August 8, 2011 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2011

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________ TO _________________

COMMISSION FILE NUMBER: 1-33796

CHIMERA INVESTMENT CORPORATION

(Exact name of Registrant as specified in its Charter)

MARYLAND	26-0630461
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1211 AVENUE OF THE AMERICAS, SUITE 2902

NEW YORK, NEW YORK

(Address of principal executive offices)

10036

(Zip Code)

(646) 454-3759

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes þ No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

Class	Outstanding at August 4, 2011
Common Stock, $.01 par value	1,027,125,679

CHIMERA INVESTMENT CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition at June 30, 2011 (Unaudited) and December 31, 2010 (Derived from the audited consolidated financial statements at December 31, 2010)			1

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Quarters and Six Months Ended June 30, 2011 and 2010 (Unaudited)			2

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2011 and 2010 (Unaudited)			3

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)			4

Notes to Consolidated Financial Statements (Unaudited)			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28

Item 3. Quantitative and Qualitative Disclosures about Market Risk			48

Item 4. Controls and Procedures			53


Part II. OTHER INFORMATION

Item 1. Legal Proceedings			54

Item 1A. Risk Factors			54

Item 6. Exhibits			55

SIGNATURES			56

CERTIFICATIONS

CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share and per share data)


	June 30, 2011 (unaudited)			December 31, 2010 (1)
Assets:
Cash and cash equivalents	$	16,080		$	7,173
Non-Agency RMBS, at fair value
Senior ($147.5 million and $484.1 million resulting from consolidation of VIEs)		347,900			987,685
Subordinated ($1.5 billion and $1.5 billion resulting from consolidation of VIEs)		2,173,005			2,210,858
Senior, non-retained (held in consolidated VIEs)		2,176,692			2,330,568
Agency RMBS, at fair value		5,013,760			2,133,584
Securitized loans held for investment (held in consolidated VIEs), net of allowance for loan losses of $7.5 million and $6.6 million, respectively		302,879			353,532
Accrued interest receivable		57,946			49,088
Other assets		847			1,212
Total assets	$	10,089,109		$	8,073,700

Liabilities:
Repurchase agreements, Agency RMBS ($4.5 billion and $1.7 billion of RMBS pledged as collateral, respectively)	$	4,320,487		$	1,600,078
Repurchase agreements, non-Agency RMBS ($0.0 and $249.4 million of RMBS pledged as collateral, respectively)		-			208,719
Securitized debt, loans held for investment, issued by consolidated VIEs ($302.9 million and $353.5 million of securitized loans pledged as collateral, respectively)		245,984			289,236
Securitized debt, non-Agency RMBS, issued by consolidated VIEs, non-retained ($3.8 billion and $4.4 billion of non-retained RMBS pledged as collateral, respectively)		1,904,936			1,956,079
Payable for investments purchased		-			127,693
Accrued interest payable		11,529			11,641
Dividends payable		133,425			174,445
Accounts payable and other liabilities		1,355			393
Investment management fees payable to affiliate		13,196			12,422
Interest rate swaps, at fair value ($23.3 million and $12.8 million of RMBS pledged as collateral, respectively)		19,658			9,988
Total liabilities	$	6,650,570		$	4,390,694

Commitments and Contingencies (Note 15)		-			-

Stockholders' Equity:
Common stock: par value $0.01 per share; 1,500,000,000 shares authorized, 1,027,167,395 and 1,027,034,357 shares issued and outstanding, respectively	$	10,263		$	10,261
Additional paid-in-capital		3,602,671			3,601,890
Accumulated other comprehensive income (loss)		25,297			274,651
Retained earnings (accumulated deficit)		(199,692	)		(203,796	)
Total stockholders' equity	$	3,438,539		$	3,683,006
Total liabilities and stockholders' equity	$	10,089,109		$	8,073,700

(1) Derived from the audited consolidated financial statements at December 31, 2010.
See notes to consolidated financial statements.

CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except share and per share data)
(unaudited)

	For the Quarter Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Net Interest Income:
Interest income	$	194,235		$	133,522		$	400,809		$	262,506
Interest expense		7,481			6,499			15,483			13,873

Interest income, non-retained		28,428			49,829			49,587			100,690
Interest expense, non-retained		28,312			21,421			55,887			55,251
Net interest income (expense)		186,870			155,431			379,026			294,072
Other-than-temporary impairments:
Total other-than-temporary impairment losses		(1,926	)		(24,746	)		(6,131	)		(47,433	)
Non-credit portion of loss recognized in other comprehensive income (loss)		882			17,853			2,462			37,996
Net other-than-temporary credit impairment losses		(1,044	)		(6,893	)		(3,669	)		(9,437	)
Other gains (losses):
Unrealized gains (losses) on interest rate swaps		(19,500	)		(11,237	)		(9,669	)		(11,237	)
Realized gains (losses) on interest rate swaps		(4,297	)		(699	)		(7,144	)		(699	)
Gains (losses) on interest rate swaps		(23,797	)		(11,936	)		(16,813	)		(11,936	)
Net gains (losses) on interest-only RMBS		(4,442	)		-			(4,442	)		-
Net gains (losses) on embedded derivatives in interest-only RMBS		(2,234	)		-			(2,234	)		-
Realized gains (losses) on sales of investments, net		(380	)		-			2,364			342
Realized losses on principal write-downs of non-Agency RMBS		(22,040	)		(326	)		(41,560	)		(1,275	)
Total other gains (losses)		(52,893	)		(12,262	)		(62,685	)		(12,869	)
Net investment income (loss)		132,933			136,276			312,672			271,766
Other expenses:
Management fee		13,152			9,263			25,902			17,377
Provision for loan losses		-			1,024			1,442			1,630
General and administrative expenses		1,820			1,409			3,307			2,569
Total other expenses		14,972			11,696			30,651			21,576
Income (loss) before income taxes		117,961			124,580			282,021			250,190
Income taxes		118			1			816			1
Net income (loss)	$	117,843		$	124,579		$	281,205		$	250,189

Net income (loss) per share-basic and diluted	$	0.11		$	0.16		$	0.27		$	0.35
Weighted average number of shares outstanding-basic and diluted		1,027,130,496			765,475,340			1,027,096,962			718,185,900
Comprehensive income (loss):
Net income (loss)	$	117,843		$	124,579		$	281,205		$	250,189
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities, net		(112,067	)		(151,524	)		(292,219	)		90,057
Reclassification adjustment for net losses included in net income (loss) for other-than-temporary credit impairment losses		1,044			6,893			3,669			9,437
Reclassification adjustment for net realized losses (gains) included in net income (loss)		22,420			326			39,196			933
Other comprehensive income (loss)		(88,603	)		(144,305	)		(249,354	)		100,427
Comprehensive income (loss)	$	29,240		$	(19,726	)	$	31,851		$	350,616

See notes to consolidated financial statements.

CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
(unaudited)

	Common Stock Par Value		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total
Balance, December 31, 2009	$	6,693	$	2,290,614		$	(99,754	)	$	(70,991	)	$	2,126,562
Net income (loss)		-		-			-			250,189			250,189
Cumulative effect of change in accounting principle		-		-			-			(88,187	)		(88,187	)
Other comprehensive income (loss)		-		-			100,427			-			100,427
Proceeds from direct purchase and dividend reinvestment		-		123			-			-			123
Proceeds from common stock offerings		2,128		765,584			-			-			767,712
Restricted stock grants		1		245			-			-			246
Common dividends declared, $0.34 per share		-		-			-			(244,213	)		(244,213	)
Balance, June 30, 2010	$	8,822	$	3,056,566		$	673		$	(153,202	)	$	2,912,859

Balance, December 31, 2010	$	10,261	$	3,601,890		$	274,651		$	(203,796	)	$	3,683,006
Net income (loss)		-		-			-			281,205			281,205
Other comprehensive income (loss)		-		-			(249,354	)		-			(249,354	)
Proceeds from direct purchase and dividend reinvestment		2		540			-			-			542
Proceeds from common stock offerings		-		(8	)		-			-			(8	)
Restricted stock grants		-		249			-			-			249
Common dividends declared, $0.27 per share		-		-			-			(277,101	)		(277,101	)
Balance, June 30, 2011	$	10,263	$	3,602,671		$	25,297		$	(199,692	)	$	3,438,539

See notes to consolidated financial statements.

CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

	For the Six Months Ended June 30, 2011			For the Six Months Ended June 30, 2010
Cash Flows From Operating Activities:
Net income (loss)	$	281,205		$	250,189
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Accretion) amortization of investment discounts/premiums		(118,635	)		(118,811	)
Unrealized losses (gains) on interest rate swaps		9,669			11,237
Net losses (gains) on interest-only RMBS		4,442			-
Unrealized losses (gains) on embedded derivatives in interest-only RMBS		2,234
Realized losses (gains) on sales of investments		(2,364	)		(342	)
Realized losses on principal write-downs of non-Agency RMBS		41,560			1,275
Net other-than-temporary credit impairment losses		3,669			9,437
Provision for loan losses		1,442			1,630
Restricted stock grants		249			246
Changes in operating assets:
Decrease (increase) in accrued interest receivable		(8,998	)		(12,554	)
Decrease (increase) in other assets		365			571
Changes in operating liabilities:
Increase (decrease) in accounts payable and other liabilities		962			207
Increase (decrease) in investment management fees payable to affiliate		774			838
Increase (decrease) in accrued interest payable		(112	)		8,910
Net cash provided by (used in) operating activities	$	216,462		$	152,833
Cash Flows From Investing Activities:
Mortgage-Backed Securities portfolio:
Purchases	$	(3,653,583	)	$	(1,502,615	)
Sales		668,529			89,877
Principal payments		262,632			377,108
Mortgage-Backed Securities portfolio, non-retained:
Principal payments		366,757			289,733
Securitized loans:
Principal payments		48,402			52,249
Net cash provided by (used in) investing activities	$	(2,307,263	)	$	(693,648	)
Cash Flows From Financing Activities:
Proceeds from repurchase agreements	$	9,335,704		$	10,564,043
Payments on repurchase agreements		(6,824,014	)		(11,201,640	)
Net proceeds from common stock offerings		(8	)		767,712
Payments on securitized debt borrowings, loans held for investment		(43,252	)		(48,417	)
Proceeds from securitized debt borrowings, non-retained		311,012			1,127,872
Payments on securitized debt borrowings, non-retained		(362,155	)		(229,362	)
Net proceeds from direct purchase and dividend reinvestment		542			123
Common dividends paid		(318,121	)		(227,581	)
Net cash provided by (used in) financing activities	$	2,099,708		$	752,750
Net increase (decrease) in cash and cash equivalents		8,907		$	211,935
Cash and cash equivalents at beginning of period		7,173			24,279
Cash and cash equivalents at end of period	$	16,080		$	236,214

See notes to consolidated financial statements.

CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

Supplemental disclosure of cash flow information:
Interest paid	$	64,979		$	60,913
Taxes paid	$	816		$	1

Non-cash investing activities:
Net change in unrealized gain on available-for sale securities	$	(249,354	)	$	100,427
Non-cash financing activities:
Common dividends declared, not yet paid	$	133,425		$	130,420

See notes to consolidated financial statements.

CHIMERA INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED JUNE 30, 2011

(unaudited)

1. Organization

Chimera Investment Corporation (“Company”) was organized in Maryland on June 1, 2007. The Company commenced operations on November 21, 2007 when it completed its initial public offering. The Company has elected to be taxed as a real estate investment trust (“REIT”), under the Internal Revenue Code of 1986, as amended. In July 2008, the Company formed Chimera Securities Holdings, LLC, a wholly-owned subsidiary. In June 2009, the Company formed Chimera Asset Holding LLC and Chimera Holding LLC, both wholly-owned subsidiaries. In January 2010, the Company formed Chimera Special Holding LLC, which is a wholly-owned subsidiary of Chimera Asset Holding LLC. In July 2010, the Company formed CIM Trading Company LLC, a wholly-owned subsidiary. Chimera Securities Holdings, LLC, Chimera Asset Holding LLC, Chimera Holding LLC, and Chimera Special Holding LLC are qualified REIT subsidiaries. CIM Trading Company LLC is a taxable REIT subsidiary (“TRS”). Annaly Capital Management, Inc. (“Annaly”) owns approximately 4.38% of the Company’s common shares. The Company is managed by Fixed Income Discount Advisory Company (“FIDAC”), an investment advisor registered with the Securities and Exchange Commission (“SEC”). FIDAC is a wholly-owned subsidiary of Annaly.

2. Summary of the Significant Accounting Policies

(a) Basis of Presentation

The consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

Beginning with the financial statements for the six month period ending June 30, 2011, the Company will reclassify previously presented financial information so that amounts previously presented in the Consolidated Statement of Operations and Comprehensive Income (Loss) as interest expense on swaps will be presented in Other gains (losses) as Realized gains (losses) on interest rate swaps. Financial statements for periods prior to June 30, 2011 will be conformed to the restated presentation. Interest expense for the quarter and six months ended June 30, 2010 will be decreased by $699 thousand and $699 thousand, and Other gains (losses) will be decreased by the same amounts, respectively.

(b) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and cash deposited overnight in money market funds.

The Company invests in residential mortgage-backed securities (“RMBS”) representing interests in obligations backed by pools of mortgage loans. The Company delineates between (1) Agency RMBS, (2) non-Agency RMBS, and (3) non-Agency RMBS, non-retained as follows: The Agency RMBS are mortgage pass-through certificates, collateralized mortgage obligations (“CMOs”), and other RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed as to principal and/or interest repayment by agencies of the U.S. Government or federally chartered corporations such Ginnie Mae, Freddie Mac or Fannie Mae. The non-Agency RMBS are not issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and is therefore subject to credit risk. Non-Agency RMBS, non-retained are detailed in Note 8 to these consolidated financial statements.

The Company holds its RMBS as available-for-sale, records investments at estimated fair value as described in Note 5 of these consolidated financial statements, and includes unrealized gains and losses in other comprehensive income (loss) in the Consolidated Statements of Operations and Comprehensive Income (Loss). From time to time, as part of the overall management of its portfolio, the Company may sell any of its RMBS investments and recognize a realized gain or loss as a component of earnings in the Consolidated Statements of Operations and Comprehensive Income (Loss) utilizing the specific identification method.

Interest income on RMBS is computed on the remaining principal balance of the investment security. Premium or discount amortization/accretion on Agency RMBS is recognized over the life of the investment using the effective interest method. Premium or discount amortization/accretion on non-Agency RMBS is recognized in accordance with Accounting Standards Codification (“ASC”) 325-40, Investment-Other: Beneficial Interests in Securitized Financial Assets. For non-Agency RMBS, the Company estimates at the time of purchase expected future cash flows, prepayment speeds, credit losses, loss severity, and loss timing based on the Company’s observation of available market data, its experience, and the collective judgment of its management team to determine the effective interest rate on the RMBS. The Company periodically reevaluates, and if necessary, makes adjustments to its analysis utilizing internal models and external market research in conjunction with management’s view on performance in the non-Agency RMBS sector. Changes to the Company’s assumptions subsequent to the purchase date may increase or decrease the amortization/accretion of premiums or discounts which affects interest income. Changes to assumptions that decrease expected future cash flows may result in other-than-temporary impairment (“OTTI”).

The Company evaluates quarterly, or more often if market conditions warrant, each investment in its RMBS portfolio for OTTI. The amortized cost of each investment in an unrealized loss position is compared to the present value of expected future cash flows of the position. In estimating future cash flows, the Company evaluated the non-Agency RMBS for OTTI by considering delinquencies, credit losses, loss severities, prepayment speeds, geographic data, borrower characteristics, loan to value ratios, seasoning and credit support in conjunction with broader macroeconomic expectations such as home price depreciation, expectations of future delinquencies and loss severities and the ability of the borrower to refinance or modify their loans. If, after determining the expected future cash flows of the position, the amortized cost of the security is more than the present value of its expected future cash flows, an OTTI has occurred. If the Company does not intend to sell and is not more likely than not required to sell the debt security prior to its anticipated recovery, the credit loss, if any, is recognized in earnings, while the balance of impairment related to other factors is recognized in other comprehensive income (loss). If the Company intends to sell the debt security, or will be more likely than not required to sell the security before its anticipated recovery, the full unrealized loss is recognized in earnings. The determination cannot be overcome by management judgment of the probability of collecting all cash flows previously projected.

(d) Interest-Only RMBS

The Company invests in interest-only Agency and non-Agency RMBS. On April 1, 2011, the Company elected the fair value option for interest-only RMBS acquired on or after such date. These interest-only RMBS represent the Company’s right to receive a specified proportion of the contractual interest flows of specific RMBS. Interest-only strips acquired on or after April 1, 2011 are measured at fair value through earnings in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). The interest-only strips are included in RMBS, at fair value on the accompanying consolidated statements of financial condition.

(e) Securitized Loans Held for Investment

The Company’s securitized residential mortgage loans are comprised of fixed-rate and variable-rate loans. Mortgage loans are designated as held for investment, and are carried at their principal balance outstanding, plus any premiums or discounts, less allowances for loan losses. Interest income on loans held for investment is recognized over the life of the investment using the effective interest method. Income recognition is suspended for loans when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. The Company estimates fair value of securitized loans as described in Note 5 of these consolidated financial statements.

