CHERRY HILL MORTGAGE INVESTMENT CORP Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of Operations. (kind 10-Q)

The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the accompanying notes included in “Part
I, Item 1. Consolidated Financial Statements” of this Quarterly Report on Form
10-Q.

This section discusses our results of operations for the current quarter ended
March 31, 2022 compared to the immediately preceding prior quarter ended
December 31, 2021 as well as the corresponding quarter of the prior year ended
March 31, 2021. In this report, we are changing the basis of comparison from the
corresponding quarter of the prior year to the immediately preceding prior
quarter, in order to provide readers greater insight into our quarterly
performance. For our future Quarterly Reports on Form 10-Q, we will present a
discussion of our results of operations for the current quarter compared to the
immediately preceding prior quarter only.

General

We are a public residential real estate finance company focused on acquiring,
investing in and managing residential mortgage assets in the United States. We
were incorporated in Maryland on October 31, 2012, and we commenced operations
on or about October 9, 2013 following the completion of our initial public
offering and a concurrent private placement. Our common stock, our 8.20% Series
A Cumulative Redeemable Preferred Stock (our “Series A Preferred Stock”) and our
8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
(our “Series B Preferred Stock”) are listed and traded on the New York Stock
Exchange under the symbols “CHMI,” “CHMI-PRA” and “CHMI-PRB,” respectively. We
are externally managed by our Manager, Cherry Hill Mortgage Management, LLC, an
SEC-registered investment adviser.

Our principal objective is to generate attractive current yields and
risk-adjusted total returns for our stockholders over the long term, primarily
through dividend distributions and secondarily through capital appreciation. We
attempt to attain this objective by selectively constructing and actively
managing a portfolio of Servicing Related Assets (as defined below) and
residential mortgage-backed securities (“RMBS”) and, subject to market
conditions, other cash flowing residential mortgage assets.

We are subject to the risks involved with real estate and real estate-related
debt instruments. These include, among others, the risks normally associated
with changes in the general economic climate, changes in the mortgage market,
changes in tax laws, interest rate levels, and the availability of financing.

We elected to be taxed as a REIT for U.S. federal income tax purposes commencing
with our short taxable year ended December 31, 2013. We operate so as to
continue to qualify to be taxed as a REIT. Our asset acquisition strategy
focuses on acquiring a diversified portfolio of residential mortgage assets that
balances the risk and reward opportunities our Manager observes in the
marketplace. Aurora has or is in the process of obtaining the licenses necessary
to invest in mortgage servicing rights (“MSRs”) on a nationwide basis and is an
approved seller/servicer for Fannie Mae and Freddie Mac.

In addition to Servicing Related Assets, we invest in RMBS, primarily those
backed by 30-, 20- and 15-year fixed rate mortgages that offer what we believe
to be favorable prepayment and duration characteristics. Our RMBS consist
primarily of Agency RMBS on which the payments of principal and interest are
guaranteed by an Agency. We have also invested in collateralized mortgage
obligations guaranteed by an Agency (“Agency CMOs”) consisting of interest only
securities (“IOs”) as well as non-Agency RMBS. We finance our RMBS with an
amount of leverage, that varies from time to time depending on the particular
characteristics of our portfolio, the availability of financing and market
conditions. We do not have a targeted leverage ratio for our RMBS. Our
borrowings for RMBS consist of short-term borrowings under master repurchase
agreements.

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Subject to maintaining our qualification as a REIT, we utilize derivative
financial instruments (or hedging instruments) to hedge our exposure to
potential interest rate mismatches between the interest we earn on our assets
and our borrowing costs caused by fluctuations in short-term interest rates. In
utilizing leverage and interest rate hedges, our objectives include, where
desirable, locking in, on a long-term basis, a spread between the yield on our
assets and the cost of our financing in an effort to improve returns to our
stockholders.

We also seek to operate our business in a manner that does not require us to
register as an investment company under the Investment Company Act.

Effective January 1, 2020, the Operating Partnership contributed substantially
all of its assets to the Sub-REIT in exchange for all of the common stock of the
Sub-REIT. As a result of this contribution, the Sub-REIT is a wholly-owned
subsidiary of the Operating Partnership and operations formerly conducted by the
Operating Partnership through its subsidiaries are now conducted by the Sub-REIT
through those same subsidiaries. The Sub-REIT has elected to be taxed as a REIT
under the Code commencing with its taxable year ended December 31, 2020.

From time to time, we may issue and sell shares of our common stock or preferred
stock, including additional shares of our Class A Preferred Stock or Class B
Preferred Stock. See “Item 1. Consolidated Financial Statements-Note 6. Equity
and Earnings per Common Share-Common and Preferred Stock.”

The Company has an at-the-market offering program for its common stock (the
“Common Stock ATM Program” and, together with the Preferred Series A ATM
Program, as defined below, the “ATM Programs”) pursuant to which it may offer
through one or more sales agents and sell from time to time up to $50.0 million
of its common stock at prices prevailing at the time, subject to volume and
other regulatory limitations. As of March 31, 2022, approximately $16.0 million
was remaining under the Common Stock ATM Program. During the three-month period
ended March 31, 2022, the Company issued and sold 505,000 shares of common stock
under the Common Stock ATM Program. The shares were sold at a weighted average
price of $8.19 per share for gross proceeds of approximately $4.1 million before
fees of approximately $83,000. During the year ended December 31, 2021, the
Company issued and sold 1,148,398 shares of common stock under the Common Stock
ATM Program. The shares were sold at a weighted average price of $8.88 per share
for gross proceeds of approximately $10.2 million before fees of approximately
$200,000.

The Company also has an at-the-market offering program for its Series A
Preferred Stock (the “Preferred Series A ATM Program”) pursuant to which it may
offer through one or more sales agents and sell from time to time up to $35.0
million of its Series A Preferred Stock at prices prevailing at the time,
subject to volume and other regulatory limitations. During the three-month
period ended March 31, 2022 and the year ended December 31, 2021, the Company
did not issue and sell any shares of Series A Preferred Stock pursuant to the
Preferred Series A ATM Program.

In September 2019, the Company initiated a share repurchase program that allows
for the repurchase of up to an aggregate of $10.0 million of its common stock.
Shares may be repurchased from time to time through privately negotiated
transactions or open market transactions, pursuant to a trading plan in
accordance with Rules 10b5-1 and 10b-18 under the Exchange Act or by any
combination of such methods. The manner, price, number and timing of share
repurchases are subject to a variety of factors, including market conditions and
applicable SEC rules. The share repurchase program does not require the purchase
of any minimum number of shares, and, subject to SEC rules, purchases may be
commenced or suspended at any time without prior notice. During the three-month
period ended March 31, 2022 and the year ended December 31, 2021, the Company
did not repurchase any common stock pursuant to the repurchase program.

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Effects of COVID-19 on the Company

The COVID-19 pandemic continues to create substantial uncertainty for government
policy makers and the Federal Reserve Board with consequent effects on the
economy in the United States. While the economy has largely reopened, the
increased presence of highly contagious variants, of the virus has exacerbated
supply chain issues that arose during the shutdown of various economies. Certain
forbearance programs and prohibitions on foreclosures have been extended while
others have expired adding to the concern of the consequences once all such
programs end. As of March 31, 2022, 1.3% of borrowers on loans underlying the
MSRs owned by Aurora are reflected as being in an active forbearance program,
with 10.6% of those borrowers continuing to make their regular scheduled monthly
payment.

On March 16, 2022, the Federal Reserve raised the federal funds rate to a range
of between 0.25% and 0.5% and signaled that a series of rate increases is likely
to follow over the course of the year. In March, the Federal Reserve also ended
its monthly asset purchases, including its purchases of Agency RMBS. With these
actions, the Federal Reserve reversed its policy stance from the highly
accommodative polices it adopted in 2020 in response to the macro-economic
effects of the COVID-19 pandemic. In response to the COVID-19 pandemic, the
Federal Reserve adopted a policy of quantitative easing whereby it purchased
each month significant amounts of U.S. Treasury securities and Agency RMBS. The
Federal Reserve also reduced the federal funds rate target to 0 to 0.25 percent,
established a series of emergency lending programs, reduced the discount rate
and encouraged depository institutions to borrow from the discount window, and
took regulatory actions to ease capital and liquidity requirements at depository
institutions. The purpose of these actions was to stabilize financial markets
and reduce both interest rates generally and the spread between long-term and
short-term interest rates. The Federal Reserve’s balance sheet increased by more
than $4.5 trillion to nearly $9 trillion, including $2.5 trillion in Agency
RMBS. Due to the reduction in interest rates, prepayment speeds and mortgage
refinancing activity increased. The Federal Reserve took similar actions during
the 2008 financial crisis.

