TABLE OF CONTENTS



		Page
PART I
ITEM 1.	Business	2
ITEM 1A.	Risk Factors	8
ITEM 1B.	Unresolved Staff Comments	3228
ITEM 2.	Properties	3228
ITEM 3.	Legal Proceedings	3228
ITEM 4.	Mine Safety Disclosures	3228
PART II
ITEM 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	3329
ITEM 6.	Selected Financial Data	3631
ITEM 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3732
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	7268
ITEM 8.	Financial Statements and Supplementary Data	7773
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~138~~141
ITEM 9A.	Controls and Procedures	~~138~~141
ITEM 9B.	Other Information	~~139~~141
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	~~139~~142
ITEM 11.	Executive Compensation	~~139~~142
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~139~~142
ITEM 13.	Certain Relationships and Related Transactions and Director Independence	~~139~~142
ITEM 14.	Principal Accountant Fees and Services	~~139~~142
PART IV
ITEM 15.	Exhibits and Financial Statement Schedule	~~139~~
~~SIGNATURES~~		142
SIGNATURES		145

FORWARD-LOOKING INFORMATION

The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the Securities and Exchange Commission (the “SEC”), press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company’s industry, interest rates, real estate values, the debt securities markets, the U.S. housing and the U.S. and foreign commercial real estate markets or the general economy or the market for residential and/or commercial mortgage loans; the Company’s business and investment strategy; the Company’s projected operating results; ~~actions~~changes in interest rates and ~~initiatives~~the market value of the ~~U.S. Government~~Company's target assets; credit risks; servicing -related risks, including those associated with foreclosure and ~~changes to U.S. Government policies and the execution and impact of these actions, initiatives and policies;~~liquidation; the state of the U.S. and to a lesser extent, international economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’s ability to obtain and maintain financing arrangements, including under the Company's repurchase agreements, a form of secured financing, and securitizations; the current potential return dynamics available in residential mortgage-backed securities (“RMBS”), and commercial mortgage-backed securities (“CMBS” and collectively with RMBS, “MBS”); the level of government involvement in the U.S. mortgage market; the anticipated default rates on ~~Non-Agency MBS (as defined herein), Residential~~CMBS and Commercial ~~Whole-Loans and Residential Bridge~~ Loans; the loss severity on Non-Agency ~~MBS; the return of the Non-Agency RMBS, Non-Agency CMBS and asset-backed securities (“ABS”) securitization markets;~~MBS the general volatility of the securities markets in which the Company participates; changes in the value of the Company’s assets; the Company’s expected portfolio of assets; the Company’s expected investment and underwriting process; interest rate mismatches between the Company’s target assets and any borrowings used to fund such ~~assets; changes in interest rates and the market value of the Company’s target~~ assets; changes in prepayment rates on the Company’s target assets; effects of hedging instruments on the Company’s target assets; rates of default or decreased recovery rates on the Company’s target assets; the degree to which the Company’s hedging strategies may or may not protect the Company from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company’s ability to maintain the Company’s qualification as a real estate investment trust for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”); the availability of opportunities to acquire Agency RMBS, Non-Agency RMBS, CMBS, Residential and Commercial ~~Whole-Loans,~~Whole Loans, Residential and Commercial Bridge Loans and other mortgage assets; the availability of qualified personnel; estimates relating to the Company’s ability to make distributions to its stockholders in the future; and the Company’s understanding of its competition.

The forward-looking statements are based on the Company's beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Some of these factors, are described in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this annual report on Form 10-K. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Part I

Item 1. Business

Our Company

Western Asset Mortgage Capital Corporation, a Delaware corporation, and ~~Subsidiary~~Subsidiaries (the “Company” unless otherwise indicated or except where the context otherwise requires ~~“we”,~~“we,” “us” or “our”) commenced operations in May 2012, focused on investing in, financing and managing a diversified portfolio of real estate related securities, ~~whole-loans~~whole loans and other financial assets, which we collectively refer to as our target assets. We are externally managed by Western Asset Management Company, LLC (our “Manager”) pursuant to the terms of a management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT. 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 ~~our~~a subsidiary as a taxable REIT subsidiary, or TRS, to engage in such activities. We also intend to operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act, as amended, or the Investment Company Act. Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol ~~"WMC".~~"WMC."

Our objective is to provide attractive risk adjusted returns to our ~~shareholders~~stockholders primarily through an attractive dividend, we intend to support with sustainable core earnings, as well as the potential for higher returns through capital appreciation. Our investment strategy is based on our Manager's perspective of which mix of our target assets it believes provides us with the best risk-reward opportunities at any given time. We also deploy leverage as part of our investment strategy to increase potential returns. ~~We primarily finance our investments through short-term repurchase agreements.~~

Our Manager

We are externally managed and advised by our Manager, an SEC-registered investment advisor and a wholly-owned subsidiary of Legg Mason, Inc.("Legg Mason"), headquartered in Pasadena, California, that specializes in fixed-income asset management. From offices in Pasadena, ~~Dubai,~~ Hong Kong, London, Melbourne, New York, São Paulo, Singapore, Tokyo and ~~Tokyo,~~Zurich, our Manager's ~~862~~835 employees provide investment services for a wide variety of global clients, including mutual funds, corporate, public, insurance, health care, union organizations and charitable foundations. In addition, two of our directors, James W. Hirschmann III and Jennifer W. Murphy, are also employees of our Manager. Our Manager is responsible for, among other duties: (i) performing all of our day-to-day functions; (ii) determining investment criteria in conjunction with our Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management.

On February 18, 2020, Franklin Resources, Inc. (“Franklin”) and Legg Mason, announced that they had entered into an agreement under which Franklin would acquire Legg Mason and its affiliates, including our Manager. The transaction is expected to close in the third quarter of 2020 and is subject to customary closing conditions. Upon completion of the transaction our Manager would become a wholly owned subsidiary of Franklin.

Our Competitive Advantages

Our competitive advantages in the marketplace stems from our relationship with our Manager. As of December 31, ~~2017,~~2019, our Manager had approximately ~~$442.2~~$460.1 billion in assets under management. Our Manager's scale makes it an important trading partner for many of the largest broker-dealers and banks, which provides our investment team the ability to source real estate related opportunities directly from originators as well as access attractive financing.

Our Investment Strategy

Our Manager’s investment philosophy, which developed from a singular focus in fixed-income asset management over a variety of credit cycles and conditions, is to provide clients with a diversified, long-term value-oriented portfolio. We benefit from the breadth and depth of our Manager’s overall investment philosophy, which focuses on a macroeconomic analysis as well as an in-depth analysis of individual assets and their relative value. In making investment decisions on our behalf, our Manager seeks to identify assets across the broad mortgage universe with attractive risk adjusted returns, which incorporates its view on the outlook for the mortgage markets, including relative valuation, supply and demand trends, the level of interest rates, the shape of the yield curve, prepayment rates, financing and liquidity, commercial and residential real estate prices, delinquencies, default rates, recovery of various segments of the economy and vintage of collateral, subject to maintaining our REIT qualification and our exemption from registration under the 1940 Act.

Our target assets are comprised of Agency CMBS, Agency RMBS (including TBAs), Non-Agency CMBS, Non-Agency RMBS, Residential and Commercial Whole-Loans, Residential Bridge Loans, Commercial Mezzanine Loans, CMO's, GSE Risk Sharing Securities, Non U.S. CMBS and ABS, each of which is described below.

Our Target Assets

~~Agency CMBS.~~ — Fixed and floating rate CMBS, for which the principal and interest payments are guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, but for which the underlying mortgage loans are secured by real property other than single family residences. These may include, but are not limited to Fannie Mae DUS (Delegated Underwriting and Servicing) MBS, Freddie Mac Multifamily Mortgage Participation Certificates, Ginnie Mae project loan pools, and/or CMOs structured from such collateral.

Agency RMBS. — Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by a U.S. Government agency, such as the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), or a U.S. Government-sponsored entity ("GSE"), such as the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). The Agency RMBS we acquire can be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Fixed-rate mortgages have interest rates that are fixed for the term of the loan and do not adjust. The interest rates on adjustable-rate mortgages generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index. Hybrid adjustable-rate mortgages have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index. Adjustable-rate mortgages and hybrid adjustable-rate mortgages generally have periodic and lifetime constraints on the amount by which the loan interest rate can change on any predetermined interest rate reset date.

Agency CMBS. — Fixed and floating rate CMBS, for which the principal and interest payments are guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, but for which the underlying mortgage loans are secured by real property other than single family residences. These may include, but are not limited to Fannie Mae DUS (Delegated Underwriting and Servicing) MBS, Freddie Mac Multifamily Mortgage Participation Certificates, Ginnie Mae project loan pools, and/or CMOs structured from such collateral. These securities generally have prepayment protection in the form of defeasance, yield maintenance or points.

Non-Agency RMBS. — RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored ~~entity, with an emphasis on securities that when originally issued were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations.~~entity. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS collateral may also include reperforming loans, which are conventional mortgage loans that were current at the time of the securitization, but had been delinquent in the past. Non-Agency RMBS may be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.

Non-Agency CMBS. — Fixed and floating rate CMBS for which the principal and interest payments are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. We do not have an established minimum current rating requirement for such investments.

Non U.S. CMBS. —CMBS which is not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity and which is secured by commercial real estate located outside of the U.S. Although our Manager believes that these investments can provide attractive risk-reward opportunities and offer additional asset diversification, investing in international real estate has a number of additional risks, including, but not limited to, currency risk, political risk and the legal risk of investing in jurisdictions with varying laws and regulations and potential tax implications.

GSE Risk Sharing Securities Issued by Fannie Mae and Freddie Mac. — From time to time we have and may in the future continue to invest in risk sharing securities issued by Fannie Mae and Freddie Mac. Principal and interest payments on these securities are based on the performance of a specified pool of Agency residential mortgages. The payments due on these securities, however, are not secured by the referenced ~~mortgages, the~~mortgages. The payments due are full faith and credit obligations of Fannie Mae or Freddie Mac respectively, but neither agency guarantees full payment of the underlying ~~mortgages .~~mortgages. Investments in these securities generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets.

TBAs. — We may utilize TBAs, in order to invest in Agency RMBS. Pursuant to these TBAs, we agree to purchase (or deliver), for future settlement, Agency RMBS with certain principal and interest terms and certain underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. Our ability to invest in Agency RMBS through TBAs may be limited by the 75% real estate income and asset tests applicable to REITs.

Mortgage pass-through certificates. — Mortgage pass-through certificates are securities representing interests in “pools” of mortgage loans secured by residential real property where payments of both interest and scheduled principal, plus pre-paid principal, on the underlying loan pools are made monthly to holders of the securities, in effect “passing through” monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor of the securities and servicers of the underlying mortgages.

Interest-Only Strips or IOs. — This type of security entitles the holder only to payments of interest based on a notional principal balance. The yield to maturity of Interest-Only Strips is extremely sensitive to the rate of principal payments (particularly prepayments) on the underlying pool of mortgages. We invest in these types of securities primarily to take advantage of particularly attractive prepayment-related or structural opportunities in the MBS markets, as well as to help manage the duration of our overall portfolio.

Inverse Interest-Only Strips or IIOs. — This type of security has a coupon with an inverse relationship to its index and is subject to caps and floors. Inverse Interest-Only MBS entitles the holder to interest only payments based on a notional principal balance, which is typically equal to a fixed rate of interest on the notional principal balance less a floating rate of interest on the notional principal balance that adjusts according to an index subject to set minimum and maximum rates. The current yield of Inverse Interest-Only MBS will generally decrease when its related index rate increases and increase when its related index rate decreases.

Agency and Non-Agency CMBS IO and IIO Securities. — Interest-Only and Inverse Interest-Only securities for which the underlying collateral is commercial mortgages the principal and interest on which may or may not be guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. Unlike single family residential mortgages in which the borrower, generally, can prepay at any time, commercial mortgages frequently limit the ability of the borrower to prepay, thereby providing a certain level of prepayment protection. Common restrictions include yield maintenance and prepayment penalties, the proceeds of which are generally at least partially allocable to these securities, as well as, defeasance.

Principal-Only Strips or POs. — This type of security generally only entitles the holder to receive cash flows that are derived from principal repayments of an underlying loan pool, but in the case of Non-Agency Principal-Only Strips will also include cash flows from default recoveries and excess interest. The yield to maturity of Principal-Only Strips is extremely sensitive to the rate of principal payments (particularly prepayments) on the underlying pool of mortgages. We invest in these types of securities primarily to take advantage of structural opportunities in the MBS markets.

Residential ~~Whole-Loans.~~Whole Loans. — Residential ~~Whole-Loans~~Whole Loans are mortgages secured by single family residences held directly by us or through ~~structured Non-Agency RMBS programs crafted specifically for~~consolidated trusts with us ~~and other clients of our Manager. To date our~~holding the beneficial interest in the trusts. Our Residential ~~Whole-Loans have been mostly~~Whole Loans include conforming fixed rate mortgages and adjustable rate ~~loans~~mortgages that do not qualify for the Consumer Finance Protection Bureau’s (or CFPB) safe harbor provision for ~~“qualifying~~“qualified mortgages” ("Non QM" mortgages). ~~However, our~~Our Manager’s review, relating to ~~possible purchases of loans,~~Non QM mortgages, includes an analysis of the loan originator’s procedures and documentation for compliance with ~~Ability~~Ability-to-Repay requirements. As discussed in Note 7 "Financing," we have and may continue to ~~Repay requirements. These loans are held in consolidated trusts with us holding the beneficial interest in the trusts. We may in the future securitized the~~securitize whole-loan interests, selling more senior interests in the pool of loans and retaining residual portions. The characteristics of our Residential ~~Whole-Loans~~Whole Loans may vary going forward.

Residential Bridge Loans. —Residential Bridge Loans are mortgages secured by non owner occupied single family and multi-family residences, typically short-term, held directly by us or through structured Non-Agency RMBS programs crafted specifically for us and other clients of our Manager. These loans are held in a consolidated trust with us holding the beneficial interest in the trust.

Commercial ~~Whole-Loans.~~ Whole Loans. — ~~Our Manager is also actively exploring opportunities to invest in small balance, $2.5~~Commercial Whole Loans are generally loans ranging from, $5.0 million to ~~$25.0~~$125.0 million, Commercial Whole-Loans, including commercial mortgages and Small Business Administration or SBA loans secured primarily by real estate. While our Manager has experience in CMBS and we currently invest in Agency and Non-Agency CMBS, as well as, Non U.S. CMBS, investing in Whole-Loans backed or secured by commercial real estate ~~assets involves complex investment, structural, regulatory~~typically short-term loans. The collateral types may include hospitality, senior care living facilities, multifamily, office, retail and ~~accounting issues. Some of these issues are unique to Commercial Whole-Loans as opposed to residential mortgages. Accordingly, there is no assurance of~~industrial properties. These loans may be held directly by us or through consolidated trusts with us holding the ~~prevalence such investments will have in our overall portfolio~~beneficial interest in the ~~future.~~trust.

Commercial Mezzanine Loans. —Commercialmezzanine loans are generally structured to represent a senior position in the borrower’s equity in, and subordinate to a first mortgage loan, on a property. These loans are generally secured by pledges of ownership interests, in whole or in part, in entities that directly or indirectly own the real property. At times, mezzanine loans may be secured by additional collateral, including letters of credit, personal guarantees, or collateral unrelated to the property.

Mezzanine loans may be structured to carry either fixed or floating interest rates as well as carry a right to participate in a percentage of gross revenues and a percentage of the increase in the fair market value of the property securing the loan. Mezzanine loans may also contain prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns to the lender. Mezzanine loans usually have maturities that match the maturity of the related mortgage loan but may have shorter

or longer terms. Depending on the structure of a transaction, Commercial Mezzanine loans may or may not qualify as "qualifying real estate interests" for purposes of the 1940 Act.

Collateralized Mortgage Obligations or CMOs. — These are securities, which can be Agency ofor Non-Agency, that are structured from residential and/or commercial pass-through certificates, which receive monthly payments of principal and interest. CMOs divide the cash flows which come from the underlying mortgage pass-through certificates into different classes of securities that may have different maturities and different weighted average lives than the underlying pass-through certificates.

ABS. — Debt and/or equity tranches of securitizations backed by various asset classes, including, but not limited to, ~~aircrafts,~~ automobiles, credit cards, equipment, franchises, recreational vehicles and student loans. Investments in ABS generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets.

Other investments. — In addition to MBS, our principal investment, and ABS from time to time, we may also make other investments in securities, which our Manager believes will assist us in meeting our investment objective and are consistent with our overall investment policies. These investments will normally be limited by the REIT requirements that 75% our assets be real estate assets and that 75% of our income be generated from real estate, thereby limiting our ability to invest in such assets.

Our Investment Portfolio

Our investment portfolio composition at December 31, ~~2017~~2019.

Investment Portfolio

Our Financing Strategy

We deploy leverage to increase potential returns to our stockholders and to fund the acquisition of our target assets. While we are not required to maintain any particular leverage ratio, we expect to maintain a debt-to-equity ratio of three to ten times the amount of our stockholders’ ~~equity. To the extent the Agency MBS percentage of~~equity, depending on our ~~portfolio decreases, our overall leverage is likely to decrease.~~investment composition. The amount of leverage we use for our portfolio depends upon a variety of factors, such as, general economic, political and financial market conditions, the anticipated liquidity and price volatility of our assets, the availability and

cost of financing the assets, the credit worthiness of financing counterparties and the health of the U.S. residential ~~mortgage~~ and ~~housing~~commercial mortgage markets. At December 31, ~~2017,~~2019, our aggregate debt-to-equity

ratio was approximately ~~7.2~~5.4 to 1.1 excluding our non-recourse debt and 8.0 to 1 including our non-recourse debt. The debt-to-equity ratio is not a comprehensive statement of overall investment portfolio leverage which is affected by any leverage embedded in TBAs and derivative instruments.

Repurchase Agreements

We primarily finance our investments through repurchase agreements for which we pledge our assets. Our repurchase agreements have maturities generally ranging from one to ~~three~~twelve months, but in some cases longer. Repurchase agreements involve the transfer of the pledged collateral to a counterparty at an agreed upon price in exchange for such counterparty’s simultaneous agreement to return the same security back to the borrower at a future date (i.e., the maturity of the borrowing). Under our repurchase agreements, we retain beneficial ownership of the pledged collateral, while the counterparty maintains custody of such collateral. At the maturity of a repurchase financing, unless the repurchase financing is renewed with the same counterparty, we are required to repay the loan, including any accrued interest, and concurrently reacquire custody of the pledged collateral or, with the consent of the counterparty, we may renew the repurchase financing at the then prevailing market interest rate and terms. The amount borrowed under our repurchase agreements is a specified percentage of the asset’s applicable fair value, which is dependent on the collateral type. Our repurchase agreement counterparties generally require collateral in excess of the loan amount, or haircuts. As of December 31, ~~2017, our haircuts range from a low~~2019, the ranges of ~~3.0% to a high of 5.0% for Agency RMBS, exclusive of IOs and IIOs for which~~ the haircuts ~~are~~on our investments were as follow:



	Minimum	Maximum (excluding IOs and IIOs)	Maximum (including IOs and IIOs)
Agency RMBS	3.0%	5.0%	30.0%
Agency CMBS⁽³⁾	3.0%	5.0%	25.0%
Non-Agency RMBS	15.0%	50.0%	n/a
Non-Agency CMBS	10.0%	35.0%	n/a
Other securities	16.7%	50.0%	n/a
Residential Whole Loans⁽¹⁾	5.0%	20.0%	n/a
Commercial Loans⁽²⁾	15.0%	60.0%	n/a

⁽¹⁾Includes Residential Bridge Loans.

⁽²⁾ Includes Securitized commercial loans.

⁽³⁾For Agency CMBS whose payment is not guaranteed by Freddie Mac haircuts can be as high as ~~20.0%, and Agency CMBS haircuts are 5.0%, exclusive of IOs and IIOs for which haircuts are as high as 15.0%~~25%. For Non-Agency RMBS, haircuts range from a low of 20.0% to a high of 26.0% and for Non-Agency CMBS, haircuts range from a low of 20.0% to a high of 40.0%. Haircuts for Whole-Loans are 20.0% and other securities range from a low of 22.5% to a high of 30.0%.

A significant decrease in asset value, advance rate, or an increase in the haircut could result in us having to sell assets in order to meet additional margin calls by our repurchase agreement counterparties. Our inability to post adequate collateral for a margin call by the counterparty could result in a condition of default under our repurchase agreements. We expect to mitigate our risk to margin calls by deploying leverage at the portfolio level at amounts below our available financing under our repurchase agreements.

In order to reduce our exposure of risk associated with concentration to any one repurchase agreement counterparty, we seek to diversify our exposure by entering into repurchase agreements with multiple counterparties. At December 31, ~~2017,~~2019, we had 34 master repurchase agreements with 28our counterparties and outstanding borrowings ~~with 16.~~under 21 of such agreements. Our total outstanding borrowings under our repurchase agreements was ~~$3.3~~$2.8 billion, with a maximum net exposure to any single repurchase agreement counterparty of ~~$65.5~~$132.3 million, or ~~14.1%~~23.4% of equity.

Convertible Senior Unsecured Notes

~~In October 2017,~~As of December 31, 2019, we ~~issued $115.0~~had $205.0 million ~~aggregate principal amount~~ of 6.75% convertible senior unsecured notes ~~which included the underwriter's option to purchase $15.0 million aggregate principal amount of the notes, for net proceeds to us of $111.1 million.~~outstanding. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by ~~the Company~~us except during the final three months prior to maturity. We view this financing as an attractive source of longer-term capital, which we believe was more cost efficient than issuing straight equity. ~~We have and will continue to deploy~~

Securitized Debt

As of December 31, 2019, Arroyo Mortgage Trust 2019-2 (a subsidiary) had $801.1 million securitized mortgage backed notes outstanding . The notes, excluding the ~~proceeds from the offering~~Owner Certificates, issued by were four classes, with a weighted average fixed interest rate of 3.425% per annum. All of the Notes are anticipated to have a final payment date in April 2049. We view the notes ~~to acquire~~as an

attractive source of longer-term financing for our ~~target assets.~~Residential Whole Loan portfolio. We may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or ii) the date on which the aggregate collateral balance is 20% of the original principal balance. The notes are redeemable at their face value plus accrued interest. The mortgage-backed notes are classified in "Securitized Debt" in the Consolidated Balance Sheets.

Separately, as of December 31, 2019, the Company had three consolidated variable interest entities that had outstanding borrowings of $681.7 million, which is classified in "Securitized Debt" in the Consolidated Balance Sheets.

Our Hedging and Risk Management Strategy

Our overall portfolio strategy is designed to generate attractive returns to our investors through various economic cycles. We believe our broad approach to investing in the real estate ~~market,~~mortgage markets, which considers all categories of real estate assets, allows us to invest in a diversified portfolio and help mitigate our portfolio from risks that arise from investing in a single or limited collateral type. In connection with our risk management activities, we enter into a variety of derivative and non-derivative instruments. Our primary objective for acquiring ~~theses~~these derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control. Our derivative instruments are designed to mitigate the effects of market risk and cash flow volatility associated with interest rate risk, including ~~associated~~ prepayment risk. As part of our hedging strategy, we may enter into ~~but not limited to,~~ interest rate swaps, including forward starting swaps, interest rate swaptions, U.S. Treasury options, future contracts, TBAs, total return swaps, credit default swaps, ~~and~~ foreign current swaps and ~~forwards.~~forwards and other similar instruments.

Regulation

REIT Qualification

We elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ended December 31, 2012. We will generally not be subject to corporate U.S. federal income tax to the extent that we make qualifying distributions to stockholders, and provided that we satisfy, on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which we lost our REIT qualification. The failure to qualify as a REIT could have a material adverse impact on our results of operations and amounts available for distribution to stockholders.

Investment Company Act Exemption

We conduct our operations so that we are not considered an investment company under the 1940 Act in reliance on the exemption provided by Section 3(c)(5)(C) of the 1940 Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires that: (i) at least 55% of our investment portfolio consist of "mortgages and other liens on and interest in real estate," or "qualifying real estate interests," and (ii) at least 80% of our investment portfolio consist of qualifying real estate interests plus "real estate-related assets." We have relied and intend to continue to rely on current interpretations of the staff of the SEC in an effort to continue to qualify for an exemption from registration under the 1940 Act. For more information on the exemptions that we utilize refer to Item 1A, "Risk Factors" of this annual report on Form 10-K.

Competition

Our net income depends, in part, on our ability to acquire assets at favorable spreads over our borrowing costs. In acquiring our target assets, we compete with other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities. In addition, other REITs with similar asset acquisition objectives, including a number that have been recently formed and others that may be organized in the future, compete with us in acquiring assets and obtaining financing. These competitors may be significantly larger than us, may have access to greater capital and other resources or may have other advantages. In addition, some competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, and establish more relationships, than us. Current market conditions may attract more competitors, which may increase the competition for sources of financing. An increase in the competition for sources of funding could adversely affect the availability and cost of financing, and thereby adversely affect the market price of our common stock.

Employees

We are externally managed pursuant to the management agreement dated May 9, 2012. We have no employees. All of our officers and two of our directors, James W. Hirschmann III and Jennifer W. Murphy, are employees of our Manager. Our Manager is responsible for, among other duties: (i) performing all of our day-to-day functions; (ii) determining investment criteria in conjunction with our Board of Directors; (iii) sourcing, ~~analysing~~analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management.

Corporate Governance and Internet Address

We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. In 2014, the Board took additional steps to enhance governance by appointing a lead independent director and adding a fourth independent director so that our Board of Directors consists of two-thirds independent directors. The audit, nominating and corporate governance, risk, and compensation committees of our Board of Directors are composed entirely of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics, which delineate our standards for our officers and directors.

Our internet address is www.westernassetmcc.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K. We make available, free of charge through a link on our site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, if any, as filed or furnished with the SEC, as soon as reasonably practicable after such filing or furnishing. Our site also contains our code of business conduct and ethics, corporate governance guidelines and the charters of our audit committee, nominating and corporate governance committee and compensation committee of our Board of Directors. Within the time period required by the rules of the SEC and the New York Stock Exchange, or NYSE, we will post on our website any amendment to our code of business conduct and ethics as defined in the code. Our documents filed with, or furnished to, the SEC are also available for review ~~and copying by the public at the SEC's Public Reference Room at 100 F Street, NE., Washington, DC 20549 and at~~on the SEC's website at www.sec.gov. ~~Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.~~

Item 1A. Risk Factors

Our business and operations are subject to a number of risks and uncertainties, the occurrence of which could adversely affect our business, financial condition, results of operations and ability to make distributions to stockholders and could cause the value of our capital stock to decline.

Risks related to our business

We may not be able to successfully operate our business or generate sufficient revenue to make or sustain distributions to our stockholders.

We cannot assure you that we will be able to continue to operate our business successfully or implement our operating policies and strategies as described herein. The results of our operations depend on several factors, including the availability of opportunities for the acquisition of assets, the level and volatility of interest rates, the availability of adequate short and long-term financing, conditions in the financial markets and economic conditions.

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, acquisitions, growth, operations, indebtedness, capitalization, distributions, financing strategy and leverage at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described herein. These changes could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

We may be unable to operate within the parameters that allow us to be excluded from regulation as a commodity pool operator, which would subject us to additional regulation and compliance requirements, andIncreases in interest rates could ~~materially~~ adversely affect the value of our ~~business~~investments and ~~financial condition.~~cause our interest expense to increase, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to our stockholders.

AsOur investment portfolio contains a significant allocation to MBS, as well Residential Whole Loans. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” In a normal yield curve environment, an investment in such assets will generally decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result ~~of regulatory changes prompted by the Dodd-Frank Act, any investment fund that trades~~ in ~~swaps~~losses to us, which may ~~be considered a "commodity pool," which would cause its operators~~negatively affect cash available for distribution to ~~be regulated as a "commodity pool operator" (CPO). In December 2012, the Commodity Futures Trading Commission issued a no-action letter giving relief~~our stockholders. Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to operators of mortgage REITs from the requirements applicable to CPOs. In order to qualify, we must, among other non-operational requirements: (1) limit our initial margin and premiums for commodity interests (swaps and exchange-traded futures) to no more than 5%longer-term interest rates (a flattening of the ~~fair~~yield curve), our borrowing costs will generally

increase more rapidly than the interest income earned on our assets. Because our investments on average, generally bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net interest margin, net income, book value and the market value of our ~~total assets;~~net assets. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and ~~(2) limit~~we could incur operating losses. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline, which would likely decrease our net ~~income from commodity interests~~income. A significant risk associated with our target assets is the risk that ~~are not "qualifying hedging transactions"~~both long-term and short-term interest rates will increase significantly. If long-term rates increase significantly, the market value of these investments will decline, and the duration and weighted average life of the investments will increase. At the same time, an increase in short-term interest rates will increase the amount of interest owed on the repurchase agreements we enter into to ~~less than 5%~~finance the purchase of our gross income. These parameters could limit the use of swaps by us below the level that our Manager would otherwise consider optimal or may lead to the registration of our Manager or directors as commodity pool operators, which will subject us to additional regulatory oversight, compliance and costs.investments.

Changes to, ~~derivatives regulation~~or the elimination of, LIBOR may ~~increase~~adversely affect interest expense related to our loans and investments.

In July 2017, the ~~costs of hedging~~United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop persuading or compelling banks to submit rates for the ~~Company.~~

calculation of LIBOR after 2021. The ~~Dodd-Frank Act established~~Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a ~~comprehensive new regulatory framework for derivative~~paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts, commonly referred to as "swaps" which requires that many swaps be executed on a regulated exchange or trading platform ("mandatory exchange trading") and cleared through a central counterparty ("mandatory clearing"). In particular,including agreements governing certain of our indebtedness, that are indexed to USD-LIBOR and are monitoring this activity and evaluating the ~~swaps that the Manager may want to use to hedge the Company's exposure to fluctuations in interest rates are now subject to clearing and mandatory exchange trading.~~related risks. In addition, ~~beginning~~approximately half of our investment portfolio pays interest at a variable rate that is tied to LIBOR. If LIBOR is no longer available, we may need to renegotiate some of our agreements to determine a replacement index or rate of interest. To the extent the replacement index or rate of interest is lower than the existing LIBOR-based rate it could have an adverse impact on the value of such investments, our financial condition and results of operations. In September 2019, the FASB proposed guidance that would help facilitate the market transition from existing reference rates to alternative rates. However, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in ~~2017, new requirements~~the United Kingdom or elsewhere. Uncertainty as to ~~variation margins apply to over-the-counter swaps and~~the nature of such potential changes, alternative reference rates or other ~~derivatives not centrally cleared. For swaps~~reforms may adversely affect the trading market for LIBOR-based securities, including our material contracts that are ~~subject~~indexed to ~~mandatory clearing,~~USD-LIBOR. Furthermore, we may need to renegotiate any agreements governing our indebtedness extending beyond 2021 that utilize LIBOR as a factor in determining the ~~Company~~interest rate to replace LIBOR with the new standard that is ~~forced to pledge some~~established. There is currently no definitive information regarding the future utilization of ~~its assets to a clearing broker as initial margin,~~LIBOR or of any particular replacement rate. As such, potential effect of any such event on our business, financial condition and ~~for the life~~results of ~~such swaps, the assets pledged as initial margin generally will not~~operations cannot yet be available to the Company for investment. For swaps that are subject to mandatory clearing and mandatory exchange trading, the Company likely will incur additional fees and costs for transactions in such swaps. Together, these requirements may make our Manager's hedging strategies more costly or may induce our Manager to change its hedging strategies.determined.

We cannot assure you that our internal controls over financial reporting will consistently be effective.

We are responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. We cannot ensure you that there will not be any material weaknesses or significant deficiencies in our internal control over financial reporting in the future.

Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance cost, litigation and damage to our investor relationships. As our reliance on technology has increased, so have the risks posed to both our information systems, both internal and those provided by our Manager and third party service providers. Our Manager has implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations or confidential information will not be negatively impacted by such an incident.

