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MarketScreener Homepage  >  Equities  >  Nyse  >  Anworth Mortgage Asset Corporation    ANH

ANWORTH MORTGAGE ASSET CORPORATION

(ANH)
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ANWORTH MORTGAGE ASSET : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/05/2020 | 03:14pm EST

As used in this Quarterly Report on Form 10-Q, "Company," "we," "us," "our," and "Anworth" refer to Anworth Mortgage Asset Corporation.


You should read the following discussion and analysis in conjunction with the
unaudited consolidated financial statements and related notes thereto contained
in Item 1 of Part I of this Quarterly Report on Form 10-Q. The information
contained in this Quarterly Report on Form 10-Q is not a complete description of
our business or the risks associated with an investment in our stock. We urge
you to carefully review and consider the various disclosures made by us in this
Quarterly Report on Form 10-Q and in our other reports filed with the SEC,
including our Annual Report on   Form 10-K   for the fiscal year ended
December 31, 2019.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains, or incorporates by reference, not
only historical information but also 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, that are subject to the safe harbors created by
such sections. Forward-looking statements involve numerous risks and

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uncertainties. Our actual results may differ from our beliefs, expectations,
estimates, and projections and, consequently, you should not rely on these
forward-looking statements as predictions of future events. Forward-looking
statements are not historical in nature and can be identified by words such as
"anticipate," "estimate," "will," "should," "expect," "believe," "assume,"
"intend," "seek," "plan," "target," "goals," "future," "likely," "may," and
similar expressions or their negative forms, or by reference to strategy, plans,
or intentions. These forward-looking statements are subject to risks and
uncertainties including, among other things, those described in our Annual
Report on Form 10-K under the caption "Risk Factors." Other risks,
uncertainties, and factors that could cause our actual results to differ
materially and adversely from those projected are described below and may be
described from time to time in reports we file with the SEC, including our
Current Reports on Form 8-K. Forward-looking statements speak only as of the
date they are made and we undertake no obligation to update or revise any such
forward-looking statements, whether as a result of new information, future
events, or otherwise.

Statements regarding the following subjects, among others, that may affect our
actual results may be forward-looking: risks associated with investing in
mortgage-backed securities, or MBS, and related assets; changes in interest
rates and the market value of our target investments; changes in prepayment
rates of the mortgage loans securing our mortgage-related investments; changes
in the yield curve; the credit performance of our Non-Agency MBS and residential
mortgage loans; the concentration of the credit risks we are exposed to; the
state of the credit markets and other general economic conditions, particularly
as they affect the price of earnings assets and the credit status of borrowers;
the availability of our target investments for purchase at attractive prices;
the availability of financing for our target investments, including the
availability of repurchase agreement financing; declines in home prices;
increases in payment delinquencies and defaults on the mortgages comprising and
underlying our target investments; changes in liquidity in the market for
mortgage-related assets, the re-pricing of credit risk in the capital markets,
inaccurate ratings of securities by rating agencies, rating agency downgrades of
securities, and changes in the supply of MBS available-for-sale; changes in the
values of the MBS and other mortgage-related investments in our portfolio and
the impact of adjustments reflecting those changes on our consolidated financial
statements; our ability to generate the amount of cash flow we expect from our
target investments; changes in our investment and financial strategies and the
new risks that those changes may expose us to; changes in the competitive
environment within our industry; changes that may affect our Manager's ability
to attract and retain personnel; our ability to successfully diversify our
business into new investments and manage the new risks they may expose us to;
our ability to manage various operational and regulatory risks associated with
our business; our ability to establish, adjust and maintain appropriate hedges
for the risks to our portfolio; risks associated with investing in
mortgage-related assets; the scope and duration of the COVID-19 coronavirus
pandemic, including actions taken by governmental authorities to contain the
spread of the virus, and the impact on our business and the general economy;
legislative and regulatory actions affecting the mortgage and derivatives
industries or our business; implementation of or changes in government
regulations or programs affecting our business; changes due to the consequences
of actions by the U.S. government and other foreign governments to address
various financial and economic issues and our ability to respond to and comply
with such actions and changes; our ability to maintain our qualification as a
REIT for federal income tax purposes; our ability to maintain our exemption from
registration under the Investment Company Act of 1940, as amended; limitations
imposed on our business due to our REIT status as exempt from registration under
the Investment Company Act of 1940, as amended; and our ability to manage our
growth. All forward-looking statements speak only as of the date 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 do not
intend to update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.

Our Business


We were incorporated in Maryland on October 20, 1997 and we commenced operations
on March 17, 1998. Our principal business is to invest in, finance, and manage a
leveraged portfolio of residential mortgage-backed securities and residential
mortgage loans which presently include the following types of investments:

Agency mortgage-backed securities, or Agency MBS, which include residential

mortgage pass-through certificates and collateralized mortgage obligations, or

CMOs, which are securities representing interests in pools of mortgage loans

? secured by residential property in which the principal and interest payments

are guaranteed by a government-sponsored enterprise, or GSE, such as the

Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan

   Mortgage Corporation, or Freddie Mac;


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Non-agency mortgage-backed securities, or Non-Agency MBS, which are securities

? issued by companies that are not guaranteed by federally sponsored enterprises

and that are secured primarily by first-lien residential mortgage loans; and

Residential mortgage loans. We acquire non-Qualified Mortgage, or Non-QM,

residential mortgage loans (which are described further on page 52) from

independent loan originators with the intent of holding these loans for

securitization. These loans are financed by a warehouse line of credit until

? securitization. We also hold residential mortgage loans through consolidated

securitization trusts. We finance these loans through asset-backed securities,

or ABS, issued by the consolidated securitization trusts. The ABS, which are

held by unaffiliated third parties, are non-recourse financing. The difference

in the amount of the loans in the trusts and the amount of the ABS represents

our retained net interest in the securitization trusts.

Our principal business objective is to generate net income for distribution to
our stockholders primarily based upon the spread between the interest income on
our mortgage assets and our borrowing costs to finance these mortgage assets.

We have elected to be taxed as a real estate investment trust, or REIT, under
the Internal Revenue Code of 1986, as amended, or the Code. As long as we retain
our REIT status, we generally will not be subject to federal or state income
taxes to the extent that we distribute our taxable net income to our
stockholders, and we routinely distribute to our stockholders substantially all
of the taxable net income generated from our operations. In order to qualify as
a REIT, we must meet various ongoing requirements under the tax law, including
requirements relating to the composition of our assets, the nature of our gross
income, minimum distribution requirements and requirements relating to the
ownership of our stock. We believe that we currently meet all of these
requirements and that we will continue to qualify as a REIT.

We view our strategy as being a hybrid investment model because our target
investments are influenced primarily by either interest rate risk, credit risk,
or a combination of both risks. Our Agency MBS are primarily sensitive to
changes in interest rates and related prepayment rates. Our Non-Agency MBS and
residential mortgage loans held-for-investment are sensitive to both mortgage
credit risk and interest rate risk.

Our Agency MBS assets are also categorized as:

(1) Agency MBS whose interest rate presently adjust or will adjust; and

(2) Agency MBS whose interest rate is fixed during the life of the mortgage.



We believe that our hybrid investment model allows us to allocate assets across
various sectors within the residential mortgage market with a focus on security
selection and a relative value investment approach. Our asset allocation process
takes into account the opportunities in the marketplace, cost of financing, cost
of hedging interest rates, prepayment risks, credit risks, and other portfolio
risks. As a result, our asset allocation reflects our management's opportunistic
approach to investing in the residential mortgage marketplace.

Our Manager


We are externally managed and advised by Anworth Management LLC, or our Manager.
Effective as of December 31, 2011, we entered into a management agreement, or
the Management Agreement, with our Manager, which effected the externalization
of our management function, or the Externalization. Since the effective date of
the Externalization, our day-to-day operations are being conducted by our
Manager through the authority delegated to it under the Management Agreement and
pursuant to the policies established by our board of directors, or our Board.

Our Manager is supervised by our Board and is responsible for administering our
day-to-day operations. In addition, our Manager is responsible for (i) the
selection, purchase, and sale of our investment portfolio; (ii) our financing
and hedging activities; and (iii) providing us with portfolio management,
administrative, and other services relating to our assets and operations as
may
be appropriate.

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Our Manager will also perform such other services and activities as described in
the Management Agreement relating to our assets and operations as may be
appropriate. In exchange for these services, our Manager receives a management
fee, paid monthly in arrears, in an amount equal to one-twelfth of 1.20% of our
Equity (as defined in the Management Agreement).

The COVID-19 coronavirus pandemic has generally not affected our Manager's
ability to manage our day-to-day operations and provide other services to us
under the Management Agreement[, as the Manager's key employees and personnel
who manage our operations are able to effectively work from home and provide
such services to us under applicable local and state shelter-in-place orders.

Our Investment Portfolio

The table below provides the asset allocation among our Agency MBS, Non-Agency MBS, and residential mortgage loans at June 30, 2020 and December 31, 2019:



                                                     June 30,                         December 31,
                                                       2020                               2019
                                            Dollar Amount     Percentage       Dollar Amount     Percentage
                                           (in thousands)                     (in thousands)
Agency MBS                                 $     1,827,777         72.58 %    $     3,510,051         73.66 %
Non-Agency MBS                                     192,032          7.62              643,610         13.51
Total MBS                                  $     2,019,809         80.20 %    $     4,153,661         87.17 %
Residential mortgage loans
held-for-securitization                            131,110          5.21              152,922          3.21
Residential mortgage loans
held-for-investment through
consolidated securitization trusts                 367,539         14.59              458,348          9.62
Total mortgage-related assets              $     2,518,458        100.00 % 
  $     4,764,931        100.00 %




When we change the allocation of our investment portfolio, our annualized yields
and cost of financing will change. As previously discussed, our investment
decisions are not driven solely by projected annualized yields but also by
taking into account the uncertainty of faster or slower prepayments, extension
risk, and credit-related events.