(f) Allowance for Loan Losses

The Company has established an allowance for loan losses on its securitized loans held for investment portfolio at a level that management believes is adequate based on an evaluation of known and inherent risks related to the securitized loans. The securitized loan portfolio is comprised primarily of non-conforming, single family, owner occupied, jumbo, prime loans that are not guaranteed as to repayment of principal or interest. The allowance for loan losses is established to provision for the credit risk associated with a borrower’s default on its loan and the potential for recovery at the liquidation of the property in an amount less than the unpaid principal balance of the loan. The estimate is based on the aggregation of factors including current economic conditions, industry loss experience, the loan originator’s loss experience, credit quality trends, loan portfolio composition, delinquency trends, national and local economic trends, national unemployment data, changes in housing appreciation or depreciation and whether specific geographic areas where the Company has significant loan concentrations are experiencing adverse economic conditions and events such as natural disasters that may affect the local economy or property values. Upon purchase of a pool of loans, the Company obtains written representations and warranties from the sellers that the Company will be reimbursed for the value of the loan if the loan fails to meet the agreed upon origination standards. While the Company has little history of its own to establish loan trends, delinquency trends of the originators and the current market conditions aid in determining the allowance for loan losses. The Company has created an unallocated provision for probable loan losses estimated as a percentage of the remaining unpaid principal balance on the loans. Management’s estimate is based on historical experience of similarly underwritten pools in conjunction with current and expected market trends.

When the Company determines it is probable that specific contractually due amounts are uncollectible, the amount is considered impaired. Where impairment is indicated, a valuation write-off is measured based upon the excess of the recorded investment over the net fair value of the collateral, reduced by selling costs. Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral is charged to the allowance for loan losses.

(g) Repurchase Agreements

The Company may finance the acquisition of its investment securities through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.

(h) Securitized Debt, loans held for investment and Securitized Debt, Non-Retained

The Company has issued securitized debt to finance its residential mortgage loan portfolio and has re-securitized RMBS to finance a portion of its RMBS portfolio. Certain transactions involving residential mortgage loans are accounted for as financings, and are recorded as an asset called “Securitized loans held for investment” and the corresponding debt as “Securitized debt, loans held for investment” in the consolidated statements of financial condition. These securitizations are collateralized by residential adjustable or fixed rate mortgage loans that have been placed in a trust and pay interest and principal payments to the debt holders of that securitization. Re-securitization transactions classified as “Securitized debt, non-retained” reflect the transfer to a trust of fixed or adjustable rate RMBS which are classified as “Non-Agency RMBS Senior, non-retained (held in consolidated VIEs)” that pay interest and principal payments to the debt holders of that re-securitization. Re-securitization transactions completed by the Company are accounted for as financings pursuant to ASC 810, Consolidation. The holders of Securitized debt and Securitized debt, non-retained have no recourse to the Company, and the Company does not receive any interest or principal paid on such debt. The Company estimates fair value of securitized debt and securitized debt, non-retained as described in Note 5 to these consolidated financial statements. The associated liabilities are carried at amortized cost.

(i) Fair Value Disclosure

A complete discussion of the methodology utilized by the Company to fair value its financial instruments is included in Note 5 to these consolidated financial statements.

(j) Derivative Financial Instruments and Hedging Activity

The Company’s policies permit it to enter into derivative contracts, including interest rate swaps and interest rate caps, as a means of mitigating its interest rate risk. The Company intends to use interest rate derivative instruments to mitigate interest rate risk rather than to enhance returns. Interest rate swaps are recorded as either assets or liabilities in the consolidated statement of financial condition, and measured at fair value with realized and unrealized gains and losses recognized in earnings. Net payments on interest rate swaps are included in the consolidated statement of cash flows as a component of net income (loss). Unrealized gains (losses) on interest rate swaps are removed from net income (loss) as an adjustment to cash flows from operating activities. The Company estimates fair value of interest rate swaps as described in Note 5 of these consolidated financial statements.

The Company elects to net by counterparty the fair value of interest rate swap contracts. These contracts contain legally enforceable provisions that allow for netting or setting off of all individual swap receivables and payables with each counterparty and, therefore, the fair value of those swap contracts are netted by counterparty. The credit support annex provisions of the Company’s interest rate swap contracts allow the parties to mitigate their credit risk by requiring the party which is out of the money to post collateral. As the Company elects to net by counterparty the fair value of interest rate swap contracts, it also nets by counterparty any cash or other collateral exchanged as part of the interest rate swap contracts.

(k) Sales, Securitizations, and Re-Securitizations

The Company periodically enters into transactions in which it sells financial assets, such as RMBS, mortgage loans and other assets. Gains and losses on sales of assets are computed on the specific identification method whereby the Company records a gain or loss on the difference between the carrying value of the asset and the proceeds from the sale. In addition, the Company from time to time securitizes or re-securitizes assets and sells tranches in the newly securitized assets. These transactions may be recorded as either a sale and the assets contributed to the securitization are removed from the consolidated statements of financial condition and a gain or loss is recognized, or as a financing whereby the assets contributed to the securitization are not derecognized but rather the liabilities issued by the securitization are recorded to reflect the term financing of the assets. In these securitizations and re-securitizations, the Company may retain senior or subordinated interests in the securitized and/or re-securitized assets.

(l) Income Taxes

The Company elected to be taxed as a REIT, and therefore it generally will not be subject to corporate, federal, or state income tax to the extent that qualifying distributions are made to stockholders and the REIT requirements, including certain asset, income, distribution and stock ownership tests are met. If the Company failed to qualify as a REIT and did not qualify for certain statutory relief provisions, the Company would be subject to federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the REIT qualification was lost. The Company and its subsidiary CIM Trading Company LLC made a joint election to treat the subsidiary as a taxable REIT subsidiary. As such, CIM Trading Company LLC is taxable as a domestic C corporation and subject to federal, state, and local income taxes based upon its taxable income.

The provisions of FASB ASC 740, Income Taxes, clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for tax positions taken or expected to be taken on a tax return. FASB ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were necessary as of June 30, 2011.

(m) Net Income per Share

The Company calculates basic net income per share by dividing net income for the period by the weighted-average shares of its common stock outstanding for that period. Diluted net income per share takes into account the effect of dilutive instruments, such as stock options, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. The Company had no potentially dilutive securities outstanding during the periods presented.

(n) Stock-Based Compensation

The Company accounts for stock based compensation awards granted to the employees of FIDAC and its affiliates in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Pursuant to ASC 505-50 the Company measures the fair value of the equity instrument using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty’s performance is complete. Compensation expense related to the grants of stock and stock options is recognized over the vesting period of such grants based on the fair value of the stock on the vesting date.

(o) Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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. The most significant estimates are related to the following: all investment securities classified as available-for-sale and interest rate swaps are reported at their estimated fair value; all investment securities are amortized/accreted based on yields that incorporate management’s assumptions as to the expected performance of the investment over time; and the loan loss provision reflects management estimates with regard to expected losses of the securitized loan portfolio. Actual results could differ from those estimates.

(p) Recent Accounting Pronouncements

Presentation

Comprehensive Income (ASC 220)

In June 2011, FASB released ASU 2011-05, which attempts to improve the comparability, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income (OCI). The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of net income and comprehensive income or two separate consecutive statements. Either presentation requires the presentation on the face of the financial statements any reclassification adjustments for items that are reclassified from OCI to net income in the statements. There is no change in what must be reported in OCI or when an item of OCI must be reclassified to net income. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. This update will result in additional disclosure, but is expected to have no material effect on the Company’s consolidated financial statements.

Broad Transactions

Fair Value Measurements and Disclosures (ASC 820)

In January 2010, FASB issued ASU 2010-06 which increases disclosures regarding the fair value of assets. A majority of this update was effective for the Company on January 1, 2010. However, the guidance also required that the disclosures on any Level 3 assets present separately information about purchases, sales, issuances and settlements. In other words, Level 3 assets are presented on a gross basis rather than as one net number. This portion of the guidance is effective for the Company on January 1, 2011. Adoption of this portion of the guidance results in increased footnote disclosure in the Company’s consolidated financial statements to the extent that Level 3 assets are held.

In May 2011, FASB release ASU 2011-04 further converging US GAAP and IFRS by providing common fair value measurement and disclosure requirements. The amendments in this update change the wording used to describe the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. These include those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011. This update may result in additional disclosure, however has no effect on the Company’s consolidated financial statements.

Transfers and Servicing (ASC 860)

In April 2011, FASB issued ASU 2011-03 regarding repurchase agreements. In a typical repurchase agreement transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. Prior to this update one of the factors in determining whether sale treatment could be used was whether the transferor maintained effective control of the transferred assets and in order to do so, the transferor must have the ability to repurchase such assets. Based on this update, FASB concluded that the assessment of effective control should focus on a transferor’s contractual rights and obligations with respect to transferred financial assets, rather than on whether the transferor has the practical ability to perform in accordance with those rights or obligations. Therefore, this update removes the transferor’s ability criterion from consideration of effective control. This update is effective for the first interim or annual period beginning on or after December 15, 2011. As the Company records repurchase agreements as secured borrowings and not sales, this update will have no effect on the Company’s consolidated financial statements.

3. Residential Mortgage-Backed Securities

The following tables present the principal value, unamortized premium, unamortized discount, gross unrealized gain, gross unrealized loss, and fair value of the Company’s available-for-sale RMBS portfolio as of June 30, 2011 and December 31, 2010, at fair value by asset class. The RMBS portfolio is composed of Agency and non-Agency RMBS collateralized by residential mortgage loans. The Agency RMBS are mortgage pass-through certificates, CMOs, and other RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. The non-Agency RMBS portfolio is not issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and is therefore subject to credit risk. The Company classifies its non-Agency RMBS into senior, subordinated, and senior, non-retained interests. Senior interests in non-Agency RMBS are considered to be entitled to the first principal repayments in their pro-rata ownership interests. Securities identified as senior, non-retained represent the portion of the Company’s non-Agency RMBS included on the Company’s balance sheet that are economically owned by third parties. The total fair value of the non-Agency RMBS that are held by the re-securitization trusts that are consolidated pursuant to ASC 810, Consolidation, was $3.8 billion and $4.4 billion at June 30, 2011 and December 31, 2010 respectively. See Note 8 of these consolidated financial statements for further discussion on consolidation.

June 30, 2011
(dollars in thousands)

	Principal Value		Unamortized Premium		Unamortized Discount			Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Non-Agency RMBS
Senior	$	6,967	$	405,648	$	(93	)	$	27,671	$	(92,293	)	$	347,900
Subordinated		4,938,497		57,946		(2,562,459	)		151,460		(412,439	)		2,173,005
Senior, non-retained		1,948,002		40,468		(79,394	)		292,459		(24,843	)		2,176,692
Agency RMBS		4,801,983		135,332		(161	)		88,065		(11,459	)		5,013,760
Total	$	11,695,449	$	639,394	$	(2,642,107	)	$	559,655	$	(541,034	)	$	9,711,357

December 31, 2010
(dollars in thousands)

	Principal Value		Unamortized Premium		Unamortized Discount			Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Non-Agency RMBS
Senior	$	664,251	$	420,657	$	(9,320	)	$	21,758	$	(109,661	)	$	987,685
Subordinated		4,962,829		58,298		(2,789,906	)		206,189		(226,552	)		2,210,858
Senior, non-retained		2,008,167		79,730		(109,619	)		428,213		(75,923	)		2,330,568
Agency RMBS		2,035,823		67,134		-			47,717		(17,090	)		2,133,584
Total	$	9,671,070	$	625,819	$	(2,908,845	)	$	703,877	$	(429,226	)	$	7,662,695

Interest-only RMBS included in the table above, represent the right to receive a specified portion of the contractual interest cash flows of the underlying unamortized principal balance of specific securities. As of June 30, 2011, interest-only RMBS accounted for under the fair value option had unrealized losses of $4.4 million and an amortized cost of $21.0 million.

The following tables present the gross unrealized losses and estimated fair value of the Company’s RMBS by length of time that such securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010. The securities in an unrealized loss position have been evaluated by the Company for OTTI as discussed above. Three consolidated trusts have been in a continuous unrealized loss position for greater than twelve months although the assets are performing in line with the Company’s expectations.

June 30, 2011
(dollars in thousands)

Unrealized Loss Position For:
		Less than 12 Months					12 Months or More					Total
RMBS		Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
Non-Agency RMBS
	Senior	$	85,660	$	(12,081	)	$	90,720	$	(80,212	)	$	176,380	$	(92,293	)
	Subordinated		502,025		(79,822	)		920,078		(332,617	)		1,422,103		(412,439	)
	Senior, non-retained		-		-			523,988		(24,843	)		523,988		(24,843	)
Agency			588,905		(11,459	)		-		-			588,905		(11,459	)
Total		$	1,176,590	$	(103,362	)	$	1,534,786	$	(437,672	)	$	2,711,376	$	(541,034	)

December 31, 2010
(dollars in thousands)

Unrealized Loss Position For:
		Less than 12 Months					12 Months or More					Total
RMBS		Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
Non-Agency RMBS
	Senior	$	549,968	$	(109,662	)	$	-	$	-		$	549,968	$	(109,662	)
	Subordinated		1,178,493		(217,224	)		12,826		(9,328	)		1,191,319		(226,552	)
	Senior, non-retained		764,724		(75,923	)		-		-			764,724		(75,923	)
Agency			600,464		(17,090	)		-		-			600,464		(17,090	)
Total		$	3,093,649	$	(419,899	)	$	12,826	$	(9,328	)	$	3,106,475	$	(429,227	)

The Company recorded a $1.0 million OTTI during the quarter ended June 30, 2011 on investments where the expected future cash flows of certain non-Agency RMBS were less than their amortized cost basis. The impairment recorded during the quarter ended June 30, 2011 was related to seven securities. The impaired investments were certain non-Agency RMBS. As of June 30, 2011 the impaired securities had cumulative losses ranging from 0% up to 15%, three-month prepayments speeds between 9 and 38 Constant Prepayment Rate (“CPR”), 60+ day delinquencies between 3% and 38% of the pool balance, and weighted average FICO scores on the pools between 698 and 744.

A summary of the OTTI included in earnings for the quarter and six months ended June 30, 2011 and 2010 is presented below.

For the Quarter Ended
	June 30, 2011		June 30, 2010

Cumulative credit loss beginning balance	$	25,299	$	12,540
Additions:
Other-than-temporary impairments not previously recognized		286		6,340
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments		758		553
Cumulative credit loss ending balance	$	26,343	$	19,433

For the Six Months Ended

	June 30, 2011		June 30, 2010

Cumulative credit loss beginning balance	$	22,674	$	9,996
Additions:
Other-than-temporary impairments not previously recognized		1,274		8,802
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments		2,395		635
Cumulative credit loss ending balance	$	26,343	$	19,433

The following tables present details of each asset class in the Company’s RMBS portfolio at June 30, 2011 and December 31, 2010. The weighted average coupon, yield, and CPR at period-end are weighted by each investment’s respective principal/notional value in the asset class. The figure presenting the annualized yield over the current quarter is the annualized interest income earned on the asset class during the quarter, divided by the average of the beginning and ending amortized cost of the asset class.

June 30, 2011

	Weighted Average Coupon at Period-End			Weighted Average Yield (Loss Adjusted) at Period-End			Annualized Yield Over Current Quarter			Weighted Average 3 Month CPR at Period-End
Non-Agency RMBS
Senior		1.91	%		14.06	%		4.08	%		17	%
Subordinated		3.99	%		14.21	%		18.53	%		17	%
Senior, non-retained		5.17	%		4.58	%		5.70	%		16	%
Agency RMBS		4.71	%		4.34	%		4.34	%		7	%

December 31, 2010

	Weighted Average Coupon at Period-End			Weighted Average Yield (Loss Adjusted) at Period-End			Annualized Yield Over Current Quarter			Weighted Average 3 Month CPR at Period-End
Non-Agency RMBS
Senior		2.01	%		13.70	%		12.99	%		16	%
Subordinated		4.04	%		17.41	%		25.16	%		15	%
Senior, non-retained		5.17	%		4.36	%		6.85	%		15	%
Agency RMBS		5.05	%		4.51	%		3.34	%		24	%

The Company’s investment guidelines place no restrictions on the credit rating of the assets the Company is able to hold in its portfolio. The portfolio is most heavily weighted to contain RMBS with credit risk. The Company chooses assets for the portfolio after carefully evaluating each investment’s risk profile.

	June 30, 2011	December 31, 2010
AAA	14.03%	14.67%
AA	0.67%	5.34%
A	0.48%	0.92%
BBB	0.53%	0.61%
BB	0.01%	0.01%
B	0.00%	0.00%
Below B or not rated	84.28%	78.45%
Total	100.00%	100.00%

The table above reflects the credit rating of the Company’s consolidated non-Agency RMBS portfolio. At June 30, 2011 approximately 14% of the AAA, AA, and A securities balance reflected in the table above include senior, non-retained, non-Agency RMBS.

The AAA rated assets in the non-Agency RMBS portfolio are predominantly senior non-retained non-Agency RMBS. As the Company securitizes or re-securitizes assets, it expects the Below B or not rated percentages in the portfolio to increase as the Company typically retains the subordinated tranches of these types of transactions.

Actual maturities of RMBS are generally shorter than stated contractual maturities. Actual maturities of the Company’s RMBS are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. The following tables summarize the Company’s RMBS at June 30, 2011 and December 31, 2010 according to their estimated weighted-average life classifications. The weighted-average lives of the RMBS at June 30, 2011 and December 31, 2010 in the tables below are based on consensus constant prepayment speeds. The prepayment model considers current yield, forward yield, steepness of the interest rate curve, current mortgage rates, mortgage rates of the outstanding loan, loan age, margin, and volatility.

