MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2019~~2020

1. Organization

MFA Financial, Inc. (the “Company”) was incorporated in Maryland on July 24, 1997 and began operations on April 10, 1998. The Company has elected to be treated as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. In order to maintain its qualification as a REIT, the Company must comply with a number of requirements under federal tax law, including that it must distribute at least 90% of its annual REIT taxable income to its stockholders. The Company has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. (See Note 2(o2(n)))

2. Summary of Significant Accounting Policies

(a) Basis of Presentation and Consolidation

The interim unaudited consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in accordance with these SEC rules and regulations. Management believes that the disclosures included in these interim unaudited consolidated financial statements are adequate to make the information presented not misleading. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, ~~2019~~2020 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, ~~2019~~2020 should not be construed as indicative of the results to be expected for the full year.

The accompanying consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP 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 period. Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could differ from those estimates, which could materially impact the Company’s results of operations and its financial condition. Management has made significant estimates in several areas, including ~~other-than-temporary~~ impairment, ~~(“OTTI”)~~valuation allowances and loss allowances on residential whole loans (see Note 3), mortgage-backed securities (“MBS”) ~~(See~~(see Note 3)4) and Other Assets (see Note 5), valuation of MBS, CRT securities and MSR-related assets ~~(See~~(see Notes 34 and 14), income recognition and valuation of residential whole loans ~~(See~~(see Notes 43 and 14), valuation of derivative instruments ~~(See~~(see Notes 5(c) and 14) and income recognition on certain Non-Agency MBS (defined below) purchased at a ~~discount. (See~~discount (see Note 3)4). In addition, estimates are used in the determination of taxable income used in the assessment of REIT compliance and contingent liabilities for related taxes, penalties and ~~interest. (See~~interest (see Note 2(o2(n))). Actual results could differ from those estimates.

The Company has 1 reportable segment since it manages its business and analyzes and reports its results of operations on the basis of 1 operating segment: investing, on a leveraged basis, in residential mortgage assets.

The consolidated financial statements of the Company include the accounts of all subsidiaries. All intercompany accounts and transactions have been eliminated. In addition, the Company consolidates entities established to facilitate transactions related to the acquisition and securitization of residential whole loans completed in prior years. Certain prior period amounts have been reclassified to conform to the current period presentation.

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2019~~2020

(b) Residential ~~Mortgage Securities~~Whole Loans (including Residential Whole Loans transferred to consolidated VIEs)

Residential whole loans included in the Company’s consolidated balance sheets are primarily comprised of pools of fixed- and adjustable-rate residential mortgage loans acquired through consolidated trusts in secondary market transactions. The accounting model utilized by the Company is determined at the time each loan package is initially acquired and is generally based on the delinquency status of the majority of the underlying borrowers in the package at acquisition. The accounting model described below for Purchased Credit Deteriorated Loans that are held at carrying value is typically utilized by the Company for Purchased Credit Deteriorated Loans where the underlying borrower has a delinquency status of less than 60 days at the acquisition date. The Company also acquires Purchased Performing Loans that are typically held at carrying value, but the accounting methods for income recognition and determination and measurement of any required credit loss reserves (as discussed below) differ from those used for Purchased Credit Deteriorated Loans held at carrying value. The accounting model described below for residential whole loans held at fair value is typically utilized by the Company for loans where the underlying borrower has a delinquency status of 60 days or more at the acquisition date. The accounting model initially applied is not subsequently changed.

The Company’s residential whole loans pledged as collateral against financing agreements are included in the consolidated balance sheets with amounts pledged disclosed parenthetically. Purchases and sales of residential whole loans that are subject to an extended period of due diligence that crosses a reporting date are recorded in our balance sheet at amounts reflecting management’s current estimate of assets that will be acquired or disposed at the closing of the transaction. This estimate is subject to revision at the closing of the transaction, pending the outcome of due diligence performed prior to closing. Residential whole loans purchased under flow arrangements with loan origination partners are generally recorded at the transaction settlement date. Recorded amounts of residential whole loans for which the closing of the purchase transaction is yet to occur are not eligible to be pledged as collateral against any financing agreement until the closing of the purchase transaction. Interest income, credit related losses and changes in the fair value of loans held at fair value are recorded post settlement for acquired loans and until transaction settlement for sold loans (see Notes 3, 6, 7, 14 and 15).

Residential Whole Loans at Carrying Value

Purchased Performing Loans

Acquisitions of Purchased Performing Loans to date have been primarily comprised of: (i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (“Non-QM loans”), (ii) short-term business purpose loans collateralized by residential properties made to non-occupant borrowers who intend to rehabilitate and sell the property for a profit (“Rehabilitation loans” or “Fix and Flip loans”), (iii) loans to finance (or refinance) non-owner occupied one-to four-family residential properties that are rented to one or more tenants (“Single-family rental loans”), and (iv) previously originated loans secured by residential real estate that is generally owner occupied (“Seasoned performing loans”). Purchased Performing Loans are initially recorded at their purchase price. Interest income on Purchased Performing Loans acquired at par is accrued based on each loan’s current interest bearing balance and current interest rate, net of related servicing costs. Interest income on such loans purchased at a premium/discount to par is recorded each period based on the contractual coupon net of any amortization of premium or accretion of discount, adjusted for actual prepayment activity. For loans acquired with related servicing rights retained by the seller, interest income is reported net of related serving costs.

An allowance for credit losses is recorded at acquisition, and maintained on an ongoing basis, for all losses expected to be incurred over the life of the respective loan. Any required credit loss allowance would reduce the net carrying value of the loan with a corresponding charge to earnings, and may increase or decrease over time. Significant judgments are required in determining any allowance for credit loss, including assumptions regarding the loan cash flows expected to be collected, the value of the underlying collateral and the ability of the Company to collect on any other forms of security, such as a personal guaranty provided either by the borrower or an affiliate of the borrower. Income recognition is suspended, and interest accruals are reversed against income, 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 (i.e., such loans are placed on nonaccrual status). For nonaccrual loans other than Fix and Flip loans, all payments are applied to principal under the cost recovery method. For nonaccrual Fix and Flip loans, interest income is recorded under the cash basis method as interest payments are received. Interest accruals are 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. Modified loans are considered

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SEPTEMBER 30, 2020

“troubled debt restructurings” if the Company grants a concession to a borrower who is experiencing financial difficulty (including the interpretation of this definition set forth in OCC Bulletin 2020-35).

Charge-offs to the allowance for loan losses occur when losses are confirmed through the receipt of cash or other consideration from the completion of a sale; when a modification or restructuring takes place in which we grant a concession to a borrower or agree to a discount in full or partial satisfaction of the loan; when we take ownership and control of the underlying collateral in full satisfaction of the loan; when loans are reclassified as other investments; or when significant collection efforts have ceased and it is highly likely that a loss has been realized.

The aggregate allowance for credit losses is equal to the sum of the losses expected to be incurred over the life of each respective loan. These losses were estimated by projecting each loan’s expected cash flows based on their contractual terms, expected prepayments, and estimated default and loss severity rates. The default and severity rates were estimated based on the following steps: (i) obtained the Company’s historical experience through an entire economic cycle for each loan type or, to the extent the Company did not have sufficient historical loss experience for a given loan type, publicly available data derived from the historical loss experience of certain banks, which data the Company believes is generally representative of its portfolio, (ii) obtained historical economic data (U.S. unemployment rates and home price appreciation) over the same period, and (iii) estimated default and severity rates during three distinct future periods based on historical default and severity rates during periods when economic conditions similar to those forecasted were experienced. The three periods were as follows: (i) a one-year forecast of economic conditions based on U.S. unemployment rates and home price appreciation, followed by (ii) a two-year “reversion” period during which economic conditions (U.S. unemployment rates and home price appreciation) are projected to revert to historical averages on a straight line basis, followed by (iii) the remaining life of each loan, during which period economic conditions (U.S. unemployment rates and home price appreciation) are projected to equal historical averages. In addition, a liability is established (and recorded in Other Liabilities) each period using a similar methodology for committed but undrawn loan amounts. This methodology has not changed from the calculation of the allowance for credit losses on January 1, 2020 pursuant to the transition to ASU 2016-13 as described below under “New Accounting Standards and Interpretations,” other than a change in the reversion period from one year to two years to reflect the expected ongoing impact of current conditions (see Note 3).

Purchased Credit Deteriorated Loans

The Company has ~~investments~~elected to account for these loans as credit impaired as they have experienced a more-than-insignificant deterioration in credit quality since origination and were acquired at discounted prices that reflect, in part, the impaired credit history of the borrower. Substantially all of these loans have previously experienced payment delinquencies and the amount owed may exceed the value of the property pledged as collateral. Consequently, these loans generally have a higher likelihood of default than newly originated mortgage loans with LTVs of 80% or less to creditworthy borrowers. The Company believes that amounts paid to acquire these loans represent fair market value at the date of acquisition. Loans considered credit impaired are initially recorded at the purchase price on a net basis, after establishing an initial allowance for credit losses (their initial cost basis is equal to their purchase price plus the initial allowance for credit losses). Subsequent to acquisition, the gross recorded amount for these loans reflects the initial cost basis, plus accretion of interest income, less principal and interest cash flows received. These loans are presented on the Company’s consolidated balance sheets at carrying value, which reflects the recorded cost basis reduced by any allowance for credit losses. Interest income on such loans purchased is recorded each period based on the contractual coupon net of amortization of the difference between their cost basis and unpaid principal balance (“UPB”), subject to the Company’s nonaccrual policy.

Residential Whole Loans at Fair Value

Certain of the Company’s residential whole loans are presented at fair value on its consolidated balance sheets as a result of a fair value election made at the time of acquisition. For the majority of these loans, there is significant uncertainty associated with estimating the timing of and amount of cash flows that will be collected. Further, the cash flows ultimately collected may be dependent on the value of the property securing the loan. Consequently, the Company considers that accounting for these loans at fair value should result in a better reflection over time of the economic returns for the majority of these loans. The Company determines the fair value of its residential whole loans held at fair value after considering portfolio valuations obtained from a third-party that specializes in providing valuations of residential mortgage loans and trading activity observed in the market place. Subsequent changes in fair value are reported in current period earnings and presented in Net (loss)/gain on residential whole loans measured at fair value through earnings on the Company’s consolidated statements of operations.

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

Cash received (or accrued) representing coupon interest payments on residential whole loans held at fair value is not included in Interest Income, but rather is included in Net (loss)/gain on residential whole loans measured at fair value through earnings on the Company’s consolidated statements of operations. Cash outflows associated with loan-related advances made by the Company on behalf of the borrower are included in the basis of the loan and are reflected in unrealized gains or losses reported each period.

Prior to the quarter ended June 30, 2020, the Company had invested in residential MBS that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae”) (collectively, “Agency MBS”), and residential MBS that are not guaranteed by any agency of the U.S. Government or any federally chartered corporation (“Non-Agency MBS”). The Company disposed of its investments in Agency MBS during the quarter and has substantially reduced its investments in Non-Agency MBS. In addition, the Company has investments in CRT securities that are issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by ~~Fannie Mae and Freddie Mac~~the issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As the loans in the underlying pool are paid, the principal balance of the CRT securities is paid. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company.

Designation

MBS that the Company generally intends to hold until maturity, but that it may sell from time to time as part of the overall management of its business, are designated as “available-for-sale” (“AFS”). Such MBS are carried at their fair value with unrealized gains and losses excluded from earnings (except when an ~~OTTI~~allowance for losses is recognized, as discussed below) and reported in Accumulated other comprehensive income/(loss) (“AOCI”), a component of Stockholders’ Equity.

Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of AOCI to earnings as a realized gain or loss using the specific identification method.

The Company ~~has~~had elected the fair value option for certain of its previously held Agency MBS that it ~~does~~did not intend to hold to maturity. These securities ~~are~~were carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations.

The Company has elected the fair value option for certain of its CRT securities as it considers this method of accounting to more appropriately reflect the risk-sharing structure of these securities. Such securities are carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations.

Revenue Recognition, Premium Amortization and Discount Accretion

Interest income on securities is accrued based on their outstanding principal balance and their contractual terms. Premiums and discounts associated with Agency MBS and Non-Agency MBS assessed as high credit quality at the time of purchase are amortized into interest income over the life of such securities using the effective yield method. Adjustments to premium amortization are made for actual prepayment activity.

Interest income on Non-Agency MBS that were purchased at a discount to par value and/or are considered to be of less than high credit quality is recognized based on the security’s effective interest rate which is the security’s internal rate of return (“IRR”). The IRR is determined using management’s estimate of the projected cash flows for each security, which are based on the Company’s observation of current information and events and include assumptions related to fluctuations in interest rates, prepayment speeds and the timing and amount of credit losses. On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the IRR/ interest income recognized on these securities or in the recognition of OTTIs. (See Note 3)

Based on the projected cash flows from the Company’s Non-Agency MBS purchased at a discount to par value, a portion of the purchase discount may be designated as non-accretable purchase discount (“Credit Reserve”), which effectively mitigates the Company’s risk of loss on the mortgages collateralizing such MBS, and is not expected to be accreted into interest income. The amount designated as Credit Reserve 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 Reserve is more favorable than forecasted, a portion of the amount designated as Credit Reserve may be reallocated to accretable discount and recognized into interest income over time. Conversely, if the performance of a security with

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~a Credit Reserve is less favorable than forecasted, the amount designated as Credit Reserve may be increased, or impairment charges and write-downs of such securities to a new cost basis could result.~~

Determination of Fair Value for Residential Mortgage Securities

In determining the fair value of the Company’s residential mortgage securities, management considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market ~~activity. (See~~activity (see Note 14).

~~Impairments/OTTI~~

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MFA FINANCIAL, INC.

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SEPTEMBER 30, 2020

Allowance for credit losses

When the fair value of an AFS security is less than its amortized cost at the balance sheet date, the security is considered impaired. The Company assesses its impaired securities, as well as securities for which a credit loss allowance had been previously recorded, on at least a quarterly basis and ~~designates such impairments as either “temporary” or “other-than-temporary.”~~determines whether any changes to the allowance for credit losses are required. If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then the Company must recognize ~~an OTTI~~a write-down through charges to earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date. If the Company does not expect to sell an ~~other-than-temporarily~~ impaired security, only the portion of the impairment related to credit losses is recognized through ~~charges~~a loss allowance charged to earnings with the remainder recognized through AOCI on the Company’s consolidated balance sheets. Impairments recognized through other comprehensive income/(loss) (“OCI”) do not impact earnings. ~~Following the recognition of an OTTI~~Credit loss allowances are subject to reversal through earnings ~~a new cost basis is established for the security, which may not be adjusted for subsequent recoveries~~resulting from improvements in fair value through earnings. However, OTTIs recognized through charges to earnings may, upon recovery, be accreted back to the amortized cost basis of the security on a prospective basis through interest income.expected cash flows. The determination as to whether ~~an OTTI exists and, if so, the amount of~~to record (or reverse) a credit ~~impairment recognized in earnings~~loss allowance is subjective, as such determinations are based on factual information available at the time of assessment as well as the Company’s estimates of future performance and cash flow projections. As a result, the timing and amount of ~~OTTIs~~losses constitute material estimates that are susceptible to significant ~~change. (See~~change (see Note 3)4).

Non-Agency MBS that are assessed to be of less than high credit quality and on which impairments are recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. The Company’s estimate of cash flows for its Non-Agency MBS is based on its review of the underlying mortgage loans securing the MBS. The Company considers information available about the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, year of origination, loan-to-value ratios (“LTVs”), geographic concentrations and dialogue with market participants. As a result, significant judgment is used in the Company’s analysis to determine the expected cash flows for its Non-Agency MBS. In determining the ~~OTTI~~allowance related to credit losses for securities that were purchased at significant discounts to par and/or are considered to be of less than high credit quality, the Company compares the present value of the remaining cash flows expected to be collected at the purchase date (or last date previously revised) against the present value of the cash flows expected to be collected at the current financial reporting date. The discount rate used to calculate the present value of expected future cash flows is the current yield used for income recognition purposes. Impairment assessment for Non-Agency MBS that were purchased at prices close to par and/or are otherwise considered to be of high credit quality involves comparing the present value of the remaining cash flows expected to be collected against the amortized cost of the security at the assessment date. The discount rate used to calculate the present value of the expected future cash flows is based on the instrument’s IRR.

~~Balance Sheet Presentation~~Residential Whole Loans at Fair Value

~~The~~Certain of the Company’s residential ~~mortgage securities pledged as collateral against repurchase agreements and Swaps~~whole loans are ~~included~~presented at fair value on ~~the~~its consolidated balance sheets as a result of a fair value election made at the time of acquisition. For the majority of these loans, there is significant uncertainty associated with estimating the timing of and amount of cash flows that will be collected. Further, the cash flows ultimately collected may be dependent on the value of the property securing the loan. Consequently, the Company considers that accounting for these loans at fair value should result in a better reflection over time of the economic returns for the majority of these loans. The Company determines the fair value of its residential whole loans held at fair value after considering portfolio valuations obtained from a third-party that specializes in providing valuations of residential mortgage loans and trading activity observed in the ~~securities pledged disclosed parenthetically. Purchases~~market place. Subsequent changes in fair value are reported in current period earnings and ~~sales of securities are recorded~~presented in Net (loss)/gain on residential whole loans measured at fair value through earnings on the ~~trade date.~~

Company’s consolidated statements of operations.

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SEPTEMBER 30, ~~2019~~2020

~~(c) Residential Whole Loans (including Residential Whole Loans transferred to consolidated VIEs)~~

Residential whole loans included in the Company’s consolidated balance sheets are primarily comprised of pools of fixed- and adjustable-rate residential mortgage loans acquired through consolidated trusts in secondary market transactions. The accounting model utilized by the Company is determined at the time each loan package is initially acquired and is generally basedCash received (or accrued) representing coupon interest payments on the delinquency status of the majority of the underlying borrowers in the package at acquisition. The accounting model described below for Purchased Credit Impaired Loans that are held at carrying value is typically utilized by the Company for Purchased Credit Impaired Loans where the underlying borrower has a delinquency status of less than 60 days at the acquisition date. The Company also acquires Purchased Performing Loans that are typically held at carrying value, but the accounting methods for income recognition and determination and measurement of any required loan loss reserves (as discussed below) differ from those used for Purchased Credit Impaired Loans held at carrying value. The accounting model described below for residential whole loans held at fair value is ~~typically utilized~~not included in Interest Income, but rather is included in Net (loss)/gain on residential whole loans measured at fair value through earnings on the Company’s consolidated statements of operations. Cash outflows associated with loan-related advances made by the Company ~~for loans where~~on behalf of the ~~underlying~~ borrower ~~has a delinquency status of 60 days or more at the acquisition date. The accounting model initially applied is not subsequently changed.~~

~~The Company’s residential whole loans pledged as collateral against repurchase agreements~~ are included in the consolidated balance sheets with amounts pledged disclosed parenthetically. Purchases and sales of residential whole loans are recorded on the trade date, with amounts recorded reflecting management’s current estimate of assets that will be acquired or disposed at the closingbasis of the ~~transaction. This estimate is subject~~loan and are reflected in unrealized gains or losses reported each period.

Prior to ~~revision at~~ the ~~closing~~quarter ended June 30, 2020, the Company had invested in residential MBS that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the ~~transaction, pending~~U.S. Government, such as the ~~outcome of due diligence performed prior to closing. Recorded amounts of~~Government National Mortgage Association (“Ginnie Mae”) (collectively, “Agency MBS”), and residential whole loans for which the closing of the purchase transaction is yet to occur are not eligible to be pledged as collateral against any repurchase agreement financing until the closing of the purchase transaction. (See Notes 4, 6, 7, 14 and 15)

~~Residential Whole Loans at Carrying Value~~

~~Purchased Performing Loans~~

~~Acquisitions of Purchased Performing Loans to date have been primarily comprised of: (i) loans to finance (or refinance) one-to-four family residential properties~~MBS that are not ~~considered to meet~~guaranteed by any agency of the ~~definition~~U.S. Government or any federally chartered corporation (“Non-Agency MBS”). The Company disposed of ~~a “Qualified Mortgage”~~its investments in ~~accordance with guidelines adopted~~Agency MBS during the quarter and has substantially reduced its investments in Non-Agency MBS. In addition, the Company has investments in CRT securities that are issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the ~~Consumer Financial Protection Bureau~~issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As the loans in the underlying pool are paid, the principal balance of the CRT securities is paid. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company.

Designation

MBS that the Company generally intends to hold until maturity, but that it may sell from time to time as part of the overall management of its business, are designated as “available-for-sale” (“~~Non-QM loans”~~AFS”). Such MBS are carried at their fair value with unrealized gains and losses excluded from earnings (except when an allowance for losses is recognized, as discussed below) and reported in Accumulated other comprehensive income/(loss) (“AOCI”), ~~(ii) short-term business purpose loans collateralized by residential properties made~~a component of Stockholders’ Equity.

Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of AOCI to ~~non-occupant borrowers who~~earnings as a realized gain or loss using the specific identification method.

The Company had elected the fair value option for certain of its previously held Agency MBS that it did not intend to ~~rehabilitate and sell the property for a profit (“Rehabilitation loans” or “Fix and Flip loans”), (iii) loans~~hold to finance (or refinance) non-owner occupied one-to four-family residential properties that are rented to one or more tenants (“Single-family rental loans”), and (iv) previously originated loans secured by residential real estate that is generally owner occupied (“Seasoned performing loans”). Purchased Performing Loans are initially recordedmaturity. These securities were carried at their ~~purchase price.~~ fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations.

Revenue Recognition, Premium Amortization and Discount Accretion

Interest income on ~~Purchased Performing Loans acquired at par~~securities is accrued based on ~~each loan’s current interest bearing~~their outstanding principal balance and ~~current~~their contractual terms. Premiums and discounts associated with Agency MBS and Non-Agency MBS assessed as high credit quality at the time of purchase are amortized into interest ~~rate, net~~income over the life of ~~related servicing costs. Interest income on~~ such ~~loans purchased at a premium/discount~~securities using the effective yield method. Adjustments to ~~par is recorded each period based on the contractual coupon net of any~~premium amortization ~~of premium or accretion of discount, adjusted~~are made for actual prepayment activity. ~~For loans acquired with related servicing rights retained by the seller, interest income is reported net~~

Determination of ~~related serving costs.~~Fair Value for Residential Mortgage Securities

An allowance for loan losses is recorded when, based on current information and events, it is probable that the Company will be unable to collect all amounts due under the existing contractual terms of the loan agreement. Any required loan loss allowance would typically be measured based onIn determining the fair value of the ~~collateral securing the loan~~Company’s residential mortgage securities, management considers a number of observable market data points, including prices obtained from pricing services, brokers and ~~would reduce the carrying value~~repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of the loan with a corresponding charge to earnings. Significant judgments are required in determining any allowance for loan loss, including assumptions regarding the loan cash flows expected to be collected, the value of the underlying collateral and the ability of the Company to collect on any other forms of security, such as a personal guaranty provided either by the borrower or an affiliate of the borrower. 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, interest income is recorded under the cash basis method as interest payments are received. Interest accruals are 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.market activity (see Note 14).

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SEPTEMBER 30, ~~2019~~2020

Allowance for credit losses

~~Purchased Credit Impaired Loans~~

When the fair value of an AFS security is less than its amortized cost at the balance sheet date, the security is considered impaired. The Company ~~has elected to account~~assesses its impaired securities, as well as securities for ~~these loans as~~which a credit ~~impaired as they were acquired at discounted prices that reflect, in part, the impaired credit history of the borrower. Substantially all of these loans have~~loss allowance had been previously experienced payment delinquencies and the amount owed may exceed the value of the property pledged as collateral. Consequently, these loans generally have a higher likelihood of default than newly originated mortgage loans with LTVs of 80% or less to creditworthy borrowers. The Company believes that amounts paid to acquire these loans represent fair market value at the date of acquisition. Loans considered credit impaired are initially recorded, at the purchase price with no allowance for loan losses. Subsequent to acquisition, the recorded amount for these loans reflects the original investment amount, plus accretion of interest income, less principal and interest cash flows received. These loans are presented on the Company’s consolidated balance sheets at carrying value, which reflects the recorded amount reduced by any allowance for loan losses established subsequent to acquisition.

Under the application of the accounting model for Purchased Credit Impaired Loans, the Company may aggregate into pools loans acquired in the same fiscal quarter that are assessed as having similar risk characteristics. For each pool established, or on an individual loan basis for loans not aggregated into pools, the Company estimates at acquisition, and periodically on at least a quarterly basis and determines whether any changes to the ~~principal~~allowance for credit losses are required. If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then the Company must recognize a write-down through charges to earnings equal to the entire difference between the investment’s amortized cost and ~~interest~~its fair value at the balance sheet date. If the Company does not expect to sell an impaired security, only the portion of the impairment related to credit losses is recognized through a loss allowance charged to earnings with the remainder recognized through AOCI on the Company’s consolidated balance sheets. Impairments recognized through other comprehensive income/(loss) (“OCI”) do not impact earnings. Credit loss allowances are subject to reversal through earnings resulting from improvements in expected cash flows. The determination as to whether to record (or reverse) a credit loss allowance is subjective, as such determinations are based on factual information available at the time of assessment as well as the Company’s estimates of future performance and cash flow projections. As a result, the timing and amount of losses constitute material estimates that are susceptible to significant change (see Note 4).

Non-Agency MBS that are assessed to be of less than high credit quality and on which impairments are recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. The Company’s estimate of cash flows for its Non-Agency MBS is based on its review of the underlying mortgage loans securing the MBS. The Company considers information available about the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, year of origination, loan-to-value ratios (“LTVs”), geographic concentrations and dialogue with market participants. As a result, significant judgment is used in the Company’s analysis to determine the expected cash flows for its Non-Agency MBS. In determining the allowance related to credit losses for securities that were purchased at significant discounts to par and/or are considered to be of less than high credit quality, the Company compares the present value of the remaining cash flows expected to be ~~collected. The difference between~~collected at the purchase date (or last date previously revised) against the present value of the cash flows expected to be collected ~~and~~at the ~~carrying amount~~current financial reporting date. The discount rate used to calculate the present value of expected future cash flows is the current yield used for income recognition purposes. Impairment assessment for Non-Agency MBS that were purchased at prices close to par and/or are otherwise considered to be of high credit quality involves comparing the present value of the loans is referred to as the “accretable yield.” This amount is accreted as interest income over the life of the loans using an effective interest rate (level yield) methodology. Interest income recorded each period reflects the amount of accretable yield recognized and not the coupon interest payments received on the underlying loans. The difference between contractually required principal and interest payments and theremaining cash flows expected to be collected ~~is referred to as~~against the ~~“non-accretable difference,” and includes estimates of both the effect of prepayments and expected credit losses over the life~~amortized cost of the ~~underlying loans.~~

~~A decrease in expected cash flows in subsequent periods may indicate impairment~~security at the ~~pool and/or individual loan level, thus requiring the establishment of an allowance for loan losses by a charge~~assessment date. The discount rate used to ~~the provision for loan losses. The allowance for loan losses generally represents~~calculate the present value of ~~cash flows~~the expected at acquisition, adjusted for any increases due to changes in estimated cash flows, that are subsequently no longer expected to be received at the relevant measurement date. Under the accounting model applied to Purchased Credit Impaired Loans, a significant increase in expected cash flows in subsequent periods first reduces any previously recognized allowance for loan losses and then will result in a recalculation of the amount of accretable yield. The adjustment of accretable yield due to a significant increase in expectedfuture cash flows is ~~accounted for prospectively as a change in estimate and results in reclassification from nonaccretable difference to accretable yield.~~based on the instrument’s IRR.

Residential Whole Loans at Fair Value

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

Prior to the quarter ended June 30, 2020, the Company had invested in residential MBS that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae”) (collectively, “Agency MBS”), and residential MBS that are not guaranteed by any agency of the U.S. Government or any federally chartered corporation (“Non-Agency MBS”). The Company disposed of its investments in Agency MBS during the quarter and has substantially reduced its investments in Non-Agency MBS. In addition, the Company has investments in CRT securities that are issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As the loans in the underlying pool are paid, the principal balance of the CRT securities is paid. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company.

Designation

MBS that the Company generally intends to hold until maturity, but that it may sell from time to time as part of the overall management of its business, are designated as “available-for-sale” (“AFS”). Such MBS are carried at their fair value with unrealized gains and losses excluded from earnings (except when an allowance for losses is recognized, as discussed below) and reported in Accumulated other comprehensive income/(loss) (“AOCI”), a component of Stockholders’ Equity.

Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of AOCI to earnings as a realized gain or loss using the specific identification method.

The Company had elected the fair value option for certain of its previously held Agency MBS that it did not intend to hold to maturity. These securities were carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations.

Revenue Recognition, Premium Amortization and Discount Accretion

Determination of Fair Value for Residential Mortgage Securities

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

Allowance for credit losses

When the fair value of an AFS security is less than its amortized cost at the balance sheet date, the security is considered impaired. The Company assesses its impaired securities, as well as securities for which a credit loss allowance had been previously recorded, on at least a quarterly basis and determines whether any changes to the allowance for credit losses are required. If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then the Company must recognize a write-down through charges to earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date. If the Company does not expect to sell an impaired security, only the portion of the impairment related to credit losses is recognized through a loss allowance charged to earnings with the remainder recognized through AOCI on the Company’s consolidated balance sheets. Impairments recognized through other comprehensive income/(loss) (“OCI”) do not impact earnings. Credit loss allowances are subject to reversal through earnings resulting from improvements in expected cash flows. The determination as to whether to record (or reverse) a credit loss allowance is subjective, as such determinations are based on factual information available at the time of assessment as well as the Company’s estimates of future performance and cash flow projections. As a result, the timing and amount of losses constitute material estimates that are susceptible to significant change (see Note 4).

Non-Agency MBS that are assessed to be of less than high credit quality and on which impairments are recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. The Company’s estimate of cash flows for its Non-Agency MBS is based on its review of the underlying mortgage loans securing the MBS. The Company considers information available about the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, year of origination, loan-to-value ratios (“LTVs”), geographic concentrations and dialogue with market participants. As a result, significant judgment is used in the Company’s analysis to determine the expected cash flows for its Non-Agency MBS. In determining the allowance related to credit losses for securities that were purchased at significant discounts to par and/or are considered to be of less than high credit quality, the Company compares the present value of the remaining cash flows expected to be collected at the purchase date (or last date previously revised) against the present value of the cash flows expected to be collected at the current financial reporting date. The discount rate used to calculate the present value of expected future cash flows is the current yield used for income recognition purposes. Impairment assessment for Non-Agency MBS that were purchased at prices close to par and/or are otherwise considered to be of high credit quality involves comparing the present value of the remaining cash flows expected to be collected against the amortized cost of the security at the assessment date. The discount rate used to calculate the present value of the expected future cash flows is based on the instrument’s IRR.

Balance Sheet Presentation

The Company’s residential mortgage securities pledged as collateral against financing agreements and Swaps are included on the consolidated balance sheets with the fair value of the securities pledged disclosed parenthetically. Purchases and sales of securities are recorded on the trade date.

(d) MSR-Related Assets

The Company has investments in financial instruments whose cash flows are considered to be largely dependent on underlying MSRs that either directly or indirectly act as collateral for the investment. These financial instruments, which are referred to as MSR-related assets, are discussed in more detail below. The Company’s MSR-related assets pledged as collateral against repurchase agreements are included in the consolidated balance sheets with the amounts pledged disclosed parenthetically. Purchases and sales of MSR-related assets are recorded on the trade ~~date. (See~~date (see Notes 3,4, 6, 7 and 14).

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

Term Notes Backed by MSR-Related Collateral

The Company has invested in term notes that are issued by special purpose vehicles (“SPV”) that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. The Company considers payment of principal and interest on these term notes to be largely dependent on the cash flows generated by the underlying MSRs as this impacts the cash flows available to the SPV that issued the term notes. Credit risk borne by the holders of the term notes is also mitigated by structural credit support in the form of over-collateralization. Credit support is also provided by a corporate guarantee from the ultimate parent or sponsor of the SPV that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the underlying MSRs be insufficient.

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

The Company’s term notes backed by MSR-related collateral are treated as AFS securities and reported at fair value on the Company’s consolidated balance sheets with unrealized gains and losses excluded from earnings and reported in ~~AOCI.~~AOCI, subject to impairment and loss allowances. Interest income is recognized on an accrual basis on the Company’s consolidated statements of operations. The Company’s valuation process for such notes is similar to that used for residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral, as applicable, and the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient.

Corporate Loans

The Company has made or participated in loans to provide financing to entities that originate residential mortgage loans and own the related MSRs. These corporate loans are generally secured by certain MSRs, as well as certain other unencumbered assets owned by the borrower.

Corporate loans are recorded on the Company’s consolidated balance sheets at the drawn amount, on which interest income is recognized on an accrual basis on the Company’s consolidated statements of ~~operations.~~operations, subject to loss allowances. Commitment fees received on the undrawn amount are deferred and recognized as interest income over the remaining loan term at the time of draw. At the end of the commitment period, any remaining deferred commitment fees are recorded as Other Income on the Company’s consolidated statements of operations. The Company evaluates the recoverability of its corporate loans on a quarterly basis considering various factors, including the current status of the loan, changes in the fair value of the MSRs that secure the loan and the recent financial performance of the borrower.

(e) Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit with financial institutions and investments in money market funds, all of which have original maturities of three months or less. Cash and cash equivalents may also include cash pledged as collateral to the Company by its ~~repurchase agreement~~financing counterparties as a result of reverse margin calls (i.e., margin calls made by the Company). The Company did not hold any cash pledged by its counterparties at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had cash and cash equivalents of ~~$154.2~~$884.2 million and ~~$52.0~~$70.6 million, respectively. ~~The Company’s~~At September 30, 2020, the Company had $837.6 million of investments in overnight money market funds, which are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or any other government ~~agency, were $130.4 million and $30.0 million at September 30, 2019 and~~agency. As of December 31, ~~2018, respectively.~~2019, the Company had $39.6 million worth of investments in overnight money market funds. In addition, deposits in FDIC insured accounts generally exceed insured ~~limits. (See~~limits (see Notes 7 and 14).

(f) Restricted Cash

Restricted cash represents the Company’s cash held by its counterparties in connection with certain of the Company’s Swaps and/or ~~repurchase~~financing agreements that is not available to the Company for general corporate purposes. Restricted cash may be applied against amounts due to ~~repurchase~~financing agreement and/or Swap counterparties, or may be returned to the Company when the related collateral requirements are exceeded or at the maturity of the Swap and/or ~~repurchase~~financing agreements. The Company had aggregate restricted cash held as collateral or otherwise in connection with its ~~repurchase~~financing agreements and/or Swaps of ~~$39.0~~$5.3 million and ~~$36.7~~$64.0 million at September 30, ~~2019~~2020 and December 31, ~~2018, respectively. (See~~2019, respectively (see Notes 5(c), 6, 7 and 14).

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

(g) ~~Goodwill~~

At ~~September 30, 2019~~ ~~and~~ ~~December 31, 2018~~, the Company had goodwill of $7.2 million, which represents the unamortized portion of the excess of the fair value of its common stock issued over the fair value of net assets acquired in connection with its formation in 1998. Goodwill, which is no longer subject to amortization, is tested for impairment at least annually, or more frequently under certain circumstances, at the entity level. Through ~~September 30, 2019, the Company had not recognized any impairment against its goodwill. Goodwill is included in Other assets on the Company’s consolidated balance sheets.~~

~~(h)~~ Real Estate Owned (“REO”)

REO represents real estate acquired by the Company, including through foreclosure, deed in lieu of foreclosure, or purchased in connection with the acquisition of residential whole loans. REO acquired through foreclosure or deed in lieu of foreclosure is initially recorded at fair value less estimated selling costs. REO acquired in connection with the acquisition of residential whole loans is initially recorded at its purchase price. Subsequent to acquisition, REO is reported, at each reporting date, at the lower of the current carrying amount or fair value less estimated selling costs and for presentation purposes is included in Other assets on the Company’s consolidated balance sheets. Changes in fair value that result in an adjustment to the reported amount of an REO property that has a fair value at or below its carrying amount are reported in Other Income, net on

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

the Company’s consolidated statements of operations. The Company has acquired certain properties that it holds for investment purposes, including rentals to third parties. These properties are held at their historical basis less depreciation, and are subject to impairment. Related rental income and expenses are recorded in Other Income, ~~net. (See~~net (see Note 5)

~~(i)~~

(h) Depreciation

Leasehold Improvements, Real estate and Other Depreciable Assets

Depreciation is computed on the straight-line method over the estimated useful life of the related assets or, in the case of leasehold improvements, over the shorter of the useful life or the lease term. Furniture, fixtures, computers and related hardware have estimated useful lives ranging from five to eight years at the time of purchase. The building component of real estate held-for-investment is depreciated over 27.5 years.

~~(j)~~(i) Loan Securitization and Other Debt Issuance Costs

Loan securitization related costs are costs associated with the issuance of beneficial interests by consolidated VIEs and incurred by the Company in connection with various financing transactions completed by the Company. Other debt issuance and related costs include costs incurred by the Company in connection with issuing its 6.25% Convertible Senior Notes due 2024 (“Convertible Senior Notes”), and its 8% Senior Notes due 2042 (“Senior Notes”) ~~and certain other repurchase agreement financings.~~. These costs may include underwriting, rating agency, legal, accounting and other fees. Such costs, which reflect deferred charges (unless the debt is recorded at fair value, as discussed below), are included on the Company’s consolidated balance sheets as a direct deduction from the corresponding debt liability. These deferred charges are amortized as an adjustment to interest expense using the effective interest method. For the Convertible Senior Notes and Senior Notes, ~~and other repurchase agreement financings,~~ such costs are amortized over the shorter of the period to the expected or stated legal maturity of the debt instruments. The Company periodically reviews the recoverability of these deferred costs and, in the event an impairment charge is required, such amount will be included in Operating and Other Expense on the Company’s consolidated statements of operations.

(j) Financing Agreements

~~(k) Repurchase Agreements~~

The Company finances the ~~holdings of a significant portion~~majority of its residential mortgage assets with financing agreements that include repurchase ~~agreements.~~agreements and other forms of collateralized financing. Under repurchase agreements, the Company sells assets to a lender and agrees to repurchase the same assets in the future for a price that is higher than the original sale price. The difference between the sale price that the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although legally structured as sale and repurchase transactions, the Company accounts for repurchase agreements as secured borrowings. Under its repurchase agreements and other forms of collateralized financing, the Company pledges its assets as collateral to secure the borrowing, in an amount which is equal to a specified percentage of the fair value of the pledged collateral, while the Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase financing, unless the repurchase financing is renewed with the same counterparty, the Company is required to repay the loan including any accrued interest and concurrently receives back its pledged collateral from the lender. With the consent of the lender, the Company may renew a repurchase financing at the then prevailing financing terms. Margin calls, whereby a lender requires that the Company

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

pledge additional assets or cash as collateral to secure borrowings under its repurchase financing with such lender, are routinely experienced by the Company when the value of the assets pledged as collateral declines as a result of principal amortization and prepayments or due to changes in market interest rates, spreads or other market conditions. The Company also may make margin calls on counterparties when collateral values increase.

The Company’s repurchase financings collateralized by residential mortgage securities and MSR-related assets typically have terms ranging from one month to six months at inception, while ~~a significant amount~~the majority of our ~~repurchase financings~~financing arrangements collateralized by residential whole loans have terms ~~ranging from three months to~~of twelve months or longer. Should a counterparty decide not to renew a ~~repurchase~~ financing arrangement at maturity, the Company must either refinance elsewhere or be in a position to satisfy the obligation. If, during the term of a ~~repurchase~~ financing, a lender should default on its obligation, the Company might experience difficulty recovering its pledged assets which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to such lender, including accrued interest receivable on such ~~collateral. (See~~collateral (see Notes 6, 7 and 14).

The Company has elected the fair value option on certain of its financing agreements. These agreements are reported at their fair value, with changes in fair value being recorded in earnings each period (or other comprehensive income, to the extent

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

the change results from a change in instrument specific credit risk), as further detailed in Note 6. Financing costs, including “up front” fees paid at inception related to financing agreements at fair value are expensed as incurred. Interest expense is recorded based on the current interest rate in effect for the related agreement.

(k) Equity-Based Compensation

Compensation expense for equity-based awards that are subject to vesting conditions, is recognized ratably over the vesting period of such awards, based upon the fair value of such awards at the grant date.

