservicers to be party to the financing agreement.
For MSR, delays may also occur due to the need to obtain GSE approval of the collateral to be posted or the need for third-party valuations of the MSR collateral.
The REIT provisions of the Code may limit our ability to hedge our assets and liabilities.
Complying with REIT requirements may limit our ability to hedge effectively. The REIT provisions of the Code may limit our ability to hedge our assets and liabilities.
We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. 20 Table of Contents The market price of our common stock may be influenced by many factors, including without limitation: changes in financial estimates by analysts; fluctuations in our results of operations or financial condition or the results of operations or financial condition of companies perceived to be similar to us; general economic and financial and real estate market conditions; changes in market valuations of similar companies; monetary policy and regulatory developments in the U.S.; and additions or departures of key personnel.
The market price of our common stock may be influenced by many factors, including without limitation: changes in financial estimates by analysts; fluctuations in our results of operations or financial condition or the results of operations or financial condition of companies perceived to be similar to us; general economic and financial and real estate market conditions; changes in market valuations of similar companies; monetary policy and regulatory developments in the U.S.; and additions or departures of key personnel.
We operate in a highly specialized industry and our success is dependent upon the efforts, experience, diligence, skill, and deep knowledge of our business and historical operations of our executive officers and key employees, as well as their industry knowledge and relationships.
We operate in a specialized and highly regulated industry and our success is dependent upon the efforts, experience, diligence, skill and deep knowledge of our industry and operations of our executive officers and our employees.
Although these transactions are intended to reduce our exposure to various risks, hedging may fail to adequately protect or could adversely affect us because, among other things: available hedges may not correspond directly with the risks for which protection is sought; the duration of the hedge may not match the duration of the related liability; the amount of income that a REIT may earn from certain hedging transactions is limited by U.S. federal income tax provisions; the credit quality of a hedging counterparty may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and the hedging counterparty may default on its obligations.
Although these transactions are intended to reduce our exposure to various risks, hedging may fail to adequately protect or could adversely affect us because, among other things: available hedges may not correspond directly with the risks for which protection is sought; the duration of the hedge may not match the duration of the related liability; the amount of income that a REIT may earn from certain hedging transactions is limited by U.S. federal income tax provisions; the credit quality of a hedging counterparty may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and the hedging counterparty may default on its obligations. 13 Table of Contents Subject to maintaining our qualification as a REIT and satisfying the criteria for no-action relief from the Commodity Futures Trading Commission’s commodity pool operator registration rules, there are no current limitations on the hedging transactions that we may undertake.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying REIT income if earned directly by the parent REIT. Both the TRS and the REIT must jointly elect to treat the subsidiary as a TRS.
A TRS may earn income that would not be qualifying REIT income if earned directly by the parent REIT. Both the TRS and the REIT must jointly elect to treat the subsidiary as a TRS.
We may not have sufficient funds available at the time we are required to repay principal amounts or to purchase the notes upon a fundamental change, and we may not be able to raise additional capital or arrange necessary financing in order to make such payments on terms that are acceptable to us, if at all. 13 Table of Contents An increase in our borrowing costs relative to the interest that we receive on our leveraged assets may adversely affect our profitability.
We may not have sufficient funds available at the time we are required to repay principal amounts or to purchase the notes upon a fundamental change, and we may not be able to raise additional capital or arrange necessary financing in order to make such payments on terms that are acceptable to us, if at all.
Our inability or failure to comply with the rules, regulations or reporting requirements, to obtain or maintain approvals and licenses applicable to our businesses, or to satisfy annual or periodic examinations may impact our ability to do business and expose us to fines, penalties or other claims and, as a result, could harm our business. 9 Table of Contents Federal and state regulation of the mortgage industry is complex and constantly evolving, and changes to applicable rules, regulations and guidance may adversely impact our business.
Our inability or failure to comply with the rules, regulations or reporting requirements, to obtain or maintain approvals and licenses applicable to our businesses, or to satisfy annual or periodic examinations may impact our ability to do business and expose us to fines, penalties or other claims and, as a result, could harm our business.
Prior to settlement of the TBA contract we may choose to move the settlement of the securities to a later date by entering into an offsetting position (referred to as a “pair off”), net settling the paired off positions for cash, and simultaneously purchasing a similar TBA contact for a later settlement date, collectively referred to as a “dollar roll”.
Prior to settlement of the TBA contract we may choose to move the settlement of the securities to a later date by entering into an offsetting position (referred to as a “pair off”), net settling the paired off positions for cash, and simultaneously purchasing a similar TBA contact for a later settlement date, collectively referred to as a “dollar roll.” The Agency RMBS purchased for a forward settlement date under the TBA contracts are typically priced at a discount to Agency RMBS for settlement in the current month.
Our results of operations are materially affected by conditions in the residential mortgage and real estate markets, the financial markets and the economy generally.
Risks Related to Our Business and Operations Difficult conditions in the residential mortgage and real estate markets, the financial markets and the economy generally may adversely impact our business, results of operations and financial condition. Our results of operations are materially affected by conditions in the residential mortgage and real estate markets, the financial markets and the economy generally.
GAAP, purposes may be subject to greater fluctuations from period to period as a result of this accounting treatment for changes in fair value of derivative instruments or for the accounting of the underlying hedged assets or liabilities in our financial statements, as it does not necessarily align with the accounting used for derivative instruments. 14 Table of Contents We depend on third-party service providers, including mortgage loan servicers, for a variety of services related to our business.
GAAP, purposes may be subject to greater fluctuations from period to period as a result of this accounting treatment for changes in fair value of derivative instruments or for the accounting of the underlying hedged assets or liabilities in our financial statements, as it does not necessarily align with the accounting used for derivative instruments.
The value of our Agency RMBS and MSR may be adversely affected by deficiencies in servicing and foreclosure practices, as well as related delays in the foreclosure process. Deficiencies in servicing and foreclosure practices among servicers of residential mortgage loans have raised and may in the future raise concerns relating to such practices.
Deficiencies in servicing and foreclosure practices among servicers of residential mortgage loans have raised and may in the future raise concerns relating to such practices. The integrity of servicing and foreclosure processes is critical to the value of our Agency RMBS and MSR, and our financial results could be adversely affected by deficiencies in the conduct of those processes.
As such, the applicable investor will have direct recourse to us for such origination and/or prior servicing issues. 15 Table of Contents In connection with our prior securitization transactions and with the sales of our MSR and other assets from time to time, we may have been or may be required to make representations and warranties to the purchasers of the assets regarding certain characteristics of those assets.
In connection with our prior securitization transactions and with the sales of our MSR and other assets from time to time, we may have been or may be required to make representations and warranties to the purchasers of the assets regarding certain characteristics of those assets.
This difference (or discount) is referred to as the “price drop.” The price drop is the economic equivalent of net interest carry income on the underlying Agency RMBS over the roll period (interest income less implied financing cost) and is commonly referred to as a “dollar roll income.” Consequently, dollar roll transactions and such forward purchase of Agency RMBS represent a form of financing and increase our “at-risk” leverage. 17 Table of Contents Under certain market conditions, TBA dollar roll transactions may result in negative carry income whereby the Agency RMBS purchased for a forward settlement date under TBA contract are priced at a premium to Agency RMBS for settlement in the current month.
This difference (or discount) is referred to as the “price drop.” The price drop is the economic equivalent of net interest carry income on the underlying Agency RMBS over the roll period (interest income less implied financing cost) and is commonly referred to as a “dollar roll income.” Consequently, dollar roll transactions and such forward purchase of Agency RMBS represent a form of financing and increase our “at-risk” leverage.
If rising interest rates cause us to be unable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and pay dividends may be materially and adversely affected.
If rising interest rates cause us to be unable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and pay dividends may be materially and adversely affected. 17 Table of Contents The value of our Agency RMBS and MSR may be adversely affected by deficiencies in servicing and foreclosure practices, as well as related delays in the foreclosure process.
Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk.
Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk. 11 Table of Contents Changes in the financing markets could adversely affect the marketability of the assets in which we invest, and this could negatively affect the value of our assets.
The lack of liquidity of our assets may adversely affect our business, including our ability to value, finance and sell our assets. We have and may in the future acquire assets or other instruments with limited or no liquidity, including securities, MSR and other instruments that are not publicly traded.
We have and may in the future acquire assets or other instruments with limited or no liquidity, including securities, MSR and other instruments that are not publicly traded. Market conditions could also significantly and negatively affect the liquidity of our assets.
Even if we are not liable for such losses, any breach of these third-party systems could expose us to material costs related to notifying affected individuals or other parties and providing credit monitoring services, as well as to regulatory fines or penalties.
Even if we are not liable for such losses, any breach of these third-party systems could expose us to material costs related to notifying affected individuals or other parties and providing credit monitoring services, as well as to regulatory fines or penalties. 14 Table of Contents Our ability to own and manage MSR and service mortgage loans is subject to terms and conditions established by the GSEs, which are subject to change.
It is not uncommon for investors in Agency RMBS to obtain leverage equal to ten or more times equity through the use of repurchase agreement financing.
Through the use of leverage, we may acquire positions with market exposure significantly greater than the amount of capital committed to the transaction. It is not uncommon for investors in Agency RMBS to obtain leverage equal to ten or more times equity through the use of repurchase agreement financing.
Prepayment rates may be affected by a number of factors including mortgage rates, the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the remaining life of the loans, the size of the remaining loans, the servicing of mortgage loans, changes in tax laws, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors.
Furthermore, a significant increase in the prepayment rate could materially reduce the ultimate cash flows we receive from MSR, and we could ultimately receive substantially less than what we paid for such assets. 16 Table of Contents Prepayment rates may be affected by a number of factors including mortgage rates, the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the remaining life of the loans, the size of the remaining loans, the servicing of mortgage loans, changes in tax laws, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors.
In connection with our securitization transactions, we prepare disclosure documentation, including term sheets and offering memorandums, which contain disclosures regarding the securitization transactions and the assets securitized.
Our securitization activities expose us to risk of litigation, which may materially and adversely affect our business and financial condition. In connection with our securitization transactions, we prepare disclosure documentation, including term sheets and offering memorandums, which contain disclosures regarding the securitization transactions and the assets securitized.
As our repurchase agreements and other short-term borrowings mature, we must enter into new borrowings, find other sources of liquidity or sell assets. An increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between the returns on our assets and the cost of our borrowings.
An increase in our borrowing costs relative to the interest that we receive on our leveraged assets may adversely affect our profitability. As our repurchase agreements and other short-term borrowings mature, we must enter into new borrowings, find other sources of liquidity or sell assets.
These policies and procedures may not sufficiently identify all of the risks to which we are or may become exposed or mitigate the risks we have identified. Any expansion of our business activities may result in our being exposed to risks to which we have not previously been exposed or may increase our exposure to certain types of risks.
These policies and procedures may not sufficiently identify all of the risks to which we are or may become exposed or mitigate the risks we have identified.
Our charter and bylaws provide that vacancies generally may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements make it more difficult to change management by removing and replacing directors and may prevent a change in control that is in the best interests of stockholders.
Our charter and bylaws provide that vacancies generally may be filled only by a majority of the remaining directors in office, even if less than a quorum.
In addition to understanding the key risks described below, investors should understand that it is not possible to predict or identify all risk factors and, consequently, the following is not a complete discussion of all potential risks or uncertainties. 8 Table of Contents Risks Related to Our Business and Operations Difficult conditions in the residential mortgage and real estate markets, the financial markets and the economy generally may adversely impact our business, results of operations and financial condition.
In addition to understanding the key risks described below, investors should understand that it is not possible to predict or identify all risk factors and, consequently, the following is not a complete discussion of all potential risks or uncertainties.
We endeavor to hedge our exposure to changes in interest rates, but there can be no assurances that our hedges will be successful, or that we will be able to enter into or maintain such hedges. As a result, interest rate fluctuations can cause significant losses, reductions in income, and limitations on our cash available for distribution to stockholders.
We endeavor to hedge our exposure to changes in interest rates, but there can be no assurances that our hedges will be successful, or that we will be able to enter into or maintain such hedges.
As a consequence of the foregoing, our business, financial condition and results of operations may be adversely affected. In addition, in connection with our ownership of MSR, we possess personally identifiable information that is shared with third-party service providers, including our mortgage servicers, as required or permitted by law.
In addition, in connection with our servicing activities and ownership of MSR, we possess non-public personally identifiable information that is shared with third-party service providers as required or permitted by law.
In addition, we may from time to time obtain and rely upon opinions of counsel regarding the qualification of certain assets and income as real estate assets. The inaccuracy of any such opinions, advice or statements may adversely affect our ability to qualify as a REIT and result in significant corporate-level tax.
In addition, we may from time to time obtain and rely upon opinions of counsel regarding the qualification of certain assets and income as real estate assets.
To the extent that we use leverage to finance assets that later become illiquid, we may lose that leverage if the financing counterparty determines that the collateral is no longer sufficient to secure the financing, or the counterparty could reduce the amount of money that it is willing to lend against the asset. 11 Table of Contents We use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce cash available for distribution to our stockholders, as well as increase losses when economic conditions are unfavorable.
