Except where the context suggests otherwise, references in this Quarterly Report
on Form 10-Q to "EFC," "we," "us," and "our" refer to (i) Ellington Financial
Inc. and its consolidated subsidiaries, including Ellington Financial Operating
Partnership LLC, our operating partnership subsidiary, which we refer to as our
"Operating Partnership," following our conversion to a corporation effective
March 1, 2019 (our "corporate conversion"), and (ii) Ellington Financial LLC and
its consolidated subsidiaries, including our Operating Partnership, before our
corporate conversion. References in this Quarterly Report on Form 10-Q to (1)
"common shares" refer to (i) our common shares representing limited liability
company interests, previously outstanding prior to our corporate conversion, and
(ii) shares of our common stock outstanding after our corporate conversion and
(2) "common shareholders" refer to (i) holders of our common shares representing
limited liability company interests prior to our corporate conversion, and (ii)
holders of shares of our common stock after our corporate conversion. We conduct
all of our operations and business activities through our Operating Partnership.
Our "Manager" refers to Ellington Financial Management LLC, our external
manager, "Ellington" refers to Ellington Management Group, L.L.C. and its
affiliated investment advisory firms, including our Manager, and "Manager Group"
refers collectively to officers and directors of EFC, and partners and
affiliates of Ellington (including families and family trusts of the foregoing).
In certain instances, references to our Manager and services to be provided to
us by our Manager may also include services provided by Ellington and its other
affiliates from time to time.
Special Note Regarding Forward-Looking Statements
When used in this Quarterly Report on Form 10-Q, in future filings with the
Securities and Exchange Commission, or the "SEC," or in press releases or other
written or oral communications, statements which are not historical in nature,
including those containing words such as "believe," "expect," "anticipate,"
"estimate," "project," "plan," "continue," "intend," "should," "would," "could,"
"goal," "objective," "will," "may," "seek," or similar expressions, are intended
to identify "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, or the "Securities Act," and Section 21E
of the Securities Exchange Act of 1934, as amended, or the "Exchange Act," and,
as such, may involve known and unknown risks, uncertainties, and assumptions.
Forward-looking statements are based on our beliefs, assumptions, and
expectations of our future operations, business strategies, performance,
financial condition, liquidity and prospects, taking into account information
currently available to us. These beliefs, assumptions, and expectations are
subject to risks and uncertainties and can change as a result of many possible
events or factors, not all of which are known to us. If a change occurs, our
business, financial condition, liquidity, results of operations and strategies
may vary materially from those expressed or implied in our forward-looking
statements. The following factors are examples of those that could cause actual
results to vary from our forward-looking statements: changes in interest rates
and the market value of our securities; market volatility; changes in the
prepayment rates on the mortgage loans underlying the securities owned by us for
which the principal and interest payments are guaranteed by a U.S. government
agency or a U.S. government-sponsored entity; increased rates of default and/or
decreased recovery rates on our assets; our ability to borrow to finance our
assets; changes in government regulations affecting our business; our ability to
maintain our exclusion from registration under the Investment Company Act of
1940, as amended, or the "Investment Company Act"; our ability to qualify and
maintain our qualification as a real estate investment trust, or "REIT"; and
risks associated with investing in real estate assets, including changes in
business conditions and the general economy, such as those resulting from the
economic effects related to the COVID-19 pandemic, and associated responses to
the pandemic. These and other risks, uncertainties and factors, including the
risk factors described under Item 1A of our Annual Report on Form 10-K and Part
II. Item 1A. of our Quarterly Report on Form 10-Q, as amended, for the
three-month period ended March 31, 2020, could cause our actual results to
differ materially from those projected or implied in any forward-looking
statements we make. All forward-looking statements speak only as of the date on
which they are made. New risks and uncertainties arise over time, and it is not
possible to predict those events or how they may affect us. Except as required
by law, we are not obligated to, and do not intend to, update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
Executive Summary
We invest in a diverse array of real-estate-related and other financial assets,
including residential and commercial mortgage loans, residential mortgage-backed
securities, or "RMBS," commercial mortgage-backed securities, or "CMBS,"
consumer loans and asset-backed securities, or "ABS," including ABS backed by
consumer loans, collateralized loan obligations, or "CLOs," non-mortgage- and
mortgage-related derivatives, equity investments in loan origination companies,
and other strategic investments. We are externally managed and advised by our
Manager, an affiliate of Ellington. Ellington is a registered investment adviser
with a 25-year history of investing in the Agency and credit markets.
We conduct all of our operations and business activities through the Operating
Partnership. As of June 30, 2020, we have an ownership interest of approximately
98.8% in the Operating Partnership. The remaining ownership interest of
approximately 1.2% in the Operating Partnership represents the interests in the
Operating Partnership that are owned by an affiliate of our


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Manager, our directors, and certain current and former Ellington employees and
their related parties, and is reflected in our financial statements as a
non-controlling interest.
Our primary objective is to generate attractive, risk-adjusted total returns for
our stockholders. We seek to attain this objective by utilizing an opportunistic
strategy to make investments, without restriction as to ratings, structure, or
position in the capital structure, that we believe compensate us appropriately
for the risks associated with them rather than targeting a specific yield. Our
evaluation of the potential risk-adjusted return of any potential investment
typically involves weighing the potential returns of such investment under a
variety of economic scenarios against the perceived likelihood of the various
scenarios. Potential investments subject to greater risk (such as those with
lower credit ratings and/or those with a lower position in the capital
structure) will generally require a higher potential return to be attractive in
comparison to investment alternatives with lower potential return and a lower
degree of risk. However, at any particular point in time, depending on how we
perceive the market's pricing of risk both generally and across sectors, we may
favor higher-risk assets or we may favor lower-risk assets, or a combination of
the two, in the interests of portfolio diversification or other considerations.
Through June 30, 2020, our credit portfolio, which includes all of our
investments other than RMBS for which the principal and interest payments are
guaranteed by a U.S. government agency or a U.S. government-sponsored entity, or
"Agency RMBS," has been the primary driver of our risk and return, and we expect
that this will continue in the near- to medium-term. For more information on our
targeted assets, see "-Our Targeted Asset Classes" below. We believe that
Ellington's capabilities allow our Manager to identify attractive assets in
these classes, value these assets, monitor and forecast the performance of these
assets, and opportunistically hedge our risk with respect to these assets.
We continue to maintain a highly leveraged portfolio of Agency RMBS to take
advantage of opportunities in that market sector, to help maintain our exclusion
from registration as an investment company under the Investment Company Act, and
to help qualify as well as maintain our qualification as a REIT. Unless we
acquire very substantial amounts of whole mortgage loans or there are changes to
the rules and regulations applicable to us under the Investment Company Act, we
expect that we will always maintain some amount of Agency RMBS.
The strategies that we employ are intended to capitalize on opportunities in the
current market environment. Subject to qualifying and maintaining our
qualification as a REIT, we intend to adjust our strategies to changing market
conditions by shifting our asset allocations across various asset classes as
credit and liquidity trends evolve over time. We believe that this flexibility,
combined with Ellington's experience, will help us generate more consistent
returns on our capital throughout changing market cycles.
Subject to qualifying and maintaining our qualification as a REIT, we
opportunistically hedge our credit risk, interest rate risk, and foreign
currency risk; however, at any point in time we may choose not to hedge all or a
portion of these risks, and we will generally not hedge those risks that we
believe are appropriate for us to take at such time, or that we believe would be
impractical or prohibitively expensive to hedge.
We also use leverage in our credit strategy, albeit significantly less leverage
than that used in our Agency RMBS strategy. Through June 30, 2020, we financed
the vast majority of our Agency RMBS assets, and a portion of our credit assets,
through repurchase agreements, which we sometimes refer to as "repos," which we
account for as collateralized borrowings. We expect to continue to finance the
vast majority of our Agency RMBS through the use of repos. In addition to
financing assets through repos, we also enter into other secured borrowing
transactions, which are accounted for as collateralized borrowings, to finance
certain of our loan assets. We have also obtained, through the securitization
markets, term financing for certain of our non-qualified mortgage, or "non-QM,"
loans, certain of our consumer loans, and certain of our leveraged corporate
loans. Additionally, we have issued unsecured long-term debt.
As of June 30, 2020, outstanding borrowings under repos and Total other secured
borrowings (which include Other secured borrowings and Other secured borrowings,
at fair value, as presented on our Condensed Consolidated Balance Sheet) were
$2.2 billion, of which approximately 39%, or $851.6 million, relates to our
Agency RMBS holdings. The remaining outstanding borrowings relate to our credit
portfolio.
As of June 30, 2020, we also had $86.0 million outstanding of unsecured
long-term debt, maturing in September of 2022, or the "Senior Notes." The Senior
Notes bear interest at a rate of 5.50%, subject to adjustment based on changes,
if any, in the ratings of the Senior Notes. The indenture governing the Senior
Notes contains a number of covenants, including several financial covenants. The
Senior Notes were issued in connection with an exchange of our previously issued
unsecured long-term debt (the "Old Senior Notes") on February 13, 2019 (the
"Note Exchange"), in connection with our intended election to be taxed as a
REIT. At the time of the Note Exchange, the Senior Notes were rated A by
Egan-Jones Rating Company1. See Note 11 of the notes to our condensed
consolidated financial statements for further detail on the Senior Notes and the
Note Exchange.


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As of June 30, 2020, our book value per share of common stock, calculated using
Total Stockholders' Equity less the aggregate liquidation preference of
outstanding preferred stock, was $15.67. Our debt-to-equity ratio was 2.7:1 as
of June 30, 2020. Our debt-to-equity ratio does not account for liabilities
other than debt financings and does not include debt associated with
securitization transactions accounted for as sales. Excluding repos on U.S.
Treasury securities, our recourse debt-to-equity ratio was 1.5:1 as of June 30,
2020. Adjusted for unsettled purchases and sales, these ratios were not
materially different as of June 30, 2020.
On January 24, 2020, we completed a follow-on offering of 5,290,000 shares of
our common stock, of which 690,000 shares were issued pursuant to the exercise
of the underwriters' option. The issuance and sale of such common shares
generated net proceeds, after underwriters' discount and offering costs, of
$95.3 million.
During the six-month period ended June 30, 2020 we repurchased 288,172 shares of
our common stock at an average price per share of $10.53 and a total cost of
$3.0 million. In addition to making discretionary repurchases, we from time to
time use 10b5-1 plans to increase the number of trading days available to
implement these repurchases.
We will elect to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended, or "the Code," upon the filing of our tax return for the taxable year
ended December 31, 2019. Provided that we maintain our qualification as a REIT,
we generally will not be subject to U.S. federal, state, and local income tax on
our REIT taxable income that is currently distributed to our stockholders. Any
taxes paid by a domestic taxable REIT subsidiary, or "TRS," will reduce the cash
available for distribution to our stockholders. REITs are subject to a number of
organizational and operational requirements, including a requirement that they
currently distribute at least 90% of their annual REIT taxable income excluding
net capital gains.
On February 28, 2019, we filed a certificate of conversion with the Secretary of
State of the State of Delaware (the "Secretary of State") to convert from a
Delaware limited liability company to a Delaware corporation (the "Conversion")
and change our name to Ellington Financial Inc. (the "Corporation"). The
Conversion became effective on March 1, 2019, and upon effectiveness, each of
our existing common shares representing limited liability company interests, no
par value, converted into one issued and outstanding, fully paid and
nonassessable share of common stock, $0.001 par value per share, of the
Corporation.
1A rating is not a recommendation to buy, sell or hold securities. Ratings may
be subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently of any other rating.
Our Targeted Asset Classes
Our targeted asset classes currently include investments in the U.S. and Europe
(as applicable) in the categories listed below. Subject to qualifying and
maintaining our qualification as a REIT, we expect to continue to invest in
these targeted asset classes. Also, we expect to continue to hold certain of our
targeted assets through one or more TRSs. As a result, a portion of the income
from such assets will be subject to U.S. federal corporate income tax.


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  Asset Class                                   Principal Assets
  Agency RMBS             .  Whole pool pass-through certificates;
                          .  Partial pool pass-through certificates;
                          .  Agency collateralized mortgage obligations, or "CMOs,"
                             including interest only securities, or "IOs,"
                             principal only securities, or "POs," inverse interest
                             only securities, or "IIOs"; and

  CLOs                    .  Retained tranches from CLO securitizations, including
                             participating in the accumulation of the underlying
                             assets for such securitization by providing capital to
                             the vehicle accumulating assets; and
                          .  Other CLO debt and equity tranches.

  CMBS and Commercial     .  CMBS; and
  Mortgage Loans          .  Commercial mortgage loans and other commercial real
                             estate debt.

  Consumer Loans and ABS  .  Consumer loans;
                          .  ABS, including ABS backed by consumer loans; and
                          .  Retained tranches from securitizations to which we
                             have contributed assets.

  Mortgage-Related        .  To-Be-Announced mortgage pass-through certificates, or
  Derivatives                "TBAs";
                          .  Credit default swaps, or "CDS," on individual RMBS, on
                             the ABX, CMBX and PrimeX indices and on other
                             mortgage-related indices; and
                          .  Other mortgage-related derivatives.

  Non-Agency RMBS         .  RMBS backed by prime jumbo, Alt-A, manufactured
                             housing, and subprime mortgages;
                          .  RMBS backed by fixed rate mortgages, Adjustable rate
                             mortgages, or "ARMs," Option-ARMs, and Hybrid ARMs;
                          .  RMBS backed by first lien and second lien mortgages;
                          .  Investment grade and non-investment grade securities;
                          .  Senior and subordinated securities;
                          .  IOs, POs, IIOs, and inverse floaters;
                          .  Collateralized debt obligations, or "CDOs";
                          .  RMBS backed by European residential mortgages, or
                             "European RMBS"; and
                          .  Retained tranches from securitizations in which we
                             have participated.

  Residential Mortgage    .  Residential non-performing mortgage loans, or "NPLs";
  Loans                   .  Re-performing loans, or "RPLs," which generally are
                             loans that were modified and/or formerly NPLs where
                             the borrower has resumed making payments in some form
                             or amount;
                          .  Residential "transition loans," such as residential
                             bridge loans and residential "fix-and-flip" loans;
                          .  Non-QM loans; and
                          .  Retained tranches from securitizations to which we
                             have contributed assets.

  Other                   .  Real estate, including commercial and residential real
                             property;
                          .  Strategic debt and/or equity investments in loan
                             originators and mortgage-related entities;
                          .  Corporate debt and equity securities and corporate
                             loans;
                          .  Mortgage servicing rights, or "MSRs";
                          .  Credit risk transfer securities, or "CRTs"; and
                          .  Other non-mortgage-related derivatives.




