# TWO HARBORS INVESTMENT CORP. (TWO) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TWO HARBORS INVESTMENT CORP.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1465740/000146574023000055/two-20221231.htm
Accession: 0001465740-23-000055
Filing date: 2023-02-28
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TWO/
All MD&A years: /company/TWO/mda/
Previous year: /company/TWO/mda/fy2021/ (FY 2021)
Next year: /company/TWO/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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, 2021.

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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 a U.S. government agency, such as the Government National Mortgage Association (or Ginnie Mae), or a U.S. government sponsored enterprise, or GSE, such as the Federal National Mortgage Association (or Fannie Mae) or the Federal Home Loan Mortgage Corporation (or Freddie Mac);

•MSR; and

•Other financial assets comprising approximately 5% to 10% of the portfolio.

Our Agency RMBS portfolio is comprised primarily of 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, 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.

On August 2, 2022, Matrix Financial Services Corporation, or Matrix, one of our wholly owned subsidiaries, entered into a definitive stock purchase agreement to acquire RoundPoint Mortgage Servicing Corporation, or RoundPoint, from Freedom Mortgage Corporation. In connection with the acquisition, Matrix has agreed to pay a purchase price upon closing in an amount equal to the tangible net book value of RoundPoint, plus a premium amount of $10.5 million, subject to certain additional post-closing adjustments. In connection with the transaction, RoundPoint will divest its retail origination business as well as its RPX servicing exchange platform. Matrix also agreed to engage RoundPoint as a subservicer prior to the closing date and began transferring loans to RoundPoint in the fourth quarter of 2022. Upon closing, all servicing licenses and operational capabilities will remain with RoundPoint, and RoundPoint will become a wholly owned subsidiary of Matrix. The parties expect to close the transaction in 2023, subject to the satisfaction of customary closing conditions and the receipt of required regulatory and GSE approvals.

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For the three months ended December 31, 2022, our net spread realized on the portfolio was lower than recent quarters due primarily to higher cost of financing due to rising interest rates, offset by higher coupon and lower amortization on Agency RMBS due to slower prepayment speeds and the higher yielding MSR making up a larger proportion of the portfolio. The following table provides the average portfolio yield and cost of financing on our assets for the three months ended December 31, 2022, and the four immediately preceding quarters:

[[GREPCENT_TABLE]]
[["","Three Months Ended"],["","December 31, 2022","","September 30, 2022","","June 30, 2022","","March 31, 2022","","December 31, 2021"],["Average portfolio yield (1)","4.92%","","4.61%","","4.39%","","3.90%","","3.72%"],["Average cost of financing (2)","3.95%","","2.84%","","1.13%","","1.01%","","0.73%"],["Net spread","0.97%","","1.77%","","3.26%","","2.89%","","2.99%"]]
[[/GREPCENT_TABLE]]

____________________

(1)Average portfolio yield includes interest income on Agency RMBS and non-Agency securities and MSR servicing income, net of estimated amortization, and servicing expenses. Beginning with the three months ended June 30, 2022, average portfolio yield also includes the implied asset yield portion of dollar roll income on TBAs. MSR estimated amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the portfolio, which is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements.

(2)Average cost of financing includes interest expense and amortization of deferred debt issuance costs on borrowings under repurchase agreements (excluding those collateralized by U.S. Treasuries), revolving credit facilities, term notes payable and convertible senior notes and interest spread income/expense and amortization of upfront payments made or received upon entering into interest rate swap agreements. Beginning with the three months ended June 30, 2022, average cost of financing also includes the implied financing benefit/cost portion of dollar roll income on TBAs. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. Beginning with the three months ended September 30, 2022, average cost of financing also includes U.S. Treasury futures income, which represents the economic equivalent to holding and financing a relevant cheapest-to-deliver U.S. Treasury note or bond using short-term repurchase agreements.

We seek to deploy moderate leverage as part of our investment strategy. We generally finance our Agency RMBS through short- and long-term borrowings structured as repurchase agreements. We also finance our MSR through revolving credit facilities, repurchase agreements, 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. Our debt-to-equity ratio is also 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. 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 - Financing” 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 operational capabilities to invest in MSR, 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 directly service residential mortgage loans, certain of our subsidiaries have obtained the requisite licenses and approvals to own and manage MSR.

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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.

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 are significantly affected by fluctuations in market prices. At December 31, 2022, approximately 80.1% of our total assets, or $10.8 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 AFS securities for which we have elected the fair value option, is recorded as a component of accumulated other comprehensive (loss) income and does not impact our reported income (loss) for U.S. GAAP purposes, or GAAP net income (loss). However, 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., Agency to-be-announced securities, or TBAs, options on TBAs, futures, options on futures, and inverse interest-only securities), which are accounted for as derivative trading instruments under U.S. GAAP, fair value option elected AFS 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 Agency P&I 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 multiple 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.

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 (loss) 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. At December 31, 2022, 23.1% of our total assets were classified as Level 3 fair value assets.

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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. 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. 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. Our most critical accounting policies involve our fair valuation of AFS securities, MSR and derivative instruments.

The methods used by us to estimate fair value for AFS securities, MSR and derivative instruments 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 prices obtained from third-party pricing vendors or broker quotes deemed indicative of market activity and current as of the measurement date, which in periods of market dislocation, may have reduced transparency. For more information on our fair value measurements, see Note 10 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K. Additionally, the key economic assumptions and sensitivity of the fair value of MSR to immediate adverse changes in these assumptions are presented in Note 5 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.

Market Conditions and Outlook

Fixed-income volatility remained high throughout the fourth quarter of 2022, and the Federal Reserve, or Fed, continued to raise short-term rates to combat inflation, despite lower than expected inflation readings that provided some evidence that inflation was easing in response to prior rate hikes. During the quarter, the Fed raised the Federal Funds target rate by 150 basis points (75 basis points in each of November and December), in excess of the 116 basis points priced into the market at the beginning of the quarter. By December 31, 2022, the market’s expectation for where short-term rates will be once the Fed finishes hiking rose by 43 basis points, to 4.97% in June 2023. Though the Fed raised rates more than expected and the market’s expectations for forward rates continued to move higher, the deviations were smaller than in the prior quarter, indicating that market expectations were more closely aligned with the Fed. Interest rates on U.S. Treasuries rose slightly in the fourth quarter and the yield curve flattened, with the 2-year U.S. Treasury rate increasing by 15 basis points to 4.43% and the 10-year U.S. Treasury rate increasing by 5 basis points to 3.88%. The Standard and Poor’s 500 Index, or the S&P 500, gained about 7% after losing close to 25% through the first three quarters of the year.

Interest rate volatility and mortgage spreads peaked in October, then declined into quarter end. The better than expected CPI data (first reported on November 10th and then on December 13th) encouraged market participants that the Fed’s actions were working and provided greater confidence that further rate hikes, while expected, were nearing an end. Spreads for mortgages ratcheted tighter in November, displacing July as the best month on record for the excess return of the Bloomberg U.S. MBS Index, and contributing to the seventh best quarterly performance in history. Nominal and option-adjusted spreads for current coupon RMBS had tightened by 30 and 37 basis points, respectively, to 128 and 30 basis points. Thirty-year mortgage rates declined by 28 basis points to finish at 6.42%, though still 330 basis points higher for the year, driving the MBS Refinance Index to its lowest level in two decades.

Funding markets for RMBS and MSR continued to function well. Spreads on repurchase agreement financing for RMBS increased marginally to SOFR plus 11 to 17 basis points with no signs of balance sheet stress.

We continue to believe that inflation will subside and expect volatility to decline in the first quarter of 2023, given the historically aggressive rate hikes by the Fed. Though mortgage spreads tightened over the quarter, they are still near the 90th percentile of long-term averages, and on a levered basis generate attractive long-term returns. Furthermore, should volatility fall, we expect mortgage spreads to tighten, adding to our portfolio’s returns. With regard to MSR, continued slow prepayment rates on our existing portfolio should generate attractive long-term returns. Owing to a supply/demand imbalance driven by lower origination volumes and the decision of several market participants to step back from the MSR market, we intend to opportunistically allocate capital to acquire MSR at attractive prices in the first half of 2023. Taking all this into account, we are optimistic that our paired Agency RMBS and MSR portfolio strategy will deliver strong results.

