

Delaware						27-0298092
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification Number)

Western Asset Mortgage Capital Corporation

~~385 East Colorado Boulevard~~47 W 200 South, Suite 200

~~Pasadena, California 91101~~Salt Lake City, Utah 84101

(Address of Registrant’s principal executive offices)

~~(626) 844-9400~~(801) 952-3390

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange ~~Act (check one).~~

Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

~~(Do not check if a smaller reporting company)~~

Smaller reporting company

Emerging growth company

x☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ýo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Securities Exchange Act of 1934). Yes o☐ No ý

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

WMC

New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

As ofNovember ~~7, 2017~~,9, 2022 there were ~~41,919,801~~6,038,010 shares, par value $0.01, of the registrant’s common stock ~~issued and~~ outstanding.

TABLE OF CONTENTS

Part I

ITEM I. Financial Statements

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)

(Unaudited)


	September 30, 2022		December 31, 2021
Assets:
Cash and cash equivalents	$	55,352	$	40,193
Restricted cash	251		260
Agency mortgage-backed securities, at fair value ($233 and $1,172 pledged as collateral, at fair value, respectively)	720		1,172
Non-Agency mortgage-backed securities, at fair value ($109,607 and $123,947 pledged as collateral, at fair value, respectively)	118,508		133,127
Other securities, at fair value ($38,310 and $51,648 pledged as collateral, at fair value, respectively)	38,310		51,648
Residential whole loans, at fair value ($1,099,625 and $1,023,502 pledged as collateral, at fair value, respectively)	1,099,625		1,023,502
Residential bridge loans, at fair value ($5,120 and $5,207 pledged as collateral, at fair value, respectively)	5,120		5,428
Securitized commercial loans, at fair value	1,171,914		1,355,808
Commercial loans, at fair value ($81,326 and $101,459 pledged as collateral, at fair value, respectively)	90,103		130,572

Investment related receivable	8,720		22,133
Interest receivable	11,324		11,823
Due from counterparties	3,215		4,565
Derivative assets, at fair value	262		105
Other assets	2,881		45,364
Total Assets (1)	$	2,606,305	$	2,825,700

Liabilities and Equity:
Liabilities:
Repurchase agreements, net	$	218,941	$	617,189
Convertible senior unsecured notes, net	109,162		119,168
Securitized debt, net ($1,808,397 and $1,344,370 at fair value and $155,135 and $180,116 held by affiliates, respectively)	2,159,862		1,863,488
Interest payable (includes $694 and $699 on securitized debt held by affiliates, respectively)	10,460		10,272


Derivative liability, at fair value	—		602
Accounts payable and accrued expenses	3,887		4,842
Payable to affiliate	3,353		1,925
Dividend payable	2,415		3,623
Other liabilities	262		262
Total Liabilities(2)	2,508,342		2,621,371

Commitments and contingencies (Note 15)

Stockholders’ Equity:
Common stock: $0.01 par value, 50,000,000 shares authorized, 6,038,010 and 6,038,010 outstanding, respectively(3)	60		60
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding	—		—
Treasury stock, at cost, 57,981 and 57,981 shares held, respectively	(1,665)		(1,665)
Additional paid-in capital(3)	919,106		918,695
Retained earnings (accumulated deficit)	(819,553)		(723,981)
Total Stockholders’ Equity	97,948		193,109
Non-controlling interest	15		11,220
Total Equity	97,963		204,329
Total Liabilities and Equity	$	2,606,305	$	2,825,700

September 30,
2017 December 31, 2016
Assets:

Cash and cash equivalents $ 36,669
$ 46,172
Mortgage-backed securities and other securities, at fair value ($3,397,699 and $2,261,430 pledged as collateral, at fair value, respectively) 3,696,580
2,576,517
Residential Whole-Loans, at fair value ($191,439 and $192,136 pledged as collateral, at fair value, respectively) 191,439
192,136
Residential Bridge Loans ($54,912 and $0 pledged as collateral, respectively) 54,912
—
Securitized commercial loan, at fair value 24,952
24,225
Investment related receivable 9,551
33,600
Accrued interest receivable 13,025
18,812
Due from counterparties 88,932
243,585
Derivative assets, at fair value 5,011
20,571
Other assets 4,134
398
Total Assets⁽¹⁾
$ 4,125,205
$ 3,156,016

Liabilities and Stockholders’ Equity:

Liabilities:

Borrowings under repurchase agreements, net $ 3,336,256
$ 2,155,644
Securitized debt, at fair value 10,979
10,659
Accrued interest payable 4,859
16,041
Investment related payables 296,317
341,458
Due to counterparties 2,320
740
Derivative liability, at fair value 986
182,158
Accounts payable and accrued expenses 2,588
3,255
Payable to affiliate 1,920
2,584
Dividend payable 12,995
12,995
Total Liabilities ⁽²⁾
3,669,220
2,725,534

Commitments and contingencies

Stockholders’ Equity:

Common stock: $0.01 par value, 500,000,000 shares authorized, 41,919,801 shares issued and outstanding, respectively 419
419
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding —
—
Additional paid-in capital 765,898
765,042
Retained earnings (accumulated deficit) (310,332 ) (334,979 )
Total Stockholders’ Equity 455,985
430,482
Total Liabilities and Stockholders’ Equity $ 4,125,205
$ 3,156,016

See notes to unaudited consolidated financial statements.

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

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

(Unaudited)


	September 30, 2022		December 31, 2021
(1) Assets of consolidated VIEs included in the total assets above:
Cash and cash equivalents	$	236	$	266
Restricted cash	251		260
Residential whole loans, at fair value ($1,099,625 and $1,023,502 pledged as collateral, at fair value, respectively)	1,099,625		1,023,502
Residential bridge loans, at fair value ($5,120 and $5,207 pledged as collateral, at fair value, respectively)	5,120		5,207
Securitized commercial loans, at fair value	1,171,914		1,355,808
Commercial loans, at fair value ($14,361 and $14,362 pledged as collateral, at fair value, respectively)	14,361		14,362
Investment related receivable	8,674		22,087
Interest receivable	10,191		10,572

Total assets of consolidated VIEs	$	2,310,372	$	2,432,064

(2) Liabilities of consolidated VIEs included in the total liabilities above:
Securitized debt, net ($1,808,397 and $1,344,370 at fair value and $155,135 and $180,116 held by affiliates, respectively)	$	2,159,862	$	1,863,488
Interest payable (includes $694 and $699 on securitized debt held by affiliates, respectively)	8,209		6,480
Accounts payable and accrued expenses	69		78
Other liabilities	251		260
Total liabilities of consolidated VIEs	$	2,168,391	$	1,870,306

(3) Amounts have been adjusted to reflect the one-for-ten reverse stock split effected July 11, 2022. See Note 2 and Note 12 for additional details.

September 30,
2017 December 31, 2016
⁽¹⁾ Assets of consolidated VIEs included in the total assets above:

Residential Whole-Loans, at fair value ($191,439 and $192,136 pledged as collateral, at fair value, respectively) $ 191,439
$ 192,136
Residential Bridge Loans ($54,912 and $0 pledged as collateral, respectively) 54,912
—
Securitized commercial loan, at fair value 24,952
24,225
Investment related receivable 7,178
1,241
Accrued interest receivable 2,529
1,622
Total assets of consolidated VIEs $ 281,010
$ 219,224

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

Securitized debt, at fair value $ 10,979
$ 10,659
Accrued interest payable 82
85
Accounts payable and accrued expenses 157
2
Total liabilities of consolidated VIEs $ 11,218
$ 10,746

See notes to unaudited consolidated financial statements.

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)

(Unaudited)


	For the three months ended September 30, 2022		For the three months ended September 30, 2021		For the nine months ended September 30, 2022		For the nine months ended September 30, 2021
Net Interest Income
Interest income	$	41,406	$	40,141	$	116,625	$	127,353
Interest expense (includes $3,493, $3,564, $10,412 and $10,919 on securitized debt held by affiliates, respectively)	35,707		32,978		100,408		104,352
Net Interest Income	5,699		7,163		16,217		23,001

Other Income (Loss)
Realized loss, net	(35)		(1,526)		(33,551)		(7,367)

Unrealized loss, net	(43,582)		(6,003)		(66,300)		(39,271)
Gain on derivative instruments, net	4,882		515		16,599		716
Other, net	(61)		277		(252)		449
Other Income (Loss)	(38,796)		(6,737)		(83,504)		(45,473)

Expenses
Management fee to affiliate	850		1,502		2,952		4,469

Other operating expenses	343		352		901		1,172
Transaction costs	2,635		954		5,590		954
General and administrative expenses:
Compensation expense	515		626		1,143		1,985
Professional fees	1,626		947		4,434		2,864
Other general and administrative expenses	676		747		2,049		2,793
Total general and administrative expenses	2,817		2,320		7,626		7,642
Total Expenses	6,645		5,128		17,069		14,237

Loss before income taxes	(39,742)		(4,702)		(84,356)		(36,709)
Income tax provision (benefit)	266		(218)		276		(19)
Net loss	(40,008)		(4,484)		(84,632)		(36,690)
Net income (loss) attributable to non-controlling interest	2		(271)		3,618		(267)
Net loss attributable to common stockholders and participating securities	$	(40,010)	$	(4,213)	$	(88,250)	$	(36,423)

Net loss per Common Share — Basic(1)	$	(6.63)	$	(0.70)	$	(14.63)	$	(6.00)
Net loss per Common Share — Diluted(1)	$	(6.63)	$	(0.70)	$	(14.63)	$	(6.00)

For the three months ended September 30, 2017 For the three months ended September 30, 2016 For the nine months ended September 30, 2017 For the nine months ended September 30, 2016
Net Interest Income

Interest income $ 30,928
$ 29,154
$ 89,413
$ 87,992
Interest expense 12,363
7,685
31,507
23,391
Net Interest Income 18,565
21,469
57,906
64,601

Other Income (Loss)

Realized gain (loss) on sale of investments, net 1,830
1,439
20,600
(4,968 )
Other than temporary impairment (7,225 ) (4,978 ) (19,901 ) (22,131 )
Unrealized gain (loss), net 5,249
15,292
35,126
47,571
Gain (loss) on derivative instruments, net 7,217
6,121
(16,035 ) (53,214 )
Other, net 216
(60 ) 841
(158 )
Other Income (Loss) 7,287
17,814
20,631
(32,900 )

Expenses

Management fee to affiliate 1,853
2,604
6,159
7,945
Other operating expenses 702
188
1,855
809
General and administrative expenses:

Compensation expense 660
868
2,064
2,254
Professional fees 781
723
2,501
3,947
Other general and administrative expenses 244
379
993
1,226
Total general and administrative expenses 1,685
1,970
5,558
7,427
Total Expenses 4,240
4,762
13,572
16,181

Income before income taxes 21,612
34,521
64,965
15,520
Income tax provision (benefit) (1,155 ) 2,239
1,272
2,239
Net income $ 22,767
$ 32,282
$ 63,693
$ 13,281

Net income per Common Share — Basic $ 0.54
$ 0.77
$ 1.52
$ 0.31
Net income per Common Share — Diluted $ 0.54
$ 0.77
$ 1.52
$ 0.31
Dividends Declared per Share of Common Stock $ 0.31
$ 0.31
$ 0.93
$ 1.07
(1) Amounts have been adjusted to reflect the one-for-ten reverse stock split effected July 11, 2022. See Note 2 and Note 12 for additional details.

See notes to unaudited consolidated financial statements.

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Changes in ~~Stockholders’~~ Equity

(in thousands—except shares and share data)

(Unaudited)


	Three Months Ended September 30, 2022
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest		Total Equity
	Shares(1)	Par
Balance at June 30, 2022	6,038,010	$	60	$	918,974	$	(777,095)	$	(1,665)	$	140,274	$	64	$	140,338


Equity distribution	—	—		—		—		—		—		(49)		(49)




Vesting of restricted stock	—	—		100		—		—		100		—		100

Net income (loss)	—	—		—		(40,010)		—		(40,010)		2		(40,008)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(2)		(2)
Dividends declared on common stock	—	—		32		(2,448)		—		(2,416)		—		(2,416)
Balance at September 30, 2022	6,038,010	$	60	$	919,106	$	(819,553)	$	(1,665)	$	97,948	$	15	$	97,963


	Three Months Ended September 30, 2021
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest		Total Equity
	Shares(1)	Par
Balance at June 30, 2021	6,081,270	$	60	$	916,331	$	(699,920)	$	(578)	$	215,893	$	2	$	215,895


Equity contributions	—	—		—		—		—		—		12,138		12,138
Equity component of convertible senior unsecured notes	—	—		2,060		—		—		2,060		—		2,060
Exchange of phantom stock to common stock	4,721	—		—		—		—		—		—		—
Offering costs	—	—		(68)		—		—		(68)		—		(68)

Vesting of restricted stock	—	—		165		—		—		165		—		165

Net loss	—	—		—		(4,213)		—		(4,213)		(271)		(4,484)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(2)		(2)
Dividends declared on common stock	—	—		24		(3,675)		—		(3,651)		—		(3,651)
Balance at September 30, 2021	6,085,991	60		918,512		(707,808)		(578)		210,186		11,867		222,053

Common Stock Additional Paid-In Capital
Retained Earnings
(Accumulated Deficit)

Shares Par Total
Balance at December 31, 2015 41,919,801
$ 419
$ 763,283
$ (252,054 ) $ 511,648
Vesting of restricted stock —
—
1,699
—
1,699
Net loss —
—
—
(25,015 ) (25,015 )
Dividends declared on common stock —
—
60
(57,910 ) (57,850 )
Balance at December 31, 2016 41,919,801
$ 419
$ 765,042
$ (334,979 ) $ 430,482
Vesting of restricted stock —
—
795
—
795
Net income —
—
—
63,693
63,693
Dividends declared on common stock —
—
61
(39,046 ) (38,985 )
Balance at September 30, 2017 41,919,801
$ 419
$ 765,898
$ (310,332 ) $ 455,985


	Nine Months Ended September 30, 2022
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest
	Shares(1)	Par												Total Equity
Balance at December 31, 2021	6,038,010	$	60	$	918,695	$	(723,981)	$	(1,665)	$	193,109	$	11,220	$	204,329


Equity distribution	—	—		—		—		—		—		(14,817)		(14,817)




Vesting of restricted stock	—	—		335		—		—		335		—		335

Net income (loss)	—	—		—		(88,250)		—		(88,250)		3,618		(84,632)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(6)		(6)
Dividends declared on common stock	—	—		76		(7,322)		—		(7,246)		—		(7,246)
Balance at September 30, 2022	6,038,010	$	60	$	919,106	$	(819,553)	$	(1,665)	$	97,948	$	15	$	97,963


	Nine Months Ended September 30, 2021
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest
	Shares(1)	Par												Total Equity
Balance at December 31, 2020	6,081,270	$	60	$	916,007	$	(660,377)	$	(578)	$	255,112	$	2	$	255,114
Equity contributions	—	—		—		—		—		—		12,138		12,138

Equity component of convertible senior unsecured notes	—	—		2,060		—		—		2,060		—		2,060
Exchange of phantom stock	4,721	—		—		—		—		—		—		—

Offering costs	—	—		(68)		—		—		(68)		—		(68)

Vesting of restricted stock	—	—		454		—		—		454		—		454

Net loss	—	—		—		(36,423)		—		(36,423)		(267)		(36,690)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(6)		(6)
Dividends declared on common stock	—	—		59		(11,008)		—		(10,949)		—		(10,949)
Balance at September 30, 2021	6,085,991	$	60	$	918,512	$	(707,808)	$	(578)	$	210,186	$	11,867	$	222,053

(1) Amounts have been adjusted to reflect the one-for-ten reverse stock split effected July 11, 2022. See Note 2 and Note 12 for additional details.

See notes to unaudited consolidated financial statements.

Table of Contents

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (inthousands)

(Unaudited)


	For the nine months ended September 30, 2022		For the nine months ended September 30, 2021
Cash flows from operating activities:
Net loss	$	(84,632)	$	(36,690)
Adjustments to reconcile net loss to net cash provided by operating activities:
Premium amortization and (discount accretion), net	2,492		145
Interest income earned added to principal of investments	(79)		(310)
Amortization of deferred financing costs	1,938		3,935
Amortization of discount on convertible senior unsecured notes	648		712
Restricted stock amortization	335		453


Premium on purchase of residential whole loans	(6,619)		(10,281)


Unrealized loss, net	66,300		39,271
Realized loss on extinguishment of convertible senior notes	134		1,337
Realized gain on sale of real estate owned ("REO")	(12,198)		(54)
Unrealized (gain) loss on derivative instruments, net	(3,793)		97

Realized loss on investments, net	45,615		6,084
Loss on derivatives, net	1,762		—
Loss on foreign currency transactions, net	1		—
Changes in operating assets and liabilities:
Interest receivable	499		2,496
Investment related receivable	—		(704)
Other assets	—		(973)
Interest payable	188		(4,243)
Accounts payable and accrued expenses	(953)		60
Payable to affiliate	1,428		(38)
Other liabilities	7		1
Net cash provided by operating activities	13,073		1,298

Cash flows from investing activities:
Purchase of securities	(39,952)		—
Proceeds from sale of securities	42,287		—
Proceeds from sale of REO	54,681		738
Principal repayments and basis recovered on securities	6,704		14,685
Purchase of residential whole loans	(405,298)		(233,041)
Proceeds from sale of residential whole loans	11,735		—
Principal repayments on residential whole loans	206,660		313,661

Principal repayments on commercial loans	20,593		103,272

Principal repayments on securitized commercial loans	—		354,202

Principal repayments on residential bridge loans	366		7,052


Premium for credit default swaps, net	(347)		—
Net settlements of TBAs	2,051		—

Proceeds from sale of interest rate swaptions, net	312		—


Due from counterparties	460		50



Premium for interest rate swaptions, net	(473)		—
Net cash (used in) provided by investing activities	(100,221)		560,619

Cash flows from financing activities:

Payment of offering costs	(2)		(86)


Proceeds from issuance of convertible senior unsecured notes	—		86,250
Payments on extinguishment of convertible senior unsecured notes	(11,690)		(128,645)

Proceeds from repurchase agreement borrowings	3,164,451		2,527,530
Repayments of repurchase agreement borrowings	(3,562,699)		(2,403,068)

For the nine months ended September 30, 2017 For the nine months ended September 30, 2016
Cash flows from operating activities:

Net income $ 63,693
$ 13,281
Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Premium amortization and (discount accretion) on investments, net (2,658 ) 2,355
Interest income earned added to principal of securities (46 ) (300 )
Amortization of deferred financing costs —
135
Restricted stock amortization 795
1,351
Interest payments and basis recovered on MAC interest rate swaps 358
491
Premium on purchase of Residential Whole-Loans (354 ) (573 )
Premium on purchase of Residential Bridge Loans (425 ) —
Unrealized (gain) loss, net (35,126 ) (47,571 )
Unrealized (gain) loss on derivative instruments, net (156,098 ) 46,073
Other than temporary impairment 19,901
22,131
Realized (gain) loss on sale of securities, net (20,600 ) 4,968
(Gain) loss on derivatives, net 156,655
(40,755 )
(Gain) loss on foreign currency transactions, net 1
905
Changes in operating assets and liabilities:

Decrease (increase) in accrued interest receivable 5,787
(2,664 )
Increase in other assets (3,736 ) (374 )
Decrease in accrued interest payable (11,182 ) (2,120 )
Increase (decrease) in accounts payable and accrued expenses (667 ) 911
Decrease in payable to affiliate (664 ) (305 )
Net cash provided by (used in) operating activities 15,634
(2,061 )
Cash flows from investing activities:

Purchase of securities (2,473,379 ) (1,450,137 )
Proceeds from sale of securities 1,189,824
1,295,969
Principal repayments and basis recovered on securities 187,157
252,076
Purchase of Residential Whole-Loans (35,323 ) (28,825 )
Principal repayments on Residential Whole-Loans 32,287
39,597
Principal repayments on securitized commercial loan 59
—
Purchase of Residential Bridge Loans (73,565 ) —
Principal repayments on Residential Bridge Loans 16,251
—
Payment of premium for option derivatives (14,995 ) (17,951 )
Premium received from option derivatives 13,721
22,707
Net settlements of TBAs 3,135
12,166
Proceeds from (Payments on) termination of futures, net (9,230 ) 19,253
Proceeds from sale of interest rate swaptions —
2,075
Premium for MAC interest rate swaps, net —
465
Interest payments and basis recovered on MAC interest rate swaps (358 ) (491 )
Due from counterparties 8,449
(9,719 )
Proceeds from termination of foreign currency swaps —
5,351
Payments on total return swaps, net (552 ) 17
Premium for interest rate swaptions, net (115 ) —
Net cash (used in) provided by investing activities (1,156,634 ) 142,553

Cash flows from financing activities:

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Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Continued) (inthousands)

(Unaudited)


	For the nine months ended September 30, 2022		For the nine months ended September 30, 2021
Proceeds from securitized debt	742,432		—
Repayments of securitized debt	(207,799)		(597,221)


Payments made for deferred financing costs	—		(2,536)
Due from counterparties, net	890		(565)
Due to counterparties, net	—		(321)
Decrease in other liabilities	(9)		(75,873)
Equity distributions to non-controlling interest	(14,817)		—
Dividends paid on common stock	(8,454)		(10,947)
Dividends paid to non-controlling interest	(4)		(4)
Net cash provided by (used in) financing activities	102,299		(605,486)

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

Net increase (decrease) in cash, cash equivalents and restricted cash	15,150		(43,569)
Cash, cash equivalents and restricted cash, beginning of period	40,453		107,745
Cash, cash equivalents and restricted cash, end of period	$	55,603	$	64,176

Supplemental disclosure of operating cash flow information:
Interest paid	$	79,700	$	87,658
Income taxes paid	$	50	$	192
Supplemental disclosure of non-cash financing/investing activities:
Underwriting and offering costs payable	$	—	$	6










Dividends and distributions declared, not paid	$	2,415	$	3,651
Dividends to non-controlling interest, not paid	$	2	$	2
Principal payments of residential whole loans, not settled	$	8,674	$	22,621
Principal payments of residential bridge loans, not settled	$	46	$	1,715

Other assets - transfer of bridge loans to REO	$	—	$	752
Other assets - Transfer of Commercial Loans to REO	$	—	$	30,345
Other assets - Contribution of REO from non-controlling interest	$	—	$	12,138



Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:
Cash and cash equivalents	$	55,352	$	63,916
Restricted cash	251		260
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows	$	55,603	$	64,176

For the nine months ended September 30, 2017 For the nine months ended September 30, 2016
Proceeds from repurchase agreement borrowings 13,054,995
10,675,773
Repayments of repurchase agreement borrowings (11,874,382 ) (10,738,416 )
Proceeds from (repayment of) cash overdraft —
(300 )
Repayments of securitized debt (26 ) —
Proceeds from forward contracts 6,875
82,020
Repayments of forward contracts (6,850 ) (82,110 )
Payments made for deferred financing costs —
(58 )
Due from counterparties, net (11,709 ) (11,116 )
Due to counterparties, net 1,580
(3,903 )
Dividends paid on common stock (38,985 ) (56,173 )
Net cash provided by (used in) financing activities 1,131,498
(134,283 )

Effect of exchange rate changes on cash and cash equivalents (1 ) 45

Net increase (decrease) in cash and cash equivalents (9,503 ) 6,254
Cash and cash equivalents beginning of period 46,172
24,711
Cash and cash equivalents end of period $ 36,669
$ 30,965

Supplemental disclosure of operating cash flow information:

Interest paid $ 30,010
$ 22,850
Income taxes paid $ 4,966
$ 1,567
Supplemental disclosure of non-cash financing/investing activities:

Principal payments of securities, not settled $ 16
$ —
Securities sold, not settled $ —
$ 8,893
Securities purchased, not settled $ (293,959 ) $ —
Net unsettled TBAs $ (2 ) $ —
Dividends and distributions declared, not paid $ 12,995
$ 12,995
Principal payments of Residential Whole-Loans, not settled $ 4,580
$ 3,230
Principal payments of Residential Bridge Loans, not settled $ 2,598
$ —
Derivative collateral offset against derivatives $ (157,913 ) $ —

See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(in thousands- except share and per share data)

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

Note 1 — Organization

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

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

On August, 4, 2022, the Company announced that its Board of Directors had authorized a review of strategic alternatives for the Company aimed at enhancing shareholder value, which may include a sale or merger of the Company. JMP Securities, A Citizens Company, was retained as exclusive financial advisor to the Company. No assurance can be given that the review being undertaken will result in a sale, merger, or other transaction sale or other business combination involving the Company, and the Company has not set a timetable for completion of the review process. As previously announced, the Company does not intend to make any further statements regarding this process unless and until a definitive agreement for a transaction has been reached, or until the process of exploring strategic alternatives has ended.

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

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in ~~conformity~~accordance with accounting principles generally accepted ~~accounting principles~~ in the United States of America ~~(“GAAP”~~("GAAP") for interim financial reporting ~~in accordance with Article 10 of Regulation S-X~~ and the instructions to Form ~~10-Q. Certain prior period~~10-Q and Rule 10-01 of Regulation S-X. For all periods presented, all per share amounts and common shares outstanding have been ~~reclassified~~adjusted on a retroactive basis to ~~conform to~~reflect the ~~current period’s presentation. In the opinion~~Company's one-for-

Table of ~~management, all adjustments (which include only normal recurring adjustments) necessary have been made to state fairly the Company’s financial position, results of operations and cash flows.~~Contents

ten reverse stock split, which was effected on July 11, 2022. The results of operations for the period ended September 30, ~~2017,~~2022 are not necessarily indicative of the results to be expected for the full year or any future period. These consolidated financial statements should be read in conjunction with the Company’s ~~annual report~~Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2021, filed with the ~~Securities and Exchange Commission (“SEC”)~~SEC on March ~~7, 2017.~~8, 2022.

The consolidated financial statements include the accounts of the Company, its wholly-owned and majority-owned subsidiaries, and variable interest entities (“VIEs”) in which ~~we are~~it is considered the primary beneficiary. ~~Refer to Note 5 - “Variable Interest Entities” for additional information regarding the impact of consolidating these VIEs.~~ All intercompany amounts between the Company and its ~~subsidiary~~subsidiaries and consolidated VIEs have been eliminated in consolidation.

Reverse Stock Split

Our amended and restated certificate of incorporation as of June 30, 2022, authorizes the Company to issue a total of 600,000,000 shares of capital stock, consisting of 500,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share.

Following approval by the Company’s stockholders of a reverse stock split between a range of 1-for-5 and 1-for-10 of currently outstanding shares of the Company’s common stock, on June 30, 2022, the Company's board of directors selected a one-for-ten reverse stock split ratio. The one-for-ten reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 and the total number of issued and outstanding shares from 60,380,105 to 6,038,010. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

Our stockholders' equity, in the aggregate, remains unchanged. Per share net income or loss increased because there are fewer shares of common stock outstanding. The common stock held in treasury was reduced in proportion to the reverse stock split ratio. There were no other accounting consequences, including changes to the amount of stock-based compensation expense to be recognized in any period, that arose as a result of the reverse stock split. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of the Company's common stock the business day prior to the effective date. The reverse stock split applied to all of the Company's outstanding shares of common stock and did not affect any stockholder’s ownership percentage of shares of the Company's common stock, except for immaterial changes resulting from the payment of cash for fractional shares.

Variable Interest Entities

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

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

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

Table of Contents

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

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

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

Use of Estimates

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

~~Earnings (Loss) Per Share~~Significant Accounting Policies

~~GAAP requires use~~There have been no significant changes to our accounting policies included in Note 2 to the consolidated financial statements of ~~the two-class method in computing earnings per share for all periods presented for each class of common stock and participating securities as if all earnings~~our Annual Report on Form 10-K for the period had been distributed. Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity. The Company’s participating securities are not allocated a share of the net loss, as the participating securities do not have a contractual obligation to share in the net losses of the Company.

The remaining earnings are allocated to common stockholders and participating securities, to the extent that each security shares in earnings, as if all of the earnings for the period had been distributed. Each total is then divided by the applicable number

of weighted average outstanding common shares to arrive at basic earnings per share. For the diluted earnings, the denominator includes the weighted average outstanding common shares and all potential common shares assumed issued if they are dilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential common shares.

~~Offering Costs~~

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

~~Cash and Cash Equivalents~~

The Company considers all highly-liquid short term investments with original maturities of 90 days or less when purchased to be cash equivalents. Cash and cash equivalents are exposed to concentrations of credit risk. The Company places its cash and cash equivalents with what it believes to be high credit quality institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit.

~~Valuation of Financial Instruments~~

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

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

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

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

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Transfers between levels are determined by the Company at the end of the reporting period. Refer to Note 3 - "Fair Value of Financial Instruments".

~~Mortgage-Backed Securities and Other Securities~~

The Company's mortgage-backed securities and other securities portfolio primarily consists of Agency RMBS, Non-Agency RMBS, Agency CMBS, Non-Agency CMBS, ABS and other real estate related assets, these investments are recorded in accordance with ASC 320, “Investments - Debt and Equity Securities”, ASC 325-40, “Beneficial Interests in Securitized Financial Assets” or ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”. The Company has chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for its mortgage-backed securities and other securities portfolio. Electing the fair value option allows the Company to record changes in fair value in the Consolidated Statements of Operations as a component of “Unrealized gain (loss), net”.

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

The Company evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired involves judgments, estimates and assumptions based on

~~subjective and objective factors. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.~~

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

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

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

~~Residential Whole-Loans~~

Investments in Residential Whole-Loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs". The Company has chosen to make the fair value election pursuant to ASC 825 for its Residential Whole-Loan portfolio. Residential Whole-Loans are recorded at fair value in the Consolidated Balance Sheets with the periodic change in fair value being recorded in earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net". All other costs incurred in connection with acquiring Residential Whole-Loans or committing to purchase these loans are charged to expense as incurred.

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

~~Residential Bridge Loans~~

Investments in Residential Bridge Loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs". These loans are recorded at their principal amount outstanding, net of any premium or discount in the Consolidated Balance Sheets. All other costs incurred in connection with acquiring the Residential Bridge Loans or committing to purchase these loans are charged to expense as incurred.

effective rate or the fair value of the collateral, if the loan is collateral dependent. Upon measurement of impairment, the Company records an allowance to reduce the carrying value of the loan with a corresponding charge to net income. Significant judgments are required in determining impairment, including assumptions regarding the value of the loan, the value of the underlying collateral and other provisions such as guarantees.

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

~~Interest Income Recognition~~

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

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

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

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

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

~~Residential Whole-Loans and Residential Bridge Loans~~

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

~~Purchases and Sales of Investments~~

The Company accounts for a contract for the purchase or sale of securities, or other securities that do not yet exist on a trade date basis, which it intends to take possession and thus recognizes the acquisition or disposition of the securities at the inception of the contract.

Sales of investments are driven by the Company’s portfolio management process. The Company seeks to mitigate risks including those associated with prepayments and will opportunistically rotate the portfolio into securities and/or other investments the Company’s Manager believes have more favorable attributes. Strategies may also be employed to manage net capital gains, which need to be distributed for tax purposes. Realized gains or losses on sales of investments, including Agency Interest-Only Strips not characterized as derivatives, are a component of "Realized gain (loss) on sale of investments, net" in the Consolidated Statements of Operations, and are recorded at the time of disposition. Realized gains or losses on Interest-Only Strips which are characterized as derivatives are a component of "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.

~~Foreign Currency Transactions~~

The Company has and expects to continue to enter into transactions denominated in foreign currency from time to time. At the date the transaction is recognized, the asset and/or liability will be measured and recorded using the exchange rate in effect at the date of the transaction. At each balance sheet date, such foreign currency assets and liabilities are re-measured using the exchange rate in effect at the date of the balance sheet, resulting in unrealized foreign currency gains or losses, which are recorded in "Other, net" in the Consolidated Statements of Operations.

~~Due From Counterparties/Due To Counterparties~~

"Due from counterparties" represents cash posted by the Company with its counterparties as collateral for the Company’s interest rate and/or currency derivative financial instruments, repurchase agreements, and TBAs. "Due to counterparties" represents cash posted with the Company by its counterparties as collateral under the Company’s interest rate and/or currency derivative financial instruments, repurchase agreements, and TBAs. Included in "Due from counterparties" and/or "Due to counterparties" are daily variation margin settlement amounts with counterparties which are based on the price movement of the Company’s futures contracts. However, commencing in 2017, daily variation margin on only the Company's centrally cleared derivatives will be treated as a settlement and classified as either "Derivative assets, at fair value" or "Derivative liability, at fair value" in the Consolidated Balance Sheets. In addition, as provided below, "Due to counterparties" may include non-cash collateral in which the Company has the obligation to return and which the Company has either sold or pledged. To the extent the Company receives collateral other than cash from its counterparties such assets are not included in the Company’s Consolidated Balance Sheets. Notwithstanding the foregoing, if the Company either rehypothecates such assets or pledges the assets as collateral pursuant to a repurchase agreement, the cash received and the corresponding liability are reflected in the Consolidated Balance Sheets.

~~Derivatives and Hedging Activities~~

Subject to maintaining its qualification as a REIT for U.S. federal income tax purposes, the Company utilizes derivative financial instruments, including interest rate swaps, interest rate swaptions, mortgage put options, currency forwards, futures contracts, TBAs and Agency and Non-Agency Interest-Only Strips to hedge the interest rate and currency risk associated with its portfolio and related borrowings. Derivatives, subject to REIT requirements, are used for hedging purposes rather than speculation. The Company has also entered into a total return swap, which transfers the total return of the referenced security to the Company. The Company determines the fair value of its derivative positions and obtains quotations from third parties, including the Chicago Mercantile Exchange or CME, to facilitate the process of determining such fair values. The Company does not necessarily seek to hedge all such risks. In addition, if the Company’s hedging activities do not achieve the desired results, reported earnings may be adversely affected.

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

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

In the Company’s Consolidated Statements of Cash Flows, premiums received or paid on termination of its interest rate swaps are included in cash flows from operating activities. Notwithstanding the foregoing, proceeds and payments on settlement of swaptions, mortgage put options, futures contracts and TBAs are included in cash flows from investing activities. Proceeds and payments on settlement of forward contracts are reflected in cash flows from financing activities in the Company’s Consolidated Statements of Cash Flows. For Agency and Non-Agency Interest-Only Strips accounted for as derivatives, the purchase, sale and recovery of basis activity is included with MBS and other securities under cash flows from investing activities in the Company’s Consolidated Statements of Cash Flows.

The Company evaluates the terms and conditions of its holdings of Agency and Non-Agency Interest-Only Strips, interest rate swaptions, currency forwards, futures contracts and TBAs to determine if these instruments have the characteristics of an investment or should be considered a derivative under GAAP. In determining the classification of its holdings of Interest-Only Strips, the Company evaluates the securities to determine if the nature of the cash flows have been altered from that of the underlying mortgage collateral. Interest-Only Strips, for which the underlying mortgage collateral has been included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives. The carrying value of the Agency and Non-Agency Interest-Only Strips, accounted for as derivatives, is included in "Mortgage-backed securities and other securities, at fair value" in the Consolidated Balance Sheets. The carrying value of interest rate swaptions, currency forwards, futures contracts and TBAs is included in "Derivative assets, at fair value" or "Derivative liability, at fair value" in the Consolidated Balance Sheets. Interest earned or paid along with the change in fair value of these instruments accounted for as derivatives is recorded in "Gain (loss) on derivative instruments, net" in its Consolidated Statements of Operations.

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

~~Repurchase Agreements and Reverse Repurchase Agreements~~

Investments sold under repurchase agreements are treated as collateralized financing transactions, unless they meet all the criteria for sales treatment. Securities financed through a repurchase agreement remain in the Company's Consolidated Balance Sheets as assets and cash received from the lender is recorded in the Company's Consolidated Balance Sheets as a liability. Interest payable in accordance with repurchase agreements is recorded as "Accrued interest payable" in the Consolidated Balance Sheets. Interest paid (including accrued amounts) in accordance with repurchase agreements is recorded as interest expense.

The Company may borrow securities under reverse repurchase agreements to deliver a security owned and sold by the Company but pledged to a different counterparty under a separate repurchase agreement when in the Manager’s view terminating the outstanding repurchase agreement is not in the Company’s best interest. Cash paid to the borrower is recorded in the Company’s Consolidated Balance Sheets as an asset. Interest receivable in accordance with reverse repurchase agreements is recorded as accrued interest receivable in the Consolidated Balance Sheets. The Company reflects all proceeds on reverse repurchase agreement and repayment of reverse repurchase agreement, on a net basis in the Consolidated Statements of Cash Flows. Upon sale of a pledged security, the Company recognizes an obligation to return the borrowed security in the Consolidated Balance Sheet in "Due to counterparties". The Company establishes haircuts to ensure the market value of the underlying asset remains sufficient to protect the Company in the event of default by the counterparty. Realized gains and losses associated with the sale of the security are recognized in "Realized gain (loss) on sale of investments, net" in the Consolidated Statements of Cash Flows.

~~Securitized Debt~~

Securitized debt was issued at par by a consolidated securitization trust. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt. The debt is recorded at fair value in the Consolidated Balance Sheets with the periodic change in fair value recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net".

~~Share-based Compensation~~

The Company accounts for share-based compensation to its independent directors, its Manager and to employees of its Manager and its affiliates using the fair value based methodology prescribed by GAAP. Compensation cost related to restricted common stock issued to the Company’s independent directors and any employee of the Company including any such restricted stock which is subject to a deferred compensation program, and any employee of the Company is measured at its fair value at the grant date, and amortized into expense over the service period on a straight-line basis. Compensation cost related to restricted common stock issued to the Manager and to employees of the Manager, including officers and certain directors, of the Company who are employees of the Manager and its affiliates is initially measured at fair value at the grant date, and amortized into expense over the vesting period on a straight-line basis and re-measured on subsequent dates to the extent the awards are unvested.

~~Warrants~~

For the Company’s warrants, the Company uses a variation of the adjusted Black-Scholes option valuation model to record the financial instruments at their relative fair values at issuance. The warrants issued with the Company’s common stock in the private placement to certain accredited institutional investors on May 15, 2012, were evaluated by the Company and were recorded at their relative fair value as a component of equity at the date of issuance.

~~Income Taxes~~

~~The Company operates and has elected to be taxed as a REIT commencing with its taxable~~ year ended December 31, 2012. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that the Company makes qualifying distributions to stockholders, and provided that the Company satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the Company lost its REIT qualification. Accordingly, the failure to qualify as a REIT could have a material adverse impact in the Company’s results of operations and amounts available for distribution to stockholders.

The dividends paid deduction for qualifying dividends paid to stockholders is computed using the Company’s taxable income as opposed to net income reported in the Consolidated Statements of Operations. Taxable income, generally, will differ from net income reported in the Consolidated Statements of Operations because the determination of taxable income is based on tax regulations and not GAAP.

The Company may create and elect to treat certain 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. A domestic TRS is subject to U.S. federal, state and local corporate income taxes, and for 2017 its value may not exceed 25% of the value of the Company; however, commencing in taxable year 2018 its value may not exceed 20% of the value of the Company. If the TRS generates net income it may declare dividends to the Company, which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at the TRS level, no distribution is required and it can increase book equity of the consolidated entity. As of September 30, 2017, the Company has a single wholly-owned subsidiary which it has elected to treat as a domestic TRS.

Current and deferred taxes are recorded on earnings (losses) recognized by the Company's TRS. Deferred income tax assets and liabilities are calculated based upon temporary differences between the Company's U.S. GAAP consolidated financial statements and the federal and state basis of assets and liabilities as of the Consolidated Balance Sheet date. The Company evaluates the realizability of its deferred tax assets and recognizes a valuation allowance if, based on available evidence, it is more likely than not that some or all of its deferred tax assets will not be realized. In evaluating the realizability of the deferred tax asset, the Company will consider the expected future taxable income, existing and projected book to tax differences as well as tax planning strategies. This analysis is inherently subjective, as it is based on forecasted earning and business and economic activity. Changes in estimates of deferred tax asset realizability, if any, are included in "Income tax provision (benefit)" in the Consolidated Statements of Operations.

As a REIT, if the Company fails to distribute in any calendar year (subject to specific timing rules for certain dividends paid in January) at least the sum of (i) 85% of its ordinary income for such year, (ii) 95% of its capital gain net income for such year, and (iii) any undistributed taxable income from the prior year, the Company would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (i) the amounts actually distributed and (ii) the amounts of income retained and on which the Company has paid corporate income tax.

~~Comprehensive Income (Loss)~~

~~The Company has none of the components of comprehensive income (loss) and therefore comprehensive income (loss) is not presented.~~

~~Accounting standards applicable to emerging growth companies~~

The JOBS Act contains provisions that relax certain requirements for “emerging growth companies”, which includes the Company. For as long as the Company is an emerging growth company, which may be up to five full fiscal years, unlike other public companies, the Company will not be required to: (i) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act; (ii) provide an auditor’s attestation report on management’s assessment of the effectiveness of the Company’s system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act; (iii) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; or (iv) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. The Company currently takes advantage of some of these exemptions. The Company’s qualification for remaining an emerging growth company under the five full fiscal years expires on December 31, 2017. However, the Company will no longer qualify for such exemption earlier than that date if its gross revenue for any year equals or exceeds $1.0 billion, the Company issues more than $1.0 billion in non-convertible debt during the three previous years, or if the Company is deemed to be a large accelerated filer. The Company has not elected to use the extended transition period for complying with any new or revised financial accounting standards.2021.

Recently adopted accounting pronouncements

Description

Adoption Date

Effect on Financial Statements

~~Description~~

~~Adoption Date~~

~~Effect on Financial Statements~~

In ~~March 2016,~~August 2020, the FASB issued ASU ~~2016-9, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.~~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).” ~~This ASU is intended to simplify several aspects of~~The amendments in this Update affect entities that issue convertible instruments and/or contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for ~~share-based payments, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.~~those specific features are removed.

~~First quarter 2017.~~January 1, 2022

The adoption of this ~~guidance~~standard did not have a material impact on the Company's consolidated financial ~~statements.~~statements due to the limited nature of such transactions.