To the extent that we use leverage to finance assets that later become illiquid, we may lose that leverage if the financing counterparty determines that the collateral is no longer sufficient to secure the financing, or the counterparty could reduce the amount of money that it is willing to lend against the asset.
Our rights and stockholders’ rights to take action against directors and officers are limited, which could limit recourse in the event of actions not in the best interests of stockholders.
These requirements make it more difficult to change management by removing and replacing directors and may prevent a change in control that is in the best interests of stockholders. 18 Table of Contents Our rights and stockholders’ rights to take action against directors and officers are limited, which could limit recourse in the event of actions not in the best interests of stockholders.
To the extent that the number of or net exposure under our lending arrangements may become concentrated with one or more lenders, the adverse impacts of defaults or terminations by such lenders may be significantly greater. 12 Table of Contents Our inability to meet certain financial covenants related to our repurchase agreements, revolving credit facilities or other credit facilities could adversely affect our financial condition, results of operations and cash flows.
To the extent that the number of or net exposure under our lending arrangements may become concentrated with one or more lenders, the adverse impacts of defaults or terminations by such lenders may be significantly greater.
Legal matters related to the termination of our Management Agreement with PRCM Advisers may adversely affect our business, results of operations, and/or financial condition. On August 14, 2020, our Management Agreement with PRCM Advisers terminated and we thereafter became a self-managed company.
On August 14, 2020, our Management Agreement with PRCM Advisers terminated and we thereafter became a self-managed company.
Illiquid assets typically experience greater price volatility, as a ready market may not exist for such assets, and such assets can be more difficult to value. Any illiquidity in our assets may make it difficult for us to sell such assets if the need or desire arises.
Any illiquidity in our assets may make it difficult for us to sell such assets if the need or desire arises.
We are also required to maintain qualifications, registrations and licenses in certain states in order to own certain of our assets. These requirements can and do change as statutes and regulations are enacted, promulgated or amended, or as regulatory guidance or interpretations evolve or change.
These requirements can and do change as statutes and regulations are enacted, promulgated or amended, or as regulatory guidance or interpretations evolve or change.
The Agency RMBS purchased for a forward settlement date under the TBA contracts are typically priced at a discount to Agency RMBS for settlement in the current month.
Under certain market conditions, TBA dollar roll transactions may result in negative carry income whereby the Agency RMBS purchased for a forward settlement date under TBA contract are priced at a premium to Agency RMBS for settlement in the current month.
Market conditions could also significantly and negatively affect the liquidity of our assets. It may be difficult or impossible to obtain third-party pricing on such illiquid assets and validating third-party pricing for illiquid assets may be more subjective than more liquid assets.
It may be difficult or impossible to obtain third-party pricing on such illiquid assets and validating third-party pricing for illiquid assets may be more subjective than more liquid assets. Illiquid assets typically experience greater price volatility, as a ready market may not exist for such assets, and such assets can be more difficult to value.
Such opinions of counsel are not binding on the IRS, and there can be no assurance that the IRS will not successfully challenge the conclusions set forth therein. 22 Table of Contents Our ownership of, and relationship with, our TRSs will be restricted and a failure to comply with the restrictions would jeopardize our REIT status and may result in the application of a 100% excise tax.
Our ownership of, and relationship with, our TRSs will be restricted and a failure to comply with the restrictions would jeopardize our REIT status and may result in the application of a 100% excise tax. A REIT may own up to 100% of the stock of one or more TRSs.
We may fail to realize all of the expected benefits of the proposed acquisition of RoundPoint or those benefits may take longer to realize than expected. The full benefits of the proposed acquisition of RoundPoint may not be realized as expected or may not be achieved within the anticipated time frame, or at all.
However, it is possible that the full benefits of the acquisition of RoundPoint may not be realized as expected or may not be achieved within our anticipated time frame, or at all. We are subject to risks associated with the use of third-party service providers.
Such sales could occur during adverse market conditions, and we could be forced to accept prices below that which we believe are appropriate. The loss of our 1940 Act exemptions may also result in a default under or permit certain of our counterparties to terminate the many repurchase agreements, financing facilities or other agreements we have in place.
The loss of our 1940 Act exemptions may also result in a default under or permit certain of our counterparties to terminate the many repurchase agreements, financing facilities or other agreements we have in place. 10 Table of Contents The lack of liquidity of our assets may adversely affect our business, including our ability to value, finance and sell our assets.
Additionally, the loan originator or other parties from whom we acquired the MSR may be insolvent or otherwise unable to honor their respective indemnification or repurchase obligations for breaches of representation and warranties. Completion of the proposed acquisition of RoundPoint Mortgage Servicing Corporation remains subject to conditions that we cannot control.
Additionally, the loan originator or other parties from whom we acquired the MSR may be insolvent or otherwise unable to honor their respective indemnification or repurchase obligations for breaches of representation and warranties. 15 Table of Contents Legal matters related to the termination of our Management Agreement with PRCM Advisers may adversely affect our business, results of operations, and/or financial condition.
The departure of any of our executive officers and/or key employees could have a material adverse effect on our operations and performance. We may change any of our strategies, policies or procedures without stockholder consent.
The departure of an executive officer, key employee or a significant and sudden turnover of employees in a key operational area of our company could have a material adverse effect on our ability to conduct our operations and to comply with contractual and regulatory obligations, which could adversely impact our business, results of operations and financial condition. 9 Table of Contents We may change any of our strategies, policies or procedures without stockholder consent.
Alternatively, any narrowing of our business activities may increase the concentration of our exposure to certain types of risk.
Any expansion of our business activities, such as our recent acquisition of RoundPoint, may result in our being exposed to risks to which we have not previously been exposed or may increase our exposure to certain types of risks. Alternatively, any narrowing of our business activities may increase the concentration of our exposure to certain types of risk.
This would adversely affect the returns on our assets, which might reduce earnings and, in turn, cash available for distribution to stockholders. We are highly dependent on information technology, and system failures or security breaches could disrupt our business. Our business is highly dependent on information technology.
An increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between the returns on our assets and the cost of our borrowings. This would adversely affect the returns on our assets, which might reduce earnings and, in turn, cash available for distribution to stockholders.
Although we do not originate or service residential mortgage loans, we must comply with various federal and state rules, regulations and guidance as a result of owning MSR. These requirements include, among other things, the Dodd-Frank Act, the Gramm-Leach-Bliley Act and the CARES Act.
These requirements include, among other things, the Dodd-Frank Act, the Gramm-Leach-Bliley Act and the CARES Act. In addition, given we are not a federally chartered depository institution, we must comply with applicable state licensing and compliance requirements in all jurisdictions in which we operate.
In addition, the implementation of more restrictive or operationally intensive guidance may increase the costs associated with owning and managing MSR as well as our ability to finance MSR. Our securitization activities expose us to risk of litigation, which may materially and adversely affect our business and financial condition.
In addition, the implementation of more restrictive or operationally intensive guidance may increase the costs associated with owning and managing MSR, our ability to finance MSR and our ability to generate revenue from servicing mortgage loans. We are subject to risks related to previous mortgage loan servicers. We service mortgage loans under requirements set forth by regulatory agencies and GSEs.
The COVID-19 pandemic and government actions to mitigate its spread and economic impact could have a material adverse effect on our business, results of operations and financial condition. The COVID-19 pandemic caused significant disruptions to the U.S. and global economies and contributed to volatility and negative pressure in financial markets.
Any of the foregoing risks could have a material adverse effect on our business, financial condition, results of operations and liquidity.
We may utilize TBAs as a means of investing and financing Agency RMBS.
The inaccuracy of any such opinions, advice or statements may adversely affect our ability to qualify as a REIT and result in significant corporate-level tax. 21 Table of Contents We may utilize TBAs as a means of investing and financing Agency RMBS.
Removed
The impact of the pandemic and measures by governments and other authorities around the world to prevent its spread have negatively impacted our business, and the worsening of COVID-19 pandemic conditions, or the occurrence of any new public health crisis, may in the future negatively impact our business.
Added
Federal and state regulation of the mortgage industry is complex and constantly evolving, and changes to applicable rules, regulations and guidance may adversely impact our business. As a licensed servicer and owner of MSR, we are required to comply with numerous federal, state and local laws and regulations that control the manner in which we conduct our business and operations.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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We have opposed the motion for judgment on the pleadings, which is pending with the Court. Discovery has commenced and is ongoing. Our board of directors believes the Federal Complaint is without merit and that we have fully complied with the terms of the Management Agreement. Item 4. Mine Safety Disclosures None. 23 Table of Contents PART II
Each party opposed the other party’s motion for summary judgment. The motions for summary judgment are fully briefed. Our board of directors believes the Federal Complaint is without merit and that we fully complied with the terms of the Management Agreement. Item 4. Mine Safety Disclosures None. 24 Table of Contents PART II
Added
We opposed the motion for judgment on the pleadings. On August 10, 2023, the motion for judgment on the pleadings was granted in part and denied in part. The discovery period has ended. On November 8, 2023, the Company and the plaintiffs filed motions for summary judgment, seeking judgment in their favor on the pending claims and counterclaims.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Our stock transfer agent and registrar is Equiniti Trust Company. Requests for information from Equiniti Trust Company can be sent to Equiniti Trust Company, P.O. Box 64856, St. Paul, MN 55164-0856 and their telephone number is 1-800-468-9716.
Our stock transfer agent and registrar is Equiniti Trust Company, LLC. Requests for information from Equiniti Trust Company, LLC can be sent to Equiniti Trust Company, LLC, P.O. Box 64856, St. Paul, MN 55164-0856 and their telephone number is 1-800-468-9716.
See Item 1A, “ Risk Factors ” and Item 7, “ Management’s Discussion and Analysis of Financial Conditions and Results of Operations ” of this Annual Report on Form 10-K for information regarding the sources of funds used for dividends and for a discussion of factors, if any, which may adversely affect our ability to pay dividends in 2023 and thereafter.
See Item 1A, “ Risk Factors ” and Item 7, “ Management’s Discussion and Analysis of Financial Conditions and Results of Operations ” of this Annual Report on Form 10-K for information regarding the sources of funds used for dividends and for a discussion of factors, if any, which may adversely affect our ability to pay dividends in 2024 and thereafter.
We have paid full cumulative dividends on all classes of our preferred stock from the respective dates of issuance through December 31, 2022. We intend to continue to pay quarterly dividends on our common stock and to distribute to our common stockholders as dividends 100% of our REIT taxable income, on an annual basis.
We have paid full cumulative dividends on all classes of our preferred stock from the respective dates of issuance through December 31, 2023. We intend to continue to pay quarterly dividends on our common stock and to distribute to our common stockholders as dividends 100% of our REIT taxable income, on an annual basis.
For a detailed description of the Equity Incentive Plans, see Note 17 - Equity Incentive Plans of the consolidated financial statements included under Item 8 of this Annual Report on Form 10-K. 24 Table of Contents The following table presents certain information about the Equity Incentive Plans as of December 31, 2022: December 31, 2022 Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column of this table) Equity compensation plans approved by stockholders (1) — $ — 4,223,261 Equity compensation plans not approved by stockholders — — — Total — $ — 4,223,261 ___________________ (1) For a detailed description of the Equity Incentive Plans, see Note 17 - Equity Incentive Plans of the consolidated financial statements included under Item 8 of this Annual Report on Form 10-K. 25 Table of Contents Performance Graph The following graph compares a stockholder’s cumulative total return, assuming $100 invested at December 31, 2017, with all reinvestment of dividends, as if such amounts had been invested in: (i) our common stock; (ii) the stocks included in the Standard and Poor’s 500 Stock Index, or S&P 500; and (iii) the stocks included in the Bloomberg REIT Mortgage Index.
The following table presents certain information about the Equity Incentive Plans as of December 31, 2023: December 31, 2023 Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column of this table) Equity compensation plans approved by stockholders (1) — $ — 4,000,917 Equity compensation plans not approved by stockholders — — — Total — $ — 4,000,917 ___________________ (1) For a detailed description of the Equity Incentive Plans, see Note 18 - Equity Incentive Plans of the consolidated financial statements included under Item 8 of this Annual Report on Form 10-K. 25 Table of Contents Performance Graph The following graph compares a stockholder’s cumulative total return, assuming $100 invested at December 31, 2018, with all reinvestment of dividends, as if such amounts had been invested in: (i) our common stock; (ii) the stocks included in the Standard and Poor’s 500 Stock Index, or S&P 500; and (iii) the stocks included in the Bloomberg REIT Mortgage Index.
Preferred shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to trading plans in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or by any combination of such methods.
Preferred shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to trading plans in accordance with Rule 10b5-1 under the Exchange Act or by any combination of such methods.
The common share repurchase program does not have an expiration date. As of December 31, 2022, we had repurchased 3,043,575 common shares under the program for a total cost of $201.5 million. We did not repurchase common shares during the three months ended December 31, 2022. Item 6. [Reserved]
The common share repurchase program does not have an expiration date. As of December 31, 2023, we had repurchased 3,637,028 common shares under the program for a total cost of $208.5 million. We did not repurchase common shares during the three months ended December 31, 2023. Item 6. [Reserved]
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Market Information Our common stock is listed on the NYSE under the symbol “TWO”. As of February 21, 2023, 96,616,279 shares of common stock were issued and outstanding.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Market Information Our common stock is listed on the NYSE under the symbol “TWO”. As of February 12, 2024, 103,427,329 shares of common stock were issued and outstanding.