At June 30, 2020 and December 31, 2019, the fair value of our MBS portfolio and its allocation were approximately as follows:


                                                              June 30,         December 31,
                                                                 2020              2019

                                                              (dollar amounts in thousands)
Fair value of MBS                                           $    2,019,809$     4,153,661
Adjustable-rate Agency MBS less than 1-year reset                       21 %               12 %
Adjustable-rate Agency MBS 1-3 year reset                                6                  2
Adjustable-rate Agency MBS 3-5 year reset                                1                  3
Adjustable-rate Agency MBS greater than 5-year reset                     4                  2
Total Adjustable-Rate Agency MBS                                        32
%               19 %
15-year fixed-rate Agency MBS                                            2                  1
20-year fixed-rate Agency MBS                                            9                  5
30-year fixed-rate Agency MBS                                           47                 60
Non-Agency MBS                                                          10                 15
Total MBS                                                              100 %              100 %




Results of Operations

Three Months Ended June 30, 2020 as Compared to June 30, 2019


For the three months ended June 30, 2020, our net income to common stockholders
was $34.5 million, or $0.35 per basic share and $0.34 per diluted share, based
on a weighted average of 99.0 million basic and 103.5 million diluted

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shares outstanding, respectively. This included net income of $36.8 million and
the payment of preferred dividends of $2.3 million. For the three months ended
June 30, 2019, our net loss to common stockholders was $(50.0) million, or
$(0.51) per basic and diluted share, based on a weighted average of 98.6 million
basic and diluted shares outstanding. This included a net loss of $(47.7)
million and the payment of preferred dividends of $2.3 million.

Net interest income, after provision for credit losses of approximately $564
thousand, for the three months ended June 30, 2020 totaled $9.8 million, or
39.5% of gross income, as compared to $7.4 million, or 15.6% of gross income,
for the three months ended June 30, 2019. Net interest income, after provision
for credit losses, is comprised of the interest income earned on our mortgage
investments (net of premium amortization expense) and other income, less
interest expense from borrowings and less provision for credit losses. Interest
and other income (net of premium amortization expense) for the three months
ended June 30, 2020 was $20.4 million, as compared to $40.1 million for the
three months ended June 30, 2019, a decrease of 49.1%, due primarily to a
decrease in income on securitized residential mortgage loans of approximately
$1.3 million (due primarily to paydowns on this portfolio), a decrease in the
weighted average portfolio outstanding, from $4.14 billion during the
three months ended June 30, 2019 to approximately $2.07 billion during the
three months ended June 30, 2020, and a decrease in the weighted average coupons
on MBS, from 3.99% during the three months ended June 30, 2019 to 3.77% during
the three months ended June 30, 2020, an increase in interest income on loans
held-for-securitization of approximately $367 thousand, and a decrease in other
interest income of approximately $20 thousand, and a decrease in premium
amortization expense of $3.2 million.

Interest expense for the three months ended June 30, 2020 was approximately
$10.0 million, as compared to approximately $32.7 million for the three months
ended June 30, 2019, a decrease of approximately 69.2%, which resulted primarily
from a decrease in the average repurchase agreement borrowings outstanding, from
$3.61 billion at June 30, 2019 to $1.92 billion at June 30, 2020, a decrease in
the weighted average interest rates, from 2.88% at June 30, 2019 to 1.02% at
June 30, 2020, and a decrease in interest expense on ABS of approximately $1.3
million (due primarily to paydowns), a decrease in interest expense on the
warehouse line of credit of approximately $78 thousand, and a decrease in
interest expense on junior subordinated notes of approximately $132 thousand.

The results of our operations are affected by a number of factors, many of which
are beyond our control, including the negative effects on the economy and on our
business resulting from the COVID-19 coronavirus pandemic, and primarily depend
on, among other things, the level of our net interest income, the market value
of our MBS, the supply of, and demand for, mortgage-related assets in the
marketplace, and the terms and availability of financing. Our net interest
income varies primarily as a result from changes in interest rates, the slope of
the yield curve (the differential between long-term and short-term interest
rates), borrowing costs (our interest expense), and prepayment speeds on our MBS
and loan portfolios, the behavior of which involves various risks and
uncertainties. Interest rates and prepayment speeds, as measured by the constant
prepayment rate, or CPR, vary according to the type of investment, conditions in
the financial markets, competition, and other factors, none of which can be
predicted with any certainty. With respect to our business operations, increases
in interest rates, in general, may, over time, cause: (i) the interest expense
associated with our borrowings, which are primarily comprised of repurchase
agreements, to increase; (ii) the value of our MBS and loan portfolios and,
correspondingly, our stockholders' equity to decline; (iii) coupons on our MBS
and loans to reset, although on a delayed basis, to higher interest rates;
(iv) prepayments on our MBS and loan portfolios to slow, thereby slowing the
amortization of our MBS purchase premiums; and (v) the value of our interest
rate swaps and, correspondingly, our stockholders' equity to increase.
Conversely, decreases in interest rates, in general, may, over time, cause:
(a) prepayments on our MBS and loan portfolios to increase, thereby accelerating
the amortization of our MBS and loan purchase premiums; (b) the interest expense
associated with our borrowings to decrease; (c) the value of our MBS and loan
portfolios and, correspondingly, our stockholders' equity to increase; (d) the
value of our interest rate swaps and, correspondingly, our stockholders' equity
to decrease; and (e) coupons on our MBS and loans to reset, although on a
delayed basis, to lower interest rates. In addition, our borrowing costs and
credit lines are further affected by the type of collateral pledged and general
conditions in the credit markets.

During the three months ended June 30, 2020, premium amortization expense decreased $3.2 million, or 41.9%, to approximately $4.4 million, from approximately $7.5 million during the three months ended June 30, 2019, due primarily to less premium outstanding, resulting from a smaller portfolio balance.


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The CPR assumptions used in our projection of long-term CPR percentages are based primarily on historical prepayment rates on our MBS assets as well as assumptions about future mortgage rates and their expected impact on future prepayments.

The following table shows the quarterly prepayment of principal of our MBS during 2020 and 2019:



                    2020                    2019
             Second      First       Second       First
Portfolio    Quarter    Quarter      Quarter     Quarter
MBS               33 %       18 %         18 %        13 %



We review our MBS portfolios relative to current market conditions, trading
prices of individual MBS, the general level of mortgage interest rates,
prepayment activity, other investment opportunities and the duration of our
portfolio versus the duration of our liabilities. Although there is no set
pattern or expectation of a trend to sales of MBS, we may sell some of the
securities in our portfolio based upon these factors. We had no set plans to
sell any of our MBS. Asset sales during the three months ended June 30, 2020
were primarily to reduce leverage, maintain adequate liquidity, pay-down the
balances with our repurchase agreement lenders, and preserve
over-collateralization for our repurchase agreement lenders, all in response to
the volatility in the marketplace resulting from the COVID-19 coronavirus
pandemic. During the three months ended June 30, 2020, we sold approximately
$0.4 billion of Agency MBS and realized a net gain of approximately $10.1
million. During the three months ended June 30, 2019, we sold approximately
$1.34 billion of Agency MBS and realized a net gain of approximately $0.7
million. During the three months ended June 30, 2020, we did not have any Agency
MBS trading investments, as compared to unrealized gains of $1.0 million on
Agency MBS trading investments during the three months ended June 30, 2019.
During the three months ended June 30, 2020 and June 30, 2019, we recognized a
gain (including derivative income) of approximately $2.5 million and
approximately $4.2 million, respectively, on TBA Agency MBS. During the
three months ended June 30, 2020 and June 30, 2019, we did not sell any of our
residential mortgage loans. At March 31, 2020, we designated our Non-Agency MBS
as trading securities. The unrealized loss on these securities, which had been
formally recorded in AOCI, is now recorded as an unrealized loss on our
statement of operations. During the three months ended June 30, 2020, we had a
net gain on these securities of approximately $25.7 million. During 2019, we did
not classify our Non-Agency MBS as trading securities. During the three months
ended June 30, 2019, no Non-Agency MBS were called or sold.

During the three months ended June 30, 2020, we had a loss on interest rate
swaps, recognized in our consolidated statements of operations, of approximately
$8.7 million, consisting primarily of $2.7 million in net cash settlements paid,
approximately $1.0 million in AOCI amortization, and the difference of
approximately $5.0 million in the negative change in fair value (see the section
entitled "Derivative Financial Instruments-Accounting for Derivative and Hedging
Activities" in Note 1, "Organization and Significant Accounting Policies," to
our accompanying unaudited consolidated financial statements for additional
information). During the three months ended June 30, 2019, we had a loss on
interest rate swaps recognized in our consolidated statements of operations of
approximately $57.7 million, consisting primarily of $4.4 million in net cash
settlements received, approximately $1.0 million in AOCI amortization, and the
difference of approximately $61.1 million in the change in fair value. During
the three months ended June 30, 2020, we earned rental income on our residential
properties portfolio of approximately $384 thousand, as compared to rental
income on our residential properties portfolio of approximately $453 thousand
during the three months ended June 30, 2019.

Total expenses were approximately $3.0 million for the three months ended June
30, 2020, as compared to approximately $3.1 million for the three months ended
June 30, 2019. For the three months ended June 30, 2020, we incurred management
fees of approximately $1.4 million, which is based on a percentage of our equity
(see Note 13, "Transactions With Affiliates," to our accompanying unaudited
consolidated financial statements for more information), as compared to
management fees of approximately $1.7 million for the three months ended June
30, 2019. Rental properties depreciation and expenses increased by approximately
$13 thousand during the three months ended June 30, 2020. "General and
administrative expenses" increased by approximately $221 thousand during the
three months ended June 30, 2020.

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Six Months Ended June 30, 2020 as Compared to June 30, 2019

For the six months ended June 30, 2020, our net loss to common stockholders was
$(153.6) million, or $(1.55) per basic and diluted share, based on a weighted
average of 98.8 million basic and diluted shares outstanding. This included a
net loss of $(149.0) million and the payment of preferred dividends of $4.6
million. For the six months ended June 30, 2019, our net loss to common
stockholders was $(72.3) million, or $(0.73) per basic and diluted share, based
on a weighted average of 98.6 million basic and diluted shares outstanding. This
included a net loss of $(67.7) million and the payment of preferred dividends of
$4.6 million.