The ending of the Federal Reserve’s highly accommodative polices and initiation
of a series of increases in the federal funds rate will likely result in higher
interest rates across asset classes, including for Agency RMBS. These actions
also may decrease spreads on interest rates, reducing our net interest income.
They may also negatively impact our results as we have certain assets and
liabilities that are sensitive to changes in interest rates. In addition, lower
net interest income resulting from higher rates is expected to be partially
offset by lower prepayments which extends the length of cash flows from the MSRs
and slows the premium amortization on the RMBS portfolio. Any benefit we expect
to receive from lower prepayments on the mortgages underlying our MSRS and RMBS
could be offset by increased volatility in the market and increased hedging
costs attributable to such volatility.

We cannot predict or control the impact future actions by the Federal Reserve
will have on our business. Accordingly, future actions by the Federal Reserve
could have a material and adverse effect on our business, financial condition
and results of operations and our ability to pay distributions to our
stockholders.

Factors Impacting our Operating Results

Our income is generated primarily by the net spread between the income we earn
on our assets and the cost of our financing and hedging activities as well as
the amortization of any purchase premiums or the accretion of discounts. Our net
income includes the actual interest payments we receive on our RMBS, the net
servicing fees we receive on our MSRs and the accretion/amortization of any
purchase discounts/premiums. Changes in various factors such as market interest
rates, prepayment speeds, estimated future cash flows, servicing costs and
credit quality could affect the amount of premium to be amortized or discount to
be accreted into interest income for a given period. Prepayment speeds vary
according to the type of investment, conditions in the financial markets,
competition and other factors, none of which can be predicted with any
certainty. Our operating results may also be affected by credit losses in excess
of initial anticipations or unanticipated credit events experienced by borrowers
whose mortgage loans underlie the MSRs held by Aurora or the non-Agency RMBS
held in our portfolio.

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Set forth below is the positive net spread between the yield on RMBS and our
costs of funding those assets at the end of each of the quarters indicated
below:

Average Net Yield Spread at Period End

Average Average Average Net
Quarter Ended Asset Yield Cost of Funds Interest Rate Spread
March 31, 2022 2.98 % 0.49 % 2.49 %
December 31, 2021 2.93 % 0.62 % 2.31 %
September 30, 2021 2.94 % 0.63 % 2.31 %
June 30, 2021 2.94 % 0.62 % 2.32 %

The Average Cost of Funds also includes the benefits of related swaps.

Changes in the Market Value of Our Assets

We hold our Servicing Related Assets as long-term investments. Our MSRs are
carried at their fair value with changes in their fair value recorded in other
income or loss in our consolidated statements of income (loss). Those values may
be affected by events or headlines that are outside of our control, such as the
COVID-19 pandemic and other events impacting the U.S. or global economy
generally or the U.S. residential market specifically, and events or headlines
impacting the parties with which we do business. See “Part I, Item 1A. Risk
Factors – Risks Related to Our Business” in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2021.

Our RMBS are carried at their fair value, as available-for-sale in accordance
with ASC 320, Investments – Debt and Equity Securities. We evaluate the cost
basis of our RMBS on a quarterly basis under ASC 326-30, Financial
Instruments-Credit Losses: Available-for-Sale Debt Securities. When the fair
value of a security is less than its amortized cost basis as of the balance
sheet date, the security’s cost basis is considered impaired. If we determine
that we intend to sell the security or it is more likely than not that we will
be required to sell before recovery, we recognize the difference between the
fair value and amortized cost as a loss in the consolidated statements of income
(loss). If we determine we do not intend to sell the security or it is not more
likely than not we will be required to sell the security before recovery, we
must evaluate the decline in the fair value of the impaired security and
determine whether such decline resulted from a credit loss or non-credit related
factors. In our assessment of whether a credit loss exists, we perform a
qualitative assessment around whether a credit loss exists and if necessary, we
compare the present value of estimated future cash flows of the impaired
security with the amortized cost basis of such security. The estimated future
cash flows reflect those that a “market participant” would use and typically
include assumptions related to fluctuations in interest rates, prepayment
speeds, default rates, collateral performance, and the timing and amount of
projected credit losses, as well as incorporating observations of current market
developments and events. Cash flows are discounted at an interest rate equal to
the current yield used to accrete interest income. If the present value of
estimated future cash flows is less than the amortized cost basis of the
security, an expected credit loss exists and is included in provision (reversal)
for credit losses on securities in the consolidated statements of income (loss).
If it is determined as of the financial reporting date that all or a portion of
a security’s cost basis is not collectible, then we will recognize a realized
loss to the extent of the adjustment to the security’s cost basis. This
adjustment to the amortized cost basis of the security is reflected in realized
gain (loss) on RMBS, available-for-sale, net in the consolidated statements of
income (loss).

Impact of Changes in Market Interest Rates on Our Assets

The value of our assets may be affected by prepayment speeds on mortgage loans.
Prepayment speed is the measurement of how quickly borrowers pay down the unpaid
principal balance (“UPB”) of their loans or how quickly loans are otherwise
liquidated or charged off. Generally, in a declining interest rate environment,
prepayment speeds tend to increase. Conversely, in an increasing interest rate
environment, prepayment speeds tend to decrease. When we acquire Servicing
Related Assets or RMBS, we anticipate that the underlying mortgage loans will
prepay at a projected rate generating an expected cash flow (in the case of
Servicing Related Assets) and yield. If we purchase assets at a premium to par
value and borrowers prepay their mortgage loans faster than expected, the
corresponding prepayments on our assets may reduce the expected yield on such
assets because we will have to amortize the related premium on an accelerated
basis. In addition, we will have to reinvest the greater amounts of prepayments
in that lower rate environment, thereby affecting future yields on our assets.
If we purchase assets at a discount to par value, and borrowers prepay their
mortgage loans slower than expected, the decrease in corresponding prepayments
may reduce the expected yield on assets because we will not be able to accrete
the related discount as quickly as originally anticipated.

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If prepayment speeds are significantly greater than expected, the fair value of
the Servicing Related Assets could be less than their fair value as previously
reported on our consolidated balance sheets. Such a reduction in the fair value
of the Servicing Related Assets would have a negative impact on our book value.
Furthermore, a significant increase in prepayment speeds could materially reduce
the ultimate cash flows we receive from the Servicing Related Assets, and we
could receive substantially less than what we paid for such assets. Our balance
sheet, results of operations and cash flows are susceptible to significant
volatility due to changes in the fair value of, or cash flows from, the
Servicing Related Assets as interest rates change.

A slower than anticipated rate of prepayment due to an increase in market
interest rates also will cause the life of the related RMBS to extend beyond
that which was projected. As a result, we would have an asset with a lower yield
than current investments for a longer period of time. In addition, if we have
hedged our interest rate risk, extension may cause the security to be
outstanding longer than the related hedge, thereby reducing the protection
intended to be provided by the hedge.

Voluntary and involuntary prepayment rates may be affected by a number of
factors including, but not limited to, the availability of mortgage credit, the
relative economic vitality of, or natural disasters affecting, the area in which
the related properties are located, the servicing of the mortgage loans,
possible changes in tax laws, other opportunities for investment, homeowner
mobility and other economic, social, geographic, demographic and legal factors,
none of which can be predicted with any certainty.

We attempt to reduce the exposure of our MSRs to voluntary prepayments through
the structuring of recapture agreements with Aurora’s subservicers. Under these
agreements, the subservicer attempts to refinance specified mortgage loans. The
subservicer sells the new mortgage loan to the applicable Agency, transfers the
related MSR to Aurora and then subservices the new mortgage loan on behalf of
Aurora. See “Part I, Item 1. Notes to Consolidated Financial Statements-Note 7.
Transactions with Related Parties” for information regarding Aurora’s recapture
agreements.