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The following table provides the carrying value of our investment portfolio by product type:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","December 31, 2022","","December 31, 2021"],["Agency RMBS","$","7,653,576","","","71.0","%","","$","7,149,399","","","76.1","%"],["Mortgage servicing rights","2,984,937","","","27.7","%","","2,191,578","","","23.3","%"],["Agency Derivatives","15,176","","","0.1","%","","40,911","","","0.5","%"],["Non-Agency securities","125,158","","","1.2","%","","12,304","","","0.1","%"],["Total","$","10,778,847","","","","","$","9,394,192"]]
[[/GREPCENT_TABLE]]

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. During periods of decreasing interest rates with rising prepayment speeds, the market value of our Agency pools generally increases and the market value of our interest-only securities and MSR generally decreases. The inverse relationship occurs when interest rates rise and prepayments fall. Although 30-year mortgage rates fell modestly during the fourth quarter of 2022, most mortgages continue to have large refinancing disincentive. Reported prepayment speeds continued to decline during the quarter reflecting the drop in activity in the housing market owing to seasonality and a slowing economy. Looking forward, prepayment speeds are expected to slow further in the first quarter of 2023 as seasonal factors plunge to their lowest annual levels. In addition to changes in interest rates, changes in home price performance, key employment metrics and government programs, among other macroeconomic factors, can affect prepayment speeds. We believe our portfolio management approach, including our asset selection process, positions us to respond to a variety of market scenarios. 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.

The following table provides the three-month average constant prepayment rate, or CPR, experienced by our Agency RMBS and MSR during the three months ended December 31, 2022, and the four immediately preceding quarters:

[[GREPCENT_TABLE]]
[["","","Three Months Ended"],["","","December 31, 2022","","September 30, 2022","","June 30, 2022","","March 31, 2022","","December 31, 2021"],["Agency RMBS","","5.9","%","","9.1","%","","14.2","%","","17.3","%","","27.7","%"],["Mortgage servicing rights","","4.6","%","","6.9","%","","10.0","%","","14.2","%","","22.1","%"]]
[[/GREPCENT_TABLE]]

Our Agency RMBS are primarily collateralized by pools of fixed-rate mortgage loans. 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, loans secured by investor-owned properties 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 portfolio 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.

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The following tables provide the carrying value of our Agency RMBS portfolio by underlying mortgage loan rate type:

[[GREPCENT_TABLE]]
[["","December 31, 2022"],["(dollars in thousands)","Principal/ Current Face","","Carrying Value","","","","Weighted Average CPR (1)","","% Prepayment Protected","","Gross Weighted Average Coupon Rate","","Amortized Cost","","Allowance for Credit Losses","","Weighted Average Loan Age (months)"],["Agency RMBS AFS:"],["30-Year Fixed"],["\u2264 2.5%","$","\u2014","","","$","\u2014","","","","","\u2014","%","","\u2014","%","","\u2014","%","","$","\u2014","","","$","\u2014","","","\u2014"],["3.0%","\u2014","","","\u2014","","","","","\u2014","%","","\u2014","%","","\u2014","%","","\u2014","","","\u2014","","","\u2014"],["3.5%","\u2014","","","\u2014","","","","","\u2014","%","","\u2014","%","","\u2014","%","","\u2014","","","\u2014","","","\u2014"],["4.0%","1,459,733","","","1,382,120","","","","","3.9","%","","100.0","%","","4.6","%","","1,474,169","","","\u2014","","","20"],["4.5%","3,087,310","","","3,006,356","","","","","5.9","%","","100.0","%","","5.2","%","","3,152,567","","","\u2014","","","25"],["5.0%","2,439,709","","","2,430,470","","","","","6.5","%","","100.0","%","","5.7","%","","2,506,339","","","\u2014","","","10"],["\u2265 5.5%","411,899","","","419,956","","","","","3.9","%","","98.8","%","","6.5","%","","424,199","","","\u2014","","","36"],["","7,398,651","","","7,238,902","","","","","5.6","%","","99.9","%","","5.3","%","","7,557,274","","","\u2014","","","19"],["Other P&I","382,626","","","378,558","","","","","1.3","%","","88.5","%","","5.4","%","","379,837","","","\u2014","","","30"],["Interest-only","963,865","","","36,116","","","","","8.1","%","","\u2014","%","","4.9","%","","45,882","","","(6,785)","","","143"],["Agency Derivatives","196,457","","","15,176","","","","","8.4","%","","\u2014","%","","6.7","%","","20,696","","","\u2014","","","216"],["Total Agency RMBS","$","8,941,599","","","$","7,668,752","","","","","","","98.7","%","","","","$","8,003,689","","","$","(6,785)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","December 31, 2021"],["(dollars in thousands)","Principal/ Current Face","","Carrying Value","","","","Weighted Average CPR (1)","","% Prepayment Protected","","Gross Weighted Average Coupon Rate","","Amortized Cost","","Allowance for Credit Losses","","Weighted Average Loan Age (months)"],["Agency RMBS AFS:"],["30-Year Fixed"],["\u2264 2.5%","$","1,243,928","","","$","1,271,382","","","","","5.9","%","","\u2014","%","","3.3","%","","$","1,272,323","","","$","\u2014","","","3"],["3.0%","1,316,662","","","1,384,176","","","","","9.6","%","","100.0","%","","3.7","%","","1,381,936","","","\u2014","","","8"],["3.5%","739,922","","","789,499","","","","","27.3","%","","100.0","%","","4.2","%","","769,989","","","\u2014","","","29"],["4.0%","1,421,793","","","1,543,595","","","","","26.5","%","","100.0","%","","4.6","%","","1,478,444","","","\u2014","","","49"],["4.5%","1,307,504","","","1,435,877","","","","","27.7","%","","100.0","%","","5.0","%","","1,373,076","","","\u2014","","","47"],["5.0%","231,941","","","255,059","","","","","44.9","%","","100.0","%","","5.7","%","","244,888","","","\u2014","","","47"],["\u2265 5.5%","93,544","","","106,687","","","","","15.7","%","","93.1","%","","6.4","%","","99,655","","","\u2014","","","172"],["","6,355,294","","","6,786,275","","","","","20.5","%","","81.2","%","","4.3","%","","6,620,311","","","\u2014","","","31"],["Other P&I","56,069","","","62,228","","","","","53.9","%","","\u2014","%","","6.5","%","","61,739","","","\u2014","","","224"],["Interest-only","3,198,447","","","300,896","","","","","20.2","%","","\u2014","%","","3.6","%","","305,577","","","(12,851)","","","47"],["Agency Derivatives","247,101","","","40,911","","","","","18.6","%","","\u2014","%","","6.7","%","","33,237","","","\u2014","","","206"],["Total Agency RMBS","$","9,856,911","","","$","7,190,310","","","","","","","76.6","%","","","","$","7,020,864","","","$","(12,851)"]]
[[/GREPCENT_TABLE]]

____________________

(1)Weighted average actual one-month CPR released at the beginning of the following month based on RMBS held as of the preceding month-end.

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Our MSR business offers attractive spreads and has many risk reducing characteristics when paired with our Agency RMBS portfolio. The following table summarizes activity related to the unpaid principal balance, or UPB, of loans underlying our MSR portfolio for the three months ended December 31, 2022, and the four immediately preceding quarters:

[[GREPCENT_TABLE]]
[["","","Three Months Ended"],["(in thousands)","","December 31, 2022","","September 30, 2022","","June 30, 2022","","March 31, 2022","","December 31, 2021"],["UPB at beginning of period","","$","206,613,560","","","$","227,074,413","","","$","229,415,913","","","$","193,770,566","","","$","194,393,942"],["Purchases of mortgage servicing rights","","2,677,674","","","4,448,870","","","5,720,323","","","45,136,996","","","13,562,240"],["Sales of mortgage servicing rights","","\u2014","","","(19,807,427)","","","\u2014","","","\u2014","","","9,065"],["Scheduled payments","","(1,538,046)","","","(1,564,465)","","","(1,697,237)","","","(1,572,871)","","","(1,441,835)"],["Prepaid","","(2,439,936)","","","(3,709,416)","","","(6,026,461)","","","(8,249,432)","","","(11,966,741)"],["Other changes","","(436,559)","","","171,585","","","(338,125)","","","330,654","","","(786,105)"],["UPB at end of period","","$","204,876,693","","","$","206,613,560","","","$","227,074,413","","","$","229,415,913","","","$","193,770,566"]]
[[/GREPCENT_TABLE]]

Counterparty exposure and leverage ratio

We monitor counterparty exposure amongst 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, 2022, we had entered into repurchase agreements with 39 counterparties, 20 of which had outstanding balances. 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, 2022, the debt-to-equity ratio funding our AFS securities, MSR and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, was 4.4:1.0.

As of December 31, 2022, we held $683.5 million in cash and cash equivalents, approximately $344.6 million of unpledged AFS securities and Agency derivatives, which includes $343.0 million of unsettled Agency RMBS purchases, and $7.6 million of unpledged non-Agency securities. As a result, we had an overall estimated unused borrowing capacity on our unpledged securities of approximately $6.1 million. As of December 31, 2022, we held approximately $26.9 million of unpledged MSR and $51.2 million of unpledged servicing advances. Overall, on December 31, 2022, we had $293.8 million unused committed and $402.3 million unused uncommitted borrowing capacity on MSR financing facilities, and $176.2 million in unused committed borrowing capacity on servicing advance financing facilities. 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.

