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What changed in TWO HARBORS INVESTMENT CORP.'s 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of TWO HARBORS INVESTMENT CORP.'s 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+384 added−359 removedSource: 10-K (2025-02-18) vs 10-K (2024-02-20)

Top changes in TWO HARBORS INVESTMENT CORP.'s 2024 10-K

384 paragraphs added · 359 removed · 278 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

37 edited+18 added−9 removed71 unchanged
Biggest changeA significant decrease in the advance rate or an increase in the haircut could result in us having to sell assets in order to meet additional margin requirements by the lender. We expect to mitigate our risk of margin calls under financing arrangements by deploying leverage at an amount that is below what could be used under current advance rates.
Biggest changeWe expect to mitigate our risk of margin calls under financing arrangements by deploying leverage at an amount that is below what could be used under current advance rates. In order to reduce our exposure to risks associated with lender counterparty concentration, we generally seek to diversify our exposure by entering into repurchase agreements with multiple counterparties.
In the ordinary course of business, we make investment decisions and allocate capital in accordance with our views on the changing risk/reward dynamics in the market and in our portfolio. Going forward, we expect our capital to be fully allocated to our strategy of pairing Agency RMBS and MSR.
In the ordinary course of business, we make investment decisions and allocate capital in accordance with our views on the changing risk/reward dynamics in the market and in our portfolio. Going forward, we expect our capital to be fully allocated to our strategy of pairing MSR and Agency RMBS.
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.
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.
We are committed to strengthening our local communities through the support of charitable organizations allied with the housing sector, and in particular those that provide housing support to families and children in need. Examples of our support include partnerships with AEON, Simpson Housing and Habitat for Humanity.
We are committed to strengthening our local communities through the support of charitable organizations allied with the housing sector, and in particular those that provide housing support to families and children in need. Examples of our support include partnerships with AEON, Simpson Housing, Supportive Housing Communities and Habitat for Humanity.
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.
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, and Agency residential mortgage-backed securities, or Agency RMBS, and, through our operational platform, RoundPoint Mortgage Servicing LLC, or RoundPoint, we are one of the largest servicers of conventional loans in the country.
Our qualification as a REIT depends upon our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and value of our assets, our distribution levels and the diversity of ownership of our shares.
Our qualification as a REIT depends upon our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code relating to, among other things, the sources of our gross income, the composition and value of our assets, our distribution levels and the diversity of ownership of our shares.
In addition to competitive wages and salaries, our compensation programs are designed to attract and retain talented professionals with diverse and unique talents.
In addition to competitive wages and salaries, our compensation programs are designed to attract and retain talented professionals with diverse experiences and unique talents.
Our inability to attract subservicing clients may adversely impact our ability to grow our servicing platform, which could in turn result in an inability to achieve economies of scale, reduce costs and adversely affect our financial results. Available Information Our website can be found at www.twoharborsinvestment.com .
Our inability to attract subservicing clients may adversely impact our ability to grow our servicing platform, which could in turn result in an inability to achieve economies of scale, reduce costs and adversely affect our financial results. Available Information Our website can be found at www.twoinv.com .
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.
Our overall package includes cash bonus and equity incentive compensation opportunities, a 401(k) plan and matching 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.
We believe that we are organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and we conduct our operations in a manner which will enable us to continue to meet the requirements for qualification and taxation as a REIT.
We believe that we are organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and we conduct our operations in a manner which will enable us to continue to meet the requirements for qualification and taxation as a REIT.
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.
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. 7 Table of Contents As we grow our subservicing business, we will also compete with bank and non-bank servicers for third-party subservicing clients.
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.
In addition, we match dollar-for-dollar, up to a cap, the cash donations made by our employees to our charitable partnerships. 5 Table of Contents 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.
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.
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. 6 Table of Contents Mortgage Industry Regulation As an owner of MSR and servicer and originator of residential mortgage loans, we must comply with various federal and state laws, rules and regulations.
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.
One of our wholly owned subsidiaries, TH MSR Holdings LLC (formerly Matrix Financial Services Corporation), 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.
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.
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 more stable performance, relative to RMBS portfolios without MSR, across changing market environments, and we are acutely focused on creating sustainable stockholder value over the long term.
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.
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 2 Table of Contents • 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.
Attn: Investor Relations 1601 Utica Ave. S., Suite 900 St. Louis Park, MN 55416 (612) 453-4100 investors@twoharborsinvestment.com
Attn: Investor Relations 1601 Utica Ave. S., Suite 900 St. Louis Park, MN 55416 (612) 453-4100 investors@twoinv.com
Certain activities that we may perform may cause us to earn income that will not be qualifying income for REIT purposes.
However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes.
However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Code, to engage in such activities, and we may form additional TRSs in the future.
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.
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.
At December 31, 2024, we had $7.8 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 $202.1 million, or 9.5% of stockholders’ equity.
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.
Our Business Our Investment Strategy Our objective is to deliver more stable performance, relative to RMBS portfolios without MSR, across changing market environments, and we are acutely focused on creating sustainable stockholder value over the long term.
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.
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.
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.
We believe that the diversification of our portfolio across MSR and Agency RMBS, and their related hedges, combined with the expertise of our investment team, will enable us to deliver stable performance, relative to RMBS portfolios without MSR, under a variety of market conditions and economic cycles.
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.
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.
On occasion, we may receive requests from U.S. federal and state agencies for records, documents and information regarding our policies, procedures and practices regarding our business activities. We incur significant ongoing costs to comply with these regulations. REIT Qualification We elected to be taxed as a REIT under the Code, commencing with our taxable period ended December 31, 2009.
On occasion, we may receive requests from U.S. federal and state agencies for records, documents and information regarding our policies, procedures and practices regarding our business activities. We incur significant ongoing costs to comply with these regulations.
We intend to compete by delivering meaningful value to homeowners through building lasting relationships by treating our customers with respect and professionalism, and through being a single-source solution for our customers to better manage and protect their homes, families and assets.
We intend to compete by delivering meaningful value to homeowners through building lasting relationships by treating our customers with respect and professionalism, and providing resources and ancillary products and services for our customers to help manage and protect their mortgages, homes and related assets.
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.
We have four office locations in: Minneapolis, Minnesota; Fort Mill, South Carolina; Dallas, Texas; and New York, New York. Compensation and Benefits.
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.
Servicing Operations We service substantially all of the mortgage loans underlying our MSR assets as well as mortgage loans underlying MSR owned by third parties.
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.
We also make available, free of charge on our website, 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.
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.
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 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.
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. As of December 31, 2024, we had 477 full time equivalent employees.
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.
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.
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.
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.
One of our subsidiary trust entities, MSR Issuer Trust, was formed for the purpose of financing MSR through securitization, pursuant to which, through two of our wholly owned subsidiaries, MSR is pledged to MSR Issuer Trust and in return, MSR Issuer Trust issues term notes to qualified institutional buyers and a variable funding note, or VFN, to one of the subsidiaries, in each case secured on a pari passu basis.
In return, MSR Issuer Trust may issue term notes to qualified institutional buyers and variable funding notes, or VFNs, to one of the subsidiaries, in each case secured on a pari passu basis.
Our Exchange Act reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov .
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.
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.
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 Originations Late in the second quarter of 2024, RoundPoint began operating its in-house, direct-to-consumer originations platform, which was established primarily to benefit our MSR portfolio through the retention or recapture of existing borrowers by providing them with competitive refinance and purchase mortgage options.
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.
Our employees are united by a shared commitment to excellence, ethical decision-making, and creating enduring value for our stakeholders. We regularly conduct pulse surveys and engage in focus groups to obtain valuable insights from employees on topics involving culture, inclusion, education, benefits and engagement, and pride ourselves on having a strong participation rate.
Removed
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.
Added
We have designated certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, to engage in such activities, and we may form additional TRSs in the future.
Removed
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.
Added
The majority of our Agency RMBS portfolio is comprised of whole pool certificates.
Removed
The majority of these securities consist of whole pools in which we own all of the investment interests in the securities.
Added
TH MSR Holdings acquires MSR from third-party originators through flow and bulk purchases, as well as through the recapture of MSR on loans in its MSR portfolio that refinance. Beginning in 2024, TH MSR Holdings also acquires MSR on loans originated by its subsidiary, RoundPoint, through purchases and recapture of MSR.
Removed
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.
Added
TH MSR Holdings does not directly service mortgage loans; instead, it engages RoundPoint to handle substantially all servicing functions for the mortgage loans underlying our MSR. RoundPoint also services mortgage loans underlying MSR owned by third parties. RoundPoint has approvals from Fannie Mae and Freddie Mac to service residential mortgage loans.
Removed
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.
Added
We have expertise in mortgage credit and may choose to invest again in those assets should the opportunity arise.
Removed
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.
Added
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%).
Removed
In connection with the transaction, we also entered into a repurchase facility that is secured by the VFN issued in connection with the MSR securitization transaction, which is collateralized by our MSR.
Added
One of our subsidiary trust entities, MSR Issuer Trust, was formed for the purpose of financing MSR through securitization. Through two of our wholly owned subsidiaries, participation certificates representing excess servicing fees are issued and transferred to the MSR Issuer Trust and the related MSR is pledged.
Removed
In order to reduce our exposure to risks associated with lender counterparty concentration, we generally seek to diversify our exposure by entering into repurchase agreements with multiple counterparties.
Added
We have three repurchase facilities in place that are secured by VFNs issued by MSR Issuer Trust which are collateralized by portions of our MSR portfolio. 3 Table of Contents To finance origination activities, we may enter into warehouse facilities collateralized by the value of the mortgage loans pledged for a period of up to 90 days or until they are sold to the GSEs or other third-party investors in the secondary market, typically within 60 days of origination.
Removed
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.
Added
Under warehouse facility financing arrangements, if the value of the collateral decreases, the lender could require us to provide additional cash collateral to re-establish the ratio of value of the collateral to the amount of borrowing ( i.e. , a margin call).
Added
In the current economic climate, lenders under warehouse facilities generally advance approximately 80% to 100% of the unpaid principal balance, or UPB, of the mortgage loans financed. A significant decrease in the advance rate or an increase in the haircut could result in us having to sell assets in order to meet additional margin requirements by the lender.
Added
The originations platform also originates loans for new borrowers who do not currently have a mortgage loan serviced by RoundPoint and brokers second lien loans to borrowers.
Added
For our own MSR portfolio, adding new or recaptured MSR through our originations platform is intended to hedge faster than expected MSR prepayment speeds in a refinance environment, and requires less capital relative to acquiring MSR through flow and bulk purchases from third-party originators.
