In this annual report on Form 10-K, references to the “Company” refer to ZAIS Financial Corp., a Maryland corporation, together with its consolidated subsidiaries; references to the Advisor refer to ZAIS REIT Management, LLC, a Delaware limited liability company; references to the “Operating Partnership” refer to ZAIS Financial Partners, L.P., a Delaware limited partnership; in each case unless specifically stated otherwise or the context otherwise indicates, and references to “risk-adjusted returns” refer to the profile of expected asset returns across a range of potential macroeconomic scenarios.PART I

Item 1. Business.

GENERAL

Overview

The Company is

We are a Maryland corporationreal estate finance company that investsacquires, originates, manages, services and finances primarily small balance commercial loans. SBC loans range in residential mortgage loans. GMFS, a mortgage banking platform the Company acquiredoriginal principal amount of between $500,000 and $10 million and are used by small businesses to purchase real estate used in October 2014, originates, sellstheir operations or by investors seeking to acquire small multi-family, office, retail, mixed use or warehouse properties. Our acquisition and services residential mortgage loans and the Company acquires performing, re-performing and newly originated loans through other channels. The Company also invests in, finances and manages RMBS that are not issued or guaranteed by a federally chartered corporation, such as Fannie Mae, Freddie Mac, or an agencyorigination platforms consist of the U.S. Government, such as Ginnie Mae ("non-Agency RMBS"), with an emphasis on securities that, when originally issued, were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations and mortgage servicing rights (“MSRs”). The Company also has the discretion to invest in RMBS that are issued or guaranteed by a federally chartered corporation or a U.S. Government agency ("Agency RMBS"), including through To-Be-Announced ("TBA") contracts, and in other real estate-related and financial assets, such as interest only strips created from RMBS ("IOs"). The Company refers collectively to its assets as its “target assets”.following four operating segments:

The Company's income is generated primarily by the net spread between the income it earns on its assets and the cost of its financing and hedging activities in its residential mortgage investments segment, and the origination, sale and servicing of residential mortgage loans in its residential mortgage banking segment. The Company's

Our objective is to provide attractive risk-adjusted returns to itsour stockholders, primarily through quarterly dividend distributionsdividends and secondarily through capital appreciation. In order to achieve this objective, we intend to continue to grow our investment portfolio and we believe that the breadth of our full service real estate finance platform will allow us to adapt to market conditions and deploy capital in our asset classes and segments with the most attractive risk-adjusted returns.

 The Company was incorporated in Maryland on May 24, 2011,We are organized and has elected to be taxed andconduct our operations to qualify as a real estate investment trust ("REIT"REIT under the Internal Revenue Code (“IRC”) forof 1986, as amended (the “Code”). So long as we qualify as a REIT, we are generally not subject to U.S. federal income tax purposes commencing with itson our net taxable year ended December 31, 2011. The Company isincome to the extent that we annually distribute all of our net taxable income to stockholders. We are organized in a traditional umbrella partnership REIT (“UpREIT”) format pursuant to which it serveswe serve as the sole general partner of, and conductsconduct substantially all of itsour business through its Operating Partnership subsidiary, ZAIS FinancialSutherland Partners, L.P., a Delaware limited partnership. The CompanyLP, or our operating partnership, which serves as our operating partnership subsidiary. We also expectsintend to operate itsour business soin a manner that it is not requiredwill permit us to registerbe excluded from registration as an investment company under the 1940 Act.

Our Path to Becoming a Public Company

Our history of acquiring SBC loans traces back to August 2007 when the Victoria series of funds (“Victoria Funds”) made their initial acquisition of an equity tranche of an SBC loan securitization. The Company is externallyVictoria Funds were formed and managed by our Manager to invest in a range of loan products requiring active management to generate returns. Our business was operated as part of the Advisor,Victoria Funds until November of 2011 at which time the Victoria Funds contributed

substantially all of their SBC loans to our operating partnership in exchange for substantially all of the operating partnership’s units, representing $371.5 million in assets and $262.2 million of equity capital. In November of 2013, we completed the private placement of shares of common stock and operating partnership units (“OP units”), pursuant to which we raised approximately $226 million of equity capital. Concurrently with the closing of the 2013 private placement, we engaged in a series of transactions, referred to as the REIT formation transactions, in order to allow us to conduct our business as a REIT for U.S. federal income tax purposes. As part of these transactions, we became a Maryland corporation.

On October 31, 2016, we completed our path to becoming a publicly traded company through our merger with and into a subsidiary of ZAIS Group, LLC ("ZAIS"),Financial, with ZAIS Financial surviving the merger and has no employees other than those employed by GMFS,changing its wholly-owned subsidiary. GMFS had 246 employees at December 31, 2015.

As announced on November 4, 2015, the Company has engagedname to Sutherland Asset Management Corporation. Prior to and as a financial advisor to assist it in evaluating potential strategic alternatives to enhance stockholder value. The continuing strategic review includes the exploration of merger or sale transactions involving the Company or a liquidation of the Company's assets. The Company and its financial advisor have engaged in preliminary discussions with several potential counterparties. While the Company is currently engaged in discussions with a potential counterparty about a potential merger or sale transaction, there is no assurance that the discussions will lead to a definitive merger or sale transaction, which would be subject to approval by the Company’s Board of Directors and its stockholders. In the event that the Company does not reach a definitive agreement with respect to a merger or sale transaction, management of the Company intends to presentcondition to the Company’s Boardmerger, ZAIS Financial disposed of Directors for its consideration a plan of liquidation. There is no assurance that the Company’s board of directors will approve any plan of liquidation and recommend its acceptance by the Company’s stockholders. In light of the strategic review and in order to reduce current market risk in its investment portfolio,the Company has recently begun the process of selling its seasoned re-performing mortgage loan portfolio, such that upon the completion of the merger, ZAIS Financial’s assets largely consisted of its GMFS origination subsidiary, cash, conduit loans, from itsand residential mortgage investments segment. A sale of these assets is expected to be completed early in the second quarter of 2016. If completed, these mortgage loan sales are likely to result in a reduction of the Company’s investment income and may therefore result in a decision to curtail dividends in the future. Additionally, as part of the strategic review, the Company has made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit purchase program and will begin the unwinding of the Company’s mortgage conduit business. Consistent with these changes to the Company’s strategy, on March 9, 2016, Brian Hargrave resigned as the Company’s Chief Investment Officer and will be succeeded by Christian Zugel, the current Chairman of the Company’s board of directors. The Company does not intend to disclose further developments until the review is complete and the Company’s board of directors has taken action with respect to the strategic review.

Acquisition of GMFS

On August 5, 2014, the Company entered into a merger agreement with GMFS (the “GMFS Merger Agreement”backed securities (“RMBS”).  PursuantAdditionally, prior to the terms of the GMFS Merger Agreement among ZFC Honeybee TRS, LLC ("Honeybee TRS"), an indirect subsidiary of the Company, ZFC Honeybee Acquisitions, LLC ("Honeybee Acquisitions"), a wholly owned subsidiary of Honeybee TRS, GMFS, and Honeyrep, LLC, solely in its capacity as the security holder representative, Honeybee Acquisitions merged with and into GMFS on October 31, 2014, with GMFS continuing as the surviving entity and an indirect subsidiary of the Company. GMFS is an approved Fannie Mae Seller-Servicer, Freddie Mac Seller-Servicer, Ginnie Mae issuer, Department of Housing and Urban Development ("HUD") / Federal Housing Administration ("FHA") Mortgagee, U.S. Department of Agriculture ("USDA") approved originator and U.S. Department of Veterans Affairs ("VA") Lender. GMFS currently originates loans that are eligible to be purchased, guaranteed or insured by Fannie Mae, Freddie Mac, FHA, USDA and VA through retail, correspondent and broker channels. GMFS also originates and sells reverse mortgage loans as part of its existing operations.

The final purchase price was approximately $61.2 million, net of approximately $1.7 million received from an escrow account pursuant to the GMFS Merger Agreement, based on the final reconciliation of GMFS's net tangible assets. The net tangible assets at closing were comprised of the estimated fair value of GMFS's MSR portfolio, the estimated value of GMFS's net tangible assets and a purchase price premium. In addition to cash paid at closing, two contingent $1 million deferred premium payments payable in cash over two years, plus potential additional consideration based on future loan production and profits will be payable over a four-year period if certain conditions are met (the “Production and Profitability Earn-Out”). The $2 million of deferred premium payments is contingent on GMFS remaining profitable and retaining certain key employees. The Production and Profitability Earn-Out is dependent on GMFS achieving certain profitability and loan production goals and is capped at $20 million. Up to 50% of the Production and Profitability Earn-Out may be paid in common stock of the Company, at the Company's option. The estimated present value of the total contingent consideration at October 31, 2014 was $11.4 million based on the future production and earnings projections of GMFS over the four-year earn-out period (at December 31, 2015 the contingent consideration liability was $11.3 million). The Company funded the closing cash payment through a combination of available cash and the sale of a portion of its non-Agency RMBS portfolio. As discussed above, pursuant to the GMFS Merger Agreement, based on the final reconciliation of the October 31, 2014 values, the Company received approximately $1.7 million in June 2015 from an escrow account established at the time of the closing. The Company recorded a reduction to goodwill in the consolidated balance sheets that included this amount, along with other final closing adjustments.

The Company is externally managed by the Advisor, a subsidiary of ZAIS. On March 17, 2015, a business combination was completed between HF2 Financial, a special purpose acquisition company, and ZAIS Group Parent, LLC ("ZGP"), which wholly owns ZAIS, pursuant to a definitive agreement dated September 16, 2014. The current owners of ZGP did not receive any proceeds at the closing of the transactionmerger, ZAIS Financial completed a tender offer, purchasing 4,185,478 shares of common stock from existing ZAIS Financial stockholders at a purchase price of $15.37 per share. In connection with the merger, 25,870,420 shares of common stock were issued to our pre-merger common stockholders and retained2,288,663 units in the operating partnership subsidiary (“OP units”) were issued to our pre-merger OP unit holders. Our pre-merger stockholders held approximately 86% of our stockholders’ equity as a significant equity stake in ZGP. Following the closeresult of the transaction, ZAIS'smerger, with continuing ZAIS Financial stockholders holding approximately 14% of our stockholders’ equity, on a fully diluted basis. We were designated as the accounting acquirer because of our larger pre-merger size relative to ZAIS Financial, the relative voting interests of our stockholders after consummation of the merger, and our senior management team has remained in place to continue to leadand board of directors continuing on after the combined organization.

At December 31, 2015,consummation of the Company held a diversified portfoliomerger.  Because we were designated as the accounting acquirer, our historical financial statements (and not those of mortgage loans, RMBS assetsZAIS Financial) are the historical financial statements following the consummation of the merger and MSRs with an aggregate fair value of $671.2 million, comprised of:

Residential Mortgage Investments

ResidentialMortgage Banking

The borrowings the Company used to fund its portfolio held for investment totaled $426.6 million at December 31, 2015, under: (i) a master repurchase agreement with Citibank, N.A. (the "Citi Loan Repurchase Facility") to fund its distressed and re-performing loan portfolio, (ii) a master repurchase facility with Credit Suisse First Boston Mortgage Capital LLC (the "Credit Suisse Loan Repurchase Facility", and together with the Citi Loan Repurchase Facility, the "Loan Repurchase Facilities") to fund its newly originated loan portfolio, (iii) master securities repurchase agreements with four counterparties and (iv) the 8.0% Exchangeable Senior Notes due 2016 (the "Exchangeable Senior Notes"). Additionally, the borrowings the Company used to fund the origination of its mortgage loans held for sale portfolio totaled $100.8 million at December 31, 2015 under warehouse lines of credit and repurchase agreements with four lenders with an aggregate borrowing capacity of $185.0 million.