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LIBOR transition

The London Interbank Offered Rate, or LIBOR, has been 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. On March 5, 2021, Intercontinental Exchange Inc. announced that ICE Benchmark Administration Limited, the administrator of LIBOR, intends to stop publication of the majority of USD-LIBOR tenors on 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. Numerous industry wide and company-specific transitions as it relates to derivatives and cash markets exposed to LIBOR are in process, if not complete. The majority of our material contracts that are or were indexed to USD-LIBOR have been amended to transition to an alternative benchmark, where necessary. As of December 31, 2022, only the Company’s term notes incorporate LIBOR as the referenced rate and mature after the phase-out of LIBOR. However, the related agreements have provisions in place that provide for an alternative to LIBOR upon its phase-out. The Company has no other financing arrangements or derivative instruments that incorporate LIBOR as the referenced rate as of December 31, 2022. Additionally, each series of our fixed-to-floating preferred stock that becomes redeemable at the time the stock begins to pay a LIBOR-based rate has existing LIBOR cessation fallback language.

Summary of Results of Operations and Financial Condition

All per share amounts, common shares outstanding and common equity-based awards for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.

Our book value per common share for U.S. GAAP purposes was $17.72 at December 31, 2022, an increase from $16.42 per common share at September 30, 2022, and a decrease from $23.47 per common share at December 31, 2021. The rise in book value for the three months ended December 31, 2022 was primarily the result of mortgage spread tightening, as well as the repurchase of 2,957,950 shares of preferred stock, which contributed approximately $0.26 to book value per common share. The decline in book value for the year ended December 31, 2022 was primarily the result of significant widening in mortgage spreads during the first nine months of the year, as the market reacted unfavorably to higher than expected inflation and aggressively hawkish words and actions from the Fed as it removed accommodation, offset by the positive fourth quarter developments noted above.

Our GAAP net loss attributable to common stockholders was $262.4 million and GAAP net income attributable to common stockholders was $186.8 million ($(3.04) and $2.13 per diluted weighted average share) for the three and twelve months ended December 31, 2022, respectively, as compared to GAAP net loss attributable to common stockholders of $15.0 million and GAAP net income attributable to common stockholders of $128.8 million ($(0.18) and $1.72 per diluted weighted average share) for the three and twelve months ended December 31, 2021, respectively.

With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding certain AFS securities for which we have elected the fair value option and securities with an allowance for credit losses, do not impact our GAAP net income (loss) or taxable income but are recognized on our consolidated balance sheets as a change in stockholders’ equity under “accumulated other comprehensive (loss) income.” For the three months ended December 31, 2022, net unrealized gains on AFS securities recognized as other comprehensive income were $106.7 million, which was the result of mortgage spread tightening. For the year ended December 31, 2022, net unrealized losses on AFS securities recognized as other comprehensive loss were $893.6 million, which was driven by significant underperformance of fixed income markets in general and widening mortgage spreads, particularly in the third quarter. Additionally, we reclassify unrealized gains and losses on AFS securities in accumulated other comprehensive (loss) income to net income (loss) upon the recognition of any realized gains and losses on sales as individual securities are sold. For the three and twelve months ended December 31, 2022 we reclassified $316.0 million and $428.5 million in unrealized losses, respectively, on sold AFS securities from accumulated other comprehensive (loss) income to (loss) gain on investment securities on the consolidated statements of comprehensive loss.

In total, we recognized other comprehensive income of $422.7 million for the three months ended December 31, 2022 and other comprehensive loss of $465.1 million for the year ended December 31, 2022. Combined with GAAP net loss attributable to common stockholders of $262.4 million and GAAP net income attributable to common stockholders of $186.8 million for the three and twelve months ended December 31, 2022, respectively, this resulted in comprehensive income attributable to common stockholders of $160.2 million and comprehensive loss attributable to common stockholders of $278.3 million for the three and twelve months ended December 31, 2022, respectively.

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The following tables present the components of our comprehensive loss for the three and twelve months ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["(in thousands, except share data)","","Three Months Ended","","Year Ended"],["Income Statement Data:","","December 31,","","December 31,"],["","","2022","","2021","","2022","","2021"],["","","(unaudited)"],["Interest income:"],["Available-for-sale securities","","$","83,712","","","$","32,729","","","$","272,230","","","$","167,310"],["Other","","15,591","","","276","","","23,310","","","1,287"],["Total interest income","","99,303","","","33,005","","","295,540","","","168,597"],["Interest expense:"],["Repurchase agreements","","81,975","","","4,562","","","167,455","","","25,774"],["Revolving credit facilities","","21,854","","","5,050","","","51,814","","","22,425"],["Term notes payable","","6,906","","","3,251","","","19,514","","","12,936"],["Convertible senior notes","","4,892","","","7,295","","","19,612","","","28,038"],["Total interest expense","","115,627","","","20,158","","","258,395","","","89,173"],["Net interest (expense) income","","(16,324)","","","12,847","","","37,145","","","79,424"],["Other (loss) income:"],["(Loss) gain on investment securities","","(347,450)","","","1,626","","","(603,937)","","","121,617"],["Servicing income","","160,926","","","125,511","","","603,911","","","468,406"],["(Loss) gain on servicing asset","","(64,085)","","","(131,828)","","","425,376","","","(114,941)"],["Gain on interest rate swap and swaption agreements","","\u2014","","","36,989","","","29,499","","","42,091"],["Gain (loss) on other derivative instruments","","53,301","","","(11,565)","","","9,310","","","(251,283)"],["Other income (loss)","","112","","","1,856","","","(5)","","","(3,845)"],["Total other (loss) income","","(197,196)","","","22,589","","","464,154","","","262,045"],["Expenses:"],["Servicing expenses","","25,272","","","21,582","","","94,119","","","86,250"],["Compensation and benefits","","7,411","","","6,396","","","40,723","","","35,041"],["Other operating expenses","","15,540","","","6,648","","","42,005","","","28,759"],["Total expenses","","48,223","","","34,626","","","176,847","","","150,050"],["(Loss) income before income taxes","","(261,743)","","","810","","","324,452","","","191,419"],["Provision for income taxes","","8,480","","","2,104","","","104,213","","","4,192"],["Net (loss) income","","(270,223)","","","(1,294)","","","220,239","","","187,227"],["Dividends on preferred stock","","(12,365)","","","(13,747)","","","(53,607)","","","(58,458)"],["Gain on repurchase and retirement of preferred stock","","20,149","","","\u2014","","","20,149","","","\u2014"],["Net (loss) income attributable to common stockholders","","$","(262,439)","","","$","(15,041)","","","$","186,781","","","$","128,769"],["Basic (loss) earnings per weighted average common share","","$","(3.04)","","","$","(0.18)","","","$","2.15","","","$","1.72"],["Diluted (loss) earnings per weighted average common share","","$","(3.04)","","","$","(0.18)","","","$","2.13","","","$","1.72"],["Dividends declared per common share","","$","0.60","","","$","0.68","","","$","2.64","","","$","2.72"],["Weighted average number of shares of common stock:"],["Basic","","86,391,405","","","83,775,184","","","86,179,418","","","74,443,000"],["Diluted","","86,391,405","","","83,775,184","","","96,076,175","","","74,510,884"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["(in thousands)","","Three Months Ended","","Year Ended"],["Income Statement Data:","","December 31,","","December 31,"],["","","2022","","2021","","2022","","2021"],["","","(unaudited)"],["Comprehensive income (loss):"],["Net (loss) income","","$","(270,223)","","","$","(1,294)","","","$","220,239","","","$","187,227"],["Other comprehensive income (loss):"],["Unrealized gain (loss) on available-for-sale securities","","422,672","","","(113,553)","","","(465,057)","","","(455,255)"],["Other comprehensive income (loss)","","422,672","","","(113,553)","","","(465,057)","","","(455,255)"],["Comprehensive income (loss)","","152,449","","","(114,847)","","","(244,818)","","","(268,028)"],["Dividends on preferred stock","","(12,365)","","","(13,747)","","","(53,607)","","","(58,458)"],["Gain on repurchase and retirement of preferred stock","","20,149","","","\u2014","","","20,149","","","\u2014"],["Comprehensive income (loss) attributable to common stockholders","","$","160,233","","","$","(128,594)","","","$","(278,276)","","","$","(326,486)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(in thousands)","","December 31, 2022","","December 31, 2021"],["Balance Sheet Data:"],["Available-for-sale securities","","$","7,778,734","","","$","7,161,703"],["Mortgage servicing rights","","$","2,984,937","","","$","2,191,578"],["Total assets","","$","13,466,160","","","$","12,114,305"],["Repurchase agreements","","$","8,603,011","","","$","7,656,445"],["Revolving credit facilities","","$","1,118,831","","","$","420,761"],["Term notes payable","","$","398,011","","","$","396,776"],["Convertible senior notes","","$","282,496","","","$","424,827"],["Total stockholders\u2019 equity","","$","2,183,525","","","$","2,743,953"]]
[[/GREPCENT_TABLE]]

Results of Operations

The following analysis focuses on financial results during the three and twelve months ended December 31, 2022 and 2021. The analysis of our financial results during the three and twelve months ended December 31, 2021 and 2020 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, 2021, which analysis is incorporated by reference.

