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OFFON

TWO HARBORS INVESTMENT CORP.

(TWO)
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TWO HARBORS INVESTMENT : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

02/25/2021 | 05:17pm EDT
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and accompanying notes included elsewhere in
this Annual Report on Form 10-K. This section of this Form 10-K generally
discusses 2020 and 2019 items and year-to-year comparisons
between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons
between 2019 and 2018 that are not included in this Form 10-K can be found in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2019.

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  Table of     C    ontents
General
We are a Maryland corporation focused on investing in and managing
Agency residential mortgage-backed securities, or Agency RMBS, mortgage
servicing rights, or MSR, and other financial assets, which we collectively
refer to as our target assets. We operate as a real estate investment trust, or
REIT, as defined under the Internal Revenue Code of 1986, as amended, or the
Code.
Our objective is to provide attractive risk-adjusted total return to our
stockholders over the long term, primarily through dividends and secondarily
through capital appreciation. We acquire and manage an investment portfolio of
our target assets, which include the following:
•Agency RMBS (which includes inverse interest-only Agency securities classified
as "Agency Derivatives" for purposes of U.S. generally accepted accounting
principles, or U.S. GAAP), meaning RMBS whose principal and interest payments
are guaranteed by the Government National Mortgage Association (or Ginnie Mae),
the Federal National Mortgage Association (or Fannie Mae), or the Federal Home
Loan Mortgage Corporation (or Freddie Mac), or collectively, the government
sponsored entities, or GSEs;
•MSR; and
•Other financial assets comprising approximately 5% to 10% of the portfolio
(includes certain non-hedging transactions that may produce non-qualifying
income for purposes of the REIT gross income tests).
Historically, we viewed our target assets in two strategies that were based on
our core competencies of understanding and managing prepayment and credit risk.
Our rates strategy included assets that were primarily sensitive to changes in
interest rates and prepayment speeds, specifically Agency RMBS and MSR. Our
credit strategy included assets that were primarily sensitive to changes in
inherent credit risk, including non-Agency securities, meaning securities that
are not issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. In the
first quarter of 2020, we experienced unprecedented market conditions as a
result of the global COVID-19 pandemic, including unusually significant spread
widening in both Agency RMBS and non-Agency securities. In response, we focused
our efforts on raising excess liquidity and de-risking our portfolio. On March
25, 2020, we sold substantially all of our non-Agency securities in order to
eliminate the risks posed by continued margin calls and ongoing funding concerns
associated with the significant spread widening on these assets. We also sold
approximately one-third of our Agency RMBS during the first quarter in order to
reduce risk and raise cash to establish a strong defensive liquidity position to
weather potential ongoing economic and market instability. Throughout the
remainder of 2020, we focused on the composition of our Agency RMBS and MSR
portfolio, deploying risk as the market entered a period of stabilization and
asset price recovery. Going forward, management expects our capital to be fully
allocated to our strategy of pairing Agency RMBS and MSR.
Our Agency RMBS portfolio is comprised of adjustable rate and fixed rate
mortgage-backed securities backed by single-family and multi-family mortgage
loans. All of our principal and interest Agency RMBS are Fannie Mae or Freddie
Mac mortgage pass-through certificates or collateralized mortgage obligations
that carry an implied rating of "AAA," or Ginnie Mae mortgage pass-through
certificates, which are backed by the guarantee of the U.S. government. The
majority of these securities consist of whole pools in which we own all of the
investment interests in the securities.
Within our MSR business, we acquire MSR assets, which represent the right to
control the servicing of residential mortgage loans and the obligation to
service the loans in accordance with relevant standards, from high-quality
originators. We do not directly service the mortgage loans underlying the MSR we
acquire; rather, we contract with appropriately licensed third-party
subservicers to handle substantially all servicing functions in the name of the
subservicer. As the servicer of record, however, we remain accountable to the
GSEs for all servicing matters and, accordingly, provide substantial oversight
of each of our subservicers.
We believe MSR are a natural fit for our portfolio over the long term. Our MSR
business leverages our core competencies in prepayment and credit risk analytics
and the MSR assets provide offsetting risks to our Agency RMBS, hedging both
interest rate and mortgage spread risk. One of our goals is to create
long-lasting relationships with high quality originators in order to facilitate
our acquisition of MSR through both flow and bulk transactions.
In making our capital allocation decisions, we take into consideration a number
of factors, including the opportunities available in the marketplace, the cost
and availability of financing, and the cost of hedging interest rate,
prepayment, credit and other portfolio risks. We have expertise in mortgage
credit and may choose to invest again in those assets should the opportunity
arise.
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For the three months ended December 31, 2020, our net spread realized on the
portfolio was slightly lower than the prior quarter, but higher than recent
periods. Our average annualized portfolio yield was lower primarily due to
higher amortization recognized on Agency RMBS due to prepayments, offset by
lower servicing expenses on MSR. Cost of financing was lower as a result of the
lower interest rate environment. The following table provides the average
annualized yield on our assets, including Agency RMBS, non-Agency securities and
MSR for the three months ended December 31, 2020, and the four immediately
preceding quarters:
                                                                              Three Months Ended
                                December 31,             September 30,               June 30,              March 31,              December 31,
                                    2020                      2020                     2020                   2020                    2019
Average annualized portfolio
yield (1)                          2.26%                     2.42%                    2.84%                  3.52%                   3.54%
Cost of financing (2)              0.50%                     0.64%                    2.61%                  2.39%                   2.35%
Net spread                         1.76%                     1.78%                    0.23%                  1.13%                   1.19%


____________________
(1)Average annualized yield includes interest income on Agency RMBS and
non-Agency securities and MSR servicing income, net of estimated amortization,
and servicing expenses.
(2)Cost of financing includes swap and cap interest rate spread and amortization
of upfront payments made or received upon entering.

We seek to deploy moderate leverage as part of our investment strategy. We
generally finance our Agency RMBS securities through short- and long-term
borrowings structured as repurchase agreements. We also finance our MSR through
revolving credit facilities, term notes payable and convertible senior notes.
Our Agency RMBS, given their liquidity and high credit quality, are eligible for
higher levels of leverage, while MSR, with less liquidity and/or more exposure
to prepayment, utilize lower levels of leverage. As a result, our debt-to-equity
ratio is determined by our portfolio mix as well as many additional factors,
including the liquidity of our portfolio, the availability and price of our
financing, the diversification of our counterparties and their available
capacity to finance our assets, and anticipated regulatory developments. Over
the past several quarters, we have generally maintained a debt-to-equity ratio
range of 5.0 to 7.0 times to finance our securities portfolio and MSR, on a
fully deployed capital basis. Our debt-to-equity ratio is directly correlated to
the composition of our portfolio; specifically, the higher percentage of Agency
RMBS we hold, the higher our debt-to-equity ratio is. Following the sale of
substantially all of our non-Agency securities in the first quarter of 2020,
debt-to-equity may increase over time. We may alter the percentage allocation of
our portfolio among our target assets depending on the relative value of the
assets that are available to purchase from time to time, including at times when
we are deploying proceeds from offerings we conduct. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition - Repurchase Agreements" for further discussion.
We recognize that investing in our target assets is competitive and we compete
with other entities for attractive investment opportunities. We believe that our
significant focus in the residential market, the extensive mortgage market
expertise of our investment team, our strong analytics and our disciplined
relative value investment approach give us a competitive advantage versus our
peers.
We have elected to be treated as a REIT for U.S. federal income tax purposes. To
qualify as a REIT we are required to meet certain investment and operating tests
and annual distribution requirements. We generally will not be subject to U.S.
federal income taxes on our taxable income to the extent that we annually
distribute all of our net taxable income to stockholders, do not participate in
prohibited transactions and maintain our intended qualification as a REIT.
However, certain activities that we may perform may cause us to earn income
which will not be qualifying income for REIT purposes. We have designated
certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in
the Code, to engage in such activities. We also operate our business in a manner
that will permit us to maintain our exemption from registration under the
Investment Company Act of 1940, as amended, or the 1940 Act. While we do not
currently originate or service residential mortgage loans, certain of our
subsidiaries have obtained the requisite licenses and approvals to own and
manage MSR.
Through August 14, 2020, we were externally managed and advised by PRCM Advisers
LLC, a subsidiary of Pine River Capital Management L.P., under the terms of a
Management Agreement between us and PRCM Advisers. We terminated the Management
Agreement effective August 14, 2020 for "cause" in accordance with Section 15(a)
thereof. On August 15, 2020, we completed our transition to self-management and
directly hired the senior management team and other personnel who had
historically provided services to us.

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  Table of     C    ontents
Factors Affecting our Operating Results
Our net interest income includes income from our securities portfolio, including
the amortization of purchase premiums and accretion of purchase discounts. Net
interest income, as well as our servicing income, net of subservicing expenses,
will fluctuate primarily as a result of changes in market interest rates, our
financing costs and prepayment speeds on our assets. Interest rates, financing
costs and prepayment rates 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.
On January 1, 2020 we adopted Accounting Standards Update (ASU) No. 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, which changed the impairment model for most financial
assets and certain other instruments. Valuation allowances for credit losses on
available-for-sale, or AFS, debt securities are recognized, rather than direct
reductions in the amortized cost of the investments, regardless of whether the
impairment is considered to be other-than-temporary. We use a discounted cash
flow method to estimate and recognize an allowance for credit losses on AFS
securities. The estimated allowance for credit losses is equal to the difference
between the prepayment adjusted contractual cash flows with no credit losses and
the prepayment adjusted expected cash flows with credit losses, discounted at
the effective interest rate on the AFS security that was in effect upon adoption
of the standard. The contractual cash flows and expected cash flows are based on
management's best estimate and take into consideration current prepayment
assumptions, lifetime expected losses based on past loss experience, current
market conditions, and reasonable and supportable forecasts of future
conditions. The allowance for credit losses causes an increase in the AFS
security amortized cost and recognizes an allowance for credit losses in the
same amount.

Fair Value Measurement
A significant portion of our assets and liabilities are reported at fair value
and, therefore, our consolidated balance sheets and statements of comprehensive
(loss) income are significantly affected by fluctuations in market prices. At
December 31, 2020, approximately 83.7% of our total assets, or $16.3 billion,
consisted of financial instruments recorded at fair value. See Note 10 - Fair
Value to the consolidated financial statements, included in this Annual Report
on Form 10-K, for descriptions of valuation methodologies used to measure
material assets and liabilities at fair value and details of the valuation
models, key inputs to those models and significant assumptions utilized.
Although we execute various hedging strategies to mitigate our exposure to
changes in fair value, we cannot fully eliminate our exposure to volatility
caused by fluctuations in market prices.
Any temporary change in the fair value of our AFS securities, excluding certain
Agency interest-only mortgage-backed securities, is recorded as a component of
accumulated other comprehensive income and does not impact our reported income
(loss) for U.S. GAAP purposes, or GAAP net income (loss). However, beginning on
January 1, 2020 (as discussed above), changes in the provision for credit losses
on AFS securities are recognized immediately in GAAP net income (loss). Our GAAP
net income (loss) is also affected by fluctuations in market prices on the
remainder of our financial assets and liabilities recorded at fair value,
including interest rate swap, cap and swaption agreements and certain other
derivative instruments (i.e., TBAs, put and call options for TBAs, U.S. Treasury
futures, Markit IOS total return swaps and inverse interest-only securities),
which are accounted for as derivative trading instruments under U.S. GAAP,
Agency interest-only mortgage-backed securities and MSR.
We have numerous internal controls in place to help ensure the appropriateness
of fair value measurements. Significant fair value measures are subject to
detailed analytics and management review and approval. Our entire investment
portfolio reported at fair value is priced by third-party brokers and/or by
independent pricing vendors. We generally receive three or more broker and
vendor quotes on pass-through principal and interest (P&I) Agency RMBS, and
generally receive multiple broker or vendor quotes on all other securities,
including interest-only Agency RMBS and inverse interest-only Agency RMBS. We
also receive three vendor quotes for the MSR in our investment portfolio. For
Agency RMBS, the third-party pricing vendors and brokers use pricing models that
commonly incorporate such factors as coupons, primary and secondary mortgage
rates, rate reset periods, issuer, prepayment speeds, credit enhancements and
expected life of the security. For MSR, vendors use pricing models that
generally incorporate observable inputs such as principal balance, note rate,
geographical location, loan-to-value (LTV) ratios, FICO, appraised value and
other loan characteristics, along with observed market yields and trading
levels. Pricing vendors will customarily incorporate loan servicing cost,
servicing fee, ancillary income, and earnings rate on escrow as observable
inputs. Unobservable or model-driven inputs include forecast cumulative
defaults, default curve, forecast loss severity and forecast voluntary
prepayment.
We evaluate the prices we receive from both third-party brokers and pricing
vendors by comparing those prices to actual purchase and sale transactions, our
internally modeled prices calculated based on market observable rates and credit
spreads, and to each other both in current and prior periods. We review and may
challenge valuations from third-party brokers and pricing vendors to ensure that
such quotes and valuations are indicative of fair value as a result of this
analysis. We then estimate the fair value of each security based upon the median
of the final broker quotes received, and we estimate the fair value of MSR based
upon the average of prices received from third-party vendors, subject to
internally-established hierarchy and override procedures.
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  Table of     C    ontents
We utilize "bid side" pricing for our Agency RMBS and, as a result, certain
assets, especially the most recent purchases, may realize a markdown due to the
"bid-offer" spread. To the extent that this occurs, any economic effect of this
would be reflected in accumulated other comprehensive income.
Considerable judgment is used in forming conclusions and estimating inputs to
our Level 3 fair value measurements. Level 3 inputs such as interest rate
movements, prepayments speeds, credit losses and discount rates are inherently
difficult to estimate. Changes to these inputs can have a significant effect on
fair value measurements. Accordingly, there is no assurance that our estimates
of fair value are indicative of the amounts that would be realized on the
ultimate sale or exchange of these assets. The Company classified 8.2% of its
total assets as Level 3 fair value assets at December 31, 2020.

Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires us
to make certain judgments and assumptions, based on information available at the
time of our preparation of the financial statements, in determining accounting
estimates used in preparation of the statements. Our significant accounting
policies are described in Note 2 to the consolidated financial statements,
included under Item 8 of this Annual Report on Form 10-K.
Accounting estimates are considered critical if the estimate requires us to make
assumptions about matters that were highly uncertain at the time the accounting
estimate was made and if different estimates reasonably could have been used in
the reporting period or changes in the accounting estimate are reasonably likely
to occur from period to period that would have a material impact on our
financial condition, results of operations or cash flows.
The methods used by us to estimate fair value for AFS securities and MSR may
produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values. Furthermore, while we believe that
our valuation methods are appropriate and consistent with other market
participants, the use of different methodologies, or assumptions, to determine
the fair value of certain financial instruments could result in a different
estimate of fair value at the reporting date. We use inputs that are current as
of the measurement date, which in periods of market dislocation, may have
reduced transparency.
Classification and Valuation of Available-for-Sale Securities
Our securities investments consist primarily of Agency RMBS and non-Agency
securities that we classify as available-for-sale, or AFS. All assets classified
as AFS, excluding certain Agency interest-only mortgage-backed securities, are
reported at estimated fair value with changes in fair value included in
accumulated other comprehensive income, a separate component of stockholders'
equity, on an after-tax basis. On July 1, 2015, we elected the fair value option
for Agency interest-only securities acquired on or after such date. All Agency
interest-only securities acquired on or after July 1, 2015 are carried at
estimated fair value with changes in fair value recorded as a component of
(loss) gain on investment securities in the consolidated statements of
comprehensive (loss) income.
In accordance with ASU No. 2016-13, Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, we use a discounted
cash flow method to estimate and recognize an allowance for credit losses on
both Agency and non-Agency AFS securities that are not accounted for under the
fair value option. The estimated allowance for credit losses is equal to the
difference between the prepayment adjusted contractual cash flows with no credit
losses and the prepayment adjusted expected cash flows with credit losses,
discounted at the effective interest rate on the AFS security that was in effect
upon adoption of the standard. The contractual cash flows and expected cash
flows are based on management's best estimate and take into consideration
current prepayment assumptions, lifetime expected losses based on past loss
experience, current market conditions, and reasonable and supportable forecasts
of future conditions. The allowance for credit losses on Agency AFS securities
relates to prepayment assumption changes on interest-only Agency RMBS. The
allowance for credit losses causes an increase in the AFS security amortized
cost and recognizes an allowance for credit losses in the same amount, with the
provision for credit losses recognized in earnings (within (loss) gain on
investment securities) and the balance of the unrealized loss recognized in
either other comprehensive (loss) income, net of tax, or (loss) gain on
investment securities, depending on the accounting treatment.
Classification and Valuation of Mortgage Servicing Rights
We account for our MSR at fair value, with changes in fair value recorded in
GAAP net (loss) income, rather than at amortized cost. Fair value is generally
determined based on prices obtained from third-party pricing vendors. Although
MSR transactions are observable in the marketplace, the details of those
transactions are not necessarily reflective of the value of our MSR portfolio.
Third-party vendors use both observable market data and unobservable market data
(including prepayment speeds, delinquency levels, discount rates and cost to
service) as inputs into models, which help to inform their best estimates of
fair value market price.
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  Table of     C    ontents
Interest Income Recognition
Interest income on securities is accrued based on the outstanding principal
balance and their contractual terms. Premiums and discounts associated with
Agency RMBS and non-Agency securities rated AA and higher at the time of
purchase, are amortized and accreted, respectively, as an adjustment to interest
income over the life of such securities using the contractual method under ASC
310-20, Nonrefundable Fees and Other Costs, which is applied at the individual
security level based upon each security's effective interest rate. Each
security's effective interest rate is calculated at the time of purchase by
solving for the discount rate that equates the present value of that security's
remaining contractual cash flows, assuming no principal prepayments, to its
purchase price. When applying the contractual effective interest method, as
principal prepayments occur, an amount of the unamortized premium or discount is
recognized in interest income such that the contractual effective interest rate
on the remaining security balance is unaffected.
Interest income on non-Agency securities that were purchased at a discount to
par value and were rated below AA at the time of purchase and Agency and
non-Agency interest-only securities that can be contractually prepaid or
otherwise settled in such a way that we would not recover substantially all of
our recorded investment is recognized based on the security's effective interest
rate using the prospective method under ASC 325-40, Investments - Other:
Beneficial Interests in Securitized Financial Assets. At the time of
acquisition, the security's effective interest rate is calculated by solving for
the single discount rate that equates the present value of our best estimate of
the amount and timing of the cash flows expected to be collected from the
security to its purchase price. On at least a quarterly basis, we review and, if
appropriate, make adjustments to our cash flow projections based on input and
analysis received from external sources, internal models, and management's
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, may result in a
prospective change in the effective interest rate and interest income recognized
on such securities.
Derivative Financial Instruments and Hedging Activities
We apply the provisions of ASC 815, which requires the recognition of all
derivatives as either assets or liabilities on our consolidated balance sheets
and to measure those instruments at fair value. The fair value adjustments of
our current derivative instruments affect net income as the hedge for accounting
purposes is being treated as an economic, or trading, hedge and not as a
qualifying hedging instrument.
Derivatives are primarily used for hedging purposes rather than speculation. We
utilize third-party pricing vendors and broker quotes to value our financial
derivative instruments. If our hedging activities do not achieve their desired
results, our reported GAAP net (loss) income may be adversely affected.
Income Taxes
Our financial results are generally not expected to reflect provisions for
current or deferred income taxes, except for those taxable benefits or
provisions recognized by our TRSs. We estimate, based on existence of sufficient
evidence, the ability to realize the remainder of any deferred tax asset our
TRSs recognize. Any adjustments to such estimates will be made in the period
such determination is made. We plan to operate in a manner that will allow us to
qualify for taxation as a REIT. As a result of our expected REIT qualification,
we do not generally expect to pay U.S. federal corporate level taxes. However,
many of the REIT requirements are highly technical and complex. If we were to
fail to meet the REIT requirements, we would be subject to U.S. federal, state
and local income taxes.
The Tax Cuts and Jobs Act of 2017, or TCJA, significantly changed how the U.S.
taxes corporations. The TCJA requires complex computations to be performed that
were not previously required in U.S. tax law, significant judgments to be made
in interpretation of the provisions of the TCJA and significant estimates in
calculations, and the preparation and analysis of information not previously
relevant or regularly produced. Technical corrections or other amendments of the
TCJA or administrative guidance interpreting the TCJA may be forthcoming at any
time. While we do not anticipate a material effect on our operations, we
continue to analyze and monitor the application of the TCJA to our business, our
peers and the economic environment.

Market Conditions and Outlook
The U.S. Federal Reserve, or the Fed, moved overnight interest rates to the zero
bound in early 2020 and is expected to hold overnight interest rates near
current levels for an extended period of time. During the fourth quarter, the
overnight rate cleared at less than 10 basis points and term overnight indexed
swap markets indicate expectations for continued low levels in the near term. In
addition, the Fed remains committed to large scale asset purchases. After
announcing QE4 in March, the Fed has purchased more than $1.25 trillion MBS and
more than $2.0 trillion U.S. Treasuries, increasing its overall balance sheet to
approximately $7 trillion. This overwhelming purchase activity resulted in
significant mortgage spread tightening and price stability since its onset.
Interest rates across the yield curve remain low. All U.S. Treasuries yield less
than 175 basis points, with all maturities through five years yielding less than
50 basis points. Realized and implied volatility levels continue to be subdued.
Primary and secondary mortgage spreads remain wide, but decreased somewhat
during the fourth quarter, and constant prepayment rates remain at elevated
levels.
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  Table of     C    ontents
The economic outlook for 2021 is quite uncertain and much will depend on the
course of the global pandemic and the successful distribution and efficacy of
vaccines. The traditional macro influences of GDP growth, job growth and
inflation may be secondary to the global economy's progression through the
health crisis. Additional fiscal support from the U.S. government, or lack
thereof, will also have a hand in shaping the upcoming year. The Coronavirus
Aid, Relief, and Economic Security Act, or the CARES Act, was passed in March
2020 and extended in December 2020 to address the economic fallout of the
COVID-19 pandemic. One provision of the Act provides up to 360 days of
forbearance relief from mortgage loan payments for borrowers with federally
backed (e.g. Fannie Mae or Freddie Mac) mortgages who experience financial
hardship related to the pandemic. Subsequently, in February 2021, the FHFA
announced extensions to the foreclosure moratorium and forbearance periods for
borrowers with Fannie Mae- or Freddie Mac-backed mortgages, and the Biden
administration announced similar foreclosure moratorium and forbearance
extensions for borrowers with Federal Housing Administration, U.S. Department of
Agriculture or U.S. Department of Veterans Affairs mortgages. Much uncertainty
has arisen around the ultimate effect on delinquencies, defaults, prepayment
speeds, low interest rates and home price appreciation. These provisions of the
CARES Act also impact MSR owners, like Two Harbors, that are required for
certain of the MSR assets to advance principal, interest, taxes and insurance
payments during the time when borrowers are in forbearance or while foreclosure
moratorium is in effect. After increasing in the months following the passage of
the Act, the number of loans in forbearance in our servicing portfolio has
subsequently decreased. If the economy is further impacted by future surges in
COVID-19 virus cases across the country, more borrowers could opt for
forbearance relief from their mortgage loan payments. As a result, we could see
the number of loans in forbearance in our servicing portfolio increase.
We believe our current portfolio allocation and our investing expertise, as well
as our operational capabilities to invest in MSR, will allow us to navigate the
dynamic mortgage market while future regulatory and policy activities take
shape. Our portfolio, consisting as it does of Agency RMBS and MSR, with
offsetting risk characteristics, allows us to mitigate a variety of risks,
including interest rate and RMBS spread volatility.
The following table provides the carrying value of our investment portfolio by
product type:
                                           December 31,                   

December 31,

        (dollars in thousands)                 2020                           2019
        Agency
        Fixed Rate                  $ 14,627,097        89.7  %    $ 27,763,471        83.2  %
        Hybrid ARM                        10,794           -  %          14,584           -  %
        Total Agency                  14,637,891        89.7  %      27,778,055        83.2  %
        Agency Derivatives                61,617         0.4  %          68,925         0.2  %

        Non-Agency                        13,031         0.1  %       3,628,273        10.9  %
        Mortgage servicing rights      1,596,153         9.8  %       1,909,444         5.7  %
        Total                       $ 16,308,692                   $ 33,384,697



Prepayment speeds and volatility due to interest rates
Our portfolio is subject to market risks, primarily interest rate risk and
prepayment risk. We seek to offset a portion of our Agency pool market value
exposure through our MSR and interest-only Agency RMBS portfolios. Generally,
rising prepayment speeds will cause the market value of our RMBS trading at a
premium to par (including interest-only securities) and MSR to decrease, and our
RMBS trading at a discount to par to increase. The inverse relationship occurs
when prepayment speeds slow. During periods of decreasing interest rates, the
market value of our Agency pools generally increases and the market value of our
interest-only securities and MSR generally decreases. We believe the low
interest rate environment is expected to persist in the near term. Changes in
home price performance, key employment metrics and government programs, among
other macroeconomic factors, could cause prepayment speeds to increase on many
RMBS, which could lead to less attractive reinvestment opportunities.
Nonetheless, we believe our portfolio management approach, including our asset
selection process, positions us to respond to a variety of market scenarios,
including an overall faster prepayment environment.
The following table provides the three-month average constant prepayment rate,
or CPR, experienced by Agency RMBS and MSR owned by us as of December 31, 2020,
and the four immediately preceding quarter-ends:
                                     December 31,                 September 30,                 June 30,                 March 31,                 December 31,
                                         2020                         2020                        2020                     2020                        2019
Agency RMBS                                    27.0  %                       23.1  %                  19.9  %                   12.3  %                      14.3  %

Mortgage servicing rights                      41.2  %                       41.5  %                  35.6  %                   19.9  %                      20.8  %