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Agency RMBS
Our Agency RMBS assets consist primarily of whole pool (and to a lesser extent,
partial pool) pass-through certificates, the principal and interest of which are
guaranteed by a federally chartered corporation, such as the Federal National
Mortgage Association, or "Fannie Mae," the Federal Home Loan Mortgage
Corporation, or "Freddie Mac," or the Government National Mortgage Association,
within the U.S. Department of Housing and Urban Development, or "Ginnie Mae,"
and which are backed by ARMs, Hybrid ARMs, or fixed-rate mortgages. In addition
to investing in pass-through certificates which are backed by traditional
mortgages, we have also invested in Agency RMBS backed by reverse mortgages.
Reverse mortgages are mortgage loans for which neither principal nor interest is
due until the borrower dies, the home is sold, or other trigger events occur.
Mortgage pass-through certificates are securities representing undivided
interests in pools of mortgage loans secured by real property where payments of
both interest and principal, plus prepaid principal, on the securities are made
monthly to holders of the security, in effect "passing through" monthly payments
made by the individual borrowers on the mortgage loans that underlie the
securities, net of fees paid to the issuer/guarantor and servicers of the
securities. Whole pool pass-through certificates are mortgage pass-through
certificates that represent the entire ownership of (as opposed to merely a
partial undivided interest in) a pool of mortgage loans.
Our Agency RMBS assets are typically concentrated in specified pools. Specified
pools are fixed-rate Agency pools consisting of mortgages with special
characteristics, such as mortgages with low loan balances, mortgages backed by
investor properties, mortgages originated through the government-sponsored
"Making Homes Affordable" refinancing programs, and mortgages with various other
characteristics. Our Agency strategy also includes RMBS that are backed by ARMs
or Hybrid ARMs and reverse mortgages, and CMOs, including IOs, POs, and IIOs.
CLOs
CLOs are a form of asset-backed security collateralized by syndicated corporate
loans. We have retained, and may retain in the future, tranches from CLO
securitizations for which we have participated in the accumulation of the
underlying assets, typically by providing capital to a vehicle accumulating
assets for such CLO securitization. Such vehicles may enter into warehouse
financing facilities in order to facilitate such accumulation. Securitizations
can effectively provide us with long-term, locked-in financing on the related
collateral pool, with an effective cost of funds well below the expected yield
on the collateral pool. Our CLO holdings may include both debt and equity
interests.
CMBS
We acquire CMBS, which are securities collateralized by mortgage loans on
commercial properties. The majority of CMBS issued are fixed rate securities
backed by fixed rate loans made to multiple borrowers on a variety of property
types, though single-borrower CMBS and floating rate CMBS have also been issued.
The majority of CMBS utilize senior/subordinate structures, similar to those
found in non-Agency RMBS. Subordination levels vary so as to provide for one or
more AAA credit ratings on the most senior classes, with less senior securities
rated investment grade and non-investment grade, including a first loss
component which is typically unrated. This first loss component is commonly
referred to as the "B-piece," which is the most subordinated (and therefore
highest yielding and riskiest) tranche of a CMBS securitization. Much of our
focus within the CMBS sector has been on B-pieces, but we also acquire other
CMBS with more senior credit priority.
Commercial Mortgage Loans and Other Commercial Real Estate Debt
We acquire commercial mortgage loans, which are loans secured by liens on
commercial properties, including hotel, industrial, multi-family, office and
retail properties. Loans may be fixed or floating rate and will generally range
from two to ten years. We typically acquire first lien loans but may also
acquire subordinated loans. As of June 30, 2020, all of our commercial mortgage
loans were first lien loans. Commercial real estate debt typically limits the
borrower's right to freely prepay for a period of time through provisions such
as prepayment fees, lockout, yield maintenance, or defeasance provisions. Some
of the commercial mortgage loans that we acquire may be non-performing,
underperforming, or otherwise distressed; these loans are typically acquired at
a discount both to their unpaid principal balances and to the value of the
underlying real estate.
We also participate in the origination of "bridge" loans, which have shorter
terms and higher interest rates than more traditional commercial mortgage loans.
Bridge loans are typically secured by properties in transition, where the
borrower is in the process of either re-developing or stabilizing operations at
the property. Properties securing these loans may include multi-family, retail,
office, industrial, and other commercial property types.
Within both our loan acquisition and loan origination strategies, we generally
focus on smaller balance loans and/or loan packages that are
less-competitively-bid. These loans typically have balances that are less than
$20 million, and are secured by


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real estate and, in some cases, a personal guarantee from the borrower.
Consumer Loans and ABS
We acquire U.S. consumer whole loans and ABS, including ABS backed by U.S.
consumer loans. Our U.S. consumer loan portfolio primarily consists of unsecured
loans, but also includes secured auto loans. We are currently purchasing newly
originated consumer loans under flow agreements with originators, and we
continue to evaluate new opportunities. We seek to purchase newly originated
consumer loans from originators that have demonstrated disciplined underwriting
with a significant focus on regulatory compliance and sound lending practices.
TBAs and Other Mortgage-Related Derivatives
In addition to investing in specified pools of Agency RMBS, subject to our
satisfying the requirements for qualification as a REIT, we utilize TBA
transactions, whereby we agree to purchase or sell, for future delivery, Agency
RMBS with certain principal and interest terms and certain types of underlying
collateral, but the particular Agency RMBS to be delivered is not identified
until shortly before the TBA settlement date. TBAs are liquid and have quoted
market prices and represent the most actively traded class of mortgage-backed
securities, or "MBS." TBA trading is based on the assumption that mortgage pools
that are eligible to be delivered at TBA settlement are fungible and thus the
specific mortgage pools to be delivered do not need to be explicitly identified
at the time a trade is initiated.
We generally engage in TBA transactions for purposes of managing certain risks
associated with our investment strategies. Other than with respect to TBA
transactions entered into by our TRSs, most of our TBA transactions are treated
for tax purposes as hedging transactions used to hedge indebtedness incurred to
acquire or carry real estate assets, or "qualifying liability hedges." The
principal risks that we use TBAs to mitigate are interest rate and yield spread
risks. For example, we may hedge the interest rate and/or yield spread risk
inherent in our long Agency RMBS by taking short positions in TBAs that are
similar in character. Alternatively, we may opportunistically engage in TBA
transactions because we find them attractive in their own right, from a relative
value perspective or otherwise. For accounting purposes, in accordance with
generally accepted accounting principles in the United States of America, or
"U.S. GAAP," we classify TBA transactions as derivatives.
We also take long and short positions in various other mortgage-related
derivative instruments, including mortgage-related credit default swaps. A
credit default swap is a credit derivative contract in which one party (the
protection buyer) pays an ongoing periodic premium (and often an upfront payment
as well) to another party (the protection seller) in return for compensation for
default (or similar credit event) by a reference entity. In this case, the
reference entity can be an individual MBS or an index of several MBS, such as an
ABX, PrimeX, or CMBX index. Payments from the protection seller to the
protection buyer typically occur if a credit event takes place. A credit event
can be triggered by, among other things, the reference entity's failure to pay
its principal obligations or a severe ratings downgrade of the reference entity.
Non-Agency RMBS
We acquire non-Agency RMBS backed by prime jumbo, Alt-A, manufactured housing,
and subprime residential mortgage loans. Our non-Agency RMBS holdings can
include investment-grade and non-investment grade classes, including non-rated
classes.
Non-Agency RMBS are generally debt obligations issued by private originators of,
or investors in, residential mortgage loans. Non-Agency RMBS generally are
issued as CMOs and are backed by pools of whole mortgage loans or by mortgage
pass-through certificates. Non-Agency RMBS generally are securitized in
senior/subordinated structures, or in excess spread/over-collateralization
structures. In senior/subordinated structures, the subordinated tranches
generally absorb all losses on the underlying mortgage loans before any losses
are borne by the senior tranches. In excess spread/over-collateralization
structures, losses are first absorbed by any existing over-collateralization,
then borne by subordinated tranches and excess spread, which represents the
difference between the interest payments received on the mortgage loans backing
the RMBS and the interest due on the RMBS debt tranches, and finally by senior
tranches and any remaining excess spread.
We also have acquired, and may acquire in the future, European RMBS, including
retained tranches from European RMBS securitizations in which we have
participated.
Residential Mortgage Loans
Our residential mortgage loans include newly originated non-QM loans,
residential transition loans, as well as legacy residential NPLs and RPLs. A
non-QM loan is not necessarily high-risk, or subprime, but is instead a loan
that does not conform to the complex Qualified Mortgage, or "QM," rules of the
Consumer Financial Protection Bureau. For example, many non-QM loans are made to
creditworthy borrowers who cannot provide traditional documentation for income,
such as borrowers who are self-employed. There is also demand from certain
creditworthy borrowers for loans above the QM 43%


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debt-to-income ratio limit that still meet all ability-to-repay standards. We
hold an equity investment in a non-QM originator, and to date we have purchased
the vast majority of our non-QM loans from this originator, although we could
potentially purchase a greater share of non-QM loans from other sources in the
future.
The residential transition loans that we originate or purchase include: (i) "fix
and flip" loans, which are made to real estate investors for the purpose of
acquiring residential homes, making value-add improvements to such homes, and
reselling the newly rehabilitated homes for a potential profit, and (ii) loans
made to real estate investors for a "business purpose," such as purchasing a
rental investment property, financing or refinancing a fully rehabilitated home
awaiting sale, or securing short-term financing pending qualification for
longer-term lower-rate financing. Our residential transition loans are secured
by non-owner occupied properties, and are typically structured as fixed-rate,
interest-only loans with terms to maturity between 6 and 24 months. Our
underwriting guidelines focus on both the "as is" and "as repaired" property
values, borrower experience as a real estate investor, and asset verification.
We remain active in the market for residential NPLs and RPLs. The market for
large residential NPL and RPL pools has remained highly concentrated, with the
great majority having traded to only a handful of large players who typically
securitize the residential NPLs and RPLs that they purchase. As a result, we
have continued to focus our acquisitions on less-competitively-bid, and more
attractively-priced mixed legacy pools sourced from motivated sellers.
Other Investment Assets
Our other investment assets include real estate, including residential and
commercial real property, strategic debt and/or equity investments in loan
originators, corporate debt and equity securities, corporate loans, which can
include litigation finance loans, CRTs, and other non-mortgage-related
derivatives. We do not typically purchase real property directly; rather, our
real estate ownership usually results from foreclosure activity with respect to
our acquired residential and commercial loans. We have made investments in loan
originators and other related entities in the form of debt and/or equity and, to
date, our investments have represented non-controlling interests. We have also
entered into flow agreements with certain of the loan originators in which we
have invested. We have not yet acquired mortgage servicing rights directly, but
we may do so in the future.
Hedging Instruments
Interest Rate Hedging
We opportunistically hedge our interest rate risk by using various hedging
strategies, subject to qualifying and maintaining our qualification as a REIT.
The interest rate hedging instruments that we use and may use in the future
include, without limitation:
• TBAs;


• interest rate swaps (including floating-to-fixed, fixed-to-floating,

floating-to-floating, or more complex swaps such as floating-to-inverse

floating, callable or non-callable);




• CMOs;


• U.S. Treasury securities;

• swaptions, caps, floors, and other derivatives on interest rates;

• futures and forward contracts; and

• options on any of the foregoing.




Because fluctuations in short-term interest rates may expose us to fluctuations
in the spread between the interest we earn on our investments and the interest
we pay on our borrowings, we may seek to manage such exposure by entering into
short positions in interest rate swaps. An interest rate swap is an agreement to
exchange interest rate cash flows, calculated on a notional principal amount, at
specified payment dates during the life of the agreement. Typically, one party
pays a fixed interest rate and receives a floating interest rate and the other
party pays a floating interest rate and receives a fixed interest rate. Each
party's payment obligation is computed using a different interest rate. In an
interest rate swap, the notional principal is generally not exchanged.
Credit Risk Hedging
We enter into credit-hedging positions in order to protect against adverse
credit events with respect to our credit investments, subject to qualifying and
maintaining our qualification as a REIT. Our credit hedging portfolio can vary
significantly from period to period, and can encompass a wide variety of
financial instruments, including corporate debt or equity-related instruments,
RMBS- or CMBS-related instruments, or instruments involving other markets. Our
hedging


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instruments can include both "single-name" instruments (i.e., instruments
referencing one underlying entity or security) and hedging instruments
referencing indices.
Currently, our credit hedges consist primarily of financial instruments tied to
corporate credit, such as CDS on corporate bond indices, short positions in and
CDS on corporate bonds; and positions involving exchange traded funds, or
"ETFs," of corporate bonds. Our credit hedges also currently include CDS tied to
individual MBS or an index of several MBS, such as CDS on CMBS indices, or
"CMBX."
Foreign Currency Hedging
To the extent that we hold instruments denominated in currencies other than U.S.
dollars, we may enter into transactions to offset the potential adverse effects
of changes in currency exchange rates, subject to qualifying and maintaining our
qualification as a REIT. In particular, we may use currency forward contracts
and other currency-related derivatives to mitigate this risk.
Trends and Recent Market Developments
Market Overview
•      The U.S. Federal Reserve, or the "Federal Reserve," continued its

accommodative monetary policy in the second quarter. At its April and June

meetings, the Federal Reserve maintained its target range of 0.00%-0.25%

for the federal funds rate, noting that "the coronavirus outbreak is

causing tremendous human and economic hardship across the United States

and around the world" including "sharp declines in economic activity and a

surge in job losses." It further noted that "the Federal Reserve is

committed to using its full range of tools to support the U.S. economy in

this challenging time." After the June meeting, the chairman of the

Federal Reserve, Jerome Powell, stated: "We're not thinking about raising

rates. We're not even thinking about thinking about raising rates." During

the quarter, the Federal Reserve continued to purchase significant amounts

of U.S. Treasury securities, Agency RMBS, and other eligible collateral,

pursuant to the asset purchase programs it outlined in March.

• After implementing several stimulus programs to counteract the economic

impact and negative risk sentiment associated with the spread of the novel

coronavirus disease ("COVID-19") in the first quarter, the Federal Reserve

announced on April 9th that it would provide up to $2.3 trillion in

additional loans through the expansion of several programs implemented

during the previous quarter, including the Paycheck Protection Program,


       the Main Street Lending Program, the Primary and Secondary Market
       Corporate Credit Facilities, and the Term Asset-Backed Securities Loan
       Facility, as well as through new facilities, including the Municipal
       Liquidity Facility. Similarly, central banks and governments around the

globe continued to implement quantitative easing programs and stimulus


       packages during the second quarter.


•      In May, Jerome Powell stated that "additional policy measures" may be
       necessary, noting that "the path ahead is both highly uncertain and
       subject to significant downside risks." On May 15th, the U.S. House of

Representatives passed the HEROES Act, which would provide for $3 trillion

of additional stimulus, but as of August 6th, the bill had not passed in


       the Senate. Regardless, as the second quarter concluded, many market
       participants were anticipating additional stimulus measures to be
       implemented during the second half of 2020.

• After dropping dramatically during the first quarter of 2020 as the spread

of COVID-19 prompted a flight to safety, interest rates hovered near

all-time lows during the second quarter. U.S. Treasury yields changed only


       slightly quarter over quarter, with the 10-year U.S. Treasury yield
       finishing the second quarter at 0.66%, virtually unchanged from the start
       of the quarter and only 12 basis points above the record low reached in

March. After a volatile first quarter, interest-rate volatility subsided

considerably in the second quarter. After reaching its highest point since

the 2008-2009 financial crisis in March, the MOVE index, which measures

interest-rate volatility, had reverted to pre-COVID-19 levels by mid-April


       and remained low through quarter-end. The 10-year U.S. Treasury yield
       traded in a 33-basis-point range in the second quarter, compared to a
       134-basis-point range in the first quarter.

• Mortgage rates continued to decline during the second quarter, with the

Freddie Mac Survey 30-year mortgage rate decreasing by 37 basis points to

close the quarter at 3.13%, and setting a new all-time low of 3.07% on

July 2nd. Although down from the 11-year high seen in March, refinancing

applications remained elevated with the declining mortgage rates. As of

June 30th, the Mortgage Bankers Association's Refinance Index had declined

30% quarter over quarter, but was still up 74% year over year. Overall


       Fannie Mae 30-year MBS prepayments increased from a CPR of 23.6 in March
       to 29.8 in April, before declining slightly to 29.3 in May, and then
       reaching a more than 7-year high of 33.0 in June.


•      LIBOR rates, which drive many of our financing costs, declined
       dramatically in the second quarter. One-month LIBOR decreased 83 basis
       points to end the quarter at 0.16%, and three-month LIBOR fell 115 basis
       points to 0.30%.




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• After declining at an annualized rate of 5.0% in the first quarter, U.S.

real GDP shrank at an estimated annualized rate of 32.9% in the second

quarter, further reflecting the negative impact of the COVID-19 pandemic


       and associated measures to contain it. U.S. retail sales declined by a
       record rate in April, before rebounding by a record rate in May and
       increasing again in June, although a surge in COVID-19 cases in June
       muddled the picture going forward. Elsewhere, the Eurozone's GDP
       contracted by 3.8% in the first quarter, the fastest rate of decline on
       record, while China's GDP shrank by 6.8% in the first quarter, the first
       decline recorded since data collection began in 1992. For the second
       quarter, Chinese GDP growth was again positive at 3.2%.

• Unemployment claims totaled 38.5 million in the second quarter, and the

unemployment rate surged to 11.1% at June 30th, from 4.4% at March 31st. A

total of 48.6 million new unemployment claims were filed between March

15th and June 27th, although the weekly pace of filings decreased from 5.0

million per week in April, to 1.5 million per week in June.