Added
In addition, origination activities are generally counter-cyclical to MSR; MSR fair value tends to move opposite to origination volume. For example, the value of MSR typically increases in periods marked by low origination activity and vice versa. Thus, origination activities provide supplementary sources of profitability to our stockholders while also hedging our MSR.
Added
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 committed to supporting the engagement and leadership of a well-rounded workforce, and providing opportunities for collaboration, development and career growth that is supportive and free from any form of unlawful discrimination or harassment; selecting and rewarding our employees based on their individual qualifications, results and performance; and respecting the unique characteristics and perspectives of each of our employees.
Added
We have a work-life integration and flexibility policy that represents our commitment to supporting our employees in their effort to manage their lives by affording some flexibility on where and when work is performed, while still ensuring that we continue to perform high quality work for the Company. Charitable Partnerships.
Added
REIT Qualification We elected to be taxed as a REIT under the Internal Revenue Code, commencing with our taxable period ended December 31, 2009.
Added
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. 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.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

78 edited+27 added−16 removed190 unchanged
Biggest changeCertain of our subsidiaries may rely upon the exemption set forth in Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally means that at least 55% of each such subsidiary’s portfolio must be comprised of qualifying assets and at least 80% of its portfolio must be comprised of qualifying assets and real estate-related assets under the 1940 Act.
Biggest changeWe intend to conduct the operations of Two Harbors and its subsidiaries so that they do not come within the definition of an investment company, either because less than 40% of the value of their total assets on an unconsolidated basis will consist of “investment securities” or because they meet certain other exceptions or exemptions set forth in the 1940 Act based on the nature of their business purpose and activities. 10 Table of Contents Certain of our subsidiaries may rely upon the exemption set forth in Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally means that at least 55% of each such subsidiary’s portfolio must be comprised of qualifying assets and at least 80% of its portfolio must be comprised of qualifying assets and real estate-related assets under the 1940 Act.
In connection with certain of our repurchase agreements, revolving credit facilities and other credit facilities, we are required to comply with certain financial covenants, the most restrictive of which are disclosed within Item 7, “ Management’s Discussion and Analysis of Financial Conditions and Results of Operations ” of this Annual Report on Form 10-K.
In connection with certain of our repurchase agreements, warehouse facilities, revolving credit facilities and other credit facilities, we are required to comply with certain financial covenants, the most restrictive of which are disclosed within Item 7, “ Management’s Discussion and Analysis of Financial Conditions and Results of Operations ” of this Annual Report on Form 10-K.
We cannot assure you that we will achieve results that will allow us to make a specified level of cash distributions and distributions in future periods may be significantly lower than in prior quarterly periods. The market price of our common stock could fluctuate and could cause you to lose a significant part of your investment.
We cannot assure you that we will achieve results that will allow us to make a specified level of cash distributions and distributions in future periods may be significantly lower than in prior periods. The market price of our common stock could fluctuate and could cause you to lose a significant part of your investment.
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.
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 Internal Revenue Code.
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, in connection with our servicing and origination 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.
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.
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. 12 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.
Adverse developments with respect to any of these markets may have an impact on new demand for homes and on homeowners’ ability to make their mortgage payments, which may compress home ownership rates and weigh heavily on future home price performance. There is a strong correlation between home price growth rates (or losses) and mortgage loan delinquencies.
Adverse developments with respect to any of these factors may have an impact on new demand for homes and on homeowners’ ability to make their mortgage payments, which may compress home ownership rates and weigh heavily on future home price performance. There is a strong correlation between home price growth rates (or losses) and mortgage loan delinquencies.
Although any phase out or reform would likely take several years to implement, if the structure of Fannie Mae or Freddie Mac were altered, or if they were eliminated altogether, the amount and type of Agency RMBS and other mortgage-related assets available for investment would be significantly affected.
Although any phase out or reform may take several years to implement, if the structure of Fannie Mae or Freddie Mac were altered, or if they were eliminated altogether, the amount and type of Agency RMBS and other mortgage-related assets available for investment would be significantly affected.
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.
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 have outstanding $261.9 million aggregate principal amount of 6.25% convertible senior notes due January 2026.
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.
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. 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.
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.
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.
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.
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.
Additional rules and regulations implemented by the CFPB and state regulators, as well as any changes to existing rules, could lead to changes in the way we conduct our business and increased costs of compliance. We operate in a highly competitive market and we may not be able to compete successfully. We operate in a highly competitive market.
Additional rules and regulations implemented by the CFPB and state regulators, as well as any changes to existing rules, could lead to changes in the way we conduct our business and increased costs of compliance. 9 Table of Contents We operate in a highly competitive market and we may not be able to compete successfully.
Furthermore, if we fail to maintain our qualification as a REIT, we no longer would be required to distribute substantially all of our net taxable income to stockholders. Complying with REIT requirements may cause us to forego otherwise attractive investment opportunities or financing or hedging strategies.
Furthermore, if we fail to maintain our qualification as a REIT, we no longer would be required to distribute substantially all of our net taxable income to stockholders. 21 Table of Contents Complying with REIT requirements may cause us to forego otherwise attractive investment opportunities or financing or hedging strategies.
Any stock offerings, awards or conversions resulting in the issuance of substantial amounts of common stock, or the perception that such awards or conversions could occur, may adversely affect the market price for our common stock. Any future offerings of our securities could dilute our existing stockholders and may rank senior for purposes of dividend and liquidating distributions.
Any stock offerings, awards or conversions resulting in the issuance of substantial amounts of common stock, or the perception that such awards or conversions could occur, may adversely affect the market price for our common stock. 20 Table of Contents Any future offerings of our securities could dilute our existing stockholders and may rank senior for purposes of dividend and liquidating distributions.
In past years, concerns about the COVID-19 pandemic, unemployment, the availability and cost of credit, rising government debt levels, inflation, energy costs, global supply chain disruptions, climate change, global economic lethargy, warfare, geopolitical unrest across various regions worldwide, European sovereign debt issues, U.S. budget debates, federal government shutdowns and international trade disputes, have from time to time contributed to increased volatility and uncertainty in the economy and financial markets.
In past years, concerns about the COVID-19 pandemic, unemployment, the availability and cost of credit, rising government debt levels, inflation, energy costs, global supply chain disruptions, climate change, global economic lethargy, warfare, geopolitical unrest across various regions worldwide, European sovereign debt issues, U.S. budget debates, federal government shutdowns and international trade disputes, the imposition of sanctions or new or increased tariffs, have from time to time contributed to increased volatility and uncertainty in the economy and financial markets.
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.
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.
We currently have repurchase agreements, revolving credit facilities and other credit facilities in place with numerous counterparties, but we can provide no assurance that lenders will continue to provide us with sufficient financing through the repurchase markets or otherwise.
We currently have repurchase agreements, revolving credit facilities, a warehouse facility and other credit facilities in place with numerous counterparties, but we can provide no assurance that lenders will continue to provide us with sufficient financing through the repurchase markets or otherwise.
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.
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.
If a service provider’s activities do not comply with the applicable legal, regulatory or contractual requirements, we could be exposed to liability as the servicer, which could negatively impact our relationships with our servicing customers or regulators, among others.
If a service provider’s activities do not comply with the applicable legal, regulatory or contractual requirements, we could be exposed to liability, which could negatively impact our relationships with our customers or regulators, among others.
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.
Complying with REIT requirements may limit our ability to hedge effectively. The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and liabilities.
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.
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 collateral securing the facility at the time of default, unless the counterparty granted a waiver.
We may issue additional shares of our common stock in public offerings, private placements as well as through equity awards to our directors, officers and employees pursuant to our Second Restated 2009 Equity Incentive Plan or our 2021 Equity Incentive Plan.
We may issue additional shares of our common stock in public offerings, private placements as well as through equity awards to our directors, officers and employees pursuant to our 2021 Equity Incentive Plan.
Our ability to purchase and hold assets is affected by our ability to secure repurchase agreements and other credit facilities on acceptable terms.
Our ability to purchase and hold assets and execute our business strategy is affected by our ability to secure repurchase agreements and other credit facilities on acceptable terms.
Any change in applicable federal, state or local laws, rules and regulations, or the interpretation or enforcement thereof, could have a substantial impact on our assets, operating expenses, business strategies and results of operations.
Any change in applicable federal, state or local laws, rules and regulations, including as a result of executive orders, or the interpretation or enforcement thereof, could have a substantial impact on our assets, operating expenses, business strategies and results of operations.
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.
Our risk management policies and procedures may not be effective. We have established and maintain various risk management policies and procedures designed to identify, monitor and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk and liquidity risk, as well as operational, information security and compliance risks related to our business, assets and liabilities.
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.
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.
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.
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, including in light of recent changes in administration and executive offices of the U.S. government.
If an adjustable-rate security is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, we will have held that security while it was least profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life. • If we are unable to acquire new Agency RMBS similar to the prepaid security, our financial condition, results of operations and cash flows could suffer.
If an adjustable-rate security is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, we will have held that security while it was least profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life. • If we are unable to acquire new Agency RMBS similar to the prepaid security, our financial condition, results of operations and cash flows could suffer. 17 Table of Contents Changes in prepayment rates may also significantly affect the value of MSR.
Our profitability depends, in large part, on our ability to acquire a sufficient supply of our target assets at favorable prices.
We operate in a highly competitive market. Our profitability depends, in large part, on our ability to acquire a sufficient supply of our target assets at favorable prices.
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.
Federal and state laws, regulations and guidance that govern mortgage servicing and originations 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 and as a mortgage originator.
GAAP or differences in timing between the recognition of taxable income and the actual receipt of cash may occur in which case we may have taxable income in excess of cash flow from our operating activities.
Our taxable income may substantially exceed our net income as determined by U.S. GAAP or differences in timing between the recognition of taxable income and the actual receipt of cash may occur in which case we may have taxable income in excess of cash flow from our operating activities.
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.
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.
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.
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.
When the servicing of a portfolio is assumed either through the purchase of servicing rights or through a subservicing arrangement, various loans in the acquired portfolio may have been previously serviced in a manner that could interfere with our ability to meet certain applicable requirements.
In addition, when the servicing of a mortgage loan is assumed either through the purchase of MSR or through a subservicing arrangement, such loan may have been previously serviced in a manner that could interfere with our ability to meet certain applicable requirements.
There can be no assurance that we will be able to attract and retain subservicing clients, which may adversely impact our ability to grow our servicing platform and achieve economies of scale. Our business could suffer if we fail to attract and retain a skilled management team and workforce.