Net interest income, after provision for credit losses of approximately $620
thousand, for the six months ended June 30, 2020 totaled $22.1 million, or 33.0%
of gross income, as compared to $16.0 million, or 16.8% of gross income, for the
six months ended June 30, 2019. Net interest income, after provision for credit
losses, is comprised of the interest income earned on our mortgage investments
(net of premium amortization expense) and other income, less interest expense
from borrowings and less provision for credit losses. Interest and other income
(net of premium amortization expense) for the six months ended June 30, 2020 was
$56.2 million, as compared to $81.8 million for the six months ended June 30,
2019, a decrease of 31.3%, due primarily to a decrease in income on securitized
residential mortgage loans of approximately $2.3 million (due primarily to
paydowns on this portfolio), a decrease in the weighted average portfolio
outstanding, from $4.27 billion during the six months ended June 30, 2019 to
approximately $2.95 billion during the six months ended June 30, 2020, and a
decrease in the weighted average coupons on MBS, from 3.91% during the
six months ended June 30, 2019 to 3.76% during the six months ended June 30,
2020, partially offset by an increase in interest income on loans
held-for-securitization of approximately $2.1 million, and an increase in other
interest income of approximately $135 thousand, due primarily to income earned
on restricted cash balances, and a decrease in premium amortization expense of
$2.6 million.

Interest expense for the six months ended June 30, 2020 was approximately $33.4
million, as compared to approximately $65.8 million for the six months ended
June 30, 2019, a decrease of approximately 49.2%, which resulted primarily from
a decrease in the average repurchase agreement borrowings outstanding, from
$3.76 billion at June 30, 2019 to $2.51 billion at June 30, 2020, a decrease in
the weighted average interest rates, from 2.83% at June 30, 2019 to 1.76% at
June 30, 2020, and a decrease in interest expense on ABS of approximately $2.3
million (due primarily to paydowns), partially offset by an increase in interest
expense on the warehouse line of credit of approximately $1.1 million.

During the six months ended June 30, 2020, premium amortization expense
decreased $2.6 million, or 19.2%, to $10.9 million, from $13.4 million during
the six months ended June 30, 2019, due primarily to less premium outstanding,
resulting from a smaller portfolio balance.

During the six months ended June 30, 2020, we sold approximately $1.4 billion of
Agency MBS and realized a net gain of approximately $19.8 million. During the
six months ended June 30, 2019, we sold approximately $2.24 billion of Agency
MBS and realized a net loss of approximately $12.8 million. During the
six months ended June 30, 2020, we had unrealized losses of approximately $1.1
million on Agency MBS trading investments, as compared to unrealized gains of
$15.9 million on Agency MBS trading investments during the six months ended June
30, 2019. During the six months ended June 30, 2020, we had a net loss on
Non-Agency MBS trading securities of approximately $89.7 million. During the six
months ended June 30, 2019, approximately $20 million of Non-Agency MBS were
called or sold and we realized a gain of approximately $22 thousand. During the
six months ended June 30, 2020 and June 30, 2019, we recognized a gain
(including derivative income) of approximately $15.0 million and approximately
$10.6 million, respectively, on TBA Agency MBS. During the six months ended June
30, 2020 and June 30, 2019, we did not sell any of our residential mortgage
loans.

During the six months ended June 30, 2020, we had a loss on interest rate swaps,
recognized in our consolidated statements of operations, of approximately $110.0
million, consisting primarily of $3.6 million in net cash settlements paid,
approximately $1.9 million in AOCI amortization, and the difference of
approximately $104.5 million in the negative change in fair value (see the
section entitled "Derivative Financial Instruments-Accounting for Derivative and
Hedging Activities" in Note 1, "Organization and Significant Accounting
Policies," to our accompanying unaudited consolidated financial statements for
additional information). During the six months ended June 30, 2019, we had
an

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unrealized loss on interest rate swaps recognized in our consolidated statements
of operations of approximately $91.4 million, consisting primarily of $9.3
million in net cash settlements received, approximately $2.0 million in AOCI
amortization, and the difference of approximately $98.7 million in the negative
change in fair value. During the six months ended June 30, 2020, we earned
rental income on our residential properties portfolio of approximately $839
thousand, as compared to rental income on our residential properties portfolio
of approximately $890 thousand during the six months ended June 30, 2019.

Total expenses were approximately $6.1 million for the six months ended June 30,
2020, as compared to approximately $6.2 million for the six months ended June
30, 2019. For the six months ended June 30, 2020, we incurred management fees of
approximately $2.9 million, which is based on a percentage of our equity (see
Note 13, "Transactions With Affiliates," to our accompanying unaudited
consolidated financial statements for more information), as compared to
management fees of approximately $3.4 million for the six months ended June 30,
2019. Rental properties depreciation and expenses increased by approximately
$100 thousand during the six months ended June 30, 2020. "General and
administrative expenses" increased by approximately $341 thousand during the
six months ended June 30, 2020.

Financial Condition

MBS Portfolio


At June 30, 2020, we held Agency MBS which had an amortized cost of
approximately $1.76 billion, consisting primarily of $0.63 billion of
adjustable-rate MBS and $1.13 billion of fixed-rate MBS. This amount represented
a decrease of approximately 49.2% from the approximately $3.46 billion held at
December 31, 2019. Of the adjustable-rate Agency MBS owned by us, approximately
63.8% were adjustable-rate pass-through certificates which had coupons that
reset within one year. The remaining 36.2% consisted of hybrid adjustable-rate
Agency MBS that have an initial interest rate that is fixed for a certain
period, usually one to ten years, and thereafter adjust annually for the
remainder of the term of the loan. At June 30, 2020, as our Non-Agency MBS are
now designated as trading securities, they had a carrying value and fair value
of approximately $192.0 million. At December 31, 2019, our Non-Agency MBS had an
amortized cost of approximately $613.6 million, a fair value of approximately
$643.6 million, and a contractually required principal balance of approximately
$801.9 million. Due to the COVID-19 coronavirus pandemic, there was much
volatility in the markets, and we sold a substantial portion of our Agency MBS
and Non-Agency MBS portfolios to meet margin calls from our lenders.

The following table presents a schedule of the fair value of our MBS owned at June 30, 2020 and December 31, 2019, as classified by type of issuer:



                                                       June 30, 2020                      December 31, 2019
                                                     Fair          Portfolio              Fair          Portfolio
Agency                                              Value          Percentage            Value          Percentage
                                                (in thousands)                       (in thousands)
Fannie Mae (FNM)                               $      1,027,368          50.9 %     $      2,617,084          63.0 %
Freddie Mac (FHLMC)                                     800,409          39.6                892,967          21.5
Non-Agency MBS                                          192,032           9.5                643,610          15.5
Total MBS                                      $      2,019,809         100.0 %     $      4,153,661         100.0 %




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The following table classifies our portfolio of MBS owned at June 30, 2020 and December 31, 2019 by type of interest rate index:



                                                      June 30, 2020                      December 31, 2019
                                                    Fair          Portfolio              Fair          Portfolio
Index                                              Value          Percentage            Value          Percentage
                                               (in thousands)                       (in thousands)
Agency MBS:
One-month LIBOR                               $            356             - %     $            386             - %
Six-month LIBOR                                          1,184             -                  1,426             -
One-year LIBOR                                         633,214          31.4                767,275          18.5
Six-month certificate of deposit                           202             -                    297             -
One-year constant maturity treasury                     15,330           0.8                 17,552           0.4
Cost of Funds Index                                      2,035           0.1                  2,532           0.1
15-year fixed-rate                                      42,074           2.1                 48,226           1.2
20-year fixed-rate                                     179,843           8.9                194,577           4.7
30-year fixed-rate                                     953,539          47.2              2,477,780          59.6
Total Agency MBS                              $      1,827,777          90.5 %     $      3,510,051          84.5 %
Non-Agency MBS                                         192,032           9.5                643,610          15.5
Total MBS                                     $      2,019,809         100.0 %     $      4,153,661         100.0 %



The fair values indicated do not include interest earned but not yet paid. With
respect to our hybrid adjustable-rate Agency MBS, the fair value of these
securities appears on the line associated with the index based on which the
security will eventually reset once the initial fixed interest rate period has
expired. For more detail on the fair value of our MBS, see Note 9, "Fair Values
of Financial Instruments," to our accompanying unaudited consolidated financial
statements.

Agency MBS
The weighted average coupons and average amortized costs of our Agency MBS at
June 30, 2020, March 31, 2020, December 31, 2019, and September 30, 2019 were as
follows:


                                                June 30,     March 31,     December 31,     September 30,
                                                  2020          2020           2019              2019
Agency MBS Portfolio:
Weighted Average Coupon:
Adjustable-rate Agency MBS                           3.47 %        3.78 %           3.95 %            3.96 %
Hybrid adjustable-rate Agency MBS                    2.76          2.78             2.78              2.71
15-year fixed-rate Agency MBS                        3.50          3.50             3.50              3.50
20-year fixed-rate Agency MBS                        3.56          3.56             3.56              3.56
30-year fixed-rate Agency MBS                        4.00          3.79             3.56              3.85
Total Agency MBS                                     3.66 %        3.64 %           3.54 %            3.69 %
Average Amortized Cost:
Adjustable-rate Agency MBS                         102.16 %      101.96 %         102.04 %          102.29 %
Hybrid adjustable-rate Agency MBS                  101.84        102.09           102.11            102.25
15-year fixed-rate Agency MBS                      101.72        101.75           101.81            101.82
20-year fixed-rate Agency MBS                      103.76        103.83           103.96            104.09
30-year fixed-rate Agency MBS                      102.51        102.54           102.33            102.39
Total Agency MBS                                   102.44 %      102.47 %         102.35 %          102.46 %
Current yield on Agency MBS (weighted
average coupon divided by average amortized
cost)                                                3.57 %        3.56 %           3.46 %            3.60 %



At June 30, 2020 and December 31, 2019, the unamortized net premium paid for our Agency MBS was approximately $41.9 million and approximately $79.4 million, respectively.


