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New words:
affiliate, brokerage, CME, combat, consummation, disaggregation, edged, foreign, interim, jurisdiction, Matrix, outsourced, partner, peaked, prospectively, reconciling, retrospectively, sustained, Topic, wholly
Removed:
agent, applicability, appoint, base, calculation, chosen, consult, consultation, discretion, driven, eased, emergence, February, fewer, floor, governmental, implement, labor, LIBOR, outbreak, passed, publication, range, replacing, rose, sharp, signaled, spurred, successor, technical, tight, tightening, unadopted, unsettled, USD, vacancy, yielding
Financial report summary
?Risks
- We may not be able to continue to generate sufficient revenue to make or sustain distributions to our stockholders.
- Difficult conditions in the mortgage and residential real estate markets as well as general market concerns may adversely affect the value of the assets in which we invest, and these conditions may persist for the foreseeable future.
- We are dependent on mortgage servicers to service the mortgage loans relating to our Servicing Related Assets, and any failure by these mortgage servicers to service the mortgage loans relating to our Servicing Related Assets could have a material and adverse effect on us.
- Our ability to own and manage MSRs is subject to terms and conditions established by the GSEs, which are subject to change.
- We may be subject to representation and warranty risk in our capacity as an owner of MSRs and our sales of MSRs and other assets.
- The performance of loans underlying our MSRs may be adversely affected by the performance of the related mortgage servicer.
- Our ability to invest in, and dispose of, our investments in Servicing Related Assets is subject to the receipt of third-party consents.
- The value of our Servicing Related Assets may vary substantially with changes in interest rates.
- If delinquencies on mortgage loans increase, the value of our Servicing Related Assets may decline significantly.
- Prepayment rates can change, adversely affecting the performance of our assets.
- Interest rate mismatches between our assets and any borrowings used to fund purchases of our assets may reduce our income during periods of changing interest rates.
- Interest rate caps on the ARMs and hybrid ARMs that may back our RMBS may reduce our net interest margin during periods of rising interest rates.
- Our Manager relies on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage our portfolio. These models are based on assumptions and actual results may differ significantly from the modeled expectations.
- Valuations of some of our assets will be inherently uncertain, may be based on estimates, may fluctuate over short periods of time and may differ from the values that would have been used if a ready market for these assets existed.
- An increase in interest rates may cause a decrease in the volume of certain of our target assets, which could adversely affect our ability to acquire target assets that satisfy our investment objectives and to make distributions to our stockholders.
- We are highly dependent on information systems and third parties, and systems failures or cybersecurity incidents could disrupt our business.
- The lack of liquidity of our assets may adversely affect our business, including our ability to sell our assets.
- We use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce cash available for distribution to our stockholders, as well as increase losses when economic conditions are unfavorable. A sudden, precipitous drop in value of our financed assets could quickly and seriously reduce our available cash due to margin calls.
- Adverse market developments generally will cause our lenders to require us to pledge cash as additional collateral. If our assets were insufficient to meet these collateral requirements, we might be compelled to liquidate particular assets at inopportune times and at unfavorable prices.
- Our use of repurchase transactions gives our lenders greater rights in the event that we file for bankruptcy, which may make it difficult for us to recover our collateral in the event of a bankruptcy filing.
- If our lenders default on their obligations to resell the RMBS back to us at the end of the repurchase transaction term, the value of the RMBS has declined by the end of the repurchase transaction term or we default on our obligations under the repurchase transaction, we will lose money on these transactions. Any such losses may materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.
- Hedging against interest rate changes and other risks may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
- We may change our investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which may result in riskier investments. In addition, our charter provides that our board of directors may authorize us to revoke or otherwise terminate our REIT election, without the approval of our stockholders.
- We operate in a highly competitive market.
- Our ability to make distributions to our stockholders depends on our operating results, our financial condition and other factors, and we may not be able to make regular cash distributions at a fixed rate or at all under certain circumstances.
- We are dependent on our Manager and certain key personnel that are provided to us through our Manager and may not find a suitable replacement if our Manager terminates or elects not to renew the management agreement or such key personnel are no longer available to us.
- The management fee payable to our Manager is payable regardless of the performance of our portfolio, which may reduce our Manager’s incentive to devote the time and effort to seeking profitable opportunities for our portfolio.
- Our investment guidelines are very broad, and our board of directors will not approve each decision to acquire, dispose of, or otherwise manage an asset.
- There will be conflicts of interest in our relationships with our Manager and Freedom Mortgage, which could result in decisions that are not in the best interests of our stockholders.
- The management agreement with our Manager was not negotiated on an arm’s-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.
