CHIMERA INVESTMENT CORP Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of Operations (type 10-Q)

The following discussion of our financial condition and results of operations

should be read in conjunction with the consolidated financial statements and

notes to those statements included in Item 1 of this Quarterly Report on Form

10-Q.

As permitted by SEC Final Rule Release No. 33-10890, Management’s Discussion and

Analysis, Selected Financial Data, and Supplementary Financial Information, 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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this report that are subject to risks and

uncertainties. These forward-looking statements include information about, among

other things, possible or assumed future results of our business, financial

condition, liquidity, results of operations, plans and objectives. When we use

the words ”believe,” ”expect,” ”anticipate,” ”estimate,” ”plan,”

”continue,” ”intend,” ”should,” ”may,” ”would,” ”will” or similar

expressions, we intend to identify forward-looking statements. Statements

regarding the following subjects, among others, are forward-looking by their

nature:

•our business and investment strategy;

•our ability to accurately forecast the payment of future dividends on our

common and preferred stock, and the amount of such dividends;

•our ability to determine accurately the fair market value of our assets;

•availability of investment opportunities in real estate-related and other

securities, including our valuation of potential opportunities that may arise as

a result of current and future market dislocations;

•effect of the novel coronavirus, or COVID-19, pandemic on real estate market,

financial markets and our Company, including the impact on the value,

availability, financing and liquidity of mortgage assets;

•how COVID-19 may affect us, our operations and our personnel;

•our expected investments;

•changes in the value of our investments, including negative changes resulting

in margin calls related to the financing of our assets;

•changes in interest rates and mortgage prepayment rates;

•prepayments of the mortgage and other loans underlying our mortgage-backed

securities, or MBS, or other asset-backed securities, or ABS;

•rates of default, delinquencies, forbearance, deferred payments or decreased

recovery rates on our investments;

•general volatility of the securities markets in which we invest;

•our ability to maintain existing financing arrangements and our ability to

obtain future financing arrangements;

•our ability to affect our strategy to securitize residential mortgage loans;

•interest rate mismatches between our investments and our borrowings used to

finance such purchases;

•effects of interest rate caps on our adjustable-rate investments;

•the degree to which our hedging strategies may or may not protect us from

interest rate volatility;

•the impact of and changes to various government programs, including in response

to COVID-19;

•impact of and changes in governmental regulations, tax law and rates,

accounting guidance, and similar matters;

•market trends in our industry, interest rates, the debt securities markets or

the general economy;

•estimates relating to our ability to make distributions to our stockholders in

the future;

•our understanding of our competition;

•our ability to find and retain qualified personnel;

•our ability to maintain our classification as a real estate investment trust,

or REIT, for U.S. federal income tax purposes;

•our ability to maintain our exemption from registration under the Investment

Company Act of 1940, as amended, or 1940 Act;

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•our expectations regarding materiality or significance; and

•the effectiveness of our disclosure controls and procedures.

Special Note Regarding COVID-19 pandemic

During the quarter ended March 31, 2022, the financial markets continued to

improve from the disruptions driven by the COVID-19 pandemic. However, there is

still uncertainty about the future of COVID-19 and variants and its impact on

our business, operations, personnel, or the U.S. economy as a whole. Any

forecasts in this regard would be highly uncertain and could not be predicted

with any certainty, including the scope and duration of the pandemic, the

effectiveness of our work from home or remote work arrangements, third-party

providers’ ability to support our operation, and any actions taken by

governmental authorities and other third parties in response to the pandemic,

and the other factors discussed above and throughout this Quarterly Report on

Form 10-Q. The uncertain future development of this crisis could materially and

adversely affect our business, operations, operating results, financial

condition, liquidity or capital levels.

Forward-looking statements are based on our beliefs, assumptions and

expectations of our future performance, taking into account all information

currently available to us. You should not place undue reliance on these

forward-looking statements. These beliefs, assumptions and expectations can

change as a result of many possible events or factors, not all of which are

known to us. If a change occurs, our business, financial condition, liquidity,

results of operations and prospects may vary materially from those expressed in

our forward-looking statements. Any forward-looking statement speaks only as of

the date on which it is made. New risks and uncertainties arise from time to

time, and it is impossible for us to predict those events or how they may affect

us. Except as required by law, we are not obligated to, and do not intend to,

update or revise any forward-looking statements, whether as a result of new

information, future events or otherwise.

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Executive Summary

We are a publicly traded REIT that is primarily engaged in the business of

investing directly or having a beneficial interest in a diversified portfolio of

mortgage assets, including residential mortgage loans, Agency RMBS, Non-Agency

RMBS, Agency CMBS, and other real estate-related assets. We use leverage to

increase returns while managing the difference or spread between longer duration

assets and shorter duration financing. Our principal business objective is

seeking to provide an opportunity for stockholders to realize attractive

risk-adjusted returns through the generation of distributable income and through

asset performance linked to residential mortgage credit fundamentals. We

selectively invest in residential mortgage assets with a focus on credit

analysis, projected prepayment rates, interest rate sensitivity and expected

return.

We currently focus our investment activities primarily on acquiring residential

mortgage loans, Non-Agency RMBS and Agency mortgage-backed securities, or MBS.

At March 31, 2022, based on the fair value of our interest earning assets,

approximately 86% of our investment portfolio was residential mortgage loans,

10% of our investment portfolio was Non-Agency RMBS, and 4% of our investment

portfolio was Agency MBS. At December 31, 2021, based on the fair value of our

interest earning assets, approximately 82% of our investment portfolio was

residential mortgage loans, 12% of our investment portfolio was Non-Agency RMBS,

and 6% of our investment portfolio was Agency MBS.

We use leverage to seek to increase our potential returns and to finance the

acquisition of our assets. We expect to finance our investments using a variety

of financing sources, including securitizations, warehouse facilities and

repurchase agreements. We may seek to manage our debt and interest rate risk by

utilizing interest rate hedges, such as interest rate swaps, caps, options and

futures to reduce the effect of interest rate fluctuations related to our

financing sources. As of March 31, 2022, we did not own any interest rate

hedges.

Our investment strategy is intended to take advantage of opportunities in the

current interest rate and credit environment. We update the execution of our

strategy to changing market conditions by shifting our asset allocations across

various asset classes as interest rates and credit cycles change over time. We

expect to take a long-term view of assets and liabilities.

Business Update

We remained active in the residential mortgage market during the first quarter,

as we took advantage of opportunities to acquire higher yielding assets compared

to prior periods. During the quarter, we committed to acquire $807 million in

residential mortgage loans. We settled on $570 million of those loans during the

quarter and the remaining $237 million are expected to settle in the second

quarter. Overall, our recourse borrowing during the quarter increased by $163

million, commensurate to the financing needed for the loan acquisitions

described above. In addition to the increased recourse borrowings, our

short-term funding costs increase by 23 basis points during the quarter due to

higher interest rates.

Also, during the first quarter, we sponsored CIM 2022-R1, a securitization of

seasoned reperforming residential mortgage loans with a principal balance of

$328 million. Securities issued by CIM 2022-R1, with an aggregate balance of

approximately $264 million, were sold in a private placement to institutional

investors. These senior securities represented approximately 80% of the capital

structure. We retained subordinate interests in securities with an aggregate

balance of approximately $64 million and certain interest-only securities. We

also retained an option to call the securitized mortgage loans at any time

beginning in February 2027. Our average cost of debt of this securitization is

3.17%.

During the quarter, certain of our subsidiaries acquired the assets owned by

Hains Point, LLC, a consolidated investment company fund. The assets transferred

included the subordinated interests in the CMLTI 2019-E and SLST 2019-1

securitization trusts. As a result of these transfers and as the primary

beneficiary of both CMLTI 2019-E and SLST 2019-1, we consolidated the related

securitization trusts at fair value. This consolidation increased our loan

portfolio and our securitized debt by of $1.0 billion and $775 million,

respectively. The subordinated interests in CMLTI 2019-E and SLST 2019-1 were

eliminated upon consolidation of these securitization trusts.

Chimera continues its focus on growing its residential credit portfolio with the

completion of its first securitization of the year along with acquiring an

additional $807 million on residential loans. As of the end of first quarter,

96% of Chimera’s capital is allocated to residential credit assets.

Market Conditions and our Strategy

The dramatic increase in headline inflation and widening of credit spreads which

began in the fourth quarter of 2021 continued during the first quarter of 2022.

Adding to inflation concerns, Russia’s invasion of Ukraine drove energy prices

substantially higher, with crude oil up 35% over the quarter. As inflation

pressures continued to rise coupled with a tight labor market, several members

of the Federal Reserve Board made hawkish public statements, indicating the

possibility that the Fed Funds

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Rate could increase by 200 to 250 basis points by year end. The Federal Reserve

has also announced not only that it has stopped purchasing Agency MBS, but also

a possible reduction of its Agency MBS portfolio. As a result of these Federal

Reserve announcements, mortgage rates moved higher and Agency spreads widened

further during the quarter. As mortgage rates near 5%, both mortgage origination

and refinance activity have slowed substantially. Nonetheless, the housing

market remained strong during the quarter, with housing prices and rents

reaching record highs on tight inventory.

With the move in interest rates, the 2-year Treasury rates increased 160 basis

points and the 10-year Treasury rates increased 83 basis points, causing the

pace of mortgage securitizations to increase in the first quarter, as issuers

looked to lock in term financing. The uptick in issuances led to widening in

credit spreads, as issuers and investors feared the pace of Federal Reserve

activity (both increased rates and sales of Agency MBS). Wider mortgage spreads

led to price drops in mortgage securities, both in Agencies and non-Agencies.