With respect to our business operations, increases in interest rates, in
general, may over time cause:

• the interest expense associated with our borrowings to increase;

• the value of our assets to fluctuate;

• the coupons on any adjustable-rate and hybrid RMBS we may own to reset,

although on a delayed basis, to higher interest rates;

• prepayments on our RMBS to slow, thereby slowing the amortization of our

purchase premiums and the accretion of our purchase discounts; and

• an increase in the value of any interest rate swap agreements we may enter into

as part of our hedging strategy.

Conversely, decreases in interest rates, in general, may over time cause:

• prepayments on our RMBS to increase, thereby accelerating the amortization of

our purchase premiums and the accretion of our purchase discounts;

• the interest expense associated with our borrowings to decrease;

• the value of our assets to fluctuate;

• a decrease in the value of any interest rate swap agreements we may enter into

as part of our hedging strategy; and

• coupons on any adjustable-rate and hybrid RMBS assets we may own to reset,

although on a delayed basis, to lower interest rates.

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Effects of Spreads on our Assets

The spread between the yield on our assets and our funding costs affects the
performance of our business. Wider spreads imply the potential for greater
income on new asset purchases but may have a negative impact on our stated book
value. Wider spreads may also negatively impact asset prices. In an environment
where spreads are widening, counterparties may require additional collateral to
secure borrowings which may require us to reduce leverage by selling assets.
Conversely, tighter spreads imply the potential for lower income on new asset
purchases but may have a positive impact on stated book value of our existing
assets. In this case, we may be able to reduce the amount of collateral required
to secure borrowings.

Credit Risk

We are subject to varying degrees of credit risk in connection with our assets.
Although we expect relatively low credit risk with respect to our portfolios of
Agency RMBS, we are subject to the credit risk of borrowers under the loans
backing any CMOs that we may own and to the credit enhancements built into the
CMO structure. We also are subject to the credit risk of the borrowers under the
mortgage loans underlying the MSRs that Aurora owns. Through loan level due
diligence, we attempt to mitigate this risk by seeking to acquire high quality
assets at appropriate prices given anticipated and unanticipated losses. We also
conduct ongoing monitoring of acquired MSRs. Nevertheless, unanticipated credit
losses could occur which could adversely impact our operating results.

Critical Accounting Policies and Use of Estimates

Our financial statements are prepared in accordance with US GAAP, which requires
the use of estimates that involve the exercise of judgment and the use of
assumptions as to future uncertainties. Our most critical accounting policies
involve decisions and assessments that could affect our reported amounts of
assets and liabilities, as well as our reported amounts of revenues and
expenses. We believe that the decisions and assessments upon which our financial
statements are based were reasonable at the time made and based upon information
available to us at that time. Our critical accounting policies and accounting
estimates may change over time as we diversify our portfolio. The material
accounting policies and estimates that we expect to be most critical to an
investor’s understanding of our financial results and condition and require
complex management judgment are discussed below. For additional information on
our material accounting policies and estimates, see “Item 1. Consolidated
Financial Statements – Note 2. Basis of Presentation and Significant Accounting
Policies”.

Investments in Securities

We have elected to classify our investments in RMBS as available-for-sale.
Although we may hold most of our securities until maturity, we may, from time to
time, sell any of our securities as part of our overall management of our asset
portfolio. All assets classified as available-for-sale will be reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders’ equity. Fair value of our investments in
RMBS is determined based upon prices obtained from third-party pricing
providers. Changes in underlying assumptions used in estimating fair value
impact the carrying value of the investments in RMBS as well as their yield. For
additional information on our assessment of credit-related impairment and our
fair value methodology, see “Item 1. Consolidated Financial Statements – Note 4.
Investments in RMBS and Note 9. Fair Value”.

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Revenue Recognition on Securities

Interest income from coupon payments is accrued based on the outstanding
principal amount of the RMBS and their contractual terms. Premiums and discounts
associated with the purchase of the RMBS are amortized or accreted into interest
income over the projected lives of the securities using the effective interest
method. Our policy for estimating prepayment speeds for calculating the
effective yield is to evaluate historical performance, consensus prepayment
speeds, and current market conditions. Adjustments are made for actual
prepayment activity. For information on how interest rates effect net interest
income, see “Item 3. Quantitative and Qualitative Disclosures about Market Risk
– Interest Rate Effect on Net Interest Income”.

Investments in MSRs

We have elected the fair value option to record our investments in MSRs in order
to provide users of our consolidated financial statements with better
information regarding the effects of prepayment risk and other market factors on
the MSRs. Under this election, we record a valuation adjustment on our
investments in MSRs on a quarterly basis to recognize the changes in fair value
of our MSRs in net income as described below. Although transactions in MSRs are
observable in the marketplace, the valuation includes unobservable market data
inputs (prepayment speeds, delinquency levels, costs to service and discount
rates). The change in fair value of is recorded within “Unrealized gain (loss)
on investments in Servicing Related Assets” on the consolidated statements of
income (loss). Fair value is generally determined by discounting the expected
future cash flows using discount rates that incorporate the market risks and
liquidity premium specific to the MSRs and, therefore, may differ from their
effective yields. In determining the valuation of MSRs, management uses
internally developed pricing models that are based on certain unobservable
market-based inputs. The Company classifies these valuations as Level 3 in the
fair value hierarchy. For additional information on our fair value methodology,
see “Item 1. Consolidated Financial Statements – Note 9. Fair Value”.

Revenue Recognition on Investments in MSRs

Mortgage servicing fee income represents revenue earned from the ownership of
MSRs. The servicing fees are based on a contractual percentage of the
outstanding principal balance and are recognized as revenue as the related
mortgage payments are collected. Corresponding costs to service are charged to
expense as incurred. Servicing fee income received and servicing expenses
incurred are reported on the consolidated statements of income (loss).

Repurchase Transactions

We finance the acquisition of our RMBS for our portfolio through repurchase
transactions under master repurchase agreements. Repurchase transactions are
treated as collateralized financing transactions and are carried at their
contractual amounts as specified in the respective transactions. Accrued
interest payable is included in “Accrued expenses and other liabilities” on the
consolidated balance sheets. Securities financed through repurchase transactions
remain on our consolidated balance sheet as an asset and cash received from the
purchaser is recorded on our consolidated balance sheet as a liability. Interest
paid in accordance with repurchase transactions is recorded in interest expense
on the consolidated statements of income (loss).

Income Taxes

We elected to be taxed as a REIT under the Code commencing with our short
taxable year ended December 31, 2013. We expect to continue to qualify to be
treated as a REIT. U.S. federal income tax law generally requires that a REIT
distribute annually at least 90% of its REIT taxable income, without regard to
the deduction for dividends paid and excluding net capital gains, and that it
pay tax at regular corporate income tax rates to the extent that it annually
distributes less than 100% of its taxable income. Our taxable REIT subsidiary,
Solutions, and its wholly-owned subsidiary, Aurora, are subject to U.S. federal
income taxes on their taxable income.

We account for income taxes in accordance with ASC 740, Income Taxes. ASC 740
requires the recording of deferred income taxes that reflect the net tax effect
of temporary differences between the carrying amounts of our assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, including operating loss carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in earnings in the period that includes the
enactment date. For information on our assessment of the realizability of
deferred tax assets, see “Item 1. Consolidated Financial Statements – Note 15.
Income Taxes”. We assess our tax positions for all open tax years and determine
if we have any material unrecognized liabilities in accordance with ASC 740. We
record these liabilities to the extent we deem them more-likely-than-not to be
incurred. We record interest and penalties related to income taxes within the
provision for income taxes in the consolidated statements of income (loss). We
have not incurred any interest or penalties.