- If our Manager ceases to be our Manager pursuant to the management agreement, our lenders and our derivative counterparties may cease doing business with us.
- Maintenance of certain exceptions from (or otherwise not falling within) the definitions of “investment company” under the Investment Company Act imposes significant limitations on our operations.
- The ownership limits in our charter may discourage a takeover or business combination that may have benefited our stockholders.
- Our stockholders’ ability to control our operations is severely limited.
- Certain provisions of Maryland law could inhibit a change in our control.
- Our authorized but unissued common and preferred stock may prevent a change in our control.
- Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interest.
- Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.
- The market price and trading volume of our common stock may be volatile.
- Future sales of our common stock or securities convertible into our common stock could cause the market value of our common stock to decline and could result in dilution of your shares.
- Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which would dilute the common stock holdings of our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.
- We have not established a minimum distribution payment level with respect to our common stock, and we cannot assure you of our ability to make distributions in the future.
- Our 8.20% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”) and our 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”, and together with the Series A Preferred Stock, the “Preferred Stock”) ranks junior to our existing and future indebtedness and will rank junior to any other class or series of stock we may issue in the future with terms specifically providing that such stock ranks senior to the Preferred Stock with respect to the payment of dividends and the distribution of assets in the event of our liquidation, dissolution or winding up (“Senior Stock”), and your interests could be diluted by the issuance of additional shares of preferred stock and by other transactions.
- The Preferred Stock has not been rated.
- We may not be able to pay dividends or other distributions on the Preferred Stock.
- Holders of our Preferred Stock may not be able to exercise conversion rights upon a change of control. If exercisable, the change of control conversion rights applicable to our Preferred Stock may not adequately compensate holders of our Preferred Stock. These change of control conversion rights may also make it more difficult for a party to acquire us or discourage a party from acquiring us.
- Our charter, including the articles supplementary designating the Preferred Stock, contains restrictions upon transfer and ownership of our stock, which may impair the ability of holders to acquire the Preferred Stock or convert Preferred Stock into our common stock.
- Holders of our Preferred Stock have limited voting rights.
- The market price of our Preferred Stock could be substantially affected by various factors.
- Future offerings of debt or equity securities may adversely affect the market price of our Preferred Stock.
- If our common stock is delisted, the ability to transfer or sell shares of our Preferred Stock may be limited and the market value of our Preferred Stock will likely be materially adversely affected.
- The discontinuance of U.S. dollar LIBOR might adversely affect the value of investments in the Series B Preferred Stock.
- Potential conflicts of interest in connection with replacing USD LIBOR.
- The composition and characteristics of CME Term SOFR are not the same as were those of USD LIBOR and there is no guarantee that CME Term SOFR is a comparable substitute for USD LIBOR.
- Because daily SOFR is published by the Federal Reserve Bank of New York based on data received from other sources, we have no control over its determination, calculation or publication. There can be no guarantee that daily SOFR will not be discontinued or fundamentally altered in a manner that is materially adverse to the interests of holders of the Series B Preferred Stock.
- Our failure to qualify as a REIT would subject us to U.S. federal, state and local income taxes, which could adversely affect the value of our common stock and would substantially reduce the cash available for distribution to our stockholders.
- Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments.
- Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders.
- Despite qualification as a REIT, we may face other tax liabilities that reduce our cash flows.
- We may lose our REIT qualification or be subject to a penalty tax if the U.S. Internal Revenue Service, or IRS, successfully challenges our characterization of our investments in Excess MSRs.
- The failure of RMBS subject to a repurchase agreement to qualify as real estate assets would adversely affect our ability to qualify as a REIT.
- Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.
- Complying with REIT requirements may limit our ability to hedge effectively.
- Our ownership of and relationship with Solutions, Aurora and any future TRSs that we form will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.
- Our ownership limitation may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their common stock.
- Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
- We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.
- Our recognition of “phantom” income may reduce a stockholder’s after-tax return on an investment in our common stock.
- Liquidation of our assets may jeopardize our REIT qualification.
- Our qualification as a REIT and exemption from U.S. federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that we acquire, and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.
Management Discussion
- Interest income for the three-month period ended March 31, 2024 was $12.7 million as compared to $12.8 million for the three-month period ended December 31, 2023. The change in interest income was marginal.
- Interest expense for the three-month period ended March 31, 2024 was $13.6 million as compared to $13.2 million for the three-month period ended December 31, 2023. The increase of $400,000 in interest expense was due to changes in the Company’s leverage.
- Servicing fee income for each of the three-month periods ended March 31, 2024 and December 31, 2023 was $12.9 million.