~~Recently issued accounting pronouncements~~

~~Description~~

Recently issued accounting pronouncements

Description

Effective Date

Effect on Financial Statements

In ~~May 2014,~~March 2020, the FASB issued ASU ~~2014-9, “Revenue from Contracts with Customers~~2020-04, “Reference Rate Reform (Topic ~~606).~~848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ~~guidance changes an entity’s recognition of revenue from~~amendments in this update provided optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, ~~with customers.~~hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The ~~core principle of the guidance is~~amendments in this Update apply only to contracts, hedging relationships, and other transactions that ~~an entity should recognize revenue to depict the transfer of promised goods~~reference LIBOR or ~~services to customers in an amount that reflects the consideration to which the entity expects~~another reference rate expected to be ~~entitled in exchange for those goods or services. In addition, the new guidance requires improved disclosures to enable users~~discontinued because of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued implementation guidance which clarifies principal versus agent considerations in reporting revenue gross versus net (ASU 2016-8). In April 2016, the FASB issued implementation guidance which clarifies the identification of performance obligations (ASU 2016-10). In May 2016, the FASB issued amendments that affect only the narrow aspects of Topic 606 (ASU2016-12).

~~First quarter 2018 and permits the use of either the full retrospective or modified retrospective method.~~

The Company's revenue is mainly derived from interest income on our investments and to a lesser extent gains on sales of investments, which are not impacted by this standard. Therefore, the adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

reference rate reform. In January ~~2016,~~2021, the FASB issued ASU 2016-1, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The guidance improves certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.

~~First quarter 2018.~~

The standard does not change the guidance for classifying and measuring investments in debt securities and loans as well nonrecourse liabilities of consolidated collateralized financing entities. Therefore, the adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements when adopted.

~~In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses~~2021-01, "Reference Rate Reform (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard significantly changes how an entity will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through the income statement. The standard will replace the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available for sale debt securities, entities will be required to record an allowance rather than reduce the carrying amount, as is currently done under the other than temporary impairment model. It also simplifies the accounting model for purchased credit impaired debt securities and loans.

~~First quarter 2020.~~

~~The Company is currently evaluating the impact the standard may have on its consolidated financial statements when adopted.~~

~~In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)~~848).~~" The guidance is intended to reduce diversity in practice in how certain transactions are classified on the statement of cash flows.~~

~~First quarter 2018 and requires retrospective adoption.~~

~~The Company is evaluating the impact the standard may have on its Consolidated Statements of Cash Flows.~~

In November 2016, the FASB issued ASU 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB's Emerging Issues Task Force." The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents as well as disclose information about the nature of the restrictions on its cash and cash equivalents.

~~First quarter 2018 and requires retrospective adoption.~~

~~The Company currently does not have restricted cash. Therefore, the adoption of this standard is not expected to have a material impact on its Consolidated Statements of Cash Flows.~~

In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business." This ASU provides a more robust framework to use in determining when a set of assets and activities constitutes a business.

~~First quarter 2020. The guidance should be applied prospectively on or after the effective date.~~

~~The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.~~

~~In May 2017, the FASB issued ASU 2017-09 "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.~~" The amendments in this ~~update provide guidance about which changes to the terms or conditions of a shared-based payment award require an entity to apply modification accounting~~Update clarify that certain optional expedients and exceptions in Topic ~~718.~~848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

~~First quarter 2018.~~March 12, 2020 through December 31, 2022

The Company ~~does not believe~~will elect to adopt the ~~adoption~~amendments in ASU 2020-04 and ASU 2021-1 no later than December 31, 2022. With respect to contracts within the scope of ~~this standard will have a material impact on its consolidated financial statements.~~Topics 310, Receivables, and 470, Debt, the company intends to account for these as continuations of existing contracts by prospectively adjusting the effective interest rates as modified.

In July 2017, the FASB issued ASU 2017-11 "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivative and Hedges (Topic 815): Part I - Accounting for Certain Financial Instruments with Down Round Features and Part II - Replacement of the Indefinite Deferral for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Noncontrolling Interest with a Scope Exception". Part I of this update changes the classification analysis of certain financial instruments (such as warrants and convertible instruments) with down round features. Down round features are features of certain equity-linked financial instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. Entities that present earnings per share are required to recognize the effect of the down round feature when it is triggered. The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.

~~First quarter 2019.~~

~~The Company is evaluating the impact this standard may have on its consolidated financial statements.~~

Table of Contents

Note 3 — Fair Value of Financial Instruments

The following tables present the Company’s financial instruments carried at fair value as of September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, based upon the valuation hierarchy (dollars in thousands):


	September 30, 2022
	Fair Value
	Level I		Level II		Level III		Total
Assets




Agency RMBS Interest-only strips	$	—	$	—	$	52	$	52
Agency RMBS Interest-only strips accounted for as derivatives, included in MBS	—		—		668		668
Subtotal Agency MBS	—		—		720		720

Non-Agency CMBS	—		88,822		—		88,822
Non-Agency RMBS	—		28,513		—		28,513
Non-Agency RMBS Interest-only strips	—		—		1,173		1,173

Subtotal Non-Agency MBS	—		117,335		1,173		118,508

Other securities	—		38,310		—		38,310
Total mortgage-backed securities and other securities	—		155,645		1,893		157,538

Residential whole loans	—		—		1,099,625		1,099,625
Residential bridge loans	—		—		5,120		5,120
Securitized commercial loans	—		—		1,171,914		1,171,914
Commercial loans	—		—		90,103		90,103
Derivative assets	—		262		—		262
Total Assets	$	—	$	155,907	$	2,368,655	$	2,524,562

Liabilities

Securitized debt	$	—	$	1,798,511	$	9,886	$	1,808,397

Total Liabilities	$	—	$	1,798,511	$	9,886	$	1,808,397

Table of Contents

September 30, 2017
Fair Value
Level I Level II Level III Total
Assets

Agency RMBS:

20-Year mortgage $ —
$ 159,278
$ —
$ 159,278
30-Year mortgage —
548,196
—
548,196
40-Year mortgage —
387,095
—
387,095
Agency RMBS Interest-Only Strips —
14,028
2,009
16,037
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS —
11,219
—
11,219
Agency CMBS —
2,103,185
—
2,103,185
Agency CMBS Interest-Only Strips —
30
—
30
Agency CMBS Interest-Only Strips accounted for as derivatives, included in MBS —
6,016
—
6,016
Subtotal Agency MBS —
3,229,047
2,009
3,231,056

Non-Agency RMBS —
50,100
14,262
64,362
Non-Agency CMBS —
278,511
—
278,511
Subtotal Non-Agency MBS —
328,611
14,262
342,873

Other securities —
113,181
9,470
122,651
Total mortgage-backed securities and other securities —
3,670,839
25,741
3,696,580

Residential Whole-Loans —
—
191,439
191,439
Securitized commercial loan —
—
24,952
24,952
Derivative assets 375
4,636
—
5,011
Total Assets $ 375
$ 3,675,475
$ 242,132
$ 3,917,982

Liabilities

Derivative liabilities $ 128
$ 858
$ —
$ 986
Securitized debt —
—
10,979
10,979
Total Liabilities $ 128
$ 858
$ 10,979
$ 11,965


										December 31, 2021
										Fair Value
										Level I		Level II		Level III		Total
Assets									Assets

	December 31, 2016
	Fair Value
	Level I		Level II		Level III		Total
Assets
Agency RMBS:
20-Year mortgage	$	—	$	498,470	$	—	$	498,470
30-Year mortgage	—		935,207		—		935,207
Agency RMBS Interest-Only Strips	—		19,790		—		19,790
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		16,503		—		16,503
Agency CMBS	—		290,605		73,059		363,664
Agency CMBS Interest-Only Strips	—		231		—		231
Agency CMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		7,729		—		7,729
Agency RMBS Interest-only strips									Agency RMBS Interest-only strips	$	—	$	—	$	114	$	114
Agency RMBS Interest-only strips accounted for as derivatives, included in MBS									Agency RMBS Interest-only strips accounted for as derivatives, included in MBS	—		—		1,058		1,058
Subtotal Agency MBS	—		1,768,535		73,059		1,841,594		Subtotal Agency MBS	—		—		1,172		1,172

Non-Agency CMBS									Non-Agency CMBS	—		99,630		5,728		105,358
Non-Agency RMBS	—		240,422		619		241,041		Non-Agency RMBS	—		25,652		—		25,652
Non-Agency RMBS Interest-Only Strips	—		—		64,116		64,116
Non-Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		—		3,085		3,085
Non-Agency CMBS	—		351,163		7,756		358,919
Non-Agency RMBS Interest-only strips									Non-Agency RMBS Interest-only strips	—		—		2,117		2,117

Subtotal Non-Agency MBS	—		591,585		75,576		667,161		Subtotal Non-Agency MBS	—		125,282		7,845		133,127

Other securities	—		36,406		31,356		67,762		Other securities	—		51,648		—		51,648
Total mortgage-backed securities and other securities	—		2,396,526		179,991		2,576,517		Total mortgage-backed securities and other securities	—		176,930		9,017		185,947

Residential Whole-Loans	—		—		192,136		192,136
Residential whole loans									Residential whole loans	—		—		1,023,502		1,023,502
Residential bridge loans									Residential bridge loans	—		—		5,428		5,428
Securitized commercial loan	—		—		24,225		24,225		Securitized commercial loan	—		—		1,355,808		1,355,808
Commercial loans									Commercial loans	—		—		130,572		130,572
Derivative assets	71		20,500		—		20,571		Derivative assets	—		105		—		105
Total Assets	$	71	$	2,417,026	$	396,352	$	2,813,449	Total Assets	$	—	$	177,035	$	2,524,327	$	2,701,362

Liabilities									Liabilities
Derivative liabilities	$	2,487	$	177,998	$	1,673	$	182,158	Derivative liabilities	$	—	$	602	$	—	$	602
Securitized debt	—		—		10,659		10,659		Securitized debt	—		1,329,451		14,919		1,344,370
Total Liabilities	$	2,487	$	177,998	$	12,332	$	192,817	Total Liabilities	$	—	$	1,330,053	$	14,919	$	1,344,972

September 30, 2017 December 31, 2016
Assets Pledged Accrued Interest Assets Pledged and Accrued Interest
Assets Pledged⁽³⁾
Accrued Interest Assets Pledged and Accrued Interest
Assets pledged for borrowings under repurchase agreements:

Agency RMBS, at fair value $ 823,403
$ 3,133
$ 826,536
$ 1,465,384
$ 5,335
$ 1,470,719
Agency CMBS, at fair value 2,109,202
5,183
2,114,385
61,200
353
61,553
Non-Agency RMBS, at fair value 64,348
162
64,510
308,165
682
308,847
Non-Agency CMBS, at fair value 278,095
1,451
279,546
358,919
1,845
360,764
Whole-Loans, at fair value ⁽¹⁾⁽²⁾
205,412
1,523
206,935
205,702
1,518
207,220
Residential Bridge Loans ⁽¹⁾
54,912
905
55,817
—
—
—
Other securities, at fair value 122,651
116
122,767
67,762
57
67,819
Cash ⁽³⁾
24,950
—
24,950
36,986
—
36,986
Total $ 3,682,973
$ 12,473
$ 3,695,446
$ 2,504,118
$ 9,790
$ 2,513,908


	September 30, 2022						December 31, 2021
	Assets Pledged		Accrued Interest		Assets Pledged and Accrued Interest		Assets Pledged		Accrued Interest		Assets Pledged and Accrued Interest
Assets pledged for borrowings under repurchase agreements:

Agency RMBS, at fair value	$	233	$	7	$	240	$	1,172	$	19	$	1,191
Non-Agency CMBS, at fair value(1)	90,107		439		90,546		107,624		504		108,128
Non-Agency RMBS, at fair value	122,401		610		123,011		66,555		343		66,898
Residential whole loans, at fair value(2)	7,214		57		7,271		453,447		2,674		456,121
Residential bridge loans(2)	5,120		66		5,186		5,207		91		5,298
Commercial loans, at fair value(2)	81,326		409		81,735		101,459		360		101,819


Other securities, at fair value	38,310		97		38,407		51,648		100		51,748
Cash(3)	120		—		120		3,151		—		3,151
Total	$	344,831	$	1,685	$	346,516	$	790,263	$	4,091	$	794,354

(1)Includes securities eliminated upon VIE consolidation.


~~(1)~~	~~Loans owned through trust certificates are pledged as collateral. The trust certificates are eliminated upon consolidation.~~


~~(2)~~	~~Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.~~


~~(3)~~	~~Cash posted as collateral is included in "Due from counterparties" in the Company’s Consolidated Balance Sheets.~~

(2)Loans owned through trust certificates are pledged as collateral. The trust certificates are eliminated upon consolidation.

(3)Cash posted as collateral is included in "Due from counterparties" in the Company’s Consolidated Balance Sheets.

A reduction in the value of pledged assets typically results in the repurchase agreement counterparties initiating a margin call. At September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, investments held by counterparties as security for repurchase agreements totaled approximately ~~$3.7 billion~~$344.7 million and ~~approximately $2.5 billion,~~$787.1 million, respectively. Cash collateral held by counterparties at September 30, ~~2017~~2022 and December 31, ~~2016~~2021 was approximately ~~$25.0 million~~$120 thousand and ~~approximately $37.0~~$3.2 million, respectively. Cash posted by repurchase agreement counterparties at both September 30, ~~2017~~2022 and December 31, ~~2016,~~2021 was ~~approximately $2.3~~zero.

Convertible Senior Unsecured Notes

6.75% Convertible Senior Unsecured Notes due 2024 (the "2024 Notes")

In September 2021, the Company issued $86.3 million aggregate principal amount of the 2024 Notes for net proceeds of $83.3 million. Interest on the 2024 Notes is paid semiannually. The 2024 Notes are convertible into, at the Company's election, cash, shares of the Company's common stock, or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the 2024 Notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the supplemental indenture for the 2024 Notes. The post reverse stock split conversion rate is 33.7952 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $29.59 per share of common stock. The 2024 Notes

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mature on September 15, 2024, unless earlier converted, redeemed, or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity.

6.75% Convertible Senior Unsecured Notes due 2022 (the "2022 Notes")

At September 30, 2022 and December 31, 2021, the Company had $26.0 million and ~~approximately $270 thousand,~~$37.7 million aggregate principal of the 2022 Notes outstanding, respectively. The 2022 Notes were repaid in full upon their maturity on October 3, 2022. Refer to Note 16 - "Subsequent Event" for details.

During the quarters ended September 30, 2022, June 30, 2022, and March 31, 2022, the Company repurchased $1.0 million, $7.2 million and$3.4 million aggregate principal amount of the 2022 Notes at par value, 0.6% premium to par value, and 0.8% premium to par value, respectively, plus accrued and unpaid interest.

Securitized debt

Arroyo Trust 2019-2

In ~~addition,~~May 2019, the Company completed a residential mortgage-backed securitization comprised of $945.5 million of Non-QM residential whole loans, issuing $919.0 million of mortgage-backed notes. The Company did not elect the fair value option for these notes, so they are recorded at their principal balance less unamortized deferred financing cost and classified in "Securitized debt, net" in the Consolidated Balance Sheets. The following table summarizes the issued Arroyo Trust 2019-2's residential mortgage pass-through certificates at September 30, ~~2017~~2022 (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Offered Notes:
Class A-1	$	176,628	3.3%	$	176,628	4/25/2049
Class A-2	9,473		3.5%	9,473		4/25/2049
Class A-3	15,007		3.8%	15,007		4/25/2049
Class M-1	25,055		4.8%	25,055		4/25/2049
Subtotal	$	226,163		$	226,163
Less: Unamortized Deferred Financing Costs	N/A			2,830
Total	$	226,163		$	223,333

The Company retained the non-offered securities in the securitization, which include the class B, Class A-IO-S and ~~December 31, 2016,~~Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2019-2 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At September 30, 2022, residential whole loans, with an outstanding principal balance of approximately $249.6 million, serve as collateral for the Arroyo Trust 2019-2's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is 20% of the original principal balance. The notes are redeemable at their face value plus accrued interest.

Arroyo Trust 2020-1

In June 2020, the Company ~~held~~completed a residential mortgage-backed securitization comprised of $355.8 million of Non-QM residential whole loans, issuing $341.7 million of mortgage-backed notes. The Company did not elect the fair value option for these notes, so they are recorded at their principal balance less unamortized deferred financing cost and classified in "Securitized debt, net" in the Consolidated Balance Sheets. The following table summarizes the issued Arroyo Trust 2020-1's residential mortgage pass-through certificates at September 30, 2022 (dollars in thousands):

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Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Offered Notes:
Class A-1A	$	77,393	1.7%	$	77,393	3/25/2055
Class A-1B	9,184		2.1%	9,184		3/25/2055
Class A-2	13,518		2.9%	13,518		3/25/2055
Class A-3	17,963		3.3%	17,963		3/25/2055
Class M-1	11,739		4.3%	11,739		3/25/2055
Subtotal	$	129,797		$	129,797
Less: Unamortized Deferred Financing Costs	N/A			1,665
Total	$	129,797		$	128,132

The Company retained the non-offered securities in the securitization, which include the Class B, Class A-IO-S, and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of ~~$0 and $357 thousand, respectively,~~the Arroyo Trust 2020-1 can only be settled with the residential loans that serve as collateral ~~from its repurchase agreement counterparties~~for the securitized debt and is non-recourse to ~~satisfy margin requirements.~~ the Company. At September 30, 2022, residential whole loans with an outstanding principal balance of approximately $143.0 million serve as collateral for the Arroyo Trust 2020-1's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to or less than 30% of the original principal balance. The notes are redeemable at their face value plus accrued interest.

Arroyo Trust 2022-1

In February 2022, the Company completed a residential-mortgage backed securitization comprised of $432.0 million of Non-QM residential whole loans, issuing $398.9 million of mortgage-backed notes. The Company has chosen to make the ~~ability~~fair value election pursuant to ~~repledge~~ASC 825 for the debt and accordingly the bonds are recorded at fair value in the Consolidated Balance Sheets with the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized loss, net."

The following table summarizes the issued Arroyo Trust 2022-1's residential mortgage pass-through certificates at September 30, 2022 (dollars in thousands):


Classes	Principal Balance		Coupon	Fair Value		Contractual Maturity
Offered Notes:
Class A-1A	$	218,530	2.5%	$	199,526	12/25/2056
Class A-1B	82,942		3.3%	69,669		12/25/2056
Class A-2	21,168		3.6%	16,617		12/25/2056
Class A-3	28,079		3.7%	21,312		12/25/2056
Class M-1	17,928		3.7%	12,814		12/25/2056


Total	$	368,647		$	319,938

The Company retained the non-offered securities in the securitization, which include the Class B, Class A-IO-S, and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2022-1 can only be settled with the residential loans that serve as collateral ~~received from its repurchase counterparties.~~for the securitized debt and is non-recourse to the Company. At September 30, 2022, residential whole loans with an outstanding principal balance of approximately$399.6 millionserve as collateral for the Arroyo Trust 2022-1's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to or less than 30% of the original principal balance. The notes are redeemable at their fair value plus accrued interest.

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Arroyo Trust 2022-2

In July 2022, the Company completed a residential-mortgage backed securitization comprised of $402.2 million of Non-QM residential whole loans, issuing $351.9 million of mortgage-backed notes. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the bonds are recorded at fair value in the Consolidated Balance Sheets with the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized loss, net."

The following table summarizes the issued Arroyo Trust 2022-2's residential mortgage pass-through certificates at September 30, 2022 (dollars in thousands):


Classes	Principal Balance		Coupon	Fair Value		Contractual Maturity
Offered Notes:
Class A-1	$	273,691	5.0%	$	263,315	7/25/2057
Class A-2	23,297		5.0%	21,916		7/25/2057
Class A-3	28,388		5.0%	26,398		7/25/2057



Class M-1	17,694		5.0%	15,097		7/25/2057


Total	$	343,070		$	326,726

The Company retained the non-offered securities in the securitization, which include the Class B-1, Class B-2, Class B-3, Class A-IO-S, and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2022-2 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At September 30, 2022, residential whole loans with an outstanding principal balance of approximately$390.9 millionserve as collateral for the Arroyo Trust 2022-2's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to or less than 30% of the original principal balance. The notes are redeemable at their fair value plus accrued interest.

Commercial mortgage-backed notes

CSMC 2014 USA

The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at September 30, 2022 (dollars in thousands):


Classes	Principal Balance		Coupon		Fair Value		Contractual Maturity
Class A-1	$	120,391	3.3	%	$	109,867	9/11/2025
Class A-2	531,700		4.0	%	482,628		9/11/2025
Class B	136,400		4.2	%	119,584		9/11/2025
Class C	94,500		4.3	%	79,772		9/11/2025
Class D	153,950		4.4	%	122,083		9/11/2025
Class E	180,150		4.4	%	132,952		9/11/2025
Class F	153,600		4.4	%	104,961		9/11/2025
Class X-1(1)	N/A		0.5	%	8,268		9/11/2025
Class X-2(1)	N/A		—	%	1,618		9/11/2025
	$	1,370,691			$	1,161,733

(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of September 30, 2022, respectively.

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At September 30, 2022, the Company owned a portion of the class F certificates with an outstanding principal balance of $14.9 million, which is eliminated in consolidation. The remaining CSMC USA debt that we elected the fair value option had a fair value of $1.2 billion at September 30, 2022, and is recorded in "Securitized debt, net" in the Consolidated Balance Sheets. Of the remaining outstanding principal balance of $1.4 billion, $196.7 million is owned by related parties and $1.2 billion is owned by third parties. The securitized debt of the CSMC USA can only be settled with the commercial loan with an outstanding principal balance of approximately $1.4 billion at September 30, 2022, that serves as collateral for the securitized debt and is non-recourse to the Company. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized loss, net."

Note 78 — Derivative Instruments

The Company’s derivatives may include interest rate swaps, ~~interest rate~~ swaptions, options, futures contracts, ~~currency swaps and forwards,~~ TBAs, Agency, and Non-Agency Interest-Only Strips that are classified as derivatives, credit default swaps, and total return swaps.

The following table summarizes the Company’s derivative instruments at September 30, ~~2017~~2022 and December 31, ~~2016~~2021 (dollars in thousands):


			September 30, 2022				December 31, 2021
Derivative Instrument	Accounting Designation	Consolidated Balance Sheets Location	Notional Amount		Fair Value			Notional Amount		Fair Value
Interest rate swaps, asset	Non-Hedge	Derivative assets, at fair value	$	152,000	$	262		$	—	$	—





Credit default swaps, asset	Non-Hedge	Derivative assets, at fair value	—		$	—		2,030		$	105

Total derivative instruments, assets					262					105

Interest rate swaps, liability	Non-Hedge	Derivative liability, at fair value	—		—			22,000		(38)




Credit default swaps, liability	Non-Hedge	Derivative liability, at fair value	—		—			4,140		(564)

Total derivative instruments, liabilities					—					(602)
Total derivative instruments, net					$	262				$	(497)

September 30, 2017 December 31, 2016
Derivative Instrument Accounting Designation Consolidated Balance Sheets Location Notional Amount
Fair Value ⁽¹⁾
Accrued Interest Payable (receivable) Notional Amount
Fair Value ⁽¹⁾
Accrued Interest Payable (receivable)
Interest rate swaps Non-Hedge Derivative assets, at fair value $ 3,046,200
$ 2,852
$ 59
$ 2,298,300
$ 20,466
$ 1,145
Options Non-Hedge Derivative assets, at fair value 400,000
375
—
—
—
—
Futures contracts Non-Hedge Derivative assets, at fair value —
—
—
56,900
71
—
Foreign currency forward contracts Non-Hedge Derivative assets, at fair value 697
10
—
784
34
—
TBA securities Non-Hedge Derivative assets, at fair value 582,000
1,774
—
—
—
—
Total derivative instruments, assets
5,011
59
20,571
1,145

Interest rate swaps Non-Hedge Derivative liability, at fair value 32,000
(19 ) —
5,046,300
(177,929 ) 3,054
Options Non-Hedge Derivative liability, at fair value 400,000
(128 ) —
—
—
—
Futures contracts Non-Hedge Derivative liability, at fair value —
—
—
176,300
(2,487 ) —
Total return swaps Non-Hedge Derivative liability, at fair value —
—
—
47,059
(1,673 ) (94 )
Foreign currency forward contracts Non-Hedge Derivative liability, at fair value 690
(3 ) —
1,532
(69 ) —
TBA securities Non-Hedge Derivative liability, at fair value 200,000
(836 ) —
—
—
—
Total derivative instruments, liabilities
(986 ) —
(182,158 ) 2,960
Total derivative instruments, net
$ 4,025
$ 59
$ (161,587 ) $ 4,105

~~(1) Fair value excludes accrued interest.~~

The following tables summarize the effects of the Company’s derivative positions, including Interest-Only Strips characterized as derivatives and TBAs, which are reported in "Gain ~~(loss)~~ on derivative instruments, net" in the Consolidated Statements of Operations for the three and nine months ended September 30, ~~2017~~2022 and September 30, ~~2016~~2021 (dollars in thousands):

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Realized Gain (Loss), net
Description Other Settlements / Expirations Variation Margin Settlement Mark-to-Market Return (Recovery) of Basis
Contractual interest income (expense), net⁽¹⁾
Total
Three months ended September 30, 2017
Interest rate swaps $ (38 ) $ 9,564
$ (2,028 ) $ 92
$ (1,764 ) $ 5,826
Interest-Only Strips— accounted for as derivatives —
—
351
(1,486 ) 1,816
681
Options (957 ) —
477
—
—
(480 )
Futures contracts (77 ) —
—
—
—
(77 )
Foreign currency forwards 45
—
(15 ) —
—
30
Total return swaps (52 ) —
329
—
95
372
TBAs 577
—
288
—
—
865
Total $ (502 ) $ 9,564
$ (598 ) $ (1,394 ) $ 147
$ 7,217

Three months ended September 30, 2016
Interest rate swaps $ (25,179 ) $ —
$ 35,878
$ 168
$ (6,904 ) $ 3,963
Interest rate swaptions —
—
—
—
—
—
Interest-Only Strips— accounted for as derivatives —
—
446
(2,827 ) 3,503
1,122
Options —
—
—
—
—
—
Futures contracts 5,844
—
(8,792 ) —
—
(2,948 )
Foreign currency forwards 103
—
(62 ) —
—
41
Foreign currency swaps 1,409
—
(1,852 ) —
61
(382 )
Total return swaps 2
—
(11 ) —
308
299
TBAs 3,579
—
447
—
—
4,026
Total $ (14,242 ) $ —
$ 26,054
$ (2,659 ) $ (3,032 ) $ 6,121


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Three months ended September 30, 2022
Interest rate swaps	$	(3,371)	$	3,423	$	—	$	4,790	$	298	$	5,140
Interest rate swaptions	(161)		—		—		—		—		(161)
Interest-Only Strips— accounted for as derivatives	—		—		(5)		(54)		16		(43)





Credit default swaps	(273)		—		—		283		—		10
TBAs	1,319		—		—		(1,383)		—		(64)
Total	$	(2,486)	$	3,423	$	(5)	$	3,636	$	314	$	4,882


Three months ended September 30, 2021
Interest rate swaps	$	—	$	485	$	—	$	(71)	$	96	$	510

Interest-Only Strips— accounted for as derivatives	—		—		(59)		(90)		82		(67)




Credit default swap	16		—		—		56		—		72

Total	$	16	$	485	$	(59)	$	(105)	$	178	$	515


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Nine months ended September 30, 2022
Interest rate swaps	$	(3,371)	$	14,744	$	—	$	3,670	$	(255)	$	14,788
Interest rate swaptions	(161)		—		—		—		—		(161)
Interest-Only Strips— accounted for as derivatives	—		—		(120)		(270)		160		(230)





Credit default swaps	(242)		—		—		393		—		151
TBAs	2,051		—		—		—		—		2,051
Total	$	(1,723)	$	14,744	$	(120)	$	3,793	$	(95)	$	16,599


Nine months ended September 30, 2021
Interest rate swaps	$	—	$	520	$	—	$	(25)	$	172	$	667

Interest-Only Strips— accounted for as derivatives	—		—		(232)		(124)		305		(51)




Credit default swap	48		—		—		52		—		100

Total	$	48	$	520	$	(232)	$	(97)	$	477	$	716

Realized Gain (Loss), net
Description Other Settlements / Expirations Variation Margin Settlement Mark-to-Market Return (Recovery) of Basis
Contractual interest income (expense), net⁽¹⁾
Total
Nine months ended September 30, 2017
Interest rate swaps $ (150,593 ) $ (7,966 ) $ 156,102
$ 378
$ (12,662 ) $ (14,741 )
Interest rate swaptions (115 ) —
—
—
—
(115 )
Interest-Only Strips— accounted for as derivatives 526
—
(783 ) (5,055 ) 6,229
917
Options (892 ) —
(134 ) —
—
(1,026 )
Futures contracts (9,230 ) —
2,416
—
—
(6,814 )
Foreign currency forwards 25
—
43
—
—
68
Total return swaps (552 ) —
1,673
—
469
1,590
TBAs 3,148
—
938
—
—
4,086
Total $ (157,683 ) $ (7,966 ) $ 160,255
$ (4,677 ) $ (5,964 ) $ (16,035 )

Nine months ended September 30, 2016
Interest rate swaps $ (28,784 ) $ —
$ (35,393 ) $ 502
$ (22,409 ) $ (86,084 )
Interest rate swaptions (1,035 ) —
1,631
—
—
596
Interest-Only Strips— accounted for as derivatives (155 ) —
(4,480 ) (8,930 ) 11,113
(2,452 )
Options 4,756
—
—
—
—
4,756
Futures contracts 19,253
—
704
—
—
19,957
Foreign currency forwards (90 ) —
8
—
—
(82 )
Foreign currency swaps 5,351
—
(5,883 ) —
268
(264 )
Total return swaps 17
—
(2,171 ) —
836
(1,318 )
TBAs 12,166
—
(489 ) —
—
11,677
Total $ 11,479
$ —
$ (46,073 ) $ (8,428 ) $ (10,192 ) $ (53,214 )


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

At September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, the Company had cash pledged as collateral for derivatives of approximately ~~$64.0~~$3.1 million and ~~approximately $206.6~~$1.4 million, respectively, which is reported in "Due from counterparties" in the Consolidated Balance Sheets. Effective in January 2017, variation margin of CME cleared derivatives are treated as settlements of the derivative contract as opposed to cash collateral. The September 30, 2017 cash collateral balance of $64.0 million represents upfront cash collateral upon the Company entering into the derivative transaction and cash collateral for derivatives not cleared through the CME. As a result of the change in the CME rules, the $157.9 million of previously posted cash collateral is now recorded as a reduction in the derivative liability. The Company also held cash collateral against derivatives of $0 and $470 thousand as collateral against derivatives at September 30, 2017 and December 31, 2016, respectively, which is reported in "Due to counterparties" in the Consolidated Balance Sheets.

Interest rate swaps ~~and interest rate swaptions~~

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The Company ~~enters into~~uses interest rate swaps ~~and interest rate swaptions~~ to mitigate its exposure to higher short-term interest rates in connection with its repurchase agreements. Interest rate swaps generally involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. Notwithstanding the foregoing, in order to manage its hedge position with regard to its liabilities, the Company on occasion will enter into interest rate swaps which involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the interest rate swap without

exchange of the underlying notional amount. The Company also enters into forward starting swaps ~~and interest rate swaptions~~ to help mitigate the effects of changes in interest rates on a portion of its borrowings under repurchase agreements. ~~Interest rate swaptions provide the~~The Company ~~the option to enter~~generally enters into anMAC (Market Agreed Coupon) interest rate ~~swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. On occasion the Company may enter into a MAC interest rate swap~~swaps in which it may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, these interest rate swaps are also subject to margin ~~requirements as previously described.~~requirements.

The Company has not elected to account for its interest rate swaps as “hedges” under GAAP, accordingly the change in fair value of the interest rate swaps not designated in hedging relationships are recorded together with periodic net interest settlement amounts in "Gain ~~(loss)~~ on derivatives instruments, net" in the Consolidated Statements of Operations.

~~Interest Rate Swaps~~

The following tables ~~summarize~~provide additional information on the ~~average fixed pay rate, average floating receive rate and average maturity for the Company’s~~Company's fixed-pay interest rate swaps as of September 30, ~~2017~~2022 and December 31, ~~2016~~2021 (dollars in thousands):


	September 30, 2022
Fixed Pay Interest Rate Swap Remaining Term	Notional Amount		Average Fixed Pay Rate		Average Variable Receive Rate		Average Maturity (Years)
Greater than 1 year and less than 3 years	$	60,000	1.4	%	1.3	%	1.5
Greater than 3 years and less than 5 years	70,000		1.4	%	1.1	%	4.3
Greater than 5 years	22,000		1.2	%	3.0	%	9.0
Total	$	152,000	1.4	%	1.4	%	3.9

September 30, 2017
Remaining Interest Rate Swap Term Notional Amount Average Fixed Pay Rate Average Floating Receive Rate Average Maturity (Years) Forward Starting
1 year or less $ 105,900
0.8 % 1.3 % 0.1 — %
Greater than 1 year and less than 3 years 600,000
1.6 % 1.3 % 2.1 — %
Greater than 3 years and less than 5 years 690,000
2.0 % 1.3 % 4.6 — %
Greater than 5 years 1,682,300
2.5 % 0.1 % 10.7 95.3 %
Total $ 3,078,200
2.2 % 0.6 % 7.3 52.1 %


	December 31, 2021
Fixed Pay Interest Rate Swap Remaining Term	Notional Amount		Average Fixed Pay Rate		Average Variable Receive Rate		Average Maturity (Years)


Greater than 5 years	$	22,000	1.2	%	0.1	%	9.8
Total	$	22,000	1.2	%	0.1	%	9.8

December 31, 2016
Remaining Interest Rate Swap Term Notional Amount Average Fixed Pay Rate Average Floating Receive Rate Average Maturity (Years) Forward Starting
1 year or less $ 105,900
0.8 % 0.8 % 0.8 — %
Greater than 1 year and less than 3 years 993,000
1.2 % 0.9 % 1.4 88.1 %
Greater than 3 years and less than 5 years 1,861,700
1.9 % 0.9 % 3.9 36.5 %
Greater than 5 years 1,701,600
3.1 % 0.9 % 10.5 6.5 %
Total $ 4,662,200
2.1 % 0.9 % 5.7 35.7 %

As of September 30, 2017 and December 31, 2016, the Company has entered into fixed-pay forward starting interest rate swaps of approximately $1.6 billion and $1.7 billion, respectively, which have weighted average forward starting dates of 7.0 months and 4.5 months, respectively.

There were no variable pay rate interest rate swaps as of September 30, 2017. The following table summarizes the average variable pay rate, average fixed receive rate and average maturity for the Company’s interest rate swaps as of December 31, 2016 (excludes interest rate swaptions) (dollars in thousands):

December 31, 2016
Remaining Interest Rate swap Term Notional Amount Average Variable Pay Rate Average Fixed Receive Rate Average Maturity (Years) Forward Starting
Greater than 3 years and less than 5 years $ 1,811,400
0.9 % 1.4 % 3.7 — %
Greater than 5 years 871,000
0.9 % 2.2 % 12.3 — %
Total $ 2,682,400
0.9 % 1.7 % 6.5 — %

The Company’s agreements with certain of its bilateral interest rate swap counterparties may be terminated at the option of the counterparty, and settled at fair value, if the Company does not maintain certain equity and leverage metrics. The most restrictive of which contain provisions which become more restrictive based upon portfolio composition. As of September 30, 2017, the Company was in compliance with the terms of such financial tests.

~~Options~~

The Company may enter into options on U.S. Treasuries. As of September 30, 2017, the Company had long position options on U.S. Treasuries with a notional amount of $400.0 million and a fair value in an asset position of $375 thousand and short position options on U.S. Treasuries with a notional amount of $400.0 million and a fair value in a liability position of $128 thousand. As of December 31, 2016, the Company had no option contracts on U.S. Treasuries.

~~Futures Contracts~~

The Company may enter into Eurodollar, Volatility Index, and U.S. Treasury futures. As of September 30, 2017, the Company had no open contracts in U.S. Treasuries futures. As of December 31, 2016, the Company had entered into contracts to buy or long positions for U.S. Treasuries with a notional amount of $56.9 million, a fair value in an asset position of $71 thousand and an expiration date of March 2017. In addition, as of December 31, 2016, the Company had sale contracts or short positions for U.S. Treasuries with a notional amount of $176.3 million, a fair value in an liability position of $2.5 million and an expiration date of March 2017.

~~Currency Swaps and Forwards~~

The Company has invested in and, in the future, may invest in additional securities which are denominated in a currency or currencies other than U.S. dollars. Similarly, it has and may in the future, finance such assets in a currency or currencies other than U.S. dollars. In order to mitigate the impact to the Company, the Company may enter into derivative financial instruments, including foreign currency swaps and foreign currency forwards, to manage fluctuations in the valuation between U.S. dollars and such foreign currencies. Foreign currency swaps involve the payment of a foreign currency at fixed interest rate on a fixed notional amount and the receipt of U.S. dollars at a fixed interest rate on a fixed notional amount. Foreign currency forwards provide for the payment of a fixed amount of a foreign currency in exchange for a fixed amount of U.S. dollars at a date certain in the future. The carrying value of foreign currency swaps and forwards is included in "Derivative assets, at fair value" and "Derivative liability, at fair value" in the Consolidated Balance Sheets with changes in valuation included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.

~~The following is a summary of the Company’s foreign currency forwards at September 30, 2017 and December 31, 2016 (dollars and euros in thousands):~~

September 30, 2017
Derivative Type Notional Amount
Notional (USD Equivalent)
Maturity Fair Value
Buy USD/Sell EUR currency forward € 580
$ 697
November 2017 $ 10
Currency forwards, assets € 580
$ 697
n/a $ 10
Buy EUR/Sell USD currency forward € 311
$ 370
November 2017 $ (1 )
Buy EUR/Sell USD currency forward € 269
$ 320
November 2017 $ (2 )
Currency forwards, liabilities € 580
$ 690
n/a $ (3 )
Total currency forwards € 1,160
$ 1,387
n/a $ 7

December 31, 2016
Derivative Type Notional Amount
Notional (USD Equivalent)
Maturity Fair Value
Buy USD/Sell EUR currency forward € 710
$ 784
January 2017 $ 34
Currency forwards, assets € 710
$ 784
n/a $ 34
Buy EUR/Sell USD currency forward € 673
$ 735
February 2017 $ (23 )
Buy EUR/Sell USD currency forward € 710
$ 797
January 2017 $ (46 )
Currency forwards, liabilities € 1,383
$ 1,532
n/a $ (69 )
Total currency forwards € 2,093
$ 2,316
n/a $ (35 )

To-Be-Announced ~~Securities~~securities

The Company purchased orand sold TBAs during the nine months ended September 30, ~~2017 and~~2022, as shown in the ~~year ended December 31, 2016. As of December 31, 2016, the Company had~~table below. There were no ~~contracts to purchase (“long position”) and sell (“short position”) TBAs on a forward basis. The following is a summary of the Company's long and short~~open TBA positions ~~reported~~ as of September 30, ~~2017, in "Derivative assets, at fair value"~~2022 and ~~"Derivative liability, at fair value" in the Consolidated Balance Sheets (dollars in thousands):~~December 31, 2021.

September 30, 2017
Notional
Amount Fair
Value
Sale contracts, asset $ (582,000 ) $ 1,774
TBA securities, asset (582,000 ) 1,774
Purchase contracts, liability 200,000
(836 )
TBA securities, liability 200,000
(836 )
TBA securities, net $ (382,000 ) $ 938

The following table presents additional information about the ~~Company’s~~Company's contracts to purchase and sell TBAs for the nine months ended September 30, ~~2017~~2022 (dollars in thousands):


	Notional Amount December 31, 2021		Additions		Settlement, Termination, Expiration or Exercise		Notional Amount September 30, 2022
Purchase of TBAs	$	—	$	600,000	$	(600,000)	$	—
Sale of TBAs	$	—	$	600,000	$	(600,000)	$	—

Notional Amount as of Additions Settlement, Termination, Expiration or Exercise Notional Amount as of
December 31, 2016 September 30, 2017
Purchase of TBAs $ —
$ 4,504,200
$ (4,304,200 ) $ 200,000
Sale of TBAs $ —
$ 4,886,200
$ (4,304,200 ) $ 582,000

Interest-Only ~~Strips~~

strips

The Company also invests in Interest-Only ~~Strips.~~strips. In determining the classification of its holdings of Interest-Only ~~Strips,~~strips, the Company evaluates the securities to determine if the nature of the cash flows has been altered from that of the underlying mortgage collateral. Generally, Interest-Only ~~Strips~~strips for which the security represents a strip off of a mortgage pass through security will be considered a hybrid instrument classified as aan MBS investment in the Consolidated Balance Sheets utilizing the fair value option. Alternatively, those Interest-Only ~~Strips,~~strips, for which the underlying mortgage collateral has been

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included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives at fair value with changes recognized in "Gain ~~(loss)~~ on derivative instruments, net" in the Consolidated Statements of Operations, along with any interest received. The carrying value of these Interest-Only Strips is included in ~~"Mortgage-backed securities and other~~"Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.

~~Total Return Swap~~Credit default swaps

~~In 2016,~~The Company currently has no outstanding credit default swaps. Under these instruments, the ~~Company entered into~~buyer makes a ~~total return swap and, in~~monthly premium payment over the ~~future, it may continue to enter into these types of credit derivatives. This swap transfers the total return~~term of the ~~referenced asset, including interim cash flows and capital appreciation or depreciation from~~contract in exchange for the seller making a payment for losses of the reference securities, upon the occurrence of a specified price to the Company. The total return swap has a referenced asset which is a security collateralized by residential loans with a notional amount of €51.0 million. The Company receives interest from the referenced asset equal to EURIBOR plus 2.75% and is required to pay the counterparty EURIBOR plus 0.50% through June 23, 2019, with the spread decreasing to 0.25% through December 2019, with the spread further decreasing to 0% through the maturity date of the referenced asset in December 2020. In February 2017, the Company terminated approximately half of its position, realizing a loss of $514 thousand. In August 2017, the Company terminated its remaining position, realizing a loss of $55 thousand.credit event.