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Although we are unable to predict future interest rate movements, our strategy
of pairing Agency RMBS with MSR, with a focus on managing various associated
risks, including interest rate, prepayment, credit, mortgage spread and
financing risk, is intended to generate attractive yields with a low level of
sensitivity to changes in the yield curve, prepayments and interest rate cycles.
Our Agency RMBS are collateralized by pools of fixed-rate mortgage loans and
hybrid adjustable-rate mortgage loans, or hybrid ARMs, which are mortgage loans
that have interest rates that are fixed for an initial period and adjustable
thereafter. Our Agency portfolio also includes securities with implicit
prepayment protection, including lower loan balances (securities collateralized
by loans of less than $200,000 in initial principal balance), higher LTVs
(securities collateralized by loans with LTVs greater than or equal to 80%),
certain geographic concentrations and lower FICO scores. Our overall allocation
of Agency RMBS and holdings of pools with specific characteristics are viewed in
the context of our aggregate rates strategy, including MSR and related
derivative hedging instruments. Additionally, the selection of securities with
certain attributes is driven by the perceived relative value of the securities,
which factors in the opportunities in the marketplace, the cost of financing and
the cost of hedging interest rate, prepayment, credit and other portfolio risks.
As a result, Agency RMBS capital allocation reflects management's flexible
approach to investing in the marketplace.
The following tables provide the carrying value of our Agency RMBS portfolio by
underlying mortgage loan rate type:
                                                                                                         December 31, 2020
                                                                                                                                       Gross Weighted                                                         Weighted
                                   Principal/                                         Weighted Average          % Prepayment           Average Coupon                                 Allowance for         Average Loan
(dollars in thousands)            Current Face           Carrying Value                     CPR                  Protected                  Rate               Amortized Cost         Credit Losses         Age (months)
Agency RMBS AFS:
30-Year Fixed
? 2.5%                          $   1,878,319          $     2,005,269                          7.7  %                 100.0  %                 3.4  %       $     1,977,388          $         -                       7
3.0%                                2,359,772                2,541,676                         19.3  %                 100.0  %                 3.7  %             2,433,757                    -                 14
3.5%                                3,327,048                3,636,988                         28.5  %                 100.0  %                 4.2  %             3,485,035                    -                 17
4.0%                                2,642,730                2,911,556                         37.5  %                 100.0  %                 4.6  %             2,751,139                    -                 36
4.5%                                2,276,487                2,538,418                         34.3  %                 100.0  %                 5.0  %             2,400,043                    -                 35
? 5.0%                                519,976                  590,044                         33.6  %                  98.4  %                 5.8  %               551,230                    -                 65
                                   13,004,332               14,223,951                         27.4  %                  99.9  %                 4.3  %            13,598,592                    -                 24
Other P&I                              99,023                  113,302                          9.6  %                     -  %                 6.6  %               110,002                    -                226
Interest-only                       3,649,556                  300,638                         14.0  %                     -  %                 3.5  %               315,876              (17,889)                48
Agency Derivatives                    318,162                   61,617                         16.5  %                     -  %                 6.7  %                45,618                    -                195
Total Agency RMBS               $  17,071,073          $    14,699,508                                                  96.7  %                              $    14,070,088          $   (17,889)


                                                                                                   December 31, 2019
                                                                                                                                          Gross Weighted                                   Weighted
                                        Principal/                                            Weighted              % Prepayment          Average Coupon                                 Average Loan
(dollars in thousands)                 Current Face           Carrying Value                 Average CPR             Protected                 Rate               Amortized Cost         Age (months)
Agency RMBS AFS:
30-Year Fixed
? 2.5%                               $           -          $             -                           -  %                     -  %                  -  %       $             -                 -
3.0%                                     6,034,075                6,168,095                         3.3  %                  98.3  %                3.8  %             6,169,224                 3
3.5%                                     6,174,872                6,451,660                         7.0  %                 100.0  %                4.3  %             6,386,051                 7
4.0%                                     8,455,585                8,993,011                        19.4  %                 100.0  %                4.6  %             8,808,458                25
4.5%                                     4,714,844                5,082,166                        25.2  %                 100.0  %                5.0  %             4,942,234                20
? 5.0%                                     741,000                  813,503                        23.5  %                 100.0  %                5.8  %               786,727                48
                                        26,120,376               27,508,435                        14.4  %                  99.6  %                4.5  %            27,092,694                16
Other P&I                                  119,168                  133,436                         7.3  %                   0.3  %                6.7  %               133,174               210
Interest-only                            2,601,693                  136,184                        10.9  %                     -  %                4.4  %               169,811               104
Agency Derivatives                         397,137                   68,925                        12.3  %                     -  %                6.7  %                56,959               184
Total Agency RMBS                    $  29,238,374          $    27,846,980                                                 98.4  %                             $    27,452,638


                                       37

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Table of C ontents


Counterparty exposure and leverage ratio
We monitor counterparty exposure in our broker, banking and lending
counterparties on a daily basis. We believe our broker and banking
counterparties are well-capitalized organizations and we attempt to manage our
cash balances across these organizations to reduce our exposure to any single
counterparty.
As of December 31, 2020, we had entered into repurchase agreements with 45
counterparties, 20 of which had outstanding balances at December 31, 2020. In
addition, we held short- and long-term borrowings under revolving credit
facilities, long-term term notes payable and long-term unsecured convertible
senior notes. As of December 31, 2020, the debt-to-equity ratio funding our AFS
securities, MSR and Agency Derivatives, which includes unsecured borrowings
under convertible senior notes, was 5.2:1.0.
As of December 31, 2020, we held $1.4 billion in cash and cash equivalents,
approximately $7.4 million of unpledged Agency securities and derivatives and
$10.4 million of unpledged non-Agency securities. As a result, we had an overall
estimated unused borrowing capacity on our unpledged securities of approximately
$13.1 million. As of December 31, 2020, we held approximately $449.4 million of
unpledged MSR and $52.3 million of unpledged servicing advances. Overall, we had
unused committed borrowing capacity on MSR asset and servicing advance financing
facilities of $215.2 million and $191.0 million, respectively. Generally, unused
borrowing capacity may be the result of our election not to utilize certain
financing, as well as delays in the timing in which funding is provided,
insufficient collateral or the inability to meet lenders' eligibility
requirements for specific types of asset classes.
We also monitor exposure to our MSR counterparties. We may be required to make
representations and warranties to investors in the loans underlying the MSR we
own; however, some of our MSR were purchased on a bifurcated basis, meaning the
representation and warranty obligations remain with the seller. If the
representations and warranties we make prove to be inaccurate, we may be
obligated to repurchase certain mortgage loans, which may impact the
profitability of our portfolio. Although we obtain similar representations and
warranties from the counterparty from which we acquired the relevant asset, if
those representations and warranties do not directly mirror those we make to the
investor, or if we are unable to enforce the representations and warranties
against the counterparty for a variety of reasons, including the financial
condition or insolvency of the counterparty, we may not be able to seek
indemnification from our counterparties for any losses attributable to the
breach.
Proposed changes to LIBOR
LIBOR is used extensively in the U.S. and globally as a "benchmark" or
"reference rate" for various commercial and financial contracts, including
corporate and municipal bonds and loans, floating rate mortgages, asset-backed
securities, consumer loans, and interest rate swaps and other derivatives. It
had been expected that a number of private-sector banks currently reporting
information used to set LIBOR would stop doing so after 2021 when their current
reporting commitment ends, which would either cause LIBOR to stop publication
immediately or cause LIBOR's regulator to determine that its quality has
degraded to the degree that it is no longer representative of its underlying
market. On November 30, 2020, Intercontinental Exchange Inc. announced that ICE
Benchmark Administration Limited, the administrator of LIBOR, does not intend to
stop publication of the majority of USD-LIBOR tenors until June 30, 2023. In the
U.S., the Alternative Reference Rates Committee, or ARRC, has identified the
Secured Overnight Financing Rate, or SOFR, as its preferred alternative rate for
U.S. dollar-based LIBOR.  SOFR is a measure of the cost of borrowing cash
overnight, collateralized by U.S. Treasury securities, and is based on directly
observable U.S. Treasury-backed repurchase transactions. Some market
participants may continue to explore whether other U.S. dollar-based reference
rates would be more appropriate for certain types of instruments. The ARRC has
proposed a paced market transition plan to SOFR, and various organizations are
currently working on industry wide and company-specific transition plans as it
relates to derivatives and cash markets exposed to LIBOR. We have material
contracts that are indexed to USD-LIBOR and are monitoring this activity,
evaluating the related risks and our exposure, and adding alternative language
to contracts, where necessary.

Summary of Results of Operations and Financial Condition
During the first quarter of 2020, we experienced unprecedented market conditions
as a result of the global COVID-19 pandemic, including unusually significant
spread widening in both Agency RMBS and non-Agency securities. In response, we
focused our efforts on raising excess liquidity and de-risking our portfolio. On
March 25, 2020, we sold substantially all of our non-Agency securities in order
to eliminate the risks posed by continued margin calls and ongoing funding
concerns associated with the significant spread widening on these assets. We
also sold approximately one-third of our Agency RMBS portfolio in order to
reduce risk and raise cash to establish a strong defensive liquidity position to
weather potential ongoing economic and market instability. These actions,
occurring at a time of wide spreads and low prices, resulted in large realized
losses in the first quarter and a corresponding decline in book value.
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  Table of     C    ontents
The actions taken by the Fed to purchase Agency RMBS have been successful in
stabilizing this market, as spreads and prices largely recovered on these assets
in the second quarter. In addition, repurchase agreement financing markets for
Agency RMBS continue to function well, term markets have re-developed, and we
have experienced no issues in accessing this source of funding.
Certain mortgage loan forbearance programs were announced in connection with the
CARES Act. As the servicer of record for the MSR assets in our portfolio, we may
be responsible for continuing to advance principal, interest, taxes and
insurance on mortgage loans that are in forbearance, delinquency or default. At
December 31, 2020, 27,088 loans, or 3.5% of our MSR portfolio by loan count,
were in forbearance, of which 14.7% had made their December payment and were
current as of December 31, 2020. Therefore, approximately 2.9% of our portfolio
by loan count was in forbearance and not current as of December 31, 2020. We are
confident in our ability to meet our servicing advance obligations and have
entered into a revolving credit facility to finance these advances.
Our GAAP net income attributable to common stockholders was $192.2 million
($0.68 per diluted weighted average share) for the three months ended
December 31, 2020 and our GAAP net loss attributable to common stockholders was
$1.7 billion ($(6.24) per diluted weighted average share) for the year ended
December 31, 2020 , as compared to GAAP net income attributable to common
stockholders of $115.8 million and $248.2 million ($0.41 and $0.93 per diluted
weighted average share) for the three and twelve months ended December 31, 2019.
With our accounting treatment for AFS securities, unrealized fluctuations in the
market values of AFS securities, excluding Agency interest-only securities and
certain securities with an allowance for credit losses, do not impact our GAAP
net (loss) income or taxable income but are recognized on our consolidated
balance sheets as a change in stockholders' equity under "accumulated other
comprehensive income." For the three and twelve months ended December 31, 2020,
net unrealized losses on AFS securities recognized as other comprehensive loss,
net of tax, were $78.7 million and $47.8 million, respectively. This, combined
with GAAP net income attributable to common stockholders of $192.2 million and
GAAP net loss attributable to common stockholders of $1.7 billion for the three
and twelve months ended December 31, 2020, respectively, resulted in
comprehensive income attributable to common stockholders of $113.5 million and
comprehensive loss attributable to common stockholders of $1.8 billion for the
three and twelve months ended December 31, 2020, respectively. For the three and
twelve months ended December 31, 2019, net unrealized losses on AFS securities
recognized as other comprehensive loss, net of tax, were $59.0 million and net
unrealized gains on AFS securities recognized as other comprehensive income, net
of tax, were $578.6 million, respectively. This, combined with GAAP net income
attributable to common stockholders of $115.8 million and $248.2 million,
resulted in comprehensive income attributable to common stockholders of $56.9
million and $826.7 million for the three and twelve months ended December 31,
2019, respectively.
Our book value per common share for U.S. GAAP purposes was $7.63 at December 31,
2020, a decrease from $14.54 per common share at December 31, 2019. For the year
ended December 31, 2020, we recognized comprehensive loss attributable to common
stockholders of $1.8 billion, which drove the overall decrease in book value.
Although some uncertainty remains regarding the future effects of the COVID-19
pandemic and the actions that may be taken by federal and state governmental
authorities and GSEs in response, the Agency RMBS market has stabilized and
there is more clarity regarding forbearance levels and deferral programs on
Agency MSR. Our liquidity position is strong, with $1.4 billion in unrestricted
cash as of December 31, 2020. Given our increased confidence, we expect to
continue to deploy such capital to our target assets over time.
                                       39
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  Table of     C    ontents
The following tables present the components of our comprehensive income (loss)
for the three and twelve months ended December 31, 2020 and 2019:
(in thousands, except share data)                                 Three Months Ended                                Year Ended
Income Statement Data:                                               December 31,                                  December 31,
                                                              2020                   2019                  2020                   2019
                                                                      (unaudited)
Interest income:
Available-for-sale securities                           $      72,071          $     230,567          $    515,685          $     962,283

Other                                                             429                  7,871                 9,365                 32,407
Total interest income                                          72,500                238,438               525,050                994,690
Interest expense:
Repurchase agreements                                          11,001                152,919               233,069                654,280

Federal Home Loan Bank advances                                     -                    514                 1,747                 10,920
Revolving credit facilities                                     3,513                  4,038                12,261                 19,354
Term notes payable                                              3,296                  5,002                14,974                 10,708
Convertible senior notes                                        4,831                  4,811                19,197                 19,067
Total interest expense                                         22,641                167,284               281,248                714,329
Net interest income                                            49,859                 71,154               243,802                280,361
Other-than-temporary impairment losses                              -                 (3,308)                    -                (14,312)
Other income (loss):
Gain (loss) on investment securities                           37,363                 28,141              (999,859)               280,118
Servicing income                                              100,549                127,690               443,351                501,612
Gain (loss) on servicing asset                                  2,522                (21,739)             (935,697)              (697,659)
Loss on interest rate swap, cap and swaption
agreements                                                    (14,689)                (6,875)             (310,806)              (108,289)
Gain (loss) on other derivative instruments                    81,289                (10,800)               90,023                259,998
Other income                                                      474                     60                 1,422                    337
Total other income (loss)                                     207,508                116,477            (1,711,566)               236,117
Expenses:
Management fees                                                     -                 17,546                31,738                 60,102
Servicing expenses                                             24,217                 20,253                94,266                 74,607

Compensation and benefits                                      11,220                  7,965                37,723                 33,229
Other operating expenses                                        7,237                  6,177                28,626                 23,826

Restructuring charges                                            (294)                     -                 5,706                      -
Total expenses                                                 42,380                 51,941               198,059                191,764
Income (loss) before income taxes                             214,987                132,382            (1,665,823)               310,402
Provision for (benefit from) income taxes                       3,816                 (2,372)              (35,688)               (13,560)