• Forbearance rates on residential mortgages rose sharply during the second

quarter, with the economic slowdown and spike in unemployment. According

to the Mortgage Bankers Association, the total forbearance rate increased


       most significantly during the month of April, from 2.7% as of March 29th
       to 7.5% as of April 26th, before rising further to 8.5% as of May 31st,
       and then plateauing during June and finishing the quarter at 8.4%.

Notably, many forbearance plans expired on June 30th and with renewed

lockdown protocols in place, forbearance rates could increase again.

• For the second quarter, the Bloomberg Barclays U.S. MBS Index generated a


       return of 0.68%, and an excess return (on a duration-adjusted basis) of
       0.39% relative to the Bloomberg Barclays U.S. Treasury Index. After
       underperforming in the first quarter, pay-ups on Agency specified pools
       performed exceptionally well during the second quarter.

• The Bloomberg Barclays U.S. Corporate Bond Index generated a gain of 8.66%

and an excess return of 8.10%, while the Bloomberg Barclays U.S. Corporate


       High Yield Bond Index generated a gain of 8.89% and an excess return of
       8.35%.

• Despite the negative economic impact of COVID-19, U.S. equities rebounded

dramatically in the second quarter, with the Dow Jones Industrial Average

("DJIA") and S&P 500 indexes posting their biggest quarterly gains since

1998 and offsetting most of the losses suffered in March, amidst optimism

over the reopening of the economy, possible additional stimulus measures,

and advances on COVID-19 treatments and a possible vaccine. The DJIA rose

17.8% and the S&P 500 rose 20.0% quarter over quarter; year-to-date

through June 30th, these indexes were down 9.6% and 4.0%, respectively.

Meanwhile, the tech-heavy NASDAQ composite index rose 30.6% quarter over

quarter and was up 12.1% on the year. Equity volatility declined during

the quarter, but remained higher than pre-COVID-19 levels. The CBOE

Volatility Index, which measures expected moves in the S&P 500 index,

registered an all-time high of 82.69 on March 16th, but then steadily

declined for most of the second quarter, finishing at 30.43 at June 30th.

Meanwhile, London's FTSE 100 index increased 8.8% quarter over quarter,


       while the MSCI World global equity index rebounded by 18.8% over the same
       period.


Portfolio Overview and Outlook
In March 2020, in response to the market volatility associated with the outbreak
of the COVID-19 pandemic, we had strategically reduced the size of our Agency
portfolio in order to lower our leverage and enhance our liquidity position. We
had also substantially suspended new investments in our credit strategies. High
levels of market distress continued into April, and during that month, we
further reduced the size of our Agency portfolio, and only resumed very limited
purchase and sale activity in our credit portfolio. In May and June, with the
markets stabilized, we fully resumed our investment activity in our credit and
Agency portfolios.
In total, our total long Agency RMBS portfolio decreased by 10% to $913.2
million as of June 30, 2020, from $1.016 billion as of March 31, 2020, as
additional sales in April and principal repayments during the quarter exceeded
new purchases in May and June.
Our total long credit portfolio, including REO but excluding hedges and other
derivative positions, was essentially unchanged at $1.996 billion as of June 30,
2020, as compared to $1.998 billion as of March 31, 2020. Excluding non-retained
tranches of our consolidated non-QM securitization trusts, our total long credit
portfolio decreased approximately 14% to $1.257 billion as of June 30, 2020, as
compared to $1.457 billion as of March 31, 2020. The quarter-over-quarter
decline in the total credit portfolio, excluding non-retained tranches of our
consolidated non-QM securitization trusts, was mainly due to the completion of
our non-QM securitization in June; otherwise, sales and principal repayments
roughly offset purchases and net realized and unrealized gains.


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Credit Summary (1)
                                               June 30, 2020                      March 31, 2020
                                                      % of Total Long                    % of Total Long
($ in thousands)                       Fair Value     Credit Portfolio    Fair Value     Credit Portfolio
Dollar Denominated:
CLOs(2)                               $   156,158           7.8 %        $   170,905           8.6 %
CMBS                                       77,815           3.9 %             75,815           3.8 %
Commercial Mortgage Loans and
REO(3)(4)                                 337,265          16.9 %            343,111          17.2 %
Consumer Loans and ABS Backed by
Consumer Loans(2)                         216,289          10.8 %            252,385          12.6 %
Corporate Debt and Equity and
Corporate Loans                             9,237           0.5 %              7,407           0.4 %
Debt and Equity Investments in Loan
Origination Entities                       44,277           2.2 %             39,436           2.0 %
Non-Agency RMBS                           154,928           7.8 %            118,793           5.9 %
Residential Mortgage Loans and
REO(3)                                    950,565          47.6 %            942,202          47.2 %
Non-Dollar Denominated:
CLOs(2)                                     2,583           0.1 %              2,310           0.1 %
Consumer Loans and ABS Backed by
Consumer Loans                                395             - %                459             - %
Corporate Debt and Equity                      25             - %                 29             - %
RMBS(5)                                    46,722           2.4 %             44,928           2.2 %
Total Long Credit                     $ 1,996,259         100.0 %        $ 1,997,780         100.0 %

(1) This information does not include U.S. Treasury securities, interest rate

swaps, TBA positions, or other hedge positions.

(2) Includes equity investments in securitization-related vehicles.

(3) As discussed in Note 2 of the notes to condensed consolidated financial

statements, REO is not considered a financial instrument and as a result is

included at the lower of cost or fair value.

(4) Includes investments in unconsolidated entities holding small balance

commercial mortgage loans and REO.

(5) Includes an investment in an unconsolidated entity holding European RMBS.




In March, the market turmoil associated with the COVID-19 pandemic caused
significant volatility, price declines and yield spread widening across
virtually all credit assets, and as result, we incurred considerable
mark-to-market losses in the first quarter. Consequently, we also received
margin calls under our financing arrangements and under our derivative contracts
that were higher than typical historical levels. In contrast, prices in many
credit-sensitive fixed income sectors rebounded in the second quarter,
generating significant net realized and unrealized gains on our credit assets,
which reversed a portion of our losses from the first quarter. Accordingly, our
margin calls reverted to more typical levels in the second quarter. We satisfied
all margin calls during both periods. As of June 30, 2020, we had cash and cash
equivalents of $146.5 million, along with unencumbered assets of approximately
$311.8 million.
During March and early April, while we were able to roll our repos in an orderly
manner, haircuts and borrowing rates were generally higher, and maturities
generally shorter. During the remainder of the second quarter, however, we made
substantial progress extending and improving our sources of financing and
leverage. In addition to completing our non-QM securitization, we also obtained
term financing for numerous loan assets that we had previously held unfinanced,
and we extended the terms of several of our credit facilities. By the end of the
quarter, the market for standard repo financing of securities had largely
returned to pre-March levels.
Most of our credit strategies performed well during the second quarter. We had
large gains on our non-QM loans, non-Agency RMBS, and CMBS, all markets where
there was substantial distressed selling during the first quarter, followed by a
sharp rebound in prices and liquidity in the second quarter. Our loan strategies
also performed well, led by excellent performance in our consumer loan and
residential transition loan portfolios. Our investments in loan originators had
strong performance during the quarter, driven by an excellent quarter from the
reverse mortgage originator in which we hold a minority stake. Our CLO strategy
and Euro-denominated RMBS portfolio generated net losses for the quarter. The
market recovery also resulted in a loss on our credit hedges.
Finally, the net interest income on our credit portfolio decreased sequentially
from the prior quarter as a result of lower average holdings.


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Economic Impacts of COVID-19
Despite the partial market recovery in the second quarter, we are still
anticipating eventual principal losses on many of our credit investments as a
result of the economic impacts of COVID-19. As has been widely reported, there
has been a significant nationwide increase in loan delinquencies, forbearances,
deferments, and modifications, and we are seeing the effects of this on our own
portfolios, as detailed below. We have also reduced the volume of new investment
activity in each of these portfolios as a result of the COVID-19 pandemic.
Non-QM Loan Portfolio-Since the onset of the COVID-19 pandemic, we have worked
with the servicer of our non-QM loans to develop a process to document and
verify hardship due to the COVID-19 pandemic. We use this information to
determine the suitability for a borrower to be granted forbearance, typically
for a term lasting three months. We have also worked with the servicer to
develop a process to evaluate the possible loss mitigation options in the event
that a borrower, at the end of the forbearance period, cannot fully repay the
forborne payments. Such options may include various repayment plans, deferment
plans, rate and/or term modifications, short sales, and principal reduction
modifications.
As of June 30, 2020, non-QM loans with a unpaid principal balance of $73.8
million, or 8.8% of our non-QM loan portfolio, were in forbearance; 41.7% of
these loans in forbearance continued to make their regular payments and were
current under the terms of their notes despite being in forbearance plans as of
June 30, 2020. The vast majority of these forbearance plans expired in July
2020.
•Small Balance Commercial Mortgage Loan Portfolio-In our small balance
commercial mortgage loan portfolio, we have granted short-term interest
deferments to certain borrowers, with such deferred interest capitalized and
added to the outstanding principal balance of the loan. In certain other cases,
we have granted loan modifications to permit the use of cash reserves to pay
interest due on the loan. As of June 30, 2020, small balance commercial mortgage
loans with a unpaid principal balance of $60.7 million, or 20.5%, of our small
balance commercial mortgage loan portfolio that were current prior to March
2020, have entered into a deferment or modification agreement.
•Consumer Loan Portfolio-We have also seen an increase in loan deferments in our
consumer loan portfolio as a result of the COVID-19 pandemic. As of June 30,
2020, consumer loans with a unpaid principal balance of $25.1 million, or 15.4%,
of our consumer loan portfolio had entered into a deferment plan at some point
between March and June of 2020. Of these loans that had entered into a deferment
plan, we had received payments on 65.5% of them, based on unpaid principal
balance, as of June 30, 2020.
•Residential Transition Loan Portfolio-In our residential transition loan
portfolio, we had no loans subject to forbearance, deferment, or modification
plans as of June 30, 2020.
Supplemental Credit Portfolio Information
The table below summarizes our interests in commercial mortgage loans by
property type of the underlying real estate collateral as a percentage of total
outstanding unpaid principal balance as of June 30, 2020:
Property Type    June 30, 2020
Multifamily            29.2 %
Mixed Use              15.0 %
Retail                 11.3 %
Industrial(1)          14.3 %
Hotel(1)               16.0 %
Office                  2.7 %
Other(1)               11.5 %
                      100.0 %

(1) Includes our allocable portion of small-balance commercial loans, based on

our ownership percentage, held in variable interest entities. Our equity

investments in such variable interest entities are included in Investments in

unconsolidated entities, at fair value on the Condensed Consolidated Balance


    Sheet.




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Agency RMBS Summary
                                            June 30, 2020                        March 31, 2020
                                                   % of Long Agency                     % of Long Agency
($ in thousands)                   Fair Value         Portfolio         Fair Value         Portfolio
Long Agency RMBS:
Fixed Rate                       $    724,756             79.3 %       $   834,002             82.1 %
Floating Rate                           7,899              0.9 %             9,054              0.9 %
Reverse Mortgages                     131,535             14.4 %           130,601             12.8 %
IOs                                    49,007              5.4 %            42,344              4.2 %
Total Long Agency RMBS           $    913,197            100.0 %       $ 1,016,001            100.0 %


Our Agency strategy performed exceptionally well during the second quarter,
driven by significantly higher pay-ups on our specified pools. Pay-ups are price
premiums for specified pools relative to their TBA counterparts. During the
first quarter of 2020, pay-ups had declined in the face of market-wide liquidity
stresses, exacerbated by quarter-end balance sheet pressures, as well as the
implementation of the Federal Reserve's amplified asset purchase program
implemented in March, which was generally limited to TBAs and generic pools, as
opposed to specified pools with pay-ups.
During the quarter, asset purchases by the Federal Reserve continued to be
significant, and the liquidity stresses of the previous quarter subsided.
Pay-ups on specified pools expanded as investors sought prepayment protection
amidst record-low mortgage rates and increasing actual and projected prepayment
rates. Average pay-ups on our specified pools increased to 3.30% as of June 30,
2020, as compared to 1.47% as of March 31, 2020, generating significant net
realized and unrealized gains on our portfolio. Our Agency strategy also
benefited from the appreciation of our reverse mortgage pools, driven by strong
investor demand and a recovery in yield spreads after the distress in March.
During the quarter, we continued to hedge interest rate risk in our Agency
strategy, primarily through the use of interest rate swaps, short positions in
TBAs, U.S. Treasury securities, and futures. We significantly reduced the size
of our net short TBA position during the quarter, including an increase in the
amount of long TBAs held for investment. As a result, the relative proportion,
based on 10-year equivalents, of short positions in TBAs decreased period over
period relative to other hedging instruments. Ten-year equivalents for a group
of positions represent the amount of 10-year U.S. Treasury securities that would
be expected to experience a similar change in market value under a standard
parallel move in interest rates.
As of June 30, 2020 and March 31, 2020, the weighted average net pass-through
rate on our fixed-rate specified pools was 4.0% and 4.1%, respectively.
Portfolio turnover for our Agency strategy, as measured by sales and excluding
paydowns, was approximately 15% for the three-month period ended June 30, 2020.
We expect to continue to target specified pools that, taking into account their
particular composition and based on our prepayment projections, should:
(1) generate attractive yields relative to other Agency RMBS and U.S. Treasury
securities, (2) have less prepayment sensitivity to government policy shocks,
and/or (3) create opportunities for trading gains once the market recognizes
their value, which for newer pools may come only after several months, when
actual prepayment experience can be observed. We believe that our research team,
proprietary prepayment models, and extensive databases remain essential tools in
our implementation of this strategy.
The following table summarizes the prepayment rates for our portfolio of
fixed-rate specified pools (excluding those backed by reverse mortgages) for the
three-month periods ended June 30, 2020, March 31, 2020, December 31, 2019,
September 30, 2019, and June 30, 2019.
                                                      Three-Month Period Ended
                                                                December    September
                               June 30, 2020   March 31, 2020   31, 2019    30, 2019    June 30, 2019
Three-Month Constant
Prepayment Rates(1)                21.1%           20.1%          19.9%       15.7%         12.8%

(1) Excludes Agency fixed-rate RMBS without any prepayment history.


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The following table provides details about the composition of our portfolio of
fixed-rate specified pools (excluding those backed by reverse mortgages) as of
June 30, 2020 and March 31, 2020:
                                               June 30, 2020                                    March 31, 2020
                                                                  Weighted                                          Weighted
                                 Current                        Average Loan       Current                        Average Loan
                    Coupon      Principal       Fair Value      Age (Months)      Principal       Fair Value      Age (Months)
                                      (In thousands)                                    (In thousands)
Fixed-rate
Agency RMBS:
15-year
fixed-rate
mortgages:
                     2.50     $     8,300     $      8,383               15     $     8,300     $      8,774               12
                     3.00           6,243            6,572               34           6,358            6,663               31
                     3.50          23,753           25,236               59          49,408           52,408               47
                     4.00           8,590            9,191               46           5,088            5,417               62
                     4.50           5,127            5,398              118           5,637            5,928              116
Total 15-year
fixed-rate
mortgages                          52,013           54,780               53          74,791           79,190               48
20-year
fixed-rate
mortgages:
                     4.50             740              813               79             752              828               76
Total 20-year
fixed-rate
mortgages                             740              813               79             752              828               76
30-year
fixed-rate
mortgages:
                     3.00          54,287           58,155               15          38,692           40,953               17
                     3.28             104              114               96             105              111               93
                     3.50         141,558          153,591               42         184,122          196,731               34
                     3.75           1,843            1,965               37           2,181            2,321               34
                     4.00         202,138          219,702               42         258,997          279,449               42
                     4.50         130,536          143,461               40         110,008          119,611               43
                     5.00          75,597           84,034               42          96,914          104,969               36
                     5.50           5,409            6,103               57           6,290            6,973               49
                     6.00           1,786            2,038               70           2,598            2,866               51
Total 30-year
fixed-rate
mortgages                         613,258          669,163               39         699,907          753,984               38
Total fixed-rate
Agency RMBS                   $   666,011     $    724,756               41     $   775,450     $    834,002               39


Our net Agency premium as a percentage of the fair value of our specified pool
holdings is one metric that we use to measure the overall prepayment risk of our
specified pool portfolio. Net Agency premium represents the total premium
(excess of market value over outstanding principal balance) on our specified
pool holdings less the total premium on related net short TBA positions. The
lower our net Agency premium, the less we believe that our specified pool
portfolio is exposed to market-wide increases in Agency RMBS prepayments. Our
net Agency premium as a percentage of fair value of our specified pool holdings
was approximately 5.5% and 3.9% as of June 30, 2020 and March 31, 2020,
respectively. These figures take into account the net short TBA positions that
we use to hedge our specified pool holdings, which had a notional value of
$330.1 million and a fair value of $354.2 million as of June 30, 2020, as
compared to a notional value of $468.5 million and a fair value of $498.2
million as of March 31, 2020. Excluding these TBA hedging positions, our Agency
premium as a percentage of fair value was approximately 8.3% and 6.9% as of
June 30, 2020 and March 31, 2020, respectively. Our Agency premium percentage
and net Agency premium percentage may fluctuate from period to period based on a
variety of factors, including market factors such as interest rates and mortgage
rates, and, in the case of our net Agency premium percentage, based on the
degree to which we hedge prepayment risk with short TBA positions. We believe
that our focus on purchasing pools with specific prepayment characteristics
provides a measure of protection against prepayments.