Note 89 — Offsetting Assets and Liabilities

The following tables present information about certain assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset in the Company’s Consolidated Balance Sheets at September 30, ~~2017~~2022 and December 31, ~~2016~~2021 (dollars in thousands):


	September 30, 2022
	Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets				Net Amount
Description							Financial Instruments(1)		Cash Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS	$	668	$	—	$	668	$	(181)	$	—	$	487
Derivative asset, at fair value (2)(3)	262		—		262		—		—		262

Total assets	$	930	$	—	$	930	$	(181)	$	—	$	749

Derivative Liabilities and Repurchase Agreements

Repurchase Agreements(4)	$	218,941	$	—	$	218,941	$	(218,857)	$	(84)	$	—
Total liability	$	218,941	$	—	$	218,941	$	(218,857)	$	(84)	$	—

September 30, 2017

Gross
Amounts

Gross
Amounts
Offset in the Consolidated
Balance
Sheets

Net Amounts
of Assets
presented in
the Consolidated
Balance
Sheets

Gross Amounts Not Offset in
the Consolidated Balance
Sheets
Net Amount

Description

Financial
Instruments⁽¹⁾

Cash
Collateral ⁽¹⁾

Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS $ 17,235
$ —
$ 17,235
$ (12,437 ) $ —
$ 4,798
Derivative asset, at fair value⁽²⁾
5,011
—
5,011
(148 ) —
4,863
Total derivative assets $ 22,246
$ —
$ 22,246
$ (12,585 ) $ —
$ 9,661

Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value⁽²⁾⁽³⁾
$ 986
$ —
$ 986
$ (148 ) $ (830 ) $ 8
Repurchase Agreements⁽⁴⁾
3,336,256
—
3,336,256
(3,336,256 ) —
—
Total derivative liability $ 3,337,242
$ —
$ 3,337,242
$ (3,336,404 ) $ (830 ) $ 8


~~(1)~~			Amounts disclosed in the Financial Instruments column of the tables above represent securities, Whole-Loans and securitized commercial loan collateral pledged and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the Cash Collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.


~~(2)~~			Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps, interest rate swaptions, mortgage put options, currency forwards, futures contracts, foreign currency swaps, total return swaps and TBAs.


~~(3)~~	~~Cash collateral pledged against the Company’s derivative counterparties was approximately $64.0 million as of September 30, 2017.~~


~~(4)~~	~~The carry value of investments pledged against the Company’s repurchase agreements was approximately $3.7 billion as of September 30, 2017.~~

(1)Amounts disclosed in the financial instruments column of the tables above represent securities, whole loans, securitized commercial loan collateral pledged, and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the cash collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.

December 31, 2016

Gross
Amounts

Gross
Amounts
Offset in the Consolidated
Balance
Sheets

Net Amounts
of Assets
presented in
the Consolidated
Balance
Sheets

Gross Amounts Not Offset in
the Consolidated Balance
Sheets
Net Amount

Financial
Instruments⁽¹⁾

Cash
Collateral ⁽¹⁾

Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS $ 27,317
$ —
$ 27,317
$ (23,338 ) $ —
$ 3,979
Derivative asset, at fair value⁽²⁾
20,571
—
20,571
(20,500 ) —
71
Total derivative assets $ 47,888
$ —
$ 47,888
$ (43,838 ) $ —
$ 4,050

Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value⁽²⁾⁽³⁾
$ 182,158
$ —
$ 182,158
$ (20,500 ) $ (161,588 ) $ 70
Repurchase Agreements⁽⁴⁾
2,155,644
—
2,155,644
(2,155,644 ) —
—
Total derivative liability $ 2,337,802
$ —
$ 2,337,802
$ (2,176,144 ) $ (161,588 ) $ 70
(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps and credit default swaps.

(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $1.4 million as of December 31, 2021.

(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $787.1 million as of December 31, 2021.

~~(1)~~

Amounts disclosed in the Financial Instruments column of the tables above represent securities, Whole-Loans and securitized commercial loan collateral pledged and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the Cash Collateral Pledged column of the tables above represents amounts pledged as collateral against derivative transactions.


~~(2)~~	Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps, interest rate swaptions, mortgage put options, currency forwards, futures contracts, foreign currency swaps and TBAs.


~~(3)~~	~~Cash collateral pledged against the Company’s derivative counterparties was approximately $206.6 million as of December 31, 2016.~~


~~(4)~~	~~The fair value of investments pledged against the Company’s repurchase agreements was approximately $2.5 billion as of December 31, 2016.~~

Certain of the Company’s repurchase agreement and derivative transactions are governed by underlying agreements that generally provide for a right of set-off in the event of default or in the event of a bankruptcy of either party to the transaction.

Note 910 — Related Party Transactions

Management Agreement

In connection with the Company’s ~~IPO~~initial public offering ("IPO") in May 2012, the Company entered into a management agreement (the “Management Agreement”) with the Manager, which describes the services to be provided by the Manager and compensation for such services. The Manager is responsible for managing the Company’s operations, ~~including:~~ including;(i) performing all of its day-to-day ~~functions;~~functions, (ii) determining investment criteria in conjunction with the Board of ~~Directors;~~Directors, (iii) sourcing, analyzing and executing investments, asset sales and ~~financings;~~financings, (iv) performing asset management ~~duties;~~duties, and (v) performing financial and accounting management, subject to the direction and oversight of the Company’s Board of Directors. Pursuant to the terms of the Management Agreement, the Manager is paid a management fee equal to 1.50% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. For purposes of calculating the management fee, “stockholders’ equity” means the sum of the net proceeds from any issuances of the Company’s equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus retained earnings, calculated in accordance with GAAP, at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount paid for repurchases of the Company’s shares of common stock, excluding any unrealized gains or losses on our investments and derivatives and other non-cash items ~~(including OTTI charges prior to January 1, 2016)~~(excluding other than temporary impairment) that have impacted ~~stockholder’s~~stockholders' equity as reported in the Company’s consolidated financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval by a majority of the Company’s independent directors. However, if the Company’s stockholders’ equity for any given quarter is negative based on the calculation described above, the Manager will not be entitled to receive any management fee for that quarter.

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On August 3, 2016, the Company and the Manager entered into an amendment to the Management Agreement that amended the definition of "Equity" in the Management Agreement. Under the new definition, for all periods beginning on January 1, 2016, OTTI will reduce the Company's "Equity" for any completed fiscal quarter that OTTI was recognized, which in turn will reduce the Company's management fee from what would have been payable before the amendment.

In addition, the Company may be required to reimburse the Manager for certain expenses as described below, and shall reimburse the Manager for the compensation paid to the Company’s ~~CFO,~~chief financial officer, controller, and their staff. Expense reimbursements to the Manager are made in cash on a regular basis. The Company’s reimbursement obligation is not subject to any dollar limitation. Because the Manager’s personnel perform certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, the Manager may be paid or reimbursed for the documented cost of performing such tasks, provided that such costs and reimbursements are in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis.

The Management Agreement may be amended, supplemented or modified by agreement between the Company and the Manager. The Management Agreement expires on May 16, ~~2018.~~2023. It is automatically renewed for one-year terms on each May 15th unless previously terminated as described below. The Company’s independent directors review the Manager’s performance and any fees payable to the Manager annually and, the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds (2/3) of the Company’s independent directors, based upon: (i) the Manager’s unsatisfactory performance that is materially detrimental to the Company; or (ii) the Company’s determination that any fees payable to the Manager are not fair, subject to the Manager’s right to prevent such termination due to unfair fees by accepting a reduction of management fees agreed to by at least two-thirds (2/3) of the Company’s independent directors. The Company will provide the Manager 180 days prior

notice of any such termination. Unless terminated for cause, the Company will pay the Manager a termination fee equal to three times the average annual management fee earned by the Manager during the prior 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

The Company may also terminate the Management Agreement at any time, without the payment of any termination fee, with 30 days prior written notice from the Company’s Board of Directors for cause, which will be determined by at least two-thirds (2/3) of the Company’s independent directors, which is defined as: (i) the Manager’s continued material breach of any provision of the Management Agreement (including the Manager’s failure to comply with the Company’s investment guidelines); (ii) the Manager’s fraud, misappropriation of funds, or embezzlement against the Company; (iii) the Manager’s gross negligence in the performance of its duties under the Management Agreement; (iv) the occurrence of certain events with respect to the bankruptcy or insolvency of the Manager, including an order for relief in an involuntary bankruptcy case or the Manager authorizing or filing a voluntary bankruptcy petition; (v) the Manager is convicted (including a plea of nolo contendere) of a felony; or (vi) the dissolution of the Manager.

In December 2021, the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support the earnings potential of the Company and its transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.

For the three months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, the Company incurred approximately ~~$1.9 million~~$850 thousand and approximately ~~$2.6~~$1.5 million in management ~~fee,~~fees, respectively. For the nine months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, the Company incurred approximately ~~$6.2~~$3.0 million and approximately ~~$7.9~~$4.5 million in management fees, respectively.

In addition to the management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company as defined in the Management Agreement. For the three months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, the Company recorded expenses included in general and administrative expenses totaling approximately ~~$202~~$64 thousand and approximately ~~$186~~$201 thousand, respectively, related to reimbursable employee costs. For the nine months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, the Company recorded expenses included in general and administrative expenses totaling approximately ~~$1.1 million~~$511 thousand and approximately ~~$550 thousand,~~$1.5 million, respectively, related to reimbursable employee costs. Any such expenses incurred by the Manager and reimbursed by the Company, including the employee compensation expense, are typically included in the Company’s general and administrative ~~expenses~~expense in the Consolidated Statements of ~~Operations, or may be reflected in the Consolidated Balance Sheets and associated Consolidated Statements of Changes in Stockholders’ Equity, based on the nature of the item.~~Operations. At September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, approximately ~~$1.9~~$3.0 million and approximately ~~$2.5~~$1.5 million, respectively, for management fees incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets. In addition, at September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, approximately ~~$67~~$402 thousand and approximately ~~$83~~$457 thousand, respectively, of reimbursable costs incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets.

~~Securitized Debt Held by Affiliate~~

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At September 30, 2017 and December 31, 2016, the Company had securitized debt related to the consolidated VIEs, with a principal balance of $11.0 million and $11.0 million, respectively (and a fair value of $11.0 million and $10.7 million, respectively) which was held by an affiliate. The securitized debt of the VIEs can only be settled with the commercial loans that serve as collateral for the securitized debt of the VIE and is non-recourse to the Company.

Note 1011 — Share-Based Payments

~~In conjunction with~~The Company's ability to grant new equity-based awards under the ~~Company’s IPO and concurrent private placement,~~Company's existing equity incentive plans expired on May 9, 2022. At the ~~Company’s Board~~Annual Meeting of ~~Directors~~Stockholders held on June 24, 2022, the Company's stockholders approved the Western Asset Mortgage Capital Corporation ~~Equity~~2022 Omnibus Incentive Plan ~~(the “Equity Plan”)~~ and the Western Asset Mortgage Capital Corporation 2022 Manager ~~Equity~~Omnibus Incentive Plan ~~(the “Manager Equity Plan” and collectively~~(collectively, the ~~“Equity Incentive~~“2022 Plans”). The ~~Equity Incentive~~2022 Plans ~~include provisions~~provide for ~~grants~~the issuance of options (including non-statutory stock options and incentive stock options), stock appreciation rights (referred to as SARs), restricted stock, restricted stock units (referred to as RSUs), stock bonuses, other stock based awards and cash awards.

The aggregate maximum number of shares of our common stock and other equity-based awards to the Manager, its employees and employees of its affiliates and to the Company’s directors, officers and employees. The Company can issue up to 3.0% of the total number of issued and outstanding shares of its common stock (on a fully diluted basis) at the time of each award (other than any shares previously issued or subject to awards made pursuant to one of the Company’s Equity Incentive Plans) under these Equity Incentive Plans. At May 15, 2012, there were 308,335 shares of common stock initially reservedavailable for ~~issuance~~future issuances under the ~~Equity Incentive Plans. Upon~~2022 Plans is 1,000,000 shares, which was reduced to 100,000 shares following the completion of the ~~follow~~reverse stock split. The Manager and the officers, employees, non-employee directors, independent contractors, and consultants of the Company or any affiliate of the Company, including any individuals who are employees of the Manager or one of the Manager’s affiliates, are eligible to participate in the 2022 Plans, provided that they have been selected by the Plan Administrator.

On June 30, 2022, the Company granted 200,000 restricted stock units, or 20,000 restricted stock units on ~~offerings, the number of shares of common~~a post reverse stock ~~available for issuance~~split basis under the ~~Equity~~Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive ~~Plans increased~~Plan to ~~1,237,711. Approximately 724,961~~the Company’s Chief Financial Officer. These restricted stock units will vest in equal installments on the first and second anniversary of ~~shares have been issued under~~ the ~~Equity Plans with 512,750 shares available for issuance, as of September 30, 2017.~~grant date.

~~Under the Equity Plan, the Company made the following grants during the nine months ended September 30, 2017 and the year ended December 31, 2016:~~

On June ~~1, 2017,~~24, 2022, the Company granted a total of ~~15,536 (3,884 each)~~217,040 restricted stock units (54,260 per each independent director) or 21,704 shares (5,425 per each independent director) on a post reverse stock split basis, to each of the Company's four independent directors. These restricted stock units will vest in full on June 24, 2023, the first anniversary of the grant date, and will be settled in shares of the Company’s common stock ~~under~~upon each of the ~~Equity Plan~~independent director’s separation from service with the Company.

On June 25, 2021, the Company granted a total of 81,160 restricted stock units (20,290 each per each independent director), or 8,116 shares (2,029 per each independent director) on a post reverse stock split basis, to each of the Company’s four independent directors. These restricted ~~shares will vest~~stock units in this grant vested in full on June ~~1, 2018,~~25, 2022, the first anniversary of the grant ~~date. Each~~date, and will be settled in shares of the Company’s common stock upon each of the independent ~~directors has elected to defer~~director’s separation from service with the shares granted to him under the Company’s Director Deferred Fee Plan (the “Director Deferred Fee Plan”). The Director Deferred Fee Plan permits eligible members of the Company's board of directors to defer certain stock awards made under its director compensation programs. The Director Deferred Fee Plan allows directors to defer issuance of their stock awards and therefore defer payment of any tax liability until the deferral is terminated, pursuant to the election form executed each year by each eligible director.Company.

On June 2, 2016, the Company granted a total of 17,132 (4,283 each) of restricted common stock under the Equity Plan to the Company’s four independent directors. These restricted shares vested in full on June 2, 2017, the first anniversary of the grant date. Each of the independent directors has elected to defer the shares granted to him under the Director Deferred Fee Plan.

During the nine months ended September 30, ~~2017~~2022 and September 30, ~~2016, 152,630~~2021, 11,716 and ~~200,983~~13,782 restricted ~~common shares~~stock units vested, respectively, including shares whose issuance has been deferred under the Director Deferred Fee Plan. The Company recognized stock-based compensation expense of approximately $218 thousand and approximately $433 thousand for the three months ended September 30, 2017 and September 30, 2016, respectively. The Company recognized stock-based compensation expense of approximately ~~$795~~$100 thousand and approximately ~~$1.4 million~~$165 thousand for the three months ended September 30, 2022 and September 30, 2021, respectively. The Company recognized stock-based compensation expense of approximately $335 thousand and approximately $453 thousand for the nine months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, respectively. In addition, the Company had unamortized compensation expense of ~~$107~~$398 thousand and $211 thousand for equity awards ~~and approximately $291 thousand for liability awards and $67 thousand for equity awards and approximately $895 thousand for liability awards~~ at September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, respectively.

~~All~~Holders of restricted ~~common shares granted, other than those whose issuance has been deferred pursuant to the Director Deferred Fee Plan, possess all incidents of ownership, including the right~~stock units are entitled to receive dividends (or dividend equivalent payments) and distributions ~~currently, and~~that become payable on the ~~right to vote.~~restricted stock units during the restricted period. Dividend equivalent payments ~~otherwise~~ allocable to restricted ~~common shares under the Company's Deferred Compensation Plan~~stock units are deemed to purchase additional phantom shares of the ~~Company’s~~Company's common stock that are credited to each ~~participant’s~~participant's deferral account. The award agreements include restrictions whereby the restricted ~~shares~~stock units cannot be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of prior to the lapse of restrictions under the respective award agreement. The restrictions lapse on the unvested restricted ~~shares~~stock units awarded when vested, subject to the ~~grantee’s~~grantee's continuing to provide services to the Company as of the vesting date. Unvested restricted ~~shares~~stock units and rights to dividends thereon are forfeited upon termination of the grantee.

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The following is a summary of restricted ~~common stock~~equity awards vesting dates as of September 30, ~~2017~~2022 and December 31, ~~2016, including shares whose issuance has been deferred under the Director Deferred Fee Plan:~~2021:


	September 30, 2022	December 31, 2021
Vesting Date	Shares Vesting	Shares Vesting
March 2022	—	3,600
June 2022	—	8,116
June 2023	31,704	—
June 2024	10,000	—
Total	41,704	11,716

September 30, 2017 December 31, 2016
Vesting Date Shares Vesting Shares Vesting
March 2017 —
133,334
June 2017 —
18,196
March 2018 66,667
66,667
June 2018 16,000
—
82,667
218,197

The following table presents information with respect to shares issued under the Company’s ~~restricted stock~~Equity Incentive Plans for the nine months ended September 30, ~~2017, including~~2022 and September 30, 2021:


	September 30, 2022			September 30, 2021
	Restricted Stock Units	Weighted Average Grant Date Fair Value (1)		Restricted Stock Units	Weighted Average Grant Date Fair Value (1)
Outstanding at beginning of period	114,825	$	131.85	102,554	$	140.99
Granted(2)	45,954	12.75		14,057	52.08
Cancelled/forfeited	—	—		(2,546)	27.50
Outstanding at end of period	160,779	97.81		114,065	132.56
Unvested at end of period	41,704	$	12.52	11,716	$	56.19

(1)The grant date fair value of the awards is based on the closing market price of the Company’s common stock at the grant date.

(2)Includes 4,250 and 5,941 shares ~~whose issuance has been deferred~~attributed to dividends on restricted stock under the Director Deferred Fee ~~Plan:~~Plan for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Shares of
Restricted Stock

Weighted Average
Grant Date Fair
Value ⁽¹⁾
Outstanding at beginning of period 707,861
$ 17.17
Granted ⁽²⁾
17,100
10.31
Cancelled/forfeited —
—
Outstanding at end of period 724,961
$ 17.01
Unvested at end of period 82,667
$ 14.09


~~(1)~~	~~The grant date fair value of restricted stock awards is based on the closing market price of the Company’s common stock at the grant date.~~


~~(2)~~	~~Included 1,564 shares of restricted stock attributed to dividends on restricted stock under the Director Deferred Fee Plan.~~

Note 1112 — Stockholders’ Equity

~~Warrants~~Reverse stock split

On ~~May 9, 2012,~~June 30, 2022, the Company announced that its board of directors approved a one-for-ten reverse stock split of the Company's outstanding shares of common stock. The one-for-ten reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 shares, resulting in the number of common shares outstanding reducing from 60,380,105 to 6,038,010. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

Our stockholders' equity, in the aggregate, remains unchanged. Per share net income or loss increased because there are fewer shares of common stock outstanding. The common stock held in treasury was reduced in proportion to the Reverse Stock Split Ratio. There were no other accounting consequences, including changes to the amount of stock-based compensation expense to be recognized in any period, that arose as a result of the reverse stock split. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of the Company's common stock the business day prior to the Effective Date. The reverse stock split applied to all of the Company's outstanding shares of common stock and did not affect any stockholder’s ownership percentage of shares of the Company's common stock, except for immaterial changes resulting from the payment of cash for fractional shares.

At-The-Market Program

In March 2017, the Company entered into ~~agreements~~an equity distribution agreement with ~~certain institutional investors~~JMP Securities LLC, which was amended on June 5, 2020, under which the Company may offer and sell up to ~~sell 2,231,787 warrant units. Each warrant unit consists~~$100.0 million shares of ~~one share of the Company’s~~ common stock ~~and a warrant to purchase 0.5~~in an At-

Table of ~~a share of~~Contents

The-Market equity offering. During the ~~Company’s common stock, subject to adjustment. As of~~nine months ended September 30, ~~2017,~~2022, the ~~adjusted exercise price of~~Company did not sell any shares under the ~~warrants was $16.70 and there were a total of 1,232,916 warrant shares purchasable. The warrants expire on May 15, 2019.~~amended agreement.

Stock Repurchase Program

~~On February 25, 2016,~~In December 2021, the Company extended its stock repurchase program as authorized by its Board of ~~Directors of~~Directors. Under the extended program, the Company ~~reauthorized its~~is permitted to repurchase ~~program of~~ up to ~~2,050,000~~300,000 shares of its common stock, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split, through December 31, ~~2017.~~2023. The ~~original~~previous authorization expired on December 31, ~~2015. Purchases~~2021. Any purchases made pursuant to the program will be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Securities and Exchange ~~Commission.~~Commission Act of 1934, as amended. The authorization does not obligate the Company to acquire any particular amount of common shares, or any shares at all, and the program may be suspended or discontinued at the ~~Company’s~~Company's discretion without prior notice. ~~The timing, manner, price and amount of any repurchases will be determined by~~

During the nine months ended September 30, 2022, the Company ~~in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The Company has~~did not ~~repurchased~~repurchase any shares ~~of common~~under the stock ~~pursuant to the authorization as of September 30, 2017.~~repurchase program.

Dividends

The following table presents cash dividends declared and paid by the Company on its common ~~stock:~~stock, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

Declaration Date

Record Date

Payment Date

Amount per Share

Tax Characterization

2022

September 22, 2022

October 3, 2022

October 26, 2022

0.40

Not yet determined

June 21, 2022

July 1, 2022

July 25, 2022

0.40

Not yet determined

March 23, 2022

April 4, 2022

April 26, 2022

0.40

Not yet determined

2021

December 21, 2021

December 31, 2021

January 26, 2022

0.60

Not yet determined(1)

September 23, 2021

October 4, 2021

October 26, 2021

0.60

Return of capital

June 22, 2021

July 2, 2021

July 26, 2021

0.60

Return of capital

March 23, 2021

April 2, 2021

April 26, 2021

0.60

Return of capital

Declaration Date Record Date Payment Date Amount per Share Tax Characterization
2017

September 21, 2017 October 2, 2017 October 26, 2017 $ 0.31
Not yet determined
June 20, 2017 June 30, 2017 July 26, 2017 $ 0.31
Not yet determined
March 23, 2017 April 3, 2017 April 26, 2017 $ 0.31
Not yet determined

2016

December 22, 2016 January 3, 2017 January 26, 2017 $ 0.31
Ordinary income
September 22, 2016 October 4, 2016 October 25, 2016 $ 0.31
Ordinary income
June 23, 2016 July 5, 2016 July 26, 2016 $ 0.31
Ordinary income
March 24, 2016 April 4, 2016 April 26, 2016 $ 0.45
Ordinary income

(1)The cash distributions made on January 26, 2022, with a record date of December 31, 2021, are treated as received by stockholders on January 26, 2022 and taxable in calendar year 2022. The tax characterization of these distributions will be determined in January 2023.

Note 1213 — Net ~~Income~~Loss per Common Share

The table below presents basic and diluted net ~~income~~loss per share of common stock using the two-class method for the three and nine months ended September 30, ~~2017~~2022 and September 30, ~~2016~~2021 (dollars, other than shares and per share amounts, in thousands):

, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

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For the three months ended September 30, 2017 For the three months ended September 30, 2016 For the nine months ended September 30, 2017 For the nine months ended September 30, 2016
Numerator:

Net income attributable to common stockholders and participating securities for basic and diluted earnings per share $ 22,767
$ 32,282
$ 63,693
$ 13,281
Less:

Dividends and undistributed earnings allocated to participating securities 75
193
238
300
Net income allocable to common stockholders — basic and diluted $ 22,692
$ 32,089
$ 63,455
$ 12,981

Denominator:

Weighted average common shares outstanding for basic earnings per share 41,853,134
41,719,800
41,824,318
41,678,592
Weighted average common shares outstanding for diluted earnings per share 41,853,134
41,719,800
41,824,318
41,678,592
Basic earnings per common share $ 0.54
$ 0.77
$ 1.52
$ 0.31
Diluted earnings per common share $ 0.54
$ 0.77
$ 1.52
$ 0.31


	For the three months ended September 30, 2022		For the three months ended September 30, 2021		For the nine months ended September 30, 2022		For the nine months ended September 30, 2021
Numerator:
Net loss attributable to common stockholders and participating securities for basic and diluted earnings per share	$	(40,010)	$	(4,213)	$	(88,250)	$	(36,423)
Less:
Dividends and undistributed earnings allocated to participating securities	32		24		62		65
Net loss allocable to common stockholders — basic and diluted	$	(40,042)	$	(4,237)	$	(88,312)	$	(36,488)

Denominator:
Weighted average common shares outstanding for basic earnings per share	6,038,010		6,079,569		6,036,876		6,077,176
Weighted average common shares outstanding for diluted earnings per share	6,038,010		6,079,569		6,036,876		6,077,176
Basic loss per common share	$	(6.63)	$	(0.70)	$	(14.63)	$	(6.00)
Diluted loss per common share	$	(6.63)	$	(0.70)	$	(14.63)	$	(6.00)

For the three and nine months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, the Company excluded the effects of the ~~warrants~~convertible senior unsecured notes from the computation of diluted earnings per share since the average market value per share of the Company’s common stock was below the exercise price of the ~~warrants.~~convertible senior unsecured notes.

Note 1314 — Income Taxes

As a REIT, the Company is not subject to federal income tax to the extent that it makes qualifying distributions to its stockholders and satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income and stock ownership tests.

Based on the Company’s analysis of any potential uncertain income tax positions, the Company concluded that it does not have any uncertain tax positions that meet the recognition or measurement criteria as of September 30, ~~2017.~~2022. The Company files U.S. federal and state income tax returns. As of September 30, ~~2017,~~2022, U.S. federal tax ~~returns~~returns filed by the Company for ~~2015, 2014~~2020, 2019 and ~~2013~~2018 and state tax returns filed for ~~2015, 2014, 2013~~2020, 2019, 2018, 2017, and ~~2012~~2016 are open for examination pursuant to ~~relevant~~relevant statutes of limitation. In the event that the Company incurs income tax related interest and penalties, the Company’s policy is to classify them as a component of its provision for income taxes.

Income Tax Provision

Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries ("TRS"). Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. During the three months ended September 30, 2022 and September 30, 2021, the Company recorded a federal and state tax provision of $266 thousand and tax benefit of $218 thousand, respectively, which is recorded in "Income tax provision (benefit)" in the Consolidated Statements of Operations. During the nine months ended September 30, 2022 and September 30, 2021, the Company recorded a federal and state tax provision of $276 thousand and tax benefit of $19 thousand, respectively.

Deferred Tax Asset

As of September 30, ~~2017,~~2022 and December 31, 2021, the Company recorded a deferred tax asset of approximately ~~$8.5~~$16.2 million and $13.0 million, respectively, relating to capital loss carryforward and temporary differences as a result of the timing

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of income recognition of certain investments held in the TRS. The capital loss carryforwards ~~and temporary differences~~ may only be recognized to the extent of capital gains. There is uncertainty as to the TRS ability to recognize capital gains in the ~~future, however, the Company can utilize a carryback to 2015.~~future. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized and has recorded a full valuation ~~allowance of $8.5 million.~~allowance.

In addition, the REIT generated net operating losses ("~~NOL's"~~NOLs") during the year ended December 31, 2021 related to ordinary losses on its MBS portfolio and it generated NOLs for the years ended December 31, 2020 and December 31, 2017, related to its interest rate swap terminations, and for its California return a portion of the ~~NOL's~~NOLs is apportioned to the TRS. The Company ~~recording~~recorded a deferred ~~state~~ tax asset relating to the NOLs of ~~$10.4~~$18.6 million and $18.6 million in the REIT and ~~$899 thousand~~$2.0 million and $2.0 million in the ~~TRS.~~TRS as of September 30, 2022 and December 31, 2021, respectively. The TRS can carryback the ~~NOL's~~NOLs generated during the years ended December 31, 2020 and December 31, 2017 to each of the two preceding years ~~and receive~~to request a refund for taxes paid. As ~~a result,~~of September 30, 2022 and December 31, 2021, the Company has concluded it is more likely than not the deferred tax asset relating to the NOLs will not be realized, with the exception of the TRS carryback to 2015, and it has recorded a combined valuation allowance of ~~$10.9 million.~~

~~Income Tax Provision~~

Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more TRS. Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. During the three and nine months ended September 30, 2017, the Company recorded a federal and state tax benefit of approximately $1.2$20.6 million and ~~a federal and state tax provision of approximately $1.3~~$20.6 million,~~, respectively, which is recorded in "Income tax provision (benefit)" in the Consolidated Statements of Operations.~~ respectively.

Effective Tax Rate

The Company's effective tax rate differs from its combined federal and state income tax rate primarily due to its valuation allowance and the deduction of dividends distributions to be paid under Code Section 857(a).

Note 1415 — Contingencies

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any material contingencies at September 30, ~~2017.~~2022.

Note 1516 — Subsequent ~~Events~~Event

In2022 Convertible Senior Unsecured Notes Maturity

The Company's 2022 Notes outstanding on September 30, 2022 of $26.0 million were repaid in full upon their maturity on October ~~2017,~~3, 2022. The Company had an unrestricted cash balance of $28.6 million at October 3, 2022, after the retirement of the 2022 Notes.

CRE 3 Loan

As of September 30, 2022, the CRE 3 junior mezzanine loan with an outstanding principal balance of $90.0 million secured by an indirect pledge of equity in the mortgage borrower and owner of a retail facility was non-performing and past its maturity date of June 29, 2021. Interest payments on this loan were received from a reserve that was exhausted in May 2021. On October 25, 2022, the senior mezzanine lender notified the Company ~~issued $115 million aggregate principal amount~~that it had consummated a strict foreclosure under the Uniform Commercial Code of ~~6.75% convertible senior unsecured notes, including~~its equity interest in the ~~underwriter’s overallotment option to purchase an additional $15 million aggregate principal~~mortgage borrower and owner of the ~~notes. The notes pay interest semiannually~~property, which had the effect of foreclosing out the Company’s subordinate pledge of equity in ~~arrears.~~the retail facility owner that served as collateral for the junior mezzanine loan. As a result, the Company’s junior mezzanine loan remains outstanding but without the benefit of the primary collateral supporting the loan. The Company ~~received~~continues to benefit from certain corporate and personal guarantees with respect to its loan and has certain rights to excess proceeds generated by two other large retail and entertainment properties owned by the borrower in Canada and the American Midwest. As a result of ~~$111.6~~the foreclosure noted above, the Company has marked down the value of its investment in the CRE 3 junior mezzanine loan from $26.9 million ~~from~~at June 30, 2022 to $8.8 million at September 30, 2022. The Company is currently exploring all available measures to maximize its recovery with respect to this loan, but if none of these measures is successful, the ~~offerings, net~~Company could experience a total loss of ~~underwriting discounts and commissions,~~its investment, which would result in a $8.8 million reduction in the Company’s book value. There can be no assurance that the Company will be ~~amortized through interest expense over the life~~able to obtain any recovery with respect to such loan.

Table of the notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity.Contents

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

ASC 470-20 "Debt/Debt with Conversion and Other Options" requires that convertible debt instruments with cash settlement features, including partial cash settlement, account for the liability component and equity component (conversion feature) of the instrument separately. The initial value of the liability component will reflect the present value of the discounted cash flows using the nonconvertible debt borrowing rate at the time of issuance. The debt discount represents the difference between the proceeds received from the issuance and the initial carrying value of the liability component, which is accreted back to the notes principal amount through interest expense over the life of the notes.

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

FORWARD-LOOKING INFORMATION

The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the Securities and Exchange Commission (the “SEC”), press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such sections. Forward-looking statements are subject to substantial risks and ~~uncertainties,~~uncertainties, many of which are difficult to predict and are generally beyond the Company’s control.

These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company’s industry, interest rates, real estate values, the debt securities markets, the U.S. housing and the U.S. and foreign commercial real estate markets or the general economy or the market for residential and/or commercial mortgage loans; the Company’s business and investment strategy; the Company’s projected operating results; ~~actions~~changes in interest rates and ~~initiatives~~the market value of the ~~U.S. Government~~Company’s target assets; credit risks; servicing-related risks, including those associated with foreclosure and ~~changes to U.S. Government policies and the execution and impact of these actions, initiatives and policies;~~liquidation; the state of the U.S. and to a lesser extent, international economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’s ability to obtain and maintain financing arrangements, including under the ~~Company's~~Company’s repurchase agreements, a form of secured financing, and securitizations; the current potential return dynamics available in residential mortgage-backed securities (“RMBS”), and commercial mortgage-backed securities (“CMBS” and collectively with RMBS, “MBS”); the level of government involvement in the U.S. mortgage market; the anticipated default rates on ~~Non-Agency MBS (as defined herein), Residential~~CMBS and Commercial ~~Whole-Loans and Residential Bridge~~ Loans; the loss severity on Non-Agency MBS; ~~the return of the Non-Agency RMBS, Non-Agency CMBS and asset-backed securities (“ABS”) securitization markets;~~ the general volatility of the securities markets in which the Company participates; changes in the value of the Company’s assets; the Company’s expected portfolio of assets; the Company’s expected investment and underwriting process; interest rate mismatches between the Company’s target assets and any borrowings used to fund such ~~assets; changes in interest rates and the market value of the Company’s target~~ assets; changes in prepayment rates on the Company’s target assets; effects of hedging instruments on the Company’s target assets; rates of default or decreased recovery rates on the Company’s target assets; the degree to which the Company’s hedging strategies may or may not protect the Company from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company’s ability to maintain the Company’s qualification as a real estate investment trust for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”); the availability of opportunities to acquire Agency RMBS, Non-Agency RMBS, CMBS, ~~Residential~~residential and ~~Commercial Whole-Loans, Residential~~commercial whole loans, residential and ~~Commercial Bridge Loans~~commercial bridge loans and other mortgage assets; the availability of qualified personnel; estimates relating to the Company’s ability to make distributions to its stockholders in the future; ~~and~~ the Company’s understanding of its ~~competition.~~competition; outcome and impact of the strategic alternatives review process announced in August 2022; the uncertainty and economic impact of pandemics, epidemics or other public health emergencies, such as the ongoing effects of the COVID-19 pandemic; and the Manager's expectations regarding the ongoing COVID-19 recovery.

The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Some of these factors, are described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s ~~annual report~~Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2021, filed with the SEC on March ~~7, 2017.~~8, 2022. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

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

Our objective is to provide attractive risk adjusted returns to our stockholders primarily through an attractive dividend, which we intend to support with sustainable distributable earnings (which we previously referred to as core earnings), as well as the potential for higher returns through capital appreciation. Our investment strategy is based on ~~Western Asset Management Company’s (our “Manager”)~~our Manager's perspective of which mix of ~~portfolio~~our target assets it believes provides us with the best risk-reward opportunities at any given time. Our Manager will vary the allocation among various asset classes subject to maintaining our qualification as a real estate investment trust ("REIT") under the federal tax law and maintaining our exemption from the 1940 Act. These restrictions limit our ability to invest in non-real estate assets and/or assets which are not secured by real estate.

At September 30, 2017, our investment portfolio was comprised of approximately $1.1 billion of Agency RMBS (including approximately $27.3 million of Agency RMBS Interest-Only Strips), approximately $2.1 billion of Agency CMBS (including approximately $6.0 million of Agency CMBS Interest-Only Strips), approximately $64.4 million of Non-Agency RMBS, approximately $278.5 million of Non-Agency CMBS, approximately $122.7 million of other securities, approximately $191.4 million of Residential Whole-Loans and approximately $54.9 million of Residential Bridge Loans. In addition, we hold a controlling financial interest in a CMBS trust with a principal balance of approximately $14.0 million, which resulted in the consolidation of the assets and liabilities of the trust. As a result of the consolidation of the CMBS trust, our holdings included a $25.0 million securitized commercial loan.

We ~~generate income from the difference between the yields earned on our investments and our cost of borrowing including any hedging activity. We use~~also deploy leverage as part of our ~~business~~investment strategy ~~in order~~ to increase potential returns to our stockholders. We primarily finance our investments through short-term borrowings structured as repurchase agreements. We may also change our financing strategy and leverage without the consent of our stockholders.returns.

As of September 30, 2017, we had entered into master repurchase agreements or MRAs with 27 counterparties. As of September 30, 2017, we had approximately $3.3 billion of borrowings outstanding under our repurchase agreements collateralized by approximately $3.7 billion of our investments. We have approximately $1.5 billion of interest rate swaps to effectively fix the interest rate of our borrowings under our repurchase agreements; excluding the net forward starting interest rate swap of $1.6 billion. As of September 30, 2017, our aggregate debt-to-equity ratio was approximately 7.3 to 1. The debt-to-equity ratio is not a comprehensive statement of overall investment portfolio leverage which is affected by any leverage embedded in TBAs and derivative instruments.

We operate and have elected to be taxed as a REIT, commencing with our taxable year ended December 31, 2012. To comply with the REIT requirements, some of our investments were held in a taxable REIT subsidiary, or “TRS”. Acquiring non-qualifying investments through the TRS enables us to avoid jeopardizing our REIT status. These investments or activities are not held or conducted at the REIT level and as a result would not impact our ability to maintain our qualification as a REIT. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute, in accordance with the REIT requirements, all of our net taxable income to stockholders and otherwise maintain our intended qualification as a REIT.

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

~~Factors Impacting Our Operating Results~~

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

Our net interest income varies primarily as a result of changes in market interest rates and constant prepayment rates, or (“CPR”) on our Agency RMBS. The CPR measures the amount of unscheduled principal prepayments on RMBS as a percentage of the principal balance. Interest income on our credit sensitive investments can also be impacted by unanticipated prepayments, defaults, liquidations or delinquencies experienced by the underlying borrowers. These factors can vary according to type of investment and conditions in the financial markets none of which can be predicted with any certainty.

See the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016, which is available on the SEC's website at www.sec.gov for additional factors that may impact our operating results.

~~Recent Market Conditions~~

Our business is affected by general U.S. residential real estate fundamentals, domestic and foreign commercial real estate fundamentals and the overall U.S. and international economic environment. In particular, our strategy is influenced by the specific characteristics of these markets, including but not limited to prepayment rates and interest rate levels. We expect the results of our operations to be affected by various factors, many of which are beyond our control. Our results of operations will primarily depend on, among other things, the level of our net interest income, the market value of our investment portfolio and the supply of and demand for mortgage-related assets. Our net interest income, which includes the amortization of purchase premiums and accretion of discounts, will vary primarily as a result of changes in interest rates, defaults and loss severity rates, borrowing costs, and prepayment speeds on our MBS and other Target Assets (as defined herein) investments. Similarly, the overall value of our investment portfolio will be impacted by these factors as well as changes in the value of residential and commercial real estate and continuing regulatory changes.

Our Manager's global outlook for 2017, which late last year was in line with market expectations for both robust growth and improving inflation has proven more optimistic than fundamentals could support. The consensus transitioned from expectations for secular stagnation before the US election to global reflation afterward, to a more moderate tone today focusing on central bank monetary policy normalization. We are still hopeful that the extraordinarily accommodative stance from central banks will continue to moderate, but believe it will be a particularly slow process and even slower than we expected earlier this year.

Global debt burdens are still higher than they were before the financial crisis and continue to serve as an impediment to greater growth. While the US growth and economic outlook remains positive, we are more cautious than we were at the start of the year based on weaker-than-expected manufacturing and housing data, and stubbornly low inflation. We do not expect a dramatic or sustained rise in interest rates over the near term.

Our current expectations are for ongoing slow but steady economic growth and moderate inflation, both in the U.S. and abroad. During the quarter, the Federal Reserve kept the federal funds rate unchanged and maintained a slow and steady path of monitory policy normalization. Presidents Trump's nomination of Jerome Powell as the next Federal Reserve chair is predicted to bring little change to the central bank's incremental rate increases and monetary policy normalization. As a result of less policy uncertainty, as it relates to the Federal Reserve’s balance sheet reduction plan, the performance of Agency RMBS was strong during the quarter with spreads tightening. However, we still believe the Agency RMBS sector is at risk for spread widening longer term. Against this backdrop, the fundamentals in the U.S. housing market remain strong and spreads for most mortgages remained supported during the quarter despite three significant hurricanes We believe that a balanced portfolio consisting of Agency CMBS, Agency RMBS, Whole-Loans, Bridge Loans and other credit-sensitive investments continues to be appropriate. We continue to be constructive on the commercial real estate sector with a focus on single asset/single borrower transactions. Our Manager will continue to actively manage the portfolio and reallocate capital as it believes appropriate.

Our Investment Strategy

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

In December 2021, we announced that our investment strategy will focus on residential real estate-related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We ~~benefit~~believe this focus will allow us to address attractive market opportunities while maintaining alignment with our Manager’s core competencies. We are continuing to transition out of the commercial investments in our portfolio, though we may from ~~the breadth and depth of our Manager’s~~

~~overall investment philosophy, which focuses~~time to time make commercial investments on ~~a macroeconomic analysis as well as~~ an ~~in-depth analysis of individual assets and their relative value.~~opportunistic basis.