 The Company’s principal place of business is Two Bridge Avenue, Suite 322, Red Bank, New Jersey 07701-1106. The Company’s telephone number is (732) 978-7518. The Company’s website address is www.zaisfinancial.com. The information found on, or otherwise accessible through, the Company’s website is not incorporated into, and does not form a part of, this report.

INVESTMENT STRATEGY

The Company’s objective is to provide attractive risk-adjusted returns to its stockholders, primarily through quarterly distributions and secondarily through capital appreciation. The Company uses the experience and relationships developed in managing the whole loan investment platform of funds managed by ZAIS. The Company’s whole loan strategy has included secondary market purchases of seasoned mortgage loans, a newly originated non-agency loan purchase program and an origination platform. The Company believes that its target assets have presented attractive risk-adjusted return profiles. As market conditions have changed over time, the Company has adjusted its strategy by shifting its asset allocations across its target asset classes to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions. See “Item 1. Business-General”are included in this annual report on Form 10-K for a discussion10-K.  On November 1, 2016, we began trading on the Company’s recent strategic review.New York Stock Exchange (“NYSE”) under ticker symbol “SLD”.

The Company reliesOur Manager

We are externally managed and advised by our Manager, an SEC registered investment adviser. Formed in 2005, Waterfall specializes in acquiring, managing, servicing and financing SBC and residential mortgage loans, as well as asset backed securities (“ABS”) and MBS. Waterfall has extensive experience in performing and non-performing loan acquisition, resolution and financing strategies. Waterfall’s investment committee is chaired by Thomas Capasse and Jack Ross, who serve as our Chief Executive Officer and President, respectively. Messrs. Capasse and Ross, who are co-founders of Waterfall, each have over 25 years of experience in managing and financing a range of financial assets, including having executed the first public securitization of SBC loans in 1993, through a variety of credit and interest rate environments. Messrs. Capasse and Ross have worked together in the same organization for more than 20 years. They are supported by a team of approximately 100 investment and other professionals with extensive experience in commercial mortgage credit underwriting, distressed asset acquisition and financing, SBC loan originations, commercial property valuation, capital deployment, financing strategies and legal and financial matters impacting our business.

We rely on the Advisor’s investmentWaterfall’s expertise in identifying loan acquisitions and efficiently financingorigination opportunities. Waterfall uses the data and analytics developed through its assets. The Advisorexperience as an owner of SBC loans and in implementing loss mitigation actions to support its origination activities and to develop its loan underwriting standards. Waterfall makes investment decisions based on a variety of factors, including expected risk-adjusted returns, credit fundamentals, liquidity, availability of adequate financing, borrowing costs and macroeconomic conditions, as well as maintaining the Company’sour REIT qualification and its exemptionour exclusion from registration as an investment company under the 1940 Act.

Our Investment Strategy and Market Opportunities Across Our Operating Segments

Our investment strategy is to opportunistically expand our market presence in our acquisition and origination segments and further grow our SBC securitization capabilities which serve as a source of attractively priced, match-term financing.  Following our 2013 private placement transaction, we capitalized on the dislocation of the credit markets and depressed levels of available capital by acquiring SBC loans from distressed sellers at historically high risk-adjusted returns.  Alongside the growth in our acquired loan portfolio and using our experience in underwriting and managing such loans, we built out our SBC and SBA origination capabilities and most recently added a residential agency mortgage origination component.  As such, we have become a full-service real estate finance platform and we believe that the breadth of our business allows us to adapt to market conditions and deploy capital in our asset classes with the most attractive risk-adjusted returns.

Our acquisition strategy complements our origination strategy by increasing our market intelligence in potential origination geographies, providing additional data to support our underwriting criteria and offering securitization market insight for various product offerings. The Companyproprietary database on the causes of borrower default, loss severity, and market information that we developed from our SBC loan acquisition experience has followed a predominantly long-term buyserved as the basis for the development ofour SBC and holdSBA loan origination programs. Additionally, our origination strategy complements our acquisition strategy by providing additional captive refinancing options for our borrowers and further data to support our investment analysis while increasing our market presence with potential sellers of SBC assets.

The following table illustrates certain information with respect to manyour four business segments as of December 31, 2017. 

According to the assets that it has acquired outside itsFederal Reserve, the U.S. commercial mortgage banking operations.market including multi-family residences, and nonfarm, nonresidential mortgages totaled approximately $4.0 trillion as of December 2017.  The Company’s target assetscommercial mortgage market is largely bifurcated by loan size between “large balance” loans and “small balance” loans.  Large balance commercial loans typically include those loans with original principal balances of at least $20 million and are as follows:primarily financed by insurance companies and commercial mortgage backed securities (“CMBS”) conduits.  SBC loans typically include those loans with original principal amounts of between $500,000 and $10 million and are primarily financed by community and regional banks, specialty finance companies and loans guaranteed under the SBA loan programs.

Residential Mortgage Loans. Prime,SBC loans are used by small businesses to purchase real estate used in their operations or by investors seeking to acquire small multi-family, office, retail, mixed use or warehouse properties. SBC loans represent a special category of commercial mortgage loans, sharing both commercial and residential mortgage loan characteristics. SBC loans are typically secured by first mortgages on commercial properties or other business assets, but because SBC loans are also often accompanied by personal guarantees, aspects of residential mortgage credit analysis are utilized in the underwriting process. Most SBC loans are fully amortizing on a schedule of up to 30 years.

The table presented below illustrates a summary of how our Manager categorizes SBC loans compared to other real estate loan asset classes.

We rely on our Manager’s expertise in identifying SBC loans for us to acquire. Our Manager will make decisions based on a variety of factors, including expected risk-adjusted returns, credit fundamentals, liquidity, availability of financing, borrowing costs and macroeconomic conditions, as well as maintaining our REIT qualification and our exclusion from registration as an investment company under the 1940 Act. Our investment decisions will depend on prevailing market conditions and may change over time in response to opportunities available in different economic and capital market environments. As a result, we cannot predict the percentage of its equity that will be invested in any particular asset or strategy at any given time.

Our Loan Portfolio

The table below presents a summary of the sourcing of our loan assets as of December 31, 2017 (in thousands):

The charts presented below illustrates additional information related to the geographic concentration, collateral concentration, and lien type of our loan portfolio:

Our SBC Loan Acquisition Platform

Our SBC loan acquisition segment represents our investments in acquired SBC loans. We hold performing SBC loans to term, and we seek to maximize the value of the non-performing SBC loans acquired by us through proprietary loan modification programs. Where this is not possible, such as in the case of many non-performing loans, we seek to effect property resolution through the use of resolution alternatives to foreclosure.

Our Manager specializes in acquiring SBC loans that are sold by banks, including as part of bank recapitalizations or mergers, and from other financial institutions such as thrifts and non-bank lenders. Other sources of SBC loans include special servicers of large balance SBC ABS and CMBS trusts, the Federal Deposit Insurance Corporation, as receiver for failed banks, servicers of non-performing SBA Section 7(a) Program loans, and Community Development Companies originating loans under the SBA 504 program, GSEs, and state economic development authorities. Over the last several years, our Manager has developed relationships with many of these entities, primarily banks and their advisors. In many cases, we are able to acquire SBC loans through negotiated transactions, at times partnering with acquiring banks or private equity firms in bank acquisitions and recapitalizations. We believe that our Manager’s experience, reputation and ability to underwrite SBC loans make it an attractive buyer for this asset class, and that its network of relationships will continue to produce opportunities for it to acquire SBC loans on attractive terms.

Competition for SBC loan asset acquisitions has been limited due to the special servicing expertise required to manage SBC loan assets due to the small size of each loan, the uniqueness of the real properties that collateralize the loans, licensing requirements, the high volume of loans needed to build portfolios, and the need to utilize residential mortgage credit analysis in the underwriting process. These factors have limited institutional investor participation in SBC loan acquisitions, which has allowed us to acquire SBC loans with attractive risk-adjusted return profiles.

The following table summarizes our loan acquisitions since 2008, including acquisitions prior to the formation of our operating partnership in November 2011 when our business was operated as part of the Victoria Funds, as of December 31, 2017:

The following chart sets forth certain information as of December 31, 2017 related to the unlevered yields on our acquired loan portfolio:

The following table sets forth certain information as of December 31, 2017 related to our acquired loan portfolio (in thousands):

Waterfall’s extensive experience in securitization strategies for SBC loans dates to the first SBC ABS for performing loans and liquidating trusts for non-performing loans purchased from the Resolution Trust Corporation in 1993. We believe that in 2011, we were the first post-financial crisis issuer of SBC ABS and have since completed several SBC bond issuances backed by newly originated and acquired SBC and SBA 7(a) loan assets. The following table summarizes our acquired loan securitization activities:

Our Loan Origination Platforms

We originate SBC loans generally ranging in initial principal amount of between $500,000 and $10 million, and typically with a duration of six years at origination. Our origination platform, which focuses on first mortgage loans, provides conventional SBC mortgage financing for SBC properties nationwide through the following programs:

Additionally, as a large regional mortgage lender, we are approved to originate and service Fannie Mae, Freddie Mac and Ginnie Mae eligible loans through the residential mortgage loan programs. These include prime, subprime and alternative-A and alternative-B mortgage loans, which may be adjustable-rate, hybrid and/or fixed-rate residential mortgage loans and pay option adjustable rate mortgage loans (“ARMs”).

Our origination platforms include the following segments: (i) SBC Originations (ii) SBA Originations and (iii) Residential Mortgage Originations.

SBC Originations

We operate our SBC loan originations segment through ReadyCap Commercial. ReadyCap Commercial is a specialty-finance nationwide originator focused on originating commercial real estate mortgage loans through its conventional, agency multi-family and transitional loan programs. The Company acquires seasonedfollowing table summarizes the loan features of ReadyCap Commercial’s three product types:

                                      (1) Bonds guaranteed by the GSEs.

Through December 31, 2017, we have originated more than $2.2 billion in SBC loans in 36 states since ReadyCap Commercial’s inception in September 2012.    The following chart summarizes our SBC conventional loan originations since ReadyCap Commercial’s formation:

As of December 31, 2017, our originated SBC loans held in our portfolio had a UPB of $1,094.3 million and a carrying value of approximately $1,109.2 million. Our originated SBC loans, substantially all of which are currently classified as performing loans, represented approximately 51.0% of the UPB and 53.3% of the carrying value of our total loan portfolio as of December 31, 2017.

The following table summarizes our originated SBC loan securitization activities:

Additionally, ReadyCap has been approved by Freddie Mac as one of 11 originators and servicers for multi-family loan products under the Freddie Mac program. As of December 31, 2017, ReadyCap employs 68 people focused on originating and supporting the SBC loan origination business.

The SBC loan origination market is highly fragmented, with few dedicated lenders. Furthermore, we believe that as economic conditions continue to stabilize or strengthen, the volume of short-term loan extensions and restructurings of existing SBC loans will be reduced, resulting in increased opportunities for us to originate new SBC loans.

We believe that we have significant opportunity to originate SBC loans at attractive risk-adjusted returns. We believe that many banks have restrictive credit guidelines for our target assets. In addition, large banks are not focused on the SBC market and smaller banks only lend in specific geographies. We see an opportunity to earn an attractive risk spread premium by lending to borrowers that do not fit the credit guidelines of many banks. We believe that increased demand, coupled with the fragmentation of the SBC lending market, provides us with attractive opportunities to originate loans to borrowers with strong credit profiles and real estate collateral that supports ultimate repayment of the loans.