There can be no assurance that we will be able to attract and retain subservicing clients, which may adversely impact our ability to grow our servicing platform and achieve economies of scale.
A reduction in the volume of mortgage loans originated may affect the volume of certain target assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment and business objectives.
Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of certain target assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment and business objectives.
Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on the collateral agreement without delay.
In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on the collateral agreement without delay.
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.
Failure to meet such guidelines and conditions could result in the unilateral termination of our subsidiaries’ approved status by one or more GSEs, the acceleration and termination of our MSR financing facilities or the assessment of fines and loss of reimbursement of loan-related advances, expenses, interest and servicing fees.
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.
Any expansion of our business activities, such as the recent launch of our originations platform through our wholly-owned subsidiary, 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.
We have engaged numerous third parties to provide us with financial, technology and other services to support our servicing operations, as well as for general corporate purposes.
We are subject to risks associated with the use of third-party service providers. We have engaged numerous third parties to provide us with financial, technology and other services to support our servicing and originations operations, as well as for general corporate purposes.
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.
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.
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. We use leverage to finance many of our investments and to enhance our financial returns.
Any failure to achieve the anticipated benefits of our originations platform could adversely affect our business, results of operations and financial condition. We use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce cash available for distribution to our stockholders, as well as increase losses when economic conditions are unfavorable.
Additionally, shares of our common stock have also been reserved for issuance in connection with the conversion of our 6.25% convertible senior notes due 2026 and our Series A, Series B and Series C preferred stock. We cannot predict the effect, if any, of future issuances or sales of our common stock on the market price of our common stock.
Additionally, shares of our common stock have also been reserved for issuance in connection with the conversion of our 6.25% convertible senior notes due January 2026 and our Series A, Series B and Series C preferred stock.
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.
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.
As a result, our board may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might be in the best interests of stockholders.
As a result, our board may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might be in the best interests of stockholders. 19 Table of Contents In addition, our charter contains restrictions limiting the ownership and transfer of shares of our common stock and other outstanding shares of capital stock.
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.
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.
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.
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.
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.
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.
The extent of our hedging activity varies in scope based on, among other things, the level and volatility of interest rates, the type of assets held and other market conditions.
We engage in transactions intended to hedge against various risks to our portfolio, including the exposure to changes in interest rates. The extent of our hedging activity varies in scope based on, among other things, the level and volatility of interest rates, the type of assets held and other market conditions.
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.
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.
We intend to conduct our operations so as not to become required to register as an investment company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities.
Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. We are organized as a holding company that conducts its businesses primarily through our subsidiaries.
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.
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 addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax law.
In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax law. 22 Table of Contents We intend to distribute our net income to stockholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax.
We may be subject to representation and warranty risk in our capacity as an owner of MSR as well as in connection with our prior securitization transactions and our sales of MSR and other assets.
Any such misrepresented information could have a material adverse effect on our business, results of operations and financial condition. We may be subject to representation and warranty risk in our capacity as an owner of MSR as well as in connection with our prior securitization transactions and our sales of MSR and other assets.
We may change any of our strategies, policies or procedures with respect to investments, asset allocation, growth, operations, indebtedness, financing strategy and distributions at any time without the consent of stockholders. Changes in strategy could also result in the elimination of certain investments and business activities that we no longer view as attractive or in alignment with our business model.
We may change any of our strategies, policies or procedures without stockholder consent. We may change any of our strategies, policies or procedures with respect to investments, asset allocation, growth, operations, indebtedness, financing strategy and distributions at any time without the consent of stockholders.
There can be no assurance that we will be successful in entering into such replacement repurchase agreements on the same terms as the repurchase agreements that were terminated or at all.
There can be no assurance that we will be successful in entering into such replacement repurchase agreements on the same terms as the repurchase agreements that were terminated or at all. 13 Table of Contents Our rights under our repurchase agreements are subject to the effects of bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under the repurchase agreements.
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.
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.
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.
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 may not be able to grow or realize the benefits of our direct-to-consumer loan origination platform, which could adversely impact our business, results of operations and financial condition.
Our business model depends in part upon the continuing viability of Fannie Mae and Freddie Mac, or similar institutions, and any changes to their structure or creditworthiness could have an adverse impact on us.
Any stagnation in or deterioration of the residential mortgage or real estate markets may limit our ability to acquire our target assets on attractive terms or cause us to experience losses related to our assets. 8 Table of Contents Our business model depends in part upon the continuing viability of Fannie Mae and Freddie Mac, or similar institutions, and any changes to their structure or creditworthiness could have an adverse impact on us.
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.
As such, the applicable investor may have direct recourse to us for such origination and/or prior servicing issues depending upon the terms and conditions approved by such investor in connection with our purchase of the related MSR. 16 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 certain disclosures, representations and warranties to the purchasers of the assets regarding certain characteristics of those assets.
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.
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.
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.
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.
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.
Alternatively, any narrowing of our business activities may increase the concentration of our exposure to certain types of risk. 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.
Any illiquidity in our assets may make it difficult for us to sell such assets if the need or desire arises.
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.
We enter into hedging transactions that expose us to contingent liabilities in the future, which may adversely affect our financial results or cash available for distribution to stockholders. We engage in transactions intended to hedge against various risks to our portfolio, including the exposure to changes in interest rates.
Any of the foregoing issues may adversely impact our results of operations and financial condition. 14 Table of Contents We enter into hedging transactions that expose us to contingent liabilities in the future, which may adversely affect our financial results or cash available for distribution to stockholders.
Any such changes could adversely affect our financial condition, risk profile, results of operations, the market price of our common stock and our ability to make distributions to stockholders. Our risk management policies and procedures may not be effective.
We also cannot assure you that we will be able to effectively execute on or realize the potential benefits of changes in strategy. Any such changes could adversely affect our financial condition, risk profile, results of operations, the market price of our common stock and our ability to make distributions to stockholders.
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.
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.
Shifts in strategy may increase our exposure to credit risk, interest rate risk, financing risk, default risk, regulatory risk and real estate market fluctuations. We also cannot assure you that we will be able to effectively execute on or realize the potential benefits of changes in strategy.
Changes in strategy could also result in the elimination of certain investments and business activities that we no longer view as attractive or in alignment with our business model. Shifts in strategy may increase our exposure to credit risk, interest rate risk, financing risk, default risk, regulatory risk and real estate market fluctuations.
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, 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. These requirements can and do change as statutes and regulations are enacted, promulgated or amended, or as regulatory guidance or interpretations evolve or change.
An increase in interest rates may cause a decrease in the availability of certain of our target assets, which could adversely affect our ability to acquire target assets that satisfy our investment objectives and to generate income and pay dividends. Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing.
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. 18 Table of Contents An increase in interest rates may cause a decrease in the availability of certain of our target assets, which could adversely affect our ability to acquire target assets that satisfy our investment objectives and to generate income and pay dividends.
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.
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.
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.
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. 15 Table of Contents If our ability to sell loans in the secondary market is impaired, it could affect our volume and margins and we may not be able to continue to originate mortgage loans.
If our representations and warranties are inaccurate, we may be obligated to repurchase the assets or indemnify the applicable purchaser, which may result in a loss.
If our disclosures or representations and warranties are alleged or found to contain inaccuracies or omissions, we may be obligated to repurchase the assets or indemnify the applicable purchaser or be liable under federal or state securities laws or other applicable laws for damages to third parties.
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.
Our servicing and origination activities expose us to risk of litigation, which may materially and adversely affect our business and financial condition.
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.
We are directly subject to risks associated with mortgage servicing, including risks related to previous mortgage loan servicers. Through our operational platform, RoundPoint, we directly service a portion of the mortgage loans underlying our MSR assets as well as mortgage loans underlying MSR owned by third parties in accordance with requirements set forth by regulatory agencies and GSEs.
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.
We may utilize TBAs as a means of investing and financing Agency RMBS.
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.
In addition, origination activities are generally counter-cyclical to MSR, which provides supplementary sources of profitability to our stockholders while also hedging our MSR. It is possible that the full benefits of the originations platform may not be realized as expected, or at all.
Removed
Any stagnation in or deterioration of the residential mortgage or real estate markets may limit our ability to acquire our target assets on attractive terms or cause us to experience losses related to our assets.
Added
Finally, as we seek to expand our mortgage loan origination business, we will compete with bank and non-bank originators to provide various residential mortgage loan and real estate services products. The mortgage loan origination market remains highly competitive.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeThe risk oversight committee is briefed semi-annually by senior management and the Chief Information Security Officer, or CISO, on cybersecurity matters, or more frequently as the circumstances require. To assist the risk oversight committee, we also have established a security and privacy steering committee comprised of members of senior management and our CISO to oversee data privacy and cybersecurity matters.
Biggest changeTo assist the board, we also have established a security and privacy steering committee comprised of members of senior management, including our CISO and our Chief Technology Officer, to oversee data privacy, information technology, and cybersecurity matters.
Item 1C. Cybersecurity Our business is highly dependent on information technology. 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.
Item 1C. Cybersecurity Our business is highly dependent on information technology. 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, processing and transmission of this information is critical to our operations.
By way of example, these measures include the following: • industry standard targeted controls and security frameworks, including the National Institute of Standards and Technology (NIST), to protect our environment, including antivirus, antimalware, multi-factor authentication, complex and regularly changed passwords, email security and firewalls to protect our assets and our ability to maintain operations; • use of technologies to help detect, identify and manage risks within our environments, including endpoint detect and response (EDR), security information and event management (SIEM) and vulnerability management; • a formal cybersecurity incident response plan designed to respond to security incidents in a systematic and complete manner, and involves senior executives, external technical, legal and other resources, including an incident response retainer with our third-party security operations center; • regularly monitoring and assessing our cybersecurity programs using external parties including a third-party security operations center, cyber maturity assessments, penetration tests and other targeted controls assessments; • central systems backup processes and associated disaster recovery plans; • membership in an information sharing and analysis center (FS-ISAC) so that we may stay informed about challenges specific to the financial services industry and contribute to the overall cybersecurity community; and • employee training and awareness programs addressing cybersecurity and data privacy challenges we face in our industry.