Net income (loss)                                             211,171                134,754            (1,630,135)               323,962

Dividends on preferred stock                                   18,951                 18,950                75,802                 75,801
Net income (loss) attributable to common
stockholders                                            $     192,220       

$ 115,804 $ (1,705,937) $ 248,161 Basic earnings (loss) per weighted average common share

                                                   $        0.70       

$ 0.42 $ (6.24) $ 0.93 Diluted earnings (loss) per weighted average common share

                                            $        0.68       

$ 0.41 $ (6.24) $ 0.93 Dividends declared per common share

                     $        0.17          $        0.40          $       0.50          $        1.67
Weighted average number of shares of common
stock:
Basic                                                     273,699,079            272,906,815           273,600,947            267,826,739
Diluted                                                   291,870,229            291,070,864           273,600,947            267,826,739


                                       40
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  Table of     C    ontents
(in thousands)                                                Three Months Ended                          Year Ended
Income Statement Data:                                           December 31,                            December 31,
                                                            2020               2019                2020                 2019
                                                                  (unaudited)

Comprehensive income (loss):
Net income (loss)                                       $ 211,171          $ 134,754          $ (1,630,135)         $ 323,962
Other comprehensive (loss) income, net of tax:
Unrealized (loss) gain on available-for-sale
securities                                                (78,739)           (58,954)              (47,799)           578,583
Other comprehensive (loss) income                         (78,739)           (58,954)              (47,799)           578,583
Comprehensive income (loss)                               132,432             75,800            (1,677,934)           902,545

Dividends on preferred stock                               18,951             18,950                75,802             75,801
Comprehensive income (loss) attributable to
common stockholders                                     $ 113,481          

$ 56,850 $ (1,753,736) $ 826,744

            (in thousands)                        December 31,     

December 31,

            Balance Sheet Data:                       2020              

2019

                                                  (unaudited)
            Available-for-sale securities        $ 14,650,922      $

31,406,328

            Mortgage servicing rights            $  1,596,153      $ 

1,909,444

            Total assets                         $ 19,515,921      $

35,921,622

            Repurchase agreements                $ 15,143,898      $

29,147,463

            Federal Home Loan Bank advances      $          -      $    210,000
            Revolving credit facilities          $    283,830      $    300,000
            Term notes payable                   $    395,609      $    394,502
            Convertible senior notes             $    286,183      $    284,954
            Total stockholders' equity           $  3,088,926      $ 
4,970,466



Results of Operations
The following analysis focuses on financial results during the three and twelve
months ended December 31, 2020 and 2019. The analysis of our financial results
during the three and twelve months ended December 31, 2019 and 2018 is omitted
from this Form 10-K and included in Part II Item 7 of our Annual Report on Form
10-K for the year ended December 31, 2019, which analysis is incorporated by
reference.
Interest Income
Interest income decreased from $238.4 million and $994.7 million for the three
and twelve months ended December 31, 2019 to $72.5 million and $525.1 million
for the same periods in 2020 due to the sale of both Agency RMBS and non-Agency
securities that occurred during the first quarter of 2020, further sales of some
higher coupon Agency RMBS and higher amortization recognized on Agency RMBS due
to prepayments.
Interest Expense
Interest expense decreased from $167.3 million and $714.3 million for the three
and twelve months ended December 31, 2019, respectively, to $22.6 million and
$281.2 million for the same periods in 2020 due to lower borrowing balances
related to the sale of both Agency RMBS and non-Agency securities that occurred
during the first quarter of 2020 and a lower interest rate environment.

                                       41
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  Table of     C    ontents
Net Interest Income
The following tables present the components of interest income and average
annualized net asset yield earned by asset type, the components of interest
expense and average annualized cost of funds on borrowings incurred by liability
and/or collateral type, and net interest income and average annualized net
interest rate spread for the three and twelve months ended December 31, 2020 and
2019:
                                                        Three Months Ended December 31, 2020                                               Year Ended December 31, 2020
                                        Average Balance             Interest              Net Yield/Cost of                                            Interest              Net Yield/Cost of
(dollars in thousands)                        (1)                Income/Expense               Funds (2)              Average Balance (1)            Income/Expense               Funds (2)

Interest-earning assets Agency available-for-sale securities $ 14,638,019 $ 72,010

                       2.0  %       $     18,626,188               $        461,951                       2.5  %
Non-Agency available-for-sale
securities                                     22,449                        61                       1.1  %                806,274                         53,734                       6.7  %
Other                                               -                       429                         -  %                  2,059                          9,365                       3.8  %

Total interest income/net asset yield $ 14,660,468 $ 72,500

                       2.0  %       $     19,434,521               $        525,050                       2.7  %
Interest-bearing liabilities
Borrowings collateralized by:
Agency available-for-sale securities    $  15,413,060          $         11,079                       0.3  %       $     19,096,633               $        218,562                       1.1  %
Non-Agency available-for-sale
securities                                      2,048                        12                       2.3  %                434,244                         12,929                       3.0  %
Agency derivatives (3)                         52,244                       123                       0.9  %                 51,740                            850                       1.6  %
Mortgage servicing rights (4)                 678,094                     6,596                       3.9  %                729,172                         29,710                       4.1  %

Unsecured borrowings:
Convertible senior notes                      286,070                     4,831                       6.8  %                285,592                         19,197                       6.7  %

Total interest expense/cost of funds    $  16,431,516                    22,641                       0.6  %       $     20,597,381                        281,248                       1.4  %
Net interest income/spread (5)                                 $         49,859                       1.4  %                                      $        243,802                       1.3  %


                                       42

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  Table of     C    ontents
                                                        Three Months Ended December 31, 2019                                               Year Ended December 31, 2019
                                        Average Balance             Interest              Net Yield/Cost of                                            Interest              Net Yield/Cost of
(dollars in thousands)                        (1)                Income/Expense               Funds (2)              Average Balance (1)            Income/Expense               Funds (2)

Interest-earning assets Agency available-for-sale securities $ 24,694,426 $ 178,621

                       2.9  %       $     23,593,771               $        763,601                       3.2  %
Non-Agency available-for-sale
securities                                  3,300,836                    51,946                       6.3  %              3,278,228                        198,682                       6.1  %
Other                                           9,308                     7,871                       4.2  %                 15,530                         32,407                       4.6  %

Total interest income/net asset yield $ 28,004,570 $ 238,438

                       3.4  %       $     26,887,529               $        994,690                       3.7  %
Interest-bearing liabilities
Borrowings collateralized by:
Agency available-for-sale securities    $  24,728,724          $        137,919                       2.2  %       $     23,018,643               $        583,646                       2.5  %
Non-Agency available-for-sale
securities                                  1,598,573                    12,179                       3.0  %              1,909,564                         67,442                       3.5  %
Agency derivatives (3)                         50,263                       359                       2.9  %                 47,824                          1,556                       3.3  %
Mortgage servicing rights (4)                 956,985                    12,016                       5.0  %                807,486                         42,618                       5.3  %

Unsecured borrowings:
Convertible senior notes                      284,848                     4,811                       6.8  %                284,413                         19,067                       6.7  %

Total interest expense/cost of funds    $  27,619,393                   167,284                       2.4  %       $     26,067,930                        714,329                       2.7  %
Net interest income/spread (5)                                 $         71,154                       1.0  %                                      $        280,361                       1.0  %


____________________
(1)Average asset balance represents average amortized cost on AFS securities.
(2)Cost of funds does not include the accrual and settlement of interest
associated with interest rate swaps and caps. In accordance with U.S. GAAP,
those costs are included in (loss) gain on interest rate swap, cap and swaption
agreements in the consolidated statements of comprehensive (loss) income. For
the three and twelve months ended December 31, 2020, our total average cost of
funds on the assets assigned as collateral for borrowings shown in the table
above, including interest spread expense associated with interest rate swaps and
caps, was 0.5% and 1.7%, respectively, compared to 2.4% and 2.5% for the same
periods in 2019.
(3)Yields on Agency Derivatives not shown as interest income is included in gain
(loss) on other derivative instruments in the consolidated statements of
comprehensive (loss) income.
(4)Includes financing for both MSR assets and related servicing advance
obligations. Yields on mortgage servicing rights and advances not shown as these
assets do not earn interest.
(5)Net interest spread does not include the accrual and settlement of interest
associated with interest rate swaps and caps. In accordance with U.S. GAAP,
those costs are included in gain (loss) on interest rate swap, cap and swaption
agreements in the consolidated statements of comprehensive (loss) income. For
the three and twelve months ended December 31, 2020, our total average net
interest rate spread on the assets and liabilities shown in the table above,
including interest spread expense associated with interest rate swaps and caps,
was 1.5% and 1.0%, respectively, compared to 0.9% and 1.1% for the same periods
in 2019.

The decrease in yields on Agency AFS securities for the three and twelve months
ended December 31, 2020, as compared to the same period in 2019, was
predominantly driven by sales of pools with higher yields. The decrease in cost
of funds associated with the financing of Agency AFS securities for the three
and twelve months ended December 31, 2020, as compared to the same period
in 2019, was the result of decreases in the borrowing rates offered by financing
counterparties.
The decrease in yields on non-Agency securities for the three and twelve months
ended December 31, 2020, as compared to the same periods in 2019, was due to the
sale of substantially all legacy non-Agencies during the first quarter of 2020.
The decrease in cost of funds associated with the financing of non-Agency AFS
securities for the three and twelve months ended December 31, 2020, as compared
to the same period in 2019, was also a result of the sale.
The decrease in cost of funds associated with the financing of Agency
Derivatives for the three and twelve months ended December 31, 2020, as compared
to the same period in 2019, was the result of decreases in the borrowing rates
offered by counterparties.
The decrease in cost of funds associated with the financing of MSR assets and
related servicing advance obligations for the three and twelve months ended
December 31, 2020, as compared to the same period in 2019, was the result of
better financing terms offered by counterparties. During the year ended December
31, 2020, we entered into a new revolving credit facility to finance our
servicing advance obligations, which are included in other assets on our
consolidated balance sheets.
Our convertible senior notes due 2022 were issued in January 2017, are unsecured
and pay interest semiannually at a rate of 6.25% per annum. The cost of funds
associated with our convertible senior notes due 2022 for the three and twelve
months ended December 31, 2020, as compared to the same period in 2019, was
consistent.
                                       43
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  Table of     C    ontents
The following tables present the components of the yield earned on our AFS
securities portfolio as a percentage of our average amortized cost of securities
for the three and twelve months ended December 31, 2020 and 2019:
                                                         Three Months Ended                                 Year Ended
                                                            December 31,                                   December 31,
(in thousands)                                       2020                  2019                     2020                    2019
Gross yield/stated coupon                                3.9  %                4.0  %                     3.9  %                4.2  %
Net (premium amortization) discount accretion           (1.9) %               (0.7) %                    (1.2) %               (0.6) %
Net yield (1)                                            2.0  %                3.3  %                     2.7  %                3.6  %


____________________
(1)Excludes Agency Derivatives. For the three and twelve months ended
December 31, 2020, the average annualized net yield on total RMBS, including
Agency Derivatives, was 2.0% and 2.7%, respectively, compared to 3.3% and 3.6%
for the same periods in 2019. Yields have not been adjusted for cost of delay
and cost to carry purchase premiums.

Other-Than-Temporary Impairments
Prior to the adoption of Topic 326 on January 1, 2020, we reviewed each of our
securities on a quarterly basis to determine if an OTTI charge was necessary.
During the three and twelve months ended December 31, 2019, we recorded $3.3
million and $14.3 million in other-than-temporary credit impairments on six and
eighteen non-Agency securities, respectively, where the future expected cash
flows for each security were less than its amortized cost. For further
information about evaluating AFS securities for OTTI prior to January 1, 2020,
refer to Note 4 - Available-for-Sale Securities, at Fair Value of the notes to
the consolidated financial statements.
Gain (Loss) On Investment Securities
The following tables present the components of (loss) gain on investment
securities for the three and twelve months ended December 31, 2020 and 2019:
                                                       Three Months Ended December 31, 2020                                            Year Ended December 31, 2020
                                       Available-For-Sale                                                             Available-For-Sale              Trading
(in thousands)                             Securities               Trading Securities             Total                  Securities                Securities               Total
Proceeds from sales                  $          1,379,468          $       

- $ 1,379,468 $ 18,349,338 $ 1,053,477 $ 19,402,815 Amortized cost of securities sold

              (1,325,981)                          -           (1,325,981)                  (19,273,667)           (1,052,500)          (20,326,167)
Total realized gains (losses) on
sales                                              53,487                           -               53,487                      (924,329)                  977              (923,352)
Provision for credit losses                        (4,509)                          -               (4,509)                      (58,440)                    -               (58,440)
Other                                             (11,615)                          -              (11,615)                      (18,067)                    -               (18,067)
Gain (loss) on investment securities $             37,363          $                -          $    37,363          $         (1,000,836)         $        977          $   (999,859)


                                                       Three Months Ended December 31, 2019                                                 Year Ended December 31, 2019
                                       Available-For-Sale                                                               Available-For-Sale
(in thousands)                             Securities               Trading Securities             Total                    Securities                Trading Securities              Total
Proceeds from sales                  $          1,814,250          $                -          $ 1,814,250                       15,879,823          $                -          $ 15,879,823
Amortized cost of securities sold              (1,786,635)                          -           (1,786,635)                     (15,595,809)                          -           (15,595,809)
Total realized gains on sales                      27,615                           -               27,615                          284,014                           -               284,014
Provision for credit losses                             -                           -                    -                                -                           -                     -
Other                                                 526                           -                  526                           (3,896)                          -                (3,896)
Gain on investment securities        $             28,141          $                -          $    28,141          $               280,118          $                -          $    280,118