The forward market outlook hints at the possibility of a recession in the next

12 to 24 months, as evidenced by the inverted yield curve.

As a result of the conditions described above, we experienced mark downs in our

Agency and Residential Credit portfolios. In addition, our securitized debt also

experienced mark downs, resulting in unrealized gains that offset some of the

book value reduction on our asset portfolio. This drove a decline in our book

value per common share to $10.15, or $1.69 per common share as of March 31, 2022

as compared to $11.84 as of December 31, 2021.

While the current market conditions present us with challenges, we believe that

our strategy of buying, financing, and securitizing residential mortgage loans

will continue to generate positive risk adjusted returns over the long run. We

continue to be active in the residential loan market, as evidenced by our loan

commitments during the first quarter and believe we can continue to add

attractive assets to our portfolio as market conditions permit.

Business Operations

Net Income (Loss) Summary

The table below presents our net income (loss) on a GAAP basis for the quarters

ended March 31, 2022, December 31, 2021 and March 31, 2021.

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Net Income (Loss)

(dollars in thousands, except share and per share data)

(unaudited)

For the Quarters Ended

March 31, 2022 December 31, 2021 March 31, 2021 QoQ Change YoY Change

Net interest income:

Interest income (1) $ 202,175 $ 221,162 $ 243,127 $ (18,987) $ (40,952)

Interest expense (2) 64,473 66,598 108,066 (2,125) (43,593)

Net interest income 137,702 154,564 135,061 (16,862) 2,641

Increase (decrease) in provision for

credit losses 240 92 (126) 148 366

Other investment gains (losses):

Net unrealized gains (losses) on

financial instruments at fair value (370,167) (108,286) 270,012 (261,881) (640,179)

Net realized gains (losses) on sales of

investments – – 37,796 – (37,796)

Gains (losses) on extinguishment of debt – 980 (237,137) (980) 237,137

Total other gains (losses) (370,167) (107,306) 70,671 (262,861) (440,838)

Other expenses:

Compensation and benefits 11,353 11,460 13,439 (107) (2,086)

General and administrative expenses 5,711 5,574 5,198 137 513

Servicing and asset manager fees 9,291 8,900 9,281 391 10

Transaction expenses 3,804 4,241 16,437 (437) (12,633)

Total other expenses 30,159 30,175 44,355 (16) (14,196)

Income (loss) before income taxes (262,864) 16,991 161,503 (279,855) (424,367)

Income taxes (70) (743) 3,912 673 (3,982)

Net income (loss) $ (262,794) $ 17,734 $ 157,591 $ (280,528) $ (420,385)

Dividends on preferred stock 18,408 18,452 18,438 (44) (30)

Net income (loss) available to common

shareholders $ (281,202) $

(718) $ 139,153 $ (280,484) $ (420,355)

Net income (loss) per share available to

common shareholders:

Basic $ (1.19) $ (0.00) $ 0.60 $ (1.19) $ (1.79)

Diluted $ (1.19) $ (0.00) $ 0.54 $ (1.19) $ (1.73)

Weighted average number of common shares

outstanding:

Basic 237,012,702 236,896,512 230,567,231 116,190 6,445,471

Diluted 237,012,702 236,896,512 261,435,081 116,190 (24,422,379)

Dividends declared per share of common

stock $ 0.33 $ 0.33 $ 0.30 $ 0.03 $ –

(1) Includes interest income of consolidated VIEs of $131,066, $138,538 and

$158,100 for the quarters ended March 31, 2022, December 31, 2021 and March 31,

2021, respectively. See Note 9 to consolidated financial statements for further

discussion.

(2) Includes interest expense of consolidated VIEs of $42,491, $43,469 and

$65,205 for the quarters ended March 31, 2022, December 31, 2021 and March 31,

2021, respectively. See Note 9 to consolidated financial statements for further

discussion.

See accompanying notes to consolidated financial statements.

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Results of Operations for the Quarters Ended March 31, 2022, December 31, 2021

and March 31, 2021.

Our primary source of income is interest income earned on our assets, net of

interest expense paid on our financing liabilities.

Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021

For the quarter ended March 31, 2022, our net loss available to common

shareholders was $281 million, or $1.19 per average basic common share, compared

to a net loss of $718 thousand, or $0.00 per average basic common share, for the

quarter ended December 31, 2021. The higher net loss available to common

shareholders for the quarter ended March 31, 2022, as compared to the quarter

ended December 31, 2021, was primarily driven by mark downs in our portfolio’s

asset prices due to an increase in interest rates and the credit spread

widening. During the quarter ended March 31, 2022, we had net unrealized losses

on financial instruments at fair value of $370 million, partially offset by net

interest income of $138 million.

Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021

For the quarter ended March 31, 2022, our net loss available to common

shareholders was $281 million, or $1.19 per average basic common share, compared

to a net income of $139 million, or $0.60 per average basic common share for the

quarter ended March 31, 2021. The higher net loss available to common

shareholders for the quarter ended March 31, 2022, was primarily driven by mark

downs in our portfolio’s asset prices due to an increase in interest rates and

the credit spread widening as compared to the quarter ended March 31, 2021.

Interest Income

Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021

Interest income decreased by $19 million, or 9%, to $202 million for the quarter

ended March 31, 2022 as compared to $221 million for the quarter ended December

31, 2021. This decrease in our interest income was driven by a decrease in our

average interest earning assets and slightly lower yields on our Loans held for

investments and Non-Agency RMBS as compared to quarter ended December 31, 2021.

We reduced our average interest earning asset balances by $279 million to $13.6

billion as compared to $13.9 billion from the quarter ended December 31, 2021.

During the quarter ended March 31, 2022 our interest income decreased by $8

million on our Loans held for investments, $6 million on our Non-Agency RMBS,

and $5 million on our Agency CMBS investments.

Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021

Interest income decreased by $41 million, or 17%, to $202 million for the

quarter ended March 31, 2022 as compared to $243 million for the quarter ended

March 31, 2021. This decrease in our interest income during quarter ended March

31, 2022 was primarily driven by a decline in our average interest earning

assets and slightly lower yields on our Loans held for investments and

Non-Agency RMBS as compared to the quarter ended March 31, 2021. We reduced our

average interest earning asset balances by $1.7 billion to $13.6 billion as

compared to $15.3 billion from the same period of 2021 to respond to rising

interest rates and residential credit cycle changes. This reduction in our Loans

held for investments, Agency CMBS and Non-Agency RMBS portfolios decreased our

interest income earned on Loans held for investments by $27 million, Non-Agency

RMBS by $10 million and Agency CMBS by $4 million.

Interest Expense

Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021

Interest expense decreased by $3 million, or 3%, to $64 million for the quarter

ended March 31, 2022 as compared to $67 million for the quarter ended December

31, 2021. This decrease in our interest expense during the quarter ended March

31, 2022 was primarily driven by a reduction in our average interest bearing

liability balances as compared to the quarter ended December 31, 2021. During

the quarter ended March 31, 2022 we reduced our average interest bearing

liability balances by $385 million to $11.1 billion, as compared to $11.5

billion, from the quarter ended December 31, 2021. During the quarter ended

March 31, 2022 interest expense on both securitized debt and total secured

financing agreements decreased by $1 million.

Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021

Interest expense decreased by $44 million, or 40%, to $64 million for the

quarter ended March 31, 2022 as compared to $108 million for the quarter ended

March 31, 2021. This decrease was primarily driven by our de-levering efforts to

reduce secured

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financing agreements balances, lower financing rates on secured financing

agreements and calls of our higher rate securitized debt financing, replacing it

with lower rates available.

During the quarter ended March 31, 2022 we reduced our average interest bearing

liability balances by $2.1 billion to $11.1 billion as compared to $13.1

billion, from the quarter ended March 31, 2021. During the quarter ended

March 31, 2022 interest expense on securitized debt decreased by $24 million and

the average cost of funding on this same debt decreased by 90 basis points as

compared to the quarter ended March 31, 2021. Additionally, due to lower average

balances and financing rates our interest expense on secured financing

agreements collateralized by Loans held for investment and Non-Agency RMBS

decreased by $11 million and $7 million, respectively, as compared to the

quarter ended March 31, 2021.

Economic Net Interest Income

Our Economic net interest income is a non-GAAP financial measure that equals

GAAP net interest income adjusted for interest expense on long term debt and any

interest earned on cash. We believe this presentation is useful to investors

because it depicts the economic value of our investment strategy by showing all

components of interest expense and net interest income of our investment

portfolio. However, Economic net interest income should not be viewed in

isolation and is not a substitute for net interest income computed in accordance

with GAAP. Where indicated, interest expense, adjusting for interest payments on

long term debt and any interest earned on cash, is referred to as Economic

interest expense. Where indicated, net interest income reflecting interest

payments on long term debt and any interest earned on cash, is referred to as

Economic net interest income.

The following table reconciles the Economic net interest income to GAAP net

interest income and Economic interest expense to GAAP interest expense for the

periods presented.

Economic

GAAP GAAP Interest Economic GAAP Net Net

Interest Interest Expense on Long Interest Interest Interest

Income Expense Term Debt Expense Income Other (1) Income

For the Quarter Ended March 31,

2022 $ 202,175 $ 64,473 $

– $ 64,473 $ 137,702 $ (18) $ 137,684

For the Quarter Ended December

31, 2021

$ 221,162 $ 66,598 $

– $ 66,598 $ 154,564 $ (12) $ 154,552

For the Quarter Ended September

30, 2021

$ 220,579 $ 71,353 $

(239) $ 71,114 $ 149,226 $ 220 $ 149,446

For the Quarter Ended June 30,

2021

$ 252,677 $ 80,610 $

(959) $ 79,651 $ 172,067 $ 936 $ 173,003

For the Quarter Ended March 31,

2021

$ 243,127 $ 108,066 $

(1,076) $ 106,990 $ 135,061 $ 1,065 $ 136,126

(1) Primarily interest expense on Long term debt and interest income on cash and

cash equivalents.