~~Beginning in 2014, the~~The Company has made annual grants of restricted stock units (“RSUs”) certain of which cliff vest after a three-year period, subject only to continued employment, and others of which cliff vest after a three-year period, subject to both continued employment and the achievement of certain performance criteria based on a formula tied to the Company’s achievement of average total shareholder return during that three-year period, as well as the total shareholder return (“TSR”) of the Company relative to the TSR of a group of peer companies (over the three-year period) selected by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) at the date of grant. The features in these awards related to the attainment of total shareholder return over a specified period constitute a “market ~~condition”~~condition,” which impacts the amount of compensation expense recognized for these awards. Specifically, the uncertainty regarding the achievement of the market condition was reflected in the grant date fair valuation of the RSUs, which is recognized as compensation expense over the relevant vesting period. The amount of compensation expense recognized is not dependent on whether the market condition was or will be achieved.

The Company makes dividend equivalent payments in connection with certain of its equity-based awards. A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock. Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., an RSU) under the Company’s Equity Compensation Plan (the “Equity Plan”), and they are paid in cash or other consideration at such times and in accordance with such rules, terms and conditions, as the Compensation Committee may determine in its discretion. Payments pursuant to dividend equivalents are generally charged to Stockholders’ Equity to the extent that the attached equity awards are expected to vest. Compensation expense is recognized for payments made for dividend equivalents to the extent that the attached equity awards (i) do not or are not expected to vest and (ii) grantees are not required to return payments of dividends or dividend equivalents to the ~~Company. (See~~Company (see Notes 2(m)2(l) and 13).

~~(m)~~(l) Earnings per Common Share (“EPS”)

Basic EPS is computed using the two-class method, which includes the weighted-average number of shares of common stock outstanding during the period and an estimate of other securities that participate in dividends, such as the Company’s ~~unvested restricted stock and RSUs that have non-forfeitable rights to dividends and~~ dividend equivalents attached to/associated with RSUs, ~~and vested stock options~~ to arrive at total common equivalent shares. In applying the two-class method, earnings are allocated to both shares of common stock and estimated securities that participate in dividends based on their respective weighted-average shares outstanding for the period. For the diluted EPS calculation, common equivalent shares are further adjusted for the effect of RSUs outstanding that are unvested and have dividends that are subject to forfeiture, and for the effect of outstanding warrants, using the treasury stock method. Under the treasury stock method, common equivalent shares are calculated assuming that all dilutive common stock equivalents are exercised and the proceeds, along with future compensation expenses associated with such instruments (if any), are used to repurchase shares of the Company’s outstanding common stock at the average market price during the reported period. In addition, the Company’s Convertible Senior Notes are included in the calculation of diluted EPS if the assumed conversion into common shares is dilutive, using the “if-converted” method. This involves adding back the periodic interest expense associated with the Convertible Senior Notes to the numerator and by adding the shares that would be issued in an assumed conversion (regardless of whether the conversion option is in or out of the money) to the denominator for the purposes of calculating diluted ~~EPS. (See~~EPS (see Note 12)

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

~~(n)~~(m) Comprehensive Income/(Loss)

The Company’s comprehensive income/(loss) available to common stock and participating securities includes net income, the change in net unrealized gains/(losses) on its AFS securities and derivative hedging instruments (to the extent that such changes are not recorded in earnings), adjusted by realized net gains/(losses) reclassified out of AOCI for sold AFS securities and terminated hedging relationships, as well as the portion of unrealized gains/(losses) on its financing agreements held at fair value related to instrument-specific credit risk, and is reduced by dividends declared on the Company’s preferred stock and issuance costs of redeemed preferred stock.

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~~(o)~~MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(n) U.S. Federal Income Taxes

The Company has elected to be taxed as a REIT under the provisions of the Internal Revenue Code of 1986, as amended, (the “Code”), and the corresponding provisions of state law. The Company expects to operate in a manner that will enable it to satisfy the various requirements to maintain its status as a REIT for federal income tax purposes. In order to maintain its status as a REIT, the Company must, among other things, distribute at least 90% of its REIT taxable income (excluding net long-term capital gains) to stockholders in the timeframe permitted by the Code. As long as the Company maintains its status as a REIT, the Company will not be subject to regular federal income tax to the extent that it distributes 100% of its REIT taxable income (including net long-term capital gains) to its stockholders within the permitted timeframe. Should this not occur, the Company would be subject to federal taxes at prevailing corporate tax rates on the difference between its REIT taxable income and the amounts deemed to be distributed for that tax year. As the Company’s objective is to distribute 100% of its REIT taxable income to its stockholders within the permitted timeframe, 0 provision for current or deferred income taxes has been made in the accompanying consolidated financial statements. Should the Company incur a liability for corporate income tax, such amounts would be recorded as REIT income tax expense on the Company’s consolidated statements of operations. Furthermore, if the Company fails to distribute during each calendar year, or by the end of January following the calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year, at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed. To the extent that the Company incurs interest, penalties or related excise taxes in connection with its tax obligations, including as a result of its assessment of uncertain tax positions, such amounts will be included in Operating and Other Expense on the Company’s consolidated statements of operations.

In addition, the Company has elected to treat certain of its subsidiaries as TRS. In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. Generally, a domestic TRS is subject to U.S. federal, state and local corporate income taxes. Since a portion of the Company’s business is conducted through one or more TRS, the net taxable income earned by its domestic TRS, if any, is subject to corporate income taxation. To maintain the Company’s REIT election, no more than 20% of the value of the Company’s assets at the end of each calendar quarter may consist of stock or securities in TRS. For purposes of the determination of U.S. federal and state income taxes, the Company’s subsidiaries that elected to be treated as TRS record current or deferred income taxes based on differences (both permanent and timing) between the determination of their taxable income and net income under GAAP. NaN net deferred tax benefit was recorded by the Company for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, related to the net taxable losses in the TRS, since a valuation allowance for the full amount of the associated deferred tax asset of approximately ~~$26.0~~$75.5 million was recognized as its recovery is not considered more likely than not. The related net operating loss carryforwards generated prior to 2018 will begin to expire in 2034; those generated in 2020, 2019 and 2018 can be carried back to each of the five taxable years preceding the taxable year of such loss and thereafter can be carried forward and do not expire.

Based on its analysis of any potentially uncertain tax positions, the Company concluded that it does not have any material uncertain tax positions that meet the relevant recognition or measurement criteria as of September 30, ~~2019,~~2020, December 31, ~~2018,~~2019, or September 30, ~~2018.~~2019. As of the date of this filing the Company’s tax returns for tax years ~~2016~~2017 through ~~2018~~2019 are open to examination.

~~(p)~~(o) Derivative Financial Instruments

The Company may use a variety of derivative instruments to economically hedge a portion of its exposure to market risks, including interest rate risk and prepayment risk. The objective of the Company’s risk management strategy is to reduce fluctuations in net book value over a range of interest rate scenarios. In particular, the Company attempts to mitigate the risk of the cost of its variable rate liabilities increasing during a period of rising interest rates. The Company’s derivative instruments ~~are currently~~have generally been comprised of Swaps, the majority of which ~~are~~were designated as cash flow hedges against the interest rate risk associated with its borrowings.

1516

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2019~~2020

12. EPS Calculation

The following table presents a reconciliation of the ~~earnings~~earnings/(loss) and shares used in calculating basic and diluted ~~EPS~~earnings/(loss) per share for ~~the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2019~~ ~~and~~ ~~2018~~:

Three Months Ended
September 30, Nine Months Ended
September 30,
(In Thousands, Except Per Share Amounts) 2019 2018 2019 2018
Basic EPS:
Net income to common stockholders $ 95,599
$ 87,132
$ 277,496
$ 240,922
Dividends declared on preferred stock (3,750 ) (3,750 ) (11,250 ) (11,250 )
Dividends, dividend equivalents and undistributed earnings allocated to participating securities (280 ) (241 ) (808 ) (702 )
Net income to common stockholders - basic $ 91,569
$ 83,141
$ 265,438
$ 228,970
Basic weighted average common shares outstanding 451,020
428,713
450,641
408,614
Basic EPS $ 0.20
$ 0.19
$ 0.59
$ 0.56

Diluted EPS:
Net income to common stockholders - basic 91,569
83,141
265,438
228,970
Interest expense on Convertible Senior Notes 3,879
—
5,085
—
Net income to common stockholders - diluted $ 95,448
$ 83,141
$ 270,523
$ 228,970
Basic weighted average common shares outstanding 451,020
428,713
450,641
408,614
Effect of assumed Convertible Senior Notes conversion to common shares 28,920
—
12,712
—
Diluted weighted average common shares outstanding (1)
479,940
428,713
463,353
408,614
Diluted EPS $ 0.20
$ 0.19
$ 0.58
$ 0.56

~~(1)~~

At September 30, 2019, the Company had approximately 3.0 million equity instruments outstanding that were not included in the calculation of diluted EPS for the three and nine months ended September 30, 2019, as their inclusion would have been anti-dilutive. These equity instruments reflect RSUs (based on current estimate of expected share settlement amount) with a weighted average grant date fair value of $7.37. These equity instruments may have a dilutive impact on future EPS.

~~During~~ the three and nine months ended September 30, ~~2019,~~2020 and 2019:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, Except Per Share Amounts)	2020		2019		2020		2019
Basic Earnings/(Loss) per Share:
Net income/(loss) to common stockholders	$	87,210	$	95,599	$	(725,207)	$	277,496
Dividends declared on preferred stock	(8,219)		(3,750)		(21,578)		(11,250)
Dividends, dividend equivalents and undistributed earnings allocated to participating securities	(325)		(280)		(91)		(808)
Net income/(loss) to common stockholders - basic	$	78,666	$	91,569	$	(746,876)	$	265,438
Basic weighted average common shares outstanding	453,323		451,020		453,170		450,641
Basic Earnings/(Loss) per Share	$	0.17	$	0.20	$	(1.65)	$	0.59

Diluted Earnings/(Loss) per Share:
Net income/(loss) to common stockholders - basic	$	78,666	$	91,569	(746,876)		265,438
Interest expense on Convertible Senior Notes	3,898		3,879		0		5,085
Net income/(loss) to common stockholders - diluted	$	82,564	$	95,448	$	(746,876)	$	270,523
Basic weighted average common shares outstanding	453,323		451,020		453,170		450,641
Effect of assumed conversion of Convertible Senior Notes to common shares	28,920		28,920		0		12,712
Effect of incremental shares issued on assumed conversion of Warrants	11,297		0		0		0
Diluted weighted average common shares outstanding (1)	493,540		479,940		453,170		463,353
Diluted Earnings/(Loss) per Share	$	0.17	$	0.20	$	(1.65)	$	0.58

(1)At September 30, 2020, the Company had approximately 39.0 million equity instruments outstanding that were not included in the calculation of diluted EPS for the nine months ended September 30, 2020, as their inclusion would have been anti-dilutive. These equity instruments reflect RSUs (based on current estimate of expected share settlement amount) with a weighted average grant date fair value of $6.29 and approximately 37.0 million warrants with a weighted average exercise price of $1.87 per share. These equity instruments may have a dilutive impact on future EPS.

During the nine months ended September 30, 2020, the Convertible Senior Notes were determined to be ~~dilutive~~anti-dilutive and were not included in the calculation of diluted EPS under the “if-converted” method. Under this method, the periodic interest expense for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether the conversion option is in or out of the money) is included in the denominator for the purpose of calculating diluted EPS. The Convertible Senior Notes may have a dilutive impact on future EPS.

13. Equity Compensation, Employment Agreements and Other Benefit Plans

(a) Equity Compensation Plan

In accordance with the terms of the Company’s Equity Plan, which was adopted by the Company’s stockholders on ~~May 21, 2015~~June 10, 2020 (and which amended and restated the Company’s 2010 Equity Compensation Plan), directors, officers and employees of the Company and any of its subsidiaries and other persons expected to provide significant services for the Company and any of its subsidiaries are eligible to receive grants of stock options (“Options”), restricted stock, RSUs, dividend equivalent rights and other stock-based awards under the Equity Plan.

Subject to certain exceptions, stock-based awards relating to a maximum of ~~12.0~~18.0 million shares of common stock may be granted under the Equity Plan; forfeitures and/or awards that expire unexercised do not count toward this limit. At

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

September 30, ~~2019,~~2020, approximately ~~3.9~~14.3 million shares of common stock remained available for grant in connection with stock-based awards under the Equity Plan. A participant may generally not receive stock-based awards in excess of ~~1.5~~2.0 million shares of common

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

stock in any one year and no award may be granted to any person who, assuming exercise of all Options and payment of all awards held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of the Company’s common stock. Unless previously terminated by the Board, awards may be granted under the Equity Plan until ~~May 20, 2025.~~June 10, 2030.

Restricted Stock Units

Under the terms of the Equity Plan, RSUs are instruments that provide the holder with the right to receive, subject to the satisfaction of conditions set by the Compensation Committee at the time of grant, a payment of a specified value, which may be a share of the Company’s common stock, the fair market value of a share of the Company’s common stock, or such fair market value to the extent in excess of an established base value, on the applicable settlement date. Although the Equity Plan permits the Company to issue RSUs that can settle in cash, all of the Company’s outstanding RSUs as of September 30, ~~2019~~2020 are designated to be settled in shares of the Company’s common stock. The Company granted 497,507 and 1,702,220 RSUs during the three and nine months ended September 30, 2020, respectively. The Company did 0t grant any RSUs during the three months ended September 30, 2019 and ~~2018 and~~ granted 912,525 ~~and 843,802~~ RSUs during the nine months ended September 30, ~~2019 and 2018, respectively.~~2019. There were ~~20,000~~0 RSUs forfeited during ~~each of~~ the nine months ended September 30, ~~2019~~2020 and ~~2018, respectively.~~20,000 RSUs forfeited during the nine months ended September 30, 2019. All RSUs outstanding at September 30, ~~2019~~2020 may be entitled to receive dividend equivalent payments depending on the terms and conditions of the award either in cash at the time dividends are paid by the Company, or for certain performance-based RSU awards, as a grant of stock at the time such awards are settled. At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had unrecognized compensation expense of ~~$6.7~~$8.3 million and ~~$5.2~~$5.5 million, respectively, related to RSUs. The unrecognized compensation expense at September 30, ~~2019~~2020 is expected to be recognized over a weighted average period of ~~1.8~~1.9 years.

Restricted Stock

The Company granted 79,545 shares of restricted common stock during the nine months ended September 30, 2020, and the Company did 0t ~~award~~grant any shares of restricted common stock during the nine months ended September 30, ~~2019 and 2018.~~2019. At September 30, ~~2019,~~2020, the Company did 0t have any unvested shares of restricted common stock outstanding.

Dividend Equivalents

A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock. Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., an RSU) under the Equity Plan, and they are paid in cash or other consideration at such times and in accordance with such rules as the Compensation Committee of the Board shall determine in its discretion. Payments made on the Company’s outstanding dividend equivalent rights are generally charged to Stockholders’ Equity when common stock dividends are declared to the extent that such equivalents are expected to vest. The Company ~~did~~ 0~~t make any~~made dividend equivalent payments in respect of such instruments of approximately $276,000 during the nine months ended September 30, 2020 and approximately $276,000 and $773,000 during the three and nine months ended September 30, 2019, ~~and 2018.~~respectively.

Expense Recognized for Equity-Based Compensation Instruments

The following table presents the Company’s expenses related to its equity-based compensation instruments for the three and nine months ended September 30, ~~2019~~2020 and 2019:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
RSUs	$	2,267	$	1,288	$	5,094	$	4,724
Total	$	2,267	$	1,288	$	5,094	$	4,724

~~2018~~:Table of Contents

MFA FINANCIAL, INC.

Three Months Ended
September 30, Nine Months Ended
September 30,
(In Thousands) 2019 2018 2019 2018
RSUs $ 1,288
$ 1,082
$ 4,724
$ 3,891
Total $ 1,288
$ 1,082
$ 4,724
$ 3,891
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(b) Employment Agreements

At September 30, ~~2019,~~2020, the Company had employment agreements with 43 of its officers, with varying terms that provide for, among other things, base salary, bonus and change-in-control payments upon the occurrence of certain triggering events.

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

The Company administers deferred compensation plans for its senior officers and non-employee directors (collectively, the “Deferred Plans”), pursuant to which participants may elect to defer up to 100% of certain cash compensation. The Deferred Plans are designed to align participants’ interests with those of the Company’s stockholders.

Amounts deferred under the Deferred Plans are considered to be converted into “stock units” of the Company. Stock units do not represent stock of the Company, but rather are a liability of the Company that changes in value as would equivalent shares of the Company’s common stock. Deferred compensation liabilities are settled in cash at the termination of the deferral period, based on the value of the stock units at that time. The Deferred Plans are non-qualified plans under the Employee Retirement Income Security Act of 1974 and, as such, are not funded. Prior to the time that the deferred accounts are settled, participants are unsecured creditors of the Company.

The Company’s liability for stock units in the Deferred Plans is based on the market price of the Company’s common stock at the measurement date. The following table presents the Company’s expenses related to its Deferred Plans for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~:2019:

Three Months Ended
September 30, Nine Months Ended
September 30,
(In Thousands) 2019 2018 2019 2018
Non-employee directors $ 134
$ (22 ) $ 459
$ —
Total $ 134
$ (22 ) $ 459
$ —


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Non-employee directors	$	75	$	134	$	(1,483)	$	459
Total	$	75	$	134	$	(1,483)	$	459

The following table presents the aggregate amount of income deferred by participants of the Deferred Plans through September 30, ~~2019~~2020 and December 31, ~~2018~~2019 that had not been distributed and the Company’s associated liability for such deferrals at September 30, ~~2019~~2020 and December 31, ~~2018~~:2019:

September 30, 2019 December 31, 2018
(In Thousands)
Undistributed Income Deferred (1)
Liability Under Deferred Plans
Undistributed Income Deferred (1)
Liability Under Deferred Plans
Non-employee directors $ 2,216
$ 2,734
$ 2,263
$ 2,417
Total $ 2,216
$ 2,734
$ 2,263
$ 2,417


	September 30, 2020				December 31, 2019
(In Thousands)	Undistributed Income Deferred (1)		Liability Under Deferred Plans		Undistributed Income Deferred (1)		Liability Under Deferred Plans
Non-employee directors	$	2,074	$	1,114	$	2,349	$	3,071
Total	$	2,074	$	1,114	$	2,349	$	3,071

(1) Represents the cumulative amounts that were deferred by participants through September 30, ~~2019~~2020 and December 31, ~~2018~~,2019, which had not been distributed through such respective date.

(d) Savings Plan

The Company sponsors a tax-qualified employee savings plan (the “Savings Plan”) in accordance with Section 401(k) of the Code. Subject to certain restrictions, all of the Company’s employees are eligible to make tax-deferred contributions to the Savings Plan subject to limitations under applicable law. Participant’s accounts are self-directed and the Company bears the costs of administering the Savings Plan. The Company matches 100% of the first 3% of eligible compensation deferred by employees and 50% of the next 2%, subject to a maximum as provided by the Code. The Company has elected to operate the Savings Plan under the applicable safe harbor provisions of the Code, whereby among other things, the Company must make contributions for all participating employees and all matches contributed by the Company immediately vest 100%. For the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, the Company recognized expenses for matching contributions of ~~$94,000~~$120,000 and ~~$89,000,~~$94,000, respectively, and ~~$323,000~~$360,000 and ~~$282,000~~$323,000 for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2019~~2020

14. Fair Value of Financial Instruments

GAAP requires the categorization of fair value measurements into three broad levels that form a hierarchy. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:

Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Residential Whole Loans, at Fair Value

The Company determines the fair value of its residential whole loans held at fair value after considering valuations obtained from a third-party that specializes in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price appreciation. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield. The Company’s residential whole loans held at fair value are classified as Level 3 in the fair value hierarchy.

Residential Mortgage Securities

The Company determines the fair value of its Agency MBS based upon prices obtained from third-party pricing services, which are indicative of market activity, and repurchase agreement counterparties.

For Agency MBS, the valuation methodology of the Company’s third-party pricing services incorporate commonly used market pricing methods, trading activity observed in the marketplace and other data inputs. The methodology also considers the underlying characteristics of each security, which are also observable inputs, including: collateral vintage, coupon, maturity date, loan age, reset date, collateral type, periodic and life cap, geography, and prepayment speeds. Management analyzes pricing data received from third-party pricing services and compares it to other indications of fair value including data received from repurchase agreement counterparties and its own observations of trading activity observed in the marketplace. The Company’s Agency MBS are classified as Level 2 in the fair value hierarchy. During the quarter ended June 30, 2020, the Company sold its remaining holdings of Agency MBS.

In determining the fair value of the Company’s Non-Agency MBS and CRT securities, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants. In valuing Non-Agency MBS, the Company understands that pricing services use observable inputs that include, in addition to trading activity observed in the marketplace, loan delinquency data, credit enhancement levels and vintage, which are taken into account to assign pricing factors such as spread and prepayment assumptions. For tranches of Legacy Non-Agency MBS that are cross-collateralized, performance of all collateral groups involved in the tranche are considered. The Company collects and considers current market intelligence on all major markets, including benchmark security evaluations and bid-lists from various sources, when available.

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

The Company’s Legacy Non-Agency MBS, RPL/NPL MBS and CRT securities are valued using various market data points as described above, which management considers directly or indirectly observable parameters. Accordingly, these securities are classified as Level 2 in the fair value hierarchy.

~~Residential Whole Loans, at Fair Value~~

~~The~~ As of September 30, 2020, the Company ~~determines the fair value~~has sold substantially all of its ~~residential whole loans held at fair value after considering valuations obtained from a third-party that specializes in providing valuations~~holdings of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimatesLegacy Non-Agency MBS and substantially reduced its holdings of ~~fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default~~other Non-Agency MBS and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, expected costs and home price appreciation. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield. The Company’s residential whole loans held at fair value are classified as Level 3 in the fair value hierarchy.CRT securities.

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

Term Notes Backed by MSR-Related Collateral

The Company’s valuation process for term notes backed by MSR-related collateral is similar to that used for residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral and, as applicable, the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient. ~~Following a re-evaluation during the quarter~~Based on its evaluation of the observability of the data used in its fair value estimation process, ~~the Company determined that it was appropriate to reclassify~~ these assets toare classified as Level 2 in the fair value ~~hierarchy as of the end of the quarter.~~hierarchy.

Swaps

~~All~~As previously disclosed, in response to the turmoil in the financial markets resulting from the COVID-19 pandemic experienced during the three months ended March 31, 2020, the Company unwound all of its Swap hedging transactions late in the ~~Company’s Swaps are cleared by a central clearing house. Valuations~~first quarter in order to recover previously posted margin. Prior to their termination, valuations provided by the central clearing house ~~are~~were used for purposes of determining the fair value of the Company’s Swaps. Such valuations obtained ~~are~~were tested with internally developed models that ~~apply~~applied readily observable market parameters. AsSwaps were classified as Level 2 in the ~~Company’s Swaps~~fair value hierarchy.

Financing Agreements, at Fair Value

Agreements with mark-to-market collateral provisions

These agreements are secured and subject to ~~the clearing house’s~~ margin ~~requirements,~~ 0calls and their base interest rates reset frequently to market based rates. As a result, no credit valuation adjustment ~~was considered necessary~~is required, and the primary factor in determining ~~the~~their fair value ~~of such instruments. Since January 2017, variation margin payments~~is the credit spread paid over the base rate, which is a non observable input as it is determined based on negotiations with the counterparty. The Company’s ~~cleared Swaps have been treated as a legal settlement of the exposure under the Swap contract. Previously such payments were treated as~~financing agreements with mark-to-market collateral ~~pledged against the exposure under the related Swap contract. The effect of this change is to reduce what would have otherwise been reported as the~~provisions held at fair value ~~of the Swap. Swaps~~ are classified as Level 2 in the fair value hierarchy if the credit spreads used to price the instrument reset frequently, which is typically the case with shorter term repurchase agreement contracts collateralized by securities. Financing agreements with mark-to-market collateral provisions that are typically longer term and are collateralized by residential whole loans where the credit spread paid over the base rate on the instrument is not reset frequently are classified as Level 3 in the fair value hierarchy.

Agreements with non-mark-to-market collateral provisions

These agreements are secured, but not subject to margin calls, and their base interest rates reset frequently to market based rates. As a result, a credit valuation adjustment would only be required if there were a significant decrease in collateral value, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with non-mark-to-market collateral provisions held at fair value are classified as Level 3 in the fair value hierarchy.

Senior Secured Credit Agreement (Term Loan Facility)

The estimated fair value of the Term Loan Facility was determined by management based on a valuation received from a third party that specializes in providing valuations on financial instruments. The most significant inputs to such valuation, market interest rates and the yield on the Company’s publicly traded financial instruments, are observable. The Company’s Term Loan Facility held at fair value is classified as Level 2 in the fair value hierarchy.

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

Changes to the valuation methodologies used with respect to the Company’s financial instruments are reviewed by management to ensure any such changes result in appropriate exit price valuations. The Company will refine its valuation methodologies as markets and products develop and pricing methodologies evolve. The methods described above may produce fair value estimates that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those used by market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced. The Company reviews the classification of its financial instruments within the fair value hierarchy on a quarterly basis, and management may conclude that its financial instruments should be reclassified to a different level in the future.

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at September 30, ~~2019~~2020


(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Residential whole loans, at fair value	$	0	$	0	$	1,229,664	$	1,229,664
Non-Agency MBS	0		56,430		0		56,430
CRT securities	0		96,335		0		96,335
Term notes backed by MSR-related collateral	0		234,091		0		234,091
Total assets carried at fair value	$	0	$	386,856	$	1,229,664	$	1,616,520
Liabilities:
Agreements with non-mark-to-market collateral provisions	$	0	$	0	$	1,727,407	$	1,727,407
Agreements with mark-to-market collateral provisions	0		258,537		1,231,734		1,490,271
Senior secured credit agreement	0		473,993		0		473,993
Securitized debt	0		388,790		0		388,790
Total liabilities carried at fair value	$	0	$	1,121,320	$	2,959,141	$	4,080,461

(In Thousands) Level 1 Level 2 Level 3 Total
Assets:
Agency MBS $ —
$ 1,813,873
$ —
$ 1,813,873
Non-Agency MBS —
2,397,789
—
2,397,789
CRT securities —
377,892
—
377,892
Residential whole loans, at fair value —
—
1,453,169
1,453,169
Term notes backed by MSR-related collateral —
1,104,130
—
1,104,130
Total assets carried at fair value $ —
$ 5,693,684
$ 1,453,169
$ 7,146,853

Fair Value at December 31, ~~2018~~2019


(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Residential whole loans, at fair value	$	0	$	0	$	1,381,583	$	1,381,583
Non-Agency MBS	0		2,063,529		0		2,063,529
Agency MBS	0		1,664,582		0		1,664,582
CRT securities	0		255,408		0		255,408
Term notes backed by MSR-related collateral	0		1,157,463		0		1,157,463
Total assets carried at fair value	$	0	$	5,140,982	$	1,381,583	$	6,522,565

(In Thousands) Level 1 Level 2 Level 3 Total
Assets:

Agency MBS $ —
$ 2,698,213
$ —
$ 2,698,213
Non-Agency MBS —
3,318,299
—
3,318,299
CRT securities —
492,821
—
492,821
Residential whole loans, at fair value —
—
1,665,978
1,665,978
Term notes backed by MSR-related collateral —
—
538,499
538,499
Total assets carried at fair value $ —
$ 6,509,333
$ 2,204,477
$ 8,713,810

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2019~~2020

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents additional information for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 about the Company’s Residential whole loans, at fair value, which are classified as Level 3 and measured at fair value on a recurring basis:

Residential Whole Loans, at Fair Value

Three Months Ended September 30, (1)

Nine Months Ended September 30, (1)(2)
(In Thousands) 2019 2018 2019 2018
Balance at beginning of period $ 1,438,827
$ 1,468,540
$ 1,471,263
$ 1,325,115
Purchases and capitalized advances (3)
92,208
76,566
227,595
393,867
Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings 13,185
8,442
33,312
26,788
Collection of principal, net of liquidation gains/(losses) (37,565 ) (54,331 ) (112,386 ) (155,199 )
Repurchases —
(561 ) (1,216 ) (1,623 )
Transfer to REO (53,486 ) (51,089 ) (165,399 ) (141,381 )
Balance at end of period $ 1,453,169
$ 1,447,567
$ 1,453,169
$ 1,447,567


	Residential Whole Loans, at Fair Value
	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019 (1)		2020		2019 (1)(2)
Balance at beginning of period	$	1,200,981	$	1,438,827	$	1,381,583	$	1,471,263
Purchases (2)	0		85,855		0		210,030

Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings	58,863		13,185		(13,683)		33,312
Cash collections, net of liquidation gains/(losses)	(21,721)		(31,212)		(65,934)		(94,821)
Sales and repurchases	(929)		0		(19,460)		(1,216)
Transfer to REO	(7,530)		(53,486)		(52,842)		(165,399)
Balance at end of period	$	1,229,664	$	1,453,169	$	1,229,664	$	1,453,169


~~(1)~~	Included in the activity presented for the three months ended September 30, 2019 and 2018 are approximately $87.0 million and $34.4 million of loans the Company committed to purchase during the three months ended June 30, 2019 and 2018, but for which the closing of the purchase transaction occurred during the three and nine months ended September 30, 2019 and 2018, respectively.


~~(2)~~	~~Excludes approximately $1.8 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of September 30, 2018.~~

~~(3)~~

Included in the activity presented for the nine months ended September 30, 2019 is an adjustment of $70.6 million for loans the Company committed to purchase during the three months ended December 31, 2018, but for which the closing of the purchase transaction occurred during the three months ended March 31, 2019. The adjustment was required following the finalization of due diligence performed prior to the closing of the purchase transaction and resulted in a downward revision to the prior estimate of the loan purchase amount.

(1)Included in the activity presented for the three months ended September 30, 2019 are approximately $87.0 million of residential whole loans held at fair value the Company committed to purchase during the three months ended June 30, 2019, but for which the closing of the purchase transaction occurred during the three months ended September 30, 2019.

(2)Included in the activity presented for the nine months ended September 30, 2019is an adjustment of $70.6 million for loans the Company committed to purchase during the three months ended December 31, 2018, but for which the closing of the purchase transaction occurred during the three months ended March 31, 2019. The adjustment was required following the finalization of due diligence performed prior to the closing of the purchase transaction and resulted in a downward revision to the prior estimate of the loan purchase amount.

The following table presents additional information for the three and nine months ended September 30, 2019 ~~and 2018~~ about the Company’s investments in term notes backed by MSR-related collateral, which were classified as Level 3 prior to September 30, 2019 and measured at fair value on a recurring basis:

Term Notes Backed by MSR Related Collateral
Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2019 2018 2019 2018
Balance at beginning of period $ 1,106,026
$ 381,390
$ 538,499
$ 381,804
Purchases —
290,042
573,137
439,392
Collection of principal (3,920 ) (166,120 ) (12,897 ) (316,120 )
Changes in unrealized gain/(losses) 2,024
(117 ) 5,391
119
Transfer to Level 2 (1,104,130 ) —
(1,104,130 ) —
Balance at end of period $ —
$ 505,195
$ —
$ 505,195


	Term Notes Backed by MSR-Related Collateral
	Three Months Ended September 30,		Nine Months Ended September 30,
(In Thousands)	2019		2019
Balance at beginning of period	$	1,106,026	$	538,499
Purchases	0		573,137

Collection of principal	(3,920)		(12,897)
Changes in unrealized gains	2,024		5,391
Transfer to Level 2	(1,104,130)		(1,104,130)
Balance at end of period	$	0	$	0

~~The Company did not transfer any assets or liabilities from one level to another during the three and nine months ended September 30, 2018.~~

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2019~~2020

The following table presents additional information for the three and nine months ended September 30, 2020 about the Company’s financing agreements with non-mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:


	Agreements with Non-mark-to-market Collateral Provisions
	Three Months Ended September 30,		Nine Months Ended September 30,
(In Thousands)	2020		2020
Balance at beginning of period	$	0	$	0
Transfer from Level 2	2,036,597		2,036,597
Payment of principal	(312,638)		(312,638)
Changes in unrealized losses	3,448		3,448
Balance at end of period	$	1,727,407	$	1,727,407

The following table presents additional information for the three and nine months ended September 30, 2020 about the Company’s financing agreements with mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:


	Agreements with Mark-to-market Collateral Provisions
	Three Months Ended September 30,		Nine Months Ended September 30,
(In Thousands)	2020		2020
Balance at beginning of period	$	0	$	0
Transfer from Level 2	1,386,592		1,386,592
Payment of principal	(156,032)		(156,032)
Changes in unrealized losses	1,174		1,174
Balance at end of period	$	1,231,734	$	1,231,734

At June 30, 2020, the Company’s financing agreements with non-mark-to-market collateral provisions and the Company’s financing agreements with mark-to-market collateral provisions had just been issued and were therefore classified as Level 2 since their values were based on market transactions. However, market information for similar financings was not available at September 30, 2020 and the Company valued these financing instruments based on unobservable inputs.

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

Fair Value Methodology for Level 3 Financial Instruments

Residential Whole Loans, at Fair Value

The following tables present a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s residential whole loans held at fair value for which it has utilized Level 3 inputs to determine fair value as of September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

September 30, 2019
(Dollars in Thousands)
Fair Value (1)
Valuation Technique Unobservable Input
Weighted Average (2)
Range

Residential whole loans, at fair value $ 797,467
Discounted cash flow Discount rate 4.6 % 4.0-8.0%
Prepayment rate 4.8 % 0.2-17.8%
Default rate 4.2 % 0.0-24.5%
Loss severity 12.9 % 0.0-100.0%

$ 655,069
Liquidation model Discount rate 8.0 % 6.0-50.0%
Annual change in home prices 3.7 % 2.5-7.3%

Liquidation timeline
(in years)
1.8
0.1-4.5

Current value of underlying properties (3)
$ 688
$4-$4,500
Total $ 1,452,536


	September 30, 2020
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	774,427	Discounted cash flow	Discount rate	3.9		%	3.2-8.0%
				Prepayment rate	3.9		%	0.0-9.3%
				Default rate	6.2		%	0.0-30.3%
				Loss severity	12.7		%	0.0-100.0%

	$	454,760	Liquidation model	Discount rate	8.1		%	6.7-50.0%
				Annual change in home prices	1.9		%	(0.3)-5.5%
				Liquidation timeline (in years)	1.8			0.1-4.8
				Current value of underlying properties (3)	$	734		$12-$4,500
Total	$	1,229,187


	December 31, 2018									December 31, 2019
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range	(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	700,250	Discounted cash flow	Discount rate	5.2		%	4.5-8.0%	Residential whole loans, at fair value	$	829,842	Discounted cash flow	Discount rate	4.2		%	3.8-8.0%
				Prepayment rate	4.8		%	0.9-15.9%					Prepayment rate	4.5		%	0.7-18.0%
				Default rate	4.1		%	0.0-24.1%					Default rate	4.0		%	0.0-23.0%
				Loss severity	12.9		%	0.0-100.0%					Loss severity	12.9		%	0.0-100.0%

	$	683,252	Liquidation model	Discount rate	8.0		%	6.1-50.0%		$	551,271	Liquidation model	Discount rate	8.0		%	6.2-50.0%
				Annual change in home prices	3.5		%	(0.5)-12.2%					Annual change in home prices	3.7		%	2.4-8.0%
				Liquidation timeline (in years)	1.8			0.1-4.5					Liquidation timeline (in years)	1.8			0.1-4.5
				Current value of underlying properties (3)	$	802		$2-$7,950					Current value of underlying properties (3)	$	684		$10-$4,500
Total	$	1,383,502							Total	$	1,381,113

(1) Excludes approximately ~~$633,000~~$477,000 and ~~$282.5 million~~$470,000 of loans for which management considers the purchase price continues to reflect the fair value of such loans at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

(2) Amounts are weighted based on the fair value of the underlying loan.

(3) The simple average value of the properties underlying residential whole loans held at fair value valued via a liquidation model was approximately ~~$357,000~~$383,000 and ~~$400,000~~$365,000 as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the fair value of residential whole loans.

~~Table~~ Loans valued using a discounted cash flow model are most sensitive to changes in the discount rate assumption, while loans valued using the liquidation model technique are most sensitive to changes in the current value of ~~Contents~~

~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

the underlying properties and the liquidation timeline. Increases in discount rates, default rates, loss severities, or liquidation timelines, either in isolation or collectively, would generally result in a lower fair value measurement, whereas increases in the current or expected value of the underlying properties, in isolation, would result in a higher fair value measurement. In practice, changes in valuation assumptions may not occur in isolation and the changes in any particular assumption may result in changes in other assumptions, which could offset or amplify the impact on the overall valuation.

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at September 30, ~~2019~~2020 and December 31, ~~2018~~:2019:


	September 30, 2020	September 30, 2020				December 31, 2019
	Level in Fair Value Hierarchy	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(In Thousands)
Financial Assets:
Residential whole loans, at carrying value	3	$	4,387,559	$	4,528,630	$	6,069,370	$	6,248,745
Residential whole loans, at fair value	3	1,229,664		1,229,664		1,381,583		1,381,583
Non-Agency MBS	2	56,430		56,430		2,063,529		2,063,529
Agency MBS	2	0		0		1,664,582		1,664,582
CRT securities	2	96,335		96,335		255,408		255,408
MSR-related assets (1)	2 and 3	252,183		252,183		1,217,002		1,217,002
Cash and cash equivalents	1	884,171		884,171		70,629		70,629
Restricted cash	1	5,303		5,303		64,035		64,035
Financial Liabilities (2):
Financing agreements with non-mark-to-market collateral provisions	3	1,727,407		1,727,407		0		0
Financing agreements with mark-to-market collateral provisions	3	1,231,734		1,231,734		4,741,971		4,753,070
Financing agreements with mark-to-market collateral provisions	2	258,537		258,537		4,397,850		4,403,139
Senior secured credit agreement	2	473,993		473,993		0		0
Securitized debt (3)	2	837,683		839,914		570,952		575,353
Convertible senior notes	2	224,867		216,919		223,971		244,088
Senior notes	1	96,900		94,311		96,862		103,231

Level in Fair Value Hierarchy September 30, 2019 December 31, 2018
Carrying
Value
Estimated Fair Value
Carrying
Value
Estimated Fair Value
(In Thousands)
Financial Assets:
Agency MBS 2 $ 1,813,873
$ 1,813,873
$ 2,698,213
$ 2,698,213
Non-Agency MBS 2 2,397,789
2,397,789
3,318,299
3,318,299
CRT securities 2 377,892
377,892
492,821
492,821
Residential whole loans, at carrying value 3 4,969,414
5,115,221
3,016,715
3,104,401
Residential whole loans, at fair value 3 1,453,169
1,453,169
1,665,978
1,665,978
MSR-related assets 2 1,164,284
1,164,284
611,807
611,807
Cash and cash equivalents 1 154,193
154,193
51,965
51,965
Restricted cash 1 38,998
38,998
36,744
36,744
Financial Liabilities (1):

Repurchase agreements 2 8,571,422
8,590,674
7,879,087
7,896,672
Securitized debt 2 605,712
609,899
684,420
680,209
Convertible Senior Notes 2 223,684
238,050
—
—
Senior Notes 1 96,850
104,311
96,816
99,951

(1)Includes $18.1 million and $59.5 million of MSR-related assets that are measured at fair value on a non-recurring basis that are classified as Level 3 in the fair value hierarchy at September 30, 2020 and December 31, 2019, respectively.

(2)Carrying value of securitized debt, Convertible Senior Notes, Senior Notes and certain repurchase agreements is net of associated debt issuance costs.

(3)Includes Securitized debt that is carried at amortized cost basis and fair value.


~~(1)~~	~~Carrying value of securitized debt, Convertible Senior Notes, Senior Notes and certain repurchase agreements is net of associated debt issuance costs.~~

Other Assets Measured at Fair Value on a Nonrecurring Basis

The Company holds REO at the lower of the current carrying amount or fair value less estimated selling costs. During the nine months ended September 30, 2020 and 2019, the Company recorded REO with an aggregate estimated fair value, less estimated cost to sell, of $74.9 million and $193.5 million, respectively, at the time of foreclosure. The Company classifies fair value measurements of REO as Level 3 in the fair value hierarchy.

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

15. Use of Special Purpose Entities and Variable Interest Entities

A Special Purpose Entity (“SPE”) is an entity designed to fulfill a specific limited need of the company that organized it. SPEs are often used to facilitate transactions that involve securitizing financial assets or resecuritizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying financial assets on improved terms. Securitization involves transferring assets to a SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business, through the SPE’s issuance of debt or equity instruments. Investors in a SPE usually have recourse only to the assets in the SPE and, depending on the overall structure of the transaction, may benefit from various forms of credit enhancement such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.

The Company has entered into several financing transactions that resulted in the Company consolidating as VIEs the SPEs that were created to facilitate these transactions. See Note 2(r)2(q) for a discussion of the accounting policies applied to the consolidation of VIEs and transfers of financial assets in connection with financing transactions.