The preferred share repurchase program does not have an expiration date. 26 Table of Contents The following table reflects purchases of our 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock under the preferred share repurchase program during the three months ended December 31, 2022: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) Series A Preferred Stock: October 1, 2022 through October 31, 2022 413,549 $ 18.14 413,549 N/A November 1, 2022 through November 30, 2022 — — — N/A December 1, 2022 through December 31, 2022 15,000 19.51 15,000 N/A Total 428,549 $ 18.18 428,549 N/A Series B Preferred Stock: October 1, 2022 through October 31, 2022 756,846 $ 17.48 756,846 N/A November 1, 2022 through November 30, 2022 — — — N/A December 1, 2022 through December 31, 2022 30,000 18.42 30,000 N/A Total 786,846 $ 17.52 786,846 N/A Series C Preferred Stock: October 1, 2022 through October 31, 2022 1,712,555 $ 17.09 1,712,555 N/A November 1, 2022 through November 30, 2022 — — — N/A December 1, 2022 through December 31, 2022 30,000 18.55 30,000 N/A Total 1,742,555 $ 17.12 1,742,555 N/A ____________________ (1) Our preferred share repurchase program allows for the repurchase of up to an aggregate of 5,000,000 shares of the company’s preferred stock, which includes the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock.
The preferred share repurchase program does not have an expiration date. 26 Table of Contents The following table reflects purchases of our 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock under the preferred share repurchase program during the three months ended December 31, 2023: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) Series A Preferred Stock: October 1, 2023 through October 31, 2023 — $ — — N/A November 1, 2023 through November 30, 2023 — — — N/A December 1, 2023 through December 31, 2023 10,297 22.18 10,297 N/A Total 10,297 $ 22.18 10,297 N/A Series B Preferred Stock: October 1, 2023 through October 31, 2023 — $ — — N/A November 1, 2023 through November 30, 2023 — — — N/A December 1, 2023 through December 31, 2023 58,822 21.53 58,822 N/A Total 58,822 $ 21.53 58,822 N/A Series C Preferred Stock: October 1, 2023 through October 31, 2023 — $ — — N/A November 1, 2023 through November 30, 2023 — — — N/A December 1, 2023 through December 31, 2023 152,687 21.96 152,687 N/A Total 152,687 $ 21.96 152,687 N/A ____________________ (1) Our preferred share repurchase program allows for the repurchase of up to an aggregate of 5,000,000 shares of the company’s preferred stock, which includes the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock.
As of December 31, 2022, we had repurchased an aggregate of 2,957,950 preferred shares under the program and had remaining authorization to repurchase up to 2,042,050 of such securities. Our common share repurchase program allows for the repurchase of up to an aggregate of 9,375,000 shares of the company’s common stock.
As of December 31, 2023, we had repurchased an aggregate of 3,693,574 preferred shares under the program and had remaining authorization to repurchase up to 1,306,426 of such securities. Our common share repurchase program allows for the repurchase of up to an aggregate of 9,375,000 shares of the company’s common stock.
COMPARISON OF CUMULATIVE TOTAL RETURN Among Two Harbors Investment Corp., S&P 500 and Bloomberg REIT Mortgage Index December 31, Index 2022 2021 2020 2019 2018 Two Harbors Investment Corp. $ 42.25 $ 55.09 $ 55.05 $ 115.18 $ 89.52 S&P 500 $ 156.77 $ 191.48 $ 148.81 $ 125.70 $ 95.61 Bloomberg REIT Mortgage Index $ 83.05 $ 109.82 $ 93.38 $ 120.03 $ 97.09 Purchases of Equity Securities by the Issuer and Affiliated Purchasers Our preferred share repurchase program allows for the repurchase of up to an aggregate of 5,000,000 shares of the company’s preferred stock, which includes the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock.
COMPARISON OF CUMULATIVE TOTAL RETURN Among Two Harbors Investment Corp., S&P 500 and Bloomberg REIT Mortgage Index December 31, Index 2023 2022 2021 2020 2019 Two Harbors Investment Corp. $ 48.37 $ 47.20 $ 61.55 $ 61.50 $ 128.66 S&P 500 $ 207.04 $ 163.98 $ 200.29 $ 155.65 $ 131.47 Bloomberg REIT Mortgage Index $ 97.93 $ 85.54 $ 113.11 $ 96.18 $ 123.63 Purchases of Equity Securities by the Issuer and Affiliated Purchasers Our preferred share repurchase program allows for the repurchase of up to an aggregate of 5,000,000 shares of the company’s preferred stock, which includes the 8.125% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.625% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock.
All per share amounts, common shares outstanding and common equity-based awards for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split. Holders As of February 17, 2023, there were 517 registered holders and approximately 112,512 beneficial owners of our common stock. Dividends We have historically paid dividends on our common stock.
Holders As of February 12, 2024, there were 492 registered holders and approximately 99,074 beneficial owners of our common stock. Dividends We have historically paid dividends on our common stock.
Removed
On September 21, 2022, our board of directors approved a one-for-four reverse stock split of our outstanding shares of common stock. The reverse stock split was effected on November 1, 2022 at 5:01 p.m. Eastern Time. At the effective time, every four issued and outstanding shares of our common stock were converted into one share of common stock.
Added
For a detailed description of the Equity Incentive Plans, see Note 18 - Equity Incentive Plans of the consolidated financial statements included under Item 8 of this Annual Report on Form 10-K.
Removed
No fractional shares were issued in connection with the reverse stock split; instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined on the basis of the volume weighted average price of our common stock on the NYSE on November 1, 2022.
Removed
In connection with the reverse stock split, the number of authorized shares of our common stock was also reduced on a one-for-four basis, from 700,000,000 to 175,000,000. The par value of each share of common stock remained unchanged.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Any temporary change in the fair value of our AFS securities, excluding certain AFS securities for which we have elected the fair value option, is recorded as a component of accumulated other comprehensive (loss) income and does not impact our reported income (loss) for U.S. GAAP purposes, or GAAP net income (loss).
Any temporary change in the fair value of our AFS securities, excluding certain AFS securities for which we have elected the fair value option, is recorded as a component of accumulated other comprehensive loss and does not impact our reported income (loss) for U.S. GAAP purposes, or GAAP net income (loss).
We generally receive three or more broker and vendor quotes on pass-through Agency P&I RMBS, and generally receive multiple broker or vendor quotes on all other securities, including interest-only Agency RMBS and inverse interest-only Agency RMBS. We also receive multiple vendor quotes for the MSR in our investment portfolio.
We generally receive three or more broker and vendor quotes on pass-through Agency P&I RMBS, and generally receive multiple broker or vendor quotes on all other securities, including interest-only Agency RMBS, and inverse interest-only Agency RMBS and other Agency securities. We also receive multiple vendor quotes for the MSR in our investment portfolio.
Additionally, we reclassify unrealized gains and losses on AFS securities in accumulated other comprehensive (loss) income to net income (loss) upon the recognition of any realized gains and losses on sales as individual securities are sold.
Additionally, we reclassify unrealized gains and losses on AFS securities in accumulated other comprehensive loss to net (loss) income upon the recognition of any realized gains and losses on sales as individual securities are sold.
(2) Yields on Agency Derivatives not shown as interest income is included in gain (loss) on other derivative instruments in the consolidated statements of comprehensive loss. (3) Yields on mortgage servicing rights and advances not shown as these assets do not earn interest. (4) U.S. Treasury securities effectively borrowed under reverse repurchase agreements.
(2) Yields on Agency Derivatives not shown as interest income is included in (loss) gain on other derivative instruments in the consolidated statements of comprehensive loss. (3) Yields on mortgage servicing rights and advances not shown as these assets do not earn interest. (4) U.S. Treasury securities effectively borrowed under reverse repurchase agreements.
Change in Accumulated Other Comprehensive (Loss) Income With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding certain AFS securities for which we have elected the fair value option, do not impact our GAAP net (loss) income or taxable income but are recognized on our consolidated balance sheets as a change in stockholders’ equity under “accumulated other comprehensive (loss) income.” As a result of this fair value accounting through stockholders’ equity, we expect our net income to have less significant fluctuations and result in less U.S.
Change in Accumulated Other Comprehensive Loss With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding certain AFS securities for which we have elected the fair value option, do not impact our GAAP net (loss) income or taxable income but are recognized on our consolidated balance sheets as a change in stockholders’ equity under “accumulated other comprehensive loss.” As a result of this fair value accounting through stockholders’ equity, we expect our net income to have less significant fluctuations and result in less U.S.
We use prices obtained from third-party pricing vendors or broker quotes deemed indicative of market activity and current as of the measurement date, which in periods of market dislocation, may have reduced transparency. For more information on our fair value measurements, see Note 10 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.
We use prices obtained from third-party pricing vendors or broker quotes deemed indicative of market activity and current as of the measurement date, which in periods of market dislocation, may have reduced transparency. For more information on our fair value measurements, see Note 11 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.
For MSR, vendors use pricing models that generally incorporate observable inputs such as principal balance, note rate, geographical location, loan-to-value (LTV) ratios, FICO, appraised value and other loan characteristics, along with observed market yields and trading levels. Pricing vendors will customarily incorporate loan servicing cost, servicing fee, ancillary income, and earnings rate on escrow as observable inputs.
For MSR, vendors use pricing models that generally incorporate observable inputs such as principal balance, note rate, geographical location, loan-to-value (LTV) ratios, FICO, appraised value and other loan characteristics, along with observed market yields and trading levels. Pricing vendors will customarily incorporate servicing fee, ancillary income, and earnings rate on escrow as observable inputs.
See Note 10 - Fair Value to the consolidated financial statements, included in this Annual Report on Form 10-K, for descriptions of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized.
See Note 11 - Fair Value to the consolidated financial statements, included in this Annual Report on Form 10-K, for descriptions of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized.
Since swaps and swaptions are used for purposes of hedging our interest rate exposure, their unrealized valuation gains and losses (excluding the reversal of unrealized gains and losses to realized gains and losses upon termination, maturation or option expiration) are generally offset by unrealized losses and gains in our Agency RMBS AFS portfolio, which are recorded either directly to stockholders’ equity through other comprehensive loss or to (loss) gain on investment securities, in the case of certain AFS securities for which we have elected the fair value option.
Since swaps and swaptions are used for purposes of hedging our interest rate exposure, their unrealized valuation gains and losses (excluding the reversal of unrealized gains and losses to realized gains and losses upon termination, maturation or option expiration) are generally offset by unrealized losses and gains in our Agency RMBS AFS portfolio, which are recorded either directly to stockholders’ equity through other comprehensive income (loss) or to loss on investment securities, in the case of certain AFS securities for which we have elected the fair value option.
Our Agency RMBS, given their liquidity and high credit quality, are eligible for higher levels of leverage, while MSR, with less liquidity and/or more exposure to prepayment, utilize lower levels of leverage.
Our Agency RMBS, given their liquidity and high credit quality, are eligible for higher levels of leverage, while MSR, with less liquidity and/or more exposure to prepayment risk, utilize lower levels of leverage.
The majority of the “other” component of (loss) gain on investment securities is related to changes in unrealized gains (losses) on certain AFS securities for which we have elected the fair value option.
The majority of the “other” component of loss on investment securities is related to changes in unrealized gains (losses) on certain AFS securities for which we have elected the fair value option.
Subsequent adverse or favorable changes in expected cash flows are recognized immediately in earnings as a provision for or reversal of provision for credit losses (within (loss) gain on investment securities).
Subsequent adverse or favorable changes in expected cash flows are recognized immediately in earnings as a provision for or reversal of provision for credit losses (within loss on investment securities).
For the year ended December 31, 2022, our board of directors elected to distribute all of our REIT taxable income for the year. Temporary differences between GAAP net income (loss) and taxable income can generate deterioration in book value on a permanent and temporary basis as taxable income is distributed that has not been earned for U.S. GAAP purposes.
For the year ended December 31, 2023, our board of directors elected to distribute all of our REIT taxable income for the year. Temporary differences between GAAP net income (loss) and taxable income can generate deterioration in book value on a permanent and temporary basis as taxable income is distributed that has not been earned for U.S. GAAP purposes.
Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Our Agency portfolio also includes securities with implicit prepayment protection, including lower loan balances (securities collateralized by loans of less than $200,000 in initial principal balance), higher LTVs (securities collateralized by loans with LTVs greater than or equal to 80%), certain geographic concentrations, loans secured by investor-owned properties and lower FICO scores.
Our Agency portfolio also includes securities with implicit prepayment protection, including lower loan balances (securities collateralized by loans of less than $300,000 in initial principal balance), higher LTVs (securities collateralized by loans with LTVs greater than or equal to 80%), certain geographic concentrations, loans secured by investor-owned properties and lower FICO scores.