Net Interest Rate Spread

The following table shows our average earning assets held, interest earned on

assets, yield on average interest earning assets, average debt balance, Economic

interest expense, economic average cost of funds, Economic net interest income

and net interest rate spread for the periods presented.

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For the Quarter Ended

March 31, 2022 December 31, 2021

(dollars in thousands) (dollars in thousands)

Average Average Average Average

Balance Interest Yield/Cost Balance Interest Yield/Cost

Assets:

Interest-earning assets (1):

Agency RMBS $ 113,723 $ 253 0.9 % $ 104,684 $ 71 0.3 %

Agency CMBS 559,478 22,870 16.4 % 851,886 27,711 13.0 %

Non-Agency RMBS 1,310,359 45,675 13.9 % 1,406,876 51,644 14.7 %

Loans held for investment 11,599,206 133,359 4.6 % 11,498,173 141,724 4.9 %

Total $ 13,582,766 $ 202,157 6.0 % $ 13,861,619 $ 221,150 6.4 %

Liabilities and stockholders’ equity:

Interest-bearing liabilities:

Secured financing agreements collateralized by:

Agency RMBS $ 20,342 $ 31 0.6 % $ 23,824 $ 40 0.7 %

Agency CMBS 435,545 270 0.2 % 731,577 346 0.2 %

Non-Agency RMBS 817,261 5,448 2.7 % 839,898 5,837 2.8 %

Loans held for investment 1,948,974 12,839 2.6 % 1,872,915 13,281 2.8 %

Securitized debt 7,870,127 45,885 2.3 % 8,009,117 47,094 2.4 %

Total $ 11,092,249 $ 64,473 2.3 % $ 11,477,331 $ 66,598 2.3 %

Economic net interest income/net interest rate

spread $ 137,684 3.7 % $ 154,552 4.1 %

Net interest-earning assets/net interest margin $ 2,490,517 4.1 % $ 2,384,288 4.5 %

Ratio of interest-earning assets to interest

bearing liabilities 1.22 1.21

(1) Interest-earning assets at amortized cost

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For the Quarter Ended

March 31, 2022 March 31, 2021

(dollars in thousands) (dollars in thousands)

Average Average Average Average

Balance Interest Yield/Cost Balance Interest Yield/Cost

Assets:

Interest-earning assets (1):

Agency RMBS $ 113,723 $ 253 0.9 % $ 116,517 $ 317 1.1 %

Agency CMBS 559,478 22,870 16.4 % 1,360,895 26,607 7.8 %

Non-Agency RMBS 1,310,359 45,675 13.9 % 1,577,137 55,800 14.2 %

Loans held for investment 11,599,206 133,359 4.6 % 12,253,034 160,392 5.2 %

Total $ 13,582,766 $ 202,157 6.0 % $ 15,307,583 $ 243,116 6.4 %

Liabilities and stockholders’ equity:

Interest-bearing liabilities:

Secured financing agreements collateralized by:

Agency RMBS $ 20,342 $ 31 0.6 % $ 66,951 $ 149 0.9 %

Agency CMBS 435,545 270 0.2 % 1,236,361 580 0.2 %

Non-Agency RMBS 817,261 5,448 2.7 % 1,002,935 12,479 5.0 %

Loans held for investment 1,948,974 12,839 2.6 % 2,253,811 24,216 4.3 %

Securitized debt 7,870,127 45,885 2.3 % 8,588,423 69,566 3.2 %

Total $ 11,092,249 $ 64,473 2.3 % $ 13,148,481 $ 106,990 3.3 %

Economic net interest income/net interest rate

spread $ 137,684 3.7 % $ 136,126 3.1 %

Net interest-earning assets/net interest margin $ 2,490,517 4.1 % $ 2,159,102 3.6 %

Ratio of interest-earning assets to interest

bearing liabilities 1.22 1.16

(1) Interest-earning assets at amortized cost

Economic Net Interest Income and the Average Earning Assets

Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021

Our Economic net interest income (which is a non-GAAP measure, see “Economic net

interest income” discussion earlier for details) decreased by $17 million to

$138 million for the quarter ended March 31, 2022 from $155 million compared to

the quarter ended December 31, 2021. Our net interest rate spread, which equals

the yield on our average interest-earning assets less the economic average cost

of funds, decreased by 40 basis points for the quarter ended March 31, 2022, as

compared to the quarter ended December 31, 2021. The net interest margin, which

equals the Economic net interest income as a percentage of the net average

balance of our interest-earning assets less our interest-bearing liabilities,

decreased by 40 basis points for the quarter ended March 31, 2022, as compared

to December 31, 2021. Our Average net interest-earning assets decreased by $106

million to $2.5 billion for the quarter ended March 31, 2022, compared to $2.4

billion for the quarter ended December 31, 2021. The decrease in our net

interest rate spread is primarily due to the decline in yields on our Non-Agency

RMBS and Loans held for investment portfolios.

Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021

Our Economic net interest income (which is a non-GAAP measure, see “Economic net

interest income” discussion earlier for details) increased by $2 million to $138

million for the quarter ended March 31, 2022 from $136 million for the quarter

ended March 31, 2021. Our net interest rate spread, which equals the yield on

our average interest-earning assets less the economic average cost of funds,

increased by 60 basis points for the quarter ended March 31, 2022, as compared

to the same period of 2021. The net interest margin, which equals the Economic

net interest income as a percentage of the net average balance of our

interest-earning assets less our interest-bearing liabilities, increased by 50

basis points for the quarter ended March 31, 2022, as compared to the same

period of 2021. Our Average net interest-earning assets increased by $331

million to $2.5 billion for the quarter ended March 31, 2022, compared to $2.2

billion for the same period of 2021. The increase in our net interest rate

spread for the quarter ended March 31, 2022 is primarily due to our de-levering

efforts to reduce secured financing agreements

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balances, lower financing rates on secured financing agreements and calls of our

higher rate securitized debt financing, replacing it with lower rates as

compared to the quarter ended March 31, 2021.

Economic Interest Expense and the Cost of Funds

The borrowing rate at which we are able to finance our assets using secured

financing agreements and securitized debt is typically correlated to LIBOR and

the term of the financing. The table below shows our average borrowed funds,

Economic interest expense, average cost of funds (inclusive of realized losses

on interest rate swaps), average one-month LIBOR, average three-month LIBOR and

average one-month LIBOR relative to average three-month LIBOR.

Average One-Month

Economic LIBOR Relative to

Average Debt Interest Average Cost of Average One-Month Average Three-Month Average Three-Month

Balance Expense Funds LIBOR LIBOR LIBOR

(Ratios

have been annualized, dollars in thousands)

For the Quarter Ended March 31, 2022 $ 11,092,249 $ 64,473

2.32 % 0.23 % 0.52 % (0.29) %

For the Quarter Ended December 31,

2021 $ 11,477,331 $ 66,598 2.32 % 0.09 % 0.16 % (0.07) %

For the Quarter Ended September 30,

2021 $ 11,902,369 $ 71,114 2.39 % 0.09 % 0.13 % (0.04) %

For the Quarter Ended June 30, 2021 $ 12,422,089 $ 79,651

2.56 % 0.10 % 0.16 % (0.06) %

For the Quarter Ended March 31, 2021 $ 13,148,481 $ 106,990

3.25 % 0.12 % 0.20 % (0.08) %

Average interest-bearing liabilities decreased by $385 million for the quarter

ended March 31, 2022, as compared to quarter ended December 31, 2021. Economic

interest expense decreased slightly by $2 million for the quarter ended

March 31, 2022, as compared to quarter ended December 31, 2021.

Average interest-bearing liabilities decreased by $2.1 billion for the quarter

ended March 31, 2022, as compared to the quarter ended March 31, 2021. Economic

interest expense decreased by $43 million for the quarter ended March 31, 2022,

as compared to the quarter ended March 31, 2021. The decrease in average

interest-bearing liabilities and Economic interest expense during the quarter

ended March 31, 2022 as compared to the quarter ended March 31, 2021, is a

result of the decrease in the amount of our secured financing agreements and

replacing our higher cost securitized debt with lower cost securitized debt.

Provision for Credit Losses

Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021

For the quarter ended March 31, 2022 and December 31, 2021, we recorded a net

increase in provision of credit losses of $240 thousand and $92 thousand,

respectively. The increase in the allowance for credit losses for the quarter

ended March 31, 2022 and December 31, 2021, is primarily due to increases in

expected losses and delinquencies. In addition, certain Non-Agency RMBS

positions, which had previously been in an unrealized gain position as of the

prior year-end, are now in an unrealized loss position as of the end of the

current period due to the decline in fair value. These Non-Agency RMBS positions

now in an unrealized loss have resulted in the recognition of an allowance for

credit losses which was previously limited by unrealized gains on these

investments.

Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021

For the quarter ended March 31, 2022 and March 31, 2021, we recorded a net

increase in provision of credit losses of $240 thousand and a decrease in

provision of credit losses of $126 thousand, respectively. The changes in the

allowance for credit losses for the quarter ended March 31, 2022 and March 31,

2022 are primarily due to changes in expected losses and delinquencies.

