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Portions of the registrant’s definitive Proxy Statement for the 2020 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of registrant’s fiscal year covered by this Annual Report, are incorporated by reference into Part III.

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•	our business and investment strategy;

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

•	our expected investments;

•	changes in the value of our investments;

•	changes in interest rates and mortgage prepayment rates;

•	prepayments of the mortgage and other loans underlying our mortgage-backed securities, or RMBS, or other asset-backed securities, or ABS;

•	rates of default, delinquencies or decreased recovery rates on our investments;

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

•	our ability to maintain existing financing arrangements and our ability to obtain future financing arrangements;

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

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

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

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

•	the impact of and changes to various government programs;

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

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

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

•	our understanding of our competition;

•	availability of qualified personnel;

•	our ability to maintain our classification as a real estate investment trust, or REIT, for U.S. federal income tax purposes;

•	our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or 1940 Act;

•	our expectations regarding materiality or significance; and

•	the effectiveness of our disclosure controls and procedures.

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•	No investment shall be made that would cause us to fail to qualify as a REIT for U.S. federal income tax purposes;

•	No investment shall be made that would cause us to be regulated as an investment company under the 1940 Act;

•	With the exception of real estate and housing, no single industry shall represent greater than 20% of the securities or aggregate risk exposure in our portfolio; and

•	Investments in non-rated or deeply subordinated ABS or other securities that are non-qualifying assets for purposes of the 75% REIT asset test will be limited to an amount not to exceed 50% of our stockholders’ equity.

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Securitization.  A significant element of our financing strategy is to acquire residential mortgage loans for our portfolio with the intention of securitizing them. In our securitizations, we generally create subordinate certificates, providing a specified amount of credit enhancement, which we intend or are required to retain in our portfolio. We have acquired and may in the future acquire Non-Agency RMBS for our portfolio with the intention of re-securitizing them and retaining a portion of the re-securitized Non-Agency RMBS in our portfolio, typically the subordinate certificates.

•	Warehouse Facilities.  We have utilized and may in the future utilize credit facilities for capital needed to fund our assets.  We seek to maintain formal relationships with multiple counterparties to maintain warehouse lines on favorable terms.

•	Repurchase Agreements.  We have financed certain of our assets through repurchase agreements.  We anticipate that repurchase agreements will be one of the sources we will use to achieve our desired amount of leverage for our real

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•	puts and calls on securities or indices of securities;

•	Eurodollar futures contracts and options on such contracts;

•	interest rate caps, swaps and swaptions;

•	U.S. Treasury futures, forward contracts, other derivative contracts and options on U.S. Treasury securities; and

•	other similar transactions.

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Adverse developments involving major financial institutions or involving one of our lenders could result in a rapid reduction in our ability to borrow and materially adversely affect our business, profitability, and liquidity. As of December 31, 2019, we had amounts outstanding under repurchase agreements with 31 separate lenders. A material adverse development involving one or more major financial institutions or the financial markets, in general, could result in our lenders reducing our access to funds available under our repurchase agreements or terminating such repurchase agreements altogether. Because substantially all our repurchase agreements are uncommitted and renewable at our lenders’ discretion, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time, which could materially adversely affect our business and profitability. Furthermore, if a few of our lenders became unwilling or unable to continue to provide us with financing, we could be forced to sell assets, including assets in unrealized loss positions, to maintain liquidity. Forced sales, particularly under adverse market conditions, may result in lower sale prices than ordinary market sales made in the normal course of business. If our investments were liquidated at prices below our amortized cost of such assets, we would incur losses, which could adversely affect our earnings. In addition, uncertainty in the global finance market and weak economic conditions in Europe, including the United Kingdom’s exit from the European Union (commonly referred to as “Brexit”), could cause the conditions described above to have a more pronounced effect on our European counterparties.

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Our profitability may be materially adversely affected by a reduction in our leverage. As long as we earn a positive spread between interest and other income we earn on our leveraged assets and our borrowing costs, we believe that we can generally increase our profitability by using greater amounts of leverage. There can be no assurance, however, that repurchase financing will remain an efficient source of long-term financing for our assets. The amount of leverage that we use may be limited because our lenders might not make funding available to us at acceptable rates or they may require that we provide additional collateral to secure our borrowings. If our financing strategy is not viable, we will have to find alternative forms of financing for our assets which may not be available to us on acceptable terms or at acceptable rates. In addition, in response to certain interest rate and investment environments or to changes in market liquidity, we could adopt a strategy of reducing our leverage by selling assets or not reinvesting principal payments as MBS amortize or prepay, thereby decreasing the outstanding amount of our related borrowings. Such an action could reduce interest income, interest expense and net income, the extent of which would depend on the level of reduction in assets and liabilities as well as the sale prices for which the assets were sold.

•	An increase in our borrowing costs relative to the interest we receive on our assets may materially adversely affect our profitability. Our earnings are primarily generated from the difference between the interest income we earn on our investment portfolio, less net amortization of purchase premiums and discounts, and the interest expense we pay on

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A re-characterization of the repurchase agreements as sales for tax purposes rather than as secured lending transactions would adversely affect our ability to maintain our qualification as a REIT and to maintain our 1940 Act exemption. When we enter a repurchase agreement, we generally sell assets to our counterparty to the agreement for cash. The counterparty is obligated to resell the assets back to us at the end of the transaction term, which is typically 30 to 90 days. We believe that for U.S. federal income tax purposes we will be treated as the owner of the assets that are the subject of repurchase agreements and that the repurchase agreements will be treated as secured lending transactions notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS or the SEC could successfully assert that we did not own these assets during the term of the repurchase agreements, in which case we could fail to qualify as a REIT or fail to maintain our 1940 Act exemption, respectively.

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A decline in the market value of our assets may result in margin calls that may force us to sell assets under adverse market conditions, which may materially adversely affect our liquidity and profitability. In general, the market value of our residential mortgage investments is impacted by changes in interest rates, prevailing market yields and other market conditions, including general economic conditions, home prices, and the real estate market generally. A decline in the market value of our residential mortgage investments may limit our ability to borrow against such assets or result in lenders initiating margin calls, which require a pledge of additional collateral or cash to re-establish the required ratio of borrowing to collateral value, under our repurchase agreements. Posting additional collateral or cash to support our credit will reduce our liquidity and limit our ability to leverage our assets, which could materially adversely affect our business. Thus, we could be forced to sell a portion of our assets, including MBS in an unrealized loss position, to maintain liquidity.

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If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term or if we default on our obligations under the repurchase agreement, we could incur losses. When we engage in repurchase transactions, we generally sell assets to the counterparty to the agreement for cash. Because the cash we receive from the counterparty is less than the value of those securities (this difference is referred to as the “haircut”), if the lender defaults on its obligation to transfer the same securities back to us, we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). (See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 2019 Form 10-K, for further discussion regarding risks related to exposure to financial institution counterparties in light of recent market conditions.) Our exposure to defaults by counterparties may be more pronounced during periods of significant volatility in the market conditions for mortgages and mortgage-related assets as well as the broader financial markets. At December 31, 2019, there was no amount at risk with any counterparty greater than 10% of the Company's equity. In addition, generally, if we default on a repurchase transaction, we could incur a loss equal to the haircut and the counterparty can elect to terminate the transaction and cease entering into additional repurchase transactions with us. In addition, if we default on a transaction under any one agreement and fail to honor the related guarantee, the counterparties on our other repurchase agreements could also declare a default under their respective repurchase agreements. Any losses we incur on our repurchase transactions could materially adversely affect our earnings and thus our cash available for distribution to our stockholders.

•	Our financing facilities may contain covenants that restrict our operations. Certain financing facilities we may enter contain restrictions, covenants, and representations and warranties that, among other things, may require us to satisfy specified financial, asset quality, loan eligibility, and loan performance tests. If we fail to meet or satisfy any of these

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Our use of repurchase agreements to borrow money may give our lenders greater rights in the event of bankruptcy. In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the Bankruptcy Code, the effect of which, among other things, would be to allow the creditor under the agreement to avoid the automatic stay provisions of the Bankruptcy Code and take possession of, and liquidate, the collateral under such repurchase agreements without delay.

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•	interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

•	available interest rate hedges may not correlate directly with the interest rate risk for which protection is sought;

•	the duration of the hedge may not match the duration of the related liability;

•	the amount of income that a REIT may earn from hedging transactions to offset interest rate losses may be limited by U.S. federal tax provisions governing REITs;

•	the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;

•	the party owing money in the hedging transaction may default on its obligation to pay; and

•	the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments, or “mark-to-market losses,” would reduce our stockholders’ equity.

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•	not be allowed to be offset by a stockholder’s net operating losses;

•	be subject to a tax as unrelated business income if a stockholder were a tax-exempt stockholder;

•	be subject to the application of U.S. federal withholding tax at the maximum rate (without reduction for any otherwise applicable income tax treaty) with respect to amounts allocable to foreign stockholders; and

•	be taxable (at the highest corporate tax rate) to us, rather than to our stockholders, to the extent the excess inclusion income relates to stock held by disqualified organizations (generally, tax-exempt organizations not subject to tax on unrelated business income, including governmental organizations).

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•	85% of our REIT ordinary income for that year;

•	95% of our REIT capital gain net income for that year; and

•	any undistributed taxable income from prior years.

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There are ownership limits and restrictions on transferability and ownership in our charter. To qualify as a REIT, not more than 50% of the value of our outstanding stock may be owned, directly or constructively, by five or fewer individuals during the second half of any calendar year. To assist us in satisfying this test, among other things, our charter generally prohibits any person or entity from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of any class or series of our outstanding capital stock. This restriction may discourage a tender offer or other transactions or a change in the composition of our Board of Directors or control that might involve a premium price for our shares or otherwise be in the best interests of our stockholders and any shares issued or transferred in violation of such restrictions being automatically transferred to a trust for a charitable beneficiary, thereby resulting in a forfeiture of the additional shares.

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Our charter permits our Board of Directors to issue stock with terms that may discourage a third party from acquiring us. Our charter permits our Board of Directors to amend the charter without stockholder approval to increase the total number of authorized shares of stock or the number of shares of any class or series and to issue common or preferred stock, having preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, or terms or conditions of redemption as determined by our board.  Thus, our board could authorize the issuance of stock with terms and conditions that could have the effect of discouraging a takeover or other

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Maryland Control Share Acquisition Act. Maryland law provides that holders of ‘‘control shares’’ of our company (defined as voting shares of stock which, when aggregated with all other shares controlled by the acquiring stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. Our bylaws provide that we are not subject to the “control share” provisions of Maryland law.  Our Board, however, may elect to make the “control share” statute applicable to us at any time and may do so without stockholder approval.

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Business Combinations.  We are subject to the “business combination” provisions of Maryland law that, subject to limitations, prohibit certain business combinations (including a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of our then outstanding voting capital stock or an affiliate or associate of ours who, at any time within the two‑year period before the date in question, was the beneficial owner of 10% or more of our then outstanding voting capital stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder. After the five‑year prohibition, any business combination between us and an interested stockholder generally must be recommended by our board of directors and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding shares of our voting capital stock and (ii) two‑thirds of the votes entitled to be cast by holders of voting capital stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These super‑majority voting requirements do not apply if our common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. These provisions of Maryland law also do not apply to business combinations that are approved or exempted by a board of directors before the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has by resolution exempted business combinations between us and any other person, provided, that such business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person).

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Unsolicited Takeovers: The “unsolicited takeover” provisions of Maryland law, permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses. These provisions may have the effect of inhibiting a third-party from making an acquisition proposal for us or of delaying, deferring, or preventing a change in control of us under the circumstances that otherwise could provide the holders of shares of common stock with the opportunity to realize a premium over the then current market price.

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Staggered Board. Our Board of Directors is divided into three classes of directors. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year one class of directors is elected by the stockholders. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interests of our stockholders.

•	actual receipt of an improper benefit or profit in money, property or services; or

•	a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated for which Maryland law prohibits such exemption from liability.

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If there is a positive change in the amount and timing of future cash flows expected to be collected from the previous estimate used for accounting purposes, the effective interest rate in future accounting periods may increase resulting in an increase in the reported amount of interest income in future periods. A positive change in the amount and timing of future cash flows expected to be collected from the previous estimate used for accounting purposes must be considered significant for Non-Agency RMBS accounted for under ASC 310-30 for the effective interest rate in future accounting periods to increase. A positive change in the amount and timing of future cash flows expected to be collected is considered to have occurred when the net present value of future cash flows expected to be collected has increased from the previous estimate. This can occur from a change in either the timing of when cash flows are expected to be collected (i.e., from changes in prepayment speeds or the timing of estimated defaults) or in the amount of cash flows expected to be collected (i.e., from reductions in estimates of future defaults). Furthermore, a positive change could occur on an overall basis in situations where the positive impact of a change in the timing of cash flows exceeds the negative impact of increased defaults, or when the positive impact of a decline in estimated defaults exceeds the negative impact of an extension of the timing of receipt of cash flows.

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If there is a negative (or adverse) change in the amount and timing of future cash flows expected to be collected from the previous estimate used for accounting purposes, and the security's fair value is below its amortized cost, an OTTI loss equal to the adverse change in cash flows expected to be collected, discounted using the security's effective rate before impairment, is required to be recorded in current period earnings. For Non-Agency RMBS accounted for under ASC 310-30, while the effective interest rate used to accrete interest income after an OTTI has been recognized will be the same, the amount of interest income recorded in future periods will decline because of the reduced balance of the amortized cost basis of the investment to which such effective interest rate is applied.

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•	Our assessment of the credit quality of the asset, including its credit rating at the acquisition date and whether the security has experienced deterioration in credit quality since its inception.

•	Our assessment of the probability of collection of all contractual cash flows.

•	Our assessment of whether the security can be contractually prepaid such that we would not recover our initial investment.

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•	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 receive the benefit of attractive financing terms for an extended period of time in contrast to short term financing and maturity dates of the investments not included in the securitization; and

•	actively managing, through assets selection, 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.

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•	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and

•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

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Chimera Investment Corporation, or the 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 elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder, or the Code.

The Company conducts its operations through various subsidiaries including subsidiaries it treats as taxable REIT subsidiaries, or TRSs. In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. The Company currently has ten wholly owned direct subsidiaries: Chimera RMBS Whole Pool LLC, and Chimera RMBS LLC formed in June 2009; CIM Trading Company LLC, or CIM Trading, formed in July 2010; Chimera Funding TRS LLC, or CIM Funding TRS, a TRS formed in October 2013, Chimera CMBS Whole Pool LLC and Chimera RMBS Securities LLC formed in March 2015; Chimera Insurance Company, LLC formed in July 2015; Chimera RR Holding LLC formed in April 2016, Anacostia LLC, a TRS formed in June 2018, and NYH Funding LLC, a TRS formed in May 2019.

(a) Basis of Presentation and Consolidation

The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included. Investment securities transactions are recorded on the trade date. Certain prior period amounts have been reclassified to conform to the current period's presentation.

The consolidated financial statements include the Company’s accounts, the accounts of its wholly-owned subsidiaries, and variable interest entities, or VIEs, in which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.

The Company uses securitization trusts considered to be VIEs in its securitization and re-securitization transactions. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly impact the VIEs’ economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. For VIEs that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIEs’ economic performance may be determined by an entity’s involvement with the design and structure of the VIE.

The trusts are structured as entities that receive principal and interest on the underlying collateral and distribute those payments to the security holders. The assets held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity. The Company’s risks associated with its involvement with these VIEs are limited to its risks and rights as a holder of the security it has retained.

Determining the primary beneficiary of a VIE requires judgment. The Company determined that for the securitizations it consolidates, its ownership provides the Company with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE. In addition, the Company has the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance, or power, such as rights to direct servicer activity or the Company was determined to have power in connection with its involvement with the structure and design of the VIE.

The Company’s interest in the assets held by these securitization vehicles, which are consolidated on the Company’s Consolidated Statements of Financial Condition, is restricted by the structural provisions of these trusts, and a recovery of the Company’s investment in the vehicles will be limited by each entity’s distribution provisions. The liabilities of the securitization vehicles, which are also consolidated on the Company’s Consolidated Statements of Financial Condition, are non-recourse to the Company, and can only be satisfied using proceeds from each securitization vehicle’s respective asset pool.

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The assets of securitization entities are comprised of residential mortgage backed securities (or RMBS), or residential mortgage loans. See Notes 3, 4 and 8 for further discussion of the characteristics of the securities and loans in the Company’s portfolio.