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Results of Operations

Presented below is a comparison of the Company’s results of operations for the
periods indicated (dollars in thousands):

Results of Operations

Three Months Ended
March 31, 2022 December 31, 2021 March 31, 2021
Income
Interest income $ 5,519 $ 4,529 $ 3,301
Interest expense 1,640 1,534 1,454
Net interest income 3,879 2,995 1,847
Servicing fee income 13,116 13,030 13,540
Servicing costs 3,193 3,390 3,082
Net servicing income 9,923 9,640 10,458
Other income (loss)
Realized gain (loss) on RMBS, available-for-sale,
net (13,222 ) (1,479 ) 2,094
Realized loss on derivatives, net (10,638 ) (4,688 ) (540 )
Realized gain on acquired assets, net 12 – 5
Unrealized gain (loss) on derivatives, net 24,456 8,233 (8,059 )
Unrealized gain (loss) on investments in Servicing
Related Assets 21,731 (5,111 ) 22,464
Total Income 36,141 9,590 28,269
Expenses
General and administrative expense 1,744 1,547 1,617
Management fee to affiliate 1,793 1,975 1,961
Total Expenses 3,537 3,522 3,578
Income Before Income Taxes 32,604 6,068 24,691
Provision for (Benefit from) corporate business
taxes 3,875 (637 ) 3,463
Net Income 28,729 6,705 21,228
Net income allocated to noncontrolling interests
in Operating Partnership (633 ) (130 ) (434 )
Dividends on preferred stock 2,463 2,463 2,463

Net Income Applicable to Common Stockholders $ 25,633 $

4,112 $ 18,331

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Presented below is summary financial data on our segments together with the data
for the Company as a whole, for the periods indicated (dollars in thousands):

Segment Summary Data

Servicing
Related
Assets RMBS All Other Total
Income Statement
Three Months Ended March 31, 2022
Interest income $ – $ 5,519 $ – $ 5,519
Interest expense 1,253 387 – 1,640
Net interest income (expense) (1,253 ) 5,132 – 3,879
Servicing fee income 13,116 – – 13,116
Servicing costs 3,193 – – 3,193
Net servicing income 9,923 – – 9,923
Other income (expense) (3,366 ) 25,705 – 22,339
Other operating expenses 522 228 2,787 3,537
Provision for corporate business taxes 3,875 – – 3,875
Net Income (Loss) $ 907 $ 30,609 $ (2,787 ) $ 28,729

Three Months Ended December 31, 2021
Interest income $ 30 $ 4,499 $ – $ 4,529
Interest expense 1,271 263 – 1,534
Net interest income (expense) (1,241 ) 4,236 – 2,995
Servicing fee income 13,030 – – 13,030
Servicing costs 3,390 – – 3,390
Net servicing income 9,640 – – 9,640
Other income (expense) (5,998 ) 2,953 – (3,045 )
Other operating expenses 597 182 2,743 3,522
Benefit from corporate business taxes (637 ) – – (637 )
Net Income (Loss) $ 2,441 $ 7,007 $ (2,743 ) $ 6,705

Three Months Ended March 31, 2021
Interest income $ 120 $ 3,181 $ – $ 3,301
Interest expense 932 522 – 1,454
Net interest income (expense) (812 ) 2,659 – 1,847
Servicing fee income 13,540 – – 13,540
Servicing costs 3,082 – – 3,082
Net servicing income 10,458 – – 10,458
Other income (expense) (4,762 ) 20,726 – 15,964
Other operating expenses 566 171 2,841 3,578
Provision for corporate business taxes 3,463 – – 3,463
Net Income (Loss) $ 855 $ 23,214 $ (2,841 ) $ 21,228

Servicing Related Assets RMBS All Other Total
Balance Sheet
March 31, 2022
Investments $ 246,103 $ 774,113 $ – $ 1,020,216
Other assets 36,101 102,837 52,866 191,804
Total assets 282,204 876,950 52,866 1,212,020
Debt 159,068 764,885 – 923,953
Other liabilities 7,308 9,371 11,737 28,416
Total liabilities 166,376 774,256 11,737 952,369
Net assets $ 115,828 $ 102,694 $ 41,129 $ 259,651
December 31, 2021
Investments $ 218,727 $ 953,496 $ – $ 1,172,223
Other assets 44,506 21,611 64,522 130,639
Total assets 263,233 975,107 64,522 1,302,862
Debt 145,268 865,494 – 1,010,762
Other liabilities 1,847 1,411 10,026 13,284
Total liabilities 147,115 866,905 10,026 1,024,046
Net assets $ 116,118 $ 108,202 $ 54,496 $ 278,816

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Interest Income

Interest income for the three-month period ended March 31, 2022 was $5.5 million
as compared to $4.5 million for the three-month period ended December 31, 2021.
The increase of $990,000 in interest income was primarily due to a decrease in
price premium amortization driven by lower prepayment speeds.

Interest income for the three-month period ended March 31, 2022 was $5.5 million
as compared to $3.3 million for the three-month period ended March 31, 2021. The
increase of $2.2 million in interest income was substantially due to a decrease
in price premium amortization, which was partially offset by a decrease in
interest income as a result of RMBS sales.

Interest Expense

Interest expense for the three-month period ended March 31, 2022 was $1.6
million as compared to $1.5 million for the three-month period ended December
31, 2021. The increase of $106,000 in interest expense was due to a rise in
interest rates.

Interest expense for the three-month period ended March 31, 2022 was $1.6
million as compared to $1.5 million for the three-month period ended March 31,
2021. The increase of $186,000 in interest expense was substantially due to a
higher notes payable balance, which was partially offset by a decrease in
interest expense on borrowings under repurchase agreements driven by a smaller
RMBS portfolio.

Servicing Fee Income

Servicing fee income for the three-month period ended March 31, 2022 was $13.1
million as compared to $13.0 million for the three-month period ended December
31, 2021. The nominal change in servicing fee income resulted from a decline in
the size of the MSR portfolio.

Servicing fee income for the three-month period ended March 31, 2022 was $13.1
million as compared to $13.5 million for the three-month period ended March 31,
2021. The decrease of $424,000 in servicing fee income resulted from a decline
in the size of the MSR portfolio.

Servicing Costs

Servicing costs for the three-month period ended March 31, 2022 was $3.2 million
as compared to $3.4 million for the three-month period ended December 31, 2021.
The decrease of $197,000 in servicing costs was due to timing of certain
payments as well as changes in the size of the MSR portfolio.

Servicing costs for the three-month period ended March 31, 2022 was $3.2 million
as compared to $3.1 million for the three-month period ended March 31, 2021. The
nominal change in servicing costs was due to timing of certain payments as well
as changes in the size of the MSR portfolio

Realized Gain (Loss) on RMBS, Available-For-Sale, Net

Realized loss on RMBS for the three-month period ended March 31, 2022 was
approximately $13.2 million as compared to $1.5 million for the three-month
period ended December 31, 2021. The increase of $11.7 million in realized loss
on RMBS was due to the sale of RMBS securities in the first quarter of 2022 in
response to the rising interest rates.

Realized loss on RMBS for the three-month period ended March 31, 2022 was
approximately $13.2 million as compared to a gain of $2.1 million for the
three-month period ended March 31, 2021. The increase of $15.3 million in
realized loss on RMBS was due to the sale of RMBS securities in the first
quarter of 2022 in response to the rising interest rates.

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Realized Loss on Derivatives, Net

Realized loss on derivatives for the three-month period ended March 31, 2022 was
approximately $10.6 million as compared to $4.7 million for the three-month
period ended December 31, 2021. The increase of $5.9 million in realized loss on
derivatives was substantially comprised of an increase of $11.5 million in
losses on TBAs and an increase of $1.2 million in losses on interest rate swaps,
offset by an increase of $6.4 million in gains on U.S. Treasury futures due to
rising interest rates.

Realized loss on derivatives for the three-month period ended March 31, 2022 was
approximately $10.6 million as compared to $540,000 for the three-month period
ended March 31, 2021. The increase of $10.1 million in realized loss on
derivatives was substantially comprised of an increase of $14.9 million in
losses on TBAs and an increase of $1.2 million in losses on interest rate swaps,
offset by an increase of $6.2 million in gains on U.S. Treasury futures due to
rising interest rates.

Unrealized Gain (Loss) on Derivatives

Unrealized gain on derivatives for the three-month period ended March 31, 2022
was approximately $24.5 million as compared to $8.2 million for the three-month
period ended December 31, 2021. The increase of $16.3 million in unrealized gain
on derivatives was primarily due to changes in interest rates and the
composition of our derivatives relative to the prior period.

Unrealized gain on derivatives for the three-month period ended March 31, 2022
was approximately $24.5 million as compared to a loss of $8.1 million for the
three-month period ended March 31, 2021. The increase of $32.6 million in
unrealized gain on derivatives was primarily due to changes in interest rates
and the composition of our derivatives relative to the prior period.