Our ~~target assets~~Target Assets

Residential Whole Loans — Residential Whole Loans are ~~Agency CMBS, Agency RMBS (including TBAs), Non-Agency CMBS, Non-Agency RMBS,~~mortgages secured by single family residences held directly by us or through consolidated trusts with us holding the beneficial interest in the trusts. Our Residential ~~and Commercial Whole-Loans, Residential and Commercial Bridge~~Whole Loans Risk Sharing Securities, Non U.S. CMBS and ABS. We do not have specific investment guidelines providing for precise minimum or maximum allocations to any sector other than those necessary for maintaining our qualification as a REIT and our exemption from the 1940 Act. These regulatory limits restrict our ability to shift away from investmentsare mainly adjustable rate mortgages that do not qualify ~~as real estate assets. Accordingly, subject~~for the Consumer Finance Protection Bureau’s (or CFPB) safe harbor provision for “qualified mortgages” ("Non-QM mortgages"). Our Manager’s review, relating to ~~these limits, allocations~~Non-QM mortgages, includes an analysis of the loan originator’s procedures and documentation for compliance with Ability to ~~various sectors~~Repay requirements. As discussed in Note 7 "Financing," to the financial statements contained in this Quarterly Report on Form 10-Q, we have and may continue to securitize Whole Loan interests, selling more senior interests in the pool of loans and retaining residual portions. The characteristics of our Residential Whole Loans may vary significantly with market constraints and our Manager’s investment views. Our Manager has not and does not expect to purchase securities on our behalf with a view to selling them shortly after purchase. However, in order to maximize returns and manage portfolio risk while remaining opportunistic, we may dispose of securities earlier than anticipated or hold securities longer than anticipated depending upon prevailing market conditions, credit performance, availability of leverage or other factors regarding a particular asset and/or our capital position.going forward.

As of September 30, 2017, our investment portfolio, excluding the securitized commercial loan from a consolidated VIE, was comprised of 53.5% of Agency CMBS, 28.4% of Agency RMBS, 7.1% of Non-Agency CMBS, 4.9% of Residential Whole-Loans, 3.1% of other securities, 1.6% of Non-Agency RMBS ~~and 1.4% of Residential Bridge Loans.~~

~~Our Target Assets~~

~~Agency CMBS.~~ — ~~Fixed and floating rate CMBS, for which the principal and interest payments~~RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity ~~but for which~~due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS collateral may also include reperforming loans, which are conventional mortgage loans ~~are~~that were current at the time of the securitization, but had been

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delinquent in the past. Non-Agency RMBS may be secured by real property other than single family residences. These may include, but are not limited to Fannie Mae DUS (Delegated Underwriting and Servicing) MBS, Freddie Mac Multifamily Mortgage Participation Certificates, Ginnie Mae project loan pools, and/fixed-rate mortgages, adjustable-rate mortgages or ~~CMOs structured from such collateral.~~hybrid adjustable-rate mortgages.

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

~~Non-Agency RMBS. — RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, with an emphasis on securities that when originally issued were rated~~ These investments can be in the ~~highest rating category by one~~form of pools, TBA and CMO (including interest only, principal only or more of the nationally recognized statistical rating organizations. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS may be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.other structures).

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

~~Non U.S. CMBS.~~ —CMBS which is not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity and which is secured by commercial real estate located outside of the U.S. Although our Manager believes that these investments can provide attractive risk-reward opportunities and offer additional asset diversification, investing in international real estate has

a number of additional risks, including but not limited to currency risk, political risk and the legal risk of investing in jurisdiction(s) with varying laws and regulations and potential tax implications. See Item 3: Quantitative and Qualitative Disclosures about Market Risk — Foreign Investment Risk and Currency Risk, herein.

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

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

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

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

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

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

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

~~Residential Whole-Loans.~~ — Residential Whole-Loans are mortgages secured by single family residences held directly by us or through structured Non-Agency RMBS programs crafted specifically for us and other clients of our Manager. To date our Residential Whole-Loans have been mostly adjustable rate loans that do not qualify for the Consumer Finance Protection Bureau’s (or CFPB) safe harbor provision for “qualifying mortgages”. However, our Manager’s review, relating to possible purchases of loans, includes an analysis of the loan originator’s procedures and documentation for compliance with Ability to Repay requirements. These loans are held in consolidated trusts with us holding the beneficial interest in the trusts. We may in

the future securitize the whole-loan interests, selling more senior interests in the pool of loans and retaining residual portions. The characteristics of our Residential Whole-Loans may vary going forward.

~~Residential Bridge Loans.~~ —Residential Bridge Loans are mortgages secured by non owner occupied single family and multi-family residences, typically short-term, held directly by us or through structured Non-Agency RMBS programs crafted specifically for us and other clients of our Manager. These loans are held in a consolidated trust with us holding the beneficial interest in the trust. We may in the future securitize these loan interests, selling more senior interests in the pool of loans and retaining residual portions.

~~Commercial Whole-Loans. -~~ Our Manager is also actively exploring opportunities to invest in small balance, $2.5 million to $25.0 million, Commercial Whole-Loans, including commercial mortgages and Small Business Administration or SBA loans secured primarily by real estate. While our Manager has experience in CMBS and we currently invest in Agency and Non-Agency CMBS, as well as, Non U.S. CMBS, investing in Whole-Loans backed or secured by commercial real estate assets involves complex investment, structural, regulatory and accounting issues. Some of these issues are unique to Commercial Whole-Loans as opposed to residential mortgages. Accordingly, there is no assurance of the prevalence suchOther investments ~~will have in our overall portfolio in the future.~~

~~Commercial Mezzanine Loans.~~ —~~Commercial~~mezzanine loans are generally structured to represent a senior position in the borrower’s equity in, and subordinate to a first mortgage loan, on a property. These loans are generally secured by pledges of ownership interests, in whole or in part, in entities that directly or indirectly own the real property. At times, mezzanine loans may be secured by additional collateral, including letters of credit, personal guarantees, or collateral unrelated to the property. Mezzanine loans may be structured to carry either fixed or floating interest rates as well as carry a right to participate in a percentage of gross revenues and a percentage of the increase in the fair market value of the property securing the loan. Mezzanine loans may also contain prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns to the lender. Mezzanine loans usually have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms.

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

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

~~Other investments.~~ — In addition to ~~MBS,~~Residential Whole Loans and Non-Agency RMBS, our ~~principal investment, and ABS from time to time,~~current target investments, we may also make ~~other~~ investments in Commercial Loans and Non-Agency CMBS and other securities on an opportunistic basis, which our Manager believes will assist us in meeting our investment objective and are consistent with our overall investment policies. These investments will normally be limited by the REIT requirements that 75% our assets be real estate assets and that 75% of our income be generated from real estate, thereby limiting our ability to invest in such assets.

Our Investment Portfolio

Our investment strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We are continuing to transition out of our commercial loan investments.

Our investment portfolio composition at September 30, 2022:

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Our Financing Strategy

~~The leverage that we employ is specific~~During 2020, the uncertainties created by the COVID-19 pandemic made it challenging to ~~each asset class and is determined based~~obtain financing arrangements on ~~several factors, including potential asset price volatility, margin requirements,~~favorable terms. In the ~~current cycle for interest rates, the shape~~latter part of ~~the yield curve, the outlook for interest rates and our ability to use~~2020 and the ~~effectiveness~~beginning of ~~interest rate hedges. We analyze both historical volatility and market-driven implied volatility~~2021, terms for ~~each asset class in order~~financing arrangements began to determine potential asset price volatility. Our leverage targets attempt to risk-adjust asset classes based on each asset class’s potential price volatility. The goal of our leverage strategy is to ensure that, at all times, our investment portfolio’s overall leverage ratio is appropriate for the level of risk inherent in the investment portfolio.

We primarily finance our investments through repurchase agreements for which we pledge our assets. Our repurchase agreements have maturities generally ranging from one to three months, but in some cases longer. The amount borrowed under our repurchase agreements is a specified percentage of the asset’s fair value, which is dependent on the collateral type. The portion of the pledged collateral held by the counterparty in excess of the amount borrowed under the repurchase agreement is the margin

requirement for that borrowing. Repurchase agreements involve the transfer of the pledged collateral to a counterparty at an agreed upon price in exchange for such counterparty’s simultaneous agreement to return the same security back to the borrower at a future date (i.e., the maturity of the borrowing). Under our repurchase agreements, we retain beneficial ownership of the pledged collateral, while the counterparty maintains custody of such collateral. At the maturity of a repurchase financing, unless the repurchase financing is renewed with the same counterparty, we are required to repay the loan, including any accrued interest, and concurrently reacquire custody of the pledged collateral or, with the consent of the counterparty, we may renew the repurchase financing at the then prevailing market interest rate and terms

Volatility in the mortgage markets may create additional stress on the overall liquidity of the Company due to the long-term nature of its assets and the short-term nature of its liabilities. In an instance of severe volatility, or where the additional stress on liquidity resulting from volatility is sustained over an extended period of time, the Company could be required to sell assets, possibly even at a loss, to generate sufficient liquidity to satisfy collateral and margin requirements which could have a material adverse effect on the Company’s financial position, results of operations and cash flows. Margin calls from counterparties are routinely experienced by us when the fair value of our existing pledged collateral declines as a result of principal amortization and prepayments or due to changes in market interest rates, spreads or other market conditions.improve significantly. As a result, we diversified our financing sources to provide an alternative to short-term repurchase agreements with daily margin requirements. We expect to continue to seek financing arrangements without daily margin requirements or with margin requirements that apply only after a significant reduction in the ~~counterparty will require that~~valuation of the assets financed, including but not limited to repurchase agreements, term financing, securitization and convertible senior unsecured notes, as the market permits. We believe the amount of leverage we ~~pledge additional securities and/or cash~~use is consistent with our intention of keeping total borrowings within a prudent range, as collateral to secure our borrowings under repurchase financing. In certain circumstances, we also may make margin calls on our counterparties when collateral values increase. As of September 30, 2017, we had $25.0 million of cash collateral helddetermined by our ~~repurchase agreement~~Manager, taking into account a variety of factors such as general economic, political and financial market conditions, the anticipated liquidity and price volatility of our assets, the availability and cost of financing the assets, the creditworthiness of financing counterparties and ~~we have satisfied all of our margin calls.~~

~~The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while~~ the yields earned on our existing portfolio of leveraged fixed-rate MBS and other fixed rate securities will remain static. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time, as well as the magnitude and durationhealth of the interest rate increase. We entered into interest rate swaps to mitigate the effects of increases in interest rates under a portion of our repurchase agreements. Refer to "Hedging Strategy" for details. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If either of these events happens, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidityU.S. residential and ~~results of operations.~~

commercial mortgage markets. We expect to maintain a ~~debt to equity~~debt-to-equity ratio of ~~three~~two to ~~ten~~four and a half times the amount of our ~~stockholders’~~stockholders' equity, ~~although there is no stated minimum or maximum leverage in~~depending on our investment ~~policies. To the extent the Agency MBS percentage of~~composition. We seek to enhance equity returns by effectively utilizing leverage and seeking to limit our ~~portfolio decreases, our overall leverage is likely~~exposure to ~~decrease. Depending on the different cost of borrowing funds at different maturities, we will vary the maturities of our borrowed funds to attempt to produce lower borrowing costs and reduce~~ interest rate ~~risk. Generally, we enter into collateralized borrowings only with institutions that are rated investment grade by at least one nationally-recognized statistical rating organization. We rely~~volatility and daily margin calls. The following table presents our debt-to-equity ratio on ~~financing~~September 30, 2022 and December 31, 2021:


(dollars in thousands)	September 30, 2022		December 31, 2021
Total debt(1)	$	328,103	$	736,357
Total equity	$	97,948	$	193,109
Debt-to-equity ratio	3.3		3.8

(1) Total debt excludes the securitized debt which is non-recourse to acquire, on a leveraged basis, assets in which we invest. If market conditions deteriorate, our counterparties may exit the repurchase market, and tighten lending standards, or increase the amount of equity capital required to obtain financing thereby making it more difficult and costly for us to obtain financing. In the future, we may be limited or restricted in the amount of leverage we may employ by the terms and provisions of any financing or other agreements. We may also change our financing strategy and leverage without the consent of our stockholders.us.

Our Hedging and Risk Management Strategy

~~Subject~~Our overall portfolio strategy is designed to ~~maintaining~~generate attractive returns to our ~~qualification as a REIT for U.S. federal income tax purposes,~~investors through various economic cycles. In connection with our risk management activities, we may ~~pursue various economic hedging strategies in an effort~~enter into a variety of derivative and non-derivative instruments. When purchased, our primary objective for acquiring these derivatives and non-derivative instruments is to ~~reduce~~

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mitigate our exposure to ~~adverse changes in interest rates and, to a more limited extent, foreign currency. There is no guarantee~~future events that ~~we will engage in any level of hedging activity or that the intended hedges will effectively reduce~~are outside our interest rate exposure. The U.S. federal income tax rules applicable to REITs may require us to implement certain of these techniques through a domestic TRS that is subject to federal, state and local corporate income taxation.

control. Our hedging activity varies in scope based on the level and volatility of interest rates, the type of assets held, including currency denomination and other changing market conditions. The majority of swaps we entered intoderivative instruments are designed to mitigate the effects of ~~increases in~~market risk and cash flow volatility associated with interest ~~rates under a portion~~rate risk, including prepayment risk. As part of our repurchase agreements. These swaps generally provide for fixed interest rates indexed off of the London interbank offered rate, or LIBOR, and effectively fix the floating interest rates. Notwithstanding the foregoing, in order to manage our hedge position with regard to our liabilities,hedging strategy, we may enter into interest rate swaps, which involve the receipt of fixed-rate amounts from counterparty in exchange for us making variable-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. We also enter into compression trades that enable us to

terminate substantial amounts of swap contracts before they expire by their terms, when there has been substantial two-way (pay and receive) swap activity. These “compression trades” reduce the number of interest rate swaps outstanding. In addition to simplifying, our balance sheet, by reducing the number of interest rate swaps outstanding, we are frequently able to reduce the amount of margin required to carry such positions.

~~We utilize~~including forward starting swaps, ~~and swaptions for several reasons including replacing expiring swaps, in anticipation of increasing our overall financing and reducing our exposure to future~~ interest rate ~~increases. Interest rate~~ swaptions, ~~provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term~~U.S. Treasury options, future contracts, TBAs, credit default swaps, forwards and ~~set pay and receive interest rates in the future.~~

We utilize foreign currency swaps, agreeing to pay a fixed amount of non U.S. currency such as the euro in exchange for a fixed amount of U.S. dollars as well as currency forwards. We entered into the currency swaps and forwards in order to hedge our exposure to foreign currency with respect to Non U.S. CMBS investments and the corresponding repurchase financings utilized to make such investments.

In order to enable us to maintain compliance with the REIT requirements, we have generally elected to treat the aforementioned derivative instruments as hedges for U.S. federal tax purposes. To date, however, we have not elected to apply hedge accounting for financial statement reporting purposes for our derivativeother similar instruments. As a result, we record the change in fair value of our derivatives and the associated interest and currency exchange in "Gain (loss) on derivatives, net" in the Statement of Operations. Additionally, we may enter intoThere can be no assurance that appropriate hedging ~~transactions in the form of puts and calls or other financial instruments that we deem appropriate.~~

~~Our interest rate hedging techniques are partly based on assumed levels of prepayments of our target assets. If prepayments are slower or faster than assumed, the life of the investment~~strategies will be ~~longer~~available or shorter, which would reduce the effectiveness of any of the interest rate hedging strategies we may use and may cause losses on such transactions. Hedging strategies, both interest rate and foreign currency, involve the use of derivative securities which are highly complex and may produce volatile returns.that if implemented they will be successful.

We may invest in equity index derivatives such as futures, options on futures and options on indices. These instruments are used normally to hedge interest rate movements as well as credit risks and other risks associated with our portfolio which may be impacted by volatility in the equity markets. Tax and other regulatory rules may limit our overall ability to use these instruments even through a TRS. Investing in these instruments introduces equity market risks into the management of the portfolio although as noted above our Manager uses them for the purpose of hedging our overall interest rate risk. These hedging strategies involving equity index products may not be successful, and may expose us to additional losses, if expected correlations between such risks and the equity markets do not occur.

Critical Accounting Policies

The consolidated financial statements include our accounts, those of our ~~consolidated subsidiary, our~~ wholly-owned ~~TRS~~subsidiaries and certain ~~variable interest entities (“VIEs”)~~VIEs in which we are the primary beneficiary. All intercompany amounts have been eliminated in consolidation. In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. ~~In accordance with SEC guidance, the following discussion addresses the accounting policies that we currently apply.~~ Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. ~~For a review of recent~~There have been no significant changes to our critical accounting ~~pronouncements that may impact our results of operations, see Note 2 of our “Notes to Consolidated Financial Statements (Unaudited)”.~~

~~Valuation of Financial Instruments~~

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

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

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

~~Mortgage-Backed Securities and Other Securities~~

Our mortgage-backed securities and other securities portfolio primarily consists of Agency RMBS, Non-Agency RMBS, Agency CMBS, Non-Agency CMBS, ABS and other real estate related assets, these investments are recorded in accordance with ASC 320, “Investments - Debt and Equity Securities”, ASC 325-40, “Beneficial Interests in Securitized Financial Assets” or ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”. We have chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for our mortgage-backed securities and other securities portfolio. Electing the fair value option allows us to record changes in fair value in the Consolidated Statements of Operations as a component of “Unrealized gain (loss), net”.

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

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

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

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

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

~~Residential Whole-Loans~~

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

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

~~Residential Bridge Loans~~

Investments in Residential Bridge Loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs". These loans are recorded at their principal amount outstanding, net of any premium or discount in our Consolidated Balance Sheets. All other costs incurred in connection with acquiring the Residential Bridge Loans or committing to purchase these loans are charged to expense as incurred.

On a quarterly basis, we evaluate the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the impairment is then measured based on the present value of expected future cash flows discounted at the loan’s effective rate or the fair value of the collateral, if the loan is collateral dependent. Upon measurement of impairment, we record an allowance to reduce the carrying value of the loan with a corresponding charge to net income. Significant judgments are required in determining impairment, including assumptions regarding the value of the loan, the value of the underlying collateral and other provisions such as guarantees.

~~Interest Income Recognition~~

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

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

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

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

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

~~Residential Whole-Loans and Residential Bridge Loans~~

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

~~Variable Interest Entities (“VIEs”)~~

~~VIEs are defined as entities that by design either lack sufficient equity~~Form 10-K for the entity to finance its activities without additional subordinated financial support or are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. We evaluate all of our interests in VIEs for consolidation. When the interests are determined to be variable interests, we assess whether we are deemed the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

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

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

In instances when a VIE is owned by both us and related parties, we consider whether there is a single party in the related party group that meets both the power and losses or benefits criteria on its own as though no related party relationship existed. If

one party within the related party group meets both these criteria, such reporting entity is the primary beneficiary of the VIE and no further analysis is needed. If no party within the related party group on its own meets both the power and losses or benefits criteria, but the related party group does as a whole meets these two criteria, the determination of primary beneficiary within the related party group is based upon an analysis of the facts and circumstances with the objective of determining which party is most closely associated with the VIE. Determining the primary beneficiary within the related party group requires significant judgement.

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

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

~~Derivatives and Hedging Activities~~

Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we utilize derivative financial instruments, including interest rate swaps, interest rate swaptions, mortgage put options, currency forwards, futures contracts, TBAs and Agency and Non-Agency Interest-Only Strips to hedge the interest rate and currency risk associated with our portfolio and related borrowings. Derivatives, subject to REIT requirements, are used for hedging purposes rather than speculation. We have also entered into a total return swap, which transfers the total return of the referenced security to the Company. We determine the fair value of our derivative positions and obtain quotations from third parties, including the Chicago Mercantile Exchange or CME, to facilitate the process of determining such fair values. If our hedging activities do not achieve the desired results, reported earnings may be adversely affected.

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

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

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

We evaluate the terms and conditions of our holdings of Agency and Non-Agency Interest-Only Strips, interest rate swaptions, currency forwards, futures contracts and TBAs to determine if these instruments have the characteristics of an investment or should be considered a derivative under GAAP. In determining the classification of our holdings of Interest-Only Strips, we evaluate the securities to determine if the nature of the cash flows has been altered from that of the underlying mortgage collateral. Interest-Only Strips, for which the underlying mortgage collateral has been included into a structured security that alters the cash

flows from the underlying mortgage collateral, are accounted for as derivatives. The carrying value of our Agency and Non-Agency Interest-Only Strips, accounted for as derivatives, is included in "Mortgage-backed securities and other securities, at fair value" in our Consolidated Balance Sheets. The carrying value of interest rate swaptions, currency forwards, futures contracts and TBAs is included in "Derivative assets, at fair value" or "Derivative liability, at fair value" in our Consolidated Balance Sheets. Interest earned or paid along with the change in fair value of these instruments accounted for as derivatives is recorded in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations".

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

~~Accounting Standards Applicable to Emerging Growth Companies~~

The JOBS Act contains provisions that relax certain requirements for “emerging growth companies” for which we qualify. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to: (i) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act; (ii) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act; (iii) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; or (iv) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise. We currently take advantage of some of these exemptions. Our qualification for remaining an emerging growth company under the five full fiscal years expires onyear ended December 31, 2017. However, we will no longer qualify for such exemption earlier than that date if our gross revenue for any year equals or exceeds $1.0 billion or more, we issue more than $1.0 billion in non-convertible debt during the three previous years, or if we are deemed to be a large accelerated filer. We have not elected to use the extended transition period for complying with any new or revised financial accounting standards.2021.

As noted above, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. Since we are not required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the consolidated financial statements of companies that comply with public company effective dates. If we were to elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

2022 Activity

~~Recent Accounting Pronouncements~~



~~Description~~	~~Effective Date~~	~~Effect on Financial Statements~~

In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers (Topic 606).” The guidance changes an entity’s recognition of revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new guidance requires improved disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued implementation guidance which clarifies principal versus agent considerations in reporting revenue gross versus net (ASU 2016-8). In April 2016, the FASB issued implementation guidance which clarifies the identification of performance obligations (ASU 2016-10). In May 2016, the FASB issued amendments that affect only the narrow aspects of Topic 606 (ASU2016-12).	~~First quarter 2018 and permits the use of either the full retrospective or modified retrospective method.~~	Our revenue is mainly derived from interest income on our investments and to a lesser extent gains on sales of investments, which are not impacted by this standard. Therefore, the adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-1, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The guidance improves certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.	~~First quarter 2018.~~	The standard does not change the guidance for classifying and measuring investments in debt securities and loans. Therefore, the adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard significantly changes how an entity will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through the income statement. The standard will replace the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available for sale debt securities, entities will be required to record an allowance rather than reduce the carrying amount, as is currently done under the other than temporary impairment model. It also simplifies the accounting model for purchased credit impaired debt securities and loans.	~~First quarter 2020.~~	~~We are evaluating the impact the standard may have on our consolidated financial statements when adopted.~~

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)." The guidance is intended to reduce diversity in practice in how certain transactions are classified on the statement of cash flows	~~First quarter 2018 and requires retrospective adoption.~~	~~We are evaluating the impact the standard may have on our Consolidated Statements of Cash Flows when adopted.~~

In November 2016, the FASB issued ASU 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB's Emerging Issues Task Force." The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents as well as disclose information about the nature of the restrictions on its cash and cash equivalents.	~~First quarter 2018 and requires retrospective adoption.~~	~~We currently do not have restricted cash. Therefore, the adoption of this standard is not expected to have a material impact on our Consolidated Statements of Cash Flows.~~

In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business." This ASU provides a more robust framework to use in determining when a set of assets and activities constitutes a business.	~~First quarter 2020. The guidance should be applied prospectively on or after the effective date.~~	~~We do not believe the adoption of this standard will have a material impact on our consolidated financial statements.~~

In May 2017, the FASB issued ASU 2017-09 "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting." The amendments in this update provide guidance about which changes to the terms or conditions of a shared-based payment award require an entity to apply modification accounting in Topic 718.	~~First quarter 2018.~~	~~We do not believe the adoption of this standard will have a material impact on our consolidated financial statements.~~

In July 2017, the FASB issued ASU 2017-11 "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivative and Hedges (Topic 815): Part I - Accounting for Certain Financial Instruments with Down Round Features and Part II - Replacement of the Indefinite Deferral for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Noncontrolling Interest with a Scope Exception". Part I of this update changes the classification analysis of certain financial instruments (such as warrants and convertible instruments) with down round features. Down round features are features of certain equity-linked financial instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. Entities that present earnings per share are required to recognize the effect of the down round feature when it is triggered. The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.	~~First quarter 2019.~~	~~We are evaluating the impact the standard will have on our consolidated financial statements.~~

~~Investments~~

~~Our Current Investment Portfolio~~

~~The following table presents certain information about our investment portfolio at September 30, 2017 (dollars in thousands)~~:

Principal
Balance Unamortized
Premium
(Discount) Discount
Designated as
Credit Reserve
and OTTI Amortized Cost Unrealized
Gain (Loss)
Carrying Value⁽⁴⁾
Net
Weighted
Average
Coupon
Agency RMBS

20-Year mortgage

Coupon Rate:

3.50 % $ 31,291
$ 1,481
$ —
$ 32,772
$ 10
$ 32,782
3.5 %
4.00 % 118,679
6,315
—
124,994
1,502
126,496
4.0 %
149,970
7,796
—
157,766
1,512
159,278
3.9 %
30-Year mortgage

Coupon Rate:

3.00 % 23,788
111
—
23,899
—
23,899
3.0 %
4.00 % 245,220
14,990
—
260,210
448
260,658
4.0 %
4.50 % 192,641
14,128
—
206,769
4,213
210,982
4.5 %
5.00 % 43,066
5,038
—
48,104
—
48,104
5.0 %
5.50 % 1,872
326
—
2,198
(125 ) 2,073
5.5 %
6.00 % 2,152
248
—
2,400
80
2,480
6.0 %
508,739
34,841
—
543,580
4,616
548,196
4.2 %

40-Year mortgage 374,844
11,062
—
385,906
1,189
387,095
3.5 %

Agency RMBS IOs and IIOs⁽¹⁾
N/A
N/A
N/A
15,416
621
16,037
3.0 %
Agency RMBS IOs and IIOs accounted for as derivatives ⁽¹⁾⁽²⁾
N/A
N/A
N/A
N/A
N/A
11,219
2.9 %
N/A
N/A
N/A
15,416
621
27,256
3.0 %

Agency CMBS 2,087,948
2,147
—
2,090,095
13,090
2,103,185
2.9 %
Agency CMBS Interest-Only Strips⁽¹⁾
N/A
N/A
N/A
—
30
30
3.2 %
Agency CMBS IOs and IIOs accounted for as derivatives ⁽¹⁾⁽²⁾
N/A
N/A
N/A
N/A
N/A
6,016
0.5 %
2,087,948
2,147
—
2,090,095
13,120
2,109,231
2.7 %
Subtotal Agency 3,121,501
55,846
—
3,192,763
21,058
3,231,056
3.1 %

Non-Agency RMBS 81,504
(802 ) (22,262 ) 58,440
5,922
64,362
3.1 %

Non-Agency CMBS 376,215
(60,850 ) (25,342 ) 290,023
(11,512 ) 278,511
4.8 %
Subtotal Non-Agency 457,719
(61,652 ) (47,604 ) 348,463
(5,590 ) 342,873
4.5 %

Other securities⁽³⁾
92,302
5,340
(5,225 ) 115,845
6,806
122,651
7.3 %
Subtotal MBS and Other securities 3,671,522
(466 ) (52,829 ) 3,657,071
22,274
3,696,580
3.3 %

Whole-Loans
Residential Whole-Loans 187,521
257
—
187,778
3,661
191,439
4.5 %
Residential Bridge Loans 54,716
196
—
54,912
N/A
54,912
10.0 %
Securitized commercial loan 24,941
—
—
24,941
11
24,952
9.0 %
Subtotal Whole-Loans 267,178
453
—
267,631
3,672
271,303
6.1 %
Total Portfolio $ 3,938,700
$ (13 ) $ (52,829 ) $ 3,924,702
$ 25,946
$ 3,967,883
3.5 %

(1) IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on interest-only class of securities. At September 30, 2017, the notional balance for Agency RMBS IOs and IIOs, Agency RMBS IOs and IIOs accounted for as derivatives, Agency CMBS IOs and IIOs and Agency CMBS IOs and IIOs accounted for as derivatives was $166.2 million, $131.8 million, $5.3 million and $193.8 million, respectively.

~~(2) Interest on these securities is reported as a component of "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.~~

~~(3) Other securities include residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $23.4 million.~~

~~(4) All investments are carried at their fair value with the exception of the residential bridge loans, which are carried at their amortized cost.~~

~~The following table summarizes our investment portfolio according to their estimated weighted average life as of September 30, 2017 (dollars in thousands):~~

Weighted Average Life
Carrying Value⁽¹⁾

Net Weighted
Average
Coupon
Less than or equal to three years $ 373,484
5.8 %
Greater than three years and less than or equal to five years 138,062
2.3 %
Greater than five years and less than or equal to 10 years 2,854,797
3.3 %
Greater than 10 years 601,540
3.8 %
Total $ 3,967,883
3.5 %


~~(1)~~	~~All investments are carried at their fair value with the exception of the residential bridge loans, which are carried at their amortized cost.~~

~~Our Agency Portfolio~~

~~The following table summarizes certain characteristics of our Agency portfolio by issuer and investment category as of September 30, 2017 (dollars in thousands):~~

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

Fannie Mae $ 824,774
$ 867,416
$ 873,021
3.9 %
Freddie Mac 208,779
219,836
221,548
3.9 %
Total Agency RMBS 20-Year, 30-Year and 40-Year 1,033,553
1,087,252
1,094,569
3.9 %
Agency RMBS IOs and IIOs ⁽²⁾

Fannie Mae N/A
6,605
7,095
3.5 %
Freddie Mac N/A
5,013
5,024
2.5 %
Ginnie Mae N/A
3,798
3,918
3.1 %
Total Agency RMBS IOs and IIOs ⁽²⁾
N/A
15,416
16,037
3.0 %
Agency RMBS IOs and IIOs accounted for as derivatives⁽²⁾

Fannie Mae N/A
N/A
8,488
2.6 %
Freddie Mac N/A
N/A
1,453
3.3 %
Ginnie Mae N/A
N/A
1,278
4.6 %
Total Agency RMBS IOs and IIOs accounted for as derivatives ⁽²⁾
N/A
N/A
11,219
2.9 %
Total: Agency RMBS 1,033,553
1,102,668
1,121,825
3.7 %

Agency CMBS

Fannie Mae 2,087,948
2,090,095
2,103,185
2.9 %
Agency CMBS IOs and IIOs⁽²⁾

Fannie Mae N/A
—
30
3.2 %
Agency CMBS IOs and IIOs accounted for as derivatives ⁽²⁾

Ginnie Mae N/A
N/A
6,016
0.5 %
Total: Agency CMBS 2,087,948
2,090,095
2,109,231
2.7 %
Total $ 3,121,501
$ 3,192,763
$ 3,231,056
3.1 %


~~(1)~~	~~Net weighted average coupon as of September 30, 2017 is presented net of servicing and other fees.~~


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

The following table details the constant prepayment rates for our Agency portfolio as of September 30, 2017, based on our Manager’s estimates which are based on third party models, as adjusted by our Manager, and are updated quarterly on a prospective basis:

Constant Prepayment Rates Low High
Agency RMBS

20-Year mortgage 8.54 % 14.02 %
30-Year mortgage 7.35 % 16.96 %
40-Year mortgage 8.52 % 9.33 %
Agency RMBS IOs and IIOs 6.97 % 21.38 %
Agency RMBS IOs and IIOs accounted for as derivatives 6.69 % 22.80 %
Agency CMBS and Agency CMBS IOs and IIOs⁽¹⁾
N/A
N/A
Agency CMBS IOs accounted for as derivatives⁽¹⁾
N/A
N/A


~~(1)~~	~~CMBS generally include prepayment restrictions; therefore, there are no Constant Prepayment Rates available.~~

~~Our Non-Agency Portfolio~~

The following table presents the fair value and weighted average purchase price for each of our Non-agency RMBS categories, including IOs accounted for as derivatives, together with certain of their respective underlying loan collateral attributes and current performance metrics as of September 30, 2017 (fair value dollars in thousands):

Weighted Average
Category Fair Value
Purchase
Price
Life (Years) Original LTV
Original
FICO

60+ Day
Delinquent

6-Month
CPR
Alt-A $ 56,044
$ 77.86
6.6
74.8 % 708
19.1 % 13.4 %
Subprime 8,318
58.57
8.2
77.4 % 598
19.0 % 6.3 %
Total $ 64,362
$ 75.37
6.8
75.2 % 694
19.1 % 12.4 %

~~The following table presents certain characteristics of our Non-Agency CMBS portfolio as of September 30, 2017 (dollars in thousands):~~

Principal Weighted Average
Type Vintage Balance Fair Value Life (Years) Original LTV
Conduit:

2006-2009 $ 164,097
$ 137,477
2.8
71.8 %
2010-2016 177,245
111,283
8.3
64.0 %
341,342
248,760
5.3
68.3 %
Single Asset:

2010-2016 34,873
29,751
6.0
60.4 %
Total $ 376,215
$ 278,511
5.3
67.5 %

~~The following table summarizes the credit ratings of our Non-agency RMBS, Non-agency CMBS and other securities, based on fair value, as of September 30, 2017:~~

Percentage
Credit Rating (1)
Non-Agency CMBS

Non-Agency RMBS

Other Securities

B 5.4 % — % — %
B- 3.5 % — % — %
Below B 35.2 % 77.9 % — %
Not Rated 55.9 % 22.1 % 100.0 %
Total 100.0 % 100.0 % 100.0 %


~~(1)~~	For securities for which one or two ratings are obtained, the lower rating is used. For securities for which three ratings are obtained, the middle rating is used. Ratings are obtained either from S&P or other rating agencies, stated in terms of the S&P equivalent.

The following table details information for our Non-Agency and other securities portfolio as of September 30, 2017, based on our Manager’s estimates which are based on third party models, as adjusted by our Manager, and are updated quarterly on a prospective basis:

Cumulative Default Cumulative Severity
Cumulative 5-Year
CRR ⁽¹⁾
Low High Low High Low High
Non-Agency RMBS 0.31 % 9.49 % 26.24 % 100.00 % 3.23 % 13.91 %
Other securities 0.66 % 1.92 % — % 100.00 % 8.42 % 10.93 %


~~(1)~~	~~Conditional Repayment Rate~~

The mortgages underlying our Non-Agency RMBS and Non-Agency CMBS are located in various states across the United States and other countries. The following table presents the five largest concentrations by location for the mortgages collateralizing our Non-Agency RMBS and Non-Agency CMBS as of September 30, 2017, based on fair value (dollars in thousands):

Non-Agency RMBS Non-Agency CMBS
Concentration Fair Value Concentration Fair Value
California 35.3 % $ 22,750
New York 12.6 % $ 35,178
Florida 10.6 % 6,822
California 8.0 % 22,415
New York 9.3 % 5,993
Florida 7.5 % 21,024
Virginia 9.2 % 5,898
Illinois 7.2 % 20,036
Maryland 4.4 % 2,863
Texas 5.5 % 15,245

~~Our Whole-Loan Portfolio~~

~~Residential Whole-Loans~~

Our Residential Whole-Loans are comprised of non-qualifying, mostly adjustable rate mortgages with low LTVs generally up to 80%. The following table presents certain information about our Residential Whole-Loans investment portfolio at September 30, 2017 (dollars in thousands):

Weighted Average
Current Coupon Rate Number of Loans
Principal
Balance
Original LTV
Original
FICO Score⁽¹⁾

Expected
Life (years)

Contractual
Maturity
(years)

Coupon
Rate
3.01 – 4.00% 94 $ 40,696
54.4 % 750
1.6 28.3 3.9 %
4.01 – 5.00% 246 92,170
55.4 % 725
1.4 26.2 4.4 %
5.01 – 6.00% 138 51,635
57.4 % 723
1.5 26.6 5.2 %
6.01 – 7.00% 5 3,020
71.2 % 738
1.3 20.4 6.3 %
Total 483 $ 187,521
56.0 % 731
1.4 26.6 4.5 %


~~(1)~~	The original FICO score is not available for 140 loans with a principal balance of approximately $56.6 million at September 30, 2017. We have excluded those loans from the weighted average computation.

~~The following table presents the U.S. states in which the collateral securing our Residential Whole-Loans at September 30, 2017, based on principal balance, is located (dollars in thousands):~~

State Concentration Principal Balance
California 70.0 % $ 131,403
New York 19.1 % 35,877
Washington 5.0 % 9,290
Massachusetts 4.9 % 9,175
Georgia 0.7 % 1,266
Other 0.3 % 510
Total 100.0 % $ 187,521

~~Residential Bridge Loans~~

Our Residential Bridge Loans are comprised of short-term fixed rate mortgages with low LTVs generally up to 80%. The following table presents certain information about our Residential Bridge Loans investment portfolio at September 30, 2017 (dollars in thousands):

Weighted Average
Current Coupon Rate Number of Loans
Principal
Balance
Unamortized Premium Carrying Value Original LTV
Original
FICO Score⁽¹⁾

Contractual
Maturity
(months)

Coupon
Rate
8.01 – 9.00% 37 $ 16,164
$ 78
$ 16,242
72.3 % 718
14.3 8.9 %
9.01 – 10.00% 75 27,011
110
27,121
73.8 % 669
7.7 9.6 %
10.01 – 11.00% 34 9,193
25
9,218
74.7 % 648
4.1 10.7 %
17.01 – 18.00% 10 2,348
(17 ) 2,331
72.0 % 630
7.7 18.0 %
Total 156 $ 54,716
$ 196
$ 54,912
73.4 % 679
9.1 10.0 %


~~(1)~~	The original FICO score is not available for 20 loans with a principal balance of approximately $6.2 million at September 30, 2017. We have excluded these loans from the weighted average computations.

~~The following table presents the U.S. states in which the collateral securing our Residential Bridge Loans at September 30, 2017, based on principal balance, is located (dollars in thousands):~~

State Concentration Principal Balance
California 49.8 % $ 27,311
Florida 27.4 % 14,988
Hawaii 7.7 % 4,225
Washington 4.9 % 2,664
Oregon 4.0 % 2,180
Other 6.2 % 3,348
Total 100.0 % $ 54,716

~~Non-performing Loans~~

As of September 30, 2017, there was one Residential Whole-Loan over 90-days past due with a current unpaid principal balance of $825 thousand and a fair value of $803 thousand and 6 Residential Bridge Loans over 90-days past due with an unpaid principal balance of approximately $1.6 million. These nonperforming Residential Whole Loans and Residential Bridge Loans represent approximately 0.4% and 2.9% of the total outstanding principal balance, respectively. No allowance and provision for credit losses was recorded for these bridge loans as of and for the three months ended September 30, 2017 since since we have elected the fair value option for our Residential Whole-Loans and we are expecting full recovery of the principal and interest is expected for the non-performing Bridge Loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.

Investment Activity

We continually evaluate potential investments and our investment selection is based on supply and demand of our target assets, costs of financing, and the expected future interest rate volatility costs of hedging. During the nine months ended September 30, 2022, we acquired $411.9 million of residential whole loans and $40.0 million of Non-Agency RMBS. We also, along with the other investors, sold a Commercial REO for total proceeds of $54.7 million.

The following table presents our investing activity for the nine months ended September 30, 2022 (dollars in thousands):


	Balance at				Loan Modification/Capitalized Interest		Principal Payments and Basis Recovery		Proceeds from Sales		Transfers to REO		Realized Gain/(Loss)		Unrealized Gain/(Loss)		Premium and discount amortization, net			Balance at
Investment Type	December 31, 2021		Purchases																September 30, 2022
Agency RMBS and Agency RMBS IOs	$	1,172	$	—	N/A		$	(124)	$	—	N/A		$	—	$	(328)	$	—		$	720
Non-Agency RMBS	27,769		39,952		N/A		(875)		(27,729)		N/A		(1,170)		(8,420)		159			29,686

Non-Agency CMBS	105,358		—		N/A		(5,705)		(10,152)		N/A		(43,934)		42,869		386			88,822
Other securities(1)	51,648		—		N/A		—		(4,406)		N/A		(478)		(8,677)		223			38,310
Total MBS and other securities	185,947		39,952		N/A		(6,704)		(42,287)		N/A		(45,582)		25,444		768			157,538
Residential whole loans	1,023,502		411,917		79		(193,363)		(11,735)		—		(33)		(125,482)		(5,260)			1,099,625
Residential bridge loans	5,428		—		—		(250)		—		—		—		(58)		—			5,120
Commercial loans	130,572		—		—		(20,593)		—		—		—		(19,876)		—			90,103
Securitized commercial loans	1,355,808		—		—		—		—		—		—		(203,828)		19,934			1,171,914
REO	43,607		—		N/A		—		(54,681)		—		12,198		—		N/A			1,124
Total Investments	$	2,744,864	$	451,869	$	79	$	(220,910)	$	(108,703)	$	—	$	(33,417)	$	(323,800)	$	15,442		$	2,525,424

(1) Other securities include $32.3 million of GSE CRTs and $6.0 million of ABS at September 30, 2022.

Portfolio Characteristics

Residential whole loans

The residential whole loans have low LTV's and are comprised of 2,990 Non-QM adjustable rate mortgages and five investor fixed rate mortgages. The following ~~tables present~~table presents certain information about our residential whole loans investment portfolio ~~activity~~at September 30, 2022 (dollars in thousands):

Table of Contents


				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)	Contractual Maturity (years)	Coupon Rate
2.01% – 3.00%	40	$	22,510	66.3	%	758	9.2	28.5	2.9	%
3.01% – 4.00%	431	224,994		65.7	%	758	7.3	28.5	3.7	%
4.01% – 5.00%	1,372	467,195		64.0	%	749	5.8	26.2	4.6	%
5.01% – 6.00%	902	366,708		65.8	%	742	5.1	27.1	5.4	%
6.01% – 7.00%	235	103,067		70.3	%	742	3.9	28.8	6.4	%
7.01% - 8.00%	15	5,852		75.1	%	731	3.2	29.4	7.4	%

Total	2,995	$	1,190,326	65.5	%	748	5.8	27.2	4.8	%

(1)The original FICO score is not available for 236 loans with a principal balance of approximately $77.7 million at September 30, 2022. We have excluded these loans from the weighted average computations.

Residential bridge loans

We are no longer allocating capital to residential bridge loans. The following table presents certain information about the remaining eight residential bridge loans left in the portfolio at September 30, 2022 (dollars in thousands):


				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate

7.01% – 9.00%	3	$	2,946	70.4	%	0.0	8.8	%
9.01% – 11.00%	2	2,144		78.1	%	0.0	10.4	%
11.01% – 13.00%	2	495		69.7	%	0.0	11.4	%





Total	7	$	5,585	73.3	%	0.0	9.7	%

(1) Non-performing loans that are past their maturity date are excluded from the calculation of the weighted average contractual maturity. The weighted average contractual maturity for these loans is zero.