The Company has engaged in loan securitizations primarily for the purpose of obtaining improved overall financing terms as well as non-recourse financing on a portion of its residential whole loan portfolio. Notwithstanding the Company’s participation

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

in these transactions, the risks facing the Company are largely unchanged as the Company remains economically exposed to the first loss position on the underlying assets transferred to the VIEs.

Loan Securitization Transactions

The following table summarizes the key details of the Company’s loan securitization transactions as of September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


(Dollars in Thousands)	September 30, 2020				December 31, 2019
Aggregate unpaid principal balance of residential whole loans sold	$	1,681,500			$	1,290,029
Face amount of Senior Bonds issued by the VIE and purchased by third-party investors	$	1,202,616			$	802,817
Outstanding amount of Senior Bonds, at carrying value	$	448,893		(1)	$	570,952		(1)
Outstanding amount of Senior Bonds, at fair value	$	388,790			$	0
Outstanding amount of Senior Bonds, total	$	837,683			$	570,952
Weighted average fixed rate for Senior Bonds issued	2.93		%	(2)	3.68		%	(2)
Weighted average contractual maturity of Senior Bonds	36 years			(2)	30 years			(2)
Face amount of Senior Support Certificates received by the Company (3)	$	266,355			$	275,174
Cash received	$	1,193,969			$	802,815

(Dollars in Thousands) September 30, 2019 December 31, 2018
Aggregate unpaid principal balance of residential whole loans sold $ 1,290,029
$ 1,290,029

Face amount of Senior Bonds issued by the VIE and purchased by third-party investors $ 802,817
$ 802,817

Outstanding amount of Senior Bonds $ 605,712
(1) $ 684,420
(1)
Weighted average fixed rate for Senior Bonds issued 3.67 % (2) 3.66 % (2)
Weighted average contractual maturity of Senior Bonds 30 years
(2) 31 years
(2)
Face amount of Senior Support Certificates received by the Company (3)
$ 275,174
$ 275,174

Cash received $ 802,815
$ 802,815


~~(1)~~	~~Net of $3.2 million and $3.8 million of deferred financing costs at September 30, 2019 and December 31, 2018, respectively.~~


~~(2)~~	At September 30, 2019 and December 31, 2018, $521.8 million and $582.8 million, respectively, of Senior Bonds sold in securitization transactions contained a contractual coupon step-up feature whereby the coupon increases by 300 basis points at 36 months from issuance if the bond is not redeemed before such date.


~~(3)~~	~~Provides credit support to the Senior Bonds sold to third-party investors in the securitization transactions.~~

(1)Net of $2.2 million and $2.9 million of deferred financing costs at September 30, 2020 and December 31, 2019, respectively.

(2)At September 30, 2020 and December 31, 2019, $743.9 million and $493.2 million, respectively, of Senior Bonds sold in securitization transactions contained a contractual coupon step-up feature whereby the coupon increases by either 100 or 300 basis points or more at 36 months from issuance if the bond is not redeemed before such date.

(3)Provides credit support to the Senior Bonds sold to third-party investors in the securitization transactions.

During the three and nine months ended September 30, 2020, the Company issued Senior Bonds with a current face of $372.8 million and $399.8 million to third-party investors for proceeds of $372.8 million and $391.2 million, respectively, before offering costs and accrued interest. The Senior Bonds issued by the Company during the nine months ended September 30, 2020 are presented at fair value on its consolidated balance sheets as a result of a fair value election made at the time of issuance.

As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, as a result of the transactions described above, securitized loans with a carrying value of approximately ~~$189.9~~$568.6 million and ~~$209.4~~$186.4 million are included in “Residential whole loans, at carrying value,” securitized loans with a fair value of approximately ~~$593.3~~$521.2 million and ~~$694.7~~$567.4 million are included in “Residential whole loans,

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

at fair value,” and REO with a carrying value approximately ~~$134.8~~$80.3 million and ~~$79.0~~$137.8 million are included in “Other assets” on the Company’s consolidated balance sheets, respectively. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the aggregate carrying value of Senior Bonds issued by consolidated VIEs was ~~$605.7~~$837.7 million and ~~$684.4~~$571.0 million, respectively. These Senior Bonds are disclosed as “Securitized debt” and are included in Other liabilities on the Company’s consolidated balance sheets. The holders of the securitized debt have no recourse to the general credit of the Company, but the Company does have the obligation, under certain circumstances to repurchase assets from the VIE upon the breach of certain representations and warranties with respect to the residential whole loans sold to the VIE. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE.

The Company concluded that the entities created to facilitate the loan securitization transactions are VIEs. The Company then completed an analysis of whether each VIE created to facilitate the securitization transactions should be consolidated by the Company, based on consideration of its involvement in each VIE, including the design and purpose of the SPE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of each VIE. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed:

•whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and

•whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.

Based on its evaluation of the factors discussed above, including its involvement in the purpose and design of the entity, the Company determined that it was required to consolidate each VIE created to facilitate the loan securitization transactions.

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~~MFA FINANCIAL, INC.~~

~~NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2019~~

Residential Whole Loans and REO (including Residential Whole Loans and REO transferred to consolidated VIEs)

Included on the Company’s consolidated balance sheets as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 are a total of ~~$6.4~~$5.6 billion and ~~$4.7~~$7.4 billion, respectively, of residential whole loans, of which approximately ~~$5.0~~$4.4 billion and ~~$3.0~~$6.1 billion, respectively, are reported at carrying value and ~~$1.5~~$1.2 billion and ~~$1.7~~$1.4 billion, respectively, are reported at fair value. These assets, and certain of the Company’s REO assets, are directly owned by certain trusts established by the Company to acquire the loans and entities established in connection with the Company’s loan securitization transactions. The Company has assessed that these entities are required to be ~~consolidated. (See~~consolidated (see Notes 43 and 5(a)).

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

16. Subsequent Events

Payoff of remaining balance of Term Loan Facility

On October 9, 2020, the Company repaid $400 million of the principal outstanding on the Term Loan Facility (see note 6) and the remaining principal balance of this facility of $81,250,000 was repaid on October 30, 2020. The repayments were made without penalty or yield maintenance. Upon the full repayment, the Term Loan Facility was terminated.

Securitization of Non-QM loans

Subsequent to the end of the third quarter the Company closed on a $570 million Non-QM securitization that generated $125.1 million of additional liquidity.

Share Repurchase Authorization

On November 2, 2020, the Company’s Board of Directors authorized a share repurchase program under which the Company may repurchase up to $250 million of its common stock through the end of 2022. The Board’s authorization replaces the authorization under the Company’s existing stock repurchase program that was adopted in December 2013, which authorized the Company to repurchase up to 10 million shares of common stock and under which approximately 6.6 million shares remained available for repurchase

The stock repurchase program does not require the purchase of any minimum number of shares. The timing and extent to which the Company repurchases its shares will depend upon, among other things, market conditions, share price, liquidity, regulatory requirements and other factors, and repurchases may be commenced or suspended at any time without prior notice. Acquisitions under the share repurchase program may be made in the open market, through privately negotiated transactions or block trades or other means, in accordance with applicable securities laws.

The Company expects to fund the share repurchases from cash balances and future investment portfolio run-off. The Company currently has approximately 453.3 million shares of common stock outstanding.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Quarterly Report on Form 10-Q, we refer to MFA Financial, Inc. and its subsidiaries as “the Company,” “MFA,” “we,” “us,” or “our,” unless we specifically state otherwise or the context otherwise indicates.

The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 1 of this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Forward Looking Statements

When used in this Quarterly Report on Form 10-Q, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “will,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “could,” “would,” “may,” the negative of these words or similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the 1933 Act and Section 21E of the 1934 Act and, as such, may involve known and unknown risks, uncertainties and assumptions.

These forward-looking statements include information about possible or assumed future results with respect to our business, financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects, among others, may be forward-looking: risks related to the ongoing spread of the novel coronavirus and the COVID-19 pandemic, including its effects on the general economy and our business, financial position and results of operations (including, among other potential effects, increased delinquencies and greater than expected losses in our whole loan portfolio); changes in interest rates and the market (i.e., fair) value of our ~~MBS,~~ residential whole loans, ~~CRT securities~~MBS and other assets; changes in the prepayment rates on residential mortgage assets, an increase of which could result in a reduction of the yield on certain investments in its portfolio and could require ~~MFA~~us to reinvest the proceeds received by it as a result of such prepayments in investments with lower coupons, while a decrease in which could result in an increase in the interest rate duration of certain investments in ~~MFA’s~~our portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash ~~flows or, in certain circumstances, other-than-temporary impairment on certain Legacy Non-Agency MBS purchased at a discount;~~flows; credit risks underlying our assets, including changes in the default rates and management’s assumptions regarding default rates on the mortgage loans ~~securing our Non-Agency MBS and relating to~~in our residential whole loan portfolio; our ability to borrow to finance our assets and the terms, including the cost, maturity and other terms, of any such borrowings; implementation of or changes in government regulations or programs affecting our business; our estimates regarding taxable income the actual amount of which is dependent on a number of factors, including, but not limited to, changes in the amount of interest income and financing costs, the method elected by us to accrete the market discount on ~~Non-Agency MBS and~~ residential whole loans and the extent of prepayments, realized losses and changes in the composition of our ~~Agency MBS, Non-Agency MBS and~~ residential whole loan portfolios that may occur during the applicable tax period, including gain or loss on any MBS disposals and whole loan modifications, foreclosures and liquidations; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of our Board and will depend on, among other things, our taxable income, our financial results and overall financial condition and liquidity, maintenance of our REIT qualification and such other factors as the Board deems relevant; our ability to maintain our qualification as a REIT for federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended (or the Investment Company Act), including statements regarding the concept release issued by the SEC relating to interpretive issues under the Investment Company Act with respect to the status under the Investment Company Act of certain companies that are engaged in the business of acquiring mortgages and mortgage-related interests; our ability to continue growing our residential whole loan portfolio, which is dependent on, among other things, the supply of loans offered for sale in the market; expected returns on ~~MFA’s~~our investments in nonperforming residential whole loans (or NPLs), which are affected by, among other things, the length of time required to foreclose upon, sell, liquidate or otherwise reach a resolution of the property underlying the NPL, home price values, amounts advanced to carry the asset (e.g., taxes, insurance, maintenance expenses, etc. on the underlying property) and the amount ultimately realized upon resolution of the asset; targeted or expected returns on our investments in recently-originated loans, the performance of which is, similar to our other mortgage loan investments, subject to, among other things, differences in prepayment risk, credit risk and financing cost associated with such investments; risks associated with ~~MFA’s~~our investments in MSR-related assets, including servicing, regulatory and economic risks, risks associated with our investments in loan originators, and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we file with the SEC, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements are based on beliefs, assumptions and expectations of our future performance, taking into account all information currently available. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to,

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and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Business/General

We are an internally-managed REIT primarily engaged in the business of investing, on a leveraged basis, in residential mortgage assets, including residential whole loans, residential mortgage securities and MSR-related assets. Our principal business objective is to deliver shareholder value through the generation of distributable income and through asset performance linked to residential mortgage credit fundamentals. We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return.

As previously disclosed, related to the impact of the unprecedented conditions created by the COVID-19 pandemic, during the first and second quarters we engaged in asset sales and took other actions that significantly changed our asset composition. In particular, we sold our remaining Agency MBS and substantially all of our Legacy Non-Agency MBS portfolio, and substantially reduced our investments in MSR-related assets and CRT securities. During the third quarter we sold our remaining Legacy Non-Agency MBS. As a result of these actions, our primary investment asset as of September 30, 2020 is our residential whole loan portfolio. During the second quarter, to further help stabilize our financial position and liquidity, we entered into a $500 million senior secured credit agreement. In addition, during the second quarter, in conjunction with our previously disclosed exit from forbearance arrangements with lenders, we entered into several new asset-backed financing arrangements and renegotiated financing arrangements for certain assets with existing lenders, that resulted in us essentially refinancing the majority of our investment portfolio.

During the third quarter, we continued to make significant progress on initiatives to lower the cost of financing our investments with more durable forms of borrowing. For example, we completed a $390 million securitization transaction of Non-QM assets in early September, which generated $92.7 million of additional liquidity and lowered the funding costs for the associated assets by approximately 165 basis points. In addition, following the end of the third quarter we completed a $570 million Non-QM securitization transaction in late October, which generated $125.1 millionof additional liquidity and lowered the funding costs for the associated assets by approximately 179 basis points.

Additionally, subsequent to the end of the third quarter we undertook steps to reduce our exposure to higher cost forms of financing that we had obtained in connection with our exit from forbearance in the second quarter. On October 9, 2020, we repaid $400 million of the principal outstanding on the senior secured loan, and the remaining balance of this facility of $81.25 million was repaid on October 30, 2020. The repayments were made without penalty or yield maintenance. These actions will reduce our costs of financing by approximately $9.4 million in the fourth quarter and approximately $53.0 million annually. Following the completion of the second Non-QM securitization described above, the repayment of the senior secured loan and the payment of the dividend to common stockholders on October 30, 2020, our cash totaled approximately $641.1 million.

At September 30, ~~2019,~~2020, we had total assets of approximately ~~$13.1~~$7.5 billion, of which ~~$6.4~~$5.6 billion, or ~~approximately 49%~~75%, ~~represent~~represented residential whole loans acquired through interests in certain trusts established to acquire the loans. ~~During the third quarter of 2019, our residential whole loan portfolio continued to grow due to acquisitions of Purchased Performing Loans.~~ Our Purchased Performing Loans, which as of September 30, ~~2019~~2020 comprised approximately ~~66%~~67% of our residential whole loans, include: (i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (or Non-QM loans), (ii) short-term business purpose loans collateralized by residential properties made to non-occupant borrowers who intend to rehabilitate and sell the property for a profit (or Rehabilitation loans or Fix and Flip loans), (iii) loans to finance (or refinance) non-owner occupied one-to-four family residential properties that are rented to one or more tenants (or Single-family rental loans), and (iv) previously originated loans secured by residential real estate that is generally owner occupied (or Seasoned performing loans). In addition, at September 30, ~~2019,~~2020, we had approximately ~~$4.6 billion~~$152.8 million in investments in residential mortgage securities, which represented approximately ~~35%~~2% of our total assets. At such date, ~~our~~this portfolio ~~includes $1.8 billion~~included $96.3 million of ~~Agency MBS, $2.4 billion~~CRT securities and $56.4 million of Non-Agency MBS ~~and $377.9 million of CRT securities. Non-Agency MBS is~~which were primarily comprised ~~of $1.6 billion of Legacy Non-Agency MBS and $828.0 million~~ of RPL/NPL MBS. These RPL/NPL MBS are backed by securitized re-performing and non-performing loans and are generally structured with a contractual coupon step-up feature where the coupon increases from 300 - 400 basis points at 36 - 48 months from issuance or sooner. At September 30, ~~2019,~~2020, our investments in MSR-related assets were ~~$1.2 billion,~~$252.2 million, or 9%3% of our total assets. Our MSR-related assets include term notes whose cash flows are considered to be largely dependent on MSR collateral and loan participations to provide financing to mortgage originators that own MSRs. Our remaining investment-related assets, which represent approximately 4%7% of our total assets at September 30, ~~2019,~~2020, were primarily comprised of REO, capital contributions made to loan origination partners, other interest-earning assets and MBS and loan-related receivables.

The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income and the market value of our assets, which is driven

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by numerous factors, including the supply and demand for residential mortgage assets in the marketplace, the terms and availability of adequate financing, general economic and real estate conditions (both on a national and local level), the impact of government actions in the real estate and mortgage sector, and the credit performance of our credit sensitive residential mortgage assets. ~~In recent periods,~~Changes in these factors, or uncertainty in the ~~impact on~~market regarding the potential for changes in these factors, can result in significant changes in the value and/or performance of our investment portfolio. Further, our GAAP results ~~from~~may be impacted by market volatility, resulting in changes in market values of certain financial instruments for which changes in fair value are recorded in net income each period, such as CRT securities and certain residential whole ~~loans, Agency MBS, and Swaps not designated as hedges, has increased.~~loans. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense) and prepayment speeds, the behavior of which involves various risks and uncertainties. Interest rates and conditional prepayment rates (or CPRs) (which measure the amount of unscheduled principal prepayment on an asset as a percentage of the asset balance), vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. With the adoption in January 2020 of new accounting standards for the measurement and recognition of credit losses, and given the extent of current and anticipated future investments in residential whole loans, our financial results are impacted by estimates of credit losses that are required to be recorded when loans that are not accounted for at fair value through net income are acquired or originated, as well as changes in these credit loss estimates that will be required to be made periodically.

With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings to increase; (ii) the value of certain of our residential mortgage assets and, correspondingly, our stockholders’ equity to decline; (iii) coupons on our adjustable-rate assets to reset, on a delayed basis, to higher interest rates; (iv) prepayments on our assets to decline, thereby slowing the amortization of purchase premiums and the accretion of our purchase discounts, and slowing our ability to redeploy capital to generally higher yielding investments; and (v) the value of our derivative hedging instruments, if any, and, correspondingly, our stockholders’ equity to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings to decrease; (ii) the value of certain of our residential mortgage assets and, correspondingly, our stockholders’ equity to increase; (iii) coupons on our adjustable-rate assets, on a delayed basis, to lower interest rates; (iv) prepayments on our assets to increase, thereby accelerating the amortization of purchase premiums and the accretion of our purchase discounts, and accelerating the redeployment of our capital to generally lower yielding investments; and (v) the value of our derivative hedging instruments, if any, and, correspondingly, our stockholders’ equity to decrease. In addition, our borrowing costs and credit lines are further affected by the type of collateral we pledge and general conditions in the credit market.

Our investments in residential mortgage assets ~~particularly investments in residential mortgage loans and Non-Agency MBS,~~ expose us to credit risk, meaning that we are generally subject to credit losses due to the risk of delinquency, default and foreclosure on the underlying real estate collateral. WeOur investment process for credit sensitive assets focuses primarily on quantifying and pricing credit risk. With respect to investments in Purchased Performing Loans, we believe that sound underwriting standards, including low LTVs at origination, significantly mitigate our risk of loss. Further, we believe the discounted purchase prices paid on certain ~~of these investments~~non-performing and Purchased Credit Deteriorated Loans mitigate our risk of loss in the event that, as we expect on most such investments, we receive less than 100% of the par value of these investments. With respect to investments in Purchased Performing Loans, we believe that sound underwriting standards, including low LTVs at origination, significantly mitigate our risk of loss. Our investment process for credit sensitive assets focuses primarily on quantifying and pricing credit risk.

Premiums arise when we acquire an MBS ~~or loan~~ at a price in excess of the aggregate principal balance of the mortgages securing the MBS (i.e., par value) or when we acquire residential whole loans at a price in excess of their aggregate principal ~~balance.~~balance Conversely, discounts arise when we acquire an MBS at a price below the aggregate principal balance of the mortgages securing the MBS or when we acquire residential whole loans at a price below their aggregate principal balance. Accretable purchase discounts on these investments are accreted to interest income. Purchase premiums, which are primarily carried on certain of our ~~Agency MBS, certain~~ CRT securities and Non-QM loans, are amortized against interest income over the life of the investment using the effective yield method, adjusted for actual prepayment activity. An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the interest income earned on these assets.

CPR levels are impacted by, among other things, conditions in the housing market, new regulations, government and private sector initiatives, interest rates, availability of credit to home borrowers, underwriting standards and the economy in general. In particular, CPR reflects the conditional repayment rate (or CRR), which measures voluntary prepayments of a loan, and the conditional default rate (or CDR), which measures involuntary prepayments resulting from defaults. CPRs on our residential mortgage securities and whole loans may differ significantly. For the three months ended September 30, 2019, our Agency MBS portfolio experienced a weighted average CPR of 18.6%, and our Legacy Non-Agency MBS portfolio experienced a weighted average CPR of 14.9%. Over the last consecutive eight quarters, ending with September 30, 2019, the monthly weighted average CPR on our Agency and Legacy Non-Agency MBS portfolios ranged from a high of 18.6% experienced during the month ended September 30, 2019 to a low of 12.2%, experienced during the month ended January 31, 2019, with an average CPR over such quarters of 15.2%. In addition, for the three months ended September 30, 2019,2020, the weighted average CPR on our Non-QM loan portfolio was ~~22.8%~~21.8%.

Our method of accounting for Non-Agency MBS purchased at significant discounts to par value requires us to make assumptions with respect to each security. These assumptions include, but are not limited to, future interest rates, voluntary prepayment rates, default rates, mortgage modifications and loss severities. As part of our Non-Agency MBS surveillance process, we track and compare each security’s actual performance over time to the performance expected at the time of purchase or, if we have modified our original purchase assumptions, to our revised performance expectations. To the extent that actual performance or our expectation of future performance of our Non-Agency MBS deviates materially from our expected performance parameters, we may revise our performance expectations, so that the amount of purchase discount designated as credit discount may be increased or decreased over time. Nevertheless, credit losses greater than those anticipated or in excess of the recorded purchase discount could occur, which could materially adversely impact our operating results.

It is generally our business strategy to hold our residential mortgage assets as long-term investments. On at least a quarterly basis, excluding investments for which the fair value option has been elected or for which specialized loan accounting is otherwise applied, we assess our ability and intent to continue to hold each asset and, as part of this process, we monitor our ~~MBS, CRT~~

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residential mortgage securities and MSR-related assets that are designated as AFS for ~~OTTI.~~impairment. A change in our ability and/or intent to continue to hold any of these securities that are in an unrealized loss position, or a deterioration in the underlying characteristics of these securities, could result in our recognizing future impairment charges or a loss upon the sale of any such security. At September 30, 2019, we had net unrealized gains on our Non-Agency MBS of $432.4 million, comprised of gross unrealized gains of $432.7 million and gross unrealized losses of $261,000, and net unrealized losses of $3.2 million on our Agency MBS, comprised of gross unrealized losses of $19.3 million and gross unrealized gains of $16.1 million. At September 30, 2019, we did not intend to sell any securities in our portfolio that are designated as AFS and that were in an unrealized loss position, and we believe it is more likely than not that we will not be required to sell those securities before recovery of their amortized cost basis, which may be at their maturity.

~~We rely primarily on borrowings under repurchase agreements to finance our residential mortgage assets.~~ Our residential mortgage investments have longer-term contractual maturities than our ~~borrowings under repurchase agreements.~~financing liabilities. Even though the majority of our investments have interest rates that adjust over time based on short-term changes in corresponding interest rate indices (typically following an initial fixed-rate period for our Hybrids), the interest rates we pay on our borrowings will typically change at a faster pace than the interest rates we earn on our investments. In order to reduce this interest rate risk exposure, we may enter into derivative instruments, which ~~at September 30, 2019 were~~in the past have generally been comprised of Swaps.

The majority of our Swap derivative instruments ~~are~~have generally been designated as cash-flow hedges against a portion of our then current and forecasted LIBOR-based repurchase agreements. ~~While these Swaps do not extend~~Following the ~~maturities~~significant interest rate decreases that occurred late in the first quarter of 2020, we unwound all of our Swap transactions at the end of the ~~associated repurchase agreements being hedged; they do, however, lock in a fixed rate of interest over their term for the notional amount of the Swap corresponding to the hedged item.~~first quarter.

Recent Market Conditions and Our Strategy

Third quarter 2020 Portfolio Activity and impact on financial results:

At September 30, ~~2019,~~2020, our residential mortgage asset portfolio, which includes residential whole loans and REO, residential mortgage securities and MSR-related assets, was approximately ~~$12.6~~$6.3 billion compared to ~~$12.8~~$6.6 billion at June 30, 2019. While portfolio run-off and sales during the quarter resulted in a modest portfolio reduction, we continued to successfully expand our new loan initiatives, adding $918 million of Purchased Performing Loans. In addition, consistent with our residential whole loan investment strategy, we made approximately $100 million of capital contributions to select loan origination partners. For the remainder of 2019, we expect to continue to seek investment opportunities primarily focused on residential whole loans and selectively in residential mortgage securities and MSR-related assets as market opportunities arise.2020.

The following table presents the activity for our residential mortgage asset portfolio for the three months ended September 30, ~~2019:~~2020:


(In Millions)	June 30, 2020		Runoff (1)		Acquisitions		Other (2)		September 30, 2020		Change
Residential whole loans and REO	$	6,226	$	(455)	$	40	$	105	$	5,916	$	(310)
MSR-related assets	254		(17)		—		15		252		(2)
Residential mortgage securities	149		(2)		—		6		153		4
Totals	$	6,629	$	(474)	$	40	$	126	$	6,321	$	(308)

(In Millions) June 30, 2019
Runoff (1)

Acquisitions (2)

Other (3)
September 30, 2019 Change
Residential whole loans and REO $ 6,251
$ (396 ) $ 918
$ 26
$ 6,799
$ 548
RPL/NPL MBS 1,037
(342 ) 133
—
828
(209 )
MSR-related assets 1,170
(15 ) 7
2
1,164
(6 )
CRT securities 407
—
—
(29 ) 378
(29 )
Legacy Non-Agency MBS 1,691
(91 ) —
(30 ) 1,570
(121 )
Agency MBS 2,257
(182 ) —
(261 ) 1,814
(443 )
Totals $ 12,813
$ (1,026 ) $ 1,058
$ (292 ) $ 12,553
$ (260 )

(1) Primarily includes principal repayments, cash collections on Purchased Credit Deteriorated Loans and sales of REO.

(2) Primarily includes changes in fair value and adjustments to record lower of cost or estimated fair value adjustments on REO.


~~(1)~~	~~Primarily includes principal repayments, cash collections on~~ ~~Purchased Credit Impaired Loans~~ ~~and sales of REO.~~


~~(2)~~	Amounts presented exclude capital contributions made to select loan origination partners, which at September 30, 2019 totaled $122.9 million. During the third quarter, we made approximately $100 million in capital contributions to select loan origination partners.

~~(3)~~

~~Primarily includes sales, changes in fair value, net premium amortization/discount accretion and adjustments to record lower of cost or estimated fair value adjustments on REO.~~ During the three months ended September 30, 2019, we sold CRT securities for $29.0 million, realizing gains of $493,000, sold certain Non-Agency MBS for $47.9 million, realizing gains of $14.4 million and sold certain Agency MBS for $257.3 million, realizing gains of $2.8 million.

At September 30, ~~2019,~~2020, our total recorded investment in residential whole loans and REO was ~~$6.8~~$5.9 billion, or ~~54.2%~~93.6% of our residential mortgage asset portfolio. Of this amount, (i) ~~$5.0~~$4.4 billion is presented as Residential whole loans, at carrying value (of which ~~$4.3~~$3.7 billion were Purchased Performing Loans and ~~$718.2~~$650.3 million were Purchased Credit ~~Impaired Loans),~~Deteriorated Loans, and (ii) ~~$1.5~~$1.2 billion is presented as Residential whole loans, at fair value, in our consolidated balance sheets. For the three months ended September 30, ~~2019,~~2020, we recognized approximately ~~$64.2~~$54.4 million of income on Residential whole loans, at carrying value in Interest Income on our consolidated statements of operations, representing an effective yield of ~~5.58%~~4.63% (excluding servicing costs), with Purchased Performing Loans generating an effective yield of 4.58% and Purchased Credit Deteriorated Loans generating an effective yield of 4.89%. In addition, we recorded a net gain on residential whole loans measured at fair value through earnings of ~~$40.2~~$76.9 million in Other Income, net in our consolidated statements of operations for the three months ended September 30, ~~2019.~~2020. At September 30, ~~2019~~2020 and June 30, ~~2019,~~2020, we had REO with an aggregate carrying value of ~~$376.2~~$298.9 million and ~~$334.1~~$348.5 million, respectively, which is included in Other assets on our consolidated balance sheets.

At the end of the third quarter of 2019, the average coupon on mortgages underlying our Agency MBS was higher compared to the end of the third quarter of 2018, due to upward resets on securities within the portfolio, purchases of higher coupon Agency MBS in 2018 and the impact of sales of lower coupon Agency MBS during 2019 and 2018. As a result, the coupon yield on our Agency MBS portfolio increased to 3.73% forDuring the three months ended September 30, ~~2019,~~2020, economic conditions continued to be negatively impacted by the unprecedented conditions resulting from ~~3.32%~~the COVID-19 pandemic. In response to the financial impact of the COVID-19 pandemic on borrowers, and in compliance with various federal and state guidelines, during the first and second quarters of 2020 we offered short-term relief to borrowers who were contractually current at the time the pandemic started to impact the economy. Under the terms of such plans, for certain borrowers a deferral plan was entered into where missed payments were deferred to the maturity of the related loan, with a corresponding change to the loan’s next payment due date. In addition, certain borrowers were granted up to a three-month payment holiday, with payments required to resume at the conclusion of the plan. For these borrowers, all delinquent payments were contractually due at the conclusion of the payment holiday. While the majority of the borrowers granted relief have resumed making payments at the conclusion of such plans, certain borrowers, particularly in our Non-QM loan portfolio, continue to be impacted financially by the COVID-19 pandemic and have not yet

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resumed payments. Where these borrowers became more than 90 days delinquent on payments during the quarter, interest income receivable related to the associated loans was reversed in accordance with our non-accrual policies. At September 30, 2020, Non-QM loans with an amortized cost of $163.9 million, or 6.7% of the portfolio, were more than 90 days delinquent. For these and other borrowers that have been impacted by the COVID-19 pandemic, we are continuing to evaluate loss mitigation options with respect to these loans, including forbearance, repayment plans, loan modification and foreclosure.

During the three months ended September 30, ~~2018, and the net Agency MBS yield increased to 2.32% for the three months ended September 30, 2019 from 2.21% for the three months ended September 30, 2018. The net yield on~~2020, we sold our remaining investments in Legacy Non-Agency MBS ~~portfolio was 10.32%~~ for ~~the three months ended~~$116,000, realizing net gains of $48,000. As of September 30, ~~2019 compared to 10.76% for the three months ended September 30, 2018. The decrease in the net yield on~~2020, our ~~Legacy Non-Agency~~RPL/NPL MBS portfolio reflects higher accretion income recognized in the prior year quarter due to the impact of redemptions of certain securities that had been previously purchased at a discount, changes in interest rates since the third quarter of the prior year, the improved performance of loans underlying the Legacy Non-Agency MBS portfolio, which has resulted in credit reserve releases, as well as the impact of the cash proceeds received during 2018 in connection with

~~the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by JP Morgan Chase & Co. and affiliated entities and Lehman Brothers Holdings Inc.~~totaled $53.8 million. The net yield on our RPL/NPL MBS portfolio was ~~5.18%~~7.20% for the three months ended September 30, ~~2019~~2020, compared ~~to 5.01% for the three months ended September 30, 2018. The increase in the net yield reflects an increase in the average coupon yield~~ to 5.18% for the three months ended September 30, ~~2019 from 4.56%~~2019. In addition, our investments in MSR-related assets at September 30, 2020 totaled $252.2 million. The net yield on our MSR-related assets was 11.79% for the three months ended September 30, ~~2018.~~2020, compared to 5.26% for the three months ended September 30, 2019. Our investments in CRT securities totaled $96.3 million at September 30, 2020.

~~We believe~~As previously disclosed, we adopted the new accounting standard addressing the measurement of credit losses on financial instruments (CECL) on January 1, 2020. With respect to our residential whole loans held at carrying value, CECL requires that ~~our $462.1 million Credit Reserve and OTTI appropriately factors in remaining uncertainties regarding underlying mortgage performance and~~reserves for credit losses be estimated at the ~~potential impact~~reporting date based on ~~future~~life of loan expected cash flows, including anticipated prepayments and reasonable and supportable forecasts of ~~our existing Legacy Non-Agency MBS portfolio. In addition, while~~future economic conditions. For the ~~majority~~third quarter, a reversal of our Legacy Non-Agency MBS will not return their full face value due to loan defaults, we believe that they will deliver attractive loss adjusted yields due to our discounted weighted average amortized cost basisthe provision for credit and valuation losses of ~~67% of face~~$30.1 million was recorded on residential whole loans held at carrying value. The total allowance for credit losses recorded on residential whole loans held at carrying value at September 30, ~~2019. Home price appreciation and underlying mortgage loan amortization have decreased the LTV for many~~2020 was $106.2 million. In addition, as of the mortgages underlying our Legacy Non-Agency portfolio. Home price appreciation during the past few years has generally been driven by a combination of limited housing supply due partly to low levels of new home construction, low mortgage rates and demographic-driven U.S. household formation. Lower LTVs lessen the likelihood of defaults and simultaneously decrease loss severities. Further, during 2018 and the nine months ended September 30, ~~2019, we have also observed faster voluntary prepayment (i.e., prepayment of~~2020, CECL reserves for credit losses totaling approximately $1.6 million were recorded related to undrawn commitments on loans ~~in full with no loss) speeds than originally projected. The yields on our Legacy Non-Agency MBS that were purchased~~held at a discount are generally positively impacted if prepayment rates on these securities exceed our prepayment assumptions. Based on these current conditions, we have reduced estimated future losses within our Legacy Non-Agency portfolio.carrying value.

Our GAAP book value per common share ~~was $7.09~~increased to $4.61 as of September 30, ~~2019, essentially unchanged~~2020 from ~~book value per common share of $7.11~~$4.51 as of June 30, ~~2019 as our portfolio continued to deliver stable book value.~~2020. Economic book value per common share, a non-GAAP financial measure of our financial position that adjusts GAAP book value by the amount of unrealized mark to market gains on our residential whole loans held at carrying value, was ~~$7.41 at~~$4.92 as of September 30, ~~2019.~~2020, an increase from $4.46 as of June 30, 2020. Increases in GAAP and Economic book value during the third quarter reflect the broad recovery of asset prices for residential mortgage assets. For additional information regarding the calculation of Economic book value per share including a reconciliation to GAAP book value per share, refer to page 8385 under the heading “Economic Book Value”.

~~Repurchase agreement funding for our residential mortgage investments continued to be available to us from multiple counterparties during the third quarter~~

Table of 2019. Typically, repurchase agreement funding involving credit-sensitive investments is available at terms requiring higher collateralization and higher interest rates than for repurchase agreement funding involving Agency MBS. At September 30, 2019, our debt consisted of borrowings under repurchase agreements with 28 counterparties, securitized debt, Convertible Senior Notes, Senior Notes outstanding and payable for unsettled purchases, resulting in a debt-to-equity multiple of 2.8 times. (See table on page 76 under Results of Operations that presents our quarterly leverage multiples since September 30, 2018.)Contents

At September 30, 2019, we have access to various sources of liquidity which we estimate to be in excess of $234.7 million. This amount includes (i) $154.2 million of cash and cash equivalents; (ii) $56.6 million in estimated financing available from unpledged Agency MBS and from other Agency MBS collateral that is currently pledged in excess of contractual requirements; and (iii) $23.9 million in estimated financing available from unpledged Non-Agency MBS and from other Non-Agency MBS and CRT collateral that is currently pledged in excess of contractual requirements. Our sources of liquidity do not include restricted cash. In addition, we have $1.1 billion of unencumbered residential whole loans. We continue to evaluate potential opportunities to finance these assets including loan securitization. With access to multiple sources of liquidity and potential financing opportunities for unencumbered residential whole loans, we believe that we are positioned to continue to take advantage of investment opportunities within the residential mortgage marketplace.

The net interest spread of our investment portfolio was 1.82% and 2.41% for the three months ended September 30, 2019 and 2018, respectively. The change in our net interest spread was primarily driven by increased funding costs, reflecting an increase in our average borrowings to finance our residential whole loan portfolio, Federal Reserve rate increases during 2018, as well as the impact of changes in funding spreads during this period.

Our estimated net effective duration remained relatively low at 1.14 as of September 30, 2019, and is unchanged from September 30, 2018. We manage our net duration through our investment selection, as well as through the use of interest rate swaps. In addition, our low leverage limits our sensitivity to changes in interest rates.

Information About Our Assets

The table below presents certain information about our asset allocation at September 30, ~~2019~~:2020:

ASSET ALLOCATION

(Dollars in Millions) Agency MBS
Legacy
Non-Agency MBS

RPL/NPL MBS (1)
Credit Risk Transfer Securities
Residential Whole Loans, at Carrying Value (2)
Residential Whole Loans, at Fair Value MSR-Related Assets
Other,
net (3)
Total
Fair Value/Carrying Value $ 1,814
$ 1,570
$ 828
$ 378
$ 4,969
$ 1,453
$ 1,164
$ 785
$ 12,961
Less Payable for Unsettled Purchases —
—
—
—
(60 ) —
—
—
(60 )
Less Repurchase Agreements (1,676 ) (1,232 ) (643 ) (304 ) (3,046 ) (679 ) (918 ) (73 ) (8,571 )
Less Securitized Debt —
—
—
—
(139 ) (467 ) —
—
(606 )
Less Convertible Senior Notes —
—
—
—
—
—
—
(224 ) (224 )
Less Senior Notes —
—
—
—
—
—
—
(97 ) (97 )
Net Equity Allocated $ 138
$ 338
$ 185
$ 74
$ 1,724
$ 307
$ 246
$ 391
$ 3,403
Debt/Net Equity Ratio (4)
12.1 x 3.6 x 3.5 x 4.1 x 1.9 x 3.7 x 3.7 x 2.8 x


~~(1)~~	RPL/NPL MBS are backed primarily by securitized re-performing and non-performing loans. The securities are generally structured such that the coupon increases from 300 - 400 basis points at 36 - 48 months from issuance or sooner. Included with the balance of Non-Agency MBS reported on our consolidated balance sheets.


~~(2)~~	Includes $2.7 billion of Non-QM loans, $968.9 million of Rehabilitation loans, $366.4 million of Single-family rental loans, $189.0 million of Seasoned performing loans and $718.2 million of Purchased Credit Impaired Loans. At September 30, 2019, the total fair value of these loans is estimated to be approximately $5.1 billion.


~~(3)~~	~~Includes cash and cash equivalents and restricted cash, other assets and other liabilities.~~


~~(4)~~	Represents the sum of borrowings under repurchase agreements, securitized debt and payable for unsettled purchases as a multiple of net equity allocated. The numerator of our Total Debt/Net Equity Ratio also includes Convertible Senior Notes and Senior Notes.