Unrealized Gain (Loss) on Investments in Servicing Related Assets

Unrealized gain on our investments in Servicing Related Assets for the
three-month period ended March 31, 2022 was approximately $21.7 million as
compared to a loss of $5.1 million for the three-month period ended December 31,
2021. The increase of $26.8 million in unrealized gain on our investments in
Servicing Related Assets was primarily due to changes in valuation inputs or
assumptions and paydown of underlying loans.

Unrealized gain on our investments in Servicing Related Assets for the
three-month period ended March 31, 2022 was approximately $21.7 million as
compared to $22.5 million for the three-month period ended March 31, 2021. The
decrease of $733,000 in unrealized gain on our investments in Servicing Related
Assets was primarily due to changes in valuation inputs or assumptions and
paydown of underlying loans.

General and Administrative Expense

General and administrative expense for the three-month period ended March 31,
2022 was $1.7 million as compared to $1.5 million for the three-month period
ended December 31, 2021. The increase of $197,000 in general and administrative
expense was primarily due to higher professional fees.

General and administrative expense for the three-month period ended March 31,
2022 was $1.7 million as compared to $1.6 million for the three-month period
ended March 31, 2021. The decrease of $127,000 in general and administrative
expense was primarily due to lower professional fees.

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Net Income Allocated to Noncontrolling Interests in Operating Partnership

Net income allocated to noncontrolling interests in the Operating Partnership,
which are LTIP-OP Units owned by directors and officers of the Company and by
certain other individuals who provide services to us through the Manager,
represented approximately 2.2%, 1.9% and 2.0% of net income for the three-month
periods ended March 31, 2022, December 31, 2021 and March 31, 2021,
respectively. The increase was due to the issuance of LTIP-OP Units during the
three-month period ended March 31, 2022.

For the periods indicated below, our accumulated other comprehensive income
(loss) changed as a result of the indicated gains and losses (dollars in
thousands):

Accumulated Other Comprehensive Income (Loss)

Three Months Ended
March 31, 2022
Accumulated other comprehensive gain (loss), December 31, 2021 $

7,527

Other comprehensive loss (44,535 )
Accumulated other comprehensive gain (loss), March 31, 2022 $ (37,008 )

Three Months Ended
December 31, 2021
Accumulated other comprehensive income, September 30, 2021 $

15,803

Other comprehensive loss (8,276 )
Accumulated other comprehensive income, December 31, 2021 $ 7,527

Three Months Ended
March 31, 2021
Accumulated other comprehensive income, December 31, 2020 $

35,594

Other comprehensive loss (19,349 )
Accumulated other comprehensive income, March 31, 2021 $

16,245

Our GAAP equity changes as the values of our RMBS are marked to market each
quarter, among other factors. The primary causes of mark to market changes are
changes in interest rates and credit spreads. During the periods ended March 31,
2022, December 31, 2021 and March 31, 2021, volatility and increases in the 10
Year U.S. Treasury rate and widening of credit spreads caused a net unrealized
loss on our RMBS in each of those periods, which is recorded in accumulated
other comprehensive income (loss).

Non-GAAP Financial Measures

This Management’s Discussion and Analysis of Financial Condition and Results of
Operations section contains analysis and discussion of non-GAAP financial
measures, including:

• earnings available for distribution; and

• earnings available for distribution per average common share.

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Earnings available for distribution (“EAD”) is a non-GAAP financial measure that
we define as GAAP net income (loss), excluding realized gain (loss) on RMBS,
realized and unrealized gain (loss) on derivatives, realized gain (loss) on
acquired assets, realized and unrealized gain (loss) on investments in MSRs (net
of any estimated MSR amortization) and any tax expense (benefit) on realized and
unrealized gain (loss) on MSRs. MSR amortization refers to the portion of the
change in fair value of the MSR that is primarily due to the realization of
cashflows, runoff resulting from prepayments and an adjustment for any gain or
loss on the capital used to purchase the MSR. EAD also includes interest rate
swap periodic interest income (expense) and drop income on TBA dollar roll
transactions, which are included in “Realized loss on derivatives, net” on the
consolidated statements of income (loss). EAD is adjusted to exclude outstanding
LTIP-OP Units in our Operating Partnership and dividends paid on our preferred
stock.

EAD is provided for purposes of potential comparability to other issuers that
invest in residential mortgage-related assets. We believe providing investors
with EAD, in addition to related GAAP financial measures, may provide investors
some insight into our ongoing operational performance. However, the concept of
EAD does have significant limitations, including the exclusion of realized and
unrealized gains (losses), and given the apparent lack of a consistent
methodology among issuers for defining EAD, it may not be comparable to
similarly titled measures of other issuers, which define EAD differently from us
and each other. As a result, EAD should not be considered a substitute for our
GAAP net income (loss) or as a measure of our liquidity. While EAD is one
indicia of the Company’s earnings capacity, it is not the only factor considered
in setting a dividend and is not the same as REIT taxable income which is
calculated in accordance with the rules of the IRS.

Earnings Available for Distribution

EAD for the three-month period ended March 31, 2022 as compared to the three
month periods ended December 31, 2021 and March 31, 2021, increased by
approximately $344,000 and $2.7 million respectively, or $0.02 and $0.13 per
average common share, respectively, substantially due to a decrease in price
premium amortization on the Company’s investments in RMBS driven by lower
prepayment speeds.

The following table reconciles the GAAP measure of net income (loss) to EAD and
related per average common share amounts, for the periods indicated (dollars in
thousands):

Three Months Ended
March 31, 2022 December 31, 2021 March 31, 2021 (B)
Net Income $ 28,729 $ 6,705 $ 21,228
Realized loss (gain) on RMBS, net 13,222 1,479 (2,094 )
Realized loss on derivatives, net (A) 14,422 8,860 4,741
Realized gain on acquired assets, net (12 ) – (5 )
Unrealized loss (gain) on derivatives, net (24,456 ) (8,233 ) 8,059

Unrealized gain on investments in MSRs, net of estimated MSR amortization

(28,011 ) (947 ) (30,059 )
Tax expense on realized and unrealized gain on MSRs 4,937 594 4,229
Total EAD: $ 8,831 $ 8,458 $ 6,099

EAD attributable to noncontrolling interests in Operating Partnership

(195 ) (160 ) (125 )
Dividends on preferred stock 2,463 2,463 2,463
EAD Attributable to Common Stockholders $ 6,173 $ 5,835 $ 3,511
EAD Attributable to Common Stockholders, per Diluted Share $ 0.34 $ 0.32 $ 0.21
GAAP Net Income Per Share of Common Stock, per Diluted Share $ 1.40 $ 0.23 $ 1.07

(A) Excludes drop income on TBA dollar rolls of $2.9 million, $3.4 million and

$2.7 million and interest rate swap periodic interest income of $915,000,

$786,000 and $1.3 million, for the three-month periods ended March 31, 2022,

December 31, 2021 and March 31, 2021, respectively, and includes trading

expenses of $176,000 for the three-month period ended March 31, 2021.

(B) Commencing with the three-month period ended December 31, 2021, the Company

has enhanced the calculation of unrealized gain (loss) on investments in MSRs

used to determine EAD. EAD for the three-month period ended March 31, 2021

has not been adjusted to reflect the Company’s enhanced calculation of

unrealized loss (gain) on investments in MSRs, net of estimated MSR

amortization. If the enhanced calculation had been applied retroactively to

the three-months ended March 31, 2021, the Company would have reported EAD

attributable to common stockholders of $3.9 million and EAD attributable to

common stockholders per share of $0.23.

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Our Portfolio

MSRs

Aurora’s portfolio of Fannie Mae and Freddie Mac MSRs have an aggregate UPB of
approximately $20.4 billion as of March 31, 2022.