Interest Income

Interest income increased from $33.0 million and $168.6 million for the three and twelve months ended December 31, 2021, respectively, to $99.3 million and $295.5 million for the same periods in 2022 due to lower amortization recognized on Agency RMBS due to slower prepayments, higher interest on cash balances as a result of the higher interest rate environment and increased use of reverse repurchase agreements. Also contributing to the increase for the three months ended December 31, 2022, as compared to the same period in 2021, was an increase in average AFS securities average amortized cost held due to net purchases. However, for the year ended December 31, 2022, as compared to the same period in 2021, the increase was offset by a decrease in average AFS securities average amortized cost held due to net sales.

Interest Expense

Interest expense increased from $20.2 million and $89.2 million for the three and twelve months ended December 31, 2021, respectively, to $115.6 million and $258.4 million for the same periods in 2022 due primarily to the higher interest rate environment as well as an increase in financing on MSR and Agency RMBS.

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Net Interest Income

The following tables present the components of interest income and average net asset yield earned by asset type, the components of interest expense and average cost of funds on borrowings incurred by collateral type, and net interest income and average net interest spread for the three and twelve months ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Three Months Ended December 31, 2022","","Year Ended December 31, 2022"],["(dollars in thousands)","Average Balance (1)","","Interest Income/Expense","","Net Yield/Cost of Funds","","Average Balance (1)","","Interest Income/Expense","","Net Yield/Cost of Funds"],["Interest-earning assets:"],["Available-for-sale securities","$","8,118,269","","","$","83,712","","","4.1","%","","$","7,997,618","","","$","272,230","","","3.4","%"],["Reverse repurchase agreements","743,925","","","7,109","","","3.8","%","","311,844","","","8,469","","","2.7","%"],["Other","\u2014","","","8,482","","","\u2014","%","","\u2014","","","14,841","","","\u2014","%"],["Total interest income/net asset yield","$","8,862,194","","","$","99,303","","","4.5","%","","$","8,309,462","","","$","295,540","","","3.6","%"],["Interest-bearing liabilities:"],["Borrowings collateralized by:"],["Available-for-sale securities","$","7,664,204","","","$","68,627","","","3.6","%","","$","7,804,563","","","$","138,138","","","1.8","%"],["Agency Derivatives (2)","14,618","","","155","","","4.2","%","","24,553","","","438","","","1.8","%"],["Mortgage servicing rights and advances (3)","1,917,069","","","36,938","","","7.7","%","","1,620,847","","","95,192","","","5.9","%"],["U.S. Treasuries (4)","493,872","","","5,015","","","4.1","%","","123,468","","","5,015","","","4.1","%"],["Unsecured borrowings:"],["Convertible senior notes","282,363","","","4,892","","","6.9","%","","287,399","","","19,612","","","6.8","%"],["Total interest expense/cost of funds","$","10,372,126","","","$","115,627","","","4.5","%","","$","9,860,830","","","$","258,395","","","2.6","%"],["Net interest (expense) income/spread","","","$","(16,324)","","","\u2014","%","","","","$","37,145","","","1.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Three Months Ended December 31, 2021","","Year Ended December 31, 2021"],["(dollars in thousands)","Average Balance (1)","","Interest Income/Expense","","Net Yield/Cost of Funds","","Average Balance (1)","","Interest Income/Expense","","Net Yield/Cost of Funds"],["Interest-earning assets"],["Available-for-sale securities","$","6,067,568","","","$","32,729","","","2.2","%","","$","8,450,440","","","$","167,310","","","2.0","%"],["Reverse repurchase agreements","111,209","","","1","","","\u2014","%","","89,011","","","7","","","\u2014","%"],["Other","\u2014","","","275","","","\u2014","%","","\u2014","","","1,280","","","\u2014","%"],["Total interest income/net asset yield","$","6,178,777","","","$","33,005","","","2.1","%","","$","8,539,451","","","$","168,597","","","2.0","%"],["Interest-bearing liabilities"],["Borrowings collateralized by:"],["Available-for-sale securities","$","6,503,608","","","$","2,911","","","0.2","%","","$","9,098,301","","","$","20,794","","","0.2","%"],["Agency Derivatives (2)","38,045","","","69","","","0.7","%","","43,910","","","349","","","0.8","%"],["Mortgage servicing rights and advances (3)","942,357","","","9,883","","","4.2","%","","931,565","","","39,992","","","4.3","%"],["Unsecured borrowings:"],["Convertible senior notes","424,641","","","7,295","","","6.9","%","","412,107","","","28,038","","","6.8","%"],["Total interest expense/cost of funds","$","7,908,651","","","$","20,158","","","1.0","%","","$","10,485,883","","","$","89,173","","","0.9","%"],["Net interest income/spread","","","$","12,847","","","1.1","%","","","","$","79,424","","","1.1","%"]]
[[/GREPCENT_TABLE]]

____________________

(1)Average asset balance represents average amortized cost on AFS securities and average unpaid principal balance on other assets.

(2)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.

(3)Yields on mortgage servicing rights and advances not shown as these assets do not earn interest.

(4)U.S. Treasury securities effectively borrowed under reverse repurchase agreements.

The increase in yields on AFS securities for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021 was primarily driven by lower amortization as a result of slower prepayment speeds. The increase in cost of funds associated with the financing of AFS securities for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021, was due to rising interest rates.

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The increase in yields on reverse repurchase agreements for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021, was the result of rising interest rates. However, these yields were offset by the cost of financing the associated repurchase agreements collateralized by U.S. Treasury securities during the three and twelve months ended December 31, 2022. We did not hold any repurchase agreements collateralized by U.S. Treasury securities during the three and twelve months ended December 31, 2021.

The increase in cost of funds associated with the financing of Agency Derivatives for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021, was the result of rising interest rates.

The increase 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, 2022, as compared to the same periods in 2021, was due to rising interest rates and an increase in the use of revolving credit facility and repurchase agreement financing which on average carry higher floating rate spreads than term notes. We have one revolving credit facility in place to finance our servicing advance obligations, which are included in other assets on our consolidated balance sheets.

The cost of funds associated with our convertible senior notes for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021, was consistent.

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, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Three Months Ended","","Year Ended"],["","December 31,","","December 31,"],["(in thousands)","2022","","2021","","2022","","2021"],["Gross yield/stated coupon","4.6","%","","4.9","%","","4.4","%","","4.7","%"],["Net (premium amortization) discount accretion","(0.5)","%","","(2.7)","%","","(1.0)","%","","(2.7)","%"],["Net yield","4.1","%","","2.2","%","","3.4","%","","2.0","%"]]
[[/GREPCENT_TABLE]]

(Loss) Gain On Investment Securities

The following table presents the components of (loss) gain on investment securities for the three and twelve months ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Three Months Ended","","Year Ended"],["","December 31,","","December 31,"],["(in thousands)","2022","","2021","","2022","","2021"],["Proceeds from sales","$","2,770,811","","","$","1,171,299","","","$","7,793,705","","","$","6,274,193"],["Amortized cost of securities sold","(3,113,102)","","","(1,139,241)","","","(8,359,967)","","","(6,137,824)"],["Total realized (losses) gains on sales","(342,291)","","","32,058","","","(566,262)","","","136,369"],["Reversal of (provision for) credit losses","318","","","(3,347)","","","(2,730)","","","(9,763)"],["Other","(5,477)","","","(27,085)","","","(34,945)","","","(4,989)"],["(Loss) gain on investment securities","$","(347,450)","","","$","1,626","","","$","(603,937)","","","$","121,617"]]
[[/GREPCENT_TABLE]]

In the ordinary course of our business, we make investment decisions and allocate capital in accordance with our views on the changing risk/reward dynamics in the market and in our portfolio. 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.

We use a discounted cash flow method to estimate and recognize an allowance for credit losses on AFS securities. Subsequent adverse or favorable changes in expected cash flows are recognized immediately in earnings as a provision for or reversal of provision for credit losses (within (loss) gain on investment securities).