~~Agency MBS~~


(Dollars in Millions)	Residential Whole Loans, at Carrying Value (1)			Residential Whole Loans, at Fair Value			Residential Mortgage Securities			MSR-Related Assets			Other, net (2)		Total
Fair Value/Carrying Value	$	4,388		$	1,230		$	153		$	252		$	1,395	$	7,418
Financing Agreements with non-mark-to-market collateral provisions	(1,471)			(256)			—			—			—		(1,727)
Financing Agreements with mark-to-market collateral provisions	(1,038)			(193)			(89)			(135)			(35)		(1,490)
Less Senior secured credit agreement	—			—			—			—			(474)		(474)
Less Securitized Debt	(470)			(369)			—			—			—		(839)
Less Convertible Senior Notes	—			—			—			—			(225)		(225)
Less Senior Notes	—			—			—			—			(97)		(97)
Net Equity Allocated	$	1,409		$	412		$	64		$	117		$	564	$	2,566
Debt/Net Equity Ratio (3)	2.1		x	2.0		x	1.4		x	1.2		x			1.9		x

~~The following tables present certain information regarding the composition~~

(1)Includes $2.4 billion of ~~our Agency MBS portfolio as~~Non-QM loans, $677.2 million of ~~September 30, 2019~~Rehabilitation loans, $474.0 million of Single-family rental loans, $147.6 million of Seasoned performing loans, and ~~December 31, 2018:~~

~~September 30, 2019~~

(Dollars in Thousands)
Current
Face

Weighted
Average
Purchase
Price

Weighted
Average
Market
Price

Fair
Value (1)

Weighted
Average
Loan Age
(Months) (2)

Weighted
Average
Coupon (2)

3 Month
Average
CPR
15-Year Fixed Rate:

Low Loan Balance (3)
$ 490,402
104.5 % 102.5 % $ 502,631
90
3.04 % 11.5 %
Generic 108,221
104.4
103.1
111,597
96
3.46
11.1
Total 15-Year Fixed Rate $ 598,623
104.5 % 102.6 % $ 614,228
91
3.12 % 11.4 %

30-Year Fixed Rate:
Generic $ 296,065
104.2 % 105.5 % $ 312,491
15
4.50 % 24.8 %
Total 30-Year Fixed Rate $ 296,065
104.2 % 105.5 % $ 312,491
15
4.50 % 24.8 %

Hybrid $ 804,449
103.5 % 103.9 % $ 836,014
118
4.26 % 20.8 %
CMO/Other $ 48,662
102.6 % 103.1 % $ 50,175
208
4.37 % 13.5 %
Total Portfolio $ 1,747,799
103.9 % 103.7 % $ 1,812,908
94
3.91 % 18.6 %

~~December 31, 2018~~

(Dollars in Thousands)
Current
Face

Weighted
Average
Purchase
Price

Weighted
Average
Market
Price

Fair
Value (1)

Weighted
Average
Loan Age
(Months) (2)

Weighted
Average
Coupon (2)
3 Month
Average
CPR
15-Year Fixed Rate:

Low Loan Balance (3)
$ 647,482
104.4 % 100.0 % $ 647,405
80
3.01 % 8.2 %
Generic 132,713
104.4
101.1
134,220
88
3.50
10.1
Total 15-Year Fixed Rate $ 780,195
104.4 % 100.2 % $ 781,625
81
3.09 % 8.5 %

30-Year Fixed Rate:
Generic $ 711,158
104.0 % 103.6 % $ 736,498
6
4.50 % 4.7 %
Total 30-Year Fixed Rate $ 711,158
104.0 % 103.6 % $ 736,498
6
4.50 % 4.7 %

Hybrid $ 1,080,569
103.5 % 103.5 % $ 1,118,638
108
3.90 % 20.0 %
CMO/Other $ 58,708
102.6 % 102.9 % $ 60,415
206
4.05 % 18.7 %
Total Portfolio $ 2,630,630
103.9 % 102.5 % $ 2,697,176
74
3.82 % 12.5 %


~~(1)~~	~~Does not include principal payments receivable of $965,000 and $1.0~~$650.3 million ~~at September 30, 2019 and December 31, 2018, respectively.~~


~~(2)~~	~~Weighted average is based on MBS current face at September 30, 2019 and December 31, 2018, respectively.~~


~~(3)~~	~~Low loan balance represents MBS collateralized by mortgages with an original loan balance of less than or equal to $175,000.~~

~~The following tables present certain information regarding our fixed-rate Agency MBS as~~ of ~~September 30, 2019 and December 31, 2018:~~

~~September 30, 2019~~

Coupon
Current
Face

Weighted
Average
Purchase
Price

Weighted
Average
Market
Price

Fair
Value (1)

Weighted
Average
Loan Age
(Months) (2)

Weighted
Average
Loan Rate

Low Loan
Balance
and/or
HARP (3)
3 Month
Average
CPR
(Dollars in Thousands)
15-Year Fixed Rate:

2.5% $ 255,293
104.1 % 101.4 % $ 258,823
82 3.06 % 100 % 9.9 %
3.0% 156,958
105.9
102.5
160,917
86 3.49
100
11.4
3.5% 2,935
103.5
103.5
3,036
107 4.19
100
10.5
4.0% 157,918
103.5
104.4
164,822
106 4.40
81
14.2
4.5% 25,519
105.3
104.4
26,630
110 4.89
35
8.9
Total 15-Year Fixed Rate $ 598,623
104.5 % 102.6 % $ 614,228
91 3.61 % 92 % 11.4 %

30-Year Fixed Rate:
4.5% $ 296,065
104.2 % 105.5 % $ 312,491
15 5.16 % — % 24.8 %
Total 30-Year Fixed Rate $ 296,065
104.2 % 105.5 % $ 312,491
15 5.16 % — % 24.8 %
Total Fixed Rate Portfolio $ 894,688
104.4 % 103.6 % $ 926,719
66 4.12 % 62 % 17.1 %

~~December 31, 2018~~

Coupon
Current
Face

Weighted
Average
Purchase
Price

Weighted
Average
Market
Price

Fair
Value (1)

Weighted
Average
Loan Age
(Months) (2)

Weighted
Average
Loan Rate

Low Loan
Balance
and/or
HARP (3)
3 Month
Average
CPR
(Dollars in Thousands)
15-Year Fixed Rate:

2.5% $ 359,252
104.1 % 98.6 % $ 354,252
73 3.03 % 100 % 6.4 %
3.0% 185,912
105.9
100.3
186,548
77 3.49
100
8.4
3.5% 3,798
103.5
101.4
3,853
98 4.18
100
12.8
4.0% 199,352
103.5
102.4
204,055
97 4.40
81
11.9
4.5% 31,881
105.3
103.3
32,917
101 4.88
34
12.7
Total 15-Year Fixed Rate $ 780,195
104.4 % 100.2 % $ 781,625
81 3.57 % 92 % 8.5 %

30-Year Fixed Rate:
4.5% $ 711,158
104.0 % 103.6 % $ 736,498
6 5.17 % — % 4.7 %
Total 30-Year Fixed Rate $ 711,158
104.0 % 103.6 % $ 736,498
6 5.17 % — % 4.7 %
Total Fixed Rate Portfolio $ 1,491,353
104.2 % 101.8 % $ 1,518,123
45 4.33 % 48 % 6.8 %


~~(1)~~	~~Does not include principal payments receivable of $965,000 and $1.0 million at September 30, 2019 and December 31, 2018, respectively.~~


~~(2)~~	~~Weighted average is based on MBS current face at September 30, 2019 and December 31, 2018, respectively.~~


~~(3)~~	Low Loan Balance represents MBS collateralized by mortgages with an original loan balance less than or equal to $175,000. Home Affordable Refinance Program (or HARP) MBS are backed by refinanced loans with LTVs greater than or equal to 80% at origination.

~~The following tables present certain information regarding our Hybrid Agency MBS as of~~ ~~September 30, 2019~~ ~~and December 31, 2018:~~

~~September 30, 2019~~

(Dollars in Thousands)
Current
Face

Weighted
Average
Purchase
Price

Weighted
Average
Market
Price

Fair
Value (1)

Weighted
Average
Coupon (2)

Weighted
Average
Loan Age
(Months) (2)

Weighted
Average
Months to
Reset (3)

Interest
Only (4)
3 Month
Average
CPR
Hybrid
Agency 3/1 $ 51,361
102.6 % 104.6 % $ 53,733
4.58 % 161 5 — % 13.5 %
Agency 5/1 351,788
103.3
104.4
367,196
4.53
128 6 16
21.4
Agency 7/1 258,132
103.5
104.1
268,617
4.43
108 7 19
24.4
Agency 10/1 143,168
104.3
102.3
146,468
3.18
95 28 60
15.1
Total Hybrids $ 804,449
103.5 % 103.9 % $ 836,014
4.26 % 118 10 24 % 20.8 %

~~December 31, 2018~~

(Dollars in Thousands)
Current
Face

Weighted
Average
Purchase
Price

Weighted
Average
Market
Price

Fair
Value (1)

Weighted
Average
Coupon (2)

Weighted
Average
Loan Age
(Months) (2)

Weighted
Average
Months to
Reset (3)

Interest
Only (4)
3 Month
Average
CPR
Hybrid
Agency 3/1 $ 66,369
102.6 % 104.7 % $ 69,478
4.42 % 151 6 — % 14.7 %
Agency 5/1 462,833
103.3
104.2
482,466
4.30
118 5 15
20.6
Agency 7/1 389,734
103.7
103.5
403,471
3.62
96 6 20
23.7
Agency 10/1 161,633
104.3
101.0
163,223
3.20
86 36 59
11.2
Total Hybrids $ 1,080,569
103.5 % 103.5 % $ 1,118,638
3.90 % 108 10 22 % 20.0 %


~~(1)~~	~~Does not include principal payments receivable of $965,000 and $1.0 million at September 30, 2019 and December 31, 2018, respectively.~~


~~(2)~~	~~Weighted average is based on MBS current face at September 30, 2019 and December 31, 2018, respectively.~~


~~(3)~~	Weighted average months to reset is the number of months remaining before the coupon interest rate resets. At reset, the MBS coupon will adjust based upon the underlying benchmark interest rate index, margin and periodic or lifetime caps. The months to reset do not reflect scheduled amortization or prepayments.


~~(4)~~	~~Interest only represents MBS backed by mortgages currently in their interest-only period. Percentage is based on MBS current face at September 30, 2019 and December 31, 2018, respectively.~~

~~Non-Agency MBS~~

~~The following table presents information with respect to our Non-Agency MBS at September 30, 2019 and December 31, 2018:~~

(In Thousands) September 30, 2019 December 31, 2018
Non-Agency MBS

Face/Par $ 2,529,749
$ 3,538,804

Fair Value 2,397,789
3,318,299

Amortized Cost 1,965,357
2,867,703

Purchase Discount Designated as Credit Reserve and OTTI (462,095 ) (1) (516,116 ) (2)
Purchase Discount Designated as Accretable (102,297 ) (155,025 )
Purchase Premiums —
40


~~(1)~~	~~Includes discount designated as Credit Reserve of $451.1 million and OTTI of $11.0 million.~~


~~(2)~~	~~Includes discount designated as Credit Reserve of $503.3 million and OTTI of $12.8 million.~~

~~Purchase Discounts on Non-Agency MBS~~

~~The following table presents the changes in the components of purchase discount on Non-Agency MBS with respect to purchase discount designated as~~Purchased Credit ~~Reserve and OTTI, and accretable purchase discount, for the~~ ~~three and nine~~ ~~months ended September 30, 2019 and 2018:~~

Three Months Ended
September 30, 2019 Three Months Ended
September 30, 2018
(In Thousands) Discount
Designated as
Credit Reserve and OTTI
Accretable
Discount (1)
Discount
Designated as
Credit Reserve and OTTI
Accretable Discount (1)
Balance at beginning of period $ (479,566 ) $ (117,753 ) $ (553,596 ) $ (202,248 )
Impact of RMBS Issuer Settlement (2)
—
—
—
(2,734 )
Accretion of discount —
10,357
—
20,115
Realized credit losses 4,062
—
12,042
—
Purchases —
—
(1,975 ) 1,368
Sales 12,479
6,029
1,552
1,974
Transfers/release of credit reserve 930
(930 ) 10,220
(10,220 )
Balance at end of period $ (462,095 ) $ (102,297 ) $ (531,757 ) $ (191,745 )

Nine Months Ended
September 30, 2019 Nine Months Ended
September 30, 2018
(In Thousands) Discount
Designated as
Credit Reserve and OTTI
Accretable
Discount (1)
Discount
Designated as
Credit Reserve and OTTI
Accretable Discount (1)
Balance at beginning of period $ (516,116 ) $ (155,025 ) $ (593,227 ) $ (215,325 )
Impact of RMBS Issuer Settlement (2)(3)
—
(1,688 ) —
(14,822 )
Accretion of discount —
38,215
—
54,860
Realized credit losses 21,482
—
31,443
—
Purchases (624 ) 291
(2,510 ) 1,856
Sales 23,842
25,231
7,144
7,079
Transfers/release of credit reserve 9,321
(9,321 ) 25,393
(25,393 )
Balance at end of period $ (462,095 ) $ (102,297 ) $ (531,757 ) $ (191,745 )


~~(1)~~	~~Together with coupon interest, accretable purchase discount is recognized as interest income over the life of the security.~~


~~(2)~~	Includes the impact of approximately $2.7 million of cash proceeds (a one-time payment) received by the Company during the three and nine months ended September 30, 2018 in connection with the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by Lehman Brothers Holdings Inc.

~~(3)~~

Includes the impact of cash proceeds (a one-time payment) received by the Company in connection with the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by JP Morgan Chase & Co. and affiliated entities of approximately $1.7 million during the nine months ended September 30, 2019 and approximately $12.1 million during the nine months ended September 30, 2018.

~~The following table presents information with respect to the yield components of our Non-Agency MBS for the three months ended September 30, 2019 and 2018:~~

Three Months Ended September 30, 2019 Three Months Ended September 30, 2018

Legacy
Non-Agency MBS
RPL/NPL MBS
Legacy
Non-Agency MBS
RPL/NPL MBS
Non-Agency MBS
Coupon Yield (1)
6.92 % 5.18 % 6.32 % 4.56 %
Effective Yield Adjustment (2)
3.40
—
4.44
0.45
Net Yield 10.32 % 5.18 % 10.76 % 5.01 %


~~(1)~~	Reflects the annualized coupon interest income divided by the average amortized cost. The discounted purchase price on Legacy Non-Agency MBS causes the coupon yield to be higher than the pass-through coupon interest rate.


~~(2)~~	The effective yield adjustment is the difference between the net yield, calculated utilizing management’s estimates of timing and amount of future cash flows for Legacy Non-Agency MBS and RPL/NPL MBS, less the current coupon yield.

Actual maturities of MBS are generally shorter than stated contractual maturities because actual maturities of MBS are affected by the contractual lives of the underlying mortgage loans, periodic payments of principal and prepayments of principal. The following table presents certain information regarding the amortized costs, weighted average yields and contractual maturities of our MBS at September 30, 2019 and does not reflect the effect of prepayments or scheduled principal amortization on our MBS:

Within One Year One to Five Years Five to Ten Years Over Ten Years Total MBS
(Dollars in Thousands)
Amortized
Cost

Weighted
Average
Yield

Amortized
Cost

Weighted
Average
Yield

Amortized
Cost

Weighted
Average
Yield

Amortized
Cost

Weighted
Average
Yield

Total
Amortized
Cost

Total Fair
Value

Weighted
Average
Yield
Agency MBS:

Fannie Mae $ —
— % $ 663
2.80 % $ 417,660
1.72 % $ 846,079
2.39 % $ 1,264,402
$ 1,260,016
2.17 %
Freddie Mac —
—
—
—
211,475
1.71
336,966
1.78
548,441
549,610
1.75
Ginnie Mae —
—
—
—
70
3.70
4,124
3.49
4,194
4,247
3.49
Total Agency MBS $ —
— % $ 663
2.80 % $ 629,205
1.72 % $ 1,187,169
2.22 % $ 1,817,037
$ 1,813,873
2.05 %
Non-Agency MBS $ 26,937
5.85 % $ 103,165
4.39 % $ 1,982
4.12 % $ 1,833,273
8.58 % $ 1,965,357
$ 2,397,789
8.31 %
Total MBS $ 26,937
5.85 % $ 103,828
4.38 % $ 631,187
1.73 % $ 3,020,442
6.08 % $ 3,782,394
$ 4,211,662
5.30 %

~~CRT Securities~~

Deteriorated Loans. At September 30, ~~2019, our~~2020, the total investment in CRT securities was $377.9 million, with a net unrealized gain of $7.8 million, a weighted average yield of 3.95% and a weighted average time to maturity of 10.9 years. At December 31, 2018, our total investment in CRT securities was $492.8 million, with a net unrealized gain of $6.6 million, a weighted average yield of 5.85% and weighted average time to maturity of 11.1 years.

~~During three months ended September 30, 2019, we sold certain CRT securities for $29.0 million, realizing gains of $493,000. The net income impact~~fair value of these ~~sales, after reversal~~loans is estimated to be approximately $4.5 billion.

(2)Includes $884.2 million of ~~previously unrealized gains on CRT securities on which we had elected~~cash and cash equivalents, $5.3 million of restricted cash, $298.9 million of real estate owned, and $108.9 million of capital contributions made to loan origination partners, as well as other assets and other liabilities.

(3)Total Debt/Net Equity ratio represents the ~~fair value option, was~~sum of borrowings under our financing agreements noted above as a ~~loss~~multiple of ~~approximately $15,000.~~net equity allocated.

Table of Contents

Residential Whole Loans

The following table presents the contractual maturities of our residential whole ~~loans held by consolidated trusts and certain entities established in connection with our~~ loan ~~securitization transactions~~portfolios at September 30, ~~2019~~ ~~and does~~2020. Amounts presented do not reflect estimates of prepayments or scheduled amortization. ~~For Purchased Credit Impaired Loans held~~


(In Thousands)	Purchased Performing Loans (1)		Purchased Credit Deteriorated Loans (2)		Residential Whole Loans, at Fair Value
Amount due:
Within one year	$	648,713	$	707	$	4,614
After one year:
Over one to five years	86,090		4,383		5,452
Over five years	3,056,989		696,923		1,219,598
Total due after one year	$	3,143,079	$	701,306	$	1,225,050
Total residential whole loans	$	3,791,792	$	702,013	$	1,229,664

(1)Excludes an allowance for credit losses of $54.6 million at ~~carrying value, amounts presented are estimated based on the underlying loan contractual amounts.~~September 30, 2020.

(2)Excludes an allowance for credit losses of $51.7 million at September 30, 2020.

(In Thousands)
Purchased
Performing Loans (1)(2)
Purchased Credit
Impaired Loans Residential Whole Loans, at Fair Value
Amount due:
Within one year $ 725,252
$ 863
$ 7,388
After one year:
Over one to five years 273,977
4,210
7,060
Over five years 3,192,852
713,124
1,438,721
Total due after one year $ 3,466,829
$ 717,334
$ 1,445,781
Total residential whole loans $ 4,192,081
$ 718,197
$ 1,453,169


~~(1)~~	~~Excludes an allowance for loan losses of $388,000 at September 30, 2019.~~


~~(2)~~	~~Excludes approximately $59.5 million of Purchased Performing Loans for which the closing of the purchase transaction had not occurred as of September 30, 2019.~~

The following table presents, at September 30, ~~2019,~~2020, the dollar amount of certain of our residential whole loans, contractually maturing after one year, and indicates whether the loans have fixed interest rates or adjustable interest rates:


(In Thousands)	Purchased Performing Loans (1)(2)		Purchased Credit Deteriorated Loans (1)(3)		Residential Whole Loans, at Fair Value (1)
Interest rates:
Fixed	$	1,027,710	$	483,308	$	889,006
Adjustable	2,115,369		217,998		336,044
Total	$	3,143,079	$	701,306	$	1,225,050

(1)Includes loans on which borrowers have defaulted and are not making payments of principal and/or interest as of September 30, 2020.

(2)Excludes an allowance for credit losses of $54.6 million at September 30, 2020.

(3)Excludes an allowance for credit losses of $51.7 million at September 30, 2020.

Residential Mortgage Securities

Non-Agency MBS

The following table presents information with respect to our Non-Agency MBS at September 30, 2020 and December 31, 2019. During the three months ended June 30, 2020, we disposed of substantially all of our investments in Legacy Non-Agency MBS:


(In Thousands)	September 30, 2020		December 31, 2019
Non-Agency MBS
Face/Par	$	60,295	$	2,195,303
Fair Value	56,430		2,063,529
Amortized Cost	51,380		1,668,088
Purchase Discount Designated as Credit Reserve	(669)		(436,598)
Purchase Discount Designated as Accretable	(8,246)		(90,617)

Table of Contents

(In Thousands)
Purchased
Performing Loans (1)(2)(3)

Residential Whole Loans, at Fair Value (1)
Interest rates:
Fixed $ 1,042,617
$ 992,373
Adjustable 2,424,212
453,408
Total $ 3,466,829
$ 1,445,781
CRT Securities


~~(1)~~	~~Includes loans on which borrowers have defaulted and are not making payments of principal and/or interest as of September 30, 2019.~~


~~(2)~~	~~Excludes an allowance for loan losses of $388,000 at September 30, 2019.~~


~~(3)~~	~~Excludes approximately $59.5 million of Purchased Performing Loans for which the closing of the purchase transaction had not occurred as of September 30, 2019.~~

~~Information is not presented for Purchased Credit Impaired Loans held at carrying value as income is recognized based on pools~~At September 30, 2020, our total investment in CRT securities was $96.3 million, with a net unrealized gain of ~~assets~~ $10.6 million, a weighted average yield of 7.11% and a weighted average time to maturity of 18.7 years. At December 31, 2019, our total investment in CRT securities was $255.4 million, with ~~similar risk characteristics using an estimated~~a net unrealized gain of $6.2 million, a weighted average yield ~~based on cash flows expected~~of 4.18% and weighted average time to ~~be collected over~~maturity of 10.3 years.

Agency MBS

During the ~~lives~~six months ended June 30, 2020, we disposed of ~~the loans~~all of our Agency MBS. At December 31, 2019, our total investment in ~~such pools rather than on the contractual coupons~~Agency MBS was $1.7 billion, with a net unrealized loss of ~~the underlying loans.~~$3.4 million, a weighted average coupon of 3.83%.

MSR-Related Assets

At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we had ~~$1.1~~$234.1 million and $1.2 billion, ~~and $538.5 million,~~ respectively, of term notes issued by SPVs that have acquired the rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. At September 30, ~~2019~~,2020, these term notes had an amortized cost of ~~$1.1 billion, gross~~$184.5 million, net unrealized gains of ~~approximately $5.4~~$49.5 million, a weighted average yield of ~~4.99%~~12.10% and a weighted average term to maturity of ~~5.7~~9.5 years. At December 31, ~~2018,~~2019, these term notes had an amortized cost of ~~$538.5 million,~~$1.2 billion, gross unrealized losses of approximately ~~$7,000,~~$5.2 million, a weighted average yield of ~~5.32%~~4.75% and a weighted average term to maturity of ~~4.7~~5.3 years.

~~During the year ended December 31, 2018, we~~We have participated in a loan where we committed to lend ~~$100.0~~$32.6 million of which approximately ~~$60.2~~$18.1 million was drawn at September 30, ~~2019~~.2020. At September 30, ~~2019~~,2020, the coupon paid by the borrower on the drawn amount is ~~5.39%, the remaining term associated with the loan is~~5.52%. The facility expires in 11 ~~months and the remaining commitment period on any undrawn amount is 11~~ months.

~~Exposure to Financial Counterparties~~

We finance a significant portion of our residential mortgage assets with repurchase agreements. In connection with these financing arrangements, we pledge our assets as collateral to secure the borrowing. The amount of collateral pledged will typically exceed the amount of the financing with the extent of over-collateralization ranging from 3% to 5% of the amount borrowed for Agency MBS collateral, up to 35% for Non-Agency MBS, CRT securities, MSR-related asset and other interest-earning asset collateral, and up to 50% for residential whole loan collateral. Consequently, while repurchase agreement financing results in our recording a liability to the counterparty in our consolidated balance sheets, we are exposed to the counterparty, if during the term of the repurchase agreement financing, a lender should default on its obligation and we are not able to recover our pledged assets. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral.

~~The table below summarizes our exposure to our counterparties at~~ ~~September 30, 2019, by country:~~

(Dollars in Thousands)
Number of
Counterparties

Repurchase
Agreement
Financing

Exposure (1)

Exposure as a
Percentage of
MFA Total
Assets
European Countries: (2)

Switzerland (3) 3 $ 1,784,463
$ 533,756
4.07 %
United Kingdom 2 1,366,569
304,171
2.32
France 2 307,106
81,288
0.62
Holland 1 63,480
6,237
0.05
Total European 8 $ 3,521,618
$ 925,452
7.06 %
Other Countries:

United States 14 $ 3,829,800
$ 909,930
6.94 %
Canada (4) 2 839,212
216,941
1.66
Japan (5) 3 223,428
24,777
0.19
South Korea 1 158,487
16,746
0.13
Total Other 20 $ 5,050,927
$ 1,168,394
8.92 %
Total 28 $ 8,572,545
$ 2,093,846
15.98 %


~~(1)~~	Represents for each counterparty the amount of cash and/or securities pledged as collateral less the aggregate of repurchase agreement financing and net interest receivable/payable on all such instruments.


~~(2)~~	~~Includes European-based counterparties as well as U.S.-domiciled subsidiaries of the European parent entity.~~


~~(3)~~	~~Includes London branch of one counterparty and Cayman Islands branch of the other counterparty.~~


~~(4)~~	Includes Canada-based counterparties as well as U.S.-domiciled subsidiaries of Canadian parent entities. In the case of one counterparty, also includes exposure of $212.4 million to a Barbados-based affiliate of the Canadian parent entity.


~~(5)~~	~~Exposure is to U.S.-domiciled subsidiary of the Japanese parent entity.~~

~~At September 30, 2019, we did not use credit default swaps or other forms of credit protection to hedge the exposures summarized in the table above.~~

Uncertainty in the global financial market and weak economic conditions in Europe, including as a result of the United Kingdom’s vote to leave the European Union (commonly known as “Brexit”), could potentially impact our major European financial counterparties, with the possibility that this would also impact the operations of their U.S. domiciled subsidiaries. This could adversely affect our financing and operations as well as those of the entire mortgage sector in general. Management monitors our exposure to our repurchase agreement counterparties on a regular basis, using various methods, including review of recent rating agency actions or other developments and by monitoring the amount of cash and securities collateral pledged and the associated loan amount under repurchase agreements with our counterparties. We intend to make reverse margin calls on our counterparties to recover excess collateral as permitted by the agreements governing our financing arrangements, or take other necessary actions to reduce the amount of our exposure to a counterparty when such actions are considered necessary.

Tax Considerations

Current period estimated taxable income

We estimate that for the nine months ended September 30, ~~2019,~~2020, our taxable income was approximately ~~$263.6~~$56.6 million. ~~Based on dividends paid or declared during the nine months ended September 30, 2019, we have undistributed taxable income of approximately $17.9 million, or $0.04 per share.~~ We have until the filing of our ~~2019~~2020 tax return (due not later than October 15, ~~2020)~~2021) to declare the distribution of any ~~2019~~2020 REIT taxable income not previously distributed.

Key differences between GAAP net income and REIT Taxable Income for Residential Mortgage Securities and Residential Whole Loans

Our total Non-Agency MBS portfolio for tax differs from our portfolio reported for GAAP primarily due to the fact that for tax purposes: (i) certain of the MBS contributed to the VIEs used to facilitate MBS resecuritization transactions were deemed to be sold; and (ii) the tax basis of underlying MBS considered to be reacquired in connection with the unwind of such transactions became the fair value of such securities at the time of the unwind. For GAAP reporting purposes the underlying MBS that were included in these MBS resecuritization transactions were not considered to be sold. Similarly, for tax purposes the residential whole loans contributed to the VIE used to facilitate our second quarter 2017 loan securitization transaction were deemed to be sold for tax purposes, but not for GAAP reporting purposes. In addition, for our Non-Agency MBS and residential whole loan tax portfolios, potential timing differences arise with respect to the accretion of discount and amortization of premium into income as well as the recognition of realized losses for tax purposes as compared to GAAP. Further, use of fair value accounting for certain residential mortgage securities and residential whole loans for GAAP, but not for tax, also gives rise to potential timing differences. Consequently, our REIT taxable income calculated in a given period may differ significantly from our GAAP net income.

The determination of taxable income attributable to Non-Agency MBS and residential whole loans is dependent on a number of factors, including principal payments, defaults, loss mitigation efforts and loss severities. In estimating taxable income for Non-Agency MBS and residential whole loans during the year, management considers estimates of the amount of discount expected to be accreted. Such estimates require significant judgment and actual results may differ from these estimates. Moreover, the deductibility of realized losses from Non-Agency MBS and residential whole loans and their effect on discount accretion and premium amortization are analyzed on an asset-by-asset basis and, while they will result in a reduction of taxable income, this reduction tends to occur gradually and, primarily for Non-Agency MBS, in periods after the realized losses are reported. In addition, for securitization and resecuritization transactions that were treated as a sale of the underlying

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MBS or residential whole loans for tax purposes, taxable gain or loss, if any, resulting from the unwind of such transactions is not recognized in GAAP net income.

Securitization transactions result in differences between GAAP net income and REIT Taxable Income

For tax purposes, depending on the transaction structure, a securitization and/or resecuritization transaction may be treated either as a sale or a financing of the underlying collateral. Income recognized from securitization and resecuritization transactions will differ for tax and GAAP purposes. For tax purposes, we own and may in the future acquire interests in securitization and/or resecuritization trusts, in which several of the classes of securities are or will be issued with original issue discount (or OID). As the holder of the retained interests in the trust, we generally will be required to include OID in our current gross interest income over the term of the applicable securities as the OID accrues. The rate at which the OID is recognized into taxable income is calculated using a constant rate of yield to maturity, with realized losses impacting the amount of OID recognized in REIT taxable income once they are actually incurred. ~~Under the Tax Cuts and Jobs Act of 2017 (or TCJA), the timing of REIT taxable income may be affected by when we include such income for financial accounting purposes.~~ For tax purposes, REIT taxable income may be recognized in excess of economic income (i.e., OID) or in advance of the corresponding cash flow from these assets, thereby affecting our dividend distribution requirement to stockholders. In addition, for securitization and/or resecuritization transactions that were treated as a sale of the underlying collateral for tax purposes, the unwinding of any such transaction will likely result in a taxable gain or loss that is likely not recognized in GAAP net income since securitization and resecuritization transactions are typically accounted for as financing transactions for GAAP purposes. The tax basis of underlying residential whole loans or MBS re-acquired in connection with the unwind of such transactions becomes the fair market value of such assets at the time of the unwind.

Taxable income of consolidated TRS subsidiaries is included in GAAP income, but may not be included in REIT Taxable Income

Net income generated by our TRS subsidiaries is included in consolidated GAAP net income, but may not be included in REIT taxable income in the same period. Net income of U.S. domiciled TRS subsidiaries is included in REIT taxable income

when distributed by the TRS. Net income of foreign domiciled TRS subsidiaries is included in REIT taxable income as if distributed to the REIT in the taxable year it is earned by the foreign domiciled TRS.

Regulatory Developments

The U.S. Congress, Federal Reserve, U.S. Treasury, Federal Deposit Insurance Corporation, SEC and other governmental and regulatory bodies have taken and continue to consider additional actions in response to the 2007-2008 financial crisis. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (or the Dodd-Frank Act) created a new regulator, an independent bureau housed within the Federal Reserve System known as the Consumer Financial Protection Bureau (or the CFPB). The CFPB has broad authority over a wide range of consumer financial products and services, including mortgage lending and servicing. One portion of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act (or Mortgage Reform Act), contains underwriting and servicing standards for the mortgage industry, restrictions on compensation for mortgage loan originators, and various other requirements related to mortgage origination and servicing. In addition, the Dodd-Frank Act grants enforcement authority and broad discretionary regulatory authority to the CFPB to prohibit or condition terms, acts or practices relating to residential mortgage loans that the CFPB finds abusive, unfair, deceptive or predatory, as well as to take other actions that the CFPB finds are necessary or proper to ensure responsible affordable mortgage credit remains available to consumers. The Dodd-Frank Act also affects the securitization of mortgages (and other assets) with requirements for risk retention by securitizers and requirements for regulating rating agencies.

~~The~~Numerous regulations have been issued pursuant to the Dodd-Frank Act, ~~requires that numerous~~including regulations ~~be issued, many of which (including those mentioned above~~ regarding mortgage loan servicing, underwriting and ~~mortgage~~ loan originator ~~compensation) have only recently been implemented~~compensation and ~~operationalized.~~others could be issued in the future. As a result, we are unable to fully predict at this time how the Dodd-Frank Act, as well as other laws or regulations that may be adopted in the future, will affect our business, results of operations and financial condition, or the environment for repurchase financing and other forms of borrowing, the investing environment for Agency MBS, Non-Agency MBS and/or residential mortgage loans, the securitization industry, Swaps and other derivatives. ~~However, at a minimum, we~~We believe that the Dodd-Frank Act and the regulations promulgated thereunder are likely to continue to increase the economic and compliance costs for participants in the mortgage and securitization industries, including us.

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In addition to the regulatory actions being implemented under the Dodd-Frank Act, on August 31, 2011, the SEC issued a concept release under which it is reviewing interpretive issues related to Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C) excludes from the definition of “investment company” entities that are primarily engaged in, among other things, “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Many companies that engage in the business of acquiring mortgages and mortgage-related instruments seek to rely on existing interpretations of the SEC Staff with respect to Section 3(c)(5)(C) so as not to be deemed an investment company for the purpose of regulation under the Investment Company Act. In connection with the concept release, the SEC requested comments on, among other things, whether it should reconsider its existing interpretation of Section 3(c)(5)(C). To date the SEC has not taken or otherwise announced any further action in connection with the concept release.

The Federal Housing Finance Agency (or FHFA) and both houses of Congress have discussed and considered separate measures intended to restructure the U.S. housing finance system and the operations of Fannie Mae and Freddie Mac. Congress may continue to consider legislation that would significantly reform the country’s mortgage finance system, including, among other things, eliminating Freddie Mac and Fannie Mae and replacing them with a single new MBS insurance agency. Many details remain unsettled, including the scope and costs of the agencies’ guarantee and their affordable housing mission, some of which could be addressed even in the absence of large-scale reform. On March 27, 2019, President Trump issued a memorandum on federal housing finance reform that directed the Secretary of the Treasury to develop a plan for administrative and legislative reforms as soon as practicable to achieve the following housing reform goals: 1) ending the conservatorships of the Government-sponsored enterprises (or GSEs) upon the completion of specified reforms; 2) facilitating competition in the housing finance market; 3) establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States; and 4) providing that the federal government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market. On September 5, 2019, in response to President Trump’s memorandum, the U.S. Department of the Treasury released a plan, developed in conjunction with the FHFA, the Department of Housing and Urban Development, and other government agencies, which includes legislative and administrative reforms to achieve each of these reform goals. At this point, it remains unclear whether any of these legislative or regulatory reforms will be enacted or implemented. The prospects for passage of any of these plans are uncertain, but the proposals underscore the potential for change to Fannie Mae and Freddie Mac. On ~~September 30, 2019,~~May 20, 2020, in connection with its stated intention to responsibly end the ~~Treasury Department and FHFA jointly announced an agreement to permit~~conservatorship of the GSEs, ~~to retain capital~~the FHFA issued a notice of ~~up to a combined $45 billion. In conjunction with this agreement on capital retention, FHFA is also expected to continue work~~proposed rulemaking and request for comments (“Proposed Rule”) on a new regulatory capital framework for Fannie Mae and Freddie Mac. The Proposed Rule is a re-proposal of the regulatory capital framework originally proposed ~~rule for GSE~~in 2018 that would have established new risk-based capital requirements ~~that would take effect once~~for the GSEs ~~have been released from government conservatorship.~~and updated the minimum leverage requirements. The re-proposal contains enhancements to establish a post-conservatorship regulatory capital framework that ensures that each Enterprise operates in a safe and sound manner and is positioned to fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market across the economic cycle, in particular during periods of financial stress. Comments on the Proposed Rule are due 60 days after publication in in the Federal Register.

While the likelihood of enactment of major mortgage finance system reform in the short term remains uncertain, it is possible that the adoption of any such reforms could adversely affect the types of assets we can buy, the costs of these assets and our business operations. As the FHFA and both houses of Congress continue to consider various measures intended to dramatically restructure the U.S. housing finance system and the operations of Fannie Mae and Freddie Mac, we expect debate and discussion on the topic to continue throughout ~~2019,~~2020, and we cannot be certain whether alternative plans may be proposed by the Trump Administration, or if any housing and/or mortgage-related legislation will emerge from committee or be approved by Congress, or the extent to which administrative reforms may be implemented, and if so, what the effect would be on our business.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. Among the provisions in this wide-ranging law are protections for homeowners experiencing financial difficulties due to the COVID-19 pandemic, including forbearance provisions and procedures. Borrowers with federally backed mortgage loans, regardless of delinquency status, may request loan forbearance for a six-month period, which could be extended for another six-month period if necessary. Federally backed mortgage loans are loans secured by first- or subordinate-liens on 1-4 family residential real property, including individual units of condominiums and cooperatives, which are insured or guaranteed pursuant to certain government housing programs, such as by the Federal Housing Administration, Federal Housing Administration, or U.S. Department of Agriculture, or are purchased or securitized by Fannie Mae or Freddie Mac. The CARES Act also includes a temporary 60 day foreclosure moratorium that applies to federally backed mortgage loans, which lasted until July 24, 2020. However, the moratorium has been extended to December 31, 2020 by Fannie Mae, Federal Housing Administration and the U.S. Department of Agriculture. Some states and local jurisdictions have also implemented moratoriums on foreclosures.

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Results of Operations

Quarter Ended September 30, ~~2019~~2020 Compared to the Quarter Ended September 30, ~~2018~~2019

��

General

For the third quarter of ~~2019,~~2020, we had net income available to our common stock and participating securities of ~~$91.8~~$79.0 million, or ~~$0.20~~$0.17 per basic and diluted common share, compared to net income available to common stock and participating securities of ~~$83.4~~$91.8 million, or ~~$0.19~~$0.20 per basic and diluted common share, for the third quarter of ~~2018.~~2019. Following the unprecedented disruption in residential mortgage markets due to concerns related to the COVID-19 pandemic that was experienced late in first quarter and into the second quarter of 2020, management focused on taking actions to bolster and stabilize our balance sheet including significant sales of assets to improve our liquidity position and renegotiated the financing associated with our remaining investments. The ~~increase~~combination of the impact of assets sales as well as higher interest expense incurred related to these new financing transactions that we entered into late in the second quarter resulted in the significant reduction in net interest income ~~available~~from our investments in the current quarter compared to ~~common stock and participating securities primarily reflects~~the prior year period. In addition, in the current period, we recorded lower ~~unrealized losses~~net realized gains on sales of residential mortgage ~~securities measured at fair value through earnings,~~assets. These decreases were partially offset by higher ~~net~~ gains on our residential whole loans measured at fair value through earnings ~~higher net Other income, partially offset by~~and a reversal of a portion of our provision for credit losses ~~realized~~ on the unwind of certain Swaps not designated as hedges for accounting purposes. In addition, operating and other expenses were higher for the third quarter of 2019, primarily due to higher costs in connection with managing our residential whole ~~loan and REO portfolios, which have grown significantly compared to the prior year period, and higher compensation related expenses, reflecting higher headcount.~~loans held at carrying values.

For the third quarter of 2019, Core earnings was $0.20 per common share, compared to $0.21 per basic and diluted common share for the third quarter of 2018. Core earnings is a non-GAAP measure of our financial performance and is computed by adjusting GAAP net income available to common and participating securities by excluding the impact of unrealized gains and losses on certain of our investments. For additional information regarding the calculation of Core earnings, including to reconcile to GAAP net income available to common stock and participating securities, refer to page 83 under the heading “Core Earnings”.

Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense) and prepayment speeds on our investments. Interest rates and CPRs (which measure the amount of unscheduled principal prepayment on a bond or loan as a percentage of its unpaid balance) vary according to the type of investment, conditions in the financial markets and other factors, none of which can be predicted with any certainty.

The changes in average interest-earning assets and average interest-bearing liabilities and their related yields and costs are discussed in greater detail below under “Interest Income” and “Interest Expense.”

For the third quarter of ~~2019,~~2020, our net interest spread and margin were ~~1.82%~~0.03% and ~~2.19%~~0.76%, respectively, compared to a net interest spread and margin of ~~2.41%~~1.82% and ~~2.82%~~2.19%, respectively, for the third quarter of ~~2018.~~2019. Our net interest income decreased by ~~$1.7~~$46.8 million, or ~~2.8%~~82.22%, to $10.1 million for the third quarter of 2020 compared to net interest income of $56.9 million for the third quarter of ~~2019, from $58.6 million for~~2019. For the third quarter of ~~2018. Current quarter~~2020, net interest income ~~from Legacy Non-Agency MBS, CRT~~for our residential mortgage securities and ~~Agency MBS declined~~MSR-related asset portfolios decreased by approximately ~~$15.9~~$30.4 million compared to the third quarter of ~~2018,~~2019, primarily due to lower average amounts invested in these securities ~~lower yields earned on our CRT securities~~due to portfolio sales in the first and ~~Legacy Non-Agency MBS, and higher funding costs for our Agency MBS, partially offset by higher yields earned on our Agency MBS portfolio. These decreases were primarily offset by higher~~second quarters of 2020. In addition, net interest income includes lower net interest income from residential whole loans held at carrying value ~~and MSR-related assets~~of approximately $7.6 million compared to the third quarter of ~~2018 of approximately $18.3 million,~~2019 primarily due to lower yields earned on these assets, an increase in our average borrowings to finance our residential whole loans at carrying value portfolio, which was partially offset by lower funding costs for and higher average amounts invested in these assets. ~~In addition, net~~We also incurred approximately $13.8 million in interest expense related to the senior secured credit agreement we entered into during the second quarter of 2020. Net interest income for the third quarter of 2020 also includes ~~$11.7~~$8.1 million of interest expense associated with residential whole loans held at fair value, reflecting a ~~$1.3~~$3.6 million ~~increase~~decrease in borrowing costs related to these investments compared to the third quarter of ~~2018.~~2019, as a result of a decrease in our average balance to finance these assets. Coupon interest income received from residential whole loans held at fair value is presented as a component of the total income earned on these investments and therefore is included in Other Income, net rather than net interest income.

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Analysis of Net Interest Income

The following table sets forth certain information about the average balances of our assets and liabilities and their related yields and costs for the three months ended September 30, ~~2019~~2020 and ~~2018~~2019. Average yields are derived by dividing annualized interest income by the average amortized cost of the related assets, and average costs are derived by dividing annualized interest expense by the daily average balance of the related liabilities, for the periods shown. The yields and costs include premium amortization and purchase discount accretion which are considered adjustments to interest rates.