Net Unrealized Gains (Losses) on Financial Instruments at Fair Value

During the first quarter of 2022, there was an increase in headline inflation,

an inversion of yield curve, an increase in expected Fed Funds Rate and widening

of credit spreads. As a result, we experienced mark to market losses in our

Agency MBS and Residential Credit portfolios compared to prior periods. In

addition, our securitized debt also experienced mark downs, resulting in mark to

market gains that offset some of the mark to market losses on our asset

portfolio. During the quarter ended March 31, 2022 we had Net unrealized losses

of $598 million, $48 million and $29 million on Loans held for investments, Non-

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Agency RMBS and, Agency MBS, respectively, which were offset by Net unrealized

gains on Securitized debt collateralized by loans held for investment of $257

million.

Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021

We recorded Net unrealized losses on financial instruments at fair value of $370

million for the quarter ended March 31, 2022, as compared to the Net unrealized

losses on financial instruments at fair value of $108 million for the quarter

ended December 31, 2021.

Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021

We recorded Net unrealized losses on financial instruments at fair value of $370

million as compared to Net unrealized gains on financial instruments at fair

value of $270 million for the quarter ended March 31, 2021.

Gains and Losses on Sales of Assets

We do not forecast sales of investments as we generally expect to invest for

long term gains. However, from time to time, we may sell assets to create

liquidity necessary to pursue new opportunities, achieve targeted leverage

ratios as well as for gains when prices indicate a sale is most beneficial to

us, or is the most prudent course of action to maintain a targeted risk adjusted

yield for our investors.

There were no investment sales during the quarter ended March 31, 2022 and

December 31, 2021. We had net realized gains of $38 million on sale of

investments during the quarter ended March 31, 2021.

Extinguishment of Securitized Debt

When we acquire our outstanding securitized debt, we extinguish the outstanding

debt and recognize a gain or loss based on the difference between the carrying

value of the debt and the cost to acquire the debt which is reflected in the

Consolidated Statements of Operations as a gain or loss on extinguishment of

debt.

We did not acquire any securitized debt collateralized by Non-Agency RMBS during

the quarters ended March 31, 2022 and March 31, 2021. During the quarter ended

December 31, 2021, we acquired securitized debt collateralized by Non-Agency

RMBS with an amortized cost balance of $370 thousand for $478 thousand. This

transaction resulted in net loss on extinguishment of debt of $108 thousand.

We did not acquire any securitized debt collateralized by loans held for

investment during the quarter ended March 31, 2022. During the quarter ended

December 31, 2021, we acquired securitized debt collateralized by loans held for

investment with an amortized cost balance of $23 million for $22 million. This

transaction resulted in net gain on extinguishment of debt of $1 million. During

the quarter ended March 31, 2021, we acquired securitized debt collateralized by

loans held for investment with an amortized cost balance of $2.7 billion for

$2.9 billion. This transaction resulted in net loss on extinguishment of debt of

$234 million.

Compensation, General and Administrative Expenses and Transaction Expenses

The table below shows our total compensation and benefit expense, general and

administrative, or G&A expenses, and transaction expenses as compared to average

total assets and average equity for the periods presented.

Total Compensation, G&A Total

Compensation, G&A and Total Compensation, G&A and

and Transaction Expenses Transaction Expenses/Average Transaction Expenses/Average

Assets Equity

(Ratios have

been annualized, dollars in thousands)

For the Quarter Ended March 31, 2022 $ 20,868 0.54 % 2.36 %

For the Quarter Ended December 31, 2021 $ 21,275 0.54 % 2.24 %

For the Quarter Ended September 30,

2021 $ 21,426 0.54 % 2.29 %

For the Quarter Ended June 30, 2021 $ 21,148 0.52 % 2.35 %

For the Quarter Ended March 31, 2021 $ 35,074 0.82 % 3.82 %

Compensation and benefit costs were approximately $11 million, $11 million and

$13 million for the quarters ended March 31, 2022, December 31, 2021 and March

31, 2021, respectively.

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G&A expenses were approximately $6 million, $6 million and $5 million for the

quarters ended March 31, 2022, December 31, 2021, and March 31, 2021,

respectively, and remained relatively unchanged. The G&A expenses are primarily

comprised of legal, market data and research, auditing, consulting, information

technology, and independent investment consulting expenses.

We incurred transaction expenses in relation to securitizations of $4 million,

$4 million and $16 million for the quarters ended March 31, 2022, December 31,

2021, and March 31, 2021, respectively. The transaction expenses remained

relatively unchanged for the quarter ended March 31, 2022 and December 31, 2021.

The transaction expense decreased by $12 million during quarter ended March 31,

2022 as compared to the quarter ended March 31, 2021 due to lower call and

securitization activity.

Servicing and Asset Manager Fees

Servicing fees and asset manager expenses remained relatively unchanged at $9

million for the quarters ended March 31, 2022, December 31, 2021 and March 31,

2021. These servicing fees are primarily related to the servicing costs of the

whole loans held in consolidated securitization vehicles and are paid from

interest income earned by the VIEs. The servicing fees generally range from 11

to 50 basis points of unpaid principal balances of our consolidated VIEs.

Earnings available for distribution

Earnings available for distribution is a non-GAAP measure and is defined as GAAP

net income excluding unrealized gains or losses on financial instruments carried

at fair value with changes in fair value recorded in earnings, realized gains or

losses on the sales of investments, gains or losses on the extinguishment of

debt, interest expense on long term debt, changes in the provision for credit

losses, and transaction expenses incurred. In addition, stock compensation

expense charges incurred on awards to retirement eligible employees is reflected

as an expense over a vesting period (36 months) rather than reported as an

immediate expense.

As defined, Earnings available for distribution is the Economic net interest

income, as defined previously, reduced by compensation and benefits expenses

(adjusted for awards to retirement eligible employees), general and

administrative expenses, servicing and asset manager fees, income tax benefits

or expenses incurred during the period, as well as the preferred dividend

charges. We view Earnings available for distribution as a consistent measure of

our investment portfolio’s ability to generate income for distribution to common

stockholders. Earnings available for distribution is one of the metrics, but not

the exclusive metric, that our board of directors uses to determine the amount,

if any, of dividends on our common stock. In addition, Earnings available for

distribution is different than REIT taxable income and the determination of

whether we have met the requirement to distribute at least 90% of our annual

REIT taxable income (subject to certain adjustments) to our stockholders in

order to maintain qualification as a REIT is not based on Earnings available for

distribution. Therefore, Earnings available for distribution should not be

considered as an indication of our REIT taxable income, a guaranty of our

ability to pay dividends, or as a proxy for the amount of dividends we may pay,

because Earnings available for distribution excludes certain items that impact

our cash needs. We believe Earnings available for distribution as described

above helps us and investors evaluate our financial performance period over

period without the impact of certain transactions. Therefore, Earnings available

for distribution should not be viewed in isolation and is not a substitute for

net income or net income per basic share computed in accordance with GAAP. In

addition, our methodology for calculating Earnings available for distribution

may differ from the methodologies employed by other REITs to calculate the same

or similar supplemental performance measures, and accordingly, our Earnings

available for distribution may not be comparable to the Earnings available for

distribution reported by other REITs.

The following table provides GAAP measures of net income and net income per

diluted share available to common stockholders for the periods presented and

details with respect to reconciling the line items to Earnings available for

distribution and related per average diluted common share amounts. Earnings

available for distribution is presented on an adjusted dilutive shares basis.

Certain prior period amounts have been reclassified to conform to the current

period’s presentation.

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For the Quarters Ended

March 31, 2022 December 31, September 30, June 30, 2021 March 31, 2021

2021 2021

(dollars in thousands, except per share data)

GAAP Net income (loss) available to common

stockholders $ (281,202) $ (718) $ 313,030 $ 144,883 $ 139,153

Adjustments:

Net unrealized (gains) losses on financial

instruments at fair value 370,167 108,286

(239,524) (36,108) (270,012)

Net realized (gains) losses on sales of

investments

– – – (7,517) (37,796)

(Gains) losses on extinguishment of debt – (980) 25,622 21,777 237,137

Interest expense on long term debt – – 238 959 1,076

Increase (decrease) in provision for credit

losses 240 92 (386) 453 (126)

Transaction expenses 3,804 4,241 3,432 5,745 16,437

Stock Compensation expense for retirement

eligible awards 723 (363) (365) (361) 661

Earnings available for distribution $ 93,732 $ 110,558

$ 102,047 $ 129,831 $ 86,530

GAAP net income (loss) per diluted common

share $ (1.19) $

(0.00) $ 1.30 $ 0.60 $ 0.54

Earnings available for distribution per

adjusted diluted common share

$ 0.39 $ 0.46

$ 0.42 $ 0.54 $ 0.36

The table below summarizes the reconciliation from weighted-average diluted

shares under GAAP to the weighted-average adjusted diluted shares used for

Earnings available for distribution for the periods reported below.

For the Quarters Ended

March 31, 2022 December

31, 2021 September 30, 2021 June 30, 2021 March 31, 2021

Weighted average diluted shares – GAAP 237,012,702

236,896,512 240,362,602 241,739,536

261,435,081

Potentially dilutive shares (1) 2,421,546 2,672,393 – – –

Non-participating Warrants – – – – (20,282,173)

Adjusted weighted average diluted

shares – Earnings available for

distribution 239,434,248 239,568,905 240,362,602 241,739,536 241,152,908

(1) Potentially dilutive shares related to restricted stock units and

performance stock units excluded from the computation of weighted average GAAP

diluted shares because their effect would have been anti-dilutive given the GAAP

net loss available to common shareholders for the quarters ended March 31, 2022

and December 31, 2021.