The following tables set forth certain characteristics of the mortgage loans
underlying those MSRs as of the dates indicated (dollars in thousands):

MSR Collateral Characteristics

As of March 31, 2022

Collateral Characteristics
Current Current WA WA WA Loan
Carrying Principal Servicing Maturity Age
Amount Balance WA Coupon(A) Fee(A) (months)(A) (months)(A) ARMs %(B)
MSRs $ 246,103 $ 20,441,178 3.48 % 0.25 % 315 26 0.1 %
MSR Total/Weighted Average $ 246,103 $ 20,441,178 3.48 % 0.25 % 315 26 0.1 %

As of December 31, 2021

Collateral Characteristics
Current Current WA WA WA Loan
Carrying Principal Servicing Maturity Age
Amount Balance WA Coupon(A) Fee(A) (months)(A) (months)(A) ARMs %(B)
MSRs $ 218,727 $ 20,773,278 3.51 % 0.25 % 316 25 0.1 %
MSR Total/Weighted Average $ 218,727 $ 20,773,278 3.51 % 0.25 % 316 25 0.1 %

(A) Weighted average coupon, servicing fee, maturity and loan age of the

underlying residential mortgage loans in the pool are based on the unpaid

principal balance.

(B) ARMs % represents the percentage of the total principal balance of the pool

that corresponds to ARMs and hybrid ARMs.

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RMBS

The following tables summarize the characteristics of our RMBS portfolio and
certain characteristics of the collateral underlying our RMBS as of the dates
indicated (dollars in thousands):

RMBS Characteristics

As of March 31, 2022

Gross Unrealized Weighted Average
Original
Face Book Carrying Number of
Asset Type Value Value Gains Losses Value(A) Securities Rating Coupon Yield(C) Maturity (Years)
RMBS
Fannie Mae $ 678,445 $ 476,781 $ 669 $ (22,459 ) $ 454,991 68 (B) 3.10 % 2.99 % 27
Freddie Mac 422,127 334,222 383 (15,483 ) 319,122 42 (B) 3.08 % 2.97 % 28
Total/Weighted Average $ 1,100,572 $ 811,003 $ 1,052 $ (37,942 ) $ 774,113 110 3.09 % 2.98 % 28

As of December 31, 2021

Gross Unrealized Weighted Average
Original
Face Book Carrying Number of
Asset Type Value Value Gains

Losses Value(A) Securities Rating Coupon Yield(C) Maturity (Years)
RMBS
Fannie Mae $ 772,607 $ 554,151 $ 9,276 $ (3,650 ) $ 559,777 76 (B) 3.09 % 2.96 % 27
Freddie Mac 484,479 391,700 5,260 (3,241 ) 393,719 45 (B) 3.02 % 2.89 % 28
Total/Weighted Average $ 1,257,086 $ 945,851 $ 14,536 $ (6,891 ) $ 953,496 121 3.06 % 2.93 % 28

(A) See “Part I, Item 1. Notes to Consolidated Financial Statements-Note 9. Fair

Value” regarding the estimation of fair value, which approximates carrying

value for all securities.

(B) The Company used an implied AAA rating for the Agency RMBS.

(C) The weighted average yield is based on the most recent gross monthly interest

income, which is then annualized and divided by the book value of settled

securities.

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The following table summarizes the net interest spread of our RMBS portfolio as
of the dates indicated:

Net Interest Spread

March 31, 2022 December 31, 2021
Weighted Average Asset Yield 3.77 % 3.19 %
Weighted Average Interest Expense 0.71 % 0.73 %
Net Interest Spread 3.06 % 2.46 %

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund and maintain investments
and other general business needs. Additionally, to maintain our status as a REIT
under the Code, we must distribute annually at least 90% of our REIT taxable
income. In 2017, the Internal Revenue Service issued a revenue procedure
permitting “publicly offered” REITs to make elective stock dividends (i.e.,
dividends paid in a mixture of stock and cash), with at least 20% of the total
distribution being paid in cash, to satisfy their REIT distribution
requirements. In December 2021, the Internal Revenue Service issued a revenue
procedure that temporarily reduces the minimum amount of the total distribution
that must be paid in cash to 10% for distributions declared on or after November
1, 2021, and on or before June 30, 2022, provided certain other parameters
detailed in the Revenue Procedure are satisfied. Pursuant to these revenue
procedures, the Company has in the past elected to make distributions of its
taxable income in a mixture of stock and cash.

Our primary sources of funds for liquidity consist of cash provided by operating
activities (primarily income from our investments in RMBS and net servicing
income from our MSRs), sales or repayments of RMBS and borrowings under
repurchase agreements and our MSR financing arrangements. The COVID-19 pandemic
has not adversely affected our ability to access these traditional sources of
our funds on the same or reasonably similar terms as available before the
pandemic.

In the future, sources of funds for liquidity may include additional MSR
financing, warehouse agreements, securitizations and the issuance of equity or
debt securities, when feasible. During the three-month period ended March 31,
2022, the Company issued and sold 505,000 shares of common stock under the
Common Stock ATM Program. The shares were sold at a weighted average price of
$8.19 per share for gross proceeds of approximately $4.1 million before fees of
approximately $83,000. During the three-month period ended December 31, 2021,
the Company issued and sold 594,898 shares of common stock under the Common
Stock ATM Program. The shares were sold at a weighted average price of $8.80 per
share for gross proceeds of approximately $5.2 million before fees of
approximately $105,000. During the three-month period ended March 31, 2021, we
did not issue and sell any capital stock pursuant to the ATM programs. In the
past we have used, and we anticipate that in the future we will use a
significant portion of the paydowns of the RMBS to purchase MSRs. We may also
sell certain RMBS and deploy the net proceeds from such sales to the extent
necessary to fund the purchase price of MSRs.

Our primary uses of funds are the payment of interest, management fees,
outstanding commitments, other operating expenses, investments in new or
replacement assets, margin calls and the repayment of borrowings, as well as
dividends. Although we continue to maintain a higher level of unrestricted cash
than prior to the pandemic, we expect to invest more of that unrestricted cash
in our targeted assets if normalization of the economy continues. We may also
use capital resources to repurchase additional shares of common stock under our
stock repurchase program when we believe such repurchases are appropriate and/or
the stock is trading at a significant discount to net asset value. We seek to
maintain adequate cash reserves and other sources of available liquidity to meet
any margin calls resulting from decreases in value related to a reasonably
possible (in the opinion of management) change in interest rates.

As of the date of this filing, we believe we have sufficient liquid assets to
satisfy all of our short-term recourse liabilities and to satisfy covenants in
our financing documents. With respect to the next twelve months, we expect that
our cash on hand combined with the cash flow provided by our operations will be
sufficient to satisfy our anticipated liquidity needs with respect to our
current investment portfolio, including related financings, potential margin
calls and operating expenses. While it is inherently more difficult to forecast
beyond the next twelve months, we currently expect to meet our long-term
liquidity requirements through our cash on hand and, if needed, additional
borrowings, proceeds received from repurchase agreements and similar financings,
proceeds from equity offerings and the liquidation or refinancing of our assets.

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Our operating cash flow differs from our net income due primarily to: (i)
accretion of discount or premium on our RMBS, (ii) unrealized gains or losses on
our Servicing Related Assets, and (iii) impairment on our securities, if any.

Repurchase Agreements

As of March 31, 2022, we had repurchase agreements with 34 counterparties and
approximately $765.0 million of outstanding repurchase agreement borrowings from
13 of those counterparties, which were used to finance RMBS. As of March 31,
2022, our exposure (defined as the amount of cash and securities pledged as
collateral, less the borrowing under the repurchase agreement) to any of the
counterparties under the repurchase agreements did not exceed five percent of
the Company’s equity. Under these agreements, which are uncommitted facilities,
we sell a security to a counterparty and concurrently agree to repurchase the
same security at a later date at the same price that we initially sold the
security plus the interest charged. The sale price represents financing proceeds
and the difference between the sale and repurchase prices represents interest on
the financing. The price at which the security is sold generally represents the
market value of the security less a discount or “haircut.” The weighted average
haircut on our repurchase debt at March 31, 2022 was approximately 4.2%. During
the term of the repurchase transaction, which can be as short as a few days, the
counterparty holds the security and posts margin as collateral. The counterparty
monitors and calculates what it estimates to be the value of the collateral
during the term of the transaction. If this value declines by more than a de
minimis threshold, the counterparty requires us to post additional collateral
(or “margin”) in order to maintain the initial haircut on the collateral. This
margin is typically required to be posted in the form of cash and cash
equivalents. Furthermore, we are, from time to time, a party to derivative
agreements or financing arrangements that may be subject to margin calls based
on the value of such instruments.