Risks related to our investing strategy

~~Mortgage loan modification, refinancing programs, reduction~~Our investments in ~~mortgage insurance premiums~~Non-Agency MBS, Residential Whole Loans, Commercial Loans and ~~minimum down~~Residential Bridge Loans involve credit risks, which could materially adversely affect our results of operations.

The holder of a residential mortgages, commercial mortgages or MBS assumes the risk that the related borrowers may default on their obligations to make full and timely payments of principal and ~~future legislative action may~~interest. Under our investment policy, we have the ability to acquire Non-Agency MBS, Residential Whole Loans, Commercial Loans and Residential Bridge Loans. In general, these investments carry greater investment risk than Agency MBS because the former are not guaranteed as to principal or interest by the U.S. Government, any federal agency or any federally chartered corporation. Higher-than-expected rates of default and/or higher-than-expected loss severities on these investments could adversely affect the value of these assets. Accordingly, defaults in the payment of principal and/or interest on our Residential Whole Loans, Commercial Loans, Residential Bridge Loans, and Non-Agency MBS and would likely result in our ~~returns on, Agency RMBS, Non-Agency RMBS~~incurring losses of income from, and/or losses in market value relating to, these assets, which could materially adversely affect our results of operations.

In particular, our portfolio of Residential Whole Loans and Commercial Loans continued to be one of our ~~additional~~faster growing asset class during 2019. We expect that our investment portfolio ~~assets.~~

~~The U.S. Government, through the U.S. Federal Reserve, the Federal Housing Administration, or the FHA,~~in Residential Whole Loans and ~~the Federal Deposit Insurance Corporation, has implemented~~Commercial Loans will continue to increase during 2020. As a number of federal programs designed to assist homeowners, including the Home Affordable Modification Program, or HAMP, which provides homeowners with assistance in avoiding residential mortgage loan foreclosures, the Hope for Homeowners Program, or H4H Program, which allowed certain distressed borrowers to refinance their mortgages into FHA-insured loans in order to avoid residential mortgage loan foreclosures, and the Home Affordable Refinance Program, or HARP, which allows borrowers who are current on their mortgage payments to refinance and reduce their monthly mortgage payments at loan-to-value ratios up to 125% (and, in some cases, above 125%) without new mortgage insurance. A numberholder of these homeowners' assistance programs have been enhanced or expanded. HAMP expired on December 31, 2016, and borrowers who had requested assistance or to whom an offer of assistance had been extended as of that date had until September 30, 2017 to finalize their modification. HARP, which was scheduled to expire on December 31, 2016, has been extended to December 31, 2018. In addition, it is uncertain whether the new administration and Congressional majority will make any changes to these programs or any amendments to the bankruptcy laws to permit the modification of mortgage loans, ~~in bankruptcy proceedings. A significant number of loan modifications could result in a significant reduction in cash flows to the holders of the mortgage securities on an ongoing basis.~~

~~Amendments to the bankruptcy laws that result in the modification of outstanding mortgage loans may adversely affect the value of and the returns on, the assets that~~ we ~~may intend to acquire and the assets we currently hold.~~

Especially with Non-Agency RMBS, a significant number of loan modifications with respect to a given security, including, but not limited to, those related to principal forgiveness and coupon reduction, resulting in increased prepayment rates, could negatively impact the realized yields and cash flows on such security. These loan modification programs, future legislative or regulatory actions, including possible amendments to the bankruptcy laws, which result in the modification of outstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans with FNMA, FHLMC or GNMA may adversely affect the value of, and the returns on, Agency RMBS and Non-Agency RMBS.

In October 2014, the FHA announced that it would allow FNMA and FHLMC to purchase loans with three percent (3%) down payments, thereby reducing the down payment requirement for borrowers to access mortgage loans which are eligible for purchase and/or guarantee by these U.S. Government sponsored entities or GSEs. Further, in January 2015, the Obama administration announced a 50 basis point (0.50%) reduction in the annual mortgage insurance premium imposed by the FHA on mortgage loans guaranteed by GNMA. The reduction in the minimum down payment along with lowering all-in mortgage interest rates on GSE sponsored residential mortgage loans will likely increase the attractiveness of refinancing as well as purchases of new and existing homes, thereby increasing the prepayment rates on the mortgage loans underlying our existing RMBS. This may adversely affect the value of, and the returns on, these assets, especially those which we acquired at a premium.

The payments of principal and interest we receive on our Agency RMBS, which depend directly upon payments on the mortgages underlying such securities, are guaranteed by FNMA, FHLMC and GNMA. FNMA and FHLMC are U.S. Government-sponsored entities, or GSEs, but their guarantees are not backed by the full faith and credit of the United States. GNMA is part of a U.S. Government agency and its guarantees are backed by the full faith and credit of the United States.

In response to general market instability and more specifically, the financial conditions of FNMA and FHLMC, in July 2008, the Housing and Economic Recovery Act of 2008, or HERA, established a new regulator for FNMA and FHLMC, the U.S. Federal Housing Finance Agency, or the FHFA. In September 2008, the U.S. Treasury, the FHFA and the U.S. Federal Reserve announced a comprehensive action plan to help stabilize the financial markets, support the availability of mortgage financing and protect taxpayers. Under this plan, among other things, the FHFA was appointed as conservator of both FNMA and FHLMC, allowing the FHFA to control the actions of the two GSEs, without forcing them to liquidate, which would be the case under receivership. Importantly, the primary focus of the plan was to increase the availability of mortgage financing by allowing these GSEs to continue to grow their guarantee business without limit, while limiting the size of their retained mortgage and Agency security portfolios and requiring that these portfolios be reduced over time.

Although the U.S. Government has committed to support the positive net worth of FNMA and FHLMC, there can be no assurance that these actions will be adequate for their needs. These uncertainties lead to questions about the availability of, and trading market for, Agency RMBS. Despite the steps taken by the U.S. Government, FNMA and FHLMC could default on their guarantee obligations which would materially and adversely affect the value of our Agency RMBS. Accordingly, if these government actions are inadequate and the GSEs continue to suffer losses or cease to exist, our business, operations and financial condition could be materially and adversely affected.

In recent year, lawmakers have proposed new legislations that would wind down the GSEs. In addition, the U.S. Government under the Trump Administration has made public comments regarding housing policy reforms, of which the scope and nature of the actions would be difficult to predict. These planned actions, including the eventual adoption of new legislations by the U.S. government, create market uncertainty with respect to the GSEs which could have a material and adverse effect on the quality and value of our Agency RMBS.The future roles of FNMA and FHLMC could be significantly reduced and the nature of their guarantee obligations could be considerably limited relative to historical measurements. Any such changes to the nature of their guarantee obligations could redefine what constitutes an Agency security and could have broad adverse implications for the market and our business, operations and financial condition. If FNMA or FHLMC were eliminated, or their structures were to change radically (~~i.e.~~, limitation or removal of the guarantee obligation), or their market share reduced because of required price increases or lower limits on the loans they can guarantee, we could be unable to acquire additional Agency RMBS and our existing Agency RMBS could be materially and adversely impacted.

We are subject to the risk that U.S. Government agencies and/or GSEs may not be able to fully satisfy their guarantees of Agency RMBS or that these guarantee obligations may be repudiated, which may adversely affect the value of our assets and our ability to sell or finance these securities.

The interest and principal payments we receive on the Agency RMBS in which we invest are guaranteed by FNMA, FHLMC or GNMA. Unlike the GNMA securities in which we may invest, the principal and interest on securities issued by FNMA and FHLMC are not guaranteed by the U.S. government. All of the Agency RMBS in which we invest depend on a steady stream of payments on the mortgages underlying the securities.

As conservator of FNMA and FHLMC, the FHFA may disaffirm or repudiate contracts (subject to certain limitations for qualified financial contracts) that FHLMC or FNMA entered into prior to the FHFA's appointment as conservator if it determines, in its sole discretion, that performance of the contract is burdensome and that disaffirmation or repudiation of the contract promotes the orderly administration of its affairs. The HERA requires the FHFA to exercise its right to disaffirm or repudiate most contracts within a reasonable period of time after its appointment as conservator. FNMA and FHLMC have disclosed that the FHFA has disaffirmed certain consulting and other contracts that these entities entered into prior to the FHFA's appointment as conservator. FHLMC and FNMA have also disclosed that the FHFA has advised that it does not intend to repudiate any guarantee obligation relating to FNMA's and FHLMC's mortgage-related securities, because the FHFA views repudiation as incompatible with the goals of the conservatorship. In addition, the HERA provides that mortgage loans and mortgage-related assets that have been transferred to a FHLMC or FNMA securitization trust must be held for the beneficial owners of the related ~~mortgage-related securities,~~borrowers may default or have defaulted on their obligations to make full and ~~cannot be used to satisfy the general creditors of FHLMC or FNMA.~~

~~If the guarantee obligations of FHLMC or FNMA were repudiated by the FHFA,~~timely payments of principal ~~and/~~and interest. A number of factors impact a borrower’s ability to repay including, among other things, changes in employment status, changes in interest rates or ~~interest to holders~~the availability of ~~Agency RMBS issued by FHLMC or FNMA would be reduced~~credit, and changes in ~~the event of any borrowers' late payments or failure to pay or a servicer's failure to remit borrower payments to the trust.~~real estate values. In that case, trust administration and servicing fees could be paid from mortgage payments prior to distributions to holders of Agency RMBS. Any actual direct compensatory damages owed due to the repudiation of FHLMC or FNMA's guarantee obligations may not be sufficient to offset any shortfalls experienced by holders of Agency RMBS. The FHFA also has the right to transfer or sell any asset or liability of FHLMC or FNMA, including its guarantee obligation, without any approval, assignment or consent. If the FHFA were to transfer FHLMC or FNMA's guarantee obligations to another party, holders of Agency RMBS would have to rely on that party for satisfaction of the guarantee obligation and would be exposedaddition to the credit risk associated with these assets, Residential Whole Loans and Commercial Loans are less liquid than certain of ~~that party.~~our other credit sensitive assets, which may make them more difficult to dispose of if the need or desire arises. If actual results are different from our assumptions in determining the prices paid to acquire such loans, particularly if the market value of the underlying properties decreases significantly subsequent to purchase, we may incur significant losses, which could materially adversely affect our results of operations.

Beginning in 2014, we have invested in GSE Risk Sharing Securities issued by FNMA and FHLMC. Principal and interest payments on these securities are based on the performance of a specified pool of Agency residential mortgages. The payments due on these securities, however, are not secured by the referenced mortgages, but are full faith and credit obligations of Fannie Mae or Freddie Mac respectively. There is no implicit or explicit guarantee of these obligations by FHFA or that FHFA would satisfy such obligations if FNMA and/or FHLMC were to default.

We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire

desirable investments in our portfolio assets and could also affect the pricing of these securities.

We operate in a highly competitive market for investment opportunities. Currently, our profitability depends, in large part, on our ability to acquire our portfolio assets at attractive prices. In acquiring these assets, we compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds (including other funds managed by our Manager), commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. Other REITs have recently raised, or may raise, additional capital, and may have investment objectives that overlap with ours, which may create additional competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the U.S. Government. Many of our competitors are not subject to the operating constraints associated with REIT tax compliance or maintenance of an exemption from the 1940 Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, competition for investments in our portfolio assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, desirable investments in these assets may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives.

A lack of liquidity in our investments may adversely affect our business. ~~Liquidity in fixed income markets has declined in recent years.~~

~~The~~Many of the assets we acquire are not publicly traded. A lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale or the unavailability of financing for these assets. In addition, mortgage-related assets generally experience periods of illiquidity, especially during periods of economic stress such as the ~~recent~~ economic recession in 2008 which resulted in increased delinquencies and defaults with respect to residential and commercial mortgage loans. The illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. Further, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our Manager has or could be attributed with material, ~~non-public~~non-

public information regarding such business entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of operations and financial condition.

These risks have increased in recent years due to general declines in liquidity in fixed income markets. As a result of both the experience of dealers and other counterparties during the 2007-2010 credit issues and the resulting changes in regulatory and capital burdens on these entities, especially banks, market liquidity in fixed income has generally declined. Dealers and other market intermediaries are less likely to be prepared to hold bonds in inventory and take balance sheet risks, resulting in a significant reduction in market making activity. In addition, many dealers have exited one or more sectors of the fixed income markets.

~~Adverse developments in the broader residential mortgage market may adversely affect the value of the assets in which we invest.~~

Since 2007, the residential mortgage market in the United States has experienced a variety of unprecedented difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns. Certain commercial banks, investment banks and insurance companies announced extensive losses from exposure to the residential mortgage market. These losses reduced financial industry capital, leading to reduced liquidity for some institutions. These factors have impacted investor perception of the risk associated with real estate-related assets, including Agency RMBS and other high-quality RMBS assets. As a result, values for RMBS assets, including some Agency RMBS and other AAA-rated RMBS assets, have experienced a certain amount of volatility. Further increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance and market value of the Agency RMBS and Non-Agency RMBS in which we invest.

Our most significant investments, to date, have been Agency RMBS and to a lesser extent Non-Agency RMBS and Agency and Non-Agency CMBS. We need to rely on our securities as collateral for our financings. Any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or

maintain our compliance with terms of any financing arrangements already in place. The securities we acquire are classified for accounting purposes as available-for-sale. All assets classified as available-for-sale are reported at fair value, based on market prices from third party sources. We have elected to include any unrealized gains and losses in our earnings. If market conditions result in a decline in the fair value of our assets, our financial position and results of operations could be adversely affected.

~~A prolonged~~An economic recession and ~~further~~ declining real estate values could impair our assets and harm our operations.

The risks associated with our business are more severe during economic recessions and are compounded by declining real estate values. The Residential Whole Loans, Residential Bridge Loans, Commercial Loans, Non-Agency RMBS and Non-Agency CMBS ~~and Whole-Loans~~ in which we invest a part of our capital will be particularly sensitive to these risks. Declining real estate values will likely reduce the level of new mortgage loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase of additional properties. Borrowers will also be less able to pay principal and interest on loans underlying the securities in which we invest if the value of residential and commercial real estate weakens further. Further, declining real estate values significantly increase the likelihood that we will incur losses on ~~Non-Agency RMBS, Non-Agency CMBS and Whole-Loans~~these investments in the event of default because the value of collateral on the mortgages underlying such securities may be insufficient to cover the outstanding principal amount of the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect our net interest income from ~~Non-Agency RMBS, Non-Agency CMBS and Whole-Loans in our portfolio,~~these investments, which could have an adverse effect on our financial condition, results of operations and our ability to make distributions to our ~~stockholders.~~stockholders

Our investments in ~~Non-Agency RMBS are generally~~Residential Whole Loans, Residential Bridge Loans and Commercial Loans subject us to ~~losses.~~servicing-related risks, including those associated with foreclosure and liquidation.

~~In general, losses~~

We rely on third-party servicers to service and manage the mortgages underlying our loan portfolio. The ultimate returns generated by these investments may depend on the quality of the servicer. If a ~~mortgaged property securing a mortgage loan included~~servicer is not vigilant in seeing that borrowers make their required monthly payments, borrowers may be less likely to make these payments, resulting in a ~~securitization will~~higher frequency of default. If a servicer takes longer to liquidate non-performing mortgages, our losses related to those loans may be ~~borne first~~higher than originally anticipated. Any failure by servicers to service these mortgages and/or to competently manage and dispose of REO properties could negatively impact the ~~equity holder~~value of these investments and our financial performance. In addition, while we have contracted with third-party servicers to carry out the actual servicing of the ~~property, then by~~loans (including all direct interface with the borrowers), for loans that we purchase together with the related servicing rights, we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that the loans are serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation. In light of the current regulatory environment, such exposure could be significant even though we might have contractual claims against our servicers for any failure to service the loans to the required standard.

The foreclosure process, especially in judicial foreclosure states such as New York, Florida and New Jersey, can be lengthy and expensive, and the delays and costs involved in completing a ~~cash reserve fund or letter of credit, if any, then by the "first loss" subordinated security holder~~foreclosure, and then bysubsequently liquidating the ~~holder~~REO property through sale, may materially increase any related loss. In addition, at such time as title is taken to a foreclosed property, it may require more extensive rehabilitation than we estimated at acquisition. Thus, a material amount of ~~a higher-rated security. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine~~foreclosed residential mortgage loans, ~~or B-Notes, and any classes of securities junior to those in which we invest, we will not be able to recover all of our investment~~particularly in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline, less collateral is available to satisfy interest and principal payments due on the related Non-Agency RMBS. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments.

The mortgage loans underlying the Non-Agency RMBS that we invest in are subject to defaults, foreclosure timeline extension, fraud and residential price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, whichstates mentioned above, could result in significant losses ~~to us.~~

~~Our investments~~ in ~~Non-Agency RMBS are subject to the risks of defaults, foreclosure timeline extension, fraud~~our Residential Whole Loan portfolio and home price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, accompanying the underlying residential mortgage loans. The ability of a borrower to repay a mortgage loan secured by a residential property is dependent upon the income or assets of the borrower. A number of factors may impair borrowers' abilities to repay their loans, including:

~~adverse changes in national and local economic and market conditions;~~

~~changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;~~

~~costs of remediation and liabilities associated with environmental conditions such as indoor mold;~~

~~the potential for uninsured or under-insured property losses;~~

~~acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses; and~~

~~acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001.~~

In the event of defaults on the residential mortgage loans that underlie our investments in Non-Agency RMBS and the exhaustion of any underlying or any additional credit support, we may not realize our anticipated return on our investments and we may incur a loss on these investments. In addition, our investments in Non-Agency RMBS will be backed by residential real property but, in contrast to Agency RMBS, the principal and interest will not be guaranteed by a U.S. Government agency or a GSE. The ability of a borrower to repay these loans or other financial assets is dependent upon the income or assets of these borrowers.

~~We may be affected by deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process.~~

Allegations of deficiencies in foreclosure documentation and servicing and foreclosure practices by several large mortgage servicers have raised various concerns relating to foreclosure practices. As a result of these alleged deficiencies in foreclosure practices, a number of servicers temporarily suspended foreclosure proceedings beginning in the second half of 2010 while they evaluated their foreclosure practices. In addition, on February 9, 2012, a group consisting of state attorneys general and state bank and mortgage regulators in 49 states reached a settlement with the largest mortgage servicers regarding foreclosure practices in the states' various jurisdictions. On January 7, 2013, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System announced a settlement with a number of mortgage servicers in lieu of continuing a foreclosure review process, under which borrowers who believed they were financially harmed by the foreclosure process in 2009 and 2010 were able to request an independent review of the process. The settlement, which includes funds for both direct payments to eligible borrowers and for other assistance such as loan modifications and forgiveness of deficiency judgments, ended the case-by-case reviews. Although servicers have generally ended their suspension of foreclosures, the processing of foreclosures continues to be slow in many states due to continuing issues in the servicer foreclosure process, including efforts by servicers to comply with regulatory consent orders and requirements, recent changes in the state foreclosure laws, court rules and proceedings and the pipeline of foreclosures resulting from these delays as well as the elevated level of foreclosures caused by the housing market downturn. We may incur substantial legal fees and court costs in acquiring a property through contested foreclosure or bankruptcy proceedings. We intend to continue to monitor and review the issues raised by the alleged improper foreclosure practices.

Prior to making investments in RMBS, our Manager carefully considers many factors, including housing prices and foreclosure timelines, and estimate loss assumptions. The concerns about deficiencies in foreclosure practices of servicers and related delays in the foreclosure process may impact our loss assumptions and affect the values of, and our returns on, our investments in RMBS. We cannot predict exactly how the servicing and foreclosure matters or the resulting litigation or settlement agreements willcould materially adversely affect our ~~business and cannot assure you that these matters will not impair our performance and reduce the return on our investments.~~results of operations.

The commercial mortgage loans underlying the CMBS and our Commercial Loans we may acquire are subject to defaults, foreclosure timeline extension, fraud and commercial price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, which could result in losses to us.

CMBS may be secured by a single commercial mortgage loan or a pool of commercial mortgage loans. Commercial mortgage loans may be secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that may be greater than similar risks associated with loans made on the security of residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability or willingness to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things,

tenant mix;

success of tenant businesses;

property management decisions;

property location and condition;

competition from comparable types of properties;

changes in laws that increase operating expenses or limit rents that may be charged;

any need to address environmental contamination at the property or the occurrence of any uninsured casualty at the property;

changes in national, regional or local economic conditions and/or specific industry segments;

declines in regional or local real estate values;

declines in regional or local rental or occupancy rates;

increases in interest rates;

real estate tax rates and other operating expenses;

changes in governmental rules, regulations and fiscal policies, including environmental legislation; and

acts of God, terrorist attacks, social unrest and civil disturbances.

If our Manager overestimates the loss-adjusted yields of our CMBS investments, we may experience losses.

Our Manager will analyze any CMBS investments we may acquire based on loss-adjusted yields, taking into account estimated future losses on the mortgage loans included in the securitization's pool of loans, and the estimated impact of these losses on expected future cash flows. Our Manager's loss estimates may not prove accurate, as actual results may vary from estimates. In the event that our Manager underestimates the pool level losses relative to the price we pay for a particular CMBS investment, we may experience losses with respect to such investment.

WeIf we do not control the special servicing of the mortgage loans included in the CMBS in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests.

With respect to CMBS in which we invest, overall control over the special servicing of the related underlying mortgage loans will be held by a "directing certificateholder" or a "controlling class representative," which is appointed by the holders of the most subordinate class of CMBS in such series. We may not have the right to appoint the directing certificateholder. In connection with the servicing of the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificateholder, take actions with respect to the specially serviced mortgage loans that could adversely affect our interests.

~~The residential and/or commercial mortgages which we may acquire in the form of whole-loans are subject to individual borrower credit risk.~~

To the extent we acquire residential or commercial first lien mortgages or whole-loans; we will be subject to individual credit risk. While such mortgages will be secured by single family residences or commercial properties, we will rely on the borrower's willingness to make timely payments. In certain states our ability to recover against a borrower on a residential property may be limited to either recovering from the borrower or foreclosing on the property. In either case, depending on state and local laws, such recovery could take an extended period of time and expense, during which period we would not be receiving any payments, thereby negatively impacting our cash flow. Similarly, to the extent a commercial loan is non-recourse, our recovery will be limited to the underlying real property which depending on several factors, including the location of such property, could take an extended period of time and expense, thereby negatively impacting our cash flow.

~~The receivables underlying the ABS we may acquire are subject to credit exposure, which could result in losses to us.~~

ABS are securities backed by various asset classes including auto loans, student loans, credit card loans, equipment loans, floor plan loans and small business loans fully guaranteed as to principal and interest by the U.S. Small Business Administration, or the SBA. ABS remain subject to the credit exposure of the underlying receivables. In the event of increased rates of delinquency with respect to any receivables underlying our ABS, we may not realize our anticipated return on these investments.

Our investments are recorded at fair value, and quoted prices or observable inputs may not be available to determine such value, resulting in the use of significant unobservable inputs to determine value.

We expect that the values of some of our investments may not be readily determinable. We measure the fair value of these investments on at least a monthly basis. The fair value at which our assets are recorded may not be an indication of their realizable value. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions that are beyond the control of our Manager, our Company or our Board of Directors. Further, fair value is only an estimate based on good faith judgment of the price at which an investment can be sold since market prices of investments can only be determined by negotiation between a willing buyer and seller. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset is valued. Accordingly, the value of our common stock could be adversely affected by our determinations regarding the fair value of our investments, whether in the applicable period or in the future. Additionally, such valuations may fluctuate over short periods of time.

Our determination of the fair value of our investments for GAAP includes inputs provided by third party dealers and pricing services. Valuations of certain investments in which we invest are often difficult to obtain. In general, dealers and pricing services heavily disclaim their valuations. Dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental, or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of a security, valuations of the same security can vary substantially from one dealer or pricing service to another. Therefore, our results of operations for a given period could be adversely affected if our determinations regarding the fair market value of these investments are materially different than the values that we ultimately realize upon their disposal. Due to an overall increase in market volatility, the valuation process has been particularly challenging recently as market events have made valuations of certain assets more difficult, unpredictable and volatile.

Declines in value of the assets in which we invest will adversely affect our financial position and results of operations, and make it more costly to finance these assets.

We use our investments as collateral for our financings. Any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. Our investments in mortgage-backed securities and Whole Loans are recorded at fair value under a fair value option election at the time of purchase with changes in fair value reported in earnings. As a result, a decline in fair values of our mortgage-backed securities and Whole Loans could reduce both our earnings and stockholders' equity. If market conditions result in a decline in the fair value of our assets, our financial position and results of operations could be adversely affected.

An increase in interest rates may cause a decrease in the availability of certain of our portfolio assets, which could adversely affect our ability to acquire assets that satisfy our investment objectives and to generate income and make distributions.

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 our portfolio assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment objectives. Rising interest rates may also cause our assets that were issued prior to an interest rate increase to provide yields that are below prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of our portfolio assets with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and make distributions may be materially and adversely affected.

The relationship between short-term and longer-term interest rates is often referred to as the "yield curve." Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because our investments, on average, generally bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net income and the market value of our net assets. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion); in which event our borrowing costs may exceed our interest income and we could incur operating losses.

Increases in interest rates could adversely affect the value of our investments and cause our interest expense to increase, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to our stockholders.

In a normal yield curve environment, generally our investments decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders.

A significant risk associated with our portfolio assets is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increased significantly, the market value of these investments would decline, and the duration and weighted average life of the investments would increase. We could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on any repurchase agreements we may enter into, thereby potentially reducing the net interest margin we earn our investments and the income available for distribution to our shareholders.

Market values of our investments may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, or increases or expected increases in voluntary prepayments for those investments that are subject to prepayment risk or widening of credit spreads.

In addition, our operating results depend in large part on the difference between the income from our assets and our financing costs. We anticipate that, in most cases in a period of rising interest rates, the income from such assets will respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income. Increases in these rates will tend to decrease our net income and market value of our assets.

Interest rate mismatches between our RMBS and Whole Loans backed by ARMs or hybrid ARMs and our borrowings used to fund our purchases of these assets may cause us to suffer losses.

We may fund our RMBS and Whole Loans with borrowings that have interest rates that adjust more frequently than the interest rate indices and repricing terms of RMBS and Whole Loans backed by adjustable-rate mortgages, or ARMs, or hybrid ARMs. Accordingly, if short-term interest rates increase, our borrowing costs may increase faster than the interest rates on RMBS and Whole Loans backed by ARMs or hybrid ARMs adjust. As a result, in a period of rising interest rates, we could experience a decrease in net income or a net loss.

In most cases, the interest rate indices and repricing terms of RMBS and Whole Loans backed by ARMs or hybrid ARMs and our borrowings will not be identical, thereby potentially creating an interest rate mismatch between our investments and our borrowings. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods when the spread between these indices was volatile. During periods of changing interest rates, these interest rate index mismatches could reduce our net income or produce a net loss, and adversely affect the level of our dividends and the market price of our common stock.

In addition, RMBS and Whole Loans backed by ARMs or hybrid ARMs will typically be subject to lifetime interest rate caps that limit the amount an interest rate can increase through the maturity of the ~~RMBS.~~RMBS and Whole Loans. However, our borrowings under repurchase agreements typically are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while caps could limit the interest rates on these types of ~~RMBS.~~RMBS and Whole Loans. This problem is magnified for RMBS and Whole Loans backed by ARMs or hybrid ARMs that are not fully indexed. Further, some RMBS and Whole Loans backed by ARMs or hybrid ARMs may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we may receive less cash income on these types of RMBS and Whole Loans than we need to pay interest on our related borrowings. These factors could reduce our net interest income and cause us to suffer a loss during periods of rising interest rates.

As of December 31, ~~2017, none of~~2019, our ~~Agency RMBS, excluding Interest-Only Strips, were secured by ARMs or hybrid ARMs. Our~~ Non-Agency RMBS ~~however,~~and Whole Loans were secured by ARMs, Hybrid ARMS, pay option ARMs and fixed-rate mortgages. ~~Further, there~~There can be no assurance that this will not change in the future.

~~Interest rate fluctuations may adversely affect the level of our net income and the value of our assets and common stock.~~

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Interest rate fluctuations present a variety of risks, including the risk of a narrowing of the difference between asset yields and borrowing rates, flattening or inversion of the yield curve and fluctuating prepayment rates, and may adversely affect our income and the value of our assets and common stock.

Increases in interest rates may negatively affect the market value of the fixed-rate mortgages and hybrid ARMs in which we may invest. Our investments in these mortgage-backed securities are recorded at fair value under a fair value option election at the time of purchase with changes in fair value reported in earnings and any decrease in our earnings could cause the market value of our common stock to decline. In addition, rising interest rates generally reduce the demand for consumer and commercial credit, including mortgage loans, due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of MBS available to us, which could affect our ability to acquire assets that satisfy our investment objectives.

Since the onset of the economic recession in 2008, the Federal Reserve has maintained an accommodative monetary policy. Recent improvements in the U.S. labor market and overall U.S. economy have led to a discussion of the return of monetary policy to a more "normal" stature. According to its meeting in January 2018, the Federal Open Market Committee, or FOMC, left the federal funds rate at 1.5% since inflation is still below target, eventhough unemployment is low. The FOMC expects inflation to meet its 2% target in 2018 and expects to gradually raise the federal funds rate to its normal level of 2%. The FOMC will allow $12 billion of Treasury securities to mature without replacing them. It will do the same with $8 billion of mortgage-backed securities. The Federal Reserve is gradually winding down the $4 trillion in holdings it acquired during quantitative easing. In determining the timing and size of future adjustments to the target range for the federal funds rate, the FOMC intends to assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Accordingly, we expect potentially three rate increases in 2018. We cannot project with certainty when and the rate at which the Federal Reserve will continue to increase the federal funds rate and what impact that will have on our business and operating results.

~~Changes in prepayment rates~~Prepayment may adversely affect our profitability.

The RMBS assets and Residential Whole Loans we acquire are backed by pools of residential mortgage loans. We receive payments, generally, from the payments that are made on these underlying residential mortgage loans. While commercial mortgages frequently include limitations on the ability of the borrower to prepay, residential mortgages generally do not. When borrowers prepay their residential mortgage loans at rates that are faster than expected, the net result is prepayments that are faster than expected on the related ~~RMBS.~~RMBS and Residential Whole Loans. These faster than expected payments may adversely affect our profitability.

We may purchase RMBS assets and Residential Whole Loans that have a higher interest rate than the then prevailing market interest rate. In exchange for this higher interest rate, we may pay a premium to par value to acquire the asset. In accordance with accounting rules, we amortize this premium over the expected term of the ~~asset based on our prepayment assumptions.~~asset. If the asset is prepaid in whole or in part

at a faster than expected rate, ~~however,~~ we must expense all or a part of the remaining unamortized portion of the premium, ~~that was paid at the time of the purchase,~~ which ~~will~~can adversely affect our profitability.

~~Prepayment rates~~Prepayments generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment ~~rates~~ are difficult to predict. House price appreciation, while increasing the value of the collateral underlying our RMBS and Residential Whole Loans, may increase ~~prepayment rates~~prepayments as borrowers may be able to refinance at more favorable terms. Prepayments can also occur when borrowers default on their residential mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property (an involuntary prepayment), or when borrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physical relocation. ~~Prepayment rates~~Prepayments also may be affected by conditions in the housing and financial markets, increasing defaults on residential mortgage loans, which could lead to an acceleration of the payment of the related principal, general economic conditions and the relative interest rates on fixed-rate mortgages and ARMs. While we seek to manage prepayment risk, in selecting RMBS and Residential Whole Loans investments we must balance prepayment risk against other

risks, the potential returns of each investment and the cost of hedging our risks. No strategy can completely insulate us from prepayment or other such risks, and we may deliberately retain exposure to prepayment or other risks.

In addition, a decrease in prepayment ~~rates~~ may adversely affect our profitability. When borrowers prepay their residential mortgage loans at slower than expected rates, prepayments on the RMBS may be slower than expected. These slower than expected payments may adversely affect our profitability. We may purchase RMBS assets that have a lower interest rate than the then prevailing market interest rate. In exchange for this lower interest rate, we may pay a discount to par value to acquire the asset. In accordance with accounting rules, we accrete this discount over the expected term of the asset based on our prepayment assumptions. If the asset is prepaid at a slower than expected rate, however, we must accrete the remaining portion of the discount at a slower than expected rate. This will extend the expected life of the asset and result in a lower than expected yield on assets purchased at a discount to par.