Non-performing residential loans

The following table presents the aging of the residential whole loans and bridge loans as of September 30, 2022 (dollars in thousands):


	Residential Whole Loans					Bridge Loans
	No of Loans	Principal		Fair Value		No of Loans	Principal		Fair Value
Current	2,985	$	1,184,619	$	1,094,291	—	$	—	$	—
1-30 days	3	2,448		2,324		1	849		858
31-60 days	—	—		—		—	—		—
61-90 days	—	—		—		—	—		—
90+ days	7	3,259		3,010		6	4,736		4,262
Total	2,995	$	1,190,326	$	1,099,625	7	$	5,585	$	5,120

Residential whole loans in non-accrual status

As of September 30, 2022, there were seven Non-QM loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $3.3 million and a fair value of $3.0 million. These nonperforming loans represent approximately 0.3% of the total outstanding principal balance. No allowance or provision for credit losses was recorded as of and for the three and nine months ended September 30, ~~2017 and September 30, 2016 (dollars~~2022, since the valuation adjustment, if any, would be reflected in ~~thousands):~~

the

Table of Contents

Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
Purchases
Principal Payments
and Basis Recovery

Proceeds from
Sales
Purchases
Principal Payments
and Basis Recovery

Proceeds from
Sales
Agency RMBS and Agency RMBS IOs and IIOs $ 293,656
$ 32,911
$ (2,906 ) $ 355,762
$ 65,698
$ 42,427
Non-Agency RMBS —
1,447
—
1,247
12,602
15,209
Agency CMBS and Agency CMBS IOs and IIOs 817,443
1,496
—
—
1,590
8,216
Non-Agency CMBS —
10,279
10,597
—
8,067
9,194
Other securities —
211
10,419
27,346
159
14,485
Total MBS and other securities 1,111,099
46,344
18,110
384,355
88,116
89,531
Residential Whole-Loans
—
11,269
—
29,398
14,493
—
Residential Bridge Loans —
9,880
—
—
—
—
Securitized Commercial Loan —
59
—
—
—
—
Total Investments $ 1,111,099
$ 67,552
$ 18,110
$ 413,753
$ 102,609
$ 89,531

Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Purchases
Principal Payments
and Basis Recovery

Proceeds from
Sales
Purchases
Principal Payments
and Basis Recovery

Proceeds from
Sales
Agency RMBS and Agency RMBS IOs and IIOs $ 631,928
$ 111,441
$ 864,819
$ 643,766
$ 167,443
$ 366,677
Non-Agency RMBS —
9,514
246,006
12,043
46,816
120,649
Agency CMBS and Agency CMBS IOs and IIOs 1,728,833
4,113
—
—
4,105
18,637
Non-Agency CMBS 16,490
61,575
45,634
—
31,216
34,188
Other securities 81,001
530
33,365
728,182
1,924
764,711
Total MBS and other securities 2,458,252
187,173
1,189,824
1,383,991
251,504
1,304,862
Residential Whole-Loans
35,671
35,626
—
29,398
42,827
—
Residential Bridge Loans 73,990
18,849
—
—
—
—
Securitized Commercial Loan —
59
—
—
—
—
Total Investments $ 2,567,913
$ 241,707
$ 1,189,824
$ 1,413,389
$ 294,331
$ 1,304,862

~~The following table presents the vintage~~⁽¹⁾ ~~of our investment portfolio at September 30, 2017~~:

2001 2005 2006 2007 2011 2012 2013 2014 2015 2016 2017 Total
Agency RMBS

20-Year Mortgage — % — % — % — % — % 0.6 % 1.3 % 2.0 % 0.1 % — % — % 4.0 %
30-Year Mortgage — % — % — % — % — % 2.4 % 3.1 % 4.0 % — % 1.0 % 3.3 % 13.8 %
40-Year Mortgage — % — % — % — % — % — % — % — % — % 2.4 % 7.4 % 9.8 %
Agency RMBS IOs and IIOs — % — % — % — % — % 0.1 % — % 0.1 % — % — % 0.2 % 0.4 %
Agency RMBS IOs and IIOs, accounted for as derivatives — % — % 0.1 % — % — % 0.2 % — % — % — % — % — % 0.3 %
Agency CMBS — % — % — % — % — % — % 0.4 % — % — % 13.3 % 39.3 % 53.0 %
Agency CMBS IOs and IIOs, accounted for as derivatives — % — % — % — % — % — % 0.2 % — % — % — % — % 0.2 %
Non-Agency RMBS — % 0.7 % 0.6 % 0.3 % — % — % — % — % — % — % — % 1.6 %
Non-Agency CMBS — % — % 1.5 % 1.9 % 0.9 % 0.2 % 0.1 % 0.3 % 1.9 % 0.2 % — % 7.0 %
Other securities 0.2 % — % — % — % — % — % — % 0.4 % 0.4 % 0.9 % 1.2 % 3.1 %
Residential Whole-Loans — % — % — % — % 0.1 % 0.2 % 2.1 % 1.0 % 0.1 % 1.3 % — % 4.8 %
Residential Bridge Loans — % — % — % — % — % — % — % — % 0.1 % 0.7 % 0.6 % 1.4 %
Securitized commercial loan — % — % — % — % — % — % — % — % — % 0.6 % — % 0.6 %
Total 0.2 % 0.7 % 2.2 % 2.2 % 1.0 % 3.7 % 7.2 % 7.8 % 2.6 % 20.4 % 52.0 % 100 %

^{(1) Based on carrying amount of the investments.}

~~Financing Activity~~

We have entered into repurchase agreements to finance the vast majority of our investments. These agreements are secured by our investments and bear interest at rates that have historically moved in close relationship to LIBOR. The following table summarizes our repurchase agreements and thefair value of ~~the collateral pledged as~~these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.

As of September 30, ~~2017 and December 31, 2016 (dollars~~2022, there were six residential bridge loans carried at fair value in ~~thousands):~~

September 30, 2017 December 31, 2016
Collateral
Repurchase
Agreement
Borrowings
Outstanding

Value of
Collateral
Pledged

Repurchase
Agreement
Borrowings
Outstanding

Value of
Collateral
Pledged
Agency RMBS, at fair value $ 792,520
$ 823,403
$ 1,427,674
$ 1,465,384
Agency CMBS, at fair value 2,019,010
2,109,202
56,365
61,200
Non-Agency RMBS, at fair value 48,443
64,348
218,712
308,165
Non-Agency CMBS, at fair value 192,015
278,095
255,656
358,919
Whole-Loans, at fair value ⁽¹⁾⁽²⁾
163,560
205,412
161,181
205,702
Residential Bridge Loans 51,074
54,912
—
—
Other securities, at fair value 69,634
122,651
36,056
67,762
Borrowings under repurchase agreements $ 3,336,256
$ 3,658,023
$ 2,155,644
$ 2,467,132

~~(1) Whole-Loans consist~~non-accrual status with an unpaid principal balance of ~~Residential Whole-Loans~~approximately $4.7 million and a ~~securitized commercial loan.~~

~~(2) Repurchase borrowings~~fair value of $4.3 million. No allowance and ~~collateral pledged attributed to~~provision for credit losses was recorded for loans ~~owned through trust certificates. The trust certificates are eliminated upon consolidation.~~

~~The following tables present our repurchase agreement borrowing activity, by type~~carried at fair value as of ~~collateral pledged,~~and for the three and nine months ended September 30, ~~2017 and~~2022, since valuation adjustments, if any, would be reflected in the fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.

As of September 30, ~~2016~~2022, we had four real estate owned ("REO") properties with an aggregate carrying value of $1.1 million related to foreclosed bridge loans. The REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The REO properties are classified in "Other assets" in the Consolidated Balance Sheet.

Non-Agency RMBS

The following table presents the fair value and weighted average purchase price for each of our Non-Agency RMBS categories, including IOs accounted for as derivatives, together with certain of their respective underlying loan collateral attributes and current performance metrics as of September 30, 2022 (fair value dollars in thousands):


			Weighted Average
Category	Fair Value		Purchase Price		Life (Years)	Original LTV		Original FICO	60+ Day Delinquent		CPR
Prime	$	12,865	$	79.89	12.1	67.8	%	748	5.0	%	18.0	%
Alt-A	16,821		63.55		14.3	74.5	%	675	11.8	%	12.6	%

Total	$	29,686	$	70.63	13.3	71.6	%	707	8.8	%	15.0	%

Agency RMBS Portfolio

The following table summarizes our Agency portfolio by investment category as of September 30, 2022 (dollars in thousands):


	Principal Balance		Amortized Cost		Fair Value		Net Weighted Average Coupon







Agency RMBS IOs and IIOs (1)	N/A		$	56	$	52	—	%
Agency RMBS IOs and IIOs accounted for as derivatives (1)	N/A		N/A		668		0.7	%

Total	$	—	$	56	$	720	0.6	%

Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
Collateral Proceeds Repayments Proceeds Repayments
Agency RMBS $ 1,459,970
$ 1,697,890
$ 2,119,828
$ 1,882,784
Agency CMBS 3,101,186
2,308,184
45,213
54,746
Non-Agency RMBS 48,443
48,908
513,797
523,329
Non-Agency CMBS 287,827
311,653
412,562
431,121
Whole-Loans⁽¹⁾
496,528
505,330
494,263
482,095
Residential Bridge Loans 51,074
54,621
—
—
Other securities 145,262
129,054
97,747
96,599
Total $ 5,590,290
$ 5,055,640
$ 3,683,410
$ 3,470,674


~~(1)~~			~~Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.~~


~~(1)~~			~~Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.~~

(1) CRE 3 is in default and not eligible for extension.

(2) The CRE 4 loan was granted a 3 year extension through August 6, 2025, with a principal pay down of $16.2 million.

(3) CRE 5, 6, and 7 were each granted one-year extensions through November 6, 2023.

Non-performing commercial loans

All but the one loan discussed below remain current.

CRE 3 Loan

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mezzanine loan. As a result, the Company’s junior mezzanine loan remains outstanding but without the benefit of the primary collateral supporting the loan. The Company continues to benefit from certain corporate and personal guarantees with respect to its loan and has certain rights to excess proceeds generated by two other large retail and entertainment properties owned by the borrower in Canada and the American Midwest. As a result of the foreclosure, the Company has marked down the value of its investment in the CRE 3 junior mezzanine loan from $26.9 million at June 30, 2022 to $8.8 million at September 30, 2022. The Company is currently exploring all available measures to maximize its recovery with respect to this loan, but if none of these measures is successful, the Company could experience a total loss of its investment, which would result in an $8.8 million reduction in the Company’s book value. There can be no assurance that the Company will be able to obtain any recovery with respect to such loan.

The following table presents the aging of the Commercial Loans as of September 30, 2022 (dollars in thousands):


	Commercial Loans
	No of Loans	Principal		Fair Value
Current	5	$	81,567	$	81,326
1-30 days	—	—		—
31-60 days	—	—		—
61-90 days	—	—		—
90+ days	1	90,000		8,777
Total	6	$	171,567	$	90,103

Commercial loan investment payoffs

On September 16, 2022, CRE 8, which had an outstanding principal balance of $4.4 million collateralized by assisted living facilities, was paid off in full.

Commercial Real Estate Owned

In February 2022, we and the other investors sold the unencumbered hotel property for $55.9 million which was foreclosed on in the third quarter of 2021. We and the other investors fully recovered our aggregate initial investment of $42.0 million. We recognized a gain on sale of approximately $12.2 million.

Geographic Concentration


	Non-Agency RMBS					Non-Agency CMBS
	Concentration		Fair Value			Concentration		Fair Value
California	29.0	%	$	8,614	California	41.9	%	$	37,176
Florida	12.7	%	3,759		Nevada	22.1	%	19,651
New York	6.4	%	1,910		Bahamas	16.4	%	14,527
Texas	4.5	%	1,327		Texas	4.0	%	3,511
New Jersey	4.2	%	1,244		Pennsylvania	2.2	%	1,913

The following table presents the various states across the United States in which the collateral securing our residential whole loans and residential bridge loans at September 30, 2022, based on principal balance, is located (dollars in thousands):

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	Residential Whole Loans					Residential Bridge Loans
	State Concentration		Principal Balance			State Concentration		Principal Balance
California	66.6	%	$	793,123	New York	47.1	%	$	2,631
New York	9.4	%	112,329		California	31.4	%	1,754
Texas	4.8	%	56,856		Florida	20.1	%	1,125
Florida	4.1	%	48,959		New Jersey	1.4	%	75
Georgia	3.6	%	42,347		Total	100.0	%	$	5,585
Other	11.5	%	136,712
Total	100.0	%	$	1,190,326

Financing Activity

We will look to continue to expand and diversify our financing sources, especially those sources that provide an alternative to short-term repurchase agreements with daily margin requirements.

Repurchase Agreements

Our repurchase agreements bear interest at a contractually agreed-upon rate and have terms ranging from one month to 12 months. Our counterparties generally require collateral in excess of the loan amount, or haircuts. As of September 30, 2022, the contractual haircuts required under repurchase agreements on our investments were as follows:


	Minimum	Maximum
Short-Term Borrowings
Agency RMBS IOs	25%	25%
Non-Agency RMBS	35%	60%
Residential Whole Loans	25%	25%
Residential Bridge Loans	25%	25%
Commercial Loans	60%	60%
Other Securities	60%	60%

Long-Term Borrowings
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency RMBS	35%	45%
Non-Agency CMBS	40%	40%
Other Securities	35%	35%

Residential Whole Loan Facility
Residential Whole Loans(1)	10%	10%

Commercial Whole Loan Facility
Commercial Loans(2)	22%	32%

(1) The haircut is based on 10% of the outstanding principal amount of the Residential Whole Loans.

(2) Each Commercial Loan is financed separately under this facility and the haircuts are dependent on the type of collateral.

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Convertible Senior Unsecured Notes

During the quarter ended March 31, 2022, we repurchased $3.4 million aggregate principal amount of the 2022 Notes at an approximate 0.8% premium to par value, plus accrued and unpaid interest.

During the quarter ended June 30, 2022, we repurchased $7.2 million aggregate principal amount of the 2022 Notes at an approximate 0.6% premium to par value, plus accrued and unpaid interest.

During the quarter ended September 30, 2022, we repurchased $1.0 million aggregate principal amount of the 2022 Notes at par value, plus accrued and unpaid interest.

Securitized Debt

In February 2022, we completed a residential mortgage-backed securitization. The Arroyo Trust 2022-1 issued $398.9 million of mortgage-backed notes and we retained the subordinate non-offered securities in the securitization, which include the Class B, Class A-IO-S and Class XS certificates. These non-offered securities were eliminated in the consolidation. As of September 30, 2022, Residential Whole Loans, with an outstanding principal balance of approximately $399.6 million, serve as collateral for the Arroyo Trust 2022-1's securitized debt.

In July 2022, we completed a residential mortgage-backed securitization. The Arroyo Trust 2022-2 issued $351.9 million of mortgage-backed notes and we retained the subordinate non-offered securities in the securitization, which included the Class B-1, Class B-2, Class B-3, Class A-IO-S and Class XS certificates. These non-offered securities were eliminated in the consolidation. As of September 30, 2022, Residential Whole Loans, with an outstanding principal balance of approximately $390.9 million, serve as collateral for the Arroyo Trust 2022-2's securitized debt.

Repurchase Agreements

At September 30, ~~2017,~~2022, we had outstanding borrowings under five of our repurchase agreements. The following table summarizes certain characteristics of our repurchase agreements at September 30, 2022 (dollars in thousands):

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Securities Pledged	Repurchase Agreement Borrowings		Weighted Average Interest Rate on Borrowings Outstanding at end of period		Weighted Average Remaining Maturity (days)
Short-Term Borrowings:

Agency RMBS	$	317	3.15	%	32

Non-Agency RMBS(1)	54,228		6.17	%	88
Residential Whole Loans (2)	778		5.40	%	11
Residential Bridge Loans (2)	2,895		5.60	%	11
Commercial Loans (2)	5,630		6.18	%	11

Other Securities	1,966		5.75	%	17
Total short term borrowings	65,814		6.11	%	75
Long Term Borrowings:
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency CMBS (1)	55,155		2.28	%	214
Non-Agency RMBS	21,943		2.28	%	214
Other Securities	23,948		2.28	%	214
Subtotal	101,046		2.28	%	214
Residential Whole Loan Facility
Residential Whole Loans (2)	4,049		5.11	%	35
Commercial Whole Loan Facility
Commercial Loans	48,032		4.55	%	35
Total long term borrowings	153,127		3.07	%	153
Repurchase agreements borrowings	$	218,941	3.98	%	130
Less unamortized debt issuance costs	—		N/A		N/A
Repurchase agreement borrowings, net	$	218,941	3.98	%	130

(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(2)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.

At September 30, 2022, we had outstanding repurchase agreement borrowings with the following ~~counterparties totaling approximately $3.3 billion:~~counterparties:

(dollars in thousands)
Repurchase Agreement Counterparties
Amount Outstanding Percent of Total Amount Outstanding Company Investments Held as Collateral
Counterparty Rating⁽¹⁾
Citigroup Global Markets Inc. $ 942,748
28.2 % $ 982,927
A+
Jefferies & Company, Inc. 489,434
14.6 % 511,641
BBB-
RBC Capital Markets LLC 409,755
12.3 % 429,862
AA-
TD Securities (USA) LLC 303,870
9.1 % 318,128
AA-
Mizuho Securities USA Inc. 233,318
7.0 % 243,720
A
Credit Suisse AG, Cayman Islands Branch 161,698
4.8 % 200,428
A
Merrill Lynch Pierce Fenner & Smith Inc. 129,053
3.9 % 133,128
A+
KGS-Alpha Capital Markets, L.P. 119,489
3.6 % 125,189
Unrated
The Bank of Nova Scotia 117,041
3.5 % 117,944
A+
RBC (Barbados) Trading Bank Corporation 115,458
3.5 % 154,068
P-1
Credit Suisse Securities (USA) LLC 82,416
2.5 % 156,214
A
Nomura Securities International, Inc. 68,874
2.1 % 73,618

Unrated⁽²⁾
Deutsche Bank AG 50,515
1.5 % 68,769
A-
BNP Paribas Securities Corporation 43,366
1.3 % 45,343
A
Goldman Sachs Bank USA 25,842
0.8 % 35,020
A+
Morgan Stanley & Co. LLC 24,675
0.7 % 37,390
A+
Royal Bank of Canada 18,704
0.6 % 24,634
AA-
Total $ 3,336,256
100.0 % $ 3,658,023


(dollars in thousands) Repurchase Agreement Counterparties	Amount Outstanding		Percent of Total Amount Outstanding		Company Investments Held as Collateral		Counterparty Rating(1)
Credit Suisse AG, Cayman Islands Branch (2)	$	106,309	48.6	%	$	165,521	A
Citigroup Global Markets Inc.	101,046		46.2	%	152,099		A+
Nomura Securities International, Inc. (3)	9,303		4.2	%	20,857		Unrated (3)
Credit Suisse Securities (USA) LLC	1,966		0.9	%	6,001		A












All other counterparties (4)	317		0.1	%	233
Total	$	218,941	100.0	%	$	344,711

(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated at September 30, 2022 by S&P.

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


~~(1)~~	The counterparty ratings presented above are the long-term issuer credit ratings as rated at September 30, 2017 by S&P, except for RBC (Barbados) Trading Bank Corporation which is the short-term issuer credit rating by Moody’s at September 30, 2017.

~~(2)~~(3) Nomura Holdings, Inc., the parent company of Nomura Securities International, Inc., is rated A-BBB+ by S&P at September 30, ~~2017.~~2022.

~~At December 31, 2016, we had~~(4) Represents amount outstanding ~~repurchase agreement borrowings~~ with ~~the following counterparties totaling approximately $2.2 billion:~~

(dollars in thousands)
Repurchase Agreement Counterparties
Amount Outstanding Percent of Total Amount Outstanding Fair Value of Company Investments Held as Collateral
Counterparty Rating⁽¹⁾
Merrill Lynch Pierce Fenner & Smith Inc. $ 507,779
23.5 % $ 509,760
A+
RBC (Barbados) Trading Bank Corporation 174,937
8.0 % 228,433
P-1
RBC Capital Markets LLC 161,986
7.5 % 170,365
AA-
Credit Suisse AG, Cayman Islands Branch 154,391
7.2 % 192,136
A
The Bank of Nova Scotia 148,531
6.9 % 152,640
A+
Barclays Capital Inc. 145,416
6.7 % 161,824
A-
TD Securities (USA) LLC 124,745
5.8 % 130,847
AA-
BNP Paribas Securities Corporation 120,346
5.6 % 126,815
A
Credit Suisse Securities (USA) LLC 92,547
4.3 % 165,858
A
The Bank of New York Mellon 76,986
3.6 % 79,704
A
Deutsche Bank AG 75,462
3.5 % 94,054
BBB+
Deutsche Bank Securities LLC 74,729
3.5 % 73,817
BBB+
KGS-Alpha Capital Markets, L.P. 74,384
3.5 % 78,657
Unrated
Goldman Sachs Bank USA 70,085
3.3 % 100,587
A+
Morgan Stanley & Co. LLC 56,410
2.6 % 86,777
A+
Mizuho Securities USA Inc. 45,570
2.1 % 50,114
A
Nomura Securities International, Inc. 35,746
1.7 % 43,243

Unrated⁽²⁾
All other counterparties ⁽³⁾
15,594
0.7 % 21,501

Total $ 2,155,644
100.0 % $ 2,467,132


~~(1)~~	~~The~~one counterparty, ~~ratings presented above are the long-term issuer credit ratings as rated at December 31, 2016 by S&P, except for RBC (Barbados) Trading Bank Corporation,~~ which ~~is the short-term issuer credit rating by Moody’s at December 31, 2016.~~


~~(2)~~	~~Nomura Holdings, Inc., the parent company of Nomura Securities International, Inc., is rated A- by S&P at December 31, 2016.~~


~~(3)~~	~~Represents amount outstanding with three counterparties, which each~~ holds collateral valued less than 5% of our stockholders’ equity as security for our obligations under the applicable repurchase agreements ~~as of December 31, 2016.~~

We record the liability for MBS and other securities purchased, for which settlement has not taken place as an investment related payable. As of September 30, 2017, we had investment related payables of $296.3 million.

~~The following table presents our repurchase agreement borrowings by type of collateral pledged~~ as of September 30, ~~2017 and September 30, 2016, and the respective Cost~~2022.

Table of ~~Funds on a GAAP and Non-GAAP basis for the periods then ended (dollars in thousands):~~Contents

Collateral Balance at September 30, 2017 Weighted Average Cost of Funds for the three months ended September 30, 2017 Weighted Average Cost
of Funds for the nine months ended September 30, 2017 Balance at September 30, 2016 Weighted Average Cost
of Funds for the three months ended September 30, 2016 Weighted Average Cost
of Funds for the nine months ended September 30, 2016
Agency RMBS $ 792,520
1.34 % 1.15 % $ 1,784,448
0.76 % 0.75 %
Agency CMBS 2,019,010
1.37 % 1.23 % 10,725
1.71 % 1.82 %
Non-Agency RMBS 48,443
2.84 % 2.69 % 270,060
2.26 % 2.18 %
Non-Agency CMBS 192,015
2.97 % 2.80 % 256,544
2.30 % 2.17 %
Whole-Loans ⁽¹⁾
163,560
3.50 % 3.35 % 173,901
2.47 % 2.52 %
Residential Bridge Loans 51,074
4.29 % 4.40 % —
— % — %
Other securities 69,634
3.47 % 3.36 % 27,858
2.67 % 2.63 %
GAAP - Effective Cost of Funds

$ 3,336,256
1.72 % 1.62 % $ 2,523,536
1.26 % 1.27 %
Interest rate swaps

N/A
0.24 % 0.64 % N/A
1.14 % 1.22 %
Non-GAAP - Effective Cost of Funds⁽²⁾

$ 3,336,256
2.00 % 2.30 % $ 2,523,536
2.43 % 2.53 %


~~(1)~~	~~Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.~~

~~(2)~~

The Non-GAAP effective cost of funds for the three and nine months ended September 30, 2017 and September 30, 2016, is calculated on an annualized basis and include interest expense for the periods and net periodic interest payments on interest rate swaps, net of premium amortization on MAC swaps, of approximately $1.7 million, $12.3 million, $6.7 million and $21.9 million, respectively. While swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are classified as hedges for U.S. federal income tax purposes in satisfying the REIT requirements. See “Non-GAAP Financial Measures.”

The following table presents our average repurchase agreement borrowings, excluding unamortized debt issuance costs, by type of collateral pledged for the three and nine months ended September 30, ~~2017 and September 30, 2016~~2022 (dollars in thousands):


Collateral	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Agency RMBS	$	321	$	501

Non-Agency RMBS(1)	56,775		58,521
Non-Agency CMBS(1)	55,155		61,279
Residential Whole Loans	49,838		180,961
Commercial loans	72,456		66,068

Residential Bridge Loans	4,955		5,345

Other securities	25,944		30,195
Total	$	265,444	$	402,870
Maximum borrowings during the period(2)	$	218,941	$	613,518

Collateral Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Agency RMBS $ 836,749
$ 1,602,770
$ 934,923
$ 1,558,747
Agency CMBS 1,429,116
14,895
1,049,598
21,453
Non-Agency RMBS 48,681
275,900
71,994
302,219
Non-Agency CMBS 196,467
270,633
223,040
291,178
Whole-Loans⁽¹⁾
166,061
165,326
174,829
169,370
Residential Bridge Loans 53,310
—
37,952
—
Other securities 55,689
25,171
51,908
35,354
Total $ 2,786,073
$ 2,354,695
$ 2,544,244
$ 2,378,321
Maximum borrowings during the period⁽²⁾
$ 3,336,256
$ 2,523,536
$ 3,336,256
$ 2,523,536

(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

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

Repurchase agreements financial metrics

Certain of our financing agreements provide the counterparty with the right to terminate the agreement and accelerate amounts due under the associated agreement if we do not maintain certain financial metrics. Although specific to each financing arrangement, typical financial metrics include minimum equity and liquidity requirements, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross-default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders with borrowings outstanding as of September 30, 2022. With the exception of one repurchase agreement for which we received a waiver, we were in compliance with the terms of such financial tests as of September 30, 2022.

Securitized Debt

Residential Mortgage-Backed Notes

Arroyo Trust 2019

The following table summarizes the consolidated Arroyo Trust 2019's issued mortgage-backed notes at September 30, 2022 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1	$	176,628	3.3%	$	176,628	4/25/2049
Class A-2	9,473		3.5%	9,473		4/25/2049
Class A-3	15,007		3.8%	15,007		4/25/2049
Class M-1	25,055		4.8%	25,055		4/25/2049
Subtotal	$	226,163		$	226,163
Less: Unamortized deferred financing costs	N/A			2,830
Total	$	226,163		$	223,333

Arroyo Trust 2020

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The following table summarizes the consolidated Arroyo Trust 2020's issued mortgage-backed notes at September 30, 2022 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1A	$	77,393	1.7%	$	77,393	3/25/2055
Class A-1B	9,184		2.1%	9,184		3/25/2055
Class A-2	13,518		2.9%	13,518		3/25/2055
Class A-3	17,963		3.3%	17,963		3/25/2055
Class M-1	11,739		4.3%	11,739		3/25/2055
Subtotal	$	129,797		$	129,797
Less: Unamortized deferred financing costs	N/A			1,665
Total	$	129,797		$	128,132

Arroyo Trust 2022-1

The following table summarizes the consolidated Arroyo Trust 2022-1's issued mortgage-backed notes at September 30, 2022 which is classified as "Securitized debt, net" on the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Fair Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1A	$	218,530	2.5%	$	199,526	12/25/2056
Class A-1B	82,942		3.3%	69,669		12/25/2056
Class A-2	21,168		3.6%	16,617		12/25/2056
Class A-3	28,079		3.7%	21,312		12/25/2056
Class M-1	17,928		3.7%	12,814		12/25/2056


Total	$	368,647		$	319,938

Arroyo Trust 2022-2

The following table summarizes the consolidated Arroyo Trust 2022-2's issued mortgage-backed notes at September 30, 2022 which is classified as "Securitized debt, net" on the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Fair Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1	$	273,691	5.0%	$	263,315	7/25/2057
Class A-2	23,297		5.0%	21,916		7/25/2057
Class A-3	28,388		5.0%	26,398		7/25/2057
Class M-1	17,694		5.0%	15,097		7/25/2057


Total	$	343,070		$	326,726

Commercial Mortgage-Backed Notes

We hold a controlling financial variable interest in CSMC USA and are required to consolidate the CMBS VIE. Refer to Note 7 - "Financings" for details. The following table summarizes the consolidated CSMC USA's commercial mortgage

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pass-through certificates at September 30, 2022 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon		Fair Value		Contractual Maturity
Class A-1	$	120,391	3.3	%	$	109,867	9/11/2025
Class A-2	531,700		4.0	%	482,628		9/11/2025
Class B	136,400		4.2	%	119,584		9/11/2025
Class C	94,500		4.3	%	79,772		9/11/2025
Class D	153,950		4.4	%	122,083		9/11/2025
Class E	180,150		4.4	%	132,952		9/11/2025
Class F	153,600		4.4	%	104,961		9/11/2025
Class X-1(1)	N/A		0.5	%	8,268		9/11/2025
Class X-2(1)	N/A		—	%	1,618		9/11/2025
	$	1,370,691			$	1,161,733


~~(1)~~			~~Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.~~


~~(2)~~	~~Amount represents the maximum borrowings at month-end during each of the respective periods.~~

(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of September 30, 2022, respectively.

~~Hedging Activity~~

~~To mitigate~~The above table does not reflect the portion of the class F bond held by us because the bond is eliminated in consolidation. Our ownership interest in the F bond represents a controlling financial interest, which resulted in consolidation of the trust. The bond had a fair market value of $10.2 million at September 30, 2022, and our exposure to ~~the effects of increases~~loss is limited to our ownership interest in short-term interest rates in connection with our repurchase agreements, we may enter into interest rate swaps. The interest rate swaps generally provide for fixed interest rates that are indexed off of LIBOR and are viewed by us to effectively fix the floating interest rates, on our repurchase agreements. In managing our interest rate swap position in conjunction with our hedging strategy and potential tax implications, we may enter into variable-rate payment swaps which effectively act as an offset to fixed-rate payment swaps, forward starting swaps and interest rate swaptions. We also enter into compression trades that enable us to terminate substantial amounts of swap contracts before they expire by their terms, when there has been substantial two-way (pay and receive) swap activity. For the nine months ended September 30, 2017, we entered into compression trades to terminate approximately $3.3 billion of fixed pay rate interest rate swaps and approximately $2.0 billion of variable pay rate interest rate swaps realizing a net loss on termination of approximately $155.8 million. These "compression trades" reduce the number of interest rate swaps outstanding.this bond.

Convertible Senior Unsecured Notes

2022 Notes

As of September 30, ~~2017,~~2022, we had ~~approximately $1.5~~$26.0 million of the 2022 Notes outstanding. The 2022 Notes were repaid in full upon their maturity on October 3, 2022. Refer to Note 16 - Subsequent Events for details.

2024 Notes

As of September 30, 2022, we had $86.3 million aggregate principal amount of the 2024 Notes outstanding. The 2024 notes mature on September 15, 2024, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

Recourse and Non-Recourse Financing

We utilize both recourse and non-recourse debt to finance our portfolio. Our recourse debt included our short and long-term repurchase agreement financings and our convertible senior unsecured notes. At September 30, 2022, our total non-recourse financing is comprised of $998.1 million of securitized debt issued in connection with our four Residential Whole Loan securitizations and $1.2 billion of ~~fixed pay rate~~securitized debt from owning a Non-Agency CMBS bond with a fair value of $10.2 million that was deemed to be a controlling financial variable interest ~~rate swaps, excluding $1.6 billion~~in CSMC USA which required us to consolidate the CMBS VIE.

Table of ~~forward starting fixed pay interest rate swap (forward starting date of 7.0 months).~~Contents

~~Interest Rate Swaps~~


(dollars in thousands)	September 30, 2022			December 31, 2021
Recourse and non-recourse financing	$	2,487,965		$	2,599,845
Non-recourse financing
Arroyo 2019-2	223,333			337,571
Arroyo 2020-1	128,132			181,547
Arroyo 2022-1	319,938			—
Arroyo 2022-2	326,726			—
CMSC USA	1,161,733			1,344,370
Total recourse financing	$	328,103	$328,103	$	736,357

Stockholders' equity	$	97,948		$	193,109

Recourse leverage	3.3x			3.8x

Hedging Activity

The following ~~table presents information about our fixed pay rate interest rate swaps as of September 30, 2017 and December 31, 2016 (dollars in thousands):~~

September 30, 2017 December 31, 2016
Remaining Interest Rate Swap Term Notional Amount
Average Fixed Pay
Rate
Average Floating Receive Rate
Average
Maturity
(Years)

Forward
Starting⁽¹⁾
Notional Amount
Average Fixed Pay
Rate
Average Floating Receive Rate
Average
Maturity
(Years)

Forward
Starting⁽¹⁾
1 year or less $ 105,900
0.8 % 1.3 % 0.1 — % $ 105,900
0.8 % 0.8 % 0.8 — %
Greater than 1 year and less than 3 years 600,000
1.6 % 1.3 % 2.1 — % 993,000
1.2 % 0.9 % 1.4 88.1 %
Greater than 3 years and less than 5 years 690,000
2.0 % 1.3 % 4.6 — % 1,861,700
1.9 % 0.9 % 3.9 36.5 %
Greater than 5 years 1,682,300
2.5 % 0.1 % 10.7 95.3 % 1,701,600
3.1 % 0.9 % 10.5 6.5 %
Total $ 3,078,200
2.2 % 0.6 % 7.3 52.1 % $ 4,662,200
2.1 % 0.9 % 5.7 35.7 %

~~(1) Represents~~tables summarize the ~~percentage of notional that is forward starting.~~

There were no variable pay rate interest rate swaps as of September 30, 2017. The following table presents information about our variable pay rate interest rate swaps as of December 31, 2016 (dollars in thousands):

December 31, 2016
Remaining Interest Rate swap Term Notional Amount
Average Variable Pay
Rate
Average Fixed Receive Rate
Average
Maturity
(Years)

Forward
Starting ⁽¹⁾
Greater than 3 years and less than 5 years $ 1,811,400
0.9 % 1.4 % 3.7 — %
Greater than 5 years 871,000
0.9 % 2.2 % 12.3 — %
Total $ 2,682,400
0.9 % 1.7 % 6.5 — %

~~(1) Represents the percentage of notional that is forward starting.~~

~~To-Be-Announced Securities~~

~~We purchased and sold TBAs~~hedging activity during the nine months ended September 30, 2017 and the year ended December 31, 2016. As of December 31, 2016, we had no contracts to purchase ("long position") or sell ("short position") TBAs on a forward basis. The following is a summary of our long and short TBA positions reported as of September 30, 2017, in "Derivative assets, at fair value" and "Derivative liability, at fair value" in our Consolidated Balance Sheets2022 (dollars in thousands):


	Notional Amount at				Settlements, Terminations or Expirations		Notional Amount at
Derivative Instrument	December 31, 2021		Acquisitions				September 30, 2022
Fixed pay interest rate swaps	$	22,000	$	309,500	$	(179,500)	$	152,000

Interest rate swaptions	—		560,000		(560,000)		—






Credit default swaps	6,170		—		(6,170)		—
TBA securities - long positions	—		600,000		(600,000)		—
TBA securities - short positions	—		600,000		(600,000)		—
Total derivative instruments	$	28,170	$	2,069,500	$	(1,945,670)	$	152,000


	Fair Value at		Acquisitions		Settlements, Terminations or Expirations		Realized Gains / Losses		Mark-to-market		Fair Value at
Derivative Instrument	December 31, 2021										September 30, 2022
Fixed pay interest rate swaps	$	(38)	$	—	$	(14,743)	$	11,373	$	3,670	$	262

Interest rate swaptions	—		473		(312)		(161)		—		—






Credit default swaps	(459)		—		347		(281)		393		—
TBA securities	—		—		(2,051)		2,051		(1,383)		(1,383)
Total derivative instruments	$	(497)	$	473	$	(16,759)	$	12,982	$	2,680	$	(1,121)

Dividends

~~The following table presents additional information about our contracts to purchase and sell TBAs for~~During the nine months ended September 30, ~~2017 (dollars in thousands):~~2022, we declared dividends totaling $1.20 per share generating a dividend yield of approximately 14.3% based on the stock closing price of $11.19 on September 30, 2022.

Book Value

The following chart reflects our book value per common share basic and diluted over five consecutive quarters:

Table of Contents

Notional
Amount

Settlement,
Termination, Expiration
or Exercise
Notional
Amount
December 31, 2016 Additions September 30, 2017
Purchase of TBAs $ —

$ 4,504,200

$ (4,304,200 )
$ 200,000
Sale of TBAs $ —

$ 4,886,200

$ (4,304,200 )
$ 582,000

~~Options~~

We continue to implement measures to improve our balance sheet by increasing liquidity, reducing leverage, and seeking alternative financing arrangements to preserve long-term shareholder value. The ~~Company may enter into Options on U.S. Treasuries. As~~decrease in book value from $23.23 as of June 30, 2022, to $16.22 as of September 30, ~~2017,~~2022, was primarily driven by spread widening across our holdings, but mainly from our residential whole-loans due to their relative size in the overall portfolio.

Review of Strategic Alternatives

On August, 4, 2022, we announced that our Board of Directors had authorized a review of strategic alternatives for the Company ~~had~~aimed at enhancing shareholder value, which may include a ~~total long position options on U.S. Treasury Note with a notional value~~sale or merger of ~~$400.0 million and a fair value in an asset position of $375 thousand and a total short position options on U.S. Treasury Note with a notional value of $400.0 million and a fair value~~the Company. JMP Securities, A Citizens Company, was retained as exclusive financial advisor to the Company. No assurance can be given that the review being undertaken will result in a ~~liability position of $128 thousand. As of December 31, 2016,~~sale, merger, or other transaction sale or other business combination involving the Company, ~~had no open options.~~

~~Futures Contracts~~

~~We may enter into Eurodollar, Volatility Index,~~ and U.S. Treasury futures. As of December 31, 2016, we had contracts to buy or long positions for U.S. Treasuries with a notional amount of $56.9 million, a fair value in an asset position of $71 thousand and an expiration date of March 2017. In addition, as of December 31, 2016, the Company had sale contracts or short positions for U.S. Treasuries with a notional amount of $176.3 million, a fair value in a liability position of $2.5 million and an expiration date of March 2017.

~~Currency Swaps and Forwards~~

~~We have invested in and, in the future, may invest in additional assets which are denominated in a currency or currencies other than U.S. dollars. Similarly,~~ we have not set a timetable for completion of the review process. As previously announced, we do not intend to make any further statements regarding this process unless and ~~may in the future, finance such assets in~~until a currency or currencies other than U.S. dollars. In order to mitigate the impact to us, we may enter into derivative financial instruments, including foreign currency swaps and foreign currency forwards, to manage fluctuations in the valuation between U.S. dollars and such foreign currencies. Foreign currency swaps involve the payment of a foreign currency at fixed interest rate on a fixed notional amount and the receipt of U.S. dollars at a fixed interest rate on a fixed notional amount. Foreign currency forwards provide for the payment of a fixed amount of a foreign currency in exchangedefinitive agreement for a ~~fixed amount~~transaction has been reached, or until the process of ~~U.S. dollars at a date certain in the future. The following is a summary of our foreign currency forwards at September 30, 2017 and December 31, 2016 (dollars and euros in thousands):~~exploring strategic alternatives has ended.

September 30, 2017 December 31, 2016
Derivative Type
Notional Amount

Notional
(USD )
Maturity Fair
Value Derivative Type
Notional Amount

Notional
(USD)
Maturity Fair
Value
Buy USD/Sell EUR currency forward € 580
$ 697
November 2017 $ 10
Buy USD/Sell EUR currency forward € 710
$ 784
January 2017 $ 34
Currency forwards, assets € 580
$ 697
n/a $ 10
Currency forwards, assets € 710
$ 784
n/a $ 34
Buy EUR/Sell USD currency forward € 311
$ 370
November 2017 $ (1 ) Buy EUR/Sell USD currency forward € 673
$ 735
February 2017 $ (23 )
Buy EUR/Sell USD currency forward € 269
$ 320
November 2017 $ (2 ) Buy EUR/Sell USD currency forward € 710
$ 797
January 2017 $ (46 )
Currency forwards, liabilities € 580
$ 690
n/a $ (3 ) Currency forwards, liabilities € 1,383
$ 1,532
n/a $ (69 )
Total currency forwards € 1,160
$ 1,387
n/a $ 7
Total currency forwards € 2,093
$ 2,316
n/a $ (35 )

Results of Operations

Comparison of the three months ended September 30, ~~2017~~2022 to the three months ended September 30, ~~2016~~2021.

General

~~Our operating~~Due to financial results ~~mainly depend upon~~which occurred during the ~~difference between the yield on~~evolving COVID-19 pandemic, our ~~investments, the cost~~results of ~~our borrowing, including our hedging activities, and the composition and changes in market prices of our portfolio. For~~operations for the three months ended September 30, ~~2017,~~2022 and September 30, 2021 may not be comparable. During the third quarter of 2022, we ~~generated~~continued to make progress towards strengthening our balance sheet, improving liquidity, and the transition of our portfolio to residential investments.

During the three months ended September 30, 2022, we sold approximately $11.7 million of residential whole loans and repurchased $1.0 million aggregate principal amount outstanding of our 2022 Notes at par. Due to spread widening, we experienced a significant decline in the fair value of residential whole loan investments. This decline in fair value of $45.3 million was offset by $3.6 million of unrealized gains on derivatives due to our hedging activity. We also reduced the fair value of CRE 3, a commercial junior mezzanine loan by $18.1 million, as a senior lender consummated a foreclosure on the equity interest in the property. See Note 6 for further discussion. Overall, our net ~~income of $22.8~~loss was $40.0 million, or ~~$0.54 per basic and diluted weighted common share, compared to net income of $32.3 million, or $0.77~~$6.63 per basic and diluted weighted common share, for the three months ended September 30, ~~2016. The decrease in net income was primarily attributable to lower net interest income generated from lower yielding investments, an increase in our average cost~~2022.