                                       44
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  Table of     C    ontents
Due to the unprecedented market conditions experienced as a result of the global
COVID-19 pandemic, we sold substantially all of our portfolio of non-Agency
securities and approximately one-third of our Agency RMBS during the first
quarter of 2020. We do not expect to sell assets on a frequent basis, but may
sell assets to reallocate capital into new assets that we believe have higher
risk-adjusted returns.
Subsequent to the adoption of Topic 326 on January 1, 2020, the Company uses a
discounted cash flow method to estimate and recognize an allowance for credit
losses on AFS securities. The estimated allowance for credit losses is equal to
the difference between the prepayment adjusted contractual cash flows with no
credit losses and the prepayment adjusted expected cash flows with credit
losses, discounted at the effective interest rate on the AFS security that was
in effect upon adoption of the standard. The contractual cash flows and expected
cash flows are based on management's best estimate and take into consideration
current prepayment assumptions, lifetime expected losses based on past loss
experience, current market conditions, and reasonable and supportable forecasts
of future conditions. The allowance for credit losses causes an increase in the
AFS security amortized cost and recognizes an allowance for credit losses in the
same amount, with the provision for credit losses recognized in earnings (within
(loss) gain on investment securities) and the balance of the unrealized loss
recognized in either other comprehensive (loss) income, net of tax, or (loss)
gain on investment securities, depending on the accounting treatment.
Servicing Income
The following table presents the components of servicing income for the three
and twelve months ended December 31, 2020 and 2019:
                                            Three Months Ended                Year Ended
                                               December 31,                  December 31,
       (in thousands)                      2020           2019           2020           2019
       Servicing fee income             $  98,250      $ 109,403      $ 416,936      $ 436,587
       Ancillary and other fee income         557            499         
1,945          1,801
       Float income                         1,742         17,788         24,470         63,224
       Total                            $ 100,549      $ 127,690      $ 443,351      $ 501,612



The decrease in servicing income for the three and twelve months ended
December 31, 2020, as compared to the same periods in 2019, was the result of
lower servicing fee income as a result of a lower portfolio balance due to
prepayments and deferred servicing fee income for loans in forbearance as a
result of COVID-19. Additionally, the decrease in float income was the result of
decreased float earning rates.
Gain (Loss) on Servicing Asset
The following table presents the components of loss on servicing asset for the
three and twelve months ended December 31, 2020 and 2019:
                                                  Three Months Ended                         Year Ended
                                                     December 31,                           December 31,
(in thousands)                                  2020               2019               2020                2019
Changes in fair value due to changes in
valuation inputs or assumptions used in the
valuation model                             $ 173,447          $  87,561          $ (396,900)         $ (390,149)
Changes in fair value due to realization of
cash flows (runoff)                          (170,897)          (109,333)           (538,761)           (307,918)
 (Losses) gains on sales                          (28)                33                 (36)                408
Gain (loss) on servicing asset              $   2,522          $ (21,739)   

$ (935,697) $ (697,659)




The increase in gain on servicing asset (decrease in loss on servicing asset)
for the three months ended December 31, 2020, as compared to the same period in
2019, was driven by favorable change in valuation assumptions used in the fair
market valuation of MSR, including the impact of acquiring MSR at a cost below
fair value, offset by increased portfolio runoff during the three months ended
December 31, 2020. The increase in loss on servicing asset for the year ended
December 31, 2020, as compared to the same period in 2019, was driven by an
increase in prepayment speed assumptions used in the fair valuation of MSR,
higher expected cost-to-service due to COVID-19 related forbearances and higher
portfolio runoff on a larger average MSR portfolio balance throughout the year
ended December 31, 2020.
                                       45
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  Table of     C    ontents
Loss on Interest Rate Swap, Cap and Swaption Agreements
The following table summarizes the net interest spread and gains and losses
associated with our interest rate swap, cap and swaption positions recognized
during the three and twelve months ended December 31, 2020 and 2019:
                                                Three Months Ended                         Year Ended
                                                   December 31,                           December 31,
(in thousands)                               2020                2019               2020                2019
Net interest spread                      $    1,953          $   4,768          $  (66,175)         $   70,514
Early termination, agreement maturation
and option expiration (losses) gains         (2,546)            (1,495)           (387,748)             94,929
Change in unrealized (loss) gain on
interest rate swap, cap and swaption
agreements, at fair value                   (14,096)           (10,148)            143,117            (273,732)
Loss on interest rate swap, cap and
swaption agreements                      $  (14,689)         $  (6,875)         $ (310,806)         $ (108,289)



Net interest spread recognized for the accrual and/or settlement of the net
interest expense associated with our interest rate swaps and caps results from
receiving either a floating interest rate (LIBOR or the OIS rate) or a fixed
interest rate and paying either a fixed interest rate or a floating interest
rate (LIBOR or the OIS rate) on positions held to economically hedge/mitigate
portfolio interest rate exposure (or duration) risk. We may elect to terminate
certain swaps, caps and swaptions to align with our investment portfolio,
agreements may mature or options may expire resulting in full settlement of our
net interest spread asset/liability and the recognition of realized gains and
losses, including early termination penalties. During the second quarter of
2020, we elected to terminate certain swaps and swaptions in order to adjust the
total notional and fixed interest rates on these instruments, as a result of
adjustments made to our investment portfolio and changes in interest rates. The
change in fair value of interest rate swaps, caps and swaptions during the three
and twelve months ended December 31, 2020 and 2019 was a result of changes to
floating interest rates (LIBOR or the OIS rate), the swap curve and
corresponding counterparty borrowing rates. Since swaps, caps and swaptions are
used for purposes of hedging our interest rate exposure, their unrealized
valuation gains and losses (excluding the reversal of unrealized gains and
losses to realized gains and losses upon termination, maturation or option
expiration) are generally offset by unrealized losses and gains in our Agency
RMBS AFS portfolio, which are recorded either directly to stockholders' equity
through other comprehensive (loss) income, net of tax, or to (loss) gain on
investment securities, in the case of Agency interest-only mortgage-backed
securities.
Gain (Loss) on Other Derivative Instruments
The following table provides a summary of the total net gains (losses)
recognized on other derivative instruments we hold for purposes of both hedging
and non-hedging activities, principally TBAs, put and call options for TBAs,
Markit IOS total return swaps, short U.S. Treasuries, U.S. Treasury futures and
inverse interest-only securities during the three and twelve months ended
December 31, 2020 and 2019:
                                                 Three Months Ended                         Year Ended
                                                    December 31,                           December 31,
(in thousands)                                2020                2019               2020               2019
Interest income, net of accretion, on
inverse interest-only securities          $    2,232          $   1,702          $   9,479          $    5,586
Interest expense on short U.S. treasuries          -                  -                  -              (1,315)
Realized and unrealized net gains
(losses) on other derivative instruments
(1)                                           79,057            (12,502)            80,544             255,727
Gain (loss) on other derivative
instruments                               $   81,289          $ (10,800)         $  90,023          $  259,998


____________________

(1)As these derivative instruments are considered trading instruments, our financial results include both realized and unrealized gains (losses) associated with these instruments.

For further details regarding our use of derivative instruments and related activity, refer to Note 7 - Derivative Instruments and Hedging Activities to the consolidated financial statements, included in this Annual Report on Form 10-K.

                                       46
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  Table of     C    ontents
Expenses
The following table presents the components of expenses, other than
restructuring charges, for the three and twelve months ended December 31, 2020
and 2019:
                                                      Three Months Ended                      Year Ended
                                                         December 31,                        December 31,
(in thousands, except share data)                   2020              2019              2020              2019
Management fees                                  $      -          $ 17,546          $ 31,738          $ 60,102
Servicing expenses                               $ 24,217          $ 20,253          $ 94,266          $ 74,607
Operating expenses:
Compensation and benefits:
Non-cash equity compensation expenses            $  2,243          $  2,423          $  9,730          $  8,660
All other compensation and benefits                 8,977             5,542            27,993            24,569
Total compensation and benefits                  $ 11,220          $  7,965          $ 37,723          $ 33,229
Other operating expenses:
Nonrecurring expenses                            $  1,541          $      -          $  5,205          $      -
All other operating expenses                        5,696             6,177            23,421            23,826
Total other operating expenses                   $  7,237          $  6,177          $ 28,626          $ 23,826
Annualized operating expense ratio                    2.4  %            1.1  %            2.0  %            1.2  %
Annualized operating expense ratio, excluding
non-cash equity compensation and other
nonrecurring expenses                                 1.9  %            0.9  %            1.5  %            1.0  %



Prior to the termination of the Management Agreement on August 14, 2020,
management fees were payable to PRCM Advisers under the agreement. The
management fee was calculated based on our stockholders' equity with certain
adjustments outlined in the management agreement. In connection with the
acquisition of CYS effective July 31, 2018, the Management Agreement was amended
to reduce PRCM Advisers' base management fee with respect to the additional
equity under management resulting from the merger to 0.75% from the effective
time through the first anniversary of the effective time. Effective July 31,
2019, the management fee reduction on the equity acquired in the CYS transaction
expired.
We also incur servicing expenses generally related to the subservicing of MSR.
The increase in servicing expenses during the three and twelve months ended
December 31, 2020, as compared to the same periods in 2019, was a result of a
higher cost to service loans in forbearance.
Prior to the termination of the Management Agreement, included in compensation
and benefits and other operating expenses were direct and allocated costs
incurred by PRCM Advisers on our behalf and reimbursed by us. For the year ended
December 31, 2020, these direct and allocated costs totaled approximately $19.3
million, compared to $4.6 million and $27.6 million for the three and twelve
months ended December 31, 2019. Included in these reimbursed costs was
compensation paid to employees of an affiliate of PRCM Advisers serving as our
principal financial officer and general counsel of $1.4 million for the year
ended December 31, 2020 and $0.1 million and $3.1 million for the three and
twelve months ended December 31, 2019, respectively. We did not reimburse PRCM
Advisers for compensation paid to our principal financial officer and general
counsel for the three months ended December 31, 2020. Prior to termination of
the Management Agreement, the allocation of compensation paid to employees of an
affiliate of PRCM Advisers serving as our principal financial officer and
general counsel was based on time spent overseeing our activities in accordance
with the Management Agreement; we did not reimburse PRCM Advisers for any
expenses related to the compensation of our chief executive officer or chief
investment officer. Additionally, included in compensation and benefits is
non-cash equity compensation expense, which represents amortization of the
restricted stock awarded to our independent directors, executive officers and
other eligible individuals. Included in non-cash equity compensation expense for
the three and twelve months ended December 31, 2020 was amortization of
restricted stock awarded to our executive officers, including our chief
executive officer, chief investment officer, principal financial officer and
general counsel of $0.9 million and $3.9 million, compared to $1.2 million and
$3.4 million for the three and twelve months ended December 31, 2019,
respectively.
Following the termination of the Management Agreement, we no longer pay a
management fee to, or reimburse the expenses of, PRCM Advisers. Expenses for
which we previously reimbursed PRCM Advisers are now paid directly by us. We are
also now responsible for the cash compensation and employee benefits of our
chief executive officer, chief investment officer and investment professionals,
which were previously the responsibility of PRCM Advisers. Prior to the
termination of the Management Agreement, we were only responsible for the equity
compensation paid to such individuals.
                                       47
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  Table of     C    ontents
Restructuring Charges
On April 13, 2020, we announced that we had elected to not renew the Management
Agreement with PRCM Advisers on the basis of unfair compensation payable to the
manager pursuant to Section 13(a)(ii) of the Management Agreement. As a result,
we had expected the Management Agreement to terminate on September 19, 2020, at
which time we would have been required to pay a termination fee equal to three
times the sum of the average annual base management fee earned by PRCM Advisers
during the 24-month period immediately preceding the date of termination,
calculated as of the end of the most recently completed fiscal quarter prior to
the date of termination, pursuant to the terms of the Management Agreement. The
termination fee was calculated to be $139.8 million based on results as of June
30, 2020.
On July 15, 2020, we provided PRCM Advisers with a notice of termination of the
Management Agreement for "cause" on the basis of certain material breaches of
the Management Agreement by PRCM Advisers, its agents and/or its assignees that
are incapable of being cured within the time period set forth therein and
certain events of gross negligence on the part of PRCM Advisers in the
performance of its duties under the Management Agreement. The Management
Agreement subsequently terminated on August 14, 2020. No termination fee was
payable to PRCM Advisers in connection with such termination, pursuant to
Section 15(a) of the Management Agreement.
In connection with the termination of the Management Agreement, we reversed the
$139.8 million accrued termination fee during the three months ended September
30, 2020. For the year ended December 31, 2020, we incurred a total of $5.7
million in contract termination costs, which includes all estimated costs
incurred for legal and advisory services provided to facilitate the termination
of the Management Agreement. In accordance with Accounting Standards
Codification (ASC) 420, Exit or Disposal Cost Obligations, all contract
termination costs are included within restructuring charges on our consolidated
statements of comprehensive (loss) income for the year ended December 31, 2020.
Income Taxes
During the three and twelve months ended December 31, 2020, our TRSs recognized
a provision for income taxes of $3.8 million and a benefit from income taxes of
$35.7 million, respectively. The provision recognized for the three months ended
December 31, 2020 was primarily due to gains recognized on MSR, offset by net
losses recognized on derivative instruments held in the our TRSs. The benefit
recognized for the year ended December 31, 2020 was primarily due to losses
recognized on MSR, offset by net gains recognized on derivative instruments held
in our TRSs. During the three and twelve months ended December 31, 2019, our
TRSs recognized a benefit from income taxes of $2.4 million and $13.6 million,
respectively, which was primarily due to losses recognized on MSR, offset by net
gains recognized on derivative instruments held in our TRSs.