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Financing

The following table details our borrowings outstanding and debt-to-equity ratios as of June 30, 2020 and March 31, 2020:


                                                                    As of
($ in thousands)                                      June 30, 2020       March 31, 2020
Recourse(1) Borrowings:
Repurchase Agreements                               $     1,147,725     $      1,846,719
Other Secured Borrowings                                     46,289               55,045
Senior Notes, at par                                         86,000               86,000
Total Recourse Borrowings                           $     1,280,014     $      1,987,764
Debt-to-Equity Ratio Based on Total Recourse
Borrowings(1)                                                 1.5:1         

2.5:1


Debt-to-Equity Ratio Based on Total Recourse
Borrowings Excluding U.S. Treasury Securities                 1.5:1                2.5:1
Non-Recourse(2) Borrowings:
Repurchase Agreements                               $       146,824     $        187,506
Other Secured Borrowings                                    109,800              122,810
Other Secured Borrowings, at fair value(3)                  742,688         

549,668

Total Recourse and Non-Recourse Borrowings $ 2,279,326 $

2,847,748


Debt-to-Equity Ratio Based on Total Recourse and
Non-Recourse Borrowings                                       2.7:1         

3.5:1


Debt-to-Equity Ratio Based on Total Recourse and
Non-Recourse Borrowings Excluding U.S. Treasury
Securities                                                    2.7:1         

3.5:1

(1) As of June 30, 2020 and March 31, 2020, excludes borrowings at certain

unconsolidated entities that are recourse to us. Including such borrowings,

our debt-to-equity ratio based on total recourse borrowings is 1.6:1 and

2.5:1 as of June 30, 2020 and March 31, 2020, respectively.

(2) All of our non-recourse borrowings are secured by collateral. In the event of

default under a non-recourse borrowing, the lender has a claim against the

collateral but not any of the Operating Partnership's other assets. In the

event of default under a recourse borrowing, the lender's claim is not

limited to the collateral (if any).

(3) Relates to our non-QM loan securitizations, where we have elected the fair

value option on the related debt.




Primarily as a result of Agency RMBS sales, our debt-to-equity ratio including
repos, Total other secured borrowings, and our Senior Notes, but excluding repos
on U.S. Treasury securities, declined to 2.7:1 as of June 30, 2020, from 3.5:1
as of March 31, 2020. Excluding repos on U.S. Treasury securities, our recourse
debt-to-equity ratio decreased to 1.5:1 as of June 30, 2020, from 2.5:1 as of
March 31, 2020. Adjusted for unsettled purchases and sales, our debt-to-equity
ratio decreased to 2.7:1 as of June 30, 2020, as compared to 3.1:1 as of March
31, 2020. Similarly, our recourse debt-to-equity ratio, also adjusted for
unsettled purchases and sales, decreased to 1.5:1 as of June 30, 2020, from
2.1:1 as of March 31, 2020, driven also by our non-QM securitization, which
reduced the amount of recourse borrowings in our credit portfolio. Our
debt-to-equity ratio may fluctuate period over period based on portfolio
management decisions, market conditions, capital markets activities, and the
timing of security purchase and sale transactions.
Our financing costs include interest expense related to our repo borrowings,
Total other secured borrowings, and Senior Notes. The interest rates on our repo
borrowings and Other secured borrowings are generally based on, or correlated
with, LIBOR. For the three-month period ended June 30, 2020, our average cost of
funds decreased to 2.35%, compared to 2.58% for the three-month period ended
March 31, 2020, driven by lower short-term interest rates.


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Critical Accounting Policies
We adopted ASC 946 upon commencement of operations in August 2007, and applied
U.S. GAAP for investment companies. In connection with our internal
restructuring and our intention to qualify as a REIT for the year ended December
31, 2019, we have determined that, effective January 1, 2019, we no longer
qualified for investment company accounting in accordance with ASC 946-10-25,
and prospectively discontinued its use. We elected the fair value option for,
and therefore we will continue to measure at fair value, those of our assets and
liabilities for which such election is permitted, as provided for under ASC 825,
Financial Instruments ("ASC 825").
Our condensed consolidated financial statements include the accounts of
Ellington Financial Inc., its Operating Partnership, its subsidiaries, and
variable interest entities, or "VIEs," for which the Company is deemed to be the
primary beneficiary. All intercompany balances and transactions have been
eliminated. Certain of our critical accounting policies require us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the condensed consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. We believe that all of the
decisions and assessments upon which our condensed consolidated financial
statements are based were reasonable at the time made based upon information
available to us at that time. We rely on the experience of our Manager and
Ellington and analysis of historical and current market data in order to arrive
at what we believe to be reasonable estimates. See Note 2 of the notes to our
condensed consolidated financial statements for a complete discussion of our
significant accounting policies. We have identified our most critical accounting
policies to be the following:
Valuation: For financial instruments that are traded in an "active market," the
best measure of fair value is the quoted market price. However, many of our
financial instruments are not traded in an active market. Therefore, management
generally uses third-party valuations when available. If third-party valuations
are not available, management uses other valuation techniques, such as the
discounted cash flow methodology. Summary descriptions, for various categories
of financial instruments, of the valuation methodologies management uses in
determining fair value of our financial instruments are detailed in Note 2 of
the notes to our condensed consolidated financial statements. Management
utilizes such methodologies to assign a good faith fair value (the estimated
price that, in an orderly transaction at the valuation date, would be received
to sell an asset, or paid to transfer a liability, as the case may be) to each
such financial instrument.
See the notes to our condensed consolidated financial statements for more
information on valuation techniques used by management in the valuation of our
assets and liabilities.
Purchases and Sales of Investments and Investment Income: Purchase and sales
transactions are generally recorded on trade date. Realized and unrealized gains
and losses are calculated based on identified cost. We generally amortize
premiums and accrete discounts on our fixed-income investments using the
effective interest method.
See the notes to our condensed consolidated financial statements for more
information on the assumptions and methods that we use to amortize purchase
premiums and accrete purchase discounts.
Recent Accounting Pronouncements
Refer to the notes to our condensed consolidated financial statements for a
description of relevant recent accounting pronouncements.


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Financial Condition
The following table summarizes the fair value our investment portfolio(1) as of
June 30, 2020 and December 31, 2019.
(In thousands)                                         June 30, 2020      December 31, 2019
Long:
Credit:
Dollar Denominated:
CLO(2)                                               $       156,158     $         172,802
CMBS                                                          77,815               124,693
Commercial Mortgage Loans and REO(3)(4)                      337,265        

320,926


Consumer Loans and ABS backed by Consumer Loans(2)           216,289        

238,193


Corporate Debt and Equity and Corporate Loans                  9,237        

20,987


Equity Investments in Loan Origination Entities               44,277        

41,393


Non-Agency RMBS                                              154,928        

113,342


Residential Mortgage Loans and REO(3)                        950,565               933,870
Non-Dollar Denominated:
CLO(2)                                                         2,583                 5,722
CMBS                                                               -                   175
Consumer Loans and ABS backed by Consumer Loans                  395                   549
Corporate Debt and Equity                                         25                    30
RMBS(5)                                                       46,722                55,156
Agency:
Fixed-Rate Specified Pools                                   724,756             1,758,882
Floating-Rate Specified Pools                                  7,899                10,002
IOs                                                           49,007                35,279
Reverse Mortgage Pools                                       131,535               132,800
Total Long                                           $     2,909,456     $       3,964,801
Short:
Credit:
Dollar Denominated:
Corporate Debt and Equity                            $          (459 )   $            (471 )
Government Debt:
Dollar Denominated                                            (4,324 )             (62,994 )
Non-Dollar Denominated                                       (26,688 )              (9,944 )
Total Short                                          $       (31,471 )   $         (73,409 )

(1) For more detailed information about the investments in our portfolio, please

see the notes to condensed consolidated financial statements.

(2) Includes equity investments in securitization-related vehicles.

(3) REO is not eligible to elect the fair value option as described in Note 2 of

the notes to condensed consolidated financial statements and, as a result, is

included at the lower of cost or fair value.

(4) Includes investments in unconsolidated entities holding small balance

commercial mortgage loans and REO.

(5) Includes an investment in an unconsolidated entity holding European RMBS.







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The following table summarizes our financial derivatives portfolio(1)(2) as of
June 30, 2020.
                                                         Notional                          Net
(In thousands)                              Long           Short           Net         Fair Value
Mortgage-Related Derivatives:
CDS on MBS and MBS Indices              $       969     $  (27,859 )   $  (26,890 )   $     7,991
Total Net Mortgage-Related
Derivatives                                                                                 7,991
Corporate-Related Derivatives:
CDS on Corporate Bonds and Corporate
Bond Indices                                 68,760       (160,123 )      (91,363 )           133
Total Return Swaps on Corporate Bond
Indices and Corporate Debt(3)                 4,726              -          4,726             365
Warrants(4)                                   1,546              -          1,546              31
Total Net Corporate-Related
Derivatives                                                                                   529
Interest Rate-Related Derivatives:
TBAs                                        132,000       (428,592 )     (296,592 )         1,608
Interest Rate Swaps                         422,425       (537,459 )     (115,034 )       (17,605 )
U.S. Treasury Futures(5)                      1,900       (167,100 )     (165,200 )          (382 )
Total Interest Rate-Related
Derivatives                                                                               (16,379 )
Other Derivatives:
Foreign Currency Forwards(6)                      -        (22,710 )      (22,710 )           182
Total Net Other Derivatives                                                                   182
Net Total                                                                             $    (7,677 )

(1) For more detailed information about the financial derivatives in our

portfolio, please refer to Note 8 of the notes to condensed consolidated

financial statements.

(2) In the table above, fair value of certain derivative transactions are shown

on a net basis. The accompanying financial statements separate derivative

transactions as either assets or liabilities. As of June 30, 2020, derivative

assets and derivative liabilities were $27.2 million and $(34.9) million,

respectively, for a net fair value of $(7.7) million, as reflected in "Net

Total" above.

(3) Notional value represents the face amount of the underlying asset.

(4) Notional represents the maximum number of shares available to be purchased

upon exercise.

(5) Notional value represents the total face amount of U.S. Treasury securities

underlying all contracts held. As of June 30, 2020, a total of 19 long and

1,444 short U.S. Treasury futures contracts were held.

(6) Short notional value represents U.S. Dollars to be received by us at the


    maturity of the forward contract.




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The following table summarizes our financial derivatives portfolio(1)(2) as of
December 31, 2019.
                                                           Notional                            Net
(In thousands)                              Long            Short             Net          Fair Value
Mortgage-Related Derivatives:
CDS on MBS and MBS Indices              $     1,039     $    (70,656 )   $    (69,617 )   $     4,062
Total Net Mortgage-Related
Derivatives                                                                                     4,062
Corporate-Related Derivatives:
CDS on Corporate Bonds and Corporate
Bond Indices                                131,137         (262,885 )       (131,748 )       (10,616 )
Total Return Swaps on Corporate Bond
Indices and Corporate Debt(3)                 7,359          (17,560 )        (10,201 )          (589 )
Total Net Corporate-Related
Derivatives                                                                                   (11,205 )
Interest Rate-Related Derivatives:
TBAs                                         40,100       (1,093,730 )     (1,053,630 )          (416 )
Interest Rate Swaps                         305,723         (732,961 )       (427,238 )        (3,251 )
U.S. Treasury Futures(4)                          -          (16,000 )        (16,000 )           148
Eurodollar Futures(5)                             -          (14,000 )        (14,000 )           (45 )
Total Interest Rate-Related
Derivatives                                                                                    (3,564 )
Other Derivatives:
Foreign Currency Forwards(6)                      -          (26,211 )        (26,211 )          (126 )
Total Net Other Derivatives                                                                      (126 )
Net Total                                                                                 $   (10,833 )

(1) For more detailed information about the financial derivatives in our

portfolio, please refer to Note 8 of the notes to condensed consolidated

financial statements for the year ended December 31, 2019.

(2) In the table above, fair value of certain derivative transactions are shown

on a net basis. The accompanying financial statements separate derivative

transactions as either assets or liabilities. As of December 31, 2019,

derivative assets and derivative liabilities were $16.8 million and $(27.6)

million, respectively, for a net fair value of $(10.8) million, as reflected

in "Net Total" above.

(3) Notional value represents the face amount of the underlying asset.

(4) Notional value represents the total face amount of U.S. Treasury securities

underlying all contracts held. As of December 31, 2019, a total of 160 short

U.S. Treasury futures contracts were held.

(5) Every $1,000,000 in notional value represents one contract.