June 30, 2011
(dollars in thousands)

	Weighted Average Life
	Less than one year		Greater than one year and less than five years		Greater than five years		Total
Fair value
Non-Agency RMBS
Senior	$	8,805	$	70,609	$	268,486	$	347,900
Subordinated		10,212		246,751		1,916,042		2,173,005
Senior, non-retained		285,136		1,440,039		451,517		2,176,692
Agency RMBS		-		646,783		4,366,977		5,013,760
Total fair value	$	304,153	$	2,404,182	$	7,003,022	$	9,711,357
Amortized cost
Non-Agency RMBS
Senior	$	9,038	$	77,991	$	325,493	$	412,522
Subordinated		10,456		278,189		2,145,339		2,433,984
Senior, non-retained		182,440		1,289,279		437,357		1,909,076
Agency RMBS		-		617,306		4,319,848		4,937,154
Total amortized cost	$	201,934	$	2,262,765	$	7,228,037	$	9,692,736

December 31, 2010
(dollars in thousands)

	Weighted Average Life
	Less than one year		Greater than one year and less than five years		Greater than five years		Total
Fair value
Non-Agency RMBS
Senior	$	26,962	$	587,075	$	373,648	$	987,685
Subordinated		7,941		218,986		1,983,931		2,210,858
Senior, non-retained		200,468		1,889,732		240,368		2,330,568
Agency RMBS		-		1,560,859		572,725		2,133,584
Total fair value	$	235,371	$	4,256,652	$	3,170,672	$	7,662,695
Amortized cost
Non-Agency RMBS
Senior	$	26,920	$	584,859	$	463,810	$	1,075,589
Subordinated		11,076		253,558		1,966,587		2,231,221
Senior, non-retained		251,579		1,500,955		225,744		1,978,278
Agency RMBS		-		1,513,644		589,313		2,102,957
Total amortized cost	$	289,575	$	3,853,016	$	3,245,454	$	7,388,045

The non-Agency RMBS portfolio is subject to credit risk. The Company seeks to mitigate credit risk through its asset selection process. The non-Agency RMBS portfolio is primarily collateralized by what the Company classifies as Alt-A first lien mortgages. The Company categorizes collateral as Alt-A regardless of whether the loans were originally described as “prime” if the behavior of the collateral when the Company purchased the security more typically resembles Alt-A. The Company defines Alt-A collateral characteristics to be when the 60+ day delinquency bucket of the pool is greater than 5% and weighted average FICO scores are greater than 650 at origination. At June 30, 2011, 99% of the non-Agency RMBS were Alt-A collateral. At December 31, 2010, 99% of the non-Agency RMBS were Alt-A collateral. The non-Agency securities contained in this portion of the portfolio have the following collateral characteristics at June 30, 2011 and December 31, 2010.

	June 30, 2011				December 31, 2010
Number of securities in portfolio			523				581
Weighted average maturity (years)			27.0				27.4
Weighted average amortized loan to value			72.3	%			72.5	%
Weighted average FICO			717.2				717.3
Weighted average loan balance (in thousands)		$	470.1			$	447.6
Weighted average percentage owner occupied			84.3	%			83.3	%
Weighted average percentage single family residence			64.1	%			63.1	%
Weighted average current credit enhancement			12.7	%			16.0	%
Weighted average geographic concentration	CA		38.1	%	CA		57.8	%
	FL		8.7	%	FL		13.3	%
	NY		5.5	%	NY		7.3	%
	NJ		2.4	%	VA		3.9	%
	VA		2.3	%	NJ		3.3	%

The information presented in the table above includes senior, non-retained, non-Agency RMBS consolidated pursuant to the adoption of ASC 810 on January 1, 2010 by the Company.

The table below presents origination year for the Company’s portfolio of non-Agency RMBS at June 30, 2011 and December 31, 2010.

Origination Year	June 30, 2011	December 31, 2010
2004	0.0%	0.1%
2005	13.2%	13.4%
2006	40.1%	27.0%
2007	40.8%	56.1%
2008	5.9%	3.3%
2009	0.0%	0.1%
Total	100.0%	100.0%

During the quarter ended June 30, 2011, the Company sold RMBS with a carrying value of $16.4 million for realized losses of $380 thousand. During the quarter ended June 30, 2010, the Company had no sales of RMBS.

The Company sold all of the AAA-rated bonds created in its re-securitizations prior to the quarter ended June 30, 2011, and therefore did not record non-recourse financing with third party investors related to re-securitizations executed in prior periods. During the six months ended June 30, 2011, the Company financed through these transactions $306.6 million of AAA-rated fixed rate bonds by selling the bonds to third party investors for net proceeds of $311.0 million.

On April 30, 2010, the Company transferred $566.6 million in principal value of its RMBS to the CSMC 2010-11R Trust in a re-securitization transaction. This transaction was recorded as a “secured borrowing” pursuant to ASC Topics 860 and 810. In this transaction, the Company financed $138.8 million of AAA-rated fixed rate bonds by selling the bonds to third party investors for net proceeds of $137.4 million. The Company has retained $427.7 million in subordinated bonds and the owner trust certificate. The subordinated bonds and the owner trust certificate provide credit support to the AAA-rated bonds. The bonds issued by the trust are collateralized by RMBS that were transferred to the CSMC 2010-11R Trust.

On May 27, 2010, the Company transferred $1.2 billion in principal value of its RMBS to the CSMC 2010-12R Trust in a re-securitization transaction. This transaction was recorded as a “secured borrowing” pursuant to ASC Topics 860 and 810. In this transaction, the Company financed $294.0 million of AAA-rated fixed rate bonds by selling the bonds to third party investors for net proceeds of $294.3 million. The Company has retained $136.3 million of AAA-rated bonds, $788.2 million in subordinated bonds and the owner trust certificate. The subordinated bonds and the owner trust certificate provide credit support to the AAA-rated bonds. The bonds issued by the trust are collateralized by RMBS that were transferred to the CSMC 2010-12R Trust.

In addition, during the quarter ended June 30, 2010, the Company financed through these transactions $195.0 million of AAA-rated fixed rate bonds with third party investors for net proceeds of $197.4 million. In total, the Company financed through these transactions, including the newly re-securitized assets, $627.9 million of AAA-rated fixed rate bonds for net proceeds of $629.2 million during the quarter ended June 30, 2010.

4. Securitized Loans Held for Investment

The following table represents the Company’s securitized residential mortgage loans classified as held for investment at June 30, 2011 and December 31, 2010. At June 30, 2011 approximately 55% of the Company’s securitized loans are adjustable rate mortgage loans and 45% are fixed rate mortgage loans. All of the adjustable rate loans held for investment are hybrid adjustable rate mortgages (“ARMs”). Hybrid ARMs are mortgages that have interest rates that are fixed for an initial period (typically three, five, seven or ten years) and thereafter reset at regular intervals subject to interest rate caps. The periodic cap on all hybrid ARMs in the securitized loan portfolio range from 0.00% to 3.00% as of June 30, 2011 and December 31, 2010. The securitized loans held for investment are carried at their principal balance outstanding, plus premiums or discounts, less an allowance for loan losses.

	June 30, 2011		December 31, 2010


Securitized loans, at amortized cost	$	310,363	$	360,118
Less: allowance for loan losses		7,484		6,586
Securitized loans held for investment	$	302,879	$	353,532

The securitized loan portfolio is collateralized by prime, jumbo, first lien residential mortgages of which 55% were originated during 2008 and 43% were originated during 2007 and the remaining 2% of the loans were originated prior to 2007. A summary of key characteristics of these loans follows.

	June 30, 2011				December 31, 2010
Number of loans			446				513
Weighted average maturity (years)			26.2				26.6
Weighted average amortized loan to value			75.1	%			74.5	%
Weighted average FICO			754				755
Weighted average loan balance (in thousands)		$	688.4			$	694.3
Weighted average percentage owner occupied			91.1	%			90.5	%
Weighted average percentage single family residence			58.4	%			58.2	%
Weighted average geographic concentration	CA		34.2	%	CA		33.3	%
	FL		6.8	%	FL		6.7	%
	AZ		5.7	%	NJ		5.3	%
	NJ		5.2	%	IL		5.3	%
	IL		5.1	%	AZ		5.2	%

The following table summarizes the changes in the allowance for loan losses for the securitized mortgage loan portfolio during the quarters ended June 30, 2011 and 2010.

	June 30, 2011			June 30, 2010

Balance, beginning of period	$	8,018		$	4,554
Provision for loan losses		1,442			1,024
Charge-offs		(1,976	)		(9	)
Balance, end of period	$	7,484		$	5,569

On a quarterly basis, the Company evaluates the adequacy of its allowance for loan losses which is calculated to reflect management’s estimate of possible losses in the securitized loan portfolio at the reporting date. The Company’s provision for loan losses considers the quality of the collateral, performance of like collateral, and expectations of future market conditions as described more fully in Note 2(e). The Company’s provision for loan losses is calculated on the outstanding principal balance of the portfolio, 60+ day delinquencies for like collateral and current and expected severities for similarly underwritten loans. The Company’s allowance for loan losses at June 30, 2011 was $7.5 million, representing 244 basis points of the principal balance of the Company’s securitized mortgage loan portfolio. The Company’s allowance for loan losses at December 31, 2010 was $6.6 million, representing 185 basis points of the principal balance of the Company’s securitized mortgage loan portfolio. The following table summarizes the status of loans greater than 30 days delinquent.

	30 Days Delinquent		60 Days Delinquent		90+ Days Delinquent		Bankruptcy		Foreclosure		REO		Total
	(dollars in thousands)
June 30, 2011	$	2,868	$	0	$	3,743	$	0	$	10,215	$	1,115	$	17,941
December 31, 2010	$	1,664	$	1,554	$	9,649	$	937	$	1,295	$	1,120	$	16,219

In addition, the following table presents the loans that were modified during the period. Loans are modified by the servicer as a method of loss mitigation.

	Number of Loans Modified During Period		Pre-Modification Recorded Investment		Post Modification Recorded Invesment
			(dollars in thousands)
June 30, 2011		5	$	3,086	$	3,198
December 31, 2010		14		11,385		11,975

5. Fair Value Measurements

GAAP defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.

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

Level 3 – inputs to the valuation methodology are unobservable and significant to fair value.

The following discussion describes the methodologies utilized by the Company to fair value its financial instruments by instrument class.

Short-term Instruments

The carrying value of cash and cash equivalents, accrued interest receivable, dividends payable, accounts payable, and accrued interest payable generally approximates estimated fair value due to the short term nature of these financial instruments.

Non-Agency and Agency RMBS

Generally, the Company determines the fair value of its investment securities utilizing a pricing model that incorporates such factors as coupon, prepayment speeds, weighted average life, collateral composition, borrower characteristics, expected interest rates, life caps, periodic caps, reset dates, collateral seasoning, expected losses, expected default severity, credit enhancement, and other pertinent factors. Certain very liquid asset classes, such as Agency fixed-rate pass-throughs may be priced using independent sources such as quoted prices for “To-Be-Announced” securities. Management reviews the fair values generated by the model to determine whether prices are reflective of the current market. Management performs a validation of the fair value calculated by the pricing model by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. The Company believes the observable inputs used in its model in conjunction with dealer and/or third party pricing services meets the criteria for classification as Level 2.

Non-Agency, Non-Retained RMBS

The non-Agency, non-retained securities reflected in the consolidated financial statements are securities consolidated pursuant to the Company’s adoption of ASC 810 on January 1, 2010. These assets have been financed with third parties without recourse to the Company in the normal course of the Company’s portfolio optimization strategy. The Company fair values these assets as described above in Non-Agency and Agency RMBS. See Note 8 to these consolidated financial statements for a detailed discussion of these securities.

Interest Rate Swaps

The Company utilizes third party quotes to determine the fair values of its interest rate swaps. The Company compares the third party quotations received to its own estimate of fair value to evaluate for reasonableness. The dealer quotes incorporate common market pricing methods, including a spread measurement to the Treasury yield curve or interest rate swap curve as well as underlying characteristics of the particular contract. Interest rate swaps are modeled by the Company by incorporating such factors as the term to maturity, Treasury curve, LIBOR rates, and the payment rates on the fixed portion of the interest rate swaps.

Any changes to the valuation methodology are reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, the Company will continue to refine its valuation methodologies. The methodology utilized by the Company for the periods presented is materially unchanged. The methods used to produce a fair value calculation may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.

During times of market dislocation, as has been experienced for some time and continues to exist, the observability of prices and inputs can be reduced for certain instruments. If dealers or independent pricing services are unable to provide a price for an asset, or if the price provided by them is deemed unreliable by the Company, then the asset will be valued at its fair value as determined in good faith by the Company. In addition, validating third party pricing for the Company’s investments may be more subjective as fewer participants may be willing to provide this service to the Company. Illiquid investments typically experience greater price volatility as a ready market does not exist. As fair value is not an entity-specific measure and is a market-based approach which considers the value of an asset or liability from the perspective of a market participant, observability of prices and inputs can vary significantly from period to period. A condition such as this can cause instruments to be reclassified from Level 1 to Level 2 or Level 2 to Level 3 when the Company is unable to obtain third party pricing verification.

At June 30, 2011 and December 31, 2010, the Company classified its assets and liabilities as Level 2. The Company’s financial assets and liabilities carried at fair value on a recurring basis are valued at June 30, 2011 and December 31, 2010 as presented below.

June 30, 2011
	Level 1		Level 2		Level 3
	(dollars in thousands)
Assets:
Non-Agency RMBS
Senior	$	-	$	347,900	$	-
Subordinated		-		2,173,005		-
Senior, non-retained		-		2,176,692		-
Agency mortgage-backed securities		-		5,013,760		-

Liabilities:
Interest rate swaps		-		19,658		-

December 31, 2010
	Level 1		Level 2		Level 3
	(dollars in thousands)
Assets:
Non-Agency RMBS
Senior	$	-	$	987,685	$	-
Subordinated		-		2,210,858		-
Senior, non-retained		-		2,330,568		-
Agency mortgage-backed securities		-		2,133,584		-

Liabilities:
Interest rate swaps		-		9,988		-

In the aggregate, the Company’s fair valuations of RMBS investments were 0.40% higher than the aggregated dealer marks for the quarter ended June 30, 2011 and 0.53% higher than the aggregated dealer marks for the quarter ended June 30, 2010.

Securitized Loans Held for Investment

The Company records securitized loans held for investment when it securitizes loans and records the transaction as a “financing.” The Company carries securitized loans held for investment at principal value, plus premiums or discounts paid, less an allowance for loan losses. The Company estimates the fair value of its securitized loans held for investment at the loss adjusted expected future cash flows of the collateral. The Company models each underlying asset by considering, among other items, the nature of the underlying collateral, coupon, servicer, actual and expected defaults, actual and expected default severities, reset indices, and prepayment speeds in conjunction with market research for similar collateral performance and management’s expectations of general economic conditions in the sector and greater economy.

Repurchase Agreements

The Company records repurchase agreements at their contractual amounts including accrued interest payable. Repurchase agreements are collateralized financing transactions utilized by the Company to acquire investment securities. Due to the short term nature of these financial instruments, the Company estimated the fair value of these repurchase agreements to be the contractual obligation plus accrued interest payable at maturity.

Securitized Debt, loans held for investment and Securitized Debt, Non-Retained

The Company records securitized debt for certificates or notes financed without recourse to the Company in securitization or re-securitization transactions treated as “financings” pursuant to ASC 860. The Company carries securitized debt at the principal balance outstanding on non-retained notes associated with its securitized loans held for investment plus premiums or discounts recorded with the sale of the notes to third parties. The premiums or discounts associated with the sale of the notes or certificates are amortized over the life of the instrument. The Company estimates the fair value of securitized debt by estimating the future cash flows associated with underlying assets collateralizing the secured debt outstanding. The Company models each underlying asset by considering, among other items, the structure of the underlying security, coupon, servicer, actual and expected defaults, actual and expected default severities, reset indices, and prepayment speeds in conjunction with market research for similar collateral performance and management’s expectations of general economic conditions in the sector and greater economy.

The following table presents the carrying value and estimated fair value, as described above, of the Company’s financial instruments at June 30, 2011 and December 31, 2010.

	June 30, 2011						December 31, 2010
	Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value
	(dollars in thousands)
Non-Agency RMBS	$	4,697,597		$	4,697,597		$	5,529,111		$	5,529,111
Agency RMBS		5,013,760			5,013,760			2,133,584			2,133,584
Securitized loans held for investment		302,879			297,057			353,532			345,410
Repurchase agreements		(4,320,487	)		(4,324,517	)		(1,808,797	)		(1,811,575	)
Securitized debt		(245,984	)		(257,943	)		(289,236	)		(303,102	)
Securitized debt, non-retained		(1,904,936	)		(1,858,321	)		(1,956,079	)		(1,887,121	)
Interest rate swaps		(19,658	)		(19,658	)		(9,988	)		(9,988	)

6. Repurchase Agreements

The Company had outstanding $4.3 billion and $1.8 billion of repurchase agreements with weighted average borrowing rates of 0.28% and 0.45% and weighted average remaining maturities of 59 and 49 days as of June 30, 2011 and December 31, 2010, respectively. At June 30, 2011 and December 31, 2010, RMBS pledged as collateral under these repurchase agreements had an estimated fair value of $4.5 billion and $2.0 billion, respectively. The average daily balances of the Company’s repurchase agreements for the quarters ended June 30, 2011 and December 31, 2010 were $4.3 billion and $1.6 billion, respectively. The interest rates of these repurchase agreements are generally indexed to the one-month or the three-month LIBOR rate and re-price accordingly.

At June 30, 2011 and December 31, 2010, the repurchase agreements collateralized by RMBS had the following remaining maturities.

	June 30, 2011		December 31, 2010
	(dollars in thousands)
Overnight	$	338,100	$	-
1-30 days		1,752,942		232,265
30 to 59 days		1,541,047		970,394
60 to 89 days		73,411		545,442
90 to 119 days		-		60,696
Greater than or equal to 120 days		614,987		-
Total	$	4,320,487	$	1,808,797

At June 30, 2011 and December 31, 2010, the Company did not have an amount at risk greater than 10% of its equity with any counterparty.