Financial Condition
Available-for-Sale Securities, at Fair Value
The majority of our AFS investment securities portfolio is comprised of
adjustable rate and fixed rate Agency mortgage-backed securities backed by
single-family and multi-family mortgage loans. We also hold $13.0 million in
tranches of mortgage-backed and asset-backed P&I and interest-only non-Agency
securities. All of our P&I Agency RMBS AFS are Fannie Mae or Freddie Mac
mortgage pass-through certificates or collateralized mortgage obligations that
carry an implied rating of "AAA," or Ginnie Mae mortgage pass-through
certificates, which are backed by the guarantee of the U.S. government. The
majority of these securities consist of whole pools in which we own all of the
investment interests in the securities.
                                       48
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  Table of     C    ontents
The tables below summarizes certain characteristics of our Agency RMBS AFS at
December 31, 2020 and December 31, 2019:
                                                                                                                  December 31, 2020
                                                                                                                                                                                         Weighted              Weighted
(dollars in thousands,        Principal/          Net (Discount)                                Allowance for         Unrealized          Unrealized                                  Average Coupon           Average
except purchase price)       Current Face            Premium             Amortized Cost         Credit Losses            Gain                Loss              Carrying Value              Rate             Purchase Price
P&I securities:
Fixed                      $  13,093,273          $   604,790          $    13,698,063          $         -          $  628,716          $     (320)         $    14,326,459                  3.64  %       $    104.95
Hybrid ARM                        10,082                  449                   10,531                    -                 363                (100)                  10,794                  5.19  %       $    107.87
Total P&I securities          13,103,355              605,239               13,708,594                    -             629,079                (420)              14,337,253                  3.64  %       $    104.95
Interest-only securities:
Fixed                          2,021,657              233,866                  233,866                 (786)              7,747              (5,540)                 235,287                  2.96  %       $     16.04
Fixed Other (1)                1,627,899               82,010                   82,010              (17,103)              7,933              (7,489)                  65,351                  1.85  %       $      8.57
Total                      $  16,752,911          $   921,115          $    14,024,470          $   (17,889)         $  644,759          $  (13,449)         $    14,637,891


                                                                                                             December 31, 2019
                                                                                                                                                                          Weighted              Weighted
(dollars in thousands, except      Principal/          Net (Discount)                                  Unrealized          Unrealized                                  Average Coupon           Average
purchase price)                   Current Face             Premium             Amortized Cost             Gain                Loss              Carrying Value              Rate             Purchase Price
P&I securities:
Fixed                           $  26,225,918          $    985,699          $    27,211,617          $  424,428          $   (8,758)         $    27,627,287                  3.80  %       $    103.96
Hybrid ARM                             13,626                   625                   14,251                 390                 (57)                  14,584                  5.81  %       $    107.58
Total P&I Securities               26,239,544               986,324               27,225,868             424,818              (8,815)              27,641,871                  3.80  %       $    103.96
Interest-only securities:
Fixed                                 609,012                44,970                   44,970               3,482                (676)                  47,776                  3.13  %       $     34.16
Fixed Other (1)                     1,992,681               124,841                  124,841              10,242             (46,675)                  88,408                  1.68  %       $      8.72
Total                           $  28,841,237          $  1,156,135          $    27,395,679          $  438,542          $  (56,166)         $    27,778,055


____________________
(1)Fixed Other represents weighted-average coupon interest-only securities that
are not generally used for our interest-rate risk management purposes. These
securities pay variable coupon interest based on the weighted average of the
fixed rates of the underlying loans of the security, less the weighted average
rates of the applicable issued P&I securities.

Our three-month average constant prepayment rate, or CPR, experienced by Agency
RMBS AFS owned by us as of December 31, 2020 and 2019 on an annualized basis,
was 27.0% and 14.3%, respectively.
Mortgage Servicing Rights, at Fair Value
One of our wholly owned subsidiaries has approvals from Fannie Mae and Freddie
Mac to own and manage MSR, which represent the right to control the servicing of
mortgage loans. We do not directly service mortgage loans, and instead contract
with appropriately licensed subservicers to handle substantially all servicing
functions in the name of the subservicer for the loans underlying our MSR. As of
December 31, 2020 and December 31, 2019, our MSR had a fair market value of $1.6
billion and $1.9 billion, respectively.
                                       49
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  Table of     C    ontents
As of December 31, 2020 and December 31, 2019, our MSR portfolio included MSR on
781,905 and 793,470 loans with an unpaid principal balance of approximately
$177.9 billion and $175.9 billion, respectively. The following tables summarize
certain characteristics of the loans underlying our MSR by gross weighted
average coupon rate types and ranges at December 31, 2020 and December 31, 2019:
                                                                                                                              December 31, 2020
                                                                                                        Gross Weighted          Weighted                                      Weighted
                                                       Unpaid Principal                                 Average Coupon        Average Loan         Weighted Average            Average
(dollars in thousands)         Number of Loans              Balance                  % Fannie Mae            Rate             Age (months)          Original FICO           Original LTV         60+ Day Delinquencies           3-Month CPR            Net Servicing Fee (bps)
30-Year Fixed:
? 3.25%                            87,561              $   29,304,400                     50.3  %                2.9  %              4                      769                    71.8  %                       0.1  %                   9.0  %                   25.5
> 3.25 - 3.75%                    148,065                  39,634,267                     67.5  %                3.5  %             30                      764                    73.1  %                       1.6  %                  38.2  %                   26.3
> 3.75 - 4.25%                    188,805                  43,124,073                     63.9  %                3.9  %             44                      757                    76.3  %                       3.8  %                  49.1  %                   27.5
> 4.25 - 4.75%                    130,598                  26,096,168                     65.7  %                4.4  %             45                      741                    78.3  %                       6.2  %                  49.2  %                   26.6
> 4.75 - 5.25%                     64,424                  11,727,196                     67.1  %                4.9  %             39                      727                    79.6  %                       8.5  %                  46.5  %                   27.8
> 5.25%                            25,637                   3,958,181                     70.4  %                5.5  %             36                      707                    79.7  %                      10.8  %                  41.2  %                   30.8
                                  645,090                 153,844,285                     62.9  %                3.8  %             32                      755                    75.3  %                       3.5  %                  42.7  %                   26.8
15-Year Fixed:
? 2.25%                             1,996                     665,514                     87.6  %                2.0  %              2                      780                    59.6  %                         -  %                   7.8  %                   25.0
> 2.25 - 2.75%                     19,260                   5,256,640                     70.6  %                2.5  %              7                      778                    59.5  %                       0.1  %                  12.4  %                   25.8
> 2.75 - 3.25%                     47,710                   8,571,486                     71.5  %                2.9  %             37                      771                    61.9  %                       1.1  %                  27.6  %                   26.1
> 3.25 - 3.75%                     36,327                   5,223,663                     71.6  %                3.4  %             45                      759                    64.9  %                       2.2  %                  33.7  %                   27.6
> 3.75 - 4.25%                     17,611                   2,148,413                     64.1  %                3.9  %             43                      745                    65.6  %                       3.4  %                  35.1  %                   29.2
> 4.25%                             9,149                     958,531                     62.8  %                4.5  %             34                      731                    66.3  %                       3.6  %                  37.0  %                   31.2
                                  132,053                  22,824,247                     70.7  %                3.1  %             32                      766                    62.5  %                       1.4  %                  28.8  %                   26.8
Total ARMs                          4,762                   1,192,951                     61.5  %                3.3  %             47                      762                    67.2  %                       4.3  %                  45.4  %                   25.2
Total                             781,905              $  177,861,483                     63.9  %                3.7  %             32                      756                    73.6  %                       3.2  %                  41.2  %                   26.8


                                                                                                                              December 31, 2019
                                                                                                        Gross Weighted          Weighted                                      Weighted
                                                       Unpaid Principal                                 Average Coupon        Average Loan         Weighted Average            Average
(dollars in thousands)         Number of Loans              Balance                  % Fannie Mae            Rate             Age (months)          Original FICO           Original LTV         60+ Day Delinquencies           3-Month CPR            Net Servicing Fee (bps)
30-Year Fixed:
? 3.75%                           106,097              $   27,627,966                     71.3  %                3.5  %             47                      771                    70.5  %                       0.1  %                  10.5  %                   26.4
> 3.75 - 4.25%                    241,274                  59,172,782                     64.5  %                3.9  %             39                      761                    76.3  %                       0.2  %                  16.1  %                   26.9
> 4.25 - 4.75%                    194,543                  43,611,524                     65.2  %                4.4  %             33                      745                    78.9  %                       0.4  %                  26.4  %                   26.3
> 4.75 - 5.25%                     95,468                  19,780,323                     65.9  %                4.9  %             26                      732                    80.4  %                       0.5  %                  32.9  %                   28.0
> 5.25%                            34,524                   5,987,442                     70.5  %                5.5  %             24                      709                    80.2  %                       1.0  %                  30.8  %                   30.8
                                  671,906                 156,180,037                     66.3  %                4.2  %             37                      753                    76.7  %                       0.3  %                  21.4  %                   26.9
15-Year Fixed:
? 2.75%                             2,325                     464,650                     80.8  %                2.6  %             46                      778                    59.7  %                         -  %                   8.6  %                   26.1
> 2.75 - 3.25%                     39,977                   6,893,458                     79.9  %                2.9  %             48                      772                    62.2  %                       0.1  %                  11.2  %                   25.8
> 3.25 - 3.75%                     40,052                   6,311,291                     74.0  %                3.4  %             40                      760                    65.0  %                       0.1  %                  15.0  %                   27.6
> 3.75 - 4.25%                     21,243                   2,990,294                     64.2  %                3.9  %             32                      747                    66.0  %                       0.2  %                  19.2  %                   29.4
> 4.25%                            11,644                   1,423,018                     61.9  %                4.5  %             23                      734                    66.6  %                       0.2  %                  24.8  %                   31.4
                                  115,241                  18,082,711                     73.9  %                3.4  %             40                      761                    64.0  %                       0.1  %                  15.0  %                   27.5
Total ARMs                          6,323                   1,619,394                     69.9  %                3.6  %             44                      762                    65.8  %                       0.3  %                  27.3  %                   25.2
Total                             793,470              $  175,882,142                     67.1  %                4.1  %             37                      754                    75.3  %                       0.3  %                  20.8  %                   27.0



                                       50
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  Table of     C    ontents
Financing
Our borrowings consist primarily of repurchase agreements, revolving credit
facilities and term notes payable. These borrowings are collateralized by our
pledge of AFS securities, derivative instruments, MSR, servicing advances and
certain cash balances. Substantially all of our Agency RMBS are currently
pledged as collateral, and a portion of our non-Agency securities have been
pledged as collateral for repurchase agreements.
During the year ended December 31, 2019, we formed a trust entity, or the MSR
Issuer Trust, for the purpose of financing MSR through securitization. On June
27, 2019, we, through the MSR Issuer Trust, completed an MSR securitization
transaction pursuant to which, through two of our wholly owned subsidiaries, MSR
is pledged to the MSR Issuer Trust and in return, the MSR Issuer Trust issued
(a) an aggregate principal amount of $400.0 million in term notes to qualified
institutional buyers and (b) a variable funding note, or VFN, with a maximum
principal balance of $1.0 billion to one of the subsidiaries, in each case
secured on a pari passu basis. The term notes bear interest at a rate equal to
one-month LIBOR plus 2.80% per annum. The term notes will mature on June 25,
2024 or, if extended pursuant to the terms of the related indenture supplement,
June 25, 2026 (unless earlier redeemed in accordance with their terms).
Additionally, our convertible senior notes due 2022 were issued in January 2017,
are unsecured and pay interest semiannually at a rate of 6.25% per annum.
At December 31, 2020 and December 31, 2019, borrowings under repurchase
agreements, FHLB advances, revolving credit facilities, term notes payable and
convertible senior notes had the following characteristics:
(dollars in thousands)                                  December 31, 2020                                                        December 31, 2019
                                                                                       Weighted                                                                 Weighted
                                                            Weighted Average        Average Years                                    Weighted 

Average Average Years

     Borrowing Type              Amount Outstanding          Borrowing Rate          to Maturity          Amount Outstanding          Borrowing Rate          to Maturity
Repurchase agreements           $       15,143,898                    0.28  %             0.2            $       29,147,463                    2.14  %             0.2
Federal Home Loan Bank
advances                                         -                       -  %               -                       210,000                    2.00  %             3.5
Revolving credit
facilities                                 283,830                    2.95  %             1.1                       300,000                    4.26  %             1.2
Term notes payable                         395,609                    2.95  %             3.5                       394,502                    4.59  %             4.5
Convertible senior notes
(1)                                        286,183                    6.25  %             1.0                       284,954                    6.25  %             2.0
Total                           $       16,109,520                    0.50  %             0.3            $       30,336,919                    2.23  %             0.3


(dollars in thousands)                                         December 31, 2020                                                             December 31, 2019
                                                                                          Weighted Average                                                              Weighted Average
                                                                 Weighted Average            Haircut on                                        Weighted Average            Haircut on
       Collateral Type                Amount Outstanding          Borrowing Rate          Collateral Value          Amount Outstanding          Borrowing Rate          Collateral Value

Agency RMBS                         $        15,089,726                    0.28  %                   4.4  %       $        27,512,526                    2.08  %                   4.1  %
Non-Agency securities                             1,899                    2.33  %                  34.3  %                 1,531,608                    2.90  %                  24.9  %
Agency Derivatives                               52,273                    0.89  %                  21.6  %                    50,714                    2.70  %                  26.4  %

Mortgage servicing rights                       670,439                    2.95  %                  24.6  %                   957,117                    4.19  %                  31.7  %
Mortgage servicing advances                       9,000                    3.26  %                  12.0  %                         -                       -  %                     -  %
Other (1)                                       286,183                    6.25  %                       NA                   284,954                    6.25  %                       NA
Total                               $        16,109,520                    0.50  %                   5.2  %       $        30,336,919                    2.23  %                   6.0  %


____________________

(1)Includes unsecured convertible senior notes paying interest semiannually at a rate of 6.25% per annum on the aggregate principal amount of $287.5 million.