Short notional value represents U.S. Dollars to be received by us at the
maturity of the forward contract
As of June 30, 2020, our Condensed Consolidated Balance Sheet reflected total
assets of $3.2 billion and total liabilities of $2.4 billion. As of December 31,
2019, our Condensed Consolidated Balance Sheet reflected total assets of $4.3
billion and total liabilities of $3.5 billion. Our investments in securities,
loans, and unconsolidated entities, financial derivatives, and real estate owned
included in total assets were $2.9 billion and $4.0 billion as of June 30, 2020
and December 31, 2019, respectively. Our investments in securities sold short
and financial derivatives included in total liabilities were $66.3 million and
$101.0 million as of June 30, 2020 and December 31, 2019, respectively. As of
June 30, 2020 and December 31, 2019, investments in securities sold short
consisted principally of short positions in sovereign bonds and U.S. Treasury
securities, which we primarily use to hedge the risk of rising interest rates
and foreign currency risk.
Typically, we hold a net short position in TBAs. The amounts of net short TBAs,
as well as of other hedging instruments, may fluctuate according to the size of
our investment portfolio as well as according to how we view market dynamics as
favoring the use of one hedging instrument or another. As of June 30, 2020 and
December 31, 2019, we had a net short notional TBA position of $0.3 billion and
$1.1 billion, respectively. The size of the net short notional TBA position
declined primarily because we covered TBA short positions in connection with
sales of Agency RMBS, and because we increased the amount of long TBAs held for
investment.
For a more detailed discussion of our investment portfolio, see "-Trends and
Recent Market Developments-Portfolio Overview and Outlook" above.
We use mortgage-related credit derivatives primarily to hedge credit risk in
certain credit strategies, although we also take net long positions in certain
CDS on RMBS and CMBS indices. Our CDS on individual RMBS represent "single-name"
positions whereby we have synthetically purchased credit protection on specific
non-Agency RMBS bonds. As there is no longer an active market for CDS on
individual RMBS, our portfolio in this sector continues to run off. We also use
CDS on corporate bond indices, options thereon, and various other instruments as
a means to hedge credit risk. As market conditions


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change, especially as the pricing of various credit hedging instruments changes
in relation to our outlook on future credit performance, we continuously
re-evaluate both the extent to which we hedge credit risk and the particular mix
of instruments that we use to hedge credit risk.
We may hold long and/or short positions in corporate bonds or equities. Our long
and short positions in corporate bonds or equities may serve as outright
investments or portfolio hedges.
We use a variety of instruments to hedge interest rate risk in our portfolio,
including non-derivative instruments such as U.S. Treasury securities and
sovereign debt instruments, and derivative instruments such as interest rate
swaps, TBAs, Eurodollar and U.S. Treasury futures, and options on the foregoing.
The mix of instruments that we use to hedge interest rate risk may change
materially from one period to the next.
We have also entered into foreign currency forward and futures contracts in
order to hedge risks associated with foreign currency fluctuations.
We have entered into repos to finance many of our assets. We account for our
repos as collateralized borrowings. As of June 30, 2020 indebtedness outstanding
on our repos was approximately $1.3 billion. As of June 30, 2020, our assets
financed with repos consisted of Agency RMBS of $896.3 million and credit assets
of $721.2 million. As of June 30, 2020, outstanding indebtedness under repos was
$851.6 million for Agency RMBS and $442.9 million for credit assets. As of
December 31, 2019 indebtedness outstanding on our repos was approximately $2.4
billion. As of December 31, 2019, our assets financed with repos consisted of
Agency RMBS of $1.9 billion and credit assets of $830.3 million. As of
December 31, 2019, outstanding indebtedness under repos was $1.9 billion for
Agency RMBS and $580.8 million for credit assets. Our repos bear interest at
rates that have historically moved in close relationship to LIBOR.
In addition to our repos, as of June 30, 2020 we had Total other secured
borrowings of $898.8 million, used to finance $1.016 billion of non-QM loans and
REO, consumer loans and ABS backed by consumer loans, and small balance
commercial loans. This compares to Total other secured borrowings of $744.7
million as of December 31, 2019, used to finance $843.4 million of non-QM loans
and REO, and consumer loans and ABS backed by consumer loans. In addition to our
secured borrowings, we had $86.0 million of Senior Notes outstanding as of both
June 30, 2020 and December 31, 2019.
As of June 30, 2020 and December 31, 2019 our debt-to-equity ratio was 2.7:1 and
3.8:1, respectively. Excluding repos on U.S. Treasury securities, our recourse
debt-to-equity ratio was 1.5:1 as of June 30, 2020 as compared to 2.6:1 as of
December 31, 2019. See the discussion in "-Liquidity and Capital Resources"
below for further information on our borrowings.
Equity
As of June 30, 2020, our equity decreased by approximately $31.0 million to
$837.7 million from $868.7 million as of December 31, 2019. The decrease
principally consisted of a net loss of $87.9 million, dividends of $35.0
million, distributions to non-controlling interests of approximately $7.1
million, and payments to repurchase shares of common stock of $3.0 million.
These decreases were partially offset by net proceeds from the issuance of
common stock of $95.3 million and contributions from our non-controlling
interests of approximately $6.4 million. Stockholders' equity, which excludes
the non-controlling interests related to the minority interest in the Operating
Partnership as well as the minority interests of our joint venture partners, was
$800.9 million as of June 30, 2020.


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Results of Operations for the Three- and Six-Month Periods Ended June 30, 2020
and 2019
The following table summarizes our results of operations for the three- and
six-month periods ended June 30, 2020 and 2019:
                                                   Three-Month                          Six-Month
                                                  Period Ended                         Period Ended
(In thousands except per share
amounts)                                 June 30, 2020     June 30, 2019     June 30, 2020      June 30, 2019
Interest Income (Expense)
Interest income                         $      39,281     $      38,547     $       91,389     $      74,563
Interest expense                              (14,686 )         (19,702 )          (36,776 )         (37,320 )
Net interest income                            24,595            18,845             54,613            37,243
Other Income (Loss)
Realized and unrealized gains
(losses) on securities and loans, net          28,072            16,982            (93,406 )          38,048
Realized and unrealized gains
(losses) on financial derivatives,
net                                            (3,503 )         (15,841 )          (25,893 )         (33,100 )
Realized and unrealized gains
(losses) on real estate owned, net               (439 )            (168 )             (445 )            (473 )
Other, net                                       (435 )           1,808              1,243             3,810
Total other income (loss)                      23,695             2,781           (118,501 )           8,285
Expenses
Base management fee to affiliate (Net
of fee rebates of $145, $508, $652,
and $447, respectively)                         2,906             1,661              5,349             3,383
Incentive fee to affiliate                          -                 -                  -                 -
Other investment related expenses               5,275             5,153              9,229             8,629
Other operating expenses                        3,771             3,134              7,588             7,147
Total expenses                                 11,952             9,948             22,166            19,159
Net Income (Loss) before Income Tax
Expense (Benefit) and Earnings
(Losses) from Investments in
Unconsolidated Entities                        36,338            11,678            (86,054 )          26,369
Income tax expense (benefit)                    1,542               376                995               376
Earnings (losses) from investments in
unconsolidated entities                         5,643             2,354               (854 )           4,151
Net Income (Loss)                              40,439            13,656            (87,903 )          30,144
Net income (loss) attributable to
non-controlling interests                       1,220             1,012                335             2,092
Dividends on preferred stock                    1,941                 -              3,882                 -
Net Income (Loss) Attributable to
Common Stockholders                     $      37,278     $      12,644

$ (92,120 ) $ 28,052 Net Income (Loss) Per Common Share $ 0.85 $ 0.43 $ (2.13 ) $ 0.94




Core Earnings
We calculate Core Earnings as U.S. GAAP net income (loss) as adjusted for: (i)
realized and unrealized gain (loss) on securities and loans, REO, financial
derivatives (excluding periodic settlements on interest rate swaps), other
secured borrowings, at fair value, and foreign currency transactions; (ii)
incentive fee to affiliate; (iii) Catch-up Premium Amortization Adjustment (as
defined below); (iv) non-cash equity compensation expense; (v) provision for
income taxes; and (vi) certain other income or loss items that are of a
non-recurring nature. For certain investments in unconsolidated entities, we
include the relevant components of net operating income in Core Earnings. The
Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium
amortization triggered by changes in actual and projected prepayments on our
Agency RMBS (accompanied by a corresponding offsetting adjustment to realized
and unrealized gains and losses). The adjustment is calculated as of the
beginning of each quarter based on our then-current assumptions about cashflows
and prepayments, and can vary significantly from quarter to quarter.
Core Earnings is a supplemental non-GAAP financial measure. We believe that the
presentation of Core Earnings provides a consistent measure of operating
performance by excluding the impact of gains and losses and other adjustments


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listed above from operating results. We believe that Core Earnings provides
information useful to investors because it is a metric that we use to assess our
performance and to evaluate the effective net yield provided by our portfolio.
In addition, we believe that presenting Core Earnings enables our investors to
measure, evaluate, and compare our operating performance to that of our peers.
However, because Core Earnings is an incomplete measure of our financial results
and differs from net income (loss) computed in accordance with U.S. GAAP, it
should be considered as supplementary to, and not as a substitute for, net
income (loss) computed in accordance with U.S. GAAP.
The following table reconciles, for the three- and six-month periods ended
June 30, 2020 and 2019, Core Earnings to the line on the our Condensed
Consolidated Statement of Operations entitled Net Income (Loss), which we
believe is the most directly comparable U.S. GAAP measure.
                                                    Three-Month                              Six-Month
                                                    Period Ended                           Period Ended
(In thousands, except per share
amounts)                                 June 30, 2020     June 30, 2019(1)     June 30, 2020      June 30, 2019(1)
Net income (loss)                       $      40,439     $        13,656      $      (87,903 )   $        30,144
Income tax expense (benefit)                    1,542                 376                 995                 376
Net income (loss) before income tax
expense (benefit)                              41,981              14,032             (86,908 )            30,520

Adjustments:


Realized (gains) losses on securities
and loans, net                                 16,040               1,505               3,780               6,827
Realized (gains) losses on financial
derivatives, net                               11,676              10,920              24,082              22,490
Realized (gains) losses on real
estate owned, net                                 211                 (98 )              (139 )                40
Unrealized (gains) losses on
securities and loans, net                     (44,112 )           (18,487 )            89,626             (44,875 )
Unrealized (gains) losses on
financial derivatives, net                     (8,173 )             4,921               1,811              10,610
Unrealized (gains) losses on real
estate owned, net                                 228                 266                 584                 513
Other realized and unrealized (gains)
losses, net(2)                                  1,302                 (55 )             1,632                (441 )
Net realized gains (losses) on
periodic settlements of interest rate
swaps                                            (892 )                52                (750 )               770
Net unrealized gains (losses) on
accrued periodic settlements of
interest rate swaps                               136                  45                  25                (231 )
Incentive fee to affiliate                          -                   -                   -                   -
Non-cash equity compensation expense              182                 114                 346                 230
Negative (positive) component of
interest income represented by
Catch-up Premium Amortization
Adjustment                                      3,648                 896               4,759               1,403
Debt issuance costs related to Other
secured borrowings, at fair value               2,075               1,671               2,075               1,671
Non-recurring expenses(3)                           -                 241                   -               1,317
(Earnings) losses from investments in
unconsolidated entities(4)                     (4,227 )            (1,304 )             2,408              (1,667 )
Total Core Earnings                            20,075              14,719              43,331              29,097
Dividends on preferred stock                    1,941                   -               3,882                   -
Core Earnings attributable to
non-controlling interests                       1,012               1,099               2,534               2,128
Core Earnings Attributable to Common
Stockholders                            $      17,122     $        13,620      $       36,915     $        26,969
Core Earnings Attributable to Common
Stockholders, per share                 $        0.39     $          0.46   

$ 0.85 $ 0.91

(1) Conformed to current period presentation.

(2) Includes realized and unrealized gains (losses) on foreign currency and

unrealized gain (loss) on other secured borrowings, at fair value, included


      in Other, net, on the Condensed Consolidated Statement of Operations.


(3)   Non-recurring expenses consist mostly of professional fees related to the
      REIT Conversion.

(4) Adjustment represents, for certain investments in unconsolidated entities,


      the net realized and unrealized gains and losses of the underlying
      investments of such entities.




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Results of Operations for the Three-Month Periods Ended June 30, 2020 and 2019
Net Income (Loss) Attributable to Common Stockholders
For the three-month period ended June 30, 2020 we had net income (loss)
attributable to common stockholders of $37.3 million compared to $12.6 million
for the three-month period ended June 30, 2019. The period-over-period increase
in our results of operations was primarily due to an increase in other income
(loss) and net interest income partially offset by an increase in expenses.
Interest Income
Interest income was $39.3 million for the three-month period ended June 30,
2020, as compared to $38.5 million for the three-month period ended June 30,
2019. Interest income for both periods included coupon payments received and
accrued on our holdings, the net accretion and amortization of purchase
discounts and premiums on those holdings, and interest on our cash balances,
including those balances held by our counterparties as collateral.
For the three-month period ended June 30, 2020, interest income from our credit
portfolio was $35.9 million, as compared to $28.6 million for the three-month
period ended June 30, 2019. This period-over-period increase was primarily due
to the larger size of the credit portfolio for the three-month period ended
June 30, 2020, partially offset by lower average asset yields on this portfolio.
For the three-month period ended June 30, 2020, interest income from our Agency
RMBS was $3.4 million, as compared to $9.5 million for the three-month period
ended June 30, 2019. This period-over-period decrease was primarily due to the
smaller size of the Agency portfolio and lower average asset yields for the
three-month period ended June 30, 2020.
The following table details our interest income, average holdings of
yield-bearing assets, and weighted average yield based on amortized cost for the
three-month periods ended June 30, 2020 and 2019:
                              Credit(1)                                 Agency(1)                                 Total(1)
                  Interest        Average                  Interest         Average                  Interest        Average
(In thousands)     Income         Holdings      Yield       Income          Holdings      Yield       Income         Holdings      Yield
Three-month
period ended
June 30, 2020   $   35,878     $  1,995,595     7.19 %   $     3,385     $    922,957     1.47 %   $   39,263     $  2,918,552     5.38 %
Three-month
period ended
June 30, 2019   $   28,554     $  1,372,590     8.32 %   $     9,501     $  1,269,508     2.99 %   $   38,055     $  2,642,098     5.76 %


(1) Amounts exclude interest income on cash and cash equivalents (including when

posted as margin) and long positions in U.S. Treasury securities. Also

excludes long holdings of corporate securities that represent components of

certain relative value trading strategies.




Some of the variability in our interest income and portfolio yields is due to
the Catch-up Premium Amortization Adjustment. For the three-month periods ended
June 30, 2020 and 2019, we had a negative Catch-up Premium Amortization
Adjustment of approximately $(3.6) million and $(0.9) million, respectively,
which decreased our interest income. Excluding the Catch-up Premium Amortization
Adjustment, the weighted average yield of our Agency portfolio and our total
portfolio was 3.05% and 5.88%, respectively, for the three-month period ended
June 30, 2020. Excluding the Catch-up Premium Amortization Adjustment, the
weighted average yield of our Agency portfolio and our total portfolio was 3.28%
and 5.90%, respectively, for the three-month period ended June 30, 2019.
Interest Expense
Interest expense primarily includes interest on funds borrowed under repos and
Total other secured borrowings, interest on our Senior Notes, coupon interest on
securities sold short, the related net accretion and amortization of purchase
discounts and premiums on those short holdings, and interest on our
counterparties' cash collateral held by us. Our total interest expense decreased
to $14.7 million for the three-month period ended June 30, 2020, as compared to
$19.7 million for the three-month period ended June 30, 2019. The
period-over-period decrease was primarily due to a decrease in borrowing rates
on both our Agency and credit assets.


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The table below summarizes the components of interest expense for the three-month periods ended June 30, 2020 and 2019.


                                                    Three-Month Period 

Ended


(In thousands)                                   June 30, 2020         June 30, 2019
Repos and Total other secured borrowings   $       13,365                     18,358
Senior Notes (1)                                    1,249                      1,249
Securities sold short (2)                              15                         91
Other (3)                                              57                          4
Total                                      $       14,686                     19,702

(1) Amount includes the related amortization of debt issuance costs. Includes

interest expense on the Senior Notes.

(2) Amount includes the related net accretion and amortization of purchase

discounts and premiums.

(3) Primarily includes interest expense on our counterparties' cash collateral

held by us.




The following table summarizes our aggregate secured borrowings, which, other
than Other secured borrowings, at fair value, carry interest rates that are
based on, or correlated with, LIBOR, including repos and Total other secured
borrowings, for the three-month periods ended June 30, 2020 and 2019.
                                                         Three-Month Period Ended
                                         June 30, 2020                              June 30, 2019
                                                            Average                                    Average
Collateral for Secured         Average        Interest      Cost of       Average        Interest      Cost of
Borrowing                    Borrowings       Expense        Funds      Borrowings       Expense        Funds
(In thousands)
Credit(1)                   $ 1,377,059     $   11,060        3.23 %   $   975,638     $   10,474        4.31 %
Agency RMBS                     907,444          2,305        1.02 %     1,172,136          7,876        2.70 %
Subtotal(1)                   2,284,503         13,365        2.35 %     2,147,774         18,350        3.43 %
U.S. Treasury Securities             37              -           - %         1,252              8        2.49 %
Total                       $ 2,284,540     $   13,365        2.35 %   $ 2,149,026     $   18,358        3.43 %
Average One-Month LIBOR                                       0.36 %                                     2.44 %
Average Six-Month LIBOR                                       0.71 %                                     2.50 %

(1) Excludes U.S. Treasury Securities.