Table of funds in 2017, lower security prices resulting in a decrease in our unrealized gains and an increase in OTTI offset by lower operating and general administrative expenses. The key components of these changes are discussed in greater detail below.Contents

~~Net Interest Income~~

~~The following table sets forth certain information regarding our net investment income~~In contrast, for the three months ended September 30, ~~2017~~2021, we had a net loss of $4.2 million, or $0.70 per basic and diluted weighted common share, which was primarily attributable to a decline in fair value in our commercial real estate loans.

Table of Contents

Net Interest Income

The following tables set forth certain information regarding our net interest income on our investment portfolio for the three months ended September 30, 2022 and September 30, ~~2016~~2021 (dollars in thousands):


Three Months Ended September 30, 2022	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	53	$	2	14.97	%
Non-Agency CMBS	109,898		2,336		8.43	%
Non-Agency RMBS	36,075		472		5.19	%
Residential whole loans	1,248,772		13,884		4.41	%
Residential bridge loans	5,585		28		1.99	%
Commercial loans	191,929		1,540		3.18	%
Securitized commercial loans	1,288,238		22,099		6.81	%
Other securities	42,768		1,045		9.69	%
Total investments	$	2,923,318	$	41,406	5.62	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	265,444	$	2,187	3.27	%
Convertible senior unsecured notes, net	109,329		2,402		8.72	%
Securitized debt	2,348,073		31,118		5.26	%
Total borrowings	$	2,722,846	$	35,707	5.20	%

Net interest income and net interest margin(2)			$	5,699	0.77	%


Three Months Ended September 30, 2021	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	70	$	4	22.67	%
Non-Agency CMBS	200,824		4,290		8.48	%
Non-Agency RMBS	28,528		369		5.13	%
Residential whole loans	831,634		8,147		3.89	%
Residential bridge loans	8,714		89		4.05	%
Commercial loans	243,534		2,847		4.64	%
Securitized commercial loan	1,407,129		23,622		6.66	%
Other securities	48,364		773		6.34	%
Total investments	$	2,768,797	$	40,141	5.75	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	391,559	$	3,037	3.08	%
Convertible senior unsecured notes, net	145,356		3,099		8.46	%
Securitized debt	1,995,098		26,842		5.34	%
Total borrowings	$	2,532,013	$	32,978	5.17	%

Net interest income and net interest margin(2)			$	7,163	1.03	%

Period Ended
Average
Amortized
Cost of
Assets

Total
Interest
Income
Yield on Average Assets
Average
Balance of
Borrowings
Total Interest Expense
Average Cost of Funds⁽¹⁾
Net Interest Income
Net
Interest
Margin
Three months ended September 30, 2017

Agency RMBS $ 854,526
$ 5,891
2.74 % $ 836,749
$ 2,823
1.34 % $ 3,068
1.42 %
Agency CMBS 1,478,355
11,181
3.00 % 1,429,116
4,938
1.37 % 6,243
1.68 %
Non-Agency RMBS 58,919
943
6.35 % 48,681
349
2.84 % 594
4.00 %
Non-Agency CMBS 293,959
6,381
8.61 % 196,467
1,472
2.97 % 4,909
6.63 %
Residential Whole-Loans 196,001
2,002
4.05 % 159,247
1,412
3.52 % 590
1.19 %
Residential Bridge Loans 61,953
1,331
8.52 % 53,310
576
4.29 % 755
4.83 %
Securitized commercial loan 24,974
575
9.13 % 17,803
306
6.82 % 269
4.27 %
Other Securities 124,657
2,624
8.35 % 55,689
487
3.47 % 2,137
6.80 %
Total $ 3,093,344
$ 30,928
3.97 % $ 2,797,062
$ 12,363
1.75 % $ 18,565
2.38 %

Three months ended September 30, 2016

Agency RMBS $ 1,725,322
$ 10,269
2.37 % $ 1,602,770
$ 3,042
0.76 % $ 7,227
1.67 %
Agency CMBS 9,621
172
7.11 % 14,895
64
1.71 % 108
4.47 %
Non-Agency RMBS 363,042
7,404
8.11 % 275,900
1,569
2.26 % 5,835
6.39 %
Non-Agency CMBS 401,588
7,975
7.90 % 270,633
1,562
2.30 % 6,413
6.35 %
Residential Whole-Loans 180,641
1,562
3.44 % 158,315
976
2.45 % 586
1.29 %
Securitized commercial loan 25,000
575
9.15 % 18,011
303
6.69 % 272
4.33 %
Other Securities 48,842
1,197
9.75 % 25,171
169
2.67 % 1,028
8.37 %
Total $ 2,754,056
$ 29,154
4.21 % $ 2,365,695
$ 7,685
1.29 % $ 21,469
3.10 %

Table of Contents

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

(2) Since we do not apply hedge accounting, our net interest margin in this table does not reflect the benefit / cost of our interest rate swaps. See "Non-GAAP Financial Measures" for net investment income table that includes the benefit / cost from our interest rate swaps.

Interest Income

For the three months ended September 30, ~~2017~~2022, and September 30, ~~2016,~~2021, we earned interest income on our investments of approximately ~~$30.9~~$41.4 million and ~~$29.2~~$40.1 million, ~~respectively, and incurred interest expense, which primarily related to our repurchase agreement borrowings~~respectively. The increase of approximately ~~$12.4~~$1.3 million was mainly due to an increase in interest rates and ~~$7.7~~principal payments and payoffs residential and commercial investments, including partial and full payoffs on two commercial loans.

Interest Expense

Interest expense increased from $33.0 million ~~respectively. While our yield on average assets~~ for the three months ended September 30, ~~2017 decreased~~2021 to 3.97% from 4.21% for three months ended September 30, 2016, our interest income increased. The increase was primarily the result of a larger average investment portfolio in the third quarter of 2017. The decrease in the average yield on our investments was a result of the repositioning of our investments from Agency RMBS and Non-Agency RMBS to Agency CMBS and Residential Whole and Bridge Loans, which in combination were slightly low yielding assets. We believe these investments will provide greater book value stability.

The reduction of our exposure from Agency RMBS to Agency CMBS was based on our expectation of continued interest rate volatility coupled with the anticipation of the Federal Reserve reducing its balance sheet, resulting in continued spread widening for Agency RMBS securities. Agency CMBS are not held on the Federal Reserve's balance sheet and would not be subject to technical pressures that Agency RMBS may experience. Our Agency CMBS are subject to limited prepayment risk as compared to Agency RMBS. We also reduced our exposure to Non-Agency RMBS, IO's and IIO's, which recovered their anticipated value, in a further effort to reduce volatility in our book value. Our higher borrowing costs$35.7 million for the three months ended September 30, ~~2017 were a result of: (i) the~~2022. The increase in interest ~~rates, (ii)~~expense was primarily attributable to increased borrowing costs on our repurchase facilities due to increasing market interest costs associated with financing our Residential Whole and Bridge Loans, which generally have higher interest rates than repurchase agreements on Agency RMBS and Agency CMBS, and (iii) higher average repurchase agreement borrowings. Our average borrowings increased from $2.4 billion for the three months ended September 30, 2016 to $2.8 billion for the three months ended September 30, 2017 and our the average cost of funds for the same period increased from 1.29% for the three months ended September 30, 2016 to 1.75% for the three months ended September 30, 2017. As a result of the movements in interest income and interest expense discussed above, our net interest margin decreased to 2.38% for the three months ended September 30, 2017 from 3.10% for the three months ended September 30, 2016. rates.

Other income (loss), net

Realized gain (loss) ~~on investments~~, net

~~Our Manager regularly reviews~~Realized gain (loss) represents the ~~characteristics of~~net gain (loss) on sales or settlements from our investment portfolio and may make changes to our portfolio in order to adjust such portfolio characteristics in response to and/or anticipation of changing market conditions in an effort to achieve the appropriate risk reward ratio. Accordingly, due to changes in market conditions or expected changes in market conditions, we repositioned our portfolio and sold Agency RMBS and redeployed our capital into Agency CMBS and credit sensitive investments.

debt. The following table presents the ~~sales and~~ realized gains (losses) of our investments and debt for each of the three months ended September 30, ~~2017~~2022 and September 30, ~~2016~~2021 (dollars in thousands):


	For the three months ended September 30, 2022								For the three months ended September 30, 2021
	Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)





Residential whole loans	$	11,736	$	43	$	(76)	$	(33)	$	—	$	—	$	—	$	—
Residential bridge loans(1)	—		—		—		—		—		19		(37)		(18)
Loans transferred to REO(1)	—		—		—		—		68		15		—		15
Disposition of REO	—		—		—		—		738		54		—		54
Convertible senior unsecured notes(2)	(1,000)		—		(2)		(2)		(122,330)		165		(1,742)		(1,577)
Total	$	10,736	$	43	$	(78)	$	(35)	$	(121,524)	$	253	$	(1,779)	$	(1,526)

For the three months ended September 30, 2017 For the three months ended September 30, 2016
Proceeds Gross Gains Gross Losses Net Gain (Loss) Proceeds Gross Gains Gross Losses Net Gain (Loss)
Agency RMBS⁽¹⁾
$ (2,906 ) $ (3 ) $ 51
$ 48
$ 42,427
$ —
$ (138 ) $ (138 )
Agency CMBS —
—
—
—
8,216
45
—
45
Non-Agency RMBS —
—
—
—
15,209
1,306
—
1,306
Non-Agency CMBS 10,597
1,641
(278 ) 1,363
9,194
—
(1,452 ) (1,452 )
Other securities 10,419
419
$ —
419
14,485
1,678
—
1,678
Total $ 18,110
$ 2,057
$ (227 ) $ 1,830
$ 89,531
$ 3,029
$ (1,590 ) $ 1,439


~~(1)~~			~~Reflects a reclassification of proceeds from a sale recorded on the trade date to reflect subsequent Agency RMBS paydowns. Excludes Interest-Only Strips, accounted for as derivatives.~~

~~Other than temporary impairment~~(1)Realized gains/losses recognized on the final settlement of the loans.

(2)Realized gains/losses recognized on the extinguishment of the 2022 Notes. See Note 7 - Financings for details.

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

The increase in OTTI was mainly attributable to Agency RMBS securities. Normally unrealized losses on Agency securities, with explicit guarantee of principal and interest by the governmental sponsored entity are not credit losses but rather due to changes in interest rates and prepayment expectations. These securities would not be considered other than temporarily impaired provided we did not intend to sell the security. However, at September 30, 2017 we had the intention to sell 47 Agency RMBS securities that were in a $4.7 million unrealized loss position and accordingly we were required to record the unrealized losses as OTTI.

~~The following table presents the other-than-temporary impairments we recorded on our securities portfolio for the three months ended September 30, 2017 and September 30, 2016 (dollars in thousands):~~

Three months ended September 30, 2017 Three months ended September 30, 2016
Agency RMBS $ 4,760
$ 202
Non-Agency RMBS —
852
Non-Agency CMBS 2,344
3,674
Other securities 121
250
Total $ 7,225
$ 4,978

Unrealized gain (loss), net

Our investments and securitized debt, for which we have elected the fair value option, are recorded at fair value with the periodic changes in fair value being recorded in earnings. The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period. ~~We completed the repositioning~~

Table of our investment portfolio in the third quarter of 2017. The decrease in unrealized gains was a combination of a repositioned portfolio and credit spread widening in our Agency CMBS investments and our credit sensitive investments compared to third quarter 2016.Contents

The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt ~~for the three months ended September 30, 2017 and September 30, 2016~~ (dollars in thousands):


	Three months ended September 30, 2022		Three months ended September 30, 2021

Agency RMBS	$	(8)	$	(3)
Non-Agency CMBS	(628)		(2,980)
Non-Agency RMBS	(2,506)		2,241
Residential whole loans	(45,327)		(2,394)
Residential bridge loans	25		175
Commercial loans	(17,729)		(5,494)
Securitized commercial loans	(78,046)		(9,616)
Other securities	(2,409)		930
Securitized debt	103,046		11,138


Total	$	(43,582)	$	(6,003)

Three months ended September 30, 2017 Three months ended September 30, 2016
Agency RMBS $ 5,806
$ 3,735
Agency CMBS (1,367 ) (34 )
Non-Agency RMBS 1,778
3,332
Non-Agency CMBS 45
7,982
Whole-Loans (435 ) 1,275
Other securities (518 ) (800 )
Securitized debt (60 ) (198 )
Total $ 5,249
$ 15,292

Gain (loss) on derivatives, net

~~Effective January 2017, variation margin~~ As of CME cleared derivatives are treated as settlements of the derivative contract rather than cash collateral, accordingly variation margin is treated as a gain or loss of partial settlement of the underlying derivative contract and reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations. Also, included in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations are the netSeptember 30, 2022, we had interest rate ~~swap payments~~swaps with a notional amount of $152.0 million and ~~currency payments (including accrued amounts) associated with these instruments.~~no forward starting swaps. Our hedging strategy is designed to mitigate our exposure to interest rate volatility.

The following table presents the components of gain (loss) on derivatives for the three months ended September 30, ~~2017~~2022 and September 30, ~~2016~~2021 (dollars in thousands):


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Three months ended September 30, 2022
Interest rate swaps	$	(3,371)	$	3,423	$	—	$	4,790	$	298	$	5,140
Interest rate swaptions	$	(161)	$	—	$	—	$	—	$	—	$	(161)
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(5)		(54)		16		(43)





Credit default swaps	(273)		—		—		283		—		10
TBAs	1,319		—		—		(1,383)		—		(64)
Total	$	(2,486)	$	3,423	$	(5)	$	3,636	$	314	$	4,882

Three months ended September 30, 2021
Interest rate swaps	$	—	$	485	$	—	$	(71)	$	96	$	510

Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(59)		(90)		82		(67)




Credit default swaps	16		—		—		56		—		72

Total	$	16	$	485	$	(59)	$	(105)	$	178	$	515

Realized Gain (Loss), net
Description Other Settlements / Expirations Variation Margin Settlement Mark-to-Market Return (Recovery) of Basis
Contractual interest income (expense), net⁽¹⁾
Total
Three months ended September 30, 2017
Interest rate swaps $ (38 ) $ 9,564
$ (2,028 ) $ 92
$ (1,764 ) $ 5,826
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives —
—
351
(1,486 ) 1,816
681
Options (957 ) —
477
—
—
(480 )
Futures contracts (77 ) —
—
—
—
(77 )
Foreign currency forwards 45
—
(15 ) —
—
30
Total return swaps (52 ) —
329
—
95
372
TBAs 577
—
288
—
—
865
Total $ (502 ) $ 9,564
$ (598 ) $ (1,394 ) $ 147
$ 7,217

Three months ended September 30, 2016
Interest rate swaps $ (25,179 ) $ —
$ 35,878
$ 168
$ (6,904 ) $ 3,963
Interest rate swaptions —
—
—
—
—
—
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives —
—
446
(2,827 ) 3,503
1,122
Futures contracts 5,844
—
(8,792 ) —
—
(2,948 )
Foreign currency forwards 103
—
(62 ) —
—
41
Foreign currency swaps 1,409
—
(1,852 ) —
61
(382 )
Total return swaps 2
—
(11 ) —
308
299
TBAs 3,579
—
447
—
—
4,026
Total $ (14,242 ) $ —
$ 26,054
$ (2,659 ) $ (3,032 ) $ 6,121


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

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

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Other, net

For the three months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, "Other, net" was ~~income of $216 thousand and~~ a loss of ~~$60~~$61 thousand and income of $277 thousand, respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income (expense) on cash collateral for our ~~derivative~~repurchase agreements and ~~repurchase agreements.~~derivatives, and miscellaneous fees and expenses on residential mortgage loans.

Expenses

Management Fee ~~Expense~~

We incurred management fee expense of approximately ~~$1.9 million~~$850 thousand and ~~$2.6~~$1.5 million for the three months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, respectively. ~~Pursuant to the terms of the Management Agreement, our Manager is paid a~~The decline in management ~~fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. The decrease~~fees was ~~mainly~~ a result of our Manager voluntarily waiving 25% of its management fee solely for the ~~restructuring~~duration of calendar year 2022 in order to support our ~~interest rate swaps, which reduced~~earnings potential and our transition to a residential focused investment portfolio. Future waivers, if any, will be at the "Equity" base used to calculate the management fee. Pursuant to the terms of the agreement, unrealized gains and losses are excluded from the "Equity" base used to calculate the management fee. Upon termination of the interest rate swapsManager's discretion.

the accumulated unrealized losses, which were excluded, became realized thereby reducing the "Equity" base by approximately $155.8 million. In addition, the August 3, 2016 amendment to the Management Agreement amended the definition of "Equity" as defined in the agreement. Under the new definition OTTI will reduce the "Equity" base used to calculate the management fee.

The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 9,10, “Related Party ~~Transactions,”~~Transactions” to the financial statements contained in this Quarterly Report on Form 10-Q.

Other Operating Expenses

We incurred other operating expenses of approximately ~~$702~~$343 thousand and ~~$188~~$352 thousand for the three months ended September 30, ~~2017~~2022, and September 30, ~~2016,~~2021, respectively. Other operating ~~cost is comprised of derivative transaction~~ costs ~~custody~~comprise bank fees, trustee fees, and ~~loan servicing fees. The increase was primarily a result of expenses related to derivative commissions and fees resulting from the increased leverage and~~ asset management/loan servicing fees ~~related to~~for loans acquired serving released. Formerly, transaction and financing costs were included in this expense category.

Transaction costs

We incurred transaction costs of $2.6 million and $954 thousand for the ~~bridge loans, which are a new target asset~~three months ended September 30, 2022 and September 30, 2021, respectively. The increase in ~~2017.~~transaction costs is primarily associated with the Arroyo Trust 2022-2 securitization that was completed in July 2022. Transaction costs incurred for the three months ended September 30, 2021 were associated with the foreclosure of one of our commercial loans.

General and Administrative Expenses

We incurred general and administrative expenses of approximately ~~$1.7~~$2.8 million and ~~$2.0~~$2.3 million for the three months ended September 30, ~~2017~~2022, and September 30, ~~2016, respectively.~~2021, respectively. The ~~following describes~~increased expense was primarily driven by an increase in professional fees resulting from accounting related consulting fees incurred during the ~~key components of general and administrative expenses.~~third quarter to address recent turnover.

~~Compensation Expense~~

Compensation expense decreased from approximately $868 thousand for the three months ended September 30, 2016 to approximately $660 thousand for the three months ended September 30, 2017. The decrease was a result lower stock based compensation, since we did not issue any stock based awards to our Manager or executive officers in 2016 and 2017.

~~Professional Fees~~

~~Professional fees slightly increased to approximately $781 thousand for the three months ended September 30, 2017 from approximately $723 thousand for the three months ended September 30, 2016.~~

~~Other general and administrative expenses~~

~~The decrease in other general and administrative expense for three months ended September 30, 2017, was a result of an adjustment to excise tax based on the filing of our 2016 federal tax return.~~

Comparison of the nine months ended September 30, ~~2017~~2022 to the nine months ended September 30, ~~2016.~~2021.

General

~~Our operating~~Due to the evolving COVID-19 pandemic, our results ~~mainly depend upon~~of operations for the ~~difference between~~nine months ended September 30, 2022 and September 30, 2021 may not be comparable. During the ~~yield on~~first three quarters of 2022, we continued to make progress towards strengthening our ~~investments,~~balance sheet, improving liquidity, and the ~~cost~~transition of our ~~borrowing, including our hedging activities, and the composition and changes in market prices of our portfolio. For~~portfolio to residential investments.

During the nine months ended September 30, ~~2017,~~2022, we ~~generated~~acquired $405.3 million of residential whole loans, sold $42.3 million of investments, including Non-Agency RMBS and CMBS, sold $11.7 million in residential whole loans, realized a gain on the sale of a REO hotel of $12.2 million, and repurchased $1.0 million aggregate principal amount of our existing 2022 Notes at par. We also reduced the fair value of CRE 3, a commercial junior mezzanine loan by $18.1 million, as a senior lender consummated a foreclosure on the equity interest in the property. See Note 6 for further discussion. Also, due to spread widening, we experienced a significant decline in the fair value of our residential whole loan investments. This decline in fair value of $125.5 million, coupled with transaction costs incurred in the securitizations of Arroyo 2022-1 and Arroyo 2022-2 of

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$5.6 million were key contributors to the generation of a net ~~income~~loss of ~~$63.7~~$88.3 million, or ~~$1.52 per basic and diluted weighted common share, compared to net income of $13.3 million, or $0.31~~$14.63 per basic and diluted weighted common share for the nine months ended September 30, 2016. The increase in net income was primarily attributable higher prices for our investments, which increased our unrealized gains, realized gains from the repositioning of our portfolio, lower OTTI, lower loss on our derivatives, as a result of restructuring our hedges and lower operating, and general and administrative expenses offset by lower net interest income. The key components of these changes are discussed in greater detail below.2022.

~~Net Interest Income~~

~~The following table sets forth certain information regarding our net investment income~~In contrast, for the nine months ended September 30, ~~2017~~2021, the key driver of a net loss of $36.4 million, or $6.00 per basic and diluted weighted common share, was declines in fair values of our non-performing commercial mezzanine loan and of our Non-Agency CMBS holdings of $48.6 million and $16.3 million, respectively. These were offset by unrealized gains from other investments.

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Net Interest Income

The following tables set forth certain information regarding our net interest income on our investment portfolio for the nine months ended September 30, 2022 and September 30, ~~2016~~2021 (dollars in thousands):


Nine Months Ended September 30, 2022	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	59	$	9	20.39	%
Non-Agency CMBS	142,362		7,436		6.98	%
Non-Agency RMBS	43,815		1,663		5.07	%
Residential whole loans	1,165,929		34,712		3.98	%
Residential bridge loans	5,688		64		1.50	%
Commercial loans	192,079		4,046		2.82	%
Securitized commercial loans	1,274,894		65,957		6.92	%
Other securities	45,340		2,738		8.07	%
Total investments	$	2,870,166	$	116,625	5.43	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	402,870	$	8,288	2.75	%
Convertible senior unsecured notes, net	113,670		7,499		8.82	%
Securitized debt	2,129,146		84,621		5.31	%
Total borrowings	$	2,645,686	$	100,408	5.07	%

Net interest income and net interest margin(2)			$	16,217	0.76	%


Nine Months Ended September 30, 2021	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	89	$	12	18.03	%
Non-Agency CMBS	202,937		13,401		8.83	%
Non-Agency RMBS	29,270		1,058		4.83	%
Residential whole loans	883,711		25,724		3.89	%
Residential bridge loans	11,383		806		9.47	%
Commercial loans	297,593		11,263		5.06	%
Securitized commercial loan	1,487,050		72,586		6.53	%
Other securities	49,355		2,503		6.78	%
Total investments	$	2,961,388	$	127,353	5.75	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	364,009	$	9,755	3.58	%
Convertible senior unsecured notes, net	159,862		10,056		8.41	%
Securitized debt	2,170,148		84,541		5.21	%
Total borrowings	$	2,694,019	$	104,352	5.18	%

Net interest income and net interest margin(2)			$	23,001	1.04	%

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Period Ended
Average
Amortized
Cost of
Assets

Total
Interest
Income
Yield on Average Assets
Average
Balance of
Borrowings
Total Interest Expense
Average Cost of Funds⁽¹⁾
Net Interest Income
Net
Interest
Margin
Nine months ended September 30, 2017

Agency RMBS $ 960,380
$ 19,851
2.76 % $ 934,923
$ 8,037
1.15 % $ 11,814
1.64 %
Agency CMBS 1,106,847
25,125
3.03 % 1,049,598
9,664
1.23 % 15,461
1.87 %
Non-Agency RMBS 91,105
4,785
7.02 % 71,994
1,447
2.69 % 3,338
4.90 %
Non-Agency CMBS 334,504
21,247
8.49 % 223,040
4,675
2.80 % 16,572
6.62 %
Residential Whole-Loans 206,957
6,336
4.09 % 168,024
4,219
3.36 % 2,117
1.37 %
Residential Bridge Loans 44,840
2,951
8.80 % 37,952
1,248
4.40 % 1,703
5.08 %
Securitized commercial loan 24,991
1,706
9.13 % 17,801
912
6.85 % 794
4.25 %
Other Securities 118,534
7,412
8.36 % 51,908
1,305
3.36 % 6,107
6.89 %
Total $ 2,888,158
$ 89,413
4.14 % $ 2,555,240
$ 31,507
1.65 % $ 57,906
2.68 %

Nine months ended September 30, 2016

Agency RMBS $ 1,629,762
$ 28,472
2.33 % $ 1,558,747
$ 8,782
0.75 % $ 19,690
1.61 %
Agency CMBS 17,231
836
6.48 % 21,453
293
1.82 % 543
4.21 %
Non-Agency RMBS 412,501
22,993
7.45 % 302,219
4,942
2.18 % 18,051
5.85 %
Non-Agency CMBS 423,670
24,783
7.81 % 291,178
4,731
2.17 % 20,052
6.32 %
Residential Whole-Loans 193,594
5,254
3.63 % 162,455
3,046
2.50 % 2,208
1.52 %
Residential Bridge Loans —
—
— % —
—
— % —
— %
Securitized commercial loan 25,000
1,713
9.15 % 17,915
900
6.71 % 813
4.34 %
Other Securities 66,954
3,941
7.86 % 35,354
697
2.63 % 3,244
6.47 %
Total $ 2,768,712
$ 87,992
4.25 % $ 2,389,321
$ 23,391
1.31 % $ 64,601
3.12 %

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

Interest Income

For the nine months ended September 30, ~~2017~~2022, and September 30, ~~2016,~~2021, we earned interest income on our investments of ~~approximately $89.4~~approximately $116.6 million and ~~$88.0~~$127.4 million, ~~respectively, and incurred interest expense, which primarily related to our borrowings under repurchase agreements,~~respectively. The decrease of approximately ~~$31.5~~$10.7 million was mainly due to a smaller investment portfolio from principal payments and ~~$23.4~~payoffs of commercial and residential investments. The decrease was partially offset by acquisitions of residential investments during the nine months ended September 30, 2022.

Interest Expense

Interest expense decreased from $104.4 million ~~respectively. While our average portfolio was slightly larger, our yield on average assets~~ for the nine months ended September 30, ~~2017 decreased~~2021 to ~~4.14% from 4.25%~~$100.4 million for the nine months ended September 30, ~~2016, resulting in an increase in interest income.~~2022. The decrease in ~~the average yield on our investments~~interest expense was primarily a result of ~~the repositioning of our~~a smaller investment from Agency RMBS and Non-Agency RMBS to Agency CMBS and Residential Whole and Bridge Loans, which in combination were slightly low yielding assets. We believe this investments mix will provide greater book value stability.

The reduction of our exposure from Agency RMBS to Agency CMBS was based on the expectation of continued interest rate volatility coupled with the anticipation of the Federal Reserve reducing its balance sheet, resulting in continued spread widening for Agency RMBS securities. Agency CMBS are not held on the Federal Reserve's balance sheet and would not be subject to technical pressures that Agency RMBS may experience. Our Agency CMBS are subject to limited prepayment risk as compared to Agency RMBS. We also reduced our exposure to Non-Agency RMBS, IO's and IIO's, which recovered their anticipated value, in a further effort to reduce volatility in our book value. Our higherportfolio, offset by increased borrowing costs ~~for the nine months ended September 30, 2017 were a result of: (i) the increase in~~on our repurchase facilities due to increasing market interest rates, and (ii) increased interest costs associated with financing our Residential Whole and Bridge Loans, which generally have higher interest rates than repurchase agreements on Agency RMBS and Agency CMBS, and (iii) higher average repurchase agreement borrowings. Our average borrowings increased from $2.4 billion for the nine months ended September 30, 2016 to $2.6 billion for the nine months ended September 30, 2017, while the average cost ofrates.

funds for the same periods increased from 1.31% for the nine months ended September 30, 2016 to 1.65% for the nine months ended September 30, 2017, respectively. As a result of the movements in interest income and interest expense discussed above, our net interest margin decreased to 2.68% for the nine months ended September 30, 2017 from 3.12% for the nine months ended September 30, 2016.

Other income (loss), net

Realized gain (loss) ~~on investments~~, net

Realized gain (loss) represents the net gain (loss) on sales or settlements from our investment portfolio and debt. The ~~mortgage and structured securities markets remain dynamic and, at times, volatile markets. Our Manager regularly reviews~~following table presents the ~~characteristics~~realized gains (losses) of our ~~portfolio~~investments and ~~may make changes to our portfolio in order to adjust such portfolio characteristics in response to and/or anticipation~~debt for each of changing market conditions in an effort to achieve the appropriate risk reward ratio. Accordingly, due to changes in market conditions or expected changes in market conditions, we repositioned our portfolio and sold Agency RMBS and Non-Agency RMBS in the nine months ended September 30, ~~2017 and redeployed our capital into Agency CMBS and Residential Whole and Bridge Loans.~~

~~The following table presents the sales and realized gains (losses) of our investments for the nine months ended September 30, 2017~~2022 and September 30, ~~2016~~2021 (dollars in thousands):


	For the nine months ended September 30, 2022								For the nine months ended September 30, 2021
	Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)


Non-Agency CMBS	$	10,152	$	—	$	(43,934)	$	(43,934)	$	—	$	—	$	(5,929)	$	(5,929)
Non-Agency RMBS	27,729		255		(1,425)		(1,170)		—		—		—		—
Other securities	4,406		—		(478)		(478)		—		—		—		—
Residential Whole-Loans	11,736		43		(76)		(33)		—		—		—		—
Residential Bridge Loans(1)	—		—		—		—		—		19		(153)		(134)
Loans transferred to REO(2)	—		—		—		—		752		15		(36)		(21)
Disposition of REO(3)	54,681		12,198		—		12,198		738		54		—		54
Convertible senior unsecured notes(4)	(11,689)		—		(134)		(134)		(128,645)		405		(1,742)		(1,337)
Total	$	97,015	$	12,496	$	(46,047)	$	(33,551)	$	(127,155)	$	493	$	(7,860)	$	(7,367)

Nine months ended September 30, 2017 Nine months ended September 30, 2016
Proceeds Gross Gains Gross Losses
Net Gain
(Loss)
Proceeds Gross Gains Gross Losses
Net Gain
(Loss)
Agency RMBS ⁽¹⁾
$ 862,245
$ 4,376
$ (7,314 ) $ (2,938 ) $ 358,029
$ 5,250
$ (5,764 ) $ (514 )
Agency CMBS —
—
—
—
18,637
54
(55 ) (1 )
Non-Agency RMBS ⁽¹⁾
243,811
24,389
(2,242 ) 22,147
120,649
3,100
(4,559 ) (1,459 )
Non-Agency CMBS 45,634
2,377
(1,351 ) 1,026
34,188
—
(4,381 ) (4,381 )
Other securities 33,365
419
(54 ) 365
764,711
3,496
(2,109 ) 1,387
Total $ 1,185,055
$ 31,561
$ (10,961 ) $ 20,600
$ 1,296,214
$ 11,900
$ (16,868 ) $ (4,968 )


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

~~Other than temporary impairment~~(1)Realized gains/losses recognized on the final settlement of the loans.

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

~~We evaluate securities~~(3)Realized gains/losses recognized in connection with the sale of the hotel REO.

(4)Realized gains/losses recognized on the extinguishment of the 2022 Notes. See Note 7 - Financings for OTTI on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired involves judgments, estimates and assumptions based on subjective and objective factors. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.details.

Normally unrealized losses on Agency securities (excluding Agency IO's), are not credit losses but rather due to changes in interest rates and prepayment expectations. These securities would not be considered other than temporarily impaired provided we did not intend to sell the security. However, at September 30, 2017 our intention was to sell these securities and accordingly we were required to record the unrealized losses as OTTI.

~~The following table presents the other-than-temporary impairments we recorded on our securities portfolio for the nine months ended September 30, 2017 and September 30, 2016 (dollars in thousands):~~

Nine months ended September 30, 2017 Nine months ended September 30, 2016
Agency RMBS $ 5,420
$ 1,226
Non-Agency RMBS —
8,081
Non-Agency CMBS 12,658
9,213
Other securities 1,823
3,611
Total $ 19,901
$ 22,131

Unrealized gain (loss), net

Our investments, and securitized debt, for which we have elected the fair value option are recorded at fair value with the periodic changes in fair value being recorded in earnings. The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the ~~period coupled with the reposition~~period.

Table of ~~our investment portfolio in the first half of 2017.~~Contents

The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt ~~for the nine months ended September 30, 2017 and September 30, 2016~~ (dollars in thousands):


	Nine months ended September 30, 2022		Nine months ended September 30, 2021

Agency RMBS	$	(59)	$	16
Non-Agency CMBS	42,869		(16,254)
Non-Agency RMBS	(8,420)		3,710
Residential whole loans	(125,482)		13,667
Residential bridge loans	(58)		639
Commercial loans	(19,876)		(48,630)
Securitized commercial loans	(203,828)		107,423
Other securities	(8,677)		4,553
Securitized debt	257,231		(104,395)


Total	$	(66,300)	$	(39,271)

Nine months ended September 30, 2017 Nine months ended September 30, 2016
Agency RMBS $ 12,203
$ 33,409
Agency CMBS 11,338
(661 )
Non-Agency RMBS (11,415 ) 21,238
Non-Agency CMBS 15,369
(7,962 )
Whole-Loans 848
546
Other securities 7,129
621
Securitized debt (346 ) 380
Total $ 35,126
$ 47,571

Gain (loss) on derivatives, net

~~Effective January 2017, variation margin~~ As of CME cleared derivatives are treated as settlements of the derivative contract rather than cash collateral, accordingly variation margin is treated as a gain or loss of partial settlement of the underlying derivative contract and reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations. Also, included in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations are the net interest rate swap payments and currency payments (including accrued amounts) associated with these instruments.

~~In April 2017,~~September 30, 2022, we ~~restructured our interest rate swaps effectively terminating fixed-pay~~had interest rate swaps with a notional ~~value~~amount of ~~approximately $3.2 billion~~$152.0 million, and ~~variable-pay~~no forward starting swaps. Our hedging strategy is designed to mitigate our exposure to interest rate swaps with a notional value of approximately $2.0 billion to reduce hedging costs. The effects of the terminations is reflected in the table below for the nine months ended September 30, 2017 in interest rate swaps Other Settlements/ Expiration and Mark to Market.volatility.

The following table presents the components of gain (loss) on derivatives for the nine months ended September 30, ~~2017~~2022 and September 30, ~~2016~~2021 (dollars in thousands):


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Nine months ended September 30, 2022
Interest rate swaps	$	(3,371)	$	14,744	$	—	$	3,670	$	(255)	$	14,788
Interest rate swaptions	(161)		—		—		—		—		(161)
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(120)		(270)		160		(230)





Credit default swaps	(242)		—		—		393		—		151
TBAs	2,051		—		—		—		—		2,051
Total	$	(1,723)	$	14,744	$	(120)	$	3,793	$	(95)	$	16,599

Nine months ended September 30, 2021
Interest rate swaps	$	—	$	520	$	—	$	(25)	$	172	$	667

Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(232)		(124)		305		(51)




Credit default swaps	48		—		—		52		—		100

Total	$	48	$	520	$	(232)	$	(97)	$	477	$	716

Realized Gain (Loss), net
Description Other Settlements / Expirations Variation Margin Settlement Mark-to-Market Return (Recovery) of Basis
Contractual interest income (expense), net⁽¹⁾
Total
Nine months ended September 30, 2017
Interest rate swaps $ (150,593 ) $ (7,966 ) $ 156,102
$ 378
$ (12,662 ) $ (14,741 )
Interest rate swaptions (115 ) —
—
—
—
(115 )
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives 526
—
(783 ) (5,055 ) 6,229
917
Options (892 ) —
(134 ) —
—
(1,026 )
Futures contracts (9,230 ) —
2,416
—
—
(6,814 )
Foreign currency forwards 25
—
43
—
—
68
Total return swaps (552 ) —
1,673
—
469
1,590
TBAs 3,148
—
938
—
—
4,086
Total $ (157,683 ) $ (7,966 ) $ 160,255
$ (4,677 ) $ (5,964 ) $ (16,035 )

Nine months ended September 30, 2016
Interest rate swaps $ (28,784 ) $ —
$ (35,393 ) $ 502
$ (22,409 ) $ (86,084 )
Interest rate swaptions (1,035 ) —
1,631
—
—
596
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives (155 ) —
(4,480 ) (8,930 ) 11,113
(2,452 )
Options 4,756
—
—
—
—
4,756
Futures contracts 19,253
—
704
—
—
19,957
Foreign currency forwards (90 ) —
8
—
—
(82 )
Foreign currency swaps 5,351
—
(5,883 ) —
268
(264 )
Total return swaps 17
—
(2,171 ) —
836
(1,318 )
TBAs 12,166
—
(489 ) —
—
11,677
Total $ 11,479
$ —
$ (46,073 ) $ (8,428 ) $ (10,192 ) $ (53,214 )


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

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

Other, net

Table of Contents

For the nine months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, "Other, net" was ~~income of $841 thousand and~~ a loss of ~~$158 thousand, respectively, of which $1~~$252 thousand and ~~$905~~income of $449 thousand, ~~was related to net foreign currency loss, respectively, and the~~respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income (expense) on cash collateral for our ~~derivative and repurchase agreements. Generally, our foreign currency denominated investments are financed with~~ repurchase agreements ~~in the same currency. We recognize a gain or loss in foreign currency exchange, depending~~and derivatives, and miscellaneous fees and expenses on ~~the movement of the exchange rates during the period.~~residential mortgage loans.

Expenses

Management Fee ~~Expense~~

We incurred management fee expense of approximately ~~$6.2~~$3.0 million and ~~$7.9~~$4.5 million for the nine months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, respectively. ~~Pursuant to the terms of the Management Agreement, our Manager is paid a~~The decline in management ~~fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. The decrease is mainly~~fees was a result of our Manager voluntarily waiving 25% of its management fee solely for the ~~restructuring~~duration of calendar year 2022 in order to support our ~~interest rate swaps, which~~earnings potential and our transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.

reduced the "Equity" base used to calculate the management fee. Pursuant to the terms of the agreement, unrealized gains and losses are excluded from the "Equity" base used to calculate the management fee. Upon termination of the interest rate swaps the accumulated unrealized losses, which were excluded, became realized thereby reducing the "Equity" base by approximately $155.8 million. In addition, the August 3, 2016 amendment to the Management Agreement amended the definition of "Equity" as defined in the agreement. Under the new definition, OTTI will reduce the equity base used to calculate the management fee.

Other Operating Expenses

We incurred other operating expenses of approximately ~~$1.9~~$901 thousand and $1.2 million for the nine months ended September 30, 2022, and September 30, 2021, respectively. Other operating costs comprise bank fees, trustee fees and asset management/loan servicing fees for loans acquired serving released. Formerly, transaction and financing costs were included in this expense category.

Transaction costs

We incurred transaction costs of $5.6 million and ~~$809~~$954 thousand for the nine months ended September 30, ~~2017~~2022 and September 30, ~~2016,~~2021, respectively. ~~Other operating cost is comprised of derivative~~The increase in transaction costs ~~custody and servicing fees. The increase~~ was primarily ~~a result~~associated with the securitizations of ~~expenses related to derivative commissions~~Arroyo Trust 2022-1 in February 2022 and ~~fees resulting from~~of Arroyo Trust 2022-2 in July 2022. Transaction costs incurred for the ~~restructuring~~three months ended September 30, 2021 were associated with the foreclosure of ~~the interest rate swaps and loan servicing fees related to the bridge loans, which are a new target asset in 2017.~~one of our commercial loans.

General and Administrative Expenses

We incurred general and administrative expenses of approximately ~~$5.6~~$7.6 million and ~~$7.4~~$7.6 million for the nine months ended September 30, ~~2017~~2022, and September 30, ~~2016,~~2021, respectively. ~~The following describes the key components of general and administrative expenses.~~There was no change between comparable periods.

~~Compensation Expense~~

~~Compensation expense was relatively flat at approximately at $2.1 million and $2.3 million for the nine months ended September 30, 2017 and September 30, 2016, respectively.~~

~~Professional Fees~~

Professional fees decreased from approximately $3.9 million for the nine months ended September 30, 2016 to approximately $2.5 million for the nine month ended September 30, 2017. The decrease was primarily related to the following: i) consulting fees attributable to the outsourced interim chief financial officer position prior to hiring a permanent replacement in June of 2016 , ii) higher 2016 audit fees, and iii) other one-time professional fees incurred in the first half of 2016.

~~Other general and administrative expenses~~

Other general and administrative decreased from approximately $1.2 million for the nine months ended September 30, 2016 to approximately $1.0 million for the nine month ended September 30, 2017. The decrease was mainly attributable to a reduction in the cost of our D&O insurance policy and an adjustment to excise tax based on the filing our 2016 federal tax return.

~~Book Value Per Share~~

~~As of September 30, 2017 and December 31, 2016, our book value per common share was $10.88 and $10.27, respectively.~~

Non-GAAP Financial Measures

Total interest income including interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives and Effective Cost of Funds (as defined below) for the three and nine months ended September 30, 2017 and September 30, 2016, constitute a Non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC. We believe that ~~the~~our non-GAAP measures ~~presented in this Quarterly Report on Form 10-Q,~~(described below), when considered ~~together~~ with ~~U.S.~~ GAAP, ~~financial measures,~~ provide supplemental information ~~that is~~ useful to investors in ~~understanding~~evaluating the results of our ~~borrowing costs and~~operations. Our presentations of such non-GAAP measures may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, such non-GAAP measures should not be considered as substitutes for our GAAP net ~~interest~~ income, as ~~viewed by us. An analysis of any Non-GAAP financial measure should be made in conjunction with results presented in accordance with GAAP.~~

For purposes of evaluating operating results, we believe it is useful to present investors with additional information pertaining to the net interest margin generated by our portfolio. Net interest margin is gross interest income, adjusted for amortization/accretion of investment premium/discount, less interest expense or financing cost. GAAP requires that certainmeasures of our Agency and Non-Agency Interest Only Strips be treated as derivatives and, accordingly, the interest income associated with these securities be included with "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations. Accordingly, in order to determine the gross interest income generated by our IO and IIO securities which are classified as derivatives, we calculate the interest income on these securities as if they were not derivatives. In addition, we include the net interest income on foreign currency swaps and total return swaps in Non-GAAP total interest income.