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At June 30, 2020, the current yield on our Agency MBS increased to 3.57%, from
3.46% at December 31, 2019. This increase was due primarily to an increase in
the weighted average coupon. As noted in the trend above, the weighted average
coupon has increased by approximately 12 basis points from December 31, 2019.
One of the factors that also impact the reported yield on our MBS portfolio is
the actual prepayment rate on the underlying mortgages. We analyze our MBS and
the extent to which prepayments impact the yield. When the rate of prepayments
exceeds expectations, we amortize the premiums paid on mortgage assets over a
shorter time period, resulting in a reduced yield to maturity on our mortgage
assets. Conversely, if actual prepayments are less than the assumed CPR, the
premium would be amortized over a longer time period, resulting in a higher
yield to maturity.

Non-Agency MBS

Non-Agency MBS yields are based on our estimate of the timing and amount of
future cash flows and our cost basis. Our cash flow estimates for these
investments are based on our observations of current information and events and
include assumptions related to interest rates, prepayment rates and the timing
and amount of credit losses and other factors.

Non-Agency MBS includes the following types of securities:

Legacy Non-Agency MBS - These are collateralized by loans that were generally

originated prior to the 2008 financial crisis and, therefore, trade at a deep

discount due to having experienced a significant amount of high levels of

? defaults by the underlying borrowers. While these underlying loans will

generally experience losses, the securities were generally acquired at deep

discounts to face/par value, which we believe serves to mitigate this potential

   exposure to credit risk;


   Non-performing - These are collateralized by loans that were generally

originated prior to 2008 and have been repackaged into newer securitization

pools. They may or may not be currently non-performing or delinquent, but there

? is a higher expectation of loss on these loans. Resolution of these loans

typically occurs from loan modifications, short sales, and foreclosures. These

loan pools usually have a greater degree of overcollateralization to support

the securities; and

Credit Risk Transfer - These securities are designed to synthetically transfer

mortgage credit risk from Fannie Mae, Freddie Mac, and other issuers to private

? investors. As loans default, the securities may incur principal write-downs.

These are allocated to the tranches within a deal according to the cash flow

structure of the securities.

At March 31, 2020, our Non-Agency MBS were designated as trading securities and are carried at fair value.


The following table summarizes our Non-Agency MBS portfolio by type at June 30,
2020 and December 31, 2019:

June 30, 2020


                                                 Weighted Average
                               Fair                        Fair Market
Portfolio Type                Value          Coupon           Price
                          (in thousands)
Legacy Non-Agency MBS    $        105,796      5.25 %    $       61.73
Non-performing                      2,305      5.62              76.84
Credit Risk Transfer               83,931      4.11              86.86
Total Non-Agency MBS     $        192,032      4.85 %    $       70.86






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December 31, 2019




                                                                                Weighted Average
                                Fair       Amortized      Contractual     Amortized
Portfolio Type                  Value         Cost         Principal        Cost       Coupon    Yield

                                           (in thousands)
Legacy Non-Agency MBS         $ 497,408$  477,786$     655,447         72.9 %    5.52 %    5.49 %
Non-performing                   11,052        10,938           11,000         99.4      5.50      6.05
Credit Risk Transfer            135,150       124,852          135,489         92.2      4.20      5.80
Total Non-Agency MBS          $ 643,610$  613,576$     801,936         76.5 %    5.30 %    5.56 %


Financing

The following information pertains to our repurchase agreement borrowings at June 30, 2020, March 31, 2020, December 31, 2019, and September 30, 2019:


                                        June 30,        March 31,         December 31,         September 30,
                                          2020             2020               2019                  2019

                                                            (dollar amounts in thousands)
Total repurchase agreements
outstanding                            $ 1,697,181$ 2,473,134$     3,657,873$      3,255,102
Average repurchase agreements
outstanding during the quarter         $ 1,919,736$ 3,476,576$     3,322,672$      3,227,250
Average repurchase agreements
outstanding during the year            $       N/A      $       N/A      $     3,516,634      $            N/A
Maximum monthly amount during the
quarter                                $ 1,847,853$ 3,607,774$     3,657,873$      3,255,102
Maximum monthly amount during the
year                                   $       N/A      $       N/A      $     4,214,226      $            N/A
Average interest rate on outstanding
repurchase agreements                         0.39 %           1.86 %               2.07 %                2.41 %
Average days to maturity                   23 days          29 days              28 days               31 days
Average interest rate after
adjusting for interest rate swaps             1.24 %           2.15 %               2.13 %                2.34 %
Weighted average maturity after
adjusting for interest rate swaps         983 days         859 days        
    978 days              940 days




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At June 30, 2020, the repurchase agreements had the following balances, weighted average interest rates, and remaining weighted average maturities:

June 30, 2020


                                          Agency MBS                       Non-Agency MBS                       Total MBS
                                                     Weighted                           Weighted                           Weighted
                                                     Average                            Average                            Average
                                                     Interest                           Interest                           Interest
                                     Balance           Rate             Balance           Rate             Balance           Rate
                                  (in thousands)                     (in thousands)                     (in thousands)
Overnight                        $              -           - %     $              -           - %     $              -           - %
Less than 30 days                       1,215,000        0.24                 81,344        2.66              1,296,344        0.39
30 days to 90 days                        380,000        0.24                 20,837        3.24                400,837        0.39
Over 90 days                                    -           -                      -           -                      -           -
Demand                                          -           -                      -           -                      -           -
                                 $      1,595,000        0.24 %     $        102,181        2.78 %     $      1,697,181        0.39 %
Weighted average maturity                 23 days                            26 days                            23 days
Weighted average interest
rate after adjusting for
interest rate swaps                                                                                                1.24 %
Weighted average maturity
after adjusting for interest
rate swaps                                                                                                     983 days
MBS pledged as collateral
under the repurchase
agreements and interest rate
swaps                            $      1,679,841$        164,741$      1,844,582

At December 31, 2019, the repurchase agreements had the following balances, weighted average interest rates, and remaining weighted average maturities:

December 31, 2019


                                             Agency MBS                     Non-Agency MBS                    Total MBS
                                                        Weighted                         Weighted                        Weighted
                                                        Average                          Average                         Average
                                                        Interest                         Interest                        Interest
                                        Balance           Rate           Balance           Rate          Balance           Rate
                                     (in thousands)                   (in thousands)                  (in thousands)
Overnight                           $              -           - %   $              -           - %  $              -           - %
Less than 30 days                          1,680,000        2.04              427,873        2.80           2,107,873        2.20
30 days to 90 days                         1,550,000        1.89                    -           -           1,550,000        1.89
Over 90 days                                       -           -                    -           -                   -           -
Demand                                             -           -                    -           -                   -           -
                                    $      3,230,000        1.97 %   $        427,873        2.80 %  $      3,657,873        2.07 %
Weighted average maturity                    30 days                          11 days                         28 days
Weighted average interest rate
after adjusting for interest
rate swaps                                                                                                       2.13 %
Weighted average maturity after
adjusting for interest rate
swaps                                                                                                        978 days
MBS pledged as collateral under
the repurchase agreements and
interest rate swaps                 $      3,419,375$        535,315$      3,954,690




The weighted average interest rate on outstanding repurchase agreements, after
adjusting for interest rate swaps, decreased from 2.13% at December 31, 2019 to
1.24% at June 30, 2020. The decrease was due primarily to a decrease in the
repurchase agreement weighted average interest rate, from 2.07% at December 31,
2019 to 0.39% at June 30, 2020.



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Residential Mortgage Loans Held-for-Securitization


At June 30, 2020, we owned approximately $131.1 million of Non-QM loans, which
are being held-for-securitization. Non-QM loans do not comply with the rules of
the Consumer Financial Protection Bureau, or the CFPB, relating to Qualified
Mortgages. Post-crisis, the CFPB issued rules on what is required for a loan to
be qualified as a Qualified Mortgage, or QM. These rules have certain
requirements, such as debt-to-income ratio, being fully-amortizing, and limits
on loan fees. Non-QM loans do not comply with at least one of these
requirements, but that does not necessarily imply that they carry more risk.
Even though these loans may not have traditional documentation of income, such
as a Form W-2 or paychecks, they generally have stated income and may have
alternate documentation, such as bank statements, CPA letters, or tax returns.
The loans we are acquiring have high FICO scores, as well as other strong
borrower attributes, which are factors we analyze in making acquisitions. See
Note 4, "Residential Mortgage Loans Held-for-Securitization," to our
accompanying unaudited consolidated financial statements for more information
regarding the residential mortgage loans held-for-securitization.

These loans are financed by a warehouse line of credit. At June 30, 2020, the
amount outstanding on this line of credit (including warehouse transaction
costs) was $104.6 million. The interest rate on the amounts advanced under this
line of credit is at LIBOR + 2.25%, which was approximately 2.86% for the three
months ended June 30, 2020. Additionally, we paid a facility fee on this line of
credit for the three and six months ended June 30, 2020, which was approximately
$188 thousand and $375 thousand, respectively. The facility fee plus legal fees
paid to secure this line of credit are being amortized over one year. See Note
9, "Fair Values of Financial Instruments," to our accompanying unaudited
consolidated financial statements for more information regarding the fair value
of these investments and their related financing.

Residential Mortgage Loans Held-for-Investment Through Consolidated Securitization Trusts


At June 30, 2020, we owned approximately $8.7 million in net interests on
certain securitization trusts. The underlying mortgage loans held in the
securitization trusts (classified as residential mortgage loans
held-for-investment through consolidated securitization trusts) and the related
financing (asset-backed securities issued by the securitization trusts) are
consolidated on our consolidated balance sheets and are carried at cost. See
Note 5, "Variable Interest Entities," to our accompanying unaudited consolidated
financial statements for more information regarding consolidation of the
securitization trusts. See Note 9, "Fair Values of Financial Instruments," to
our accompanying unaudited consolidated financial statements for more
information regarding the fair value of these investments and their related
financing.