Financial Condition Available-for-Sale Securities, at Fair Value The majority of our AFS investment securities portfolio is comprised of fixed rate Agency mortgage-backed securities backed by single-family and multi-family mortgage loans. We also hold $125.2 million in tranches of mortgage-backed and asset-backed P&I and interest-only non-Agency securities.
Financial Condition Available-for-Sale Securities, at Fair Value The majority of our AFS investment securities portfolio is comprised of fixed rate Agency mortgage-backed securities backed by single-family and multi-family mortgage loans. We also hold $4.2 million in tranches of mortgage-backed and asset-backed P&I and interest-only non-Agency securities.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.
We believe the current degree of leverage within our portfolio helps ensure that we have access to unused borrowing capacity, thus supporting our liquidity and the strength of our balance sheet. 45 Table of Contents The following table provides a summary of our borrowings under repurchase agreements (excluding those collateralized by U.S.
We believe the current degree of leverage within our portfolio helps ensure that we have access to unused borrowing capacity, thus supporting our liquidity and the strength of our balance sheet. The following table provides a summary of our borrowings under repurchase agreements (excluding those collateralized by U.S.
We believe our portfolio management approach, including our asset selection process, positions us to respond to a variety of market scenarios.
We believe our active portfolio management approach, including our asset selection process, positions us to respond to a variety of market scenarios.
For Agency RMBS, the third-party pricing vendors and brokers use pricing models that commonly incorporate such factors as coupons, primary and secondary mortgage rates, rate reset periods, issuer, prepayment speeds, credit enhancements and expected life of the security.
For Agency securities, the third-party pricing vendors and brokers use pricing models that commonly incorporate such factors as coupons, primary and secondary mortgage rates, rate reset periods, issuer, prepayment speeds, credit enhancements and expected life of the security.
The change in fair value of interest rate swaps and swaptions during the three and twelve months ended December 31, 2022 and 2021 was a result of changes to floating interest rates (OIS or SOFR), the swap curve and corresponding counterparty borrowing rates.
The change in fair value of interest rate swaps and swaptions during the three and twelve months ended December 31, 2023 and 2022 was a result of changes to floating interest rates (OIS or SOFR), the swap curve and corresponding counterparty borrowing rates.
We are subject to a variety of financial covenants under our lending agreements. The following represent the most restrictive financial covenants across our lending agreements as of December 31, 2022: • Total indebtedness to tangible net worth must be less than 8.0:1.0.
We are subject to a variety of financial covenants under our lending agreements. The following represent the most restrictive financial covenants across our lending agreements as of December 31, 2023: • Total indebtedness to tangible net worth must be less than 8.0:1.0.
Consequently, we met the REIT income and asset tests. We also met all REIT requirements regarding the ownership of our common stock and the distribution of our net income. Therefore, for the year ended December 31, 2022, we believe that we qualified as a REIT under the Code.
Consequently, we met the REIT income and asset tests. We also met all REIT requirements regarding the ownership of our common stock and the distribution of our net income. Therefore, for the year ended December 31, 2023, we believe that we qualified as a REIT under the Code.
The increase in cost of funds associated with the financing of Agency Derivatives for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021, was the result of rising interest rates.
The increase in cost of funds associated with the financing of Agency Derivatives for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022, was the result of rising interest rates.
We calculate that at least 75% of our assets were qualified REIT assets, as defined in the Code for the year ended December 31, 2022. We also calculate that our revenue qualified for the 75% source of income test and for the 95% source of income test rules for the year ended December 31, 2022.
We calculate that at least 75% of our assets were qualified REIT assets, as defined in the Code for the year ended December 31, 2023. We also calculate that our revenue qualified for the 75% source of income test and for the 95% source of income test rules for the year ended December 31, 2023.
Accordingly, we monitor our compliance with both the 55% Test and the 80% Tests of the 1940 Act in order to maintain our exempt status. As of December 31, 2022, we determined that we maintained compliance with both the 55% Test and the 80% Test requirements.
Accordingly, we monitor our compliance with both the 55% Test and the 80% Tests of the 1940 Act in order to maintain our exempt status. As of December 31, 2023, we determined that we maintained compliance with both the 55% Test and the 80% Test requirements.
The increase in cost of funds associated with the financing of MSR assets and related servicing advance obligations for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021, was due to rising interest rates and an increase in the use of revolving credit facility and repurchase agreement financing which on average carry higher floating rate spreads than term notes.
The increase in cost of funds associated with the financing of MSR assets and related servicing advance obligations for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022, was due to rising interest rates and an increase in the use of revolving credit facilities and repurchase agreement financing, which on average carry higher floating rate spreads than term notes.
The provision recognized for the three months ended December 31, 2022 was primarily due to income from MSR servicing activities and net gains recognized on derivative instruments offset by net losses recognized on MSR and operating expenses.
The provision recognized for the three months ended December 31, 2022 was primarily due to income from MSR servicing activities and net gains recognized on derivative instruments, offset by net losses recognized on MSR and operating expenses in our TRSs.
As of December 31, 2022, 50% of the highest net worth during the 24 calendar months prior, as defined, was $1.6 billion and our net worth, as defined, was $2.2 billion. We are also subject to additional financial covenants in connection with various other agreements we enter into in the normal course of our business.
As of December 31, 2023, 50% of the highest net worth during the 24 calendar months prior, as defined, was $1.4 billion and our net worth, as defined, was $2.2 billion. We are also subject to additional financial covenants in connection with various other agreements we enter into in the normal course of our business.
We do not expect to sell assets on a frequent basis, but may sell assets to reallocate capital into new assets that we believe have higher risk-adjusted returns. We use a discounted cash flow method to estimate and recognize an allowance for credit losses on AFS securities.
We do not expect to sell assets on a frequent basis, but may sell assets to reallocate capital into new assets that we believe have higher risk-adjusted returns. 38 Table of Contents We use a discounted cash flow method to estimate and recognize an allowance for credit losses on AFS securities.
The provision recognized for the year ended December 31, 2022 was primarily due to income from MSR servicing activities and net gains recognized on MSR offset by net losses recognized on derivative instruments and operating expenses.
The provision recognized for the year ended December 31, 2022 was primarily due to income from MSR servicing activities and net gains recognized on MSR, offset by net losses recognized on derivative instruments and operating expenses in our TRSs.
Additionally, we frequently perform shock analyses against various market events to monitor the adequacy of our excess liquidity. 48 Table of Contents During the year ended December 31, 2022, we did not experience any material issues accessing our funding sources.
Additionally, we frequently perform shock analyses against various market events to monitor the adequacy of our excess liquidity. 46 Table of Contents During the year ended December 31, 2023, we did not experience any material issues accessing our funding sources.
However, these yields were offset by the cost of financing the associated repurchase agreements collateralized by U.S. Treasury securities during the three and twelve months ended December 31, 2022. We did not hold any repurchase agreements collateralized by U.S. Treasury securities during the three and twelve months ended December 31, 2021.
However, for the year ended December 31, 2023 and the three and twelve months ended December 31, 2022, these yields were offset by the cost of financing the associated repurchase agreements collateralized by U.S. Treasury securities. We did not hold any repurchase agreements collateralized by U.S. Treasury securities during the three months ended December 31, 2023.
As of December 31, 2022, we had master repurchase agreements in place with 39 counterparties (lenders), the majority of which are U.S. domiciled financial institutions, and we continue to evaluate additional counterparties to manage and optimize counterparty risk.
As of December 31, 2023, we had master repurchase agreements in place with 37 counterparties (lenders), the majority of which are U.S. domiciled financial institutions, and we continue to evaluate additional counterparties to manage and optimize counterparty risk.
GAAP and tax accounting related to unrealized gains and losses from derivative instruments, realized and unrealized gains and losses from MSR and RMBS, accretion and amortization from RMBS, changes in reserves related to servicing advances and allowance for credit losses on certain RMBS, and deferral of net capital losses.
GAAP and tax accounting related to unrealized gains and losses from derivative instruments, realized and unrealized gains and losses from MSR and RMBS, accretion and amortization from RMBS, litigation expenses, changes in reserves related to servicing advances and allowance for credit losses on certain RMBS, deferral of net capital losses and utilization of net operating losses.
Income Taxes During the three and twelve months ended December 31, 2022, our TRSs recognized a provision for income taxes of $8.5 million and $104.2 million, respectively.
During the three and twelve months ended December 31, 2022, we recognized a provision for income taxes of $8.5 million and $104.2 million, respectively.
The increase in gain (decrease in loss) on servicing asset for the year ended December 31, 2022, as compared to the same period in 2021, was driven by higher favorable change in valuation assumptions used in the fair valuation of MSR, lower portfolio runoff and gains on sales of MSR.
The increase in loss (decrease in gain) on servicing asset for the year ended December 31, 2023, as compared to the same period in 2022, was driven by lower favorable change in valuation assumptions used in the fair valuation of MSR, offset by lower portfolio runoff and gains on sales of excess MSR.
Repurchase agreements, revolving credit facilities and term notes payable are collateralized by our pledge of AFS securities, derivative instruments, MSR, servicing advances and certain cash balances. Substantially all of our Agency RMBS are currently pledged as collateral, and a portion of our non-Agency securities have been pledged as collateral for repurchase agreements.
Repurchase agreements, revolving credit facilities and term notes payable are collateralized by our pledge of AFS securities, derivative instruments, MSR, servicing advances and certain cash balances. Substantially all of our Agency securities are currently pledged as collateral, and the majority of our non-Agency securities have been pledged as collateral for repurchase agreements.
GAAP to taxable income timing differences, than if the portfolio were accounted for as trading instruments. Dividends For the year ended December 31, 2022, we declared cash dividends totaling $2.64 per common share. As a REIT, we are required to distribute at least 90% of our taxable income to stockholders, subject to certain distribution requirements.
GAAP to taxable income timing differences than if the portfolio were accounted for as trading instruments. Dividends For the year ended December 31, 2023, we declared cash dividends totaling $1.95 per common share. As a REIT, we are required to distribute at least 90% of our taxable income to stockholders, subject to certain distribution requirements.
The temporary tax differences recorded in 2022 and 2021 were principally timing differences between U.S.
The temporary tax differences recorded in 2023 and 2022 were principally timing differences between U.S.
(2) U.S. Treasury securities effectively borrowed under reverse repurchase agreements. As of December 31, 2022, the debt-to-equity ratio funding our AFS securities, MSR, servicing advances and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, was 4.4:1.0.
(2) U.S. Treasury securities effectively borrowed under reverse repurchase agreements. 43 Table of Contents As of December 31, 2023, the debt-to-equity ratio funding our AFS securities, MSR, servicing advances and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, was 4.5:1.0.
Summary of Results of Operations and Financial Condition All per share amounts, common shares outstanding and common equity-based awards for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split. Our book value per common share for U.S.
Summary of Results of Operations and Financial Condition All per share amounts, common shares outstanding and common equity-based awards for all periods presented have been adjusted on a retroactive basis to reflect the one-for-four reverse stock split effected on November 1, 2022. Our book value per common share for U.S.
We believe our broker and banking counterparties are well-capitalized organizations, and we attempt to manage our cash balances across these organizations to reduce our exposure to any single counterparty. As of December 31, 2022, we had entered into repurchase agreements with 39 counterparties, 20 of which had outstanding balances.
We believe our broker and banking counterparties are well-capitalized organizations, and we attempt to manage our cash balances across these organizations to reduce our exposure to any single counterparty. As of December 31, 2023, we had entered into repurchase agreements with 37 counterparties, 19 of which had outstanding balances.
As of December 31, 2022, our liquidity, as defined, was $683.5 million. • Net worth must be greater than the higher of $1.5 billion or 50% of the highest net worth during the 24 calendar months prior.
As of December 31, 2023, our liquidity, as defined, was $729.7 million. • Net worth must be greater than the higher of $1.5 billion or 50% of the highest net worth during the 24 calendar months prior.
As of December 31, 2022, our total indebtedness to tangible net worth, as defined, was 5.1:1.0. • Cash liquidity must be greater than $200.0 million.
As of December 31, 2023, our total indebtedness to tangible net worth, as defined, was 4.9:1.0. • Cash liquidity must be greater than $200.0 million.
The cash movements can be summarized by the following: • Cash flows from operating activities. For the year ended December 31, 2022, operating activities increased our cash balances by approximately $623.4 million, primarily driven by our financial results for the year. • Cash flows from investing activities .
The cash movements can be summarized by the following: • Cash flows from operating activities. For the year ended December 31, 2023, operating activities increased our cash balances by approximately $343.5 million, primarily driven by our financial results for the year. • Cash flows from investing activities .
As of December 31, 2022, we held $683.5 million in cash and cash equivalents available to support our operations; $10.8 billion of AFS securities, MSR, and derivative assets held at fair value; and $10.4 billion of outstanding debt in the form of repurchase agreements, borrowings under revolving credit facilities, term notes payable and convertible senior notes.
As of December 31, 2023, we held $729.7 million in cash and cash equivalents available to support our operations; $11.5 billion of AFS securities, MSR, and derivative assets held at fair value; and $9.9 billion of outstanding debt in the form of repurchase agreements, borrowings under revolving credit facilities, term notes payable and convertible senior notes.