~~The following table sets forth certain information regarding our net investment income for the three and nine months ended September 30, 2017 and September 30, 2016 (dollars in thousands):~~

Period Ended
Average Amortized Cost of Assets⁽¹⁾

Total
Interest
Income⁽²⁾

Yield on
Average
Assets⁽¹⁾

Average
Balance of
Borrowings

Total Interest Expense⁽³⁾

Average
Effective
Cost of
Funds
Net Interest Income
Net
Interest
Margin
Three months ended September 30, 2017

Agency RMBS $ 865,145
$ 6,156
2.82 % $ 836,749
$ 2,823
1.34 % $ 3,333
1.53 %
Agency CMBS 1,485,287
11,246
3.00 % 1,429,116
4,938
1.37 % 6,308
1.68 %
Non-Agency RMBS 58,919
943
6.35 % 48,681
349
2.84 % 594
4.00 %
Non-Agency CMBS 293,959
6,381
8.61 % 196,467
1,472
2.97 % 4,909
6.63 %
Residential Whole-Loans 196,001
2,002
4.05 % 159,247
1,412
3.52 % 590
1.19 %
Residential Bridge Loans 61,953
1,331
8.52 % 53,310
576
4.29 % 755
4.83 %
Securitized commercial loan 24,974
575
9.13 % 17,803
306
6.82 % 269
4.27 %
Other Securities 124,657
2,624
8.35 % 55,689
487
3.47 % 2,137
6.80 %
Total return swaps 2,884
95
13.07 % n/a
n/a
n/a
95
13.07 %
Interest rate swaps n/a
n/a
n/a
n/a
1,672
0.24 % (1,672 ) (0.21 )%
Total $ 3,113,779
$ 31,353
4.00 % $ 2,797,062
$ 14,035
1.99 % $ 17,318
2.21 %

Three months ended September 30, 2016

Agency RMBS $ 1,754,014
$ 10,721
2.43 % $ 1,602,770
$ 3,042
0.76 % $ 7,679
1.74 %
Agency CMBS 19,427
252
5.16 % 14,895
64
1.71 % 188
3.85 %
Non-Agency RMBS 365,447
7,548
8.22 % 275,900
1,569
2.26 % 5,979
6.51 %
Non-Agency CMBS 401,588
8,036
7.96 % 270,633
1,562
2.30 % 6,474
6.41 %
Residential Whole-Loans 180,641
1,562
3.44 % 158,315
976
2.45 % 586
1.29 %
Commercial Whole-Loans 25,000
575
9.15 % 18,011
303
6.69 % 272
4.33 %
Other Securities 48,842
1,197
9.75 % 25,171
169
2.67 % 1,028
8.37 %
Total return swaps 9,719
308
12.61 % n/a
n/a
n/a
308
12.61 %
Interest rate swaps n/a
n/a
n/a
n/a
6,736
1.14 % (6,736 ) (0.96 )%
Total $ 2,804,678
30,199
4.28 % $ 2,365,695
$ 14,421
2.43 % $ 15,778
2.24 %

Period Ended
Average Amortized Cost of Assets⁽¹⁾

Total
Interest
Income⁽²⁾

Yield on
Average
Assets⁽¹⁾

Average
Balance of
Borrowings

Total Interest Expense⁽³⁾

Average
Effective
Cost of
Funds
Net Interest Income
Net
Interest
Margin
Nine months ended September 30, 2017

Agency RMBS $ 974,051
$ 20,801
2.86 % $ 934,923
$ 8,037
1.15 % $ 12,764
1.75 %
Agency CMBS 1,115,406
25,310
3.03 % 1,049,598
9,664
1.23 % 15,646
1.88 %
Non-Agency RMBS 91,445
4,824
7.05 % 71,994
1,447
2.69 % 3,377
4.94 %
Non-Agency CMBS 334,504
21,247
8.49 % 223,040
4,675
2.80 % 16,572
6.62 %
Residential Whole-Loans 206,957
6,336
4.09 % 168,024
4,219
3.36 % 2,117
1.37 %
Residential Bridge Loans 44,840
2,951
8.80 % 37,952
1,248
4.40 % 1,703
5.08 %
Securitized commercial loan 24,991
1,706
9.13 % 17,801
912
6.85 % 794
4.25 %
Other Securities 118,534
7,412
8.36 % 51,908
1,305
3.36 % 6,107
6.89 %
Total return swaps 4,718
469
13.29 % n/a
n/a
n/a
469
13.29 %
Interest rate swaps n/a
n/a
n/a
n/a
12,284
0.64 % (12,284 ) (0.56 )%
Total $ 2,915,446
$ 91,056
4.18 % $ 2,555,240
$ 43,791
2.29 % $ 47,265
2.17 %

Nine months ended September 30, 2016

Agency RMBS $ 1,667,560
$ 29,979
2.40 % $ 1,558,747
$ 8,782
0.75 % $ 21,197
1.70 %
Agency CMBS 28,042
1,122
5.34 % 21,453
293
1.82 % 829
3.95 %
Non-Agency RMBS 415,254
23,383
7.52 % 302,219
4,942
2.18 % 18,441
5.93 %
Non-Agency CMBS 423,670
25,051
7.90 % 291,178
4,731
2.17 % 20,320
6.41 %
Residential Whole-Loans 193,594
5,254
3.63 % 162,455
3,046
2.50 % 2,208
1.52 %
Commercial Whole-Loans 25,000
1,713
9.15 % 17,915
900
6.71 % 813
4.34 %
Other Securities 66,954
3,941
7.86 % 35,354
697
2.63 % 3,244
6.47 %
Total return swaps 8,726
836
12.80 % n/a
n/a
n/a
836
12.80 %
Interest rate swaps n/a
n/a
n/a
n/a
21,907
1.22 % (21,907 ) (1.03 )%
Total $ 2,828,800
91,279
4.31 % $ 2,389,321
$ 45,298
2.53 % $ 45,981
2.17 %


~~(1)~~	~~Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.~~


~~(2)~~	~~Refer to below table for components of interest income.~~


~~(3)~~	~~Includes the net amount paid, including accrued amounts and premium amortization for MAC interest rate swaps during the periods included in loss on derivative instruments for GAAP.~~

~~The following table reconciles total interest income to adjusted interest income, which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP~~ financial ~~measure) for the three and nine months ended September 30, 2017 and September 30, 2016:~~

(dollars in thousands) Three months ended September 30, 2017 Three months ended September 30, 2016 Nine months ended September 30, 2017 Nine months ended September 30, 2016
Coupon interest income:
Agency RMBS $ 8,886
$ 16,525
$ 30,513
$ 50,693
Agency CMBS 11,071
677
24,408
2,194
Non-Agency RMBS 571
8,575
4,482
27,098
Non-Agency CMBS 4,242
6,021
14,675
19,270
Residential Whole-Loans 2,268
2,107
7,145
6,890
Residential Bridge Loans 1,450
—
3,179
—
Securitized commercial loan 575
575
1,706
1,713
Other Securities 2,160
464
5,300
1,656
Subtotal coupon interest 31,223
34,944
91,408
109,514
Premium accretion, discount amortization and amortization of basis, net:
Agency RMBS (2,995 ) (6,255 ) (10,662 ) (22,220 )
Agency CMBS 110
(505 ) 717
(1,358 )
Non-Agency RMBS 372
(1,172 ) 303
(4,106 )
Non-Agency CMBS 2,139
1,954
6,572
5,513
Residential Whole-Loans (266 ) (544 ) (809 ) (1,635 )
Residential Bridge Loans (119 ) —
(228 ) —
Securitized commercial loan —
—
—
—
Other Securities 464
732
2,112
2,284
Subtotal accretion and amortization (295 ) (5,790 ) (1,995 ) (21,522 )
Interest income $ 30,928
$ 29,154
$ 89,413
$ 87,992
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives⁽¹⁾:

Coupon interest income $ 1,816
$ 3,503
$ 6,229
$ 11,113
Amortization of basis (Non-GAAP Financial Measure) (1,486 ) (2,827 ) (5,055 ) (8,930 )
Contractual interest income, net on Foreign currency swaps⁽¹⁾
—
61
—
268
Total return swaps 95
308
469
836
Subtotal 425
1,045
1,643
3,287
Total adjusted interest income $ 31,353
$ 30,199
$ 91,056
$ 91,279


~~(1)~~	~~Reported in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.~~

Effective Cost of Funds includes the net interest component related to our interest rate. While we have not elected hedge accounting for these instruments, such derivative instruments are viewed by us as an economic hedge against increases in future market interest rates on our liabilities and are characterized as hedges for purposes of satisfying the REIT requirements and therefore the Effective Cost of Funds reflects interest expense adjusted to include the realized loss (i.e., the interest expense component) for allperformance or any measure of our ~~interest rate swaps.~~liquidity under GAAP.

~~The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three and nine months ended September 30, 2017 and September 30, 2016:~~

Three months ended September 30, 2017 Three months ended September 30, 2016 Nine months ended September 30, 2017 Nine months ended September 30, 2016
(dollars in thousands) Reconciliation
Cost of Funds/
Effective Borrowing Costs
Reconciliation
Cost of Funds/
Effective Borrowing Costs
Reconciliation
Cost of Funds/
Effective Borrowing Costs
Reconciliation
Cost of Funds/
Effective Borrowing Costs
Interest expense $ 12,363
1.75 % $ 7,685
1.29 % $ 31,507
1.65 % $ 23,391
1.31 %
Net interest paid - interest rate swaps 1,672
0.24 % 6,736
1.14 % 12,284
0.64 % 21,907
1.22 %
Effective Borrowing Costs $ 14,035
1.99 % $ 14,421
2.43 % $ 43,791
2.29 % $ 45,298
2.53 %
Weighted average borrowings $ 2,797,062

$ 2,365,695

$ 2,555,240

$ 2,389,321

~~Core~~Distributable Earnings

Distributable Earnings (formerly referred to as Core ~~Earnings~~Earnings) is a ~~Non-GAAP~~non-GAAP financial measure that is used by us to approximate cash yield or income associated with our portfolio and is defined as GAAP net income (loss) as adjusted, excluding: (i) net realized gain (loss) on investments and termination of derivative contracts; (ii) net unrealized gain (loss) on ~~investments;~~investments and debt; (iii) net unrealized gain (loss) resulting from mark-to-market adjustments on derivative contracts; (iv) ~~other than temporary impairment; (v)~~ provision for income taxes; ~~(vi)~~(v) non-cash stock-based compensation expense; (vi) non-cash amortization of the convertible senior unsecured notes discount; (vii) one-time charges such as acquisition costs and ~~(vii)~~impairment on loans; and (viii) one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between us, our Manager and our independent directors and after approval by a majority of ~~the~~ our independent directors.

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We utilize ~~Core~~Distributable Earnings as a key metric to evaluate the effective yield of the portfolio. ~~Core~~Distributable Earnings allows us to reflect the net investment income of our portfolio as adjusted to reflect the net interest rate swap interest expense. ~~Core~~Distributable Earnings allows us to isolate the interest expense associated with our interest rate swaps in order to monitor and project our borrowing costs and interest rate spread.

~~We believe that~~ It is one metric of several used in determining the ~~Non-GAAP measure, when considered with GAAP, provides supplemental information useful~~appropriate distributions to ~~investors in evaluating the results of~~ our operations. Our presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, Core Earnings should not be considered as a substitute for our GAAP net income, as a measure of our financial performance or any measure of our liquidity under GAAP.shareholders.

The table below reconciles Net ~~Income (Loss)~~Loss to ~~Core~~Distributable Earnings for the three and nine months ended September 30, ~~2017~~2022 and September 30, ~~2016:~~2021:


(dollars in thousands)	Three months ended September 30, 2022		Three months ended September 30, 2021		Nine months ended September 30, 2022		Nine months ended September 30, 2021
Net loss attributable to common stockholders and participating securities	$	(40,010)	$	(4,213)	$	(88,250)	$	(36,423)
Income tax provision (benefit)	266		(218)		276		(19)
Net loss before income taxes	(39,744)		(4,431)		(87,974)		(36,442)

Adjustments:
Investments:
Net unrealized loss on investments and securitized debt	43,582		6,003		66,300		39,271
Net realized (gain) loss on investments	33		(51)		36,902		6,030
Realized loss on foreign currency transactions	1		—		1		—

One-time transaction costs	2,632		681		5,708		781

Derivative Instruments:
Net realized gain on derivatives	(929)		(485)		(12,982)		(520)
Net unrealized (gain) loss on derivatives	(3,636)		105		(3,793)		97

Other:
Realized loss on extinguishment of convertible senior unsecured notes	2		1,577		134		1,337
Amortization of discount on convertible senior unsecured notes	209		228		648		712
Other non-cash adjustments	—		—		—��		977
Non-cash stock-based compensation expense	100		165		335		453
Total adjustments	41,994		8,223		93,253		49,138
Distributable Earnings	$	2,250	$	3,792	$	5,279	$	12,696

(dollars in thousands) Three months ended September 30, 2017 Three months ended September 30, 2016 Nine months ended September 30, 2017 Nine months ended September 30, 2016
Net Income $ 22,767
$ 32,282
$ 63,693
$ 13,281
Income tax provision (benefit) (1,155 ) 2,239
1,272
2,239
Income before income taxes 21,612
34,521
64,965
15,520

Adjustments:

Investments:

Unrealized (gain) loss on investments and securitized debt (5,249 ) (15,292 ) (35,126 ) (47,571 )
Other than temporary impairment 7,225
4,978
19,901
22,131
Realized (gain) loss on sale of investments (1,830 ) (1,439 ) (20,600 ) 4,968
Realized (gain) loss on foreign currency transactions (1 ) 149
1
266
Unrealized (gain) loss on foreign currency transactions —
195
—
639

Derivative Instruments:

Net realized (gain) loss on derivatives (9,062 ) 14,242
165,649
(11,479 )
Net unrealized (gain) loss on derivatives 598
(26,054 ) (160,255 ) 46,073

Non-cash stock-based compensation expense 218
433
795
1,351
Total adjustments (8,101 ) (22,788 ) (29,635 ) 16,378
Core Earnings $ 13,511
$ 11,733
$ 35,330
$ 31,898

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Alternatively, our ~~Core~~Distributable Earnings can also be derived as presented in the table below by starting with ~~Adjusted~~adjusted net interest income, which includes interest income on Interest-Only Strips accounted for as derivatives and other derivatives, and net interest expense incurred on interest rate swaps and foreign currency swaps and forwards (a Non-GAAP financial measure), subtracting ~~Operating Expenses,~~Total expenses, adding Non-cash stock based compensation, adding one-time transaction costs, adding amortization of discount on convertible senior notes and adding ~~Interest~~interest income on cash balances and other income (loss), net:


(dollars in thousands)	Three months ended September 30, 2022		Three months ended September 30, 2021		Nine months ended September 30, 2022		Nine months ended September 30, 2021
Net interest income	$	5,699	$	7,163	$	16,217	$	23,001
Interest income from IOs and IIOs accounted for as derivatives	11		23		40		73
Net interest income (expense) from interest rate swaps	298		96		(255)		172
Adjusted net interest income	6,008		7,282		16,002		23,246
Total expenses	(6,645)		(5,128)		(17,069)		(14,237)
Other non-cash adjustments	—		—		—		977
Non-cash stock-based compensation	100		165		335		453
One-time transaction costs	2,632		681		5,708		781
Amortization of discount on convertible unsecured senior notes	209		228		648		712
Interest income on cash balances and other income (loss), net	(52)		293		(212)		497
Income attributable to non-controlling interest	(2)		271		(133)		267
Distributable Earnings	$	2,250	$	3,792	$	5,279	$	12,696

Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value

"Economic book value" is a non-GAAP financial measure of our financial position on an unconsolidated basis. We own certain securities that represent a controlling variable interest, which under GAAP requires consolidation; however, our economic exposure to these variable interests is limited to the fair value of the individual investments. Economic book value is calculated by taking the GAAP book value and 1) adding the fair value of the retained interest or acquired security of the VIEs held by us and 2) removing the asset and liabilities associated with each of consolidated trusts (CSMC USA, Arroyo 2019-2, Arroyo 2020-1, Arroyo 2022-1, and Arroyo 2022-2). Management believes that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the actual financial interest of these investments irrespective of the variable interest consolidation 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 table below is a reconciliation of the GAAP Book Value to Non-GAAP Economic Book Value (dollars in thousands - except per share data):


	$ Amount		Per Share



















GAAP Book Value at September 30, 2022	$	97,948	$	16.22

Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned
Deconsolidation of VIEs assets	(2,281,396)		(377.84)
Deconsolidation of VIEs liabilities	2,168,088		359.07
Interest in securities of VIEs owned, at fair value	131,618		21.80
Economic Book Value at September 30, 2022	$	116,258	$	19.25

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(dollars in thousands) Three months ended September 30, 2017 Three months ended September 30, 2016 Nine months ended September 30, 2017 Nine months ended September 30, 2016
Adjusted net interest income $ 17,318
$ 15,778
$ 47,265
$ 45,981
Total Expenses (4,240 ) (4,762 ) (13,572 ) (16,181 )
Non-cash stock based compensation 218
433
795
1,351
Interest income on cash balances and other income (loss), net 215
284
842
747
Core Earnings $ 13,511
$ 11,733
$ 35,330
$ 31,898
Adjusted Net Investment Income and Net Interest Margin

Adjusted net investment income is a non-GAAP financial measure that is an adjustment to net income which excludes the net interest income for third-party consolidated VIEs, and includes premium amortization for interest rate swaps included in gain/loss on derivative instruments. Adjusted net investment income is used as an input when calculating net interest margin in the below tables and gives investors another view of portfolio performance. Adjusted net investment income may not be comparable to similar measures presented by other companies, as it is a non-GAAP financial measure that is not based on a comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. Adjusted net investment income should be considered in addition to, not as a substitute for, or superior to, financial measures determined in accordance with GAAP.

Net interest margin is a non-GAAP financial measure calculated by dividing annualized adjusted net investment income for the period by adjusted total investments for the period. Net interest margin provides investors visibility into the Company’s profitability of interest income versus interest expense after excluding consolidating VIEs and adding the net effect of our interest rate swaps and derivatives. However, since net interest margin is an adjusted measure derived from net investment income (non-GAAP), and differs from net income (loss) as computed in accordance with GAAP, which may not be comparable to similar measures provided by other companies, it should be considered as supplementary to, and not as a substitute for, net income margin computed by net income (loss) in accordance with GAAP.

The following tables set forth certain information regarding our non-GAAP adjusted net investment income and net interest margin which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives and excludes the interest expense for third-party consolidated VIEs for the three and nine months ended September 30, 2022 and September 30, 2021 (dollars in thousands):

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Three Months Ended September 30, 2022	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	902	$	13	5.72	%
Non-Agency CMBS	109,898		2,336		8.43	%
Non-Agency RMBS	36,075		472		5.19	%
Residential whole loans	1,248,772		13,884		4.41	%
Residential bridge loans	5,585		28		1.99	%
Commercial loans	191,929		1,540		3.18	%
Securitized commercial loans	1,288,238		22,099		6.81	%
Other securities	42,768		1,045		9.69	%

Total investments	2,924,167		41,417		5.62	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,288,238)		(22,099)		6.81	%
Investments in consolidated VIEs eliminated in consolidation	14,079		220		6.20	%
Adjusted total investments	$	1,650,008	$	19,538	4.70	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	265,444	$	2,187	3.27	%
Convertible senior unsecured notes, net	109,329		2,402		8.72	%
Securitized debt	2,348,073		31,118		5.26	%
Interest rate swaps	n/a		(298)		(0.04)	%
Total borrowings	2,722,846		35,409		5.16	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,270,756)		(21,132)		6.60	%
Adjusted total borrowings	$	1,452,090	$	14,277	3.90	%

Adjusted net investment income and net interest margin			$	5,261	1.26	%

(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.

(2)Refer to below table for components of interest income.

(3)Includes only the third-party sponsored securitized debt from CSMC USA.

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Three Months Ended September 30, 2021	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments
Agency RMBS	$	1,160	$	27	9.23	%
Non-Agency CMBS	200,824		4,290		8.48	%
Non-Agency RMBS	28,528		369		5.13	%
Residential whole loans	831,634		8,147		3.89	%
Residential bridge loans	8,714		89		4.05	%
Commercial loans	243,534		2,847		4.64	%
Securitized commercial loan	1,407,129		23,622		6.66	%
Other securities	48,364		773		6.34	%
Total investments	2,769,887		40,164		5.75	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,407,129)		(23,622)		6.66	%
Investments in consolidated VIEs eliminated in consolidation	51,278		1,038		8.03	%
Adjusted total investments	$	1,414,036	$	17,580	4.93	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	391,559	$	3,037	3.08	%
Convertible senior unsecured notes, net	145,356		3,099		8.46	%
Securitized debt	1,995,098		26,842		5.34	%
Interest rate swaps	n/a		(96)		(0.02)	%
Total borrowings	2,532,013		32,882		5.15	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,361,048)		(21,745)		6.34	%
Adjusted total borrowings	$	1,170,965	$	11,137	3.77	%

Adjusted net investment income and net interest margin			$	6,443	1.81	%

(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.

(2)Refer to below table for components of interest income.

(3)Includes only the third-party sponsored securitized debt from RETL Trust and CSMC USA.

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Nine Months Ended September 30, 2022	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	1,023	$	49	6.40	%
Non-Agency CMBS	142,362		7,436		6.98	%
Non-Agency RMBS	43,815		1,663		5.07	%
Residential whole loans	1,165,929		34,712		3.98	%
Residential bridge loans	5,688		64		1.50	%
Commercial loans	192,079		4,046		2.82	%
Securitized commercial loans	1,274,894		65,957		6.92	%
Other securities	45,340		2,738		8.07	%

Total investments	2,871,130		116,665		5.43	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,274,894)		(65,957)		6.92	%
Investments in consolidated VIEs eliminated in consolidation	13,966		659		6.31	%
Adjusted total investments	$	1,610,202	$	51,367	4.27	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	402,870	$	8,288	2.75	%
Convertible senior unsecured notes, net	113,670		7,499		8.82	%
Securitized debt	2,129,146		84,621		5.31	%
Interest rate swaps	n/a		255		0.01	%
Total borrowings	2,645,686		100,663		5.09	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,264,942)		(62,940)		6.65	%
Adjusted total borrowings	$	1,380,744	$	37,723	3.65	%

Adjusted net investment income and net interest margin			$	13,644	1.13	%

(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.

(2)Refer to below table for components of interest income.

(3)Includes only the third-party sponsored securitized debt from CSMC USA.

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Nine Months Ended September 30, 2021	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	1,353	$	85	8.40	%
Non-Agency CMBS	202,937		13,401		8.83	%
Non-Agency RMBS	29,270		1,058		4.83	%
Residential whole loans	883,711		25,724		3.89	%
Residential bridge loans	11,383		806		9.47	%
Commercial loans	297,593		11,263		5.06	%
Securitized commercial loans	1,487,050		72,586		6.53	%
Other securities	49,355		2,503		6.78	%

Total investments	2,962,652		127,426		5.75	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,487,050)		(72,586)		6.53	%
Investments in consolidated VIEs eliminated in consolidation	56,396		3,432		8.14	%
Adjusted total investments	$	1,531,998	$	58,272	5.09	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	364,009	$	9,755	3.58	%
Convertible senior unsecured notes, net	159,862		10,056		8.41	%
Securitized debt	2,170,148		84,541		5.21	%
Interest rate swaps	n/a		(172)		(0.01)	%
Total borrowings	2,694,019		104,180		5.17	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,434,559)		(67,057)		6.25	%
Adjusted total borrowings	$	1,259,460	$	37,123	3.94	%

Adjusted net investment income and net interest margin			$	21,149	1.85	%

(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.

(2)Refer to below table for components of interest income.

(3)Includes only the third-party sponsored securitized debt from RETL Trust and CSMC USA.

The following table reconciles total interest income to adjusted interest income, which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three and nine months ended September 30, 2022 and September 30, 2021:

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(dollars in thousands)	Three months ended September 30, 2022		Three months ended September 30, 2021		Nine months ended September 30, 2022		Nine months ended September 30, 2021
Coupon interest income:

Agency RMBS	$	—	$	11	$	13	$	38
Non-Agency CMBS	1,949		2,621		7,050		7,171
Non-Agency RMBS	446		609		1,804		1,762
Residential whole loans	14,829		10,268		39,972		32,993
Residential bridge loans	28		108		64		827
Commercial loans	1,540		2,820		4,046		11,118
Securitized commercial loans	15,510		17,533		46,023		54,137
Other securities	860		1,043		2,515		3,717
Subtotal coupon interest	35,162		35,013		101,487		111,763
Premium accretion, discount amortization and amortization of basis, net:

Agency RMBS	2		(7)		(4)		(26)
Non-Agency CMBS	387		1,669		386		6,230
Non-Agency RMBS	26		(240)		(141)		(704)
Residential whole loans	(945)		(2,121)		(5,260)		(7,269)
Residential bridge loans	—		(19)		—		(21)
Commercial loans	—		27		—		145
Securitized commercial loans	6,589		6,089		19,934		18,449
Other securities	185		(270)		223		(1,214)
Subtotal accretion and amortization	6,244		5,128		15,138		15,590
Interest income	$	41,406	$	40,141	$	116,625	$	127,353
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
Coupon interest income	$	16	$	82	$	160	$	305
Amortization of basis	(5)		(59)		(120)		(232)


Subtotal	11		23		40		73
Total adjusted interest income	$	41,417	$	40,164	$	116,665	$	127,426

(1)Reported in "Gain on derivative instruments, net" in our Consolidated Statements of Operations.

Effective Cost of Funds

Effective Cost of Funds includes the net interest component related to our interest rate swaps, as well as the impact of our foreign currency swaps and forwards. While we have not elected hedge accounting for these instruments, such derivative instruments are viewed by us as an economic hedge against increases in future market interest rates on our liabilities and changes in foreign currency exchange rates on our assets and liabilities and are characterized as hedges for purposes of satisfying the REIT requirements and therefore the Effective Cost of Funds reflects interest expense adjusted to include the realized gain/loss (i.e., the interest income/expense component) for all of our interest rate swaps and the impact of our foreign currency swaps and forwards.

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The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three and nine months ended September 30, 2022 and September 30, 2021:


	Three months ended September 30, 2022				Three months ended September 30, 2021				Nine months ended September 30, 2022				Nine months ended September 30, 2021
(dollars in thousands)	Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs
Interest expense	$	35,707	5.20	%	$	32,978	5.17	%	$	100,408	5.07	%	$	104,352	5.18	%
Adjustments:
Interest expense on Securitized debt from consolidated VIEs	(21,132)		(6.60)	%	(21,745)		(6.34)	%	(62,940)		(6.65)	%	(67,057)		(6.25)	%
Net interest paid - interest rate swaps	(298)		(0.04)	%	(96)		(0.02)	%	255		0.01	%	(172)		(0.01)	%
Effective Cost of Funds	$	14,277	3.90	%	$	11,137	3.77	%	$	37,723	3.65	%	$	37,123	3.94	%
Weighted average borrowings	$	1,452,090			$	1,170,965			$	1,380,744			$	1,259,460

Liquidity and Capital Resources

General

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, and other general business needs. To maintain our REIT qualifications under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income, excluding capital gains and, such distributions requirements limit our ability to retain earnings and increase capital for operations. We believe that our significant capital resources and access to financing will provide us with financial flexibility at levels sufficient to meet current and anticipated capital requirements, including funding new investment opportunities, paying distributions to our stockholders and servicing our debt obligations.

Our liquidity and capital resources are managed on a daily basis to ensure that we have sufficient liquidity to absorb market events that could negatively impact collateral valuations and result in margin calls as well as to ensure that we have the flexibility to manage our investment portfolio to take advantage of market opportunities. Our principal sources of ~~cash~~funds generally consist of borrowings under repurchase agreements, Residential Whole Loan securitizations, payments of principal and interest we receive on our investment portfolio, ~~and~~ cash generated from ~~operations.~~investment sales, and to the extent such transactions are entered into, proceeds from capital market and unsecured convertible note transactions.

Under our repurchase agreements and derivative contracts, counterparties retain the right to determine the fair value of the collateral pledged, or in the case of cleared swaps the required collateral may be determined by clearinghouse rules. A reduction in the value of the collateral pledged will require us to provide additional collateral or fund cash margin calls. Alternatively, since margins calls for our interest rate swaps and swaptions generally are inversely correlated to those of our repurchase agreements, our interest rate swap and swaptions counterparties would likely be required to post collateral with us during a period in which we were required to post collateral with our repurchase agreement counterparties. Similarly, we would likely be required to post collateral with swap and swaption counterparties during periods in which our repurchase agreement counterparties are required to post collateral with us. In an instance of severe volatility, or where the additional stress on liquidity resulting from volatility is sustained over an extended period of time, we could be required to sell securities, possibly even at a loss to generate sufficient liquidity to satisfy collateral and margin requirements which could have a material adverse effect on our financial position, results of operations and cash flows.

As part of our risk management process, our Manager closely monitors our liquidity position. This includes the development and evaluation of various alternative processes and procedures, which continue to be updated with regard to scenario testing for purposes of assessing our liquidity in the face of different economic and market developments. We currently believe we have sufficient ~~current~~ liquidity and ~~access to additional liquidity to meet financial obligations~~capital resources available, for at least the next 12 ~~months.~~

~~At September 30, 2017,~~months, to fund our ~~primary sources of cash consisted of borrowings under~~operations, meet our ~~repurchase agreements, principal repayments~~financial obligations, purchase our target assets, and ~~net interest margin generated from~~make dividend payments to maintain our ~~investment portfolio.~~

~~Borrowings Under Various Financing Arrangements~~

REIT qualifications. As of September 30, ~~2017,~~2022, we had ~~master repurchase agreements with 27 counterparties. We had borrowings under repurchase agreements with 17 counterparties~~$55.4 million in cash and cash equivalents. Also our other sources of ~~approximately $3.3 billion at September 30, 2017. The following tables present our repurchase agreement borrowings by type~~liquidity were unencumbered investments, and unused borrowing capacity in certain borrowing facilities since the amount borrowed is less than the maximum advance rate.

Sources of ~~collateral pledged, as~~Liquidity

Our primary sources of September 30, 2017 and September 30, 2016, and the respective effective cost of funds (Non-GAAP financial measure) for the three and nine months ended September 30, 2017 and September 30, 2016, respectively. See “Non-GAAP Financial Measures” (dollars in thousands):

September 30, 2017 Three months ended September 30, 2017 Nine months ended September 30, 2017
Collateral
Borrowings
Outstanding

Value of
Collateral
Pledged ⁽¹⁾

Weighted
Average
Interest Rate
end of period

Weighted
Average Cost
of Funds

Weighted Average Effective Cost of Funds
(Non-GAAP)⁽²⁾

Weighted
Average Cost
of Funds

Weighted Average Effective Cost of Funds
(Non-GAAP)⁽²⁾

Weighted
Average
Haircut
end of period
Agency RMBS, at fair value $ 792,520
$ 823,403
1.39 % 1.34 % 1.34 % 1.15 % 1.15 % 4.79 %
Agency CMBS, at fair value 2,019,010
2,109,202
1.39 % 1.37 % 1.37 % 1.23 % 1.23 % 5.06 %
Non-Agency RMBS, at fair value 48,443
64,348
2.85 % 2.84 % 2.84 % 2.69 % 2.69 % 23.29 %
Non-Agency CMBS, at fair value 192,015
278,095
2.96 % 2.97 % 2.97 % 2.80 % 2.80 % 30.38 %
Residential Whole-Loans, at fair value⁽³⁾
156,751
191,439
3.48 % 3.52 % 3.52 % 3.36 % 3.36 % 20.00 %
Residential Bridge Loans⁽³⁾

51,074
54,912
4.29 % 4.29 % 4.29 % 4.40 % 4.40 % 20.00 %
Securitized commercial loan, at fair value⁽³⁾
6,809
13,973
3.09 % 3.20 % 3.20 % 3.28 % 3.28 % 50.00 %
Other securities, at fair value 69,634
122,651
3.36 % 3.47 % 3.47 % 3.36 % 3.36 % 39.68 %
Interest rate swaps n/a
n/a
n/a
n/a
0.24 % n/a
0.64 % n/a
Total $ 3,336,256
$ 3,658,023
1.69 % 1.72 % 2.00 % 1.62 % 2.30 % 8.46 %


~~(1)~~	~~Excludes approximately $25.0 million of cash collateral posted.~~

~~(2)~~

The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps, net of premium amortization on MAC swaps, of approximately $1.7 million and $12.3 million for the three and nine months ended September 30, 2017. While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements. See “Non-GAAP Financial Measures”.


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

September 30, 2016 Three months ended September 30, 2016 Nine months ended September 30, 2016
Collateral
Borrowings
Outstanding

Fair Value of
Collateral
Pledged ⁽¹⁾

Weighted
Average
Interest Rate
end of period

Weighted
Average Cost
of Funds

Weighted
Average
Effective Cost of
Funds (Non-GAAP)⁽²⁾

Weighted
Average Cost
of Funds

Weighted
Average
Effective Cost of
Funds (Non-GAAP)⁽²⁾

Weighted
Average
Haircut
end of period
Agency RMBS $ 1,784,448
$ 1,841,935
0.75 % 0.76 % 0.76 % 0.75 % 0.75 % 4.35 %
Agency CMBS 10,725
13,737
1.66 % 1.71 % 1.71 % 1.82 % 1.82 % 24.28 %
Non-Agency RMBS 270,060
395,064
2.32 % 2.26 % 2.26 % 2.18 % 2.18 % 28.95 %
Non-Agency CMBS⁽³⁾
256,544
358,481
2.36 % 2.30 % 2.30 % 2.17 % 2.17 % 27.20 %
Residential Whole-Loans⁽⁴⁾
167,111
204,882
2.77 % 2.45 % 2.45 % 2.50 % 2.50 % 20.00 %
Securitized commercial loan⁽⁴⁾
6,790
13,517
3.05 % 2.95 % 2.95 % 2.96 % 2.96 % 50.00 %
Other securities 27,858
50,912
3.05 % 2.67 % 2.67 % 2.63 % 2.63 % 43.53 %
Interest rate swaps n/a
n/a
n/a
n/a
1.14 % n/a
1.22 % n/a
Total $ 2,523,536
$ 2,878,528
1.25 % 1.26 % 2.43 % 1.27 % 2.53 % 10.98 %


~~(1)~~	~~Excludes approximately $30.5 million of cash collateral posted.~~

~~(2)~~

The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps, net of premium amortization on MAC swaps, of approximately $6.7 million and $21.9 million for the three and nine months ended September 30, 2016, respectively. While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements. See “Non-GAAP Financial Measures”.


~~(3)~~	~~Including Non U.S. CMBS pledged as collateral and Non U.S. repurchase agreement borrowings.~~


~~(4)~~	~~Repurchase agreement borrowings collateralized by Whole-Loans and securitized commercial loan owned through trust certificates. The trust certificates are eliminated upon consolidation.~~

As of September 30, 2017, our repurchase agreements require collateral in excess of the loan amount, or haircuts, ranging from a low of 3.0% to a high of 5.0% for Agency RMBS, exclusive of IOs and IIOs for which the haircutsliquidity are as high as 20.0% and Agency CMBS haircuts are 5.0%, exclusive of IOs and IIOs for which haircuts are as high as 25.0%. For Non-Agency RMBS haircuts range from a low of 20.0% to a high of 26.0% and Non-Agency CMBS haircuts range from a low of 15.0% to a high of 60.0%. Haircuts for Whole-Loans range from a low of 20.0% to a high of 50.0% and other securities range from a low of 22.5% to a high of 50.0%. Declines in the value of our portfolio can trigger margin calls by our counterparties under our repurchase agreements. Margin calls could adversely affect our liquidity. Our inability to post adequate collateral for a margin call by the counterparty could result in a condition of default under our repurchase agreements. An event of default or termination event would give some of our counterparties the option to terminate all existing repurchase transactions with us and require any amount due to the counterparties by us to be payable immediately. If this were to occur, we may be forced to sell assets under adverse market conditions or through foreclosure which may have a material adverse consequence on our business, financial position, our results of operations and cash flows. During the nine months ended September 30, 2017, we were able to satisfy margin calls using cash on hand, unlevered or underleveraged securities, cash from rehypothecation of securities received as incremental collateral and cash from our repurchase agreement borrowings.follows:

Under the repurchase agreements, the respective counterparties, subject to the terms of the individual agreements, retain the right to determine the fair value of the underlying collateral. A reduction in the value of pledged assets requires us to provide additional collateral or fund margin calls. In addition, certain of the repurchase agreements may be terminated by our counterparties if we do not maintain certain equity and leverage metrics. For our repurchase agreements with outstanding borrowings, we were in compliance with the terms of such financial tests as of September 30, 2017.

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

Cash Generated from Operations

For the nine months ended September 30, ~~2017,~~2022, net cash ~~from~~provided by operating activities was approximately ~~$15.6 million, this~~$13.1 million. This was primarily attributable to ~~the net interest income we earned on our investments less operating expenses, general and administrative expenses and~~ margin settlements of interest rate ~~swaps.~~swaps, the net interest income on our investments, realized gain on the sale of an REO hotel, less operating expenses, and general and administrative expenses. For the nine months ended September 30, ~~2016,~~2021, net cash ~~used~~provided by operating activities was approximately ~~$2.1 million, which~~$1.3 million. This was primarily attributable to ~~the lower~~ net interest income ~~we earned~~ on our investments, ~~coupled with higher~~less operating expenses, and general and administrative expenses. ~~The change period over period was mainly attributable to the settlement of interest rate swaps.~~

Cash Provided by and Used in Investing Activities

For the nine months ended September 30, ~~2017,~~2022, net cash used byin investing activities was approximately ~~$1.2 billion.~~$100.2 million. This was primarily attributable to ~~our investment acquisitions,~~ purchases of Non-Agency RMBS and residential whole loans during the period,

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which was partially offset by ~~proceeds from sales and~~ receipts of principal payments and payoffs on our ~~investments.~~investments and the sale of an REO hotel. For the nine months ended September 30, ~~2016, our~~2021, net cash provided by investing activities ~~increased our cash balance by~~was approximately ~~$142.6~~$560.6 million. This was primarily attributable to ~~our proceeds from sales and receipt~~receipts of principal payments and payoffs on our ~~investments, which was partially offset by our investment acquisitions.~~investments.

Cash Provided by and Used in Financing Activities

For the nine months ended September 30, ~~2017,~~2022, net cash provided by financing activities was approximately ~~$1.1 billion.~~$102.3 million. This was ~~primarily~~ attributable to ~~higher weighted average borrowings as a result of investment acquisitions~~the net cash proceeds from the Arroyo Trust 2022-1 and ~~a decrease in cash collateral posted,~~Arroyo Trust 2022-2 securitizations, which was partially offset by ~~dividends paid on~~a net decrease in repurchase agreement borrowings, paydowns in our ~~common stock.~~securitized debt, and extinguishment of convertible senior unsecured notes. For the nine months ended September 30, ~~2016, our~~2021, net cash used in financing activities ~~decreased our cash balance by~~was approximately ~~$134.3~~$605.5 million. This was ~~primarily~~ attributable to ~~a decrease in our net~~repayment of securitized debt and distribution of escrows related to consolidated VIEs.

Repurchase Agreements

As of September 30, 2022, we had borrowings under five of our master repurchase agreements ~~from investment sales and lower leverage from principal payments on our investments .~~

~~Other Potential Sources of Financing~~

~~We held cash~~ of approximately ~~$36.7 million and $31.0 million at~~$218.9 million. The following tables present our repurchase agreement borrowings by type of collateral pledged, as of September 30, ~~2017~~2022 and September 30, ~~2016, respectively. Our primary sources of cash currently consist of repurchase facility borrowings, investment income, principal repayments on investments~~2021, and the ~~proceeds~~respective effective cost of ~~any future securities offering, to~~funds (Non-GAAP financial measure) for the ~~extent available~~three and nine months ended September 30, 2022 and September 30, 2021, respectively (dollars in thousands). See “Non-GAAP Financial Measures” for more information:


	September 30, 2022						Three months ended September 30, 2022				Nine months ended September 30, 2022
Collateral	Borrowings Outstanding		Value of Collateral Pledged		Weighted Average Interest Rate end of period		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Haircut end of period

Agency RMBS, at fair value	$	317	$	233	3.15	%	2.47	%	2.47	%	1.60	%	1.60	%	25.00	%
Non-Agency CMBS, at fair value(2)	55,155		90,107		2.28	%	2.31	%	2.31	%	2.07	%	2.07	%	40.00	%
Non-Agency RMBS, at fair value	76,171		122,401		5.05	%	3.89	%	3.89	%	3.04	%	3.04	%	41.26	%
Residential whole loans, at fair value(3)	4,827		7,214		5.16	%	2.40	%	2.40	%	2.73	%	2.73	%	48.34	%
Residential bridge loans, at fair value(3)	2,895		5,120		5.60	%	4.72	%	4.72	%	3.53	%	3.53	%	25.00	%
Commercial loans, at fair value(3)	53,662		81,326		4.72	%	4.27	%	4.27	%	3.34	%	3.34	%	31.57	%


Other securities, at fair value	25,914		38,310		2.54	%	2.57	%	2.57	%	2.27	%	2.27	%	36.90	%
Interest rate swaps	n/a		n/a		n/a		n/a		(0.45)	%	n/a		0.08	%	n/a
Total	$	218,941	$	344,711	3.98	%	3.27	%	2.82	%	2.75	%	2.84	%	38.70	%

(1)The effective cost of funds for the ~~capital markets. In~~period presented is calculated on an annualized basis and includes interest expense for the ~~future, we expect our primary sources~~period and net periodic interest payments on interest rate swaps of ~~liquidity to consist of payments of principal~~approximately $298 thousand received and $255 thousand paid for the three and nine months ended September 30, 2022. While interest ~~we receive~~rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our ~~portfolio assets, unused borrowing capacity~~liabilities and are treated as hedges for purposes of satisfying the REIT requirements. See “Non-GAAP Financial Measures.”