Residential Properties Portfolio


At June 30, 2020, we owned 83 single-family residential properties, which are
all located in Southeastern Florida and are carried at a total cost, net of
accumulated depreciation, of approximately $13.1 million. During the three and
six months ended June 30, 2020, we sold one property and two properties,
respectively, for a gain of approximately $45 thousand and $123 thousand,
respectively. At December 31, 2019, we owned 85 single-family residential
properties which were carried at a total cost, net of accumulated depreciation,
of approximately $13.5 million.

Hedging Strategies


As we intend to hedge our exposure to rising rates on funds borrowed to finance
our investments in securities, we periodically enter into derivative
transactions, primarily in the form of interest rate swaps. We designate
interest rate swaps as cash flow hedges for tax purposes. To the extent that we
enter into hedging transactions to reduce our interest rate risk on indebtedness
incurred to acquire or carry real estate assets, any income or gain from the
disposition of hedging transactions should be qualifying income under the REIT
rules for purposes of the 75% and 95% gross income test. To qualify for this
exclusion, the hedging transaction must be clearly identified as such before the
close of the day on which it was acquired, originated, or entered into. The
transaction must hedge indebtedness incurred or to be incurred by us to acquire
or carry real estate assets.

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As part of our asset/liability management policy, we may enter into hedging
agreements, such as interest rate swaps. These agreements are entered into to
try to reduce interest rate risk and are designed to provide us with income and
capital appreciation in the event of certain changes in interest rates. We
review the need for hedging agreements on a regular basis consistent with our
capital investment policy. Interest rate swaps are derivative instruments as
defined by ASC 815-10. We do not anticipate entering into derivative
transactions for speculative or trading purposes. In accordance with the
interest rate swaps, we pay a fixed-rate of interest during the term of the
interest rate swaps and we receive a payment that varies with the three-month
LIBOR rate.

The following table relates to our interest rate swaps at June 30, 2020, March 31, 2020, December 31, 2019, and September 30, 2019:


                                           June 30,       March 31,       December 31,       September 30,
                                             2020            2020             2019                2019
Aggregate notional amount of interest           $915$1.276$2.501$2.191
rate swaps                                   million         billion            billion             billion
Average maturity of interest rate swaps    5.1 years       4.6 years          4.0 years           3.9 years
Weighted average fixed-rate paid on
interest rate swaps                             2.23 %          2.10 %             2.02 %              2.08 %


Interest rate swaps are used to provide protection from increases in interest
rates having a negative impact on the market value of our portfolio, which could
result in our lenders requiring additional collateral for our repurchase
agreement borrowings. An increase or decrease in the notional value of these
agreements usually provides an increase or decrease in protection to our
portfolio's change in value due to interest rate changes. Other methods that can
also lessen our portfolio's change in value due to interest rate increases
include acquiring mortgages that are inherently less sensitive to interest rate
changes and borrowings using long-term agreements.

After August 22, 2014, none of our interest rate swaps were designated for hedge
accounting. For both terminated interest rate swaps and the de-designated
interest rate swaps, as long as there is the probability that the forecasted
transactions that were being hedged (i.e., rollovers of our repurchase agreement
borrowings) are still expected to occur, the amount of the gain or loss in AOCI
related to these interest rate swaps in AOCI remains in AOCI and is amortized
over the remaining term of the interest rate swaps. At June 30, 2020, the net
unrealized loss in AOCI on the interest rate swaps was approximately $5.8
million, as compared to a net unrealized loss in AOCI of approximately $7.6
million at December 31, 2019.

For more information on the amounts, policies, objectives, and other qualitative
data on our derivatives, see Notes 1, 9, and 15 to our accompanying unaudited
consolidated financial statements.

Liquidity and Capital Resources

Agency MBS and Non-Agency MBS Portfolios


Our primary source of funds consists of repurchase agreements, which totaled
approximately $1.7 billion at June 30, 2020. As collateral for the repurchase
agreements and interest rate swaps, we had pledged approximately $1.68 billion
in Agency MBS and approximately $165 million in Non-Agency MBS. Our other
significant sources of funds for the three months ended June 30, 2020 consisted
of payments of principal from our MBS portfolio in the amount of approximately
$207.4 million and proceeds from the sales of MBS of approximately $539.6
million.

For the three months ended June 30, 2020, there was a net decrease in cash, cash
equivalents, and restricted cash of approximately $41.4 million. This consisted
of the following components:

Net cash provided by operating activities for the three months ended June 30,

2020 was approximately $11.9 million. This was comprised primarily of net

income of approximately $36.8 million and adding back the following non-cash

? items: the amortization of premiums and discounts on MBS of approximately $4.4

million; depreciation on rental properties of approximately $119 thousand;

amortization of restricted stock of $4 thousand; amortization of premium on

   residential loans of approximately $0.4 million; net settlements


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on interest rate swaps of approximately $1.0 million; a loss on interest rate

swaps of approximately $5.0 million; a gain on TBA Agency MBS, net of derivative

income, of approximately $2.5 million; net gains on sales of AFS Agency MBS of

approximately $10.1 million; a net gain on Non-Agency MBS of approximately $25.7

million; a gain on the sale of residential properties of $45 thousand; and loan

loss provision on securitized loans of approximately $0.6 million. Net cash

provided by operating activities also included an increase in accrued expenses

and payables of approximately $0.1 million; a decrease in prepaid expense and

other assets of approximately $3.9 million; a decrease in interest receivable of

  approximately $3.1 million; and a decrease in accrued interest payable of
  approximately $5.1 million.

Net cash provided by investing activities for the three months ended June 30,

2020 was approximately $757.4 million, which consisted of $207.4 million from

principal payments on MBS; proceeds from sales of MBS of approximately $539.6

? million; principal payments on residential mortgage loans of $10.1 million;

principal payments on securitized loans of $109 thousand; and proceeds from the

sales of residential properties of approximately $179 thousand, partially

offset by improvements on residential properties of approximately $44 thousand.

Net cash used in financing activities for the three months ended June 30, 2020

was approximately $810.7 million. This consisted of borrowings on repurchase

agreements of approximately $5.84 billion, offset by repayments on repurchase

agreements of approximately $6.61 billion; net proceeds from TBA Contracts of

? approximately $3.4 million; derivative counterparty margin of approximately

$4.6 million; termination of interest rate swaps of approximately $14.9

million; dividends paid of approximately $4.9 million on common stock;

dividends paid of approximately $2.3 million on preferred stock; repayments on

our warehouse line of credit of approximately $11.6 million; and common stock

issued of approximately $159 thousand.

At June 30, 2020, our leverage (excluding the ABS issued by securitization
trusts) on total capital (including all preferred stock and junior subordinated
notes) decreased from 6.2x at December 31, 2019 to 4.1x at June 30, 2020. The
decrease in our leverage was due primarily to a decrease in repurchase
agreements and credit line outstanding, from $3.79 billion at December 31, 2019
to $1.8 billion at June 30, 2020, partially offset by a decrease in our total
capital (as described above), from $609.4 million at December 31, 2019 to $437.6
million at June 30, 2020.

In the future, we expect that our primary sources of funds will continue to
consist of borrowed funds under repurchase agreement transactions and monthly
payments of principal and interest on our MBS portfolios. Our liquid assets
generally consist of unpledged MBS, cash, and cash equivalents. A large negative
change in the market value of our MBS might reduce our liquidity, requiring us
to sell assets, with the likely result of realized losses upon sale.

During the three months ended June 30, 2020, we raised approximately $163 thousand in capital under our Dividend Reinvestment and Stock Purchase Plan.

On August 10, 2016, we entered into an At Market Issuance Sales Agreement, or
the FBR Sales Agreement, with FBR Capital Markets & Co., or FBR, pursuant to
which we may offer and sell from time to time through FBR, as our agent, up to
$196,615,000 maximum aggregate amount of our common stock, Series B Preferred
Stock, and Series C Preferred Stock, in such amounts as we may specify by notice
to FBR, in accordance with the terms and conditions as set forth in the FBR
Sales Agreement. During the three months ended June 30, 2020, we did not sell
any shares of our Series B Preferred Stock, Series C Preferred Stock, or our
common stock under the FBR Sales Agreement.

On October 3, 2011, we announced that our Board had authorized a share
repurchase program which permits us to acquire up to 2,000,000 shares of our
common stock. The shares are expected to be acquired at prevailing prices
through open market transactions. The manner, price, number, and timing of share
repurchases will be subject to market conditions and applicable rules of the
SEC. Subsequently, our Board authorized the Company to acquire an aggregate of
an additional 45,000,000 shares (pursuant to six separate authorizations)
between December 13, 2013 and January 22, 2016. During the three months ended
June 30, 2020, we did not repurchase any shares of our common stock under our
share repurchase program.

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Disclosure of Contractual Obligations

During the three months ended June 30, 2020, there were no material changes
outside the normal course of business to the contractual obligations identified
in our Annual Report on   Form 10-K   for the fiscal year ended December 31,
2019.

Stockholders' Equity

We use available-for-sale treatment for our Agency MBS, which are carried on our
consolidated balance sheets at fair value rather than historical cost. Based
upon this treatment, our total equity base at June 30, 2020 was approximately
$380.8 million. Common stockholders' equity was approximately $282.5 million, or
a book value of $2.85 per share. Common stockholders' equity serves as the basis
for how book value per common share is calculated.

Under available-for-sale accounting treatment, unrealized fluctuations in fair
values of MBS are assessed to determine whether they are other-than-temporary.
To the extent we determine that these unrealized fluctuations are temporary,
they do not impact GAAP income or taxable income but rather are reflected on our
consolidated balance sheets by changing the carrying value of these assets and
reflecting the change in stockholders' equity under "Accumulated other
comprehensive income (loss) consisting of unrealized gains and losses."