7. Securitized Debt

All of the Company’s securitized debt is collateralized by residential mortgage loans or RMBS. For financial reporting purposes, the Company’s securitized debt is accounted for as a financing transaction. Thus, the residential mortgage loans or RMBS held as collateral are recorded in the assets of the Company as securitized loans held for investment or RMBS and the securitized debt is recorded as a liability in the consolidated statements of financial condition.

At June 30, 2011 the Company’s securitized debt collateralized by residential mortgage loans had a principal balance of $257.9 million. The debt matures between the years 2023 and 2038. At June 30, 2011 the debt carried a weighted average cost of financing equal to 5.49%. At December 31, 2010, the Company’s securitized debt collateralized by residential mortgage loans had a principal balance of $303.1 million. The debt matures between the years 2023 and 2038. At December 31, 2010, the debt carried a weighted average cost of financing equal to 5.52%.

At June 30, 2011 the Company’s securitized debt, non-retained, collateralized by RMBS had a principal balance of $1.9 billion. The debt matures between the years 2035 and 2047. At June 30, 2011 the debt carried a weighted average cost of financing equal to 5.18%. At December 31, 2010, the Company’s securitized debt, non-retained, collateralized by RMBS had a principal balance of $2.0 billion. The debt matures between the years 2035 and 2047. At December 31, 2010, the debt carried a weighted average cost of financing equal to 5.17%.

The following table presents the estimated principal repayment schedule of the securitized debt and securitized debt, non-retained held by the Company at June 30, 2011 and December 31, 2010, based on expected cash flows of the residential mortgage loans or RMBS, as adjusted for projected losses, collateralizing the debt. All of the securitized debt recorded in the Company’s consolidated statements of financial condition is non-recourse to the Company.

	June 30, 2011		December 31, 2010
	(dollars in thousands)
Within One Year	$	569,620	$	634,988
One to Three Years		743,046		831,305
Three to Five Years		338,626		305,953
Greater Than or Equal to Five Years		464,972		417,977
Total	$	2,116,264	$	2,190,223

Maturities of the Company’s securitized debt are dependent upon cash flows received from the underlying loans. The estimate of their repayment is based on scheduled principal payments on the underlying loans. This estimate will differ from actual amounts to the extent prepayments and/or loan losses are experienced. See Note 4 for a more detailed discussion of the loans collateralizing the securitized debt.

8. Consolidation

In June 2009, the FASB issued two new accounting standards that amended guidance applicable to the accounting for transfers of financial assets and the consolidation of Variable Interest Entities (“VIEs”) (ASC 860 and ASC 810, respectively). The primary effect of these standards was to eliminate the concept of a QPSE when transferring assets and to remove the exemption of a QSPE when applying the consolidation standard. The Company adopted these new accounting standards as of January 1, 2010.

The Company uses securitization trusts or variable interest entities in its securitization and re-securitization transactions. Prior to January 1, 2010, these variable interest entities met the definition of QSPE’s and, as such, were not subject to consolidation. Effective January 1, 2010, all such variable interest entities were considered for consolidation based on the criteria in ASC 810.

Per ASC 810, an entity shall consolidate a VIE when that entity has a variable interest that provides the reporting entity with a controlling financial interest. The assessment of the characteristics of the reporting entity’s VIE shall consider the VIEs purpose and design. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the VIEs economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE and/or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Since the Company’s inception, the Company has created VIEs for the purpose of securitizing whole mortgage loans or re-securitizing RMBS and obtaining permanent, non-recourse term financing. The Company evaluated its interest in each securitization trust VIE to determine the primary beneficiary status. The Company determined that seven trusts, one of which had been consolidated since its inception, met the requirements of consolidation. The Company determined that in these seven securitizations, based on holding all of the subordinate interests, it maintains the obligation to absorb losses and/or the right to receive benefits from the VIE that could be significant to the VIE. In addition, the Company had the power to direct activities of the trust or was determined to have the ability to control the trust due to its contribution in the purpose and design of the structure. The remaining two trusts evaluated did not meet the requirements to consolidate due to the inability to control one of the trusts and the lack of obligations to absorb losses on the other trust.

VIEs for Which the Company is the Primary Beneficiary

Based on the Company’s consolidation evaluation, the Company consolidated three VIEs on January 1, 2010 that were not previously consolidated and consolidated three VIEs that it created during 2010. The Company’s retained beneficial interest is typically the subordinated tranches of these re-securitizations and in some cases the Company may hold interests in additional tranches. The effect is the inclusion of an additional $2.2 billion of non-Agency RMBS at fair value no longer retained by the Company and the inclusion in its liabilities of $1.9 billion of non-recourse securitized debt associated with these re-securitizations.

On an ongoing basis, the Company expects that the VIEs will be fair valued as Level 2 assets. Line items pertaining to the third-party owned interests are separately stated within the Company’s consolidated financial statements and labeled as “non-retained”.

The trusts are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The assets and other instruments held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity. Additionally, the obligations of the securitization entities do not have any recourse to the general credit of any other consolidated subsidiaries, nor to the Company as the primary beneficiary. The Company’s risks associated with its involvement with these VIEs is limited to its risks and rights as a certificate holder of the bonds it has retained. See Note 5 for a discussion of the fair value measurement of the assets and liabilities.

The assets of the securitization entities consolidated by the Company are similar in nature to the Company’s portfolio as a whole. The securitization entities are all composed of RMBS of the quality and characteristics of assets reflected in the RMBS classifications found in the Company’s consolidated financial statements. See Note 3 for a discussion of the securities characteristics of the portfolio.

The table below presents the assets and liabilities of consolidated entities as of January 1, 2010. The cumulative effect adjustment reflects the reversal of realized gains of $98.1 million previously recorded on the sales of these newly consolidated trusts net of the additional accretion of discounts due to consolidating the trusts.

	Carrying Value (1)
	(dollars in thousands)
Assets
Non-Agency RMBS
Senior, non-retained	$	1,114,034
Liabilities
Securitized debt, non-retained		1,202,221
Net assets and liabilities of newly consolidated entities		(88,187	)
Cumulative effect adjustment to retained earnings upon adoption	$	(88,187	)

(1) Carrying value represents the amount the assets would have been recorded at in the consolidated financial statements at January 1, 2010 had they been recorded in the consolidated financial statements on the date the Company first met the conditions for consolidation.

The cumulative effect of adopting ASC 810 on January 1, 2010 based on the shares outstanding on that date was to reduce the beginning book value of the Company by $0.13 per share.

The table below reflects the assets and liabilities recorded in the consolidated statements of financial condition related to the consolidated securitization entities as of June 30, 2011 and December 31, 2010.

	June 30, 2011		December 31, 2010
	(dollars in thousands)
Assets
Non-Agency RMBS	$	3,826,486	$	4,357,631
Securitized loans		302,879		353,532
Liabilities
Securitized debt, non-retained	$	1,904,936	$	1,956,079
Securitized debt, loans held for investment		245,984		289,236

The consolidation of these securitization entities increases both the income and expense recorded in the consolidated statements of operations for the Company as detailed in the table below.

	For the Quarter Ended
	June 30, 2011			June 30, 2010
	(dollars in thousands)
Interest income, non-retained	$	28,428		$	49,829
Interest income, securitized loans		4,203			4,421
Interest expense, non-retained		28,312			21,421
Interest expense, securized loans		4,522			4,758
Net interest income	$	(203	)	$	28,071

	For the Six Months Ended
	June 30, 2011			June 30, 2010
	(dollars in thousands)
Interest income, non-retained	$	49,587		$	100,690
Interest income, securitized loans		8,702			11,074
Interest expense, non-retained		55,887			55,251
Interest expense, securitized loans		9,472			9,563
Net interest income	$	(7,070	)	$	46,950

A discussion of the significant accounting policies of the Company to record income and expense is included in Note 2 to these consolidated financial statements. The effect of adopting ASC 810 based on the weighted average shares outstanding had no material effect on the net interest income of the Company for the six months ended June 30, 2011.

The effect of the consolidation of these securitization entities on the consolidated statements of cash flows for the Company is presented in the table below for the periods presented.

	For the Six Months Ended
	June 30, 2011			June 30, 2010
	(dollars in thousands)
Proceeds from securitized debt borrowings, non-retained	$	311,012		$	1,127,872
Payments on securitized debt borrowings, non-retained		(362,155	)		(229,362	)
Payments on securitized debt borrowings, loans held for investment		(43,252	)		(48,417	)
Increase (decrease) in accrued interest receivable		(634	)		(9,345	)
Increase (decrease) in accrued interest payable		454			9,212
Net cash flows, non-retained	$	(94,575	)	$	849,960

VIEs for Which the Company is Not the Primary Beneficiary

The table below represents the carrying amounts and classification of assets recorded on the Company’s consolidated financial statements related to its variable interests in non-consolidated VIEs, as well as its maximum exposure to loss as a result of its involvement with these VIEs.

	June 30, 2011				December 31, 2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
Assets
Non-Agency RMBS
Senior	$	338	$	455	$	400	$	559
Subordinated		6,617		6,087		7,664		6,485
Agency RMBS		2,255		2,619		2,680		2,530
Total	$	9,210	$	9,161	$	10,744	$	9,574

The Company’s involvement with VIEs for which it is not the primary beneficiary generally are in the form of purchasing securities issued by the trusts similar to its investments in other RMBS that are not part of a trust it has evaluated for consolidation. The Company’s maximum exposure to loss in these entities is represented by the fair value of these assets. This amount does not include OTTI or other write-downs that the Company previously recognized through earnings.

9. Interest Rate Swaps

In connection with the Company’s interest rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts. These derivative financial instrument contracts do not qualify as hedges under ASC 815 Derivatives and Hedging. As of June 30, 2011 and December 31, 2010, such instruments are comprised of interest rate swaps, which in effect modify the cash flows on repurchase agreements. The use of interest rate swaps creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts. In the event of a default by the counterparty, the Company could have difficulty obtaining its RMBS pledged as collateral for swaps. The Company does not anticipate any defaults by its counterparties.

The Company’s swaps are used to lock in a fixed rate related to a portion of its current and anticipated repurchase agreements.

The table below summarizes the location and fair value of interest rate swaps reported in the Consolidated Statements of Financial Condition as of June 30, 2011 and December 31, 2010.

	Location on Consolidated Statement of Financial Condition	Notional Amount		Net Estimated Fair Value/Carrying Value			Net Estimated Fair Value of RMBS Pledged as Collateral
	(dollars in thousands)

June 30, 2011	Assets	$	-	$	-		$	-
June 30, 2011	Liabilities	$	950,000	$	(19,658	)	$	23,295
December 31, 2010	Assets	$	-	$	-		$	-
December 31, 2010	Liabilities	$	450,000	$	(9,988	)	$	12,818

The effect of the Company’s interest rate swaps on the Consolidated Statements of Operations and Comprehensive Income (Loss) is presented below.

	Location on Consolidated Statements of Operations and Comprehensive Income (Loss)
	Realized Gains (Losses) on Interest Rate Swaps			Unrealized Gain (Losses) on Interest Rate Swaps
	(dollars in thousands)

For the Quarter Ended:
June 30, 2011	$	(4,297	)	$	(19,500	)
June 30, 2010	$	(699	)	$	(11,237	)

For the Six Months Ended:
June 30, 2011	$	(7,144	)	$	(9,669	)
June 30, 2010	$	(699	)	$	(11,237	)

The weighted average pay rate on the Company’s interest rate swaps at June 30, 2011 was 2.08% and the weighted average receive rate was 0.19%. The weighted average pay rate on the Company’s interest rate swaps at June 30, 2010 was 2.59% and the weighted average receive rate was 0.35%.

The Company enters into interest rate swap contracts with counterparties utilizing standard International Swap Dealers Association Master Agreements (“ISDA”) that create exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts. These ISDAs have terms and covenants, the breach of which would permit the counterparty to terminate the agreement at the time when the Company is in a net loss position.

10. Common Stock

On January 28, 2011 the Company entered into an equity distribution agreement with FIDAC and UBS Securities LLC (“UBS”). Through this agreement, the Company may sell through UBS, as its sales agent, up to 125,000,000 shares of its common stock in ordinary brokers’ transactions at market prices or other transactions as agreed between the Company and UBS. The Company did not sell any shares of its common stock under the equity distribution agreement during the six months ended June 30, 2011.

On September 24, 2009, the Company implemented a dividend reinvestment and share purchase plan (“DRSPP”). The DRSPP provides holders of record of its common stock an opportunity to automatically reinvest all or a portion of their cash distributions received on common stock in additional shares of our common stock as well as to make optional cash payments to purchase shares of our common stock. Persons who are not already stockholders may also purchase our common stock under the plan through optional cash payments. The DRSPP is administered by the Administrator, The Bank of New York Mellon. During the six months ended June 30, 2011 the Company raised $542 thousand by issuing 134,538 shares through the DRSPP. During the six months ended June 30, 2010 the Company raised $123 thousand by issuing 32,138 shares through the DRSPP.

During the quarter ended June 30, 2011 the Company declared dividends to common shareholders totaling $133.4 million or $0.13 per share. During the quarter ended June 30, 2010, the Company declared dividends to common shareholders totaling $130.4 million or $0.17 per share.

During the six months ended June 30, 2011 the Company declared dividends to common shareholders totaling $277.1 million or $0.27 per share. During the six months ended June 30, 2010, the Company declared dividends to common shareholders totaling $244.2 million or $0.34 per share.

On March 31, 2010, the Company announced the sale of 85,000,000 shares of common stock at a price of $3.61 per share in a public offering. In addition, the underwriters exercised the option to purchase an additional 12,750,000 shares of common stock to cover overallotments. The aggregate net proceeds the Company received before expenses in this sale were approximately $352.7 million. This sale was completed on April 7, 2010.

On June 22, 2010, the Company announced the sale of 100,000,000 shares of common stock at a price of $3.61 per share in a public offering. In addition, the underwriters exercised the option to purchase an additional 15,000,000 shares of common stock to cover overallotments. The aggregate net proceeds the Company received before expenses in this sale were approximately $415.0 million. This sale was completed on June 28, 2010.

There was no preferred stock issued or outstanding as of June 30, 2011 and December 31, 2010.

11. Long Term Incentive Plan

The Company has adopted a long term stock incentive plan to provide incentives to its independent directors and employees of FIDAC and its affiliates, to stimulate their efforts towards the Company’s continued success, long-term growth and profitability and to attract, reward and retain personnel and other service providers. The incentive plan authorizes the Compensation Committee of the board of directors to grant awards, including incentive stock options, non-qualified stock options, restricted shares and other types of incentive awards. The specific award granted to an individual is based upon, in part, the individual’s position within FIDAC, the individual’s position within the Company, his or her contribution to the Company’s performance, market practices, as well as the recommendations of FIDAC. The incentive plan authorizes the granting of options or other awards for an aggregate of the greater of 8.0% of the outstanding shares of the Company’s common stock up to a ceiling of 40,000,000 shares.

On January 2, 2008, the Company granted restricted stock awards in the amount of 1,301,000 shares to FIDAC’s employees and the Company’s independent directors. The awards to the independent directors vested on the date of grant and the awards to FIDAC’s employees vest quarterly over a period of 10 years. Of these shares, as of June 30, 2011, 479,400 shares have vested and 44,525 shares were forfeited or cancelled.

As of June 30, 2011 there was $14.6 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the long term incentive plan, based on the closing price of the shares on the grant date. That cost is expected to be recognized over a weighted-average period of 6.5 years. The total fair value of shares vested, less those forfeited, during the quarter ended June 30, 2011 was $121 thousand, based on the closing price of the stock on the vesting date.

12. Income Taxes

As long as the Company qualifies as a REIT, the Company is not subject to Federal income tax to the extent that it makes qualifying distributions to its stockholders, and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. Most states recognize REIT status as well. During the quarter ended June 30, 2011 the Company recorded $118 thousand in income tax expense related to earnings of its TRS and state income taxes. During the quarter ended June 30, 2010, the Company recorded $1,000 income tax expense related to state and local minimum tax liabilities.

In general, common stock cash dividends declared by the Company will be considered ordinary income to stockholders for income tax purposes. From time to time, a portion of the Company’s dividends may be characterized as capital gains or return of capital. For the quarters ended June 30, 2011 and December 31, 2010, the Company estimates that all income distributed in the form of dividends will be characterized as ordinary income.

The Company files tax returns in several U.S. jurisdictions, including New York State and New York City. The 2007 through 2010 tax years remain open to U.S. federal, state and local tax examinations.

13. Credit Risk and Interest Rate Risk

The Company’s primary components of market risk are credit risk and interest rate risk. The Company is subject to interest rate risk in connection with its investments in Agency and non-Agency residential mortgage loans and credit sensitive RMBS. When the Company assumes interest rate risk, it attempts to minimize interest rate risk through asset selection, hedging and matching the income earned on mortgage assets with the cost of related liabilities. The Company is subject to interest rate risk, primarily in connection with its investments in fixed-rate and adjustable-rate RMBS, residential mortgage loans, and borrowings under repurchase agreements. The Company attempts to minimize credit risk through due diligence and asset selection by purchasing loans underwritten to agreed-upon specifications of selected originators. The Company has established a whole loan target market including prime borrowers with FICO scores generally greater than 650, Alt-A documentation, geographic diversification, owner-occupied property, and moderate loan to value ratio. These factors are considered to be important indicators of credit risk.