By way of example, these measures include the following: • industry standard targeted controls and security frameworks, including the National Institute of Standards and Technology (NIST), to protect our environment, including antivirus, antimalware, multi-factor authentication, complex and regularly changed passwords, patch management, email security and firewalls to protect our assets and our ability to maintain operations; • use of technologies to help detect, identify and manage risks within our environments, including endpoint detect and response, security information and event management and vulnerability management; • a formal cybersecurity incident response plan designed to respond to security incidents in a systematic and complete manner, and involves senior executives, external technical, legal and other resources, including an incident response retainer with our third-party security operations center; • regularly monitoring and assessing our cybersecurity programs using external parties including a third-party 24/7 security operations center and by conducting periodic cyber maturity and risk assessments, penetration tests and other targeted controls assessments; • central systems backup processes and associated disaster recovery plans; • membership in an information sharing and analysis center and other industry groups so that we may stay informed about challenges specific to the financial services industry and contribute to the overall cybersecurity community; and • employee training and awareness programs addressing cybersecurity and data privacy challenges we face in our industry.
Our CISO has extensive information technology and program management experience, has served in the role since 2019 and has supported the company since 2015.
Our CISO has extensive information technology and program management experience, has served in this role for the Company since 2019 and has supported the Company’s information security function since 2015.
Such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations or trading activities or damage to our reputation, all of which could have a material adverse effect on our business, results of operations and financial condition. 22 Table of Contents We recognize the importance of protecting our information and our information technology systems, and assessing, identifying and managing cybersecurity-related risks have been integrated into our risk management processes.
Such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations or trading activities or damage to our reputation, all of which could have a material adverse effect on our business, results of operations and financial condition.
Computer malware, viruses, ransomware and phishing attacks remain widespread and are increasingly sophisticated. We are frequently the target of attempted cyber threats. We continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact.
We continuously monitor and develop our information technology networks and infrastructure to help prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses, and other events that could have a security impact.
The risk oversight committee of our board of directors is responsible for overseeing matters relating to our information technology and cybersecurity risk exposures and the steps our company takes to monitor and mitigate these risks.
Our board of directors is responsible for overseeing matters relating to our information technology and cybersecurity risk exposures and the steps our Company takes to monitor and mitigate these risks. The board is briefed semi-annually or as needed by senior management and the Chief Information Security Officer, or CISO, on cybersecurity matters, or more frequently as the circumstances require.
Added
Computer malware, viruses, ransomware and phishing attacks remain widespread and are increasingly sophisticated. We are frequently the target of attempted cyber threats, as are many other organizations within the financial servicing industry.
Added
For additional information on these risks, see Item 1A, “ Risk Factors ” of this Annual Report on Form 10-K. We recognize the importance of protecting our information and our information technology systems, and assessing, identifying and managing cybersecurity-related risks have been integrated into our risk management processes.
Added
To date, we believe that the risks from identified cybersecurity threats, including as a result of previous cybersecurity incidents, have not materially affected and are not reasonably likely to materially affect us, including our business strategy, results of operations or financial condition.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties We lease administrative office space in Minnesota, New York, South Carolina and Texas. We do not own, lease or utilize any physical properties that would be considered material to our business and operations. 23 Table of Contents
Biggest changeItem 2. Properties We lease administrative office space in Minnesota, New York, South Carolina and Texas. We do not own, lease or utilize any physical properties that would be considered material to our business and operations. 24 Table of Contents

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeEach 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
Biggest changeEach 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. 25 Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

11 edited+3 added−1 removed8 unchanged
Biggest changeCOMPARISON 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.
Biggest changeCOMPARISON OF CUMULATIVE TOTAL RETURN Among Two Harbors Investment Corp., S&P 500, Russell 2000 Index and FTSE Nareit Mortgage REITs Index December 31, Index 2019 2020 2021 2022 2023 2024 Two Harbors Investment Corp. $ 100.00 $ 47.80 $ 47.83 $ 36.68 $ 37.59 $ 36.62 S&P 500 $ 100.00 $ 96.91 $ 152.34 $ 124.73 $ 157.48 $ 196.85 Russell 2000 Index $ 100.00 $ 119.93 $ 137.67 $ 109.50 $ 127.98 $ 142.73 FTSE Nareit Mortgage REITs Index $ 100.00 $ 81.38 $ 94.05 $ 69.27 $ 74.52 $ 79.96 27 Table of Contents 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.
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.
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 2025 and thereafter.
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.
We have paid full cumulative dividends on all classes of our preferred stock from the respective dates of issuance through December 31, 2024. 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.
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]
The common share repurchase program does not have an expiration date. As of December 31, 2024, 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, 2024. Item 6. [Reserved]
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.
For a detailed description of the Equity Incentive Plan, see Note 20 - Equity Incentive Plans of the consolidated financial statements included under Item 8 of this Annual Report on Form 10-K.
Securities Authorized for Issuance under Equity Compensation Plans Our Second Restated 2009 Equity Incentive Plan and our 2021 Equity Incentive Plan, or the Equity Incentive Plans, were adopted by our board of directors and approved by our stockholders for the purpose of enabling us to provide equity compensation to attract and retain qualified directors, officers, advisers, consultants and other personnel.
Securities Authorized for Issuance under Equity Compensation Plans Our 2021 Equity Incentive Plan, or the Equity Incentive Plan, was adopted by our board of directors and approved by our stockholders for the purpose of enabling us to provide equity compensation to attract and retain qualified directors, officers, advisers, consultants and other personnel.
The Equity Incentive Plans are administered by the compensation committee of our board of directors and permit the grants of restricted common stock, restricted stock units, or RSUs, performance-based awards (including performance share units, or PSUs), phantom shares, dividend equivalent rights and other equity-based awards.
The Equity Incentive Plan is administered by the compensation committee of our board of directors and permits the grants of restricted common stock, restricted stock units, or RSUs, performance-based awards (including performance share units, or PSUs), phantom shares, dividend equivalent rights and other equity-based awards.
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.
The following table presents certain information about the Equity Incentive Plan as of December 31, 2024: December 31, 2024 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) — $ — 3,546,040 Equity compensation plans not approved by stockholders — — — Total — $ — 3,546,040 ___________________ (1) For a detailed description of the Equity Incentive Plan, see Note 20 - Equity Incentive Plans of the consolidated financial statements included under Item 8 of this Annual Report on Form 10-K. 26 Table of Contents Performance Graph The following graph compares a stockholder’s cumulative total return, assuming $100 invested at December 31, 2019, 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; (iii) the stocks included in the Russell 2000 Index; and (iv) the stocks included in the FTSE Nareit Mortgage REITs Index.
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.
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, 2025, 104,022,011 shares of common stock were issued and outstanding.
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.
Holders As of February 12, 2025, there were 466 registered holders and approximately 93,446 beneficial owners of our common stock. Dividends We have historically paid dividends on our 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.
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.
Removed
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.
Added
Beginning with this Annual Report on Form 10-K, the Bloomberg REIT Mortgage Index has been excluded from this graph, as this benchmark was discontinued during the year ended December 31, 2024.
Added
The Russell 2000 Index and the FTSE Nareit Mortgage REITs Index have been included as we believe the companies included in these indices are comparable to the Company’s size, business and operations.
Added
The preferred share repurchase program does not have an expiration date. As of December 31, 2024, we had repurchased an aggregate of 4,179,183 preferred shares under the program for a total cost of $77.3 million. We did not repurchase preferred shares during the three months ended December 31, 2024.

Item 7. Management's Discussion & Analysis

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

121 edited+52 added−50 removed41 unchanged
Biggest changeFor the three and twelve months ended December 31, 2023, we reclassified $77.6 million and $140.9 million, respectively, in unrealized losses on sold AFS securities from accumulated other comprehensive loss to (loss) gain on investment securities on the consolidated statements of comprehensive loss. 34 Table of Contents The following table presents the components of our comprehensive income (loss) for the three and twelve months ended December 31, 2023 and 2022: (in thousands, except share data) Three Months Ended Year Ended Income Statement Data: December 31, December 31, 2023 2022 2023 2022 (unaudited) Net interest income (expense): Interest income $ 122,401 $ 99,303 $ 480,364 $ 295,540 Interest expense 168,080 115,627 643,225 258,395 Net interest (expense) income (45,679) (16,324) (162,861) 37,145 Net servicing income: Servicing income 178,609 160,926 685,777 603,911 Servicing costs 12,029 25,272 95,488 94,119 Net servicing income 166,580 135,654 590,289 509,792 Other income (loss): Loss on investment securities (82,469) (347,450) (69,970) (603,937) (Loss) gain on servicing asset (172,589) (64,085) (111,620) 425,376 (Loss) gain on interest rate swap and swaption agreements (139,234) — (52,946) 29,499 (Loss) gain on other derivative instruments (143,812) 53,301 (166,210) 9,310 Other income (loss) — 112 5,103 (5) Total other loss (538,104) (358,122) (395,643) (139,757) Expenses: Compensation and benefits 21,297 7,411 52,865 40,723 Other operating expenses 23,959 15,540 62,313 42,005 Total expenses 45,256 22,951 115,178 82,728 (Loss) income before income taxes (462,459) (261,743) (83,393) 324,452 (Benefit from) provision for income taxes (29,259) 8,480 22,978 104,213 Net (loss) income (433,200) (270,223) (106,371) 220,239 Dividends on preferred stock (12,012) (12,365) (48,607) (53,607) Gain on repurchase and retirement of preferred stock 519 20,149 2,973 20,149 Net (loss) income attributable to common stockholders $ (444,693) $ (262,439) $ (152,005) $ 186,781 Basic (loss) earnings per weighted average common share $ (4.56) $ (3.04) $ (1.60) $ 2.15 Diluted (loss) earnings per weighted average common share $ (4.56) $ (3.04) $ (1.60) $ 2.13 Dividends declared per common share $ 0.45 $ 0.60 $ 1.95 $ 2.64 Weighted average number of shares of common stock: Basic 97,489,039 86,391,405 95,672,143 86,179,418 Diluted 97,489,039 86,391,405 95,672,143 96,076,175 Comprehensive income (loss): Net (loss) income $ (433,200) $ (270,223) $ (106,371) $ 220,239 Other comprehensive income (loss): Unrealized gain (loss) on available-for-sale securities 483,579 422,672 102,282 (465,057) Other comprehensive income (loss) 483,579 422,672 102,282 (465,057) Comprehensive income (loss) 50,379 152,449 (4,089) (244,818) Dividends on preferred stock (12,012) (12,365) (48,607) (53,607) Gain on repurchase and retirement of preferred stock 519 20,149 2,973 20,149 Comprehensive income (loss) attributable to common stockholders $ 38,886 $ 160,233 $ (49,723) $ (278,276) 35 Table of Contents (in thousands) December 31, 2023 December 31, 2022 Balance Sheet Data: Available-for-sale securities $ 8,327,149 $ 7,778,734 Mortgage servicing rights $ 3,052,016 $ 2,984,937 Total assets $ 13,138,800 $ 13,466,160 Repurchase agreements $ 8,020,207 $ 8,603,011 Revolving credit facilities $ 1,329,171 $ 1,118,831 Term notes payable $ 295,271 $ 398,011 Convertible senior notes $ 268,582 $ 282,496 Total stockholders’ equity $ 2,203,390 $ 2,183,525 Results of Operations The following analysis focuses on financial results during the three and twelve months ended December 31, 2023 and 2022.