We could be materially and adversely affected by poor market conditions where the properties securing the mortgage loans underlying our investments are geographically concentrated.

Our performance depends on the economic conditions in markets in which the properties securing the mortgage loans underlying our investments are concentrated. As of December 31, ~~2017,~~2019, a substantial portion of our investments had underlying properties in California. Our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders could be materially and adversely affected by this geographic concentration if market conditions, such as an oversupply of space or a reduction in demand for real estate in an area, deteriorate in California. Moreover, due to the geographic concentration of properties securing the mortgages underlying our investments, the Company may be disproportionately affected by general risks such as natural disasters, including major wildfires, floods and earthquakes and , severe or inclement weather, ~~and acts of terrorism~~ should such developments occur in or near the markets in California in which such properties are located.

We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic and acts of terrorism.

The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as coronavirus, or other widespread health emergency (or concerns over the possibility of such an emergency) terrorist attacks could create economic and financial disruptions, and could lead to operational difficulties that could impair our ability to manage our businesses.

We may make investments in non U.S. dollar denominated securities, which will be subject to currency rate exposure and risks associated with the uncertainty of foreign laws and markets.

Some of our real estate-related securities investments may be denominated in foreign currencies, and therefore, we expect to have currency risk exposure to any such foreign currencies. A change in foreign currency exchange rates may have an adverse impact on returns on our non U.S. dollar denominated investments. Although we may hedge our foreign currency risk subject to the REIT income tests, we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations. To the extent that we invest in non U.S. dollar denominated securities, in addition to risks inherent in the investment in securities generally discussed in this Form 10-K, we will also be subject to risks associated with the uncertainty of foreign laws and markets, including, but not limited to, unexpected changes in regulatory requirements, political and economic instability in certain geographic locations, difficulties in managing international operations, currency exchange controls, potentially adverse tax consequences, additional accounting and control expenses and the administrative burden of complying with a wide variety of foreign laws.

We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to make distributions to all stockholders.

Our business is highly dependent on communications and information systems of our Manager and other third party service providers. Any failure or interruption of our Manager's or other third party service providers' systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.

Loss of our exemption from regulation pursuant to the 1940 Act would adversely affect us.

We conduct our business so as not to become regulated as an investment company under the 1940 Act in reliance on the exemption provided by Section 3(c)(5)(C) of the 1940 Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires that: (i) at least 55% of our investment portfolio consist of "mortgages and other liens on and interest in real estate," or "qualifying real estate interests," and (ii) at least 80% of our investment portfolio consist of qualifying real estate interests plus "real estate-related assets." In satisfying this 55% requirement, based on pronouncements of the SEC staff, we may treat whole pool Agency RMBS

and CMBS as qualifying real estate interests. The SEC staff has not issued guidance with respect to whole pool Non-Agency RMBS. Accordingly, based on our own judgment and analysis of the SEC's pronouncements with respect to whole pool Agency RMBS, we may also treat Non-Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate interests. We currently treat partial pool Agency, Non-Agency RMBS and partial pool CMBS as real estate-related assets. We treat any ABS, interest rate swaps or other derivative hedging transactions we enter into as miscellaneous assets that will not exceed 20% of our total assets. We rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets.

The SEC in 2011 solicited public comment on a wide range of issues relating to Section 3(c)(5)(C), including the nature of the assets that qualify for purposes of the exemption and whether mortgage REITs should be regulated in a manner similar to investment companies. ~~To date the staff has not issued any additional guidance.~~ There can be no assurance that the laws and regulations governing the 1940 Act status of REITs, including the guidance of the Division of Investment Management of the SEC regarding this exemption, will not change in a manner that adversely affects our operations. To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could require us to hold assets we might wish to sell or to sell assets we might wish to hold. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the exemption we rely on from the 1940 Act, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.

The mortgage related investments that we acquire are limited by the provisions of the 1940 Act and the rules and regulations promulgated thereunder. If the SEC determines that any of these securities are not qualifying interests in real estate or real estate-related assets, adopts a contrary interpretation with respect to these securities or otherwise believes we do not satisfy the above exceptions or changes its interpretation of the above exceptions, we could be required to restructure our activities or sell certain of our assets. We may be required at times to adopt less efficient methods of financing certain of our mortgage related investments and we may be precluded from acquiring certain types of higher yielding securities. The net effect of these factors would be to lower our net interest income. If we fail to qualify for an exemption from registration as an investment company or an exclusion from the definition of an investment company, our ability to use leverage would be substantially reduced. Further, if the SEC determined that we were an unregistered investment company, we could be subject to monetary penalties and injunctive relief in an action brought by the SEC, we would potentially be unable to enforce contracts with third parties which could seek to obtain rescission of transactions undertaken during the period for which it was established we were an unregistered investment company. If we were required to register as an investment company, it would result in a change of our financial statement requirements. Our business will be materially and adversely affected if we fail to qualify for this exemption from regulation pursuant to the 1940 Act. In addition, the loss of our 1940 Act exemption would also permit our Manager to terminate the Management Agreement, which could result in material adverse effect on our business and results of operations.

Compliance with our 1940 Act exemption will limit our ability to invest in certain of our target assets.

At times the Manager may be limited in allocating equity to target that do not qualify as real estate or real estate related assets for purposes of the 1940 Act exemption. This limitation could adversely affect the performance of our portfolio if thesenon qualifying assets presents more attractive investment opportunities. Among the current target assets that are not real estate assets are ABS, non pool Agency and Non-Agency MBS, GSE Risk Sharing Securities and certain Commercial Mezzanine Loans.

The downgrade of the U.S. ~~government's~~Government's or certain European countries' credit ratings and any future downgrades of the U.S. ~~government's~~Government's or certain European countries' credit ratings may materially adversely affect our business, financial condition and results of operations.

On August 5, 2011, Standard & Poor's downgraded the U.S. ~~government's~~Government's credit rating for the first time in history. More recently, concerns over economic recession, geopolitical issues, the ability of certain European sovereigns to honor their debt obligations and the exposure of certain European financial institutions to such debt, potential deflationary pressures in Europe, slowing growth in China, rapid decline in the price of oil and certain other commodities, the availability and cost of financing, the mortgage market, uncertainty related to political events such as the government spending and tax policy and uncertain real estate market have contributed to volatility and relatively low expectations for the world economy and domestic and international markets. Europe remains vulnerable to volatile financial and credit markets due to economic and political uncertainties, including the United Kingdom's decision to withdraw from the European Union, the ongoing refugee crisis, financial uncertainty in Greece

and a lack of confidence in the European Union's banking system. Because FNMA and FHLMC are in conservatorship of the U.S. ~~government,~~Government, downgrades to the U.S. ~~government's~~Government's credit rating could impact the credit risk associated with Agency MBS and, therefore, decrease the value of the Agency MBS in which we invest. In addition, the downgrade of the U.S. ~~government's~~Government's credit rating and the credit ratings of certain European countries has created broader financial turmoil and uncertainty, which has recently weighed heavily on the global banking system. Therefore, the downgrade of the U.S. ~~government's~~Government's credit rating and the credit

ratings of certain European countries and any future downgrades of the U.S. ~~government's~~Government's credit rating or the credit ratings of certain European countries may materially adversely affect our business, financial condition and results of operations.

Risks related to financing and hedging

Our strategy involves significant leverage, which may amplify losses.

Our current target leverage generally ranges between three to ten times the amount of our stockholders' equity (calculated in accordance with U.S. GAAP). We incur this leverage by borrowing against a substantial portion of the market value of our assets. By utilizing this leverage, we can enhance our returns. Nevertheless, this leverage, which is fundamental to our investment strategy, also creates significant risks.

As a result of our significant leverage, we may incur substantial losses if our borrowing costs increase. Our borrowing costs may increase for any of the following reasons:

short-term interest rates increase;

the market value of our securities decreases;

interest rate volatility increases; or

the availability of financing in the market decreases.

Fluctuations in interest rates could materially affect our financial results

In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts, including agreements governing certain of our indebtedness that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks. In September 2019, the FASB proposed guidance that would help facilitate the market transition from existing reference rates to alternative rates. However, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based securities, including our material contract that are indexed to USD-LIBOR. Furthermore, we may need to renegotiate any credit agreements extending beyond 2021 that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, potential effect of any such event on our business, financial condition and results of operations cannot yet be determined.

There can be no assurance that our Manager will be able to prevent mismatches in the maturities of our assets and liabilities.

Because we employ financial leverage in funding our portfolio, mismatches in the maturities of our assets and liabilities can create risk in the need to continually renew or otherwise refinance our liabilities. Our net interest margins are dependent upon a positive spread between the returns on our asset portfolio and our overall cost of funding. Our Manager actively employs portfolio-wide and security-specific risk measurement and management processes in our daily operations. Our Manager's risk management tools include software and services licensed or purchased from third parties, in addition to proprietary systems and analytical methods developed internally. There can be no assurance that these tools and the other risk management techniques described above will protect us from asset/liability risks.

We may be subject to margin calls under our master repurchase agreements, which could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

We have entered into master repurchase agreements with various financial institutions and borrow under these master repurchase agreements to finance the acquisition of assets for our investment portfolio. Pursuant to the terms of borrowings under our master repurchase agreements, a decline in the value of the subject assets may result in our lenders initiating margin calls. A margin call means that the lender requires us to pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of the borrowing. The specific collateral value to borrowing ratio that would trigger a margin call is not set in the master repurchase agreements and will not be determined until we engage in a repurchase transaction under these agreements.

Our fixed-rate securities generally are more susceptible to margin calls as increases in interest rates tend to have a greater negative affect on the market value of fixed-rate securities. If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. The threat of or occurrence of a margin call could force us to sell our assets, either directly or through a foreclosure, under adverse market conditions. Because of the significant leverage we have, we may incur substantial losses upon the threat or occurrence of a margin call.

If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term, or if we default on our obligations under the repurchase agreement, we will lose money on our repurchase transactions.

When we engage in repurchase transactions, we generally sell securities to lenders (repurchase agreement counterparties) and receive cash from these lenders. The lenders are obligated to resell the same securities back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender will be less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us we may incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the

securities). We would also lose money on a repurchase transaction if the value of the underlying securities has declined as of the end of the transaction term, as we would have to repurchase the securities based on their initial value but would receive securities worth less than that amount. Further, if we default on one of our obligations under a repurchase transaction, the lender can terminate the transaction and cease entering into any other repurchase transactions with us. Our inability to post adequate collateral for a margin call by the counterparty, in a time frame as short as the close of the same business day, could result in a condition of default under our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse effect on our financial position, results of operations and cash flows. Certain of our repurchase agreements contain cross-default provisions, such that if a default occurs under an agreement with any specific lender, that lender could also declare a default under other repurchase agreements or other financing or derivative contracts, if any, with such lender. Further, 1416 of the counterparties to our repurchase agreements held, as of December 31, ~~2017,~~2019, collateral valued in excess of 5% of our stockholders' equity as security for our obligations under the applicable repurchase agreements. Any losses we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution to our stockholders.

If a counterparty to one of our swap agreements or TBAs defaults on its obligations, we may incur losses.

If a counterparty to one of the bilateral swap agreements that we enter into or TBAs that we enter into defaults on its obligations under the agreement, we may not receive payments due under the agreement, and thus, we may lose any unrealized gain associated with the agreement. In the case of a swap agreement, the fact that such swap agreement hedged a liability means that the liability could cease to be hedged upon the default of a counterparty. Additionally, we may also risk the loss of any collateral we have pledged to secure our obligations under a bilateral swap agreement if the counterparty, or in the case of a cleared swap, if our clearing broker, becomes insolvent or files for bankruptcy.

Failure to procure adequate repurchase agreement financing, which generally have short terms, or to renew or replace repurchase agreement financing as it matures, would adversely affect our results of operations.

We use repurchase agreement financing as a strategy to increase the return on our investment portfolio. However, we may not be able to achieve our desired leverage ratio for a number of reasons, including if the following events occur:

our lenders do not make repurchase agreement financing available to us at acceptable rates;

certain of our lenders exit the repurchase market;

our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do; or

we determine that the leverage would expose us to excessive risk.

We cannot assure you that any, or sufficient, repurchase agreement financing will be available to us on terms that are acceptable to us. In recent years, investors and financial institutions that lend in the securities repurchase market, have tightened lending standards in response to the difficulties and changed economic conditions that have materially adversely affected the MBS market. These market disruptions have been most pronounced in the Non-Agency MBS market, and the impact has also extended to Agency MBS, which has made the value of these assets unstable and relatively illiquid compared to prior periods. Any decline in their value, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements then in place.

As of December 31, ~~2017,~~2019, we had amounts outstanding under repurchase agreements with 1621 separate lenders and had repurchase agreements with 2834 different lenders. Prior to entering into a lending relationship with any financial institution, our Manager does a thorough credit review of such potential lender. Notwithstanding the foregoing, a material adverse development

involving one or more major financial institutions or the financial markets in general, in addition to the regulatory changes, could result in our lenders reducing our access to funds available under our repurchase agreements or terminating such agreements altogether.

Furthermore, because we rely primarily on short-term borrowings, our ability to achieve our investment ~~objective~~objectives will depend not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. If we are ~~not able~~unable to renew or replace our maturing short-term borrowings due to liquidity shortfalls in the repurchase agreement market and other short-term funding markets, changes in the regulatory environment or for any other reason, we will have to sell some or all of our assets, possibly under adverse market conditions which may have a material adverse effect on our financial position, results of operations and cash flows. In addition, the aforementioned changes to the regulatory capital requirements imposed on our lenders may significantly increase the cost of the financing that they provide to us. 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 recent changes in the regulatory environment and their management of perceived risk, particularly with respect to assignee liability.

Our repurchase agreement financing may require us to provide additional collateral and may restrict us from leveraging our assets as fully as desired.

We use repurchase agreements to finance acquisitions of our investments. If the market value of the asset pledged or sold by us to a financing institution pursuant to a repurchase agreement declines, we may be required by the financing institution to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so, which could result in defaults. Posting additional collateral to support our credit will reduce our liquidity and limit our ability to leverage our assets, which could adversely affect our business. In the event we do not have sufficient liquidity to meet such requirements, financing institutions can accelerate repayment of our indebtedness, increase interest rates, liquidate our collateral or terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for bankruptcy protection.

On the date each month that principal payments are announced (i.e., the factor day for our Agency RMBS), the value of our Agency RMBS pledged as collateral under our repurchase agreements is reduced by the amount of the prepaid principal and, as a result, our lenders will typically initiate a margin call requiring the pledge of additional collateral or cash, in an amount equal to such prepaid principal, in order to re-establish the required ratio of borrowing to collateral value under such repurchase agreements. Accordingly, with respect to our Agency RMBS the announcement on factor day of principal prepayments is in advance of our receipt of the related scheduled payment, thereby creating a short-term receivable for us in the amount of such principal prepayments; however, under our repurchase agreements, we may receive a margin call relating to the related reduction in value of our Agency RMBS and prior to receipt of this short-term receivable, be required to post additional collateral or cash in an amount equal to the product of the advance rate of such repurchase agreement and the principal prepayment on or about factor day, which would reduce our liquidity during the period in which the ~~short term~~short-term receivable is outstanding. As a result, in order to meet any such margin calls, we could be forced to sell assets in order to maintain liquidity. Forced sales under adverse market conditions may result in lower sales prices than ordinary market sales in the normal course of business.

Further, financial institutions providing the repurchase facilities may require us to maintain a certain amount of cash uninvested or to set aside non-levered assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose which could reduce our return on equity. If we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.

Lenders may require us to enter into restrictive covenants relating to our operations.

When we obtain further financing, lenders could impose restrictions on us that would affect our ability to incur additional debt, our capability to make distributions to stockholders and our flexibility to determine our operating policies. Loan documents we execute may contain negative covenants that limit, among other things, our ability to repurchase stock, distribute more than a certain amount of our funds from operations, and employ leverage beyond certain amounts.

Our rights under repurchase agreements may be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our counterparties under the repurchase agreements.

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 take possession of and liquidate the assets that we have pledged under their repurchase agreements. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as the claim of an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit

Insurance Act, our ability to exercise our rights to recover our securities under a repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur.

An increase in our borrowing costs relative to the interest that we receive on our portfolio investments may adversely affect our profitability and cash available for distribution to our stockholders.

As long as we earn a positive spread between interest and other income we earn on our leveraged assets and our borrowing costs, we believe that we can generally increase our profitability by using greater amounts of leverage. We cannot, however, assure you that repurchase financing will remain an efficient source of long-term financing for our assets. The amount of leverage that we use may be limited because our lenders might not make funding available to us or they may require that we provide additional collateral to secure our borrowings. If our financing strategy is not viable, we will have to find alternative forms of financing for our assets which may not be available to us on acceptable terms or at acceptable rates. In addition, in response to certain interest rate and investment environments or to changes in the market liquidity, we could adopt a strategy of reducing our leverage by selling assets or not reinvesting principal payments as MBS amortize and/or prepay, thereby decreasing the outstanding amount

of our related borrowings. Such an action could reduce interest income, interest expense and net income, the extent of which would be dependent on the level of reduction in assets and liabilities as well as the sale prices for which assets were sold.

As our financings mature, we will be required either to enter into new borrowings or to sell certain of our investments. Since we rely primarily on borrowings under repurchase agreements to finance our assets, our ability to achieve our investment objectives depends on our ability to borrow funds in sufficient amounts and on acceptable terms, and on our ability to renew or replace maturing borrowings on a continuous basis. Our repurchase agreement credit lines are renewable at the discretion of our lenders and, as such, do not contain guaranteed roll-over terms. Our ability to enter into repurchase transactions in the future will depend on the market value of our assets pledged to secure the specific borrowings, the availability of acceptable financing and market liquidity and other conditions existing in the lending market at that time. If we are unable to renew or replace maturing borrowings, we could be forced to sell assets in order to maintain liquidity. Forced sales under adverse market conditions could result in lower sales prices than ordinary market sales in the normal course of business. Further, an increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between our returns on our assets and the cost of our borrowings. This would adversely affect our returns on our assets, which might reduce earnings and, in turn, cash available for distribution to our stockholders.

Our investments in Residential and Commercial Whole Loans are difficult to value and are dependent upon the ability to finance, refinance and securitize such investments. The inability to do so could materially and adversely affect our liquidity and earnings and limit the cash available for distribution to our stockholders.

We may seek to finance and refinance our Residential Whole Loans and Commercial Whole Loans to generate greater value from such loan. However, there may be impediments to executing either a financing or refinancing strategy for these investments. The financing of these investments presents additional challenges because in general it is less available than repurchase financing for MBS, especially Agency CMBS and Agency RMBS, and likely to have less advantageous pricing and more onerous terms. Accordingly, there can be no assurance that we will be able to finance Whole Loans at all, let alone on terms we believe are advantageous.

We may enter into hedging transactions that could expose us to contingent liabilities in the future.

Subject to maintaining our qualification as a REIT and exemption from registration under the 1940 Act, part of our investment strategy may involve entering into economic hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.

Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

Subject to maintaining our qualification as a REIT and exemption from registration under the 1940 Act, we may pursue various economic hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging activity varies in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:

interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;

due to a credit loss, the duration of the hedge may not match the duration of the related liability;

the amount of income that a REIT may earn from hedging transactions (other than hedging transactions that satisfy certain requirements of the Code or that are done through a ~~TRS)~~taxable REIT subsidiary (a "TRS") to offset interest rate losses is limited by U.S. federal tax provisions governing ~~REITs;~~REITs);

the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments or "mark-to-market losses," would reduce our stockholders' equity;

the credit quality of the hedging counterparty owing money on the hedge 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 owing money in the hedging transaction may default on its obligation to pay.

Our hedging transactions, which are intended to limit losses, may actually adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

While the majority of our interest rate swaps are traded on a regulated exchange, certain hedging instruments are traded over the counter and do not trade on regulated exchanges and, therefore, are not guaranteed by an exchange or a clearing house. In addition, over the counter instruments are more lightly regulated by U.S. and foreign governmental authorities. Consequently, there may be no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international

requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction which did not clear through a clearing house would most likely result in its default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our commitments, if any, at the then current market price. Although generally we seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into an offsetting contract in order to cover our risk. There can be no assurance that a liquid secondary market will exist for any hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

Risks associated with our relationship with our Manager

Our Board of Directors has approved very broad investment guidelines for our Manager and does not approve each investment and financing decision made by our Manager.

Our Manager is authorized to follow very broad investment guidelines. Our Board of Directors periodically reviews our investment guidelines and our investment portfolio but does not, and is not required to review all of our proposed investments, except that an investment in a security structured or issued by another entity managed by our Manager must be approved by at least two-thirds (2/3) of our independent directors prior to such investment. In addition, in conducting periodic reviews, our Board of Directors may rely primarily on information provided to them by our Manager. Furthermore, our Manager may use complex strategies, and transactions entered into by our Manager may be costly, difficult or impossible to unwind by the time they are reviewed by our Board of Directors. Our Manager has great latitude within the broad parameters of our investment guidelines in determining the types and amounts of Agency and Non-Agency RMBS, CMBS, ABS and ~~other portfolio~~Whole Loan investments it may decide are attractive investments for us, which could result in investment returns that are substantially below expectations or that result in losses, which would materially and adversely affect our business operations and results. Further, decisions made and investments and financing arrangements entered into by our Manager may not fully reflect the best interests of our stockholders.

There are conflicts of interest in our relationship with our Manager that could result in decisions that are not in the best interests of our stockholders.

We are subject to conflicts of interest arising out of our relationship with our Manager. We do not have any employees. All of our executive officers and two of our directors, James W. Hirschmann III and Jennifer W. Murphy, are employees of our Manager. Our Management Agreement with our Manager was negotiated between related parties and its terms, including fees and other amounts payable, may not be as favorable to us as if it had been negotiated at ~~arm's length~~arm's-length with an unaffiliated third party. In addition, the obligations of our Manager and its officers and personnel to engage in other business activities may reduce the time our Manager and its officers and personnel spend managing us.

We compete for investment opportunities directly with other client portfolios managed by our Manager. Clients of our Manager have investment mandates and objectives that target the same assets as us. A substantial number of client accounts managed by our Manager have exposure to RMBS, CMBS and ~~our~~ other ~~portfolio~~ investments and may have similar investment mandates and objectives. While our Manager has only a limited number of client accounts investing in ~~Whole-Loans,~~Whole loans, the supply of ~~Whole-Loan~~Whole Loan investments meeting the Manager's investment criteria ~~are~~is extremely limited. In addition, our Manager may have additional clients that compete directly with us for investment opportunities in the future. Our Manager has an investment allocation policy in place that is intended to ensure that no single client is intentionally favored over another and that trades are allocated in a fair and equitable manner. We may compete with our Manager or its other clients for investment or financing opportunities sourced by our Manager; however, we may either not be presented with the opportunity or have to compete with our Manager to acquire these investments or have access to these sources of financing. Our Manager and our executive officers may choose to allocate favorable investments to itself or to its or other clients instead of to us. Further, at times when there are turbulent conditions in the mortgage markets or distress in the credit markets or other times when we will need focused support and assistance from our Manager, our Manager's other clients will likewise require greater focus and attention, placing our Manager's resources in high demand. In such situations, we may not receive the level of support and assistance that we may receive if we were internally managed or if our Manager did not act as a manager for other entities. There is no assurance that our Manager's allocation policies that address some of the conflicts relating to our access to investment and financing sources will be adequate to address all of the conflicts that may arise.

We pay our Manager a management fee that is not tied to our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us. This could hurt both our ability to make distributions to our stockholders and the market price of our common stock. Furthermore, the compensation payable to our Manager will increase as a result of future issuances of our equity securities, even if the issuances are dilutive to existing stockholders.

As of December 31, ~~2017,~~2019, our Manager owned ~~1,314,838~~1,383,865 shares of our common stock. To the extent our Manager elects to sell all or a portion of these shares in the future, our Manager's interests may be less aligned with our interests.

We are dependent on our Manager and its key personnel for our success.

We have no separate facilities and are completely reliant on our Manager. All of our executive officers and two of our directors, are employees of our Manager. Our Manager has significant discretion as to the implementation of our investment and operating policies and strategies. Accordingly, we believe that our success will depend to a significant extent upon the efforts, experience, diligence, skill and network of business contacts of the executive officers and key personnel of our Manager. The executive officers and key personnel of our Manager evaluate, negotiate, close and monitor our investments; therefore, our success depends on their continued service. The departure of any of the executive officers or key personnel of our Manager could have a material adverse effect on our performance. In addition, we offer no assurance that our Manager will remain our investment manager or that we will continue to have access to our Manager's principals and professionals. The term of our Management Agreement with our Manager expires on May 16, ~~2019,~~2021, with automatic one-year renewals thereafter. If the Management Agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan. Moreover, our Manager is not obligated to dedicate any of its personnel exclusively to us nor is it obligated to dedicate any specific portion of its time to our business, and none of our Manager's personnel are contractually dedicated to us under our Management Agreement with our Manager.

The Management Agreement with our Manager was not negotiated on an arm's-length basis, may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.

All of our executive officers and two of our directors are employees of our Manager. Our Management Agreement with our Manager was negotiated between related parties and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

Termination of the Management Agreement with our Manager without cause is difficult and costly. Our independent directors review our Manager's performance and any fees payable to our Manager annually and the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds (2/3) of our independent directors based upon: (i) our Manager's unsatisfactory performance that is materially detrimental to us; or (ii) our determination that any fees payable to our Manager are not fair, subject to our Manager's right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds (2/3) of our independent directors. We are required to provide our Manager 180 days prior notice of any such termination. Unless terminated for cause, we are required to pay our Manager a termination fee equal to three times the average annual management fee earned by our Manager during the prior 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination. This provision increases the effective cost to us of electing not to renew, or defaulting in our obligations under, the Management Agreement, thereby adversely affecting our inclination to end our relationship with our Manager, even if we believe our Manager's performance is not satisfactory.

Our Manager is only contractually committed to serve us until May 16, ~~2019.~~2021. The Management Agreement is automatically renewable for one-year terms; provided, however, that our Manager may terminate the Management Agreement annually upon 180 days prior notice. If the Management Agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.

Pursuant to the Management Agreement, our Manager does not assume any responsibility other than to render the services called for thereunder and is not responsible for any action of our Board of Directors in following or declining to follow its advice or recommendations. Our Manager maintains a contractual as opposed to a fiduciary relationship with us. Under the terms of the Management Agreement, our Manager, its officers, stockholders, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager are not liable to us, our directors, our stockholders or any partners for acts or omissions performed in accordance with and pursuant to the Management Agreement, except because of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the Management Agreement. In addition, we indemnify our Manager, its officers, stockholders, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the Management Agreement.

Our Manager's management fee is payable regardless of our performance.

We pay our Manager a management fee regardless of the performance of our portfolio. Our Manager's entitlement to non-performance-based compensation might reduce its incentive to devote its time and effort to seeking assets that provide attractive

risk-adjusted returns for our portfolio. This in turn could hurt both our ability to make distributions to our stockholders and the market price of our common stock.

Our Manager is subject to extensive regulation as an investment advisor, which could adversely affect its ability to manage our business.

Our Manager is subject to regulation as an investment advisor by various regulatory authorities that are charged with protecting the interests of its clients, including us. Instances of criminal activity and fraud by participants in the investment management industry and disclosures of trading and other abuses by participants in the financial services industry have led the U.S. government and regulators to the rules and regulations governing, and oversight of, the U.S. financial system, including the investment management industry and more aggressive enforcement of the existing laws and regulations. Our Manager could be subject to civil liability, criminal liability, or sanction, including revocation of its registration as an investment adviser, revocation of the licenses of its employees, censures, fines, or temporary suspension or permanent bar from conducting business, if it is found to have violated any of these laws or regulations. Any such liability or sanction could adversely affect its ability to manage our business. Our Manager must continually address conflicts between its interests and those of its clients, including us. In addition, the SEC and other regulators have increased their scrutiny of potential conflicts of interest. We believe our Manager has procedures and controls that are reasonably designed to address these issues. However, appropriately dealing with conflicts of interest is complex and difficult and if our Manager fails, or appears to fail, to deal appropriately with conflicts of interest, it could face litigation or regulatory proceedings or penalties, any of which could adversely affect its ability to manage our business.

In fact, in January 2014 settlements of two separate and unrelated regulatory matters involving our Manager with the United States Department of Labor and the Securities and Exchange Commission were announced. The first matter involved the trading of Non-Agency RMBS and whether certain trades complied with the cross trading rules applicable to pension plans subject to Employee Retirement Income Security Act ("ERISA") and to SEC registered funds under the 1940 Act. Our Manager settled that matter without admitting or denying the charges and paying approximately $7.4 million in compensation to clients and approximately $1.6 million in fines to the regulators. The second matter involved the handling of an investment which prohibited ERISA accounts from holding it which was allocated in error to certain ERISA accounts. Our Manager settled that matter without admitting or denying the charges and paying $10 million in compensation and $2 million in fines. Neither matter related to the Company. The settlements will not adversely affect our Manager's ability to manage the Company's affairs.

Risks related to our common stock

The market price and trading volume of our common stock may vary substantially.

Our common stock is listed on the NYSE under the symbol ~~"WMC".~~"WMC." The stock markets, including the NYSE, have experienced significant price and volume fluctuations over the past several years. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares. Accordingly, no assurance can be given as to the ability of our stockholders to sell their common stock or the price that our stockholders may obtain for their common stock.

Some of the factors that could negatively affect the market price of our common stock include:

actual or anticipated variations in our quarterly operating results;

changes in our earnings estimates or publication of research reports about us or the real estate industry;

changes in market valuations of similar companies;

adverse market reaction to any increased indebtedness we incur in the future;

additions to or departures of our Manager's key personnel;

actions by our stockholders;

changes in our dividend policy or payments; and

speculation in the press or investment community.

Market factors unrelated to our performance could also negatively impact the market price of our common stock. One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate as a percentage of our stock price relative to market interest rates. If market interest rates increase, prospective investors may seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and conditions in the capital markets can

affect the market value of our common stock. For instance, if interest rates rise, it is likely that the market price of our common stock will decrease as market rates on interest-bearing securities increase.

Investing in our common stock may involve a high degree of risk.

The investments that we make in accordance with our investment objectives may result in a high amount of risk when compared to alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore an investment in our common stock may not be suitable for someone with lower risk tolerance.

Common stock eligible for future sale may have adverse effects on our share price.

We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock. The market price of our common stock may decline significantly when the restrictions on resale (or lock up agreements), which may attach to future sales of our common stock, by certain of our stockholders lapse. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock.

Also, we may issue additional shares in follow-on public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issuances, which may dilute the existing stockholders' interests in us.

We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.

We intend to pay quarterly distributions and to make distributions to our stockholders in an amount such that we distribute all or substantially all of our net taxable income, calculated in accordance with the REIT ~~regulations,~~requirements, each year. We have not established a minimum distribution payment level and our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described herein. All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, debt covenants, maintenance of our REIT qualification and other factors as our Board of Directors may deem relevant from time to time. We believe that a change in any one of the following factors could adversely affect our results of operations and impair our ability to pay distributions to our stockholders:

the profitability of our existing investments and the investment of net proceeds of any subsequent offering;

our ability to make profitable investments;

margin calls or other expenses that reduce our cash flow;

decreases in the value of our portfolio or defaults in our asset portfolio; and

the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions in the future. In addition, some of our distributions may include a return in capital.

Future offerings of debt or equity securities, which would rank senior to our common stock, may adversely affect the market price of our common stock.

If we decide to issue debt or equity securities in the future, which would rank senior to our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally,

any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us. Furthermore, the compensation payable to our Manager will increase as a result of future issuances of our equity securities, including issuances upon exercise of the warrants, described below, even if the issuances are dilutive to existing stockholders.