As of December 31, 2020, the debt-to-equity ratio funding our AFS securities,
MSR, servicing advances and Agency Derivatives, which includes unsecured
borrowings under convertible senior notes, was 5.2:1.0. We believe the current
degree of leverage within our portfolio helps ensure that we have access to
unused borrowing capacity, thus supporting our liquidity and the strength of our
balance sheet.
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  Table of     C    ontents
The following table provides a summary of our borrowings under repurchase
agreements, FHLB advances, revolving credit facilities, term notes payable and
convertible senior notes, our net TBA notional amounts and our debt-to-equity
ratios for the three months ended December 31, 2020, and the four immediately
preceding quarters:
(dollars in thousands)
                                                                                                                                                                         End of Period
                                                                                                                        End of Period         End of Period Net            Economic
                                                                        End

of Period Maximum Balance Total Borrowings Long (Short) TBA Debt-to-Equity For the Three Months Ended

                   Quarterly Average             Balance            of Any Month-End         to Equity Ratio            Notional                 Ratio (1)
December 31, 2020                          $       16,431,516          $  16,109,520          $   16,842,273                    5.2:1.0       $    5,197,000                      6.8:1.0
September 30, 2020                         $       17,702,696          $  17,332,697          $   17,896,976                    5.7:1.0       $    6,236,000                      7.7:1.0
June 30, 2020                              $       18,121,689          $  17,938,992          $   18,062,737                    6.3:1.0       $    3,236,000                      7.4:1.0
March 31, 2020                             $       30,142,279          $  18,777,669          $   33,225,403                    6.5:1.0       $    1,761,000                      7.0:1.0
December 31, 2019                          $       27,619,393          $  30,336,919          $   30,336,919                    6.1:1.0       $    7,427,000                      7.5:1.0


____________________

(1)Defined as total borrowings under repurchase agreements, FHLB advances, revolving credit facilities, term notes payable and convertible senior notes, plus implied debt on net TBA notional, divided by total equity.

Equity

The tables below provide details of our changes in stockholders' equity from December 31, 2019 to December 31, 2020 as well as a reconciliation of comprehensive income and GAAP net income to non-GAAP measures.

                                                                                                                  Common Book
                                                                                                                   Value Per
(dollars in millions, except per share amounts)           Book Value           Common Shares Outstanding             Share

Common stockholders' equity at December 31, 2019 $ 3,969.2

               272.9                  $     14.54

Reconciliation of non-GAAP measures to GAAP net loss and Comprehensive loss: Core Earnings, net of tax expense of $0.1 million ?¹? 286.5 Dividends on preferred stock

                                  (75.8)

Core Earnings attributable to common stockholders, net of tax expense of $0.1 million ?¹?

                            210.7

Realized and unrealized gains and losses, net of tax benefit of $35.8 million

                                   (1,916.6)

Other comprehensive loss, net of tax                          (47.8)

Dividend declarations                                        (136.8)

Other                                                           9.7                         0.8

Repurchase of common stock                                     (1.1)                       (0.1)

Issuance of common stock, net of offering costs                 0.4                         0.1

Common stockholders' equity at December 31, 2020 $ 2,087.7

               273.7                  $      7.63
Total preferred stock liquidation preference                1,001.3

Total stockholders' equity at December 31, 2020 $ 3,089.0

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  Table of     C    ontents

                                                                                       Year Ended
                                                                                      December 31,
(in millions)                                                                             2020
Comprehensive loss attributable to common stockholders                             $       (1,753.7)
Adjustment for other comprehensive income attributable to common
stockholders:
Unrealized gains on available-for-sale securities                                              47.8
Net loss attributable to common stockholders                                               (1,705.9)

Adjustments for non-Core Earnings:


Realized losses on investment securities                                                      929.9
Unrealized loss on investment securities                                                       11.5
Provision for credit losses on investment securities                                           58.5
Realized and unrealized losses on mortgage servicing rights                                   681.9

Realized loss on termination or expiration of interest rate swaps, caps and swaptions

                                                                                     387.7
Unrealized gain on interest rate swaps, caps and swaptions                                   (143.1)
Loss on other derivative instruments                                                            3.6
Other income                                                                                   (1.1)

Change in servicing reserves                                                                    2.8
Non-cash equity compensation expense                                                            9.8

Other nonrecurring expenses                                                                     5.2
Restructuring charges                                                                           5.7
Net benefit from income taxes on non-Core Earnings                                            (35.8)
Core Earnings attributable to common stockholders (1)                       

$ 210.7

____________________

(1)Core Earnings is a non-U.S. GAAP measure that we define as comprehensive
(loss) income attributable to common stockholders, excluding "realized and
unrealized gains and losses" (impairment losses, provision for credit losses,
realized and unrealized gains and losses on the aggregate portfolio, reserve
expense for representation and warranty obligations on MSR, non-cash
compensation expense related to restricted common stock, other nonrecurring
expenses and restructuring charges). As defined, Core Earnings includes net
interest income, accrual and settlement of interest on derivatives, dollar roll
income on TBAs, servicing income, net of estimated amortization on MSR,
management fees and recurring cash related operating expenses. Dollar roll
income is the economic equivalent to holding and financing Agency RMBS using
short-term repurchase agreements. Core Earnings provides supplemental
information to assist investors in analyzing the Company's results of operations
and helps facilitate comparisons to industry peers.
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  Table of     C    ontents
U.S. GAAP to Estimated Taxable Income
The following tables provide reconciliations of our GAAP net income (loss) to
our estimated taxable income (loss) split between our REIT and TRSs for the
years ended December 31, 2020 and 2019:
                                                                  Year Ended December 31, 2020
(dollars in millions)                         TRS                REIT             Eliminations           Consolidated

GAAP net (loss) income, pre-tax $ (175.7) $ (1,508.9)

      $       18.8          $    (1,665.8)
State taxes                                    (1.2)               (0.1)                    -                   (1.3)
Adjusted GAAP net (loss) income ,
pre-tax                                      (176.9)           (1,509.0)                 18.8               (1,667.1)
Permanent differences

Intercompany RMBS sales                           -                   -                 (18.8)                 (18.8)

Other permanent differences                     0.2                 1.3                     -                    1.5
Temporary differences

Net accretion of OID and market discount      (48.7)             (148.5)                    -                 (197.2)
Net unrealized gains and losses on
derivatives                                   237.7                38.9                     -                  276.6

Net realized gains and losses on sales
of RMBS                                           -              (247.9)                    -                 (247.9)
Credit loss impairment                            -                60.5                     -                   60.5
Other temporary differences                     2.7                 5.7                     -                    8.4
Capital loss carryforward deferral                -             1,158.5                     -                1,158.5

Estimated taxable income (loss)                15.0              (640.5)                    -                 (625.5)

Dividend paid deduction                           -                   -                     -                      -
Estimated taxable income (loss)
post-dividend deduction                  $     15.0          $   (640.5)         $          -          $      (625.5)


                                                                  Year Ended December 31, 2019
(dollars in millions)                         TRS                 REIT             Eliminations           Consolidated

GAAP net (loss) income, pre-tax $ (75.1) $ 347.1

       $       38.4          $       310.4
State taxes                                     (2.1)               (0.5)                    -                   (2.6)
Adjusted GAAP (loss) net income, pre-tax       (77.2)              346.6                  38.4                  307.8
Permanent differences

Intercompany RMBS sales                            -                   -                 (38.4)                 (38.4)
Dividends from TRSs                                -                50.1                     -                   50.1
Other permanent differences                        -                (8.3)                    -                   (8.3)
Temporary differences

Net accretion of OID and market discount       (39.3)               45.8                     -                    6.5
Net unrealized gains and losses on
derivatives                                    231.0               557.9                     -                  788.9
Other temporary differences                      4.8                20.9                     -                   25.7
Capital loss carryforward (utilized)
deferral                                        (0.1)             (490.6)                    -                 (490.7)
Net operating loss carryforward
(utilized) deferral                            (77.9)              (11.8)                    -                  (89.7)
Estimated taxable income                        41.3               510.6                     -                  551.9

Dividend paid deduction                            -              (510.6)                    -                 (510.6)
Estimated taxable income post-dividend
deduction                                $      41.3          $        -          $          -          $        41.3



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  Table of     C    ontents
The permanent tax differences recorded in 2020 include a difference related to
the intercompany sales of RMBS and a recurring difference in compensation
expense related to restricted stock dividends and vesting. The permanent tax
differences recorded in 2019 include dividends paid from the Company's TRSs to
the REIT, a difference related to the intercompany sales of RMBS and a recurring
difference in compensation expense related to restricted stock dividends and
vesting. Temporary differences recorded in 2020 and 2019 are principally timing
differences between U.S. GAAP and tax accounting related to unrealized gains and
losses from derivative instruments, realized and unrealized gains and losses
from MSR and accretion, amortization from Agency RMBS and non-Agency securities
and changes in reserves related to servicing advances and allowance for credit
losses on certain RMBS.
Change in Accumulated Other Comprehensive Income
With our accounting treatment for AFS securities, unrealized fluctuations in the
market values of AFS securities, excluding Agency interest-only securities, do
not impact our GAAP net (loss) income or taxable income but are recognized on
our consolidated balance sheets as a change in stockholders' equity under
"accumulated other comprehensive income." As a result of this fair value
accounting through stockholders' equity, we expect our net income to have less
significant fluctuations and result in less U.S. GAAP to taxable income timing
differences, than if the portfolio were accounted for as trading instruments.
Dividends
For the year ended December 31, 2020, we declared cash dividends totaling $0.50
per share. As a REIT, we are required to distribute at least 90% of our taxable
income to stockholders, subject to certain distribution requirements. For the
year ended December 31, 2020, our board of directors elected to make cash
distributions even though the REIT incurred a taxable loss for the year. This
loss may be utilized in future tax years to reduce taxable income after
consideration for the dividends paid deduction. As such, temporary differences
between GAAP net income (loss) and taxable income can generate deterioration in
book value on a permanent and temporary basis as taxable income is distributed
that has not been earned for U.S. GAAP purposes.

Liquidity and Capital Resources
Our liquidity and capital resources are managed and forecasted on a daily basis.
We believe this ensures that we have sufficient liquidity to absorb market
events that could negatively impact collateral valuations and result in margin
calls. We also believe that it gives us the flexibility to manage our portfolio
to take advantage of market opportunities.
Our principal sources of cash consist of borrowings under repurchase agreements,
revolving credit facilities, term notes payable, payments of principal and
interest we receive on our target assets, cash generated from our operating
results, and proceeds from capital market transactions. We typically use cash to
repay principal and interest on our borrowings, to purchase our target assets,
to make dividend payments on our capital stock, and to fund our operations.
On March 21, 2019, we completed a public offering of 18,000,000 shares of our
common stock at a price of $13.76 per share. On March 22, 2019, an
additional 2,700,000 shares were sold to the underwriters of the offering
pursuant to an overallotment option. The net proceeds were approximately $284.5
million, after deducting offering expenses of approximately $0.3 million. To the
extent that we raise additional equity capital through capital market
transactions, we anticipate using cash proceeds from such transactions to
purchase our target assets and for other general corporate purposes. Such
general corporate purposes may include the refinancing or repayment of debt, the
repurchase or redemption of common and preferred equity securities, and other
capital expenditures.
As of December 31, 2020, we held $1.4 billion in cash and cash equivalents
available to support our operations; $16.3 billion of AFS securities, MSR, and
derivative assets held at fair value; and $16.1 billion of outstanding debt in
the form of repurchase agreements, borrowings under revolving credit facilities,
term notes payable and convertible senior notes. During the three months ended
December 31, 2020, the debt-to-equity ratio funding our AFS securities, MSR,
servicing advances and Agency Derivatives, which includes unsecured borrowings
under convertible senior notes, decreased from 5.7:1.0 to 5.2:1.0. The decrease
was driven by the repositioning of financing on Agency AFS securities to TBA
positions and a higher equity balance driven by our financial results for the
quarter. During the year ended December 31, 2020, the debt-to-equity ratio
funding our AFS securities, MSR, servicing advances and Agency Derivatives,
which includes unsecured borrowings under convertible senior notes, decreased
from 6.1:1.0 to 5.2:1.0. The decrease was also driven by the repositioning of
financing on Agency AFS securities to TBA positions.
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  Table of     C    ontents
As of December 31, 2020, we held approximately $7.4 million of unpledged Agency
securities and derivatives and $10.4 million of unpledged non-Agency securities.
As a result, we had an overall estimated unused borrowing capacity on unpledged
securities of approximately $13.1 million. As of December 31, 2020, we held
approximately $449.4 million of unpledged MSR and $52.3 million of unpledged
servicing advances. Overall, we had unused committed borrowing capacity on MSR
asset and servicing advance financing facilities of $215.2 million and $191.0
million, respectively. Generally, unused borrowing capacity may be the result of
our election not to utilize certain financing, as well as delays in the timing
in which funding is provided, insufficient collateral or the inability to meet
lenders' eligibility requirements for specific types of asset classes. On a
daily basis, we monitor and forecast our available, or excess, liquidity.
Additionally, we frequently perform shock analyses against various market events
to monitor the adequacy of our excess liquidity. If borrowing rates and/or
collateral requirements change in the near term, we believe we are subject to
less earnings volatility than a more leveraged organization.
During the year ended December 31, 2020, we did not experience any material
issues accessing our funding sources, although the balance sheet capacity of
some counterparties has tightened due to compliance with the Basel III
regulatory capital reform rules as well as the management of perceived risk in
the current market environment due to the COVID-19 pandemic. We expect ongoing
sources of financing to be primarily repurchase agreements, revolving credit
facilities, term notes payable, convertible notes and similar financing
arrangements. We plan to finance our assets with a moderate amount of leverage,
the level of which may vary based upon the particular characteristics of our
portfolio and market conditions.
As of December 31, 2020, we had master repurchase agreements in place with 45
counterparties (lenders), the majority of which are U.S. domiciled financial
institutions, and we continue to evaluate additional counterparties to manage
and optimize counterparty risk. Under our repurchase agreements, we are required
to pledge additional assets as collateral to our lenders when the estimated fair
value of the existing pledged collateral under such agreements declines and such
lenders, through a margin call, demand additional collateral. Lenders generally
make margin calls because of a perceived decline in the value of our assets
collateralizing the repurchase agreements. This may occur following the monthly
principal reduction of assets due to scheduled amortization and prepayments on
the underlying mortgages, or may be caused by changes in market interest rates,
a perceived decline in the market value of the investments and other market
factors. To cover a margin call, we may pledge additional assets or cash. At
maturity, any cash on deposit as collateral is generally applied against the
repurchase agreement balance, thereby reducing the amount borrowed. Should the
value of our assets suddenly decrease, significant margin calls on our
repurchase agreements could result, causing an adverse change in our liquidity
position.
The following table summarizes our repurchase agreements and counterparty
geographical concentration at December 31, 2020 and December 31, 2019:
                                                          December 31, 2020                                                    December 31, 2019
                                        Amount             Net Counterparty          Percent of               Amount            Net Counterparty         Percent of
(dollars in thousands)               Outstanding             Exposure(1)               Funding             Outstanding            Exposure(1)              Funding
North America                      $   9,653,053          $       413,862                  66.2  %       $  16,165,067          $   1,026,474                  57.6  %
Europe (2)                             3,413,584                  117,463                  18.8  %           7,519,258                521,804                  29.3  %
Asia (2)                               2,077,261                   93,865                  15.0  %           5,463,138                234,180                  13.1  %
Total                              $  15,143,898          $       625,190                 100.0  %       $  29,147,463          $   1,782,458                 100.0  %