With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding certain AFS securities for which we have elected the fair value option and securities with an allowance for credit losses, do not impact our GAAP net income (loss) or taxable income but are recognized on our consolidated balance sheets as a change in stockholders’ equity under “accumulated other comprehensive (loss) income.” For the three months ended December 31, 2022, net unrealized gains on AFS securities recognized as other comprehensive income were $106.7 million, which was the result of mortgage spread tightening.
With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding certain AFS securities for which we have elected the fair value option and securities with an allowance for credit losses, do not impact our GAAP net (loss) income or taxable income but are recognized on our consolidated balance sheets as a change in stockholders’ equity under “accumulated other comprehensive loss.” For the three and twelve months ended December 31, 2023, net unrealized gains on AFS securities recognized as other comprehensive income were $405.9 million and net unrealized losses on AFS securities recognized as other comprehensive loss were $38.6 million, respectively.
Fair Value Measurement A significant portion of our assets and liabilities are reported at fair value and, therefore, our consolidated balance sheets and statements of comprehensive loss are significantly affected by fluctuations in market prices. At December 31, 2022, approximately 80.1% of our total assets, or $10.8 billion, consisted of financial instruments recorded at fair value.
Fair Value Measurement A significant portion of our assets and liabilities are reported at fair value and, therefore, our consolidated balance sheets and statements of comprehensive loss are significantly affected by fluctuations in market prices. At December 31, 2023, approximately 87.3% of our total assets, or $11.5 billion, consisted of financial instruments recorded at fair value.
Our GAAP net loss attributable to common stockholders was $262.4 million and GAAP net income attributable to common stockholders was $186.8 million ($(3.04) and $2.13 per diluted weighted average share) for the three and twelve months ended December 31, 2022, respectively, as compared to GAAP net loss attributable to common stockholders of $15.0 million and GAAP net income attributable to common stockholders of $128.8 million ($(0.18) and $1.72 per diluted weighted average share) for the three and twelve months ended December 31, 2021, respectively.
Our GAAP net loss attributable to common stockholders was $444.7 million and $152.0 million ($(4.56) and $(1.60) per diluted weighted average share) for the three and twelve months ended December 31, 2023, respectively, as compared to GAAP net loss attributable to common stockholders of $262.4 million and GAAP net income attributable to common stockholders of $186.8 million ($(3.04) and $2.13 per diluted weighted average share) for the three and twelve months ended December 31, 2022, respectively.
Treasuries (1) 877,632 — Total $ 11,692,108 $ 9,995,328 ____________________ (1) U.S. Treasury securities effectively borrowed under reverse repurchase agreements.
Treasuries (1) — 877,632 Total $ 11,314,539 $ 11,692,108 ____________________ (1) U.S. Treasury securities effectively borrowed under reverse repurchase agreements.
We utilize “bid side” pricing for our Agency RMBS and, as a result, certain assets, especially the most recent purchases, may realize a markdown due to the “bid-offer” spread. To the extent that this occurs, any economic effect of this would be reflected in accumulated other comprehensive (loss) income.
We utilize “bid side” pricing for our Agency securities and, as a result, certain assets, especially the most recent purchases, may realize a markdown due to the “bid-offer” spread. To the extent that this occurs on available-for-sale securities not accounted for under the fair value option, any economic effect of this would be reflected in accumulated other comprehensive loss.
During the three and twelve months ended December 31, 2022, our economic debt-to-equity ratio funding our AFS securities, MSR and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, decreased from 7.5:1.0 to 6.3:1.0 and increased from 4.8:1.0 to 6.3:1.0, respectively.
During the three and twelve months ended December 31, 2023, our economic debt-to-equity ratio funding our Agency and non-Agency investment securities, MSR and servicing advances, which includes unsecured borrowings under convertible senior notes, implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, decreased from 6.3:1.0 to 6.0:1.0 and 6.3:1.0 to 6.0:1.0, respectively.
We intend to continue to operate in a manner which complies with all of our financial covenants. 49 Table of Contents The following table summarizes assets at carrying values that were pledged or restricted as collateral for the future payment obligations of repurchase agreements, revolving credit facilities, term notes payable and derivative instruments at December 31, 2022 and December 31, 2021: (in thousands) December 31, 2022 December 31, 2021 Available-for-sale securities, at fair value $ 7,426,953 $ 7,009,449 Mortgage servicing rights, at fair value 2,958,057 2,130,807 Restricted cash 324,854 747,979 Due from counterparties 22,055 33,718 Derivative assets, at fair value 14,738 39,608 Other assets 67,819 33,767 U.S.
We intend to continue to operate in a manner which complies with all of our financial covenants. 47 Table of Contents The following table summarizes assets at carrying values that were pledged or restricted as collateral for the future payment obligations of repurchase agreements, revolving credit facilities, term notes payable and derivative instruments at December 31, 2023 and December 31, 2022: (in thousands) December 31, 2023 December 31, 2022 Available-for-sale securities, at fair value $ 8,126,028 $ 7,426,953 Mortgage servicing rights, at fair value 3,047,890 2,958,057 Restricted cash 12,575 324,854 Due from counterparties 36,420 22,055 Derivative assets, at fair value 11,877 14,738 Other assets 79,749 67,819 U.S.
Treasuries (2) 888,295 4.49 % — % — — % — % Other (1) 282,496 6.25 % N/A 424,827 6.25 % N/A Total $ 10,402,349 4.54 % 8.4 % $ 8,898,809 0.80 % 6.6 % ____________________ (1) Includes unsecured convertible senior notes due 2026 paying interest semiannually at a rate of 6.25% per annum on the aggregate principal amount of $287.5 million.
Treasuries (2) — — % — % 888,295 4.49 % — % Other (1) 268,582 6.25 % N/A 282,496 6.25 % N/A Total $ 9,913,231 6.22 % 9.1 % $ 10,402,349 4.54 % 8.4 % ____________________ (1) Includes unsecured convertible senior notes due 2026 paying interest semiannually at a rate of 6.25% per annum on the aggregate principal amount of $271.9 million.
The increase in cost of funds associated with the financing of AFS securities for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021, was due to rising interest rates. 38 Table of Contents The increase in yields on reverse repurchase agreements for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021, was the result of rising interest rates.
The increase in cost of funds associated with the financing of AFS securities for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022, was due to rising interest rates.
All of our P&I Agency RMBS AFS are Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, or Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. government.
All of our P&I Agency RMBS AFS are Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, or Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. government. The majority of these securities consist of whole pools in which we own all of the investment interests in the securities.
For the year ended December 31, 2022, investing activities decreased our cash balances by approximately $2.8 billion, primarily driven by purchases of AFS securities and MSR and net payments under reverse repurchase agreements, offset by proceeds from sales of and principal payments on AFS securities and sales of MSR. • Cash flows from financing activities.
For the year ended December 31, 2023, investing activities decreased our cash balances by approximately $195.8 million, primarily driven by purchases of Agency RMBS, MSR and derivative instruments, offset by sales of and principal payments on Agency RMBS, sales of MSR and net proceeds from reverse repurchase agreements. • Cash flows from financing activities.
SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. Numerous industry wide and company-specific transitions as it relates to derivatives and cash markets exposed to LIBOR are in process, if not complete.
SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. Numerous industry wide and company-specific transitions as it relates to derivatives and cash markets exposed to LIBOR were completed in connection with its phase-out on June 30, 2023.
Additionally, the selection of securities with certain attributes is driven by the perceived relative value of the securities, which factors in the opportunities in the marketplace, the cost of financing and the cost of hedging interest rate, prepayment, credit and other portfolio risks.
Additionally, the selection of securities with certain attributes is driven by the perceived relative value of the securities, which factors in the opportunities in the marketplace, the cost of financing and the cost of hedging interest rate, prepayment, credit and other portfolio risks. Accordingly, our Agency RMBS capital allocation reflects management’s flexible approach to investing in the marketplace.
Gain On Interest Rate Swap And Swaption Agreements The following table summarizes the net interest spread and gains and losses associated with our interest rate swap and swaption positions recognized during the three and twelve months ended December 31, 2022 and 2021: Three Months Ended Year Ended December 31, December 31, (in thousands) 2022 2021 2022 2021 Net interest spread $ — $ 5,772 $ (4,830) $ 14,262 Early termination, agreement maturation and option expiration (losses) gains — (5,143) 43,197 2,369 Change in unrealized gain (loss) on interest rate swap and swaption agreements, at fair value — 36,360 (8,868) 25,460 Gain on interest rate swap and swaption agreements $ — $ 36,989 $ 29,499 $ 42,091 40 Table of Contents Net interest spread recognized for the accrual and/or settlement of the net interest expense associated with our interest rate swaps results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or a floating interest rate (OIS or SOFR) on positions held to economically hedge/mitigate portfolio interest rate exposure (or duration) risk.
(Loss) Gain On Interest Rate Swap And Swaption Agreements The following table summarizes the net interest spread and gains and losses associated with our interest rate swap and swaption positions recognized during the three and twelve months ended December 31, 2023 and 2022: Three Months Ended Year Ended December 31, December 31, (in thousands) 2023 2022 2023 2022 Net interest spread $ 7,444 $ — $ 21,358 $ (4,830) Early termination, agreement maturation and option expiration (losses) gains (12,438) — (36,194) 43,197 Change in unrealized loss on interest rate swap and swaption agreements, at fair value (134,240) — (38,110) (8,868) (Loss) gain on interest rate swap and swaption agreements $ (139,234) $ — $ (52,946) $ 29,499 39 Table of Contents Net interest spread recognized for the accrual and/or settlement of the net interest expense associated with our interest rate swaps results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or a floating interest rate (OIS or SOFR) on positions held to economically hedge/mitigate portfolio interest rate exposure (or duration) risk.
Additionally, the key economic assumptions and sensitivity of the fair value of MSR to immediate adverse changes in these assumptions are presented in Note 5 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.
Additionally, the key economic assumptions and sensitivity of the fair value of MSR to immediate adverse changes in these assumptions are presented in Note 6 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K. Market Conditions and Outlook The fourth quarter of 2023 was marked by continued volatility in rates and spreads.
In addition to our master repurchase agreements to fund our Agency and non-Agency securities, we have one repurchase facility and three revolving credit facilities that provide short- and long-term financing for our MSR portfolio. We also have one revolving credit facility that provides long-term financing for our servicing advances.
In addition to our master repurchase agreements that fund our Agency and non-Agency securities as well as any repurchased MSR term note bonds (originally issued by our subsidiaries), we have one repurchase facility and three revolving credit facilities that provide short- and long-term financing for our MSR portfolio.
Treasuries), revolving credit facilities, term notes payable and convertible senior notes, plus implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity. Effective as of December 31, 2022, net payable (receivable) on unsettled RMBS is now included in the calculation for economic debt-to-equity.
Treasuries), revolving credit facilities, term notes payable and convertible senior notes, plus implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity. Equity The following table provides details of our changes in stockholders’ equity from December 31, 2022 to December 31, 2023.
GAAP to Estimated Taxable Income The following tables provide reconciliations of our GAAP net income (loss) to our estimated taxable income (loss) split between our REIT and TRSs for the years ended December 31, 2022 and 2021: Year Ended December 31, 2022 (in millions) TRS REIT Consolidated GAAP net income (loss), pre-tax $ 445.5 $ (121.0) $ 324.5 State taxes (13.4) 0.1 (13.3) Adjusted GAAP net income (loss), pre-tax 432.1 (120.9) 311.2 Permanent differences State deferred tax expense 14.3 — 14.3 Other permanent differences 0.9 (1.3) (0.4) Temporary differences Net accretion of OID and market discount (61.7) 2.8 (58.9) Net unrealized gains and losses (416.8) (206.7) (623.5) Net realized gains and losses on sales of RMBS — 18.9 18.9 Net realized gains and losses on sales of MSR 15.9 (124.0) (108.1) Credit loss impairment — 2.7 2.7 Other temporary differences (0.5) 24.9 24.4 Capital loss carryforward deferral — 1,029.3 1,029.3 Net operating loss carryforward utilization — (336.6) (336.6) Estimated taxable (loss) income (15.8) 289.1 273.3 Dividend paid deduction — (289.1) (289.1) Estimated taxable loss post-dividend deduction $ (15.8) $ — $ (15.8) Year Ended December 31, 2021 (in millions) TRS REIT Consolidated GAAP net income (loss), pre-tax $ 60.1 $ 131.3 $ 191.4 State taxes 10.6 — 10.6 Adjusted GAAP net income (loss), pre-tax 70.7 131.3 202.0 Permanent differences State deferred tax benefit (9.0) — (9.0) Other permanent differences — 0.1 0.1 Temporary differences Net accretion of OID and market discount (53.7) (59.4) (113.1) Net unrealized gains and losses (137.3) (31.6) (168.9) Net realized gains and losses on sales of RMBS — (4.9) (4.9) Credit loss impairment — 9.8 9.8 Other temporary differences 5.8 2.0 7.8 Capital loss carryforward deferral — 16.6 16.6 Estimated taxable (loss) income (123.5) 63.9 (59.6) Dividend paid deduction — (63.9) (63.9) Estimated taxable (loss) post-dividend deduction $ (123.5) $ — $ (123.5) 47 Table of Contents The permanent tax differences recorded in 2022 and 2021 included a difference related to officer’s compensation deduction limitations, compensation expense related to restricted stock dividends and vesting, and state deferred taxes.