Biggest changeOur comprehensive loss attributable to common stockholders was $1.6 million and comprehensive income attributable to common stockholders was $107.6 million for the three and twelve months ended December 31, 2024, respectively, as compared to comprehensive income attributable to common stockholders of $38.9 million and comprehensive loss attributable to common stockholders of $49.7 million for the three and twelve months ended December 31, 2023, respectively. 35 Table of Contents The following table presents the components of our comprehensive income (loss) for the three and twelve months ended December 31, 2024 and 2023: (in thousands, except share data) Three Months Ended Year Ended Income Statement Data: December 31, December 31, 2024 2023 2024 2023 (unaudited) Net interest income (expense): Interest income $ 103,774 $ 122,401 $ 450,152 $ 480,364 Interest expense 138,668 168,080 607,806 643,225 Net interest expense (34,894) (45,679) (157,654) (162,861) Net servicing income: Servicing income 167,568 178,609 681,648 685,777 Servicing costs 4,575 12,029 20,069 95,488 Net servicing income 162,993 166,580 661,579 590,289 Other income (loss): Loss on investment securities (8,009) (82,469) (40,038) (69,970) Gain (loss) on servicing asset 82,520 (172,589) (62,674) (111,620) Gain (loss) on interest rate swap and swaption agreements 199,612 (139,234) 147,871 (52,946) Loss on other derivative instruments (55,144) (143,812) (41,017) (166,210) Gain on mortgage loans held-for-sale 558 — 1,482 — Other income 850 — 1,199 5,103 Total other income (loss) 220,387 (538,104) 6,823 (395,643) Expenses: Compensation and benefits 21,800 21,297 89,753 52,865 Other operating expenses 19,085 23,959 76,241 62,313 Total expenses 40,885 45,256 165,994 115,178 Income (loss) before income taxes 307,601 (462,459) 344,754 (83,393) Provision for (benefit from) income taxes 30,872 (29,259) 46,586 22,978 Net income (loss) 276,729 (433,200) 298,168 (106,371) Dividends on preferred stock (11,784) (12,012) (47,136) (48,607) Gain on repurchase and retirement of preferred stock — 519 644 2,973 Net income (loss) attributable to common stockholders $ 264,945 $ (444,693) $ 251,676 $ (152,005) Basic earnings (loss) per weighted average common share $ 2.54 $ (4.56) $ 2.41 $ (1.60) Diluted earnings (loss) per weighted average common share $ 2.37 $ (4.56) $ 2.37 $ (1.60) Dividends declared per common share $ 0.45 $ 0.45 $ 1.80 $ 1.95 Comprehensive income (loss): Net income (loss) $ 276,729 $ (433,200) $ 298,168 $ (106,371) Other comprehensive (loss) income: Unrealized (loss) gain on available-for-sale securities (266,565) 483,579 (144,095) 102,282 Other comprehensive (loss) income (266,565) 483,579 (144,095) 102,282 Comprehensive income (loss) 10,164 50,379 154,073 (4,089) Dividends on preferred stock (11,784) (12,012) (47,136) (48,607) Gain on repurchase and retirement of preferred stock — 519 644 2,973 Comprehensive (loss) income attributable to common stockholders $ (1,620) $ 38,886 $ 107,581 $ (49,723) 36 Table of Contents (in thousands) December 31, 2024 December 31, 2023 Balance Sheet Data: Available-for-sale securities $ 7,371,711 $ 8,327,149 Mortgage servicing rights $ 2,994,271 $ 3,052,016 Total assets $ 12,204,319 $ 13,138,800 Repurchase agreements $ 7,805,057 $ 8,020,207 Revolving credit facilities $ 1,020,171 $ 1,329,171 Term notes payable $ — $ 295,271 Convertible senior notes $ 260,229 $ 268,582 Total stockholders’ equity $ 2,122,509 $ 2,203,390 Results of Operations Interest Income Interest income decreased from $122.4 million and $480.4 million for the three and twelve months ended December 31, 2023, respectively, to $103.8 million and $450.2 million for the same periods in 2024 due to a decrease in Agency RMBS portfolio size and lower average cash balances held throughout the periods.
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.
Additionally, we reclassify unrealized gains and losses on AFS securities in accumulated other comprehensive loss to net income (loss) 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 (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.
(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 income (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.
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.
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 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.
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.
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 12 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.
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.
For the year ended December 31, 2024, 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.
Our ability to quickly sell certain assets, such as MSR, may be limited by delays encountered while obtaining certain Agency approvals required for such dispositions and may be further limited by delays due to the time period needed for negotiating transaction documents, conducting diligence, and complying with Agency requirements regarding the transfer of such assets before settlement may occur.
Our ability to quickly sell certain assets, such as MSR and mortgage loans, may be limited by delays encountered while obtaining certain Agency approvals required for such dispositions and may be further limited by delays due to the time period needed for negotiating transaction documents, conducting diligence, and complying with Agency requirements regarding the transfer of such assets before settlement may occur.
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.
Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 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, 2023.
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.
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 2024 and 2023 items and year-to-year comparisons between 2024 and 2023.
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 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. 46 Table of Contents The following table provides a summary of our borrowings under repurchase agreements (excluding those collateralized by U.S.
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.
See Note 12 - 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.
However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Code, to engage in such activities.
However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Internal Revenue Code, to engage in such activities.
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.
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.
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.
The change in fair value of interest rate swaps and swaptions during the three and twelve months ended December 31, 2024 and 2023 was a result of changes to floating interest rates (OIS or SOFR), the swap curve and corresponding counterparty borrowing rates.
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.
The increase in yields on AFS securities for the three and twelve months ended December 31, 2024, as compared to the same periods in 2023 was driven by net purchases of higher coupon AFS securities with lower unamortized premiums.
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.
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, 2024, we determined that we maintained compliance with both the 55% Test and the 80% Test requirements.
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.
Treasuries), revolving credit facilities, warehouse 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, 2023 to December 31, 2024.
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.
As of December 31, 2024, 50% of the highest net worth during the 24 calendar months prior, as defined, was $1.2 billion and our net worth, as defined, was $2.1 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.
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.
GAAP to taxable income timing differences than if the portfolio were accounted for as trading instruments. Dividends For the year ended December 31, 2024, we declared cash dividends totaling $1.80 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.
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.
We calculate that at least 75% of our assets were qualified REIT assets, as defined in the Internal Revenue Code for the year ended December 31, 2024. 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, 2024.
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.
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.
Our GAAP net income (loss) is also affected by fluctuations in market prices on the remainder of our financial assets and liabilities recorded at fair value, including interest rate swap, cap and swaption agreements and certain other derivative instruments ( i.e. , Agency to-be-announced securities, or TBAs, options on TBAs, futures, options on futures, and inverse interest-only securities), which are accounted for as derivative trading instruments under U.S.
Our GAAP net income (loss) is also affected by fluctuations in market prices on the remainder of our financial assets and liabilities recorded at fair value, including interest rate swap and swaption agreements and certain other derivative instruments ( i.e. , Agency to-be-announced securities, or TBAs, options on TBAs, futures, options on futures, inverse interest-only securities, interest rate lock commitments and forward loan sale commitments), which are accounted for as derivative trading instruments under U.S.
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.
Swaps and swaptions are used for purposes of hedging our interest rate exposure, and therefore, 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) generally offset a portion of the unrealized losses and gains recognized on our Agency RMBS AFS portfolio, which are recorded either directly to stockholders’ equity through other comprehensive (loss) income or to loss on investment securities, in the case of certain AFS securities for which we have elected the fair value option.
Consequently, even if we identify a buyer for our MSR, there is no assurance that we would be able to quickly sell such assets if the need or desire arises.
Consequently, even if we identify a buyer for our MSR and mortgage loans, there is no assurance that we would be able to quickly sell such assets if the need or desire arises.
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.
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, 2024, we had entered into repurchase agreements with 36 counterparties, 19 of which had outstanding balances.
Accordingly, there is no assurance that our estimates of fair value are indicative of the amounts that would be realized on the ultimate sale or exchange of these assets. At December 31, 2023, 23.3% of our total assets were classified as Level 3 fair value assets. Critical Accounting Estimates The preparation of financial statements in accordance with U.S.
Accordingly, there is no assurance that our estimates of fair value are indicative of the amounts that would be realized on the ultimate sale or exchange of these assets. At December 31, 2024, 24.6% of our total assets were classified as Level 3 fair value assets. Critical Accounting Estimates The preparation of financial statements in accordance with U.S.
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.
As of December 31, 2024, we had master repurchase agreements in place with 36 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.
Additionally, a substantial portion of our MSR is currently pledged as collateral for repurchase agreements, revolving credit facilities and term notes payable, and a portion of our servicing advances have been pledged as collateral for revolving credit facilities.
Additionally, a substantial portion of our MSR is currently pledged as collateral for repurchase agreements and revolving credit facilities, and a portion of our servicing advances have been pledged as collateral for revolving credit facilities.
The temporary tax differences recorded in 2023 and 2022 were principally timing differences between U.S.
The temporary tax differences recorded in 2024 and 2023 were principally timing differences between U.S.
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.
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, 2024, we believe that we qualified as a REIT under the Internal Revenue Code. 52 Table of Contents
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, 2024, our liquidity, as defined, was $504.6 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.
The increase in total operating expenses during the year ended December 31, 2023, as compared to the same period in 2022, was driven by the addition of RoundPoint’s compensation, benefits, operating and loan level expenses, as well as higher expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers LLC.
The increase in total operating expenses during the year ended December 31, 2024, as compared to the same period in 2023, was driven by the addition of RoundPoint’s compensation, benefits, operating and loan level expenses, partially offset by lower expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers.
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 .
The cash movements can be summarized by the following: • Cash flows from operating activities. For the year ended December 31, 2024, operating activities increased our cash balances by approximately $201.0 million, primarily driven by our financial results for the year. • Cash flows from investing activities .
We seek to offset a portion of our Agency pool market value exposure through our MSR and interest-only Agency RMBS portfolios. During periods of decreasing interest rates with rising prepayment speeds, the market value of our Agency pools generally increases and the market value of our interest-only securities and MSR generally decreases.