As a result of this mark-to-market accounting treatment, our book value and book
value per share are likely to fluctuate far more than if we used historical
amortized cost accounting on all of our assets. As a result, comparisons with
some companies that use historical cost accounting for all of their balance
sheets may not be meaningful.

Unrealized changes in the fair value of AFS Agency MBS have one significant and
direct effect on our potential earnings and dividends: positive mark-to-market
changes will increase our equity base and allow us to increase our borrowing
capacity, while negative changes will tend to reduce borrowing capacity under
our capital investment policy. A very large negative change in the net market
value of our AFS Agency MBS might reduce our liquidity, requiring us to sell
assets with the likely result of realized losses upon sale. "Accumulated other
comprehensive income" on AFS Agency MBS was approximately $63.1 million, or 3.6%
of the amortized cost of our AFS Agency MBS, at June 30, 2020. This, along with
"Accumulated other comprehensive (loss), derivatives" of approximately $(5.8)
million, constituted the total "Accumulated other comprehensive income" of
approximately $57.3 million.

Non-GAAP Financial Measures Related to Operating Results

In addition to our operating results presented in accordance with GAAP, the
following table includes the following non-GAAP financial measures: core
earnings (including per common share), total interest income and average asset
yield, including TBA dollar roll income, paydown expense on Agency MBS,
effective total interest expense, and effective cost of funds. The table below
reconciles our net income to common stockholders for the three and six months
ended June 30, 2020 to core earnings for the same period. Core earnings
represents net income to common stockholders (which is the nearest comparable
GAAP measure), adjusted for the items shown in the table below.

Our management believes that:

these non-GAAP financial measures are useful because they provide investors

? with greater transparency to the information that we use in our financial and

   operational decision-making process;




   the inclusion of paydown expense on Agency MBS is more indicative of the

current earnings potential of our investment portfolio, as it reflects the

actual principal paydowns which occurred during the period. Paydown expense on

? Agency MBS is not dependent on future assumptions on prepayments or the

cumulative effect from prior periods of any current changes to those

assumptions, as is the case with the GAAP measure, "Premium amortization on

   MBS";



the adjustment for depreciation expense on residential rental properties is a

? non-cash item and is added back by other companies to derive core earnings or

   funds from operations; and


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the presentation of these measures, when analyzed in conjunction with our GAAP

operating results, allows investors to more effectively evaluate our

? performance to that of our peers, particularly those that have discontinued

hedge accounting and those that have used similar portfolio and derivative

strategies.



These non-GAAP financial measures should not be used as a substitute for our
operating results for the three and six months ended June 30, 2020. An analysis
of any non-GAAP financial measure should be used in conjunction with results
presented in accordance with GAAP.

Core Earnings


                                                        Three Months Ended                  Six Months Ended
                                                           June 30, 2020                      June 30, 2020
                                                       Amount          Per Share          Amount          Per Share
                                                   (in thousands)                     (in thousands)
Net income (loss) to common stockholders          $         34,542    $      0.35$      (153,576)$    (1.55)
Adjustments to derive core earnings:
Realized net (gain) on sales of Agency MBS                (10,095)         (0.10)            (15,805)         (0.16)
Realized net (gain) loss on sales of
Non-Agency MBS                                               (320)              -              55,070           0.56
Realized net (gain) on sales of Agency MBS
held as trading investments                                      -              -             (3,981)         (0.04)
Unrealized (gain) loss on Non-Agency MBS held
as trading securities(1)                                  (25,367)         (0.26)              34,616           0.35
Unrealized loss on Agency MBS held as trading
investments                                                      -              -               1,141           0.01
Loss on interest rate swaps, net                             8,652           0.09             110,007           1.11
(Gain) on derivatives-TBA Agency MBS, net                  (2,484)         (0.03)            (15,049)         (0.15)
(Gain) on sales of residential properties                     (45)              -               (123)              -
Net settlement on interest rate swaps after
de-designation(2)                                          (2,698)         (0.03)             (3,555)         (0.04)
Dollar roll income on TBA Agency MBS(3)                        316         
 0.01                 853           0.01
Premium amortization on MBS                                  4,382           0.05              10,859           0.11
Paydown expense(4)                                         (5,696)         (0.06)            (10,654)         (0.11)
Depreciation expense on residential rental
properties(5)                                                  119              -                 240              -
Deferred payments on modifications/forbearance
agreements(6)                                                  301              -                 301              -
Core earnings                                     $          1,607    $      0.02    $         10,344    $      0.10
Basic weighted average number of shares
outstanding                                                 98,977                             98,769


At March 31, 2020, we designated our Non-Agency MBS as trading securities. (1) The unrealized loss at that time, instead of being recorded in AOCI, as had

    been previously done, is now recognized through earnings.


    Net settlements on interest rate swaps after de-designation include all

subsequent net payments made or received on interest rate swaps which were (2) de-designated as hedges in August 2014 and also on any new interest rate

swaps entered into after that date. These amounts are recorded in "Unrealized

loss on interest rate swaps, net."

Dollar roll income on TBA Agency MBS is the income resulting from the price (3) discount typically obtained by extending the settlement of TBA Agency MBS to

a later date. This is a component of the "(Loss) on derivatives, net" that is

shown on our unaudited consolidated statements of operations.

Paydown expense on Agency MBS represents the proportional expense of Agency (4) MBS purchase premiums relative to the Agency MBS principal payments and

prepayments which occurred during the three-month period.

Depreciation expense is added back in the core earnings calculation, as it is (5) a non-cash item, and it is similarly added back in other companies'

calculation of core earnings or funds from operations.

(6) The trustee reports these as losses in the securitization trusts, but these

    payments are due upon liquidation or maturity.


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Critical Accounting Policies and Estimates

Management has the obligation to ensure that its policies and methodologies are in accordance with GAAP. Management has reviewed and evaluated its critical accounting policies and believes them to be appropriate.


The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying unaudited consolidated financial
statements. In preparing these unaudited consolidated financial statements,
management has made its best estimates and judgments on the basis of information
then readily available to it of certain amounts included in the unaudited
consolidated financial statements, giving due consideration to materiality.
Application of these accounting policies involves the exercise of judgment and
use of assumptions as to future uncertainties and, as a result, actual results
could differ materially and adversely from these estimates.

Our accounting policies are described in Note 1, "Organization and Significant
Accounting Policies," to our accompanying unaudited consolidated financial
statements. Management believes the more significant of our accounting policies
are the following:

Income Recognition

The most significant source of our income is derived from our investments in
Agency MBS. We reflect income using the effective yield method which, through
amortization of premiums and accretion of discounts at an effective yield,
recognizes periodic income over the estimated life of the investment on a
constant yield basis, as adjusted for actual prepayment activity and estimated
prepayments. Management believes our revenue recognition policies are
appropriate to reflect the substance of the underlying transactions.

Interest income on our Agency MBS is accrued based on the actual coupon rate and
the outstanding principal amounts of the underlying mortgages. Premiums and
discounts are amortized or accreted into interest income over the expected lives
of the securities using the effective interest yield method, adjusted for the
effects of actual prepayments and estimated prepayments based on ASC 320-10.

Our policy for estimating prepayment speeds for calculating the effective yield
is to evaluate historical performance, street consensus prepayment speeds and
current market conditions. If our estimate of prepayments is incorrect, we may
be required to make an adjustment to the amortization or accretion of premiums
and discounts that would have an impact on future income, which could be
material and adverse.

The vast majority of our Non-Agency MBS had previously been accounted for under
"Loans and Debt Securities Acquired with Credit Deterioration" (ASC 310-30).
Under CECL, debt securities previously accounted for as assets acquired with
credit impairment (PCI) are treated as assets acquired with credit deterioration
(PCD). Under ASC 326, PCD assets that are also available-for-sale debt
securities follow the available-for-sale debt security impairment model. This
compares the fair value of a security with its amortized cost. If the fair value
of a security exceeds its amortized cost, there is no credit loss. If the fair
value of a security is less than its amortized cost, then the security is
impaired and further assessment needs to be done to determine if the decline in
fair value is due to a credit loss or to other factors. The first step in this
assessment process is for an entity to determine whether it had the intent to
sell the security, or the ability to hold the security until the expected
recovery of its amortized cost basis, or until maturity. If an entity did not
have either the intent or the ability to hold the security until the expected
recovery of the amortized cost basis, then the amortized cost basis is written
down to the debt security's fair value through earnings.

Upon the adoption of CECL at January 1, 2020, we reviewed those Non-Agency MBS
that were in an unrealized loss position to determine if there was any credit
loss. In our Annual Report on Form 10-K for the year ended December 31, 2019, we
stated the following: "On the Non-Agency MBS that were in an unrealized loss
position, at December 31, 2019, we did not expect to sell these Non-Agency MBS
at a price less than the amortized cost basis of our investments. Because the
decline in market value on these Non-Agency MBS is attributable to changes in
interest rate and not the credit quality of the Non-Agency MBS in our portfolio,
and because we did not have the intent to sell these investments, nor is it more
likely than not that we will be required to sell these investments before
recovery of their amortized cost

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basis, which may be at maturity, we do not consider these investments to be
other-than-temporarily impaired." On January 1, 2020, when we adopted CECL, we
reviewed our assessment of the Non-Agency MBS in an unrealized loss position at
December 31, 2019, and concluded that there was no credit loss on these
securities. Our conclusion included a review of factors such as the ratings of
these securities by rating agencies, the payment structure of these securities,
whether the issuer has continued to make payments of principal and interest, and
review of prepayment speeds, delinquency, and default rates.