We expect to continue to source SBC loan originations through the following loan origination channels:

SBA Origination, Acquisition and Servicing Platform

We operate our SBA loan origination, acquisition, and servicing segment through ReadyCap Lending. We acquire, originate and service owner-occupied loans guaranteed by the SBA under the SBA Section 7(a) Program through  ReadyCap Lending’s license, one of only 14 licensed non-bank SBLCs. In the future, we may also originate SBC loans for real estate under the SBA 504 loan program, pursuant to which the SBA guarantees subordinated, long-term financing. We believe investor demand for pass-through securities backed by the guaranteed portions of SBA Section 7(a) Program loans has been strong because the principal and interest payments are guaranteed by the full faith and credit of the U.S. Government. For this reason, we believe that SBA participating lenders that have sold the guaranteed portions of SBA Section 7(a) Program loans in recent years have been able to recognize attractive gains.

The SBA was created out of the Small Business Act in 1953. The SBA’s function is to protect the interests of small businesses. The SBA classifies a small business as a business that is organized for profit and is independently owned and operating primarily within the United States with less than $15 million in tangible net worth and not more than $5 million in average after-tax net income. The SBA supports small businesses by administering several programs that provide loan guarantees against default on qualified loans made to eligible small businesses.

The SBA Section 7(a) Program is the SBA’s primary program for providing financing for start-up and existing small businesses. The SBA typically guarantees 75% of qualified loans over $150,000. While the eligibility requirements of the SBA Section 7(a) Program vary depending on the industry of the borrower and other factors, the general eligibility requirements include the following: (i) gross sales of the borrower cannot exceed size standards set by the SBA (e.g., $30.0 million for limited service hospitality properties) or, alternatively, average net income cannot exceed $5.0 million for the most recent two fiscal years, (ii) liquid assets of the borrower and affiliates cannot exceed specified limits, (iii) tangible net worth of the borrower must be less than $15.0 million, (iv) the borrower must be a U.S. citizen or legal permanent resident and (v) the maximum aggregate SBA loan guarantees to a borrower cannot exceed $3.75 million. The table below provides information on the SBA Section 7(a) Program’s key features, including its eligible uses, maximum loan amount, loan maturity, interest rate, guarantee fee, yearly fee and personal guarantee.

Sources:  SBA, Business Development Corporation, Office of the Comptroller of the Currency, Congressional Research Service

      Our return on equity related to the SBA 7(a) program is generated through retained yield on the unguaranteed principal balance as well as sale premium and retained servicing on the guaranteed principal balance as displayed by the following:

The following table sets forth certain information as of December 31, 2017 related to our acquired SBA 7(a) loan portfolio (in thousands):

We have originated more than $188.7 million in SBA loans in 37 states since the program’s inception in mid-2015 through December 31, 2017. As of December 31, 2017, our originated SBA loans held in our loan portfolio had a UPB of $58.9 million and a carrying value of approximately $58.0 million.

The following table sets forth certain information as of December 31, 2017 related to our sale of originated SBA loans (in thousands):

The following table sets forth certain information as of December 31, 2017, related to our SBA servicing portfolio (in thousands):

We use the securitization markets to access term financing on the unguaranteed retained portion of the SBA 7(a) Program loans. The following table summarizes our SBA loan securitization activities:

Residential Mortgage Origination Platform

In connection with our merger with ZAIS Financial on October 31, 2016, as described above, we added a residential mortgage loan origination component through GMFS, our wholly-owned subsidiary.  GMFS currently originates loans that are eligible to be purchased, guaranteed or insured by Fannie Mae, Freddie Mac, FHA, VA and USDA through retail, correspondent and broker channels. GMFS is licensed in 18 states and provides a wide range of residential mortgage services, including home purchase financing, mortgage refinancing, reverse mortgages, new construction loans and condo financing. GMFS operates through 13 retail branches located in Louisiana, Georgia, Mississippi, Alabama, and Texas.GMFS employs both a servicing retained and servicing released execution strategy, while retaining approximately 85-90% of current production.  Our residential mortgage loan portfolio represented approximately 6.3% of the carrying value and 5.9% of the UPB of our total loan portfolio as of December 31, 2017. Our residential mortgage origination platform employed a total of 248 people as of December 31, 2017. 

GMFS adds a residential origination platform to our sourcing capabilities, allowing access to new credit investment opportunities while controlling the origination process.  We believe we can enhance and grow the GMFS origination platform through better access to capital and an expanded product offering. In addition, using this platform we intend to continue to invest in MSRs through retention and secondary market transactions and to selectively pursue new residential product offerings.

Highlights of the historical GMFS origination activity by purpose for the year ended December 31, 2017 are as follows:

The following table sets forth certain historical information related to the GMFS servicing of residential mortgage loans:

Highlights of the GMFS operating activity (which is included in our residential mortgage banking segment) for the year ended December 31, 2017 are as follows:

Our management team has extensive experience and an established track record of operating through multiple market cycles.  We primarily originate, sell and service conventional, conforming agency and government insured residential mortgage loans that are primarily, but not exclusively, performingoriginated or acquired through our three channels: retail, correspondent and re-performingwholesale. Our mortgage lending operation generates origination and processing fees, net of origination costs, at the time of acquisition. The Company also acquires newly originated non-agencyorigination as well as gains or unexpected losses when the loans through its loan purchase program, which provides approved sellers a web-based platform forare sold to third party investors, including the pricing, lockingGSEs and fundingGinnie Mae. We retain servicing rights from the mortgage originations and earn servicing fees, net of individual loans which must adhere to loan eligibility criteria and underwriting guidelines. The Company also originates and services agency and government guaranteed residentialsub-servicer costs, from our mortgage loans through GMFS.servicing portfolio.

Non -Agency RMBS. RMBSWe believe that we have a significant opportunity to expand our footprint within the mortgage banking industry through:

Our Loan Pipeline

We have a large and active pipeline of potential acquisition and origination opportunities that are not issuedin various stages of our investment process. We refer to assets as being part of our acquisition pipeline or guaranteedour origination pipeline if:

As of December 31, 2017, our Manager has identified approximately $682.0 million in potential assets as measured by the fully committed amounts of the loans, comprised of:

We operate in a U.S. Government agencycompetitive market for investment opportunities and competition may limit our ability to originate or federally chartered corporation, with an emphasis on securities that, when originally issued, were ratedacquire the potential investments in the highest rating category bypipeline. The consummation of any of the potential loans in the pipeline depends upon, among other things, one or more of the nationally recognized statistical rating organizations.

The mortgage loan collateral for non-Agency RMBS consistsfollowing: available capital and liquidity, our Manager’s allocation policy, satisfactory completion of residential mortgage loans that do not generally conform to underwriting guidelines issued by Fannie Mae, Freddie Mac or Ginnie Mae,our due to certain factors, including mortgage balances in excessdiligence investigation and investment process, approval of agency underwriting guidelines, borrower characteristics, loan characteristics and level of documentation, and therefore are not issued or guaranteed by an agency of the U.S Government. The mortgage loan collateral may be classified as prime, subprime and alternative-A and alternative-B mortgage loans, which may be adjustable-rate, hybrid and/or fixed-rate residential mortgage loans, and pay option ARMs.

MSRs. MSRs provide a mortgage servicerour Manager’s Investment Committee, market conditions, our agreement with the right to service a pool of mortgages in exchange for a portion of the interest payments madeseller on the underlying mortgages.terms and structure of such potential loan, and the execution and delivery of satisfactory transaction documentation. Historically, we have acquired less than a majority of

the Company targetsassets in our Manager’s pipeline at any one time and there can be collateralized by either fixed rate loansno assurance the assets currently in its pipeline will be acquired or ARMs. The Company has the discretion to invest in Agency RMBS through TBA contracts, which are forward contracts for the purchase of Agency RMBS at a predetermined price with a stated face amount, coupon and stated maturity at an agreed upon future date.

Other Real Estate-Related and Financial Assets. IOs created from RMBS are mortgage-backed securities structured with two or more classes that receive different distributions of interest on a pool of Agency RMBS or non-Agency RMBS or whole loans. Subject to maintaining its REIT status pursuant to the Internal Revenue Code, the Company may acquire debt and equity tranches of securitizations backed by various asset classes, including small balance commercial mortgages, manufactured housing, aircraft, automobiles, credit cards, equipment, franchises, recreational vehicles and student loans.

Asset Allocations. At December 31, 2015, the Company held a diversified portfolio of mortgage loans, RMBS assets and MSRs with an aggregate fair value of $671.2 million, comprised of: (i) performing, re-performing and newly originated loans held for investment with a fair value of $397.7 million, (ii) mortgage loans originated by our Manager in the GMFS mortgage banking platform and held for sale with a fair value of $116.0 million, (iii) RMBS assets with a fair value of $109.3 million, and (iv) MSRs with a fair value of $48.2 million. As market conditions have changed, the Company has adjusted its strategy by shifting its asset allocations across its target asset classes. The Company has relied on the Advisor’s expertise in identifying assets within the target assets described above and, to the extent that leverage was employed, efficiently financing those assets. The Company’s allocation decisions have been based on a variety of factors, including expected risk-adjusted returns, credit fundamentals liquidity and the availability of certain assets.future.

FINANCING STRATEGY

The Company usesWe use prudent leverage primarily for the purposes of financing its portfolio and increasingto increase potential returns to stockholders rather thanour stockholders. We finance the loans we originate primarily through securitization transactions, as well through other borrowings. We also plan to sell the guaranteed portion of our SBA loan originations in the secondary market.

Our Manager’s extensive experience in non-performing and performing loan acquisition, origination, servicing and securitization strategies has enabled us to complete several securitizations of SBC loan and SBA 7(a) loan assets since January 2011. SBC securitization structures are non-recourse and typically provide debt equal to 50% to 90% of the cost basis of the SBC assets. Non-performing SBC ABS involve liquidating trusts with liquidation proceeds used to repay senior debt. Performing SBC ABS involve longer-duration trusts with principal and interest collections allocated to senior debt and losses on liquidated loans to equity and subordinate tranches. Our strategy is to continue to finance our assets through the securitization market, which will allow us to continue to match fund the SBC loans pledged as collateral to secure these securitizations on a long-term non-recourse basis.

We anticipate using other borrowings as part of our financing strategy, including re-securitizations, repurchase agreements, warehouse facilities, bank credit facilities (including term loans and revolving facilities), and public and private equity and debt issuances.

As of December 31, 2017, our committed and outstanding financing arrangements included:

Although we are not required to maintain any specific debt-to-equity leverage ratio, the amount of leverage we may employ for particular assets will depend upon the availability of particular types of financing and our Manager’s assessment of the credit, liquidity, price volatility and other risks of those assets and financing counterparties. We are currently targeting on a debt-to-equity basis, 3:1 to 4:1 leverage on performing SBC loans we purchase or originate and finance through non-recourse securitization structures and 1:1 to 3:1 leverage on non-performing SBC loans that we purchase. Our expected leverage ratios for our recourse debt are 1.5:1 to 3:1. We believe that these target leverage ratios are conservative for these asset classes and exemplify the conservative levels of borrowings we intend to use over time. We intend to use leverage for the primary purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates. The Company funds the origination and acquisition of its target assets through the use of prudent amounts of leverage. The borrowings the Company used to fund its portfolio totaled approximately $527.4 million as of December 31, 2015 under the warehouse lines of credit and repurchase agreements with four counterparties, Loan Repurchase Facilities and master securities repurchase agreements with four counterparties. Additionally, $57.5 million aggregate principal amount of the Exchangeable Senior Notes were outstanding as of December 31, 2015.