(b) Statements of Financial Condition Presentation

The Company’s Consolidated Statements of Financial Condition include both the Company’s direct assets and liabilities and the assets and liabilities of consolidated securitization vehicles. Assets of each consolidated VIE can only be used to satisfy the obligations of that VIE, and the liabilities of consolidated VIEs are non-recourse to the Company. The Company is not obligated to provide, nor does it intend to provide, any financial support to these consolidated securitization vehicles. The notes to the consolidated financial statements describe the Company’s assets and liabilities including the assets and liabilities of consolidated securitization vehicles. See Note 8 for additional information related to the Company’s investments in consolidated securitization vehicles.

(c) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and cash deposited overnight in money market funds, which are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation. There were no restrictions on cash and cash equivalents at December 31, 2019 and December 31, 2018.

(d) Agency and Non-Agency Mortgage-Backed Securities

The Company invests in mortgage backed securities, or MBS, representing interests in obligations backed by pools of mortgage loans. The Company delineates between Agency MBS and Non-Agency MBS as follows: (1) Agency MBS are mortgage pass-through certificates, collateralized mortgage obligations, or CMOs, and other MBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by agencies of the U.S. Government, such as Ginnie Mae, or federally chartered corporations such as Freddie Mac or Fannie Mae where principal and interest repayments are guaranteed by the respective agency of the U.S. Government or federally chartered corporation; and (2) Non-Agency MBS are not issued or guaranteed by a U.S. Government Agency or other institution and are subject to credit risk. Repayment of principal and interest on Non-Agency MBS is not guaranteed and it is subject to the performance of the mortgage loans or MBS collateralizing the obligation. Agency MBS collectively refers to include Agency CMBS and Agency RMBS as defined in Part I of this annual report.

The Company also invests in Interest Only Agency MBS strips and Interest Only Non-Agency RMBS strips, or IO MBS strips. IO MBS strips represent the Company’s right to receive a specified proportion of the contractual interest flows of the collateral. Interest income on IO MBS strips is accrued based on the outstanding notional balance and the security’s contractual terms, and amortization of any premium is calculated in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 325-40, Beneficial Interests in Securitized Financial Assets, or ASC 325-40. The Company accounts for IO MBS strips at fair value with changes in fair value recognized in the Company’s Consolidated Statements of Operations.

The Company classifies its MBS as available-for-sale and records investments at estimated fair value as described in Note 5 of these consolidated financial statements. The Company includes unrealized gains and losses considered to be temporary on certain MBS in Other comprehensive income, or OCI, in the Consolidated Statements of Operations. For IO MBS strips and certain other MBS investments, the Company carries these investments at fair value with changes in fair value included in earnings in the Consolidated Statements of Operations. From time to time, as part of the overall management of its portfolio, the Company may sell any of its investments and recognize a realized gain or loss as a component of earnings in the Consolidated Statements of Operations utilizing the average cost method.

The Company’s accounting policy for interest income and impairment related to its MBS is as follows:

Interest Income Recognition

The recognition of interest income on MBS securities varies depending on the characteristics of the security as follows:

Agency MBS and Non-Agency RMBS of High Credit Quality

FASB ASC 310-20, Nonrefundable Fees and Other Costs, or ASC 310-20, is applied to the recognition of interest income for the following securities:

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•	Certain Agency MBS

•	Non-Agency RMBS that meet all of the following conditions at the acquisition date (referred to hereafter as “Non-Agency RMBS of High Credit Quality”):

1. Rated AA or higher by a nationally recognized credit rating agency using the lowest rating available;

2. The Company expects to collect all of the security's contractual cash flows; and

3. The security cannot be contractually prepaid such that the Company would not recover substantially all of its recorded investment.

Under ASC 310-20, interest income, including premiums and discounts associated with the acquisition of these securities, is recognized over the life of such securities using the interest method based on the contractual cash flows of the security. In applying the interest method, the Company considers estimates of future principal prepayments in the calculation of the effective yield. Differences that arise between previously anticipated prepayments and actual prepayments received, as well as changes in future prepayment assumptions, result in a recalculation of the effective yield on the security. This recalculation of the effective yield is updated on a quarterly basis. Upon a recalculation of the effective yield, the investment in the security is adjusted to the amount that would have existed had the new effective yield been retrospectively applied since acquisition with a corresponding charge or credit to interest income.

The Agency MBS, for which we have elected fair value option, we apply FASB ASC 325-40. For these securities accounted for under ASC 325-40, any positive or adverse change in cash flows results in a prospective increase or decrease in the effective interest rate used to recognize interest income.

Non-Agency RMBS Not of High Credit Quality

Non-Agency RMBS purchased at a discount and not of high credit quality at the time of purchase are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, or ASC 310-30, or ASC 325-40 (referred to hereafter as “Non-Agency RMBS Not of High Credit Quality”).

Non-Agency RMBS are accounted for under ASC 310-30 if the following conditions are met as of the acquisition date:

1.	There is evidence of deterioration in credit quality of the security from its inception; and

2.	It is probable that the Company will be unable to collect all contractual cash flows of the security.

Non-Agency RMBS that are not within the scope of ASC 310-30 are accounted for under ASC 325-40 if at the acquisition date:

1.	The security is not of high credit quality (defined as rated below AA or is unrated), or

2.	The security can contractually be prepaid or otherwise settled in such a way that the Company would not recover substantially all of its recorded investment.

Interest income on Non-Agency RMBS Not of High Credit Quality is recognized using the interest method based on management’s estimates of cash flows expected to be collected. The effective interest rate on these securities is based on management’s estimate for each security of the projected cash flows, which are estimated based on observation of current market information and include assumptions related to fluctuations in prepayment speeds and the timing and amount of credit losses. On a quarterly basis, the Company reviews and, if appropriate, adjusts its cash flow projections based on inputs and analyses received from external sources, internal models, and the Company’s judgments about prepayment rates, the timing and amount of credit losses, and other factors. Changes in the amount or timing of cash flows from those originally projected, or from those estimated at the last evaluation date, are considered to be either positive changes or adverse changes. For securities accounted for under ASC 325-40, any positive or adverse change in cash flows that does not result in the recognition of an other-than-temporary impairment, or OTTI, results in a prospective increase or decrease in the effective interest rate used to recognize interest income. For securities accounted for under ASC 310-30, only significant positive changes are reflected prospectively in the effective interest rate used to recognize interest income. Under ASC 310-30, adverse changes in cash flows expected to be collected for Non-Agency RMBS, in an unrealized loss position, generally result in recognition of an OTTI with no change in the effective interest rate used to recognize interest income.

Impairment

Considerations Applicable to certain MBS

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When the fair value of an available-for-sale MBS is less than its amortized cost, the security is considered impaired. On a quarterly basis, the Company evaluates its securities for OTTI. If the Company intends to sell an impaired security, or it is more-likely-than-not that the Company will be required to sell an impaired security before its anticipated recovery, then the Company must recognize an OTTI through a charge to earnings equal to the entire difference between the investment’s amortized cost and its fair value at the measurement date. If the Company does not intend to sell an impaired security and it is not more-likely-than-not that it would be required to sell an impaired security before recovery, the Company must further evaluate the security for impairment due to credit losses. The credit component of OTTI is recognized in earnings and the remaining component is recorded as a component of OCI. Following the recognition of an OTTI through earnings, a new amortized cost basis is established for the security and subsequent recovery in fair value may not be adjusted through current earnings. Subsequent recoveries are amortized into income over the remaining life of the security as an adjustment to yield.

When evaluating whether the Company intends to sell an impaired security or will more-likely-than-not be required to sell an impaired security before recovery, the Company makes judgments that consider among other things, its liquidity, leverage, contractual obligations, and targeted investment strategy to determine its intent and ability to hold the investments that are deemed impaired. The determination as to whether an OTTI exists is based on factual information available at the time of assessment as well as the Company’s estimates of future conditions. As a result, the determination of OTTI and its timing and amount is based on estimates that may change materially over time.

The Company’s estimate of the amount and timing of cash flows for its MBS is based on its review of the underlying securities or mortgage loans securing the MBS. The Company considers historical information available and expected future performance of the underlying securities or mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, extent of credit support available, Fair Isaac Corporation, or FICO, scores at loan origination, year of origination, loan-to-value ratios, geographic concentrations, as well as reports by credit rating agencies, current and forecast interest rates, general market assessments and dialogue with market participants. As a result, substantial judgment is used in the Company’s analysis to determine the expected cash flows for its MBS.

Considerations Applicable to Non-Agency RMBS of High Credit Quality

The impairment assessment for Non-Agency RMBS of High Credit Quality involves comparing the present value of the remaining cash flows expected to be collected to the amortized cost of the security at the assessment date. The discount rate used to calculate the present value of the expected future cash flows is based on the security’s effective interest rate as calculated under ASC 310-20 (i.e., the discount rate implicit in the security as of the last measurement date). If the present value of the remaining cash flows expected to be collected is less than the amortized cost basis, an OTTI is recognized in earnings for the difference. This amount is considered to be the credit loss component; the remaining difference between amortized cost and the fair value of the security is considered to be the portion of loss recognized in other comprehensive income.

Considerations Applicable to Non-Agency RMBS Not of High Credit Quality

Non-Agency RMBS within the scope of ASC 325-40 or ASC 310-30 are considered other-than-temporarily impaired when the following two conditions exist: (1) the fair value is less than the amortized cost basis, and (2) there has been an adverse change in cash flows expected to be collected from the last measurement date (i.e. adverse changes in either the amount or timing of cash flows from those previously expected).

The OTTI is separated into a credit loss component that is recognized in earnings and the portion of loss recognized in other comprehensive income. The credit component is comprised of the impact of the fair value decline due to changes in assumptions related to default (collection) risk and prepayments. The portion of loss recognized in other comprehensive income comprises the change in fair value of the security due to all other factors, including changes in benchmark interest rates and market liquidity. In determining the OTTI related to credit losses for securities, the Company compares the present value of the remaining cash flows adjusted for prepayments expected to be collected at the current financial reporting date to the present value of the remaining cash flows expected to be collected at the original purchase date (or the last date those estimates were revised for accounting purposes). The discount rate used to calculate the present value of expected future cash flows is the effective interest rate used for income recognition purposes as determined under ASC 325-40 or ASC 310-30.

The determination of whether an OTTI exists and, if so, the extent of the credit component is subject to significant judgment and management’s estimates of both historical information available at the time of assessment, the current market environment, as well as the Company’s estimates of the future performance and projected amount and timing of cash flows expected to be

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collected on the security. As a result, the timing and amount of OTTI constitutes an accounting estimate that may change materially over time.

Investments for which the Company has elected the fair value option are not evaluated for OTTI as all changes in fair value are reflected in earnings.

(e) Loans Held for Investment

The Company's Loans held for investments is comprised of seasoned residential mortgage loans that are not guaranteed as to repayment of principal or interest. These loans are serviced and may be modified by a third-party servicer. Additionally, in certain cases, the Company has the ability to remove the servicer with or without cause upon prior notice. These residential mortgage loans are designated as held for investment. Interest income on loans held for investment is recognized over the expected life of the loans using the interest method with changes in yield reflected in earnings on a prospective basis and are carried at fair value with changes in fair value recorded in earnings.

The Company estimates the fair value of securitized loans as described in Note 5 of these consolidated financial statements.

Interest is accrued on all loans held for investment when due. Interest which is not received at the due date is written off when it becomes delinquent. Nonrefundable fees and costs related to acquiring the Company’s residential mortgage loans are recognized as expenses in the Consolidated Statements of Operations. Income recognition is suspended for loans when, based on information from the servicer, a full recovery of interest or principal becomes doubtful.

Real estate owned

Real estate owned, or REO, represents properties which the Company has received the legal title of the property to satisfy the outstanding loan. REO is re-categorized from loan to REO when the Company takes legal title of the property. REO assets are measured and reported at the estimated fair value less the estimated cost to sell at the end of each reporting period. At the time the asset is re-categorized, any difference between the previously recorded loan balance and the carrying value of the REO at the time the Company takes legal title of the property, is recognized as a gain or loss. All REO assets of the Company are held-for-sale and it is the Company’s intention to sell the property in the shortest time possible to maximize their return and recovery on the previously recorded loan. The carrying value of REO assets at December 31, 2019 and 2018 was $25 million and $17 million, respectively, and were recorded in Other Assets on the Company’s Consolidated Statements of Financial Condition.

(f) Repurchase Agreements

The Company finances the acquisition of a significant portion of its mortgage-backed securities with repurchase agreements. The Company has evaluated each agreement and has determined that each of the repurchase agreements be accounted for as secured borrowings, which is recourse to the Company.

(g) Securitized Debt, collateralized by Non-Agency RMBS and Securitized Debt, collateralized by Loans held for investment

Certain re-securitization transactions classified as Securitized Debt, collateralized by Non-Agency RMBS, reflect the transfer to a trust of fixed or adjustable rate MBS which are classified as Non-Agency RMBS that pay interest and principal to the debt holders of that re-securitization. Re-securitization transactions completed by the Company that did not qualify as sales are accounted for as secured borrowings. The associated securitized debt is carried at amortized cost, net of any unamortized premiums or discounts.

Certain transactions involving residential mortgage loans are accounted for as secured borrowings and are recorded as Securitized loans held for investment and the corresponding debt as Securitized debt, collateralized by 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 to the debt holders of that securitization. The Securitized debt, collateralized by loans held for investment, is carried at fair value.

The Company recognizes interest expense on securitized debt over the contractual life of the debt using the interest method with changes in yield reflected in earnings on a retrospective basis. For securitized debt, where the Company has elected fair value option, the interest expense is recognized using the interest method with changes in yield reflected in earnings on a prospective basis. The Company recognizes a gain or loss on extinguishment of debt when it acquires its outstanding debt at discount or premium.

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The Company estimates the fair value of its securitized debt as described in Note 5 to these consolidated financial statements.

(h) Fair Value

The Company carries the majority of its financial instruments at fair value. The Company has elected fair value option on certain Non-Agency RMBS, Agency MBS, Loans held for investments and Securitized debt, collateralized by loans held for investment. The Company believes the fair value option election will provide its financial statements user with reduced complexity, greater consistency, understandability and comparability.

Agency MBS:

The Company has elected to account for Agency MBS investments acquired on or after July 1, 2017 under the fair value option. Under the fair value option, these investments will be carried at fair value, with changes in fair value reported in earnings (included as part of “Net unrealized gains (losses) on financial instruments at fair value”). Consistent with all other investments for which the Company has elected the fair value option, the Company will recognize revenue on a prospective basis in accordance with guidance in ASC 325-40.

All Agency MBS investments owned prior to July 1, 2017 will continue to be carried at fair value with changes in fair value reported in other comprehensive income (OCI) as available-for-sale investments. All revenue recognition for these Agency MBS investments owned prior to July 1, 2017 will be in accordance with ASC 310-20, per the Company’s accounting practices.

Non-Agency RMBS:

The Company has elected to account for all Non-Agency RMBS investments acquired on or after January 1, 2019 under the fair value option. Under the fair value option, these investments will be carried at fair value, with changes in fair value reported in earnings (included as part of “Net unrealized gains (losses) on financial instruments at fair value”). Consistent with all other investments for which the Company has elected the fair value option, the Company will recognize revenue on a prospective basis in accordance with guidance in ASC 325-40.

The Company has elected the fair value option for certain interests in Non-Agency RMBS which it refers to as the overcollateralization classes. The cash flows for these holdings are generally subordinate to all other interests of the trusts and generally only pay out funds when certain ratios are met and excess cash holdings, as determined by the trustee, are available for distribution to the overcollateralization class. Many of the investments in this group have no current cash flows and may not ever pay cash flows, depending on the loss experience of the collateral group supporting the investment. Estimating future cash flows for this group of Non-Agency RMBS investments is highly subjective and uncertain; therefore, the Company records these holdings at fair value with changes in fair value reflected in earnings. Changes in fair value of the overcollateralization classes are presented in Net unrealized gains (losses) on financial instruments at fair value on the Consolidated Statements of Operations.

The fair value of the Non-Agency RMBS carried at fair value with changes in fair value reflected in earnings was $423 million and $12 million as of December 31, 2019 and 2018, respectively.

Interest-Only MBS:

The Company accounts for the IO MBS strips at fair value with changes in fair value reported in earnings. The IO MBS strips are included in MBS, at fair value, on the accompanying Consolidated Statements of Financial Condition.