~~The dilutive effect~~Conversion of our outstanding warrants, including in certain circumstances, upon the future issuance of common stock, could have an adverse effect on the future market price of our common stock or otherwise adversely affect the interests of our common stockholders.

On May 15, 2012, we issued and sold to certain institutional investors a number of warrants, which expire on May 15, 2019, entitling them to purchase up to an aggregate of 1,115,893 shares of our common stock. These warrants had an initial exercise price of $20.50 per share (subject to adjustment and limitation on exercise in certain circumstances) and are exercisable for seven years after the date of the warrants' issuance, or earlier upon notice of redemption by us. As a result of two follow on public offerings on October 3, 2012 and April 3, 2014 and the stock portion of our dividend declared on December 19, 2013 the exercise price of each of the outstanding warrants has been reduced to $16.70 and the number of shares purchasable has increased to 1,232,916. The exercise of the warrants in the future would be dilutive to holders of our common stock if our book value per share or the market price of our common stock is higher than the exercise price at the time of exercise. The potential for dilution from the warrants could have an adverse effect on the future market price of our common stock.

~~Further, the exercise price of the warrants will be adjusted under certain circumstances, including, subject to certain exceptions, if we sell common stock (or other securities~~ convertible into or exchangeable for our common stock) in a public offering or private placement, for cash at a price per share (after deduction of underwriting discounts or placement fees and other expenses incurred by us that are attributable to the offering) that is less than the closing price of our common stock immediately prior to: (i) the announcement of the proposed sale in the case of public offerings; or (ii) the execution of the purchase agreement in the case of private placements. Accordingly, the exercise price will be adjusted downward in connection with any future offering, which would increase the dilutive effect of the warrants. Furthermore, any similar public offerings or private placements of our common stock we conduct in the future will likely increase the dilutive effect of the warrants.

~~Conversion of the~~senior unsecured notes may dilute the ownership interest of existing ~~shareholders,~~stockholders, including holders who had previously converted their notes.

~~In October 2017, the~~The Company has issued ~~$115.0~~$205.0 million aggregate principal amount of 6.75% convertible senior unsecured ~~notes, which included the underwriter’s option to purchase $15.0 million aggregate principal amount of the notes for net proceeds of $111.1 million.~~notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity.

The notes are convertible into, at the Company's election, cash, shares of the Company's common stock or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the agreement. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock.

To the extent we issue shares of our common stock upon conversion of the notes, the conversion of some or all of our notes will dilute the ownership interests of existing ~~shareholders.~~stockholders. Any sales in the public market of shares of our common stock issuable upon such conversion of the notes could adversely affect the prevailing market price.

Risks related to our organization and structure

Our authorized but unissued shares of common and preferred stock may prevent a change in our control.

Our amended and restated certificate of incorporation authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our Board of Directors may, without stockholder approval, amend our amended and restated certificate of incorporation to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our Board of Directors 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 involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.

Ownership limitations may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares.

~~In order for us to qualify~~To maintain our qualification as a REIT, ~~for each taxable year after 2012,~~ no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. "Individuals" for

this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. To assist us in maintaining our qualification as a REIT, our amended and restated certificate of incorporation generally prohibits any person from directly or indirectly owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.

Provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law may have the effect of preventing or hindering a change in control and adversely affecting the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price our common stock.

We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our operations.

We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our operations. Such distributions would reduce the amount of cash we have available for investing and other purposes and could be dilutive to our financial results. In addition, funding our distributions from our net proceeds may constitute a return of capital to our investors, which would have the effect of reducing each stockholder's basis in its shares of common stock.

Risks Related to REIT Status

If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

We believe we have operated and intend to continue to operate in a manner that allows us to qualify as a REIT. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the annual REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, there can be no assurance that the IRS will not contend that our interests in ~~the subsidiary~~our subsidiaries or in securities of other issuers will not cause a violation of the REIT requirements.

If we were to fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be subject to U.S. federal income ~~tax, including any applicable alternative minimum~~ tax, on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to income from "qualified dividends" payable to U.S. stockholders that are individuals, trusts and estates is currently 20%, exclusive of the 3.8% investment tax ~~surcharge, resulting from the Tax Cuts and Jobs Act of 2017, which was signed into law on December 22, 2017, therby making significant changes to the Internal Revenue Code.~~surcharge. Dividends payable by REITs, however, generally are not eligible for the qualified dividend reduced rates. ~~For taxable years beginning after December 31, 2017 and before January 1, 2026, generally stockholders~~Stockholders that are individuals, trusts or estates generally may deduct 20% of the aggregate amount of ordinary dividends distributed by us, subject to certain ~~limitations.~~limitations for taxable years beginning after December 31, 2017 and before January 1, 2026. While the qualified dividend rules do not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually at least 90% of our net taxable income, determined without regard to the dividends paid deduction and excluding net capital gains, in order for U.S. federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a nondeductible 4% excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to continue to make distributions to our stockholders to comply with the REIT requirements of the ~~Code.~~Code and avoid corporate income tax and the 4% annual excise tax.

From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with U.S. GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, the ~~tax code~~Code limits our ability to use capital losses to offset ordinary income, thereby requiring us to distribute such ordinary income. If we do not have other funds available in these situations we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the nondeductible 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, excise taxes, state or local income, property and transfer taxes, such as mortgage recording taxes, and other taxes. In addition, ~~in order~~ to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income, orand to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through ~~a TRS~~TRSs or other consolidated entities that will be subject to corporate-level income tax at regular corporate rates. We may also incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm's-length basis. The payment of any of these taxes would decrease cash available for distribution to our stockholders.

Complying with REIT requirements may cause us to liquidate or forgo otherwise attractive opportunities.

To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and securities. The remainder of our investments in securities (other than government securities, ~~and~~ qualified real estate ~~assets)~~assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government securities, ~~and~~ qualified real estate ~~assets)~~assets and securities issued by a TRS) can consist of the securities of any one issuer, and no more than 20% of the value of our total assets can be represented by securities of one or more ~~TRS.~~TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments from our investment portfolio. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

In addition to the asset tests set forth above, to qualify as a REIT we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make and, in certain cases, to maintain ownership of, certain attractive investments.

We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them.

We have acquired and may acquire in the future mortgage-backed securities and other portfolio instruments in the secondary market for less than their face amount. In addition, pursuant to our ownership of certain mortgage-backed securities, we may be treated as holding certain debt instruments acquired in the secondary market for less than their face amount. The discount at which such securities or debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as "market discount" for U.S. federal income tax purposes. Under general tax rules, accrued market discount is reported as income when, and to the extent that, any payment of principal of the mortgage-backed security or debt instrument is made. If we collect less on the mortgage-backed security or

debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting capital loss deductions to the extent we do not have offsetting capital gains.

In addition, pursuant to our ownership of certain mortgage-backed securities or debt instruments, we may be treated as holding distressed debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are "significant modifications" under applicable Treasury regulations, the modified debt may be considered to have been reissued to us at a gain in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt, even if the value of the debt or the payment expectations have not changed.

Moreover, some of the mortgage-backed securities or debt instruments that we acquire may have been issued with original issue discount. Under general tax rules, we are required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such mortgage-backed securities will be made. If such mortgage-backed securities turn out not to be fully collectable, an offsetting loss deduction will become available only in the later year that uncollectability is provable.

Under the recently enacted Tax Cuts and Jobs Act (the ‘‘Act’’), we generally will be required to take certain amounts in income no later than the time such amounts are reflected on certain financial statements. The application of this rule may require the accrual of income with respect to certain of debt instruments or mortgage-backed securities, such as original issue discount or market discount, earlier than would be the case under the general tax rules, although the precise application of this rule is unclear at this time. This rule generally will be effective for tax years beginning after December 31, 2017 or, for debt instruments or mortgage-backed securities issued with original issue discount, for tax years beginning after December 31, 2018.

Finally, in the event that mortgage-backed securities or any debt instruments we are treated as holding pursuant to our investments in mortgage-backed securities are delinquent as to mandatory principal and interest payments, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability. Similarly, we may be required to accrue interest income with respect to subordinate mortgage-backed securities at the stated rate

regardless of whether corresponding cash payments are received or are ultimately collectable. In each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectable, the utility of that deduction could depend on our having taxable income in that later year or thereafter.

Certain apportionment rules may affect our ability to comply with the REIT asset and gross income tests.

The Code provides that a regular or a residual interest in a real estate mortgage investment conduit, or REMIC, is generally treated as a real estate asset for the purpose of the REIT asset tests, and any amount includible in our gross income with respect to such an interest is generally treated as interest on an obligation secured by a mortgage on real property for the purpose of the REIT gross income tests. If, however, less than 95% of the assets of a REMIC in which we hold an interest consist of real estate assets (determined as if we held such assets), we will be treated as holding our proportionate share of the assets of the REMIC for the purpose of the REIT asset tests and receiving directly our proportionate share of the income of the REMIC for the purpose of determining the amount of income from the REMIC that is treated as interest on an obligation secured by a mortgage on real property. In connection with the expanded Agency RMBS-backed HARP loan program in which we may invest, the IRS issued guidance providing that, among other things, if a REIT holds a regular interest in an "eligible REMIC," or a residual interest in an "eligible REMIC" that informs the REIT that at least 80% of the REMIC's assets constitute real estate assets, then the REIT may treat 80% of the interest in the REMIC as a real estate asset for the purpose of the REIT income and asset tests. Although the portion of the income from such a REMIC interest that does not qualify for purposes of the REIT 75% gross income test would likely be qualifying income for the purpose of the 95% REIT gross income test, the remaining 20% of the REMIC interest generally would not qualify as a real estate asset, which could adversely affect our ability to satisfy the REIT asset tests. Accordingly, owning such a REMIC interest could adversely affect our ability to qualify as a REIT.

The "taxable mortgage pool" rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

Securitizations could result in the creation of taxable mortgage pools for U.S. federal income tax purposes. As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we generally would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax-exempt "disqualified organizations," such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion of our income from the taxable mortgage pool. In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. Moreover,

we would be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

Our ability to invest in and dispose of "to be announced" securities could be limited by our election to be subject to tax as a REIT.

We may purchase Agency RMBS through "to-be-announced" forward contracts, or TBAs. In certain instances, rather than take delivery of the Agency RMBS subject to a TBA, we may dispose of the TBA through a dollar roll transaction in which we agree to purchase similar securities in the future at a predetermined price or otherwise, which may result in the recognition of income or gains. We account for dollar roll transactions as purchases and sales of securities. The law is unclear regarding whether TBAs will be qualifying assets for the 75% asset test and whether income and gains from dispositions of TBAs will be qualifying income for the 75% gross income test. Accordingly, our ability to purchase Agency RMBS through TBAs and to dispose of TBAs, through dollar roll transactions or otherwise, could be limited.

The failure of securities subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT.

We enter into financing arrangements that are structured as sale and repurchase agreements pursuant to which we nominally sell certain of our securities to a counterparty and simultaneously enter into an agreement to repurchase these securities at a later date in exchange for a purchase price. Economically, these agreements are financings which are secured by the securities sold pursuant thereto. We believe that we will be treated for REIT asset and income test purposes as the owner of the securities that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership of the securities to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the securities during the term of the sale and repurchase agreement, in which case we could fail to qualify as a REIT.

Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

To continue to qualify as a REIT, we must comply with requirements regarding the composition of our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any ~~resultant~~resulting gain if we sell assets that are treated as dealer property or inventory.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute "gross income" for purposes of the 75% or 95% gross income ~~tests.~~tests, provided that certain identification requirements are met. To the extent that we fail to properly identify such transactions as hedges, or enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we limit our use of advantageous hedging techniques, and we may implement those hedges through a domestic TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRS.

Qualifying as a REIT involves highly technical and complex provisions of the Code.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited ~~influence, including~~influence.

New legislation or administrative or judicial action, in ~~cases where we own an equity interest in an entity that is classified~~each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a ~~partnership for~~REIT

The U.S. federal income tax ~~purposes.~~

~~Changes to~~treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax ~~laws could materially and adversely affect us and our stockholders.~~

The recently enacted Tax Cuts and Jobs Act makes substantial changes to the Code. Among those changes are a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to ‘‘sunset’’ provisions, the elimination or modification of various currently allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, and preferential rates of taxation on most ordinary REIT dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers. The effect of these, and the many other,

~~changes made in the Tax Cuts and Jobs Act is highly uncertain, both in terms of their direct effect on the taxation~~treatment of an investment in us. The U.S. federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in U.S. federal tax laws and interpretations thereof could affect or cause us to change our ~~common stock~~investments and ~~their indirect effect on~~commitments and affect the ~~value~~tax considerations of ~~our assets or market conditions generally. Furthermore, many of the provisions of the Tax Cuts and Jobs Act will require guidance through the issuance of Treasury regulations~~an investment in ~~order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on~~ us. It is also likely that there will be technical corrections legislation proposed with respect to the Tax Cuts and Jobs Act this year, the effect of which cannot be predicted and may be adverse to us or our stockholders.

Item 1B. Unresolved Staff Comment

None

Item 2. Properties

~~We do not own any properties.~~ Our executive and administrative offices are located in Pasadena, California, in office space shared with our Manager. We do not own any materially important physical properties; however, we have residential homes (or real estate owned) that we acquire, from time to time, through foreclosures on mortgage loans.

Item 3. Legal Proceedings

None.

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the NYSE under the symbol ~~"WMC". The following table sets forth the high, low and last sales prices for our common stock, as reported on the NYSE:~~

Period High Low Close
2017

First Quarter $ 10.55
$ 9.43
$ 9.77
Second Quarter $ 10.84
$ 9.58
$ 10.30
Third Quarter $ 10.95
$ 10.02
$ 10.47
Fourth Quarter $ 10.75
$ 9.50
$ 9.95
2016

First Quarter $ 10.95
$ 8.04
$ 10.05
Second Quarter $ 10.18
$ 8.71
$ 9.39
Third Quarter $ 11.03
$ 9.22
$ 10.42
Fourth Quarter $ 11.18
$ 9.63
$ 10.07
"WMC."

The following table summarizes our dividends declared on common stock, on a per share basis, for the years ended December 31, ~~2017~~2019 and ~~2016:~~2018:



Declaration Date	Record Date	Payment Date	Common Stock Dividend
~~2017~~2019
December ~~21, 2017~~19, 2019	December 30, 2019	January ~~2, 2018~~	~~January 26, 2018~~24, 2020	$0.31
September ~~21, 2017~~19, 2019	September 30, 2019	October ~~2, 2017~~	~~October 26, 2017~~25, 2019	$0.31
June 20, ~~2017~~2019	~~June 30, 2017~~July 1, 2019	July 26, ~~2017~~2019	$0.31
March ~~23, 2017~~21, 2019	April ~~3, 2017~~1, 2019	April 26, ~~2017~~2019	$0.31
~~2016~~2018
December ~~22, 2016~~19, 2018	December 31, 2018	January ~~3, 2017~~	~~January 26, 2017~~25, 2019	$0.31
September ~~22, 2016~~17, 2018	September 27, 2018	October ~~4, 2016~~	~~October 25, 2016~~26, 2018	$0.31
June ~~23, 2016~~21, 2018	July ~~5, 2016~~2, 2018	July 26, ~~2016~~2018	$0.31
March ~~24, 2016~~22, 2018	April ~~4, 2016~~2, 2018	April 26, ~~2016~~2018	$~~0.45~~0.31

In order to maintain our qualification as a REIT, we must make annual distributions to our stockholders of at least 90% of our taxable income (not including net capital gains). We have adopted a policy of paying regular quarterly dividends on our common stock. Refer to Note ~~11-~~12- "Stockholders' Equity" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K for details on the tax characterization of our dividend.

A combination of cash and stock dividends has been paid on our common stock since our initial public offering. Dividends are declared at the discretion of the Board of Directors and depend on actual and anticipated cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors the Board of Directors may consider relevant.

As of March ~~28, 2018,~~3, 2020, we had 76 registered holders of our common stock and ~~41,679,679~~53,523,876 shares outstanding.

Securities Authorized for Issuance Under Equity Compensation Plans

In conjunction with our IPO and concurrent private placement, our Board of Directors approved the Western Asset Mortgage Capital Corporation Equity Plan (the "Equity Plan") and the Western Asset Manager Equity Plan (the "Manager Equity Plan" and collectively the "Equity Incentive Plans"). For further details, see Note 1011- "Share-Based Payments" to the Consolidated Financial Statements included under Item 8 in this Form 10-K.

The following table presents certain information about the Equity Incentive Plans as of December 31, ~~2017:~~2019:



Award	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
Restricted common stock	N/A	N/A	~~512,262~~688,305
Total	—	—	~~512,262~~688,305

Stockholder Return Performance

The following graph is a comparison of the cumulative total stockholder return on the Company's common stock, the Standard & Poor's 500 Index (the "S&P 500 Index"), the Russell 2000 Index (the "Russell 2000") and the FTSE NAREIT Mortgage REITs Index (the "FTSE Mortgage REIT"), a peer group index for a ~~five year~~five-year period from December 31, ~~2012~~2014 to December 31, ~~2017,~~2019, and accordingly does not take into account the dividend the Company declared on December ~~21, 2017~~19, 2019 and paid on January ~~26, 2018.~~24, 2020. The graph assumes that $100 was invested on December 31, ~~2012~~2014 in the Company's common stock, the S&P 500 Index, the Russell 2000 and the FTSE Mortgage REIT and that all dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of the Company's shares will continue in line with the same or similar trends depicted in the graph below.



Index	12/31/12	12/31/13	12/31/14	12/31/15	12/31/16	12/31/17	12/31/14	12/31/15	12/31/16	12/31/17	12/31/18	12/31/19
Western Asset Mortgage Capital Corp	100.00	101.28	120.08	100.83	113.75	126.73	100.00	83.97	94.73	105.53	100.42	140.40
S&P 500	100.00	132.39	150.51	152.59	170.84	208.14	100.00	101.38	113.51	138.29	132.23	173.86
Russell 2000	100.00	138.82	145.62	139.19	168.85	193.58	100.00	95.59	115.95	132.94	118.30	148.49
FTSE NAREIT Mortgage REIT	100.00	98.04	115.57	105.31	129.38	154.98	100.00	91.12	111.95	134.10	130.71	158.60

Recent Sales of Unregistered Securities: Use of Proceeds from Registered Securities

Not applicable.

~~Purchase of Equity Securities by the Issuer~~

On December 21, 2017, the Board of Directors of the Company reauthorized its repurchase program of up to 2,100,000 shares of its common stock through December 31, 2019. The previous reauthorization announced on February 25, 2016 of the Company's repurchase program of up to 2,050,000 shares of its common stock expired on December 31, 2017. The original authorization expired on December 31, 2015. Purchases made pursuant to the program will be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Securities and Exchange Commission. The authorization does not obligate the Company to acquire any particular amount of common shares and the program may be suspended or discontinued at the Company's discretion without prior notice.

~~The following table shows common shares repurchase activity during the year ended December 31, 2017:~~

Month Total Number of Shares Purchased
Average Price Paid Per Share⁽¹⁾
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs at the end of period⁽¹⁾
October 1 - 31, 2017 —
—
2,100,000
November 1- 30, 2017 107,707
$ 9.76
107,707
1,992,293
December 1 - 31, 2017 18,015
$ 10.02
18,015
1,974,278
Total 125,722
125,722

^{(1) Includes brokers commission of $0.03 per share.}

Item 6. Selected Financial Data

The information below should be read in conjunction with " Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included in Item 8. "Financial Statements and Supplementary Data," included in this annual report on Form 10-K.


in thousands—except share and per share data	Year ended December 31, 2017			Year ended December 31, 2016			Year ended December 31, 2015			Year ended December 31, 2014			Year ended December 31, 2013			Year ended December 31, 2019			Year ended December 31, 2018			Year ended December 31, 2017			Year ended December 31, 2016			Year ended December 31, 2015
Operating Data:
Net Interest Income																66,990			71,122			75,918			91,326			125,099
Interest income	$	124,291		$	123,756		$	152,704		$	149,110		$	125,328
Interest expense	48,373			32,430			27,605			22,263			18,019
Net Interest Income	75,918			91,326			125,099			126,847			107,309

Other Income (Loss):
Realized gain (loss) on sale of investments, net	20,598			(21,991		)	8,279			(2,178		)	(110,712		)
Other than temporary impairment	(22,873		)	(32,286		)	(19,791		)	(17,014		)	(11,858		)
Unrealized gain (loss), net	28,396			(17,107		)	(34,011		)	189,011			(160,109		)
Gain (loss) on derivative instruments, net	3,292			(20,735		)	(68,895		)	(180,496		)	157,547
Gain on linked transactions, net	—			—			—			1,870			4,137
Other, net	1,031			180			2,318			1,433			91
Other Income (Loss)	30,444			(91,939		)	(112,100		)	(7,374		)	(120,904		)	25,710			(21,328		)	30,444			(91,939		)	(112,100		)
Operating expenses	10,519			11,493			12,888			10,394			8,485			12,873			14,749			10,519			11,493			12,888
General and administrative expenses	7,259			9,753			9,595			8,366			5,775			8,071			7,927			7,259			9,753			9,595
Income (loss) before income taxes	88,584			(21,859		)	(9,484		)	100,713			(27,855		)	71,756			27,118			88,584			(21,859		)	(9,484		)
Income tax provision (benefit)	3,487			3,156			—			—			—
Income tax provision																1,057			709			3,487			3,156			—
Net Income (loss)	$	85,097		$	(25,015	)	$	(9,484	)	$	100,713		$	(27,855	)	$	70,699		$	26,409		$	85,097		$	(25,015	)	$	(9,484	)
Net income (loss) per Common Share—Basic	$	2.03		$	(0.61	)	$	(0.25	)	$	2.67		$	(1.19	)	$	1.37		$	0.61		$	2.03		$	(0.61	)	$	(0.25	)
Net income (loss) per Common Share—Diluted	$	2.03		$	(0.61	)	$	(0.25	)	$	2.67		$	(1.19	)	$	1.37		$	0.61		$	2.03		$	(0.61	)	$	(0.25	)
Dividends Declared per Share of Common Stock	$	1.24		$	1.38		$	2.49		$	2.74		$	5.10	(1)	$	1.24		$	1.24		$	1.24		$	1.38		$	2.49
Balance Sheet Data (at period end):
Total assets	$	3,886,906		$	3,156,016		$	3,414,429		$	4,909,277		$	3,094,877		$	5,160,971		$	4,497,395		$	3,886,906		$	3,156,016		$	3,414,429
Total liabilities	$	3,420,868		$	2,725,534		$	2,902,781		$	4,286,065		$	2,684,783		$	4,596,510		$	3,994,386		$	3,420,868		$	2,725,534		$	2,902,781
Total stockholders' equity	$	466,038		$	430,482		$	511,648		$	623,212		$	410,094		$	564,461		$	503,009		$	466,038		$	430,482		$	511,648
Other Data:
Cash flow provided by (used in):
Operating activities	$	59,382		$	11,546		$	133,898		$	107,374		$	179,341		$	(52,240	)	$	107,052		$	59,382		$	11,546		$	133,898
Investing activities	$	(1,202,572	)	$	504,631		$	1,359,855		$	(1,311,678	)	$	2,002,411		$	(478,503	)	$	(716,875	)	$	(1,202,572	)	$	504,631		$	1,359,855
Financing activities	$	1,145,043		$	(494,799	)	$	(1,516,439	)	$	1,203,001		$	(2,189,519	)	$	537,227		$	639,594		$	1,145,043		$	(494,799	)	$	(1,516,439	)


~~(1)~~	~~Includes $2.35 dividend per share declared on December 19, 2013, consisting of cash and stock.~~

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion provides the reader a narrative from the perspective of management and should be read in conjunction with our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data" of this annual report on Form 10-K.

Overview

The size and composition of our portfolio depend on investment strategies implemented by our Manager, the accessibility to capital and overall market conditions, including availability of attractively priced target assets and financing. Our objective is to provide an attractive risk adjusted return to our ~~shareholders~~stockholders over the long term. Our Manager has built a diversified portfolio of our target assets to better enable us to deliver attractive returns through market cycles. Our portfolio is mainly comprised of Agency CMBS, ~~Agency RMBS, Non-Agency RMBS,~~ Non-Agency CMBS, Residential Whole loans and ~~Residential Whole-Loans and Residential Bridge~~Commercial Loans. To a ~~significantly~~ lesser extent, we have ~~invested~~investments in ~~other securities including certain~~Agency RMBS, Residential Bridge Loans, Non-Agency RMBS, GSE Risk Sharing Securities ~~as well as certain Non U.S. CMBS~~ and ABS investments secured by a portfolio of private student loans. In addition, our holdings include afour securitized commercial ~~loan~~loans from athe three consolidated ~~VIE.~~CMBS VIEs.

We use leverage as part of our business strategy in order to increase potential returns to our stockholders. We accomplish this by borrowing against existing investments primarily through repurchase agreements. We may also change our financing strategy and leverage without the consent of our stockholders.

We operate and elected to be taxed as a REIT, commencing with our taxable year ended December 31, 2012. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute, in accordance with the REIT regulations, all of our net taxable income to stockholders and maintain our intended qualification as a REIT. Certain of our non-qualifying investments were held in our taxable REIT subsidiary or ~~"TRS".~~"TRS." Net income generated in our TRS is taxable and subject to federal, state and local income tax at the applicable corporate tax rates.

We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the 1940 Act.

Factors Impacting Our Operating Results

Our business is affected by general U.S. residential and commercial real estate fundamentals and the overall U.S. and international economic environment. In particular, our strategy is influenced by the specific characteristics of these markets, including, but not limited to, interest rate levels and credit spreads.

Our operating results can be affected by a number of factors and primarily depend on, among other things, the size of our investment portfolio, our net interest income, changes in the market value of our investments, derivative instruments and to a lesser extent realized gains and losses on the sale of our investments and termination of our derivative instruments. Our overall performance is also impacted by the supply and demand for our target assets in the market, the terms and availability of financing for such assets, general economic conditions, the impact of U.S Government actions that affect the real estate and mortgage sectors, and the unanticipated credit events experienced by borrowers whose loans are included in our MBS, as well as our Residential Whole Loans, Residential Bridge Loan and ~~Bridge~~Commercial Loan borrowers.

Our net interest income, which includes the amortization of purchase premiums and accretion of discounts, will vary primarily as a result of changes in interest rates, defaults and loss severity rates, borrowing costs, and prepayment speeds on our MBS and other Target Assets (as defined herein) investments. Similarly, the overall value of our investment portfolio will be impacted by these factors as well as changes in the value of residential and commercial real estate and continuing regulatory changes.

See the Item 1A. "Risk Factors" in this annual report on Form 10-K for additional factors that may impact our operating results.

Recent Market Conditions

Our business is affected by general U.S. residential real estate fundamentals, domestic and foreign commercial real estate fundamentals and the overall U.S. and international economic environment. In particular, our strategy is influenced by the specific characteristics of these markets, including, but not limited to, prepayment rates and interest rate levels. We expect the results of our operations to be affected by various factors, many of which are beyond our control.

Our Manager's ~~global~~ outlook for ~~2017 was~~2020, is as follows; i) Coronavirus will cause growth setbacks in ~~line with market expectations for both robust growth~~the global recovery . ii) U.S. and ~~improving~~global inflation ~~has proven more optimistic than anticipated. The consensus transitioned from expectations for secular stagnation before the US election~~will continue to ~~global reflation afterward, to a more moderate tone today focusing on central bank~~be subdued, iii) sustained monetary policy ~~normalization. Our Manager's current expectations~~accommodation by the Federal Reserve and European Central Bank suggests "low for ~~2018 is for ongoing slow but steady~~long", and iv) spread products should outperform government bonds.

Against this backdrop, we remain constructive on housing fundamentals and expect modest home price growth over the coming years. Credit underwriting standards are historically high, making the quality of new loan production strong. We remain positive on the credit risk of GSEs (Fannie Mae and Freddie Mac) and recently issued non-agency loans as well as re-performing loans and securities. We also remain constructive on the CMBS market, due to broadly positive commercial real estate fundamentals and a favorable economic ~~growth~~outlook. Here, we are positive on short-duration, well-structured single-borrower securitizations and ~~moderate inflation, both~~loans; in ~~the U.S. and abroad.~~ conduit deals we see better value in AAA rated bonds.

During the fourth quarter of ~~2017,~~2019, the Federal Reserve ~~raised~~continued monetary easing, reducing the ~~federal~~fed funds rate a quarter point ~~which indicates~~

~~the central bank is confident~~in October 2019. They also significantly increased liquidity in the ~~strength of~~repurchase agreement market through its Open Market Operations. The yield curve steepened during the ~~economy~~quarter, with 2-year Treasury yields declining five basis points and ~~ready to push~~10-year yields increasing 25 basis points. We saw credit spreads and spreads on Agency MBS tighten. Although there was a modest benefit from declining interest rates, ~~to more normal levels. President Trump's nomination of Jerome Powell as~~ the next Federal Reserve chair is predicted to bring little change to the central bank's incremental rate increases and monetary policy normalization but we have yet to see how the FOMC might react to unexpected inflation. At the meeting in January 2018, the FOMC, left the federal funds rate at 1.5% since inflation is still below target, although unemployment is low. The FOMC expects inflation to meet its 2% target in 2018 and expects to gradually raise the federal funds rate to its normal level of 2%. At the March 2018 meeting, the FOMC raised the rate another quarter point from 1.5% to 1.75%,with two more rate hikes anticipated in 2018. The FOMC, as part of its balance sheet reduction plan, will allow $12 billion of Treasury securities to mature without replacing them. It will do the same with $8 billion of mortgage-backed securities. The Federal Reserve is gradually winding down the $4 trillion in holdings it acquired during quantitative easing. Accordingly, we expect potentially three rate increases in 2018. We believe the Agency RMBS sector is at risk for spread widening in the longer term. Against this backdrop, the fundamentals in the U.S. housing market remain strong and spreads for most mortgages remained supported during the fourth quarter of 2017 despite three significant hurricanes.

~~The market conditions outlined above may have a meaningful impact~~ on our ~~operating results and~~Agency CMBS portfolio overshadowed this benefit resulting in a slight decline in our ~~existing portfolio and may cause us to adjust our investment and financing strategies over time as new opportunities emerge and the risk profiles~~book value of ~~our business changes.~~0.5%.

Critical Accounting Policies

The consolidated financial statements include our accounts, those of our consolidated wholly-owned TRS and certain variable interest entities (“VIEs”) in which we are the primary beneficiary. All intercompany amounts have been eliminated in consolidation. In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting policies that we currently apply. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. For a review of recent accounting pronouncements that may impact our results of operations, refer Note 2 - “Summary of Significant Accounting Policies” contained in this annual report on Form 10-K.

Valuation of Financial Instruments

We disclose the fair value of our financial instruments according to a fair value hierarchy (Levels I, II, and III, as defined below). ASC 820 "Fair Value Measurements and Disclosures" establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements. ASC 820 further specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:

Level I — Quoted prices in active markets for identical assets or liabilities.

Level II — Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable, for example, when there is little or no market activity for an investment at the end of the period, unobservable inputs may be used.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Transfers between levels are determined by us at the end of the reporting period.

Mortgage-Backed Securities and Other Securities

Our mortgage-backed securities and other securities portfolio primarily consists of Agency RMBS, Non-Agency RMBS, Agency CMBS, Non-Agency CMBS, ABS and other real estate related ~~assets, these~~assets. These investments are recorded in accordance with

ASC 320, “Investments - Debt and Equity ~~Securities”,~~Securities,” ASC 325-40, “Beneficial Interests in Securitized Financial Assets” or ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit ~~Quality”.~~Quality.” We have chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for our mortgage-backed securities and other securities portfolio. Electing the fair

value option allows us to record changes in fair value in the Consolidated Statements of Operations as a component of “Unrealized gain (loss), ~~net”.~~net.”

If we purchase securities with evidence of credit deterioration, we will analyze to determine if the guidance found in ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” is applicable.