Our Earnings available for distribution for the quarter ended March 31, 2022

were $94 million, or $0.39 per average diluted common share, and decreased by

$17 million, or $0.07 per average diluted common share, as compared to $111

million, or $0.46 per average diluted common share, for the quarter ended

December 31, 2021. The decrease in Earnings available for distribution was

driven by lower interest income due to lower average interest earning assets and

slightly lower yields on Non-Agency RMBS and Loans held for investments during

the quarter ended March 31, 2022 as compared to the quarter ended December 31,

2021.

Our Earnings available for distribution for the quarter ended March 31, 2022

were $94 million, or $0.39 per average diluted common share, and increased by $7

million, or $0.03 per average diluted common share, as compared to $87 million,

or $0.36 per average diluted common share, for the quarter ended March 31, 2021.

The increase in Earnings available for distribution was driven by lower interest

expense due to lower financing rate on our securitized debt and secured

financing agreements during the quarter ended March 31, 2022 as compared to the

quarter ended March 31, 2021.

Net Income (Loss) and Return on Total Stockholders’ Equity

The table below shows our Net Income and Economic net interest income as a

percentage of average stockholders’ equity and Earnings available for

distribution as a percentage of average common stockholders’ equity. Return on

average equity is defined as our GAAP net income (loss) as a percentage of

average equity. Average equity is defined as the average of our beginning and

ending stockholders’ equity balance for the period reported. Economic net

interest income and Earnings available for distribution are non-GAAP measures as

defined in previous sections.

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Economic Net Interest Earnings available for

Return on Average Equity Income/Average Equity * distribution/Average Common Equity

(Ratios have been annualized)

For the Quarter Ended March 31, 2022 (29.72) % 15.57 % 14.38 %

For the Quarter Ended December 31, 2021 1.87 % 16.30 % 15.45 %

For the Quarter Ended September 30, 2021 35.47 % 15.99 % 14.54 %

For the Quarter Ended June 30, 2021 18.16 % 19.24 % 19.47 %

For the Quarter Ended March 31, 2021 17.16 % 14.82 % 12.62 %

* Excludes long term debt expense.

Return on average equity decreased by 3,159 basis points for the quarter ended

March 31, 2022, as compared to the quarter ended December 31, 2021. This

decrease is driven primarily by unrealized asset pricing losses on our financial

instruments. Economic net interest income as a percentage of average equity

decreased by 73 basis points for the quarter ended March 31, 2022 compared to

the quarter ended December 31, 2021. Earnings available for distribution as a

percentage of average common equity decreased by 107 basis points for the

quarter ended March 31, 2022 compared to the quarter ended December 31, 2021.

The decrease in Earnings available for distribution as a percentage of average

common equity for the quarter ended March 31, 2022 as compared to the quarter

ended December 31, 2021, was primarily driven by a decline in average interest

earning assets and lower yields on Non-Agency RMBS and Loans held for

investments.

Return on average equity decreased by 4,688 basis points for the quarter ended

March 31, 2022, as compared to the quarter ended March 31, 2021. This decrease

is driven primarily by unrealized asset pricing losses on our financial

instruments. Economic net interest income as a percentage of average equity

increased by 75 basis points for the quarter ended March 31, 2022 compared to

the quarter ended March 31, 2021. Earnings available for distribution as a

percentage of average common equity increased by 176 basis points for the

quarter ended March 31, 2022 compared to the quarter ended March 31, 2021. This

increase in Earnings available for distribution as a percentage of average

common equity for the quarter ended March 31, 2022 as compared to the quarter

ended March 31, 2021, was primarily driven by lower interest expense due to

lower financing rate on our securitized debt and secured financing agreements

during the quarter ended March 31, 2022 as compared to the quarter ended March

31, 2021.

Financial Condition

Portfolio Review

During the quarter ended March 31, 2022, we focused our efforts on taking

advantage of the opportunity to acquire higher yielding assets. During the

quarter ended March 31, 2022, on an aggregate basis, we purchased $1.1 billion

of investments and received $899 million in principal payments related to our

Agency MBS, Non-Agency RMBS and Loans held for investment portfolio.

The following table summarizes certain characteristics of our portfolio at

March 31, 2022 and December 31, 2021.

March 31, 2022 December

31, 2021

Interest earning assets at period-end (1) $ 14,941,502 $ 14,893,829

Interest bearing liabilities at period-end $ 11,518,763 $ 11,075,655

GAAP Leverage at period-end 3.5:1 3.0:1

GAAP Leverage at period-end (recourse) 1.0:1 0.9:1

(1) Excludes cash and cash equivalents.

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March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021

Portfolio Composition Amortized Cost

Fair Value

Non-Agency RMBS 7.8 % 10.1 % 9.7 % 12.1 %

Senior 4.1 % 4.5 % 6.2 % 6.5 %

Subordinated 2.4 % 4.2 % 2.6 % 4.4 %

Interest-only 1.3 % 1.4 % 0.9 % 1.2 %

Agency RMBS 0.8 % 0.8 % 0.5 % 0.4 %

Pass-through – % – % – % – %

Interest-only 0.8 % 0.8 % 0.5 % 0.4 %

Agency CMBS 3.4 % 5.3 % 3.4 % 5.2 %

Project loans 2.3 % 4.2 % 2.4 % 4.2 %

Interest-only 1.1 % 1.1 % 1.0 % 1.0 %

Loans held for investment 88.0 % 83.8 % 86.4 % 82.3 %

Fixed-rate percentage of portfolio 95.8 % 95.4 % 94.9 % 94.4 %

Adjustable-rate percentage of portfolio 4.2 % 4.6 % 5.1 % 5.6 %

GAAP leverage at period-end is calculated as a ratio of our secured financing

agreements and securitized debt liabilities over GAAP book value. GAAP recourse

leverage is calculated as a ratio of our secured financing agreements over

stockholders equity.

The following table presents details of each asset class in our portfolio at

March 31, 2022 and December 31, 2021. The principal or notional value represents

the interest income earning balance of each class. The weighted average figures

are weighted by each investment’s respective principal/notional value in the

asset class.

March 31, 2022

Principal or

Notional Value at Weighted

Period-End Average Weighted Weighted Average Weighted Average 3

Weighted Average 12 Weighted Average 3 Weighted Average 12

(dollars in Amortized Cost

Average Fair Weighted Average Yield at Period-End Month Prepay Rate Month Prepay Rate Month CDR at Month CDR at Weighted Average Weighted Average

thousands) Basis Value Coupon (1) at Period-End at Period-End Period-End Period-End Loss Severity(2) Credit Enhancement

Non-Agency Mortgage-Backed Securities

Senior $ 1,250,785 $ 47.25 $ 74.28 4.5 % 17.7 % 14.1 % 15.0 % 2.0 % 2.0 % 27.6 % 2.1 %

Subordinated $ 512,981 $ 67.98 $ 76.88 4.6 % 7.1 % 18.2 % 23.3 % 0.3 % 0.4 % 30.3 % 5.1 %

Interest-only $ 3,644,165 $ 4.97 $ 3.72 1.7 % 12.2 % 18.8 % 24.2 % 0.8 % 1.4 % 20.8 % 0.1 %

Agency RMBS

Interest-only $ 1,501,720 $ 8.13 $ 4.93 1.1 % 1.3 % 24.2 % 26.3 % N/A N/A N/A N/A

Agency CMBS

Project loans $ 329,515 $ 102.01 $ 108.10 4.4 % 4.2 % – % – % N/A N/A N/A N/A

Interest-only $ 2,779,083 $ 5.55 $ 5.29 0.7 % 4.0 % 12.8 % 10.7 % N/A N/A N/A N/A

Loans held for investment $ 12,799,611 $ 99.02 $ 100.97 5.4 % 4.8 % 13.9 % 15.5 % 1.1 % 0.8 % 59.5 % N/A

(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated

using each investment’s respective amortized cost.

(2) Calculated based on reported losses to date, utilizing widest data set

available (i.e., life-time losses, 12-month loss, etc.)

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December 31, 2021

Principal or

Notional Value at

Period-End Weighted Average Weighted Weighted Average Weighted Average 3 Weighted Average 12 Weighted Average 3 Weighted Average 12

(dollars in Amortized Cost

Average Fair Weighted Average Yield at Period-End Month Prepay Rate at Month Prepay Rate Month CDR at Month CDR at Weighted Average Weighted Average

thousands) Basis Value Coupon (1) Period-End at Period-End Period-End Period-End Loss Severity(2) Credit Enhancement

Non-Agency Mortgage-Backed

Securities

Senior $ 1,283,788 $ 48.02 $ 76.78 4.5 % 18.0 % 14.1 % 14.6 % 1.6 % 1.9 % 23.6 % 2.8 %

Subordinated $ 845,432 $ 68.10 $ 77.12 3.8 % 7.1 % 18.6 % 19.3 % 0.2 % 0.5 % 28.9 % 3.6 %

Interest-only $ 3,904,665 $ 4.90 $ 4.42 1.7 % 13.2 % 22.2 % 25.5 % 1.0 % 1.8 % 23.4 % – %

Agency RMBS

Interest-only $ 992,978 $ 10.37 $ 6.09 1.3 % 0.3 % 25.6 % 26.6 % N/A N/A N/A N/A

Agency CMBS

Project loans $ 560,565 $ 101.77 $ 109.61 4.3 % 4.1 % – % – % N/A N/A N/A N/A

Interest-only $ 2,578,640 $ 5.70 $ 5.69 0.7 % 4.6 % 14.0 % 30.9 % N/A N/A N/A N/A

Loans held for investment $ 11,519,255 $ 99.22 $ 106.58 5.5 % 4.9 % 16.1 % 15.0 % 0.9 % 0.4 % 50.5 % N/A

(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated

using each investment’s respective amortized cost.