____________________
(1)Represents the net carrying value of the assets sold under agreements to
repurchase, including accrued interest plus any cash or assets on deposit to
secure the repurchase obligation, less the amount of the repurchase liability,
including accrued interest.
(2)Exposure to European and Asian domiciled banks and their U.S. subsidiaries.

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  Table of     C    ontents
In addition to our master repurchase agreements to fund our Agency and
non-Agency securities, we have one repurchase facility and two revolving credit
facilities that provide short- and long-term financing for our MSR portfolio. We
also have one revolving credit facility that provides long-term financing for
our servicing advances. An overview of the facilities is presented in the table
below:
(dollars in thousands)
                                                                          December 31, 2020
                                                                      Unused                 Unused
                                                Amount               Committed            Uncommitted
    Expiration Date (1)                       Outstanding          Capacity (2)             Capacity             Total Capacity              Eligible Collateral
March 12, 2022                              $    214,830          $    135,170          $     350,000          $       700,000          Mortgage servicing rights
July 16, 2021                               $     60,000          $     80,000          $           -          $       140,000          Mortgage servicing rights
June 21, 2021                               $          -          $          -          $     200,000          $       200,000          Mortgage servicing rights (3)
September 28, 2022                          $      9,000          $    191,000          $           -          $       200,000          Mortgage servicing advances


____________________
(1)The facilities are set to mature on the stated expiration date, unless
extended pursuant to their terms.
(2)Represents unused capacity amounts to which commitment fees are charged.
(3)This repurchase facility is secured by the VFN issued in connection with the
MSR securitization transaction completed on June 27, 2019, which is
collateralized by our MSR.

Through February 19, 2021, our wholly owned subsidiary, TH Insurance, was a
member of the FHLB. As a member of the FHLB, TH Insurance had access to a
variety of products and services offered by the FHLB, including secured
advances. However, we did not have any outstanding secured advances or credit
capacity available as of December 31, 2020.
The ability to borrow from the FHLB was subject to our continued
creditworthiness, pledging of sufficient eligible collateral to secure advances,
and compliance with certain agreements with the FHLB. Each advance required
approval by the FHLB and was secured by collateral in accordance with the FHLB's
credit and collateral guidelines, as may be revised from time to time by the
FHLB. Eligible collateral may include Agency RMBS and certain non-Agency
securities with a rating of A and above.
In January 2016, the FHFA released a final rule regarding membership in the
Federal Home Loan Bank system. Among other effects, the final rule excludes
captive insurers from membership eligibility, including our subsidiary member,
TH Insurance. Since TH Insurance was admitted as a member in 2013, it was
eligible for a membership grace period that ran through February 19, 2021,
during which new advances or renewals that matured beyond the grace period were
prohibited; however, any existing advances that matured beyond this grace period
were permitted to remain in place subject to their terms insofar as we
maintained good standing with the FHLB. Any new advances or renewals occurring
during this time were limited to 40% of TH Insurance's total assets. TH
Insurance's FHLB membership expired on February 19, 2021.
We are subject to a variety of financial covenants under our lending agreements.
The following represent the most restrictive financial covenants across our
lending agreements as of December 31, 2020:
•Total indebtedness to tangible net worth must be less than 8.0:1.0. As of
December 31, 2020, our total indebtedness to tangible net worth, as defined, was
5.3:1.0.
•Cash liquidity must be greater than $200.0 million. As of December 31, 2020,
our liquidity, as defined, was $1.4 billion.
•Net worth must be greater than $1.5 billion or 50% of the highest net worth
during the 24 calendar months prior, whichever is higher. As of December 31,
2020, 50% of the highest net worth during the 24 calendar months prior was $2.6
billion and our net worth, as defined, was $3.1 billion.
We are also subject to additional financial covenants in connection with various
other agreements we enter into in the normal course of our business. We intend
to continue to operate in a manner which complies with all of our financial
covenants.
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  Table of     C    ontents
The following table summarizes assets at carrying values that were pledged or
restricted as collateral for the future payment obligations of repurchase
agreements, FHLB advances, revolving credit facilities, term notes payable and
derivative instruments at December 31, 2020 and December 31, 2019:
                                                      December 31,      

December 31,

     (in thousands)                                       2020             

2019

Available-for-sale securities, at fair value $ 14,633,217 $ 29,802,456


     Mortgage servicing rights, at fair value           1,146,710         1,554,825

     Restricted cash                                    1,126,439           919,010
     Due from counterparties                               21,312           102,365
     Derivative assets, at fair value                      61,557          
 68,874
     Other assets                                          28,540                 -

     Total                                           $ 17,017,775      $ 32,447,530



Although we generally intend to hold our target assets as long-term investments,
we may sell certain of our assets in order to manage our interest rate risk and
liquidity needs, to meet other operating objectives and to adapt to market
conditions. Our Agency RMBS are generally actively traded and thus, in most
circumstances, readily liquid. However, certain of our assets, including MSR,
are subject to longer trade timelines, and, as a result, market conditions could
significantly and adversely affect the liquidity of our assets. Any illiquidity
of our assets may make it difficult for us to sell such assets if the need or
desire arises. Our ability to quickly sell certain assets, such as MSR may be
limited by delays encountered while obtaining certain regulatory approvals
required for such dispositions and may be further limited by delays due to the
time period needed for negotiating transaction documents, conducting diligence,
and complying with regulatory requirements regarding the transfer of such assets
before settlement may occur. Consequently, even if we identify a buyer for our
MSR, there is no assurance that we would be able to quickly sell such assets if
the need or desire arises.
In addition, if we are required to liquidate all or a portion of our portfolio
quickly, we may realize significantly less than the value at which we previously
recorded our assets. Assets that are illiquid are more difficult to finance, and
to the extent that we use leverage to finance assets that become illiquid, we
may lose that leverage or have it reduced. Assets tend to become less liquid
during times of financial stress, which is often the time that liquidity is most
needed. As a result, our ability to sell assets or vary our portfolio in
response to changes in economic and other conditions may be limited by liquidity
constraints, which could adversely affect our results of operations and
financial condition.
We cannot predict the timing and impact of future sales of our assets, if any.
Because many of our assets are financed with repurchase agreements, revolving
credit facilities and term notes payable, a significant portion of the proceeds
from sales of our assets (if any), prepayments and scheduled amortization are
used to repay balances under these financing sources.
The following table provides the maturities of our repurchase agreements, FHLB
advances, revolving credit facilities, term notes payable and convertible senior
notes as of December 31, 2020 and December 31, 2019:
                                         December 31,      December 31,
                  (in thousands)             2020              2019
                  Within 30 days        $  5,370,506      $  5,465,916
                  30 to 59 days            4,292,861         6,300,372
                  60 to 89 days            2,062,234         6,687,285
                  90 to 119 days           1,610,198         4,740,217
                  120 to 364 days          1,868,099         6,113,673
                  One to three years         510,013           584,954
                  Three to five years        395,609           394,502
                  Five to ten years                -                 -
                  Ten years and over               -            50,000

                  Total                 $ 16,109,520      $ 30,336,919



                                       58
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  Table of     C    ontents
For the year ended December 31, 2020, our restricted and unrestricted cash
balance increased approximately $1.0 billion to $2.6 billion at December 31,
2020. The cash movements can be summarized by the following:
•Cash flows from operating activities. For the year ended December 31, 2020,
operating activities increased our cash balances by approximately $0.6 billion,
primarily driven by our financial results for the year.
•Cash flows from investing activities. For the year ended December 31, 2020,
investing activities increased our cash balances by approximately $14.9 billion,
primarily driven by proceeds from sales of and principal payments on AFS
securities, offset by purchases of AFS securities and MSR.
•Cash flows from financing activities. For the year ended December 31, 2020,
financing activities decreased our cash balance by approximately $14.5 billion,
primarily driven by decreases in repurchase agreements as a result of sales of
and principal payments on AFS securities.

Off-Balance Sheet Arrangements
We have not participated in transactions that create relationships with
unconsolidated entities or financial partnerships which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. Further, we have not guaranteed
any obligations of unconsolidated entities or entered into any commitment or
intent to provide funding to any such entities.

Aggregate Contractual Obligations
The following table summarizes the effect on our liquidity and cash flows from
contractual obligations for repurchase agreements, revolving credit facilities,
convertible senior notes, interest expense on borrowings and our non-cancelable
office leases, net of contractual subleases:
                                                                       Due During the Year Ended December 31,
(in thousands)                2021                 2022              2023             2024              2025             Thereafter              Total
Repurchase agreements    $ 15,143,898          $       -          $     -          $      -          $      -          $         -          $ 15,143,898

Revolving credit
facilities                     60,000            223,830                -                 -                 -                    -               283,830
Convertible senior notes            -            286,183                -                 -                 -                    -               286,183
Interest expense on
borrowings(1)                  31,789              2,055                -                 -                 -                    -                33,844
Long-term operating
lease obligations               1,751              1,259              501                 -                 -                    -                 3,511
Total                    $ 15,237,438          $ 513,327          $   501          $      -          $      -          $         -          $ 15,751,266


____________________

(1)Interest expense on borrowings calculated based on rates at December 31, 2020.


We are party to contracts that contain a variety of indemnification obligations,
principally with brokers, underwriters, counterparties to lending agreements and
investors in the RMBS we issued in connection with our previous residential
mortgage loan securitization transactions, the term notes we issued in
connection with our MSR securitization and the loans underlying our MSR. The
maximum potential future payment amount we could be required to pay under these
indemnification obligations may be unlimited.

Recently Issued Accounting Standards
Refer to Note 2 - Basis of Presentation and Significant Accounting Policies of
the notes to the consolidated financial statements included in Item 8 of this
Form 10-K.

Inflation

Substantially all of our assets and liabilities are financial in nature. As a
result, changes in interest rates and other factors impact our performance far
more than does inflation, although inflation rates can often have a meaningful
influence over the direction of interest rates. Our financial statements are
prepared in accordance with U.S. GAAP and dividends are based upon net ordinary
income and capital gains as calculated for tax purposes; in each case, our
results of operations and reported assets, liabilities and equity are measured
with reference to historical cost or fair value without considering inflation.
                                       59

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Table of C ontents


Other Matters
We intend to conduct our business so as to maintain our exempt status under, and
not to become regulated as, an investment company for purposes of the 1940 Act.
If we failed to maintain our exempt status under the 1940 Act and became
regulated as an investment company, our ability to, among other things, use
leverage would be substantially reduced and, as a result, we would be unable to
conduct our business as described in Item 1, "Business - Other
Business - Regulation" of this Annual Report on Form 10-K. Accordingly, we
monitor our compliance with both the 55% Test and the 80% Tests of the 1940 Act
in order to maintain our exempt status. As of December 31, 2020, we determined
that we maintained compliance with both the 55% Test and the 80% Test
requirements.
We calculate that at least 75% of our assets were qualified REIT assets, as
defined in the Code for the year ended December 31, 2020. We also calculate that
our revenue qualified for the 75% source of income test and for the 95% source
of income test rules for the year ended December 31, 2020. Consequently, we met
the REIT income and asset tests. We also met all REIT requirements regarding the
ownership of our common stock and the distribution of our net income. Therefore,
for the year ended December 31, 2020, we believe that we qualified as a REIT
under the Code.

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