Included in Non-Agency RMBS, at fair value on the Consolidated Statements of Financial Condition are IO MBS strips carried at fair value with changes in fair value reflected in earnings of $289 million and $267 million as of December 31, 2019 and 2018. Included in Agency RMBS, at fair value on the Consolidated Statements of Financial Condition are IO MBS strips carried at fair value with changes in fair value reflected in earnings of $128 million and $66 million as of December 31, 2019 and 2018. Included in Agency CMBS, at fair value on the Consolidated Statements of Financial Condition are IO MBS strips carried at fair value with changes in fair value reflected in earnings of $49 million and $68 million as of December 31, 2019 and 2018. Interest income reported on all IO MBS securities was $27 million and $25 million for the years ended December 31, 2019 and 2018, respectively.

Loans Held for Investment:

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The Company’s Loans held for investment are carried at fair value with changes in fair value reflected in earnings. The Company carries Loans held for investment at fair value as it may resecuritize these loans in the future. Additionally, the fair value option allows both the loans and related financing to be consistently reported at fair value and to achieve operational and valuation simplifications.

Changes in fair value of Loans held for investment are presented in Net unrealized gains (losses) on financial instruments at fair value on the Consolidated Statements of Operations.

Securitized Debt, Collateralized by Loans Held for Investment:

The Company’s securitized debt, collateralized by loans held for investment, is carried at fair value with changes in fair value reflected in earnings. The Company has elected the fair value option for these financings as it may call or restructure these debt financings in the future. Additionally, the fair value option allows both the loans and related financing to be consistently reported at fair value and to achieve operational and valuation simplifications. Changes in fair value of securitized debt, collateralized by loans held for investment are presented in Net unrealized gains (losses) on financial instruments at fair value on the Consolidated Statements of Operations.

Fair Value Disclosure

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

(i) Derivative Financial Instruments

The Company’s investment policies permit it to enter into derivative contracts, including interest rate swaps, swaptions, mortgage options, futures, and interest rate caps to manage its interest rate risk and, from time to time, enhance investment returns. The Company’s derivatives are recorded as either assets or liabilities in the Consolidated Statements of Financial Condition and measured at fair value. These derivative financial instrument contracts are not designated as hedges for GAAP; therefore, all changes in fair value are recognized in earnings. The Company estimates the fair value of its derivative instruments as described in Note 5 of these consolidated financial statements. Net payments on derivative instruments are included in the Consolidated Statements of Cash Flows as a component of net income. Unrealized gains (losses) on derivatives are removed from net income to arrive at cash flows from operating activities.

The Company elects to net the fair value of its derivative contracts by counterparty when appropriate. These contracts contain legally enforceable provisions that allow for netting or setting off of all individual derivative receivables and payables with each counterparty and therefore, the fair values of those derivative contracts are reported net by counterparty. The credit support annex provisions of the Company’s derivative contracts allow the parties to mitigate their credit risk by requiring the party which is in a net payable position to post collateral. As the Company elects to net by counterparty the fair value of derivative contracts, it also nets by counterparty any cash collateral exchanged as part of the derivative. Refer to Note 9 Derivative Instruments for further details.

(j) Sales, Securitizations, and Re-Securitizations

The Company periodically enters into transactions in which it sells financial assets, such as MBS and mortgage loans. Gains and losses on sales of assets are calculated using the average cost method whereby the Company records a gain or loss on the difference between the average amortized cost 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 sales, whereby the assets contributed to the securitization are removed from the Consolidated Statements of Financial Condition and a gain or loss is recognized, or as secured borrowings whereby the assets contributed to the securitization are not derecognized but rather the debt issued by the securitization entity 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 or re-securitized assets. In transfers that are considered secured borrowings, no gain or loss is recognized. Any difference in the proceeds received and the carrying value of the transferred asset is recorded as a premium or discount and amortized into earnings as an adjustment to yield.

(k) Income Taxes

The Company has elected to be taxed as a REIT and intends to comply with the provision of the Code, with respect thereto. Accordingly, the Company will generally not be subject to U.S. federal, state or local income taxes to the extent that qualifying

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distributions are made to stockholders and as long as 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 U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the REIT qualification was lost.

A tax position is recognized only when, based on management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The Company does not have any unrecognized tax positions that would affect its financial statements or require disclosure. No accruals for penalties and interest were necessary as of December 31, 2019 or 2018.

(l) Net Income per Share

The Company calculates basic net income per share by dividing net income for the period by the basic 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 unvested restricted stock.

(m) Stock-Based Compensation

Compensation expense for equity based awards granted to the Company’s independent directors and stock based compensation awards granted to employees of the Company subject only to service condition is recognized on a straight-line basis over the vesting period of such awards, based upon the fair value of such awards at the grant date. The Company recognizes forfeitures when they occur and does not adjust the fair value of the grants for estimated forfeitures. For awards subject to vesting on a straight line basis, the total amount of expense is at least equal to the measured expense of each vested tranche. Awards subject to only a service condition are valued according to the market price for the Company’s common stock at the date of grant. For awards based on the performance of the Company, it engages an independent appraisal company to determine the value of the shares at the date of grant or estimates the value based on the Company's performance relative to an established peer group. The Company considers the underlying contingency risks associated with the performance criteria. The values of these grants are expensed ratably over their respective vesting periods (irrespective of achievement of the performance criteria) adjusted, as applicable, for forfeitures.

(n) Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could be materially different than anticipated in those estimates, which could have a material adverse impact on the Company’s results of operations and its financial condition. Management has made significant estimates including in accounting for income recognition and OTTI on Agency MBS, Non-Agency RMBS, IO MBS (Note 3) and residential mortgage loans (Note 4), valuation of Agency MBS and Non-Agency RMBS (Notes 3 and 5), residential mortgage loans (Note 4 and 5), securitized debt (Note 5 and 7), derivative instruments (Notes 5 and 9) and compensation expense estimates (Note 12). Actual results could differ materially from those estimates.

(o) Recent Accounting Pronouncements

Financial Instruments - Credit Losses - (Topic 326)

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This update replaces the current model for recognizing credit losses from an incurred credit loss model to a current expected credit loss (CECL) model for instruments measured at amortized cost and requires entities to record allowances for available-for-sale (AFS) debt securities for all expected (rather than incurred) credit losses of the asset rather than reduce the carrying amount, as the Company does under the current OTTI model. This update also revises the accounting model for purchased credit-impaired debt securities. The changes in the allowances created in accordance with this update will be recorded in earnings. Expected credit losses are limited to the amount of the unrealized loss on the debt securities impacted by the update. If at the end of a reporting period the debt security with an expected loss is in an unrealized gain position, no expected credit losses will be recorded.

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The update does not have any impact on financial instruments which are carried at fair value with changes in fair value recorded in earnings. As all Loans held for investment are carried at fair value, with changes in fair value recorded in earnings, the update will have no impact on the carrying value or revenue recognition of Loans held for investment.

The update supersedes subtopic 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. Upon the effective date of the update, all investments previously classified as AFS and accounted for under subtopic 310-30 will be accounted for under subtopic 326-30 Financial Instruments - Credit Losses; Available-for-Sale Debt Securities and subtopic 325-40, Investments -Other-Beneficial Interests in Securitized Financial Assets.

Under subtopic 310-30, when there is a significant increase in cash flows previously expected to be collected, the Company will increase the yield. When there is a significant decline in cash flows previously expected to be collected, and the fair value of the debt security has declined below its amortized cost basis, an OTTI is considered to have occurred and the amortized cost basis of the investment is reduced. The yield is not lowered under subtopic 310-30 as a result of declines in cash flows previously expected to be collected.

Subtopic 325-40 differs from subtopic 310-30 in that the increase in cash flows previously expected to be collected does not have to be considered significant to potentially result in an increase in the yield. In addition, a significant decline in cash flows previously expected to be collected will result in either an increase in the credit allowance (if the decline is due to an increase in expected losses), or a reduction in the yield (if decline is a result of prepayments or other factors).

With this change for AFS securities accounted for under subtopics 310-30 to subtopics 326-30 and 325-40 upon the effective date of the update, there will be a reduction in the yields on certain AFS investments previously accounted for under subtopic 310-30 for which there have been significant declines in cash flows expected to be collected but the fair values are in excess of the amortized cost basis of the investments at the transition date.

The guidance in the ASU will be applied prospectively and is effective for the Company as of January 1, 2020. The standard requires the company to record a cumulative-effect adjustment to the statement of financial position as the effective date. As all debt securities impacted by the update are in an unrealized gain position as of the transition date, there is no impact on the financial statements at January 1, 2020. AFS securities on which other-than-temporary impairment had been recognized prior to the effective date of the new standard will transition to the new guidance prospectively with no change in the amortized cost basis of the security. The effective interest rate on such a debt security before the adoption date will be retained and locked in and changes in cash flows will not impact the yield of the security. Amounts previously recognized in accumulated other comprehensive income related to cash flow improvements will continue to be accreted to interest income over the remaining life of the debt security on a level-yield basis. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption will be recognized in income in the period received. Increases in expected losses will result in the Company recording an allowance.

The Company classifies its Non-Agency RMBS as senior, subordinated, or Interest-only. The Company also invests in Agency MBS which it classifies as Agency RMBS to include residential and residential interest-only MBS and Agency CMBS to include commercial and commercial interest-only MBS. Senior interests in Non-Agency RMBS are generally entitled to the first principal repayments in their pro-rata ownership interests at the acquisition date. The tables below present amortized cost, fair value and unrealized gain/losses of Company's MBS investments as of December 31, 2019 and 2018.

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				December 31, 2019
				(dollars in thousands)
	Principal or Notional Value			Total Premium			Total Discount			Amortized Cost			Fair Value			Gross Unrealized Gains			Gross Unrealized Losses			Net Unrealized Gain/(Loss)
Non-Agency RMBS
Senior	$	2,024,564		$	2,038		$	(953,916	)	$	1,072,686		$	1,700,911		$	628,518		$	(293	)	$	628,225
Subordinated	876,592			9,915			(332,913		)	553,594			624,598			76,272			(5,268		)	71,004
Interest-only	7,458,653			301,170			—			301,170			288,899			51,481			(63,752		)	(12,271		)
Agency RMBS
Pass-through	6,080,547			131,023			—			6,211,570			6,362,626			152,271			(1,215		)	151,056
Interest-only	1,539,941			139,536			—			139,536			127,667			220			(12,089		)	(11,869		)
Agency CMBS
Project loans	2,621,938			52,681			(4,961		)	2,669,658			2,801,692			132,700			(666		)	132,034
Interest-only	1,817,246			51,140			—			51,140			49,025			586			(2,701		)	(2,115		)
Total	$	22,419,481		$	687,503		$	(1,291,790	)	$	10,999,354		$	11,955,418		$	1,042,048		$	(85,984	)	$	956,064

				December 31, 2018
				(dollars in thousands)
	Principal or Notional Value			Total Premium			Total Discount			Amortized Cost			Fair Value			Gross Unrealized Gains			Gross Unrealized Losses			Net Unrealized Gain/(Loss)
Non-Agency RMBS
Senior	$	2,386,049		$	537		$	(1,112,368	)	$	1,274,218		$	1,943,124		$	669,356		$	(450	)	$	668,906
Subordinated	394,037			8,642			(179,669		)	223,010			276,467			53,702			(245		)	53,457
Interest-only	5,888,747			296,874			—			296,874			266,539			33,123			(63,458		)	(30,335		)
Agency RMBS
Pass-through	8,984,249			221,606			—			9,205,855			9,174,382			51,986			(83,459		)	(31,473		)
Interest-only	578,284			64,185			—			64,185			65,675			1,490			—			1,490
Agency CMBS
Project loans	2,895,679			61,727			(4,469		)	2,952,937			2,881,222			6,303			(78,018		)	(71,715		)
Interest-only	2,450,288			71,841			—			71,841			67,671			496			(4,666		)	(4,170		)
Total	$	23,577,333		$	725,412		$	(1,296,506	)	$	14,088,920		$	14,675,080		$	816,456		$	(230,296	)	$	586,160

The table below presents changes in accretable yield, or the excess of the security’s cash flows expected to be collected over the Company’s investment, solely as it pertains to the Company’s Non-Agency RMBS portfolio accounted for according to the provisions of ASC 310-30.

	For the Year Ended
	December 31, 2019			December 31, 2018
	(dollars in thousands)
Balance at beginning of period	$	1,248,309		$	1,303,589
Purchases	—			43,866
Yield income earned	(228,208		)	(231,205		)
Reclassification (to) from non-accretable difference	59,957			157,117
Sales and deconsolidation	(26,378		)	(25,058		)
Balance at end of period	$	1,053,680		$	1,248,309

The table below presents the outstanding principal balance and related amortized cost at December 31, 2019 and 2018, as it pertains to the Company’s Non-Agency RMBS portfolio accounted for according to ASC 310-30 guidance.

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	For the Year Ended
	December 31, 2019			December 31, 2018
	(dollars in thousands)
Outstanding principal balance:
Beginning of period	$	2,325,154		$	2,673,350
End of period	$	1,964,143		$	2,325,154
Amortized cost:
Beginning of period	$	1,158,291		$	1,381,839
End of period	$	965,546		$	1,158,291

The following tables present the gross unrealized losses and estimated fair value of the Company’s Agency and Non-Agency MBS by length of time that such securities have been in a continuous unrealized loss position at December 31, 2019 and 2018. All available for sale securities in an unrealized loss position have been evaluated by the Company for OTTI.

							December 31, 2019
							(dollars in thousands)
	Unrealized Loss Position for Less than 12 Months									Unrealized Loss Position for 12 Months or More									Total
	Estimated Fair Value			Unrealized Losses			Number of Positions			Estimated Fair Value			Unrealized Losses			Number of Positions			Estimated Fair Value			Unrealized Losses			Number of Positions
Non-Agency RMBS
Senior	$	—		$	—		—			$	31,635		$	(293	)	1			$	31,635		$	(293	)	1
Subordinated	69,178			(5,064		)	9			1,836			(204		)	11			71,014			(5,268		)	20
Interest-only	50,376			(22,737		)	46			64,129			(41,015		)	66			114,505			(63,752		)	112
Agency RMBS
Pass-through	11,398			(605		)	4			67,552			(610		)	5			78,950			(1,215		)	9
Interest-only	121,228			(12,089		)	22			—			—			—			121,228			(12,089		)	22
Agency CMBS
Project loans	41,971			(277		)	3			44,896			(389		)	4			86,867			(666		)	7
Interest-only	15,045			(295		)	6			9,930			(2,406		)	7			24,975			(2,701		)	13
Total	$	309,196		$	(41,067	)	90			$	219,978		$	(44,917	)	94			$	529,174		$	(85,984	)	184

							December 31, 2018
							(dollars in thousands)
	Unrealized Loss Position for Less than 12 Months									Unrealized Loss Position for 12 Months or More									Total
	Estimated Fair Value			Unrealized Losses			Number of Positions			Estimated Fair Value			Unrealized Losses			Number of Positions			Estimated Fair Value			Unrealized Losses			Number of Positions
Non-Agency RMBS
Senior	$	—		$	—		—			$	33,303		$	(450	)	1			$	33,303		$	(450	)	1
Subordinated	13,404			(245		)	7			—			—			8			13,404			(245		)	15
Interest-only	36,340			(4,434		)	31			95,411			(59,024		)	92			131,751			(63,458		)	123
Agency RMBS
Pass-through	779,322			(6,220		)	17			1,809,566			(77,239		)	114			2,588,888			(83,459		)	131
Interest-only	—			—			—			—			—			—			—			—			—
Agency CMBS
Project loans	1,697,555			(56,382		)	548			504,570			(21,636		)	183			2,202,125			(78,018		)	731
Interest-only	5,769			(48		)	2			41,659			(4,618		)	17			47,428			(4,666		)	19
Total	$	2,532,390		$	(67,329	)	605			$	2,484,509		$	(162,967	)	415			$	5,016,899		$	(230,296	)	1,020

At December 31, 2019, the Company did not intend to sell any of its Agency and Non-Agency MBS that were in an unrealized loss position, and it was not more likely than not that the Company would be required to sell these MBS before recovery of

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their amortized cost basis, which may be at their maturity. With respect to RMBS held by consolidated VIEs, the ability of any entity to cause the sale by the VIE prior to the maturity of these RMBS is either expressly prohibited, not probable, or is limited to specified events of default, none of which have occurred as of December 31, 2019.