The Company’s income is generated primarily by the net spread between the income it earns on its assets and the cost of its financing and hedging activities in its residential mortgage investments segment, and the origination, sale and servicing of residential mortgage loans in its residential mortgage banking segment. Although the Company is not required to maintain any particular leverage ratio, the amount of leverage it deploys for particular investments in its target assets depends upon the Advisor’s assessment of a variety of factors, whichWe may, include the anticipated liquidity and price volatility of the assets in its investment portfolio, the gap between the duration of its assets and liabilities, including hedges, the availability and cost of financing assets, its opinion of the creditworthiness of its financing counterparties, the health of the U.S. economy and residential and commercial mortgage-related markets, its outlook for the level, slope, and volatility of interest rates, the credit quality of collateral underlying the Company’s residential mortgage loans, non-Agency RMBS and other target assets, its outlook for asset spreads relative to the LIBOR curve and regulatory requirements limiting the permissible amount of leverage tohowever, be utilized. Based on market conditions, the Company has deployed, on a debt-to-equity basis, up to four to one leverage on its seasoned residential whole loans and up to three to one leverage on its non-Agency RMBS assets. Any leverage on newly originated loans may have been significantly greater than the leverage used on its seasoned loan portfolio depending on the characteristics of the newly originated loans. Additionally, to the extent the Company securitizes any residential mortgage loans in the future, it expects that the leverage obtained through such structures will vary considerably depending on the characteristics of the underlying loans.

The Company islimited or restricted in the amount of leverage itwe may employ by the terms and provisions of its existing borrowings as well asany financing or other financing agreements that itwe may enter into in the future. The Companyfuture, and we may also be subject to margin calls as a result of itsour financing activities. In addition, the Company intends to relyactivity. At December 31, 2017, we had a leverage ratio of 2.7x on short-term financing such as warehouse linesa total debt-to-equity basis, and a leverage ratio of credit, the duration of which may be less than 1 year, and repurchase transactions under master repurchase agreements, the duration of which may be 30 days for its securities repurchase agreements and 364 days for its Loan Repurchase Facilities.1.6x on a total recourse debt-to-equity ratio.

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this annual report on Form 10-K, for a discussion of the Company’s borrowings under the warehouse lines of credit and repurchase agreements, Loan Repurchase Facilities and securities repurchase agreements as of December 31, 2015 and the terms of the Exchangeable Senior Notes.HEDGING STRATEGY

The Company utilizes derivative financial instruments to hedge the interest rate risk associated with its borrowings. Subject to maintaining itsour qualification as a REIT, and exemption from registration as an investment company under the 1940 Act, the Companywe may also engage in a variety of interest rate management techniques that seek on one hand to mitigate the influence of interest rate changes on the values of some of its assets and on the other hand help the Company achieve its risk management objectives. The Company’s interest rate management techniques may include:use derivative financial instruments (or hedging instruments), including interest rate swap agreements, interest rate cap agreements, options on interest rate swaps, or

swaptions, financial futures, structured credit indices, and options in an effort to hedge the interest rate and credit spread risk associated with the financing of our portfolio. Specifically, we attempt to hedge our exposure to potential interest rate mismatches between the interest we earn on our assets and our borrowing costs caused by fluctuations in short-term interest rates, and we intend to hedge our SBC loan originations from the date the interest rate is locked until the loan is included in a securitization. We also use hedging instruments in connection with our residential mortgage loan origination platform in an attempt to offset some of the impact of prepayments on our loans. In particular, we use MBS forward sales exchange-traded derivativescontracts to manage the interest rate price risk associated with the interest rate lock commitments we make with potential borrowers.  In utilizing leverage and swaptions; putsinterest rate hedges, our objectives include, where desirable, locking in, on a long-term basis, a spread between the yield on our assets and calls on securities or indicesthe cost of securities; U.S. Departmentour financing in an effort to improve returns to our stockholders. We will undertake to hedge our originated loan inventory pending securitization with respect to changes in securitization liability cost resulting from both changes in benchmark treasuries and credit spreads. Hedges are periodically re-balanced to match expected duration of the Treasury securitiessecuritization and options on U.S. Departmentare closed at securitization issuance with the resulting gain or loss allocated to the retained basis in the securitization with the objective of protecting the Treasury securities; IOs and MSRs; and other similar transactions and financial instruments.yield for the aforementioned changes in securitization liabilities.

CORPORATE GOVERNANCE

The Company strivesWe strive to maintain an ethical workplace in which the highest standards of professional conduct are practiced.

COMPETITION

The Company’s earnings depend, in large part, on its ability to originate or acquire assets at favorable spreads over its borrowing costsWe compete with numerous regional and its ability to efficiently manage its portfolio risks. In originating or acquiring its target assets and establishing hedge positions, the Company competes with other existing mortgage REITs (both internally and externally managed), mortgage finance and specialty financecommunity banks, specialty-finance companies, savings and loan associations banks, mortgage bankers, insurance companies, hedge funds (including those managed by ZAIS), ZAIS, to the extent that ZAIS holds assets directly on its own behalf or indirectly through one or more of its subsidiaries, affiliates or other newly formed entities, mutual funds, institutional investors, investment banking firms, governmental bodies and other companies with similar asset acquisition objectives. It is likelyentities, and we expect that the Company will also compete with other entities whichothers may be organized in the future. Some of the Company’s competitors may have greater financial resources and access to lower cost of capital. These competitors may not be subject to the same regulatory constraints (such as REIT compliance or maintaining an exemption under the 1940 Act) as the Company. The effect of the existence of additional REITs and other market participantsinstitutions may be to increaseincreased competition for the available supply of mortgageSBC and SBA assets suitable for purchase, which may cause the price for such assets to rise. Additionally, origination of SBC loans, SBA loans and residential agency loans by our competitors may increase the availability of these loans, which may result in a reduction of interest rates on these loans.

In the face of this competition, we expect to have access to our Manager’s professionals and their industry expertise, which may provide us with a competitive advantage in sourcing transactions and help it assess acquisition and origination risks and determine appropriate pricing for potential assets. Additionally, we believe that we are currently one of only a handful of active market participants in the secondary SBC loan market. Due to the special servicing expertise needed to effectively manage these assets, the small size of each loan, the uniqueness of the real properties that collateralize the loans and the need to bring residential mortgage credit analysis into the underwriting process, we expect a competitive demand for these assets to remain constrained. We seek to manage credit risk through our loan-level pre-origination or purchase,pre-acquisition due diligence and underwriting processes, which as well asof December 31, 2017 has limited the amount of financing availablerealized

losses. However, we may not be able to achieve our business goals or expectations due to the Company through warehouse lines of credit, repurchase agreementscompetitive risks that we face. For additional information concerning these competitive risks, see “Item 1A - Risk Factors – Risks Related to Our Business – New entrants in the market for SBC loan acquisitions and other financing arrangements.originations could adversely impact our ability to acquire SBC loans at attractive prices and originate SBC loans at attractive risk-adjusted returns.”

EMPLOYEES; STAFFING

The Company isWe are managed by the Advisor, a subsidiary of ZAIS, pursuant to an amended and restated investment advisory agreement between the Company and the Advisor, dated as of August 11, 2014, as amended from time to time (the “Investment Advisory Agreement”). The Company’s GMFS mortgage banking platform employed a total of 246 people as of December 31, 2015. The Company has no employees other than those employed in connection with its GMFS mortgage banking platform. ZAIS was established in 1997 and is an investment adviser registered with the SEC specializing in structured credit, including residential whole loans, RMBS and ABS. As of December 31, 2015, ZAIS had approximately $4.2 billion of assets under management (comprised primarily of (i) total assets for mark-to-market funds and separately managed accounts; (ii) uncalled capital commitments, if any, for funds that are not in liquidation; and (iii) for issued structured vehicles, all assets being managed calculated per the management fee basis methodology defined in the respective vehicles’ indenture, although in certain circumstances some or all of the referenced management fees may be waived.  Assets under management also includes assets in the warehouse phase for new structured credit vehicles and is based on actual assets managed without reductions for leverage and most other liabilities and includes all assets regardless of whether management fees are being earned. ZAIS possesses a comprehensive analytics and technology infrastructure, credit modeling, loan and securities valuation, loan data management and servicing oversight capabilities and significant structuring and securitization experience. As of December 31, 2015, ZAIS’ team included 95 professionals in the United States and London. ZAIS is the managing member of the Advisor and ZAIS and its employees support the Advisor in providing services to the CompanyWaterfall pursuant to the termsmanagement agreement with Waterfall. Frederick Herbst, who is employed by Waterfall and serves as our Chief Financial Officer, is dedicated exclusively to us, and seven of a shared facilities and servicesWaterfall’s accounting professionals are also dedicated primarily to us. Waterfall or we may in the future hire additional personnel that may be dedicated to our business. Waterfall is not, however, obligated under the management agreement between ZAIS andto dedicate any of its personnel exclusively to our business, nor is it or its personnel obligated to dedicate any specific portion of its or their time to our business. Accordingly, with the Advisor. The Company relies on the Advisor and ZAISexception of our Chief Financial Officer, our executive officers are not required to provide or obtain, on the Company’s behalf, the personnel and services necessarydevote any specific amount of time to our business. We are responsible for the Companycosts of our own employees. However, with the exception of our ReadyCap Commercial, ReadyCap Lending and GMFS subsidiaries, which will employ its own personnel, we do not expect to conduct its business.have our own employees.

EXECUTIVE OFFICERS OF THE COMPANY

The Company is externally managed and advised by its Advisor, a subsidiary of ZAIS. The Company relies on its Advisor and ZAIS to provide or obtain, on its behalf, the personnel and services necessary for it to conduct its business because the Company has no employees of its own, other than those employed in connection with its GMFS mortgage banking platform. Pursuant to the terms of the Investment Advisory Agreement, the Advisor and its affiliates provide the Company with its management team, including its Chief Executive Officer, Chief Financial Officer, Chief Investment Officer and Chief Accounting Officer, along with appropriate support personnel. All of the Company’s officers and non-independent directors are also employees of ZAIS and its affiliates.

The following sets forth certain information with respect to the Company’sour executive officers:officers.

Set forth below is biographical information for our executive officers and other key personnel.

Michael Szymanski, 49, currentlyThomas E. Capasse is a Manager and co-founder of our Manager. Mr. Capasse also serves as Chairman of our board of directors and our Chief Executive Officer. Prior to founding Waterfall, Mr. Capasse managed the principal finance groups at Greenwich Capital from 1995 until 1997, Nomura Securities from 1997 until 2001, and Macquarie Securities from 2001 until 2004. Mr. Capasse has significant and long-standing experience in the securitization market as a founding member of Merrill Lynch’s ABS Group (1983 – 1994) with a focus on MBS transactions (including the initial Subprime Mortgage and Manufactured Housing ABS) and experience in many other ABS sectors. Mr. Capasse began his career as a fixed income analyst at Dean Witter and Bank of Boston. Mr. Capasse received a Bachelor of Arts degree in Economics from Bowdoin College in 1979.