14. Management Agreement and Related Party Transactions

The Company has entered into a management agreement with FIDAC, which provided for an initial term through December 31, 2010 with an automatic one-year extension option and subject to certain termination rights. On November 18, 2010, the Compensation Committee of the Board of Directors renewed the management agreement through December 31, 2011. The Company pays FIDAC a quarterly management fee equal to 1.50% per annum of the gross Stockholders’ Equity (as defined in the management agreement) of the Company.

Management fees accrued and paid to FIDAC for the quarters ended June 30, 2011 and 2010 were $13.2 million and $9.2 million, respectively. Management fees accrued and paid to FIDAC for the six months ended June 30, 2011 and 2010 were $25.9 million and $17.4 million, respectively.

The Company is obligated to reimburse FIDAC for its costs incurred under the management agreement. In addition, the management agreement permits FIDAC to require the Company to pay for its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses that FIDAC incurred in the operation of the Company. These expenses are allocated between FIDAC and the Company based on the ratio of the Company’s proportion of gross assets compared to all remaining gross assets managed by FIDAC as calculated at each quarter end. FIDAC and the Company will modify this allocation methodology, subject to the Company’s board of directors’ approval if the allocation becomes inequitable (i.e., if the Company becomes very highly leveraged compared to FIDAC’s other funds and accounts). During the quarter and six months ended June 30, 2011 the Company reimbursed FIDAC approximately $170,000 and $316,000 for such expenses. During the quarter and six months ended June 30, 2010, the Company reimbursed FIDAC approximately $148,000 and $148,000 for such expenses.

On March 1, 2011, the Company entered into an administrative services agreement with RCap Securities Inc., (“RCap”). RCap is a SEC registered broker-dealer and a wholly-owned subsidiary of Annaly, to clear its securities trades and RCap receives customary market-based fees and charges in return for such services. During the quarter and six months ended June 30, 2011, administrative fees paid to RCAP were $55 thousand.

During the quarters ended June 30, 2011 and June 30, 2010, 31,600 shares and 33,725 shares of restricted stock issued by the Company to FIDAC’s employees vested, respectively, as discussed in Note 11. During the quarter ended June 30, 2011 and June 30, 2010, 938 shares and 2,112 shares of restricted stock issued by the Company to FIDAC’s employees were forfeited, respectively.

During the six months ended June 30, 2011 and June 30, 2010, 63,200 shares and 65,950 shares of restricted stock issued by the Company to FIDAC’s employees vested, respectively. During the quarter ended June 30, 2011 and June 30, 2010, 1,500 shares and 2,697 shares of restricted stock issued by the Company to FIDAC’s employees were forfeited, respectively.

In April 2009, the Company entered into a Securities Industry and Financial Markets Association standard preprinted form Master Repurchase Agreement with RCap Securities, Inc. This standard agreement does not contain any sort of liquidity, net worth or other similar types of positive or negative covenants. Rather, the agreement contains covenants that require the buyer and seller of securities to deliver collateral or securities, and similar covenants which are customary in master repurchase agreements. At June 30, 2011 and December 31, 2010, the Company had no financing under this agreement. The Company has been in compliance with all covenants of this agreement since it entered into this agreement.

In March 2008, the Company entered into a Securities Industry and Financial Markets Association standard preprinted form Master Repurchase Agreement with Annaly. This standard agreement does not contain any sort of liquidity, net worth or other similar types of positive or negative covenants. Rather, the agreement contains covenants that require the buyer and seller of securities to deliver collateral or securities, and similar covenants which are customary in master repurchase agreements. At June 30, 2011 and December 31, 2010, the Company had no financing under this agreement. The Company has been in compliance with all covenants of this agreement since it entered into this agreement.

15. Commitments and Contingencies

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any unreported contingencies at June 30, 2011.

16. Subsequent Events

The Company has reviewed subsequent events and determined that no subsequent events occurred that would require accrual or additional disclosure.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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 projected financial and operating results;

our ability to maintain existing financing arrangements, obtain future financing arrangements and the terms of such arrangements;

general volatility of the securities markets in which we invest;

the impact of and changes to various government programs;

our expected investments;

changes in the value of our investments;

interest rate mismatches between our investments and our borrowings used to fund such purchases;

changes in interest rates and mortgage prepayment rates;

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

rates of default or decreased recovery rates on our investments;

prepayments of the mortgage and other loans underlying our mortgage-backed or other asset-backed securities;

the degree to which our hedging strategies may or may not protect us from interest rate volatility;

impact of and changes in governmental regulations, tax law and rates, accounting guidance, and similar matters;

availability of investment opportunities in real estate-related and other securities;

availability of qualified personnel;

estimates relating to our ability to make distributions to our stockholders in the future;

our understanding of our competition; and

market trends in our industry, interest rates, the debt securities markets or the general economy.

The 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. Some of these factors are described under the caption ‘‘Risk Factors’’ in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. If a change occurs, our business, financial condition, liquidity and results of operations 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.

Executive Summary

We acquire, either directly or indirectly through our subsidiaries, residential mortgage-backed securities, or RMBS, residential mortgage loans, commercial mortgage loans, real estate related securities and various other asset classes. We are externally managed by Fixed Income Discount Advisory Company, which we refer to as FIDAC or our Manager. FIDAC is a fixed-income investment management company that is registered as an investment adviser with the Securities and Exchange Commission, or SEC. FIDAC is a wholly owned subsidiary of Annaly Capital Management, Inc., or Annaly. FIDAC has a broad range of experience in managing investments in Agency RMBS, which are mortgage pass-through certificates, collateralized mortgage obligations, or CMOs, and other RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, non-Agency RMBS, collateralized debt obligations, or CDOs, and other real estate related investments.

We have elected and intend to qualify to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2007. Our targeted asset classes and the principal investments we expect to make in each are as follows:

Asset Class

Principal Investments

RMBS	●	Non-Agency RMBS, including investment-grade and non-investment grade classes, including the BB-rated, B-rated and non-rated classes.

	●	Agency RMBS.

Residential Mortgage Loans	●	Prime mortgage loans, which are mortgage loans that conform to the underwriting guidelines of Fannie Mae and Freddie Mac, which we refer to as Agency Guidelines; and jumbo prime mortgage loans, which are mortgage loans that conform to the Agency Guidelines except as to loan size.

	●	Alt-A mortgage loans, which are mortgage loans that may have been originated using documentation standards that are less stringent than the documentation standards applied by certain other first lien mortgage loan purchase programs, such as the Agency Guidelines, but have one or more compensating factors such as a borrower with a strong credit or mortgage history or significant assets.

	●	FHA/VA insured loans, which are mortgage loans that comply to the underwriting guidelines of the Federal Housing Administration (FHA) or Department of Veteran Affairs (VA) and which are guaranteed by the FHA or VA, respectively.

Commercial Mortgage Loans	●	First or second lien loans secured by multifamily properties, which are residential rental properties consisting of five or more dwelling units; and mixed residential or other commercial properties; retail properties; office properties; or industrial properties, which may or may not conform to the Agency Guidelines.

Other Asset-Backed Securities	●	CMBS.

	●	Debt and equity tranches of CDOs

	●	Consumer and non-consumer ABS, including investment-grade and non-investment grade classes, including the BB-rated, B-rated and non-rated classes.

Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. We intend to achieve this objective by investing in a broad class of financial assets to construct an investment portfolio that is designed to achieve attractive risk-adjusted returns and that is structured to comply with the various federal income tax requirements for REIT status and to maintain our exemption from the Investment Company Act of 1940, or the 1940 Act.

Since we commenced operations in November 2007, we have focused our investment activities on acquiring non-Agency RMBS and on purchasing residential mortgage loans that have been originated by select high-quality originators, including the retail lending operations of leading commercial banks. Our investment portfolio is weighted toward non-Agency RMBS. At June 30, 2011 approximately 71.5% of our investment portfolio’s principal value was non-Agency RMBS, 25.5% of our investment portfolio’s principal value was Agency RMBS, and 3.0% of our investment portfolio’s principal value was secured residential mortgage loans. At December 31, 2010, approximately 83.4% of our investment portfolio’s principal value was non-Agency RMBS, 12.6% of our investment portfolio’s principal value was Agency RMBS, and 4.0% of our investment portfolio’s principal value was secured residential mortgage loans. We expect that over the near term our investment portfolio will continue to be weighted toward RMBS, subject to maintaining our REIT qualification and our 1940 Act exemption.

Our investment strategy is intended to take advantage of opportunities in the current interest rate and credit environment. We will adjust our strategy to changing market conditions by shifting our asset allocations across these various asset classes as interest rate and credit cycles change over time. We believe that our strategy, combined with FIDAC’s experience, will enable us to pay dividends and achieve capital appreciation throughout changing market cycles. We expect to take a long-term view of assets and liabilities, and our reported earnings and mark-to-market valuations at the end of a financial reporting period will not significantly impact our objective of providing attractive risk-adjusted returns to our stockholders over the long-term.

We use leverage to seek to increase our potential returns and to fund the acquisition of our assets. Our income is generated primarily by the difference, or net spread, between the income we earn on our assets and the cost of our borrowings. We expect to finance our investments using a variety of financing sources including, when available, repurchase agreements, warehouse facilities, securitizations, commercial paper and term financing CDOs. We may manage our debt by utilizing interest rate hedges, such as interest rate swaps, to reduce the effect of interest rate fluctuations related to our debt.

Trends

We expect the results of our operations to be affected by various factors, many of which are beyond our control. Our results of operations will primarily depend on, among other things, the level of our net interest income, the market value of our assets, and the supply of and demand for such assets. Our net interest income, which reflects the amortization of purchase premiums and accretion of discounts, varies primarily as a result of changes in interest rates, borrowing costs, credit losses, and prepayment speeds, which is a measurement of how quickly borrowers pay down the unpaid principal balance on their mortgage loans.

Prepayment Speeds. Prepayment speeds, as reflected by the Constant Prepayment Rate, or CPR, vary according to interest rates, the type of investment, conditions in financial markets, and other factors, none of which can be predicted with any certainty. In general, when interest rates rise, it is relatively less attractive for borrowers to refinance their mortgage loans, and as a result, prepayment speeds tend to decrease. When interest rates fall, prepayment speeds tend to increase. For mortgage loan and RMBS investments purchased at a premium, as prepayment speeds increase, the amount of income we earn decreases because the purchase premium we paid for the bonds amortizes faster than expected. Conversely, decreases in prepayment speeds result in increased income and can extend the period over which we amortize the purchase premium. For mortgage loan and RMBS investments purchased at a discount, as prepayment speeds increase, the amount of income we earn increases because of the acceleration of the accretion of the discount into interest income. Conversely, decreases in prepayment speeds result in decreased income and can extend the period over which we accrete the purchase discount into interest income. In the recent past, the correlation between falling interest rates and increasing prepayment speeds has not evidenced itself for certain asset classes. Due to continuing economic hardship in the general economy, some borrowers have been unable to refinance their loans to lower interest rates as credit conditions remain restrictive.

Rising Interest Rate Environment. As indicated above, as interest rates rise, prepayment speeds generally decrease. Rising interest rates, however, increase our financing costs which may result in a net negative impact on our net interest income. In addition, if we acquire Agency and non-Agency RMBS collateralized by monthly reset adjustable-rate mortgages, or ARMs, and three- and five-year hybrid ARMs, such interest rate increases could result in decreases in our net investment income, as there could be a timing mismatch between the interest rate reset dates on our RMBS portfolio and the financing costs of these investments. We expect, that our fixed-rate assets would decline in value in a rising interest rate environment and that our net interest spreads on fixed rate assets could decline in a rising interest rate environment to the extent such assets are financed with floating rate debt.

Falling Interest Rate Environment. As interest rates fall, prepayment speeds generally increase. Falling interest rates, however, decrease our financing costs which may result in a net positive impact on our net interest income. In addition, if we acquire Agency and non-Agency RMBS collateralized by monthly reset adjustable-rate mortgages, or ARMs, and three- and five-year hybrid ARMs, such interest rate decreases could result in increases in our net investment income, as there could be a timing mismatch between the interest rate reset dates on our RMBS portfolio and the financing costs of these investments. We expect, however, that our fixed-rate assets would increase in value in a falling interest rate environment and that our net interest spreads on fixed rate assets could increase in a falling interest rate environment to the extent such assets are financed with floating rate debt.

Credit Risk. One of our strategic focuses is acquiring assets which we believe to be of high credit quality. We believe this strategy will generally keep our credit losses and financing costs low. We also focus on acquiring distressed non-Agency RMBS that have been downgraded because of defaults in the mortgages collateralizing such RMBS. When we acquire such RMBS we attempt to purchase it at a price such that its loss-adjusted return profile is in line with our targeted yields. We retain the risk of potential credit losses on all of the residential mortgage loans we hold in our portfolio as well as all of the non-Agency RMBS. We attempt to mitigate credit risk in the asset selection process. Prior to the purchase of investments, we conduct a credit-risk based analysis of the collateral securing our investment that includes examining borrower characteristics, geographic concentrations, current and projected delinquencies, current and projected severities, and actual and expected prepayment speeds among other characteristics to formulate expected losses.

Size of Investment Portfolio. The size of our investment portfolio, as measured by the aggregate unpaid principal balance of our mortgage loans and aggregate principal balance of our mortgage related securities and the other assets we own is also a key revenue driver. Generally, as the size of our investment portfolio grows, the amount of interest income we receive increases. The larger investment portfolio, however, drives increased expenses as we incur additional interest expense to finance the purchase of our assets.

Summary. Our net interest income per share, including the effect of payments on interest rate swaps and credit losses related to principal write-downs, for the quarter and six months ended June 30, 2011 and June 30, 2010 decreased in part due to the increase in credit losses and an increase in the costs paid on the interest rate hedges. As expected, credit losses on the non-Agency portfolio increased for the quarter and six months ending June 30, 2011 as compared to June 30, 2010. As the credit enhancement of our securities is eroded we expect the portfolio to continue to record credit losses. We believe the significant discount at which we purchased the assets provides us with sufficient protection against actual net losses on our investments while we hold them to maturity. In addition, we added additional interest rate swaps during the current quarter that increased our net interest expense. Interest income earned on our assets, including the effect of credit losses associated with principal write downs, declined due to a declining weighted average coupon on the portfolio, the change in the asset composition of the portfolio to include more amortizing rather than accreting assets, and to the increase principal write downs on our non-Agency portfolio for the quarter and six months ending June 30, 2011 as compared to June 30, 2010.

Financial Condition

Estimated Economic Book Value

This Management Discussion and Analysis section contains analysis and discussion of financial information that utilizes or presents ratios based on GAAP book value. The table and discussion below present our estimated economic book value. We calculate and disclose this non-GAAP measurement because we believe it represents our estimated economic book value at the measurement date.

On January 1, 2010 GAAP required us to consolidate certain re-securitization transactions we consummated during 2009 and 2010. In these re-securitizations, we transferred assets to the re-securitization trusts, which issued tranches of senior and subordinate notes or certificates. We sold the senior tranches and therefore have no continuing involvement in these trusts other than being a holder of notes or certificates issued by the trusts, with the same rights of other holders of the notes or certificates. The notes and certificates we own that were issued by the trusts are largely subordinated interests in those trusts. The trusts have no recourse to our assets other than pursuant to a breach by us of the transaction documents related to the transfer of the assets by us to the trusts.

GAAP requires us to fair value and present the assets of these trusts on our consolidated statements of financial condition as if we still owned the underlying securities we transferred to the trusts. We present the assets related to the consolidated trusts in our consolidated statements of financial position as a component of non-Agency RMBS identified as senior, non-retained, and the liabilities as securitized debt, non-retained. We have fair valued the underlying securities we transferred to the trusts for the calculation of GAAP book value in accordance with our pricing policy, as described more fully in our critical accounting estimates, and recorded the corresponding liability for the notes or certificates sold to third parties. All fair value adjustments are recorded in Other Comprehensive Income.

However, because of the governing documents of the trusts we are unable to sell the underlying securities we transferred into the trusts as we no longer own those securities, we also present our estimated economic book value. We believe this measure represents the estimated value of the securities issued by these trusts that we own. In contrast to GAAP book value, our estimated economic book value considers only the assets we own or are able to dispose of, pledge, or otherwise monetize. To determine our estimated economic book value, we fair value the notes or certificates issued by the re-securitization trusts that we actually own in accordance with our pricing policy. Accordingly, our estimated economic book value does not include assets or liabilities for which we have no continuing involvement, specifically the notes or certificates of the re-securitization trusts that were sold to third parties. We believe this estimate represents the value of the assets that we hold in our portfolio should we decide to sell, pledge, or otherwise dispose of assets as of the measurement date.

At June 30, 2011 the difference between GAAP book value and estimated economic book value was determined to be $271.8 million. At December 31, 2010 the difference between GAAP book value and estimated economic book value was determined to be $374.5 million. This difference is primarily driven by the nature of the assets we have retained in these re-securitization transactions as compared to the nature of underlying securities in these transactions. In these re-securitization transactions, we retained the subordinated, typically non-rated, first loss notes or certificates issued by the re-securitization trusts. These securities are complex, typically locked out as to principal repayment, relatively illiquid, and do not necessarily appreciate or depreciate in tandem with the broader non-Agency RMBS market or with the underlying securities owned by the trusts. The tables below present the adjustments to GAAP book value that we believe necessary to adequately reflect our calculation of estimated economic book value as of June 30, 2011 and December 31, 2010.