The majority of the “other” component of (loss) gain on investment securities is related to changes in unrealized gains (losses) on certain AFS securities for which we have elected the fair value option. Fluctuations in this line item are primarily driven by the reclassification of unrealized gains and losses to realized gains and losses upon sale, as well as changes in fair value assumptions.

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Table of Contents

Servicing Income

The following table presents the components of servicing income for the three and twelve months ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Three Months Ended","","Year Ended"],["","December 31,","","December 31,"],["(in thousands)","2022","","2021","","2022","","2021"],["Servicing fee income","$","137,949","","","$","123,912","","","$","564,923","","","$","461,381"],["Ancillary and other fee income","418","","","548","","","1,932","","","2,436"],["Float income","22,559","","","1,051","","","37,056","","","4,589"],["Total","$","160,926","","","$","125,511","","","$","603,911","","","$","468,406"]]
[[/GREPCENT_TABLE]]

The increase in servicing income for the three and twelve months ended December 31, 2022, as compared to the same periods in 2021, was due to a higher portfolio balance, lower compensating interest as a result of lower prepayment rates and higher float income as a result of the higher interest rate environment.

(Loss) Gain On Servicing Asset

The following table presents the components of gain (loss) on servicing asset for the three and twelve months ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Three Months Ended","","Year Ended"],["","December 31,","","December 31,"],["(in thousands)","2022","","2021","","2022","","2021"],["Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model","$","(6,441)","","","$","21,189","","","$","793,631","","","$","562,843"],["Changes in fair value due to realization of cash flows (runoff)","(60,908)","","","(152,450)","","","(371,023)","","","(666,160)"],["Gains (losses) on sales","3,264","","","(567)","","","2,768","","","(11,624)"],["(Loss) gain on servicing asset","$","(64,085)","","","$","(131,828)","","","$","425,376","","","$","(114,941)"]]
[[/GREPCENT_TABLE]]

The decrease in loss on servicing asset for the three months ended December 31, 2022, as compared to the same period in 2021, was driven by lower portfolio runoff and gains on sales of MSR, offset by unfavorable change in valuation assumptions used in the fair valuation of MSR. The increase in gain (decrease in loss) on servicing asset for the year ended December 31, 2022, as compared to the same period in 2021, was driven by higher favorable change in valuation assumptions used in the fair valuation of MSR, lower portfolio runoff and gains on sales of MSR.

Gain On Interest Rate Swap And Swaption Agreements

The following table summarizes the net interest spread and gains and losses associated with our interest rate swap and swaption positions recognized during the three and twelve months ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Three Months Ended","","Year Ended"],["","December 31,","","December 31,"],["(in thousands)","2022","","2021","","2022","","2021"],["Net interest spread","$","\u2014","","","$","5,772","","","$","(4,830)","","","$","14,262"],["Early termination, agreement maturation and option expiration (losses) gains","\u2014","","","(5,143)","","","43,197","","","2,369"],["Change in unrealized gain (loss) on interest rate swap and swaption agreements, at fair value","\u2014","","","36,360","","","(8,868)","","","25,460"],["Gain on interest rate swap and swaption agreements","$","\u2014","","","$","36,989","","","$","29,499","","","$","42,091"]]
[[/GREPCENT_TABLE]]

40

Table of Contents

Net interest spread recognized for the accrual and/or settlement of the net interest expense associated with our interest rate swaps results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or a floating interest rate (OIS or SOFR) on positions held to economically hedge/mitigate portfolio interest rate exposure (or duration) risk. We may elect to terminate certain swaps 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. The change in fair value of interest rate swaps and swaptions during the three and twelve months ended December 31, 2022 and 2021 was a result of changes to floating interest rates (OIS or SOFR), the swap curve and corresponding counterparty borrowing rates. Since swaps 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 or to (loss) gain on investment securities, in the case of certain AFS securities for which we have elected the fair value option.

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, futures, options on futures, and inverse interest-only securities during the three and twelve months ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Three Months Ended","","Year Ended"],["(in thousands)","December 31,","","December 31,"],["","2022","","2021","","2022","","2021"],["TBAs","$","48,233","","","$","(20,225)","","","$","(487,713)","","","$","(193,479)"],["Futures","5,016","","","14,638","","","514,467","","","(49,213)"],["Options on TBAs","\u2014","","","(5,683)","","","\u2014","","","(5,683)"],["Options on futures","\u2014","","","\u2014","","","(2,224)","","","\u2014"],["Inverse interest-only securities","52","","","(295)","","","(15,220)","","","(2,908)"],["Gain (loss) on other derivative instruments","$","53,301","","","$","(11,565)","","","$","9,310","","","$","(251,283)"]]
[[/GREPCENT_TABLE]]

All derivative instruments shown above are considered trading instruments. As a result, our financial results include both realized and unrealized gains (losses) associated with these instruments. The increase in gain (decrease in loss) on other derivative instruments for the three months ended December 31, 2022, as compared to the same period in 2021, was driven by net realized and unrealized gains recognized on TBAs. The increase in gain (decrease in loss) on other derivative instruments for the year ended December 31, 2022, as compared to the same period in 2021, was driven by net realized and unrealized gains recognized on futures, offset by net realized and unrealized losses recognized on TBAs. 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.

41

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Expenses

The following table presents the components of expenses for the three and twelve months ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Three Months Ended","","Year Ended"],["","December 31,","","December 31,"],["(dollars in thousands)","2022","","2021","","2022","","2021"],["Servicing expenses","$","25,272","","","$","21,582","","","$","94,119","","","$","86,250"],["Operating expenses:"],["Compensation and benefits:"],["Non-cash equity compensation expenses","$","1,653","","","$","2,525","","","$","11,630","","","$","11,485"],["All other compensation and benefits","5,758","","","3,871","","","29,093","","","23,556"],["Total compensation and benefits","$","7,411","","","$","6,396","","","$","40,723","","","$","35,041"],["Other operating expenses:"],["Nonrecurring expenses","$","10,836","","","$","665","","","$","18,982","","","$","5,220"],["All other operating expenses","4,704","","","5,983","","","23,023","","","23,539"],["Total other operating expenses","$","15,540","","","$","6,648","","","$","42,005","","","$","28,759"],["Annualized operating expense ratio","4.2","%","","1.9","%","","3.3","%","","2.3","%"],["Annualized operating expense ratio, excluding non-cash equity compensation and other nonrecurring expenses","1.9","%","","1.4","%","","2.1","%","","1.7","%"]]
[[/GREPCENT_TABLE]]

We incur servicing expenses generally related to the subservicing of MSR. The increase in servicing expenses during the three and twelve months ended December 31, 2022, as compared to the same periods in 2021, was a result of an increase in portfolio size and subservicing fees.

The increase in total operating expenses during the three and twelve months ended December 31, 2022, as compared to the same period in 2021, was driven by higher compensation and benefits and nonrecurring expenses, offset by lower other operating expenses.

Income Taxes

During the three and twelve months ended December 31, 2022, our TRSs recognized a provision for income taxes of $8.5 million and $104.2 million, respectively. The provision recognized for the three months ended December 31, 2022 was primarily due to income from MSR servicing activities and net gains recognized on derivative instruments offset by net losses recognized on MSR and operating expenses. The provision recognized for the year ended December 31, 2022 was primarily due to income from MSR servicing activities and net gains recognized on MSR offset by net losses recognized on derivative instruments and operating expenses. During the three and twelve months ended December 31, 2021, our TRSs recognized a provision for income taxes of $2.1 million and $4.2 million, respectively, which was primarily due to income from MSR servicing activities and gains recognized on MSR, offset by net losses recognized on derivative instruments held and operating expenses.

Financial Condition

Available-for-Sale Securities, at Fair Value

The majority of our AFS investment securities portfolio is comprised of fixed rate Agency mortgage-backed securities backed by single-family and multi-family mortgage loans. We also hold $125.2 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, 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.