Jack J. Ross is a Manager and co-founder of our Manager. Mr. Ross also serves as our President and as a member of our board of directors. Prior to founding Waterfall in January 2005, Mr. Ross was the founder of Licent Capital, a specialty broker/dealer for intellectual property securitization. From 1987 until 1999, Mr. Ross was employed by Merrill Lynch where he managed the real estate finance and ABS groups. Mr. Ross began his career at Drexel Burnham Lambert where he worked on several of the early ABS transactions and at Laventhol & Horwath where he served as a senior auditor. Mr. Ross received a Masters of Business Administration degree in Finance with distinction from the University of Pennsylvania’s Wharton School of Business in 1984 and a Bachelor of Science degree in Accounting, cum laude, from the State University of New York at Buffalo in 1978.

Frederick C. Herbst serves as a directorManaging Director of our Manager and as the Company’sour Chief Executive Officer and President. Mr. Szymanski currently serves as President of ZAIS and member of the ZAIS Management Committee, and as Chief Executive Officer of the Advisor and a member of the Advisor’s investment committee. Mr. Szymanski also serves as Chief Executive Officer, President and director of ZAIS Group Holdings, Inc. (“ZGH”), the parent company of ZAIS.Financial Officer. Prior to joining ZAIS,2009, Mr. Szymanski was Chief Executive Officer of XE Capital Management, LLC, an investment management firm specializing in structured products, from 2003 to 2008. Prior to that, Mr. SzymanskiHerbst was Chief Financial Officer of Zurich Capital Markets (“ZCM”)Clayton Holdings, Inc., a subsidiarypublicly traded provider of Zurich Financial Group, from 2000analytics and due diligence services to 2002. At ZCM, Mr. Szymanski managed global finance, accounting, tax, treasury, and risk management for a business specializingparticipants in structured products, including hedge fund linked derivatives and principal investments.the mortgage industry. Prior to that,Clayton Holdings, he was Chief Financial Officer of Arbor Realty Trust, Inc., a publicly traded real estate investment trust, from 2003 until 2005, and of Arbor Commercial Mortgage, LLC from 1999 until 2005. Prior to joining Arbor, Mr. SzymanskiHerbst was aChief Financial Officer of The Hurst Companies, Inc., Controller with The Long Island Savings Bank, FSB, Vice President in the Bank and Insurance Strategies GroupFinance with Eastern States Bankcard Association

and advisory services to financial institutions and corporations. Prior to that, Mr. Szymanski spent nine years at Ernst & Young LLP advising financial services clients, leaving as a Senior Manager with Ernst & Young. Mr. Herbst received a Bachelor of Arts degree in the Capital Markets/M&A Advisory GroupAccounting from Wittenberg University in New York.1979. Mr. Szymanski servedHerbst became a CPA in E&Y’s National Office-Financial Services Industries Group, providing internal consultation services1983.

Thomas Buttacavoli is a Manager, Managing Director and co-founder of our Manager. Mr. Buttacavoli serves as our Chief Investment Officer and Portfolio Manager of our SBC loan portfolio. Prior to resolve clients’ accounting and regulatory issues,joining Waterfall in 2005, Mr. Buttacavoli was a Structured Finance Analyst specializing in financial instruments.intellectual property securitization at Licent Capital. Prior to joining Licent Capital, he was a Strategic Planning Analyst at BNY Capital Markets. Mr. Szymanski isButtacavoli started his career as a CPA andFinancial Analyst within Merrill Lynch’s Partnership Finance Group. Mr. Buttacavoli received a B.A.Bachelor of Arts degree in Business Administration with a concentration in Accountancy from the University of Notre DameFinance and an Executive M.B.A. with a concentration in FinanceAccounting from New York University’s Stern School of Business.Business in 1999.

Donna Blank, 55, currentlyCarole A. Mortensen serves as the Company’sa Managing Director of our Manager and as our Chief Financial Officer and also serves as Chief Financial Officer at ZAIS and ZGH.Operating Officer. Prior to joining Waterfall in 2011, Ms. Mortensen held several positions within the Company,financial services industry including Ally Bank (GMAC ResCap), UBS Investment Bank, Credit Suisse and Moody's Investors Service. Ms. Blank served as the Executive Vice President and Chief Financial Officer of National Financial Partners from 2008 to 2013. From 2003 to 2008, Ms. Blank was the Chief Financial Officer of Financial Guaranty Insurance Company. Ms. BlankMortensen received a B.A.Bachelor of Arts degree in Political Science from theSeton Hall University of Michigan. She holds an MBA in Finance, and a Master in International Affairs, both from Columbia University.1992.

Christian M. Zugel, 55, founded ZAIS in 1997 and currently serves as the Chairman of the Company’s board of directors and its Chief Investment Officer. Mr. Zugel also serves as Chairman of the board of directors of ZGH and as Chief Investment Officer of ZGH. Prior to founding ZAIS Group, Mr. Zugel was a senior executive with J.P. Morgan Securities Inc., where he led J.P. Morgan’s entry into many new trading initiatives. At J.P. Morgan, Mr. Zugel also served on the Asia Pacific management-wide and firm-wide market risk committees. Mr. Zugel received a Masters in Economics from the University of Mannheim, Germany.

Nisha Motani, 44, currently serves as the Company’s Chief Accounting Officer and Chief Accounting Officer of ZGH. She also serves as and Director of Fund Reporting at ZAIS where she oversees annual audits, monthly net asset value reporting, quarterly and annual financial statement reporting, and informational requests from investors for all entities managed by ZAIS. Ms. Motani is also responsible for setting internal accounting policies and procedures, researching accounting issues, and serving as a direct liaison to the auditors and tax preparers for entities managed by ZAIS. Prior to joining ZAIS in October 2003, Ms. Motani worked as a senior manager in the Financial Services audit practice of Deloitte & Touche where she specialized in investment management. She is a CPA with a B.S. in Accounting from Rutgers School of Business.

AVAILABLE INFORMATION

The Company maintainsWe maintain a website at www.zaisfinancial.comwww.sutherlandam.com and will make available, free of charge, on itsour website (a) itsour annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (including any amendments thereto), proxy statements and other information (collectively, “Company Documents”) filed with, or furnished to, the SEC, as soon as reasonably practicable after such documents are so filed or furnished, (b) Corporate Governance Guidelines, (c) director independence standards,Director Independence Standards, (d) Code of Conduct and Ethics and (e) written charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee of the board of directors. Company Documents filed with, or furnished to, the SEC are also available for review and copying by the public at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549 and at the SEC’s website at www.sec.gov. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The Company providesWe provide copies of itsour Corporate Governance Guidelines and Code of Conduct and Ethics, free of charge, to stockholders who request such documents. Requests should be directed to Marilyn Meek, Financial Relations Board, an MWW CompanyJacques Cornet, ICR, Inc., at 304 Park685 Third Avenue, South, 8^th2nd Floor, New York, New York 10010.NY 10017.

Item 1A. Risk Factors.Factors

The Company'sOur business and operations are subject to a number of risks and uncertainties, the occurrence of which could adversely affect itsour business, financial condition, consolidated results of operations and ability to make distributions to stockholders and could cause the value of the Company'sour capital stock to decline. Please refer to the section entitled "Forward-Looking“Forward-Looking Statements."”

Risks RelatingRelated to the Company'sOur Business

IfWe anticipate that a significant portion of our investments will be in the Companyform of SBC loans that are subject to increased risks.

Our acquired non-performing loans represented in the aggregate 2.1% of the UPB and 1.3% of the carrying value, of our total loan portfolio as of December 31, 2017. As of December 31, 2017, our 345 non-performing loans had a current unpaid principal balance of $45.7 million and a carrying value of $26.9 million. We consider a loan to be performing if the borrower is current on 100% of the contractual payments due for principal and interest during the most recent 90 days. We consider a loan to be non-performing if the borrower does not meet the criteria of a performing loan. Non-performing SBC loans are subject to increased risks of credit loss for a variety of reasons, including, the underlying property is too highly-leveraged or the borrower has experienced financial distress. Whatever the reason, the borrower may be unable to consummatemeet its contractual debt service obligation to us or our subsidiaries. Non-performing SBC loans may require a strategic transaction, its financial conditionsubstantial amount of workout negotiations and/or restructuring, which may divert our attention from other activities and resultsentail, among other things, a substantial reduction in the interest rate or capitalization of operations may be adversely affected.

As described elsewhere in this annual report on Form 10-K, the Company has engaged a financial advisor to assist it in evaluating potential strategic alternatives to enhance stockholder value. The continuing strategic review includes the exploration of merger or sale transactions involving the Company or a liquidation of Company's assets. The Company and its financial advisor have engaged in preliminary discussions with several potential counterparties. While the Company is currently engaged in discussions with a potential counterparty about a potential merger or sale transaction, there is no assurancepast due interest. However, even if restructurings are successfully accomplished, risks still exist that the potential strategic alternativesborrowers will lead to a definitive merger or sale transaction, which would be subject to approval by the Company's board of directors and its stockholders. The Company does not intend to disclose further developments until the review is complete and the Company’s board of directors has taken action with respect to the strategic review.  If the Company is unable to consummate such a strategic transaction, or if there is any significant delay in closing such a transaction, the Company may not be able or willing to re-establish amaintain the restructured payments or refinance the restructured mortgage relatedupon maturity. Additional risks inherent in the acquisition of non-performing SBC loans include undisclosed claims, undisclosed tax liens that may have priority, higher legal costs and greater difficulties in determining the value of the underlying property.

As of December 31, 2017 the average loan-to-value (“LTV”), of ReadyCap’s originated portfolio was 65%. The weighted LTV of our acquired loans was 63% as of December 31, 2017. If such SBC loans with higher LTV ratios become delinquent, we may experience greater credit losses compared to lower-leveraged properties. Additional risks inherent in its residential mortgage investments segment with equally attractive returnthe acquisition of delinquent SBC loans include undisclosed claims, undisclosed tax liens that may have priority, higher legal costs and credit risk characteristics and its financial condition and resultsgreater difficulties in determining the value of operations may be adversely affected.the underlying property.

The lack of liquidity in the Company'sof our assets may adversely affect its business.our business, including our ability to value and sell our assets.

A portion of the assets the Company owns, originatesSBC loans and ABS we own, acquire or acquiresoriginate may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. In light of the strategic review and in order to reduce current market risk in its investment portfolio, the Company has recently begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. A sale of these assets is expected to be completed early in the second quarter of 2016. Additionally, as part of the strategic review, the Company has made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit program and will begin the unwinding of the Company’s mortgage conduit business. The illiquidity of the Company'sour assets may make it difficult for itus to sell such assets.assets if the need or desire arises. In addition, if the Company iswe are required to liquidate its remainingall or a portion of our portfolio quickly, itwe may realize significantly less value than the value at which it haswe have previously recorded itsour assets. As a result, the Company'sour ability to vary itsour portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of operations and financial condition.

Waterfall’s due diligence of potential SBC loans and ABS assets may not reveal all of the liabilities associated with such SBC loans and ABS assets and may not reveal the other combined weaknesses in such SBC loans and ABS assets, which could lead to investment losses.

Before making an investment, Waterfall calculates the level of risk associated with the SBC loan to be acquired or originated based on several factors which include the following: a complete review of seller’s data files, including data integrity, compliance review and custodial file review; rent rolls and other property operating data; personal credit reports of the borrower and owner and/or operator; property valuation review; environmental review; and tax and title search. In making the assessment and otherwise conducting customary due diligence, we will employ standard documentation requirements and require appraisals prepared by local independent third party appraisers it selects. Additionally, we will seek to have sellers provide representations and warranties on SBC loans we acquire, and if we are unable to obtain representations and warranties, we will factor the increased risk into the price we pay for such loans. Despite our review process, there can be no assurance that our due diligence process will uncover all relevant facts or that any investment will be successful.