Gross unrealized losses on the Company’s Agency MBS (excluding Agency MBS which are reported at fair value with changes in fair value recorded in earnings) were $1 million and $95 million as of December 31, 2019 and 2018, respectively. Given the inherent credit quality of Agency MBS, the Company does not consider any of the current impairments on its Agency MBS to be credit related. In evaluating whether it is more likely than not that it will be required to sell any impaired security before its anticipated recovery, which may be at their maturity, the Company considers the significance of each investment, the amount of impairment, the projected future performance of such impaired securities, as well as the Company’s current and anticipated leverage capacity and liquidity position. Based on these analyses, the Company determined that at December 31, 2019 and 2018, unrealized losses on its Agency MBS were temporary.

Gross unrealized losses on the Company’s Non-Agency RMBS (excluding Non-Agency RMBS which are reported at fair value with changes in fair value recorded in earnings) were $348 thousand and $601 thousand at December 31, 2019 and 2018, respectively. Based upon the most recent evaluation, the Company does not consider these unrealized losses to be indicative of OTTI and does not believe that these unrealized losses are credit related, but rather are due to other factors. The Company has reviewed its Non-Agency RMBS that are in an unrealized loss position to identify those securities with losses that are other-than-temporary based on an assessment of changes in cash flows expected to be collected for such RMBS, which considers recent bond performance and expected future performance of the underlying collateral.

A summary of the OTTI included in earnings for the years ended December 31, 2019, 2018 and 2017 and are presented below.

	For the Year Ended
	December 31, 2019			December 31, 2018			December 31, 2017
	(dollars in thousands)
Total other-than-temporary impairment losses	$	(801	)	$	(2,556	)	$	(5,169	)
Portion of loss recognized in other comprehensive income (loss)	(4,052		)	(19,235		)	(56,687		)
Net other-than-temporary credit impairment losses	$	(4,853	)	$	(21,791	)	$	(61,856	)

 

The following table presents a roll forward of the credit loss component of OTTI on the Company’s Non-Agency RMBS for which a portion of loss was recognized in OCI. The table delineates between those securities that are recognizing OTTI for the first time as opposed to those that have previously recognized OTTI.

	For the Year Ended
	December 31, 2019			December 31, 2018			December 31, 2017
	(dollars in thousands)
Cumulative credit loss beginning balance	$	587,199		$	591,521		$	556,485
Additions:
Other-than-temporary impairments not previously recognized	1,479			9,379			12,669
Reductions for securities sold or deconsolidated during the period	(175		)	(9,169		)	(12,405		)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments	3,375			12,412			47,211
Reductions for increases in cash flows expected to be collected over the remaining life of the securities	(5,593		)	(16,944		)	(12,439		)
Cumulative credit impairment loss ending balance	$	586,285		$	587,199		$	591,521

Cash flows generated to determine net other-than-temporary credit impairment losses recognized in earnings are estimated using significant unobservable inputs. The significant inputs used to measure the component of OTTI recognized in earnings for the Company’s Non-Agency RMBS for the periods reported are summarized as follows:

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	For the Year Ended
	December 31, 2019	December 31, 2018
Loss Severity
Weighted Average	69%	59%
Range	53% - 102%	5% - 132%
60+ days delinquent
Weighted Average	8%	13%
Range	2% - 18%	0% - 30%
Credit Enhancement (1)
Weighted Average	0%	14%
Range	0% - 0%	0% - 55%
3 Month Prepay Rate
Weighted Average	8%	10%
Range	3% - 21%	0% - 39%
12 Month Prepay Rate
Weighted Average	9%	11%
Range	3% - 12%	1% - 28%

(1) Calculated as the combined credit enhancement to the Re-REMIC and underlying from each of their respective capital structures.

The following tables present a summary of unrealized gains and losses at December 31, 2019 and 2018.

				December 31, 2019
				(dollars in thousands)
	Gross Unrealized Gain Included in Accumulated Other Comprehensive Income			Gross Unrealized Gain Included in Cumulative Earnings			Total Gross Unrealized Gain			Gross Unrealized Loss Included in Accumulated Other Comprehensive Income			Gross Unrealized Loss Included in Cumulative Earnings			Total Gross Unrealized Loss
Non-Agency RMBS
Senior	$	628,518		$	—		$	628,518		$	(293	)	$	—		$	(293	)
Subordinated	57,174			19,098			76,272			(55		)	(5,213		)	(5,268		)
Interest-only	—			51,481			51,481			—			(63,752		)	(63,752		)
Agency RMBS
Pass-through	—			152,271			152,271			—			(1,215		)	(1,215		)
Interest-only	—			220			220			—			(12,089		)	(12,089		)
Agency CMBS
Project loans	23,643			109,057			132,700			(651		)	(15		)	(666		)
Interest-only	—			586			586			—			(2,701		)	(2,701		)
Total	$	709,335		$	332,713		$	1,042,048		$	(999	)	$	(84,985	)	$	(85,984	)

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				December 31, 2018
				(dollars in thousands)
	Gross Unrealized Gain Included in Accumulated Other Comprehensive Income			Gross Unrealized Gain Included in Cumulative Earnings			Total Gross Unrealized Gain			Gross Unrealized Loss Included in Accumulated Other Comprehensive Income			Gross Unrealized Loss Included in Cumulative Earnings			Total Gross Unrealized Loss
Non-Agency RMBS
Senior	$	669,356		$	—		$	669,356		$	(450	)	$	—		$	(450	)
Subordinated	50,235			3,467			53,702			(151		)	(94		)	(245		)
Interest-only	—			33,123			33,123			—			(63,458		)	(63,458		)
Agency RMBS
Pass-through	1,708			50,278			51,986			(59,552		)	(23,907		)	(83,459		)
Interest-only	—			1,490			1,490			—			—			—
Agency CMBS
Project loans	811			5,492			6,303			(35,125		)	(42,893		)	(78,018		)
Interest-only	—			496			496			—			(4,666		)	(4,666		)
Total	$	722,110		$	94,346		$	816,456		$	(95,278	)	$	(135,018	)	$	(230,296	)

Changes in prepayments, actual cash flows, and cash flows expected to be collected, among other items, are affected by the collateral characteristics of each asset class. The Company chooses assets for the portfolio after carefully evaluating each investment’s risk profile.

The following tables provide a summary of the Company’s MBS portfolio at December 31, 2019 and 2018.

	December 31, 2019
	Principal or Notional Value at Period-End (dollars in thousands)			Weighted Average Amortized Cost Basis			Weighted Average Fair Value		Weighted Average Coupon		Weighted Average Yield at Period-End (1)
Non-Agency RMBS
Senior	$	2,024,564		$	52.98		84.01		5.0	%	20.8	%
Subordinated	876,592			63.15			71.25		3.7	%	6.9	%
Interest-only	7,458,653			4.04			3.87		1.1	%	8.4	%
Agency RMBS
Pass-through	6,080,547			102.15			104.64		4.0	%	3.4	%
Interest-only	1,539,941			9.06			8.29		1.6	%	4.0	%
Agency CMBS
Project loans	2,621,938			101.82			106.86		3.7	%	3.6	%
Interest-only	1,817,246			2.81			2.70		0.7	%	4.7	%

(1) Bond Equivalent Yield at period end.

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	December 31, 2018
	Principal or Notional Value at Period-End (dollars in thousands)			Weighted Average Amortized Cost Basis			Weighted Average Fair Value			Weighted Average Coupon		Weighted Average Yield at Period-End (1)
Non-Agency RMBS
Senior	$	2,386,049		$	53.40		$	81.44		5.0	%	19.5	%
Subordinated	394,037			56.60			70.16			4.0	%	9.9	%
Interest-only	5,888,747			5.04			4.53			1.2	%	8.7	%
Agency RMBS
Pass-through	8,984,249			102.47			102.12			4.0	%	3.6	%
Interest-only	578,284			11.10			11.36			1.5	%	5.5	%
Agency CMBS
Project loans	2,895,679			101.98			99.50			3.6	%	3.4	%
Interest-only	2,450,288			2.93			2.76			0.6	%	3.2	%

(1) Bond Equivalent Yield at period end.

The following table presents the weighted average credit rating of the Company’s Non-Agency RMBS portfolio at December 31, 2019 and 2018.

	December 31, 2019		December 31, 2018
AAA	0.4	%	0.5	%
AA	0.1	%	0.1	%
A	0.9	%	0.3	%
BBB	1.6	%	0.4	%
BB	3.8	%	3.6	%
B	1.6	%	1.1	%
Below B or not rated	91.6	%	94.0	%
Total	100.0	%	100.0	%

Actual maturities of MBS are generally shorter than the stated contractual maturities. Actual maturities of the Company’s MBS are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. The following tables provide a summary of the fair value and amortized cost of the Company’s MBS at December 31, 2019 and 2018 according to their estimated weighted-average life classifications. The weighted-average lives of the MBS in the tables below are based on lifetime expected prepayment rates using an industry prepayment model for the Agency MBS portfolio and the Company’s prepayment assumptions for the Non-Agency RMBS. 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.

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	December 31, 2019
	(dollars in thousands)
	Weighted Average Life
	Less than one year			Greater than one year and less than five years			Greater than five years and less than ten years			Greater than ten years			Total
Fair value
Non-Agency RMBS
Senior	$	16,343		$	450,185		$	676,382		$	558,001		$	1,700,911
Subordinated	—			43,796			95,973			484,829			624,598
Interest-only	—			126,631			159,057			3,211			288,899
Agency RMBS
Pass-through	—			5,939,408			421,539			1,679			6,362,626
Interest-only	—			1,614			126,053			—			127,667
Agency CMBS
Project loans	15,065			—			29,385			2,757,242			2,801,692
Interest-only	—			20,528			28,497			—			49,025
Total fair value	$	31,408		$	6,582,162		$	1,536,886		$	3,804,962		$	11,955,418
Amortized cost
Non-Agency RMBS
Senior	$	15,206		$	304,850		$	409,958		$	342,672		$	1,072,686
Subordinated	—			29,085			86,033			438,476			553,594
Interest-only	—			150,221			148,889			2,060			301,170
Agency RMBS
Pass-through	—			5,796,044			414,482			1,044			6,211,570
Interest-only	—			2,260			137,276			—			139,536
Agency CMBS
Project loans	15,084			—			28,954			2,625,620			2,669,658
Interest-only	—			22,950			28,190			—			51,140
Total amortized cost	$	30,290		$	6,305,410		$	1,253,782		$	3,409,872		$	10,999,354

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	December 31, 2018
	(dollars in thousands)
	Weighted Average Life
	Less than one year			Greater than one year and less than five years			Greater than five years and less than ten years			Greater than ten years			Total
Fair value
Non-Agency RMBS
Senior	$	7,611		$	357,543		$	946,536		$	631,434		$	1,943,124
Subordinated	—			39,825			43,744			192,898			276,467
Interest-only	1,189			38,710			105,722			120,918			266,539
Agency RMBS
Pass-through	—			640,713			8,524,211			9,458			9,174,382
Interest-only	—			—			65,675			—			65,675
Agency CMBS
Project loans	—			15,468			28,205			2,837,549			2,881,222
Interest-only	—			48,580			19,091			—			67,671
Total fair value	$	8,800		$	1,140,839		$	9,733,184		$	3,792,257		$	14,675,080
Amortized cost
Non-Agency RMBS
Senior	$	7,522		$	277,025		$	585,187		$	404,484		$	1,274,218
Subordinated	—			29,487			26,036			167,487			223,010
Interest-only	2,250			47,372			118,896			128,356			296,874
Agency RMBS
Pass-through	—			645,368			8,550,766			9,721			9,205,855
Interest-only				—			64,185			—			64,185
Agency CMBS
Project loans	—			15,543			29,447			2,907,947			2,952,937
Interest-only	—			53,076			18,765			—			71,841
Total amortized cost	$	9,772		$	1,067,871		$	9,393,282		$	3,617,995		$	14,088,920

The Non-Agency RMBS portfolio is subject to credit risk. The Non-Agency RMBS portfolio is primarily collateralized by Alt-A first lien mortgages. An Alt-A mortgage is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or prime, and less risky than subprime, the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between those of prime and subprime home loans. Typically, Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores and higher loan-to-value ratios. At origination of the loan, Alt-A mortgage securities are defined as Non-Agency RMBS where (i) the underlying collateral has weighted average FICO scores between 680 and 720 or (ii) the FICO scores are greater than 720 and RMBS have 30% or less of the underlying collateral composed of full documentation loans. At December 31, 2019 and December 31, 2018, 58% and 64% of the Non-Agency RMBS collateral was classified as Alt-A, respectively, based on fair value. At December 31, 2019 and 2018, 12% of the Non-Agency RMBS collateral was classified as prime, respectively, based on fair value. The remaining Non-Agency RMBS collateral is classified as subprime.

The Non-Agency RMBS in the Portfolio have the following collateral characteristics at December 31, 2019 and 2018.

	December 31, 2019				December 31, 2018
Weighted average maturity (years)		23.6				21.3
Weighted average amortized loan to value (1)		63.2		%		62.9		%
Weighted average FICO (2)		719				708
Weighted average loan balance (in thousands)		$	313			$	308
Weighted average percentage owner occupied		80.6		%		85.7		%
Weighted average percentage single family residence		60.0		%		63.8		%
Weighted average current credit enhancement		1.1		%		1.4		%
Weighted average geographic concentration of top four states	CA	32.5		%	CA	33.8		%
	FL	6.6		%	FL	7.7		%
	NY	6.3		%	NY	7.4		%
	TX	2.0		%	NJ	2.1		%

(1) Value represents appraised value of the collateral at the time of loan origination.

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(2) FICO as determined at the time of loan origination.

The table below presents the origination year of the underlying loans related to the Company’s portfolio of Non-Agency RMBS at December 31, 2019 and 2018.

Origination Year	December 31, 2019		December 31, 2018
2003 and prior	1.3	%	1.3	%
2004	1.5	%	1.7	%
2005	10.7	%	12.9	%
2006	52.9	%	49.8	%
2007	26.6	%	31.0	%
2008 and later	7.0	%	3.3	%
Total	100.0	%	100.0	%

Gross realized gains and losses are recorded in “Net realized gains (losses) on sales of investments” on the Company’s Consolidated Statements of Operations. The proceeds and gross realized gains and gross realized losses from sales of investments for the years ended December 31, 2019, 2018 and 2017 are as follows:

	For the Year Ended
	December 31, 2019			December 31, 2018			December 31, 2017
	(dollars in thousands)
Proceeds from sales:
Non-Agency RMBS	38,659			100,791			68,164
Agency RMBS	2,915,545			7,064			570,195
Agency CMBS	375,489			9,120			173,646
Gross realized gains:
Non-Agency RMBS	422			7,424			12,171
Agency RMBS	35,221			—			3,068
Agency CMBS	11,328			122			2,300
Gross realized losses:
Non-Agency RMBS	(1,445		)	(7,234		)	(20		)
Agency RMBS	(24,531		)	(1,919		)	(7,740		)
Agency CMBS	(2,225		)	(1,237		)	(656		)
Net realized gain (loss)	$	18,770		$	(2,844	)	$	9,123

Included in the gross realized gains for the year ended December 31, 2018 in the table above are exchanges of securities with a fair value of $81 million. The Company exchanged its investment in a re-REMIC security for the underlying collateral supporting the group related to the exchanged asset. These exchanges were treated as non-cash sales and purchases and resulted in a net realized gain of $3 million, reflected in earnings for the year ended December 31, 2018. There were no such exchanges during the year ended December 31, 2019. For the year ended December 31, 2017, the fair value of these exchanges of securities was $63 million, and resulted in a realized gain of $9 million.

The Loans held for investment are comprised primarily of loans collateralized by seasoned subprime residential mortgages. Additionally, it includes non-conforming, single family, owner occupied, jumbo, prime residential mortgages.

At December 31, 2019, all Loans held for investment are carried at fair value. See Note 5 for a discussion on how the Company determines the fair values of the Loans held for investment. As changes in the fair value of these loans are reflected in earnings, the Company does not estimate or record a loan loss provision. The total amortized cost of our Loans held for investment was $13.7 billion and $12.2 billion as of December 31, 2019 and 2018, respectively.