We pair our MSR and interest-only Agency RMBS portfolio with a portion of our Agency pool portfolio to offset risk. During periods of decreasing interest rates with rising prepayment speeds, the market value of our Agency pools generally increases and the market value of our interest-only securities and MSR generally decreases.
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.
One of our wholly owned subsidiaries, TH MSR Holdings LLC (formerly Matrix Financial Services Corporation) 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.
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.
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 Summary of Results of Operations and Financial Condition Our book value per common share for U.S.
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.
The benefit recognized for the three months ended December 31, 2023 was primarily due to net losses recognized on MSR and operating expenses, partially offset by net income from MSR servicing activities in our TRSs.
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.
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 income (loss) are significantly affected by fluctuations in market prices. At December 31, 2024, approximately 85.0% of our total assets, or $10.4 billion, consisted of financial instruments recorded at fair value.
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.
Repurchase agreements and revolving credit facilities 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 for repurchase agreements.
The decrease in servicing expenses during the three months ended December 31, 2023, as compared to the same period in 2022, was the result of lower third-party subservicing fees due to the acquisition of RoundPoint.
The decrease in servicing costs during the three and twelve months ended December 31, 2024, as compared to the same periods in 2023, was the result of lower third-party subservicing fees due to the acquisition of RoundPoint.
(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.
Gain (Loss) 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, 2024 and 2023: Three Months Ended Year Ended December 31, December 31, (in thousands) 2024 2023 2024 2023 Net interest spread $ 12,158 $ 7,444 $ 58,527 $ 21,358 Early termination, agreement maturation and option expiration gains (losses) 66,033 (12,438) (3,999) (36,194) Change in unrealized gain (loss) on interest rate swap and swaption agreements, at fair value 121,421 (134,240) 93,343 (38,110) Gain (loss) on interest rate swap and swaption agreements $ 199,612 $ (139,234) $ 147,871 $ (52,946) 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.
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.
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 and inverse interest-only Agency RMBS.
The following table provides the carrying value of our investment portfolio by asset type: (dollars in thousands) December 31, 2023 December 31, 2022 Agency RMBS $ 8,335,245 73.2 % $ 7,668,752 71.1 % Mortgage servicing rights 3,052,016 26.8 % 2,984,937 27.7 % Other 4,150 — % 125,158 1.2 % Total $ 11,391,411 $ 10,778,847 Prepayment speeds and volatility due to interest rates Our portfolio is subject to market risks, primarily interest rate risk and prepayment risk.
The following table provides the carrying value of our investment portfolio by asset type: (dollars in thousands) December 31, 2024 December 31, 2023 Agency RMBS $ 7,376,965 71.1 % $ 8,335,245 73.2 % Mortgage servicing rights 2,994,271 28.9 % 3,052,016 26.8 % Other 3,734 — % 4,150 — % Total $ 10,374,970 $ 11,391,411 Prepayment speeds and volatility due to interest rates Our portfolio is subject to market risks, primarily interest rate risk and prepayment risk.
As of December 31, 2023 and December 31, 2022, our MSR had a fair market value of $3.1 billion and $3.0 billion, respectively. 41 Table of Contents As of December 31, 2023 and December 31, 2022, our MSR portfolio included MSR on 848,264 and 809,025 loans with an unpaid principal balance of approximately $215.6 billion and $204.9 billion, respectively.
As of December 31, 2024 and December 31, 2023, our MSR had a fair market value of $3.0 billion and $3.1 billion, respectively. As of December 31, 2024 and December 31, 2023, our MSR portfolio included MSR on 803,091 and 848,264 loans with an unpaid principal balance of approximately $200.3 billion and $215.6 billion, respectively.
As a result, we had an overall estimated unused borrowing capacity on our unpledged securities of approximately $3.2 million. As of December 31, 2023, we held approximately $4.1 million of unpledged MSR and $63.5 million of unpledged servicing advances.
As a result, we had an overall estimated unused borrowing capacity on unpledged securities of approximately $6.5 million. As of December 31, 2024, we held approximately $5.2 million of unpledged MSR and $22.9 million of unpledged servicing advances.
(Loss) Gain On Other Derivative Instruments The following table provides a summary of the total net gains (losses) recognized on other derivative instruments we hold for purposes of both hedging and non-hedging activities, principally TBAs, futures, options on futures, and inverse interest-only securities during the three and twelve months ended December 31, 2023 and 2022: Three Months Ended Year Ended (in thousands) December 31, December 31, 2023 2022 2023 2022 TBAs $ 28,967 $ 48,233 $ (155,942) $ (487,713) Futures (175,506) 5,016 (8,973) 514,467 Options on futures — — (779) (2,224) Inverse interest-only securities 2,727 52 (516) (15,220) (Loss) gain on other derivative instruments $ (143,812) $ 53,301 $ (166,210) $ 9,310 For further details regarding our use of derivative instruments and related activity, refer to Note 8 - Derivative Instruments and Hedging Activities to the consolidated financial statements, included in this Annual Report on Form 10-K.
Loss On Other Derivative Instruments The following table provides a summary of the total net gains (losses) recognized on other derivative instruments we hold for purposes of both hedging and non-hedging activities, principally TBAs, futures, options on futures, and inverse interest-only securities during the three and twelve months ended December 31, 2024 and 2023: Three Months Ended Year Ended (in thousands) December 31, December 31, 2024 2023 2024 2023 TBAs $ (141,978) $ 28,967 $ (144,416) $ (155,942) Futures 89,155 (175,506) 105,216 (8,973) Options on futures — — (127) (779) Inverse interest-only securities (2,321) 2,727 (1,690) (516) Loss on other derivative instruments $ (55,144) $ (143,812) $ (41,017) $ (166,210) For further details regarding our use of derivative instruments and related activity, refer to Note 9 - Derivative Instruments and Hedging Activities to the consolidated financial statements, included in this Annual Report on Form 10-K.
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.
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.
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.
The decrease in cost of funds associated with the financing of AFS securities for the three months ended December 31, 2024, as compared to the same period in 2023, was due to declining interest rates.
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.
During the three and twelve months ended December 31, 2024, our economic debt-to-equity ratio funding our Agency and non-Agency investment securities, MSR and related servicing advances and mortgage loans held-for-sale, which includes unsecured borrowings under convertible senior notes, implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, decreased from 7.0:1.0 to 6.5:1.0 and increased from 6.0:1.0 to 6.5:1.0, respectively. 49 Table of Contents As of December 31, 2024, we held approximately $5.4 million of unpledged Agency RMBS and $3.4 million of unpledged non-Agency securities.
We also have one revolving credit facility that provides long-term financing for our servicing advances.
We also have one revolving credit facility that provides long-term financing for our servicing advances and one warehouse facility that provides short-term financing for our mortgage loans held-for-sale.
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.
GAAP purposes was $14.47 at December 31, 2024, a decrease from $14.93 per common share at September 30, 2024, and a decrease from $15.21 per common share at December 31, 2023.
The decline in book value for both the three and twelve months ended December 31, 2023 was primarily driven by net widening of mortgage spreads and dividends declared, offset by net unrealized gains recognized on AFS securities.
The decline in book value for both the three and twelve months ended December 31, 2024 was primarily driven by unrealized losses recognized on AFS securities and dividends declared, partially offset by net servicing income earned.
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.
As of December 31, 2024, we held $504.6 million in cash and cash equivalents available to support our operations; $10.4 billion of AFS securities, MSR, mortgage loans held-for-sale and derivative assets held at fair value; and $9.1 billion of outstanding debt in the form of repurchase agreements, borrowings under revolving credit facilities and warehouse facilities and convertible senior notes.
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.
The provision recognized for the year ended December 31, 2024 was primarily due to net income from MSR servicing and mortgage loan origination activities, partially offset by operating expenses incurred in our TRSs.
(Loss) Gain On Servicing Asset The following table presents the components of (loss) gain on servicing asset for 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 Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model $ (115,944) $ (6,441) $ 97,859 $ 793,631 Changes in fair value due to realization of cash flows (runoff) (55,486) (60,908) (227,663) (371,023) (Losses) gains on sales (1) (1,159) 3,264 18,184 2,768 (Loss) gain on servicing asset $ (172,589) $ (64,085) $ (111,620) $ 425,376 ____________________ (1) During the year ended December 31, 2023, excess MSR was transferred to Agency-sponsored trusts in exchange for stripped mortgage backed securities, or SMBS.
Gain (Loss) On Servicing Asset The following table presents the components of gain (loss) on servicing asset for the three and twelve months ended December 31, 2024 and 2023: Three Months Ended Year Ended December 31, December 31, (in thousands) 2024 2023 2024 2023 Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model $ 139,393 $ (115,944) $ 140,168 $ 97,859 Changes in fair value due to realization of cash flows (runoff) (57,367) (55,486) (231,606) (227,663) Gains (losses) on sales (1) 494 (1,159) 28,764 18,184 Gain (loss) on servicing asset $ 82,520 $ (172,589) $ (62,674) $ (111,620) ____________________ (1) During the year ended December 31, 2023, excess MSR was transferred to Agency-sponsored trusts in exchange for stripped mortgage backed securities, or SMBS.
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.
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, 2024 and 2023: Year Ended December 31, 2024 (in millions) TRS REIT Consolidated GAAP net income (loss), pre-tax $ 183.6 $ 161.2 $ 344.8 State taxes (10.1) — (10.1) Adjusted GAAP net income (loss), pre-tax 173.5 161.2 334.7 Permanent differences Dividends from TRSs — 96.9 96.9 State deferred tax expense 6.8 — 6.8 Other permanent differences — 6.8 6.8 Temporary differences Net accretion of OID and market discount (68.2) 40.4 (27.8) Net unrealized gains and losses (6.5) (215.1) (221.6) Net realized gains and losses on sales of RMBS — 3.1 3.1 Net realized gains and losses on sales of MSR 11.5 (4.9) 6.6 Credit loss impairment — 0.3 0.3 Other temporary differences (0.1) (6.5) (6.6) Capital loss carryforward deferral — 89.5 89.5 Net operating loss carryforward utilization (71.8) — (71.8) Estimated taxable income 45.2 171.7 216.9 Dividend paid deduction — (171.7) (171.7) Estimated taxable income post-dividend paid deduction $ 45.2 $ — $ 45.2 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 post-dividend paid deduction $ 16.7 $ — $ 16.7 48 Table of Contents The permanent differences recorded in 2024 and 2023 were primarily due to dividends paid from the Company’s TRSs to the REIT as well as differences related to officer’s compensation deduction limitations, compensation expense related to restricted stock dividends and vesting, the dividends paid deduction for tax, amortization of goodwill for tax, and state taxes, net of federal benefit in the Company’s TRSs.