If Waterfall underestimates the credit analysis and the expected risk adjusted return relative to other comparable investment opportunities, we may experience losses.

Waterfall expects to value our SBC and SBC ABS investments based on an initial credit analysis and the investment’s expected risk adjusted return relative to other comparable investment opportunities available to us, taking into account estimated future losses on the mortgage loans, and the estimated impact of these losses on expected future cash flows. Waterfall’s loss estimates may not prove accurate, as actual results may vary from estimates. In the event that Waterfall underestimates the losses relative to the price we pay for a particular SBC or SBC ABS investment, we may experience losses with respect to such investment.

The failure of a third-party servicer or the failure of our own internal servicing system to effectively service our portfolio of mortgage loans would materially and adversely affect us.

Most mortgage loans and securitizations of mortgage loans require a servicer to manage collections for each of the underlying loans. We will service our loan portfolio under a “component servicing” model (which includes the use of primary servicing by nationally recognized servicers and sub-servicing by participants in our Qualified Partner Program (“QPP”), who specialize in assets for the particular region in which the asset sits), which allows for highly customized loss mitigation strategies for non-performing and performing loans. Performing SBC loans (either loans purchased with historical activity, i.e., not originated, purchased in the secondary market or ReadyCap originations) will be securitized with us retaining the subordinate tranches. KeyBank Real Estate Capital, performs both primary and special servicing with all loss mitigation decisions directed by Waterfall (which also maintains an option to purchase delinquent loans from the securitization trust). Non-performing SBC loans are serviced either through an approved SBC primary servicer providing both primary and special servicing or providing only primary servicing with special servicing contracted to smaller regionally focused SBC operators and servicers who gain eligibility to participate in its consolidatedQPP. Servicers’ responsibilities include providing collection activities, loan workouts, modifications and refinancings, foreclosures, short sales, sales of foreclosed real estate and financings to facilitate such sales. Both default frequency and default severity of loans may depend upon the quality of the servicer. If a servicer is not vigilant in encouraging the borrowers to make their monthly

payments, the borrowers may be far less likely to make these payments, which could result in a higher frequency of default. If a servicer takes longer to liquidate non-performing assets, loss severities may be higher than originally anticipated. Higher loss severity may also be caused by less competent dispositions of real estate owned (“REO”), properties.

We will seek to increase the value of non-performing loans through special servicing activities that will be performed by our participating special servicers. Servicer quality is of prime importance in the default performance of SBC loans and SBC ABS. Many servicers have gone out of business in recent years, requiring a transfer of loan servicing to another servicer. Should we have to transfer loan servicing to another servicer, the transfer of loans to a new servicer could result in more loans becoming delinquent because of confusion or lack of attention. Servicing transfers involve notifying borrowers to remit payments to the new servicer, and these transfers could result in misdirected notices, misapplied payments, data input errors and other problems. Industry experience indicates that mortgage loan delinquencies and defaults are likely to temporarily increase during the transition to a new servicer and immediately following the servicing transfer. Further, when loan servicing is transferred, loan servicing fees may increase, which may have an adverse effect on the credit support of assets held by us.

Effectively servicing our portfolio of SBC loans is critical to our success, particularly given our strategy of maximizing the value of our portfolio with our loan modifications, loss mitigation, restructuring and other special servicing activities, and therefore, if one of our servicers fails to effectively service the portfolio of mortgage loans, it could have a material and adverse effect on our business, results of operations and financial condition.

The Company operatesbankruptcy of a third-party servicer would adversely affect our business, results of operation and financial condition.

Depending on the provisions of the agreement with the servicer of any of our SBC loans, the servicer may be allowed to commingle collections on the mortgage loans owned by us with its own funds for certain periods of time (usually a few business days) after the servicer receives them. In the event of a bankruptcy of a servicer, we may not have a perfected interest in any collections on the mortgage loans owned by us that are in that servicer’s possession at the time of the commencement of the bankruptcy case. The servicer may not be required to turn over to us any collections on mortgage loans that are in its possession at the time it goes into bankruptcy. To the extent that a servicer has commingled collections on mortgage loans with its own funds, we may be required to return to that servicer as preferential transfers all payments received on the mortgage loans during a period of up to one year prior to that servicer’s bankruptcy.

If a servicer were to go into bankruptcy, it may stop performing its servicing functions (including any obligations to advance moneys in respect of a mortgage loan) and it may be difficult to find a third party to act as that servicer’s successor. Alternatively, the servicer may take the position that unless the amount of its compensation is increased or the terms of its servicing obligations are otherwise altered it will stop performing its obligations as servicer. If it were to be difficult to find a third party to succeed the servicer, we may have no choice but to agree to a servicer’s demands. The servicer may also have the power, with the approval of the bankruptcy court, to assign its rights and obligations to a third party without our consent, and even over its objections, and without complying with the terms of the applicable servicing agreement. The automatic stay provisions of Title 11 of the United States Code (the “Bankruptcy Code”), would prevent (unless the permission of the bankruptcy court were obtained) any action by us to enforce the servicer’s obligations under its servicing agreement or to collect any amount owed to us by the servicer. The Bankruptcy Code also prevents the removal of the servicer as servicer and the appointment of a successor without the permission of the bankruptcy court or the consent of the servicer.

Any costs or delays involved in the completion of a foreclosure or liquidation of the underlying property may further reduce proceeds from the property and may increase the loss.

In the future, it is possible that we may find it necessary or desirable to foreclose on some, if not many, of the SBC loans we acquire, and the foreclosure process may be lengthy and expensive. Borrowers may resist mortgage foreclosure actions by asserting numerous claims, counterclaims and defenses against us including, without limitation, numerous lender liability claims and defenses, even when such assertions may have no basis in fact, in an effort to prolong the foreclosure action and force us into a modification of the SBC loan or a favorable buy-out of the borrower’s position. In some states, foreclosure actions can sometimes take several years or more to litigate. At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the foreclosure process. Foreclosure may create a negative public perception of the related mortgaged property, resulting in a highly competitive market for investment opportunities and competition may limit its ability to originate or acquire desirable investmentsdecrease in its target assetsvalue. Even if we are successful in foreclosing on a SBC loan, the

liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover its cost basis in the SBC loan, resulting in a loss to us. Furthermore, any costs or delays involved in the completion of a foreclosure of the SBC loan or a liquidation of the underlying property will further reduce the proceeds and thus increase the loss. Any such reductions could alsomaterially and adversely affect the pricingvalue of these assets.the commercial SBC loans in which we invests and, therefore, could have a material and adverse effect on our business, results of operations and financial condition.

Inaccurate and/or incomplete information received in connection with our due diligence and underwriting process could have a negative impact on our financial condition and results of operation.

Our credit and underwriting philosophy for both acquired and originated SBC loans will encompass individual borrower and property diligence, taking into consideration several factors, including (i) the seller’s data files, including data integrity, compliance review and custodial file review; (ii) rent rolls and other property operating data; (iii) personal credit reports of the borrower, owner and/or operator; (iv) property valuations; (v) environmental reviews; and (vi) tax and title searches. We will also ask sellers to provide representations and warranties on SBC loans we acquire, and if we are unable to obtain representations and warranties, we will factor the increased risk into the price we pay for such loans. Our financial condition and results of operations could be negatively impacted to the extent we rely on information that is misleading, inaccurate or incomplete.

The Company operates in a highly competitive market for investment opportunities. The Company's profitability depends, in large part, on its ability to originate or acquire its target assets at attractive prices. In originating or acquiring its target assets, the Company will compete with a varietyuse of institutional investors, including other REITs, specialty finance companies, public and private funds (including other funds managed by ZAIS), ZAIS, to the extent that ZAIS holds assets directly on its own behalf or indirectly through one or more of its subsidiaries, affiliates or other newly formed entities, commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of the Company's competitors are substantially larger and have considerably greater financial, technical, marketing and other resources compared to the Company. Some competitors may have a lower cost of funds and access to funding sources that may not be available to the Company. Many of the Company's competitors are not subject to the operating constraints associated with REIT tax compliance or maintenance of an exemption from the 1940 Act. In addition, some of the Company's competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than the Company. Furthermore, competition for investmentsunderwriting guideline exceptions in the Company's target assetsSBC loan origination process may lead to the price of such assets increasing, which may further limit the Company's ability to generate desired returns. The Company cannot provide assurance that the competitive pressures it faces will not have a material adverse effect on its business, financial conditionresult in increased delinquencies and consolidated results of operations. Also, as a result of this competition, desirable investmentsdefaults.

Although SBC loan originators generally underwrite mortgage loans in the Company's target assets may be limited in the future and the Company may not be able to take advantage of attractive investment opportunitiesaccordance with their pre-determined loan underwriting guidelines, from time to time asand in the ordinary course of business, originators, including the Company, can provide no assurancewill make exceptions to these guidelines. On a case-by-case basis, our underwriters may determine that it will be able to identifya prospective borrower that does not strictly qualify under our underwriting guidelines warrants an underwriting exception, based upon compensating factors. Compensating factors may include a lower LTV ratio, a higher debt coverage ratio, experience as a real estate owner or investor, borrower net worth or liquidity, stable employment, longer length of time in business and make investments that are consistentlength of time owning the property. Loans originated with its investment objectives.

The Company is highly dependent on information systemsexceptions may result in a higher number of delinquencies and communication systems; systems failures and other operational disruptions could significantly affect its business, which may, in turn, negatively affect its operating results and its ability to pay dividends to its stockholders.

The Company's business is highly dependent on the communications and information systems of ZAIS and GMFS, which may interface with or depend on systems operated by third parties, including market counterparties, loan originators and other service providers. Any failure or interruption of these systems could cause delays or other problems in the Company's activities, including in its target asset origination or acquisition activities,defaults, which could have a material and adverse effect on our business, results of operations and financial condition.

Deficiencies in appraisal quality in the Company's operatingmortgage loan origination and acquisition process may result in increased principal loss severity.

During the mortgage loan underwriting process, appraisals are generally obtained on the collateral underlying each prospective mortgage. The quality of these appraisals may vary widely in accuracy and consistency. The appraiser may feel pressure from the broker or lender to provide an appraisal in the amount necessary to enable the originator to make the loan, whether or not the value of the property justifies such an appraised value. Inaccurate or inflated appraisals may result in an increase in the severity of losses on the mortgage loans, which could have a material and adverse effect on our business, results of operations and negativelyfinancial condition.

We may be exposed to environmental liabilities with respect to properties to which we take title, which may in turn decrease the value of the underlying properties.

In the course of our business, we may take title to real estate, and, if we do take title, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of operations could be materially and adversely affected. In addition, an owner or operator of real property may become liable under various federal, state and local laws, for the costs of removal of certain hazardous substances released on its property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of an underlying property becomes liable for removal costs, the ability of the owner to make debt payments may be reduced, which in turn may adversely affect the value of its common stock and its ability to pay dividends to its stockholders.the relevant mortgage-related assets held by us.

Additionally, the Company relies heavily on financial, accounting and other data processing systems and operational risks arising from mistakes made in the confirmation or settlement

Cybersecurity risk and cyber incidents may adversely affect the Company's business by causing a disruption to its operations, a compromise or corruption of its confidential information and/or damage to its business relationships, all of which could negatively impact its financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of the Company's information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to the Company's information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance cost, litigation and damage to the Company's investor relationships. As the Company's reliance on technology has increased, so have the risks posed to both its information systems, both internal and those provided by ZAIS, the Advisor and third-party service providers. ZAIS has implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as the Company's increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that the Company's financial results, operations or confidential information will not be negatively impacted by such an incident.