Among other instruments, we use interest rate swaps to hedge against the risk of
rising interest rates. If we were to include as a component of our cost of funds
the amortization of upfront payments and the actual and accrued periodic
payments on our interest rate swaps used to hedge our assets, our total average
cost of funds would increase to 2.49% for the three-month period ended June 30,
2020 and decrease to 3.38% for the three-month period ended June 30, 2019.
Excluding the Catch-up Premium Amortization Adjustment, our net interest margin,
defined as the yield on our portfolio of yield-bearing targeted assets less our
cost of funds (including amortization of upfront payments and actual and accrued
periodic payments on interest rate swaps as described above), was 3.39% and
2.52% for the three-month periods ended June 30, 2020 and 2019, respectively.
These metrics do not include costs associated with other instruments that we use
to hedge interest rate risk, such as TBAs and futures.
Base Management Fees
For the three-month period ended June 30, 2020, the gross base management fee,
which is based on total equity at the end of each quarter, was $3.0 million, and
our Manager credited us with rebates on our base management fee of $0.1 million,
resulting in a net base management fee of $2.9 million. For the three-month
period ended June 30, 2019, the gross base management fee was $2.2 million, and
our Manager credited us with rebates on our base management fee of $0.5 million,
resulting in a net base management fee of $1.7 million. For each period, the
base management fee rebates related to those of our CLO investments for which
Ellington or one of its affiliates earned CLO management fees. The
period-over-period increase in the net base management fee was primarily due to
our larger capital base at June 30, 2020, as well as a decrease in rebates on
our base management fee.


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Incentive Fees
In addition to the base management fee, our Manager is also entitled to a
quarterly incentive fee if our performance (as measured by adjusted net income,
as defined in the management agreement) over the relevant rolling four quarter
calculation period exceeds a defined return hurdle for the period. No incentive
fee was incurred for the three-month periods ended June 30, 2020 or 2019, since
on a rolling four quarter basis, our income did not exceed the prescribed hurdle
amount. Because our operating results can vary materially from one period to
another, incentive fee expense can be highly variable.
Other Investment Related Expenses
Other investment related expenses consist of servicing fees on our mortgage and
consumer loans, as well as various other expenses and fees directly related to
our financial assets and certain financial liabilities carried at fair value.
For the three-month periods ended June 30, 2020 and 2019 other investment
related expenses were relatively unchanged at $5.3 million and $5.2 million,
respectively.
Other Operating Expenses
Other operating expenses consist of professional fees, compensation expense
related to our dedicated or partially dedicated personnel, and various other
operating expenses necessary to run our business. Other operating expenses
exclude management and incentive fees, interest expense, and other investment
related expenses. Other operating expenses were $3.8 million for the three-month
period ended June 30, 2020, as compared to $3.1 million for the three-month
period ended June 30, 2019. The increase in other operating expenses for the
three-month period ended June 30, 2020 was primarily due to increases in
professional fees and fund administration expense.
Other Income (Loss)
Other income (loss) consists of net realized and unrealized gains (losses) on
securities and loans, financial derivatives, and real estate owned. Other, net,
another component of Other income (loss), includes rental income and income
related to loan origination, as well as realized gains (losses) on foreign
currency transactions and unrealized gains (losses) on foreign currency
remeasurement and Other Secured Borrowings, at fair value. For the three-month
period ended June 30, 2020, other income (loss) was $23.7 million, consisting
primarily of net realized and unrealized gains of $28.1 million on our
securities and loans, partially offset by net realized and unrealized losses on
our financial derivatives of $(3.5) million. Net realized and unrealized gains
of $28.1 million on our securities and loans primarily resulted from net
realized and unrealized gains on non-QM loans, Agency RMBS, non-Agency RMBS, and
CMBS, partially offset by net realized and unrealized losses on CLOs. These
gains were primarily due to a sharp rebound in credit prices and liquidity in
the second quarter following substantial distressed selling in the first
quarter, as well as a significant rally in pay-ups on specified pools. Net
realized and unrealized losses of $(3.5) million on our financial derivatives
was primarily related to net realized and unrealized losses on options, CDS on
asset-backed indices, interest rate swaps, futures and warrants, partially
offset by net realized and unrealized gains on TBAs and total return swaps.
For the three-month period ended June 30, 2019, other income was $2.8 million,
consisting primarily of net realized and unrealized gains of $17.0 million on
our securities and loans and gains included in Other, net of $1.8 million,
partially offset by net realized and unrealized losses of $(15.8) million on our
financial derivatives. Net realized and unrealized gains of $17.0 million on our
securities and loans primarily resulted from net realized and unrealized gains
on Agency RMBS, non-Agency RMBS, CMBS, and residential mortgage loans, partially
offset by net realized and unrealized losses on CLOs, U.S. Treasury securities,
and consumer loans. Net realized and unrealized losses of $(15.8) million on our
financial derivatives was primarily related to net realized and unrealized
losses on interest rate swaps, TBAs, and futures.
Results of Operations for the Six-Month Periods Ended June 30, 2020 and 2019
Net Income (Loss) Attributable to Common Stockholders
For the six-month period ended June 30, 2020 we had net income (loss)
attributable to common stockholders of $(92.1) million compared to $28.1 million
for the three-month period ended June 30, 2019. The period-over-period reversal
in our results of operations was primarily due to net realized and unrealized
losses on securities and loans, partially offset by an increase in net interest
income for the six-month period ended June 30, 2020.
Interest Income
Interest income was $91.4 million for the six-month period ended June 30, 2020,
as compared to $74.6 million for the six-month period ended June 30, 2019.
Interest income for both periods included coupon payments received and accrued
on our holdings, the net accretion and amortization of purchase discounts and
premiums on those holdings, and interest on our cash balances, including those
balances held by our counterparties as collateral.


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For the six-month period ended June 30, 2020, interest income from our credit
portfolio was $75.0 million, as compared to $56.4 million for the six-month
period ended June 30, 2019. This period-over-period increase was primarily due
to the larger size of the credit portfolio for the three-month period ended
June 30, 2020, partially offset by lower average asset yields on this portfolio.
For the six-month period ended June 30, 2020, interest income from our Agency
RMBS was $15.5 million, as compared to $17.1 million for the six-month period
ended June 30, 2019. This period-over-period decrease was primarily due to lower
average asset yields for the six-month period ended June 30, 2020.
The following table details our interest income, average holdings of
yield-bearing assets, and weighted average yield based on amortized cost for the
six-month periods ended June 30, 2020 and 2019:
                             Credit(1)                                Agency(1)                                 Total(1)
                 Interest        Average                  Interest        Average                  Interest        Average
(In thousands)    Income         Holdings      Yield       Income         Holdings      Yield       Income         Holdings      Yield
Six-month
period ended
June 30, 2020  $   75,023     $  1,924,792     7.80 %   $   15,453     $  1,377,148     2.24 %   $   90,476     $  3,301,940     5.48 %
Six-month
period ended
June 30, 2019  $   56,405     $  1,356,350     8.32 %   $   17,063     $  1,119,006     3.05 %   $   73,468     $  2,475,356     5.94 %


(1) Amounts exclude interest income on cash and cash equivalents (including when

posted as margin) and long positions in U.S. Treasury securities. Also

excludes long holdings of corporate securities that represent components of

certain relative value trading strategies.




Some of the variability in our interest income and portfolio yields is due to
the Catch-up Premium Amortization Adjustment. For the six-month periods ended
June 30, 2020 and 2019, we had a negative Catch-up Premium Amortization
Adjustment of approximately $(4.8) million and $(1.4) million, respectively,
which decreased our interest income. Excluding the Catch-up Premium Amortization
Adjustment, the weighted average yield of our Agency portfolio and our total
portfolio was 2.94% and 5.77%, respectively, for the six-month period ended
June 30, 2020. Excluding the Catch-up Premium Amortization Adjustment, the
weighted average yield of our Agency portfolio and our total portfolio was 3.30%
and 6.05%, respectively for the six-month period ended June 30, 2019.
Interest Expense
Interest expense primarily includes interest on funds borrowed under repos and
Total other secured borrowings, interest on our Senior Notes, coupon interest on
securities sold short, the related net accretion and amortization of purchase
discounts and premiums on those short holdings, and interest on our
counterparties' cash collateral held by us. Our total interest expense decreased
to $36.8 million for the six-month period ended June 30, 2020, as compared to
$37.3 million for the six-month period ended June 30, 2019. Although average
borrowings increased significantly period over period, interest expense declined
as a result of a decrease in borrowing rates on our both our Agency and credit
assets.
The table below summarizes the components of interest expense for the six-month
periods ended June 30, 2020 and 2019.
                                                   Six-Month Period Ended
(In thousands)                                 June 30, 2020        June 30, 2019
Repos and Total other secured borrowings   $      33,759                   34,425
Senior Notes (1)                                   2,497                    2,472
Securities sold short (2)                            430                      402
Other (3)                                             90                       21
Total                                      $      36,776                   37,320

(1) Amount includes the related amortization of debt issuance costs. For the

six-month period ended June 30, 2020, amount includes interest expense on the

Senior Notes. For the six-month period ended June 30, 2019, amount includes

interest expense on the Senior Notes and the Old Senior Notes.

(2) Amount includes the related net accretion and amortization of purchase

discounts and premiums.

(3) Primarily includes interest expense on our counterparties' cash collateral


    held by us.




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The following table summarizes our aggregate secured borrowings, which, other
than Other secured borrowings, at fair value, carry interest rates that are
based on, or correlated with, LIBOR, including repos and Total other secured
borrowings, for the six-month periods ended June 30, 2020 and 2019.
                                                          Six-Month Period Ended
                                         June 30, 2020                              June 30, 2019
                                                            Average                                    Average
Collateral for Secured         Average        Interest      Cost of       Average        Interest      Cost of
Borrowing                    Borrowings       Expense        Funds      Borrowings       Expense        Funds
(In thousands)
Credit(1)                   $ 1,403,418     $   23,282        3.34 %   $   971,893     $   20,501        4.25 %
Agency RMBS                   1,327,434         10,473        1.59 %     1,033,830         13,858        2.70 %
Subtotal(1)                   2,730,852         33,755        2.49 %     2,005,723         34,359        3.45 %
U.S. Treasury Securities            759              4        0.98 %         5,519             66        2.41 %
Total                       $ 2,731,611     $   33,759        2.49 %   $ 2,011,242     $   34,425        3.45 %
Average One-Month LIBOR                                       0.90 %                                     2.47 %
Average Six-Month LIBOR                                       1.11 %                                     2.63 %

(1) Excludes U.S. Treasury Securities.




Among other instruments, we use interest rate swaps to hedge against the risk of
rising interest rates. If we were to include as a component of our cost of funds
the amortization of upfront payments and the actual and accrued periodic
payments on our interest rate swaps used to hedge our assets, our total average
cost of funds would increase to 2.53% for the six-month period ended June 30,
2020 and decrease to 3.36% for the six-month period ended June 30, 2019.
Excluding the Catch-up Premium Amortization Adjustment, our net interest margin,
defined as the yield on our portfolio of yield-bearing targeted assets less our
cost of funds (including amortization of upfront payments and actual and accrued
periodic payments on interest rate swaps as described above), was 3.24% and
2.69% for the six-month periods ended June 30, 2020 and 2019, respectively.
These metrics do not include costs associated with other instruments that we use
to hedge interest rate risk, such as TBAs and futures.
Base Management Fees
For the six-month period ended June 30, 2020, the gross base management fee,
which is based on total equity at the end of each quarter, was $6.0 million, and
our Manager credited us with rebates on our base management fee of $0.7 million,
resulting in a net base management fee of $5.3 million. For the six-month period
ended June 30, 2019, the gross base management fee was $4.4 million, and our
Manager credited us with rebates on our base management fee of $1.0 million,
resulting in a net base management fee of $3.4 million. For each period, the
base management fee rebates related to those of our CLO investments for which
Ellington or one of its affiliates earned CLO management fees. The
period-over-period increase in the net base management fee was primarily due to
our larger capital base at June 30, 2020.
Incentive Fees
In addition to the base management fee, our Manager is also entitled to a
quarterly incentive fee if our performance (as measured by adjusted net income,
as defined in the management agreement) over the relevant rolling four quarter
calculation period exceeds a defined return hurdle for the period. No incentive
fee was incurred for the six-month periods ended June 30, 2020 or 2019, since on
a rolling four quarter basis, our income did not exceed the prescribed hurdle
amount. Because our operating results can vary materially from one period to
another, incentive fee expense can be highly variable.
Other Investment Related Expenses
Other investment related expenses consist of servicing fees on our mortgage and
consumer loans, as well as various other expenses and fees directly related to
our financial assets and certain financial liabilities carried at fair value.
For the six-month periods ended June 30, 2020 and 2019 other investment related
expenses were $9.2 million and $8.6 million, respectively. The increase in other
investment related expenses was primarily due to period-over-period increases in
debt issuance costs related to our non-QM loan securitizations and servicing
expenses on our consumer loan portfolios, partially offset by a decrease in
various other expenses related to our residential and commercial mortgage loan
and REO portfolios.


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Other Operating Expenses
Other operating expenses consist of professional fees, compensation expense
related to our dedicated or partially dedicated personnel, and various other
operating expenses necessary to run our business. Other operating expenses
exclude management and incentive fees, interest expense, and other investment
related expenses. Other operating expenses were $7.6 million for the six-month
period ended June 30, 2020 as compared to $7.1 million for the six-month period
ended June 30, 2019. The increase in other operating expenses for the six-month
period ended June 30, 2020 was primarily due to an increase in fund
administration expenses and the recognition of Delaware corporate franchise tax,
partially offset by decreases in professional fees and compensation expense.
Other Income (Loss)
Other income (loss) consists of net realized and unrealized gains (losses) on
securities and loans, financial derivatives, and real estate owned. Other, net,
another component of Other income (loss), includes rental income and income
related to loan origination, as well as realized gains (losses) on foreign
currency transactions and unrealized gains (losses) on foreign currency
remeasurement and Other Secured Borrowings, at fair value. For the six-month
period ended June 30, 2020, other income (loss) was $(118.5) million, consisting
primarily of net realized and unrealized losses of $(93.4) million on our
securities and loans and net realized and unrealized losses on our financial
derivatives of $(25.9) million. Net realized and unrealized losses of $(93.4)
million on our securities and loans primarily resulted from net unrealized
losses on CLOs, non-Agency RMBS, CMBS, non-QM loans, and consumer loans and ABS
backed by consumer loans, partially offset by net unrealized gains on Agency
RMBS. These unrealized losses were primarily due to the market and economic
disruptions caused by the COVID-19 pandemic. Net realized and unrealized losses
of $(25.9) million on our financial derivatives was primarily related to net
realized and unrealized losses on interest rate swaps, TBAs, futures, and total
return swaps, partially offset by net realized and unrealized gains on CDS on
asset-backed indices, CDS on corporate bond indices, and CDS on corporate bonds.
For the six-month period ended June 30, 2019, other income was $8.3 million,
consisting primarily of net realized and unrealized gains of $38.0 million on
our securities and loans and gains included in Other, net of $3.8 million,
partially offset by net realized and unrealized losses of $(33.1) million on our
financial derivatives. Net realized and unrealized gains of $38.0 million on our
securities and loans primarily resulted from net realized and unrealized gains
on Agency RMBS, residential mortgage loans, and non-Agency RMBS and CMBS,
partially offset by net realized and unrealized losses on consumer loans, small
balance commercial loans, CLOs, and U.S. Treasury securities. Net realized and
unrealized losses of $(33.1) million on our financial derivatives was primarily
related to net realized and unrealized losses on interest rate swaps, TBAs,
futures, CDS on corporate bond indices, and CDS on asset-backed indices
partially offset by net realized and unrealized gains on forwards.
Liquidity and Capital Resources
Liquidity refers to our ability to meet our cash needs, including repaying our
borrowings, funding and maintaining positions in our targeted assets, making
distributions in the form of dividends, and other general business needs. Our
short-term (one year or less) and long-term liquidity requirements include
acquisition costs for assets we acquire, payment of our base management fee and
incentive fee, compliance with margin requirements under our repos, reverse
repos, and financial derivative contracts, repayment of repo borrowings and
other secured borrowings to the extent we are unable or unwilling to extend such
borrowings, payment of our general operating expenses, payment of interest
payments on our Senior Notes, and payment of our dividends. Our capital
resources primarily include cash on hand, cash flow from our investments
(including principal and interest payments received on our investments and
proceeds from the sale of investments), borrowings under repos and other secured
borrowings, and proceeds from equity and debt offerings. We expect that these
sources of funds will be sufficient to meet our short-term and long-term
liquidity needs.