(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(3)Repurchase agreement borrowings collateralized by whole loans, bridge loans, and commercial loans owned through trust certificates. The trust certificates are eliminated upon consolidation.

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	September 30, 2021						Three months ended September 30, 2021				Nine months ended September 30, 2021
Collateral	Borrowings Outstanding		Fair Value of Collateral Pledged(3)		Weighted Average Interest Rate end of period		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Haircut end of period

Agency RMBS, at fair value	$	1,048	$	1,342	1.05	%	1.06	%	1.06	%	1.19	%	1.19	%	25.00	%
Non-Agency CMBS, at fair value(1)	78,666		136,968		2.07	%	2.12	%	2.12	%	3.33	%	3.33	%	38.03	%
Non-Agency RMBS, at fair value	15,632		28,003		2.12	%	2.18	%	2.18	%	3.55	%	3.55	%	35.00	%
Residential whole loans, at fair value(2)	277,780		328,811		2.95	%	4.10	%	4.10	%	5.70	%	5.70	%	18.71	%
Residential bridge loans(2)	5,817		5,960		2.60	%	2.66	%	2.66	%	2.71	%	2.71	%	20.00	%
Commercial loans, at fair value(2)	74,272		101,271		2.40	%	2.93	%	2.93	%	2.63	%	2.63	%	31.14	%
Membership interest(3)	—		—		—	%	3.08	%	3.08	%	3.02	%	3.02	%	—	%

Other securities, at fair value	30,093		52,093		2.24	%	2.30	%	2.30	%	3.20	%	3.20	%	37.15	%
Interest rate swaps	n/a		n/a		n/a		n/a		(0.10)	%	n/a		(0.06)	%	n/a
Total	$	483,308	$	654,448	2.64	%	3.08	%	2.98	%	3.58	%	3.52	%	25.47	%

(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(2)Repurchase agreement borrowings collateralized by whole loans, bridge loans, and commercial loan owned through trust certificates. The trust certificates are eliminated upon consolidation.

(3)The pledged amount relates to our non-controlling membership interest in our wholly-owned subsidiary, WMC RETL LLC, which was financed under ~~our financing sources and future issuances of equity and debt securities.~~a repurchase agreement. The membership interest is eliminated in consolidation.

Contractual Obligations and Commitments

Our contractual obligations as of September 30, ~~2017~~2022 are as follows (dollars in thousands):


	Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total
Borrowings under repurchase agreements	$	218,941	$	—	$	—	$	—	$	218,941
Contractual interest on repurchase agreements	3,570		—		—		—		3,570
Convertible senior unsecured notes	26,049		86,250		—		—		112,299
Contractual interest on convertible senior unsecured notes	6,701		5,822		—		—		12,523
Securitized debt(2)	—		1,370,691		—		1,067,676		2,438,367
Contractual interest on securitized debt	94,702		189,404		77,146		1,071,579		1,432,831




Total	$	349,963	$	1,652,167	$	77,146	$	2,139,255	$	4,218,531

Less than 1
year

1 to 3
years

3 to 5
years

More than
5 years
Total
Borrowings under repurchase agreements $ 3,336,256
—
—
—
$ 3,336,256
Investment related payables 296,317
—
—
—
296,317
Total: GAAP Basis - Excluding TBA - long positions 3,632,573
—
—
—
3,632,573
TBA - long positions 207,016
—
—
—
207,016
Total: Non-GAAP Basis $ 3,839,589
—
—
—
$ 3,839,589


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

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

~~Repurchase Agreements~~

As of September 30, 2017, we have an obligation for approximately $10.4 million in contractual interest payments related to our repurchase agreements through the respective maturity date of each repurchase agreement.

~~Securitized Debt~~

~~At September 30, 2017, we had securitized debt related to the consolidated VIEs, with a principal balance of $11.0 million (and a fair value of $11.0 million).~~ (2)The securitized debt is non-recourse to us and ~~related interest payments of the VIEs~~ can only be settled with the ~~securitized commercial loan~~loans that serve as collateral. The collateral for the securitized debt has a principal balance of ~~the VIE and~~$2.6 billion. Assumes entire outstanding principal balance at September 30, 2022 is ~~non-recourse to us.~~paid at maturity.

Management Agreement

On May 9, 2012, we entered into a management agreement (the “Management Agreement”) with our Manager which describes the services to be provided by our Manager and compensation for such services. Our Manager is responsible for managing our operations, including: (i) performing all of our day-to-day functions; (ii) determining investment criteria in conjunction with our Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management, subject to the direction and oversight of our Board of Directors. Pursuant to the terms of the Management Agreement, our Manager is paid a management

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fee equal to 1.50% per annum of our stockholders’ equity, (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.

In December 2021, the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support our earnings potential and our transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.

Off-Balance Sheet Arrangements

As of September 30, 2017, we held contracts to purchase (“long position”) and sell (“short position”) TBAs on a forward basis. If a counterparty to one of the TBAs that we enter into defaults on its obligations, we may not receive payments or securities due under the TBA agreement, and thus, we may lose any unrealized gain associated with that TBA transaction.

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

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

~~See Note 11 “Stockholders' Equity - Warrants” to the financial statements contained in this Quarterly Report on Form 10-Q, for a description of our outstanding warrants.~~

Dividends

~~We intend to make regular quarterly dividend distributions to holders of~~To maintain our ~~common stock.~~qualification as a REIT, U.S. federal income tax law generally requires that ~~a REIT~~we distribute ~~annually, in accordance with the REIT regulations,~~ at least 90% of ~~its~~our REIT taxable income ~~for the taxable year,~~annually, determined without regard to the deduction for dividends paid and excluding ~~net~~ capital ~~gains as well as undistributed taxable income retained by a TRS. To~~gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our ~~net~~ taxable ~~income, in accordance with the REIT regulations, for any given year, we will pay tax on such amount at the regular corporate rates.~~ income.

We ~~intend~~evaluate each quarter to determine our ability to pay ~~regular quarterly~~ dividends to our stockholders based on our net taxable income if and to the extent authorized by our Board of Directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service ~~on our repurchase agreements and other debts payable.~~payments. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock ~~distribution or distribution~~distribution.

Table of ~~debt securities.~~Contents

~~Recent Developments~~

In October 2017, we issued $115 million aggregate principal amount of 6.75% convertible senior unsecured notes, including the underwriter’s overallotment option to purchase an additional $15 million aggregate principal amount of the notes. The notes pay interest semiannually in arrears. We received proceeds of $111.6 million from the offering, net of underwriting discounts and commissions, which will be amortized through interest expense over the life of the notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

The notes are convertible into, at our election, cash, shares of our common stock or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require us to repurchase all or any portion of their notes for cash equal to 100%

of the principal amount of the notes, plus accrued and unpaid interest, if we undergo a fundamental change as specified in the agreement. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Credit Risk

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

As of September 30, ~~2017, 17~~2022, four of the counterparties ~~that~~with which we had outstanding repurchase agreement borrowings held collateral which we posted as security for such borrowings in excess of 5% of our ~~Stockholders’~~stockholders’ equity. Prior to entering into a repurchase agreement with any particular institution, our Manager does a thorough review of such potential counterparty. Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.

Interest Rate Risk

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

Interest Rate Effect on Net Interest Income

Our operating results will depend in large part on differences between the income earned on our assets and our borrowing costs. The cost of our borrowings is generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase and the yields earned on our leveraged fixed-rate mortgage assets will remain static. Further, the cost of such financing could increase at a faster pace than the yields earned on our leveraged ARM and hybrid ARM assets. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.

Interest Rate Cap Risk

To the extent we invest in adjustable-rate RMBS and whole loans, such ~~securities are generally~~instruments may be subject to interest rate caps, which potentially could cause such ~~RMBS~~instruments to acquire many of the characteristics of fixed-rate securities if interest rates were to rise above the cap levels. This issue is magnified to the extent we acquire ARM and hybrid ARM assets that are not based on mortgages which are fully indexed. In addition, ARM and hybrid ARM assets may be subject to periodic payment

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caps that result in some portion of

the interest being deferred and added to the principal outstanding or a portion of the incremental interest rate increase being deferred. To the extent we invest in such ARM and/or hybrid ARM assets, we could potentially receive less cash income on such assets than we would need to pay the interest cost on our related borrowings. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “Interest Rate Risk.”

Interest Rate Effects on Fair value

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

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

Market Risk

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

The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments, including interest rate swaps, Interest-Only Strips, and net interest income at September 30, ~~2017,~~2022, assuming a static portfolio of assets. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilizes our Manager’s assumptions, models and estimates, which are based on our Manager’s judgment and experience.

Change in Interest Rates
Percentage Change in Projected
Net Interest Income

Percentage Change in Projected
Portfolio Value
+1.00% (16.53 )% (0.92 )%
+0.50% (8.95 )% (0.44 )%
-0.50% 8.33 % 0.40 %
-1.00% 12.22 % 0.75 %


Change in Interest Rates	Percentage Change in Projected Net Interest Income		Percentage Change in Projected Portfolio Value
+1.00%	(43.43)	%	(1.14)	%
+0.50%	(21.74)	%	(0.58)	%
-0.50%	21.80	%	0.59	%
-1.00%	43.71	%	1.20	%

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

Certain assumptions have been made in connection with the calculation of the information set forth in the table above and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at September 30, ~~2017.~~2022. The analysis presented utilizes assumptions and estimates based on our Manager’s judgment and experience. Furthermore, while we generally expect to retain such assets and the associated interest rate risk, future purchases and sales of assets could materially change our interest rate risk profile.

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Prepayment Risk

The value of our Agency and Non-Agency RMBS and our ~~Residential Whole-Loans~~residential whole loans may be affected by prepayment rates on the underlying residential mortgage. We acquire RMBS and ~~Residential Whole-Loans~~residential whole loans and anticipate that the underlying residential mortgages will prepay at a projected rate generating an expected yield. If we purchase assets at a premium to par value, when borrowers prepay their residential mortgage loans faster than expected, the corresponding prepayments may reduce the expected yield on our residential mortgage assets because we will have to amortize the related premium on an accelerated basis and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we are required to make a retrospective adjustment to historical amortization. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their residential mortgage loans slower than expected, such decrease may reduce the expected yield on such assets because we will not be able to accrete the related discount as quickly as originally anticipated and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we will be required to make a retrospective adjustment to historical amortization.

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

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

Extension Risk

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

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

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

Real Estate Risk

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

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building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds ~~available~~available to a borrower to repay our loans, which could also cause us to suffer losses.

Counterparty Risk

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

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

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

As of September 30, 2017, we have entered into five master securities forward trading agreements, or MSFTAs, which may govern the trading of some or all TBA transactions. Pursuant to the terms of these MSFTAs, we and our counterparties would be required to post margin to the other when the mark to market exposure of the TBA transactions executed under the agreement exceed certain thresholds. We expect to continue to negotiate and enter into MSFTAs with additional TBA counterparties. The margin provisions of the MSFTA help to mitigate, but do not eliminate, counterparty risk associated with TBA transactions. If a counterparty to a TBA transaction cannot perform under the terms of the trade, we may not receive securities we have agreed to purchase or payment for securities we have agreed to sell, and thus, we may lose any unrealized gain associated with such transaction.

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

Funding Risk

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

Liquidity Risk

Our liquidity risk is principally associated with the financing of long-maturity assets with short-term borrowings in the form of repurchase agreements. Although the interest rate adjustments of these assets and liabilities fall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.

Should the value of our assets pledged as collateral suddenly decrease, margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position. Our inability to post adequate collateral for a margin call by the counterparty could result in a condition of default under our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse consequence on our business and results of operations.

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

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

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

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

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

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

Inflation

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

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Foreign Investment risk

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

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

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

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

Currency Risk

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

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ITEM 4. Controls and Procedures

Disclosure Controls and Procedures: Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that the required information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of September 30, ~~2017.~~2022. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

No change occurred in our internal control over financial reporting (as defined in Rule13a-15(f) and Rule 15d-15(f) of the Exchange Act) during the three months ended September 30, ~~2017~~2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business. ~~As of~~During the three months ended September 30, ~~2017,~~2022, the Company was not involved in any material legal proceedings.

ITEM 1A. Risk Factors

~~Other than the additional risk factor presented below, there~~There were no material changes during the period covered by this report to the risk factors previously disclosed in our ~~annual report~~Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2021, as filed with the SEC on March ~~7, 2017.~~8, 2022. Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse effect on our business, financial condition and results of ~~operation.~~operations.

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

Our performance depends on the economic conditions in markets in which the properties securing the mortgage loans underlying our investments are concentrated. As of September 30, 2017, a substantial portion of our investments had underlying properties in California. Our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders could be materially and adversely affected by this geographic concentration if market conditions, such as an oversupply of space or a reduction in demand for real estate in an area, deteriorate in California. Moreover, due to the geographic concentration of properties securing the mortgages underlying our investments, the Company may be disproportionately affected by general risks such as natural disasters, including major fires, floods and earthquakes, severe or inclement weather, and acts of terrorism should such developments occur in or near the markets in California in which such properties are located.

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

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not Applicable.

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

The following exhibits are filed as part of this report.



Exhibit No.		Description

3.1*		Amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.1 to Amendment No. 10 Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012.

3.2*		Amendment to the amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, dated June 3, 2016, incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K, filed March 7, 2017.

3.3*		Amendment to the amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, dated July 8, 2022, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed on July 11, 2022.

3.4*		Amended and restated bylaws of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.2 to Amendment No. 10 to Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012

4.1*		Specimen Common Stock Certificate of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 4.1 to Amendment No. 10 to Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012.

4.2*		Indenture, dated as of October 2, 2017, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on October 3, 2017.

4.3*		First Supplemental Indenture, dated as of October 2, 2017, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on October 3, 2017.

4.4*		Form of 6.75% Convertible Senior Notes due 2022 (attached as Exhibit A to the First Supplemental Indenture filed as Exhibit 4.3 hereto), incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed on October 3, 2017.

10.14.5		~~Amendment to the Management Agreement~~Second Supplemental Indenture, dated as of September 14, 2021, between Western Asset Mortgage Capital Corporation and ~~Western Asset Management Company, dated August 3, 2016,~~Wells Fargo Bank, National Association, incorporated by reference to Exhibit ~~10.1 to the Quarterly Report on Form 10-Q, filed on August 5, 2016.~~

10.2*	~~Form of Warrant, incorporated by reference to Exhibit 10.2 to Amendment No. 9 Form S-11 (Registration Statement No. 333-159962), filed April 30, 2012.~~

10.3*	Management Agreement, dated May 9, 2012, between Western Asset Mortgage Capital Corporation and Western Asset Management Company, incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q, filed August 14, 2012.

10.4*	Registration Rights Agreement, dated May 15, 2012, among Western Asset Mortgage Capital Corporation, Western Asset Management Company and certain individual holders named therein, incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q, filed August 14, 2012.

10.5*	~~Western Asset Mortgage Capital Corporation Equity Plan, incorporated by reference to Exhibit 10.5 to Amendment No. 9 Form S-11 (Registration Statement No. 333-159962), filed April 30, 2012.~~

10.6*	Western Asset Mortgage Capital Corporation Manager Equity Plan, incorporated by reference to Exhibit 10.6 to Amendment No. 9 Form S-11 (Registration Statement No. 333-159962), filed April 30, 2012.

10.7*	Form of Indemnification Agreement between Western Asset Mortgage Capital Corporation and a director, incorporated by reference to Exhibit 10.7 to Amendment No. 9 Form S-11 (Registration Statement No. 333-159962), filed April 30, 2012.

10.8*	~~Restricted Stock Award Agreement, dated May 15, 2012, for Western Asset Management Company, incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q, filed August 14, 2012.~~

10.9*	~~Form of Restricted Stock Award Agreement for independent directors, incorporated by reference to Exhibit 10.2 to the Form S-8 dated May 15, 2012 (File No. 1-35543).~~



10.10*	~~Equity Distribution Agreement, dated March 6, 2017, among Western Asset Mortgage Capital Corporation, Western Asset Management Company and JMP Securities LLC, incorporated by reference to Exhibit 1.1~~4.2 to the Current Report on Form 8-K, filed ~~March 9,~~on October 3, 2017.

~~31.1~~4.6*		Form of 6.75% Convertible Senior Notes due 2024 (attached as Exhibit A to the Second Supplemental Indenture filed as Exhibit 4.5 hereto), incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed on October 3, 2017.

31.1		Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.

31.2		Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.

32.1		Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.

~~101.INS~~101		~~XBRL Instance Document~~The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021; (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021; (iii) the Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2022 and 2021; (iv) the Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2022 and 2021; and (v) the Notes to Consolidated Financial Statements.

~~101.SCH~~104		Cover Page Interactive Data File (the cover page XBRL ~~Taxonomy Extension Schema Document~~tags are embedded within the iXBRL document).

~~101.CAL~~		~~XBRL Taxonomy Extension Calculation Linkbase Document~~

~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document~~

~~101.LAB~~		~~XBRL Taxonomy Extension Label Linkbase Document~~

~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase Document~~

Amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.1 to Amendment No. 10 Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012

*Fully or partly previously filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



			By:			/s/ ~~JENNIFER W. MURPHY~~BONNIE M. WONGTRAKOOL

			~~Jennifer W. Murphy~~Bonnie M. Wongtrakool
			~~President,~~ Chief Executive Officer and Director (Principal Executive Officer)

			November ~~7, 2017~~9, 2022


			By:			/s/ ~~LISA MEYER~~ROBERT W. LEHMAN

			~~Lisa Meyer~~Robert W. Lehman
			Chief Financial Officer ~~and Treasurer (Principal Financial and Accounting Officer)~~

			November ~~7, 2017~~9, 2022

~~112~~


	September 30, 2022				December 31, 2021
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value




Liabilities
Convertible senior unsecured notes	$	109,162	$	101,548	$	119,168	$	122,133
Securitized debt(1)	355,960		332,574		524,649		528,046
Total	$	465,122	$	434,122	$	643,817	$	650,179



	Nine months ended September 30, 2017									Nine months ended September 30, 2016
	Discount Designated as Credit Reserve and OTTI			Accretable Discount⁽¹⁾			Amortizable Premium⁽¹⁾			Discount Designated as Credit Reserve and OTTI			Accretable Discount⁽¹⁾			Amortizable Premium⁽¹⁾
Balance at beginning of period	$	(130,484	)	$	(109,822	)	$	44,527		$	(152,750	)	$	(145,532	)	$	56,163
Accretion of discount	—			8,542			—			—			13,381			—
Amortization of premium	—			—			(776		)	—			—			(4,242		)
Realized credit losses	1,854			—			—			5,765			—			—
Purchases	(1,724		)	(668		)	1,522			(15,482		)	(2,265		)	4,366
Sales	89,628			32,016			(31,060		)	33,610			22,986			(11,752		)
Net impairment losses recognized in earnings	(12,696		)	—			—			(18,340		)	—			—
Transfers/release of credit reserve⁽²⁾	593			(1,374		)	781			18,542			(15,775		)	(2,767		)
Balance at end of period	$	(52,829	)	$	(71,306	)	$	14,994		$	(128,655	)	$	(127,205	)	$	41,768



	December 31, 2016
	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			Number of Securities
Agency RMBS:
20-Year mortgage	$	142,749	$	(1,935	)	47	$	—	$	—		—	$	142,749	$	(1,935	)	47
30-Year mortgage	432,949		(11,264		)	54	22,586		(945		)	13	455,535		(12,209		)	67
Agency RMBS Interest-Only Strips	6,105		(227		)	6	1,630		(94		)	2	7,735		(321		)	8
Agency CMBS	145,791		(260		)	7	—		—			—	145,791		(260		)	7
Subtotal Agency	727,594		(13,686		)	114	24,216		(1,039		)	15	751,810		(14,725		)	129

Non-Agency RMBS	11,628		(50		)	3	33,034		(2,185		)	6	44,662		(2,235		)	9
Non-Agency CMBS	59,529		(4,031		)	17	208,288		(26,015		)	47	267,817		(30,046		)	64
Subtotal Non-Agency	71,157		(4,081		)	20	241,322		(28,200		)	53	312,479		(32,281		)	73

Other securities	7,966		(415		)	1	23,390		(1,179		)	2	31,356		(1,594		)	3
Total	$	806,717	$	(18,182	)	135	$	288,928	$	(30,418	)	70	$	1,095,645	$	(48,600	)	205



ý☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



o☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



		Page

	Part I — FINANCIAL INFORMATION

ITEM 1.	Financial Statements	2

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5250

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	~~102~~89

ITEM 4.	Controls and Procedures	~~108~~95

	Part II — OTHER INFORMATION	~~109~~96

ITEM 1.	Legal Proceedings	~~109~~96

ITEM 1A.	Risk Factors	~~109~~96

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~109~~96

ITEM 3.	Defaults Upon Senior Securities	~~109~~96

ITEM 4.	Mine Safety Disclosures	~~109~~96

ITEM 5.	Other Information	~~109~~96

ITEM 6.	Exhibits	~~110~~97

Signatures		~~112~~98



	September 30, 2017			December 31, 2016
Assets:
Cash and cash equivalents	$	36,669		$	46,172
Mortgage-backed securities and other securities, at fair value ($3,397,699 and $2,261,430 pledged as collateral, at fair value, respectively)	3,696,580			2,576,517
Residential Whole-Loans, at fair value ($191,439 and $192,136 pledged as collateral, at fair value, respectively)	191,439			192,136
Residential Bridge Loans ($54,912 and $0 pledged as collateral, respectively)	54,912			—
Securitized commercial loan, at fair value	24,952			24,225
Investment related receivable	9,551			33,600
Accrued interest receivable	13,025			18,812
Due from counterparties	88,932			243,585
Derivative assets, at fair value	5,011			20,571
Other assets	4,134			398
Total Assets⁽¹⁾	$	4,125,205		$	3,156,016

Liabilities and Stockholders’ Equity:
Liabilities:
Borrowings under repurchase agreements, net	$	3,336,256		$	2,155,644
Securitized debt, at fair value	10,979			10,659
Accrued interest payable	4,859			16,041
Investment related payables	296,317			341,458
Due to counterparties	2,320			740
Derivative liability, at fair value	986			182,158
Accounts payable and accrued expenses	2,588			3,255
Payable to affiliate	1,920			2,584
Dividend payable	12,995			12,995
Total Liabilities ⁽²⁾	3,669,220			2,725,534

Commitments and contingencies

Stockholders’ Equity:
Common stock: $0.01 par value, 500,000,000 shares authorized, 41,919,801 shares issued and outstanding, respectively	419			419
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding	—			—
Additional paid-in capital	765,898			765,042
Retained earnings (accumulated deficit)	(310,332		)	(334,979		)
Total Stockholders’ Equity	455,985			430,482
Total Liabilities and Stockholders’ Equity	$	4,125,205		$	3,156,016



	September 30, 2017		December 31, 2016
⁽¹⁾ Assets of consolidated VIEs included in the total assets above:
Residential Whole-Loans, at fair value ($191,439 and $192,136 pledged as collateral, at fair value, respectively)	$	191,439	$	192,136
Residential Bridge Loans ($54,912 and $0 pledged as collateral, respectively)	54,912		—
Securitized commercial loan, at fair value	24,952		24,225
Investment related receivable	7,178		1,241
Accrued interest receivable	2,529		1,622
Total assets of consolidated VIEs	$	281,010	$	219,224

⁽²⁾ Liabilities of consolidated VIEs included in the total liabilities above:
Securitized debt, at fair value	$	10,979	$	10,659
Accrued interest payable	82		85
Accounts payable and accrued expenses	157		2
Total liabilities of consolidated VIEs	$	11,218	$	10,746



	Common Stock			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)
	Shares	Par		Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)			Total
Balance at December 31, 2015	41,919,801	$	419	$	763,283	$	(252,054	)	$	511,648
Vesting of restricted stock	—	—		1,699		—			1,699
Net loss	—	—		—		(25,015		)	(25,015		)
Dividends declared on common stock	—	—		60		(57,910		)	(57,850		)
Balance at December 31, 2016	41,919,801	$	419	$	765,042	$	(334,979	)	$	430,482
Vesting of restricted stock	—	—		795		—			795
Net income	—	—		—		63,693			63,693
Dividends declared on common stock	—	—		61		(39,046		)	(38,985		)
Balance at September 30, 2017	41,919,801	$	419	$	765,898	$	(310,332	)	$	455,985



	September 30, 2017
	Fair Value
	Level I		Level II		Level III		Total
Assets
Agency RMBS:
20-Year mortgage	$	—	$	159,278	$	—	$	159,278
30-Year mortgage	—		548,196		—		548,196
40-Year mortgage	—		387,095		—		387,095
Agency RMBS Interest-Only Strips	—		14,028		2,009		16,037
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		11,219		—		11,219
Agency CMBS	—		2,103,185		—		2,103,185
Agency CMBS Interest-Only Strips	—		30		—		30
Agency CMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		6,016		—		6,016
Subtotal Agency MBS	—		3,229,047		2,009		3,231,056

Non-Agency RMBS	—		50,100		14,262		64,362
Non-Agency CMBS	—		278,511		—		278,511
Subtotal Non-Agency MBS	—		328,611		14,262		342,873

Other securities	—		113,181		9,470		122,651
Total mortgage-backed securities and other securities	—		3,670,839		25,741		3,696,580

Residential Whole-Loans	—		—		191,439		191,439
Securitized commercial loan	—		—		24,952		24,952
Derivative assets	375		4,636		—		5,011
Total Assets	$	375	$	3,675,475	$	242,132	$	3,917,982

Liabilities
Derivative liabilities	$	128	$	858	$	—	$	986
Securitized debt	—		—		10,979		10,979
Total Liabilities	$	128	$	858	$	10,979	$	11,965


	Fair Value at				Range
	September 30, 2022		Valuation Technique	Unobservable Input	Minimum		Maximum		Weighted Average






Residential whole loans	$	1,099,625	Discounted Cash Flow	Market Discount Rate	6.4	%	7.6	%	7.1	%
				Weighted Average Life	1.8		10.6		5.7
Residential bridge loans	$	5,120	Discounted Cash Flow	Market Discount Rate	12.9	%	35.7	%	20.7	%
				Weighted Average Life	0.4		4.1		2.1



Commercial loans	$	90,103	Discounted Cash Flow	Market Discount Rate	2.3	%	9.1	%	8.0	%
				Weighted Average Life	0.2		7.1		2.0


	Three months ended September 30, 2022
$ in thousands	Agency MBS		Non-Agency MBS		Residential Whole Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loans		Securitized debt
Beginning balance	$	785	$	1,181	$	1,195,853	$	5,095	$	128,421	$	1,243,371	$	14,919
Transfers into Level III from Level II	—		—		—		—		—		—		—
Transfers from Level III into Level II	—		—		—		—		—		—		—

Sales and settlements	—		—		(11,735)		—		—		—		—



Loan modifications / capitalized interest	—		—		4		—		—		—		—
Principal repayments	—		—		(37,036)		—		(20,588)		—		—
Total net gains / losses included in net income
Realized gains/(losses), net on assets	—		—		(33)		—		—		—		—


Unrealized gains/(losses), net on assets(1)	(63)		88		(46,545)		25		(17,730)		(78,046)		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		(3,863)
Premium and discount amortization, net	(2)		(96)		(883)		—		—		6,589		(1,170)
Ending balance	$	720	$	1,173	$	1,099,625	$	5,120	$	90,103	$	1,171,914	$	9,886

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(63)	$	88	$	(35,855)	$	25	$	(17,730)	$	(78,046)	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	3,863


	Three months ended September 30, 2017																Three months ended September 30, 2021
$ in thousands	Mortgage-backed securities and other securities			Residential Whole-Loans			Securitized commercial loan			Securitized debt			Derivative liability			$ in thousands	Agency MBS		Non-Agency MBS		Residential Whole Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt
Beginning balance	$	36,731		$	203,540		$	24,875		$	10,945		$	329		Beginning balance	$	1,501	$	11,803	$	801,503	$	7,471	$	267,203	$	1,595,077	$	14,937
Transfers into Level III from Level II	9,470			—			—			—			—			Transfers into Level III from Level II	—		5,683		—		—		—		—		—
Transfers from Level III into Level II	(23,852		)	—			—			—			—			Transfers from Level III into Level II	—		—		—		—		—		—		—
Purchases	2,009			—			—			—			—			Purchases	—		—		232,993		—		—		—		—
Sales and settlements	—			—			—			—			(53		)

Transfers to REO																Transfers to REO	—		—		—		(68)		(30,000)		—		—

Loan modifications / capitalized interest																Loan modifications / capitalized interest	—		—		34		—		—		—		—
Principal repayments	(388		)	(11,264		)	(59		)	(26		)	—			Principal repayments	—		—		(80,607)		(1,575)		(102,969)		(214,545)		—
Total net gains / losses included in net income																Total net gains / losses included in net income
Realized (gains)/losses, net on liabilities	—			—			—			—			53
Other than temporary impairment	(121		)	—			—			—			—
Realized gains/(losses), net on assets																Realized gains/(losses), net on assets	—		—		—		(3)		—		—		—

Unrealized gains/(losses), net on assets⁽¹⁾	1,385			(575		)	136			—			—			Unrealized gains/(losses), net on assets(1)	(93)		(399)		(3,074)		154		(5,495)		(9,617)		—
Unrealized (gains)/losses, net on liabilities ⁽²⁾	—			—			—			60			(329		)	Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		1,103
Premium and discount amortization, net	507			(262		)	—			—			—			Premium and discount amortization, net	(66)		(18)		(1,432)		(19)		27		6,090		(1,120)
Ending balance	$	25,741		$	191,439		$	24,952		$	10,979		$	—		Ending balance	$	1,342	$	17,069	$	949,417	$	5,960	$	128,766	$	1,377,005	$	14,920

	Three months ended September 30, 2016
$ in thousands	Mortgage-backed securities and other securities			Residential Whole-Loans			Securitized commercial loan			Securitized debt			Derivative liability
Beginning balance	$	226,826		$	189,696		$	23,688		$	10,423		$	2,160
Transfers into Level III from Level II	—			—			—			—			—
Transfers from Level III into Level II	—			—			—			—			—
Purchases	—			29,404			—			—			—
Sales and settlements	(9,194		)	—			—			—			—
Principal repayments	(4,366		)	(14,493		)	—			—			—
Total net gains / losses included in net income
Realized gains/(losses), net on assets	(1,696		)	—			—			—			—
Other than temporary impairment	(251		)	—			—			—			—
Unrealized gains/(losses), net on assets⁽¹⁾	(996		)	819			450			—			—
Unrealized (gains)/losses, net on liabilities ⁽²⁾	—			—			—			198			11
Premium and discount amortization, net	(2,530		)	(544		)	—			—			—
Ending balance	$	207,793		$	204,882		$	24,138		$	10,621		$	2,171
Unrealized gains/(losses), net on assets held at the end of the period(1)																Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(93)	$	(399)	$	(1,055)	$	36	$	(5,479)	$	(12,336)	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)																Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	(1,121)


	September 30, 2022
	Principal Balance		Unamortized Premium (Discount), net		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Net Weighted Average Coupon





Agency RMBS Interest-Only Strips (1) (2)	N/A		N/A		$	56	$	—	$	(4)	$	52	—	%
Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	N/A		N/A		N/A		N/A		N/A		668		0.7	%

Total Agency MBS	—		—		56		—		(4)		720		0.6	%

Non-Agency RMBS	45,569		(14,848)		30,721		1,568		(3,776)		28,513		4.2	%
Non-Agency RMBS Interest- Only Strips (1)	N/A		N/A		5,307		—		(4,134)		1,173		0.3	%

Subtotal Non-Agency RMBS	45,569		(14,848)		36,028		1,568		(7,910)		29,686		1.1	%
Non-Agency CMBS	110,115		(2,993)		107,122		729		(19,029)		88,822		7.4	%
Total Non-Agency MBS	155,684		(17,841)		143,150		2,297		(26,939)		118,508		3.4	%

Other securities (3)	46,493		(8,510)		42,942		1,216		(5,848)		38,310		7.1	%
Total	$	202,177	$	(26,351)	$	186,148	$	3,513	$	(32,791)	$	157,538	3.8	%


~~(3)~~	~~Interest on these securities is reported as a component of "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.~~


~~(4)~~	Other securities include residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $23.4 million and $23.1 million, as of September 30, 2017 and December 31, 2016, respectively.


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


~~(2)~~	~~Subsequent reductions of a security’s non-accretable discount results in a corresponding reduction in its amortizable premium.~~


	September 30, 2022
	< or equal to 10 years		> 10 years and < or equal to 20 years		> 20 years and < or equal to 30 years		> 30 years		Total




Agency RMBS Interest-Only Strips	$	—	$	—	$	52	$	—	$	52
Agency RMBS Interest-Only Strips accounted for as derivatives	—		668		—		—		668
Subtotal Agency	—		668		52		—		720

Non-Agency CMBS	66,003		12,254		10,565		—		88,822
Non-Agency RMBS	—		—		9,273		19,240		28,513
Non-Agency RMBS Interest- Only Strips	—		—		199		974		1,173

Subtotal Non-Agency	66,003		12,254		20,037		20,214		118,508

Other securities	6,526		3,869		19,684		8,231		38,310
Total	$	72,529	$	16,791	$	39,773	$	28,445	$	157,538


	Three months ended September 30, 2022						Three months ended September 30, 2021
	Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Accretion		Interest Income		Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Accretion		Interest Income

Agency RMBS	$	—	$	2	$	2	$	11	$	(7)	$	4
Non-Agency CMBS	1,949		387		2,336		2,621		1,669		4,290
Non-Agency RMBS	446		26		472		609		(240)		369
Other securities	860		185		1,045		1,043		(270)		773
Total	$	3,255	$	600	$	3,855	$	4,284	$	1,152	$	5,436



	For the three months ended September 30, 2017											For the three months ended September 30, 2016
	Proceeds			Gross Gains			Gross Losses			Net Gain (Loss)		Proceeds		Gross Gains		Gross Losses			Net Gain (Loss)
Agency RMBS⁽¹⁾	$	(2,906	)	$	(3	)	$	51		$	48	$	42,427	$	—	$	(138	)	$	(138	)
Agency CMBS	—			—			—			—		8,216		45		—			45
Non-Agency RMBS	—			—			—			—		15,209		1,306		—			1,306
Non-Agency CMBS	10,597			1,641			(278		)	1,363		9,194		—		(1,452		)	(1,452		)
Other securities	10,419			419			—			419		14,485		1,678		—			1,678
Total	$	18,110		$	2,057		$	(227	)	$	1,830	$	89,531	$	3,029	$	(1,590	)	$	1,439


	Residential whole loans, at Fair Value				Residential bridge loans, at Fair Value
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Principal balance	$	1,190,326	$	989,143	$	5,585	$	5,834
Unamortized premium	31,789		31,070		—		—
Unamortized discount	(1,634)		(1,337)		—		—
Amortized cost	1,220,481		1,018,876		5,585		5,834
Gross unrealized gains	700		14,190		9		78
Gross unrealized losses	(121,556)		(9,564)		(474)		(484)
Fair value	$	1,099,625	$	1,023,502	$	5,120	$	5,428


September 30, 2022					December 31, 2021
State	State Concentration		Principal Balance		State	State Concentration		Principal Balance
California	66.6	%	$	793,123	California	73.9	%	$	730,771
New York	9.4	%	112,329		New York	11.6	%	114,625
Texas	4.8	%	56,856		Florida	2.7	%	26,293
Florida	4.1	%	48,959		Georgia	2.5	%	25,106
Georgia	3.6	%	42,347		Texas	1.9	%	19,062
Other	11.5	%	136,712		Other	7.4	%	73,286
Total	100.0	%	$	1,190,326	Total	100.0	%	$	989,143



	September 30, 2017		December 31, 2016
Residential Whole-Loans, at fair value	$	191,439	$	192,136
Residential Bridge Loans	54,912		—
Securitized commercial loan, at fair value	24,952		24,225
Investment related receivable	7,178		1,241
Accrued interest receivable	2,529		1,622
Total assets	$	281,010	$	219,224
Securitized debt, at fair value	$	10,979	$	10,659
Accrued interest payable	82		85
Accounts payable and accrued expenses	157		2
Total liabilities	$	11,218	$	10,746


	CSMC USA Trust Securitized Commercial Loan, at Fair Value	RSBC Trust Commercial Loans, at Fair Value				Commercial Loans, at Fair Value
		September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Principal balance		$	1,385,591	$	1,385,591	$	14,362	$	14,362	$	157,205	$	177,797

Unamortized discount		(90,836)		(110,770)		—		—		—		—
Amortized cost		1,294,755		1,274,821		14,362		14,362		157,205		177,797
Gross unrealized gains		—		80,987		—		—		—		—
Gross unrealized losses		(122,841)		—		(1)		—		(81,463)		(61,587)
Fair value		$	1,171,914	$	1,355,808	$	14,361	$	14,362	$	75,742	$	116,210


~~(1)~~	~~Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated upon consolidation.~~


	September 30, 2022
Counterparty	Amount of Collateral at Risk, at fair value		Weighted Average Remaining Maturity (days)	Percentage of Stockholders’ Equity
Credit Suisse AG, Cayman Islands Branch	$	59,894	62	61.1	%
Citigroup Global Markets Inc.	50,806		214	51.9	%
Nomura Securities International, Inc.	11,695		11	11.9	%



	September 30, 2017
Remaining Interest Rate Swap Term	Notional Amount		Average Fixed Pay Rate		Average Floating Receive Rate		Average Maturity (Years)	Forward Starting
1 year or less	$	105,900	0.8	%	1.3	%	0.1	—	%
Greater than 1 year and less than 3 years	600,000		1.6	%	1.3	%	2.1	—	%
Greater than 3 years and less than 5 years	690,000		2.0	%	1.3	%	4.6	—	%
Greater than 5 years	1,682,300		2.5	%	0.1	%	10.7	95.3	%
Total	$	3,078,200	2.2	%	0.6	%	7.3	52.1	%



	September 30, 2017
Derivative Type	Notional Amount		Notional (USD Equivalent)		Maturity	Fair Value
Buy USD/Sell EUR currency forward	€	580	$	697	November 2017	$	10
Currency forwards, assets	€	580	$	697	n/a	$	10
Buy EUR/Sell USD currency forward	€	311	$	370	November 2017	$	(1	)
Buy EUR/Sell USD currency forward	€	269	$	320	November 2017	$	(2	)
Currency forwards, liabilities	€	580	$	690	n/a	$	(3	)
Total currency forwards	€	1,160	$	1,387	n/a	$	7



	September 30, 2017
	Notional Amount			Fair Value
Sale contracts, asset	$	(582,000	)	$	1,774
TBA securities, asset	(582,000		)	1,774
Purchase contracts, liability	200,000			(836		)
TBA securities, liability	200,000			(836		)
TBA securities, net	$	(382,000	)	$	938



	Notional Amount as of		Additions		Settlement, Termination, Expiration or Exercise			Notional Amount as of
	December 31, 2016		Additions		Settlement, Termination, Expiration or Exercise			September 30, 2017
Purchase of TBAs	$	—	$	4,504,200	$	(4,304,200	)	$	200,000
Sale of TBAs	$	—	$	4,886,200	$	(4,304,200	)	$	582,000



	Shares of Restricted Stock	Weighted Average Grant Date Fair Value ⁽¹⁾
Outstanding at beginning of period	707,861	$	17.17
Granted ⁽²⁾	17,100	10.31
Cancelled/forfeited	—	—
Outstanding at end of period	724,961	$	17.01
Unvested at end of period	82,667	$	14.09



		Principal Balance		Unamortized Premium (Discount)			Discount Designated as Credit Reserve and OTTI			Amortized Cost		Unrealized Gain (Loss)			Carrying Value⁽⁴⁾		Net Weighted Average Coupon
Agency RMBS
20-Year mortgage
Coupon Rate:
3.50	%	$	31,291	$	1,481		$	—		$	32,772	$	10		$	32,782	3.5	%
4.00	%	118,679		6,315			—			124,994		1,502			126,496		4.0	%
		149,970		7,796			—			157,766		1,512			159,278		3.9	%
30-Year mortgage
Coupon Rate:
3.00	%	23,788		111			—			23,899		—			23,899		3.0	%
4.00	%	245,220		14,990			—			260,210		448			260,658		4.0	%
4.50	%	192,641		14,128			—			206,769		4,213			210,982		4.5	%
5.00	%	43,066		5,038			—			48,104		—			48,104		5.0	%
5.50	%	1,872		326			—			2,198		(125		)	2,073		5.5	%
6.00	%	2,152		248			—			2,400		80			2,480		6.0	%
		508,739		34,841			—			543,580		4,616			548,196		4.2	%

40-Year mortgage		374,844		11,062			—			385,906		1,189			387,095		3.5	%

Agency RMBS IOs and IIOs⁽¹⁾		N/A		N/A			N/A			15,416		621			16,037		3.0	%
Agency RMBS IOs and IIOs accounted for as derivatives ⁽¹⁾⁽²⁾		N/A		N/A			N/A			N/A		N/A			11,219		2.9	%
		N/A		N/A			N/A			15,416		621			27,256		3.0	%

Agency CMBS		2,087,948		2,147			—			2,090,095		13,090			2,103,185		2.9	%
Agency CMBS Interest-Only Strips⁽¹⁾		N/A		N/A			N/A			—		30			30		3.2	%
Agency CMBS IOs and IIOs accounted for as derivatives ⁽¹⁾⁽²⁾		N/A		N/A			N/A			N/A		N/A			6,016		0.5	%
		2,087,948		2,147			—			2,090,095		13,120			2,109,231		2.7	%
Subtotal Agency		3,121,501		55,846			—			3,192,763		21,058			3,231,056		3.1	%

Non-Agency RMBS		81,504		(802		)	(22,262		)	58,440		5,922			64,362		3.1	%

Non-Agency CMBS		376,215		(60,850		)	(25,342		)	290,023		(11,512		)	278,511		4.8	%
Subtotal Non-Agency		457,719		(61,652		)	(47,604		)	348,463		(5,590		)	342,873		4.5	%