	Three Months Ended September 30,
	2020						2019
(Dollars in Thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Assets:
Interest-earning assets:
Residential whole loans, at carrying value (1)	$	4,699,124	$	54,393	4.63	%	$	4,604,305	$	64,226	5.58	%
Agency MBS (2)	—		—		—		2,037,817		11,806		2.32
Legacy Non-Agency MBS (2)	2,253		48		8.52		1,214,589		31,347		10.32
RPL/NPL MBS (2)	50,293		905		7.20		1,021,398		13,235		5.18
Total MBS	52,546		953		7.25		4,273,804		56,388		5.28
CRT securities (2)	85,529		1,376		6.44		390,051		4,251		4.36
MSR-related assets (2)	211,791		6,241		11.79		1,160,627		15,274		5.26
Cash and cash equivalents (3)	754,493		100		0.05		199,070		903		1.81
Other interest-earning assets	123,073		3,017		9.81		105,867		1,679		6.34
Total interest-earning assets	5,926,556		66,080		4.46		10,733,724		142,721		5.32
Total non-interest-earning assets	1,650,120						2,448,754
Total assets	$	7,576,676					$	13,182,478

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Collateralized financing agreements (4)(5)	$	3,511,403	$	30,929	3.45	%	$	8,654,350	$	74,240	3.36	%
Securitized debt (6)	607,893		5,318		3.42		617,689		5,692		3.61
Convertible Senior Notes	224,666		3,898		6.94		223,496		3,879		6.94
Senior Notes	96,891		2,012		8.31		96,842		2,012		8.31
Senior secured credit agreement	499,796		13,807		11.00		—		—		—
Total interest-bearing liabilities	4,940,649		55,964		4.43		9,592,377		85,823		3.50
Total non-interest-bearing liabilities	118,145						189,429
Total liabilities	5,058,794						9,781,806
Stockholders’ equity	2,517,882						3,400,672
Total liabilities and stockholders’ equity	$	7,576,676					$	13,182,478

Net interest income/net interest rate spread (7)			$	10,116	0.03	%			$	56,898	1.82	%
Net interest-earning assets/net interest margin (8)	$	985,907			0.76	%	$	1,141,347			2.19	%

Three Months Ended September 30,
2019 2018
(Dollars in Thousands) Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost
Assets:

Interest-earning assets:

Agency MBS (1)
$ 2,037,817
$ 11,806
2.32 % $ 2,595,896
$ 14,332
2.21 %
Legacy Non-Agency MBS (1)
1,214,589
31,347
10.32
1,709,704
46,010
10.76
RPL/NPL MBS (1)
1,021,398
13,235
5.18
1,010,910
12,657
5.01
Total MBS 4,273,804
56,388
5.28
5,316,510
72,999
5.49
CRT securities (1)
390,051
4,251
4.36
500,649
7,748
6.19
Residential whole loans, at carrying value (2)
4,602,337
64,226
5.58
2,003,913
29,524
5.89
MSR-related assets (1)
1,160,627
15,274
5.26
482,100
6,407
5.32
Cash and cash equivalents (3)
199,070
903
1.81
181,242
754
1.66
Other interest-earning assets 105,867
1,679
6.34
—
—
—
Total interest-earning assets 10,731,756
142,721
5.32
8,484,414
117,432
5.54
Total non-interest-earning assets 2,449,468

2,838,746

Total assets $ 13,181,224

$ 11,323,160

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Total repurchase agreements (4)
$ 8,654,350
$ 74,240
3.36 % $ 6,594,050
$ 50,881
3.02 %
Securitized debt 617,689
5,692
3.61
665,572
5,986
3.52
Convertible Senior Notes 223,496
3,879
6.94
—
—
—
Senior Notes 96,842
2,012
8.31
96,797
2,011
8.31
Total interest-bearing liabilities 9,592,377
85,823
3.50
7,356,419
58,878
3.13
Total non-interest-bearing liabilities 188,175

551,749

Total liabilities 9,780,552

7,908,168

Stockholders’ equity 3,400,672

3,414,992

Total liabilities and stockholders’ equity $ 13,181,224

$ 11,323,160

Net interest income/net interest rate spread (5)
$ 56,898
1.82 % $ 58,554
2.41 %
Net interest-earning assets/net interest margin (6)
$ 1,139,379
2.19 % $ 1,127,995
2.82 %

(1)Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.

(2)Yields presented throughout this Quarterly Report on Form 10-Q are calculated using average amortized cost data for securities which excludes unrealized gains and losses and includes principal payments receivable on securities. For GAAP reporting purposes, purchases and sales are reported on the trade date. Average amortized cost data used to determine yields is calculated based on the settlement date of the associated purchase or sale as interest income is not earned on purchased assets and continues to be earned on sold assets until settlement date.

(3)Includes average interest-earning cash, cash equivalents and restricted cash.

(4)Collateralized financing agreements include the following: Secured term notes, Non-mark-to-market term-asset based financing and repurchase agreements. For additional information, see Note 6, included under Item 1 of this Quarterly Report on Form 10-Q.

(5)Average cost of financing agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.

(6)Includes both Securitized debt, at carrying value and Securitized debt, at fair value.

(7)Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.

(8)Net interest margin reflects annualized net interest income divided by average interest-earning assets.

Table of Contents

~~(1)~~

Yields presented throughout this Quarterly Report on Form 10-Q are calculated using average amortized cost data for securities which excludes unrealized gains and losses and includes principal payments receivable on securities. For GAAP reporting purposes, purchases and sales are reported on the trade date. Average amortized cost data used to determine yields is calculated based on the settlement date of the associated purchase or sale as interest income is not earned on purchased assets and continues to be earned on sold assets until settlement date.


~~(2)~~	~~Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.~~


~~(3)~~	~~Includes average interest-earning cash, cash equivalents and restricted cash.~~


~~(4)~~	~~Average cost of repurchase agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.~~


~~(5)~~	~~Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.~~


~~(6)~~	~~Net interest margin reflects annualized net interest income divided by average interest-earning assets.~~

Rate/Volume Analysis

The following table presents the extent to which changes in interest rates (yield/cost) and changes in the volume (average balance) of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) the changes attributable to changes in volume (changes in average balance multiplied by prior rate); (ii) the changes attributable to changes in rate (changes in rate multiplied by prior average balance); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately, based on absolute values, to the changes due to rate and volume.

Three Months Ended September 30, 2019
Compared to
Three Months Ended September 30, 2018
Increase/(Decrease) due to
Total Net
Change in
Interest Income/Expense
(In Thousands) Volume Rate
Interest-earning assets:

Agency MBS $ (3,218 ) $ 692
$ (2,526 )
Legacy Non-Agency MBS (12,833 ) (1,830 ) (14,663 )
RPL/NPL MBS 135
443
578
CRT securities (1,495 ) (2,002 ) (3,497 )
Residential whole loans, at carrying value (1)
36,341
(1,639 ) 34,702
MSR-related assets 8,930
(63 ) 8,867
Cash and cash equivalents 78
71
149
Other interest-earning assets 1,679
—
1,679
Total net change in income from interest-earning assets $ 29,617
$ (4,328 ) $ 25,289

Interest-bearing liabilities:
Agency repurchase agreements $ (2,422 ) $ 1,380
$ (1,042 )
Legacy Non-Agency repurchase agreements (2,767 ) (215 ) (2,982 )
RPL/NPL MBS repurchase agreements 303
154
457
CRT securities repurchase agreements (741 ) (15 ) (756 )
MSR-related assets repurchase agreements 4,440
154
4,594
Residential whole loans at carrying value repurchase agreements 20,904
(19 ) 20,885
Residential whole loans at fair value repurchase agreements 1,632
(265 ) 1,367
Other repurchase agreements 836
—
836
Securitized debt (437 ) 143
(294 )
Convertible Senior Notes 3,879
—
3,879
Senior Notes 1
—
1
Total net change in expense of interest-bearing liabilities $ 25,628
$ 1,317
$ 26,945
Net change in net interest income $ 3,989
$ (5,645 ) $ (1,656 )


	Three Months Ended September 30, 2020
	Compared to
	Three Months Ended September 30, 2019
	Increase/(Decrease) due to				Total Net Change in Interest Income/Expense
(In Thousands)	Volume		Rate
Interest-earning assets:
Residential whole loans, at carrying value (1)	$	1,299	$	(11,132)	$	(9,833)
Residential mortgage securities	(72,235)		13,925		(58,310)
MSR-related assets	(18,637)		9,604		(9,033)
Cash and cash equivalents	705		(1,508)		(803)
Other interest-earning assets	307		1,031		1,338
Total net change in income from interest-earning assets	$	(88,561)	$	11,920	$	(76,641)

Interest-bearing liabilities:
Residential whole loan at carrying value financing agreements	$	855	$	(3,369)	$	(2,514)
Residential whole loan at fair value financing agreements	(2,216)		(787)		(3,003)
Residential mortgage securities repurchase agreements	(36,909)		6,260		(30,649)
MSR-related assets repurchase agreements	(6,754)		450		(6,304)
Other repurchase agreements	(302)		(539)		(841)
Securitized debt	(89)		(285)		(374)
Convertible Senior Notes and Senior Notes	23		(4)		19
Senior secured credit agreement	13,807		—		13,807
Total net change in expense from interest-bearing liabilities	$	(31,585)	$	1,726	$	(29,859)
Net change in net interest income	$	(56,976)	$	10,194	$	(46,782)


~~(1)~~	~~Excludes residential whole loans held at fair value which are reported as a component of non-interest-earning assets.~~

(1)Excludes residential whole loans held at fair value which are reported as a component of non-interest-earning assets.

Table of Contents

The following table presents certain quarterly information regarding our net interest spread and net interest margin for the quarterly periods presented:

Total Interest-Earning Assets and Interest-
Bearing Liabilities

Net Interest
Spread (1)

Net Interest
Margin (2)
Quarter Ended
September 30, 2019 1.82 % 2.19 %
June 30, 2019 1.90
2.29
March 31, 2019 1.98
2.41
December 31, 2018 2.17
2.60
September 30, 2018 2.41
2.82


	Total Interest-Earning Assets and Interest- Bearing Liabilities
	Net Interest Spread (1)		Net Interest Margin (2)
Quarter Ended
September 30, 2020	0.03	%	0.76	%
June 30, 2020	(0.90)		0.02
March 31, 2020	1.82		2.20
December 31, 2019	2.33		2.68
September 30, 2019	1.82		2.19


~~(1)~~	~~Reflects the difference between the yield on average interest-earning assets and average cost of funds.~~


~~(2)~~	~~Reflects annualized net interest income divided by average interest-earning assets.~~

(1)Reflects the difference between the yield on average interest-earning assets and average cost of funds.

(2)Reflects annualized net interest income divided by average interest-earning assets.

The following table presents the components of the net interest spread earned on our ~~Agency MBS, Legacy Non-Agency MBS~~Residential whole loans, at carrying value for the quarterly periods presented:


	Purchased Performing Loans						Purchased Credit Deteriorated Loans						Total Residential Whole Loans, at Carrying Value
Quarter Ended	Net Yield (1)		Cost of Funding (2)		Net Interest Spread (3)		Net Yield (1)		Cost of Funding (2)		Net Interest Spread (3)		Net Yield (1)		Cost of Funding (2)		Net Interest Spread (3)
September 30, 2020	4.58	%	3.42	%	1.16	%	4.89	%	3.22	%	1.67	%	4.63	%	3.39	%	1.24	%
June 30, 2020	5.17		6.34		(1.17)		5.07		6.03		(0.96)		5.15		6.30		(1.15)
March 31, 2020	5.10		3.44		1.66		4.84		3.39		1.45		5.07		3.43		1.64
December 31, 2019	5.24		3.61		1.63		5.79		3.51		2.28		5.31		3.59		1.72
September 30, 2019	5.55		3.92		1.63		5.76		3.79		1.97		5.58		3.90		1.68

(1)Reflects annualized interest income on Residential whole loans, at carrying value divided by average amortized cost of Residential whole loans, at carrying value. Excludes servicing costs.

(2)Reflects annualized interest expense divided by average balance of repurchase agreements and ~~RPL/NPL MBS~~securitized debt. Total Residential whole loans, at carrying value cost of funding include, 3, 5 and 3 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended March 31, 2020, December 31, 2019 and September 30, 2019, respectively. Cost of funding for the quarter ended June 30, 2020 includes the impact of amortization of $10.7 million of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes. The amortization of these losses increased the funding cost by 116 basis points for Purchased Performing Loans, 107 basis points for Purchased Credit Deteriorated Loans, and 115 basis points for total Residential whole loans, at carrying value during the quarter ended June 30, 2020. At June 30, 2020, following the closing of certain financing transactions and our exit from forbearance arrangements, and an evaluation of our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring. In addition, cost of funding for the quarter ended June 30, 2020 is significantly higher than prior periods as it reflects default interest and/or higher rates charged by lenders while we were under a forbearance agreement. In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.

(3)Reflects the difference between the net yield on average Residential whole loans, at carrying value and average cost of funds on Residential whole loans, at carrying value.

Table of Contents

The following table presents the components of the net interest spread earned on our residential mortgage securities and MSR-related assets for the quarterly periods presented:

Agency MBS Legacy Non-Agency MBS RPL/NPL MBS Total MBS
Quarter Ended
Net
Yield
(1)

Cost of
Funding (2)

Net Interest
Rate
Spread (3)

Net
Yield
(1)

Cost of
Funding (2)

Net Interest
Rate
Spread (3)

Net
Yield
(1)

Cost of
Funding (2)

Net Interest
Rate
Spread (3)

Net
Yield
(1)

Cost of
Funding (2)

Net Interest
Rate
Spread (3)
September 30, 2019 2.32 % 2.47 % (0.15 )% 10.32 % 3.24 % 7.08 % 5.18 % 3.18 % 2.00 % 5.28 % 2.86 % 2.42 %
June 30, 2019 2.50
2.56
(0.06 ) 11.30
3.30
8.00
4.98
3.39
1.59
5.45
2.95
2.50
March 31, 2019 2.77
2.53
0.24
10.45
3.30
7.15
4.90
3.43
1.47
5.31
2.95
2.36
December 31, 2018 2.72
2.36
0.36
10.65
3.30
7.35
4.82
3.27
1.55
5.36
2.82
2.54
September 30, 2018 2.21
2.22
(0.01 ) 10.76
3.29
7.47
5.01
3.10
1.91
5.49
2.73
2.76


	Residential Mortgage Securities						MSR-Related Assets
Quarter Ended	Net Yield (1)		Cost of Funding (2)		Net Interest Rate Spread (3)		Net Yield (1)		Cost of Funding		Net Interest Rate Spread (3)
September 30, 2020	6.75	%	3.60	%	3.15	%	11.79	%	3.43	%	8.36	%
June 30, 2020	6.09		5.23		0.86		9.96		6.21		3.75
March 31, 2020	5.40		2.72		2.68		4.74		2.56		2.18
December 31, 2019	6.54		3.26		3.28		4.88		2.82		2.06
September 30, 2019	7.44		3.21		4.23		5.26		3.23		2.03


~~(1)~~	~~Reflects annualized interest income on MBS divided by average amortized cost of MBS.~~

~~(2)~~

Reflects annualized interest expense divided by average balance of repurchase agreements, including the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration and securitized debt. Agency MBS cost of funding includes 1, (9), (13), (5), and 6 basis points and Legacy Non-Agency MBS cost of funding includes 1, (14), (20), (4), and 5 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018 and September 30, 2018, respectively.


~~(3)~~	~~Reflects the difference between the net yield on average MBS and average cost of funds on MBS.~~

(1)Reflects annualized interest income on divided by average amortized cost.

(2)Reflects annualized interest expense divided by average balance of repurchase agreements, including the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration and securitized debt. Agency MBS cost of funding includes 78, 36 and 1 basis points and Legacy Non-Agency MBS cost of funding includes 52, 24, and 1 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended March 31, 2020, December 31, 2019 and September 30, 2019, respectively. Cost of funding for the quarter ended June 30, 2020 includes the impact of amortization of $278,000 of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes. The amortization of these losses increased the funding cost by 174 basis points for total RPL/NPL MBS during the quarter ended June 30, 2020. At June 30, 2020, following the closing of certain financing transactions and our exit from forbearance arrangements, and an evaluation of our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring. In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.

(3)Reflects the difference between the net yield on average and average cost of funds.

Interest Income

Interest income on our Agency MBS for the third quarter of 2019 decreased by $2.5 million, or 17.6%, to $11.8 million from $14.3 million for the third quarter of 2018. This decrease primarily reflects a $558.1 million decrease in the average amortized cost of our Agency MBS portfolio, due primarily to portfolio run-off and sales, to $2.0 billion for the third quarter of 2019 from $2.6 billion for the third quarter of 2018 partially offset by an increase in the net yield on our Agency MBS to 2.32% for the third quarter of 2019 from 2.21% for the third quarter of 2018. At the end of the third quarter of 2019, the average coupon on mortgages underlying our Agency MBS was higher compared to the end of the third quarter of 2018. In addition, for the third quarter of 2019, our Agency MBS portfolio experienced an 18.6% CPR and we recognized $7.2 million of net premium amortization compared to a CPR of 16.8% and $7.2 million of net premium amortization for the third quarter of 2018. At September 30, 2019, we had net purchase premiums on our Agency MBS of $68.3 million, or 3.9% of current par value, compared to net purchase premiums of $103.0 million, or 3.9% of par value, at December 31, 2018.

Interest income on our Non-Agency MBS decreased $14.1 million, or 24.0%, for the third quarter of 2019 to $44.6 million compared to $58.7 million for the third quarter of 2018. This decrease is primarily due to portfolio run-off and sales of Legacy Non-Agency MBS and resulted in a decrease in the average amortized cost of our Non-Agency MBS portfolio of $484.6 million, or 17.8%, to $2.2 billion for the third quarter of 2019 from $2.7 billion for the third quarter of 2018.

Interest income on our Legacy Non-Agency MBS for the third quarter of 2019 decreased $14.7 million to $31.3 million from $46.0 million for the third quarter of 2018. This decrease primarily reflects a $495.1 million decrease in the average amortized cost of our Legacy Non-Agency MBS portfolio to $1.2 billion for the third quarter of 2019 from $1.7 billion for the third quarter of 2018 and a decrease in the net yield on this portfolio to 10.32% for the third quarter of 2019 compared to 10.76% for the third quarter of 2018. The decrease in the net yield on our Legacy Non-Agency MBS portfolio primarily reflects higher accretion income recognized in the prior year quarter due to the impact of redemptions of certain securities that had been previously purchased at a discount, and changes in interest rates since the third quarter of the prior year.

Interest income on our RPL/NPL MBS portfolio increased $578,000 to $13.2 million for the third quarter of 2019 from $12.7 million for the third quarter of 2018. This increase primarily reflects an increase in the net yield on our RPL/NPL MBS portfolio to 5.18% for the third quarter of 2019 compared to 5.01% for the third quarter of 2018 and a $10.5 million increase in the average amortized cost of this portfolio for the third quarter of 2019 from the third quarter of 2018. The increase in the net yield primarily reflects an increase in the average coupon yield to 5.18% for the third quarter of 2019 from 4.56% for the third quarter of 2018.

During the third quarter of 2019, we recognized net purchase discount accretion of $10.3 million on our Non-Agency MBS, compared to $20.1 million for the third quarter of 2018. At September 30, 2019, we had net purchase discounts of $563.9 million, including Credit Reserve and previously recognized OTTI of $462.1 million, on our Legacy Non-Agency MBS, or 33.1% of par value. During the third quarter of 2019 we reallocated $930,000 of purchase discount designated as Credit Reserve to accretable purchase discount.

The following table presents the coupon yield and net yields earned on our Agency MBS, Legacy Non-Agency MBS and RPL/NPL MBS and weighted average CPRs experienced for such MBS for the quarterly periods presented:

Agency MBS Legacy Non-Agency MBS RPL/NPL MBS
Quarter Ended
Coupon Yield (1)

Net Yield (2)

3 Month Average CPR (3)

Coupon Yield (1)

Net Yield (2)

3 Month Average CPR (3)

Coupon Yield (1)

Net Yield (2)

3 Month Average Bond CPR (4)
September 30, 2019 3.73 % 2.32 % 18.6 % 6.92 % 10.32 % 14.9 % 5.18 % 5.18 % 18.2 %
June 30, 2019 3.76
2.50
18.3
6.91
11.30
15.7
4.98
4.98
16.1
March 31, 2019 3.69
2.77
13.6
6.78
10.45
12.7
4.86
4.90
11.6
December 31, 2018 3.58
2.72
12.5
6.64
10.65
14.7
4.75
4.82
12.9
September 30, 2018 3.32
2.21
16.8
6.32
10.76
16.8
4.56
5.01
19.6


~~(1)~~	Reflects the annualized coupon interest income divided by the average amortized cost. The discounted purchase price on Legacy Non-Agency MBS causes the coupon yield to be higher than the pass-through coupon interest rate.


~~(2)~~	~~Reflects annualized interest income on MBS divided by average amortized cost of MBS.~~


~~(3)~~	~~3 month average CPR weighted by positions as of the beginning of each month in the quarter.~~


~~(4)~~	~~All principal payments are considered to be prepayments for CPR purposes.~~

Interest income on our residential whole loans held at carrying value ~~increased~~decreased by ~~$34.7~~$9.8 million, or ~~117.5%~~15.3%, for the third quarter of ~~2019,~~2020, to ~~$64.2~~$54.4 million compared to ~~$29.5~~$64.2 million for the third quarter of ~~2018.~~2019. This ~~increase~~decrease primarily reflects a ~~$2.6 billion~~decrease in the yield (excluding servicing costs) to 4.63% for the third quarter of 2020 from 5.58% for the third quarter of 2019 partially offset by a $94.8 million increase in the average balance of this portfolio to $4.7 billion for the third quarter of 2020 from $4.6 billion for the third quarter of ~~2019~~2019.

Due to previously discussed asset sales, the average amortized cost of our residential mortgage securities portfolio decreased $4.5 billion to $138.1 million for the third quarter of 2020 from ~~$2.0~~$4.7 billion for the third quarter of ~~2018 partially offset by a decrease in the yield (excluding servicing costs)~~2019 and interest income on our residential mortgage securities portfolio decreased $58.3 million to ~~5.58%~~$2.3 million for the third quarter of ~~2019~~2020 from ~~5.89%~~$60.6 million for the third quarter of ~~2018.~~

~~Interest~~2019. In addition, interest income on our MSR-related assets ~~increased by $8.9~~decreased $9.0 million to $6.2 million for the third quarter of 2020 from $15.3 million for the third quarter of 2019 ~~compared~~primarily reflecting a $948.8 million decrease in the average amortized cost of this portfolio to ~~$6.4~~$211.8 million for the third quarter of ~~2018. This increase primarily reflects a $678.5 million increase in the average balance of these investments~~2020 from $1.2 billion for the third quarter of 2019, partially offset by an increase in the yield on this portfolio to ~~$1.2 billion compared to $482.1 million~~11.79% for the third quarter of ~~2018 partially offset by a decrease in the yield to~~2020 from 5.26% for the third quarter of ~~2019 from 5.32% for~~2019. The increase in yield noted in the third quarter was as a result of ~~2018.~~the impairment charges taken in the first quarter of 2020 that resulted in an adjustment to the amortized cost of these assets.

Interest Expense

Our interest expense for the third quarter of ~~2019 increased~~2020 decreased by ~~$26.9~~$29.9 million, or ~~45.8%~~34.8%, to ~~$85.8~~$56.0 million from ~~$58.9~~$85.8 million for the third quarter of ~~2018.~~2019. This ~~increase~~decrease primarily reflects an increase in our average borrowings to finance our residential whole loan portfolio and MSR-related assets, and an increase in financing rates on our Agency MBS repurchase agreement financings. In addition we incurred interest expense on our Convertible Senior Notes issued during the third quarter of 2019. The impact of these items on our interest expense was partially offset by a decrease in our average repurchase agreement borrowings

to finance our ~~Legacy Non-Agency MBS~~residential mortgage securities portfolio and ~~Agency MBS portfolios and CRT securities.~~MSR-related assets partially offset by approximately $13.8 million in interest expense incurred in the current period related to the senior secured credit agreement we entered into during the second quarter of 2020. The effective interest rate paid on our borrowings increased to 4.43% for the quarter ended September 30, 2020 from 3.50% for the quarter ended September 30, ~~2019 from 3.13%~~2019.

Table of Contents

Provision for ~~the quarter ended September 30, 2018.~~ Credit and Valuation Losses on Residential Whole Loans Held at Carrying Value and Held-for-Sale

Payments made and/or received on our Swaps designated as hedges for accounting purposes are a component of our borrowing costs and resulted in interest expense of $322,000, or 1 basis points, for the third quarter of 2019, as compared to interest expense of $547,000, or 3 basis points, for the third quarter of 2018. The weighted average fixed-pay rate on our Swaps designated as hedges increased to 2.29% for the quarter ended September 30, 2019 from 2.19% for the quarter ended and September 30, 2018. The weighted average variable interest rate received on our Swaps designated as hedges increased to 2.24% for the quarter ended September 30, 2019 from 2.09% for the quarter ended September 30, 2018.

~~Other Income, net~~

For the third quarter of 2020, we recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $30.5 million (which includes a reversal of our provision for credit losses on undrawn commitments of $478,000). The reversal for the period reflects an adjustment to certain macro-economic inputs to our loan loss estimates and lower loan balances. For the third quarter of 2019, we recorded a provision of $347,000.

Other Income, net

For the third quarter of 2020, Other Income, net increased ~~by $14.1~~$14.7 million, or ~~29.1%~~23.5%, to ~~$62.4~~$77.1 million compared to ~~$48.4~~$62.4 million for the third quarter of ~~2018.~~2019. The components of Other Income, net for the third quarter of ~~2019~~2020 and ~~2018~~2019 are summarized in the table below:


	Quarter Ended September 30,
(In Thousands)	2020		2019
Net gain on residential whole loans measured at fair value through earnings	$	76,871	$	40,175
Transfer from OCI of loss on swaps previously designated as hedges for accounting purposes	(7,177)		—
Liquidation gains on Purchased Credit Deteriorated Loans and other loan related income	1,694		4,189
Impairment and other losses on securities available-for-sale and other assets	(221)		—
Net unrealized gain/(loss) on residential mortgage securities measured at fair value through earnings	91		(695)
Net realized gain on sales of residential mortgage securities	48		17,708
Other	5,804		1,052
Total Other Income, net	$	77,110	$	62,429

Quarter Ended September 30,
(In Thousands) 2019 2018
Net gain on residential whole loans measured at fair value through earnings $ 40,175
$ 34,942
Net realized gain on sales of residential mortgage securities 17,708
16,415
Net unrealized loss on residential mortgage securities measured at fair value through earnings (571 ) (8,545 )
Liquidation gains on Purchased Credit Impaired Loans and other loan related income 4,189
3,172
Net (loss)/gain on Swaps not designated as hedges for accounting purposes (929 ) 4,002
Net loss on REO properties (1,993 ) (2,125 )
Other 3,850
498
Total Other Income, net $ 62,429
$ 48,359

Operating and Other Expense

For the third quarter of ~~2019,~~2020, we had compensation and benefits and other general and administrative expenses of ~~$12.9~~$18.3 million, or ~~1.52%~~2.90% of average equity, compared to ~~$11.0~~$12.9 million, or ~~1.29%~~1.52% of average equity, for the third quarter of ~~2018.~~2019. Compensation and benefits expense increased by approximately ~~$1.1~~$3.7 million to $11.7 million for the third quarter of 2020, compared to $7.9 million for the third quarter of 2019, ~~compared to $6.9 million~~primarily reflecting a provision for estimated severance costs in connection with a reduction in workforce that occurred in the third quarter of ~~2018, primarily reflecting higher headcount and additional expense recognized in connection with long term incentive awards in the current year period.~~2020. Our other general and administrative expenses increased by ~~$867,000~~$1.6 million to ~~$5.0~~$6.6 million for the quarter ended September 30, ~~2019~~2020, compared to ~~$4.2~~$5.0 million for the third quarter ~~ended September 30, 2018,~~of 2019, primarily due to ~~transaction~~higher Directors compensation costs as the annual grant of equity awards to non-employee Directors pursuant to the director compensation program occurred in the third quarter of 2020 rather than in the second quarter as was the case in the prior year period. In addition, higher costs for professional services, corporate insurance and administrative costs associated with financing arrangements were partially offset by lower data analytic and other IT related ~~to our investments in loan origination partners.~~costs.

Operating and Other Expense for the third quarter of ~~2019~~2020 also includes ~~$10.8~~$9.0 million of loan servicing and other related operating expenses related to our residential whole loan activities. These expenses ~~increased~~decreased compared to the prior year period by approximately ~~$2.0~~$1.4 million, or ~~23.2%~~13.9%, primarily due to ~~increases in non-recoverable~~lower non recoverable advances and servicing fees on ~~REO and an increase in the allowance for loan losses on Purchased Credit Impaired~~our residential whole ~~loans, partially~~loan and REO portfolios and lower loan acquisition related expenses than the prior year period, largely offset by ~~lower servicing~~costs related ~~expenses.~~to loan securitization activities.

Table of Contents

Selected Financial Ratios

The following table presents information regarding certain of our financial ratios at or for the dates presented:


At or for the Quarter Ended	Return on Average Total Assets (1)		Return on Average Total Stockholders’ Equity (2)(3)		Total Average Stockholders’ Equity to Total Average Assets (4)		Dividend Payout Ratio (5)	Leverage Multiple (6)	Book Value per Share of Common Stock (7)		Economic Book Value per Share of Common Stock (8)
September 30, 2020	4.17	%	13.85	%	33.23	%	0.29	1.9	$	4.61	$	4.92
June 30, 2020	4.33		15.70		30.08		—	2.0	4.51		4.46
March 31, 2020	(26.72)		(26.58)		24.99		—	3.4	4.34		4.09
December 31, 2019	2.92		11.90		25.48		0.95	3.0	7.04		7.44
September 30, 2019	2.79		11.24		25.80		1.00	2.8	7.09		7.41

At or for the Quarter Ended
Return on
Average Total
Assets (1)

Return on
Average Total
Stockholders’
Equity (2)

Total Average
Stockholders’
Equity to Total
Average Assets (3)

Dividend Payout
Ratio (4)

Leverage Multiple (5)

Book Value
per Share
of Common
Stock (6)
September 30, 2019 2.79 % 11.24 % 25.80 % 1.00 2.8 $ 7.09
June 30, 2019 2.74
10.91
26.13
1.00 2.8 7.11
March 31, 2019 2.66
10.40
26.71
1.05 2.7 7.11
December 31, 2018 1.87
6.96
28.65
1.54 2.6 7.15
September 30, 2018 2.94
10.21
30.15
1.05 2.3 7.46


~~(1)~~	~~Reflects annualized net income available to common stock and participating securities divided by average total assets.~~


~~(2)~~	~~Reflects annualized net income divided by average total stockholders’ equity.~~


~~(3)~~	~~Reflects total average stockholders’ equity divided by total average assets.~~


~~(4)~~	~~Reflects dividends declared per share of common stock divided by earnings per share.~~


~~(5)~~	Represents the sum of borrowings under repurchase agreements, securitized debt, payable for unsettled purchases, obligations to return securities obtained as collateral, Convertible Senior Notes and Senior Notes divided by stockholders’ equity.


~~(6)~~	~~Reflects total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.~~

(1)Reflects annualized net income available to common stock and participating securities divided by average total assets.

(2)Reflects annualized net income divided by average total stockholders’ equity.

(3)For the quarter ended March 31, 2020, the amount calculated reflects the quarterly net income divided by average total stockholders’ equity.

(4)Reflects total average stockholders’ equity divided by total average assets.

(5)Reflects dividends declared per share of common stock divided by earnings per share.

(6)Represents the sum of our borrowings under financing agreements and payable for unsettled purchases divided by stockholders’ equity.

(7)Reflects total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.

(8)“Economic book value” is a non-GAAP financial measure of our financial position. To calculate our Economic book value, our portfolios of Residential whole loans at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these loans. For additional information please refer to page 85 under the heading “Economic Book Value”.

Nine Month Period Ended September 30, ~~2019~~2020 Compared to the Nine Month Period Ended September 30, ~~2018~~2019

General

For the nine months ended September 30, ~~2019,~~2020, we had a net ~~income~~loss available to our common stock and participating securities of ~~$266.2~~$746.8 million, or ~~$0.59~~$1.65 per basic and diluted common share, compared to net income available to common stock and participating securities of ~~$229.7~~$266.2 million, or ~~$0.56~~$0.59 per basic common share and $0.58 per diluted common share, for the nine months ended September 30, ~~2018.~~2019. Following the unprecedented disruption in residential mortgage markets due to concerns related to the COVID-19 pandemic that was experienced late in first quarter and into the second quarter of 2020, management was focused on taking actions to bolster and stabilize our balance sheet, improve our liquidity position and renegotiate the financing associated with our remaining investments. During the second quarter, we sold our remaining Agency MBS and substantially all of our Legacy Non-Agency MBS portfolio and substantially reduced our investments in MSR-related assets and CRT securities. During the third quarter, we sold our remaining Legacy Non-Agency MBS. In addition, as we had entered into forbearance agreements with the majority of our remaining lenders that were in place for most of the second quarter, our financing costs were dramatically increased during this period. The ~~increase~~combination of the impact of asset sales and higher financing costs during the forbearance period resulted in ~~net income available to common stock and participating securities primarily reflects higher~~the significant reduction in net interest income ~~primarily driven by increased investment~~from our investments. During the nine months ended September 30, 2020, we also incurred unusually high professional services and other costs in connection with negotiating forbearance arrangements with our lenders, entering into new financing arrangements and reinstating prior financing arrangements on the exit from forbearance. In addition, during the nine months ended September 30, 2020, we recorded impairment losses on securities available-for-sale, net realized losses on sales of residential mortgage securities and residential whole loans, ~~held at carrying value~~losses on terminated Swaps that had previously been designated as hedges for accounting purposes were transferred from OCI to earnings, and ~~higher net Other income, primarily due to higher~~ unrealized ~~gains~~losses on residential mortgage securities measured at fair value through ~~earnings, higher net realized gains on sales of residential mortgage securities, and additional~~earnings. These decreases were partially offset by net gains on our residential whole loans measured at fair value through ~~earnings, partially offset by~~earnings. Further, we recorded a provision for credit losses ~~realized~~ on ~~the unwind~~residential whole loans held at carrying value of ~~certain Swaps not designated as hedges~~$32.4 million, which includes a provision for ~~accounting purposes. In addition, operating and other expenses were higher for~~credit losses on undrawn commitments of $1.6 million, during the nine months ended September 30, 2019, primarily due to higher costs in connection with managing our residential whole loan and REO portfolios, which have grown significantly compared to the prior year period, and higher compensation related expenses, reflecting higher headcount.2020.

For the nine months ended September 30, 2019, Core earnings was $0.57 per common share, compared to $0.58 per common share for the nine months ended September 30, 2018. Core earnings is a non-GAAP measure of our financial performance and is computed by adjusting GAAP net income available to common and participating securities by excluding the impact of unrealized gains and losses on certain of our investments. For additional information regarding the calculation of Core earnings, including to reconcile to GAAP net income available to common stock and participating securities, refer to page 83 under the heading “Core Earnings”.

Net Interest Income

Table of Contents

For the nine months ended September 30, ~~2019,~~2020, our net interest spread and margin were ~~1.90%~~0.65% and ~~2.29%~~1.25%, respectively, compared to a net interest spread and margin of ~~2.32%~~1.90% and ~~2.71%~~2.29%, respectively, for the nine months ended September 30, ~~2018.~~2019. Our net interest income ~~increased~~decreased by ~~$17.0~~$107.5 million, or ~~10.5%~~60.2%, to $71.2 million for the nine months ended September 30, 2020, from $178.7 million for the nine months ended September 30, ~~2019, from $161.7 million for the nine months ended September 30, 2018.~~2019. For the nine months ended September 30, 2020, net interest income for our residential mortgage securities and MSR-related asset portfolios decreased by approximately $79.5 million compared to the nine months ended September 30, 2019, primarily due to lower average amounts invested in these securities due to portfolio sales in the current period. In addition, we also incurred approximately $14.6 million in interest expense related to the senior secured credit agreement we entered into during the second quarter of 2020 and approximately $6.6 million higher interest expense on our Convertible Senior Notes issued in June 2019. Net interest income also includes lower net interest income from residential whole loans held at carrying value ~~MSR-related assets and RPL/NPL MBS increased by~~of approximately ~~$59.5~~$14.2 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, ~~2018,~~2019 primarily due to higher average amounts invested in these assets. These increases were offset by lower net interest income from Legacy Non-Agency MBS, CRT securities and Agency MBS compared to the nine months ended September 30, 2018 by approximately $35.0 million, primarily due to lower average amounts invested in these securities and higher funding costs on Agency MBS and CRT securities,assets partially offset by higher funding costs as a result of entering into forbearance agreements and lower yields earned on our ~~Legacy Non-Agency MBS and Agency MBS portfolios.~~residential whole loans at carrying value portfolio. In addition, net interest income for the nine months ended September 30, ~~2019~~2020 also includes ~~$34.2~~$30.8 million of interest expense associated with residential whole loans held at fair value, reflecting a ~~$4.6~~$3.4 million ~~increase~~decrease in borrowing costs related to these investments compared to the nine months ended September 30, ~~2018.~~2019. Coupon interest income received from residential whole loans held at fair value is presented as a component of the total income earned on these investments and therefore is included in Other Income, net rather than net interest income.

Table of Contents

Analysis of Net Interest Income

The following table sets forth certain information about the average balances of our assets and liabilities and their related yields and costs for the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019. Average yields are derived by dividing annualized interest income by the average amortized cost of the related assets, and average costs are derived by dividing annualized interest expense by the daily average balance of the related liabilities, for the periods shown. The yields and costs include premium amortization and purchase discount accretion which are considered adjustments to interest rates.


	Nine Months Ended September 30,
	2020						2019
	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
(Dollars in Thousands)
Assets:
Interest-earning assets:
Residential whole loans, at carrying value (1)	$	5,554,592	$	207,306	4.98	%	$	4,011,929	$	171,725	5.71	%
Agency MBS (2)	522,119		8,852		2.26		2,379,289		45,521		2.55
Legacy Non-Agency MBS (2)	356,471		28,786		10.77		1,322,559		106,147		10.70
RPL/NPL MBS (2)	195,495		8,071		5.50		1,182,484		44,463		5.01
Total MBS	1,074,085		45,709		5.67		4,884,332		196,131		5.35
CRT securities (2)	173,033		5,969		4.60		411,273		15,545		5.04
MSR-related assets (2)	598,838		30,189		6.72		959,145		38,232		5.31
Cash and cash equivalents (3)	443,034		646		0.19		186,587		2,703		1.93
Other interest-earning assets	128,565		9,089		9.43		94,708		4,272		6.01
Total interest-earning assets	7,972,147		298,908		5.00		10,547,974		428,608		5.42
Total non-interest-earning assets	1,834,040						2,465,917
Total assets	$	9,806,187					$	13,013,891

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Collateralized financing agreements (4)(5)	$	5,818,826	$	179,754	4.06	%	$	8,520,981	$	220,939	3.42	%
Securitized debt (6)	568,186		15,673		3.62		646,234		17,834		3.64
Convertible Senior Notes	224,291		11,678		6.94		98,243		5,085		6.94
Senior Notes	96,879		6,038		8.31		96,831		6,035		8.31
Senior secured credit agreement	176,939		14,571		11.00		—		—		—
Total interest-bearing liabilities	6,885,121		227,714		4.35		9,362,289		249,893		3.52
Total non-interest-bearing liabilities	122,635						242,414
Total liabilities	7,007,756						9,604,703
Stockholders’ equity	2,798,431						3,409,188
Total liabilities and stockholders’ equity	$	9,806,187					$13,013,891

Net interest income/net interest rate spread (7)			$	71,194	0.65	%			$	178,715	1.90	%
Net interest-earning assets/net interest margin (8)	$	1,087,026			1.25	%	$	1,185,685			2.29	%

Nine Months Ended September 30,
2019 2018
Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost
(Dollars in Thousands)
Assets:

Interest-earning assets:

Agency MBS (1)
$ 2,379,289
$ 45,521
2.55 % $ 2,654,925
$ 42,795
2.15 %
Legacy Non-Agency MBS (1)
1,322,559
106,147
10.70
1,831,292
137,439
10.01
RPL/NPL MBS (1)
1,182,484
44,463
5.01
929,835
32,373
4.64
Total MBS 4,884,332
196,131
5.35
5,416,052
212,607
5.23
CRT securities (1)
411,273
15,545
5.04
556,258
25,939
6.22
Residential whole loans, at carrying value (2)
4,010,395
171,725
5.71
1,410,100
61,788
5.84
MSR-related assets (1)
959,145
38,232
5.31
440,979
20,249
6.12
Cash and cash equivalents (3)
186,919
2,703
1.93
230,945
2,348
1.36
Other interest-earning assets 94,708
4,272
6.01
—
—
—
Total interest-earning assets 10,546,772
428,608
5.42
8,054,334
322,931
5.35
Total non-interest-earning assets (2)
2,465,777

2,785,653

Total assets $ 13,012,549

$ 10,839,987

Liabilities and stockholders’ equity:

Interest-bearing liabilities:

Total repurchase agreements (4)
$ 8,520,981
$ 220,939
3.42 % $ 6,434,725
$ 142,832
2.93 %
Securitized debt 646,234
17,834
3.64
486,352
12,378
3.36
Convertible Senior Notes 98,243
5,085
6.90
—
—
—
Senior Notes 96,831
6,035
8.31
96,787
6,032
8.31
Total interest-bearing liabilities 9,362,289
249,893
3.52
7,017,864
161,242
3.03
Total non-interest-bearing liabilities 241,080

526,766

Total liabilities 9,603,369

7,544,630

Stockholders’ equity 3,409,180

3,295,357

Total liabilities and stockholders’ equity $ 13,012,549

$ 10,839,987

Net interest income/ net interest rate spread (5)

$ 178,715
1.90 %
$ 161,689
2.32 %
Net interest-earning assets/ net interest margin (6)
$ 1,184,483

2.29 % $ 1,036,470

2.71 %

~~(1)~~


~~(2)~~	~~Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.~~


~~(3)~~	~~Includes average interest-earning cash, cash equivalents and restricted cash.~~


~~(4)~~	~~Average cost of repurchase agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.~~


~~(5)~~	~~Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.~~


~~(6)~~	~~Net interest margin reflects annualized net interest income divided by average interest-earning assets.~~

(1)Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.