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The following summarizes our borrowings under repos by remaining maturity:
(In thousands)                                       June 30, 2020                 December 31, 2019
                                               Outstanding                     Outstanding
Remaining Days to Maturity                     Borrowings      % of Total      Borrowings      % of Total
30 Days or Less                              $     241,355          18.7 %   $     528,545          21.6 %
31 - 60 Days                                       498,263          38.6 %         848,878          34.7 %
61 - 90 Days                                       262,078          20.2 %         733,575          30.0 %
91 - 120 Days                                       12,156           0.9 %          10,270           0.4 %
121 - 150 Days                                       2,708           0.2 %           7,460           0.3 %
151 - 180 Days                                      41,971           3.2 %          34,580           1.4 %
181 - 360 Days                                     194,315          15.0 %         186,661           7.7 %
> 360 Days                                          41,703           3.2 %          95,331           3.9 %
                                             $   1,294,549         100.0 %   $   2,445,300         100.0 %


Repos involving underlying investments that were sold prior to June 30, 2020 for
settlement following June 30, 2020, are shown using their original maturity
dates even though such repos may be expected to be terminated early upon
settlement of the sale of the underlying investment.
The amounts borrowed under our repo agreements are generally subject to the
application of "haircuts." A haircut is the percentage discount that a repo
lender applies to the market value of an asset serving as collateral for a repo
borrowing, for the purpose of determining whether such repo borrowing is
adequately collateralized. As of June 30, 2020, the weighted average contractual
haircut applicable to the assets that serve as collateral for our outstanding
repo borrowings (excluding repo borrowings related to U.S. Treasury securities)
was 36.2% with respect to credit assets, 6.5% with respect to Agency RMBS
assets, and 19.8% overall. As of December 31, 2019 these respective weighted
average contractual haircuts were 29.3%, 5.0%, and 12.3%. The increase in the
weighted average contractual haircuts for both our credit assets and our Agency
RMBS was primarily due to volatile market conditions and market-wide liquidity
stresses resulting from the COVID-19 pandemic. Although this increase in
financing haircuts has not yet been shown to be temporary, market haircut levels
as of the end of the quarter were noticeably lower than those observed in early
April 2020. Additionally, a significant portion of the increase in the weighted
average contractual haircut on our overall portfolio is due to the lower share
of our overall portfolio represented by Agency RMBS.
We expect to continue to borrow funds in the form of repos as well as other
similar types of financings. The terms of our repo borrowings are predominantly
governed by master repurchase agreements, which generally conform to the terms
in the standard master repurchase agreement as published by the Securities
Industry and Financial Markets Association as to repayment and margin
requirements. In addition, each lender may require that we include supplemental
terms and conditions to the standard master repurchase agreement. Typical
supplemental terms and conditions include the addition of or changes to
provisions relating to margin calls, net asset value requirements, cross default
provisions, certain key person events, changes in corporate structure, and
requirements that all controversies related to the repurchase agreement be
litigated in a particular jurisdiction. These provisions may differ for each of
our repo lenders.
As of June 30, 2020 and December 31, 2019, we had $1.3 billion and $2.4 billion,
respectively, of borrowings outstanding under our repos. As of June 30, 2020,
the remaining terms on our repos ranged from 1 day to 700 days, with a weighted
average remaining term of 110 days. Our repo borrowings were with a total of 25
counterparties as of June 30, 2020. As of June 30, 2020, our repos had a
weighted average borrowing rate of 1.47%. As of June 30, 2020, our repos had
interest rates ranging from 0.27% to 7.95%. As of December 31, 2019, the
remaining terms on our repos ranged from 2 days to 882 days, with a weighted
average remaining term of 91 days. Our repo borrowings were with a total of 28
counterparties as of December 31, 2019. As of December 31, 2019, our repos had a
weighted average borrowing rate of 2.37%. As of December 31, 2019, our repos had
interest rates ranging from 0.15% to 5.20%. Investments transferred as
collateral under repos had an aggregate fair value of $1.6 billion and $2.8
billion as of June 30, 2020 and December 31, 2019, respectively.
The interest rates of our repos have historically moved in close relationship to
short-term LIBOR rates, and in some cases are explicitly indexed to short-term
LIBOR rates and reset accordingly. It is expected that amounts due upon maturity
of our repos will be funded primarily through the roll/re-initiation of repos
and, if we are unable or unwilling to roll/re-initiate our repos, through free
cash and proceeds from the sale of securities.
During March and early April, while we were able to roll our repos in an orderly
manner, haircuts and borrowing rates were generally higher, and maturities
generally shorter. During the remainder of the second quarter, however, we made


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substantial progress extending and improving our sources of financing and
leverage. In addition to completing our non-QM securitization, we also obtained
term financing for numerous loan assets that we had previously held unfinanced,
and we extended the terms of several of our credit facilities. By the end of the
quarter, the market for standard repo financing of securities had largely
returned to pre-March levels.
The following table details total outstanding borrowings, average outstanding
borrowings, and the maximum outstanding borrowings at any month end for each
quarter under repos for the past twelve quarters:
                                   Borrowings                                        Maximum Borrowings
                                 Outstanding at                Average               Outstanding at Any
Quarter Ended                      Quarter End          Borrowings Outstanding            Month End
                                                             (In thousands)
June 30, 2020(1)              $         1,294,549     $              1,520,985     $           1,709,620
March 31, 2020(2)                       2,034,225                    2,440,982                 2,485,496
December 31, 2019(3)                    2,445,300                    2,119,394                 2,445,300
September 30, 2019                      2,056,422                    1,796,310                 2,056,422
June 30, 2019                           1,715,506                    1,769,909                 1,962,866
March 31, 2019                          1,550,016                    1,471,592                 1,550,016
December 31, 2018                       1,498,849                    1,509,819                 1,595,118
September 30, 2018                      1,636,039                    1,534,490                 1,672,077
June 30, 2018                           1,421,506                    1,398,813                 1,471,052
March 31, 2018                          1,330,943                    1,269,297                 1,330,943
December 31, 2017(4)                    1,209,315                    1,050,018                 1,209,315
September 30, 2017                      1,029,810                    1,078,165                 1,133,586

(1) During this quarter, we continued to lower leverage and improve our liquidity

given the uncertainty as a result of the COVID-19 pandemic.

(2) In March 2020, in response to significant volatility and heightened risks in

the financial markets as a result of the spread of COVID-19, we significantly

reduced our outstanding borrowings to lower leverage and increase our

liquidity.

(3) At the end of 2019 we increased the size of both our Credit and Agency

portfolios which we subsequently financed through repos.

(4) At the end of 2017 we increased the size of our Credit portfolio by

purchasing certain more liquid, lower-risk securities which we subsequently

financed through repos.




In addition to our borrowings under repos, we have entered into various other
types of transactions to finance certain of our non-QM loans and REO, and
consumer loans and ABS backed by consumer loans; these transactions are
accounted for as collateralized borrowings. As of June 30, 2020 and December 31,
2019, we had outstanding borrowings related to such transactions in the amount
of $898.8 million and $744.7 million, respectively, which is reflected under the
captions "Other secured borrowings" and "Other secured borrowings, at fair
value" on the Condensed Consolidated Balance Sheet. As of June 30, 2020 and
December 31, 2019, the fair value of non-QM loans and REO, consumer loans and
ABS backed by consumer loans, and small balance commercial mortgage loans
collateralizing our Total other secured borrowings was $1.016 billion and $843.4
million, respectively. See Note 11 in the notes to our condensed consolidated
financial statements for further information on our other secured borrowings.
As of both June 30, 2020 and December 31, 2019, we had $86.0 million outstanding
of Senior Notes, maturing in September 2022 and bearing interest at a rate of
5.50%, subject to adjustment based on changes, if any, in the ratings of the
Senior Notes. These Senior Notes were issued on February 13, 2019 in connection
with the Note Exchange. See Note 11 in the notes to our condensed consolidated
financial statements for further detail on the Senior Notes.
As of June 30, 2020, we had an aggregate amount at risk under our repos with 25
counterparties of approximately $333.9 million, and as of December 31, 2019, we
had an aggregate amount at risk under our repos with 28 counterparties of
approximately $348.4 million. Amounts at risk represent the excess, if any, for
each counterparty of the fair value of collateral held by such counterparty over
the amounts outstanding under repos. If the amounts outstanding under repos with
a particular counterparty are greater than the collateral held by the
counterparty, there is no amount at risk for the particular counterparty. Amount
at risk as of June 30, 2020 and December 31, 2019 does not include approximately
$4.8 million and $5.1 million, respectively, of net accrued interest receivable,
which is defined as accrued interest on securities held as collateral less
interest payable on cash borrowed.
Our derivatives are predominantly subject to bilateral collateral arrangements
or clearing in accordance with the Dodd-Frank Act. We may be required to deliver
or receive cash or securities as collateral upon entering into derivative
transactions. Changes in the relative value of derivative transactions may
require us or the counterparty to post or receive additional


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collateral. Entering into derivative contracts involves market risk in excess of
amounts recorded on our balance sheet. In the case of cleared derivatives, the
clearinghouse becomes our counterparty and the future commission merchant acts
as an intermediary between us and the clearinghouse with respect to all facets
of the related transaction, including the posting and receipt of required
collateral.
As of June 30, 2020, we had an aggregate amount at risk under our derivative
contracts, excluding TBAs, with ten counterparties of approximately $13.4
million. We also had $7.7 million of initial margin for cleared
over-the-counter, or "OTC," derivatives posted to central clearinghouses as of
that date. As of December 31, 2019, we had an aggregate amount at risk under our
derivatives contracts, excluding TBAs, with ten counterparties of approximately
$26.4 million. We also had $14.2 million of initial margin for cleared OTC
derivatives posted to central clearinghouses as of that date. Amounts at risk
under our derivatives contracts represent the excess, if any, for each
counterparty of the fair value of our derivative contracts plus our collateral
held directly by the counterparty less the counterparty's collateral held by us.
If a particular counterparty's collateral held by us is greater than the
aggregate fair value of the financial derivatives plus our collateral held
directly by the counterparty, there is no amount at risk for the particular
counterparty.
We purchase and sell TBAs and Agency pass-through certificates on a when-issued
or delayed delivery basis. The delayed delivery for these securities means that
these transactions are more prone to market fluctuations between the trade date
and the ultimate settlement date, and therefore are more vulnerable, especially
in the absence of margining arrangements with respect to these transactions, to
increasing amounts at risk with the applicable counterparties. As of June 30,
2020, in connection with our forward settling TBA and Agency pass-through
certificates, we had an aggregate amount at risk with seven counterparties of
approximately $6.3 million. As of December 31, 2019, in connection with our
forward settling TBA and Agency pass-through certificates, we had an aggregate
amount at risk with nine counterparties of approximately $4.2 million. Amounts
at risk in connection with our forward settling TBA and Agency pass-through
certificates represent the excess, if any, for each counterparty of the net fair
value of the forward settling transactions plus our collateral held directly by
the counterparty less the counterparty's collateral held by us. If a particular
counterparty's collateral held by us is greater than the aggregate fair value of
the forward settling transactions plus our collateral held directly by the
counterparty, there is no amount at risk for the particular counterparty.
We held cash and cash equivalents of approximately $146.5 million and $72.3
million as of June 30, 2020 and December 31, 2019, respectively.
On June 13, 2018, our Board of Directors approved the adoption of a share
repurchase program under which we are authorized to repurchase up to 1.55
million shares of common stock. The program, which is open-ended in duration,
allows us to make repurchases from time to time on the open market or in
negotiated transactions, including under 10b5-1 plans. Repurchases are at our
discretion, subject to applicable law, share availability, price and our
financial performance, among other considerations. In addition to making
discretionary repurchases, we from time to time use 10b5-1 plans to increase the
number of trading days available to implement these repurchases.
During the six-month period ended June 30, 2020, we repurchased 288,172 shares
at an average price per share of $10.53 and a total cost of $3.0 million. From
inception of the current repurchase plan through August 7, 2020, we repurchased
701,965 shares at an average price per share of $13.36 and a total cost of $9.4
million, and have authorization to repurchase an additional 848,035 common
shares.
On April 3, 2019, we commenced an "at-the-market" offering program, or "ATM
program," by entering into equity distribution agreements with third party sales
agents under which we are authorized to offer and sell shares of common stock
from time to time with a maximum aggregate gross offering price of up to $150
million. Through January 21, 2020 we did not issue any shares of common stock
under the ATM program. Effective January 21, 2020, we terminated the ATM
program.
On January 24, 2020, we completed a follow-on offering of 5,290,000 shares of
our common stock, of which 690,000 shares were issued pursuant to the exercise
of the underwriters' option. The issuance and sale of such common shares
generated net proceeds, after underwriters' discount and offering costs, of
$95.3 million.
We may declare dividends based on, among other things, our earnings, our
financial condition, the REIT qualification requirements of the Internal Revenue
Code of 1986, as amended, our working capital needs and new opportunities. The
declaration of dividends to our stockholders and the amount of such dividends
are at the discretion of our Board of Directors.


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The following table sets forth the dividend distributions authorized by the
Board of Directors payable to common shareholders and holders of Convertible
Non-controlling Interest Units (as defined in Note 2 of the notes to condensed
consolidated financial statements) for the periods indicated below:
Six-Month Period Ended June 30, 2020
Declaration Date           Dividend Per Share       Dividend Amount        Record Date        Payment Date
                                                    (In thousands)
January 8, 2020          $               0.15     $           6,699     January 31, 2020    February 25, 2020
February 7, 2020                         0.15                 6,699     February 28, 2020    March 25, 2020
March 6, 2020                            0.15                 6,658      March 31, 2020      April 27, 2020
April 7, 2020                            0.08                 3,551      April 30, 2020       May 26, 2020
May 7, 2020                              0.08                 3,551       May 29, 2020        June 25, 2020
June 5, 2020                             0.09                 3,995       June 30, 2020       July 27, 2020

Six-Month Period Ended June 30, 2019

Declaration Date Dividend Per Share Dividend Amount Record Date Payment Date


                                                    (In thousands)
February 14, 2019        $               0.41     $          12,496     March 1, 2019    March 15, 2019
March 11, 2019                           0.14                 4,267     March 29, 2019   April 25, 2019
April 5, 2019                            0.14                 4,267     April 30, 2019    May 28, 2019
May 7, 2019                              0.14                 4,267      May 31, 2109    June 25, 2019
June 7, 2019                             0.14                 4,267     June 28, 2019    July 25, 2019


On July 8, 2020, the Board of Directors approved a dividend in the amount of
$0.09 per share of common stock payable on August 25, 2020 to stockholders of
record as of July 31, 2020. On August 7, 2020, the Board of Directors approved a
dividend in the amount of $0.09 per share of common stock payable on
September 25, 2020 to stockholders of record as of August 31, 2020.
The following table sets forth the dividend distributions authorized by the
Board of Directors payable to holders of our Series A Preferred Stock for the
periods indicated below:
Declaration Date          Dividend Per Share       Dividend Amount      Record Date      Payment Date
                                                   (In thousands)
April 7, 2020            $          0.421875     $           1,941     April 17, 2020   April 30, 2020
July 8, 2020                        0.421875                 1,941     July