42

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The tables below summarizes certain characteristics of our Agency RMBS AFS at December 31, 2022 and December 31, 2021:

[[GREPCENT_TABLE]]
[["","December 31, 2022"],["(dollars in thousands, except purchase price)","Principal/ Current Face","","Net (Discount) Premium","","Amortized Cost","","Allowance for Credit Losses","","Unrealized Gain","","Unrealized Loss","","Carrying Value","","Weighted Average Coupon Rate","","Weighted Average Purchase Price"],["P&I securities","$","7,781,277","","","$","155,833","","","$","7,937,110","","","$","\u2014","","","$","6,310","","","$","(325,960)","","","$","7,617,460","","","4.64","%","","$","102.26"],["Interest-only securities","963,866","","","45,882","","","45,882","","","(6,785)","","","1,890","","","(4,871)","","","36,116","","","1.98","%","","$","19.55"],["Total","$","8,745,143","","","$","201,715","","","$","7,982,992","","","$","(6,785)","","","$","8,200","","","$","(330,831)","","","$","7,653,576"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","December 31, 2021"],["(dollars in thousands, except purchase price)","Principal/ Current Face","","Net (Discount) Premium","","Amortized Cost","","Allowance for Credit Losses","","Unrealized Gain","","Unrealized Loss","","Carrying Value","","Weighted Average Coupon Rate","","Weighted Average Purchase Price"],["P&I securities","$","6,411,363","","","$","270,687","","","$","6,682,050","","","$","\u2014","","","$","171,308","","","$","(4,855)","","","$","6,848,503","","","3.65","%","","$","104.66"],["Interest-only securities","3,198,447","","","305,577","","","305,577","","","(12,851)","","","20,699","","","(12,529)","","","300,896","","","2.93","%","","$","14.09"],["Total","$","9,609,810","","","$","576,264","","","$","6,987,627","","","$","(12,851)","","","$","192,007","","","$","(17,384)","","","$","7,149,399"]]
[[/GREPCENT_TABLE]]

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, 2022 and December 31, 2021, our MSR had a fair market value of $3.0 billion and $2.2 billion, respectively.

As of December 31, 2022 and December 31, 2021, our MSR portfolio included MSR on 809,025 and 796,205 loans with an unpaid principal balance of approximately $204.9 billion and $193.8 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, 2022 and December 31, 2021:

[[GREPCENT_TABLE]]
[["","December 31, 2022"],["(dollars in thousands)","Number of Loans","","Unpaid Principal Balance","","","","","","Weighted Average Gross Coupon Rate","","Weighted Average Current Loan Size","","Weighted Average Loan Age (months)","","Weighted Average Original FICO","","Weighted Average Original LTV","","60+ Day Delinquencies","","3-Month CPR","","Net Servicing Fee (bps)"],["30-Year Fixed:"],["\u2264 3.25%","299,221","","","$","96,929,358","","","","","","","2.8","%","","$","382","","","23","","","768","","","71.0","%","","0.4","%","","3.3","%","","25.8"],[" 3.25 - 3.75%","140,499","","","36,531,127","","","","","","","3.4","%","","327","","","38","","","754","","","74.2","%","","0.8","%","","5.0","%","","26.3"],[" 3.75 - 4.25%","108,214","","","22,603,005","","","","","","","3.9","%","","272","","","61","","","751","","","75.7","%","","1.3","%","","6.3","%","","27.3"],[" 4.25 - 4.75%","60,343","","","10,752,661","","","","","","","4.4","%","","249","","","63","","","736","","","77.4","%","","2.4","%","","7.8","%","","26.4"],[" 4.75 - 5.25%","31,694","","","5,735,770","","","","","","","4.9","%","","285","","","44","","","732","","","78.5","%","","2.9","%","","7.0","%","","28.2"],[" 5.25%","31,046","","","7,270,132","","","","","","","5.9","%","","343","","","15","","","736","","","80.8","%","","1.4","%","","6.4","%","","33.5"],["","671,017","","","179,822,053","","","","","","","3.4","%","","344","","","34","","","758","","","73.3","%","","0.8","%","","4.5","%","","26.5"],["15-Year Fixed:"],["\u2264 2.25%","23,157","","","6,521,890","","","","","","","2.0","%","","330","","","20","","","777","","","59.1","%","","0.1","%","","3.0","%","","25.2"],[" 2.25 - 2.75%","38,830","","","8,781,681","","","","","","","2.4","%","","277","","","24","","","772","","","58.9","%","","0.2","%","","4.2","%","","25.9"],[" 2.75 - 3.25%","36,300","","","5,297,231","","","","","","","2.9","%","","202","","","53","","","766","","","61.5","%","","0.3","%","","6.6","%","","26.2"],[" 3.25 - 3.75%","21,402","","","2,307,332","","","","","","","3.4","%","","159","","","65","","","757","","","63.8","%","","0.6","%","","8.3","%","","26.9"],[" 3.75 - 4.25%","10,044","","","909,909","","","","","","","3.9","%","","146","","","61","","","742","","","65.1","%","","0.8","%","","9.0","%","","28.6"],[" 4.25%","5,648","","","575,114","","","","","","","4.7","%","","193","","","34","","","734","","","65.7","%","","1.3","%","","10.0","%","","33.5"],["","135,381","","","24,393,157","","","","","","","2.6","%","","257","","","35","","","769","","","60.4","%","","0.3","%","","5.1","%","","26.2"],["Total ARMs","2,627","","","661,483","","","","","","","3.6","%","","330","","","56","","","761","","","67.7","%","","1.0","%","","13.6","%","","25.5"],["Total","809,025","","","$","204,876,693","","","","","","","3.3","%","","$","334","","","34","","","760","","","71.7","%","","0.8","%","","4.6","%","","26.5"]]
[[/GREPCENT_TABLE]]

43

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[[GREPCENT_TABLE]]
[["","December 31, 2021"],["(dollars in thousands)","Number of Loans","","Unpaid Principal Balance","","","","","","Weighted Average Gross Coupon Rate","","Weighted Average Current Loan Size","","Weighted Average Loan Age (months)","","Weighted Average Original FICO","","Weighted Average Original LTV","","60+ Day Delinquencies","","3-Month CPR","","Net Servicing Fee (bps)"],["30-Year Fixed:"],["\u2264 3.25%","215,128","","","$","72,197,662","","","","","","","2.8","%","","$","395","","","11","","","767","","","70.7","%","","0.3","%","","10.7","%","","25.7"],[" 3.25 - 3.75%","167,615","","","43,576,971","","","","","","","3.4","%","","321","","","28","","","755","","","74.2","%","","0.8","%","","24.0","%","","26.3"],[" 3.75 - 4.25%","125,831","","","26,250,276","","","","","","","3.9","%","","263","","","54","","","753","","","75.7","%","","2.3","%","","34.0","%","","27..4"],[" 4.25 - 4.75%","79,107","","","14,291,435","","","","","","","4.4","%","","239","","","58","","","797","","","77.5","%","","4.4","%","","36.4","%","","26.3"],[" 4.75 - 5.25%","38,902","","","6,318,470","","","","","","","4.9","%","","230","","","52","","","722","","","78.9","%","","6.4","%","","37.4","%","","27.3"],[" 5.25%","15,796","","","2,176,065","","","","","","","5.5","%","","211","","","51","","","705","","","79.2","%","","9.2","%","","37.6","%","","30.5"],["","642,379","","","164,810,879","","","","","","","3.4","%","","332","","","29","","","756","","","73.4","%","","1.5","%","","22.7","%","","26.3"],["15-Year Fixed:"],["\u2264 2.25%","16,525","","","5,397,141","","","","","","","2.0","%","","371","","","9","","","778","","","57.1","%","","0.1","%","","8.3","%","","25.2"],[" 2.25 - 2.75%","41,168","","","9,901,133","","","","","","","2.4","%","","294","","","13","","","774","","","58.0","%","","0.2","%","","14.2","%","","25.6"],[" 2.75 - 3.25%","46,236","","","7,568,257","","","","","","","2.9","%","","220","","","40","","","768","","","61.3","%","","0.4","%","","21.6","%","","26.1"],[" 3.25 - 3.75%","28,010","","","3,485,491","","","","","","","3.4","%","","172","","","55","","","758","","","64.3","%","","1.1","%","","26.6","%","","27.4"],[" 3.75 - 4.25%","12,685","","","1,302,862","","","","","","","3.9","%","","152","","","55","","","742","","","65.3","%","","2.1","%","","28.5","%","","28.8"],[" 4.25%","5,965","","","513,255","","","","","","","4.5","%","","130","","","47","","","727","","","66.1","%","","2.6","%","","29.4","%","","31.2"],["","150,589","","","28,168,139","","","","","","","2.7","%","","264","","","27","","","769","","","60.0","%","","0.5","%","","18.1","%","","26.1"],["Total ARMs","3,237","","","791,548","","","","","","","3.0","%","","315","","","54","","","762","","","68.0","%","","2.9","%","","29.5","%","","25.2"],["Total","796,205","","","$","193,770,566","","","","","","","3.3","%","","$","322","","","28","","","758","","","71.5","%","","1.3","%","","22.1","%","","26.3"]]
[[/GREPCENT_TABLE]]

Financing

Our borrowings consist primarily of repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes. Repurchase agreements, revolving credit facilities and term notes payable 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. Additionally, a substantial portion of our MSR is currently pledged as collateral for repurchase agreements, revolving credit facilities and term notes payable, and a portion of our servicing advances have been pledged as collateral for revolving credit facilities. In connection with our securitization of MSR and issuance of term notes payable, a variable funding note, or VFN, was issued to one of our subsidiaries. We have one repurchase facility that is secured by the VFN, which is collateralized by our MSR. Finally, our convertible senior notes due 2026 are unsecured and pay interest semiannually at a rate of 6.25% per annum.