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The following table provides a summary of the changes in the carrying value of Loans held for investment at fair value at December 31, 2019 and 2018:

	For the Year Ended
	December 31, 2019			December 31, 2018
	(dollars in thousands)
Balance, beginning of period	$	12,572,581		$	13,678,263
Purchases	5,086,491			1,671,330
Principal paydowns	(1,717,745		)	(1,859,155		)
Sales and settlements	(1,812,760		)	(807,364		)
Net periodic accretion (amortization)	(77,491		)	(83,393		)
Realized gains (losses) on sales and settlements	1,590			101
Change in fair value	240,149			(27,201		)
Balance, end of period	$	14,292,815		$	12,572,581

The primary cause of the change in fair value is due to market demand and changes in credit risk of mortgage loans. During the year ended December 31, 2019, the Company sold $1.8 billion of loans to a trust, with the Company retaining $124 million of beneficial interests. During the year ended December 31, 2018, the Company sold $415 million of loans to a trust, with the Company retaining $40 million of beneficial interests.

During the year ended December 31, 2019, the Company transferred loans with an unpaid principal balance of $343 million to a third party. The Company evaluated the sale under current accounting guidance and determined that the sale did not effectively transfer control of the loans from the Company, the transferor, to the third party, the transferee, due to a right by the Company to call the loans at a fixed price at a future date. As such, the transfer has been accounted for by the Company as a secured borrowing and no gain or loss was recorded upon the transfer of the loans. The proceeds received, net of any collateral received in the transfer, has been recorded as a Securitized debt at fair value, collateralized by loans held for investment on the Consolidated Statements of Financial Condition. The secured borrowing related to unpaid principal amount of these loans is non-recourse to the Company and these loans can only be used to satisfy the obligations of the transferee and the obligations of the transferee are non-recourse to the Company. See footnote 7 for more details regarding Securitized debt.

Residential mortgage loans

The loan portfolio for all residential mortgages were originated during the following periods:

Origination Year	December 31, 2019 (1)		December 31, 2018
2002 and prior	6.8	%	7.3	%
2003	6.0	%	6.6	%
2004	12.6	%	13.6	%
2005	18.6	%	19.5	%
2006	22.5	%	22.7	%
2007	20.7	%	19.5	%
2008	6.4	%	6.2	%
2009	1.5	%	1.0	%
2010 and later	4.9	%	3.6	%
Total	100.0	%	100.0	%

(1) The table above excludes approximately $754 million of Loans held for investments which were purchased prior to December 31, 2019 and will settle subsequent to December 31, 2019.

The following table presents a summary of key characteristics of the residential loan portfolio at December 31, 2019 and 2018:

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	December 31, 2019 (1)				December 31, 2018
Number of loans		139,194				140,345
Weighted average maturity (years)		19.3				18.6
Weighted average loan to value (2)		87.4		%		87.5		%
Weighted average FICO (2)		627				629
Weighted average loan balance (in thousands)		$	95			$	89
Weighted average percentage owner occupied		88.0		%		90.1		%
Weighted average percentage single family residence		84.4		%		86.3		%
Weighted average geographic concentration of top five states	CA	11.6		%	CA	9.0		%
	FL	7.4		%	FL	7.3		%
	NY	6.9		%	OH	5.9		%
	OH	5.3		%	NY	5.7		%
	PA	5.3		%	PA	5.6		%

(1) The table above excludes approximately $754 million of Loans held for investments which were purchased prior to December 31, 2019 and will settle subsequent to December 31, 2019.

(2) As provided by the Trustee.

The following tables show various characteristics of our residential loan portfolio and outstanding principal balance of the loans that are 30 days delinquent and greater for the year ended December 31, 2019 and 2018, respectively.

December 31, 2019 (1)
(dollars in thousands)
Loan Balance	Number of Loans		Interest Rate	Maturity Date	Total Principal			30-89 Days Delinquent			90+ Days Delinquent
Held-for-Investment at fair value:
Adjustable rate loans:
$1 to $250	7,776		1.00% to 19.24%	6/1/1983 - 3/13/2057	$	655,914		$	75,436		$	44,117
$250 to $500	497		2.00% to 13.13%	3/1/2023 - 7/1/2057	163,972			18,117			10,950
$500 to $750	96		2.00% to 9.38%	1/1/2034 - 10/1/2056	56,661			2,224			2,747
$750 to $1,000	20		1.97% to 8.13%	10/1/2036 - 11/1/2048	16,947			759			862
Over $1,000	12		2.00% to 6.63%	5/1/2036 - 10/1/2048	19,499			1,222			3,869
	8,401				$	912,993		$	97,758		$	62,545
Fixed loans:
$1 to $250	123,580		0.00% to 24.00%	6/1/1989 - 5/1/2062	$	9,482,855		$	1,021,054		$	571,242
$250 to $500	6,259		0.00% to 11.69%	12/1/2019 - 3/1/2065	2,059,131			275,574			131,472
$500 to $750	712		2.00% to 10.69%	8/1/2019 - 9/1/2059	418,044			46,972			12,137
$750 to $1,000	137		2.00% to 8.00%	3/1/2013 - 1/1/2058	116,993			6,224			5,312
Over $1,000	105		2.00% to 9.50%	9/1/2019 - 12/1/2057	179,827			10,497			—
	130,793				$	12,256,850		$	1,360,321		$	720,163
Total	139,194				$	13,169,843		$	1,458,079		$	782,708

(1) The table above excludes approximately $754 million of Loans held for investments which were purchased prior to December 31, 2019 and will settle subsequent to December 31, 2019.

The foreclosure, bankruptcy, and REO principal balances on our loans were $299 million, $322 million and $59 million, respectively, as of December 31, 2019, which are included in the table above.

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December 31, 2018
(dollars in thousands)
Loan Balance	Number of Loans		Interest Rate	Maturity Date	Total Principal			30-89 Days Delinquent			90+ Days Delinquent
Held-for-Investment at fair value:
Adjustable rate loans:
$1 to $250	8,258		1.00% to 19.49%	6/1/1983 - 6/1/2058	$	713,392		$	80,781		$	48,235
$250 to $500	456		2.00% to 12.75%	3/1/2023 - 2/1/2057	148,867			17,722			10,779
$500 to $750	65		2.00% to 10.00%	1/1/2034 - 8/1/2047	38,148			2,979			2,762
$750 to $1,000	7		4.13% to 5.13%	4/1/2035 - 4/1/2038	6,008			784			—
Over $1,000	7		4.00% to 5.00%	7/1/2037 - 8/1/2039	12,195			—			1,164
	8,793				$	918,610		$	102,266		$	62,940
Fixed loans:
$1 to $250	126,085		0.00% to 24.00%	6/1/1989 - 5/1/2062	$	9,566,517		$	894,574		$	591,283
$250 to $500	4,942		0.00% to 12.52%	4/1/2018 - 11/1/2061	1,595,673			160,015			128,876
$500 to $750	406		2.00% to 10.69%	7/1/2031 - 5/1/2058	238,292			12,239			10,600
$750 to $1,000	88		2.00% to 7.98%	3/1/2013 - 12/1/2055	75,289			2,677			1,805
Over $1,000	31		3.00% to 6.38%	6/1/2037 - 6/1/2057	38,200			—			—
	131,552				$	11,513,971		$	1,069,505		$	732,564
Total	140,345				$	12,432,581		$	1,171,771		$	795,504

The foreclosure, bankruptcy, and REO principal balances on our loans were $292 million, $266 million and $47 million, respectively, as of December 31, 2018, which are included in the table above.

The Company applies fair value guidance in accordance with GAAP to account for its financial instruments. The Company categorizes its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques 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.

Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. Any changes to the valuation methodology are reviewed by management to ensure the changes are appropriate. As markets and products evolve 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 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, the

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Company believes its valuation methods are appropriate and consistent with other market participants. Using 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, the observability of prices and inputs can be difficult for certain investments. If third party 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 by the Company without validation to third-party pricing. Illiquid investments typically experience greater price volatility as an active market does not exist. Observability of prices and inputs can vary significantly from period to period and may cause instruments to change classifications within the three level hierarchy.

A description of the methodologies utilized by the Company to estimate the fair value of its financial instruments by instrument class follows:

Agency MBS and Non-Agency RMBS

The Company determines the fair value of all of its investment securities based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon, prepayment speeds, loan size, collateral composition, borrower characteristics, expected interest rates, life caps, periodic caps, reset dates, collateral seasoning, delinquency, expected losses, expected default severity, credit enhancement, and other pertinent factors. To corroborate that the estimates of fair values generated by these internal models are reflective of current market prices, the Company compares the fair values generated by the model to non-binding independent prices provided by two independent third party pricing services. For certain highly liquid asset classes, such as Agency fixed-rate pass-through bonds, the Company’s valuations are also compared to quoted prices for To-Be-Announced, or TBA, securities.

Each quarter the Company develops thresholds which are determined utilizing current bid/ask spreads, liquidity, price volatility and other factors as appropriate. If internally developed model prices differ from the independent prices provided by greater than a market derived predetermined threshold for the period, the Company highlights these differences for further review, both internally and with the third party pricing service. The Company obtains the inputs used by the third party pricing services and compares them to the Company’s inputs. The Company updates its own inputs if the Company determines the third party pricing inputs more accurately reflect the current market environment. If the Company believes that its internally developed inputs more accurately reflect the current market environment, it will request that the third party pricing service review market factors that may not have been considered by the third party pricing service and provide updated prices. The Company reconciles and resolves all pricing differences in excess of the predetermined thresholds before a final price is established. At December 31, 2019, six investment holdings with an internally developed fair value of $22 million had a difference between the model generated prices and third party prices provided in excess of the derived predetermined threshold for the period. The internally developed prices were $3 million higher than the third party prices provided of $19 million. After review and discussion, the Company affirmed and valued the investments at the higher internally developed prices. No other differences were noted at December 31, 2019 in excess of the derived predetermined threshold for the period. At December 31, 2018, nineteen investment holdings with an internally developed fair value of $127 million had a difference between the model generated prices and third party prices provided in excess of the derived predetermined threshold for the period. The internally developed prices were $4 million higher than the third party prices provided of $123 million. After review and discussion, the Company affirmed and valued the investments at the higher internally developed prices. No other differences were noted at December 31, 2018 in excess of the derived predetermined threshold for the period.

The Company’s estimate of prepayment, default and severity curves all involve judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting Non-Agency RMBS fair value estimates Level 3 inputs in the fair value hierarchy. As the fair values of Agency MBS are more observable, these investments are classified as level 2 in the fair value hierarchy.

Loans Held for Investment

Loans consisting of seasoned subprime residential mortgage loans:

The Company estimates the fair value of its Loans held for investment consisting of seasoned subprime residential mortgage loans on a loan by loan basis using an internally developed model which compares the loan held by the Company with a loan currently offered in the market. The loan price is adjusted in the model by considering the loan factors which would impact the value of a loan. These loan factors include: loan coupon as compared to coupon currently available in the market, FICO, loan-to-value ratios, delinquency history, owner occupancy, and property type, among other factors. A baseline is developed for each

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significant loan factor and adjusts the price up or down depending on how that factor for each specific loan compares to the baseline rate. Generally, the most significant impact on loan value is the loan interest rate as compared to interest rates currently available in the market and delinquency history.

The Company also monitors market activity to identify trades which may be used to compare internally developed prices; however, as the portfolio of loans held at fair value is a seasoned subprime pool of mortgage loans, comparable loan pools are not common or directly comparable. There are limited transactions in the market place to develop a comprehensive direct range of values.

The Company reviews the fair values generated by the model to determine whether prices are reflective of the current market by corroborating its estimates of fair value by comparing the results to non-binding independent prices provided by two independent third party pricing services for the loan portfolio. Each quarter the Company develops thresholds which are determined utilizing the securitization market.

If the internally developed fair values of the loan pools differ from the independent prices provided by greater than a predetermined threshold for the period, the Company highlights these differences for further review, both internally and with the third party pricing service. The Company obtains certain inputs used by the third party pricing services and evaluates them for reasonableness. The Company updates its own model if the Company determines the third party pricing inputs more accurately reflect the current market environment or observed information from the third party vendors. If the Company believes that its internally developed inputs more accurately reflect the current market environment, it will request that the third party pricing service review market factors that may not have been considered by the third party pricing service. The Company reconciles and resolves all pricing differences in excess of the predetermined thresholds before a final price is established.

At December 31, 2019, the internally developed fair value of one loan pool of $147 million had a difference between the model generated prices and third party prices provided in excess of the derived predetermined threshold for the period. The internally developed prices were $20 million higher than the third party price provided of $127 million. After review and discussion, the Company affirmed and valued the investment at the higher internally developed price. At December 31, 2018, the internally developed fair value of three loan pools of $489 million had a difference between the model generated prices and third party prices provided in excess of the derived predetermined threshold for the period. The internally developed prices were $3 million higher than the third party price provided of $486 million. After review and discussion, the Company affirmed and valued the investment at the higher internally developed price.

The Company’s estimates of fair value of Loans held for investment involve management judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting fair value estimates level 3 inputs in the fair value hierarchy.

Loans collateralized by jumbo, prime residential mortgages:

The loans collateralized by jumbo, prime residential mortgages are carried at fair value. The loans are held as part of a consolidated Collateralized Financing Entity, or a CFE. A CFE is a variable interest entity that holds financial assets, issues beneficial interests in those assets and has no more than nominal equity and the beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allow the Company to elect to measure the CFE’s financial assets using the fair value of the CFE’s financial liabilities as the fair values of the financial liabilities of the CFE are more observable. Therefore, the fair value of the loans collateralized by jumbo, prime residential mortgages is based on the fair value of the financial liabilities. See discussion of the fair value of Securitized Debt, collateralized by Loans Held for Investment at fair value below.

As the more observable financial liabilities are considered level 3 in the fair value hierarchy, the Loans collateralized by jumbo, prime residential mortgages are also level 3 in the fair value hierarchy.

Securitized Debt, collateralized by Non-Agency RMBS

The Company carries securitized debt, collateralized by Non-Agency RMBS at the principal balance outstanding plus unamortized premiums, less unaccreted discounts recorded in connection with the financing of the loans or RMBS with third parties. For disclosure purposes, the Company estimates the fair value of securitized debt, collateralized by Non-Agency RMBS by estimating the future cash flows associated with the underlying assets collateralizing the secured debt outstanding. The Company models the fair value of each underlying asset by considering, among other items, the structure of the underlying security, coupon, servicer, delinquency, 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 other economic factors. This process, including the review process, is consistent

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with the process used for Agency MBS and Non-Agency RMBS using internal models. For further discussion of the valuation process and benchmarking process, see Agency MBS and Non-Agency RMBS discussion herein.

The Company’s estimates of fair value of securitized debt, collateralized by Non-Agency RMBS involve management’s judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting fair value estimates level 3 inputs in the fair value hierarchy.

Securitized Debt, collateralized by Loans Held for Investment

The process for determining the fair value of securitized debt, collateralized by loans held for investment is based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon, prepayment speeds, loan size, 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. This process, including the review process, is consistent with the process used for Agency MBS and Non-Agency RMBS using internal models. For further discussion of the valuation process and benchmarking process, see Agency MBS and Non-Agency RMBS discussion herein. The primary cause of the change in fair value is due to market demand and changes in credit risk of mortgage loans.

The Company’s estimates of fair value of securitized debt, collateralized by loans held for investment involve management’s judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting fair value estimates level 3 inputs in the fair value hierarchy.

Fair value option

The table below shows the unpaid principal, fair value and impact of change in fair value on each of the financial instruments carried with fair value option as of December 31, 2019 and 2018, respectively:

	December 31, 2019
	(dollars in thousands)
	Unpaid Principal/ Notional		Fair Value			Year to Date Gain/(Loss) on Change in Fair Value
Assets:
Non-agency RMBS
Subordinated	580,761		422,826			10,513
Interest-only	7,458,653		288,899			18,064
Agency RMBS
Pass-through	6,080,549		6,362,628			124,685
Interest-only	1,539,941		127,667			(13,359	)
Agency CMBS
Project loans	1,753,755		1,889,923			146,441
Interest-only	1,817,246		49,025			2,054
Loans held for investment, at fair value	13,924,291		14,292,815			240,148
Liabilities:
Securitized debt at fair value, collateralized by loans held for investment	8,184,369		8,179,608			(118,911	)

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	December 31, 2018
	(dollars in thousands)
	Unpaid Principal/ Notional		Fair Value				Year to Date Gain/(Loss) on Change in Fair Value
Assets:
Non-agency RMBS
Subordinated	N/A		$	12,014			$	(145	)
Interest-only	5,888,747		266,539				21,356
Agency RMBS
Pass-through	7,573,835		7,739,382				31,185
Interest-only	578,284		65,675				3,785
Agency CMBS
Project loans	1,607,626		1,595,681				(35,002		)
Interest-only	2,450,288		67,670				444
Loans held for investment, at fair value	12,432,582		12,572,581				(27,201		)
Liabilities:
Securitized debt at fair value, collateralized by loans held for investment	8,561,319		8,455,376				52,209

Derivatives

Interest Rate Swaps and Swaptions

The Company uses clearing exchange market prices to determine the fair value of its exchange cleared interest rate swaps. For bi-lateral swaps, the Company determines the fair value based on the net present value of expected future cash flows on the swap. The Company uses option pricing model to determine the fair value of its swaptions. For bi-lateral swaps and swaptions, the Company compares its own estimate of fair value with counterparty prices to evaluate for reasonableness. Both the clearing exchange and counter-party pricing 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 and swaptions are modeled by the Company by incorporating such factors as the term to maturity, swap curve, overnight index swap rates, and the payment rates on the fixed portion of the interest rate swaps. The Company has classified the characteristics used to determine the fair value of interest rate swaps and swaptions as Level 2 inputs in the fair value hierarchy.