(3)Includes average interest-earning cash, cash equivalents and restricted cash.

(4)Collateralized financing agreements include the following: Secured term notes, Non-mark-to-market term-asset based financing, and repurchase agreements. For additional information, see Note 6, included under Item 1 of this Quarterly Report on Form 10-Q.

(5)Average cost of repurchase agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration.

(6)Includes both Securitized debt, at carrying value and Securitized debt, at fair value.

(7)Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.

(8)Net interest margin reflects annualized net interest income divided by average interest-earning assets.

Table of Contents

Rate/Volume Analysis


	Nine Months Ended September 30, 2020
	Compared to
	Nine Months Ended September 30, 2019
	Increase/(Decrease) due to				Total Net Change in Interest Income/Expense
(In Thousands)	Volume		Rate
Interest-earning assets:
Residential whole loans, at carrying value (1)	$	59,688	$	(24,107)	$	35,581
Residential mortgage securities	(167,490)		7,492		(159,998)
MSR-related assets	(16,592)		8,549		(8,043)
Cash and cash equivalents	1,695		(3,752)		(2,057)
Other interest-earning assets	1,862		2,955		4,817
Total net change in income from interest-earning assets	$	(120,837)	$	(8,863)	$	(129,700)

Interest-bearing liabilities:
Residential whole loan at carrying value financing agreements	$	43,522	$	6,512	$	50,034
Residential whole loan at fair value financing agreements	(2,852)		1,381		(1,471)
Residential mortgage securities repurchase agreements	(75,707)		(6,622)		(82,329)
MSR-related assets repurchase agreements	(7,166)		919		(6,247)
Other repurchase agreements	(790)		(382)		(1,172)
Securitized debt	(2,090)		(71)		(2,161)
Convertible Senior Notes and Senior Notes	6,966		(370)		6,596
Senior secured credit agreement	14,571		—		14,571
Total net change in expense of interest-bearing liabilities	$	(23,546)	$	1,367	$	(22,179)
Net change in net interest income	$	(97,291)	$	(10,230)	$	(107,521)

(1)Excludes residential whole loans held at fair value which are reported as a component of non-interest-earning assets.

Nine Months Ended September 30, 2019
Compared to
Nine Months Ended September 30, 2018
Increase/(Decrease) due to
Total Net
Change in
Interest Income/Expense
(In Thousands) Volume Rate
Interest-earning assets:

Agency MBS $ (4,734 ) $ 7,460
$ 2,726
Legacy Non-Agency MBS (40,287 ) 8,995
(31,292 )
RPL/NPL MBS 9,360
2,730
12,090
CRT securities (6,019 ) (4,375 ) (10,394 )
Residential whole loans, at carrying value (1)
111,377
(1,440 ) 109,937
MSR-related assets 20,970
(2,987 ) 17,983
Cash and cash equivalents (506 ) 861
355
Other interest-earning assets 4,272
—
4,272
Total net change in income from interest-earning assets $ 94,433
$ 11,244
$ 105,677

Interest-bearing liabilities:

Agency repurchase agreements $ (2,590 ) $ 7,881
$ 5,291
Legacy Non-Agency repurchase agreements (7,828 ) (138 ) (7,966 )
RPL/NPL MBS repurchase agreements 7,858
1,355
9,213
CRT securities repurchase agreements (2,276 ) 1,010
(1,266 )
MSR-related assets repurchase agreements 11,155
607
11,762
Residential whole loan at carrying value repurchase agreements 59,108
515
59,623
Residential whole loan at fair value repurchase agreements (1,849 ) 927
(922 )
Other repurchase agreements 2,372
—
2,372
Securitized debt 4,342
1,114
5,456
Convertible Senior Notes 5,085
—
5,085
Senior Notes 3
—
3
Total net change in expense of interest-bearing liabilities $ 75,380
$ 13,271
$ 88,651
Net change in net interest income $ 19,053
$ (2,027 ) $ 17,026

Table of Contents


~~(1)~~	~~Excludes residential whole loans held at fair value which are reported as a component of non-interest-earning assets.~~

The following table presents the components of the net interest spread earned on our ~~Agency MBS, Legacy Non-Agency MBS and RPL/NPL MBS~~Residential whole loans, at carrying value for the periods presented:


	Purchased Performing Loans						Purchased Credit Deteriorated Loans						Total Residential Whole Loans, at Carrying Value
Nine Months Ended	Net Yield (1)		Cost of Funding (2)		Net Interest Spread (3)		Net Yield (1)		Cost of Funding (2)		Net Interest Spread (3)		Net Yield (1)		Cost of Funding (2)		Net Interest Spread (3)
September 30, 2020	4.98	%	4.43	%	0.55	%	4.93	%	4.23	%	0.70	%	4.98	%	4.41	%	0.57	%
September 30, 2019	5.69		4.11		1.58		5.76		3.05		2.71		5.71		3.88		1.83

Agency MBS Legacy Non-Agency MBS RPL/NPL MBS Total MBS
Nine Months Ended
Net Yield
(1)

Cost of Funding
(2)

Net Interest Spread
(3)

Net Yield
(1)

Cost of Funding
(2)

Net Interest Spread
(3)

Net Yield
(1)

Cost of Funding
(2)

Net Interest Spread
(3)

Net Yield
(1)

Cost of Funding
(2)

Net Interest Spread
(3)
September 30, 2019 2.55 % 2.53 % 0.02 % 10.70 % 3.28 % 7.42 % 5.01 % 3.34 % 1.67 % 5.35 % 2.93 % 2.42 %
September 30, 2018 2.15 % 2.05 % 0.10 % 10.01 % 3.29 % 6.72 % 4.64 % 3.08 % 1.56 % 5.23 % 2.63 % 2.60 %

(1)Reflects annualized interest income on Residential whole loans, at carrying value divided by average amortized cost of Residential whole loans, at carrying value. Excludes servicing costs.

(2)Reflects annualized interest expense divided by average balance of repurchase agreements and securitized debt. Total Residential whole loans, at carrying value cost of funding includes 12 and 5 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the nine months ended September 30, 2020 and 2019, respectively. Cost of funding for the nine months ended September 30, 2020 includes the impact of amortization of $12.3 million of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes. The amortization of these losses increased the funding cost by 45 basis points for Purchased Performing Loans, 36 basis points for Purchased Credit Deteriorated Loans, and 44 basis points for total Residential whole loans, at carrying value. At June 30, 2020, following the closing of certain financing transactions and our exit from forbearance arrangements, and an evaluation of our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring. In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.

(3)Reflects the difference between the net yield on average Residential whole loans, at carrying value and average cost of funds on Residential whole loans, at carrying value.

The following table presents the components of the net interest spread earned on our residential mortgage securities and MSR-related assets for the periods presented:


	Residential Mortgage Securities						MSR-Related Assets
Nine Months Ended	Net Yield (1)		Cost of Funding (2)		Net Interest Spread (3)		Net Yield (1)		Cost of Funding		Net Interest Spread (3)
September 30, 2020	5.53	%	2.74	%	2.79	%	6.72	%	3.56	%	3.16	%
September 30, 2019	5.33		2.95		2.38		5.31		3.40		1.91

(1) Reflects annualized interest income ~~on MBS~~ divided by average amortized ~~cost of MBS.~~cost.

(2) Reflects annualized interest expense divided by average balance of repurchase agreements, including the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average portfolio duration, and securitized debt. Agency MBS cost of funding includes 833 and 148 basis points and Legacy Non-Agency MBS cost of funding includes 1149 and 1411 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the nine months ended September 30, 2020 and 2019, respectively. Cost of funding for the nine months ended September 30, 2020 includes the impact of amortization of $278,000 of losses previously recorded in OCI related to Swaps unwound during the quarter ended March 31, 2020 that had been previously designated as hedges for accounting purposes. The amortization of these losses increased the funding cost by 37 basis points for RPL/NPL MBS. At June 30, 2020, following the closing of certain financing transactions and ~~2018, respectively.~~the Company’s exit from forbearance arrangements, and an evaluation of the our anticipated future financing transactions, $49.9 million of unamortized losses on Swaps previously designated as hedges for accounting purposes was transferred from OCI to earnings, as it was determined that certain financing transactions that were previously expected to be hedged by these Swaps were no longer probable of occurring. In addition, during the quarter ended September 30, 2020, we transferred from AOCI to earnings approximately $7.2 million of losses on Swaps that had been previously designated as hedges for accounting purposes as we had assessed that the underlying transactions were no longer probable of occurring.

(3) Reflects the difference between the net yield ~~on average MBS~~ and average cost of ~~funds on MBS.~~funds.

Interest Income

Interest income on our Agency MBS for the nine months ended September 30, 2019 increased by $2.7 million, or 6.4%, to $45.5 million from $42.8 million for the nine months ended September 30, 2018. This increase primarily reflects an increase in the net yield on our Agency MBS to 2.55% for the nine months ended September 30, 2019 from 2.15% for the nine months ended September 30, 2018, partially offset by a $275.6 million decrease in the average amortized cost of our Agency MBS portfolio due primarily to portfolio run-off and sales, to $2.4 billion for the nine months ended September 30, 2019 from $2.7 billion for the nine months ended September 30, 2018. At the end of the third quarter of 2019, the average coupon on mortgages underlying our Agency MBS was higher compared to the end of the third quarter of 2018. In addition, during the nine months ended September 30, 2019, our Agency MBS portfolio experienced a 16.7% CPR and we recognized $21.0 million of net premium amortization compared to a CPR of 13.5% and $19.8 million of net premium amortization for the nine months ended September 30, 2018. At September 30, 2019, we had net purchase premiums on our Agency MBS of $68.3 million, or 3.9% of current par value, compared to net purchase premiums of $103.0 million, or 3.9% of par value, at December 31, 2018.

Interest income on our Non-Agency MBS decreased by $19.2 million, or 11.3%, for the nine months ended September 30, 2019 to $150.6 million compared to $169.8 million for the nine months ended September 30, 2018. This decrease is primarily due to portfolio run-off and sales of Legacy Non-Agency MBS, which more than offset the impact of higher amounts invested in RPL/NPL MBS and resulted in a decrease in the average amortized cost of our Non-Agency MBS portfolio of $256.1 million or 9.27%, to $2.5 billion from $2.8 billion for the nine months ended September 30, 2018.

Interest income on our Legacy Non-Agency MBS for the nine months ended September 30, 2019 decreased $31.3 million to $106.1 million from $137.4 million for the nine months ended September 30, 2018. This decrease primarily reflects a $508.7 million decrease in the average amortized cost of our Legacy Non-Agency MBS portfolio to $1.3 billion for the nine months ended September 30, 2019 from $1.8 billion for the nine months ended September 30, 2018. This decrease more than offset the impact of the higher yields generated on our Legacy Non-Agency MBS portfolio, which were 10.70% for the nine months ended September 30, 2019 compared to 10.01% for the nine months ended September 30, 2018. The increase in the net yield on our Legacy Non-Agency MBS portfolio reflects changes in interest rates since the third quarter of the prior year, the improved performance of loans underlying the Legacy Non-Agency MBS portfolio, which has resulted in credit reserve releases, higher accretion income recognized in the current nine month period due to the impact of redemptions of certain securities that had been previously purchased at a discount as well as the impact of the cash proceeds received during 2018 in connection with the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by JP Morgan Chase & Co. and affiliated entities and Lehman Brothers Holding Inc.

Interest income on our RPL/NPL MBS portfolio increased $12.1 million to $44.5 million for the nine months ended September 30, 2019 from $32.4 million for the nine months ended September 30, 2018. This is primarily due to a $252.6 million increase in the average amortized cost of our RPL/NPLMBS portfolio to $1.2 billion for the nine months ended September 30, 2019 from $929.8 million for the nine months ended September 30, 2018. In addition, our RPL/NPL MBS portfolio yielded 5.01% for the nine months ended September 30, 2019 compared to 4.64% for the nine months ended September 30, 2018. The increase in the net yield primarily reflects an increase in the average coupon yield to 5.00% for the nine months ended September 30, 2019 from 4.47% for the nine months ended September 30, 2018.

During the nine months ended September 30, 2019, we recognized net purchase discount accretion of $38.2 million on our Non-Agency MBS, compared to $54.9 million for the nine months ended September 30, 2018. At September 30, 2019, we had net purchase discounts of $563.9 million, including Credit Reserve and previously recognized OTTI of $462.1 million, on our Legacy Non-Agency MBS, or 33.1% of par value. During the nine months ended September 30, 2019 we reallocated $9.3 million of purchase discount designated as Credit Reserve to accretable purchase discount.

Agency MBS Legacy Non-Agency MBS RPL/NPL MBS
Nine Months Ended
Coupon Yield (1)

Net Yield (2)

9 Month Average CPR (3)

Coupon Yield (1)

Net Yield (2)

9 Month Average CPR (3)

Coupon Yield (1)

Net Yield (2)

9 Month Average Bond CPR (4)
September 30, 2019 3.73 % 2.55 % 16.7 % 6.87 % 10.70 % 14.4 % 5.00 % 5.01 % 15.0 %
September 30, 2018 3.14
2.15
13.5
6.10
10.01
14.3
4.47
4.64
18.0


~~(1)~~	Reflects the annualized coupon interest income divided by the average amortized cost. The discounted purchase price on Legacy Non-Agency MBS causes the coupon yield to be higher than the pass-through coupon interest rate.


~~(2)~~	~~Reflects annualized interest income on MBS divided by average amortized cost of MBS.~~


~~(3)~~	~~6 month average CPR weighted by positions as of the beginning of each month in the quarter.~~


~~(4)~~	~~All principal payments are considered to be prepayments for CPR purposes.~~

Interest income on our residential whole loans held at carrying value increased by ~~$109.9~~$35.6 million, or ~~177.9%~~20.7%, for the nine months ended September 30, ~~2019~~2020 to ~~$171.7~~$207.3 million compared to ~~$61.8~~$171.7 million for the nine months ended September 30, ~~2018.~~2019. This increase primarily reflects a ~~$2.6~~$1.5 billion increase in the average balance of this portfolio to $5.6 billion for the nine months ended September 30, 2020 from $4.0 billion for the nine months ended September 30, 2019, ~~from $1.4 billion for the nine months ended September 30, 2018,~~ partially offset by a decrease in the yield (excluding servicing costs) to 4.98% for the nine months ended September 30, 2020 from 5.71% for the nine months ended September 30, ~~2019 from 5.84%~~2019.

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Due to previously discussed asset sales, the average amortized cost of our residential mortgage securities portfolio decreased $4.0 billion to $1.2 billion for the nine months ended September 30, ~~2018.~~

2020 from $5.3 billion for the nine months ended September 30, 2019 and interest income on our residential mortgage securities portfolio decreased $160.0 million to $51.7 million for the nine months ended September 30, 2020 from $211.7 million for the nine months ended September 30, 2019. Interest income on our MSR-related assets ~~increased~~decreased by ~~$18.0~~$8.0 million ~~or 88.8%,~~to $30.2 million for the nine months ended September 30, 2020 compared to $38.2 million for the nine months ended September 30, ~~2019 compared to $20.2 million for the nine months ended September 30, 2018.~~2019. This ~~increase~~decrease primarily reflects a ~~$518.2~~$360.3 million ~~increase~~decrease in the average balance of these investments for the nine months ended September 30, ~~2019~~2020 to ~~$959.1~~$598.8 million compared to ~~$441.0~~$959.1 million for the nine months ended September 30, ~~2018,~~2019, partially offset by ~~a decrease~~an increase in the yield to 6.72% for the nine months ended September 30, 2020 from 5.31% for the nine months ended September 30, 2019, ~~from 6.12% for the nine months ended September 30, 2018.~~.

Interest Expense

Our interest expense for the nine months ended September 30, ~~2019 increased~~2020 decreased by ~~$88.7~~$22.2 million, or ~~55.0%~~8.9%, to ~~$249.9~~$227.7 million, from ~~$161.2~~$249.9 million for the nine months ended September 30, ~~2018.~~2019. This ~~increase~~decrease primarily reflects a decrease in our average repurchase agreement borrowings to finance our residential mortgage securities portfolio and MSR-related assets partially offset by an increase in our average borrowings to finance residential whole loans held at carrying value ~~MSR-related assets, RPL/NPL MBS and other interest-earning assets, an increase in securitized debt to finance residential whole loans held at fair value~~ and an increase in financing rates on our ~~repurchase agreement financings.~~financing agreements. In addition in the current period we incurred interest expense of approximately $14.6 million related to the senior secured credit agreement we entered into during the second quarter of 2020 and higher interest expense of $6.6 million on our Convertible Senior Notes issued ~~during the nine months ended September 30,~~in June 2019. The impact of these items on our interest expense was partially offset by a decrease in our average repurchase agreement borrowings to finance our Legacy Non-Agency MBS and Agency MBS portfolios and CRT securities. The effective interest rate paid on our borrowings increased to 4.35% for the nine months ended September 30, 2020, from 3.52% for the nine months ended September 30, ~~2019, from 3.03% for the nine months ended September 30, 2018.~~2019.

Payments made and/or received on our Swaps designated as hedges for accounting purposes are a component of our borrowing costs and resulted in an increase in interest expense of $3.4 million, or 5 basis points, for the nine months ended September 30, 2020, compared to a reduction in interest expense of $1.6 million, or 3 basis points, for the nine months ended September 30, ~~2019, compared to an increase in interest expense of $4.2 million, or 8 basis points, for the nine months ended September 30, 2018.~~2019. The weighted average fixed-pay rate on our Swaps designated as hedges ~~increased~~decreased to 2.06% for the nine months ended September 30, 2020 from 2.32% for the nine months ended September 30, ~~2019 from 2.09% for the nine months ended September 30, 2018.~~2019. The weighted average variable interest rate received on our Swaps designated as hedges ~~increased~~decreased to 1.63% for the nine months ended September 30, 2020 from 2.40% for the nine months ended September 30, ~~2019 from 1.86%~~2019.

Provision for Credit Losses on Residential Whole Loans Held at Carrying Value

For the nine months ended September 30, 2020, we recorded a provision for credit losses on residential whole loans held at carrying value of $32.4 million (which includes a provision for credit losses on undrawn commitments of $1.6 million) compared to a provision of $1.5 million for the nine months ended September 30, ~~2018.~~2019. As previously discussed, on January 1, 2020, we adopted the new accounting standard addressing the measurement of credit losses on financial instruments (CECL). With respect to our residential whole loans held at carrying value, CECL requires that reserves for credit losses are estimated at the reporting date based on life of loan expected cash flows, including anticipated prepayments and reasonable and supportable forecasts of future economic conditions.

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Other Income, net

For the nine months ended September 30, ~~2019,~~2020, Other (Loss)/Income, net ~~increased~~decreased by ~~$33.4~~$807.9 million, ~~or 24.4%,~~to a $637.5 million loss, compared to $170.5 million ~~compared to $137.0 million~~of income for the nine months ended September 30, ~~2018.~~2019. The components of Other Income, net for the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 are summarized in the table below:


	Nine Months Ended September 30,
(In Thousands)	2020		2019
Impairment and other losses on securities available-for-sale and other assets	$	(424,966)	$	—
Net realized (loss)/ gain on sales of residential mortgage securities and residential whole loans	(188,847)		50,027
Transfer from OCI of loss on swaps previously designated as hedges for accounting purposes	(57,034)		—
Net gain on residential whole loans measured at fair value through earnings	44,431		116,915
Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings	(13,432)		7,977
Liquidation gains on Purchased Credit Deteriorated Loans and other loan related income	4,427		11,234
Other	(2,057)		(15,693)
Total Other (Loss)/Income, net	$	(637,478)	$	170,460

Nine Months Ended
September 30,
(In Thousands) 2019 2018
Net gain on residential whole loans measured at fair value through earnings $ 116,915
$ 105,883
Net realized gain on sales of residential mortgage securities 50,027
32,661
Net unrealized gain/(loss) on residential mortgage securities measured at fair value through earnings 8,101
(11,776 )
Liquidation gains on Purchased Credit Impaired Loans and other loan related income 11,234
10,018
Net (loss)/gain on Swaps not designated as hedges for accounting purposes (17,267 ) 4,355
Net loss on REO properties (3,566 ) (4,899 )
Other 5,016
783
Total Other Income, net $ 170,460
$ 137,025

Operating and Other Expense

During the nine months ended September 30, ~~2019,~~2020, we had compensation and benefits and other general and administrative expenses of ~~$39.9~~$47.8 million, or ~~1.56%~~2.28% of average equity, compared to ~~$34.2~~$39.9 million, or ~~1.38%~~1.56% of average equity, for the nine months ended September 30, ~~2018.~~2019. Compensation and benefits expense increased ~~$3.7~~$4.8 million to $29.1 million for the nine months ended September 30, 2020, compared to $24.3 million for the nine months ended September 30, 2019, ~~compared~~primarily reflecting a provision for estimated severance costs in connection with a reduction in workforce that occurred in the third quarter of 2020. Our other general and administrative expenses increased by $3.1 million to ~~$20.7~~$18.7 million for the nine months ended September 30, ~~2018, primarily due to higher headcount and additional expense recognized in connection with long term incentive awards. Our other general and administrative expenses increased by $2.0 million~~2020 compared to $15.6 million for the nine months ended September 30, 2019, ~~compared to $13.6 million for the nine months ended September 30, 2018,~~ primarily due to ~~transaction~~higher costs ~~related to our investments in loan origination partners~~for professional services, corporate insurance, administrative expenses associated with financing arrangements, corporate income tax and ~~higher~~the write-off of certain internally developed software and deferred financing costs, partially offset by lower costs associated with deferred compensation to Directors in the current year period, which were impacted by the changes in our stock price. In addition, during the ~~Company’s stock price~~current year we also incurred professional service and ~~higher information technology~~other costs of $44.4 million related ~~expenses.~~to negotiating forbearance arrangements with our lenders entering into new financing arrangements and reinstating prior financing arrangements on the exit from forbearance.

Operating and Other Expense during the nine months ended September 30, ~~2019~~2020 also includes ~~$31.8~~$28.6 million of loan servicing and other related operating expenses related to our residential whole loan activities. These expenses ~~increased~~decreased compared to the prior year period by approximately ~~$8.2~~$1.6 million, ~~or 34.8%,~~ primarily due to ~~increases in~~lower servicing fees and non-recoverable advances on REO as well higher servicing and related fees associated with this portfolio. In addition, the current year-to-date period included a provision for loan losses recorded against Purchased Performing Loans and an increase in the allowance for loan losses on Purchased Credit Impairedour residential whole ~~loans.~~loan and REO portfolios, partially offset by costs related to loan securitization activities.

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Selected Financial Ratios

The following table presents information regarding certain of our financial ratios at or for the dates presented:


At or for the Nine Months Ended	Return on Average Total Assets (1)		Return on Average Total Stockholders’ Equity (2)		Total Average Stockholders’ Equity to Total Average Assets (3)		Dividend Payout Ratio (4)	Leverage Multiple (5)	Book Value per Share of Common Stock (6)
September 30, 2020	(10.15)	%	(34.55)	%	28.54	%	(0.03)	1.9	$	4.61
September 30, 2019	2.73		10.85		26.20		1.02	2.8	7.09

At or for the Nine Months Ended
Return on
Average Total
Assets (1)

Return on
Average Total
Stockholders’
Equity (2)

Total Average
Stockholders’
Equity to Total
Average Assets (3)

Dividend Payout
Ratio (4)

Leverage Multiple (5)

Book Value
per Share
of Common
Stock (6)
September 30, 2019 2.73 % 10.85 % 26.20 % 1.02 2.8
$ 7.09
September 30, 2018 2.82
9.75
30.40
1.07 2.3
7.46


~~(1)~~	(1)Reflects annualized ~~net income available to common stock and participating securities divided by average total assets.~~


~~(2)~~	~~Reflects annualized net income divided by average total stockholders’ equity.~~


~~(3)~~	~~Reflects total average stockholders’ equity divided by total average assets.~~


~~(4)~~	~~Reflects dividends declared per share of common stock divided by earnings per share.~~


~~(5)~~	Represents the sum of borrowings under repurchase agreements, securitized debt, payable for unsettled purchases, obligations to return securities obtained as collateral, Convertible Senior Notes and Senior Notes divided by stockholders’ equity.


~~(6)~~	~~Reflects total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.~~

~~Reconciliation of GAAP and Non-GAAP Financial Measures~~

~~Core Earnings~~

“Core earnings” is a non-GAAP financial measure of our operating performance, within the meaning of Regulation G and Item 10(e) of Regulation S-K, as promulgated by the Securities and Exchange Commission. Core earnings excludes certain unrealized gains and losses on investments in residential mortgage securities and related hedges that we are required to include in GAAP Net Income each period because management believes that these items, which to date have typically resulted from short-term market volatility or other market technical factors and not due to changes in fundamental asset cash flows, are not reflective of the economic income generated by our investment portfolio. Accordingly, we believe that the adjustments to compute Core earnings specified below better allow investors and analysts to evaluate our financial results, including by analyzing changes in our Core earnings between periods. In addition to using Core earnings in the evaluation of investment portfolio performance over time, Management considers estimates of periodic Core earnings as an input to the determination of the level of quarterly dividends to common shareholders that are recommended to the Board of Directors for approval and in its forecasting and decision-making processes relating to the allocation of capital between different asset classes.

We believe that Core earnings provides useful supplemental information to both management and investors in evaluating our financial results. Core earnings should be used in conjunction with results presented in accordance with GAAP. Core earnings does not represent and should not be considered as a substitute for Net Income or Cash Flows from Operating Activities, each as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

~~The following table provides a reconciliation of our GAAP~~ net income available to common stock and participating securities todivided by average total assets.

(2)Reflects annualized net income divided by average total stockholders’ equity.

(3)Reflects total average stockholders’ equity divided by total average assets.

(4)Reflects dividends declared per share of common stock divided by earnings per share.

(5)Represents the sum of borrowings under our ~~non-GAAP Core earnings~~financing agreements, and payable for unsettled purchases divided by stockholders’ equity.

(6)Reflects total stockholders’ equity less the ~~three~~preferred stock liquidation preference divided by total shares of common stock outstanding.

Reconciliation of GAAP and ~~nine months ended September 30, 2019 and 2018:~~Non-GAAP Financial Measures

Three Months Ended
September 30, Nine Months Ended
September 30,
(In Thousands, Except Per Share Amounts) 2019 2018 2019 2018
GAAP Net income to common stockholders - basic $ 91,569
$ 83,141
$ 265,438
$ 228,970
Adjustments:
Unrealized (gain)/loss on CRT securities measured at fair value through earnings (83 ) 3,049
(733 ) 6,280
Unrealized net (gain)/loss on Agency MBS measured at fair value through earnings and related swaps that are not accounted for as hedging transactions (2,074 ) 1,494
(7,832 ) 1,494
Total adjustments $ (2,157 ) $ 4,543
$ (8,565 ) $ 7,774
Core earnings $ 89,412
$ 87,684
$ 256,873
$ 236,744

GAAP earnings per common share $ 0.20
$ 0.19
$ 0.59
$ 0.56
Core earnings per common share $ 0.20
$ 0.21
$ 0.57
$ 0.58
Weighted average common shares for basic earnings per share 451,020
428,713
450,641
408,614

Economic Book Value

“Economic book value” is a non-GAAP financial measure of our financial position. To calculate our Economic book value, our portfolios of Residential whole loans at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these loans. This adjustment is also reflected in the table below in ~~the Company’s~~our end of period stockholders’ equity. Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for all of our residential mortgage investments, irrespective of the accounting model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders’ Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The following table provides a reconciliation of our GAAP book value per common share to our non-GAAP Economic book value per common share as of ~~September 30, 2019 and December 31, 2018:~~the quarterly periods below:


(In Thousands, Except Per Share Amounts)	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019		March 31, 2019
GAAP Total Stockholders’ Equity	$	2,565.7	$	2,521.1	$	2,440.7	$	3,384.0	$	3,403.4	$	3,403.4	$	3,404.5
Preferred Stock, liquidation preference	(475.0)		(475.0)		(475.0)		(200.0)		(200.0)		(200.0)		(200.0)
GAAP Stockholders’ Equity for book value per common share	2,090.7		2,046.1		1,965.7		3,184.0		3,203.4		3,203.4		3,204.5
Adjustments:
Fair value adjustment to Residential whole loans, at carrying value	141.1		(25.3)		(113.5)		182.4		145.8		131.2		92.1

Stockholders’ Equity including fair value adjustment to Residential whole loans, at carrying value (Economic book value)	$	2,231.8	$	2,020.8	$	1,852.2	$	3,366.4	$	3,349.2	$	3,334.6	$	3,296.6

GAAP book value per common share	$	4.61	$	4.51	$	4.34	$	7.04	$	7.09	$	7.11	$	7.11
Economic book value per common share	$	4.92	$	4.46	$	4.09	$	7.44	$	7.41	$	7.40	$	7.32
Number of shares of common stock outstanding	453.3		453.2		453.1		452.4		451.7		450.6		450.5

(In Thousands, Except Per Share Amounts) September 30, 2019 December 31, 2018
GAAP Total Stockholders’ Equity $ 3,403,426
$ 3,416,101
Preferred Stock, liquidation preference (200,000 ) (200,000 )
GAAP Stockholders’ Equity for book value per common share 3,203,426
3,216,101
Adjustments:
Fair value adjustment to Residential whole loans, at carrying value 145,807
87,686

Stockholders’ Equity including fair value adjustment to Residential whole loans, at carrying value $ 3,349,233
$ 3,303,787

GAAP book value per common share $ 7.09
$ 7.15
Economic book value per common share $ 7.41
$ 7.35
Number of shares of common stock outstanding 451,692
449,787

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Recent Accounting Standards to Be Adopted in Future Periods

~~Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments~~

In ~~June 2016,~~August 2020, the ~~FASB~~Financial Accounting Standards Board (or FASB) issued accounting standards update (or ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (or ASU ~~2016-13,~~ ~~Measurement~~2020-06). ASU 2020-06 was issued in order to reduce the complexity associated with recording financial instruments with characteristics of ~~Credit Losses on Financial Instruments~~ ~~(or~~both liabilities and equity by eliminating certain accounting models associated with such instruments and enhancing disclosure requirements. ASU ~~2016-13), which has subsequently been amended by ASUs 2019-05,~~ ~~Financial Instruments - Credit Losses (Topic 326): Targeted Relief,2019-04,~~ ~~Codification Improvements to Topic 326, Financial Instruments - Credit Losses,~~ ~~and 2018-19,~~ ~~Codification Improvements to Topic 326, Financial Instruments - Credit Losses~~. The amendments in ASU 2016-13 require entities to measure all expected credit losses (rather than incurred losses) for financial assets held at the reporting date, based on historical experience, current conditions and reasonable and supportable forecasts. Entities will now use forward-looking information to better inform their credit loss estimates. ASU 2016-13 also requires enhanced financial statement disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. ASU 2016-132020-06 is effective for ~~public business entities~~us for ~~fiscal years, and interim periods within those~~ fiscal years beginning after December 15, ~~2019.~~2021. Early adoption is permitted, ~~for all entities for annual periods~~but no earlier than in fiscal years beginning after December 15, ~~2018, and~~2020, including interim periods therein. The amendments in this ASU are required to be applied by recording a cumulative-effect adjustment to equity as of the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an OTTI had been recognized before the effective date. We are currently in the process of updating our systems and processes to meet the new requirements of this ASU, including working with certain of our vendors to implement new systems and/or make changes to existing systems that will be needed to perform the necessary accounting entries to comply with the new standard. In addition, we are reviewing historical performance data for our portfolios of both residential mortgage securities and residential whole loans, as well as other economic input data, in order to develop and validate modeling and forecasting methodologies that will be used to estimate credit losses and produce the financial statement disclosures required by ASU 2016-13. We will continue to monitor and evaluate the potential effects that ASU 2016-13 will have on our consolidated financial statements and related disclosures.

Under ASU 2016-13, credit losses for available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments in this ASU require that credit losses be recorded through an allowance for credit losses, which will allow subsequent reversals in credit loss estimates to be recognized in current income. In addition, the allowance on available-for-sale debt securities will be limited to the extent that the fair value is less than the amortized cost. Based on our initial evaluation of the amendments in this ASU, we anticipate being required to make changes to the way we account for credit impairment losses on our available-for-sale debt securities. Under our current accounting, credit impairment losses are generally required to be recorded as OTTI, which directly reduce the carrying amount of impaired securities, and are recorded in earnings and are not reversed if expected cash flows subsequently recover. Under the new guidance, credit impairments on such securities will be recorded as an allowance for credit losses that are also recorded in earnings, but the allowance can be reversed through earnings in a subsequent period if expected cash flows subsequently recover.within those fiscal years. We do not expect ~~that transition~~ASU 2020-06 to ~~the new available-for-sale debt securities guidance will result in~~have a material ~~change to~~impact on our ~~retained earnings.~~accounting or disclosures.

In addition, we expect that the new guidance will also result in changes to the accounting and presentation of our Residential whole loans held at carrying value. We are currently considering whether to avail ourselves of transition relief which would allow us to adopt the fair value option on certain or potentially all of our Purchase Credit Impaired whole loans that we currently account for at carrying value. If we were to make this election on transition to the new standard, the loans on which this election was made would be recorded at fair value and the difference between the loan fair value and carrying value at the date of adoption would be recorded as an adjustment, currently expected to be positive, to retained earnings. Thereafter, such loans would be accounted for in the same manner as our Residential whole loans at fair value, which would result in a number of presentation and income recognition differences to the accounting currently applied. To the extent we do not elect this transition relief, we anticipate that, upon adoption, the guidance will result in an increase in the gross carrying amount of our Purchased Credit Impaired Loans held at carrying value by the amount of the allowance for loan losses calculated under the new guidance. Thereafter, changes in the expected cash flows of such assets are expected to result in the recognition (or reversal) of an allowance for loan losses that will impact earnings. In addition, we expect that on adoption of the guidance there will be an increase in the allowance for credit losses for our Purchased Performing Loans held at carrying value, with a resulting negative adjustment to retained earnings. Thereafter, changes in the estimated credit losses for such assets will result in additions to, or reversals of, the allowance for loan losses that will impact earnings.

Liquidity and Capital Resources

General

Our principal sources of cash generally consist of borrowings under repurchase agreements and other collateralized financings, payments of principal and interest we receive on our investment portfolio, cash generated from our operating results and, to the extent such transactions are entered into, proceeds from capital market and structured financing transactions. Our most significant uses of cash are generally to pay principal and interest on our financing transactions, to purchase residential mortgage assets, to make dividend payments on our capital stock, to fund our operations, to meet margin calls and to make other investments that we consider appropriate.

We seek to employ a diverse capital raising strategy under which we may issue capital stock and other types of securities. To the extent we raise additional funds through capital market transactions, we currently anticipate using the net proceeds from such transactions to acquire additional residential mortgage-related assets, consistent with our investment policy, and for working capital, which may include, among other things, the repayment of our financing transactions. There can be no assurance, however, that we will be able to access the capital markets at any particular time or on any particular terms. We have available for issuance an unlimited amount (subject to the terms and limitations of our charter) of common stock, preferred stock, ~~depositary~~depository shares representing preferred stock, warrants, debt securities, rights and/or units pursuant to our automatic shelf registration statement and, at September 30, ~~2019~~,2020, we had approximately ~~11.6~~8.8 million shares of common stock available for issuance pursuant to our DRSPP shelf registration statement. During the nine months ended September 30, ~~2019,~~2020, we issued ~~240,741~~137,740 shares of common stock through our DRSPP, raising net proceeds of approximately ~~$1.8 million and 982,350~~$752,095. During the nine months ended September 30, 2020, we did not sell any shares of common stock through the ATM Program.

On March 2, 2020, we completed the issuance of 11.0 million shares of our ~~ATM Program, raising~~Series C Preferred Stock with a par value of $0.01 per share, and a liquidation preference of $25.00 per share plus accrued and unpaid dividends, in an underwritten public offering. The total net proceeds ofwe received from the offering were approximately ~~$7.1 million.~~$266.0 million, after deducting offering expenses and the underwriting discount.

Financing agreements

Our borrowings under ~~repurchase~~financing agreements include a combination of shorter term and longer arrangements. Certain of these arrangements are ~~uncommitted~~collateralized directly by our residential mortgage investments or otherwise have recourse to the Company, while securitized debt financing is non-recourse financing. Further, certain of our financing agreements contain terms that allow the lender to make margin calls on the Company based on changes in the value of the underlying collateral securing the borrowing. Repurchase agreements and other forms of collateralized financing are renewable at the discretion of our lenders and, as such, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time. The terms of the repurchase transaction borrowings under our master repurchase agreements, as such terms relate to repayment, margin requirements and the segregation of all securities that are the subject of repurchase transactions, generally conform to the terms contained in the standard master repurchase agreement published by the Securities Industry and Financial Markets Association (or SIFMA) or the global master repurchase agreement published by SIFMA and the International Capital Market ~~Association.~~Association In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts ~~(as defined below)~~(or the percentage amount by which the collateral value is contractually required to exceed the loan amount), purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default and setoff provisions. Other non-repurchase agreement financing arrangements also contain provisions governing collateral maintenance.

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With respect to margin maintenance requirements for ~~repurchase~~ agreements secured by harder to value assets, such as ~~Non-Agency MBS,~~ residential whole loans, Non-Agency MBS and MSR-related assets, margin calls are typically determined by our counterparties based on their assessment of changes in the fair value of the underlying collateral and in accordance with the agreed upon haircuts specified in the transaction confirmation with the counterparty. We address margin call requests in accordance with the required terms specified in the applicable ~~repurchase~~ agreement and such requests are typically satisfied by posting additional cash or collateral on the same business day. We review margin calls made by counterparties and assess them for reasonableness by comparing the counterparty valuation against our valuation determination. When we believe that a margin call is unnecessary because our assessment of collateral value differs from the counterparty valuation, we typically hold discussions with the counterparty and are able to resolve the matter. In the unlikely event that resolution cannot be reached, we will look to resolve the dispute based on the remedies available to us under the terms of the repurchase agreement, which in some instances may include

the engagement of a third-party to review collateral valuations. For certain other agreements that do not include such provisions, we could resolve the matter by substituting collateral as permitted in accordance with the agreement or otherwise request the counterparty to return the collateral in exchange for cash to unwind the financing. For additional information regarding the Company’s various types of financing arrangements, including those of with non mark-to-market terms and the haircuts for those agreements with mark-to-market collateral provisions, see Note 6, included under Item 1 of this Quarterly Report on Form 10-Q.