The AdvisorWaterfall will utilize analytical models and data in connection with the valuation of the Company'sour SBC loans and securities,SBC ABS, and any incorrect, misleading or incomplete information used in connection therewith would subject the Companyus to potential risks.

Given the complexityAs part of the Company's investment strategies, the Advisor must rely heavily on analytical models (bothrisk management process Waterfall intends to use detailed proprietary models, developedincluding loan-level non-performing loan models, to evaluate collateral liquidation timelines and price changes by ZAIS and those supplied by third parties) andregion, along with the impact of different loss mitigation plans. Additionally, Waterfall intends to use information, models and data supplied by third parties. Models and data will be used to value origination opportunities and potential target assets and also in connection with hedging the Company's acquisitions.assets. In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose the Companyus to potential risks. For example, by relying on incorrect models and data, especially valuation models, the AdvisorWaterfall may be induced to buy certain target assets at prices that are too high, to sell certain other assets at prices that are too low, or to miss favorable opportunities altogether. Similarly, any hedging based on faulty models and data may prove to be unsuccessful.

Any disruption in the availability and/or functionality of our technology infrastructure and systems and any failure of our security measures related to these systems could adversely impact our business.

Our ability to acquire and originate SBC loans and manage any related interest rate risks and credit risks is critical to our success and is highly dependent upon the efficient and uninterrupted operation of our computer and communications hardware and software systems. For example, we will rely on our proprietary database to track and maintain all loan performance and servicing activity data for loans in our portfolio. This data is used to manage the portfolio, track loan performance, develop and execute asset disposition strategies. In addition, this data is used to evaluate and price new investment opportunities. Some of these systems will be located at our facility and some will be maintained by third party vendors. Any significant interruption in the availability and functionality of these systems could harm our business. In the event of a systems failure or interruption by our third party vendors, we will have limited ability to affect the timing and success of systems restoration. If such interruptions continue for a prolonged period of time, it could have a material and adverse impact on our business, results of operations and financial condition.

Our security measures may not effectively prohibit others from obtaining improper access to our information. If a person is able to circumvent our security measures, he or she could destroy or misappropriate valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation.

Difficult conditions in the mortgage, residential and commercial real estate markets the financial markets and the economy generally may cause the Companyus to experience market losses related to itsour holdings, and there is no assurance that these conditions will improve in the near future.

The Company's consolidatedOur results of operations are materially affected by conditions in the mortgage market, the residential and commercial real estate markets, the financial markets and the economy generally. TheContinuing concerns about the mortgage market and a declining real estate market, as well as inflation, energy costs, geopolitical issues, unemployment and the availability and cost of credit, have contributed to increased volatility and diminished expectations for the economy and markets going forward. In particular, the U.S. mortgage market has been severely affected by changes in the lending landscape and has experienced defaults, credit losses and significant liquidity concerns, and there is no assurance that these conditions have fully stabilized or that they will not worsen. DisruptionThis is especially true in the SBC loan sector. Disruptions in mortgage marketmarkets negatively impactsimpact new demand for homes and home price performance. There is a strong inverse correlation between home price growth rates and mortgage loan delinquencies.real estate. A deterioration of the RMBS marketSBC or SBC ABS markets may cause the Companyus to experience losses related to itsour assets and to sell assets at a loss. DeclinesOur profitability may be materially adversely affected if we are unable to obtain cost effective financing. A continuation or increase in the volatility and deterioration in the SBC and SBC ABS markets as well as the broader financial markets may adversely affect the performance and fair market values of the Company's residential mortgage loans or RMBSour SBC loan and SBC ABS assets and may adversely affect its consolidatedour results of operations and credit availability, which may reduce earnings and, in turn, cash available for distribution to itsour stockholders.

Dramatic declinesNew entrants in the residentialmarket for SBC loan acquisitions and commercial real estate markets duringoriginations could adversely impact our ability to acquire SBC loans at attractive prices and originate SBC loans at attractive risk-adjusted returns.

Although we believe that we are currently one of only a handful of active market participants in the financial crisis resultedsecondary SBC loan market, new entrants in significant asset write-downs by financial institutions, which caused many financial institutionsthis market could adversely impact our ability to seekacquire and originate SBC loans at attractive prices. In acquiring and originating our target assets, we may compete with numerous regional and community banks, specialty finance companies, savings and loan associations, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders and other entities, and we expect that others may be organized in the future. The effect of the existence of additional capital, to merge withREITs and other institutions and, in some cases, to fail. Institutions from which the Company may seek to obtain financing may have owned or financed residential or commercial mortgage loans, real estate-related securities and real estate loans, which declined in value and caused them to suffer losses during the financial crisis. Many lenders and institutional investors reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions. If these conditions exist, these institutions may become insolvent or tighten their lending standards, which could make it more difficult be increased competition

for the Companyavailable supply of SBC assets suitable for purchase, which may cause the price for such assets to obtain financing on favorable terms or at all.

The Company's profitabilityrise, which may be adversely affected iflimit our ability to generate desired returns. Additionally, origination of SBC loans by our competitors may increase the Company is unable to obtain cost-effective financing for its assets. These consequences could be exacerbated in the eventavailability of potential future credit rating downgrades of the U.S. and certain European countries and the failure to resolve issues related to the "fiscal cliff" and the U.S. debt ceiling,SBC loans which could create broader financial and global banking turmoil and lead to a significant rise in interest rates and a decrease in the fair market value of the Company's assets.

The diminished level of Agency participation in, and other changes in the role of the Agencies in, the mortgage market may adversely affect the Company's business.

If Agency participation in the mortgage market were reduced or eliminated, or their structures were to change radically (i.e., limitation or removal of the guarantee obligation), or their market share reduced because of required price increases or lower limits on the loans they can guarantee, the Company could be unable to acquire Agency RMBS or unable to originate Agency and government guaranteed mortgage loans on attractive terms or at all. The Company could be negatively affected in a number of ways depending on the manner in which related events unfold for Fannie Mae, Freddie Mac and other such agencies. GMFS, its mortgage banking platform, is an approved Fannie Mae Seller-Servicer, Freddie Mac Seller-Servicer, Ginnie Mae issuer, Department of Housing and Urban Development ("HUD") / Federal Housing Administration ("FHA") Mortgagee, U.S. Department of Agriculture ("USDA") approved originator and U.S. Department of Veterans Affairs ("VA") Lender, and any diminished participation by the Agencies may result in GMFS becoming unablea reduction of interest rates on SBC loans. Some competitors may have a lower cost of funds and access to sell its originated mortgage loansfunding sources that may not be available to us. Many of our competitors are not subject to the Agencies on attractive termsoperating constraints associated with REIT tax compliance or at all. Additionally, althoughmaintenance of an exemption from the Company does not own any Agency RMBS as1940 Act. In addition, some of December 31, 2015, itour competitors may rely on Agency RMBS it may acquire (as well as residential mortgagehave higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of SBC loans and non Agency RMBSABS assets and establish more relationships than us.

We cannot assure you that the competitive pressures we may face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, desirable investments in our target assets may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that it owns) as collateral for its financings under securities repurchase agreements. Any decline inwill be able to identify and make investments that are consistent with our investment objectives.

We cannot predict the valueunintended consequences and market distortions that may stem from far-ranging regulatory reform of Agency RMBS, or perceived market uncertainty about their value or their structures, would make it more difficult for the Companyoversight of financial markets.

In response to obtain financing on acceptable terms or at all. Further, the current support providedfinancial issues affecting the banking system and financial markets and ongoing concerns of, and threats to, commercial banks, investment banks and other financial institutions, the Emergency Economic Stabilization Act (“EESA”), was enacted by the U.S. TreasuryCongress in 2008. There can be no assurance that the EESA or any other U.S. Government actions will have a beneficial impact on the financial markets. To the extent the markets do not respond favorably to Fannie Mae and Freddie Mac, and any additional support it may provide in the future, could have the effect of lowering the interest rates the Company expects to receive from Agency RMBS it may acquire, thereby tightening the spread between the interest the Company may earn on Agency RMBS and the cost of financing such assets. A reduction in the supply of Agency RMBS could also negatively affect the pricing of Agency RMBSactions by reducing the spread between the interest the Company may earn on an investment portfolio of Agency RMBS and its cost of financing such a portfolio. Future legislation could further change the relationship between Fannie Mae and Freddie Mac and the U.S. Government and could also nationalize, privatize, or eliminate such entities entirely In March 2013, the Federal Housing Finance Agency announced that it would establish a new institutional body, which later became knownactions do not function as the Federal Mortgage Insurance Corporation (the "FMIC"), to replace Fannie Mae and Freddie Mac once they wind down operations. In 2013 and 2014, members of Congress proposed draft bills that would phase out Fannie Mae and Freddie Mac over a specified period of time, including one proposal where the FMIC would be modeled after the Federal Deposit Insurance Corporation (the "FDIC") and provide catastrophic reinsurance in the secondary market for MBS, and also take over multi-family guarantees. While prospects for passage are uncertain, these legislative measures underscore the potential for change to the Agencies. Any law affecting these Agencies may create market uncertainty and have the effect of reducing the actual or perceived credit quality of RMBS and may make it more expensive for GMFS to originate Agency related mortgage loans or impact its ability to sell its originated mortgage loans to the Agencies on attractive terms or at all. As a result, such laws could increase the risk of loss on RMBS the Company may acquire and loans GMFS originates. It also is possible that such laws could adversely impact the market for such securities and loans and spreads at which they trade. All of the foregoing could materially and adversely affect the Company's financial condition and consolidated results of operations.

Actions of the U.S. Government, including the U.S. Congress, Federal Reserve, U.S. Treasury and other governmental and regulatory bodies, including the SEC, to stabilize or reform the financial marketsintended, our business may not achievereceive the intended effectanticipated positive impact from the legislation and such result may adversely affect the Company's business.have broad adverse market implications.

In July 2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which includes extensive changes(the “Dodd-Frank Act”) in part to the laws regulatingimpose significant investment restrictions and capital requirements on banking entities and other organizations that are significant to U.S. financial services firm. Among other things,markets. For instance, the Dodd-Frank Act imposeshas imposed significant restrictions on the proprietary trading activities of certain banking entities and has subjected other systemically significant organizations regulated by the U.S. Federal Reserve to increased capital requirements and quantitative limits for engaging in such activities. The new law includes significant changesDodd-Frank Act also seeks to reform the regulationasset-backed securitization market (including the MBS market) by requiring the retention of financial institutions includinga portion of the creationcredit risk inherent in the pool of (1) the CFPB within the Federal Reserve to regulate consumer financial servicessecuritized assets and productsby imposing additional registration and (2) the Financial Stability Oversight Council to identify, monitor and address emerging systemic risks posed by the activities of financial services firms and make recommendations to the Federal Reserve to alleviate those risks. The CFPB has sole rulemaking and interpretive authority under existing and future consumer financial services laws and supervisory, examination and enforcement authority over institutions subject to its jurisdiction.disclosure requirements. The Dodd-Frank Act also provides for enhanced regulation of derivativesimposes significant regulatory restrictions on the origination and securitization transactions (includingof commercial mortgage loans. Also, the addition of risk retention requirements, third-party due diligence disclosure requirements, expanded asset-level data requirementsSEC has proposed significant changes to Regulation AB, which, if adopted in their present form, could have sweeping changes to commercial and new standards relatingresidential mortgage loan securitization markets as well as to eligibility of securities as "mortgage-related securities" under the Exchange Act), restrictions on executive compensation and enhanced oversight of credit rating agencies. In addition, the Dodd-Frank Act providesmarket for the eliminationre-securitization of prepayment penalties for mortgage loans and expanded consumer protection in respect of high-cost loans. In many cases the provisions of the statute will take effect only after regulations are adopted by the applicable Federal agencies.