Set forth below is the average aggregate balance of borrowings under the
Company’s repurchase agreements for each of the periods shown and the aggregate
balance as of the end of each such period (dollars in thousands):

Repurchase Agreement Average and Maximum Amounts

Average Monthly Maximum Month-End Quarter Ending
Quarter Ended Amount Amount Amount
March 31, 2022 $ 820,270 $ 859,726 $ 764,885
December 31, 2021 $ 830,099 $ 865,494 $ 865,494
September 30, 2021 $ 790,587 $ 821,540 $ 777,416
June 30, 2021 $ 858,269 $ 897,047 $ 897,047
March 31, 2021 $ 1,012,389 $ 1,118,231 $ 934,001
December 31, 2020 $ 1,303,927 $ 1,465,037 $ 1,149,978
September 30, 2020 $ 1,374,041 $ 1,419,991 $ 1,365,471
June 30, 2020 $ 1,286,998 $ 1,395,317 $ 1,395,317

The decrease in the Company’s borrowings under its repurchase agreements was
primarily due to the sale of RMBS securities during 2020 and 2021.

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These short-term borrowings were used to finance certain of our investments in
RMBS. The RMBS repurchase agreements are guaranteed by the Company. The weighted
average difference between the market value of the assets and the face amount of
available financing for the RMBS repurchase agreements, or the haircut, was 4.2%
and 4.6% as of March 31, 2022 and December 31, 2021, respectively. The following
tables provide additional information regarding borrowings under our repurchase
agreements (dollars in thousands):

Repurchase Agreement Characteristics

As of March 31, 2022

Repurchase Weighted
RMBS Market Value Agreements Average Rate
Less than one month $ 401,150 $ 396,958 0.33 %
One to three months 377,070 367,927 0.46 %
Total/Weighted Average $ 778,220 $ 764,885 0.39 %

As of December 31, 2021

Repurchase Weighted
RMBS Market Value Agreements Average Rate
Less than one month $ 297,720 $ 291,007 0.13 %
One to three months 595,168 574,487 0.14 %
Total/Weighted Average $ 892,888 $ 865,494 0.14 %

The amount of collateral as of March 31, 2022 and December 31, 2021, including
cash, was $805.2 million and $905.1 million, respectively.

The weighted average term to maturity of our borrowings under repurchase
agreements as of March 31, 2022 and December 31, 2021 was 33 days and 38 days,
respectively.

MSR Financing

As of March 31, 2022, the Company had two separate MSR financing facilities: (i)
the Freddie Mac MSR Revolver, which is a revolving credit facility for up to
$100.0 million that is secured by all Freddie Mac MSRs owned by Aurora; and (ii)
the Fannie Mae MSR Revolving Facility, which is a revolving credit facility for
up to $150.0 million, that is secured by all Fannie Mae MSRs owned by Aurora.
Both financing facilities are available for MSRs as well as certain servicing
related advances associated with MSRs.

Freddie Mac MSR Revolver. In July 2018, the Company, Aurora and QRS V
(collectively with Aurora and the Company, the “Borrowers”) entered into a $25.0
million revolving credit facility (the “Freddie Mac MSR Revolver”) pursuant to
which Aurora pledged all of its existing and future MSRs on loans owned or
securitized by Freddie Mac. The term of the Freddie Mac MSR Revolver is 364 days
with the Borrowers’ option for two renewals for similar terms followed by a
one-year term out feature with a 24-month amortization schedule. The Freddie Mac
MSR Revolver was upsized to $45.0 million in September 2018. The Company also
has the ability to request up to an additional $5.0 million of borrowings. On
April 2, 2019, Aurora and QRS V entered into an amendment that increased the
maximum amount of the Freddie Mac MSR Revolver to $100.0 million. In July 2021,
the Borrowers entered into an amendment to the Freddie Mac MSR Revolver that
extended the revolving period for an additional 364 days with the option for two
more renewals of 364 days each. At the end of the revolving period, the
outstanding amount will be converted to a one-year term loan. Amounts borrowed
bear interest at an adjustable rate equal to a spread above one-month LIBOR. At
March 31, 2022 and December 31, 2021, approximately $65.0 million and $63.0
million, respectively, was outstanding under the Freddie Mac MSR Revolver.

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Fannie Mae MSR Revolving Facility. In October 2021, Aurora and QRS III entered
into a loan and security agreement (the “Fannie Mae MSR Revolving Facility”), to
replace the Prior Fannie Mae MSR Financing Facility. Under the Fannie Mae MSR
Revolving Facility, Aurora and QRS III pledged their respective rights in all
existing and future MSRs for loans owned or securitized by Fannie Mae to secure
borrowings outstanding from time to time. The maximum credit amount outstanding
at any one time under the Fannie Mae MSR Revolving Facility is $150.0 million.
The revolving period is 24 months which may be extended by agreement with the
lender. During the revolving period, borrowings bear interest at a rate equal to
a spread over one-month LIBOR subject to a floor. At the end of the revolving
period, the outstanding amount will be converted to a three-year term loan that
will bear interest at a rate calculated at a spread over the rate for one-year
interest rate swaps. The Company has guaranteed repayment of all indebtedness
under the Fannie Mae MSR Revolving Facility. At March 31, 2022 and December 31,
2021, approximately $94.8 million and $83.0 million, respectively, was
outstanding under the Fannie Mae MSR Revolving Facility.

As noted above, the Fannie Mae MSR Revolving Facility replaced the Prior Fannie
Mae MSR Financing Facility. In September 2019, Aurora and QRS III entered into a
loan and security agreement (the “Prior Fannie Mae MSR Financing Facility”).
Under the Prior Fannie Mae MSR Facility, Aurora and QRS III pledged their
respective rights in all existing and future MSRs for loans owned or securitized
by Fannie Mae to secure borrowings outstanding from time to time. The maximum
credit amount outstanding at any one time under the facility was $200 million,
of which $100 million was committed. Borrowings bore interest at a rate equal to
a spread over onemonth LIBOR subject to a floor. This facility was terminated
and replaced in October 2021 with the Fannie Mae MSR Revolving Facility (as
defined and discussed above). As a result, there was no outstanding balance
under the Prior Fannie Mae MSR Financing Facility at March 31, 2022 and December
31, 2021.

Cash Flows

Operating and Investing Activities

Our operating activities provided cash of approximately $13.8 million and our
investing activities provided cash of approximately $57.6 million for the
three-month period ended March 31, 2022.

Dividends

U.S. federal income tax law generally requires that a REIT distribute annually
at least 90% of its REIT taxable income, without regard to the deduction for
dividends paid and excluding net capital gains, and that it pay tax at regular
corporate rates to the extent that it annually distributes less than 100% of its
taxable income. We intend to make regular quarterly distributions of all or
substantially all of our REIT taxable income to holders of our common and
preferred stock out of assets legally available for this purpose, 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
debt payable. If our cash available for distribution is less than our REIT
taxable income, we could be required to sell assets or borrow funds to make cash
distributions, or, with respect to our common stock, we may make a portion of
the required distribution in the form of a taxable stock distribution or
distribution of debt securities. We will make distributions only upon the
authorization of our board of directors. The amount, timing and frequency of
distributions will be authorized by our board of directors based upon a variety
of factors, including:

• actual results of operations;

• our level of retained cash flows;

• our ability to make additional investments in our target assets;

• restrictions under Maryland law;

• the terms of our preferred stock;

• any debt service requirements;

• our taxable income;

• the annual distribution requirements under the REIT provisions of the Code; and

• other factors that our board of directors may deem relevant.

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Our ability to make distributions to our stockholders will depend upon the
performance of our investment portfolio, and, in turn, upon our Manager’s
management of our business. Distributions will be made quarterly in cash to the
extent that cash is available for distribution. We may not be able to generate
sufficient cash available for distribution to pay distributions to our
stockholders. In addition, our board of directors may change our distribution
policy with respect to our common stock in the future. No assurance can be given
that we will be able to make any other distributions to our stockholders at any
time in the future or that the level of any distributions we do make to our
stockholders will achieve a market yield or increase or even be maintained over
time.