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.
In addition to our master repurchase agreements that fund our Agency and non-Agency securities, we have three repurchase facilities and two revolving credit facilities that provide short- and long-term financing for our MSR portfolio.
Liquidity and Capital Resources Our liquidity and capital resources are managed and forecasted on a daily basis. We believe this ensures that we have sufficient liquidity to absorb market events that could negatively impact collateral valuations and result in margin calls. We also believe that it gives us the flexibility to manage our portfolio to take advantage of market opportunities.
Liquidity and Capital Resources Our liquidity and capital resources are managed and forecasted on a daily basis. We believe this helps ensure that we have sufficient liquidity to absorb market events that could negatively impact collateral valuations and result in margin calls.
(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.
(in millions, except per share amounts) Book Value Common Shares Outstanding Common Book Value Per Share Common stockholders’ equity at December 31, 2023 $ 1,569.5 103.2 $ 15.21 Net income 298.1 Other comprehensive loss (143.9) Comprehensive income 154.2 Dividends on preferred stock (47.2) Gain on repurchase and retirement of preferred stock 0.6 Comprehensive income attributable to common stockholders 107.6 Dividends on common stock (187.9) Other 10.9 0.5 Balance before capital transactions 1,500.1 103.7 Repurchase and retirement of preferred stock 0.4 Issuance of common stock, net of offering costs 0.2 — Common stockholders’ equity at December 31, 2024 $ 1,500.7 103.7 $ 14.47 Total preferred stock liquidation preference 621.8 Total stockholders’ equity at December 31, 2024 $ 2,122.5 47 Table of Contents U.S.
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.
Income Taxes During the three and twelve months ended December 31, 2024, we recognized a provision for income taxes of $30.9 million and $46.6 million, respectively.
The increase in loss on servicing asset for the three months ended December 31, 2023, as compared to the same period in 2022, was driven by higher unfavorable change in valuation assumptions used in the fair valuation of MSR and losses realized on sales of MSR, offset by lower portfolio runoff.
The increase in gain (decrease in loss) on servicing asset for the three and twelve months ended December 31, 2024, as compared to the same periods in 2023, was driven by favorable change in valuation inputs and assumptions used in the fair valuation of MSR and higher realized gains on sales of MSR, partially offset by slightly higher portfolio run-off.
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.
We also hold $3.7 million in tranches of mortgage-backed and asset-backed P&I and interest-only non-Agency securities. 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.
Overall, on December 31, 2023, we had $167.9 million unused committed and $423.3 million unused uncommitted borrowing capacity on MSR financing facilities, and $165.7 million in unused committed borrowing capacity on servicing advance financing facilities.
Overall, on December 31, 2024, we had $70.1 million unused committed and $795.0 million unused uncommitted borrowing capacity on MSR financing facilities, and $59.7 million in unused committed borrowing capacity on servicing advance financing facilities.
Loss On Investment Securities The following table presents the components of loss on investment securities for 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 Proceeds from sales $ 978,936 $ 2,770,811 $ 2,673,827 $ 7,793,705 Amortized cost of securities sold (1,061,837) (3,113,102) (2,792,703) (8,359,967) Total realized losses on sales (82,901) (342,291) (118,876) (566,262) Reversal of (provision for) credit losses 328 318 545 (2,730) Other 104 (5,477) 48,361 (34,945) Loss on investment securities $ (82,469) $ (347,450) $ (69,970) $ (603,937) In the ordinary course of our business, we make investment decisions and allocate capital in accordance with our views on the changing risk/reward dynamics in the market and in our portfolio.
Loss On Investment Securities The following table presents the components of loss on investment securities for the three and twelve months ended December 31, 2024 and 2023: Three Months Ended Year Ended December 31, December 31, (in thousands) 2024 2023 2024 2023 Proceeds from sales $ 1,286,810 $ 978,936 $ 2,183,330 $ 2,673,827 Amortized cost of securities sold (1,293,570) (1,061,837) (2,222,634) (2,792,703) Total realized losses on sales (6,760) (82,901) (39,304) (118,876) (Provision for) reversal of provision for credit losses (284) 328 (259) 545 Other (965) 104 (475) 48,361 Loss on investment securities $ (8,009) $ (82,469) $ (40,038) $ (69,970) 39 Table of Contents In the ordinary course of our business, we make investment decisions and allocate capital in accordance with our views on the changing risk/reward dynamics in the market and in our portfolio.
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.
The following represent the most restrictive financial covenants across our lending agreements as of December 31, 2024: • Total indebtedness to tangible net worth must be less than 8.0:1.0. As of December 31, 2024, our total indebtedness to tangible net worth, as defined, was 4.7:1.0. • Cash liquidity must be greater than $200.0 million.
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.
Treasury securities. We did not hold any repurchase agreements collateralized by U.S. Treasury securities during the three and twelve months ended December 31, 2024 or the three months ended December 31, 2023.
As of December 31, 2023, we held approximately $1.1 million of unpledged Agency securities and $3.8 million of unpledged non-Agency securities. As a result, we had an overall estimated unused borrowing capacity on unpledged securities of approximately $3.2 million. As of December 31, 2023, we held approximately $4.1 million of unpledged MSR and $63.5 million of unpledged servicing advances.
As of December 31, 2024, we held $504.6 million in cash and cash equivalents, approximately $5.4 million of unpledged Agency RMBS and $3.4 million of unpledged non-Agency securities. As a result, we had an overall estimated unused borrowing capacity on our unpledged securities of approximately $6.5 million.
The increase in yields on reverse repurchase agreements 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.
The decrease in yields on reverse repurchase agreements for the three months ended December 31, 2024, as compared to the same period in 2023, was due to declining interest rates.
Expenses The following table presents the components of expenses for the three and twelve months ended December 31, 2023 and 2022: Three Months Ended Year Ended December 31, December 31, (dollars in thousands) 2023 2022 2023 2022 Compensation and benefits: Non-cash equity compensation expenses $ 1,613 $ 1,653 $ 10,976 $ 11,630 All other compensation and benefits 19,684 5,758 41,889 29,093 Total compensation and benefits $ 21,297 $ 7,411 $ 52,865 $ 40,723 Other operating expenses: Certain operating expenses (1) $ 3,408 $ 10,836 $ 26,356 $ 18,982 All other operating expenses 20,551 4,704 35,957 23,023 Total other operating expenses $ 23,959 $ 15,540 $ 62,313 $ 42,005 Annualized operating expense ratio 8.6 % 4.2 % 5.2 % 3.3 % Annualized operating expense ratio, excluding non-cash equity compensation and certain operating expenses (1) 7.6 % 1.9 % 3.5 % 2.1 % ____________________ (1) Certain operating expenses predominantly consists of expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers LLC, as discussed within Note 16 to the consolidated financial statements, included under Item 1 of this Annual Report on Form 10-K.
Prior to the launch of originations, our mortgage loans held-for-sale consisted of a small number of loans purchased from the collateral underlying our MSR. 41 Table of Contents Expenses The following table presents the components of expenses for the three and twelve months ended December 31, 2024 and 2023: Three Months Ended Year Ended December 31, December 31, (dollars in thousands) 2024 2023 2024 2023 Compensation and benefits: Non-cash equity compensation expenses $ 1,610 $ 1,613 $ 10,946 $ 10,976 All other compensation and benefits 20,190 19,684 78,807 41,889 Total compensation and benefits $ 21,800 $ 21,297 $ 89,753 $ 52,865 Other operating expenses: Certain operating expenses (1) $ 39 $ 3,408 $ 714 $ 26,356 All other operating expenses 19,046 20,551 75,527 35,957 Total other operating expenses $ 19,085 $ 23,959 $ 76,241 $ 62,313 Annualized operating expense ratio 7.7 % 8.6 % 7.6 % 5.2 % Annualized operating expense ratio, excluding non-cash equity compensation and certain operating expenses (1) 7.4 % 7.6 % 7.0 % 3.5 % ____________________ (1) Certain operating expenses predominantly consists of expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers, as discussed within Note 18 to the consolidated financial statements, included under Item 1 of this Annual Report on Form 10-K.
Our principal sources of cash consist of borrowings under repurchase agreements, revolving credit facilities, term notes payable, payments of principal and interest we receive on our target assets, cash generated from our operating results, and proceeds from capital market transactions.
We also believe that it gives us the flexibility to manage our portfolio to take advantage of market opportunities. Our principal sources of cash consist of borrowings under repurchase agreements, revolving credit facilities, warehouse facilities, payments of principal and interest we receive on our target assets, cash generated from our operating results, and proceeds from capital market transactions.
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.
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.
In each transaction, a portion of the SMBS was acquired by third parties, and we acquired the remaining balance of those SMBS, which are included within Agency AFS securities unless sold prior to December 31, 2023.
In each transaction, a portion of the SMBS was acquired by third parties, and we acquired the remaining balance of those SMBS, which were briefly included within Agency AFS securities until their sale in the same year.
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.
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. Certain of our subsidiaries have obtained the requisite licenses and approvals to own and manage MSR and to originate and directly service residential mortgage loans.
We review and may challenge valuations from third-party brokers and pricing vendors to ensure that such quotes and valuations are indicative of fair value as a result of this analysis.
We review and may challenge valuations from third-party brokers and pricing vendors to ensure that such quotes and valuations are indicative of fair value as a result of this analysis. We then estimate the fair value of each security based upon the median of the final broker quotes received, subject to internally-established hierarchy and override procedures.
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.
The tables below summarize certain characteristics of our Agency RMBS AFS at December 31, 2024 and December 31, 2023: December 31, 2024 (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 $ 7,600,374 $ 64,627 $ 7,665,001 $ — $ 2,789 $ (321,829) $ 7,345,961 4.93 % $ 101.17 Interest-only securities 462,886 27,747 27,747 (2,386) 473 (3,818) 22,016 2.05 % $ 24.04 Total $ 8,063,260 $ 92,374 $ 7,692,748 $ (2,386) $ 3,262 $ (325,647) $ 7,367,977 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 43 Table of Contents Mortgage Servicing Rights, at Fair Value One of our wholly owned subsidiaries, TH MSR Holdings, 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.
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.
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.
As of 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, was 4.5:1.0. 33 Table of Contents As of December 31, 2023, we held $729.7 million in cash and cash equivalents, approximately $1.1 million of unpledged Agency securities and $3.8 million of unpledged non-Agency securities.