Some of our financing arrangements incorporate LIBOR as the referenced rate; however all arrangements either mature prior to the phase out of LIBOR or have provisions in place that provide for an alternative to LIBOR upon its phase-out. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Conditions and Outlook - LIBOR transition” in this Annual Report on Form 10-K for further discussion.

At December 31, 2022 and December 31, 2021, borrowings under repurchase agreements, revolving credit facilities, term notes payable and convertible senior notes had the following characteristics:

44

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[[GREPCENT_TABLE]]
[["(dollars in thousands)","","December 31, 2022","","December 31, 2021"],["Borrowing Type","","Amount Outstanding","","Weighted Average Borrowing Rate","","Weighted Average Years to Maturity","","Amount Outstanding","","Weighted Average Borrowing Rate","","Weighted Average Years to Maturity"],["Repurchase agreements","","$","8,603,011","","","3.95","%","","0.2","","","$","7,656,445","","","0.24","%","","0.2"],["Revolving credit facilities","","1,118,831","","","7.68","%","","1.1","","","420,761","","","3.46","%","","1.2"],["Term notes payable","","398,011","","","7.19","%","","1.5","","","396,776","","","2.90","%","","2.5"],["Convertible senior notes (1)","","282,496","","","6.25","%","","3.0","","","424,827","","","6.25","%","","2.7"],["Total","","$","10,402,349","","","4.54","%","","1.7","","","$","8,898,809","","","0.80","%","","0.5"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","December 31, 2022","","December 31, 2021"],["Collateral Type","","Amount Outstanding","","Weighted Average Borrowing Rate","","Weighted Average Haircut on Collateral Value","","Amount Outstanding","","Weighted Average Borrowing Rate","","Weighted Average Haircut on Collateral Value"],["Agency RMBS","","$","7,321,834","","","3.70","%","","3.9","%","","$","7,495,230","","","0.17","%","","4.2","%"],["Non-Agency securities","","70,809","","","5.73","%","","40.0","%","","171","","","1.24","%","","43.9","%"],["Agency Derivatives","","13,073","","","4.83","%","","18.9","%","","36,044","","","0.74","%","","17.8","%"],["Mortgage servicing rights","","1,801,992","","","7.61","%","","30.6","%","","923,337","","","3.30","%","","27.9","%"],["Mortgage servicing advances","","23,850","","","7.75","%","","12.9","%","","19,200","","","3.23","%","","13.8","%"],["U.S. Treasuries (2)","","888,295","","","4.49","%","","\u2014","%","","\u2014","","","\u2014","%","","\u2014","%"],["Other (1)","","282,496","","","6.25","%","","N/A","","424,827","","","6.25","%","","N/A"],["Total","","$","10,402,349","","","4.54","%","","8.4","%","","$","8,898,809","","","0.80","%","","6.6","%"]]
[[/GREPCENT_TABLE]]

____________________

(1)Includes unsecured convertible senior notes due 2026 paying interest semiannually at a rate of 6.25% per annum on the aggregate principal amount of $287.5 million.

(2)U.S. Treasury securities effectively borrowed under reverse repurchase agreements.

As of December 31, 2022, the debt-to-equity ratio funding our AFS securities, MSR, servicing advances and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, was 4.4:1.0. As previously discussed, 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 risk, utilize lower levels of leverage. Generally, our debt-to-equity ratio is directly correlated to the composition of our portfolio; typically, the higher the percentage of Agency RMBS we hold, the higher our debt-to-equity ratio will be. However, in addition to portfolio mix, our debt-to-equity ratio is a function of many other 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. 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. 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.

45

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The following table provides a summary of our borrowings under repurchase agreements (excluding those collateralized by U.S. Treasuries), revolving credit facilities, term notes payable and convertible senior notes and our debt-to-equity ratios for the three months ended December 31, 2022, and the four immediately preceding quarters:

[[GREPCENT_TABLE]]
[["(dollars in thousands)"],["For the Three Months Ended","","Quarterly Average","","End of Period Balance","","Maximum Balance of Any Month-End","","End of Period Total Borrowings to Equity Ratio","","End of Period Net Long (Short) TBA Cost Basis","","End of Period Net Payable (Receivable) for Unsettled RMBS","","End of Period Economic Debt-to-Equity Ratio (1)"],["December 31, 2022","","$","9,878,254","","","$","9,514,054","","","$","10,672,731","","","4.4:1.0","","$","3,923,298","","","$","342,964","","","6.3:1.0"],["September 30, 2022","","$","10,973,416","","","$","11,844,972","","","$","11,844,972","","","5.5:1.0","","$","4,153,582","","","$","34,576","","","7.5:1.0"],["June 30, 2022","","$","8,949,630","","","$","9,463,102","","","$","9,463,102","","","3.8:1.0","","$","6,409,396","","","$","1,240,666","","","6.9:1.0"],["March 31, 2022","","$","9,139,305","","","$","9,121,894","","","$","9,366,946","","","3.5:1.0","","$","4,737,226","","","$","(234,971)","","","5.2:1.0"],["December 31, 2021","","$","7,908,651","","","$","8,898,809","","","$","8,898,809","","","3.2:1.0","","$","4,238,881","","","$","\u2014","","","4.8:1.0"]]
[[/GREPCENT_TABLE]]

____________________

(1)Defined as total borrowings under repurchase agreements (excluding those collateralized by U.S. Treasuries), revolving credit facilities, term notes payable and convertible senior notes, plus implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, divided by total equity. Effective as of December 31, 2022, net payable (receivable) on unsettled RMBS is now included in the calculation for economic debt-to-equity. Prior period data have been updated to conform to the current period calculation.

Equity

The following table provides details of our changes in stockholders’ equity from December 31, 2021 to December 31, 2022. All per share amounts, common shares outstanding and common equity-based awards for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.

[[GREPCENT_TABLE]]
[["(in millions, except per share amounts)","Book Value","","Common Shares Outstanding","","Common Book Value Per Share"],["Common stockholders\u2019 equity at December 31, 2021","$","2,017.7","","","86.0","","","$","23.47"],["Net income","220.2"],["Other comprehensive loss","(465.0)"],["Comprehensive loss","(244.8)"],["Dividends on preferred stock","(53.6)"],["Gain on repurchase and retirement of preferred stock","20.1"],["Comprehensive loss attributable to common stockholders","(278.3)"],["Dividend declarations","(228.9)"],["Other","11.7","","","0.1"],["Balance before capital transactions","1,522.2","","","86.1"],["Repurchase and retirement of preferred stock","2.4"],["Issuance of common stock, net of offering costs","6.6","","","0.3"],["Common stockholders\u2019 equity at December 31, 2022","$","1,531.2","","","86.4","","","$","17.72"],["Total preferred stock liquidation preference","652.3"],["Total stockholders\u2019 equity at December 31, 2022","$","2,183.5"]]
[[/GREPCENT_TABLE]]