At March 31, 2020, we changed the designation of our Non-Agency MBS from
available-for-sale securities to trading securities. The reason for this change
in designation was due to the negative effects on the economy resulting from the
COVID-19 coronavirus pandemic and the high volatility in the market for
Non-Agency MBS. Starting in the third week in March 2020, we began receiving
requests from our repurchase agreement counterparties for margin calls,
increases in the haircuts (the amount of coverage on the collateral securing the
repurchase agreement financing), and higher interest rates. This all resulted
from the perceived damage to the economy from the COVID-19 coronavirus pandemic.
After the Federal Reserve stepped in and supported the Agency MBS market, the
prices for Agency MBS stabilized. The Non-Agency MBS market was still volatile
(with non-agency prices continuing to decline). We sold a substantial portion of
our Non-Agency MBS in order to reduce leverage, maintain adequate liquidity,
pay-down the balances on our repurchase agreement borrowings, and preserve
over-collateralization for our repurchase agreement lenders. Due to the high
volatility in the market for Non-Agency MBS, and the more restrictive terms by
our repurchase agreement counterparties on these securities, we felt that we
could no longer state that we had the intent and the ability to hold these
securities until recovery of their amortized cost basis, or until maturity.
Therefore, we changed the designation of these securities to trading securities
as of March 31, 2020. Once an entity elects to classify a security as a trading
security, it should be prepared to maintain that classification until the
security is sold or matures.

Transfer of securities from available-for-sale to trading securities means that
the unrealized gains and losses that were in accumulated other comprehensive
income are reported through earnings as unrealized gains or losses as of the
date of the change in designation. Trading securities are subsequently measured
at fair value, with the changes in fair value reported in income in the period
the change occurs.

Interest income on the Non-Agency MBS that were purchased at a discount to par
value, and were rated below AA at the time of purchase, was previously
recognized based on the security's effective interest rate. The effective
interest rate on these securities was based on the projected cash flows from
each security, which was estimated based on our observation of current
information and events, and include assumptions related to interest rates,
prepayment rates, and the timing and amount of credit losses. On at least a
quarterly basis, we reviewed and, if appropriate, made adjustments to our cash
flow projections based on input and analysis received from external sources,
internal models, and our judgment about interest rates, prepayment rates, the
timing and amount of credit losses, and other factors. Changes in cash flows
from those originally projected, or from those estimated at the last evaluation,
resulted in a prospective change in the yield/interest income recognized on such
securities. Actual maturities of these Non-Agency MBS was affected by the
contractual lives of the associated mortgage collateral, periodic payments of
principal, and prepayments of principal. Therefore, actual maturities of these
securities are generally shorter than stated contractual maturities. Stated
contractual maturities are generally greater than ten years. At March 31, 2020,
we designated our Non-Agency MBS as trading securities. On a prospective basis,
interest income is recognized based on the actual coupon rate and the
outstanding principal amount.

Securities transactions are recorded on the date the securities are purchased or
sold. Realized gains or losses from securities transactions are determined based
on the specific identified cost of the securities.

Valuation and Classification of Investment Securities


We carry our investment securities on our consolidated balance sheets at fair
value. The fair values of our Agency MBS are primarily based on third party bid
price indications provided by independent third-party pricing services. If, in
the opinion of management, one or more securities prices reported to us are not
reliable or unavailable, management reviews the fair value based on
characteristics of the security it receives from the issuer and available market
information. The fair values reported reflect estimates and may not necessarily
be indicative of the amounts we could realize in a current market exchange. We
review various factors (i.e., expected cash flows, changes in interest rates,

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credit protection, etc.) in determining whether and to what extent an
other-than-temporary impairment exists. The unrealized losses on our Agency MBS
were primarily caused by fluctuations in interest rates due to market volatility
resulting from the COVID-19 coronavirus pandemic and its negative effect on the
economy, and not due to credit quality. At June 30, 2020, we did not have the
intent to sell these investments, nor is it more likely than not that we will be
required to sell these investments before recovery of their amortized cost
basis, which may be at maturity. The payments of principal and interest on these
securities are guaranteed by Fannie Mae and Freddie Mac, which are under the
conservatorship of the U.S. government. Accordingly, there is zero loss
expectation on these securities, and no allowance for credit losses has been
recorded. Assets classified as trading investments are reported at fair value
with unrealized gains and losses included in our consolidated statements of
operations. For more detail on the fair value of our Agency MBS, see Note 9,
"Fair Values of Financial Instruments," to our accompanying unaudited
consolidated financial statements.

In determining the fair value of our Non-Agency MBS, management considers a
number of observable market data points, including prices obtained from
well-known major financial brokers that make markets in these instruments,
pricing from independent pricing services, and timely trading activity in the
marketplace. Management reviews these inputs in the valuation of our Non-Agency
MBS. We understand that in order to determine the fair market value of a
security, market participants not only consider the characteristics of the type
of security and its underlying collateral but also take into consideration the
historical performance data of the underlying collateral of that security
including loan delinquency, loan losses and credit enhancement. In addition, we
also collect and consider current market intelligence on all major markets,
including benchmark security evaluations and bid list results from various
sources. Upon the adoption of CECL on January 1, 2020, the unrealized losses on
our investments in Non-Agency MBS were primarily caused by fluctuations in
interest. We purchased the Non-Agency MBS primarily at a discount relative to
their face value. At March 31, 2020, we designated these securities as trading
securities, and they are carried at fair value. See the section on Non-Agency
MBS under the caption, "Mortgage-Backed Securities," in Significant Accounting
Policies in Note 1.

Our MBS are valued using various market data points as described above, which management considers to be directly or indirectly observable parameters. Accordingly, our MBS are classified as Level 2 in the fair value hierarchy.

Residential Mortgage Loans Held-for-Securitization


Residential mortgage loans held-for-securitization are held at our wholly-owned
subsidiary, Anworth Mortgage Loans, Inc., in connection with our intent to
sponsor our own securitizations. Loans purchased with the intent to securitize
are recorded on the trade date. Any fees associated with acquiring the loans
held-for-securitization, as well as any premium paid to acquire the loans, are
deferred. These are included in the loan balance and amortized using the
effective interest yield method. Upon securitization, the costs of
securitization such as underwriting fees, legal fees, and accounting fees are
added to the loan balances and amortized using the effective interest yield
method. Interest income is recorded as revenue when earned and deemed
collectible or until a loan becomes more than 90 days' past due, at which point
the loan is placed on non-accrual status. When a non-accrual loan has been
cured, meaning when all delinquent principal and interest have been remitted by
the borrower, the loan is placed back on accrual status. Alternatively,
nonaccrual loans may be placed back on accrual status after the loan is
considered re-performing, generally when the loan has been current for 6 months.
The estimates for the allowance for loan losses require consideration of various
observable inputs including, but not limited to, historical loss experience,
delinquency status, borrower credit scores, geographic concentrations and
loan-to-value ratios, and are adjusted for current economic conditions as deemed
necessary by management. Many of these factors are subjective and cannot be
reduced to a mathematical formula. In addition, since we have not incurred any
direct losses on our portfolio, we review national historical credit performance
information from external sources to assist in our analysis. Changes in our
estimates can significantly impact the allowance for loan losses and provision
expense. The allowance reflects management's best estimate of the credit losses
inherent in the loan portfolio at the balance sheet date. It is also possible
that we will experience credit losses that are different from our current
estimates or that the time of those losses may differ from our estimates

The residential mortgage loans held-for-securitization are financed by warehouse
lines of credit. Fees incurred in securing the credit line are deducted from the
amount outstanding under the line and are amortized to interest expense over the
term of the credit line. Under these borrowing facilities, we make various
representations and warranties and the loans must also meet certain eligibility
criteria. We may be required to remove a loan from a warehouse line of credit.

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We do not maintain a loan repurchase reserve, as any risk of loss due to loan
repurchase would normally be covered by recourse to the companies from which we
acquired the loans.

Residential Mortgage Loans Held-for-Investment Through Consolidated Securitization Trusts


Residential mortgage loans held-for-investment through consolidated
securitization trusts are carried at unpaid principal balance net of any
allowance for loan losses. These estimates for the allowance for loan losses
require consideration of various observable inputs including, but not limited
to, historical loss experience, delinquency status, borrower credit scores,
geographic concentrations and loan-to-value ratios, and are adjusted for current
economic conditions as deemed necessary by management. Many of these factors are
subjective and cannot be reduced to a mathematical formula. In addition, we
review national historical credit performance information from external sources
to assist in our analysis. Changes in our estimates can significantly impact the
allowance for loan losses and provision expense. The allowance reflects
management's best estimate of the credit losses inherent in the loan portfolio
at the balance sheet date. It is also possible that we will experience credit
losses that are different from our current estimates or that the time of those
losses may differ from our estimates.

Accounting for Derivatives and Hedging Activities


In accordance with ASC 815, we recognize all derivatives as either assets or
liabilities and we measure these investments at fair value. Changes in fair
value for derivatives not designated as hedges are recorded in our consolidated
statements of operations as "(Loss) on derivatives, net."

In accordance with ASC 815-10, a derivative that is designated as a hedge is
recognized as an asset/liability and measured at estimated fair value. In order
for our interest rate swap agreements to qualify for hedge accounting, upon
entering into the swap agreement, we must anticipate that the hedge will be
highly "effective," as defined by ASC 815-10.

Prior to March 18, 2014 and August 22, 2014 (the dates when we de-designated our
interest rate swaps from hedge accounting), on the date we entered into a
derivative contract, we designated the derivative as a hedge of the variability
of cash flows that were to be received or paid in connection with a recognized
asset or liability (a "cash flow" hedge). Changes in the fair value of a
derivative that were highly effective and that were designated and qualified as
a cash flow hedge, to the extent that the hedge was effective, were recorded in
"other comprehensive income" and reclassified to income when the forecasted
transaction affected income (e.g., when periodic settlement interest payments
were due on repurchase agreements). The swap agreements were carried on our
consolidated balance sheets at their fair value based on values obtained from
large financial institutions who were market makers for these types of
instruments. Hedge ineffectiveness, if any, was recorded in current-period
income.

We formally assessed, both at the hedge's inception and on an ongoing basis,
whether the derivatives that were used in hedging transactions were highly
effective in offsetting changes in the cash flows of hedged items and whether
those derivatives were expected to remain highly effective in future periods. If
it was determined that a derivative was not (or ceased to be) highly effective
as a hedge, we discontinued hedge accounting.