As of December 31, 2024, the debt-to-equity ratio funding our Agency and non-Agency investment securities, MSR and related servicing advances and mortgage loans held-for-sale, which includes unsecured borrowings under convertible senior notes, was 4.3:1.0.
We have one revolving credit facility in place to finance our servicing advance obligations, which are included in other assets on our consolidated balance sheets.
We have one revolving credit facility in place to finance our servicing advance obligations, which are included in other assets on our consolidated balance sheets. Late in the second quarter of 2024, RoundPoint began operating its in-house, direct-to-consumer originations platform.
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.
Additionally, we frequently perform shock analyses against various market events to monitor the adequacy of our excess liquidity. During the year ended December 31, 2024, we did not experience any material issues accessing our funding sources. We expect ongoing sources of financing to be primarily repurchase agreements, revolving credit facilities, warehouse facilities, convertible notes and similar financing arrangements.
We expect ongoing sources of financing to be primarily repurchase agreements, revolving credit facilities, term notes payable, convertible notes and similar financing arrangements. We plan to finance our assets with a moderate amount of leverage, the level of which may vary based upon the particular characteristics of our portfolio and market conditions.
We plan to finance our assets with a moderate amount of leverage, the level of which may vary based upon the particular characteristics of our portfolio and market conditions.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeChanges 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.
Biggest changeChanges in Interest Rates (dollars in thousands) -50 bps -25 bps +25 bps +50 bps Change in annualized net interest income (1) : $ (24,679) $ (12,412) $ 12,336 $ 24,701 % change in net interest income (1) (16.5) % (8.3) % 8.2 % 16.5 % Change in value of financial position: Available-for-sale securities $ 196,311 $ 100,039 $ (103,369) $ (209,650) As a % of common equity 13.1 % 6.6 % (6.9) % (14.0) % Mortgage servicing rights (2) $ (69,569) $ (31,904) $ 22,362 $ 41,594 As a % of common equity (2) (4.6) % (2.1) % 1.5 % 2.8 % Mortgage loans held-for-sale $ 34 $ 18 $ (20) $ (43) As a % of common equity — % — % — % — % Derivatives, net $ (158,153) $ (75,712) $ 68,949 $ 131,207 As a % of common equity (10.5) % (5.1) % 4.6 % 8.7 % Reverse repurchase agreements $ 74 $ 37 $ (37) $ (74) As a % of common equity — % — % — % — % Repurchase agreements $ (3,989) $ (1,994) $ 1,994 $ 3,989 As a % of common equity (0.3) % (0.1) % 0.2 % 0.3 % Revolving credit facilities $ (235) $ (117) $ 117 $ 234 As a % of common equity — % — % — % — % Warehouse facilities $ (1) $ — $ — $ 1 As a % of common equity — % — % — % — % Convertible senior notes $ (999) $ (498) $ 495 $ 987 As a % of common equity (0.1) % — % — % 0.1 % Total Net Assets $ (36,527) $ (10,131) $ (9,509) $ (31,755) As a % of total assets (0.3) % (0.1) % (0.1) % (0.3) % As a % of common equity (2.4) % (0.7) % (0.6) % (2.1) % ____________________ (1) Amounts include the effect of interest spread from our interest rate swaps and float income from custodial accounts associated with our servicing portfolio, but do not reflect any potential changes to dollar roll income associated with our TBA positions or U.S.
Additionally, if one or more of our repurchase agreement or revolving credit facility counterparties chose not to provide ongoing funding, our ability to finance would decline or exist at possibly less favorable terms. As such, we cannot provide assurance that we will always be able to roll over our repurchase agreements and revolving credit facilities.
Additionally, if one or more of our repurchase agreement, revolving credit facility or warehouse facility counterparties chose not to provide ongoing funding, our ability to finance would decline or exist at possibly less favorable terms. As such, we cannot provide assurance that we will always be able to roll over our repurchase agreements, revolving credit facilities and warehouse facilities.
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.
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, 2024.
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.
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. 54 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, 2024.
In executing on our current interest rate risk management strategy, we have entered into TBAs, interest rate swap and swaption agreements, futures and options on futures. In addition, because MSR are negative duration assets, they may provide a hedge to interest rate exposure on our Agency RMBS portfolio.
In executing on our current interest rate risk management strategy, we have entered into TBAs, interest rate swap and swaption agreements, futures, options on futures, and forward mortgage loan sale commitments. In addition, because MSR are negative duration assets, they may provide a hedge to interest rate exposure on our Agency RMBS portfolio.
To help manage the adverse impact of interest rate changes on the value of our portfolio as well as our cash flows, we may, at times, enter into various forward contracts, including short securities, TBAs, options, futures, swaps, caps, credit default swaps and total return swaps.
To help manage the adverse impact of interest rate changes on the value of our portfolio, our cash flows, and our loan origination pipeline (consisting of IRLCs and mortgage loans held-for-sale), we may, at times, enter into various forward contracts, including short securities, TBAs, options, futures, swaps, caps, credit default swaps, total return swaps and forward mortgage loan sale commitments.
Interest Rate Risk Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control.
Interest Rate Risk Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and related financing obligations.
However, we retain the risk of potential credit losses on all of the loans underlying our non-Agency securities. 53 Table of Contents
However, we retain the risk of potential credit losses on our mortgage loans held-for-sale and all of the loans underlying our non-Agency securities. 56 Table of Contents
While this table reflects the estimated impact of interest rate changes on the static portfolio, we actively manage our portfolio and continuously make adjustments to the size and composition of our asset and hedge portfolio. Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table.
While this table reflects the estimated impact of interest rate changes on the static portfolio, we actively manage our portfolio and continuously make adjustments to the size and composition of our asset and hedge portfolio.
We also treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, to the extent set forth in an opinion from Sidley Austin LLP substantially to the effect that, for purposes of the 75% gross income test, any gain recognized by us in connection with the settlement of our TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS.
We also treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, to the extent set forth in an opinion from Sidley Austin LLP substantially to the effect that, for purposes of the 75% gross income test, any gain recognized by us in connection with the settlement of our TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS. 53 Table of Contents Interest Rate Effect on Net Interest Income Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing and hedging activities.
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.
All changes in value are measured as the change from the December 31, 2024 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.
Generally, in a rising interest rate environment, we would expect prepayments to decrease and the fair value of our MSR to increase. Conversely, in a decreasing interest rate environment, we would expect prepayments to increase and the fair value of our MSR to decrease. Real Estate Risk .
Generally, in a rising interest rate environment, we would expect prepayments to decrease and the fair value of our MSR to increase. Conversely, in a decreasing interest rate environment, we would expect prepayments to increase and the fair value of our MSR to decrease. Our mortgage loans held-for-sale are reflected at their estimated fair value.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while providing an opportunity to stockholders to realize attractive risk-adjusted total return through ownership of our capital stock.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while providing an opportunity to stockholders to realize more stable performance, relative to RMBS portfolios without MSR, across changing market environments.
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.
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.
Subject to maintaining our qualification as a REIT, we engage in a variety of interest rate risk management techniques that seek to mitigate the influence of interest rate changes on the values of our assets.
Additionally, rising interest rates are likely to have an adverse impact on the operational efficiency and, thus profitability, of our loan originations platform. Subject to maintaining our qualification as a REIT, we engage in a variety of interest rate risk management techniques that seek to mitigate the influence of interest rate changes on the values of our assets.
The following analyses of risks are based on our experience, estimates, models and assumptions. The analysis is based on models which utilize estimates of fair value and interest rate sensitivity.
The following analyses of risks are based on our experience, estimates, models and assumptions. The analysis is based on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of decisions may produce results that differ significantly from the estimates and assumptions used in our models.
Two of these measures are presented below in more detail. The first measure is change in annualized net interest income over the next 12 months, including interest spread from our interest rate swaps and float income from custodial accounts associated with our MSR.
The first measure is change in annualized net interest income over the next 12 months, including interest spread from our interest rate swaps and float income from custodial accounts associated with our servicing portfolio. The second measure is change in value of financial position, including the value of our derivative assets and liabilities.
During a period of rising interest rates, our borrowing costs generally will increase while the coupon interest earned on our existing portfolio of leveraged fixed-rate Agency RMBS will remain static. Both of these factors could result in a decline in our net interest spread and net interest margin. The inverse result may occur during a period of falling interest rates.
Both of these factors could result in a decline in our net interest spread and net interest margin. The inverse result may occur during a period of falling interest rates.
Liquidity Risk Our liquidity risk is principally associated with our financing of long-maturity assets with shorter-term borrowings in the form of repurchase agreements and borrowings under revolving credit facilities. Although the interest rate adjustments of these assets and liabilities fall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.
Liquidity Risk Our liquidity risk is principally associated with our financing of long-maturity assets with shorter-term borrowings in the form of repurchase agreements and borrowings under revolving credit facilities and warehouse facilities.
Should the value of our assets pledged as collateral suddenly decrease, lender margin calls could increase, causing an adverse change in our liquidity position.
Although the interest rate adjustments of these assets and liabilities fall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched. Should the value of our assets pledged as collateral suddenly decrease, lender margin calls could increase, causing an adverse change in our liquidity position.
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.
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. Two of these measures are presented below in more detail.
Prepayment Risk Prepayment risk is the risk that the principal amount of a mortgage loan will be repaid at a different rate than anticipated. As we receive prepayments of principal on our Agency RMBS, premiums paid on such assets will be amortized against interest income.
As we receive prepayments of principal on our Agency RMBS, premiums paid on such assets will be amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the assets.
Removed
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.
Added
The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while the coupon interest earned on our existing portfolio of leveraged fixed-rate Agency RMBS and mortgage loans held-for-sale will remain static.
Removed
Our material contracts that are or were indexed to USD-LIBOR have been amended to transition to an alternative benchmark, where necessary.
Added
Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table. 55 Table of Contents Prepayment Risk Prepayment risk is the risk that the principal amount of a mortgage loan will be repaid at a different rate than anticipated.
Removed
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
The estimated fair value fluctuates primarily due to changes in interest rates, market valuation of credit risks and other factors. Generally in a rising rate environment, we would expect the fair value of these loans to decrease; conversely, in a decreasing rate environment, we would expect the fair value of these loans to increase. Real Estate Risk .
Removed
See Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Conditions and Outlook - LIBOR transition ” for further discussion.
Removed
Interest Rate Effect on Net Interest Income Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing and hedging activities. The costs associated with our borrowings are generally based on prevailing market interest rates.

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