GAAP to Estimated Taxable Income The following tables provide reconciliations of our GAAP net income (loss) to our estimated taxable income (loss) split between our REIT and TRSs for the years ended December 31, 2023 and 2022: Year Ended December 31, 2023 (in millions) TRS REIT Consolidated GAAP net income (loss), pre-tax $ 99.0 $ (182.4) $ (83.4) State taxes (2.5) (0.4) (2.9) Adjusted GAAP net income (loss), pre-tax 96.5 (182.8) (86.3) Permanent differences Dividends from TRSs — 65.0 65.0 State deferred tax benefit (2.1) — (2.1) Other permanent differences (0.8) 4.0 3.2 Temporary differences Net accretion of OID and market discount (67.7) 33.5 (34.2) Net unrealized gains and losses 53.2 48.6 101.8 Net realized gains and losses on sales of RMBS — (1.1) (1.1) Net realized gains and losses on sales of MSR 0.2 (27.3) (27.1) Credit loss impairment — (0.5) (0.5) Other temporary differences 4.0 26.3 30.3 Capital loss carryforward deferral — 331.2 331.2 Net operating loss carryforward utilization (66.6) (51.5) (118.1) Estimated taxable income 16.7 245.4 262.1 Dividend paid deduction — (245.4) (245.4) Estimated taxable income post-dividend paid deduction $ 16.7 $ — $ 16.7 Year Ended December 31, 2022 (in millions) TRS REIT Consolidated GAAP net income (loss), pre-tax $ 445.5 $ (121.0) $ 324.5 State taxes (13.4) 0.1 (13.3) Adjusted GAAP net income (loss), pre-tax 432.1 (120.9) 311.2 Permanent differences State deferred tax expense 14.3 — 14.3 Other permanent differences 0.9 (1.3) (0.4) Temporary differences Net accretion of OID and market discount (61.7) 2.8 (58.9) Net unrealized gains and losses (416.8) (206.7) (623.5) Net realized gains and losses on sales of RMBS — 18.9 18.9 Net realized gains and losses on sales of MSR 15.9 (124.0) (108.1) Credit loss impairment — 2.7 2.7 Other temporary differences (0.5) 24.9 24.4 Capital loss carryforward deferral — 1,029.3 1,029.3 Net operating loss carryforward utilization — (336.6) (336.6) Estimated taxable (loss) income (15.8) 289.1 273.3 Dividend paid deduction — (289.1) (289.1) Estimated taxable (loss) post-dividend paid deduction $ (15.8) $ — $ (15.8) 45 Table of Contents The permanent differences recorded in 2023 were primarily due to dividends paid from the Company’s TRSs to the REIT.
At December 31, 2022 and December 31, 2021, borrowings under repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes had the following characteristics: 44 Table of Contents (dollars in thousands) December 31, 2022 December 31, 2021 Borrowing Type Amount Outstanding Weighted Average Borrowing Rate Weighted Average Years to Maturity Amount Outstanding Weighted Average Borrowing Rate Weighted Average Years to Maturity Repurchase agreements $ 8,603,011 3.95 % 0.2 $ 7,656,445 0.24 % 0.2 Revolving credit facilities 1,118,831 7.68 % 1.1 420,761 3.46 % 1.2 Term notes payable 398,011 7.19 % 1.5 396,776 2.90 % 2.5 Convertible senior notes (1) 282,496 6.25 % 3.0 424,827 6.25 % 2.7 Total $ 10,402,349 4.54 % 1.7 $ 8,898,809 0.80 % 0.5 (dollars in thousands) December 31, 2022 December 31, 2021 Collateral Type Amount Outstanding Weighted Average Borrowing Rate Weighted Average Haircut on Collateral Value Amount Outstanding Weighted Average Borrowing Rate Weighted Average Haircut on Collateral Value Agency RMBS $ 7,321,834 3.70 % 3.9 % $ 7,495,230 0.17 % 4.2 % Non-Agency securities 70,809 5.73 % 40.0 % 171 1.24 % 43.9 % Agency Derivatives 13,073 4.83 % 18.9 % 36,044 0.74 % 17.8 % Mortgage servicing rights 1,801,992 7.61 % 30.6 % 923,337 3.30 % 27.9 % Mortgage servicing advances 23,850 7.75 % 12.9 % 19,200 3.23 % 13.8 % U.S.
At December 31, 2023 and December 31, 2022, borrowings under repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes had the following characteristics: (dollars in thousands) December 31, 2023 December 31, 2022 Borrowing Type Amount Outstanding Weighted Average Borrowing Rate Weighted Average Years to Maturity Amount Outstanding Weighted Average Borrowing Rate Weighted Average Years to Maturity Repurchase agreements $ 8,020,207 5.74 % 0.2 $ 8,603,011 3.95 % 0.2 Revolving credit facilities 1,329,171 8.66 % 1.1 1,118,831 7.68 % 1.1 Term notes payable 295,271 8.27 % 0.5 398,011 7.19 % 1.5 Convertible senior notes (1) 268,582 6.25 % 2.0 282,496 6.25 % 3.0 Total $ 9,913,231 6.22 % 0.3 $ 10,402,349 4.54 % 1.7 (dollars in thousands) December 31, 2023 December 31, 2022 Collateral Type Amount Outstanding Weighted Average Borrowing Rate Weighted Average Haircut on Collateral Value Amount Outstanding Weighted Average Borrowing Rate Weighted Average Haircut on Collateral Value Agency RMBS $ 7,739,356 5.64 % 3.8 % $ 7,321,834 3.70 % 4.0 % Non-Agency securities 233 6.36 % 44.2 % 70,809 5.73 % 40.0 % Agency Derivatives 8,046 6.14 % 18.5 % 13,073 4.83 % 18.9 % Mortgage servicing rights 1,862,714 8.59 % 32.4 % 1,801,992 7.61 % 30.6 % Mortgage servicing advances 34,300 8.68 % 12.4 % 23,850 7.75 % 12.9 % U.S.
During the three months ended December 31, 2022, the debt-to-equity ratio funding our AFS securities, MSR and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, decreased from 5.5:1.0 to 4.4:1.0 due to decreased financing on Agency RMBS and MSR.
During the three and twelve months ended December 31, 2023, the debt-to-equity ratio funding our Agency and non-Agency investment securities, MSR and servicing advances, which includes unsecured borrowings under convertible senior notes, decreased from 5.2:1.0 to 4.5:1.0 and and increased from 4.4:1.0 to 4.5:1.0, respectively.
(2) Represents unused capacity amounts to which commitment fees are charged. (3) This repurchase facility is secured by a VFN issued in connection with our securitization of MSR, which is collateralized by our MSR.
(2) Represents unused capacity amounts to which commitment fees are charged. (3) The revolving period of this facility ceases on September 17, 2024, at which time the facility starts a 6-month amortization period. (4) This repurchase facility is secured by a VFN issued in connection with our securitization of MSR, which is collateralized by our MSR.
Interest Income Interest income increased from $33.0 million and $168.6 million for the three and twelve months ended December 31, 2021, respectively, to $99.3 million and $295.5 million for the same periods in 2022 due to lower amortization recognized on Agency RMBS due to slower prepayments, higher interest on cash balances as a result of the higher interest rate environment and increased use of reverse repurchase agreements.
Interest Income Interest income increased from $99.3 million and $295.5 million for the three and twelve months ended December 31, 2022, respectively, to $122.4 million and $480.4 million for the same periods in 2023 due to an increase in Agency RMBS portfolio size, lower amortization recognized on Agency RMBS due to lower unamortized premium, and higher interest on cash balances as a result of the higher interest rate environment.
(in millions, except per share amounts) Book Value Common Shares Outstanding Common Book Value Per Share Common stockholders’ equity at December 31, 2021 $ 2,017.7 86.0 $ 23.47 Net income 220.2 Other comprehensive loss (465.0) Comprehensive loss (244.8) Dividends on preferred stock (53.6) Gain on repurchase and retirement of preferred stock 20.1 Comprehensive loss attributable to common stockholders (278.3) Dividend declarations (228.9) Other 11.7 0.1 Balance before capital transactions 1,522.2 86.1 Repurchase and retirement of preferred stock 2.4 Issuance of common stock, net of offering costs 6.6 0.3 Common stockholders’ equity at December 31, 2022 $ 1,531.2 86.4 $ 17.72 Total preferred stock liquidation preference 652.3 Total stockholders’ equity at December 31, 2022 $ 2,183.5 46 Table of Contents U.S.
(in millions, except per share amounts) Book Value Common Shares Outstanding Common Book Value Per Share Common stockholders’ equity at December 31, 2022 $ 1,531.2 86.4 $ 17.72 Net loss (106.4) Other comprehensive income 102.3 Comprehensive loss (4.1) Dividends on preferred stock (48.6) Gain on repurchase and retirement of preferred stock 3.0 Comprehensive loss attributable to common stockholders (49.7) Dividends on common stock (192.2) Other 11.0 0.2 Balance before capital transactions 1,300.3 86.6 Repurchase and retirement of preferred stock 0.6 Repurchase of common stock (7.0) (0.6) Issuance of common stock, net of offering costs 275.6 17.2 Common stockholders’ equity at December 31, 2023 $ 1,569.5 103.2 $ 15.21 Total preferred stock liquidation preference 633.9 Total stockholders’ equity at December 31, 2023 $ 2,203.4 44 Table of Contents U.S.
The following table provides the maturities of our repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes as of December 31, 2022 and December 31, 2021: (in thousands) December 31, 2022 December 31, 2021 Within 30 days $ 2,691,195 $ 1,771,027 30 to 59 days 2,160,737 1,807,544 60 to 89 days 2,536,636 1,981,056 90 to 119 days 905,443 1,249,435 120 to 364 days 509,000 1,265,638 One to three years 1,316,842 543,026 Three to five years 282,496 281,083 Total $ 10,402,349 $ 8,898,809 50 Table of Contents For the year ended December 31, 2022, our restricted and unrestricted cash balance decreased approximately $962.2 million to $1.1 billion at December 31, 2022.
The following table provides the maturities of our repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes as of December 31, 2023 and December 31, 2022: (in thousands) December 31, 2023 December 31, 2022 Within 30 days $ 2,833,162 $ 2,691,195 30 to 59 days 1,918,818 2,160,737 60 to 89 days 2,059,438 2,536,636 90 to 119 days 994,789 905,443 120 to 364 days 833,571 509,000 One to three years 1,273,453 1,316,842 Three to five years — 282,496 Total $ 9,913,231 $ 10,402,349 48 Table of Contents For the year ended December 31, 2023, our restricted and unrestricted cash balance decreased approximately $331.7 million to $794.8 million at December 31, 2023.
During the three and twelve months ended December 31, 2021, our TRSs recognized a provision for income taxes of $2.1 million and $4.2 million, respectively, which was primarily due to income from MSR servicing activities and gains recognized on MSR, offset by net losses recognized on derivative instruments held and operating expenses.
Income Taxes During the three months ended December 31, 2023, we recognized a benefit from income taxes of $29.3 million, which was primarily due to net losses recognized on MSR and operating expenses, offset by net income from MSR servicing activities in our TRSs.
Interest Expense Interest expense increased from $20.2 million and $89.2 million for the three and twelve months ended December 31, 2021, respectively, to $115.6 million and $258.4 million for the same periods in 2022 due primarily to the higher interest rate environment as well as an increase in financing on MSR and Agency RMBS. 37 Table of Contents Net Interest Income The following tables present the components of interest income and average net asset yield earned by asset type, the components of interest expense and average cost of funds on borrowings incurred by collateral type, and net interest income and average net interest spread for the three and twelve months ended December 31, 2022 and 2021: Three Months Ended December 31, 2022 Year Ended December 31, 2022 (dollars in thousands) Average Balance (1) Interest Income/Expense Net Yield/Cost of Funds Average Balance (1) Interest Income/Expense Net Yield/Cost of Funds Interest-earning assets: Available-for-sale securities $ 8,118,269 $ 83,712 4.1 % $ 7,997,618 $ 272,230 3.4 % Reverse repurchase agreements 743,925 7,109 3.8 % 311,844 8,469 2.7 % Other — 8,482 — % — 14,841 — % Total interest income/net asset yield $ 8,862,194 $ 99,303 4.5 % $ 8,309,462 $ 295,540 3.6 % Interest-bearing liabilities: Borrowings collateralized by: Available-for-sale securities $ 7,664,204 $ 68,627 3.6 % $ 7,804,563 $ 138,138 1.8 % Agency Derivatives (2) 14,618 155 4.2 % 24,553 438 1.8 % Mortgage servicing rights and advances (3) 1,917,069 36,938 7.7 % 1,620,847 95,192 5.9 % U.S.