46

Table of Contents

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, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022"],["(in millions)","TRS","","REIT","","","","Consolidated"],["GAAP net income (loss), pre-tax","$","445.5","","","$","(121.0)","","","","","$","324.5"],["State taxes","(13.4)","","","0.1","","","","","(13.3)"],["Adjusted GAAP net income (loss), pre-tax","432.1","","","(120.9)","","","","","311.2"],["Permanent differences"],["State deferred tax expense","14.3","","","\u2014","","","","","14.3"],["Other permanent differences","0.9","","","(1.3)","","","","","(0.4)"],["Temporary differences"],["Net accretion of OID and market discount","(61.7)","","","2.8","","","","","(58.9)"],["Net unrealized gains and losses","(416.8)","","","(206.7)","","","","","(623.5)"],["Net realized gains and losses on sales of RMBS","\u2014","","","18.9","","","","","18.9"],["Net realized gains and losses on sales of MSR","15.9","","","(124.0)","","","","","(108.1)"],["Credit loss impairment","\u2014","","","2.7","","","","","2.7"],["Other temporary differences","(0.5)","","","24.9","","","","","24.4"],["Capital loss carryforward deferral","\u2014","","","1,029.3","","","","","1,029.3"],["Net operating loss carryforward utilization","\u2014","","","(336.6)","","","","","(336.6)"],["Estimated taxable (loss) income","(15.8)","","","289.1","","","","","273.3"],["Dividend paid deduction","\u2014","","","(289.1)","","","","","(289.1)"],["Estimated taxable loss post-dividend deduction","$","(15.8)","","","$","\u2014","","","","","$","(15.8)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2021"],["(in millions)","TRS","","REIT","","","","Consolidated"],["GAAP net income (loss), pre-tax","$","60.1","","","$","131.3","","","","","$","191.4"],["State taxes","10.6","","","\u2014","","","","","10.6"],["Adjusted GAAP net income (loss), pre-tax","70.7","","","131.3","","","","","202.0"],["Permanent differences"],["State deferred tax benefit","(9.0)","","","\u2014","","","","","(9.0)"],["Other permanent differences","\u2014","","","0.1","","","","","0.1"],["Temporary differences"],["Net accretion of OID and market discount","(53.7)","","","(59.4)","","","","","(113.1)"],["Net unrealized gains and losses","(137.3)","","","(31.6)","","","","","(168.9)"],["Net realized gains and losses on sales of RMBS","\u2014","","","(4.9)","","","","","(4.9)"],["Credit loss impairment","\u2014","","","9.8","","","","","9.8"],["Other temporary differences","5.8","","","2.0","","","","","7.8"],["Capital loss carryforward deferral","\u2014","","","16.6","","","","","16.6"],["Estimated taxable (loss) income","(123.5)","","","63.9","","","","","(59.6)"],["Dividend paid deduction","\u2014","","","(63.9)","","","","","(63.9)"],["Estimated taxable (loss) post-dividend deduction","$","(123.5)","","","$","\u2014","","","","","$","(123.5)"]]
[[/GREPCENT_TABLE]]

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The permanent tax differences recorded in 2022 and 2021 included a difference related to officer’s compensation deduction limitations, compensation expense related to restricted stock dividends and vesting, and state deferred taxes. The temporary tax differences recorded in 2022 and 2021 were 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 RMBS, accretion and amortization from RMBS, changes in reserves related to servicing advances and allowance for credit losses on certain RMBS, and deferral of net capital losses. There was also a temporary tax difference recorded in 2022 related to the utilization of net operating losses.

Change in Accumulated Other Comprehensive (Loss) Income

With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding certain AFS securities for which we have elected the fair value option, 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 (loss) 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, 2022, we declared cash dividends totaling $2.64 per common 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, 2022, our board of directors elected to distribute all of our REIT taxable income for the year. 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. 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, 2022, we held $683.5 million in cash and cash equivalents available to support our operations; $10.8 billion of AFS securities, MSR, and derivative assets held at fair value; and $10.4 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, 2022, the debt-to-equity ratio funding our AFS securities, MSR and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, decreased from 5.5:1.0 to 4.4:1.0 due to decreased financing on Agency RMBS and MSR. During the year ended December 31, 2022, the debt-to-equity ratio funding our AFS securities, MSR and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, increased from 3.2:1.0 to 4.4:1.0 due to increased financing on Agency RMBS and MSR as well as a decrease in equity. During the three and twelve months ended December 31, 2022, our economic debt-to-equity ratio funding our AFS securities, MSR and Agency Derivatives, which includes unsecured borrowings under convertible senior notes, implied debt on net TBA cost basis and net payable (receivable) for unsettled RMBS, decreased from 7.5:1.0 to 6.3:1.0 and increased from 4.8:1.0 to 6.3:1.0, respectively.

As of December 31, 2022, we held approximately $344.6 million of unpledged AFS securities and Agency derivatives, which includes $343.0 million of unsettled Agency RMBS purchases, and $7.6 million of unpledged non-Agency securities. As a result, we had an overall estimated unused borrowing capacity on unpledged securities of approximately $6.1 million. As of December 31, 2022, we held approximately $26.9 million of unpledged MSR and $51.2 million of unpledged servicing advances. Overall, on December 31, 2022, we had $293.8 million unused committed and $402.3 million unused uncommitted borrowing capacity on MSR financing facilities, and $176.2 million in unused committed borrowing capacity on servicing advance financing facilities. 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.

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During the year ended December 31, 2022, we did not experience any material issues accessing our funding sources. 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, 2022, we had master repurchase agreements in place with 39 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.

In addition to our master repurchase agreements to fund our Agency and non-Agency securities, we have one repurchase facility and three 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:

[[GREPCENT_TABLE]]
[["(dollars in thousands)"],["December 31, 2022"],["Expiration Date (1)","","Amount Outstanding","","Unused Committed Capacity (2)","","Unused Uncommitted Capacity","","Total Capacity","","Eligible Collateral"],["April 4, 2024","","$","638,731","","","$","\u2014","","","$","61,269","","","$","700,000","","","Mortgage servicing rights"],["December 29, 2023","","$","309,000","","","$","\u2014","","","$","191,000","","","$","500,000","","","Mortgage servicing rights (3)"],["March 20, 2024","","$","256,250","","","$","93,750","","","$","150,000","","","$","500,000","","","Mortgage servicing rights (4)"],["June 30, 2023","","$","200,000","","","$","200,000","","","$","\u2014","","","$","400,000","","","Mortgage servicing rights"],["September 28, 2024","","$","23,850","","","$","176,150","","","$","\u2014","","","$","200,000","","","Mortgage servicing advances"]]
[[/GREPCENT_TABLE]]

____________________

(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 a VFN issued in connection with our securitization of MSR, which is collateralized by our MSR. During the three months ended December 31, 2022, this repurchase facility was amended to prescribe a reduction in the total capacity to $300.0 million starting February 8, 2023.

(4)The revolving period of this facility ceases on March 17, 2023, at which time the facility starts a 12-month amortization period.

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, 2022:

•Total indebtedness to tangible net worth must be less than 8.0:1.0. As of December 31, 2022, our total indebtedness to tangible net worth, as defined, was 5.1:1.0.

•Cash liquidity must be greater than $200.0 million. As of December 31, 2022, our liquidity, as defined, was $683.5 million.

•Net worth must be greater than the higher of $1.5 billion or 50% of the highest net worth during the 24 calendar months prior. As of December 31, 2022, 50% of the highest net worth during the 24 calendar months prior, as defined, was $1.6 billion and our net worth, as defined, was $2.2 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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The following table summarizes assets at carrying values that were pledged or restricted as collateral for the future payment obligations of repurchase agreements, revolving credit facilities, term notes payable and derivative instruments at December 31, 2022 and December 31, 2021:

[[GREPCENT_TABLE]]
[["(in thousands)","December 31, 2022","","December 31, 2021"],["Available-for-sale securities, at fair value","$","7,426,953","","","$","7,009,449"],["Mortgage servicing rights, at fair value","2,958,057","","","2,130,807"],["Restricted cash","324,854","","","747,979"],["Due from counterparties","22,055","","","33,718"],["Derivative assets, at fair value","14,738","","","39,608"],["Other assets","67,819","","","33,767"],["U.S. Treasuries (1)","877,632","","","\u2014"],["Total","$","11,692,108","","","$","9,995,328"]]
[[/GREPCENT_TABLE]]

____________________

(1)U.S. Treasury securities effectively borrowed under reverse repurchase agreements.

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 Agency 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 Agency 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, revolving credit facilities, term notes payable and convertible senior notes as of December 31, 2022 and December 31, 2021:

[[GREPCENT_TABLE]]
[["(in thousands)","December 31, 2022","","December 31, 2021"],["Within 30 days","$","2,691,195","","","$","1,771,027"],["30 to 59 days","2,160,737","","","1,807,544"],["60 to 89 days","2,536,636","","","1,981,056"],["90 to 119 days","905,443","","","1,249,435"],["120 to 364 days","509,000","","","1,265,638"],["One to three years","1,316,842","","","543,026"],["Three to five years","282,496","","","281,083"],["Total","$","10,402,349","","","$","8,898,809"]]
[[/GREPCENT_TABLE]]

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For the year ended December 31, 2022, our restricted and unrestricted cash balance decreased approximately $962.2 million to $1.1 billion at December 31, 2022. The cash movements can be summarized by the following:

•Cash flows from operating activities. For the year ended December 31, 2022, operating activities increased our cash balances by approximately $623.4 million, primarily driven by our financial results for the year.

•Cash flows from investing activities. For the year ended December 31, 2022, investing activities decreased our cash balances by approximately $2.8 billion, primarily driven by purchases of AFS securities and MSR and net payments under reverse repurchase agreements, offset by proceeds from sales of and principal payments on AFS securities and sales of MSR.

•Cash flows from financing activities. For the year ended December 31, 2022, financing activities increased our cash balance by approximately $1.2 billion, primarily driven by an increase in financing on RMBS and MSR, offset by the repayment of our convertible senior notes due 2022 and payment of dividends.

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

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.

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, 2022, 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, 2022. 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, 2022. 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, 2022, we believe that we qualified as a REIT under the Code.