We evaluate securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired involves judgments, estimates and assumptions based on subjective and objective factors. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired, and the impairment is designated as either “temporary” or “other-than-temporary.” When a security is impaired, an OTTI is considered to have occurred if (i) if we intend to sell the security (i.e., a decision has been made as of the reporting date) or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If we intend to sell the security or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, the entire amount of the impairment loss, if any, is recognized in earnings as OTTI and the cost basis of the security is adjusted to its fair value. Additionally, for securities accounted for under ASC 325-40 an OTTI is deemed to have occurred when there is an adverse change in the expected cash flows to be received and the fair value of the security is less than its carrying amount. In determining whether an adverse change in cash flows occurred, the present value of the remaining cash flows, as estimated at the initial transaction date (or the last date previously revised), is compared to the present value of the expected cash flows at the current reporting date. The estimated cash flows reflect those a “market participant” would use and are discounted at a rate equal to the current yield used to accrete interest income. Any resulting OTTI adjustments are reflected in “Other than temporary impairment” in our Consolidated Statements of Operations.

Increases in interest income may be recognized on a security on which we have previously recorded an OTTI charge if the cash flow of such security subsequently improves.

In addition, unrealized losses on our Agency securities, with explicit guarantee of principal and interest by the governmental sponsored entity ("GSE"), are not credit losses but rather were due to changes in interest rates and prepayment expectations. These securities would not be considered other than temporarily impaired provided we did not intend to sell the security.

Residential ~~Whole-Loans~~Whole Loans

Investments in Residential ~~Whole-Loans~~Whole Loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other ~~Costs".~~Costs." We have chosen to make the fair value election pursuant to ASC 825 for our entire Residential Whole-Loan portfolio. Residential ~~Whole-Loans~~Whole Loans are recorded at fair value with periodic changes in fair market value being recorded in earnings as a component of "Unrealized gain (loss), ~~net".~~net." All other costs incurred in connection with acquiring Residential ~~Whole-Loans~~Whole Loans or committing to purchase these loans are charged to expense as incurred.

On a quarterly basis, we evaluate the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, we do not record an allowance for loan loss as we have elected the fair value option. However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.

Residential Bridge Loans

For the Bridge Loans acquired prior to October 25, 2017, we did not elect the fair value option pursuant to ASC 825 and accordingly these loans are recorded at their principal amount outstanding, net of any premium or discount in the Consolidated

Balance Sheets. Commencing with purchases subsequent to October 25, 2017, we decided to ~~elected~~elect the fair value option pursuant to ASC 825 to be consistent with the accounting of our other investments, which are all carried at fair value. These loans are recorded at fair value with periodic changes in fair market value being recorded in earnings as a component of "Unrealized gain

(loss), net". All other costs incurred in connection with acquiring the Residential Bridge Loans or committing to purchase these loans are charged to expense as incurred.

A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. We evaluate each of Residential Bridge Loans ~~that we did not elect the fair value option~~ on a quarterly basis. These loans are individually specific as they relate to the borrower, collateral type, interest rate, LTV and term as well as geographic location. We evaluate the collectability of both principal and interest of each loan. When a loan is impaired, the impairment is then measured based on fair value of the collateral, since these loans are collateral dependent. Upon measurement of impairment, we record an allowance to reduce the carrying value of the loan with a corresponding charge to net ~~income.~~income for those loans that we did not elect the fair value option. Significant judgments are required in determining impairment, including assumptions regarding the value of the loan, the value of the underlying collateral and other provisions such as guarantees. We will not record an allowance for loan loss for the Residential Bridge Loans that Company has elected the fair value option.

Income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or it is legally discharged.

Securitized Commercial Loans

Securitized commercial loans are comprised of commercial loans of consolidated variable interest entities which were sponsored by third parties. These loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs." We have chosen to make the fair value election pursuant to ASC 825. Accordingly, these loans are recorded at fair value with periodic changes in fair value being recorded in earnings as a component of "Unrealized gain (loss), net."

The securitized commercial loans are typically collateralized by commercial real estate. As a result, we regularly evaluate the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower on a loan by loan basis. On a quarterly basis, we evaluate the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, we do not record an allowance for loan loss as we have elected the fair value option. However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed. Interest income accrual is resumed when the loan becomes contractually current and performance is demonstrated. A loan is written off when it is no longer realizable and/or legally discharged.

Commercial Loans

Investments in Commercial Loans, which are comprised of commercial mortgage loans and commercial mezzanine loans, are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs." We have chosen to make the fair value election pursuant to ASC 825 for our Commercial Loan portfolio. Accordingly, these loans are recorded at fair value with periodic changes in fair value being recorded in earnings as a component of "Unrealized gain (loss), net." All other costs incurred in connection with acquiring the Commercial Loans or committing to purchase these loans are charged to expense as incurred.

Our loans are typically collateralized by commercial real estate. As a result, we regularly evaluate the extent and impact of any credit migration associated with the performance and or value of the underlying collateral property as well as the financial and operating capability of the borrower on a loan by loan basis. On a quarterly basis, we evaluate the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, we do not record an allowance for loan loss as we have elected the fair value option. However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when,

in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed. Interest income accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.

Interest Income Recognition

Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, rated AA and higher at the time of purchase

Interest income on mortgage-backed and other securities is accrued based on the respective outstanding principal balances and corresponding contractual terms. We record interest income in accordance with ASC subtopic 835-30 "Imputation of ~~Interest",~~Interest," using the effective interest method. As such premiums and discounts associated with Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, rated AA and higher at the time of purchase, are amortized into interest income over the estimated life of such securities. Adjustments to premium and discount amortization are made for actual prepayment activity. We estimate prepayments at least quarterly for our securities and, as a result, if the projected prepayment speed increases, we will accelerate the rate of amortization on premiums or discounts and make a retrospective adjustment to historical amortization. Alternatively, if projected prepayment speeds decrease, we will reduce the rate of amortization on the premiums or discounts and make a retrospective adjustment to historical amortization.

Non-Agency MBS and other securities that are rated below AA at the time of purchase and Interest-Only Strips that are not classified as derivatives

Interest income on Non-Agency MBS and other securities that are rated below AA at the time of purchase and Interest-Only Strips that are not classified as derivatives are also recognized in accordance with ASC 835, using the effective yield method. The effective yield on these securities is based on the projected cash flows from each security, which is estimated based on our observation of the then current information and events, where applicable, and will include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses. On at least a quarterly basis, we review and, if appropriate, make adjustments to our cash flow projections based on input and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. ~~Where appropriate, we may include in our cash flow projections the U.S. Department of Justice’s settlements with the major residential mortgage originators, regarding certain lending practices.~~ Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Actual maturities of the securities are affected by the contractual lives of the underlying collateral, periodic payments of scheduled principal, and prepayments of principal. Therefore, actual maturities of the securities will generally be shorter than stated contractual maturities.

Based on the projected cash flow of such securities purchased at a discount to par value, we may designate a portion of such purchase discount as credit protection against future credit losses and, therefore, not accrete such amount into interest income. The amount designated as credit discount may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security with a credit discount is more favorable than forecasted, a portion of the amount designated as credit discount may be accreted into interest income prospectively.

~~Residential Whole-Loans and Residential Bridge Loans~~Loan Portfolio

Interest income on our residential loan portfolio and commercial loan portfolio is recorded ~~in accordance with ASC 835~~ using the effective interest method based on the contractual payment terms of the loan. Any premium amortization or discount accretion will be reflected as a component of "Interest income" in our Consolidated Statements of Operations.

Variable Interest Entities (“VIEs”)

VIEs are defined as entities that by design either lack sufficient equity for the entity to finance its activities without additional subordinated financial support or are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. We evaluate all of our interests in VIEs for consolidation. When the interests are determined to be variable interests, we assess whether we are deemed the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers is deemed to have the power to direct the activities of a VIE.

To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests. This assessment requires that we apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by us.

In instances ~~when~~where the Company and its related parties have variable interests in a VIE, ~~is owned by both us and related parties,~~ we consider whether there is a single party in the related party group that meets both the power and losses or benefits criteria on its own as though no related party relationship existed. If one party within the related party group meets both these criteria, such reporting entity is the primary beneficiary of the VIE and no further analysis is needed. If no party within the related party group on its own meets both the power and losses or benefits criteria, but the related party group ~~does~~ as a whole meets these two criteria, the determination of primary beneficiary within the related party group requires significant judgment. The analysis is based upon ~~an analysis~~qualitative as well as quantitative factors, such as the relationship of the ~~facts and circumstances~~VIE to each of the members of the related-party group, as well as the significance of the VIE's activities to those members, with the objective of determining which party is most closely associated with the VIE. ~~Determining the primary beneficiary within the related party group requires significant judgement.~~

In instances when we are required to consolidate a VIE that is determined to be a qualifying collateralized financing entity, under GAAP, we will measure both the financial assets and financial liabilities of the VIE using the fair value of either the VIE’s financial assets or financial liabilities, whichever is more observable.

Ongoing assessments of whether an enterprise is the primary beneficiary of a VIE is required.

Derivatives and Hedging Activities

Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, as part of our hedging strategy, we may enter into ~~but not limited to,~~ interest rate swaps, including forward starting swaps, interest rate swaptions, U.S. Treasury options, ~~future~~futures contracts, TBAs, Agency and Non-Agency interest only strips total return swaps, credit default swaps and foreign current swaps and forwards. Derivatives, subject to REIT requirements, are used for hedging purposes rather than speculation. We determine the fair value of our derivative positions and obtain quotations from third parties, including the Chicago Mercantile Exchange or CME, to facilitate the process of determining such fair values. If our hedging activities do not achieve the desired results, reported earnings may be adversely affected.

GAAP requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative. The fair value adjustment will affect either other comprehensive income in stockholders' equity until the hedged item is recognized in earnings or net income depending on whether the derivative instrument is designated and qualifies as a for hedge for accounting purposes and if so, the nature of the hedging activity. We have elected not to apply hedge accounting for our derivative instruments. Accordingly, we record the change in fair value of our derivative instruments, which includes net interest rate swap payments/receipts (including accrued amounts) and net currency payments/receipts (including accrued amounts) related

to interest rate swaps and currency swaps, respectively in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.

In January 2017, the CME amended its rulebooks to legally characterize variation margin payments and receipts for over-the-counter derivatives they clear as settlements of the derivatives' exposure rather than collateral against exposure. As a result of the change in legal characterization, effective January 1, 2017, variation margin is no longer classified as collateral in the Consolidated Balance Sheets in either "Due from counterparties" or "Due to counterparties", but rather a component of the respective "Derivative asset, at fair value" or "Derivative liability, at fair value" in the Consolidated Balance Sheets. The variation margin is now considered partial settlements of the derivative contract and will result in realized gains or losses which prior to January 1, 2017 were classified as unrealized gains or losses on derivatives. Prior to the CME rulebook change variation margin was included in financing activities in our Consolidated Statement of Cash Flows in either "Due from counterparties, net" or "Due to counterparties, net". Commencing in January 2017, cash postings for variation margin are included in operating activities in the Consolidated Statements of Cash Flows.

Proceeds and payments on settlement of swaptions, mortgage put options, futures contracts credit default swaps and TBAs are included in cash flows from investing activities. Proceeds and payments on settlement of forward contracts are reflected in cash flows from financing activities in our Consolidated Statements of Cash Flows. For Agency and Non-Agency Interest-Only Strips accounted for as derivatives, the purchase, sale and recovery of basis activity is included with MBS and other securities under cash flows from investing activities in our Consolidated Statements of Cash Flows.

We evaluate the terms and conditions of our holdings of Agency and Non-Agency Interest-Only Strips, interest rate swaptions, currency forwards, futures contracts and TBAs to determine if these instruments have the characteristics of an investment or should be considered a derivative under GAAP. In determining the classification of our holdings of Interest-Only Strips, we evaluate the securities to determine if the nature of the cash flows has been altered from that of the underlying mortgage collateral. Interest-Only Strips, for which the underlying mortgage collateral has been included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives. The carrying value of our Agency and Non-Agency Interest-Only Strips, accounted for as derivatives, is included in "Mortgage-backed securities and other securities, at fair value" in our Consolidated Balance Sheets. The carrying value of interest rate swaptions, currency forwards, futures contracts and TBAs

is included in "Derivative assets, at fair value" or "Derivative liability, at fair value" in our Consolidated Balance Sheets. Interest earned or paid along with the change in fair value of these instruments accounted for as derivatives is recorded in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of ~~Operations".~~Operations.

We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. An embedded derivative is separated from the host contact and accounted for separately when all of the guidance criteria are met. Hybrid instruments that are remeasured at fair value through earnings, including the fair value option, are not bifurcated. Derivative instruments, including derivative instruments accounted for as liabilities are recorded at fair value and are re-valued at each reporting date, with changes in the fair value together with interest earned or paid (including accrued amounts) reported in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.

~~2017~~2019 Activity

Investment Activity

~~In December of 2016, we evaluated~~We continually evaluate our ~~investments in Agency RMBS and Non-Agency RMBS,~~investment portfolio, focusing on expected future prepayment trends, supply of and demand, costs of financing, costs of hedging, expected future interest rate volatility and the overall shape of the U.S. Treasury and interest rate swap yield curves. ~~Based on~~We utilized the proceeds from our ~~evaluation~~May secondary equity offering, our two convertible note issuances and ~~our long-term views of the Agency RMBS sector, we decided to reposition our portfolio, reducing our exposure to Agency RMBS~~net proceeds from sales and ~~legacy Non-Agency RMBS and deployed capital~~paydowns, along with related borrowing to acquire ~~Agency CMBS, Non-Agency CMBS, Residential Whole and Bridge Loans and Non-Agency RMBS collateralized by reperforming loan pools.~~$3.6 billion of investments.

The following table presents our investing activity for the year ended December 31, ~~2017~~2019 (dollars in thousands):


Investment Type	Balance at December 31, 2016		Purchases		Principal Payments and Basis Recovery			Proceeds from Sales			Realized Gain/(Loss)			Unrealized Gain/(loss)			Premium and discount amortization, net			OTTI			Balance at December 31, 2017		Balance at December 31, 2018		Purchases		Principal Payments and Basis Recovery			Proceeds from Sales			Transfers to REO			Realized Gain/(Loss)			Unrealized Gain/(loss)			Premium and discount amortization, net			OTTI			Balance at December 31, 2019
Agency CMBS and Agency CMBS IOs																									$	1,486,142	$	762,648	$	(23,874	)	$	(891,072	)	N/A			$	28,603		$	78,665		$	(2,327	)	$	(216	)	$	1,438,569
Agency RMBS and Agency RMBS IOs	$	1,469,970	$	632,100	$	(138,811	)	$	(1,254,559	)	$	(2,483	)	$	7,202		$	(9,084	)	$	(6,302	)	$	698,033	19,837		583,982		(50,697		)	(205,310		)	N/A			1,560			8,247			(711		)	(222		)	356,686
Non-Agency RMBS	308,242		37,668		(11,634		)	(246,033		)	22,208			(12,969		)	2,072			—			99,554		50,555		—		(3,131		)	—			N/A			—			(230		)	(49		)	(1,331		)	45,814
Agency CMBS and Agency CMBS IOs	371,624		1,787,174		(5,254		)	—			—			6,398			717			(92		)	2,160,567
Non-Agency CMBS	358,919		51,511		(84,303		)	(54,875		)	740			13,453			8,276			(15,117		)	278,604		200,301		207,177		(46,478		)	(40,235		)	N/A			(1,308		)	(890		)	4,017			(6,565		)	316,019
Other securities⁽¹⁾	67,762		81,000		(783		)	(38,447		)	659			12,297			1,559			(1,982		)	122,065		59,906		27,678		(1,911		)	—			N/A			—			1,564			(6,472		)	(604		)	80,161
Total MBS and other securities	2,576,517		2,589,453		(240,785		)	(1,593,914		)	21,124			26,381			3,540			(23,493		)	3,358,823		1,816,741		1,581,485		(126,091		)	(1,136,617		)	N/A			28,855			87,356			(5,542		)	(8,938		)	2,237,249
Residential Whole-Loans	192,136		88,879		(43,221		)	—			—			723			(1,094		)	—			237,423
Residential Whole Loans																									1,041,885		579,124		(262,149		)	—			—			—			20,790			(3,790		)	—			1,375,860
Residential Bridge Loans	—		143,666		(37,175		)	—			—			558			(376		)	—			106,673		221,719		—		(179,548		)	—			(5,029		)	(487		)	501			(737		)	—			36,419
Securitized commercial loan	24,225		—		(154		)	—			—			805			—			—			24,876
Commercial Loans																									216,123		350,232		(197,245		)	—			—			—			(121		)	1,224			—			370,213
Securitized commercial loans																									1,013,511		1,113,231		(1,214,688		)	—			—			—			(1,070		)	(1,944		)	—			909,040
Total Investments	$	2,792,878	$	2,821,998	$	(321,335	)	$	(1,593,914	)	$	21,124		$	28,467		$	2,070		$	(23,493	)	$	3,727,795	$	4,309,979	$	3,624,072	$	(1,979,721	)	$	(1,136,617	)	$	(5,029	)	$	28,368		$	107,456		$	(10,789	)	$	(8,938	)	$	4,928,781

^{(1) Other securities includesinclude}^{$89.861.7 million}^{of GSE CRTs and}^{$32.218.5 million}^{of ABS at}^{December 31, 20172019}^.

WeDuring 2019, due to favorable risk adjusted returns, we opportunistically increased ~~Agency CMBS holdings from 13.3% in 2016 to 57.9% in 2017, reducing~~ our Agency RMBS holdings by 52.5%. The underlying collateral for the Agency CMBS are multifamily residential loans guaranteed by Fannie Mae and Freddie Mac. We find this sector attractive because the underlying loans have built in prepayment protection and therefore are less sensitive to interest rate risk and have a lower cost of hedging comparedexposure to Agency RMBS. In addition, since Agency CMBS are not held on the Federal Reserve's balance sheet, these securities will not be subject to potential spread widening from the Federal Reserve's balance sheet reduction plan.

We ~~continue~~continued to see favorable risk-adjusted ~~return opportunities~~returns in credit sensitive investments, particularly Residential Whole Loans, Commercial Loans and ~~Bridge Loans, securitized pools of prime jumbo loans and commercial mezzanine loans, including junior tranches. We intend to~~Non-Agency CMBS. As a result, we continue to deploy capital into ~~credit sensitive~~these investments. At December 31, ~~2017,~~2019, we held ~~$869.2 million~~$3.1 billion in credit sensitive investments, primarily consisting of ~~32.1%~~43.8% in Residential Whole Loans, 29.0% in securitized commercial loans (our risk is limited to only our direct ownership interest in the trust), 11.8% in Commercial Loans, 10.1% in Non-Agency CMBS, ~~27.3% Residential Whole-Loans, 12.3%~~1.5% in Non-Agency RMBS, 1.2% in Residential Bridge Loans, ~~11.5% Non-Agency RMBS, which includes investments~~and 2.6% in ~~securitized reperforming loans of $37.2 million and 10.3%~~ GSE credit risk transfer and ABS securities. We work to mitigate the credit risk on our credit sensitive holdings by developing relationships with originators that adhere to our investment guidelines for our Residential Whole ~~and Bridge~~Loans. For our Commercial Loans and ~~for the~~ other investments, we perform a detailed credit analysis on the underlying collateral at the time of purchase.

Portfolio Characteristics

Our Agency Portfolio

The following table summarizes ~~certain characteristics of~~ our Agency portfolio by ~~issuer and~~ investment category as of December 31, ~~2017~~2019 (dollars in thousands):

Principal Balance Amortized Cost Fair Value
Net Weighted Average Coupon⁽¹⁾
Agency RMBS 20-Year, 30-Year and 40-Year

Fannie Mae $ 572,185
$ 597,210
$ 598,895
3.8 %
Freddie Mac 68,859
72,710
73,282
4.2 %
Total Agency RMBS 20-Year, 30-Year and 40-Year 641,044
669,920
672,177
3.9 %
Agency RMBS IOs and IIOs ⁽²⁾

Fannie Mae N/A
6,051
6,626
3.4 %
Freddie Mac N/A
5,148
5,203
2.4 %
Ginnie Mae N/A
3,551
3,608
3.1 %
Total Agency RMBS IOs and IIOs ⁽²⁾
N/A
14,750
15,437
2.9 %
Agency RMBS IOs and IIOs accounted for as derivatives⁽²⁾

Fannie Mae N/A
N/A
7,989
2.6 %
Freddie Mac N/A
N/A
1,370
3.2 %
Ginnie Mae N/A
N/A
1,060
4.4 %
Total Agency RMBS IOs and IIOs accounted for as derivatives ⁽²⁾
N/A
N/A
10,419
2.9 %
Total: Agency RMBS 641,044
684,670
698,033
3.6 %

Agency CMBS

Fannie Mae 2,145,139
2,147,281
2,154,800
2.9 %
Agency CMBS IOs and IIOs⁽²⁾

Fannie Mae N/A
—
10
3.2 %
Agency CMBS IOs and IIOs accounted for as derivatives⁽²⁾

Ginnie Mae N/A
N/A
5,757
0.5 %
Total: Agency CMBS 2,145,139
2,147,281
2,160,567
2.7 %
Total $ 2,786,183
$ 2,831,951
$ 2,858,600
3.0 %



	Principal Balance		Amortized Cost		Fair Value		Net Weighted Average Coupon
Agency CMBS	$	1,347,929	$	1,374,443	$	1,435,477	3.4	%
Agency CMBS IOs and IIOs accounted for as derivatives⁽¹⁾	N/A		N/A		3,092		0.4	%
Total Agency CMBS	1,347,929		1,374,443		1,438,569		3.1	%

Agency RMBS	327,814		333,287		340,771		3.5	%
Agency RMBS IOs and IIOs ⁽¹⁾	N/A		8,661		10,343		2.8	%
Agency RMBS IOs and IIOs accounted for as derivatives ⁽¹⁾	N/A		N/A		5,572		3.0	%
Total Agency RMBS	327,814		341,948		356,686		3.3	%
Total	$	1,675,743	$	1,716,391	$	1,795,255	3.1	%


(1)	~~Net weighted average coupon as of December 31, 2017 is presented net of servicing and other fees.~~


~~(2)~~	IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on the interest-only class of securities.

Credit Sensitive Portfolio

The following table presents information by vintage⁽¹⁾ as it relates to our credit sensitive investment portfolio at December 31, ~~2017~~2019:


Credit Securities	Pre 2006		2006		2007		2010		2011		2012		2013		2014		2015		2016		2017		Total
Credit Sensitive Securities																									Pre 2006		2006		2007		2011		2012		2013		2014		2015		2016		2017		2018		2019		Total
Non-Agency RMBS	3.0	%	2.7	%	1.4	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	3.3	%	10.4	%	—	%	0.1	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	0.9	%	0.3	%	—	%	1.3	%
Non-Agency RMBS IOs	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	1.0	%	1.0	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	0.2	%	0.1	%	—	%	0.3	%
Non-Agency CMBS	—	%	6.2	%	6.6	%	—	%	4.0	%	0.8	%	0.4	%	2.5	%	8.7	%	—	%	2.9	%	32.1	%	—	%	0.3	%	0.4	%	1.4	%	0.1	%	—	%	0.9	%	1.5	%	0.4	%	0.5	%	1.9	%	2.7	%	10.1	%
Other securities	1.1	%	—	%	—	%	—	%	—	%	—	%	—	%	1.1	%	1.6	%	4.4	%	6.0	%	14.2	%	0.3	%	—	%	—	%	—	%	—	%	—	%	0.1	%	0.2	%	0.7	%	0.1	%	1.1	%	—	%	2.5	%
Residential Whole-Loans	0.2	%	—	%	—	%	0.1	%	0.6	%	1.0	%	8.8	%	4.3	%	0.2	%	6.3	%	5.7	%	27.2	%
Residential Whole Loans																									—	%	—	%	—	%	0.2	%	0.2	%	1.5	%	0.7	%	0.1	%	1.1	%	4.9	%	24.3	%	10.9	%	43.9	%
Residential Bridge Loans	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	0.3	%	2.4	%	9.5	%	12.2	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	0.2	%	0.9	%	—	%	1.1	%
Securitized commercial loan	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	2.9	%	—	%	2.9	%
Securitized commercial loans																									—	%	—	%	—	%	—	%	—	%	—	%	—	%	0.8	%	—	%	—	%	21.6	%	6.6	%	29.0	%
Commercial Loans																									—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	3.0	%	8.8	%	11.8	%
Total	4.3	%	8.9	%	8.0	%	0.1	%	4.6	%	1.8	%	9.2	%	7.9	%	10.8	%	16.0	%	28.4	%	100.0	%	0.3	%	0.4	%	0.4	%	1.6	%	0.3	%	1.5	%	1.7	%	2.6	%	2.2	%	6.8	%	53.2	%	29.0	%	100.0	%


(1)	Based on carrying amount of the investments.

Non-Agency RMBS

The following table presents the fair value and weighted average purchase price for each of our Non-agency RMBS categories, including IOs accounted for as derivatives, together with certain of their respective underlying loan collateral attributes and current performance metrics as of December 31, ~~2017~~2019 (fair value dollars in thousands):


			Weighted Average												Weighted Average
Category	Fair Value		Purchase Price		Life (Years)	Original LTV		Original FICO	60+ Day Delinquent		6-Month CPR		Fair Value		Purchase Price		Life (Years)	Original LTV		Original FICO	60+ Day Delinquent		6-Month CPR
Prime													$	10,681	$	64.04	12.1	68.9	%	769	0.1	%	12.6	%
Alt-A	$	91,417	$	70.60	8.1	77.5	%	689	11.0	%	11.6	%	35,133		64.87		11.5	80.9	%	663	8.7	%	8.2	%
Subprime	8,137		58.57		8.1	77.4	%	598	19.9	%	6.3	%
Total	$	99,554	$	69.62	8.1	77.5	%	682	11.8	%	11.2	%	$	45,814	$	64.68	11.6	78.1	%	688	6.7	%	9.2	%

Non-Agency CMBS

The following table presents certain characteristics of our Non-Agency CMBS portfolio as of December 31, ~~2017~~2019 (dollars in thousands):


		Principal				Weighted Average				Principal				Weighted Average
Type	Vintage	Balance		Fair Value		Life (Years)	Original LTV		Vintage	Balance		Fair Value		Life (Years)	Original LTV
Conduit:							0								0
	2006-2009	$	140,538	$	111,661	2.8	72.1	%	2006-2009	$	35,830	$	22,785	1.5	72.7	%
	2010-2016	177,245		111,065		7.8	64.0	%	2010-2019	104,106		82,402		4.1	61.4	%
		317,783		222,726		5.3	68.1	%		139,936		105,187		3.5	63.8	%
Single Asset:
	2010-2016	61,400		55,878		3.8	62.7	%	2010-2019	214,522		210,832		2.3	64.8	%
Total		$	379,183	$	278,604	5.0	67.0	%		$	354,458	$	316,019	2.7	64.4	%

Residential ~~Whole-Loans~~Whole Loans

The Residential Whole Loans have low LTV's and are comprised of 2,908 Non-QM adjustable rate mortgages, 612 conforming fixed rate mortgages and 9 investor fixed rate mortgages. The following table presents certain information about our Residential ~~Whole-Loan~~Whole-Loans investment portfolio as of December 31, ~~2017~~2019 (dollars in thousands):


				Weighted Average										Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score⁽¹⁾	Expected Life (years)	Contractual Maturity (years)	Coupon Rate		Number of Loans	Principal Balance		Original LTV		Original FICO Score⁽¹⁾	Expected Life (years) ⁽²⁾	Contractual Maturity (years)	Coupon Rate
3.01 - 4.00%	142	$	55,593	55.5	%	751	1.7	29.1	3.9	%	53	$	17,284	61.7	%	736	2.4	28.0	3.9	%
4.01 - 5.00%	338	125,860		56.9	%	725	1.4	26.5	4.5	%	1,689	557,144		61.4	%	744	2.8	28.5	4.8	%
5.01 - 6.00%	132	48,553		58.2	%	728	1.6	27.0	5.2	%	1,682	713,397		62.0	%	736	3.0	28.3	5.4	%
6.01 - 7.00%	4	2,264		71.1	%	758	1.3	20.5	6.3	%	103	37,102		54.1	%	727	3.8	25.3	6.2	%
7.01 - 8.00%											2	516		73.2	%	753	4.7	28.6	7.1	%
Total	616	$	232,270	57.0	%	734	1.5	27.1	4.5	%	3,529	$	1,325,443	61.5	%	739	3.0	28.3	5.2	%


(1)	The original FICO score is not available for ~~141~~286 loans with a principal balance of approximately ~~$56.5~~$94.6 million at December 31, ~~2017.~~2019. We have excluded these loans from the weighted average computations.


(2)	Excludes the expected lives of the conforming Residential Whole Loans held by RCR Trust.

As of December 31, 2017, there was one Residential Whole-Loan over 90-days past due with a current unpaid principal balance of $579 thousand and a fair value of $570 thousand. This nonperforming Residential Whole Loans a represent approximately 0.2% of the total outstanding principal balance. No allowance and provision for credit losses was recorded for these loans as of and for the twelve months ended December 31, 2017 since we elected the fair value option for this loan. We stopped accruing interest income for this loan when it became contractually 90 days delinquent.

Residential Bridge Loans

Our Residential Bridge Loans are comprised of short-term fixed rate mortgages secured by ~~non owner~~non-owner occupied single and multi-family residences with low LTVs, generally up to 85%. The following table presents certain information about our Residential Bridge Loans investment portfolio at December 31, ~~2017~~2019 (dollars in thousands):

Weighted Average
Current Coupon Rate Number of Loans
Principal
Balance
Original LTV
Contractual
Maturity
(months)

Coupon
Rate
5.01 - 6.00% 9 $ 4,016
64.5 % 10.8 5.9 %
6.01 - 7.00% 64 18,420
67.8 % 10.6 6.7 %
7.01 – 8.00% 98 25,608
66.4 % 9.5 7.6 %
8.01 – 9.00% 56 19,728
70.3 % 11.9 8.9 %
9.01 – 10.00% 67 25,001
73.3 % 6.8 9.7 %
10.01 – 11.00% 36 10,656
75.4 % 5.0 10.8 %
11.01 - 12.00% 2 919
89.8 % 8.2 11.4 %
17.01 – 18.00% 8 1,520
73.8 % 5.9 18.0 %
Total 340 $ 105,868
70.1 % 9.0 8.6 %



				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)	Coupon Rate
7.01 – 9.00%	36	$	22,409	70.2	%	5.8	8.4	%
9.01 – 11.00%	28	9,972		74.0	%	5.6	10.1	%
11.01 - 13.00%	9	2,741		63.1	%	2.0	11.7	%
13.01 - 15.00%	1	1,125		75.0	%	0.0	13.5	%
17.01 – 19.00%	2	949		75.0	%	0.0	18.0	%
Total	76	$	37,196	71.0	%	5.6	9.5	%

Non-performing Loans

The following table presents the aging of the Residential Whole Loans and Bridge Loans as of December 31, 2019 (dollars in thousands):



	Residential Whole Loans					Bridge Loans
	No of Loans	Principal		Fair Value		No of Loans	Principal		Fair Value ⁽¹⁾
Current	3,467	$	1,300,238	$	1,350,590	41	$	23,353	$	23,329
1-30 days delinquent	41	13,537		14,012		2	303		306
31-60 days delinquent	5	1,338		1,334		4	1,147		1,135
61-90 days delinquent	4	3,205		3,224		2	285		280
90+ days delinquent	12	7,125		6,700		27	12,108		11,369
Total	3,529	$	1,325,443	$	1,375,860	76	$	37,196	$	36,419

(1) Includes $3.1 million loans carried at amortized cost.

As of December 31, ~~2017,~~2019, there were ~~nine~~12 Residential ~~Bridge~~Whole Loans ~~over 90-days past due~~carried at fair value in non-accrual status with an unpaid principal balance of approximately ~~$1.8~~$7.1 million and a fair value of approximately $6.7 million. These nonperforming loans represent approximately 0.5% of the total outstanding principal balance. No allowance or provision for credit losses was recorded as of and for the year ended December 31, 2019 since the valuation adjustment, if any, would be reflected in the fair value of these loans. The Company stopped accruing interest income for these loan when they became contractually 90 days delinquent.