Treasury Futures

The fair value of Treasury futures is determined by quoted market prices in an active market. The Company has classified the characteristics used to determine the fair value of Treasury futures as Level 1 inputs in the fair value hierarchy.

Repurchase Agreements

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 estimates the fair value of these repurchase agreements using the contractual obligation plus accrued interest payable.

Short-term Financial Instruments

The carrying value of cash and cash equivalents, accrued interest receivable, dividends payable, payable for investments purchased, receivable for investments sold and accrued interest payable are considered to be a reasonable estimate of fair value due to the short term nature and low credit risk of these short-term financial instruments.

The Company’s financial assets and liabilities carried at fair value on a recurring basis, including the level in the fair value hierarchy, at December 31, 2019 and 2018 are presented below.

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	December 31, 2019
	(dollars in thousands)
	Level 1			Level 2			Level 3			Counterparty and Cash Collateral, netting			Total
Assets:
Non-Agency RMBS, at fair value	$	—		$	—		$	2,614,408		$	—		$	2,614,408
Agency RMBS, at fair value	—			6,490,293			—			—			6,490,293
Agency CMBS, at fair value	—			2,850,717			—			—			2,850,717
Loans held for investment, at fair value	—			—			14,292,815			—			14,292,815
Derivatives	3,611			1,092			—			(1,092		)	3,611
Liabilities:
Securitized debt at fair value, collateralized by loans held for investment	—			—			8,179,608			—			8,179,608
Derivatives	—			205,703			—			(205,703		)	—

	December 31, 2018
	(dollars in thousands)
	Level 1			Level 2			Level 3		Counterparty and Cash Collateral, netting			Total
Assets:
Non-Agency RMBS, at fair value	$	—		$	—		2,486,130		$	—		$	2,486,130
Agency RMBS, at fair value	—			9,240,057			—		—			9,240,057
Agency CMBS, at fair value	—			2,948,893			—		—			2,948,893
Loans held for investment, at fair value	—			—			12,572,581		—			12,572,581
Derivatives	—			89,121			—		(51,653		)	37,468
Liabilities:
Securitized debt at fair value, collateralized by loans held for investment	—			—			8,455,376		—			8,455,376
Derivatives	13,375			169,790			—		(183,165		)	—

The table below provides a summary of the changes in the fair value of financial instruments classified as Level 3 at December 31, 2019 and 2018.

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Fair Value Reconciliation, Level 3
	For the Year Ended
	December 31, 2019
	(dollars in thousands)
	Non-Agency RMBS			Loans held for investment			Securitized Debt
Beginning balance Level 3	$	2,486,130		$	12,572,581		$	8,455,376
Transfers in to Level 3	—			—			—
Transfers out of Level 3	—			—			—
Purchases of assets/ issuance of debt	497,848			5,086,491			1,487,286
Principal payments	(415,518		)	(1,717,745		)	(1,530,818		)
Sales and Settlements	(38,605		)	(1,812,760		)	(314,454		)
Net accretion (amortization)	95,562			(77,491		)	(26,758		)
Gains (losses) included in net income
Other than temporary credit impairment losses	(4,853		)	—			—
Realized gains (losses) on sales and settlements	(1,088		)	1,590			(9,925		)
Net unrealized gains (losses) included in income	28,577			240,149			118,901
Gains (losses) included in other comprehensive income
Total unrealized gains (losses) for the period	(33,645		)	—			—
Ending balance Level 3	$	2,614,408		$	14,292,815		$	8,179,608

Fair Value Reconciliation, Level 3
	For the Year Ended
	December 31, 2018
	(dollars in thousands)
	Non-Agency RMBS			Loans held for investment			Securitized Debt
Beginning balance Level 3	$	2,851,316		$	13,678,263		$	9,388,657
Transfers in to Level 3	—			—			—
Transfers out of Level 3	—			—			—
Purchases of assets/ issuance of debt	253,952			1,671,330			1,769,539
Principal payments	(521,109		)	(1,859,155		)	(1,778,625		)
Sales and Settlements	(100,786		)	(807,364		)	(834,414		)
Net accretion (amortization)	101,088			(83,393		)	(11,197		)
Gains (losses) included in net income
Other than temporary credit impairment losses	(21,791		)	—			—
Realized gains (losses) on sales and settlements	201			101			(26,375		)
Net unrealized gains (losses) included in income	21,208			(27,201		)	(52,209		)
Gains (losses) included in other comprehensive income
Total unrealized gains (losses) for the period	(97,949		)	—			—
Ending balance Level 3	$	2,486,130		$	12,572,581		$	8,455,376

There were no transfers in or out from Level 3, during the year ended December 31, 2019 and 2018, respectively.

The significant unobservable inputs used in the fair value measurement of the Company’s Non-Agency RMBS and securitized debt are the weighted average discount rates, prepayment rate, constant default rate, and the loss severity.

Discount Rate

The discount rate refers to the interest rate used in the discounted cash flow analysis to determine the present value of future cash flows. The discount rate takes into account not just the time value of money, but also the risk or uncertainty of future cash flows. An increased uncertainty of future cash flows results in a higher discount rate. The discount rate used to calculate the

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present value of the expected future cash flows is based on the discount rate implicit in the security as of the last measurement date. As discount rates move up, the values of the discounted cash flows are reduced.

The discount rates applied to the expected cash flows to determine fair value are derived from a range of observable prices on securities backed by similar collateral. As the market becomes more or less liquid, the availability of these observable inputs will change.

Prepayment Rate

The prepayment rate specifies the percentage of the collateral balance that is expected to prepay at each point in the future. The prepayment rate is based on factors such as collateral FICO score, loan-to-value ratio, debt-to-income ratio, and vintage on a loan level basis and is scaled up or down to reflect recent collateral-specific prepayment experience as obtained from remittance reports and market data services.

For securitized debt carried at fair value issued at a premium, as prepayment rates increase, the amount of interest expense the Company recognizes decreases as the issued premium on the debt amortizes faster than expected. Conversely, decreases in prepayment rates result in increased expense and can extend the period over which the Company amortizes the premium.

For debt issued at a discount, as prepayment rates increase, the amount of interest the Company expenses increases from the acceleration of the accretion of the discount into interest expense. Conversely, decreases in prepayment rates result in decreased expense as the accretion of the discount into interest expense occurs over a longer period.

Constant Default Rate

Constant default rate represent an annualized rate of default on a group of mortgages. The constant default rate, or CDR, represents the percentage of outstanding principal balances in the pool that are in default, which typically equates to the home being past 60-day and 90-day notices and in the foreclosure process. When default rates increase, expected cash flows on the underlying collateral decreases. When default rates decrease, expected cash flows on the underlying collateral increases.

Default vectors are determined from the current “pipeline” of loans that are more than 30 days delinquent, in foreclosure, bankruptcy, or are REO. These delinquent loans determine the first 30 months of the default curve. Beyond month 30, the default curve transitions to a value that is reflective of a portion of the current delinquency pipeline.

Loss Severity

Loss severity rates reflect the amount of loss expected from a foreclosure and liquidation of the underlying collateral in the mortgage loan pool. When a mortgage loan is foreclosed the collateral is sold and the resulting proceeds are used to settle the outstanding obligation. In many circumstances, the proceeds from the sale do not fully repay the outstanding obligation. In these cases, a loss is incurred by the lender. Loss severity is used to predict how costly future losses are likely to be. An increase in loss severity results in a decrease in expected future cash flows. A decrease in loss severity results in an increase in expected future cash flows.

The curve generated to reflect the Company’s expected loss severity is based on collateral-specific experience with consideration given to other mitigating collateral characteristics. Collateral characteristics such as loan size, loan-to-value, seasoning or loan age and geographic location of collateral also effect loss severity.

Sensitivity of Significant Inputs – Non-Agency RMBS and securitized debt, collateralized by loans held for investment

Prepayment rates vary according to interest rates, the type of financial instrument, 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 RMBS investments purchased at a premium, as prepayment rates increase, the amount of income the Company earns decreases as the purchase premium on the bonds amortizes faster than expected. Conversely, decreases in prepayment rates result in increased income and can extend the period over which the Company amortizes the purchase premium. For RMBS investments purchased at a discount, as prepayment rates increase, the amount of income the Company earns increases from the acceleration of the accretion of the discount into interest income. Conversely, decreases in prepayment rates result in decreased income as the accretion of the purchase discount into interest income occurs over a longer period.

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A summary of the significant inputs used to estimate the fair value of Non-Agency RMBS held for investment at fair value as of December 31, 2019 and 2018 follows:

	December 31, 2019
	Significant Inputs
	Discount Rate		Prepay Rate		CDR		Loss Severity
	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average
Non-Agency RMBS
Senior	3% -8%	3.8%	6% -20%	9.4%	0% -9%	1.8%	26% -82%	42.0%
Subordinated	0% -13%	5.1%	6% -35%	9.6%	0% -6%	1.3%	27% -55%	36.7%
Interest-only	0% -100%	12.5%	6% -43%	18.5%	0% -6%	1.0%	26% -83%	35.3%

	December 31, 2018
	Significant Inputs
	Discount Rate		Prepay Rate		CDR		Loss Severity
	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average
Non-Agency RMBS
Senior	3% -8%	4.5%	1% -25%	6.7%	0% -11%	2.5%	35% -81%	44.6%
Subordinated	4% -20%	5.8%	1% -19%	7.9%	0% -6%	1.9%	30% -65%	40.3%
Interest-only	8% -100%	11.1%	3% -32%	10.7%	0% -8%	1.9%	30% -86%	42.1%

A summary of the significant inputs used to estimate the fair value of securitized debt at fair value, collateralized by loans held for investment, as of December 31, 2019 and 2018 follows:

	December 31, 2019
	Significant Inputs
	Discount Rate		Prepay Rate		CDR		Loss Severity
	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average
Securitized debt at fair value, collateralized by loans held for investment	0% -10%	3.3%	6% - 20%	9.1%	0% - 3%	1.4%	30% - 75%	59.8%

	December 31, 2018
	Significant Inputs
	Discount Rate		Prepay Rate		CDR		Loss Severity
	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average	Range	Weighted Average
Securitized debt at fair value, collateralized by loans held for investment	0% -10%	4.5%	6% - 18%	9.3%	0% - 23%	1.4%	30% - 65%	58.7%

All of the significant inputs listed have some degree of market observability based on the Company’s knowledge of the market, information available to market participants, and use of common market data sources. Collateral default and loss severity projections are in the form of “curves” that are updated quarterly to reflect the Company’s collateral cash flow projections. Methods used to develop these projections conform to industry conventions. The Company uses assumptions it considers its best estimate of future cash flows for each security.

Sensitivity of Significant Inputs – Loans held for investment

The Loans held for investment are comprised primarily of loans collateralized by seasoned subprime residential mortgages. Additionally, it includes non-conforming, single family, owner occupied, jumbo, prime residential mortgages. The significant unobservable inputs used to estimate the fair value of the Loans held for investment collateralized by seasoned subprime residential mortgage loans, as of December 31, 2019 and 2018 include coupon, FICO score at origination, loan-to-value ratios

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(LTV), owner occupancy status, and property type. A summary of the significant inputs used to estimate the fair value of Loans held for investment collateralized primarily by seasoned subprime mortgages at fair value as of December 31, 2019 and 2018 follows:

	December 31, 2019		December 31, 2018
Factor:
Coupon
Base Rate	4.3%		5.2%
Actual	6.6%		6.9%
FICO
Base Rate	636		638
Actual	624		626
Loan-to-value (LTV)
Base Rate	86%		88%
Actual	88%		88%
Loan Characteristics:
Occupancy
Owner Occupied	89%		90%
Investor	2%		1%
Secondary	9%		9%
Property Type
Single family	85%		86%
Manufactured housing	4%		4%
Multi-family/mixed use/other	11%		10%

The loan factors are generally not observable for the individual loans and the base rates developed by the Company’s internal model are subjective and change as market conditions change. The impact of the loan coupon on the value of the loan is dependent on whether the loan is clean or reperforming. A clean loan, with no history of delinquent payments and a relatively high loan interest rate would result in a higher overall value than a reperforming loan which has a history of delinquency. Similarly, a higher FICO score and a lower LTV ratio results in increases in the fair market value of the loan and a lower FICO score and a higher LTV ratio results in a lower value.

Property types also affect the overall loan values. Property types include single family, manufactured housing and multi-family/mixed use and other types of properties. Single family homes represent properties which house one to four family units. Manufactured homes include mobile homes and modular homes. Loan value for properties that are investor or secondary homes have a reduced value as compared to the baseline loan value. Additionally, single family homes will result in an increase to the loan value where manufactured and multi-family/mixed use and other properties will result in a decrease to the loan value, as compared to the baseline.

Financial instruments not carried at fair value

The following table presents the carrying value and fair value, as described above, of the Company’s financial instruments not carried at fair value on a recurring basis at December 31, 2019 and 2018.

	December 31, 2019
	(dollars in thousands)
	Level in Fair Value Hierarchy	Carrying Amount		Fair Value
Repurchase agreements	2	13,427,545		13,450,193
Securitized debt, collateralized by Non-Agency RMBS	3	133,557		117,552

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	December 31, 2018
	(dollars in thousands)
	Level in Fair Value Hierarchy	Carrying Amount		Fair Value
Repurchase agreements	2	14,030,465		14,085,164
Securitized debt, collateralized by Non-Agency RMBS	3	159,955		140,711

The interest rates of the Company’s repurchase agreements are generally indexed to the one-month and three-month LIBOR rates and re-price accordingly. The repurchase agreements outstanding, weighted average borrowing rates, weighted average remaining maturities, average balances and the fair value of collateral pledged as of December 31, 2019 and 2018 were:

	December 31, 2019			December 31, 2018
Repurchase agreements outstanding secured by:
Agency RMBS (in thousands)	$	6,247,275		$	8,588,446
Agency CMBS (in thousands)	2,013,515			1,604,826
Non-agency RMBS and Loans held for investment (in thousands)	5,166,755			3,837,193
Total:	$	13,427,545		$	14,030,465
MBS pledged as collateral at fair value on Repurchase agreements:
Agency RMBS (in thousands)	$	6,602,039		$	9,123,369
Agency CMBS (in thousands)	2,102,520			1,708,648
Non-agency RMBS and Loans held for investment (in thousands)	6,694,685			4,998,990
Total:	$	15,399,244		$	15,831,007
Average balance of Repurchase agreements secured by:
Agency RMBS (in thousands)	$	8,062,881		$	4,651,613
Agency CMBS (in thousands)	1,993,372			1,434,030
Non-agency RMBS and Loans held for investment (in thousands)	4,436,133			3,730,527
Total:	$	14,492,386		$	9,816,170
Average borrowing rate of Repurchase agreements secured by:
Agency RMBS (in thousands)	2.10		%	2.55		%
Agency CMBS (in thousands)	2.10		%	2.58		%
Non-agency RMBS and Loans held for investment (in thousands)	3.19		%	4.04		%
Average remaining maturity of Repurchase agreements secured by:
Agency RMBS (in thousands)	14 Days			29 Days
Agency CMBS (in thousands)	13 Days			33 Days
Non-agency RMBS and Loans held for investment (in thousands)	255 Days			231 Days
Average original maturity of Repurchase agreements secured by:
Agency RMBS (in thousands)	38 Days			89 Days
Agency CMBS (in thousands)	34 Days			84 Days
Non-agency RMBS and Loans held for investment (in thousands)	279 Days			259 Days

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At December 31, 2019 and 2018, the repurchase agreements collateralized by MBS and Loans held for investment had the following remaining maturities.