Treasuries (4) — — — % 144,045 6,629 4.6 % Unsecured borrowings: Convertible senior notes 268,447 4,651 6.9 % 272,993 18,815 6.9 % Other 6 6 Total interest expense/cost of funds $ 10,449,060 $ 168,080 6.4 % $ 10,815,118 $ 643,225 5.9 % Net interest expense/spread $ (45,679) (1.0) % $ (162,861) (0.8) % 36 Table of Contents Three Months Ended December 31, 2022 Year Ended December 31, 2022 (dollars in thousands) Average Balance (1) Interest Income/Expense Net Yield/Cost of Funds Average Balance (1) Interest Income/Expense Net Yield/Cost of Funds Interest-earning assets: Available-for-sale securities $ 8,118,269 $ 83,712 4.1 % $ 7,997,618 $ 272,230 3.4 % Reverse repurchase agreements 743,925 7,109 3.8 % 311,844 8,469 2.7 % Other 8,482 14,841 Total interest income/net asset yield $ 8,862,194 $ 99,303 4.5 % $ 8,309,462 $ 295,540 3.6 % Interest-bearing liabilities: Borrowings collateralized by: Available-for-sale securities $ 7,664,204 $ 68,627 3.6 % $ 7,804,563 $ 138,138 1.8 % Agency Derivatives (2) 14,618 155 4.2 % 24,553 438 1.8 % Mortgage servicing rights and advances (3) 1,917,069 36,938 7.7 % 1,620,847 95,192 5.9 % U.S.
GAAP purposes was $17.72 at December 31, 2022, an increase from $16.42 per common share at September 30, 2022, and a decrease from $23.47 per common share at December 31, 2021.
GAAP purposes was $15.21 at December 31, 2023, a decrease from $15.36 per common share at September 30, 2023, and a decrease from $17.72 per common share at December 31, 2022.
The increase in yields on AFS securities for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021 was primarily driven by lower amortization as a result of slower prepayment speeds.
The increase in yields on AFS securities for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022 was driven by net purchases of higher coupon AFS securities with lower unamortized premiums.
We evaluate the prices we receive from both third-party brokers and pricing vendors by comparing those prices to actual purchase and sale transactions, our internally modeled prices calculated based on market observable rates and credit spreads, and to each other both in current and prior periods.
Unobservable or model-driven inputs include forecast per loan annual cost to service, forecast cumulative defaults, default curve, forecast loss severity and forecast voluntary prepayment. 29 Table of Contents We evaluate the prices we receive from both third-party brokers and pricing vendors by comparing those prices to actual purchase and sale transactions, our internally modeled prices calculated based on market observable rates and credit spreads, and to each other both in current and prior periods.
Net interest income, as well as our servicing income, net of subservicing expenses, will fluctuate primarily as a result of changes in market interest rates, our financing costs and prepayment speeds on our assets.
Factors Affecting our Operating Results Our net interest income includes income from our securities portfolio, including the amortization of purchase premiums and accretion of purchase discounts. Net interest income, as well as our servicing income, net of servicing costs, will fluctuate primarily as a result of changes in market interest rates, our financing costs and prepayment speeds on our assets.
The following tables summarize certain characteristics of the loans underlying our MSR by gross weighted average coupon rate types and ranges at December 31, 2022 and December 31, 2021: December 31, 2022 (dollars in thousands) Number of Loans Unpaid Principal Balance Weighted Average Gross Coupon Rate Weighted Average Current Loan Size Weighted Average Loan Age (months) Weighted Average Original FICO Weighted Average Original LTV 60+ Day Delinquencies 3-Month CPR Net Servicing Fee (bps) 30-Year Fixed: ≤ 3.25% 299,221 $ 96,929,358 2.8 % $ 382 23 768 71.0 % 0.4 % 3.3 % 25.8 > 3.25 - 3.75% 140,499 36,531,127 3.4 % 327 38 754 74.2 % 0.8 % 5.0 % 26.3 > 3.75 - 4.25% 108,214 22,603,005 3.9 % 272 61 751 75.7 % 1.3 % 6.3 % 27.3 > 4.25 - 4.75% 60,343 10,752,661 4.4 % 249 63 736 77.4 % 2.4 % 7.8 % 26.4 > 4.75 - 5.25% 31,694 5,735,770 4.9 % 285 44 732 78.5 % 2.9 % 7.0 % 28.2 > 5.25% 31,046 7,270,132 5.9 % 343 15 736 80.8 % 1.4 % 6.4 % 33.5 671,017 179,822,053 3.4 % 344 34 758 73.3 % 0.8 % 4.5 % 26.5 15-Year Fixed: ≤ 2.25% 23,157 6,521,890 2.0 % 330 20 777 59.1 % 0.1 % 3.0 % 25.2 > 2.25 - 2.75% 38,830 8,781,681 2.4 % 277 24 772 58.9 % 0.2 % 4.2 % 25.9 > 2.75 - 3.25% 36,300 5,297,231 2.9 % 202 53 766 61.5 % 0.3 % 6.6 % 26.2 > 3.25 - 3.75% 21,402 2,307,332 3.4 % 159 65 757 63.8 % 0.6 % 8.3 % 26.9 > 3.75 - 4.25% 10,044 909,909 3.9 % 146 61 742 65.1 % 0.8 % 9.0 % 28.6 > 4.25% 5,648 575,114 4.7 % 193 34 734 65.7 % 1.3 % 10.0 % 33.5 135,381 24,393,157 2.6 % 257 35 769 60.4 % 0.3 % 5.1 % 26.2 Total ARMs 2,627 661,483 3.6 % 330 56 761 67.7 % 1.0 % 13.6 % 25.5 Total 809,025 $ 204,876,693 3.3 % $ 334 34 760 71.7 % 0.8 % 4.6 % 26.5 43 Table of Contents December 31, 2021 (dollars in thousands) Number of Loans Unpaid Principal Balance Weighted Average Gross Coupon Rate Weighted Average Current Loan Size Weighted Average Loan Age (months) Weighted Average Original FICO Weighted Average Original LTV 60+ Day Delinquencies 3-Month CPR Net Servicing Fee (bps) 30-Year Fixed: ≤ 3.25% 215,128 $ 72,197,662 2.8 % $ 395 11 767 70.7 % 0.3 % 10.7 % 25.7 > 3.25 - 3.75% 167,615 43,576,971 3.4 % 321 28 755 74.2 % 0.8 % 24.0 % 26.3 > 3.75 - 4.25% 125,831 26,250,276 3.9 % 263 54 753 75.7 % 2.3 % 34.0 % 27..4 > 4.25 - 4.75% 79,107 14,291,435 4.4 % 239 58 797 77.5 % 4.4 % 36.4 % 26.3 > 4.75 - 5.25% 38,902 6,318,470 4.9 % 230 52 722 78.9 % 6.4 % 37.4 % 27.3 > 5.25% 15,796 2,176,065 5.5 % 211 51 705 79.2 % 9.2 % 37.6 % 30.5 642,379 164,810,879 3.4 % 332 29 756 73.4 % 1.5 % 22.7 % 26.3 15-Year Fixed: ≤ 2.25% 16,525 5,397,141 2.0 % 371 9 778 57.1 % 0.1 % 8.3 % 25.2 > 2.25 - 2.75% 41,168 9,901,133 2.4 % 294 13 774 58.0 % 0.2 % 14.2 % 25.6 > 2.75 - 3.25% 46,236 7,568,257 2.9 % 220 40 768 61.3 % 0.4 % 21.6 % 26.1 > 3.25 - 3.75% 28,010 3,485,491 3.4 % 172 55 758 64.3 % 1.1 % 26.6 % 27.4 > 3.75 - 4.25% 12,685 1,302,862 3.9 % 152 55 742 65.3 % 2.1 % 28.5 % 28.8 > 4.25% 5,965 513,255 4.5 % 130 47 727 66.1 % 2.6 % 29.4 % 31.2 150,589 28,168,139 2.7 % 264 27 769 60.0 % 0.5 % 18.1 % 26.1 Total ARMs 3,237 791,548 3.0 % 315 54 762 68.0 % 2.9 % 29.5 % 25.2 Total 796,205 $ 193,770,566 3.3 % $ 322 28 758 71.5 % 1.3 % 22.1 % 26.3 Financing Our borrowings consist primarily of repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes.
The following tables summarize certain characteristics of the loans underlying our MSR by gross weighted average coupon rate types and ranges at December 31, 2023 and December 31, 2022: December 31, 2023 (dollars in thousands) Number of Loans Unpaid Principal Balance Weighted Average Gross Coupon Rate Weighted Average Current Loan Size Weighted Average Loan Age (months) Weighted Average Original FICO Weighted Average Original LTV 60+ Day Delinquencies 3-Month CPR Net Servicing Fee (bps) 30-Year Fixed: ≤ 3.25% 300,020 $ 94,894,696 2.8 % $ 374 35 768 70.9 % 0.4 % 2.9 % 25.1 > 3.25 - 3.75% 146,125 37,950,849 3.4 % 329 48 753 74.1 % 0.8 % 3.9 % 25.2 > 3.75 - 4.25% 106,188 22,115,548 3.9 % 274 70 751 75.7 % 1.1 % 4.8 % 25.5 > 4.25 - 4.75% 59,731 10,989,253 4.4 % 262 69 739 77.3 % 2.0 % 5.4 % 25.3 > 4.75 - 5.25% 41,155 9,621,267 4.9 % 355 38 746 78.7 % 1.6 % 4.4 % 25.2 > 5.25% 62,101 17,412,054 6.0 % 382 19 745 80.2 % 1.3 % 5.0 % 26.4 715,320 192,983,667 3.5 % 347 42 758 73.7 % 0.8 % 3.7 % 25.3 15-Year Fixed: ≤ 2.25% 22,725 5,921,063 2.0 % 307 32 777 59.1 % 0.2 % 2.9 % 25.0 > 2.25 - 2.75% 38,338 8,012,105 2.4 % 258 36 772 58.8 % 0.2 % 3.6 % 25.0 > 2.75 - 3.25% 34,192 4,585,258 2.9 % 190 62 766 61.8 % 0.3 % 5.7 % 25.3 > 3.25 - 3.75% 19,514 1,915,441 3.4 % 149 75 756 64.0 % 0.6 % 7.0 % 25.4 > 3.75 - 4.25% 9,125 761,588 3.9 % 139 71 741 65.2 % 1.0 % 8.1 % 25.3 > 4.25% 6,546 793,853 5.0 % 227 32 742 65.3 % 0.9 % 8.5 % 27.9 130,440 21,989,308 2.6 % 242 45 769 60.3 % 0.3 % 4.5 % 25.2 Total ARMs 2,504 674,197 4.5 % 358 56 761 70.6 % 0.9 % 12.8 % 25.4 Total 848,264 $ 215,647,172 3.5 % $ 336 42 759 72.3 % 0.7 % 3.8 % 25.3 December 31, 2022 (dollars in thousands) Number of Loans Unpaid Principal Balance Weighted Average Gross Coupon Rate Weighted Average Current Loan Size Weighted Average Loan Age (months) Weighted Average Original FICO Weighted Average Original LTV 60+ Day Delinquencies 3-Month CPR Net Servicing Fee (bps) 30-Year Fixed: ≤ 3.25% 299,221 $ 96,929,358 2.8 % $ 382 23 768 71.0 % 0.4 % 3.3 % 25.8 > 3.25 - 3.75% 140,499 36,531,127 3.4 % 327 38 754 74.2 % 0.8 % 5.0 % 26.3 > 3.75 - 4.25% 108,214 22,603,005 3.9 % 272 61 751 75.7 % 1.3 % 6.3 % 27.3 > 4.25 - 4.75% 60,343 10,752,661 4.4 % 249 63 736 77.4 % 2.4 % 7.8 % 26.4 > 4.75 - 5.25% 31,694 5,735,770 4.9 % 285 44 732 78.5 % 2.9 % 7.0 % 28.2 > 5.25% 31,046 7,270,132 5.9 % 343 15 736 80.8 % 1.4 % 6.4 % 33.5 671,017 179,822,053 3.4 % 344 34 758 73.3 % 0.8 % 4.5 % 26.5 15-Year Fixed: ≤ 2.25% 23,157 6,521,890 2.0 % 330 20 777 59.1 % 0.1 % 3.0 % 25.2 > 2.25 - 2.75% 38,830 8,781,681 2.4 % 277 24 772 58.9 % 0.2 % 4.2 % 25.9 > 2.75 - 3.25% 36,300 5,297,231 2.9 % 202 53 766 61.5 % 0.3 % 6.6 % 26.2 > 3.25 - 3.75% 21,402 2,307,332 3.4 % 159 65 757 63.8 % 0.6 % 8.3 % 26.9 > 3.75 - 4.25% 10,044 909,909 3.9 % 146 61 742 65.1 % 0.8 % 9.0 % 28.6 > 4.25% 5,648 575,114 4.7 % 193 34 734 65.7 % 1.3 % 10.0 % 33.5 135,381 24,393,157 2.6 % 257 35 769 60.4 % 0.3 % 5.1 % 26.2 Total ARMs 2,627 661,483 3.6 % 330 56 761 67.7 % 1.0 % 13.6 % 25.5 Total 809,025 $ 204,876,693 3.3 % $ 334 34 760 71.7 % 0.8 % 4.6 % 26.5 42 Table of Contents Financing Our borrowings consist primarily of repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes.