We make distributions based on a number of factors, including an estimate of
taxable earnings. Dividends distributed and taxable income will typically differ
from GAAP earnings due to items such as fair value adjustments, differences in
premium amortization and discount accretion, and nondeductible general and
administrative expenses. Our common dividend per share may be substantially
different than our taxable earnings and GAAP earnings per share. Our GAAP income
per diluted share for the three-month periods ended March 31, 2022, December 31,
2021 and March 31, 2021 was $1.40, $0.24 and $1.07, respectively.

Contractual Obligations

Our contractual obligations as of March 31, 2022 and December 31, 2021 included
repurchase agreements, borrowings under our MSR financing arrangements, our
Management Agreement with our Manager, and our subservicing agreements.

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The following table summarizes our contractual obligations for borrowed money as
of the dates indicated (dollars in thousands):

Contractual Obligations Characteristics

As of March 31, 2022

Less than 1 to 3 3 to 5 More than
1 year years years 5 years Total
Repurchase agreements
Borrowings under repurchase
agreements $ 764,885 $ – $ – $ – $ 764,885
Interest on repurchase
agreement borrowings(A) $ 137 $ – $ – $ – $ 137
Freddie Mac MSR Revolver
Borrowings under Freddie Mac
MSR Revolver $ 65,000 $ – $ – $ – $ 65,000
Interest on Freddie Mac MSR
Revolver borrowings $ 1,390 $ – $ – $ – $ 1,390
Fannie Mae MSR Revolving
Facility
Borrowings under Fannie Mae MSR
Revolving Facility $ – $ 10,150 $ 84,650 $ – $ 94,800
Interest on Fannie Mae MSR
Revolving Facility $ 3,604 $ 8,247 $ 6,328 $ – $ 18,179

As of December 31, 2021

Less than 1 to 3 3 to 5 More than
1 year years years 5 years Total
Repurchase agreements
Borrowings under repurchase
agreements $ 865,494 $ – $ – $ – $ 865,494
Interest on repurchase
agreement borrowings(A) $ 135 $ – $ – $ – $ 135
Freddie Mac MSR Revolver
Borrowings under Freddie Mac
MSR Revolver $ 63,000 $ – $ – $ – $ 63,000
Interest on Freddie Mac MSR
Revolver borrowings $ 1,954 $ – $ – $ – $ 1,954
Fannie Mae MSR Revolving
Facility
Borrowings under Fannie Mae MSR
Revolving Facility $ – $ 7,566 $ 75,434 $ – $ 83,000
Interest on Fannie Mae MSR
Revolving Facility $ 3,156 $ 6,127 $ 4,941 $ – $ 14,224

(A) Interest expense is calculated based on the interest rate in effect at March

31, 2022 and December 31, 2021, respectively, and includes all interest
expense incurred through those dates.

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Management Agreement

The Management Agreement with our Manager provides that our Manager is entitled
to receive a management fee, the reimbursement of certain expenses and, in
certain circumstances, a termination fee. The management fee is an amount equal
to 1.5% per annum of our stockholders’ equity, adjusted as set forth in the
Management Agreement, and calculated and payable quarterly in arrears. We will
also be required to pay a termination fee equal to three times the average
annual management fee earned by our Manager during the two four-quarter periods
ending as of the end of the most recently completed fiscal quarter prior to the
effective date of the termination. Such termination fee will be payable upon
termination or non-renewal of the Management Agreement by us without cause or by
our Manager if we materially breach the Management Agreement.

We pay all of our direct operating expenses, except those specifically required
to be borne by our Manager under the Management Agreement. Our Manager is
responsible for all costs incident to the performance of its duties under the
Management Agreement. We believe that our Manager uses the proceeds from its
management fee in part to pay the Services Provider for services provided under
the Services Agreement. Our officers receive no cash compensation directly from
us. Our Manager provides us with our officers. Our Manager is entitled to be
reimbursed for an agreed upon portion of the costs of the wages, salary and
other benefits with respect to our chief financial officer, and, prior to
January 1, 2022, our general counsel, originally based on the percentages of
their working time and efforts spent on matters related to the Company. The
amount of the wages, salary and benefits reimbursed with respect to the officers
our Manager provides to us is subject to the approval of the compensation
committee of our board of directors.

The term of the Management Agreement expired on October 22, 2021 and was
automatically renewed for a one-year term on such date and will be automatically
renewed for a one-year term on each anniversary of such date thereafter unless
terminated or not renewed as described below. Either we or our Manager may elect
not to renew the Management Agreement upon expiration of its initial term or any
renewal term by providing written notice of non-renewal at least 180 days, but
not more than 270 days, before expiration. No such written notice of non-renewal
was provided in 2021 and the Management Agreement’s term was automatically
extended until October 22, 2022. In the event we elect not to renew the term, we
will be required to pay our Manager the termination fee described above. We may
terminate the Management Agreement at any time for cause effective upon 30 days
prior written notice of termination from us to our Manager, in which case no
termination fee would be due. Our board of directors will review our Manager’s
performance prior to the automatic renewal of the Management Agreement and, as a
result of such review, upon the affirmative vote of at least two-thirds of the
members of our board of directors or of the holders of a majority of our
outstanding common stock, we may terminate the Management Agreement based upon
unsatisfactory performance by our Manager that is materially detrimental to us
or a determination by our independent directors that the management fees payable
to our Manager are not fair, subject to the right of our Manager to prevent such
a termination by agreeing to a reduction of the management fees payable to our
Manager. Upon any termination of the Management Agreement based on
unsatisfactory performance or unfair management fees, we are required to pay our
Manager the termination fee described above. Our Manager may terminate the
Management Agreement, without payment of the termination fee, in the event we
become regulated as an investment company under the Investment Company Act. Our
Manager may also terminate the Management Agreement upon 60 days’ written notice
if we default in the performance of any material term of the Management
Agreement and the default continues for a period of 30 days after written notice
to us, whereupon we would be required to pay our Manager the termination fee
described above.

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Subservicing Agreements

As of March 31, 2021, Aurora had four subservicing agreements in place, one of
which is with Freedom Mortgage. Following the sale of the Ginnie Mae MSRs to
Freedom Mortgage in June 2020, Freedom Mortgage continued to subservice certain
loans that had been purchased from Ginnie Mae pools due to delinquency or
default. Freedom Mortgage ceased subservicing these loans during 2021 because
these loans and any related advance claims had been rehabilitated or liquidated.
One of the other subservicing agreements is with RoundPoint. Freedom Mortgage
acquired RoundPoint and it became a wholly-owned subsidiary of Freedom Mortgage
in August 2020. The agreements have varying initial terms (three years, for
Freedom Mortgage, and two years for the other three sub-servicers) and are
subject to automatic renewal for additional terms equal to the applicable
initial term unless either party chooses not to renew. Each agreement may be
terminated without cause by either party by giving notice as specified in the
agreement. If an agreement is not renewed by the Company or terminated by the
Company without cause, de-boarding fees will be due to the subservicer. Under
each agreement, the subservicer agrees to service the applicable mortgage loans
in accordance with applicable law and the requirements of the applicable Agency
and the Company pays customary fees to the applicable subservicer for specified
services.

Joint Marketing Recapture Agreement

We attempt to reduce the exposure of our MSRs to voluntary prepayments through
the structuring of recapture agreements with Aurora’s subservicers.

In May 2018, Aurora entered into a recapture purchase and sale agreement with
RoundPoint, one of Aurora’s subservicers and since August 2020, a wholly-owned
subsidiary of Freedom Mortgage. Pursuant to this agreement, RoundPoint attempts
to refinance certain mortgage loans underlying Aurora’s MSR portfolio
subserviced by RoundPoint as directed by Aurora. If a loan is refinanced,
Freedom Mortgage will sell the loan to Fannie Mae or Freddie Mac, as applicable,
retain the sale proceeds and transfer the related MSR to Aurora. The agreement
continues in effect while the subservicing agreement remains in effect.

Inflation

Substantially all of our assets and liabilities are financial in nature. As a
result, interest rates and other factors affect our performance more so than
inflation, although inflation rates can often have a meaningful influence over
the direction of interest rates. Furthermore, our financial statements are
prepared in accordance with GAAP and our distributions are determined by our
board of directors primarily based on our REIT taxable income, and, in each
case, our activities and balance sheet are measured with reference to historical
cost and/or fair market value without considering inflation.

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