(2) Calculated based on reported losses to date, utilizing widest data set

available (i.e., life-time losses, 12-month loss, etc.)

Based on the projected cash flows for our Non-Agency RMBS that are not of high

credit quality, a portion of the original purchase discount is designated as

Accretable Discount, which reflects the purchase discount expected to be

accreted into interest income, and a portion is designated as Non-Accretable

Difference, which represents the contractual principal on the security that is

not expected to be collected. The amount designated as Non-Accretable Difference

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 is more

favorable than previously estimated, a portion of the amount designated as

Non-Accretable Difference may be transferred to Accretable Discount and accreted

into interest income over time. Conversely, if the performance of a security is

less favorable than previously estimated, a provision for credit loss may be

recognized resulting in an increase in the amounts designated as Non-Accretable

Difference.

The following table presents changes to Accretable Discount (net of premiums) as

it pertains to our Non-Agency RMBS portfolio, excluding premiums on

interest-only investments, during the previous five quarters.

For

the Quarters Ended

(dollars in thousands)

Accretable Discount (Net of Premiums) December 31,

September 30,

March 31, 2022 2021 2021 June 30, 2021 March 31, 2021

Balance, beginning of period $ 333,546 $ 352,545 $ 338,024 $ 358,562 $ 409,690

Accretion of discount (19,470) (22,172) (21,820) (37,986) (24,023)

Purchases – – 1,995 (3,453) –

Sales – – – (17,123) (41,651)

Elimination in consolidation (60,361) – – – –

Transfers from/(to) credit reserve,

net 4,779 3,173 34,346 38,024 14,546

Balance, end of period $ 258,494 $ 333,546 $ 352,545 $ 338,024 $ 358,562

We invest a significant majority of our capital in pools of Non-Agency RMBS and

Loans held for investment. These investments carry risk for credit losses. As we

are exposed to risk for credit losses, it is important for us to closely monitor

credit losses incurred, as well as how expectations of credit losses are

expected to change. We estimate future credit losses based on historical

experience, market trends, current delinquencies as well as expected recoveries.

The net present value of these expected credit losses can change, sometimes

significantly from period to period as new information becomes available. When

credit loss experience and expectations improve, we will collect more principal

on our investments. If credit loss experience deteriorates, we will collect less

principal on our investments. The favorable or unfavorable changes in credit

losses are reflected in the yield on our investments in mortgage loans and

recognized in earnings over the remaining life of our investments. The following

table presents changes to net present value of expected credit losses for our

Non-Agency RMBS and Loans held for investment portfolios during the previous

five quarters. Gross losses are discounted at the rate used to amortize any

discounts or premiums on our investments into income. A decrease (negative

balance) in the “Increase/(decrease)”

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line item in the tables below represents a favorable change in expected credit

losses. An increase (positive balance) in the “Increase/(decrease)” line item in

the tables below represents an unfavorable change in expected credit losses.

For the Quarters Ended

(dollars in thousands)

Non-Agency RMBS December 31, September 30,

March 31, 2022 2021 2021 June 30, 2021 March 31, 2021

Balance, beginning of period $ 106,240 $ 107,686 $ 129,053 $ 133,607 $ 157,527

Realized losses 7,995 (987) (229) (2,482) (3,927)

Accretion 3,049 2,928 3,374 3,466 4,152

Purchased losses – – 1,006 3,066 –

Sold losses – – – (678) (733)

Losses removed due to consolidation (10,191) – – – –

Increase/(decrease) (12,503) (3,387) (25,518) (7,926) (23,412)

Balance, end of period $ 94,590 $ 106,240 $ 107,686 $ 129,053 $ 133,607

For the Quarters Ended

(dollars in thousands)

Loans held for investment December 31, September 30,

March 31, 2022 2021 2021 June 30, 2021 March 31, 2021

Balance, beginning of period $ 369,028 $ 340,431 $ 420,323 $ 448,763 $ 511,190

Realized losses (12,260) (8,368) (7,641) (13,244) (8,512)

Accretion 4,251 4,074 4,487 4,795 3,420

Purchased losses 14,883 3,485 5,524 – –

Losses added due to consolidation 49,774 – – – –

Increase/(decrease) (16,026) 29,406 (82,262) (19,991) (57,335)

Balance, end of period $ 409,650 $ 369,028 $ 340,431 $ 420,323 $ 448,763

Liquidity and Capital Resources

General

Liquidity measures our ability to meet cash requirements, including ongoing

commitments to repay our borrowings, purchase RMBS, residential mortgage loans

and other assets for our portfolio, pay dividends and other general business

needs. Our principal sources of capital and funds for additional investments

primarily include earnings, principal paydowns and sales from our investments,

borrowings under securitizations and re-securitizations, secured financing

agreements and other financing facilities including warehouse facilities, and

proceeds from equity or other securities offerings.

As discussed earlier, during the first quarter of 2022, we experienced mark

downs in our Agency, Residential Credit and securitized debt portfolios as a

result of the increase in headline inflation, an inversion of yield curve, an

increase in expected Fed Funds Rate and widening of credit spreads. There is

still uncertainty and risks related to the COVID-19 pandemic and potentially

new, more infectious variants. If these conditions become more pronounced, we

may experience an adverse impact on our liquidity. We have sought and expect to

continue to seek longer-term, more durable financing to reduce our risk to

margin calls related to shorter-term repurchase financing.

Our ability to fund our operations, meet financial obligations and finance

target asset acquisitions may be impacted by our ability to secure and maintain

our master secured financing agreements, warehouse facilities and secured

financing agreements facilities with our counterparties. Because secured

financing agreements and warehouse facilities are short-term commitments of

capital, lenders may respond to market conditions making it more difficult for

us to renew or replace on a continuous basis our maturing short-term borrowings

and have and may continue to impose more onerous conditions when rolling forward

such financings. If we are not able to renew our existing facilities or arrange

for new financing on terms acceptable to us, or if we default on our covenants

or are otherwise unable to access funds under our financing facilities or if we

are required to post more collateral or face larger haircuts, we may have to

curtail our asset acquisition activities and dispose of assets.

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To meet our short term (one year or less) liquidity needs, we expect to continue

to borrow funds in the form of secured financing agreements and, subject to

market conditions, other types of financing. The terms of the secured financing

transaction borrowings under our master secured financing agreement generally

conform to the terms in the standard master secured financing agreement as

published by the Securities Industry and Financial Markets Association, or

SIFMA, or similar market accepted agreements, as to repayment and margin

requirements. In addition, each lender typically requires that we include

supplemental terms and conditions to the standard master secured financing

agreement. Typical supplemental terms and conditions include changes to the

margin maintenance requirements, net asset value, required haircuts or the

percentage that is subtracted from the value of MBS that collateralizes the

financing, purchase price maintenance requirements, and requirements that all

disputes related to the secured financing agreement be litigated or arbitrated

in a particular jurisdiction. These provisions may differ for each of our

lenders.

Based on our current portfolio, leverage ratio and available borrowing

arrangements, we believe our assets will be sufficient to enable us to meet

anticipated short-term liquidity requirements. If our cash resources are

insufficient to satisfy our liquidity requirements, we may have to sell

additional investments, potentially at a loss, issue debt or additional common

or preferred equity securities.

To meet our longer-term liquidity needs (greater than one year), we expect our

principal sources of capital and funds to continue to be provided by earnings,

principal paydowns and sales from our investments, borrowings under

securitizations and re-securitizations, secured financing agreements and other

financing facilities, as well as proceeds from equity or other securities

offerings.

In addition to the principal sources of capital described above, we may enter

into warehouse facilities and use longer dated structured secured financing

agreements. The use of any particular source of capital and funds will depend on

market conditions, availability of these facilities, and the investment

opportunities available to us.

Current Period

We held cash and cash equivalents of approximately $166 million and $386 million

at March 31, 2022 and December 31, 2021, respectively. As a result of our

operating, investing and financing activities described below, our cash position

decreased

by $220 million from December 31, 2021 to March 31, 2022.

Our operating activities provided net cash of approximately $136 million and

$122 million for the quarters ended March 31, 2022 and 2021, respectively. The

cash flows from operations were primarily driven by interest received in excess

of interest paid of $159 million and $145 million during the quarters ended

March 31, 2022 and 2021, respectively.

Our investing activities used cash of $187 million and provided cash of $814

million for the quarters ended March 31, 2022 and 2021, respectively. During the

quarter ended March 31, 2022, we used cash on investment purchases of $1.1

billion, primarily consisting of Loans held for investment of $1.0 billion,

Agency MBS of $45 million and Non-Agency RMBS of $23 million. This cash used was

offset in part by cash received for principal repayments on Agency MBS,

Non-Agency RMBS and Loans held for investment of $899 million. During the

quarter ended March 31, 2021, we received cash from sale of investments of $1.1

billion primarily consisting of Loans held for investments of $903 million, and

principal repayments on our Agency MBS, Non-Agency RMBS, and Loans held for

investments of $776 million. This cash provided was offset in part by cash used

on investment purchases of $1.1 billion, primarily consisting of Loans held for

investments.