	June 30, 2011
	GAAP Book Value		Adjustments			Estimated Economic Book Value
	(dollars in thousands)
Assets:
Non-Agency Mortgage-Backed Securities, at fair value
Senior	$	347,900	$	-		$	347,900
Subordinated		2,173,005		-			2,173,005
Senior, non-retained		2,176,692		(2,176,692	)		-
Agency Mortgage-Backed Securities, at fair value		5,013,760		-			5,013,760
Securitized loans held for investment, net of allowance for loan losses		302,879		-			302,879
Other current assets		74,873		-			74,873
Total assets	$	10,089,109	$	(2,176,692	)	$	7,912,417


Repurchase agreements		4,320,487		-			4,320,487
Securitized debt		245,984		-			245,984
Securitized debt, non-retained		1,904,936		(1,904,936	)		-
Other liabilities		179,163		-			179,163
Total liabilities		6,650,570		(1,904,936	)		4,745,634


Total stockholders' equity		3,438,539		(271,756	)		3,166,783
Total liabilities and stockholders' equity	$	10,089,109	$	(2,176,692	)	$	7,912,417

Book Value Per Share	$	3.35	$	(0.27	)	$	3.08


	December 31, 2010
	GAAP Book Value		Adjustments			Estimated Economic Book Value
Assets:	(dollars in thousands)
Non-Agency Mortgage-Backed Securities, at fair value
Senior	$	987,685	$	-		$	987,685
Subordinated		2,210,858		-			2,210,858
Senior, non-retained		2,330,568		(2,330,568	)		-
Agency Mortgage-Backed Securities, at fair value		2,133,584		-			2,133,584
Securitized loans held for investment, net of allowance for loan losses		353,532		-			353,532
Other current assets		57,473		-			57,473
Total assets	$	8,073,700	$	(2,330,568	)	$	5,743,132


Repurchase agreements		1,808,797		-			1,808,797
Securitized debt		289,236		-			289,236
Securitized debt, non-retained		1,956,079		(1,956,079	)		-
Other liabilities		336,582		-			336,582
Total liabilities		4,390,694		(1,956,079	)		2,434,615


Total stockholders' equity		3,683,006		(374,489	)		3,308,517
Total liabilities and stockholders' equity	$	8,073,700	$	(2,330,568	)	$	5,743,132

Book Value Per Share	$	3.59	$	(0.36	)	$	3.23

Our estimate of economic book value has important limitations. Our estimate of fair value is as of a point in time and subject to significant judgment. Other market participants may derive a different fair value for each asset than we calculate. Should we sell the assets in our portfolio, we may realize materially different proceeds from the sale than we have estimated as of the reporting date.

Although we believe that the calculation of estimated economic value described above helps our management and investors understand the fair value of the assets we own and the liabilities for which we are legally obligated, it is of limited usefulness as an analytical tool. It does not take account of the fair value of assets that we do not own, but regarding which we will be the principal beneficiary of increases in value above, and will bear the principal burden of reductions in value to below, what currently is anticipated. Therefore, the estimated economic book value should not be viewed in isolation and is not a substitute for book value computed in accordance with GAAP.

Portfolio Review

At June 30, 2011 our portfolio consisted of $4.7 billion of non-Agency RMBS, $5.0 billion of Agency RMBS, at fair value, and $302.9 million of securitized mortgage loans, at amortized cost. At December 31, 2010, our portfolio consisted of $5.5 billion of non-Agency RMBS, $2.1 billion of Agency RMBS and $353.5 million of securitized mortgage loans.

The following table summarizes certain characteristics of our portfolio at June 30, 2011 and 2010, and December 31, 2010. Asset types under “Portfolio Composition, at principal value” represent the issued trust certificates and not the underlying collateral held by the variable interest entities consolidated pursuant to ASC 810:

		June 30, 2011			June 30, 2010			December 31, 2010

Interest earning assets at period-end *		$	10,014,236		$	6,595,363		$	8,016,227
Interest bearing liabilities at period-end		$	6,471,407		$	3,801,485		$	4,054,112
Leverage at period-end		1.9:1			1.3:1			1.1:1
Leverage at period-end (recourse)		1.3:1			0.5:1			0.5:1
Portfolio Composition, at principal value
Non-Agency RMBS			71.5	%		80.5	%		83.4	%
Senior			0.0	%		5.2	%		4.0	%
Senior, interest only			33.6	%		25.9	%		35.7	%
Subordinated			26.0	%		30.2	%		29.8	%
Subordinated, interest only			1.6	%		2.2	%		1.8	%
Senior, non-retained			10.3	%		17.0	%		12.1	%
Agency RMBS			25.5	%		13.4	%		12.6	%
Securitized loans			3.0	%		6.1	%		4.0	%
Fixed-rate percentage of portfolio			80.4	%		72.4	%		51.7	%
Adjustable-rate percentage of portfolio			19.6	%		27.6	%		48.3	%
Annualized yield on average interest earning assets for the quarter ended**			6.64	%		8.47	%		8.17	%
Annualized cost of funds on average borrowed funds for the quarter ended***			2.44	%		2.93	%		4.10	%

*	Excludes cash and cash equivalents.
**	Includes the effect of realized loss on principal write-downs.
***	Includes the effect of interest paid on interest rate hedges.

The following table presents details of each asset class in our portfolio at June 30, 2011. The principal or notional value represents the interest income earning balance of each class. The weighted average amortized cost, fair value, coupon, yield, and CPR at period-end are weighted by each investment’s respective principal/notional value in the asset class. The figure presenting the annualized yield over the current quarter is the annualized interest income earned on the asset class during the quarter, including the effect of principal write-downs, divided by the average of the beginning and ending amortized cost of the asset class.

	June 30, 2011
	Principal or Notional Value at Period-End		Weighted Average Amortized Cost Basis at Period-End		Weighted Average Fair Value at Period-End		Weighted Average Coupon at Period-End			Weighted Average Yield (Loss Adjusted) at Period-End			Annualized Yield Over Current Quarter*			Weighted Average 3 Month CPR at Period- End
Non-Agency Mortgage-Backed Securities
Senior	$	6,967	$	98.67	$	97.03		1.15	%		2.59	%		1.95	%		16	%
Senior, interest only	$	6,387,919	$	6.35	$	5.34		1.91	%		14.07	%		4.12	%		17	%
Subordinated	$	4,938,497	$	48.68	$	43.32		4.05	%		13.61	%		18.40	%		17	%
Subordinated, interest only	$	301,619	$	9.95	$	11.15		2.93	%		23.96	%		28.36	%		14	%
Senior, non-retained	$	1,948,002	$	98.00	$	111.74		5.17	%		4.58	%		5.70	%		16	%
Agency Mortgage-Backed Securities	$	4,849,630	$	102.81	$	104.41		4.71	%		4.34	%		4.34	%		7	%
Securitized loans
Senior	$	252,159	$	101.19	$	101.19		5.47	%		5.35	%		2.35	%		24	%
Senior, interest only	$	266,092	$	0.01	$	0.01		0.40	%		100.00	%		4428.57	%		24	%
Subordinated	$	54,880	$	100.54	$	100.54		5.16	%		-5.04	%		16.49	%		26	%

* Includes the effect of realized loss on principal write-downs.

Our portfolio is primarily comprised of non-Agency RMBS which is subject to risk of loss with regard to principal repayment. The following table summarizes certain characteristics of our non-Agency portfolio at June 30, 2011 and December 31, 2010. The information presented in the table below includes senior, non-retained non-Agency RMBS consolidated pursuant to the adoption of ASC 810 on January 1, 2010

	June 30, 2011				December 31, 2010
Number of securities in portfolio			523				581
Weighted average maturity (years)			27.0				27.4
Weighted average amortized loan to value			72.3	%			72.5	%
Weighted average FICO			717.2				717.3
Weighted average loan balance (in thousands)		$	470.1			$	447.6
Weighted average percentage owner occupied			84.3	%			83.3	%
Weighted average percentage single family residence			64.1	%			63.1	%
Weighted average current credit enhancement			12.7	%			16.0	%
Weighted average geographic concentration	CA		38.1	%	CA		57.8	%
	FL		8.7	%	FL		13.3	%
	NY		5.5	%	NY		7.3	%
	NJ		2.4	%	VA		3.9	%
	VA		2.3	%	NJ		3.3	%

The table below summarizes the credit ratings of our non-Agency RMBS investments at June 30, 2011 and December 31, 2010. Our investment guidelines place no restrictions on the credit ratings of the assets we may acquire or retain. In addition, the table below includes AAA rated non-Agency senior securities consolidated pursuant to the adoption of ASC 810, but for which we have no continuing involvement.

	June 30, 2011			December 31, 2010
AAA		14.03	%		14.67	%
AA		0.67	%		5.34	%
A		0.48	%		0.92	%
BBB		0.53	%		0.61	%
BB		0.01	%		0.01	%
B		0.00	%		0.00	%
Below B or not rated		84.28	%		78.45	%
Total		100.00	%		100.00	%

The table above reflects the credit rating of our consolidated non-Agency RMBS portfolio. At June 30, 2011 approximately 14% of the AAA, AA, and A securities balance reflected in the table above include senior, non-retained, non-Agency RMBS.

Our management team evaluates each investment based on the characteristics of the underlying collateral rather than relying on the ratings assigned to the asset by rating agencies.

Results of Operations for the Quarters and Six Months Ended June 30, 2011 and 2010

For the purpose of computing net interest income and ratios relating to cost of funds measures throughout this report, interest expense includes net interest payments on interest rate swaps, presented as Realized gains (losses) on interest rate swaps in our Consolidated Statements of Operations and Comprehensive Income (Loss). Interest rate swaps are used to hedge the increase in interest paid on repurchase agreements. Presenting the contractual interest payments on interest rate swaps with the interest paid on interest-bearing liabilities reflects our total contractual interest payments. This presentation depicts the economic value of our investment strategy, by showing actual interest expense and net interest income. Where indicated, interest expense including interest payments on interest rate swaps, is referred to as economic interest expense. Where indicated, net interest income including interest payments on interest rate swaps, is referred to as economic net interest income.

Net Income (Loss) Summary

Our net income for the quarter ended June 30, 2011 was $117.8 million, or $0.11 per share. Our net income was generated primarily by interest income on our portfolio. Our net income for the quarter ended June 30, 2010 was $124.6 million, or $0.16 per share. We attribute the decrease in our net income per share for the quarter ended June 30, 2011 as compared to June 30, 2010 to the increase in realized losses on principal write-downs of non-Agency RMBS.

Our net income for the six months ended June 30, 2011 was $281.2 million, or $0.27 per share. Our net income was generated primarily by interest income on our portfolio. Our net income for the quarter ended June 30, 2010 was $250.2 million, or $0.35 per share. We attribute the decrease in our net income per share for the six months ended June 30, 2011 as compared to June 30, 2010 to the decrease in our interest rate spread and an increase in realized losses on principal write-downs of non-Agency RMBS.

The table below presents the net income (loss) summary for the quarters and six months ended June 30, 2011 and 2010.

Net Income (Loss) Summary

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

(unaudited)

	For the Quarter Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Net Interest Income:
Interest income	$	194,235		$	133,522		$	400,809		$	262,506
Interest expense		7,481			6,499			15,483			13,873

Interest income, non-retained		28,428			49,829			49,587			100,690
Interest expense, non-retained		28,312			21,421			55,887			55,251
Net interest income (expense)		186,870			155,431			379,026			294,072
Other-than-temporary impairments:
Total other-than-temporary impairment losses		(1,926	)		(24,746	)		(6,131	)		(47,433	)
Non-credit portion of loss recognized in other comprehensive income (loss)		882			17,853			2,462			37,996
Net other-than-temporary credit impairment losses		(1,044	)		(6,893	)		(3,669	)		(9,437	)
Other gains (losses):
Unrealized gains (losses) on interest rate swaps		(19,500	)		(11,237	)		(9,669	)		(11,237	)
Realized gains (losses) on interest rate swaps		(4,297	)		(699	)		(7,144	)		(699	)
Gains (losses) on interest rate swaps		(23,797	)		(11,936	)		(16,813	)		(11,936	)
Net gains (losses) on interest-only RMBS		(4,442	)		-			(4,442	)		-
Net gains (losses) on embedded derivatives in interest-only RMBS		(2,234	)		-			(2,234	)		-
Realized gains (losses) on sales of investments, net		(380	)		-			2,364			342
Realized losses on principal write-downs of non-Agency RMBS		(22,040	)		(326	)		(41,560	)		(1,275	)
Total other gains (losses)		(52,893	)		(12,262	)		(62,685	)		(12,869	)
Net investment income (loss)		132,933			136,276			312,672			271,766
Other expenses:
Management fee		13,152			9,263			25,902			17,377
Provision for loan losses		-			1,024			1,442			1,630
General and administrative expenses		1,820			1,409			3,307			2,569
Total other expenses		14,972			11,696			30,651			21,576
Income (loss) before income taxes		117,961			124,580			282,021			250,190
Income taxes		118			1			816			1
Net income (loss)	$	117,843		$	124,579		$	281,205		$	250,189

Net income (loss) per share-basic and diluted	$	0.11		$	0.16		$	0.27		$	0.35
Weighted average number of shares outstanding-basic and diluted		1,027,130,496			765,475,340			1,027,096,962			718,185,900
Comprehensive income (loss):
Net income (loss)	$	117,843		$	124,579		$	281,205		$	250,189
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities, net		(112,067	)		(151,524	)		(292,219	)		90,057
Reclassification adjustment for net losses included in net income (loss) for other-than-temporary credit impairment losses		1,044			6,893			3,669			9,437
Reclassification adjustment for net realized losses (gains) included in net income (loss)		22,420			326			39,196			933
Other comprehensive income (loss)		(88,603	)		(144,305	)		(249,354	)		100,427
Comprehensive income (loss)	$	29,240		$	(19,726	)	$	31,851		$	350,616

Net Interest Income and Average Earning Asset Yield

We had average earning assets of $12.1 billion and $8.6 billion for the quarters ended June 30, 2011 and 2010, respectively, and $11.7 billion and $7.9 billion for the six months ended June 30, 2011 and 2010, respectively. Our interest income was $222.7 million and $183.4 million for the quarters ended June 30, 2011 and 2010, respectively, and $450.4 million and $363.2 million for the six months ended June 30, 2011 and 2010, respectively. Our increase in interest income resulted from the increase in our interest earning assets which followed our 2010 secondary offerings. The annualized yield on our portfolio, after giving effect to credit losses, was 6.64% and 8.47% for the quarters ended June 30, 2011 and 2010, respectively, and 7.01% and 9.19% for the six months ended June 30, 2011 and 2010, respectively. The decrease in the annualized yield is attributed to a decline in weighted average coupon on our portfolio and an increase in the credit losses recorded on non-Agency RMBS.

Our economic net interest income, which equals interest income less interest expense and realized losses on interest rate swaps, totaled $182.6 million and $154.7 million for the quarters ended June 30, 2011 and 2010, respectively, and $371.9 million and $293.4 million for the six months ended June 30, 2011 and 2010, respectively. Our net interest spread, which equals the yield on our average assets for the period less the economic average cost of funds for the period, was 4.20% and 5.54% for the quarters ended June 30, 2011 and 2010, respectively, and 4.45% and 5.50% for the six months ended June 30, 2011 and 2010, respectively. We attribute the increase in economic net interest income to the increase in the amount of interest earning assets following our 2010 secondary offerings. We attribute the decrease in net interest spread to the decline in the weighted average yield on the assets in the portfolio, increased debt issue cost amortization, and increased economic interest expense associated with interest rate swaps.

The table below shows our average assets held, total interest earned on assets, yield on average interest earning assets (including the effect of realized losses on principal write-downs), average debt balance, economic interest expense (including the effect of realized losses on interest rate swaps), average cost of funds, economic net interest income, and net interest rate spread for the quarters ended June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010 and June 30, 2010 and the year ended December 31, 2010.

Economic Net Interest Income
	Average Earning Assets Held (1)		Interest Earned on Assets *		Yield on Average Interest Earning Assets			Average Debt Balance		Economic Interest Expense (2)		Average Cost of Funds			Economic Net Interest Income (2)		Net Interest Rate Spread
	(Ratios have been annualized, dollars in thousands)

For the quarter ended June 30, 2011	$	12,078,396	$	222,661		6.64	%	$	6,560,926	$	40,090		2.44	%	$	182,571		4.20	%
For the quarter ended March 31, 2011	$	11,235,639	$	227,722		7.41	%	$	5,688,313	$	38,424		2.70	%	$	189,298		4.71	%
For the year ended December 31, 2010	$	8,479,109	$	755,398		8.91	%	$	3,793,049	$	152,236		4.01	%	$	603,162		4.90	%
For the quarter ended December 31, 2010	$	9,311,588	$	193,744		8.17	%	$	3,871,908	$	39,649		4.10	%	$	154,095		4.07	%
For the quarter ended September 30, 2010	$	8,801,534	$	198,461		9.02	%	$	3,733,893	$	42,764		4.58	%	$	155,697		4.44	%
For the quarter ended June 30, 2010	$	8,640,373	$	183,349		8.47	%	$	3,906,061	$	28,619		2.93	%	$	154,730		5.54	%

(1) Excludes cash and cash equivalents.
(2) Includes effect of realized losses on interest rate swaps.

Interest Expense and the Cost of Funds

We had average borrowed funds of $6.6 billion and $3.9 billion and total economic interest expense, including the realized losses on interest rate swaps, of $40.1 million and $28.6 million for the quarters ended June 30, 2011 and 2010, respectively. We had average borrowed funds of $6.1 billion and $3.8 billion and total economic interest expense of $78.5 million and $69.8 million for the six months ended June 30, 2011 and 2010, respectively. Our annualized cost of funds was 2.44% and 2.93% for the quarters ended June 30, 2011 and 2010, respectively. Our annualized cost of funds was 2.56% and 3.69% for the six months ended June 30, 2011 and 2010. The increase in economic interest expense for the quarter ended June 30, 2011 when compared to the quarter ended June 30, 2010 is due to the $2.7 billion increase in the average borrowed funds during the period.