The majority of these securities consist of whole pools in which we own all of the investment interests in the securities. 42 Table of Contents The tables below summarizes certain characteristics of our Agency RMBS AFS at December 31, 2022 and December 31, 2021: December 31, 2022 (dollars in thousands, except purchase price) Principal/ Current Face Net (Discount) Premium Amortized Cost Allowance for Credit Losses Unrealized Gain Unrealized Loss Carrying Value Weighted Average Coupon Rate Weighted Average Purchase Price P&I securities $ 7,781,277 $ 155,833 $ 7,937,110 $ — $ 6,310 $ (325,960) $ 7,617,460 4.64 % $ 102.26 Interest-only securities 963,866 45,882 45,882 (6,785) 1,890 (4,871) 36,116 1.98 % $ 19.55 Total $ 8,745,143 $ 201,715 $ 7,982,992 $ (6,785) $ 8,200 $ (330,831) $ 7,653,576 December 31, 2021 (dollars in thousands, except purchase price) Principal/ Current Face Net (Discount) Premium Amortized Cost Allowance for Credit Losses Unrealized Gain Unrealized Loss Carrying Value Weighted Average Coupon Rate Weighted Average Purchase Price P&I securities $ 6,411,363 $ 270,687 $ 6,682,050 $ — $ 171,308 $ (4,855) $ 6,848,503 3.65 % $ 104.66 Interest-only securities 3,198,447 305,577 305,577 (12,851) 20,699 (12,529) 300,896 2.93 % $ 14.09 Total $ 9,609,810 $ 576,264 $ 6,987,627 $ (12,851) $ 192,007 $ (17,384) $ 7,149,399 Mortgage Servicing Rights, at Fair Value One of our wholly owned subsidiaries has approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent the right to control the servicing of mortgage loans.
The tables below summarizes certain characteristics of our Agency RMBS AFS at December 31, 2023 and December 31, 2022: December 31, 2023 (dollars in thousands, except purchase price) Principal/ Current Face Net (Discount) Premium Amortized Cost Allowance for Credit Losses Unrealized Gain Unrealized Loss Carrying Value Weighted Average Coupon Rate Weighted Average Purchase Price P&I securities $ 8,421,733 $ 24,239 $ 8,445,972 $ — $ 22,677 $ (196,748) $ 8,271,901 4.65 % $ 100.65 Interest-only securities 840,723 58,567 58,567 (3,619) 907 (4,757) 51,098 2.08 % $ 17.25 Total $ 9,262,456 $ 82,806 $ 8,504,539 $ (3,619) $ 23,584 $ (201,505) $ 8,322,999 December 31, 2022 (dollars in thousands, except purchase price) Principal/ Current Face Net (Discount) Premium Amortized Cost Allowance for Credit Losses Unrealized Gain Unrealized Loss Carrying Value Weighted Average Coupon Rate Weighted Average Purchase Price P&I securities $ 7,781,277 $ 155,833 $ 7,937,110 $ — $ 6,310 $ (325,960) $ 7,617,460 4.64 % $ 102.26 Interest-only securities 963,866 45,882 45,882 (6,785) 1,890 (4,871) 36,116 1.98 % $ 19.55 Total $ 8,745,143 $ 201,715 $ 7,982,992 $ (6,785) $ 8,200 $ (330,831) $ 7,653,576 Mortgage Servicing Rights, at Fair Value One of our wholly owned subsidiaries, Matrix, has approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent the right to control the servicing of residential mortgage loans.
Although we obtain similar representations and warranties from the counterparty from which we acquired the relevant asset, if those representations and warranties do not directly mirror those we make to the investor, or if we are unable to enforce the representations and warranties against the counterparty for a variety of reasons, including the financial condition or insolvency of the counterparty, we may not be able to seek indemnification from our counterparties for any losses attributable to the breach. 34 Table of Contents LIBOR transition The London Interbank Offered Rate, or LIBOR, has been used extensively in the U.S. and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives.
Although we obtain similar representations and warranties from the counterparty from which we acquired the relevant asset, if those representations and warranties do not directly mirror those we make to the investor, or if we are unable to enforce the representations and warranties against the counterparty for a variety of reasons, including the financial condition or insolvency of the counterparty, we may not be able to seek indemnification from our counterparties for any losses attributable to the breach.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

11 edited+3 added−1 removed44 unchanged
Our AFS securities are reflected at their estimated fair value, with the difference between amortized cost net of allowance for credit losses and estimated fair value for all AFS securities except certain AFS securities for which we have elected the fair value option reflected in accumulated other comprehensive (loss) income.
Our AFS securities are reflected at their estimated fair value, with the difference between amortized cost net of allowance for credit losses and estimated fair value for all AFS securities except certain AFS securities for which we have elected the fair value option reflected in accumulated other comprehensive loss.
Typically, the interest receivable terms ( i.e. , LIBOR, OIS or SOFR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related borrowing agreement from floating to fixed.
Typically, the interest receivable terms ( i.e. , OIS or SOFR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related borrowing agreement from floating to fixed.
In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the assets. 54 Table of Contents We believe that we will be able to reinvest proceeds from scheduled principal payments and prepayments at acceptable yields; however, no assurances can be given that, should significant prepayments occur, market conditions would be such that acceptable investments could be identified and the proceeds timely reinvested.
In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the assets. 52 Table of Contents We believe that we will be able to reinvest proceeds from scheduled principal payments and prepayments at acceptable yields; however, no assurances can be given that, should significant prepayments occur, market conditions would be such that acceptable investments could be identified and the proceeds timely reinvested.
Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at December 31, 2022.
Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at December 31, 2023.
Actual economic conditions or implementation of decisions may produce results that differ significantly from the estimates and assumptions used in our models. 52 Table of Contents We perform interest rate sensitivity analyses on various measures of our financial results and condition by examining how our assets, financing, and hedges will perform in various interest rate “shock” scenarios.
Actual economic conditions or implementation of decisions may produce results that differ significantly from the estimates and assumptions used in our models. 50 Table of Contents We perform interest rate sensitivity analyses on various measures of our financial results and condition by examining how our assets, financing and hedges will perform in various interest rate “shock” scenarios.
The second measure is change in value of financial position, including the value of our derivative assets and liabilities. All changes in value are measured as the change from the December 31, 2022 financial position. All projected changes in annualized net interest income are measured as the change from the projected annualized net interest income based off current performance returns.
The second measure is change in value of financial position, including the value of our derivative assets and liabilities. All changes in value are measured as the change from the December 31, 2023 financial position. All projected changes in annualized net interest income are measured as the change from the projected annualized net interest income based off current performance returns.
As with net interest income, the uncertainty associated with the estimate of change in portfolio value is therefore directly related to the size of interest rate move considered. 53 Table of Contents The following interest rate sensitivity table displays the potential impact of instantaneous, parallel changes in interest rates of +/- 25 and +/- 50 bps on annualized net interest income and portfolio value, based on our interest sensitive financial instruments at December 31, 2022.
As with net interest income, the uncertainty associated with the estimate of change in portfolio value is therefore directly related to the size of interest rate move considered. 51 Table of Contents The following interest rate sensitivity table displays the potential impact of instantaneous, parallel changes in interest rates of +/- 25 and +/- 50 bps on annualized net interest income and portfolio value, based on our interest sensitive financial instruments at December 31, 2023.
However, we retain the risk of potential credit losses on all of the loans underlying our non-Agency securities. 55 Table of Contents
However, we retain the risk of potential credit losses on all of the loans underlying our non-Agency securities. 53 Table of Contents
We are subject to interest rate risk in connection with our assets and related financing obligations. 51 Table of Contents LIBOR and other indices which had been deemed “benchmarks” for various commercial and financial contracts have been the subject of recent national, international, and other regulatory guidance and proposals for reform, and it appears likely that LIBOR will be phased out by June 2023.
We are subject to interest rate risk in connection with our assets and related financing obligations. 49 Table of Contents LIBOR and other indices which had been deemed “benchmarks” for various commercial and financial contracts have been the subject of recent national, international, and other regulatory guidance and proposals for reform, and LIBOR was phased out on June 30, 2023.
In hedging interest rate risk, we seek to reduce the risk of losses on the value of our investments that may result from changes in interest rates in the broader markets, improve risk-adjusted returns and, where possible, obtain a favorable spread between the yield on our assets and the cost of our financing.
In hedging interest rate risk, we seek to mitigate the impact of changing interest rates on the value of our investments, improve risk-adjusted returns and, where possible, obtain a favorable spread between the yield on our assets and the cost of our financing.
Changes in Interest Rates (dollars in thousands) -50 bps -25 bps +25 bps +50 bps Change in annualized net interest income (1) : $ 30,448 $ 15,202 $ (15,227) $ (30,449) % change in net interest income (1) 19.9 % 9.9 % (9.9) % (19.9) % Change in value of financial position: Available-for-sale securities $ 185,657 $ 95,050 $ (99,075) $ (201,828) As a % of common equity 12.1 % 6.2 % (6.5) % (13.2) % Mortgage servicing rights (2) $ (50,798) $ (26,038) $ 20,734 $ 37,482 As a % of common equity (2) (3.3) % (1.7) % 1.3 % 2.5 % Derivatives, net $ (168,410) $ (81,962) $ 75,960 $ 146,201 As a % of common equity (11.0) % (5.3) % 5.0 % 9.6 % Reverse repurchase agreements $ 912 $ 456 $ (456) $ (912) As a % of common equity 0.1 % — % — % (0.1) % Repurchase agreements $ (5,236) $ (2,618) $ 2,618 $ 5,236 As a % of common equity (0.4) % (0.2) % 0.2 % 0.3 % Revolving credit facilities $ (403) $ (201) $ 200 $ 400 As a % of common equity — % — % — % — % Term notes payable $ (152) $ (76) $ 75 $ 151 As a % of common equity — % — % — % — % Convertible senior notes $ (1,581) $ (791) $ 773 $ 1,527 As a % of common equity (0.1) % (0.1) % 0.1 % 0.1 % Total Net Assets $ (40,011) $ (16,180) $ 829 $ (11,743) As a % of total assets (0.3) % (0.1) % — % (0.1) % As a % of common equity (2.6) % (1.1) % 0.1 % (0.8) % ____________________ (1) Amounts include the effect of interest spread from our interest rate swaps and float income from custodial accounts associated with our MSR, but do not reflect any potential changes to dollar roll income associated with our TBA positions or U.S.
Changes in Interest Rates (dollars in thousands) -50 bps -25 bps +25 bps +50 bps Change in annualized net interest income (1) : $ (2,585) $ (1,311) $ 1,290 $ 2,584 % change in net interest income (1) (1.7) % (0.8) % 0.8 % 1.7 % Change in value of financial position: Available-for-sale securities $ 205,542 $ 105,263 $ (109,484) $ (222,774) As a % of common equity 13.1 % 6.7 % (7.0) % (14.2) % Mortgage servicing rights (2) $ (79,718) $ (40,134) $ 34,050 $ 67,215 As a % of common equity (2) (5.1) % (2.5) % 2.2 % 4.3 % Derivatives, net $ (137,110) $ (67,169) $ 64,771 $ 127,402 As a % of common equity (8.8) % (4.3) % 4.1 % 8.1 % Reverse repurchase agreements $ 59 $ 30 $ (30) $ (59) As a % of common equity — % — % — % — % Repurchase agreements $ (4,926) $ (2,463) $ 2,463 $ 4,926 As a % of common equity (0.3) % (0.2) % 0.2 % 0.3 % Revolving credit facilities $ (371) $ (185) $ 185 $ 370 As a % of common equity — % — % — % — % Term notes payable $ (556) $ (278) $ 278 $ 555 As a % of common equity — % — % — % — % Convertible senior notes $ (1,044) $ (520) $ 517 $ 1,031 As a % of common equity (0.1) % — % — % 0.1 % Total Net Assets $ (18,124) $ (5,456) $ (7,250) $ (21,334) As a % of total assets (0.1) % — % (0.1) % (0.2) % As a % of common equity (1.2) % (0.3) % (0.5) % (1.4) % ____________________ (1) Amounts include the effect of interest spread from our interest rate swaps and float income from custodial accounts associated with our MSR, but do not reflect any potential changes to dollar roll income associated with our TBA positions or U.S.
Removed
We currently have agreements that are indexed to LIBOR and are monitoring related reform proposals and evaluating the related risks; however, it is not possible to predict the effects of any future initiatives to regulate, reform or change the manner of administration of LIBOR could result in adverse consequences to the rate of interest payable and receivable on, market value of and market liquidity for LIBOR-based financial instruments.
Added
Our material contracts that are or were indexed to USD-LIBOR have been amended to transition to an alternative benchmark, where necessary.
Added
Any other unmodified agreements that incorporate LIBOR as the referenced rate either (i) already had provisions in place that provide for an alternative to LIBOR upon its phase-out or that are governed by the LIBOR Act, (ii) matured or (iii) were terminated prior to June 30, 2023.
Added
Our hedging methods are based on many factors, including, but not limited to, our estimates with regard to future interest rates.