As of December 31, 2019, there were 27 Residential Bridge Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $12.1 million and a fair value of $11.4 million. These nonperforming Residential Bridge Loans represent approximately ~~1.7%~~32.6% of the total outstanding principal balance. Since we did not elect the fair value option for these loans, we are required to review for impairment Therefore, we reviewed the estimated fair value of the collateral to determine if an allowance and provision of credit loss was required. Based upon our evaluation we expect full recovery of the principal and interest and accordingly noNo allowance and provision for credit losses was recorded for ~~these~~ loans carried at fair value as of and for the ~~twelve months~~year ended December 31, ~~2017.~~2019 since valuation adjustments, if any, would be reflected in the fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.

As of December 31, 2019, we had 11 real estate owned ("REO") properties with an aggregate carrying value of $3.3 million related to foreclosed Bridge Loans. The REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The REO properties are classified in "Other assets" in the Consolidated Balance Sheet.

Commercial Real Estate Investments

Securitized Commercial Loans

In November 2015, we acquired a $14.0 million variable interest in CMSC Trust, which is a VIE that we were required to consolidate. Please refer to Note 6 - "Commercial Real Estate Investments" for details. The CMSC Trust holds a $24.0 million mezzanine loan collateralized by interests in commercial real estate. The mezzanine loan serves as collateral for the $24.0 million of securitized debt issued. Refer to Note 7 - "Financings" for details on the associated securitized debt.

In March 2018, we acquired a $67.8 million variable interest in RETL 2018 Trust, which is a VIE that we were required to consolidate. Please refer to Note 6 - "Commercial Real Estate Investments" for details. The RETL 2018 Trust held a commercial loan collateralized by first mortgages, deeds of trusts and interests in commercial real estate located throughout the United States and Puerto Rico. The commercial loan served as collateral for the securitized debt issued by RETL 2018 Trust. Refer to Note 7 - "Financings" for details on the associated securitized debt. In March 2019, RETL, the securitized debt was refinanced and the outstanding principal balance of the securitized debt issued by RETL 2018 Trust was paid in full and the trust was liquidated.

RETL 2018 was refinanced with a new securitization RETL 2019-RVP ("RETL 2019 Trust") in March 2019. We acquired a $65.3 million variable interest in the trust certificates issued by RETL 2019 Trust, including $45.3 million which represents the 5% eligible risk retention certificate. Please refer to Note 6 - "Commercial Real Estate Investments" for details. The RETL 2019 Trust holds a commercial loan collateralized by first mortgages, deeds of trusts and interests in commercial real estate located throughout the United States and Puerto Rico. The outstanding principal balance on this commercial loan is $674.3 million as of December 31, 2019. The commercial loan served as collateral for the $674.3 million securitized debt issued by RETL 2019 Trust. Refer to Note 7 - "Financings" for details on the associated securitized debt.

In December 2019, we acquired a $161.4 million interest in the trust certificates issued by the MRCD 2019-PRKC Mortgage Trust (MRCD Trust"), including $10.5 million HRR certificates, which represents the initial controlling class. We determined that MRCD Trust was a VIE and that we were also the primary beneficiary because the Manager was involved in certain aspects of the design of the trust and we own the controlling class. As the primary beneficiary, we consolidated MRCD Trust and its investment in the trust certificates (HRR class and a portion of the A class) of MRCD Trust were eliminated in the consolidation. The MRCD Trust holds two commercial loans, collateralized by first mortgages, deeds of trusts and interests in commercial real estate. The outstanding principal balance on first commercial loan is $234.5 million as of December 31, 2019 and bears an interest rate of 4.27%. The outstanding principal balance on second commercial loan is $10.5 million as of December 31, 2019 and bears an interest rate of 12.02%. The loans' stated maturity date is December 9, 2024.

Commercial Loans

In February 2019, our wholly-owned subsidiary, CRE LLC acquired a $76.0 million commercial first mortgage loan ("CRE 3") secured by health care and rehabilitation centers. CRE 3 has a maturity date of January 9, 2021 with a one-year extension option and bears an interest rate of one month LIBOR plus 7.0%. In May 2019, CRE 3 was paid in full.

In June 2019, CRE LLC acquired a $50.0 million commercial first mortgage loan ("CRE 4") secured by nursing facilities. CRE 4 has a maturity date of January 11, 2022 with two one-year extension options and bears an interest rate of one month LIBOR plus 4.75%.

In August 2019, CRE LLC acquired a $90.0 million commercial mezzanine loan ("CRE 5") secured by commercial real estate properties in retail and entertainment industries. CRE 5 has a maturity date of June 29, 2021 with a two-year first extension and a one-year second extension. The loan is interest only and bears an interest rate of one month LIBOR plus 9.25%.

In September 2019, CRE LLC acquired a $40.0 million commercial first mortgage loan ("CRE 6") secured by commercial real estate properties in retail industry. CRE 6 has a maturity date of August 6, 2021 with a two one-year extension and bears an interest rate of one month LIBOR plus 3.02%.

In December 2019, CRE LLC acquired three separate commercial first mortgage loans ("CRE 7," "CRE 8," and "CRE 9") with a total principal balance of $45.0 million secured by commercial real estate properties in the hospitality industry. Each loan has a maturity date of November 6, 2021 with a three one-year extension and bears an interest rate of one month LIBOR plus 3.75%.

In December 2019, CRE LLC acquired a $4.4 million commercial first mortgage loan ("CRE 10") secured by assisted living centers. CRE 10 has a maturity date of December 6, 2022 and bears an interest rate of one month LIBOR plus 4.85%.

Commercial Loan Trust

Revolving Small Balance Commercial Trust 2018-1

In January 2019, RSBC Trust acquired a $13.6 million commercial real estate mortgage loan ("SBC 4") secured by multi-family apartment complex. SBC 4 matures on December 1, 2021 with a one-year extension option, bears an interest rate of one month LIBOR plus 4.0% subject to a LIBOR floor of 2.0% and requires monthly principal and interest payments.

In January 2019, RSBC Trust acquired a $32.0 million interest-only commercial real estate mortgage loan ("SBC 5") secured by skilled nursing facilities. SBC 5 matures on July 6, 2021 and bears an interest rate of one month LIBOR plus 4.1%.

Geographic Concentration

The mortgages underlying our Non-Agency RMBS and Non-Agency CMBS are located in various states across the United States and other countries. The following table presents the five largest concentrations by location for the mortgages collateralizing our Non-Agency RMBS and Non-Agency CMBS as of December 31, ~~2017,~~2019, based on fair value (dollars in thousands):


	Non-Agency RMBS					Non-Agency CMBS				Non-Agency RMBS					Non-Agency CMBS
	Concentration		Fair Value			Concentration		Fair Value		Concentration		Fair Value			Concentration		Fair Value
California	28.3	%	$	28,152	California	8.1	%	$	22,525	25.6	%	$	11,728	California	16.2	%	$	51,308
Florida	11.1	%	11,081		New York	8.0	%	22,410		9.2	%	4,204		Nevada	10.9	%	34,298
New York	8.0	%	8,009		Florida	7.4	%	20,609		6.8	%	3,104		Illinois	6.1	%	19,193
Virginia	7.3	%	7,275		Illinois	7.3	%	20,257
Georgia										5.1	%	2,336		Florida	5.0	%	15,698
Maryland	4.7	%	4,711		North Carolina	7.2	%	20,196		4.7	%	2,155		Bahamas	4.8	%	15,041

Repurchase Agreements

As of December 31, ~~2017,~~2019, we had 34 master repurchase agreements with ~~28 counterparties and~~our counterparties. We had borrowings ~~with 16 counterparties~~under 21 of the 34 master repurchase agreements of approximately ~~$3.3 billion.~~$2.8 billion at December 31, 2019. The following table presents our repurchase agreement borrowings, by type of collateral pledged, as of December 31, ~~2017~~2019 and December 31, ~~2016,~~2018, and the respective effective cost of funds (Non-GAAP financial measure) for the years ended December 31, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

See "Non-GAAP Financial Measures" (dollars in thousands):

Collateral Borrowings Outstanding
Value of Collateral Pledged⁽¹⁾

Weighted
Average
Interest Rate
end of
period
Weighted Average Cost of Funds
Weighted Average Effective Cost of Funds
(Non-GAAP) ⁽²⁾

Weighted
Average
Haircut
end of
period
December 31, 2017
Agency RMBS $ 665,919
$ 690,255
1.62 % 1.21 % 1.21 % 4.36 %
Agency CMBS 2,035,222
2,143,340
1.53 % 1.32 % 1.32 % 5.02 %
Non-Agency RMBS 46,530
58,127
2.76 % 2.70 % 2.70 % 23.64 %
Non-Agency CMBS 154,325
208,062
2.98 % 2.83 % 2.83 % 27.99 %
Whole-Loans⁽³⁾
189,270
237,423
3.66 % 3.48 % 3.48 % 20.00 %
Residential Bridge Loans⁽³⁾
100,183
106,673
4.05 % 4.47 % 4.47 % 20.00 %
Securitized commercial loan⁽³⁾
—
—
— % 3.28 % 3.28 % — %
Other securities 60,237
89,823
2.94 % 3.28 % 3.28 % 27.96 %
Interest rate swaps n/a
n/a
n/a
n/a
0.51 % n/a
Total $ 3,251,686
$ 3,533,703
1.86 % 1.66 % 2.18 % 8.00 %

December 31, 2016
Agency RMBS $ 1,427,674
$ 1,465,384
0.96 % 0.77 % 0.77 % 4.25 %
Agency CMBS 56,365
61,200
1.07 % 1.69 % 1.69 % 7.18 %
Non-Agency RMBS 218,712
308,165
2.53 % 2.24 % 2.24 % 29.43 %
Non-Agency CMBS 255,656
358,919
2.55 % 2.24 % 2.24 % 28.21 %
Whole-Loans⁽³⁾
154,391
192,136
2.90 % 2.63 % 2.63 % 20.00 %
Securitized commercial loan⁽³⁾
6,790
13,566
3.24 % 2.97 % 2.97 % 50.00 %
Other securities 36,056
67,762
2.32 % 2.74 % 2.74 % 45.02 %
Interest rate swaps n/a
n/a
n/a
n/a
1.10 % n/a
Total $ 2,155,644
$ 2,467,132
1.48 % 1.27 % 2.37 % 11.68 %



Collateral	Borrowings Outstanding		Value of Collateral Pledged		Weighted Average Interest Rate end of period		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP) ⁽¹⁾		Weighted Average Haircut end of period
December 31, 2019
Agency CMBS, at fair value	$	1,352,248	$	1,400,230	2.05	%	2.51	%	2.51	%	5.13	%
Agency RMBS, at fair value	348,274		356,687		1.99	%	2.47	%	2.47	%	5.35	%
Non-Agency RMBS, at fair value	30,481		45,816		3.56	%	3.93	%	3.93	%	36.70	%
Non-Agency CMBS, at fair value	190,390		246,797		3.05	%	3.64	%	3.64	%	22.46	%
Residential Whole Loans, at fair value⁽²⁾	476,172		529,495		3.32	%	4.03	%	4.03	%	7.88	%
Residential Bridge Loans⁽²⁾	29,869		34,897		3.93	%	4.61	%	4.61	%	20.00	%
Commercial loans, at fair value⁽²⁾	224,594		350,213		3.93	%	4.71	%	4.71	%	33.60	%
Securitized commercial loan, at fair value⁽²⁾	116,087		171,640		3.93	%	3.61	%	3.61	%	31.38	%
Other securities, at fair value	56,762		80,031		3.23	%	3.85	%	3.85	%	28.30	%
Interest rate swaps	n/a		n/a		n/a		n/a		(0.33	)%	n/a
Total	$	2,824,877	$	3,215,806	2.61	%	3.14	%	2.81	%	11.11	%

December 31, 2018
Agency CMBS, at fair value	$	1,392,649	$	1,486,142	2.71	%	2.06	%	2.06	%	5.03	%
Agency RMBS, at fair value	14,650		19,837		3.09	%	2.00	%	2.00	%	21.66	%
Non-Agency RMBS, at fair value	30,922		50,555		4.06	%	3.57	%	3.57	%	35.21	%
Non-Agency CMBS, at fair value	134,814		186,552		4.05	%	3.69	%	3.69	%	25.59	%
Residential Whole Loans, at fair value⁽²⁾	863,356		1,041,885		4.08	%	4.01	%	4.01	%	15.94	%
Residential Bridge Loans⁽²⁾	204,754		221,486		4.50	%	4.50	%	4.50	%	20.00	%
Commercial loans, at fair value⁽²⁾	131,788		196,123		4.55	%	4.65	%	4.65	%	35.00	%
Securitized commercial loan, at fair value⁽²⁾	7,543		13,688		4.30	%	4.01	%	4.01	%	45.00	%
Other securities, at fair value	38,361		59,780		4.18	%	3.81	%	3.81	%	35.83	%
Interest rate swaps	n/a		n/a		n/a		n/a		(0.19	)%	n/a
Total	$	2,818,837	$	3,276,048	3.45	%	2.66	%	2.47	%	12.63	%


(1)	~~For the years ended December 31, 2017 and 2016, excludes approximately $23.6 million and $37.0 million of cash collateral posted.~~

~~(2)~~

The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps, net of premium amortization on MAC swaps, of approximately ~~$14.1~~$9.5 million received and ~~$27.2~~$6.2 million received for the years ended December 31, ~~2017~~2019 and ~~2016.~~2018, respectively. While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements. See "Non-GAAP Financial ~~Measures".~~Measures."


~~(3)~~(2)	Repurchase agreement borrowings collateralized by ~~Whole-Loans~~Whole Loans, Bridge Loans and securitized commercial ~~loan~~loans owned through trust certificates. The trust certificates are eliminated upon consolidation.

We are also required to pledge cash or securities as collateral as part of a margin arrangement for our derivative contracts, calculated daily, subject either to the terms of individual agreements for bilateral agreements and the clearinghouse rules in the case of cleared swaps. The amount of margin that we are required to post will vary and generally reflects collateral posted with respect to swaps that are in an unrealized loss position to us and a percentage of the aggregate notional amount of swaps per counterparty as well as margin posted with our clearing broker, pursuant to clearinghouse rules and practices, for cleared swaps. Conversely, if our bilateral swaps and swaptions are in an unrealized gain position, our counterparties are required to post collateral with us, under the same terms that we post collateral with them. ~~On occasion we~~We may enter into a MAC interest rate swap in which we may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, these interest rate swaps are also subject to margin requirements.

Convertible Senior Unsecured Notes

In ~~October 2017, the Company completed the issuance of $115.0~~August 2019, we issued an additional $40.0 million aggregate principal amount of ~~its~~ 6.75% ~~Convertible Senior~~convertible senior unsecured notes (the "August 2019 Reopened Notes") for net proceeds of $38.8 million. The August 2019 Reopened Notes ~~due~~have substantially identical terms as the existing notes issued in October 2017. The notes mature on October 1, 2022, ~~(the “Convertible Notes”) in a public offering, which included $15.0~~unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

In December 2019, we issued an additional $50.0 million aggregate principal amount ~~sold by~~of 6.75% convertible senior unsecured notes (the "December 2019 Reopened Notes") for net proceeds of $49.2 million. The December 2019 Reopened Notes have substantially identical terms as the ~~Company to the underwriter on the same terms and conditions to cover over-allotments.~~existing notes issued in October 2017. The notes ~~are unsecured, pay interest semiannually at a rate of 6.75% per annum and are convertible at the option of the holder into shares of our common stock. The notes will~~ mature inon October 1, 2022, unless earlier converted, redeemed or repurchased ~~in accordance with~~by the holders pursuant to their ~~terms. We do~~terms, and are not ~~have~~redeemable by us except during the ~~right to redeem the notes~~final three months prior to maturity, but may be required to repurchase the notes from holders under certain circumstances. The notes have an initial conversion rate of 83.1947 shares of common stock per $1,000 principal amount of the notes (equivalent to an initial conversion price of $12.02 per share), subject to adjustment. The net proceeds from the offering were approximately $111.1 million after deducting underwriting discounts and offering expenses.maturity.

At-The-Market Program

In April 2017, ~~the Company~~we entered into an equity distribution agreement with JMP Securities LLC, or ~~"JMP",~~"JMP," under which ~~the Company~~we may offer and sell up to $100.0 million shares of common stock in an At-The-Market equity offering from time to time through JMP. ~~We did not sell any~~During the year ended December 31, 2019, we sold 299,497 shares under this agreement ~~during 2017.~~for net proceeds of $3.0 million.

Secondary Public Offering

In September 2018, we completed a secondary public offer in which we sold 6,500,000 shares of our common stock, including all 303,422 shares in treasury stock, at a price of $10.85 per share, for net proceeds of approximately $67.7 million after subtracting underwriting commissions and offering expenses of approximately $2.8 million.

In May 2019, we completed a secondary public offering in which we sold 5,000,000 shares of our common stock at a price of $10.14 per share, for net proceeds of approximately $49.3 million after subtracting underwriting commissions and offering expenses of approximately $1.4 million. We used the net proceeds from the offering to opportunistically invest in our target assets in accordance with our investment guidelines.

Securitized Debt

In May 2019, a wholly owned subsidiary completed a residential mortgage-backed securitization comprised of a portion of its Residential Whole Loan portfolio. RMI 2015 Trust and RNR Trust collectively transferred $945.5 million of Non-QM Residential Whole Loans, to a wholly-owned subsidiary of the Company, Arroyo Mortgage Trust 2019-2 ("Arroyo Trust") and Arroyo Trust issued $919.0 million of mortgage-backed notes and we retained the subordinate Non-Offered Securities. At December 31, 2019, Residential Whole Loans, with an outstanding principal balance of approximately $814.0 million, serve as collateral for the Arroyo Trust's securitized debt.

The following table summarizes the consolidated Arroyo Trust's issued mortgage-backed notes at December 31, 2019 which is classified in "Securitized debt" in the Consolidated Balance Sheets (dollars in thousands):



Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1	$	681,668	3.3%	$	681,666	4/25/2049
Class A-2	36,525		3.5%	36,524		4/25/2049
Class A-3	57,866		3.8%	57,864		4/25/2049
Class M-1	25,055		4.8%	25,055		4/25/2049
Subtotal	801,114			$	801,109
Less: Unamortized deferred financing costs	N/A			5,298
Total	$	801,114		$	795,811

Cash Generated from Operations

For the year ended December 31, ~~2017,~~2019, net cash used in operating activities ~~increased~~was approximately $52.2 million. This was primarily attributable to the net income we earned on our investments net of adjustments pertaining to the amortization/accretion of premiums and discounts and other non-cash items less operating expenses, general and administrative and margin settlements on our interest rate swaps. For the year ended December 31, 2018, net cash ~~balance~~provided by operating activities was approximately$107.1 million. This was primarily attributable to the net income we earned on our investments net of adjustments pertaining to the amortization/accretion of premiums and discounts and other non-cash items less operating expenses, general and administrative and margin settlements on our interest rate swaps. For the year ended December 31, 2017, net cash provided by operating activities was by approximately $59.4 million. This was primarily attributable to the net income we earned on our investments net of adjustments pertaining to the amortization/accretion of premiums and discounts and other non-cash ~~items. For the year ended December 31, 2016,~~items less operating ~~activities increased our cash balance by approximately $11.5 million. This was primarily attributable to the net income we earned~~expenses, general and administrative and margin settlements on our investments net of adjustments pertaining to the amortization/accretion of premiums and discounts and other non-cash items. For the year ended December 31, 2015, operating activities increased our cash balance by approximately $133.9 million. This was primarily attributable to the net income we earned on our investments net of adjustments pertaining to the amortization/accretion of premiums and discounts and other non-cash items.interest rate swaps.

Cash Provided by and Used in Investing Activities

For the year ended December 31, ~~2017, our~~2019, net cash used in investing activities ~~decreased our cash balance by~~was approximately ~~$1.2 billion.~~$478.5 million. This was primarily attributable to our investment acquisitions, including an investment from a consolidated CMBS VIEs, which was partially offset by proceeds from sales and receipts of principal payments on our investments. For the year ended December 31, ~~2016, our~~2018, net cash used in investing activities ~~increased our cash balance by~~was approximately ~~$504.6~~$716.9 million. This was primarily attributable to our investment acquisitions, including an investment from a consolidated CMBS VIE, which was partially offset by proceeds from sales of MBS and other securities and by our receipt of principal payments on MBS and other ~~securities, partially offset by cash expenditures to acquire MBS and other securities and payments made on reverse repurchase agreements.~~securities. For the year ended December 31, ~~2015, our~~2017, net cash used in investing activities ~~increased our cash balance by~~was approximately ~~$1.4~~$1.2 billion. This was primarily attributable to our to our investment acquisitions, which was partially offset by proceeds from sales, ~~of MBS~~ and ~~other securities and by our receipt~~receipts of principal payments on ~~MBS and other securities, partially offset by cash expenditures to acquire MBS and other securities and payments made on reverse repurchase agreement.~~our investments.

Cash Provided by and Used in Financing Activities

For the year ended December 31, ~~2017, our~~2019, net cash provided by financing ~~activities increased our cash balance by~~was approximately ~~$1.1 billion.~~$537.2 million. This was primarily attributable to ~~higher weighted average borrowings and~~net proceeds from financings during the ~~issuance of the convertible senior unsecured notes,~~year and a secondary public offering. Our net cash provided by financing activities was partially offset by dividends paid on our common stock. For the year ended December 31, ~~2016, our~~2018, net cash provided by financing ~~activities decreased our cash balance by~~activity was approximately ~~$494.8~~$639.6 million. This was primarily attributable to net proceeds from financings during the year and a ~~decrease in~~secondary public offering. Our net cash provided by financing activities was partially offset by dividends paid on our ~~net borrowings under repurchase agreements.~~common stock. For the year ended December 31, ~~2015, our~~2017, net cash provided by financing ~~activities decreased our cash balance by~~activity was approximately ~~$1.5~~$1.1 billion. This was primarily attributable to ~~a decrease in~~net proceeds from financings during the year, which was partially offset by dividends paid on our ~~net borrowings under repurchase agreements.~~common stock.

Contractual Obligations and Commitments

Our contractual obligations as of December 31, ~~2017~~2019 are as follows (dollars in thousands):


	Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total		Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total
Borrowings under repurchase agreements	$	3,251,686	$	—	$	—	$	—	$	3,251,686	$	2,472,651	$	142,348	$	209,878	$	—	$	2,824,877
Contractual interest on repurchase agreements	14,697		—		—		—		14,697		30,255		19,408		5,433		—		55,096
Convertible senior unsecured notes	—		—		115,000		—		115,000		—		205,000		—		—		205,000
Contractual interest on convertible senior unsecured notes	7,763		15,525		15,525		—		38,813		13,838		27,675		—		—		41,513
Investment related payables	17,217		—		—		—		17,217
Securitized debt⁽²⁾											10,581		598,452		83,560		801,114		1,493,707
Contractual interest on securitized debt⁽³⁾											52,810		67,920		62,912		678,487		862,129
Total: GAAP Basis - Excluding TBA - long positions	3,291,363		15,525		130,525		—		3,437,413		2,580,135		1,060,803		361,783		1,479,601		5,482,322
TBA—long positions	128,350		—		—		—		128,350		1,012,598		—		—		—		1,012,598
Total: Non-GAAP Basis	$	3,419,713	$	15,525	$	130,525	$	—	$	3,565,763
Total											$	3,592,733	$	1,060,803	$	361,783	$	1,479,601	$	6,494,920


(1)	The table above does not include amounts due under the Management Agreement (as defined herein) with our Manager, as those obligations do not have fixed and determinable payments.

~~Repurchase Agreements~~

At December 31, 2017, we had entered into repurchase agreement borrowings of approximately $114.9 million, which settled by January 18, 2018, with a weighted average interest rate of 2.00%, a weighted average contractual maturity of 54 days and secured by collateral of approximately $124.7 million. These borrowings are recorded as a liability in our Consolidated Balance Sheets when settled.

~~Securitized Debt~~

At December 31, 2017, we had securitized debt related to the consolidated VIEs, with a balance of $10.9 million (and a fair value of $10.9 million). The securitized debt of the VIEs can only be settled with the commercial loan that serve as collateral of the VIE and is non-recourse to us.


(2)	The securitized debt is non-recourse to us and can only be settled with the loans that serve as collateral. The collateral for the securitized debt has a principal balance of $1.8 billion. Assumes entire outstanding principal balance at December 31, 2019 is paid at maturity.


(3)	For variable rate debt, the one month LIBOR rate as of December 31, 2019 of 1.7% was used to calculate the contractual interest.

Management Agreement

On May 9, 2012, we entered into a management agreement (the "Management Agreement") with our Manager which describes the services to be provided by our Manager and compensation for such services. Our Manager is responsible for managing our operations, including: (i) performing all of our day-to-day functions; (ii) determining investment criteria in conjunction with our Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management, subject to the direction and oversight of our Board of Directors. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.50% per annum of our stockholders' equity, (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. Refer to Note 910 - "Related Party Transactions" to our Consolidated Financial Statements included in Item 8 included in this annual report on Form 10-K.

Off-Balance Sheet Arrangements

We do not have any relationships with any entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Further, other than guaranteeing certain obligations of our wholly-owned taxable REIT subsidiary or TRS and the obligations of our wholly-owned subsidiary, WMC CRE LLC, we have not guaranteed any obligations of any entities or entered into any commitment to provide additional funding to any such entities.

~~See Note 11 "Stockholder' Equity - Warrants" to the financial statements contained in this Annual Report on Form 10-K, for a description of our outstanding warrants.~~

Dividends

We intend to make regular quarterly dividend distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually, in accordance with the REIT regulations, at least 90% of its REIT taxable income for the taxable year, without regard to the deduction for dividends paid and excluding net capital gains as well as undistributed taxable income retained by a TRS. To the extent that we distribute less than 100% of our net taxable income, in accordance with the REIT regulations, for any given year, we will pay tax on such amount at the regular corporate rates. We intend to pay regular quarterly dividends to our stockholders based on our net taxable income, if and to the extent authorized by our Board of Directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debts payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

~~Recent Developments~~

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.

We seek to manage the risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market values while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns from our assets through ownership of our common stock. While we do not seek to avoid risk completely, our Manager seeks to actively manage risk for us, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

Credit Risk

We are subject to varying degrees of credit risk in connection with our assets. Although we do not expect to encounter credit risk in our Agency ~~RMBS~~CMBS and Agency ~~CMBS,~~RMBS, we are exposed to the risk of potential credit losses from general credit spread widening related to Non-Agency RMBS, Non-Agency CMBS, Residential Whole Loans, Residential Bridge Loans, Commercial Loans and other portfolio investments in addition to unexpected increase in borrower defaults on these ~~securities, as well as our Whole-Loans.~~investments. Investment decisions are made following a bottom-up credit analysis and specific relevant risk assumptions. As part of the risk management process, our Manager uses detailed proprietary models, applicable to evaluate, depending on the asset class, house price appreciation and depreciation by region, prepayment speeds and foreclosure/default frequency, cost and timing. If our Manager determines that the proposed investment can meet the appropriate risk and return criteria as well as complement our existing asset portfolio, the investment will undergo a more thorough analysis.

As of December 31, ~~2017, 14~~2019, 16 of the counterparties that we had outstanding repurchase agreement borrowings held collateral which we posted as security for such borrowings in excess of 5% of our ~~Stockholders’~~stockholders’ equity. Prior to entering into a repurchase agreement with any particular institution, our Manager does a thorough review of such potential counterparty. Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.

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 our related financing obligations. In general, we expect to finance the acquisition of our assets through financings in the form of repurchase agreements, warehouse facilities, securitizations, ~~resecuritizations,~~ bank credit facilities (including term loans and revolving facilities) and public and private equity and debt issuances in addition to transaction or asset specific funding arrangements. Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we may utilize derivative financial instruments to hedge the interest rate risk associated with our borrowings. These hedging activities may not be effective. We also may engage in a variety of interest rate management techniques that seek to mitigate changes in interest rates or other potential influences on the values of our assets.

Interest Rate Effect on Net Interest Income

Our operating results will depend in large part on differences between the income earned on our assets and our borrowing costs. The cost of our borrowings is generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase and the yields earned on our leveraged fixed-rate mortgage assets will remain static. Further, the cost of such financing could increase at a faster pace than the yields earned on our leveraged ARM and hybrid ARM assets. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further,

an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.

Interest Rate Cap Risk

To the extent we invest in adjustable-rate RMBS and Whole-Loans, such ~~securities are generally~~instruments may be subject to interest rate caps, which potentially could cause such ~~RMBS~~instruments to acquire many of the characteristics of fixed-rate securities if interest rates were to rise above the cap levels. This issue is magnified to the extent we acquire ARM and hybrid ARM assets that are not based on mortgages which are fully indexed. In addition, ARM and hybrid ARM assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding or a portion of the incremental interest rate increase being deferred. To the extent we invest in such ARM and/or hybrid ARM assets, we could potentially receive less cash

income on such assets than we would need to pay the interest cost on our related borrowings. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “Interest Rate Risk.”

Interest Rate Effects on Fair value

Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than those of our liabilities, including our hedging instruments. See “Market Risk” below.

The impact of changing interest rates on fair value can change significantly when interest rates change materially. Therefore, the volatility in the fair value of our assets could increase significantly in the event interest rates change materially. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, changes in actual interest rates may have a material adverse effect on us.

Market Risk

~~Market value risk.~~Our MBS and other assets are reflected at their fair value with unrealized gains and losses included in earnings. The fair value of our investments fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the fair value of these assets would be expected to decrease; conversely, in a decreasing interest rate environment, the fair value of these securities would be expected to increase.

The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments, including interest rate swaps, Interest-Only Strips, and net interest income at December 31, ~~2017,~~2019, assuming a static portfolio of assets. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilizes our Manager’s assumptions, models and estimates, which are based on our Manager’s judgment and experience.


Change in Interest Rates	Percentage Change in Projected Net Interest Income		Percentage Change in Projected Portfolio Value		Percentage Change in Projected Net Interest Income		Percentage Change in Projected Portfolio Value
+1.00%	(7.08	)%	(0.32	)%	34.38	%	(1.09	)%
+0.50%	(4.74	)%	(0.11	)%	19.67	%	(0.52	)%
-0.50%	2.89	%	0.03	%	11.99	%	0.48	%
-1.00%	6.32	%	(0.07	)%	28.52	%	0.94	%

While the table above reflects the estimated immediate impact of interest rate increases and decreases on a static portfolio, we may rebalance our portfolio from time to time either to seek to take advantage of or reduce the impact of changes in interest rates. It is important to note that the impact of changing interest rates on market value and net interest income can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the market value of our assets could increase significantly when interest rates change beyond amounts shown in the table above. In addition, other factors impact the market value of and net interest income from our interest rate-sensitive investments and derivative instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, interest income would likely differ from that shown above and such difference might be material and adverse to our stockholders.

Certain assumptions have been made in connection with the calculation of the information set forth in the table above 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, ~~2017.~~2019. The analysis presented utilizes assumptions and estimates based on our Manager’s judgment and experience. Furthermore, while we generally expect to retain such assets and the associated interest rate risk, future purchases and sales of assets could materially change our interest rate risk profile.

Prepayment Risk

The value of our Agency and Non-Agency RMBS and our Residential ~~Whole-Loans~~Whole Loans may be affected by prepayment rates on the underlying residential mortgage. We acquire RMBS and Residential ~~Whole-Loans~~Whole Loans and anticipate that the underlying residential mortgages will prepay at a projected rate generating an expected yield. If we purchase assets at a premium to par value, when borrowers prepay their residential mortgage loans faster than expected, the corresponding prepayments may reduce the

expected yield on our residential mortgage assets because we will have to amortize the related premium on an accelerated basis and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we are required to make a retrospective adjustment to historical amortization. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their residential mortgage loans slower than expected, such decrease may reduce the expected yield on such assets because we will not be able to accrete the related discount as quickly as originally anticipated and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we will be required to make a retrospective adjustment to historical amortization.