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 six-month LIBOR, average one-month LIBOR relative to average six-month LIBOR, and average cost of funds relative to average one- and six- month LIBOR for the quarters June 30, 2011, March 31, 2011 December 31, 2010, September 30, 2010 and June 30, 2010 and the year ended December 31, 2010.

Average Cost of Funds
	Average Borrowed Funds		Economic Interest Expense (1)		Average Cost of Funds			Average One- Month LIBOR			Average Six- Month LIBOR			Average One-Month LIBOR Relative to Average Six-Month LIBOR			Average Cost of Funds Relative to Average One-Month LIBOR			Average Cost of Funds Relative to Average Six-Month LIBOR
	(Ratios have been annualized, dollars in thousands)

For the quarter ended June 30, 2011	$	6,560,926	$	40,090		2.44	%		0.20	%		0.42	%		(0.22	%)		2.24	%		2.02	%
For the quarter ended March 31, 2011	$	5,688,313	$	38,424		2.70	%		0.26	%		0.46	%		(0.20	%)		2.44	%		2.24	%
For the year ended December 31, 2010	$	3,793,049	$	152,236		4.01	%		0.27	%		0.52	%		(0.25	%)		3.74	%		3.49	%
For the quarter ended December 31, 2010	$	3,871,908	$	39,649		4.10	%		0.26	%		0.45	%		(0.19	%)		3.84	%		3.65	%
For the quarter ended September 30, 2010	$	3,733,893	$	42,764		4.58	%		0.29	%		0.59	%		(0.30	%)		4.29	%		3.99	%
For the quarter ended June 30, 2010	$	3,906,061	$	28,619		2.93	%		0.32	%		0.63	%		(0.31	%)		2.61	%		2.30	%

(1) Includes effect of realized losses on interest rate swaps.

Gains and Losses on Sales of Assets

During the quarter ended June 30, 2011, we sold RMBS with a carrying value of $16.4 million for realized losses of $380 thousand. We had no sales for the quarter ended June 30, 2010. During the six months ended June 30, 2011 and 2010, we sold RMBS with a carrying value of $666.2 million and $89.6 million for realized gains of $2.4 million and $342 thousand, respectively.

Secured Debt Financing Transactions

We did not re-securitize RMBS during the quarter and six months ended June 30, 2011.

We sold all of the AAA-rated bonds created in our re-securitizations prior to the quarter ended June 30, 2011, and therefore we did not record non-recourse financing with third party investors related to re-securitizations executed in prior periods. During the six months ended June 30, 2011, we financed through these transactions $306.6 million of AAA-rated fixed rate bonds by selling the bonds to third party investors for net proceeds of $311.0 million.

On April 30, 2010, we transferred $566.6 million in principal value of our RMBS to the CSMC 2010-11R Trust in a re-securitization transaction. This transaction was recorded as a “secured borrowing” pursuant to ASC Topics 860 and 810. In this transaction, we financed $138.8 million of AAA-rated fixed rate bonds by selling the bonds to third party investors for net proceeds of $137.4 million. We have retained $427.7 million in subordinated bonds and the owner trust certificate. The subordinated bonds and the owner trust certificate provide credit support to the AAA-rated bonds. The bonds issued by the trust are collateralized by RMBS that were transferred to the CSMC 2010-11R Trust.

On May 27, 2010, we transferred $1.2 billion in principal value of our RMBS to the CSMC 2010-12R Trust in a re-securitization transaction. This transaction was recorded as a “secured borrowing” pursuant to ASC Topics 860 and 810. In this transaction, we financed $294.0 million of AAA-rated fixed rate bonds by selling the bonds to third party investors for net proceeds of $294.3 million. We have retained $136.3 million of AAA-rated bonds, $788.2 million in subordinated bonds and the owner trust certificate. The subordinated bonds and the owner trust certificate provide credit support to the AAA-rated bonds. The bonds issued by the trust are collateralized by RMBS that were transferred to the CSMC 2010-12R Trust.

In addition, during the quarter ended June 30, 2010, we financed through these transactions $195.0 million of AAA-rated fixed rate bonds by selling the bonds to third party investors for net proceeds of $197.4 million. In total, we financed through these transactions, including the newly re-securitized assets, $627.9 million of AAA-rated fixed rate bonds for net proceeds of $629.2 million during the quarter ended June 30, 2010.

Management Fee and General and Administrative Expenses

We paid FIDAC a management fee of $13.2 million and $9.3 million for the quarters ended June 30, 2011 and 2010, respectively, and $25.9 million and $17.4 million for the six months ended June 2011 and 2010, respectively. The management fee is based on our stockholders’ equity and the increase in the management fee for the quarter and six months ended June 30, 2011 as compared to the quarter and six months ended June 30, 2010 resulted from the increased equity due to the completion of secondary offerings of common stock during 2010.

General and administrative (or G&A) expenses, including the provision for loan losses, were $1.8 million and $2.4 million for the quarters ended June 30, 2011 and 2010, respectively, and $4.7 million and $4.2 million for the six months ended June 30, 2011 and 2010, respectively. G&A expenses decreased due to no additional loan loss provision being recorded.

Total expenses as a percentage of average total assets were 0.59% and 0.72% for the quarters ended June 30, 2011 and 2010, respectively, and 0.68% and 0.75% for the six months ended June 30, 2011 and 2010, respectively. The decrease in total expenses as a percentage of average total assets is the result of an increase in the asset base due to the completion of secondary offerings of common stock during 2010.

During the quarters ended June 30, 2011 and 2010 we reimbursed FIDAC approximately $170,000 and $148,000, respectively for our pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of FIDAC and its affiliates required for our operations. During the six months ended June 30, 2011 and 2010 we reimbursed FIDAC approximately $316,000 and $148,000 respectively for our pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of FIDAC and its affiliates required for our operations.

The table below shows our total management fee and G&A expenses as compared to average total assets and average equity for the quarters ended June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010 June 30, 2010 and for the year ended December 31, 2010.

Management Fees, Loan Loss Provision and G&A Expenses and Operating Expense Ratios

	Total Management Fee, Loan Loss Provision and G&A Expenses		Total Management Fee, Loan Loss Provision and G&A Expenses/Total Assets			Total Management Fee, Loan Loss Provision and G&A Expenses/Average Equity
	(Ratios have been annualized, dollars in thousands)

For the quarter ended June 30, 2011	$	14,972		0.59	%		1.72	%
For the quarter ended March 31, 2011	$	15,679		0.68	%		1.74	%
For the year ended December 31, 2010	$	49,628		0.78	%		1.71	%
For the quarter ended December 31, 2010	$	14,454		0.76	%		1.76	%
For the quarter ended September 30, 2010	$	13,598		0.77	%		1.87	%
For the quarter ended June 30, 2010	$	11,696		0.72	%		1.80	%

Net Income (Loss) and Return on Average Equity

Our net income was $117.8 million and $124.6 million for the quarters ended June 30, 2011 and 2010, respectively, and $281.2 million and $250.2 million for the six months ended June 30, 2011 and 2010, respectively. The table below shows our economic net interest income, gains (losses) on sale of assets, unrealized gains (losses) on interest rate swaps, total expenses, income tax, each as a percentage of average equity, and the return on average equity for the quarters ended June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010 and June 30, 2010 and the year ended December 31, 2010. Our return on average equity decreased from 19.14% for the quarter ended June 30, 2010 to 13.50% for the quarter ended June 30, 2011 and from 19.86% for the six months ended June 30, 2010 to 15.79% for the six months ended June 30, 2011 due to the increase in realized losses on principal write-downs, increased G&A expenses and a decrease in the yield on our assets.

Components of Return on Average Equity
	Net Interest Income/Average Equity *			Realized Gains (Losses) on Sales, Credit Losses and OTTI/Average Equity			Realized and unrealized Gains (Losses) on Interest Rate Swaps/Average Equity			Total Expenses/ Average Equity			Income Tax/Average Equity			Return on Average Equity
	(Ratios have been annualized)

For the quarter ended June 30, 2011		21.41	%		(2.69	%)		(3.49	%)		(1.72	%)		(0.01	%)		13.50	%
For the quarter ended March 31, 2011		20.96	%		(2.15	%)		1.10	%		(1.74	%)		(0.08	%)		18.09	%
For the year ended December 31, 2010		20.77	%		(0.34	%)		(0.34	%)		(1.71	%)		(0.03	%)		18.35	%
For the quarter ended December 31, 2010		18.72	%		0.22	%		1.80	%		(1.76	%)		0.00	%		18.98	%
For the quarter ended September 30, 2010		21.42	%		(0.19	%)		(1.87	%)		(1.87	%)		(0.10	%)		17.39	%
For the quarter ended June 30, 2010		23.78	%		(1.11	%)		(1.73	%)		(1.80	%)		0.00	%		19.14	%

* Includes the effect of realized losses on interest rate swaps

Liquidity and Capital Resources

General

Liquidity measures our ability to meet cash requirements, including ongoing commitments to repay our borrowings, fund and maintain RMBS, mortgage loans and other assets, pay dividends and other general business needs. Our principal sources of capital and funds for additional investments primarily include earnings from our investments, borrowings under securitizations and re-securitizations, repurchase agreements and other financing facilities, and proceeds from equity offerings.

To meet our short term (one year or less) liquidity needs, we expect to continue to borrow funds in the form of repurchase agreements and, subject to market conditions, other types of financing. The terms of the repurchase transaction borrowings under our master repurchase agreements generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association, or SIFMA, as to repayment, margin requirements and the segregation of all securities we have initially sold under the repurchase transaction. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions include changes to the margin maintenance requirements, required haircuts, and purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default provisions. These provisions will differ for each of our lenders and will not be determined until we engage in a specific repurchase transaction.

We also expect to meet our short term liquidity needs by relying on the cash flows generated by our investments. These cash flows are primarily comprised of monthly principal and interest payments received on our investments. We may also sell our investments and utilize those proceeds to meet our short term liquidity needs or enter into non-recourse financing of our assets through sales of securities to third parties of re-securitization transactions that we have completed in prior periods.

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. However, a decline in the value of our collateral could cause a temporary liquidity shortfall due to the timing of the necessary margin calls on the financing arrangements and the actual receipt of the cash related to principal paydowns. If our cash resources are at any time insufficient to satisfy our liquidity requirements, we may have to sell investments, potentially at a loss, or issue debt or additional equity securities in a common stock offering.

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 from our investments, borrowings under securitizations and re-securitizations, repurchase agreements and other financing facilities, and proceeds from equity offerings. In addition, we may reenter into warehouse facilities, use commercial paper, term financing CDOs, and longer dated structured repurchase agreements. The use of these sources 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 $16.1 million and $236.2 million at June 30, 2011 and 2010, respectively. Our cash and cash equivalents decreased relative to the June 31, 2010 balance due to the timing of the receipt of proceeds from our secondary offerings of common stock completed on June 28, 2010.

Our operating activities provided net cash of approximately $216.5 million and $152.8 million for the six months ended June 30, 2011 and 2010, respectively. The cash provided by operating activities increased due to the increase in net interest income earned by the portfolio which resulted from the increase in interest earning assets to $10.0 billion in investments at June 30, 2011 as compared to $6.6 billion at June 30, 2010. In addition, the effect of the non-cash expense of realized losses on principal write-downs increased from $1.3 million for the six months ending June 30, 2010 as compared to $41.6 million for the six months ended June 30, 2011.

Our investing activities used net cash of $2.3 billion and $693.6 million for the six months ended June 30, 2011 and 2010, respectively. During the six months ended June 30, 2011 we utilized cash to purchase $3.7 billion in securities which were offset by proceeds from asset sales of $668.5 million and principal repayments of $677.8 million. During the six months ended June 30, 2010 we utilized cash to purchase $1.5 billion in securities which were offset by proceeds from asset sales that provided $89.9 million and principal repayments of $719.1 million. The increase in cash used for investing activities is the result of increasing leverage on the Agency RMBS portfolio.

Our financing activities provided net cash of $2.1 billion and $752.8 million for the six months ended June 30, 2011 and 2010, respectively. The six months ended June 30, 2011 reflected net proceeds on repurchase agreements of $2.5 billion as compared to net cash provided by repurchase agreements of $637.6 million for the six months ended June 30, 2010. In addition, the six months ended June 30, 2011 reflected net proceeds from securitized debt borrowings of $311.0 million as compared to $1.1 billion for the six months ended June 30, 2010. In contrast, the six months ended June 30, 2010 reflected $767.7 million in proceeds from the completion secondary offerings of common stock whereby the six months ended June 30, 2011 did not have secondary offerings of common stock. The increase in cash provided by financing activities is primarily provided by the use of repurchase agreements to finance asset purchases. Recourse leverage increased to 1.3:1 at June 30, 2011 as compared to 0.5:1 at June 30, 2010 reflective of the increase in financed Agency RMBS.

We expect to continue to finance our activities in a manner that is consistent with our current operations largely via repurchase agreements. During the six months ended June 30, 2011, we received $677.8 million from principal repayments and used leverage on our Agency RMBS which provided approximately $2.5 billion in cash. In addition, we may from time to time sell securities as a source of cash to fund new purchases.

At June 30, 2011 and December 31, 2010, the remaining maturities of repurchase agreements for RMBS is presented below.

	June 30, 2011		December 31, 2010
	(dollars in thousands)
Overnight	$	338,100	$	-
1-30 days		1,752,942		232,265
30 to 59 days		1,541,047		970,394
60 to 89 days		73,411		545,442
90 to 119 days		-		60,696
Greater than or equal to 120 days		614,987		-
Total	$	4,320,487	$	1,808,797

We collateralize the repurchase agreements we use to finance our operations with RMBS. Our counterparties negotiate a ‘haircut’ when we enter into a financing transaction, which vary from lender to lender. A haircut is a percentage that is subtracted from the par value of RMBS that collateralizes the financing. The size of the haircut reflects the perceived risk associated with holding the RMBS 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 RMBS values occur. Despite the haircut, repurchase agreements subject us to two types of margin calls. First, there are monthly margin calls that are triggered as principal payments and pre-payments are received by us as these payments lower the value of the collateral. As a result, we expect to receive margin calls from our repurchase counterparties monthly simply due to the release of updated factors from the trustees of the trusts which issued the RMBS we own. The monthly principal payments and pre-payments are not known in advance and vary depending on the behavior of the borrowers of the mortgages underlying the trusts. Second, counterparties make margin calls or return margin as a result of normal daily increases or decreases in asset values. Each counterparty may calculate or manage these margin calls differently. In addition, when financing assets using standard form of Securities Industry and Financial Markets Association 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 asset values in aggregate exceeds their allowable exposure to us. A decline in asset 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.

The table below presents our average repurchase balance during the period and repurchase balance at each period end. Our balance at period end tends to have little fluctuation from the average balances except in periods where we are increasing the size of our portfolio using leverage. For example, subsequent to our completion of a secondary offering of common stock during the fourth quarter of 2010 our quarter end repurchase balance increased compared to our average repurchase balance.

Period	Average Repurchase Balance		Repurchase Balance at Quarter End
	(dollars in thousands)
Quarter Ended June 30, 2011	$	4,308,787	$	4,320,487
Quarter Ended March 31, 2011		3,385,155		3,870,407
Year Ended December 31, 2010		1,525,280		1,808,797
Quarter Ended December 31, 2010		1,575,917		1,808,797
Quarter Ended September 30, 2010		1,272,017		1,568,223
Quarter Ended June 30, 2010		1,415,432		1,337,805

We are not required to maintain any specific debt-to-equity ratio as we believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At June 30, 2011 and December 31, 2010 our total debt was approximately $6.5 billion and $4.1 billion, which represented a debt-to-equity ratio of approximately 1.9:1 and 1.1:1, respectively. We include repurchase agreements, securitized debt, and securitized debt, non-retained in the numerator of our debt-to-equity ratio and stockholders’ equity as the denominator.

Stockholders’ Equity

On January 28, 2011, we entered into an equity distribution agreement with FIDAC and UBS Securities LLC, or UBS. Through this agreement, we may sell through UBS, as our sales agent, up to 125,000,000 shares of our common stock in ordinary brokers’ transactions at market prices or other transactions as agreed between us and UBS. We did not sell any shares of our common stock under the equity distribution agreement during the quarter ended June 30, 2011.

On September 24, 2009, we implemented a dividend reinvestment and share purchase plan, or DRSPP. The DRSPP provides holders of record of our common stock an opportunity to automatically reinvest all or a portion of their cash distributions received on common stock in additional shares of our common stock as well as to make optional cash payments to purchase shares of our common stock. Persons who are not already stockholders may also purchase our common stock under the plan through optional cash payments. The DRSPP is administered by the Administrator, The Bank of New York Mellon. During the six months ended June 30, 2011 we raised $542 thousand by issuing 134,538 shares through the DRSPP. During the six months ended June 30, 2010, we raised $122 thousand by issuing 32,138 shares through the DRSPP.

During the quarter ended June 30, 2011 we declared dividends to common shareholders totaling $133.4 million or $0.13 per share. During the quarter ended June 30, 2010, we declared dividends to common shareholders totaling $130.4 million or $0.17 per share.

During the six months ended June 30, 2011 we declared dividends to common shareholders totaling $277.1 million or $0.27 per share. During the six months ended June 30, 2010, we declared dividends to common shareholders totaling $244.2 million or $0.34 per share.

On March 31, 2010, we announced the sale of 85,000,000 shares of common stock at a price of $3.61 per share in a public offering. In addition, the underwriters exercised the option to purchase an additional 12,750,000 shares of common stock to cover overallotments. The aggregate net proceeds we received before expenses in this sale were approximately $352.7 million. This sale was completed on April 7, 2010.