Our financing activities used cash of $169 million and $888 million for the

quarters ended March 31, 2022 and 2021, respectively. During the quarter ended

March 31, 2022, we primarily used cash for repayment of principal on our

securitized debt of $497 million and paid common and preferred dividends of $97

million. This cash used was offset in part by cash received for securitized debt

collateralized by loans issuance of $262 million and net proceeds received on

our secured financing agreements of $163 million. During the quarter ended March

31, 2021, we used cash for repayment of principal on our securitized debt of

$3.4 billion, net payments on our secured financing agreements of $594 million,

settlement of warrants of $220 million, and paid common and preferred dividends

of $88 million. This cash paid was offset in part by cash received for

securitized debt collateralized by loans issuance of $3.4 billion.

Our recourse leverage was 1.0:1 and 0.9:1 at March 31, 2022 and at December 31,

2021, respectively and remained relatively unchanged. Our recourse leverage

excludes the securitized debt which can only be repaid from the proceeds on the

assets securing this debt in their respective VIEs. Our recourse leverage is

presented as a ratio of our secured financing agreements, which are recourse to

our assets and our equity.

At March 31, 2022 and December 31, 2021, the remaining maturities and borrowing

rates on our RMBS and loan secured financing agreements were as follows.

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March 31, 2022 December 31, 2021

(dollars in thousands)

Weighted Average Weighted Average

Principal (1) Borrowing Rates Range of Borrowing Rates Principal (1) Borrowing Rates Range of Borrowing Rates

Overnight $ – NA NA $ – NA NA

1 to 29 days 1,561,598 1.57% 0.30% – 2.35% 1,018,670 0.73% 0.11% – 1.95%

30 to 59 days 162,097 1.44% 0.95% – 1.67% 379,031 1.66% 1.55% – 1.70%

60 to 89 days 146,974 2.48% 1.49% – 2.71% 342,790 1.86% 0.90% – 2.35%

90 to 119 days 78,400 1.50% 1.50% – 1.50% 67,840 1.66% 1.66% – 1.66%

120 to 180 days 847,135 3.64% 1.73% – 4.38% 157,944 1.38% 0.95% – 1.45%

180 days to 1 year 406,705 2.95% 0.94% – 3.45% 895,210 3.70% 1.95% – 4.38%

1 to 2 years – NA NA 143,239 3.05% 3.05% – 3.05%

2 to 3 years – NA NA – NA NA

Greater than 3 years 221,496 5.56% 5.56% – 5.56% 256,889 5.56% 5.56% – 5.56%

Total $ 3,424,405 2.53% $ 3,261,613 2.30%

(1) The principal balance for secured financing agreements in the table above is

net of $3 million of deferred financing cost as of March 31, 2022 and

December 31, 2021, respectively.

Average remaining maturity of Secured financing agreements secured by:

March 31, 2022 December 31, 2021

Agency RMBS (in thousands) 4 Days 4 Days

Agency CMBS (in thousands) 11 Days 13 Days

Non-Agency RMBS and Loans held for

investment (in thousands) 178 Days 257 Days

We collateralize the secured financing agreements we use to finance our

operations with our MBS investments and mortgage loans held in trusts controlled

by us. Our counterparties negotiate a ‘haircut’, which is the difference

expressed in percentage terms between the fair value of the collateral and the

amount the counterparty will lend to us, when we enter into a financing

transaction. The size of the haircut reflects the perceived risk and market

volatility associated with holding the MBS by the lender. The haircut provides

lenders with a cushion for daily market value movements that reduce the need for

a margin call to be issued or margin to be returned as normal daily increases or

decreases in MBS market values occur. Haircuts have remained relatively stable

during first quarter of 2022. At March 31, 2022, the weighted average haircut on

our remaining secured financing agreements collateralized by Agency RMBS IOs was

15.0%, Agency CMBS was 7.6% and Non-Agency RMBS and Loans held for investment

was 24.4%. At December 31, 2021, the weighted average haircut on our remaining

secured financing agreements collateralized by Agency RMBS IOs was 15.0%, Agency

CMBS was 6.7% and Non-Agency RMBS and Loans held for investment was 27.9%.

The fair value of the Non-Agency MBS is more difficult to determine in current

financial conditions, as well as more volatile period to period than Agency MBS,

the Non-Agency MBS typically requires a larger haircut. In addition, when

financing assets using standard form of SIFMA Master Repurchase Agreements, the

counterparty to the agreement typically nets its exposure to us on all

outstanding repurchase agreements and issues margin calls if movement of the

fair values of the assets in the aggregate exceeds their allowable exposure to

us. A decline in asset fair values could create a margin call or may create no

margin call depending on the counterparty’s specific policy. In addition,

counterparties consider a number of factors, including their aggregate exposure

to us as a whole and the number of days remaining before the repurchase

transaction closes prior to issuing a margin call. To minimize the risk of

margin calls, as of March 31, 2022, we have entered into $1.1 billion of

financing arrangements for which the collateral cannot be adjusted as a result

of changes in market value, minimizing the risk of a margin call as a result in

price volatility. We refer to these agreements as non mark-to-market (non-MTM)

facilities. These non-MTM facilities generally have higher costs of financing,

but lower the risk of a margin call which could result in sales of our assets at

distressed prices. All non-MTM facilities are collateralized by non-agency RMBS

collateral, which tends to have increased volatile price changes during periods

of market stress. We believe these non-MTM facilities significantly reduce our

financing risks. See Note 5 to our Consolidated Financial Statements for a

discussion on how we determine the fair values of the RMBS collateralizing our

secured financing agreements.

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At March 31, 2022, the weighted average borrowing rates for our secured

financing agreements collateralized by Agency RMBS IOs was 0.6%, Agency CMBS was

0.4% and Non-Agency MBS and Loans held for investment was 2.8%. At December 31,

2021, the weighted average borrowing rates for our secured financing agreements

collateralized by Agency RMBS IOs was 0.7%, Agency CMBS was 0.2%, and Non-Agency

MBS and Loans held for investment was 2.8%.

The table below presents our average daily secured financing agreements balance

and the secured financing agreements balance at each period end for the periods

presented. Our balance at period-end tends to fluctuate from the average daily

balances due to the adjusting of the size of our portfolio by using leverage.

Average secured financing Secured financing agreements

Period agreements balances balance at period end

(dollars in thousands)

Quarter End March 31, 2022 $ 3,222,122 $ 3,424,405

Quarter End December 31, 2021 $ 3,468,212 $ 3,261,613

Quarter End September 30, 2021 $ 3,824,615 $ 3,788,336

Quarter End June 30, 2021 $ 3,792,547 $ 3,554,428

Quarter End March 31, 2021 $ 4,560,057 $ 4,045,912

We are not required to maintain any specific leverage ratio. We believe the

appropriate leverage for the particular assets we are financing depends on the

credit quality and risk of those assets. At March 31, 2022 and December 31,

2021, the carrying value of our total interest-bearing debt was approximately

$11.5 billion and $11.1 billion, respectively, which represented a leverage

ratio of approximately 3.5:1 and 3.0:1, respectively. We include our secured

financing agreements and securitized debt in the numerator of our leverage ratio

and stockholders’ equity as the denominator.

At March 31, 2022, we had secured financing agreements with 11 counterparties.

All of our secured financing agreements are secured by Agency MBS, Non-Agency

RMBS and Loans held for investment and cash. Under these secured financing

agreements, we may not be able to reclaim our collateral but will still be

obligated to pay our repurchase obligations. We mitigate this risk by ensuring

our counterparties are highly rated. As of March 31, 2022 and December 31, 2021,

we had $4.5 billion and $4.4 billion, respectively, of securities or cash

pledged against our secured financing agreements obligations.

We expect to enter into new secured financing agreements at maturity. When we

renew our secured financing agreements, there is a risk that we will not be able

to renew them or obtain favorable interest rates and haircuts as a result of

uncertainty in the market including, but not limited to, uncertainty as a result

of the COVID-19 pandemic.

Exposure to Financial Counterparties

We actively manage the number of secured financing agreements counterparties to

reduce counterparty risk and manage our liquidity needs. The following table

summarizes our exposure to our secured financing agreements counterparties at

March 31, 2022:

March 31, 2022

Country Number of Counterparties Secured Financing Exposure (1)

Agreement

(dollars in thousands)

United States 7 2,179,175 829,687

Japan 1 937,172 224,397

Canada 1 230,388 45,933

Netherlands 1 45,354 2,675

South Korea 1 32,316 2,115

Total 11 $ 3,424,405 $ 1,104,807

(1) Represents the amount of securities and/or cash pledged as collateral to

each counterparty less the aggregate of secured financing agreement.

We regularly monitor our exposure to financing counterparties for credit risk

and allocate assets to these counterparties based, in part, on the credit

quality and internally developed metrics measuring counterparty risk. Our

exposure to a particular counterparty is calculated as the excess collateral

which is pledged relative to the secured financing agreement balance. If our

exposure to our financing counterparties exceeds internally developed

thresholds, we develop a plan to reduce the exposure to an acceptable level. At

March 31, 2022, we did not have any exposure to a counterparty which exceeded

10% of our equity.

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At March 31, 2022, we did not use credit default swaps or other forms of credit

protection to hedge the exposures summarized in the table above.

Stockholders’ Equity

In February 2021, our Board of Directors increased the authorization of our

share repurchase program, or the Repurchase Program, to $250 million. Such

authorization does not have an expiration date, and at present, there is no

intention to modify or otherwise rescind such authorization. Shares of our

common stock may be purchased in the open market, including through block

purchases, through privately negotiated transactions, or pursuant to any trading

plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act. The

timing, manner, price and amount of any repurchases will be determined at our

discretion and the program may be suspended, terminated or modified at any time

for any reason. Among other factors, we intend to only consider repurchasing

shares of our common stock when the purchase price is less than the last

publicly reported book value per common share. In addition, we do not intend to

repurchase any shares from directors, officers or other affiliates. The program

does not obligate us to acquire any specific number of shares, and all

repurchases will be made in accordance with Rule 10b-18, which sets certain

restrictions on the method, timing, price and volume of stock repurchases.