The value of our Agency and Non-Agency CMBS, as well as Commercial ~~Whole-Loans~~Whole Loans, will also be affected by prepayment ~~rates,~~rates; however, commercial mortgages frequently limit the ability of the borrower to prepay, thereby providing a certain level of prepayment protection. Common restrictions include yield maintenance and prepayment penalties, the proceeds of which are generally at least partially allocable to these securities, as well as defeasance.

Likewise, the value of our ABS and other structured securities will also be affected prepayment rates. The collateral underlying such securities may, similar to most residential mortgages, allow the borrower to prepay at any time or, similar to commercial mortgages, limit the ability of the borrower to prepay by imposing lock-out provisions, prepayment penalties and/or make whole provisions.

Extension Risk

Most residential mortgage loans do not prohibit the partial or full prepayment of principal outstanding. Accordingly, while the stated maturity of a residential mortgage loan may be 30 years, or in some cases even longer, historically the vast majority of residential mortgage loans are satisfied prior to their maturity date. In periods of rising interest rates, borrowers have less incentive to refinance their existing mortgages and mortgage financing may not be as readily available. This generally results in a slower rate of prepayments and a corresponding longer weighted average life for ~~RMBS.~~RMBS and Residential Whole Loans. The increase, or extension, in weighted average life is commonly referred to as “Extension Risk” which can negatively impact our portfolio. To the extent we receive smaller pre-payments of ~~principal;~~principal, we will have less capital to invest in new assets. This is extremely detrimental in periods of rising interest rates as we will be unable to invest in new higher coupon investments and a larger portion of our portfolio will remain invested in lower coupon investments. Further, our borrowing costs are generally short-term and, even if hedged, are likely to increase in a rising interest rate environment, thereby reducing our net interest margin. Finally, to the extent we acquired securities at a discount to par, a portion of the overall return on such investments is based on the recovery of this discount. Slower principal prepayments will result in a longer recovery period and a lower overall return on our investment.

Prepayment rates on Agency and Non-Agency CMBS, as well as Commercial ~~Whole-Loans~~Whole Loans, are generally less volatile than residential mortgage assets as commercial mortgages usually limit the ability of the borrower to prepay the mortgage prior to maturity or a period shortly before maturity. Accordingly, extension risk for Agency and Non-Agency CMBS and Commercial ~~Whole-Loans~~Whole Loans is generally less than RMBS and Residential ~~Whole-Loans~~Whole Loans as it presumed that other than defaults (i.e., involuntary prepayments), most commercial mortgages will remain outstanding for the contractual term of the mortgage.

Prepayment rates on ABS and our other structured securities will be determined by the underlying collateral. The extension risk of such securities will generally be less than residential mortgages, but greater than commercial mortgages.

Real Estate Risk

Residential and commercial property values are subject to volatility and may be adversely affected by a number of factors, including, but not limited to: national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the supply of housing stock); changes or continued weakness

in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.

Counterparty Risk

The following discussion on counterparty risk reflects how these transactions are structured, rather than how they are presented for financial reporting purposes.

When we engage in repurchase transactions, we generally sell securities to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same securities back to us at the end of

the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us, we could incur a loss on the transaction up to the amount of the haircut (assuming there was no change in the value of the securities).

If a counterparty to a bi-lateral interest rate swap cannot perform under the terms of the interest rate swap, we may not receive payments due under that agreement, and thus, we may lose any unrealized gain associated with the interest rate swap. We may also risk the loss of any collateral we have pledged to secure our obligations under interest rate swap if the counterparty becomes insolvent or files for bankruptcy. In the case of a cleared swap, if our clearing broker were to default, become insolvent or file for bankruptcy, we may also risk the loss of any collateral we have posted to the clearing broker unless we were able to transfer or “port” our positions and held collateral to another clearing broker. In addition, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended. Most of our interest swaps are currently cleared through a central clearing house which reduces but does not eliminate the aforementioned risks. Also see “Liquidity Risk” below.

As of December 31, 2017, we have entered into five master securities forward trading agreements, or MSFTAs, which may govern the trading of some or all TBA transactions. Pursuant to the terms of these MSFTAs, we and our counterparties would be required to post margin to the other when the mark to market exposure of the TBA transactions executed under the agreement exceed certain thresholds. We expect to continue to negotiate and enter into MSFTAs with additional TBA counterparties. The margin provisions of the MSFTA help to mitigate, but do not eliminate, counterparty risk associated with TBA transactions. If a counterparty to a TBA transaction cannot perform under the terms of the trade, we may not receive securities we have agreed to purchase or payment for securities we have agreed to sell, and thus, we may lose any unrealized gain associated with such transaction.

Prior to entering into a trading agreement or transaction with any particular institution where we take on counterparty risk, our Manager does a thorough review of such potential counterparty. Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.

Funding Risk

We have financed a substantial majority of our assets with repurchase agreement financing. Over time, as market conditions change, in addition to these financings, we may use other forms of leverage. Changes in the regulatory environment, as well as, weakness in the financial markets, the residential mortgage markets, the commercial mortgage markets, the asset-backed securitization markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.

Liquidity Risk

Our liquidity risk is principally associated with the financing of long-maturity assets with short-term borrowings in the form of repurchase agreements. 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, margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position. Our inability to post adequate collateral for a margin call by the counterparty could result in a condition of default under our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse consequence on our business and results of operations.

In an instance of severe volatility, or where the additional stress on liquidity resulting from volatility is sustained over an extended period of time, we could be required to sell securities, possibly even at a loss to generate sufficient liquidity to satisfy

collateral and margin requirements which could have a material adverse effect on our financial position, results of operations and cash flows.

Additionally, if one or more of our repurchase agreement counterparties chose not to provide on-going funding, our ability to finance would decline or exist at possibly less advantageous terms. Further, if we are unable to renew, replace or expand repurchase financing with other sources of financing on substantially similar terms, it may have a material adverse effect on our business, financial position, results of operations and cash flows, due to the ~~long term~~long-term nature of our investments and relatively short-term maturities of our repurchase agreements. As such, there is no assurance that we will always be able to roll over our repurchase agreements.

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 yields earned on our existing portfolio of leveraged fixed-rate MBS and other fixed rate assets will remain static. Further, certain of our floating rate assets may contain annual or lifetime interest rate caps as well as limit the frequency or timing of changes to the underlying interest rate index. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time, as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could have a material adverse effect on our liquidity and results of operations.

In addition, the assets that comprise our investment portfolio are not traded on a public exchange. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than ~~publicly-traded~~publicly traded securities. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions. Recent regulatory changes have imposed new capital requirements and other restrictions on banks and other market intermediaries’ ability and desire to hold assets on their balance sheets and otherwise make markets in fixed income securities and other assets resulting in reduced liquidity in many sectors of the market. This regulatory trend is expected to continue. As a result of these developments, it may become increasingly difficult for us to sell assets in the market, especially in credit oriented sectors such as Non-Agency RMBS and CMBS, ABS and ~~Whole-Loans.~~Whole Loans.

We enter into interest rate swaps to manage our interest rate risk. We are required to pledge cash or securities as collateral as part of a margin arrangement, calculated daily, in connection with the interest rate swaps. The amount of margin that we are required to post will vary and generally reflects collateral required to be posted with respect to interest rate swaps that are in an unrealized loss position to us and is generally based on a percentage of the aggregate notional amount of interest rate swaps per counterparty. Margin calls could adversely affect our liquidity. Our inability to post adequate collateral for a margin call could result in a condition of default under our interest rate swap agreements, thereby resulting in liquidation of the collateral pledged by us, which may have a material adverse consequence on our business, financial position, results of operations and cash flows. Conversely, if our interest rate swaps are in an unrealized gain position, our counterparties to bilateral swaps are required to post collateral with us, under the same terms that we post collateral with them. ~~On occasion, we may~~We generally enter into a MAC interest rate swap in which we ~~may~~ receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, MAC interest rate swaps are ~~also~~ subject to the margin requirements previously described.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily directly correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with GAAP and our distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at least 90% of our net taxable income on an annual basis, in accordance with the REIT regulations, in order to maintain our REIT qualification. In each case, our activities and consolidated balance sheets are measured with reference to historical cost and/or fair market value without considering inflation.

Foreign Investment risk

We have invested in ~~Non~~non U.S. CMBS transactions and, in the future, we may make other investments in non U.S. issuers and transactions. These investments present certain unique risks, including those resulting from future political, legal, and economic developments, which could include favorable or unfavorable changes in currency exchange rates, exchange control regulations (including currency blockage), expropriation, nationalization, or confiscatory taxation of assets, adverse changes in investment capital or exchange control regulations (which may include suspension of the ability to transfer currency from a country), political changes, diplomatic developments, difficulty in obtaining and enforcing judgments against non U.S. entities, the possible imposition of the applicable country’s governmental laws or restrictions, and the reduced availability of public information concerning issuers. In the event of a nationalization, expropriation, or other confiscation of assets, we could lose our entire investment in a security. Legal remedies available to investors in certain jurisdictions may be more limited than those available to investors in the United States. Issuers of non U.S. securities may not be subject to the same degree of regulation as U.S. issuers.

Furthermore, non U.S. issuers are not generally subject to uniform accounting, auditing, and financial reporting standards or other regulatory practices and requirements comparable to those applicable to U.S. issuers. There is generally less government supervision and regulation of non U.S. exchanges, brokers, and issuers than there is in the United States, and there is greater difficulty in taking appropriate legal action in ~~Non~~non U.S. courts. There are also special tax considerations that apply to securities of non U.S. issuers and securities principally traded overseas.

To the extent that our investments are denominated in U.S. dollars, ~~the investment is~~these investments are not affected directly by changes in currency exchange rates relative to the dollar and exchange control regulations. We are, however, subject to currency risk with respect to such investments to the extent that a decline in a non U.S. issuer’s or borrower’s own currency relative to the dollar may impair such issuer’s or borrower’s ability to make timely payments of principal and/or interest on a loan or other debt security. To the extent that our investments are in non-dollar denominated securities, the value of the investment and the net investment income available for distribution may be affected favorably or unfavorably by changes in currency exchange rates relative to the dollar and exchange control regulations.

Currency exchange rates can be volatile and affected by, among other factors, the general economics of a country, the actions of governments or central banks and the imposition of currency controls and speculation. In addition, a security may be denominated in a currency that is different from the currency where the issuer is domiciled.

Currency Risk

We have and may continue in the future to invest in assets which are denominated in a currency other than ~~U.S~~U.S. dollars and may finance such investments with repurchase financing or other forms of financing which may also be denominated in a currency other than U.S. dollars. To the extent we make such investments and/or enter into such financing arrangements, we may utilize foreign currency swaps, forwards or other derivative instruments to hedge our exposure to foreign currency risk. Despite being economic hedges, we have elected not to treat such derivative instruments as hedges for accounting purposes and therefore the changes in the value of such instruments, including actual and accrued payments, will be included in our Consolidated ~~Statement~~Statements of Operations. While such transactions are entered into in an effort to minimize our foreign currency risk, there can be no assurance that they will perform as expected. If actual prepayments of the foreign denominated asset are faster, or slower, than expected, the hedge instrument is unlikely to fully protect us from changes in the valuation of such foreign currency. Further, as with interest rate swaps, there is counterparty risk associated with the future creditworthiness of such counterparty.

Table of Contents

Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements




Report of Independent Registered Public Accounting Firm	7975
Consolidated Balance Sheets as of December 31, ~~2017~~2019 and ~~2016~~ 2018	8177
Consolidated Statement of Operations for the years ended December 31, ~~2017,~~2019, December 31, ~~2016~~2018 and December 31, ~~2015~~ 2017	8379
Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, ~~2017,~~2019, December 31, ~~2016~~2018 and December 31, ~~2015~~ 2017	8480
Consolidated Statement of Cash Flow for the years ended December 31, ~~2017,~~2019, December 31, ~~2016~~2018 and December 31, ~~2015~~ 2017	8581
Notes to Consolidated Financial Statements	8884

Index to Financial Statement Schedules
Schedule IV—Mortgage Loans on Real Estate	~~134~~137

Financial Statements Schedules other than the one listed above are omitted because the required information is not applicable or deemed not material, or the required information is presented in the financial statements and/or in the notes to financial statements.

Report of Independent Registered Public Accounting Firm

To theBoard of Directors and Stockholders of Western Asset Mortgage Capital Corporation:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Western Asset Mortgage Capital Corporation and its ~~subsidiary~~subsidiaries (the “Company”) as of December 31, ~~2017~~2019 and ~~2016,~~2018, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, ~~2017,~~2019, including the related notes and accompanying schedule of mortgage loans on real estate as of December 31, ~~2017~~2019 (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, ~~2017,~~2019, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, ~~2017~~2019 and ~~2016,~~ 2018,and the results of ~~their~~ itsoperations and ~~their~~ itscash flows for each of the three years in the period ended December 31, ~~2017~~ 2019in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2017,~~2019, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ~~("PCAOB")~~(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers, LLP

Los Angeles, California

March ~~29, 2018~~6, 2020

We have served as the Company’s auditor since 2011.

~~Table of Contents~~

Western Asset Mortgage Capital Corporation and ~~Subsidiary~~Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)


	December 31, 2017			December 31, 2016			December 31, 2019			December 31, 2018
Assets:
Cash and cash equivalents	$	48,024		$	46,172		$	31,331		$	21,987
Agency mortgage-backed securities, at fair value ($2,833,595 and $1,526,584 pledged as collateral, at fair value, respectively)	2,858,600			1,841,594
Non-Agency mortgage-backed securities, at fair value ($266,189 and $667,084 pledged as collateral, at fair value, respectively)	378,158			667,161
Other securities, at fair value ($89,823 and $67,762 pledged as collateral, at fair value, respectively)	122,065			67,762
Residential Whole-Loans, at fair value ($237,423 and $192,136 pledged as collateral, at fair value, respectively)	237,423			192,136
Residential Bridge Loans ($64,526 and $0 at fair value and $106,673 and $0 pledged as collateral, respectively)	106,673			—
Securitized commercial loan, at fair value	24,876			24,225
Restricted cash							52,948			55,808
Agency mortgage-backed securities, at fair value ($1,756,917 and $1,505,979 pledged as collateral, at fair value, respectively)							1,795,255			1,505,979
Non-Agency mortgage-backed securities, at fair value ($292,613 and $237,107 pledged as collateral, at fair value, respectively)							361,833			250,856
Other securities, at fair value ($80,031 and $59,780 pledged as collateral, at fair value, respectively)							80,161			59,906
Residential Whole-Loans, at fair value ($1,375,860 and $1,041,885 pledged as collateral, at fair value, respectively)							1,375,860			1,041,885
Residential Bridge Loans ($33,269 and $211,999 at fair value and $34,897 and $221,486 pledged as collateral, respectively)							36,419			221,719
Securitized commercial loans, at fair value							909,040			1,013,511
Commercial Loans, at fair value ($350,213 and $196,123 pledged as collateral, at fair value, respectively)							370,213			216,123
Investment related receivable	7,665			33,600			19,931			42,945
Accrued interest receivable	13,603			18,812
Interest receivable							19,413			21,959
Due from counterparties	86,930			243,585			98,947			39,623
Derivative assets, at fair value	728			20,571			5,111			2,606
Other assets	2,161			398			4,509			2,488
Total Assets⁽¹⁾	$	3,886,906		$	3,156,016		$	5,160,971		$	4,497,395
Liabilities and Stockholders' Equity:
Liabilities:
Borrowings under repurchase agreements, net	$	3,251,686		$	2,155,644
Repurchase agreements, net							$	2,824,801		$	2,818,837
Convertible senior unsecured notes, net	108,743			—			197,299			110,060
Securitized debt, at fair value	10,945			10,659
Accrued interest payable	8,322			16,041
Investment related payables	17,217			341,458
Securitized debt, net ($681,643 and $949,626 at fair value and $142,905 and $246,802 held by affiliates, respectively)							1,477,454			949,626
Interest payable (includes $647 and $816 on securitized debt held by affiliates, respectively)							15,001			8,532
Due to counterparties	1,490			740			709			17,781
Derivative liability, at fair value	4,346			182,158			6,370			10,130
Accounts payable and accrued expenses	3,118			3,255			3,188			3,858
Payable to affiliate	2,041			2,584			2,148			4,615
Dividend payable	12,960			12,995			16,592			14,916
Other liabilities							52,948			56,031
Total Liabilities⁽²⁾	3,420,868			2,725,534			4,596,510			3,994,386
Commitments and contingencies
Stockholders' Equity:
Common stock, $0.01 par value, 500,000,000 shares authorized, and 41,794,079 and 41,919,801 outstanding, respectively	419			419
Common stock, $0.01 par value, 500,000,000 shares authorized, and 53,523,876 and 48,116,379 outstanding, respectively							535			481
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding	—			—			—			—
Treasury stock, at cost 125,722 and 0 shares held, respectively	(1,232		)	—
Additional paid-in capital	768,763			765,042			889,227			833,810
Retained earnings (accumulated deficit)	(301,912		)	(334,979		)	(325,301		)	(331,282		)
Total Stockholders' Equity	466,038			430,482			564,461			503,009
Total Liabilities and Stockholders' Equity	$	3,886,906		$	3,156,016		$	5,160,971		$	4,497,395

See notes to consolidated financial statements.

~~Table of Contents~~

Western Asset Mortgage Capital Corporation and ~~Subsidiary~~Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)


(1)	Assets of consolidated VIEs included in the total assets above:

December 31, 2017 December 31, 2016
Residential Whole-Loans, at fair value ($237,423 and $192,136 pledged as collateral, at fair value, respectively) $ 237,423
$ 192,136
Residential Bridge Loans ($64,526 and $0 at fair value and $106,673 and $0 pledged as collateral, respectively) 106,673
—
Securitized commercial loan, at fair value 24,876
24,225
Investment related receivable 7,665
1,241
Accrued interest receivable 3,358
1,622
Total assets of consolidated VIEs $ 379,995
$ 219,224



	December 31, 2019		December 31, 2018
Cash and cash equivalents	$	7,589	$	674
Restricted cash	52,948		55,808
Residential Whole-Loans, at fair value ($1,375,860 and $1,041,885 pledged as collateral, at fair value, respectively)	1,375,860		1,041,885
Residential Bridge Loans ($31,748 and $211,766 at fair value and $34,897 and $221,486 pledged as collateral, respectively)	34,897		221,486
Securitized commercial loans, at fair value	909,040		1,013,511
Commercial Loans, at fair value ($90,788 and $196,123 pledged as collateral, respectively)	90,788		196,123
Investment related receivable	19,138		42,945
Interest receivable	10,829		15,540
Other assets	90		178
Total assets of consolidated VIEs	$	2,501,179	$	2,588,150


(2)	Liabilities of consolidated VIEs included in the total liabilities above:


Securitized debt, at fair value	$	10,945	$	10,659
Accrued interest payable	70		85
Securitized debt, net ($681,643 and $949,626 at fair value and $142,905 and $246,802 held by affiliates, respectively)					$	1,477,454	$	949,626
Interest payable (includes $647 and $816 on securitized debt held by affiliates, respectively)					3,886		2,419
Accounts payable and accrued expenses	189		2		185		708
Other liabilities					52,948		56,033
Total liabilities of consolidated VIEs	$	11,204	$	10,746	$	1,534,473	$	1,008,786

See notes to consolidated financial statements.

Western Asset Mortgage Capital Corporation and ~~Subsidiary~~Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)


	For the years ended December 31,									For the years ended December 31,
	2017			2016			2015			2019			2018			2017
Net Interest Income
Interest income	$	124,291		$	123,756		$	152,704		$	217,264		$	209,362		$	124,291
Interest expense	48,373			32,430			27,605
Interest expense (includes $5,674, $13,739 and $981 on securitized debt held by affiliates, respectively)										150,274			138,240			48,373
Net Interest Income	75,918			91,326			125,099			66,990			71,122			75,918

Other Income (Loss)
Realized gain (loss) on sale of investments, net	20,598			(21,991		)	8,279			28,278			(63,257		)	20,598
Other than temporary impairment	(22,873		)	(32,286		)	(19,791		)	(8,574		)	(11,180		)	(22,873		)
Unrealized gain (loss), net	28,396			(17,107		)	(34,011		)	107,529			(24,671		)	28,396
Gain (loss) on derivative instruments, net	3,292			(20,735		)	(68,895		)	(103,727		)	77,969			3,292
Other, net	1,031			180			2,318			2,204			(189		)	1,031
Other Income (Loss)	30,444			(91,939		)	(112,100		)	25,710			(21,328		)	30,444

Expenses
Management fee to affiliate	8,100			10,448			10,874			7,354			8,673			8,100
Other operating expenses	2,419			1,045			2,014			5,519			6,076			2,419
General and administrative expenses:
Compensation expense	2,692			3,022			3,762			2,591			2,186			2,692
Professional fees	3,242			4,814			4,368			3,980			4,299			3,242
Other general and administrative expenses	1,325			1,917			1,465			1,500			1,442			1,325
Total general and administrative expenses	7,259			9,753			9,595			8,071			7,927			7,259
Total Expenses	17,778			21,246			22,483			20,944			22,676			17,778

Income (loss) before income taxes	88,584			(21,859		)	(9,484		)
Income tax provision (benefit)	3,487			3,156			—
Net income (loss)	$	85,097		$	(25,015	)	$	(9,484	)
Income before income taxes										71,756			27,118			88,584
Income tax provision										1,057			709			3,487
Net income										$	70,699		$	26,409		$	85,097

Net income (loss) per Common Share—Basic	$	2.03		$	(0.61	)	$	(0.25	)
Net income (loss) per Common Share—Diluted	$	2.03		$	(0.61	)	$	(0.25	)
Net income per Common Share — Basic										$	1.37		$	0.61		$	2.03
Net income per Common Share — Diluted										$	1.37		$	0.61		$	2.03

See notes to consolidated financial statements.

Western Asset Mortgage Capital Corporation and ~~Subsidiary~~Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

(in thousands—except shares and share data)


	Common Stock Outstanding				Additional Paid-In Capital				Retained Earnings (Accumulated) Deficit			Treasury Stock				Total			Common Stock Outstanding				Additional Paid-In Capital			Retained Earnings (Accumulated) Deficit			Treasury Stock			Total
	Shares		Par					Shares				Treasury Stock			Par								Additional Paid-In Capital			Retained Earnings (Accumulated) Deficit			Treasury Stock			Total
Balance at December 31, 2014	41,719,801		$	417	Additional Paid-In Capital			$	Retained Earnings (Accumulated) Deficit	760,925		$	(138,130	)		Total		$	—		$	623,212
Grants of restricted stock	200,000		2		(2		)		—			—				—
Vesting of restricted stock	—		—		2,301				—			—				2,301
Net income (loss)	—		—		—				(9,484		)	—				(9,484		)
Dividends on common stock	—		—		59				(104,440		)	—				(104,381		)
Balance at December 31, 2015	41,919,801		419		763,283				(252,054		)	—				511,648
Vesting of restricted stock	—		—		1,699				—			—				1,699
Net income (loss)	—		—		—				(25,015		)	—				(25,015		)
Dividends on common stock	—		—		60				(57,910		)	—				(57,850		)
Balance at December 31, 2016	41,919,801		419		765,042				(334,979		)	—				430,482			41,919,801		$	419	$	765,042		$	(334,979	)	$	—		$	430,482
Vesting of restricted stock	—		—		981				—			—				981			—		—		981			—			—			981
Equity component of convertible senior unsecured notes	—		—		2,656				—			—				2,656			—		—		2,656			—			—			2,656
Treasury Stock	(125,722	)	—		—				—			(1,232		)		(1,232		)	(125,722	)	—		—			—			(1,232		)	(1,232		)
Net income (loss)	—		—		—				85,097			—				85,097
Net income																			—		—		—			85,097			—			85,097
Dividends on common stock	—		—		84				(52,030		)	—				(51,946		)	—		—		84			(52,030		)	—			(51,946		)
Balance at December 31, 2017	41,794,079		$	419	$	768,763			$	(301,912	)	$	(1,232	)		$	466,038		41,794,079		419		768,763			(301,912		)	(1,232		)	466,038
Net proceeds from public offerings of common stock																			6,196,578		62		64,818			—			—			64,880
Offering costs,																			—		—		(373		)	—			—			(373		)
Vesting of restricted stock																			—		—		265			—			—			265
Treasury Stock																			125,722		—		213			—			1,232			1,445
Net income																			—		—		—			26,409			—			26,409
Dividends on common stock																			—		—		124			(55,779		)	—			(55,655		)
Balance at December 31, 2018																			48,116,379		481		833,810			(331,282		)	—			503,009
Net proceeds from public offerings of common stock																			5,299,497		53		52,661			—			—			52,714
Offering costs																			—		—		(430		)	—			—			(430		)
Grants of restricted stock																			108,000		1		(1		)	—			—			—
Vesting of restricted stock																			—		—		564			—			—			564
Equity component of convertible senior unsecured notes																			—		—		2,445			—			—			2,445
Net income																			—		—		—			70,699			—			70,699
Dividends on common stock																			—		—		178			(64,718		)	—			(64,540		)
Balance at December 31, 2019																			53,523,876		$	535	$	889,227		$	(325,301	)	$	—		$	564,461

See notes to consolidated financial statements.

~~Table of Contents~~

Western Asset Mortgage Capital Corporation and ~~Subsidiary~~Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

For the year ended December 31,
2017 2016 2015
Cash flows from operating activities:

Net income (loss) $ 85,097
$ (25,015 ) $ (9,484 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Premium amortization and (discount accretion) on investments, net (2,070 ) (548 ) 5,086
Interest income earned added to principal of securities (46 ) (413 ) (207 )
Amortization of deferred financing costs 192
191
486
Amortization of discount on convertible senior unsecured notes 137
—
—
Restricted stock amortization 981
1,699
2,301
Premium amortization for MAC interest rate swaps —
(658 ) (1,250 )
Interest payments and basis recovered on MAC interest rate swaps 525
658
1,595
Premium on purchase of Residential Whole-Loans           (1,239 ) (574 ) (3,329 )
Premium on purchase of Residential Bridge Loans (753 ) —
—
Unrealized (gain) loss, net (28,396 ) 17,107
34,011
Unrealized (gain) loss on derivative instruments, net (148,308 ) 5,135
73,599
Other than temporary impairment 22,873
32,286
19,791
Realized (gain) loss on sale of investments, net (20,598 ) 21,991
(8,279 )
(Gain) loss on derivatives, net 156,076
(41,516 ) 13,920
Loss (gain) on foreign currency transactions, net 1
758
(2,130 )
Changes in operating assets and liabilities:
Decrease in accrued interest receivable           5,209
3,809
4,688
Increase in other assets (1,763 ) (16 ) (56 )
Increase (decrease) in accrued interest payable (7,719 ) (4,390 ) 2,858
Increase (decrease) in accounts payable and accrued expenses (274 ) 1,477
(16 )
Increase (decrease) in payable to related party           (543 ) (435 ) 314
Net cash provided by operating activities 59,382
11,546
133,898
Cash flows from investing activities:

Purchase of securities (2,881,276 ) (2,172,623 ) (1,354,274 )
Proceeds from sale of securities 1,593,914
2,273,922
2,547,364
Principal repayments and basis recovered on securities 240,785
344,937
397,073
Purchase of Residential Whole-Loans (87,640 ) (28,825 ) (225,870 )
Principal repayments on Residential Whole-Loans 42,176
52,473
20,355
Purchase of Commercial Whole-Loans —
—
(8,750 )
Principal repayments on Commercial Whole-Loans —
—
8,750
Purchase of securitized commercial loan —
—
(14,000 )
Principal repayments on securitized commercial loan 154
—
—
Purchase of Residential Bridge Loans (142,913 ) —
—
Principal repayments on Residential Bridge Loans 31,794
—
—
Payment of premium for option derivatives (16,355 ) (17,951 ) (16,064 )
Premium received from option derivatives 14,553
22,707
15,354
Premium received from credit default swap 74
—
—
Net settlements of TBAs 4,035
6,140
3,710
Proceeds from (Payments on) termination of futures, net (9,130 ) 23,609
(527 )
Proceeds from sale of interest rate swaptions —
2,075
32,186

~~See notes to consolidated financial statements.~~

~~Table of Contents~~



	For the year ended December 31,
	2019			2018			2017
Cash flows from operating activities:
Net income	$	70,699		$	26,409		$	85,097
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Premium amortization and (discount accretion), net	7,398			5,374			(2,070		)
Interest income earned added to principal of securities	—			—			(46		)
Amortization of deferred financing costs	1,488			767			192
Amortization of discount on convertible senior unsecured notes	718			550			137
Restricted stock amortization	564			265			981
Interest payments and basis recovered on MAC interest rate swaps	5,772			2,465			525
Premium on purchase of Residential Whole Loans	(15,304		)	(15,850		)	(1,239		)
Premium on purchase of Residential Bridge Loans	—			(3,889		)	(753		)
Premium on purchase of securitized commercial loans	(3,769		)	(3,019		)	—
Unrealized (gain) loss, net	(107,529		)	24,671			(28,396		)
Unrealized (gain) loss on derivative instruments, net	(9,390		)	10,381			(148,308		)
Other than temporary impairment	8,574			11,180			22,873
Realized loss on sale of real estate owned ("REO"), net	90			—			—
Realized (gain) loss on sale of investments, net	(28,368		)	63,257			(20,598		)
(Gain) loss on derivatives, net	9,631			(10,316		)	156,076
Loss on foreign currency transactions, net	—			—			1
Changes in operating assets and liabilities:
Decrease (increase) in interest receivable	2,546			(8,356		)	5,209
Decrease (increase) in other assets	1,157			(184		)	(1,763		)
Increase (decrease) in interest payable	6,469			210			(7,719		)
(Decrease) increase in accounts payable and accrued expenses	(519		)	563			(274		)
(Decrease) increase in payable to related party	(2,467		)	2,574			(543		)
Net cash (used in) provided by operating activities	(52,240		)	107,052			59,382
Cash flows from investing activities:
Purchase of securities	(1,581,485		)	(1,128,399		)	(2,881,276		)
Proceeds from sale of securities	1,136,617			2,430,054			1,593,914
Principal repayments and basis recovered on securities	126,091			123,837			240,785
Proceeds from sale of REO	1,033			—			—
Purchase of Residential Whole Loans	(563,821		)	(873,911		)	(87,640		)
Principal repayments on Residential Whole Loans	254,125			76,942			42,176
Purchase of commercial loans	(350,232		)	(235,857		)	—
Principal repayments on commercial loans	197,245			20,638			—
Purchase of securitized commercial loans	(1,109,461		)	(1,350,000		)	—
Principal repayments on securitized commercial loans	1,214,688			361,781			154
Purchase of Residential Bridge Loans	—			(418,953		)	(142,913		)
Principal repayments on Residential Bridge Loans	211,316			274,964			31,794
Payment of premium for option derivatives	(780		)	(1,757		)	(16,355		)
Premium received from option derivatives	2,158			1,236			14,553
Premium for credit default swaps, net	3,885			(297		)	74
Net settlements of TBAs	1,934			(800		)	4,035

Western Asset Mortgage Capital Corporation and ~~Subsidiary~~Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(in thousands)

For the year ended December 31,
2017 2016 2015
Premium for MAC interest rate swaps, net —
465
(3,858 )
Payments on termination of MAC interest rate swaps —
—
(186 )
Due from counterparties 8,449
(8,449 ) —
Proceeds from termination of foreign currency swaps —
6,771
—
Payments on total return swaps (552 ) 38
—
Interest payments and basis recovered on MAC interest rate swaps (525 ) (658 ) (1,193 )
Premium for interest rate swaptions, net (115 ) —
(40,215 )
Net cash provided by (used in) investing activities (1,202,572 ) 504,631
1,359,855

Cash flows from financing activities:

Payment of offering costs (94 ) —
—
Repurchase of common stock (1,094 ) —
—
Proceeds from repurchase agreement borrowings 18,438,166
15,977,505
17,544,060
Proceeds from convertible note offering 115,000
—
—
Repayments of repurchase agreement borrowings (17,342,124 ) (16,407,929 ) (18,863,913 )
Proceeds from (Repayment of) cash overdraft —
(300 ) 300
Repayments of securitized debt (68 ) —
—
Proceeds from forward contracts 8,246
112,574
242,279
Repayments of forward contracts (8,214 ) (112,640 ) (243,180 )
Payments on termination of MAC interest rate swaps containing an other-than-insignificant financing element —
—
(18,655 )
Interest payments and basis recovered on MAC interest rate swaps containing an other-than-insignificant financing element —
—
(402 )
Payments made for deferred financing costs (3,837 ) (58 ) (620 )
Due from counterparties, net (9,707 ) 14,427
(64,806 )
Due to counterparties, net 750
(9,210 ) (2,230 )
Dividends paid on common stock (51,981 ) (69,168 ) (109,272 )
Net cash provided by (used in) financing activities 1,145,043
(494,799 ) (1,516,439 )

Effect of exchange rate changes on cash and cash equivalents (1 ) 83
175

Net increase (decrease) in cash and cash equivalents 1,852
21,461
(22,511 )
Cash and cash equivalents beginning of period 46,172
24,711
47,222
Cash and cash equivalents end of period $ 48,024
$ 46,172
$ 24,711

Supplemental disclosure of operating cash flow information:

Interest paid $ 43,032
$ 32,041
$ 27,515
Income taxes paid $ 4,966
$ 2,093
$ —
Supplemental disclosure of non-cash financing/investing activities:

Repurchase of common stock, not settled $ (137 ) $ —
$ —
Principal payments of securities, not settled $ —
$ —
$ 572
Securities purchased, not settled $ (17,217 ) $ (309,086 ) $ (66,146 )

~~See notes to consolidated financial statements.~~

~~Table of Contents~~



	For the year ended December 31,
	2019			2018			2017
Proceeds from (Payments on) termination of futures, net	(12,862		)	6,112			(9,130		)
Due from counterparties, net	(2,850		)	—			8,449
Payments on total return swaps	—			—			(552		)
Interest payments and basis recovered on MAC interest rate swaps	(5,772		)	(2,465		)	(525		)
Premium for interest rate swaptions, net	(332		)	—			(115		)
Net cash used in investing activities	(478,503		)	(716,875		)	(1,202,572		)

Cash flows from financing activities:
Net proceeds from issuance of common stock	52,714			64,880			—
Payment of offering costs	(580		)	(195		)	(94		)
Repurchase of common stock	—			(1,733		)	(1,094		)
Proceeds from sale of treasury stock	—			3,177			—
Proceeds from repurchase agreement borrowings	21,381,571			21,472,963			18,438,166
Proceeds from convertible note offering	90,625			—			115,000
Repayments of repurchase agreement borrowings	(21,375,531		)	(21,905,812		)	(17,342,124		)
Proceeds from securitized debt	1,828,361			1,285,219			—
Repayments of securitized debt	(1,292,141		)	(344,612		)	(68		)
Proceeds from forward contracts	—			—			8,246
Repayments of forward contracts	—			—			(8,214		)
Payments made for deferred financing costs	(8,522		)	—			(3,837		)
Due from counterparties, net	(56,474		)	47,307			(9,707		)
Due to counterparties, net	(17,072		)	16,291			750
Increase (decrease) in other liabilities, net	(2,860		)	55,808			—
Dividends paid on common stock	(62,864		)	(53,699		)	(51,981		)
Net cash provided by financing activities	537,227			639,594			1,145,043

Effect of exchange rate changes on cash and cash equivalents	—			—			(1		)

Net increase in cash and cash equivalents	6,484			29,771			1,852
Cash, cash equivalents and restricted cash, beginning of period	77,795			48,024			46,172
Cash, cash equivalents and restricted cash, end of period	$	84,279		$	77,795		$	48,024

Supplemental disclosure of operating cash flow information:
Interest paid	$	144,987		$	138,524		$	43,032
Income taxes paid	$	549		$	1,635		$	4,966
Supplemental disclosure of non-cash financing/investing activities:
Underwriting and offering costs payable	$	27		$	177		$	—
Repurchase of common stock, not settled	$	—		$	—		$	(137	)
Securities purchased, not settled	$	—		$	—		$	(17,217	)
Derivative collateral offset against derivatives	$	—		$	—		$	(157,913	)
Dividends and distributions declared, not paid	$	16,592		$	14,916		$	12,960

Western Asset Mortgage Capital Corporation and ~~Subsidiary~~Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(in thousands)

For the year ended December 31,
2017 2016 2015
Assets of CSMC Trust $ —
$ —
$ 11,000
Liabilities of CSMC Trust $ —
$ —
$ (11,000 )
Net unsettled TBAs $ —
$ (14 ) $ —
Derivative collateral offset against derivatives $ (157,913 ) $ —
$ —
Dividends and distributions declared, not paid $ 12,960
$ 12,995
$ 24,313
Principal payments of Residential Whole-Loans, not settled $ 2,286
$ 1,241
$ —
Principal payments of Residential Bridge Loans, not settled $ 5,381
$ —
$ —



	For the year ended December 31,
	2019		2018		2017
Principal payments of Residential Whole Loans, not settled	$	17,254	$	9,230	$	2,286
Principal payments of Residential Bridge Loans, not settled	$	1,949	$	33,717	$	5,381
Other assets - Transfer of Bridge Loans to REO	$	5,029	$	143	$	—
Proceeds from sale of REO, not settled	$	728	$	—	$	—

Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:
Cash and cash equivalents	$	31,331	$	21,987	$	48,024
Restricted cash	52,948		55,808		—
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows	$	84,279	$	77,795	$	48,024

~~See notes to consolidated financial statements.~~

Western Asset Mortgage Capital Corporation and ~~Subsidiary~~Subsidiaries

Notes to Consolidated Financial Statements

(in thousands—except share and per share data)

The following defines certain of the commonly used terms in these Notes to Consolidated Financial Statements: "Agency" or "Agencies" refer to a federally chartered corporation, such as the Federal National Mortgage Association ("Fannie Mae" or "FNMA") or the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"), or an agency of the U.S. Government, such as the Government National Mortgage Association ("Ginnie Mae" or "GNMA"); references to "MBS" refer to mortgage backed securities, including residential mortgage-backed securities or ~~"RMBS",~~"RMBS," commercial mortgage-backed securities or ~~"CMBS",~~"CMBS," and "Interest-Only Strips" (as defined herein);"Agency MBS" refer to RMBS, CMBS and Interest-Only Strips issued or guaranteed by the Agencies while "Non-Agency MBS "refer to RMBS, CMBS and Interest-Only Strips that are not issued or guaranteed by the Agencies; references to "ARMs" refers to adjustable rate mortgages; references to "Interest-Only Strips" refer to interest-only ("IO") and inverse interest-only ("IIO") securities issued as part of or collateralized with MBS; references to "TBA" refer to To-Be-Announced Securities; references to ~~Residential Whole-Loans, Residential~~"Residential Whole Loans," "Residential Bridge ~~Loans~~Loans" and ~~Commercial Whole-Loans~~"Commercial Loans" (collectively ~~"Whole-Loans"~~"Whole Loans") refer to individual mortgage loans secured ~~either~~ by single family, multi-family orand commercial properties.

Note 1—Organization

Western Asset Mortgage Capital Corporation, is a Delaware corporation, and its ~~subsidiary~~subsidiaries (the "Company") commenced operations in May 2012. The Company invests in, finances and manages a diversified portfolio of real estate related securities, ~~whole-loans~~Whole Loans and other financial assets. The Company's portfolio is comprised of Agency CMBS, Agency RMBS (including TBAs), Non-Agency RMBS, Non-Agency CMBS, Non-Qualified Residential Whole Loans ("Non-QM"), Conforming Residential Whole Loans, Residential Bridge Loans and ~~Whole-Loans.~~Commercial Loans. In addition, and to a significantly lesser extent, the Company has invested in other securities including certain Agency obligations that are not technically MBS as well as certain Non U.S. CMBS and in asset-backed securities ("ABS") investments secured by a portfolio of private student loans. The Company's investment strategy is based on Western Asset Management ~~Company's~~Company, LLC's (the "Manager") perspective of which mix of portfolio assets it believes provides the Company with the best risk-reward opportunities at any given time. The Manager will vary the allocation among various asset classes subject to maintaining the Company's qualification as a REIT and maintaining its exemption from the Investment Company Act of 1940, as amended (the "1940 Act"). These restrictions limit the Company's ability to invest in non-qualifying MBS, non-real estate assets and/or assets which are not secured by real estate. Accordingly, the Company's portfolio will continue to be principally invested in qualifying MBS, ~~Whole-Loans~~Whole Loans and other real estate related assets.

The Company is externally managed by the Manager, an investment advisor registered with the Securities and Exchange Commission ("SEC"). The Manager is a wholly-owned subsidiary of Legg Mason, ~~Inc.~~Inc ("Legg Mason"). The Company operates and has elected to be taxed as a real estate investment trust or "REIT" commencing with its taxable year ended December 31, 2012.

Note 2—Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The ~~consolidated~~accompanying financial statements ~~of the Company are~~and related notes have been prepared in ~~accordance~~conformity with generally accepted accounting principles in the United States of America ("GAAP"). The consolidated financial statements include the accounts of the Company, ~~and~~ its wholly -owned ~~subsidiary~~subsidiaries and variable interest entities ("VIEs") in which it is considered the primary beneficiary. ~~Refer to Note 5 - "Variable Interest Entities" for additional information regarding the impact of consolidation of these VIE's.~~ All intercompany amounts between the Company and its ~~subsidiary~~subsidiaries and ~~consolidate VIE's~~consolidated VIEs have been eliminated in consolidation.

Variable Interest Entities

VIEs are defined as entities that by design either lack sufficient equity for the entity to finance its activities without additional subordinated financial support or are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. The Company evaluates all of its interests in VIEs for consolidation. When the interests are determined to be variable interests, the Company assesses whether it is deemed the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, it considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment ~~includes~~includes: first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the

~~Table of Contents~~

Western Asset Mortgage Capital Corporation and ~~Subsidiary~~Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(in thousands—except share and per share data)

most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers is deemed to have the power to direct the activities of a VIE.

To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, it considers all of its economic interests. This assessment requires the Company to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.

In instances ~~when a VIE is owned by both~~where the Company and its related parties have variable interests in a VIE, the Company considers whether there is a single party in the related party group that meets both the power and losses or benefits criteria on its own as though no related party relationship existed. If one party within the related party group meets both these criteria, such reporting entity is the primary beneficiary of the VIE and no further analysis is needed. If no party within the related party group on its own meets both the power and losses or benefits criteria, but the related party group ~~does~~ as a whole meets these two criteria, the determination of primary beneficiary within the related party group requires significant judgment. The analysis is based upon ~~an analysis~~qualitative as well as quantitative factors, such as the relationship of the ~~facts and circumstances~~VIE to each of the members of the related-party group, as well as the significance of the VIE's activities to those members, with the objective of determining which party is most closely associated with the VIE. ~~Determining the primary beneficiary within the related party group requires significant judgment.~~

In instances when the Company is required to consolidate a VIE that is determined to be a qualifying collateralized financing entity, under GAAP, the Company will measure both the financial assets and financial liabilities of the VIE using the fair value of either the VIE’s financial assets or financial liabilities, whichever is more observable.

Ongoing assessments of whether an enterprise is the primary beneficiary of a VIE are required.

Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Earnings (Loss) Per Share

GAAP requires use of the two-class method in computing earnings per share for all periods presented for each class of common stock and participating securities as if all earnings for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity. The Company’s participating securities are not allocated a share of the net loss, as the participating securities do not have a contractual obligation to share in the net losses of the Company.

The remaining earnings are allocated to common stockholders and participating securities, to the extent that each security shares in earnings, as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number of weighted average outstanding common shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes the weighted average outstanding common shares and all potential common shares assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential common shares.

~~Table of Contents~~

~~Western Asset Mortgage Capital Corporation and Subsidiary~~

~~Notes to Consolidated Financial Statements (Continued)~~

~~(in thousands—except share and per share data)~~

Offering Costs

Offering costs borne by the Company in connection with common stock offerings and private placements are reflected as a reduction of additional paid-in-capital. Offering costs borne by the Company in connection with its shelf registration will be deferred and recorded in "Other assets" until such time the Company completes a common stock offering where all or a portion will be reclassified and reflected as a reduction of additional paid-in-capital. The deferred offering costs will be expensed upon the expiration of the shelf if the Company does not complete aan equity offering.

Cash and Cash Equivalents

Western Asset Mortgage Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(in thousands—except share and per share data)



Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.01 par value		New York Stock Exchange



Large accelerated filer	o	Accelerated filer	x

Non-accelerated filer ~~(Do not check if a smaller reporting company)~~	o	Smaller reporting company	o

		Emerging growth company	o


(dollars in thousands) Repurchase Agreement Counterparties	Amount Outstanding		Percent of Total Amount Outstanding		Company Investments Held as Collateral		Counterparty Rating⁽¹⁾	Amount Outstanding		Percent of Total Amount Outstanding		Company Investments Held as Collateral		Counterparty Rating⁽¹⁾
Citigroup Global Markets Inc.	$	843,680	26.0	%	$	889,203	A+	$	576,634	20.4	%	$	595,702	A+
Credit Suisse AG, Cayman Islands Branch ⁽²⁾								371,725		13.2	%	501,325		A+
Royal Bank of Canada	390,374		12.0	%	411,268		AA-	337,664		12.0	%	349,439		AA-
Jefferies & Company, Inc.	303,527		9.3	%	319,410		BBB-
Barclays Capital Inc.								251,440		8.9	%	323,529		A
JP Morgan Securities LLC								203,363		7.2	%	222,882		A+
JPMorgan Chase Bank, National Association								164,265		5.8	%	175,294		A-
Mirae Asset Securities (USA) Inc.								164,227		5.8	%	168,396		BBB
UBS Securities LLC	267,175		8.2	%	280,509		A+	140,048		5.0	%	142,804		A+
Merrill Lynch Pierce Fenner & Smith Inc.	232,090		7.1	%	241,277		A+
South Street Securities LLC								108,678		3.8	%	112,174		Unrated
Bank of Montreal								105,622		3.7	%	110,139		A+
Nomura Securities International, Inc. ⁽³⁾								102,956		3.6	%	138,148		Unrated
UBS AG, London Branch								76,774		2.7	%	109,523		A+
The Bank of Nova Scotia								55,738		2.0	%	57,436		A+
SunTrust Robinson Humphrey, Inc. ⁽⁴⁾								45,187		1.6	%	47,419		Unrated
Mizuho Securities USA Inc.	197,557		6.1	%	209,733		A	39,705		1.4	%	43,320		A
Credit Suisse AG, Cayman Islands Branch	189,270		5.8	%	237,423		A
UBS AG, London Branch	150,165		4.6	%	214,962		A+
TD Securities (USA) LLC	148,603		4.6	%	154,398		AA-
JP Morgan Securities LLC	118,558		3.6	%	124,192		A+
KGS-Alpha Capital Markets, L.P.	116,868		3.6	%	122,428		Unrated
Nomura Securities International, Inc.	100,183		3.1	%	106,673		Unrated⁽²⁾
RBC (Barbados) Trading Bank Corporation	96,627		3.0	%	120,729		P-1
The Bank of Nova Scotia	76,096		2.3	%	77,184		A+
All other counterparties ⁽³⁾	20,913		0.7	%	24,314
Credit Suisse Securities (USA) LLC								37,333		1.3	%	65,703		A+
All other counterparties ⁽⁵⁾								43,518		1.6	%	52,573
Total	$	3,251,686	100.0	%	$	3,533,703		$	2,824,877	100.0	%	$	3,215,806


Collateral	Year ended December 31, 2017		Year ended December 31, 2016		Year ended December 31, 2019		Year ended December 31, 2018
Agency CMBS					$	1,488,995	$	1,845,679
Agency RMBS	$	875,600	$	1,678,450	261,210		424,525
Agency CMBS	1,289,755		19,866
Non-Agency RMBS	65,765		291,681		28,234		62,971
Non-Agency CMBS	207,423		281,679		159,336		207,293
Residential Whole-Loans	168,776		162,067
Securitized commercial loan	5,425		6,958
Residential Whole Loans					562,871		411,265
Commercial Loans					203,686		37,975
Securitized commercial loans					29,569		5,836
Residential Bridge Loans	46,135		—		105,657		205,989
Other securities	54,320		34,789		48,592		65,568
Total	$	2,713,199	$	2,475,490	$	2,888,150	$	3,267,101
Maximum borrowings during the period⁽¹⁾	$	3,336,256	$	3,059,579	$	3,100,204	$	3,573,043



Classes	Principal Balance⁽¹⁾		Coupon	Fair Value⁽¹⁾		Contractual Maturity
Class A	$	219,431	2.9%	$	219,567	3/15/2021
Class B	101,200		3.3%	101,326		3/15/2021
Class C	277,821		3.8%	278,517		3/15/2021
Class X-CP⁽²⁾	N/A		1.2%	1,026		4/15/2020
Class X-EXT⁽²⁾	N/A		—%	31		3/15/2021
	$	598,452		$	600,467



ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



Delaware (State or other jurisdiction of incorporation or organization)		27-0298092 (I.R.S. Employer Identification No.)



Period	High		Low		Close
2017
First Quarter	$	10.55	$	9.43	$	9.77
Second Quarter	$	10.84	$	9.58	$	10.30
Third Quarter	$	10.95	$	10.02	$	10.47
Fourth Quarter	$	10.75	$	9.50	$	9.95
2016
First Quarter	$	10.95	$	8.04	$	10.05
Second Quarter	$	10.18	$	8.71	$	9.39
Third Quarter	$	11.03	$	9.22	$	10.42
Fourth Quarter	$	11.18	$	9.63	$	10.07



Month	Total Number of Shares Purchased	Average Price Paid Per Share⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs at the end of period⁽¹⁾
October 1 - 31, 2017	—			—	2,100,000
November 1- 30, 2017	107,707	$	9.76	107,707	1,992,293
December 1 - 31, 2017	18,015	$	10.02	18,015	1,974,278
Total	125,722			125,722


Collateral	Balance at December 31, 2016		Proceeds		Repayments			Balance at December 31, 2017		Balance at December 31, 2018		Proceeds		Repayments			Balance at December 31, 2019
Agency CMBS										$	1,392,649	$	9,398,879	$	(9,439,280	)	$	1,352,248
Agency RMBS	$	1,427,674	$	5,229,691	$	(5,991,446	)	$	665,919	14,650		1,936,698		(1,603,074		)	348,274
Agency CMBS	56,365		8,855,845		(6,876,988		)	2,035,222
Non-Agency RMBS	218,712		300,905		(473,087		)	46,530		30,922		204,679		(205,120		)	30,481
Non-Agency CMBS	255,656		1,172,392		(1,273,723		)	154,325		134,814		847,909		(792,333		)	190,390
Residential Whole-Loans⁽¹⁾	154,391		2,052,319		(2,017,440		)	189,270
Securitized commercial loan⁽¹⁾	6,790		61,255		(68,045		)	—
Residential Whole Loans⁽¹⁾										863,356		4,635,432		(5,022,616		)	476,172
Residential Bridge Loans⁽¹⁾	—		295,479		(195,296		)	100,183		204,754		1,119,287		(1,294,172		)	29,869
Commercial loans⁽¹⁾										131,788		2,609,859		(2,517,053		)	224,594
Securitized commercial loans⁽¹⁾										7,543		319,022		(210,478		)	116,087
Other securities	36,056		470,280		(446,099		)	60,237		38,361		309,806		(291,405		)	56,762
Borrowings under repurchase agreements	$	2,155,644	$	18,438,166	$	(17,342,124	)	$	3,251,686	$	2,818,837	$	21,381,571	$	(21,375,531	)	$	2,824,877
Less unamortized debt issuance costs										—		N/A		N/A			76
Borrowings under repurchase agreements, net										$	2,818,837	$	21,381,571	$	(21,375,531	)	$	2,824,801


(1)	~~Repurchase~~The borrowings and collateral pledged attributed to loans owned through trust certificates. The trust certificates are eliminated upon consolidation.


(1)	The counterparty ratings presented above are the long-term issuer credit ratings as rated at December 31, ~~2017~~2019 by S~~&P, except for RBC (Barbados) Trading Bank Corporation which is the short-term issuer credit rating by Moody’s at December 31, 2017.~~&P.


(2)	Includes master repurchase agreements in which the buyer includes Alpine Securitization LTD., a Credit Suisse sponsored asset-backed commercial paper conduit.


(3)	Nomura Holdings, Inc., the parent company of Nomura Securities International, Inc., is rated A-BBB+ by S&P at December 31, ~~2017.~~2019.


~~(3)~~(4)	SunTrust Banks Inc, the parent company of SunTrust Robinson Humphrey, Inc. is rated P-2 by Moody's at December 31, 2019.


(5)	Represents amount outstanding with ~~two~~four counterparties, which each holds collateral valued less than 5% of our stockholders’ equity as security for our obligations under the applicable repurchase agreements as of December 31, ~~2017.~~2019.


(1)	Amount represents the maximum borrowings at month-end during each of the respective periods.


Derivative Instrument	Notional Amount at December 31, 2016		Acquisitions		Settlements, Terminations or Expirations			Notional Amount at December 31, 2017		Notional Amount at December 31, 2018		Acquisitions		Settlements, Terminations or Expirations			Notional Amount at December 31, 2019
Fixed pay interest swaps	$	4,662,200	$	5,748,400	$	(7,158,400	)	$	3,252,200
Fixed pay interest rate swaps										$	3,127,800	$	3,497,500	$	(4,074,300	)	$	2,551,000
Variable pay interest rate swaps	2,682,400		694,900		(3,377,300		)	—		728,400		1,759,800		(1,083,200		)	1,405,000
Interest rate swaptions	—		200,000		(200,000		)	—		—		162,803		(162,803		)	—
Options - long positions	—		6,285,100		(5,965,100		)	320,000		—		435,600		(435,600		)	—
Options - short positions	—		4,984,500		(4,664,500		)	320,000		—		1,063,300		(1,063,300		)	—
Futures contracts - long positions	56,900		452,900		(509,800		)	—		—		567,300		(567,300		)	—
Futures contracts - short positions	176,300		1,430,300		(1,126,600		)	480,000		300,400		1,437,200		(1,737,600		)	—
Total return swaps	47,059		—		(47,059		)	—
Foreign currency forward contracts	2,316		5,955		(8,271		)	—
Credit default swaps	—		14,815		—			14,815		50,000		151,000		(50,000		)	151,000
TBA securities - long positions	—		5,843,200		(5,718,200		)	125,000		—		3,200,000		(2,200,000		)	1,000,000
TBA securities - short positions	—		5,718,200		(5,718,200		)	—		—		3,200,000		(2,200,000		)	1,000,000
Total derivative instruments	$	7,627,175	$	31,378,270	$	(34,493,430	)	$	4,512,015	$	4,206,600	$	15,474,503	$	(13,574,103	)	$	6,107,000


Derivative Instrument	Fair Value at December 31, 2016			Acquisitions			Settlements, Terminations or Expirations			Realized Gains / Losses			Mark-to-market			Fair Value at December 31, 2017			Fair Value at December 31, 2018			Acquisitions			Settlements, Terminations or Expirations			Realized Gains / Losses			Mark-to-market			Fair Value at December 31, 2019
Fixed pay interest swaps	$	(114,603	)	$	(25,919	)	$	131,145		$	(100,651	)	$	105,837		$	(4,191	)
Fixed pay interest rate swaps																			$	(5,470	)	$	(32,894	)	$	194,324		$	(160,611	)	$	7,652		$	3,001
Variable pay interest rate swaps	(42,860		)	—			29,448			(29,698		)	43,110			—			2,054			7,608			(55,099		)	47,464			(2,512		)	(485		)
Interest rate swaptions	—			115						(115		)				—			—			332						(332		)				—
Options - long positions	—			15,130			(10,401		)	(4,029		)	(600		)	100			—			485			—			(485		)	—			—
Options - short positions	—			(5,694		)	2,768			2,576			300			(50		)	—			(2,157		)	294			1,863			—			—
Futures contracts - long positions	71			—			1,426			(1,426		)	(71		)	—			—			—			(3,801		)	3,801			—			—
Futures contracts - short positions	(2,487		)	—			7,704			(7,704		)	3,115			628			(4,657		)	—			16,663			(16,663		)	4,657			—
Total return swaps	(1,673		)	—			552			(552		)	1,673			—
Foreign currency forward contracts	(35		)	—			(32		)	32			35			—
Credit default swaps	—			(73		)	—			—			(22		)	(95		)	549			(4,252		)	367			(540		)	1,029			(2,847		)
TBA securities	—			—			(4,049		)	4,049			(10		)	(10		)	—			—			(1,934		)	1,934			(928		)	(928		)
Total derivative instruments	$	(161,587	)	$	(16,441	)	$	158,561		$	(137,518	)	$	153,367		$	(3,618	)	$	(7,524	)	$	(30,878	)	$	150,814		$	(123,569	)	$	9,898		$	(1,259	)


	December 31, 2017									December 31, 2019
Remaining Interest Rate Swap Term	Notional Amount		Average Fixed Pay Rate		Average Floating Receive Rate		Average Maturity (Years)	Forward Starting⁽¹⁾
Greater than 1 year and less than 3 years	$	600,000	1.6	%	1.5	%	1.8	—	%
Fixed Pay Interest Rate Swap Remaining Term										Notional Amount		Average Fixed Pay Rate		Average Floating Receive Rate		Average Maturity (Years)
1 year or less										$	200,000	1.8	%	1.9	%	0.4
Greater than 3 years and less than 5 years	960,000		2.0	%	1.4	%	4.3	—	%	622,400		2.6	%	1.9	%	4.1
Greater than 5 years	1,692,200		2.5	%	1.4	%	10.5	90.2	%	1,728,600		2.1	%	2.0	%	8.9
Total	$	3,252,200	2.2	%	1.4	%	7.1	46.9	%	$	2,551,000	2.2	%	2.0	%	7.1



	December 31, 2019
Variable Pay Interest Rate Swap Remaining Term	Notional Amount		Average Variable Pay Rate		Average Fixed Receive Rate		Average Maturity (Years)
Greater than 1 years and less than 3 years	$	810,000	2.0	%	2.0	%	1.6
Greater than 3 years and less than 5 years	550,000		1.9	%	1.6	%	5.0
Greater than 5 years	45,000		1.9	%	2.3	%	19.5
Total	$	1,405,000	2.0	%	1.9	%	3.5


Year ended December 31, 2017	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets
Year ended December 31, 2019							Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments
Agency CMBS							$	1,517,394	$	48,959	3.23	%
Agency RMBS	$	898,883	$	25,050	2.79	%	268,554		9,128		3.40	%
Agency CMBS	1,354,720		40,571		2.99	%
Non-Agency RMBS	88,566		6,127		6.92	%	47,982		2,468		5.14	%
Non-Agency CMBS	323,769		27,455		8.48	%	226,072		18,195		8.05	%
Residential Whole-Loans	207,786		8,515		4.10	%
Residential Whole Loans							1,196,675		57,234		4.78	%
Residential Bridge Loans	52,696		4,487		8.51	%	115,199		8,109		7.04	%
Securitized commercial loan	24,964		2,247		9.00	%
Commercial loans							348,884		28,556		8.18	%
Securitized commercial loans							830,311		39,454		4.75	%
Other securities	116,683		9,839		8.43	%	69,894		5,161		7.38	%
Total investments	$	3,068,067	$	124,291	4.05	%	$	4,620,965	$	217,264	4.70	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds		Average Carrying Value		Total Interest Expense		Average Cost of Funds⁽¹⁾
Borrowings
Repurchase agreements	$	2,713,199	$	45,128	1.66	%	$	2,888,151	$	90,802	3.14	%
Convertible senior unsecured notes, net⁽¹⁾	108,743		2,264		8.34	%
Convertible senior unsecured notes, net							130,457		10,556		8.09	%
Securitized debt	10,984		981		8.93	%	1,305,158		48,916		3.75	%
Total borrowings	$	2,832,926	$	48,373	1.76	%	$	4,323,766	$	150,274	3.48	%

Net interest income and net interest margin			$	75,918	2.47	%
Net interest income and net interest margin⁽²⁾									$	66,990	1.45	%


(1)	Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.



Constant Prepayment Rates	Low		High
Agency RMBS
20-Year mortgage	9.68	%	11.98	%
30-Year mortgage	7.46	%	16.99	%
40-Year mortgage	9.13	%	9.69	%
Agency RMBS IOs and IIOs	9.66	%	24.96	%
Agency RMBS IOs and IIOs accounted for as derivatives	6.66	%	22.34	%



	Cumulative Default				Cumulative Severity				Cumulative 5-Year CRR ⁽¹⁾
	Low		High		Low		High		Low		High
Non-Agency RMBS	0.22	%	7.75	%	23.71	%	113.88	%	3.24	%	11.46	%
Non-Agency RMBS IOs and IIOs	2.00	%	2.00	%	30.00	%	30.00	%	10.00	%	10.00	%
Risk Sharing Securities Issued by Fannie Mae and Freddie Mac	0.71	%	0.99	%	—	%	19.15	%	7.79	%	10.05	%
Other securities	1.00	%	2.00	%	90.00	%	100.00	%	10.00	%	10.00	%


(1)	~~Excludes Interest-Only Strips, accounted for as derivatives.~~Realized gains/losses recognized on the final settlement of the loans.


(2)	Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.



	Realized Gain (Loss), net
Description	Other Settlements / Expirations			Variation Margin Settlement			Mark-to-market			Return (Recovery) of Basis			Contractual interest income(expense), net⁽¹⁾		Total
Year ended December 31, 2019
Interest rate swaps	$	(4,978	)	$	(108,169	)	$	5,140		$	5,769		$	3,732	$	(98,506	)
Interest rate swaptions	(332		)	—			—			—			—		(332		)
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives	—			—			(508		)	(2,688		)	3,277		81
Options	1,378			—			—			—			—		1,378
Futures contracts	(12,862		)	—			4,657			—			—		(8,205		)
Credit default swaps	(178		)	—			1,029			—			—		851
TBAs	1,934			—			(928		)	—			—		1,006
Total	$	(15,038	)	$	(108,169	)	$	9,390		$	3,081		$	7,009	$	(103,727	)

Year ended December 31, 2018
Interest rate swaps	$	163		$	76,979		$	(5,147	)	$	2,465		$	3,693	$	78,153
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives	—			—			(655		)	(3,661		)	4,511		195
Options	(871		)	—			300			—			—		(571		)
Futures contracts	6,112			—			(5,285		)	—			—		827
Credit default swaps	(241		)	—			396			—			—		155
TBAs	(800		)	—			10			—			—		(790		)
Total	$	4,363		$	76,979		$	(10,381	)	$	(1,196	)	$	8,204	$	77,969


(1)	Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.



Year ended December 31, 2018	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments
Agency CMBS	$	1,976,291	$	59,502	3.01	%
Agency RMBS	442,145		14,415		3.26	%
Non-Agency RMBS	92,789		6,047		6.52	%
Non-Agency CMBS	294,811		26,424		8.96	%
Residential Whole Loans	494,438		23,331		4.72	%
Residential Bridge Loans	223,015		15,889		7.12	%
Commercial loans	88,091		6,898		7.83	%
Securitized commercial loans	931,090		48,422		5.20	%
Other Securities	96,810		8,434		8.71	%
Total	$	4,639,480	$	209,362	4.51	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds⁽¹⁾
Borrowings
Repurchase agreements	$	3,267,101	$	86,742	2.66	%
Convertible senior unsecured notes, net	109,456		9,058		8.28	%
Securitized debt	957,816		42,440		4.43	%
Total borrowings	$	4,334,373	$	138,240	3.19	%

Net interest income and net interest margin⁽³⁾			$	71,122	1.53	%


(1)	Excludes Interest-Only Strips, accounted for as derivatives.



	Year ended December 31, 2018		Year ended December 31, 2017
Agency RMBS⁽¹⁾	$	807	$	5,774
Non-Agency RMBS	996		—
Non-Agency CMBS	8,660		15,117
Other securities	717		1,982
Total	$	11,180	$	22,873


(2)	"Other Settlements /Expirations" and "Market to Market" include the effects of the April 2017 restructuring of our interest rate swaps.


~~(1)~~	~~Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.~~