	December 31, 2019			December 31, 2018
	(dollars in thousands)
Overnight	$	—		$	—
1 to 29 days	9,709,387			6,326,232
30 to 59 days	800,648			4,620,656
60 to 89 days	608,520			1,504,695
90 to 119 days	—			169,244
Greater than or equal to 120 days	2,308,990			1,409,638
Total	$	13,427,545		$	14,030,465

All of the Company’s securitized debt is collateralized by residential mortgage loans or Non-Agency RMBS. For financial reporting purposes, the Company’s securitized debt is accounted for as secured borrowings. Thus, the residential mortgage loans or RMBS held as collateral are recorded in the assets of the Company as Loans held for investment or Non-Agency RMBS and the securitized debt is recorded as a non-recourse liability in the accompanying Consolidated Statements of Financial Condition.

Securitized Debt Collateralized by Non-Agency RMBS

At December 31, 2019 and 2018 the Company’s securitized debt collateralized by Non-Agency RMBS is carried at amortized cost and had a principal balance of $152 million and $175 million, respectively. At December 31, 2019 and 2018, the debt carried a weighted average coupon equal to 6.5% and 6.4%, respectively. As of December 31, 2019, the maturities of the debt range between the years 2035 and 2037. None of the Company’s securitized debt collateralized by Non-Agency RMBS is callable.

During the year ended December 31, 2019, the Company acquired securitized debt collateralized by Non-Agency RMBS with an amortized cost balance of $2.9 million for $3.5 million. This transaction resulted in a net loss on extinguishment of debt of $608 thousand, which is reflected in the earnings for the year ended December 31, 2019. The Company did not acquire any securitized debt collateralized by Non-Agency RMBS during the year ended December 31, 2018. During the year ended December 31, 2017, the Company acquired securitized debt collateralized by Non-Agency RMBS with an amortized cost balance of $166 thousand for $167 thousand. This transaction resulted in a net loss on the extinguishment of debt of $1 thousand, which is reflected in earnings for the year ended December 31, 2017.

The following table presents the estimated principal repayment schedule of the securitized debt collateralized by Non-Agency RMBS at December 31, 2019 and 2018, based on expected cash flows of the residential mortgage loans or RMBS, as adjusted for projected losses on the underlying collateral of the debt. All of the securitized debt recorded in the Company’s Consolidated Statements of Financial Condition is non-recourse to the Company.

	December 31, 2019			December 31, 2018
	(dollars in thousands)
Within One Year	$	18,826		$	23,602
One to Three Years	18,332			30,803
Three to Five Years	4,453			8,047
Greater Than Five Years	665			3,605
Total	$	42,276		$	66,057

 

Maturities of the Company’s securitized debt collateralized by Non-Agency RMBS are dependent upon cash flows received from the underlying collateral. The estimate of their repayment is based on scheduled principal payments on the underlying collateral. This estimate will differ from actual amounts to the extent prepayments or losses are experienced. See Note 3 for a more detailed discussion of the securities collateralizing the securitized debt.

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Securitized Debt Collateralized by Loans Held for Investment

At December 31, 2019 and 2018 the Company’s securitized debt collateralized by loans held for investment had a principal balance of $8.2 billion and $8.6 billion, respectively. At December 31, 2019 and 2018 the total securitized debt collateralized by loans held for investment carried a weighted average coupon equal to 4.2% and 4.5%, respectively. As of December 31, 2019, the maturities of the debt range between the years 2023 and 2067.

During the year ended December 31, 2019, the Company acquired securitized debt collateralized by loans with an amortized cost balance of $324 million for $314 million. This transaction resulted in a net gain on the extinguishment of debt of $10 million, which is reflected in earnings for the year ended December 31, 2019. During the year ended December 31, 2018, the Company acquired securitized debt collateralized by loans with an amortized cost balance of $861 million for $835 million. These transactions resulted in a net gain on the extinguishment of debt of $26 million, which is reflected in earnings for the year ended December 31, 2018. During the year ended December 31, 2017, the Company acquired securitized debt collateralized by loans with an amortized cost balance of $1.0 billion for $1.1 billion. This transaction resulted in a net loss on the extinguishment of debt of $35 million .

The following table presents the estimated principal repayment schedule of the securitized debt collateralized by loans held for investment at December 31, 2019 and 2018, based on expected cash flows of the residential mortgage loans or RMBS, as adjusted for projected losses on the underlying collateral of the debt. All of the securitized debt recorded in the Company’s Consolidated Statements of Financial Condition is non-recourse to the Company.

	December 31, 2019			December 31, 2018
	(dollars in thousands)
Within One Year	$	1,582,646		$	1,608,381
One to Three Years	2,563,699			2,587,635
Three to Five Years	1,791,756			1,949,060
Greater Than Five Years	2,129,460			2,237,259
Total	$	8,067,561		$	8,382,335

Maturities of the Company’s securitized debt collateralized by loans held for investment 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 or loan losses are experienced. See Note 4 for a more detailed discussion of the loans collateralizing the securitized debt.

Certain of the securitized debt collateralized by loans held for investment contain call provisions at the option of the Company. The following table presents the par value of the callable debt by year at December 31, 2019. 

December 31, 2019
(dollars in thousands)
Year	Principal
2020	3,527,114
2021	2,841,599
2022	795,683
2023	105,417
Total	$	7,269,813

Since its inception, the Company has utilized VIEs for the purpose of securitizing whole mortgage loans or re-securitizing RMBS and obtaining long-term, non-recourse financing. The Company evaluated its interest in each VIE to determine if it is the primary beneficiary.

As of December 31, 2019, the Company’s Consolidated Statement of Financial Condition includes assets of consolidated VIEs with a carrying value of $12.5 billion and liabilities with a carrying value of $8.1 billion. As of December 31, 2018, the Company’s Consolidated Statement of Financial Condition includes assets of consolidated VIEs with a carrying value of $13.4 billion and liabilities with a carrying value of $8.7 billion.

During the year ended December 31, 2019, the Company securitized and consolidated approximately $1.5 billion unpaid principal balance of seasoned residential subprime mortgage loans. During the year ended December 31, 2018, the Company securitized and consolidated approximately $2.2 billion unpaid principal balance (of which $1.3 billion related to the collapse

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and repackaging of certain loan pools previously consolidated as of December 31, 2017) of seasoned residential subprime mortgage loans.

VIEs for Which the Company is the Primary Beneficiary

The retained beneficial interests in VIEs for which the Company is the primary beneficiary are typically the subordinated tranches of these securitizations and in some cases the Company may hold interests in additional tranches. The table below reflects the assets and liabilities recorded in the Consolidated Statements of Financial Condition related to the consolidated VIEs as of December 31, 2019 and 2018.

	December 31, 2019			December 31, 2018
	(dollars in thousands)
Assets:
Non-Agency RMBS, at fair value	$	598,080		$	1,017,442
Loans held for investment, at fair value	11,853,659			12,263,265
Accrued interest receivable	63,218			72,389
Other assets	29,787			39,855
Liabilities:
Securitized debt, collateralized by Non-Agency RMBS	$	133,557		$	159,955
Securitized debt at fair value, collateralized by loans held for investment	7,899,259			8,455,376
Accrued interest payable	28,775			33,541
Other liabilities	2,644			3,286

Income, OTTI and expense amounts related to consolidated VIEs recorded in the Consolidated Statements of Operations is presented in the tables below.

	For the Year ended
	December 31, 2019			December 31, 2018			December 31, 2017
	(dollars in thousands)
Interest income, Assets of consolidated VIEs	$	780,746		$	904,830		$	914,022
Interest expense, Non-recourse liabilities of VIEs	337,387			395,255			390,858
Net interest income	$	443,359		$	509,575		$	523,164
Total other-than-temporary impairment losses	$	(424	)	$	(1,026	)	$	(2,174	)
Portion of loss recognized in other comprehensive income (loss)	(3,831		)	(17,820		)	(51,118		)
Net other-than-temporary credit impairment losses	$	(4,255	)	$	(18,845	)	$	(53,292	)
Servicing fees	$	33,920		$	39,313		$	41,493

VIEs for Which the Company is Not the Primary Beneficiary

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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 in the form of interest rate swaps, swaptions, and Treasury futures. The Company’s swaps are used to lock in a fixed rate related to a portion of its current and anticipated payments on its repurchase agreements. The Company typically agrees to pay a fixed rate of interest, or pay rate, in exchange for the right to receive a floating rate of interest, or receive rate, over a specified period of time. Treasury futures are derivatives which track the prices of specific Treasury securities and are traded on an active exchange. It is generally the Company’s policy to close out any Treasury futures positions prior to delivering the underlying security. The Company uses Treasury futures to lock in a fixed rate related to a portion of its current and anticipated payments on its repurchase agreements.

The use of derivatives 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 or cash pledged as collateral for these derivative instruments. The Company periodically monitors the credit profiles of its counterparties to determine if it is exposed to counterparty credit risk. See Note 14 for further discussion of counterparty credit risk.

The table below summarizes the location and fair value of the derivatives reported in the Consolidated Statements of Financial Condition after counterparty netting and posting of cash collateral as of December 31, 2019 and 2018.

						December 31, 2019
						Derivative Assets					Derivative Liabilities
Derivative Instruments		Notional Amount Outstanding				Location on Consolidated Statements of Financial Condition	Net Estimated Fair Value/Carrying Value				Location on Consolidated Statements of Financial Condition	Net Estimated Fair Value/Carrying Value
						(dollars in thousands)
Interest Rate Swaps		$	4,111,300			Derivatives, at fair value, net	$	—			Derivatives, at fair value, net	$	—
Swaptions		—				Derivatives, at fair value, net	—				Derivatives, at fair value, net	—
Treasury Futures		619,700				Derivatives, at fair value, net	3,611				Derivatives, at fair value, net	—
Total		$	4,731,000				$	3,611				$	—

						December 31, 2018
						Derivative Assets					Derivative Liabilities
Derivative Instruments		Notional Amount Outstanding				Location on Consolidated Statements of Financial Condition	Net Estimated Fair Value/Carrying Value				Location on Consolidated Statements of Financial Condition	Net Estimated Fair Value/Carrying Value
						(dollars in thousands)
Interest Rate Swaps		$	10,906,700			Derivatives, at fair value, net	$	35,798			Derivatives, at fair value, net	$	—
Swaptions		53,000				Derivatives, at fair value, net	1,670				Derivatives, at fair value, net	—
Treasury Futures		619,700				Derivatives, at fair value, net	—				Derivatives, at fair value, net	—
Total		$	11,579,400				$	37,468				$	—

 

The effect of the Company’s derivatives on the Consolidated Statements of Operations is presented below.

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		Net gains (losses) on derivatives for the year ended
Derivative Instruments	Location on Consolidated Statements of Operations and Comprehensive Income	December 31, 2019			December 31, 2018			December 31, 2017
		(dollars in thousands)
Interest Rate Swaps	Net unrealized gains (losses) on derivatives	$	(122,272	)	$	(125,595	)	$	43,697
Interest Rate Swaps	Net realized gains (losses) on derivatives (1)	(356,713		)	(1,488		)	(31,593		)
Treasury Futures	Net unrealized gains (losses) on derivatives	16,986			(16,928		)	1,768
Treasury Futures	Net realized gains (losses) on derivatives	(37,032		)	21,333			(4,061		)
Swaptions	Net unrealized gains (losses) on derivatives	(923		)	1,361			2,511
Swaptions	Net realized gains (losses) on derivatives	(404		)	(1,476		)	(6,134		)
Total		$	(500,358	)	$	(122,793	)	$	6,188

(1) Includes loss on termination of interest rate swaps of $360 million and $16 million during the year ended December 31, 2019 and 2017, respectively. There were no swaps terminations during the year ended December 31, 2018.

The company paid $360 million to terminate interest rate swaps with a notional value of $6.4 billion during the year ended December 31, 2019. The terminated swaps had original maturities of 2019 to 2029. There were no swap terminations during the year ended December 31, 2018.

The weighted average pay rate on the Company’s interest rate swaps at December 31, 2019 was 2.62% and the weighted average receive rate was 1.94%. The weighted average pay rate on the Company’s interest rate swaps at December 31, 2018 was 2.58% and the weighted average receive rate was 2.69%. The weighted average maturity on the Company’s interest rate swaps at December 31, 2019 and 2018 was 6 and 7 years, respectively.

Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange, or NYSE. Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. Certain of the Company’s interest rate swaps are cleared through a registered commodities exchange. Each of the Company’s International Swaps and Derivative Association, or ISDA, and clearing exchange agreements contains provisions under which the Company is required to fully collateralize its obligations under the interest rate swap agreements if at any point the fair value of the swap represents a liability greater than the minimum transfer amount contained within the agreements. The Company is also required to post initial collateral upon execution of certain of its swap transactions. If the Company breaches any of these provisions, it will be required to settle its obligations under the agreements at their termination values, which approximates fair value. The Company uses clearing exchange market prices to determine the fair value of its interest rate swaps. The aggregate fair value of all derivative instruments with credit-risk-related contingent features are in a net liability position at December 31, 2019 is approximately $215 million including accrued interest, which represents the maximum amount the Company would pay upon termination, which is fully collateralized.

Preferred Stock

In January 2019, the Company issued 8,000,000 shares of 8.00% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share, or the Series D Preferred Stock, at a public offering price of $25.00 per share and for net proceeds to us of $193 million. The Series D Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not authorized or declared) exclusively at the Company’s option commencing in March 30, 2024, subject to the Company’s right, under limited circumstances, to redeem the Series D Preferred Stock prior to that date. The initial dividend rate for the Series D Preferred Stock, from and including January 23, 2019, to but not including March 30, 2024, will be equal to 8.00% per annum of the $25.00 liquidation preference per share (equivalent to the fixed annual rate of $2.00 per share). On and after March 30, 2024, dividends on the Series D Preferred Stock will accumulate at a percentage of the $25.00 liquidation preference equal to an annual floating rate of the three-month LIBOR plus a spread of 5.379% per annum. The Series D Preferred Stock is entitled to receive, when and as declared, a dividend at a rate of 8.00% per year on the $25.00 liquidation preference before the common stock is paid any dividends and is senior to the common stock with respect to distributions upon liquidation, dissolution or winding up.

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The Company declared dividends to Series A preferred stockholders of $12 million, or $2.00 per preferred share during the years ended December 31, 2019 and 2018, respectively.

The Company declared dividends to Series B preferred stockholders $26 million, or $2.00 per preferred share during the years ended December 31, 2019 and 2018, respectively.

The Company declared dividends to Series C preferred stockholders of $20 million and $6 million, or $1.94 and $0.54, respectively, per preferred share during the years ended December 31, 2019 and 2018.

The Company declared dividends to Series D preferred stockholders of $15 million, or $1.87 per preferred share during the year ended December 31, 2019.

Common Stock

In February 2018, our Board of Directors reauthorized $100 million under our share repurchase program, or the Repurchase Program. Such authorization does not have an expiration date and, at present, there is no intention to modify or otherwise rescind such authorization. Shares of our common stock may be purchased in the open market, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The timing, manner, price and amount of any repurchases will be determined at our discretion and the program may be suspended, terminated or modified at any time for any reason. Among other factors, the Company intends to only consider repurchasing shares of our common stock when the purchase price is less than the last publicly reported book value per common share. In addition, the Company does not intend to repurchase any shares from directors, officers or other affiliates. The program does not obligate the Company to acquire any specific number of shares, and all repurchases will be made in accordance with Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.

Pursuant to our Repurchase Program, the Company repurchased approximately 883 thousand shares of its common stock at an average price of $16.81 per share for a total of $15 million during the year ended December 31, 2018. The Company did not repurchase any of its common stock during the year ended December 31, 2019. The approximate dollar value of shares that may yet be purchased under the Repurchase Program is $85 million as of December 31, 2019.

The Company declared dividends to common shareholders of $377 million and $375 million, or $2.00, per share during the years ended December 31, 2019 and December 31, 2018, respectively.