We did not repurchase any of its common stock during the quarter ended March 31,

2022. We repurchased approximately 161 thousand shares of our common stock at an

average price of $11.39 per share for a total of $2 million during the quarter

ended March 31, 2021. The approximate dollar value of shares that may yet be

purchased under the Repurchase Program is $226 million as of March 31, 2022.

Additionally, we issued shares of our common stock as discussed below under

“Restricted Stock Unit and Performance Share Unit Grants,” and a de minimis

amount under our Dividend Reinvestment Plan.

In February 2022, we entered into separate Distribution Agency Agreements (the

“Sales Agreements”) with each of

Credit Suisse Securities (USA) LLC, JMP Securities LLC, Goldman Sachs & Co. LLC,

Morgan Stanley & Co. LLC and

RBC Capital Markets, LLC (the “Sales Agents”). Pursuant to the terms of the

Sales Agreements, we may offer and sell

shares of our common stock, having an aggregate offering price of up to

$500,000,000, from time to time through any of

the Sales Agents under the Securities Act of 1933. During the quarter ended

March 31, 2022, we did not issue any shares under the at-the-market sales

program.

We declared dividends to common shareholders of $79 million, or $0.33 per share,

and $70 million, or $0.30 per share, during the quarters ended March 31, 2022

and 2021, respectively.

We declared dividends to Series A preferred stockholders of $3 million, or $0.50

per preferred share, during the quarters ended March 31, 2022 and 2021,

respectively.

We declared dividends to Series B preferred stockholders of $7 million, or $0.50

per preferred share, during the quarters ended March 31, 2022 and 2021,

respectively.

We declared dividends to Series C preferred stockholders of $5 million, or

$0.484375 per preferred share, during the quarters ended March 31, 2022 and

2021, respectively.

We declared dividends to Series D preferred stockholders of $4 million, or $0.50

per preferred share, during the quarters ended March 31, 2022 and 2021,

respectively.

On October 30, 2021, all 5,800,000 issued and outstanding shares of Series A

Preferred Stock with an outstanding liquidation preference of $145 million

became callable at a redemption price equal to the liquidation preference plus

accrued and unpaid dividends through, but not including, the redemption date.

The dividend rate on shares of Series A Preferred Stock is 8.00% per annum. Our

fixed-to-floating rate series B, C and D preferred stock are LIBOR based and

will become floating on their respective call dates.

Restricted Stock Unit and Performance Share Unit Grants

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Grants of Restricted Stock Units, or RSUs

During the quarter ended March 31, 2022 and 2021, we granted RSU awards to

senior management. These RSU awards are designed to reward our senior management

for services provided to us. Generally, the RSU awards vest equally over a

three-year period beginning from the grant date and will fully vest after three

years. For employees who are retirement eligible, defined as years of service to

us plus age, is equal to or greater than 65, the service period is considered to

be fulfilled and all grants are expensed immediately. The RSU awards are valued

at the market price of our common stock on the grant date and generally the

employees must be employed by us on the vesting dates to receive the RSU awards.

We granted 128 thousand RSU awards during the quarter ended March 31, 2022, with

a grant date fair value of $2 million. We granted 182 thousand RSU awards during

the quarter ended March 31, 2021, with a grant date fair value of $2 million. In

addition, during the quarter ended March 31, 2021, we granted certain of our

senior management 1 million RSU awards that vest in five equal tranches with one

tranche vested immediately and the remaining four will vest equally over a

four-year period. These additional RSUs are not subject to retirement eligible

provisions and had a grant date fair value of $10 million.

Grants of Performance Share Units, or PSUs

PSU awards are designed to align compensation with our future performance. The

PSU awards granted during the year ended December 31, 2021 and 2020, include a

three-year performance period ending on December 31, 2024 and December 31, 2023,

respectively. The final number of shares awarded will be between 0% and 200% of

the PSUs granted based on our Economic Return compared to a peer group. Our

three-year Economic Return is equal to our change in book value per common share

plus common stock dividends. Compensation expense will be recognized on a

straight-line basis over the three-year vesting period based on an estimate of

our Economic Return in relation to the entities in the peer group and will be

adjusted each period based on our best estimate of the actual number of shares

awarded. During the quarter ended March 31, 2022, we granted 128 thousand PSU

awards to senior management with a grant date fair value of $2 million. During

the quarter ended March 31, 2021, we granted 182 thousand PSU awards to senior

management with a grant date fair value of $2 million.

At March 31, 2022 and December 31, 2021, there were approximately 2.9 million

unvested shares of RSUs and PSUs issued to our employees and directors,

respectively.

Contractual Obligations and Commitments

The following tables summarize our contractual obligations at March 31, 2022 and

December 31, 2021. The estimated principal repayment schedule of the securitized

debt is based on expected cash flows of the residential mortgage loans or RMBS,

as adjusted for expected principal write-downs on the underlying collateral of

the debt.

March 31, 2022

(dollars in thousands)

Greater Than or

One to Three Three to Five Equal to Five

Contractual Obligations Within One Year Years Years Years Total

Secured financing agreements $ 3,202,909 $ – $ 221,496 $ – $ 3,424,405

Securitized debt, collateralized by

Non-Agency RMBS 2,193 1,517 565 29 4,304

Securitized debt at fair value,

collateralized by Loans held for investment 1,989,813 2,898,571 1,790,442 1,631,291 8,310,117

Interest expense on MBS secured financing

agreements (1) 9,626 – 958 – 10,584

Interest expense on securitized debt (1) 196,238 277,683 161,465 141,714 777,100

Total $ 5,400,779 $ 3,177,771 $ 2,174,926 $ 1,773,034 $ 12,526,510

(1) Interest is based on variable rates in effect as of March 31, 2022.

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December 31, 2021

(dollars in thousands)

Greater Than or

One to Three Three to Five Equal to Five

Contractual Obligations Within One Year Years Years Years Total

Secured financing agreements $ 2,861,485 $ 143,239 $ 256,889 $ – $ 3,261,613

Securitized debt, collateralized by

Non-Agency RMBS 4,374 2,361 949 82 7,766

Securitized debt at fair value,

collateralized by Loans held for investment 2,031,445 2,886,255 1,697,760 1,145,995 7,761,455

Interest expense on MBS secured financing

agreements (1) 7,687 352 1,270 – 9,309

Interest expense on securitized debt (1) 170,798 223,316 117,998 101,367 613,479

Total $ 5,075,789 $ 3,255,523 $ 2,074,866 $ 1,247,444 $ 11,653,622

(1) Interest is based on variable rates in effect as of December 31, 2021.

Not included in the table above are the unfunded construction loan commitments

of $17 million and $23 million as of March 31, 2022 and December 31, 2021,

respectively. We expect the majority of these commitments will be paid within

one year and are reported under Payable for investments purchased in our

Consolidated Statements of Financial Condition.

Capital Expenditure Requirements

At March 31, 2022 and December 31, 2021, we had no material commitments for

capital expenditures.

Dividends

To maintain our qualification as a REIT, we must pay annual dividends to our

stockholders of at least 90% of our taxable income (subject to certain

adjustments). Before we pay any dividend, we must first meet any operating

requirements and scheduled debt service on our financing facilities and other

debt payable.

Critical Accounting Policies and Estimates

Accounting policies are integral to understanding our Management’s Discussion

and Analysis of Financial Condition and Results of Operations. The preparation

of financial statements in accordance with GAAP requires management to make

certain judgments and assumptions, on the basis of information available at the

time of the financial statements, in determining accounting estimates used in

the preparation of these statements. Our significant accounting policies and

accounting estimates are described in Note 2 to the Consolidated Financial

Statements. Critical accounting policies are described in this section. An

accounting policy is considered critical if it requires management to make

assumptions or judgments about matters that are highly uncertain at the time the

accounting estimate was made or require significant management judgment in

interpreting the accounting literature. If actual results differ from our

judgments and assumptions, or other accounting judgments were made, this could

have a significant and potentially adverse impact on our financial condition,

results of operations and cash flows.

The accounting policies and estimates which we consider most critical relate to

the recognition of revenue on our investments, including recognition of any

losses, and the determination of fair value of our financial instruments.

The consolidated financial statements include, on a consolidated basis, our

accounts, the accounts of our wholly-owned subsidiaries, and variable interest

entities, or VIEs, for which we are the primary beneficiary. All significant

intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires

management to make estimates and assumptions that affect the reported amounts of

assets and liabilities and disclosure of contingent assets and liabilities at

the date of the financial statements and the reported amounts of revenues and

expenses during the reporting period. Although our estimates contemplate current

conditions and how we expect them to change in the future, it is reasonably

possible that actual conditions could be different than anticipated in those

estimates, which could materially adversely impact our results of operations and

our financial condition. Management has made significant estimates in several

areas, including current expected credit losses of Non-Agency

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RMBS, valuation of Loans held for investments, Agency and Non-Agency MBS and

interest rate swaps and income recognition on Loans held for investments and

Non-Agency RMBS. Actual results could differ materially from those estimates.

Recent Accounting Pronouncements

Refer to Note 2 in the Notes to Consolidated Financial Statements for a

discussion of accounting guidance we have recently adopted or expect to be

adopted in the future.

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