When we discontinued hedge accounting, the gain or loss on the derivative
remained in "Accumulated other comprehensive income (loss)" and is reclassified
into income when the forecasted transaction affects income. In all situations in
which hedge accounting is discontinued and the derivative remains outstanding,
we carry the derivative at its fair value on our consolidated balance sheets,
recognizing changes in the fair value in current-period income. At June 30,
2020, none of our derivative instruments were designated as hedges for
accounting purposes.

For purposes of the cash flow statement, cash flows from derivative instruments
were classified with the cash flows from the hedged item. Cash flows from
derivatives that are not hedges are classified according to the underlying
nature or purpose of the derivative. For more detail on our derivative
instruments, see Notes 1, 9, and 15 to our accompanying unaudited consolidated
financial statements.

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Income Taxes

Our financial results do not reflect provisions for current or deferred income
taxes. Management believes that we have and intend to continue to operate in a
manner that will allow us to be taxed as a REIT and, as a result, management
does not expect to pay substantial, if any, corporate level taxes. Many of these
requirements, however, are highly technical and complex. If we were to fail to
meet these requirements, we would be subject to federal income tax.

Recent and Recently Adopted Accounting Pronouncements

A description of recent and recently adopted accounting pronouncements, the date
adoption is required, and the impact on our consolidated financial statements is
contained in Note 1, "Organization and Significant Accounting Policies," to our
accompanying unaudited consolidated financial statements.

Government Activity

Developments Concerning Fannie Mae and Freddie Mac

Payments on the Agency MBS in which we invest are guaranteed by Fannie Mae and
Freddie Mac, which are stockholder corporations chartered by Congress with a
public mission to provide liquidity, stability, and affordability to the U.S.
housing market. Since 2008, Fannie Mae and Freddie Mac have been regulated by
the Federal Housing Finance Agency, or the FHFA, the U.S. Department of Housing
and Urban Development, the SEC, and the U.S. Department of the Treasury, or the
U.S.Treasury, and are currently operating under the conservatorship of the
FHFA. The U.S.Treasury has agreed to support the continuing operations of
Fannie Mae and Freddie Mac with any necessary capital contributions while in
conservatorship. However, the U.S. government does not guarantee the securities
or other obligations of Fannie Mae or Freddie Mac.

Over the past several years, separate legislation has been introduced in both
houses of the U.S. Congress to wind-down or reform both of these agencies. None
of these bills have garnered enough support for a vote. It is currently unknown
if, and when, any of these bills would become law and, if they did, what impact
that would have on housing finance in general and what the impact would be on
the existing securities guaranteed by Fannie Mae and Freddie Mac, as well as the
impact on the pricing, supply, liquidity, and value of the MBS in which we
invest.

Actions of the Federal Reserve


The outbreak of the COVID-19 coronavirus pandemic has severely affected
population health worldwide and created unprecedented economic disruption. In
addition, measures to prevent the spread of the COVID-19 coronavirus pandemic
have caused, and may continue to cause, substantial business closures, travel
restrictions, and self-isolation. Most states and local governments, in
coordination with the Federal government, have ordered people to stay home and
mandated non-essential businesses to close. Millions of people have been laid
off and have filed for unemployment benefits, potentially affecting their
ability to make payments on their mortgage, rent, or other debt. In response,
the Federal Reserve has taken the following actions:



? On March 15, 2020, the Federal Reserve Open Market Committee, or the FOMC,

lowered the fed funds rate to a target range of 0% to 0.25%;

The Federal Reserve increased holdings of U.S.Treasury securities by at least

? $500 billion and holdings of Agency MBS by at least $200 billion. It announced

   that it would also reinvest the principal from its holding into further
   acquisitions of Agency MBS;

The FOMC announced it would expand its overnight and term repurchase agreement

? operations by trillions of dollars, which was designed to stabilize these

markets;

The Federal Reserve, in coordination with the Bank of England, Bank of Canada,

? Bank of Japan, the European Central Bank, and the Swiss National Bank,

announced a coordinated action to enhance liquidity


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via standing U.S. dollar liquidity swap line agreements. The new lower rate will

be the U.S. Overnight Index Swap, or the OIS, rate plus 25 basis points. This

announcement is designed to reduce stress in global funding markets and to

mitigate the stress on the supply of funds to households and businesses, both

  domestically and globally;


   The Federal Reserve enhanced the ability of banks and other financial

institutions to access the Fed discount window, which supports the liquidity

? and stability of the banking system and the effective implementation of the

monetary supply. The Fed primary credit rate was lowered by 150 basis points to

0.25%;

The Federal Reserve established a Commercial Paper Funding Facility, or CPFF,

to support the flow of credit to consumers, such as through auto loans and

? mortgages, and to provide liquidity for the operational needs of a wide range

of businesses. The U.S.Treasury has committed $10 billion to the Federal

   Reserve for this facility; and


   Congress passed the $2.2 trillion CARES Act to provide, through the U.S.

Treasury and the Federal Reserve, aid to individuals and businesses. As part of

? this Act, lenders were encouraged to work with consumers struggling to make

their loan payments by offering forbearance of several months to any persons

who requested such assistance.



We cannot predict the economic impact of COVID-19 and the ultimate effect it
will have on our business, nor can we predict whether the actions of the Federal
Reserve, the U.S. government, state and local governments, and foreign
governments will be successful, or whether future actions may be necessary.
Although some of the actions have provided economic relief to individuals and
businesses and may have stabilized, for the present time, certain lending
markets, we cannot predict how the actions already taken, or those that may be
taken, could impact our business, results of operations, and financial
condition. These actions, while intending to help the economy currently, could
have longer-term and broader implications, and could negatively affect the
availability of financing and the quantity and quality of available mortgage
products, and could cause changes in interest rates and the yield curve, any and
each of which could materially and adversely affect our business, results of
operations, and financial condition, as well as those of the entire mortgage
sector in general, and the broader U.S. and global economies.



Other Recent Activity


During the past several years, there have been continuing liquidity and credit
concerns surrounding the mortgage markets and the general global economy. While
the U.S. government and other foreign governments have taken various actions to
address these concerns, there are also concerns about the ability of the U.S.
government to reduce its budget deficit as well as possible future rating
downgrades of U.S. sovereign debt and government-sponsored agency debt. In
August 2019, Congress agreed to increase the spending caps by $320 billion and
also to remove the debt ceiling limit for two years. This bill was signed by
President Trump. A failure by the U.S. government to reach agreement on future
budgets and debt ceilings, reduce its budget deficit, or a future downgrade of
U.S. sovereign debt and government-sponsored agencies' debt, could have a
material adverse effect on the U.S. economy and the global economy. These events
could have a material adverse effect on our borrowing costs, the availability of
financing, and the liquidity and valuation of securities in general, and also on
the securities in our portfolio.

Over the past several years, U.S. and British banking authorities assessed fines
on several major financial institutions for LIBOR manipulation. LIBOR is an
unregulated rate based on estimates that lenders submitted to the British
Bankers' Association, a trade group that compiled the information and published
daily the LIBOR rate. On February 1, 2014, the administration of LIBOR was
transferred from the British Bankers' Association to the Intercontinental
Exchange Benchmark Administration, or the IBA, following authorization by the
Financial Conduct Authority (the United Kingdom regulators). In July 2017, the
Financial Conduct Authority announced that by the end of 2021, LIBOR would be
replaced with a more reliable alternative. At this time, we do not know what
changes will be made by the Financial Conduct Authority. In the United States,
the Alternative Refinance Rates Committee selected the Secured Overnight
Financing Rate, or SOFR, an overnight secured U.S.Treasury repurchase agreement
rate, as the new rate and adopted a proposed transition plan for the change from
U.S. LIBOR to SOFR. The calculation of LIBOR under the IBA is the average of the
interest rates that some of the world's leading banks charge each other for
short-term loans.

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It is unclear at this time as to how the change to another alternative to LIBOR
will affect the interest rates that repurchase agreement counterparties and
lenders charge on borrowings in general and how they could specifically affect
our borrowing agreements.

On June 23, 2016, the citizens of the United Kingdom, or the UK, voted to leave,
or Brexit, the European Union, or the EU. The UK had two years from its formal
notification of withdrawal (given on March 29, 2017) from the EU to negotiate a
new treaty to replace the terms of its EU membership. The UK was due to leave
the EU in March 2019 and EU leaders had adopted formal guidelines about the
future relationship between the EU and the UK. It is unknown at this time what
effects the Brexit vote and the UK/EU relationship will have on interest rates,
on stock markets (over the longer term), and the effect on the U.S. economy and
the global economy. However, the recent legislative victory by the Conservative
Party and British Prime Minister Boris Johnson makes it more likely for a United
States/UK free trade agreement to occur. The UK formerly left the EU on January
31, 2020.

On January 16, 2020, the U.S. Congress passed the USMCA trade agreement, which
became effective after the legislatures of the United States, Mexico, and Canada
had all approved it. It is believed that the USMCA trade agreement will be
beneficial to U.S. workers, manufacturers, and farmers in particular, as well as
improving trade relations amongst all three nations

Subsequent Events

On July 23, 2020, we renewed our warehouse line of credit relating to the residential mortgage loans held-for-securitization for an amount of $300 million and a term of one year.

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Financials (USD)
Sales 2020 38,0 M - -
Net income 2020 -35,1 M - -
Net Debt 2020 - - -
P/E ratio 2020 -5,92x
Yield 2020 12,9%
Capitalization 226 M 226 M -
Capi. / Sales 2020 5,95x
Capi. / Sales 2021 7,01x
Nbr of Employees 1
Free-Float 95,4%
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Average target price 4,00 $
Last Close Price 2,28 $
Spread / Highest target 141%
Spread / Average Target 75,4%
Spread / Lowest Target 9,65%
EPS Revisions
Managers
NameTitle
Joseph Emery McAdams Chairman, President & Chief Executive Officer
Charles Jay Siegel Chief Financial Officer, Secretary & Treasurer
Joseph Lloyd McAdams Director
Joe E. Davis Lead Independent Director
Robert Craig Davis Independent Director