Earnings per share for the years ended December 31, 2019, 2018 and 2017 respectively, are computed as follows:

	For the Year Ended
	December 31, 2019			December 31, 2018			December 31, 2017
	(dollars in thousands)
Numerator:
Net income available to common shareholders	$	340,847		$	368,440		$	491,184
Effect of dilutive securities:	—			—			—
Dilutive net income available to common shareholders	$	340,847		$	368,440		$	491,184
Denominator:
Weighted average basic shares	187,156,990			187,146,170			187,780,355
Effect of dilutive securities	1,249,454			602,692			506,965
Weighted average dilutive shares	188,406,444			187,748,862			188,287,320
Net income per average share attributable to common stockholders - Basic	$	1.82		$	1.97		$	2.62
Net income per average share attributable to common stockholders - Diluted	$	1.81		$	1.96		$	2.61

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The following table presents the changes in the components of Accumulated Other Comprehensive Income, or the AOCI, for the year ended December 31, 2019 and 2018:

	December 31, 2019
	(dollars in thousands)
	Unrealized gains (losses) on available-for-sale securities, net			Total Accumulated OCI Balance
Balance as of December 31, 2018	$	626,832		$	626,832
OCI before reclassifications	70,855			70,855
Amounts reclassified from AOCI	10,649			10,649
Net current period OCI	81,504			81,504
Balance as of December 31, 2019	$	708,336		$	708,336

 

	December 31, 2018
	(dollars in thousands)
	Unrealized gains (losses) on available-for-sale securities, net			Total Accumulated OCI Balance
Balance as of December 31, 2017	$	796,902		$	796,902
OCI before reclassifications	(185,570		)	(185,570		)
Amounts reclassified from AOCI	15,500			15,500
Net current period OCI	(170,070		)	(170,070		)
Balance as of December 31, 2018	$	626,832		$	626,832

 

The following table presents the details of the reclassifications from AOCI for the year ended December 31, 2019 and 2018:

	December 31, 2019			December 31, 2018
Details about Accumulated OCI Components	Amounts Reclassified from Accumulated OCI			Amounts Reclassified from Accumulated OCI			Affected Line on the Consolidated Statements Of Operations
Unrealized gains and losses on available-for-sale securities
	$	(5,796	)	$	6,291		Net realized gains (losses) on sales of investments
	(4,853		)	(21,791		)	Net other-than-temporary credit impairment losses
	$	(10,649	)	$	(15,500	)	Income before income taxes
	—			—			Income taxes
	$	(10,649	)	$	(15,500	)	Net of tax

In accordance with the terms of the Company’s 2007 Equity Incentive Plan (as amended and restated on December 10, 2015), or the Incentive Plan, directors, officers and employees of the Company are eligible to receive restricted stock grants. These awards generally have a vesting period lasting three years. During the vesting period, these shares may not be sold. There were approximately 4 million shares available for future grants under the Incentive Plan as of December 31, 2019.

The Compensation Committee of the Board of Directors of the Company has approved a Stock Award Deferral Program, or the Deferral Program. Under the Deferral Program, non-employee directors and certain executive officers can elect to defer payment of certain stock awards made pursuant to the Equity Plan. Deferred awards are treated as deferred stock units and paid at the earlier of separation from service or a date elected by the participant who is separating. Payments are generally made in a lump sum or, if elected by the participant, in five annual installments. Deferred awards receive dividend equivalents during the deferral period in the form of additional deferred stock units. Amounts are paid at the end of the deferral period by delivery of

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shares from the Incentive Plan (plus cash for any fractional deferred stock units), less any applicable tax withholdings. Deferral elections do not alter any vesting requirements applicable to the underlying stock award.

Grants of Restricted Stock Units or, RSUs

During the first quarters of 2019 and 2018, the Company granted RSU awards to senior management. These RSU awards are designed to reward senior management of the Company for services provided to the Company. Generally, the RSU awards vest equally over a three-year period beginning from the grant date and will fully vest after three years. For employees whose years of service to the Company plus age is equal to or greater than 65, the service period is considered to be fulfilled and all grants are expensed immediately. The RSU awards are valued at the market price of the Company’s common stock on the grant date and generally the employees must be employed by the Company on the vesting dates to receive the RSU awards. The Company granted 487 thousand RSU awards during the year ended December 31, 2019, with a grant date fair value of $9 million for the 2018 and 2019 performance years. The Company granted 335 thousand RSU awards during the year ended December 31, 2018 with a grant date fair value $6 million for the 2017 performance year.

Grants of Performance Share Units or, PSUs

PSU awards are designed to align compensation with the Company’s future performance. The PSU awards granted during the year ended December 31, 2019, include a three-year performance period ending on December 31, 2021. The final number of shares awarded will be between 0% and 200% of the PSUs granted based on the Company Economic Return compared to a peer group. The Company’s three-year Company Economic Return is equal to the Company’s change in book value per common share plus common stock dividends. Compensation expense will be recognized on a straight-line basis over the three-year vesting period based on an estimate of the Company Economic Return in relation to the entities in the peer group and will be adjusted each period based on the Company’s best estimate of the actual number of shares which will vest. During the year ended December 31, 2019, the Company granted 318 thousand PSU awards to senior management with a grant date fair value of $5 million.

The 2018 PSU awards include a three years performance period ending on December 31, 2020. The final number of shares that will vest will be between 0% to 150% of the total PSU awards granted based on the total shareholder return of the Company as compared to an index of comparable financial institutions and will cliff vest at the end of the performance period. The PSU awards are measured at fair value on the grant date which will be recognized as compensation expense ratably over the three-year vesting period.  Fair value is determined using a Monte Carlo valuation model developed to value the specific features of the PSU awards, including market based conditions. Inputs into the model include the Company’s historical volatility, the peer average historical volatility, and the correlation coefficient of the volatility.  In addition, inputs also included the share price at the beginning of the measurement period and an estimated total shareholder return for both the Company and the peer group of comparable financial institutions. Based on the model results, the 133 thousand PSU awards granted during year ended December 31, 2018, had a grant date fair value of $2 million which will cliff vest on December 31, 2020.

The following table presents information with respect to the Company's stock awards during the years ended December 31, 2019 and 2018.

	For the Year Ended
	December 31, 2019				December 31, 2018
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Unvested shares outstanding - beginning of period	1,159,183		16.51		769,815		25.58
Granted	804,738		17.91		467,657		17.90
Vested	(207,827	)	16.11		(69,303	)	15.99
Forfeited	(10,132	)	18.63		(8,986	)	18.40
Unvested shares outstanding - end of period	1,745,962		17.19		1,159,183		16.51

The Company recognized stock based compensation expenses of $13 million and $8 million, respectively for the years ended December 31, 2019 and 2018.

The Company also maintains a qualified 401(k) plan.  The plan is a retirement savings plan that allows eligible employees to contribute a portion of their wages on a tax-deferred basis under Section 401(k) of the Code. for the year ended December 31, 2019, employees may contribute, through payroll deductions, up to $19,000 if under the age of 50 years and an additional $6,000 “catch-up” contribution for employees 50 years or older. The Company matches 100% of the first 6% of the eligible

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compensation deferred by employee contributions. The employer funds the 401(k) matching contributions in the form of cash, and participants may direct the Company match to an investment of their choice. The benefit of the Company’s contributions vests immediately. Generally, a participating employee is entitled to distributions from the plans upon termination of employment, retirement, death or disability. The 401(k) expenses related to the Company’s qualified plan for the years ended December 31, 2019 and 2018, were $434 thousand, respectively.

For the years ended December 31, 2019 and December 31, 2018, the Company qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company is not subject to U.S. federal income tax to the extent that it makes qualifying distributions of taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income (subject to certain adjustments) to its shareholders and meet certain other requirements such as assets it may hold, income it may generate and its shareholder composition. It is generally the Company’s policy to distribute to its shareholders all of the Company’s taxable income.

The state and local tax jurisdictions in which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT and therefore the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filing fees and its TRSs are subject to U.S. federal, state and local taxes. There were no significant income tax expenses for the years ended December 31, 2019, 2018 and 2017. The Company recorded a deferred tax asset of $5 million and $7 million for the years ended December 31, 2019 and 2018, respectively, relating to the activities of its TRSs. Of these amounts, the amount related to cumulative net operating losses was $22 thousand and $550 thousand as of December 31, 2019 and 2018, respectively, and the amount related to losses which were disallowed under Code Section 267(a) was $4 million and $7 million as of December 31, 2019 and 2018, respectively. The amount related to interest disallowed under Code Section 163(j) was $1 million as of December 31, 2019. There were no amounts disallowed under Code Section 163(j) as of December 31, 2018. The Company evaluates, based on both positive and negative evidence, the likelihood of realizing its deferred tax assets and established a valuation allowance of $5 million and $7 million for the years ended December 31, 2019 and 2018.

In general, 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 distributions.

The Company’s effective tax rate differs from its combined U.S. federal, state and city corporate statutory tax rate primarily due to the deduction of dividend distributions required to be paid under Code Section 857(a).

The Company’s 2018, 2017 and 2016 U.S. federal, state and local tax returns remain open for examination.

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 MBS and Non-Agency RMBS, residential mortgage loans, borrowings under repurchase agreements and securitized debt. 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 financing.

The Company attempts to minimize credit risk through due diligence, asset selection and portfolio monitoring. The Company has established a whole loan target market including prime and subprime borrowers, Alt-A documentation, geographic diversification, owner-occupied property, and moderate loan-to-value ratios. These factors are considered to be important indicators of credit risk.

By using derivative instruments and repurchase agreements, the Company is exposed to counterparty credit risk if counterparties to the contracts do not perform as expected. If a counterparty fails to perform on a derivative hedging instrument, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset on its balance sheet to the extent that amount exceeds collateral obtained from the counterparty or, if in a net liability position, the extent to which collateral posted exceeds the liability to the counterparty. The amounts reported as a derivative asset/(liability) are derivative contracts in a gain/(loss) position, and to the extent subject to master netting arrangements, net of derivatives in a loss/(gain) position with the same counterparty and collateral received/(pledged). If the counterparty fails to perform on a repurchase agreement, the Company is exposed to a loss to the extent that the fair value of collateral pledged exceeds the liability to the counterparty. The Company attempts to minimize counterparty credit risk by evaluating and monitoring the counterparty’s credit, executing master netting arrangements and obtaining collateral, and executing contracts and agreements with multiple counterparties to reduce exposure to a single counterparty.

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Our repurchase agreements and derivative transactions are governed by underlying agreements that provide for a right of setoff under master netting arrangements, including in the event of default or in the event of bankruptcy of either party to the transactions. The Company presents its assets and liabilities subject to such arrangements on a net basis in our consolidated statements of financial condition. The following table presents information about our liabilities that are subject to such arrangements and can potentially be offset on our consolidated statements of financial condition as of December 31, 2019 and 2018.

	December 31, 2019
	(dollars in thousands)
	Gross Amounts of Recognized  Assets (Liabilities)			Gross Amounts Offset in the Consolidated Statements of Financial Position			Net Amounts Offset in the Consolidated Statements of Financial Position			Gross Amounts Not Offset with Financial Assets (Liabilities) in the Consolidated Statements of Financial Position
										Financial Instruments			Cash Collateral (Received) Pledged (1)			Net Amount
Repurchase Agreements	$	(13,427,545	)	$	—		$	(13,427,545	)	$	15,399,244		$	20,211		$	1,991,910
Interest Rate Swaps - Gross Assets	1,092			(1,092		)	—			—			119,469			119,469
Interest Rate Swaps - Gross Liabilities	(205,703		)	205,703			—			—			—			—
Treasury Futures - Gross Assets	3,611			—			3,611			—			1,514			5,125
Treasury Futures - Gross Liabilities	—			—			—			—			—			—
Swaptions - Gross Assets	—			—			—			—			—			—
Swaptions - Gross Liabilities	—			—			—			—			—			—
Total	$	(13,628,545	)	$	204,611		$	(13,423,934	)	$	15,399,244		$	141,194		$	2,116,504

(1) Included in other assets

	December 31, 2018
	(dollars in thousands)
	Gross Amounts of Recognized  Assets (Liabilities)			Gross Amounts Offset in the Consolidated Statements of Financial Position			Net Amounts Offset in the Consolidated Statements of Financial Position			Gross Amounts Not Offset with Financial Assets (Liabilities) in the Consolidated Statements of Financial Position
										Financial Instruments			Cash Collateral (Received) Pledged (1)			Net Amount
Repurchase Agreements	$	(14,030,465	)	$	—		$	(14,030,465	)	$	15,831,008		$	—		$	1,800,543
Interest Rate Swaps - Gross Assets	87,451			(51,653		)	35,798			—			198,112			233,910
Interest Rate Swaps - Gross Liabilities	(169,790		)	169,790			—			—			—			—
Treasury Futures - Gross Assets	—			—			—			—			3,220			3,220
Treasury Futures - Gross Liabilities	(13,375		)	13,375			—			—			—			—
Swaptions - Gross Assets	1,670			—			1,670			—			—			1,670
Swaptions - Gross Liabilities	—			—			—			—			—			—
Total	$	(14,124,509	)	$	131,512		$	(13,992,997	)	$	15,831,008		$	201,332		$	2,039,343

(1) Included in other assets

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. In connection with certain re-securitization transactions engaged in by the Company, it has the obligation under certain circumstances to repurchase assets from the VIE upon breach of certain representations and warranties.

During the third quarter of 2018, Anacostia LLC, a TRS, acquired a 24.9% ownership interest in KAH Capital Management LLC, or KAH Capital, for $25 thousand. KAH Capital was formed to sponsor and manage one or more funds or accounts that focus on investments in U.S. housing related assets including reperforming and distressed loans, structured transactions and securities sourced from Government Sponsored Enterprises (GSEs) and private sellers, as well as other investments related to U.S. mortgage finance. KAH Capital will generate advisory and fee income and accordingly our investment is indirectly held through Anacostia LLC, a taxable REIT subsidiary.

In addition to the investment in KAH Capital, the Company has made a $150 million capital commitment to Hains Point, LLC (Hains Point), which is KAH Capital’s initial fund which is consolidated by the Company as the sole investor in the fund. As of

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December 31, 2019, the Company has funded $101 million towards that commitment. KAH Capital will manage the investments in Hains Point including asset selection, repurchase and other financing arrangements as well as hedging transactions. Capital calls for investments made in Hains Point are subject to our consent and approval. As of December 31, 2019 KAH Capital has earned $4.2 million out of a total of $6.5 million for its investment advisory services to the Company.

None.

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The following is a presentation of the results of operations for the quarters ended December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019.

	For the Quarter Ended
	December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019
	(dollars in thousands, except per share data)
Net Interest Income:
Interest income	$	340,662		$	330,144		$	339,914		$	350,389
Interest expense	169,203			188,551			198,110			202,950
Net interest income	171,459			141,593			141,804			147,439
Net other-than-temporary credit impairment losses	—			—			—			(4,853		)
Net gains (losses) on derivatives	78,030			(136,671		)	(237,079		)	(204,638		)
Net unrealized gains (losses) on financial instruments at fair value	(112,751		)	130,825			190,748			200,812
Net realized gains (losses) on sales of investments	17,687			1,596			(7,526		)	8,603
Gain (loss) on Extinguishment of Debt	9,926			—			(608		)	—
Total other expenses	33,998			31,015			28,424			29,216
Net income (loss)	$	130,318		$	106,326		$	58,760		$	118,147
Dividend on preferred stock	$	18,438		$	18,438		$	18,438		$	17,392
Net income (loss) available to common shareholders	$	111,880		$	87,888		$	40,322		$	100,755
Net income per common share-basic	$	0.60		$	0.47		$	0.22		$	0.54

The following is a presentation of the results of operations for the quarters ended December 31, 2018, September 30, 2018, June 30, 2018 and March 31, 2018.

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	For the Quarter Ended
	December 31, 2018			September 30, 2018			June 30, 2018			March 31, 2018
	(dollars in thousands, except per share data)
Net Interest Income:
Interest income	$	348,033		$	321,715		$	306,436		$	297,132
Interest expense	193,920			174,671			161,266			149,251
Net interest income	154,113			147,044			145,170			147,881
Net other-than-temporary credit impairment losses	(4,269		)	(7,233		)	(9,131		)	(1,158		)
Net gains (losses) on derivatives	(315,877		)	74,078			24,502			94,504
Net unrealized gains (losses) on financial instruments at fair value	84,836			(34,306		)	(18,364		)	14,466
Net realized gains (losses) on sales of investments	1,213			(6,123		)	2,167			—
Gain (loss) on Extinguishment of Debt	7,055			9,263			387			9,670
Total other expenses	29,855			25,395			26,587			26,322
Net income (loss)	$	(102,798	)	$	157,321		$	118,108		$	239,007
Dividend on preferred stock	$	14,437		$	9,960		$	9,400		$	9,400
Net income (loss) available to common shareholders	$	(117,235	)	$	147,361		$	108,708		$	229,607
Net income per common share-basic	$	(0.63	)	$	0.79		$	0.58		$	1.22

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