20, 2020 July 30, 2020




For the six-month period ended June 30, 2020, our operating activities provided
net cash in the amount of $66.5 million and our investing activities provided
net cash in the amount of $848.2 million. Our repo activity used to finance many
of our investments (including repayments of amounts borrowed under our repos)
used net cash of $1.1 billion. We received $242.2 million in proceeds from the
issuance of Total other secured borrowings and we used $37.4 million for
principal payments on Other secured borrowings. Thus our operating and investing
activities, when combined with our repo financings and Other secured borrowings
(net of repayments), provided net cash of $16.0 million for the six-month period
ended June 30, 2020. We received proceeds from the issuance of common stock, net
of offering costs paid, of $95.3 million and contributions from non-controlling
interests provided cash of $8.2 million. We used $36.7 million to pay dividends,
$5.4 million for distributions to non-controlling interests (our joint venture
partners), and $3.0 million to repurchase common stock. As a result there was an
increase in our cash holdings of $74.2 million, from $72.5 million as of
December 31, 2019 to $146.7 million as of June 30, 2020.
For the six-month period ended June 30, 2019, our operating activities provided
net cash in the amount of $43.3 million and our investing activities used net
cash in the amount of $304.8 million. Our repo activity used to finance many of
our investments (including repayments, in conjunction with the sales of
investments, of amounts borrowed under our repos) provided net cash of $229.6
million. We received $91.4 million in proceeds from the issuance of Total other
secured borrowings, we used $32.6 million for principal payments on Other
secured borrowings, and we used $1.0 million for Debt issuance costs, which were
related to Other secured borrowings, at fair value. Thus our operating and
investing activities, when


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combined with our repo financings, Other secured borrowings (net of repayments),
provided net cash of $25.9 million for the six-month period ended June 30, 2019.
In addition, contributions from non-controlling interests provided cash of $7.4
million. We used $25.3 million to pay dividends, $9.5 million for distributions
to non-controlling interests (our joint venture partners), and $0.8 million to
repurchase common stock. As a result there was a decrease in our cash holdings
of $2.2 million, from $45.1 million as of December 31, 2018 to $42.8 million as
of June 30, 2019.
Based on our current portfolio, amount of free cash on hand, debt-to-equity
ratio, and current and anticipated availability of credit, we believe that our
capital resources will be sufficient to enable us to meet anticipated short-term
and long-term liquidity requirements. However, the unexpected inability to
finance our Agency RMBS portfolio would create a serious short-term strain on
our liquidity and would require us to liquidate much of that portfolio, which in
turn would require us to restructure our portfolio to maintain our exclusion
from registration as an investment company under the Investment Company Act and
to qualify and maintain our qualification as a REIT. Steep declines in the
values of our credit assets financed using repos, or in the values of our
derivative contracts, would result in margin calls that would significantly
reduce our free cash position. Furthermore, a substantial increase in prepayment
rates on our assets financed by repos could cause a temporary liquidity
shortfall, because we are generally required to post margin on such assets in
proportion to the amount of the announced principal paydowns before the actual
receipt of the cash from such principal paydowns. If our cash resources are at
any time insufficient to satisfy our liquidity requirements, we may have to sell
assets or issue additional debt or equity securities.
In March 2020, as a result of significant declines in asset prices and general
price volatility, we received margin calls under our financing arrangements and
under our derivative contracts that were higher than typical historical levels.
During the second quarter, prices for most credit assets stabilized and market
volatility subsided, and as a result, our margin calls reverted to more typical
levels. We satisfied all margin calls during both periods.
Although we may from time to time enter into financing arrangements that limit
our leverage, our investment guidelines do not limit the amount of leverage that
we may use, and we believe that the appropriate leverage for the particular
assets we hold depends on the credit quality and risk of those assets, as well
as the general availability and terms of stable and reliable financing for those
assets.
Contractual Obligations and Commitments
We are a party to a management agreement with our Manager. Pursuant to that
agreement, our Manager is entitled to receive a base management fee, an
incentive fee, reimbursement of certain expenses and, in certain circumstances,
a termination fee. Such fees and expenses do not have fixed and determinable
payments. For a description of the management agreement provisions, see Note 13
of the notes to our condensed consolidated financial statements.
We have numerous contractual obligations and commitments related to our
outstanding borrowings (see Note 11 of the notes to our condensed consolidated
financial statements) and related to our financial derivatives (see Note 8 of
the notes to our condensed consolidated financial statements).
See Note 21 of the notes to our condensed consolidated financial statements as
of June 30, 2020 for further detail on our other contractual obligations and
commitments.
Off-Balance Sheet Arrangements
As of June 30, 2020, we did not have any material relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. Further, we have not
guaranteed any obligations of unconsolidated entities nor do we have any
commitment to provide funding to any such entities that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or resources that would be material to an investor in our
securities. As such, we are not materially exposed to any market, credit,
liquidity, or financing risk that could arise if we had engaged in such
relationships. See Note 6 and Note 10 of the notes to our condensed consolidated
financial statements for further detail about a multi-seller consumer loan
securitization transaction we entered into in August 2016.
At June 30, 2020 we have not entered into any repurchase agreements for which
delivery of the borrowed funds is not scheduled until after period end.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in
nature. As a result, interest rates and other factors influence our performance
far more so than does inflation. Changes in interest rates do not necessarily
correlate with inflation


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rates or changes in inflation rates. Our activities and balance sheet are
measured with reference to historical cost and/or fair market value without
considering inflation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The primary components of our market risk at June 30, 2020 are related to credit
risk, prepayment risk, and interest rate risk. We seek to actively manage these
and other risks and to acquire and hold assets that we believe justify bearing
those risks, and to maintain capital levels consistent with those risks.
Credit Risk
We are subject to credit risk in connection with many of our assets, especially
non-Agency RMBS, CMBS, residential and commercial mortgage loans, corporate debt
investments including CLOs and investments in securitization warehouses, and
consumer loans.
Credit losses on real estate loans can occur for many reasons, including, but
not limited to, poor origination practices, fraud, faulty appraisals,
documentation errors, poor underwriting, legal errors, poor servicing practices,
weak economic conditions, decline in the value of homes, businesses or
commercial properties, special hazards, earthquakes and other natural events,
such as the COVID-19 pandemic, or an outbreak of another highly infectious or
contagious disease, over-leveraging of the borrower on a property, reduction in
market rents and occupancies and poor property management services, changes in
legal protections for lenders, reduction in personal income, job loss, and
personal events such as divorce or health problems. Property values are subject
to volatility and may be affected adversely by a number of factors, including,
but not limited to, national, regional, and local economic conditions (which may
be adversely affected by industry slowdowns and other factors), local real
estate conditions (such as an oversupply of housing), changes or continued
weakness in specific industry segments, construction quality, age and design,
demographic factors, and retroactive changes to building or similar codes.
The ability of borrowers to repay consumer loans may be adversely affected by
numerous borrower-specific factors, including unemployment, divorce, major
medical expenses or personal bankruptcy. General factors, including an economic
downturn, high energy costs or acts of God or terrorism, pandemics such as novel
coronavirus (COVID-19) or another highly infectious or contagious disease, may
also affect the financial stability of borrowers and impair their ability or
willingness to repay their loans. Whenever any of our consumer loans defaults,
we are at risk of loss to the extent of any deficiency between the liquidation
value of the collateral, if any, securing the loan, and the principal and
accrued interest of the loan. Many of our consumer loans are unsecured, or are
secured by collateral (such as an automobile) that depreciates rapidly; as a
result, these loans may be at greater risk of loss than residential real estate
loans.
Our corporate investments, especially our lower-rated or unrated CLO
investments, corporate equity, and our investments in loan originators, have
significant risk of loss, and our efforts to protect these investments may
involve substantial costs and may not be successful. The risk of loss with
respect to these investments has been, and will likely continue to be,
exacerbated by the COVID-19 pandemic. We also will be subject to significant
uncertainty as to when and in what manner and for what value the corporate
debt in which we directly or indirectly invest will eventually be satisfied
(e.g., through liquidation of the obligor's assets, an exchange offer or plan of
reorganization involving the debt securities or a payment of some amount in
satisfaction of the obligation). In addition, these investments could involve
loans to companies that are more likely to experience bankruptcy or similar
financial distress, such as companies that are thinly capitalized, employ a high
degree of financial leverage, are in highly competitive or risky businesses, are
in a start-up phase, or are experiencing losses.
Similarly, we are exposed to the risk of potential credit losses on the other
assets in our credit portfolio.
For many of our investments, the two primary components of credit risk are
default risk and severity risk.
Default Risk
Default risk is the risk that a borrower fails to make scheduled principal and
interest payments on a mortgage loan or other debt obligation. We may attempt to
mitigate our default risk by, among other things, opportunistically entering
into credit default swaps and total return swaps. These instruments can
reference various MBS indices, corporate bond indices, or corporate entities. We
often rely on third-party servicers to mitigate our default risk, but such
third-party servicers may have little or no economic incentive to mitigate loan
default rates.
Severity Risk
Severity risk is the risk of loss upon a borrower default on a mortgage loan or
other secured or unsecured debt obligation. Severity risk includes the risk of
loss of value of the property or other asset, if any, securing the mortgage loan
or debt obligation, as well as the risk of loss associated with taking over the
property or other asset, if any, including foreclosure costs. We often rely on
third-party servicers to mitigate our severity risk, but such third-party
servicers may have little or no economic


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incentive to mitigate loan loss severities. In the case of mortgage loans, such
mitigation efforts may include loan modification programs and prompt foreclosure
and property liquidation following a default. Many of our consumer loans are
unsecured, or are secured by collateral (such as an automobile) that depreciates
rapidly; as a result, these loans may be at greater risk of loss than
residential real estate loans. Pursuing any remaining deficiency following a
default on a consumer loan is often difficult or impractical, especially when
the borrower has a low credit score, making further substantial collection
efforts unwarranted. In addition, repossessing personal property securing a
consumer loan can present additional challenges, including locating and taking
physical possession of the collateral. We rely on servicers who service these
consumer loans, to, among other things, collect principal and interest payments
on the loans and perform loss mitigation services, and these servicers may not
perform in a manner that promotes our interests. In the case of corporate debt,
if a company declares bankruptcy, the bankruptcy process has a number of
significant inherent risks. Many events in a bankruptcy proceeding are the
product of contested matters and adversarial proceedings and are beyond the
control of the creditors. A bankruptcy filing by a company whose debt we have
purchased may adversely and permanently affect such company. If the proceeding
results in liquidation, the liquidation value of the company may have
deteriorated significantly from what we believed to be the case at the time of
our initial investment. The duration of a bankruptcy proceeding is also
difficult to predict, and our return on investment can be adversely affected by
delays until a plan of reorganization or liquidation ultimately becomes
effective. A bankruptcy court may also re-characterize our debt investment as
equity, and subordinate all or a portion of our claim to that of other
creditors. This could occur even if our investment had initially been structured
as senior debt.
Prepayment Risk
Prepayment risk is the risk of change, whether an increase or a decrease, in the
rate at which principal is returned in respect of fixed-income assets in our
portfolio, including both through voluntary prepayments and through liquidations
due to defaults and foreclosures. Most significantly, our portfolio is exposed
to the risk of changes in prepayment rates of mortgage loans, including the
mortgage loans underlying our RMBS, and changes in prepayment rates of certain
of our consumer loan holdings. This rate of prepayment is affected by a variety
of factors, including the prevailing level of interest rates as well as
economic, demographic, tax, social, legal, and other factors. Changes in
prepayment rates will have varying effects on the different types of securities
in our portfolio, and we attempt to take these effects into account in making
asset management decisions. Additionally, increases in prepayment rates may
cause us to experience losses on our interest only securities and inverse
interest only securities, as those securities are extremely sensitive to
prepayment rates. Prepayment rates, besides being subject to interest rates and
borrower behavior, are also substantially affected by government policy and
regulation. For example, the government sponsored HARP program, which was
designed to encourage mortgage refinancings, was a steady contributor to Agency
RMBS prepayment speeds from its inception in 2009 until its expiration at the
end of 2018. Mortgage rates have declined significantly during 2020, and remain
very low by historical standards. As a result, prepayments continue to represent
a meaningful risk, especially with respect to our Agency RMBS.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations, and other factors beyond our control. We are subject to interest
rate risk in connection with most of our assets and liabilities. For some
securities in our portfolio, the coupon interest rates on, and therefore also
the values of, such securities are highly sensitive to interest rate movements,
such as inverse floating rate RMBS, which benefit from falling interest rates.
Our repurchase agreements generally carry interest rates that are determined by
reference to LIBOR or similar short-term benchmark rates for those same periods.
Whenever one of our fixed-rate repo borrowings matures, it will generally be
replaced with a new fixed-rate repo borrowing based on market interest rates
prevailing at such time. Subject to qualifying and maintaining our qualification
as a REIT and our exclusion from registration under the Investment Company Act,
we opportunistically hedge our interest rate risk by entering into interest rate
swaps, TBAs, U.S. Treasury securities, Eurodollar futures, U.S. Treasury
futures, and other instruments. In general, such hedging instruments are used to
mitigate the interest rate risk arising from the mismatch between the duration
of our financed assets and the duration of the liabilities used to finance such
assets. The majority of this mismatch currently relates to our Agency RMBS.


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The following sensitivity analysis table shows the estimated impact on the value
of our portfolio segregated by certain identified categories as of June 30,
2020, assuming a static portfolio and immediate and parallel shifts in interest
rates from current levels as indicated below.
(In thousands)                 Estimated Change for a Decrease in Interest Rates by                 Estimated Change for an Increase in Interest Rates by
                                 50 Basis Points                   100 Basis Points                  50 Basis Points                    100 Basis Points
Category of                                  % of Total                        % of Total                         % of Total                         % of Total
Instruments               Market Value         Equity         Market Value       Equity        Market Value         Equity         Market Value        Equity
Agency RMBS              $      7,432        0.89  %        $      13,376        1.6  %      $      (8,920 )     (1.06 )%        $      (19,329 )    (2.31 )%
Non-Agency RMBS, CMBS,
ABS and Loans                   5,617        0.67  %               11,957       1.43  %             (4,893 )     (0.58 )%                (9,062 )    (1.08 )%
U.S. Treasury
Securities, and
Interest Rate Swaps,
Options, and Futures           (8,052 )     (0.96 )%              (16,420 )    (1.96 )%              7,737        0.92  %                15,158       1.81  %
Mortgage-Related
Derivatives                         -           -  %                    -          -  %                  1           -  %                     3          -  %
Corporate Securities
and Derivatives on
Corporate Securities               (5 )         -  %                   (9 )        -  %                  6           -  %                    14          -  %
Repurchase Agreements,
Reverse Repurchase
Agreements, and Senior
Notes                          (1,085 )     (0.13 )%                 (967 )    (0.12 )%              2,012        0.24  %                 4,702       0.56  %
Total                    $      3,907        0.47  %        $       7,937       0.95  %      $      (4,057 )     (0.48 )%        $       (8,514 )    (1.02 )%


The preceding analysis does not show sensitivity to changes in interest rates
for instruments for which we believe that the effect of a change in interest
rates is not material to the value of the overall portfolio and/or cannot be
accurately estimated. In particular, this analysis excludes certain of our
holdings of corporate securities and derivatives on corporate securities, and
reflects only sensitivity to U.S. interest rates.
Our analysis of interest rate risk is derived from Ellington's proprietary
models as well as third-party information and analytics. Many assumptions have
been made in connection with the calculations set forth in the table above and,
as such, there can be no assurance that assumed events will occur or that other
events will not occur that would affect the outcomes. For example, for each
hypothetical immediate shift in interest rates, assumptions have been made as to
the response of mortgage prepayment rates, the shape of the yield curve, and
market volatilities of interest rates; each of the foregoing factors can
significantly and adversely affect the fair value of our interest rate-sensitive
instruments.
The above analysis utilizes assumptions and estimates based on management's
judgment and experience, and relies on financial models, which are inherently
imperfect; in fact, different models can produce different results for the same
securities. While the table above reflects the estimated impacts of immediate
parallel interest rate increases and decreases on specific categories of
instruments in our portfolio, we actively trade many of the instruments in our
portfolio, and therefore our current or future portfolios may have risks that
differ significantly from those of our June 30, 2020 portfolio estimated above.
Moreover, the impact of changing interest rates on fair value can change
significantly when interest rates change by a greater amount than the
hypothetical shifts assumed above. Furthermore, our portfolio is subject to many
risks other than interest rate risks, and these additional risks may or may not
be correlated with changes in interest rates. For all of the foregoing reasons
and others, the table above is for illustrative purposes only and actual changes
in interest rates would likely cause changes in the actual fair value of our
portfolio that would differ from those presented above, and such differences
might be significant and adverse. See "-Special Note Regarding Forward-Looking
Statements."


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