~~The following tables present information regarding the margin requirements, or the percentage amount by which the collateral value is contractually required~~We expect that we will continue to ~~exceed the loan amount (this difference is referred to~~pledge residential mortgage assets as ~~the “haircut”), on~~part of certain of our ~~repurchase agreements at~~ongoing financing arrangements. ~~September 30, 2019~~ ~~and~~ ~~December 31, 2018~~:

At September 30, 2019
Weighted
Average
Haircut
Low
High
Repurchase agreement borrowings secured by:

Agency MBS
4.42 % 3.00 % 5.00 %
Legacy Non-Agency MBS
20.57
15.00
35.00
RPL/NPL MBS 21.89
15.00
30.00
CRT securities 19.25
15.00
25.00
Residential whole loans 14.85
8.00
50.00
MSR-related assets 21.00
20.00
30.00
Other 21.20
20.00
35.00

At December 31, 2018
Weighted
Average
Haircut Low High
Repurchase agreement borrowings secured by:

Agency MBS
4.60 % 3.00 % 5.00 %
Legacy Non-Agency MBS
21.38
15.00
35.00
RPL/NPL MBS 21.31
15.00
30.00
CRT securities 20.01
17.00
25.00
Residential whole loans 16.55
8.00
33.00
MSR-related assets 21.88
20.00
30.00
Other 21.15
20.00
35.00

~~During~~As we experienced in the first ~~nine months~~quarter of ~~2019,~~2020, when the ~~weighted average haircut requirements for the respective underlying collateral types for our repurchase agreements have remained fairly consistent compared to the end~~value of ~~2018.~~

~~Repurchase agreement funding for~~ our residential mortgage ~~investments has been available~~assets pledged as collateral experienced rapid decreases, margin calls under our financing arrangements could materially increase, causing an adverse change in our liquidity position. Additionally, if one or more of our financing counterparties chose not to ~~us at generally attractive market terms from multiple counterparties. Typically, due to the risks inherent in credit sensitive residential mortgage investments, repurchase agreement~~provide ongoing funding, involving such investments is available at terms requiring higher collateralization and higher interest rates than repurchase agreement funding secured by Agency MBS. Therefore, we generally expect to be ableour ability to finance our ~~acquisitions of Agency MBS~~long-maturity assets would decline or otherwise become available on ~~more favorable terms than financing for credit sensitive investments.~~

~~We maintain cash and cash equivalents, unpledged Agency and Non-Agency MBS and collateral in excess of margin requirements held by~~possibly less advantageous terms. Further, when liquidity tightens, our counterparties to our short term arrangements with mark-to-market collateral provisions may increase their required collateral cushion (or ~~collectively, “cash and other unpledged collateral”)~~margin) requirements on new financings, including financings that we roll with the same counterparty, thereby reducing our ability to ~~meet routine margin calls and protect against unforeseen reductions~~use leverage. Access to financing may also be negatively impacted by ongoing volatility in financial markets, thereby potentially adversely impacting our ~~borrowing capabilities.~~ current or future lenders’ ability or willingness to provide us with financing. In addition, there is no assurance that favorable market conditions will exist to permit us to consummate additional securitization transactions if we determine to seek that form of financing.

Our ability to meet future margin calls will be affected by our ability to use cash or obtain financing from unpledged collateral, the amount of which can vary based on the market value of such collateral, our cash position and margin requirements. Our cash position fluctuates based on the timing of our operating, investing and financing activities and is managed based on our anticipated cash needs. (See our Consolidated Statements of Cash Flows, included under Item 1 of this Quarterly Report on Form 10-Q and “Interest Rate Risk” included under Item 3 of this Quarterly Report on Form 10-Q.)

At September 30, ~~2019,~~2020, we had a total of ~~$10.6~~$5.2 billion of ~~MBS, CRT securities,~~ residential whole loans, residential mortgage securities, MSR-related assets and other interest-earning assets and ~~$39.0~~$5.3 million of restricted cash pledged ~~against~~to our ~~repurchase agreements and Swaps.~~financing counterparties. At September 30, ~~2019,~~2020, we ~~have~~had access to various sources of liquidity which we ~~estimate exceeds $234.7~~estimated exceeded $940.2 million. This amount includes (i) ~~$154.2~~$884.2 million of cash and cash ~~equivalents;~~equivalents and (ii) ~~$56.6~~$56.0 million in ~~estimated~~unused capacity under our financing ~~available from unpledged Agency MBS and other Agency MBS collateral that is currently pledged in excess of contractual requirements; and (iii) $23.9 million in estimated~~

~~financing available from unpledged Non-Agency MBS and from other Non-Agency MBS and CRT collateral that is currently pledged in excess of contractual requirements.~~arrangements. Our sources of liquidity do not include restricted cash. In addition, we have ~~$1.1 billion~~$65.5 million of unencumbered residential whole loans. We are evaluating potential opportunities to finance ~~these assets,~~our residential whole loans, including loan securitization.

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The table below presents certain information about our borrowings under ~~repurchase~~asset-backed financing agreements and securitized debt:

Repurchase Agreements Securitized Debt
Quarter Ended (1)
Quarterly
Average
Balance End of Period
Balance Maximum
Balance at Any
Month-End Quarterly
Average
Balance End of Period
Balance Maximum
Balance at Any
Month-End
(In Thousands)
September 30, 2019 $ 8,654,350
$ 8,571,422
$ 8,833,159
$ 617,689
$ 605,712
$ 621,071
June 30, 2019 8,621,895
8,630,642
8,639,311
645,972
627,487
649,405
March 31, 2019 8,282,621
8,509,713
8,509,713
675,678
659,184
679,269
December 31, 2018 7,672,309
7,879,087
7,879,087
699,207
684,420
702,377
September 30, 2018 6,594,050
7,278,270
7,278,270
665,572
714,203
744,521


~~(1)~~	The information presented in the table above excludes $230.0 million of Convertible Senior Notes issued in June 2019 and $100.0 million of Senior Notes issued in April 2012. The outstanding balance of both the Convertible Senior Notes and Senior Notes have been unchanged since issuance.


	Asset-backed Financing Agreements						Securitized Debt
Quarter Ended (1)	Quarterly Average Balance		End of Period Balance		Maximum Balance at Any Month-End		Quarterly Average Balance		End of Period Balance		Maximum Balance at Any Month-End
(In Thousands)
September 30, 2020	$	3,511,453	$	3,217,678	$	3,613,968	$	610,120	$	837,683	$	837,683
June 30, 2020	4,736,610		3,692,845		5,024,926		538,245		516,102		541,698
March 31, 2020	9,233,808		7,768,180		9,486,555		558,007		533,733		594,458
December 31, 2019	8,781,646		9,139,821		9,139,821		590,813		570,952		621,071
September 30, 2019	8,654,350		8,571,422		8,833,159		617,689		605,712		649,405

(1)The information presented in the table above excludes $230.0 million of Convertible Senior Notes issued in June 2019, $100.0 million of Senior Notes issued in April 2012, and $481.3 million of a senior secured term loan facility. The outstanding balance of both the Convertible Senior Notes and Senior Notes have been unchanged since issuance. Subsequent to the end of the third quarter of 2020, we repaid in full the outstanding principal balance of the senior secured term loan facility.

Cash Flows and Liquidity for the Nine Months Ended September 30, ~~2019~~2020

Our cash, cash equivalents and restricted cash increased by ~~$104.5~~$754.8 million during the nine months ended September 30, ~~2019,~~2020, reflecting: ~~$564.3 million used in~~$5.9 billion provided by our investing activities, ~~$515.2 million provided by~~$5.1 billion used in our financing activities and ~~$153.6~~$16.8 million provided by our operating activities.

At September 30, ~~2019,~~2020, our debt-to-equity multiple was ~~2.8~~1.9 times compared to ~~2.6~~3.0 times at December 31, ~~2018.~~2019. At September 30, ~~2019,~~2020, we had borrowings under ~~repurchase~~asset-backed financing agreements of ~~$8.6~~$3.2 billion, ~~with 28 counterparties,~~ of which ~~$1.7 billion were secured by Agency MBS, $1.2 billion were secured by Legacy Non-Agency MBS, $642.7 million were secured by RPL/NPL MBS, $303.5 million were secured by CRT securities, $3.7~~$3.0 billion were secured by residential whole loans ~~$918.1~~and $258.5 million were secured by residential mortgage securities, MSR-related assets, and ~~$72.9 million were secured by~~ other interest-earning assets. ~~We continue to have available capacity under our repurchase agreement credit lines.~~ In addition, at September 30, ~~2019,~~2020, we had securitized debt of ~~$605.7~~$837.7 million in connection with our loan securitization transactions. At December 31, ~~2018,~~2019, we had borrowings under ~~repurchase~~asset-backed financing agreements of ~~$7.9~~$9.1 billion, ~~with 26 counterparties,~~ of which ~~$2.4~~$4.7 billion were secured by residential whole loans, $1.6 billion were secured by Agency MBS, ~~$1.4~~$1.1 billion were secured by Legacy Non-Agency MBS, ~~$1.1 billion~~$495.1 million were secured by RPL/NPL MBS, ~~$391.6~~$203.6 million were secured by CRT securities, ~~$2.0 billion were secured by residential whole loans, $474.1~~$962.5 million were secured by MSR-related assets and ~~$76.4~~$57.2 million were secured by other interest-earning assets. In addition, at December 31, ~~2018,~~2019, we had securitized debt of ~~$684.4~~$571.0 million in connection with our loan securitization transactions.

During the nine months ended September 30, ~~2019, $564.3 million~~2020, $5.9 billion was ~~used in~~provided by our investing activities. We paid ~~$3.0~~$1.3 billion for purchases of residential whole loans, loan related investments and capitalized advances, and purchased ~~$580.8~~$163.7 million of MSR-related assets ~~$246.3 million of Non-Agency MBS~~ and ~~$10.5 million of~~ CRT securities funded with cash and repurchase agreement borrowings. In addition, during the nine months ended September 30, ~~2019,~~2020, we received cash of ~~$1.6 billion~~$609.8 million from prepayments and scheduled amortization on our MBS, CRT securities and MSR-related assets, of which ~~$536.4~~$137.7 million was attributable to Agency MBS, ~~$985.3~~$410.9 million was from Non-Agency MBS, ~~and $33.7~~$56.2 million was attributable to MSR-related assets, and approximately $4.9 million was attributable to CRT securities, and we sold certain of our investment securities, MSR-related assets, and other assets for ~~$735.8 million,~~$3.8 billion, realizing net ~~gains~~losses of ~~$50.0~~$71.6 million. While we generally intend to hold our MBS and CRT securities as long-term investments, we may sell certain of our securities in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions. In particular, subsequent to the end of the first quarter, we sold our remaining Agency MBS, substantially all of our Legacy Non-Agency MBS portfolio and substantially reduced our investments in MSR-related assets and CRT securities. During the three months ended September 30, 2020, we sold our remaining Legacy Non-Agency MBS. During the nine months ended September 30, ~~2019~~2020, we received ~~$906.1 million~~$1.3 billion of principal payments on residential whole loans and ~~$81.2~~$203.6 million of proceeds on sales of REO.

In connection with our repurchase agreement ~~borrowings~~financings and Swaps, we routinely receive margin calls/reverse margin calls from our counterparties and make margin calls to our counterparties. Margin calls and reverse margin calls, which requirements vary over time, may occur daily between us and any of our counterparties when the value of collateral pledged changes from the amount contractually required. The value of securities pledged as collateral fluctuates reflecting changes in: (i) the face (or par)

value of our assets; (ii) market interest rates and/or other market conditions; and (iii) the market value of our

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Swaps. Margin calls/reverse margin calls are satisfied when we pledge/receive additional collateral in the form of additional assets and/or cash.

The table below summarizes our margin activity with respect to our repurchase agreement financings and derivative hedging instruments for the quarterly periods presented:

Collateral Pledged to Meet Margin Calls
Cash and
Securities Received for
Reverse Margin Calls
Net Assets
Received/(Pledged) for Margin Activity
For the Quarter Ended (1)
Fair Value of
Securities
Pledged Cash Pledged Aggregate Assets
Pledged For
Margin Calls
(In Thousands)
September 30, 2019 $ 77,214
$ —
$ 77,214
$ 98,710
$ 21,496
June 30, 2019 26,037
—
26,037
6,287
(19,750 )
March 31, 2019 49,139
—
49,139
65,461
16,322
December 31, 2018 14,452
—
14,452
23,760
9,308
September 30, 2018 61,492
3,005
64,497
8,294
(56,203 )


	Collateral Pledged to Meet Margin Calls						Cash and Securities Received for Reverse Margin Calls		Net Assets Received/(Pledged) for Margin Activity
For the Quarter Ended (1)	Fair Value of Securities Pledged		Cash Pledged		Aggregate Assets Pledged For Margin Calls
(In Thousands)
September 30, 2020	$	—	$	2,526	$	2,526	$	2,199	$	(327)
June 30, 2020	—		108,999		108,999		322,682		213,683
March 31, 2020	30,187		213,392		243,579		67,343		(176,236)
December 31, 2019	—		26,972		26,972		18,311		(8,661)
September 30, 2019	77,214		35,271		112,485		129,132		16,647

(1) Excludes variation margin payments on the Company’s cleared Swaps which are treated as a legal settlement of the exposure under the Swap contract.

We are subject to various financial covenants under our ~~repurchase~~financing agreements, ~~and derivative contracts,~~ which include minimum liquidity and net worth ~~and/or profitability~~ requirements, net worth decline limitations and maximum debt-to-equity ~~ratios and minimum market capitalization requirements.~~ratios. We ~~have maintained~~were in compliance with all ~~of our~~ financial covenants ~~through~~as of September 30, ~~2019.~~2020.

During the nine months ended September 30, 2019, we paid $271.0 million for cash dividends on our common stock and dividend equivalents and paid cash dividends of $11.3 million on our preferred stock. On September 12, 2019, we declared our third quarter 2019 dividend on our common stock of $0.20 per share; on October 31, 2019, we paid this dividend, which totaled approximately $90.6 million, including dividend equivalents of approximately $276,000.

We believe that we have adequate financial resources to meet our current obligations, including margin calls, as they come due, to fund dividends we declare and to actively pursue our investment strategies. However, should the value of our MBS suddenly decrease, significant margin calls on our repurchase agreement borrowings could result and our liquidity position could be materially and adversely affected. Further, should market liquidity tighten, our repurchase agreement counterparties might increase our margin requirements on new financings, reducing our ability to use leverage. Access to financing may also be negatively impacted by the ongoing volatility in the world financial markets, potentially adversely impacting our current or potential lenders’ ability or willingness to provide us with financing. In addition, there is no assurance that favorable market conditions will continue to permit us to consummate additional securitization transactions if we determine to seek that form of financing.

Off-Balance Sheet Arrangements

We have not participated in transactions that create relationships with unconsolidated entities or financial partnerships which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Inflation

Substantially all of our assets and liabilities are financial in nature. As a result, changes in interest rates and other factors impact our performance far more than does inflation. Our results of operations and reported assets, liabilities and equity are measured with reference to historical cost or fair value without considering inflation.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We seek to manage our risks related to interest rates, liquidity, prepayment speeds, market value and the credit quality of our assets while, at the same time, seeking to provide an opportunity to stockholders to realize attractive total returns through ownership of our capital stock. While we do not seek to avoid risk, we seek, consistent with our investment policies, to: assume risk that can be quantified based on management’s judgment and experience and actively manage such risk; earn sufficient returns to justify the taking of such risks; and maintain capital levels consistent with the risks that we undertake.

Interest Rate Risk

We generally acquire interest-rate sensitive assets and fund them with interest-rate sensitive liabilities, a portion of which are typically hedged with Swaps. We are exposed to interest rate risk on our residential mortgage assets, as well as on our liabilities. Changes in interest rates can affect our net interest income and the fair value of our assets and liabilities.

~~We finance the majority of our investments in residential mortgage assets with short-term repurchase agreements.~~ In general, when interest rates change, ~~the~~ borrowing costs ofon our ~~repurchase~~financing agreements ~~(net of the impact of Swaps)~~will change more quickly than the yield on our assets. In a rising interest rate environment, the borrowing costs of our repurchase agreements may increase faster than the interest income on our assets, thereby reducing our net income. In order to mitigate compression in net income based on such interest rate movements, we may use Swaps to lock in a portion of the net interest spread between assets and liabilities.

When interest rates change, the fair value of our residential mortgage assets could change at a different rate than the fair value of our liabilities. We measure the sensitivity of our portfolio to changes in interest rates by estimating the duration of our assets and liabilities. Duration is the approximate percentage change in fair value for a 100 basis point parallel shift in the yield curve. In general, our assets have higher duration than our liabilities and in order to reduce this exposure we use Swaps to reduce the gap in duration between our assets and liabilities.

In calculating the duration of our Agency MBS we take into account the characteristics of the underlying mortgage loans including whether the underlying loans are fixed rate, adjustable or hybrid; coupon, expected prepayment rates and lifetime and periodic caps. We use third-party financial models, combined with management’s assumptions and observed empirical data when estimating the duration of our Agency MBS.

In analyzing the interest rate sensitivity of our Legacy Non-Agency MBS we take into account the characteristics of the underlying mortgage loans, including credit quality and whether the underlying loans are fixed-rate, adjustable or hybrid. We estimate the duration of our Legacy Non-Agency MBS using management’s assumptions.

The majority of our RPL/NPL MBS deal structures contain a contractual coupon step-up feature where the coupon increases from 300 - 400 basis points at 36 - 48 months from issuance or sooner. Therefore, we believe their fair value exhibits little sensitivity to changes in interest rates. We estimate the duration of these securities using management’s assumptions.

The fair value of our re-performing residential whole loans is dependent on the value of the underlying real estate collateral, past and expected delinquency status of the borrower as well as the level of interest rates. ~~Because~~For certain residential whole loans that were purchased as re-performing loans, because the borrower is not delinquent on their mortgage payments but is less likely to prepay the loan due to weak credit history and/or high LTV, we believe ~~our re-performing residential whole~~these loans exhibit positive duration. We estimate the duration of our re-performing residential whole loans using management’s assumptions.

The fair value of our Non-QM loans and Single-family rental loans are typically dependent on the value of the underlying real estate collateral, as well as the level of interest rates. Because these loans are primarily newly or recently originated performing loans, we believe these investments exhibit positive duration. Given the short duration of ~~the Company’s~~our Rehabilitation loans, we believe the fair value of these loans exhibits little sensitivity to changes in interest rates. We estimate the duration of these Purchased Performing Loans held at carrying value using management’s assumptions.

The fair value of our non-performing residential whole loans is typically primarily dependent on the value of the underlying real estate collateral and the time required for collateral liquidation. Since neither the value of the collateral nor the liquidation timeline is generally sensitive to interest rates, we believe their fair value exhibits little sensitivity to interest rates. We estimate the duration of our non-performing residential whole loans using management’s assumptions.

We typically use Swaps as part of our overall interest rate risk management strategy. Such derivative financial instruments are intended to act as a hedge against future interest rate increases on our ~~repurchase agreement financings, which rates are typically highly~~

~~correlated with LIBOR.~~financing transactions. While ~~our~~use of such derivatives dodoes not extend the maturities of our borrowings under repurchase agreements, they do, in effect, lock in a fixed rate of interest over their term for a corresponding amount of our repurchase agreement financings that are hedged.

At September 30, 2019, MFA’s $3.4 billion of Agency MBS and Legacy Non-Agency MBS were backed by Hybrid, adjustable and fixed-rate mortgages. Additional information about these MBS, including average months to reset and three-month average CPR, is presented below:

Agency MBS
Legacy Non-Agency MBS (1)

Total (1)
Time to Reset
Fair
Value (2)

Average Months to Reset (3)

3 Month
Average CPR (4)
Fair Value
Average Months to Reset (3)

3 Month
Average CPR (4)

Fair
Value (2)

Average Months to Reset (3)

3 Month
Average CPR (4)
(Dollars in Thousands)

< 2 years (5)
$ 790,932
6
20.8 % $ 948,067
5
16.3 % $ 1,738,999
6
18.2 %
2-5 years 87,180
36
15.5
—
—
—
87,180
36
15.5
> 5 years 8,077
68
39.6
—
—
—
8,077
68
39.6
ARM-MBS Total $ 886,189
10
20.4 % $ 948,067
5
16.3 % $ 1,834,256
7
18.2 %
15-year fixed (6)
$ 614,228

10.5 % $ 813

15.0 % $ 615,041

10.6 %
30-year fixed (6)
312,491

32.9
573,813

12.6
886,304

19.2
40-year fixed (6)
—

—
44,191

15.1
44,191

15.1
Fixed-Rate Total $ 926,719

17.1 % $ 618,817

12.8 % $ 1,545,536

15.4 %
MBS Total $ 1,812,908

18.6 % $ 1,566,884
14.9 % $ 3,379,792
16.9 %


~~(1)~~	~~Excludes $828.0 million of RPL/NPL MBS. Refer to table below for further information.~~


~~(2)~~	~~Does not include principal payments receivable of $965,000.~~


~~(3)~~	Months to reset is the number of months remaining before the coupon interest rate resets. At reset, the MBS coupon will adjust based upon the underlying benchmark interest rate index, margin and periodic and/or lifetime caps. The months to reset do not reflect scheduled amortization or prepayments.


~~(4)~~	~~3 month average CPR weighted by positions as of the beginning of each month in the quarter.~~


~~(5)~~	Amounts presented are based on origination data. Includes floating-rate MBS that may be collateralized by fixed-rate mortgages. In addition, underlying loans may have been modified to be fixed or step rate.


~~(6)~~	~~Information presented based on data available at time of loan origination.~~

~~The following table presents certain information about our RPL/NPL MBS portfolio at~~ ~~September 30, 2019~~:

(Dollars in Thousands) Fair Value Net Coupon
Months to
Step-Up (1)

3 Month Average
Bond CPR (2)
Re-Performing loans $ 114,594
4.45 % 21
— %
Non-Performing loans 713,455
5.24
23
20.1
Total RPL/NPL MBS $ 828,049
5.13 % 23
18.2 %


~~(1)~~	Months to step-up is the weighted average number of months remaining before the coupon interest rate increases pursuant to the first coupon reset. We anticipate that the securities will be redeemed prior to the step-up date.


~~(2)~~	~~All principal payments are considered to be prepayments for CPR purposes.~~

~~At September 30, 2019, our CRT securities and MSR-related assets had a fair value of $377.9 million and $1.2 billion, respectively, and their coupons reset monthly based on one-month LIBOR.~~

The interest rates for the vast majority of our investments, financings and hedging transactions are either explicitly or indirectly based on LIBOR. On July 27, 2017, the United Kingdom Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. At this time, it is not possible to predict the effect of such change, including the establishment of potential alternative reference rates, on the economy or markets we are active in either currently or in the future, or on any of our assets or liabilities whose interest rates are based on LIBOR. We are in the process of evaluating the potential impact of a discontinuation of LIBOR after 2021 on our portfolio, as well as the related accounting impact. However, we expect that ~~during~~in the ~~remainder of 2019 and throughout 2020,~~near term, we will work closely with the Trustee companies and/or other entities that are involved in calculating the interest rates for our residential mortgage securities and securitized debt, our loan servicers for our hybrid and floating rate loans, and with the various counterparties to our financing and hedging transactions in order to determine what changes, if any, are required to be made to existing agreements for these transactions.

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Shock Table

The information presented in the following “Shock Table” projects the potential impact of sudden parallel changes in interest rates on our net interest income and portfolio value ~~including the impact of Swaps,~~ over the next 12 months based on the assets in our investment portfolio at September 30, ~~2019~~.2020. All changes in income and value are measured as the percentage change from the projected net interest income and portfolio value under the base interest rate scenario at September 30, ~~2019~~2020.


Change in Interest Rates	Estimated Value of Assets (1)		Estimated Value of Securitized and Other Fixed Rate Debt		Estimated Value of Financial Instruments		Change in Estimated Value		Percentage Change in Net Interest Income		Percentage Change in Portfolio Value
(Dollars in Thousands)
+100 Basis Point Increase	$	7,338,936	$	9,758	$	7,348,694	$	(143,322)	8.38	%	(1.91)	%
+ 50 Basis Point Increase	$	7,428,701	$	(2,068)	$	7,426,633	$	(65,383)	4.60	%	(0.87)	%
Actual at September 30, 2020	$	7,505,910	$	(13,894)	$	7,492,016	$	—	—	%	—	%
- 50 Basis Point Decrease	$	7,570,563	$	(25,719)	$	7,544,844	$	52,828	(5.08)	%	0.71	%
-100 Basis Point Decrease	$	7,622,661	$	(37,545)	$	7,585,116	$	93,100	(9.39)	%	1.24	%

(1)Such assets include residential whole loans and REO, MBS and CRT securities, MSR-related assets, cash and cash equivalents and restricted cash.

Change in Interest Rates
Estimated
Value
of Assets (1)
Estimated
Value of
Swaps Estimated
Value of
Financial
Instruments
Change in
Estimated
Value
Percentage
Change in Net
Interest
Income Percentage
Change in
Portfolio
Value
(Dollars in Thousands)
+100 Basis Point Increase $ 12,819,461
$ 26,137
$ 12,845,598
$ (180,069 ) (4.90 )% (1.38 )%
+ 50 Basis Point Increase $ 12,948,352
$ (4,438 ) $ 12,943,914
$ (81,753 ) (2.65 )% (0.63 )%
Actual at September 30, 2019 $ 13,060,681
$ (35,014 ) $ 13,025,667
$ —
— % — %
- 50 Basis Point Decrease $ 13,156,451
$ (65,589 ) $ 13,090,862
$ 65,195
0.36 % 0.50 %
-100 Basis Point Decrease $ 13,235,660
$ (96,164 ) $ 13,139,496
$ 113,829
1.05 % 0.87 %


~~(1)~~	~~Such assets include MBS and CRT securities, residential whole loans and REO, MSR-related assets, cash and cash equivalents and restricted cash.~~

Certain assumptions have been made in connection with the calculation of the information set forth in the Shock Table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at September 30, ~~2019.~~2020. The analysis presented utilizes assumptions and estimates based on management’s judgment and experience. Furthermore, while we generally expect to retain the majority of our assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially change our interest rate risk profile. It should be specifically noted that the information set forth in the above table and all related disclosure constitute forward-looking statements within the meaning of Section 27A of the 1933 Act and Section 21E of the 1934 Act. Actual results could differ significantly from those estimated in the Shock Table above.

The Shock Table quantifies the potential changes in net interest income and portfolio value, which includes the value of our ~~Swaps~~securitized and other fixed rate date (which are carried at fair value), should interest rates immediately change (i.e., are shocked). The Shock Table presents the estimated impact of interest rates instantaneously rising 50 and 100 basis points, and falling 50 and 100 basis points. The cash flows associated with our portfolio for each rate shock are calculated based on assumptions, including, but not limited to, prepayment speeds, yield on replacement assets, the slope of the yield curve and composition of our portfolio. Assumptions made with respect to the interest rate sensitive liabilities include anticipated interest rates, collateral requirements as a percent of repurchase agreement financings, and the amounts and terms of borrowing. At September 30, ~~2019,~~2020, we applied a floor of 0% for all anticipated interest rates included in our assumptions. Due to this floor, it is anticipated that any hypothetical interest rate shock decrease would have a limited positive impact on our funding costs; however, because prepayments speeds are unaffected by this floor, it is expected that any increase in our prepayment speeds (occurring as a result of any interest rate shock decrease or otherwise) could result in an acceleration of premium amortization on our Agency MBS and discount accretion on our Non-Agency MBS and in the reinvestment of principal repayments in lower yielding assets. As a result, because the presence of this floor limits the positive impact of interest rate decrease on our funding costs, hypothetical interest rate shock decreases could cause a decline in the fair value of our financial instruments and our net interest income.

At September 30, ~~2019,~~2020, the impact on portfolio value was approximated using estimated net effective duration (i.e., the price sensitivity to changes in interest rates), including the effect of ~~Swaps and~~ securitized and other fixed rate debt, of ~~1.14~~1.57 which is the weighted average of ~~1.45 for our Agency MBS, 0.91 for our Non-Agency investments, 2.24~~2.39 for our Residential whole loans, ~~(1.51)~~0.61 for our ~~Swaps,~~Non-Agency investments, (1.46) for our securitized debt, and other fixed rate debt, and ~~0.17~~0.11 for our Other assets and cash and cash equivalents. Estimated convexity (i.e., the approximate change in duration relative to the change in interest rates) of the portfolio was ~~(0.51)~~(0.65), which is the weighted average of ~~(0.56)~~(0.84) for our ~~Agency MBS,~~Residential whole loans, zero for our ~~Swaps and~~ securitized and other fixed rate debt, ~~(0.12)~~zero for our Non-Agency MBS ~~(0.79) for our Residential whole loans~~ and zero for our Other assets and cash and cash equivalents. The impact on our net interest income is driven mainly by the difference between portfolio yield and cost of funding of our repurchase ~~agreements, which includes the cost and/or benefit from Swaps.~~agreements. Our asset/liability structure is generally such that an increase in interest rates would be expected to result in a decrease in net interest income, as our borrowings are generally shorter in term than our interest-earning assets. When interest rates are shocked, prepayment assumptions are adjusted based on management’s expectations along with the results from the prepayment model.

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Credit Risk

~~Although we do not believe that we are exposed to credit risk in our Agency MBS portfolio, we~~We are exposed to credit risk through our credit sensitive residential mortgage investments, in particular ~~Legacy Non-Agency MBS, CRT securities and~~ residential whole loans and CRT securities and to a lesser extent our investments in RPL/NPL MBS and MSR-related assets. As discussed above, since the end of the first quarter we have engaged in asset sales and taken other actions that significantly changed our asset composition subsequent to March 31, 2020. During the third quarter of 2020, we sold the remainder of our Legacy Non-Agency MBS. As a result, our primary credit risk currently relates to our residential whole loans.

Our exposure to credit risk from our credit sensitive investments is discussed in more detail below:

~~Legacy Non-Agency MBS~~

Our investment process for Legacy Non-Agency MBS involves analysis focused primarily on quantifying and pricing credit risk. When we purchase Legacy Non-Agency MBS, we assign certain assumptions to each of the MBS, including but not limited to, future interest rates, voluntary prepayment rates, mortgage modifications, default rates and loss severities, and generally allocate a portion of the purchase discount as a Credit Reserve which provides credit protection for such securities. As part of our surveillance process, we review our Legacy Non-Agency MBS by tracking their actual performance compared to the securities’ expected performance at purchase or, if we have modified our original purchase assumptions, compared to our revised performance expectations. To the extent that actual performance of a Legacy Non-Agency MBS is less favorable than its expected performance, we may revise our performance expectations. As a result, we could reduce the accretable discount on the security and/or recognize an other-than-temporary impairment through earnings, either of which could have a material adverse impact on our operating results.

In evaluating our asset/liability management and Legacy Non-Agency MBS credit performance, we consider the credit characteristics of the mortgage loans underlying our Legacy Non-Agency MBS. The following table presents certain information about our Legacy Non-Agency MBS portfolio at ~~September 30, 2019~~. Information presented with respect to the weighted average Fair Isaac Corporation (or FICO) scores and other information aggregated based on information reported at the time of mortgage origination are historical and, as such, do not reflect the impact of the general changes in home prices or changes in borrowers’ credit scores or the current use of the mortgaged properties.

~~The information in the table below is presented as of~~ ~~September 30, 2019~~:

(Dollars in Thousands)
Securities with
Average Loan FICO
of 715 or Higher (1)

Securities with
Average Loan FICO
Below 715 (1)
Total

Number of securities 164
137
301
MBS current face (2)
$ 922,828
$ 779,275
$ 1,702,103
Total purchase discounts, net (2)
$ (274,433 ) $ (289,493 ) $ (563,926 )
Purchase discount designated as Credit Reserve and OTTI (2)(3)
$ (198,692 ) $ (263,403 ) $ (462,095 )
Purchase discount designated as Credit Reserve and OTTI as percentage
of current face
21.5 % 33.8 % 27.2 %
MBS amortized cost (2)
$ 648,395
$ 489,782
$ 1,138,177
MBS fair value (2)
$ 864,931
$ 701,953
$ 1,566,884
Weighted average fair value to current face 93.7 % 90.1 % 92.1 %
Weighted average coupon (4)
4.58 % 5.08 % 4.81 %
Weighted average loan age (months) (4)(5)
157
163
160
Weighted average current loan size (4)(5)
$ 422
$ 266
$ 351
Percentage amortizing (6)
100 % 99 % 100 %
Weighted average FICO score at origination (4)(7)
728
702
716
Owner-occupied loans 90.5 % 87.5 % 89.1 %
Rate-term refinancings 24.6 % 17.4 % 21.3 %
Cash-out refinancings 34.8 % 45.0 % 39.5 %
3 Month CPR (5)
16.2 % 15.5 % 15.9 %
3 Month CRR (5)(8)
14.2 % 13.2 % 13.8 %
3 Month CDR (5)(8)
2.4 % 2.8 % 2.6 %
3 Month loss severity 40.7 % 57.8 % 49.2 %
60+ days delinquent (7)
9.7 % 12.4 % 10.9 %
Percentage of always current borrowers (Lifetime) (9)
25.0 % 20.2 % 22.8 %
Percentage of always current borrowers (12M) (10)
77.4 % 70.8 % 74.4 %


~~(1)~~	~~FICO score is used by major credit bureaus to indicate a borrower’s creditworthiness at time of loan origination.~~


~~(2)~~	Excludes Non-Agency MBS issued since 2012 in which the underlying collateral consists of RPL/NPL MBS. These Non-Agency MBS have a current face of $824.8 million, amortized cost of $824.3 million, fair value of $828.1 million and purchase discounts of $475,000 at September 30, 2019.


~~(3)~~	~~Purchase discounts designated as Credit Reserve and OTTI are not expected to be accreted into interest income.~~


~~(4)~~	~~Weighted average is based on MBS current face at September 30, 2019.~~


~~(5)~~	~~Information provided is based on loans for individual groups owned by us.~~


~~(6)~~	~~Percentage of face amount for which the original mortgage note contractually calls for principal amortization in the current period.~~


~~(7)~~	~~Information provided is based on loans for all groups that provide credit enhancement for MBS with credit enhancement.~~


~~(8)~~	~~CRR represents voluntary prepayments and CDR represents involuntary prepayments.~~


~~(9)~~	~~Percentage of face amount of loans for which the borrower has not been delinquent since origination.~~


~~(10)~~	~~Percentage of face amount of loans for which the borrower has not been delinquent in the last twelve months.~~

The mortgages securing our Legacy Non-Agency MBS are located in many geographic regions across the United States. The following table presents the five largest geographic concentrations by state of the mortgages collateralizing our Legacy Non-Agency MBS at ~~September 30, 2019~~:



~~Property Location~~	~~Percent of Unpaid Principal Balance~~
~~California~~	~~42.7~~	%
~~Florida~~	~~8.1~~	%
~~New York~~	~~8.1~~	%
~~Maryland~~	~~4.0~~	%
~~New Jersey~~	~~3.8~~	%

~~RPL/NPL MBS~~

These securities are backed by re-performing and non-performing loans, were purchased primarily at prices around par and represent the senior and mezzanine tranches of the related securitizations. The majority of these securities are structured with significant credit enhancement (typically approximately 50%) and the subordinate tranches absorb all credit losses (until those tranches are extinguished) and typically receive no cash flow (interest or principal) until the senior tranche is paid off. Prior to purchase, we analyze the deal structure in order to assess the associated credit risk. Subsequent to purchase, the ongoing credit risk associated with the deal is evaluated by analyzing the extent to which actual credit losses occur that result in a reduction in the amount of subordination enjoyed by our bond.

~~CRT Securities~~

We are exposed to potential credit losses from our investments in CRT securities issued by or sponsored by Fannie Mae and Freddie Mac. While CRT securities are issued by or sponsored by these GSEs, payment of principal on these securities is not guaranteed. As an investor in a CRT security, we may incur a loss if losses on the mortgage loans in the reference pool exceed the credit enhancement on the underlying CRT security owned by us or if an actual pool of loans experience losses. We assess the credit risk associated with our investments in CRT securities by assessing the current and expected future performance of the associated loan pool.

Residential Whole Loans

We are ~~also~~ exposed to credit risk from our investments in residential whole loans. Our investment process for non-performing and Purchased Credit ~~Impaired~~Deteriorated Loans is ~~generally similar to that used for Legacy Non-Agency MBS and is likewise~~ focused on quantifying and pricing credit risk. Non-Performing and Purchased Credit ~~Impaired~~Deteriorated Loans are acquired at purchase prices that are generally discounted to the contractual loan balances based on a number of factors, including the impaired credit history of the borrower and the value of the collateral securing the loan. In addition, as we generally own the mortgage-servicing rights associated with these loans, our process is also focused on selecting a sub-servicer with the appropriate expertise to mitigate losses and maximize our overall return. This involves, among other things, performing due diligence on the sub-servicer prior to their engagement as well as ongoing oversight and surveillance. To the extent that delinquencies and defaults on these loans are higher than our expectation at the time the loans were purchased, the discounted purchase price at which the asset is acquired is intended to provide a level of protection against financial loss.

Credit risk on Purchased Performing Loans is mitigated through our process to underwrite the loan before it is purchased and includes an assessment of the borrower’s financial condition and ability to repay the loan, nature of the collateral and relatively low LTV, including after-repair LTV for the majority of our Rehabilitation loans.

The following table presents certain information about our Residential whole loans, at carrying value at September 30, ~~2019:~~2020:


	Purchased Performing Loans						Purchased Credit Deteriorated Loans
	Loans with an LTV:						Loans with an LTV:
(Dollars in Thousands)	80% or Below			Above 80%			80% or Below			Above 80%			Total
Amortized cost	$	3,659,498		$	132,294		$	423,880		$	278,134		$	4,493,806
Unpaid principal balance (UPB)	$	3,601,206		$	132,238		$	467,432		$	345,182		$	4,546,058
Weighted average coupon (1)	6.1		%	6.5		%	4.5		%	4.4		%	5.8		%
Weighted average term to maturity (months)	273			335			267			319			277
Weighted average LTV (2)	62.8		%	86.3		%	56.8		%	108.7		%	66.3		%
Loans 90+ days delinquent (UPB)	$	293,277		$	12,326		$	63,682		$	83,842		$	453,127

(1)Weighted average is calculated based on the interest bearing principal balance of each loan within the related category. For loans acquired with servicing rights released by the seller, interest rates included in the calculation do not reflect loan servicing fees. For loans acquired with servicing rights retained by the seller, interest rates included in the calculation are net of servicing fees.

(2)LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Rehabilitation loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Rehabilitation loans, totaling $222.2 million, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. The LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 68%. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.

Purchased Performing Loans Purchased Credit Impaired Loans
Loans with an LTV: Loans with an LTV:
(Dollars in Thousands) 80% or Below Above 80% 80% or Below Above 80% Total
Carrying value $ 4,000,299
$ 191,782
$ 400,921
$ 317,276
$ 4,910,278
Unpaid principal balance (UPB) $ 3,931,041
$ 190,553
$ 463,080
$ 437,103
$ 5,021,777
Weighted average coupon (1)
6.3 % 6.7 % 4.5 % 4.4 % 6.0 %
Weighted average term to maturity (months) 266
327
272
323
274
Weighted average LTV (2)
63.9 % 90.8 % 58.1 % 110.1 % 68.3 %
Loans 90+ days delinquent (UPB) $ 51,222
$ 2,508
$ 33,230
$ 70,778
$ 157,738

~~(1)~~

Weighted average is calculated based on the interest bearing principal balance of each loan within the related category. For loans acquired with servicing rights released by the seller, interest rates included in the calculation do not reflect loan servicing fees. For loans acquired with servicing rights retained by the seller, interest rates included in the calculation are net of servicing fees.Table of Contents

~~(2)~~

LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Rehabilitation loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Rehabilitation loans, totaling $250.0 million, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. The LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 69%. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.

The following table presents the five largest geographic concentrations by state of our residential whole loan portfolio at September 30, ~~2019:~~

2020:



Property Location	Percent of Interest-Bearing Unpaid Principal Balance
California	~~37.0~~35.0	%
Florida	~~11.7~~13.2	%
New York	7.7	%
New Jersey	~~5.3~~5.4	%
~~Illinois~~Georgia	~~3.2~~3.3	%

RPL/NPL MBS

CRT Securities

MSR-Related Assets

Term Notes

We have invested in certain term notes that are issued by SPVs that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. Payment of principal and interest on these term notes is considered by us to be largely dependent on the cash flows generated by the underlying MSRs as this impacts the cash flows available to the SPV that issued the term notes. Credit risk borne by the holders of the term notes is also mitigated by structural credit support in the form of over-collateralization. In addition, credit support is also provided by a corporate guarantee from the ultimate parent or sponsor of the SPV that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the underlying MSRs be insufficient.

Corporate Loan

We have participated in a loan agreement to provide financing to an entity that originates residential whole loans and owns the related MSRs. We assess the credit risk associated with this loan participation by considering various factors, including the current status of the loan, changes in fair value of the MSRs that secure the loan and the recent financial performance of the borrower.

Credit Spread Risk

Credit spreads measure the additional yield demanded by investors in financial instruments based on the credit risk associated with an instrument relative to benchmark interest rates. They are impacted by the available supply and demand for instruments with various levels of credit risk. Widening credit spreads would result in higher yields being required by investors in financial instruments. Credit spread widening generally results in lower values of the financial instruments we hold at that time, but will generally result in a higher yield on future investments with similar credit risk. It is possible that the credit spreads on our assets and liabilities, including hedges, will not always move in tandem. Consequently, changes in credit spreads can result in volatility in our financial results and reported book value.