On June 22, 2010, we announced the sale of 100,000,000 shares of common stock at a price of $3.61 per share in a public offering. In addition, the underwriters exercised the option to purchase an additional 15,000,000 shares of common stock to cover overallotments. The aggregate net proceeds we received before expenses in this sale were approximately $415.0 million. This sale was completed on June 28, 2010.

There was no preferred stock issued or outstanding as of June 30, 2011 and December 31, 2010.

Related Party Transactions

Management Agreement

On November 15, 2007 we entered into a management agreement with FIDAC, pursuant to which FIDAC is entitled to receive a management fee and, in certain circumstances, a termination fee and reimbursement of certain expenses as described in the management agreement. Such fees and expenses do not have fixed and determinable payments. The management fee is payable quarterly in arrears in an amount equal to 1.50% per annum, calculated quarterly, of our stockholders’ equity (as defined in the management agreement). FIDAC uses the proceeds from its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us.

Clearing Fees

On March 1, 2011, we entered into an administrative services agreement with RCap Securities, Inc., or RCap. We use RCap, a SEC registered broker-dealer and a wholly-owned subsidiary of Annaly, to clear trades for us and RCap is paid customary market-based fees and charges in return for such services.

Financing Arrangements with Affiliates

In April 2009, we entered into a Securities Industry and Financial Markets Association standard preprinted form Master Repurchase Agreement with RCap Securities, Inc., a wholly owned subsidiary of Annaly. This standard agreement does not contain any sort of liquidity, net worth or other similar types of positive or negative covenants. Rather, the agreement contains covenants that require the buyer and seller of securities to deliver collateral or securities, and similar covenants which are customary in master repurchase agreements. At June 30, 2011 and December 31, 2010 we had no financing under this agreement. We have been in compliance with all covenants of this agreement since we entered into this agreement.

In March 2008, we entered into a Securities Industry and Financial Markets Association standard preprinted form Master Repurchase Agreement with Annaly. This standard agreement does not contain any sort of liquidity, net worth or other similar types of positive or negative covenants. Rather, the agreement contains covenants that require the buyer and seller of securities to deliver collateral or securities, and similar covenants which are customary in master repurchase agreements. At June 30, 2011 and December 31, 2010 we had no financing under this agreement. We have been in compliance with all covenants of this agreement since we entered into this agreement.

Restricted Stock Grants

We granted 1,301,000 shares of restricted stock to our Manager’s employees and members of our board of directors during the year ended December 31, 2008. During the quarters ended June 30, 2011 and 2010, 31,600 and 33,725 shares of restricted stock we had awarded to our Manager’s employees vested and 938 and 2,112 shares were forfeited or cancelled, respectively. We did not grant any incentive awards during the six months ended June 30, 2011. At June 30, 2011 and 2010 there were approximately 822,000 and 965,000 unvested shares of restricted stock issued to employees of FIDAC, respectively. For the six months ended June 30, 2011 and 2010, compensation expense less general and administrative costs associated with the amortization of the fair value of the restricted stock totaled $249,000 and $251,000, respectively.

Contractual Obligations and Commitments

The following tables summarize our contractual obligations at June 30, 2011 and December 31, 2010.

June 30, 2011
Contractual Obligations	Within One Year		One to Three Years		Three to Five Years		Greater Than or Equal to Five Years		Total
	(dollars in thousands)
Repurchase agreements for RMBS	$	4,320,487	$	-	$	-	$	-	$	4,320,487
Securitized debt		569,620		743,046		338,626		464,972		2,116,264
Interest expense on RMBS repurchase agreements (1)		2,335		-		-		-		2,335
Interest expense on securitized debt (1)		92,360		115,472		80,992		243,000		531,824
Total	$	4,984,802	$	858,518	$	419,618	$	707,972	$	6,970,910
(1) Interest is based on variable rates in effect as of June 30, 2011.


December 31, 2010
Contractual Obligations	Within One Year		One to Three Years		Three to Five Years		Greater Than or Equal to Five Years		Total
	(dollars in thousands)
Repurchase agreements for RMBS	$	1,808,797	$	-	$	-	$	-	$	1,808,797
Securitized debt		634,988		831,305		305,953		417,976		2,190,222
Interest expense on RMBS repurchase agreements (1)		1,223		-		-		-		1,223
Interest expense on securitized debt (1)		86,453		113,635		68,335		171,042		439,465
Total	$	2,531,461	$	944,940	$	374,288	$	589,018	$	4,439,707
(1) Interest is based on variable rates in effect as of December 31, 2010.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to any such entities.

Capital Resources

At June 30, 2011 and December 31, 2010, we had no material commitments or capital expenditures.

Dividends

To qualify as a REIT, we must pay annual dividends to our stockholders of at least 90% of our taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. We intend to pay regular quarterly dividends to our stockholders. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, which would only be paid out of available cash to the extent permitted under our financing facilities, we must first meet any operating requirements and scheduled debt service on our financing facilities and other debt payable.

Inflation

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

Subsequent Events

None.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary components of our market risk are related to credit risk, interest rate risk, prepayment risk, market value risk and real estate risk. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and we seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

Credit Risk

We are subject to credit risk in connection with our investments and face more credit risk on assets we own which are rated below ‘‘AAA’’. The credit risk related to these investments pertains to the ability and willingness of the borrowers to pay, which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. We believe that residual loan credit quality is primarily determined by the borrowers’ credit profiles and loan characteristics. FIDAC uses a comprehensive credit review process. FIDAC’s analysis of loans includes borrower profiles, as well as valuation and appraisal data. FIDAC uses compensating factors such as liquid assets, low loan to value ratios and job stability in evaluating loans. FIDAC’s resources include a proprietary portfolio management system, as well as third party software systems. FIDAC utilizes a third party due diligence firm to perform an independent underwriting review to insure compliance with existing guidelines. FIDAC selects loans for review predicated on risk-based criteria such as loan-to-value, borrower’s credit score(s) and loan size. FIDAC also outsources underwriting services to review higher risk loans, either due to borrower credit profiles or collateral valuation issues. In addition to statistical sampling techniques, FIDAC creates adverse credit and valuation samples, which we individually review. FIDAC rejects loans that fail to conform to our standards. FIDAC accepts only those loans which meet our underwriting criteria. Once we own a loan, FIDAC’s surveillance process includes ongoing analysis through our proprietary data warehouse and servicer files. Additionally, the non-Agency RMBS and other ABS which we acquire for our portfolio are reviewed by FIDAC to ensure that they satisfy our risk based criteria. FIDAC’s review of non-Agency RMBS and other ABS includes utilizing its proprietary portfolio management system. FIDAC’s review of non-Agency RMBS and other ABS is based on quantitative and qualitative analysis of the risk-adjusted returns on non-Agency RMBS and other ABS present.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. We are subject to interest rate risk in connection with our investments and our related debt obligations, which are generally repurchase agreements, warehouse facilities, securitization, commercial paper and term financing CDOs. Our repurchase agreements and warehouse facilities may be of limited duration that are periodically refinanced at current market rates. We intend to mitigate this risk through utilization of derivative contracts, primarily interest rate swap agreements.

Interest Rate Effect on Net Interest Income

Our operating results depend, in large part, on differences between the income from our investments and our borrowing costs. Most of our warehouse facilities and repurchase agreements provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR. The fixed spread varies depending on the type of underlying asset which collateralizes the financing. Accordingly, the portion of our portfolio which consists of floating interest rate assets will be match-funded utilizing our expected sources of short-term financing, while our fixed interest rate assets will not be match-funded. During periods of rising interest rates, the borrowing costs associated with our investments tend to increase while the income earned on our fixed interest rate investments may remain substantially unchanged. This will result in a narrowing of the net interest spread between the related assets and borrowings and may even result in losses. Further, during this portion of the interest rate and credit cycles, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Such delinquencies or defaults could also have an adverse effect on the spread between interest-earning assets and interest-bearing liabilities. Hedging techniques are partly based on assumed levels of prepayments of our fixed-rate and hybrid adjustable-rate mortgage loans and RMBS. If prepayments are slower or faster than assumed, the life of the mortgage loans and RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.

Interest Rate Effects on Fair Value

Another component of interest rate risk is the effect changes in interest rates will have on the fair value of the assets we acquire. We face the risk that the fair value of our assets will increase or decrease at different rates than that of our liabilities, including our hedging instruments. We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration essentially measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.

It is important to note that the impact of changing interest rates on fair value can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the fair value of our assets could increase significantly when interest rates change beyond 100 basis points. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our stockholders.

Interest Rate Cap Risk

We also invest in adjustable-rate mortgage loans and RMBS. These are mortgages or RMBS in which the underlying mortgages are typically subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the security’s interest yield may change during any given period. However, our borrowing costs pursuant to our financing agreements will not be subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our adjustable-rate mortgage loans and RMBS would effectively be limited. This problem will be magnified to the extent we acquire adjustable-rate RMBS that are not based on mortgages which are fully indexed. In addition, the mortgages or the underlying mortgages in an RMBS may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on our adjustable-rate mortgages or RMBS than we need in order to pay the interest cost on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.

Interest Rate Mismatch Risk

We fund a substantial portion of our acquisitions of hybrid adjustable-rate mortgages and RMBS with borrowings that, after the effect of hedging, have interest rates based on indices and re-pricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and re-pricing terms of the mortgages and RMBS. Thus, in most cases the interest rate indices and re-pricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. Therefore, our cost of funds would likely rise or fall more quickly than would our earnings rate on assets. During periods of changing interest rates, such interest rate mismatches could negatively impact our financial condition, cash flows and results of operations. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above. Our analysis of risks is based on FIDAC’s experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in this Form 10-Q.

Our profitability and the value of our portfolio (including interest rate swaps) may be adversely affected during any period as a result of changing interest rates. The following table quantifies the potential changes in net interest income and portfolio value should interest rates go up or down 25, 50, and 75 basis points, assuming the yield curves of the rate shocks will be parallel to each other and the current yield curve. All changes in income and value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at June 30, 2011 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates.

	June 30, 2011

Change in Interest Rate	Projected Percentage Change in Net Interest Income			Projected Percentage Change in Portfolio Value
-75 Basis Points		(9.10	%)		4.76	%
-50 Basis Points		(7.08	%)		3.21	%
-25 Basis Points		(5.09	%)		1.62	%
Base Interest Rate		-			-
+25 Basis Points		0.84	%		(1.66	%)
+50 Basis Points		1.07	%		(3.35	%)
+75 Basis Points		1.31	%		(5.08	%)

Prepayment Risk

As we receive prepayments of principal on these investments, premiums and discounts on such investments will be amortized or accreted against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments. Decreases in prepayment rates will generally have the effect of reducing the amortization of premiums and discounts, thereby resulting in an increase and reduction of interest income, respectively.

Extension Risk

FIDAC computes the projected weighted-average life of our investments based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when fixed-rate or hybrid adjustable-rate mortgage loans or RMBS are acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect us from rising interest rates because the borrowing costs are fixed for the duration of the fixed-rate portion of the related assets. However, if prepayment rates decrease in a rising interest rate environment, the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument while the income earned on the hybrid adjustable-rate assets would remain fixed. This situation may also cause the market value of our hybrid adjustable-rate assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Market Risk

Market Value Risk

Our available-for-sale securities are reflected at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The estimated fair value of these securities fluctuates primarily due to changes in interest rates, prepayment speeds, market liquidity, credit quality, and other factors. Generally, in a rising interest rate environment, the estimated fair value of these securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of these securities would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our investments may be adversely impacted.

Real Estate Market Risk

We own assets secured by real property and may own real property directly in the future. Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.

Risk Management

To the extent consistent with maintaining our REIT status, we seek to manage risk exposure to protect our portfolio of residential mortgage loans, RMBS, and other assets and related debt against the effects of major interest rate changes. We generally seek to manage our risk by:

monitoring and adjusting, if necessary, the reset index and interest rate related to our RMBS and our financings;

attempting to structure our financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;

using derivatives, financial futures, swaps, options, caps, floors and forward sales to adjust the interest rate sensitivity of our investments and our borrowings;

using securitization financing to lower average cost of funds relative to short-term financing vehicles further allowing us to receive the benefit of attractive terms for an extended period of time in contrast to short term financing and maturity dates of the investments included in the securitization; and

actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of our investments and the interest rate indices and adjustment periods of our financings.

Our efforts to manage our assets and liabilities are concerned with the timing and magnitude of the re-pricing of assets and liabilities. We attempt to control risks associated with interest rate movements. Methods for evaluating interest rate risk include an analysis of our interest rate sensitivity “gap”, which is the difference between interest-earning assets and interest-bearing liabilities maturing or re-pricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.

The following table sets forth the estimated maturity or re-pricing of our interest-earning assets and interest-bearing liabilities at June 30, 2011. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, except adjustable-rate loans, and securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature and does include the effect of the interest rate swaps. The interest rate sensitivity of our assets and liabilities in the table could vary substantially if based on actual prepayment experience.


	June 30, 2011

	Within 3 Months			3-12 Months			1 Year to 3 Years			Greater than 3 Years			Total
Rate sensitive assets	$	13,260,421		$	1,647,110		$	2,282,715		$	1,815,519		$	19,005,765
Cash equivalents		16,080			-			-			-			16,080
Total rate sensitive assets		13,276,501			1,647,110			2,282,715			1,815,519			19,021,845

Rate sensitive liabilities		2,973,109			861,648			321,195			1,420,480			5,576,432
Interest rate sensitivity gap	$	10,303,392		$	785,462		$	1,961,520		$	395,039		$	13,445,413

Cumulative rate sensitivity gap	$	10,303,392		$	11,088,854		$	13,050,374		$	13,445,413
Cumulative interest rate sensitivity gap as a
percentage of total rate sensitive assets		54	%		58	%		69	%		71	%

Our analysis of risks is based on our manager’s experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our manager may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in the above tables and in this Form 10-Q. These analyses contain certain forward-looking statements and are subject to the safe harbor statement set forth under the heading, “Special Note Regarding Forward-Looking Statements.”

ITEM 4.

CONTROLS AND PROCEDURES

Our management, including our Chief Executive Officer, or CEO and Chief Financial Officer, or CFO, reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and operating, (1) were effective in ensuring that information regarding the Company and its subsidiaries is made known to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in providing reasonable assurance that information the Company must disclose in its periodic reports under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms.

There have been no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial statements.

Item 1A. RISK FACTORS

There have been no material changes to the risk factors discussed in Part I, "Item 1A. Risk Factors" of our most recent our Annual Report on Form 10-K or subsequent Quarterly Reports on Form 10-Q. If any of the risks and uncertainties identified in our Special Note Regarding Forward-Looking Statements contained in this report together with those previously disclosed in our Annual Report on Form 10-K or subsequent Quarterly Reports on Form 10-Q or those that are presently unforeseen materialize, it could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “Management Discussion and Analysis of Financial Condition and Results of Operations – Special Note Regarding Forward-Looking Statements.”

Item 6. EXHIBITS

Exhibits:

The exhibits required by this item are set forth on the Exhibit Index attached hereto

EXHIBIT INDEX

Exhibit Number	Description
3.1	Articles of Amendment and Restatement of Chimera Investment Corporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No. 333-145525) filed on September 27, 2007 and incorporated herein by reference).
3.2	Articles of Amendment of Chimera Investment Corporation (filed as Exhibit 3.1 to the Company’s Report on Form 8-K filed on May 28, 2009 and incorporated herein by reference)
3.3	Articles of Amendment of Chimera Investment Corporation (filed as Exhibit 3.1 to the Company’s Report on Form 8-K filed on November 5, 2010 and incorporated herein by reference).
3.4	Amended and Restated Bylaws of Chimera Investment Corporation (filed as Exhibit 3.2 to the Company’s Registration Statement on Amendment No. 2 to Form S-11 (File No. 333-145525) filed on November 5, 2007 and incorporated herein by reference).
4.1	Specimen Common Stock Certificate of Chimera Investment Corporation (filed as Exhibit 4.1 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No. 333-145525) filed on September 27, 2007 and incorporated herein by reference).
31.1	Certification of Matthew Lambiase, Chief Executive Officer and President of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of A. Alexandra Denahan, Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Matthew Lambiase, Chief Executive Officer and President of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of A. Alexandra Denahan, Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.INS XBRL	Instance Document*
Exhibit 101.SCH XBRL	Taxonomy Extension Schema Document*
Exhibit 101.CAL XBRL	Taxonomy Extension Calculation Linkbase Document*
Exhibit 101.DEF XBRL	Additional Taxonomy Extension Definition Linkbase Document Created*
Exhibit 101.LAB XBRL	Taxonomy Extension Label Linkbase Document*
Exhibit 101.PRE XBRL	Taxonomy Extension Presentation Linkbase Document*

* Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition at June 30, 2011 (Unaudited) and December 31, 2010 (Derived from the audited consolidated statement of financial condition at December 31, 2010); (ii) Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the quarters and six months ended June 30, 2011 and 2010; (iii) Consolidated Statements of Stockholders' Equity (Unaudited) for the six months ended June 30, 2011 and 2010; (iv) Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2011 and 2010; and (v) Notes to Consolidated Financial Statements (Unaudited) for the quarter ended June 30, 2011. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHIMERA INVESTMENT CORPORATION


	By:	/s/ Matthew Lambiase
		Matthew Lambiase
		Chief Executive Officer and President
		August 4, 2011




	By:	/s/ A. Alexandra Denahan
		A. Alexandra Denahan
		Chief Financial Officer (Principal Financial Officer)
		August 4, 2011

Form: 10-Q

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