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Liquidity Risk

The primary liquidity risk we face arises from financing long-maturity assets with shorter-term borrowings primarily in the form of repurchase agreement financings. This risk was particularly pronounced during the first quarter of 2020, as conditions created by the COVID-19 pandemic resulted in us receiving an usually high number of margin calls, negatively impacting our overall liquidity and ultimately leading us to enter into the Forbearance Agreements.

We pledge residential mortgage assets and cash to secure our ~~repurchase~~financing agreements. Our financing agreements with mark-to-market collateral provisions require us to pledge additional collateral in the event the market value of the assets pledged decreases, in order maintain the lenders contractually specified collateral cushion, which is measured as the difference between the loan amount and ~~Swaps. At September 30, 2019, we had access to various sources~~the market value of liquidity which we estimate to be in excess of $234.7 million, an amount which includes: (i) $154.2 million of cash and cash equivalents, (ii) $56.6 million in estimated financing available from unpledged Agency MBS and other Agency MBS collateral that are currentlythe asset pledged in excess of contractual requirements, and (iii) $23.9 million in estimated financing available from currently unpledged Non-Agency MBS and from other Non-Agency MBS and CRT collateral that is currently pledged in excess of contractual requirements. Our sources of liquidity do not include restricted cash. In addition, we have $1.1 billion of unencumbered residential whole loans. We are evaluating potential opportunities to finance these assets including loan securitization.as collateral. Should the value of our residential mortgage assets pledged as collateral suddenly decrease, margin calls under our repurchase agreements would likely increase, causing an adverse change in our liquidity position. Additionally, if one or more of our financing counterparties chose not to provide ongoing funding, our ability to finance our long-maturity assets would decline or be available on possibly less advantageous terms. ~~As such, we cannot assure you that we will always be able to roll over our repurchase agreement financings.~~ Further, ~~should market~~when liquidity ~~tighten,~~tightens, our repurchase agreement counterparties may increase our ~~margin~~collateral cushion (or margin) requirements on new financings, including repurchase agreement borrowings that we roll with the same counterparty, reducing our ability to use leverage.

At September 30, 2020, we had access to various sources of liquidity which we estimate to be in excess of $940.2 million, an amount which includes: (i) $884.2 million of cash and cash equivalents and (ii) $56.0 million in unused capacity under our financing arrangements. Our sources of liquidity do not include restricted cash. In addition, at September 30, 2020 we had $65.5 million of unencumbered residential whole loans.

Prepayment Risk

Premiums arise when we acquire an MBS or loan at a price in excess of the aggregate principal balance of the mortgages securing the MBS (i.e., par value) or when we acquire residential whole loans at a price in excess of their aggregate principal balance. Conversely, discounts arise when we acquire an MBS or loan at a price below the aggregate principal balance of the mortgages securing the MBS or when we acquire residential whole loans at a price below their aggregate principal balance. Premiums paid are amortized against interest income and accretable purchase discounts on these investments are accreted to interest income. Purchase premiums, which are primarily carried on our ~~Agency MBS,~~Non-QM loans and certain CRT securities, ~~and Non-QM loans,~~ are amortized against interest income over the life of the investment using the effective yield method, adjusted for actual prepayment activity. An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the interest income earned on these assets. Generally, if prepayments on Non-Agency MBS and residential whole loans purchased at significant discounts and not accounted for at fair value are less than anticipated, we expect that the income recognized on these assets will be reduced and impairments and/or ~~loan~~credit loss reserves may result.

In addition, increased prepayments are generally associated with decreasing market interest rates as borrowers are able to refinance their mortgages at lower rates. Therefore, increased prepayments on our investments may accelerate the redeployment of our capital to generally lower yielding investments. Similarly, decreased prepayments are generally associated with increasing market interest rates and may slow our ability to redeploy capital to generally higher yielding investments.

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Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Management, under the direction of its Chief Executive Officer and Chief Financial Officer, is responsible for maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 1934 Act) that are designed to ensure that information required to be disclosed in reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this Quarterly Report on Form 10-Q, management reviewed and evaluated the Company’s disclosure controls and procedures. The evaluation was performed under the direction of the Company’s Chief Executive Officer and Chief Financial Officer to determine the effectiveness, as of September 30, ~~2019~~,2020, of the design and operation of the Company’s disclosure controls and procedures. Based on that review and evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective as of September 30, ~~2019~~.2020. Notwithstanding the foregoing, a control system, no matter how well designed, implemented and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s current periodic reports.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, ~~2019~~2020 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which we are a party or any of our assets are subject.

Item 1A. Risk Factors

For a discussion of the Company’s risk factors, see Part 1, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019 (the “2019 Form 10-K”), as supplemented by the risk factors described under “Item 1.A. Risk Factors” in the Company’s Quarterly Reports on Form 10-Q for the three months ended March 31, 2020 (the “2020 Q1 Form 10-Q”) and six months ended June 30,2020 (the “2020 Q2 Form 10-Q”). There are no material changes from the risk factors set forth in ~~such Annual Report on~~the 2019 10-K, the 2020 Q1 Form ~~10-K.~~10-Q and the 2020 Q2 Form 10-Q. However, the risks and uncertainties that the Company faces are not limited to those set forth in the ~~Company’s Annual Report on~~2019 Form 10-K ~~for~~and the ~~year ended December 31, 2018.~~2020 Q1 Form 10-Q and the 2020 Q2 Form 10-Q. Additional risks and uncertainties not currently known to the Company (or that it currently believes to be immaterial) may also adversely affect the Company’s business and the trading price of our securities.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities

As previously disclosed, in August 2005, the Company’s Board authorized a ~~Repurchase Program,~~repurchase program, to repurchase up to 4.0 million shares of the Company’s outstanding common stock under the Repurchase Program. The Board reaffirmed such authorization in May 2010. In December, 2013, the Company’s Board increased the number of shares authorized for repurchase to an aggregate of 10.0 million shares (under which approximately 6.6 million shares ~~remain~~remained available for ~~repurchase)~~repurchase at September 30, 2020). Such authorization does not have an expiration date and, at present, there is no intention to modify or otherwise rescind such authorization. Subject to applicable securities laws, repurchases of common stock under the Repurchase Program are made at times and in amounts as the Company deems appropriate (including, in its discretion, through the use of one or more plans adopted under Rule 10b-5-1 promulgated under the 1934 Act), using available cash resources. Shares of common stock repurchased by the Company under the Repurchase Program are cancelled and, until reissued by the Company, are deemed to be authorized but unissued shares of the Company’s common stock. The Repurchase Program may be suspended or discontinued by the Company at any time and without prior notice.

The Company engaged in no share repurchase activity during the third quarter of ~~2019~~2020 pursuant to the ~~Repurchase Program~~repurchase program nor did it withhold any restricted shares (under the terms of grants under its Equity Plan) to offset tax withholding obligations that occur upon the vesting and release of restricted stock awards and/or RSUs.

In November 2020, the Company’s Board authorized a new share repurchase program under which the Company may repurchase up to $250 million of its outstanding common stock. The authorization under this repurchase program expires at the end of 2022. The Board’s authorization replaces and supersedes the authorization under the repurchase program that was adopted in December 2013.

The stock repurchase program does not require the purchase of any minimum number of shares. Subject to applicable securities laws, repurchases of common stock under the repurchase program may be made at times and in amounts as the Company deems appropriate, using available cash resources. The timing and extent to which the Company repurchases its shares will depend upon, among other things, market conditions, share price, liquidity, regulatory requirements and other factors, and repurchases may be commenced or suspended at any time without prior notice. Acquisitions under the share repurchase program may be made in the open market, through privately negotiated transactions or block trades or other means, in accordance with applicable securities laws (including, in the Company’s discretion, through the use of one or more plans adopted under Rule 10b-5-1 promulgated under the 1934 Act).

Shares of common stock repurchased by the Company under the repurchase program are cancelled and, until reissued by the Company, are deemed to be authorized but unissued shares of the Company’s common stock. The repurchase program may be suspended or discontinued by the Company at any time and without prior notice.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Table of Contents

Item 5. Other Information

None.

Item 6. Exhibits

The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under “Exhibit Index,” which is incorporated herein by reference.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Date: November 5, 2020			MFA FINANCIAL, INC.
			(Registrant)


~~Date: November 6, 2019~~			~~MFA FINANCIAL, INC.~~
By:	~~(Registrant)~~


	~~By:~~	/s/ Stephen D. Yarad
				Stephen D. Yarad
				Chief Financial Officer
				and Chief Accounting Officer
				(Principal Financial Officer)

Table of Contents

EXHIBIT INDEX

The following exhibits are filed as part of this Quarterly Report:


Exhibit						Description


~~Exhibit~~						~~Description~~

















31.1						Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101						Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in iXBRL (Inline Extensible Business Reporting Language): (i) our Consolidated Balance Sheets as of September 30, ~~2019~~2020 (Unaudited) and December 31, ~~2018;~~2019; (ii) our Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, ~~2019~~2020 and ~~2018;~~2019; (iii) our Consolidated Statements of Comprehensive Income / (Loss) (Unaudited) for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019; (iv) Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, ~~2019~~2020 and ~~2018;~~2019; (v) our Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~three months ended September 30, ~~2019~~2020 and ~~2018;~~2019; and (vi) the notes to our Unaudited Consolidated Financial Statements.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

E-1



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	MFA	New York Stock Exchange
7.50% Series B Cumulative Redeemable Preferred Stock, par value $0.01 per share	MFA/PB	New York Stock Exchange
6.50% Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share	MFA/PC	New York Stock Exchange
8.00% Senior Notes due 2042	MFO	New York Stock Exchange


				Page

PART I
FINANCIAL INFORMATION

Item 1.			~~Page~~ Financial Statements

~~PART I~~
~~FINANCIAL INFORMATION~~

~~Item 1.~~	~~Financial Statements~~

	Consolidated Balance Sheets as of September 30, ~~2019~~2020 (Unaudited) and December 31, ~~2018~~2019	1

			Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, ~~2019~~2020 and September 30, ~~2018~~2019	2

			Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three and Nine Months Ended September 30, ~~2019~~2020 and September 30, ~~2018~~2019	3

			Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, ~~2019~~2020 and September 30, ~~2018~~2019	4

			Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, ~~2019~~2020 and September 30, ~~2018~~2019	6

			Notes to the Unaudited Consolidated Financial Statements	78

Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations	5462

Item 3.			Quantitative and Qualitative Disclosures about Market Risk	8990

Item 4.			Controls and Procedures	9795

PART II
OTHER INFORMATION

Item 1.			Legal Proceedings	9896

Item 1A.			Risk Factors	9896

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds	9896

Item 3.			Defaults Upon Senior Securities	9896

~~Item 4.~~	~~Mine Safety Disclosures~~	98

~~Item 5.~~	~~Other Information~~	98

~~Item 6.~~	~~Exhibits~~	98

~~Signatures~~		99


MFA FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS
(In Thousands Except Per Share Amounts)	September 30, 2020		December 31, 2019
	(Unaudited)
Assets:
Residential whole loans:
Residential whole loans, at carrying value ($3,843,153 and $4,847,782 pledged as collateral, respectively) (1)	$	4,493,805	$	6,069,370
Residential whole loans, at fair value ($705,666 and $794,684 pledged as collateral, respectively) (1)	1,229,664		1,381,583
Allowance for credit losses on residential whole loans held at carrying value	(106,246)		(3,025)
Total residential whole loans, net	5,617,223		7,447,928
Residential mortgage securities, at fair value ($152,765 and $3,966,591 pledged as collateral, respectively)	152,765		3,983,519
Mortgage servicing rights (“MSR”) related assets ($252,183 and $1,217,002 pledged as collateral, respectively)	252,183		1,217,002
Cash and cash equivalents	884,171		70,629
Restricted cash	5,303		64,035
Other assets	571,614		784,251
Total Assets	$	7,483,259	$	13,567,364

Liabilities:
Financing agreements ($4,080,461 and $0 held at fair value, respectively)	$	4,851,121	$	10,031,606
Other liabilities	66,482		151,806
Total Liabilities	$	4,917,603	$	10,183,412

Commitments and contingencies (See Note 10)

Stockholders’ Equity:
Preferred stock, $0.01 par value; 7.5% Series B cumulative redeemable; 8,050 shares authorized; 8,000 shares issued and outstanding ($200,000 aggregate liquidation preference)	$	80	$	80
Preferred stock, $0.01 par value; 6.5% Series C fixed-to-floating rate cumulative redeemable; 12,650 shares authorized; 11,000 shares issued and outstanding ($275,000 aggregate liquidation preference)	110		0
Common stock, $0.01 par value; 874,300 and 886,950 shares authorized; 453,333 and 452,369 shares issued and outstanding, respectively	4,533		4,524
Additional paid-in capital, in excess of par	3,924,584		3,640,341
Accumulated deficit	(1,408,910)		(631,040)
Accumulated other comprehensive income	45,259		370,047
Total Stockholders’ Equity	$	2,565,656	$	3,383,952
Total Liabilities and Stockholders’ Equity	$	7,483,259	$	13,567,364

MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2019			2018			2019			2018
Net income	$	95,599		$	87,132		$	277,496		$	240,922
Other Comprehensive Income/(Loss):
Unrealized gain/(loss) on Agency MBS, net	603			(9,177		)	22,483			(27,507		)
Unrealized gain/(loss) on Non-Agency MBS, CRT securities and MSR term notes, net	4,880			(25,101		)	27,602			(62,743		)
Reclassification adjustment for MBS sales included in net income	(14,499		)	(9,455		)	(36,370		)	(25,580		)
Derivative hedging instrument fair value changes, net	(233		)	5,390			(30,384		)	32,974
Amortization of de-designated hedging instruments, net	(685		)	—			(1,769		)	—
Other Comprehensive Income/(Loss)	(9,934		)	(38,343		)	(18,438		)	(82,856		)
Comprehensive income before preferred stock dividends	$	85,665		$	48,789		$	259,058		$	158,066
Dividends declared on preferred stock	(3,750		)	(3,750		)	(11,250		)	(11,250		)
Comprehensive Income Available to Common Stock and Participating Securities	$	81,915		$	45,039		$	247,808		$	146,816


MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)
	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Net income/(loss)	$	87,210	$	95,599	$	(725,207)	$	277,496
Other Comprehensive Income/(Loss):
Unrealized gains on securities available-for-sale	15,082		5,483		408,585		50,085
Reclassification adjustment for MBS sales included in net income	(60)		(14,499)		(389,127)		(36,370)
Reclassification adjustment for impairments included in net income	0		0		(344,269)		0
Derivative hedging instrument fair value changes, net	0		(233)		(50,127)		(30,384)
Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk	(22,652)		0		(22,652)		0
Reclassification adjustment for losses/(gains) related to hedging instruments included in net income	7,176		(685)		72,802		(1,769)
Other Comprehensive Income/(Loss)	(454)		(9,934)		(324,788)		(18,438)
Comprehensive income before preferred stock dividends	$	86,756	$	85,665	$	(1,049,995)	$	259,058
Dividends required on preferred stock	(8,219)		(3,750)		(21,578)		(11,250)
Comprehensive Income/(Loss) Available to Common Stock and Participating Securities	$	78,537	$	81,915	$	(1,071,573)	$	247,808

MFA FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS

(In Thousands Except Per Share Amounts)	September 30, 2019			December 31, 2018
	(Unaudited)
Assets:
Residential mortgage securities:
Agency MBS, at fair value ($1,809,380 and $2,575,331 pledged as collateral, respectively)	$	1,813,873		$	2,698,213
Non-Agency MBS, at fair value ($2,389,549 and $3,248,900 pledged as collateral, respectively)	2,397,789			3,318,299
Credit Risk Transfer (“CRT”) securities, at fair value ($377,779 and $480,315 pledged as collateral, respectively)	377,892			492,821
Residential whole loans, at carrying value ($3,657,830 and $1,645,372 pledged as collateral, respectively) (1)	4,969,414			3,016,715
Residential whole loans, at fair value ($835,762 and $738,638 pledged as collateral, respectively) (1)	1,453,169			1,665,978
Mortgage servicing rights (“MSR”) related assets ($1,164,284 and $611,807 pledged as collateral, respectively)	1,164,284			611,807
Cash and cash equivalents	154,193			51,965
Restricted cash	38,998			36,744
Other assets	735,209			527,785
Total Assets	$	13,104,821		$	12,420,327

Liabilities:
Repurchase agreements	$	8,571,422		$	7,879,087
Other liabilities	1,129,973			1,125,139
Total Liabilities	$	9,701,395		$	9,004,226

Commitments and contingencies (See Note 10)

Stockholders’ Equity:
Preferred stock, $.01 par value; 7.50% Series B cumulative redeemable; 8,050 shares authorized; 8,000 shares issued and outstanding ($200,000 aggregate liquidation preference)	$	80		$	80
Common stock, $.01 par value; 886,950 shares authorized; 451,692 and 449,787 shares issued and outstanding, respectively	4,517			4,498
Additional paid-in capital, in excess of par	3,634,140			3,623,275
Accumulated deficit	(637,161		)	(632,040		)
Accumulated other comprehensive income	401,850			420,288
Total Stockholders’ Equity	$	3,403,426		$	3,416,101
Total Liabilities and Stockholders’ Equity	$	13,104,821		$	12,420,327


~~(1)~~ Item 4.	Includes approximately $189.9 million and $209.4 million of Residential whole loans, at carrying value and $593.3 million and $694.7 million of Residential whole loans, at fair value transferred to consolidated variable interest entities (“VIEs”) at September 30, 2019 and December 31, 2018, respectively. Such assets can be used only to settle the obligations of each respective VIE. Mine Safety Disclosures	96

Item 5.	Other Information	97

Item 6.	Exhibits	97

Signatures		98


MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
	Nine Months Ended September 30, 2020
(In Thousands, Except Per Share Amounts)	Preferred Stock 6.50% Series C Fixed-to-Floating Rate Cumulative Redeemable - Liquidation Preference $25.00 per Share			Preferred Stock 7.50% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total
	Shares	Amount		Shares	Amount		Shares	Amount
Balance at December 31, 2019	0	$	0	8,000	$	80	452,369	$	4,524	$	3,640,341	$	(631,040)	$	370,047	$	3,383,952
Cumulative effect adjustment on adoption of new accounting standard ASU 2016-13	—	—		—	—		—	—		—		(8,326)		—		(8,326)
Net loss	—	—		—	—		—	—		—		(908,995)		—		(908,995)
Issuance of Series C Preferred Stock, net of expenses	11,000	110		—	—		—	—		265,919		—		—		266,029
Issuance of common stock, net of expenses	—	—		—	—		1,106	7		680		—		—		687
Repurchase of shares of common stock (1)	—	—		—	—		(337)	—		(2,652)		—		—		(2,652)
Equity based compensation expense	—	—		—	—		—	—		1,266		—		—		1,266
Accrued dividends attributable to stock-based awards	—	—		—	—		—	—		1,059		—		—		1,059



Change in unrealized gains on MBS, net	—	—		—	—		—	—		—		—		(243,812)		(243,812)
Derivative hedging instrument fair value changes and amortization, net	—	—		—	—		—	—		—		—		(48,533)		(48,533)
Balance at March 31, 2020	11,000	$	110	8,000	$	80	453,138	$	4,531	$	3,906,613	$	(1,548,361)	$	77,702	$	2,440,675
Net income	—	—		—	—		—	—		—		96,578		—		96,578
Issuance of common stock, net of expenses	—	—		—	—		106	1		36		—		—		37

Equity based compensation expense	—	—		—	—		—	—		1,709		—		—		1,709




Change in unrealized gains on MBS, net	—	—		—	—		—	—		—		—		(96,021)		(96,021)
Derivative hedging instrument fair value changes and amortization, net	—	—		—	—		—	—		—		—		64,032		64,032
Warrants Issued	—	—		—	—		—	—		14,041		—		—		14,041
Balance at June 30, 2020	11,000	$	110	8,000	$	80	453,244	$	4,532	$	3,922,399	$	(1,451,783)	$	45,713	$	2,521,051
Net income	—	—		—	—		—	—		—		87,210		—		87,210
Issuance of common stock, net of expenses	—	—		—	—		89	1		—		—		—		1
Repurchase of shares of common stock (1)	—	—		—	—		—	—		—		—		—		—
Equity based compensation expense	—	—		—	—		—	—		2,266		—		—		2,266
Accrued dividends attributable to stock-based awards	—	—		—	—		—	—		(81)		—		—		(81)
Dividends declared on common stock ($0.05 per share)	—	—		—	—		—	—		—		(22,667)		—		(22,667)
Dividends declared on Series B Preferred Stock ($1.40625 per share) (2)	—	—		—	—		—	—		—		(11,250)		—		(11,250)
Dividends declared on Series C Preferred Stock ($0.93889 per share) (2)	—	—		—	—		—	—		—		(10,328)		—		(10,328)
Dividends attributable to dividend equivalents	—	—		—	—		—	—		—		(92)		—		(92)
Change in unrealized gains on MBS, net	—	—		—	—		—	—		—		—		15,022		15,022
Derivative hedging instrument fair value changes and amortization, net	—	—		—	—		—	—		—		—		7,176		7,176
Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk	—	—		—	—		—	—		—		—		(22,652)		(22,652)
Balance at September 30, 2020	11,000	$	110	8,000	$	80	453,333	$	4,533	$	3,924,584	$	(1,408,910)	$	45,259	$	2,565,656



MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
	Nine Months Ended September 30, 2018
(In Thousands, Except Per Share Amounts)	Preferred Stock 7.50% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share			Common Stock				Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total
(In Thousands, Except Per Share Amounts)	Shares	Amount		Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total
Balance at December 31, 2017	8,000	$	80	397,831		$	3,978	$	3,227,304		$	(578,950	)	$	609,224		$	3,261,636
Cumulative effect adjustment on adoption of new accounting standard for revenue recognition	—	—		—		—					295			—			295
Net income	—	—		—		—		—			83,395			—			83,395
Issuance of common stock, net of expenses	—	—		849		6		1,224			—			—			1,230
Repurchase of shares of common stock (1)	—	—		(251	)	—		(1,957		)	—			—			(1,957		)
Equity based compensation expense	—	—		—		—		549			—			—			549
Accrued dividends attributable to stock-based awards	—	—		—		—		430			—			—			430
Dividends declared on common stock ($0.20 per share)	—	—		—		—		—			(79,686		)	—			(79,686		)
Dividends declared on preferred stock ($0.46875 per share)	—	—		—		—		—			(3,750		)	—			(3,750		)
Dividends attributable to dividend equivalents	—	—		—		—		—			(217		)	—			(217		)
Change in unrealized losses on MBS, net	—	—		—		—		—			—			(46,163		)	(46,163		)
Derivative hedging instruments fair value changes, net	—	—		—		—		—			—			19,669			19,669
Balance at March 31, 2018	8,000	$	80	398,429		$	3,984	$	3,227,550		$	(578,913	)	$	582,730		$	3,235,431
Net income	—	—		—		—		—			70,395			—			70,395
Issuance of common stock, net of expenses	—	—		104		1		480			—			—			481
Equity based compensation expense	—	—		—		—		2,255			—			—			2,255
Accrued dividends attributable to stock-based awards	—	—		—		—		(230		)	—			—			(230		)
Dividends declared on common stock ($0.20 per share)	—	—		—		—		—			(79,706		)	—			(79,706		)
Dividends declared on preferred stock ($0.46875 per share)	—	—		—		—		—			(3,750		)	—			(3,750		)
Dividends attributable to dividend equivalents	—	—		—		—		—			(244		)	—			(244		)
Change in unrealized losses on MBS, net	—	—		—		—		—			—			(25,934		)	(25,934		)
Derivative hedging instruments fair value changes, net	—	—		—		—		$	—		$	—		$	7,915		$	7,915
Balance at June 30, 2018	8,000	$	80	398,533		$	3,985	$	3,230,055		$	(592,218	)	$	564,711		$	3,206,613
Net income	—	—		—		—		—			87,132			—			87,132
Issuance of common stock, net of expenses	—	—		50,939		510		389,361			—			—			389,871
Equity based compensation expense	—	—		—		—		1,082			—			—			1,082
Accrued dividends attributable to stock-based awards	—	—		—		—		(230		)	—			—			(230		)
Dividends declared on common stock ($0.20 per share)	—	—		—		—		—			(89,894		)	—			(89,894		)
Dividends declared on preferred stock ($0.46875 per share)	—	—		—		—		—			(3,750		)	—			(3,750		)
Dividends attributable to dividend equivalents	—	—		—		—		—			(241		)	—			(241		)
Change in unrealized losses on MBS, net	—	—		—		—		—			—			(43,733		)	(43,733		)
Derivative hedging instruments fair value changes, net	—	—		—		—		—			—			5,390			5,390
Balance at September 30, 2018	8,000	$	80	449,472		$	4,495	$	3,620,268		$	(598,971	)	$	526,368		$	3,552,240


MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Supplemental Disclosure of Cash Flow Information
Interest Paid	$	213,318	$	237,644

Non-cash Investing and Financing Activities:
Transfer from residential whole loans to real estate owned	$	74,891	$	193,531
Dividends and dividend equivalents declared and unpaid	$	22,758	$	90,614
Payable for unsettled residential whole loan purchases	$	0	$	59,524


	Carrying Value		Amortized Cost Basis		Unpaid Principal Balance (“UPB”)		Weighted Average Coupon (1)		Weighted Average Term to Maturity (Months)	Weighted Average LTV Ratio (2)		Weighted Average Original FICO (3)	Aging by Amortized Cost Basis
															Past Due Days
(Dollars In Thousands)													Current		30-59		60-89		90+
Purchased Performing Loans:
Non-QM loans (4)	$	2,438,395	$	2,465,148	$	2,397,247	5.87	%	352	64	%	712	$	2,174,935	$	74,231	$	52,069	$	163,913
Rehabilitation loans (4)	677,235		699,868		699,868		7.28		4	63		718	491,343		65,166		22,995		120,364
Single-family rental loans (4)	474,045		479,070		475,072		6.28		319	70		734	439,503		16,111		7,373		16,083
Seasoned performing loans (4)	147,556		147,706		161,257		3.45		173	41		723	136,622		1,406		880		8,798
Purchased Credit Deteriorated Loans (4)(5)	650,328		702,013		812,614		4.45		289	79		N/A	N/M		N/M		N/M		122,478
Residential whole loans, at carrying value, total or weighted average	$	4,387,559	$	4,493,805	$	4,546,058	5.81	%	277


	Nine Months Ended September 30, 2020
(Dollars In Thousands)	Non-QM Loans		Rehabilitation Loans (1)(2)		Single-family Rental Loans		Seasoned Performing Loans		Purchased Credit Deteriorated Loans (3)		Totals
Allowance for credit losses at December 31, 2019	$	388	$	2,331	$	62	$	0	$	244	$	3,025
Transition adjustment on adoption of ASU 2016-13 (4)	6,904		517		754		19		62,361		70,555
Current provision	26,358		33,213		6,615		230		8,481		74,897

Write-offs	0		(428)		0		0		(219)		(647)

Valuation adjustment on loans held for sale	70,181		0		0		0		0		70,181
Allowance for credit and valuation losses at March 31, 2020	$	103,831	$	35,633	$	7,431	$	249	$	70,867	$	218,011
Current provision/(reversal)	(2,297)		(5,213)		(500)		(25)		(2,579)		(10,614)
Write-offs	0		(420)		0		0		(207)		(627)
Valuation adjustment on loans held for sale	(70,181)		0		0		0		0		(70,181)
Allowance for credit losses at June 30, 2020	$	31,353	$	30,000	$	6,931	$	224	$	68,081	$	136,589
Current provision/(reversal)	(4,568)		(7,140)		(1,906)		(74)		(16,374)		(30,062)
Write-offs	(32)		(227)		0		0		(22)		(281)
Allowance for credit losses at September 30, 2020	$	26,753	$	22,633	$	5,025	$	150	$	51,685	$	106,246


	Amortized Cost Basis by Origination Year and LTV Bands
(Dollars In Thousands)	2020		2019		2018		2017		2016		Prior		Total
Non-QM loans
LTV < 80% (1)	$	380,729	$	1,196,185	$	684,404	$	74,862	$	6,371	$	0	$	2,342,551
LTV >= 80% (1)	48,082		35,468		29,784		9,111		152		0		122,597
Total Non-QM loans	$	428,811	$	1,231,653	$	714,188	$	83,973	$	6,523	$	0	$	2,465,148
Nine Months Ended September 30, 2020 Gross write-offs	$	—	$	—	$	32	$	—	$	—	$	—	$	32
Nine Months Ended September 30, 2020 Recoveries	—		—		—		—		—		—		—
Nine Months Ended September 30, 2020 Net write-offs	$	—	$	—	$	32	$	—	$	—	$	—	$	32

Rehabilitation loans
LTV < 80% (1)	$	36,478	$	542,865	$	93,973	$	7,546	$	0	$	0	$	680,862
LTV >= 80% (1)	1,262		15,496		548		1,700		0		0		19,006
Total Rehabilitation loans	$	37,740	$	558,361	$	94,521	$	9,246	$	0	$	0	$	699,868
Nine Months Ended September 30, 2020 Gross write-offs	$	—	$	13	$	1,030	$	32	$	—	$	0	$	1,075
Nine Months Ended September 30, 2020 Recoveries	—		—		—		—		—		—		—
Nine Months Ended September 30, 2020 Net write-offs	$	—	$	13	$	1,030	$	32	$	—	$	0	$	1,075

Single family rental loans
LTV < 80% (1)	$	22,400	$	287,103	$	140,017	$	13,356	$	0	$	0	$	462,876
LTV >= 80% (1)	1,394		14,588		212		0		0		0		16,194
Total Single family rental loans	$	23,794	$	301,691	$	140,229	$	13,356	$	0	$	0	$	479,070
Nine Months Ended September 30, 2020 Gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Nine Months Ended September 30, 2020 Recoveries	—		—		—		—		—		—		—
Nine Months Ended September 30, 2020 Net write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Seasoned performing loans
LTV < 80% (1)	$	0	$	0	$	0	$	0	$	79	$	139,538	$	139,617
LTV >= 80% (1)	0		0		0		0		0		8,089		8,089
Total Seasoned performing loans	$	0	$	0	$	0	$	0	$	79	$	147,627	$	147,706
Nine Months Ended September 30, 2020 Gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Nine Months Ended September 30, 2020 Recoveries	—		—		—		—		—		—		—
Nine Months Ended September 30, 2020 Net write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Purchased credit deteriorated loans
LTV < 80% (1)	$	0	$	0	$	0	$	633	$	2,982	$	420,265	$	423,880
LTV >= 80% (1)	0		0		0		0		3,184		274,950		278,134
Total Purchased credit deteriorated loans	$	0	$	0	$	0	$	633	$	6,166	$	695,215	$	702,014
Nine Months Ended September 30, 2020 Gross write-offs	$	—	$	—	$	—	$	—	$	—	$	448	$	448
Nine Months Ended September 30, 2020 Recoveries	—		—		—		—		—		0		0
Nine Months Ended September 30, 2020 Net write-offs	$	—	$	—	$	—	$	—	$	—	$	448	$	448

Total LTV < 80% (1)	$	439,607	$	2,026,153	$	918,394	$	96,397	$	9,432	$	559,803	$	4,049,786
Total LTV >= 80% (1)	50,738		65,552		30,544		10,811		3,336		283,039		444,020
Total residential whole loans, at carrying value	$	490,345	$	2,091,705	$	948,938	$	107,208	$	12,768	$	842,842	$	4,493,806
Total Gross write-offs	$	—	$	13	$	1,062	$	32	$	—	$	448	$	1,555
Total Recoveries	—		—		—		—		—		0		0
Total Net write-offs	$	—	$	13	$	1,062	$	32	$	—	$	448	$	1,555



(In Thousands)	Principal/ Current Face		Purchase Premiums		Accretable Purchase Discounts			Discount Designated as Credit Reserve and OTTI (1)			Amortized Cost (2)		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)			Fair Value
Agency MBS: (3)
Fannie Mae	$	1,217,508	$	46,917	$	(23	)	$	—		$	1,264,402	$	10,896	$	(15,282	)	$	(4,386	)	$	1,260,016
Freddie Mac	526,173		21,303		—			—			548,441		5,159		(3,990		)	1,169			549,610
Ginnie Mae	4,118		76		—			—			4,194		53		—			53			4,247
Total Agency MBS	1,747,799		68,296		(23		)	—			1,817,037		16,108		(19,272		)	(3,164		)	1,813,873
Non-Agency MBS:
Expected to Recover Par (4)(5)	917,981		—		(14,176		)	—			903,805		17,905		(5		)	17,900			921,705
Expected to Recover Less than Par (4)	1,611,768		—		(88,121		)	(462,095		)	1,061,552		414,788		(256		)	414,532			1,476,084
Total Non-Agency MBS (6)	2,529,749		—		(102,297		)	(462,095		)	1,965,357		432,693		(261		)	432,432			2,397,789
Total MBS	4,277,548		68,296		(102,320		)	(462,095		)	3,782,394		448,801		(19,533		)	429,268			4,211,662
CRT securities (7)	364,284		5,882		(117		)	—			370,049		8,084		(241		)	7,843			377,892
Total MBS and CRT securities	$	4,641,832	$	74,178	$	(102,437	)	$	(462,095	)	$	4,152,443	$	456,885	$	(19,774	)	$	437,111		$	4,589,554


~~(1)~~	~~Discount designated as Credit Reserve and amounts related to OTTI are~~ (1)Discount designated as Credit Reserve is generally not expected to be accreted into interest income. Amounts disclosed at September 30, 2019 reflect Credit Reserve of $451.1 million and OTTI of $11.0 million. Amounts disclosed at December 31, 2018 reflect Credit Reserve of $503.3 million and OTTI of $12.8 million.


~~(2)~~	~~Includes principal payments receivable of $965,000 and $1.0 million at September 30, 2019 and December 31, 2018, respectively, which are not included in the Principal/Current Face.~~


~~(4)~~	~~Based on management~~’~~s current estimates of future principal cash flows expected to be received.~~


~~(5)~~	~~Includes RPL/NPL MBS, which at September 30, 2019 had an $824.8 millionPrincipal/Current face, $824.3 millionamortized cost and $828.1 millionfair value. At December 31, 2018, RPL/NPL MBS had a $1.4 billion Principal/Current face, $1.4 billion amortized cost and $1.4 billionfair value.~~


~~(6)~~	~~At September 30, 2019 and December 31, 2018, the Company expected to recover approximately 82% and 85% of the then-current face amount of Non-Agency MBS, respectively.~~



	Three Months Ended September 30, 2019				Three Months Ended September 30, 2018
(In Thousands)	Sales Proceeds		Gains/(Losses)		Sales Proceeds		Gains/(Losses)
Agency MBS	$	257,289	$	2,771	$	—	$	—
Non-Agency MBS	47,867		14,444		24,341		3,391
CRT Securities	28,969		493		118,855		13,024
Total	$	334,125	$	17,708	$	143,196	$	16,415



	Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
(In Thousands)	Sales Proceeds		Gains/(Losses)		Sales Proceeds		Gains/(Losses)
Agency MBS	$	360,634	$	499	$	75,306	$	(3,787	)
Non-Agency MBS	244,778		41,420		43,703		12,208
CRT Securities	133,507		8,108		222,877		24,240
Total	$	738,919	$	50,027	$	341,886	$	32,661


	Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
(In Thousands)	Sales Proceeds		Gains/(Losses)		Sales Proceeds		Gains/(Losses)
Agency MBS	$	0	$	0	$	257,289	$	2,771
Non-Agency MBS	116		48		47,867		14,444
CRT Securities	0		0		28,969		493
Total	$	116	$	48	$	334,125	$	17,708


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
(In Thousands)	Sales Proceeds		Gains/(Losses)		Sales Proceeds		Gains/(Losses)
Agency MBS	$	1,500,875	$	(19,291)	$	360,634	$	499
Non-Agency MBS	1,318,958		107,999		244,778		41,420
CRT Securities	243,025		(27,011)		133,507		8,108
Total	$	3,062,858	$	61,697	$	738,919	$	50,027



	Less than 12 Months					12 Months or more					Total
	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
(Dollars in Thousands)	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
Agency MBS:
Fannie Mae	$	36,775	$	104	25	$	660,757	$	15,178	280	$	697,532	$	15,282
Freddie Mac	—		—		—	163,863		3,990		101	163,863		3,990
Ginnie Mae	—		—		—	172		—		1	172		—
Total Agency MBS	36,775		104		25	824,792		19,168		382	861,567		19,272
Non-Agency MBS:
Expected to Recover Par (1)	—		—		—	7,495		5		1	7,495		5
Expected to Recover Less than Par (1)	2,009		11		1	1,894		245		2	3,903		256
Total Non-Agency MBS	2,009		11		1	9,389		250		3	11,398		261
Total MBS	38,784		115		26	834,181		19,418		385	872,965		19,533
CRT securities (2)	7,189		41		2	24,966		200		7	32,155		241
Total MBS and CRT securities	$	45,973	$	156	28	$	859,147	$	19,618	392	$	905,120	$	19,774


~~(1)~~	~~Based on management’s current estimates of future principal cash flows expected to be received.~~


~~(2)~~	(2)Amounts disclosed at September 30, 2019 include CRT securities with a fair value of $32.2 million for which the fair value option has been elected. Such securities had unrealized losses of $241,000 at September 30, 2019.


~~(3)~~	~~Excluded from the table above are approximately $59.5 million of Purchased Performing Loans for which the closing of the purchase transaction had not occurred as of September 30, 2019.~~


~~(4)~~	~~Carrying value of Rehabilitation loans excludes an allowance for loan losses of $388,000 at September 30, 2019.~~



(Dollars in Thousands)	September 30, 2019			December 31, 2018 (1)
Less than 60 Days Past Due:
Outstanding principal balance	$	654,542		$	610,290
Aggregate fair value	$	617,172		$	561,770
Weighted Average LTV Ratio (2)	77.08		%	76.18		%
Number of loans	3,140			2,898

60 Days to 89 Days Past Due:
Outstanding principal balance	$	66,657		$	63,938
Aggregate fair value	$	60,262		$	54,947
Weighted Average LTV Ratio (2)	77.02		%	82.86		%
Number of loans	340			285

90 Days or More Past Due:
Outstanding principal balance	$	871,647		$	970,758
Aggregate fair value	$	775,735		$	854,545
Weighted Average LTV Ratio (2)	78.26		%	90.24		%
Number of loans	3,397			3,531
Total Residential whole loans, at fair value	$	1,453,169		$	1,471,262


~~(1)~~	Primarily includes recovery of delinquent interest upon the liquidation of non-performing loans, recurring coupon interest payments received on mortgage loans that are contractually current, and cash payments received from private mortgage insurance on liquidated loans.


~~(1)~~	~~Includes $19.6 million of REO that is held-for-investment at September 30, 2019.~~


~~(1)~~	Includes net gain recorded on transfer of approximately $5.0 million and $5.8 million, for the three months ended September 30, 2019 and 2018, respectively; and approximately $16.1 million and $17.0 million for the nine months ended September 30, 2019 and 2018, respectively.


	September 30, 2020						December 31, 2019
	Notional Amount		Weighted Average Fixed-Pay Interest Rate		Weighted Average Variable Interest Rate (2)		Notional Amount		Weighted Average Fixed-Pay Interest Rate		Weighted Average Variable Interest Rate (2)

Maturity (1)
(Dollars in Thousands)


Over 3 months to 6 months	$	0	0	%	0	%	$	200,000	2.05	%	1.70	%
Over 6 months to 12 months	0		0		0		1,430,000		2.30		1.77
Over 12 months to 24 months	0		0		0		1,300,000		2.11		1.86
Over 24 months to 36 months	0		0		0		20,000		1.38		1.90
Over 36 months to 48 months	0		0		0		222,000		2.88		1.84




Total Swaps	$	0	0	%	0	%	$	3,172,000	2.24	%	1.81	%


	September 30, 2020
(In Thousands)	Unpaid Principal Balance		Amortized Cost Balance		Fair Value/Carrying Value(1)
Financing agreements, at fair value
Agreements with non-mark-to-market collateral provisions	$	1,723,959	$	1,723,959	$	1,727,407
Agreements with mark-to-market collateral provisions	1,489,097		1,489,097		1,490,271
Senior secured credit agreement	481,250		462,923		473,993
Securitized debt	389,051		380,407		388,790
Total Financing agreements, at fair value	$	4,083,357	$	4,056,386	$	4,080,461

Other financing agreements
Securitized debt	$	451,197			$	448,893
Convertible senior notes	230,000				224,867
Senior notes	100,000				96,900
Total Financing agreements at carrying value	$	781,197			$	770,660
Total Financing agreements	$	4,864,554			$	4,851,121


~~(1)~~	~~Haircut represents the percentage amount by which the collateral value is contractually required to exceed the loan amount.~~