MBS. The Dodd-Frank Act also prohibits lenders from originating residential mortgage loans unlesscreated a new regulator, the lender determines that the borrower has a reasonable ability to repay the loan. Under the Dodd-Frank Act, a lender and its assignees will not have liability under this prohibition with respect to any "qualified mortgage." The CFPB has issued a final rule amending Regulation Z promulgated under the Federal Truth-in-Lending Act (“TILA”Consumer Financial Protection Bureau (the “CFPB”), which became effective on January 10, 2014, specifying the ability-to-repay requirements and the characteristics of a qualified mortgage (the "ATR/Qualified Mortgage Rule"). Interest-only loans, hybrid mortgage loans and certain balloon loans, as well as loans with a debt-to-income ratio exceeding 43%, will not meet the requirements for a qualified mortgage. With respect to qualified mortgages, the ATR/Qualified Mortgage Rule provides a safe harbor from liability if certain requirements are satisfied, or a rebuttable presumption from such liability if only certain of these requirements are satisfied. To the extent that a mortgage loan originated by the Company does not satisfy the requirements of a "qualified mortgage" under either set of requirements, the Company and its assignees could be liable for actual damages suffered by the borrower, litigation costs, statutory damages and special statutory damages. Various state and local legislatures may adopt similar or more onerous provisions in the future.

Oneoversees many of the CFPB's areas of focus has been on whethercore laws which regulate the mortgage originators take appropriate steps to ensure that business arrangements with service providers do not present risks to consumers. The sub-servicer the Company may retain to directly service residential mortgage loans (when the Company owns the associated MSRs) is one of the Company's most significant service providers with respect to the Company's residential mortgage loan business and the Company's failure to take steps to ensure that this sub-servicer is servicing these residential mortgage loans in accordance with applicable law and regulation could result in enforcement action by the CFPB against the Company that could restrict the Company's business and expose it to penalties or other claims. The Company generally uses a small number of sub-servicers on its residential whole loan portfolio and, as a result, the risks associated with the Company's use of sub-servicers are concentrated around a small number of sub-servicer counterparties. On January 17, 2013, the CFPB promulgated final rules implementing the Dodd-Frank Act's amendments to TILA andindustry, including the Real Estate Settlement Procedures Act (“RESPA”) (the "Servicing Rules"), which became effective on January 10, 2014. The Servicing Rules are part of a broader effort to establish minimum national standards for mortgage servicing. Among other things, the Servicing Rules incorporate many of the provisions of a settlement reached by federal regulators and state attorneys general representing 49 states and five large mortgage servicers in 2012, target early intervention with borrowers following initial delinquency and impose detailed requirements applicable in each step of a servicer's loss mitigation process. In particular, the Servicing Rules restrict so-called "dual tracking," in which a servicer simultaneously evaluates a mortgagor for a loan modification or other loss mitigation alternatives at the same time that it prepares to foreclose on the mortgaged property. In addition, the State of California recently enacted the Homeowner's Bill of Rights, which requires similar changes in delinquent loan servicing and foreclosure procedures and creates a private right of action permitting borrowers to bring legal actions against lenders that violate the law. The Servicing Rules and the similar state regulations therefore could resultTruth in increased delays in foreclosure orLending Act. While the inability to foreclose, which could in turn result in losses with respect to the Company's residential whole loan portfolio.

In October 2014, the FDIC, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency (the "OCC"), the SEC, the Federal Reserve and the HUD adopted a final rule implementing the credit risk retention requirements of Section 941full impact of the Dodd-Frank Act for asset-backed securities (the "Risk Retention Rules"). As required byand the role of the CFPB cannot be assessed until all implementing regulations are released, the Dodd-Frank Act, the Risk Retention Rules generally require "securitizers" to retain not less than 5% of the credit risk of the mortgage loans securitized (the "Required Risk") for a certain period of time (not to exceed seven years). The Risk Retention Rules prohibit hedging Required Risk if payments on the hedge instrument are materially related to the Required Risk and the hedge position would limit the financial exposure of the securitizer to the Required Risk. A securitizer may not pledge its interest in any Required Risk as collateral for any financing unless such financing is full recourse to the securitizer. However, the Risk Retention Rules do not apply to RMBS backed solely by qualified mortgages. The Risk Retention Rules applicable to RMBS became effective on December 24, 2015, and to the extent that the Company sponsors a securitization of non-qualified mortgages after such date, the Company will be required to comply with the Risk Retention Rules, which could subject the Company to losses in respect of the related RMBS. The Company would be subject to various enforcement options by the regulators for the failure to comply with the Risk Retention Rules.

In addition to the ATR/Qualified Mortgage Rule and the servicing rules described above, the Company cannot predict what actions, if any, that the CFPB will take in the mortgage markets, nor what the impact of such actions will be on the mortgage markets or the Company's results of operations, financial condition and business. In addition to the foregoing, the U.S. Government, Federal Reserve, U.S. Department of the Treasury and other governmental and regulatory bodies such as the Financial Stability Oversight Council, a panel comprising top U.S. financial regulators, may scrutinize or seek to implement changes to regulation which could in recent years negatively impact mortgage REITs, such as the Company. For example, in recent years, a number of local governmental authorities have considered eminent domain as one of several potential alternatives to help resolve housing finance challenges. This type of legislation and action could have a severe negative impact on the mortgage markets and may introduce risks that are difficult, if not impossible, to quantify. There is no certainty as to whether any governmental bodies will take steps to acquire any mortgage loans under such programs, or ultimately pass other legislation that will affect the mortgage markets. Such eminent domain programs would authorize governmental authorities to acquire certain mortgage loans by voluntary purchase or eminent domain and to modify those mortgage loans to allow homeowners to continue to own and occupy their homes, irrespective of whether the mortgage loans are actually in default or foreclosure. No such eminent domain programs have become operational, but there can be no assurance that jurisdictions will not take steps to acquire mortgage loans under an eminent domain program (or other programs or initiatives) in the future and what purchase price would be paid for any such mortgage loans.

The Dodd-Frank Act'sAct’s extensive requirements may have a significant effect on the financial markets, and may affect the availability or terms of financing from the Company'sour lender counterparties and the availability or terms of residential mortgageSBC loans and RMBS,MBS, both of which may have an adverse effect on the Company'sour financial condition and consolidated results of operations.

In addition, the U.S. Government, Federal Reserve, U.S. Treasury, the SEC and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis that began in 2007. The CompanyWe cannot predict whether or when such actions may occur or what effect, if any, such actions could have on itsour business, consolidated results of operations and financial condition. In addition, because the programs are designed, in part, to provide liquidity to restart the market for certain of our targeted assets, the establishment of these programs may result in increased competition for opportunities in its targeted assets. It is also possible that our competitors may utilize the programs which would provide them with debt and equity capital funding from the U.S. government.

The elimination or reductionincreasing number of the mortgage-interest tax deductionproposed United States federal, state and local laws may affect certain mortgage-related assets in which we intend to invest and could negatively affect the U.S. housing marketmaterially increase our cost of doing business.

Various tax reform proposals continuebankruptcy legislation has been proposed that, among other provisions, could allow judges to circulatemodify the terms of residential mortgages in Congress, somebankruptcy proceedings, could hinder the ability of the servicer to foreclose promptly on defaulted mortgage loans or permit limited assignee liability for certain violations in the mortgage loan origination process, any or all of which could adversely affect our business or result in us being held responsible for violations in the mortgage

loan origination process even where we were not the originators of the loan. We do not know what impact this type of legislation, which has been primarily, if not entirely, focused on residential mortgage originations, would changehave on the mannerSBC loan market. We are unable to predict whether United States federal, state or local authorities, or other pertinent bodies, will enact legislation, laws, rules, regulations, handbooks, guidelines or similar provisions that will affect our business or require changes in our practices in the future, and any such changes could materially and adversely affect our cost of doing business and profitability.

Failure to obtain or maintain required approvals and/or state licenses necessary to operate our mortgage-related activities may adversely impact our investment strategy.

We may be required to obtain and maintain various approvals and/or licenses from federal or state governmental authorities, government sponsored entities or similar bodies in connection with some or all of our activities. There is no assurance that we can obtain and maintain any or all of the approvals and licenses that we desire or that we will avoid experiencing significant delays in seeking such approvals and licenses. Furthermore, we will be subject to various disclosure and other requirements to obtain and maintain these approvals and licenses, and there is no assurance that we will satisfy those requirements. Our failure to obtain or maintain licenses will restrict our options and ability to engage in desired activities, and could subject the us to fines, suspensions, terminations and various other adverse actions if it is determined that we have engaged without the requisite approvals or licenses in activities that required an approval or license, which homecould have a material and adverse effect on our business, results of operation and financial condition.

Some of our SBC loans will have interest deductionsrate features that adjust over time, and any interest rate caps on these loans may reduce our income or cause it to suffer a loss during periods of rising interest rates.

Our ARMs are treated. Itsubject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through maturity of a loan. Our borrowings, including our repurchase agreement and securitizations, are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while interest rate caps would limit the interest rates on our ARMs. This problem is unclear whethermagnified for our ARMs that are not fully indexed. Further, some ARMs may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we could receive less cash income on ARMs than we need to pay interest on our related borrowings. These factors could lower our net interest income or cause us to suffer a loss during periods of rising interest rates.

Our inability to manage future growth effectively could have an adverse impact on our financial condition and results of operations.

Our ability to achieve our investment objectives will depend on our ability to grow, which will depend, in turn, on Waterfall’s ability to identify, acquire, originate and invest in SBC loans and ABS that meet our investment criteria. Our ability to grow our business will depend in large part on our ability to expand our SBC loan origination activities. Any failure to effectively manage our future growth, including a failure to successfully expand our SBC loan origination activities could have a material and adverse effect on our business, financial condition and results of operations.

Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions, and changes in such rules, accounting interpretations or our assumptions could adversely impact our ability to timely and accurately prepare our consolidated financial statements.

We are subject to Financial Accounting Standards Board standards and interpretations that can result in significant accounting changes that could have a material and adverse impact on our results of operations and financial condition. Accounting rules for financial instruments, including the acquisition and sales or securitization of mortgage loans, investments in ABS, derivatives, investment consolidations and other aspects of our anticipated operations are highly complex and involve significant judgment and assumptions. For example, the Company estimates and judgments are based on a number of factors, including projected cash flows from the collateral securing our SBC loans, the likelihood of repayment in full at the maturity of a loan, potential for an SBC loan refinancing opportunity in the future and expected market discount rates for varying property types. These complexities could lead to a delay in the preparation of financial information and the delivery of this information to our stockholders.

Changes in accounting rules, interpretations or our assumptions could also undermine our ability to prepare timely and accurate financial statements, which could result in a lack of investor confidence in our financial information and could materially and adversely affect the market price of our common stock.

We will depend on Waterfall and its key personnel for our success. We may not find a suitable replacement for Waterfall if the management agreement with Waterfall is terminated, or if key personnel leave the employment of Waterfall or otherwise become unavailable to us.

We will be dependent on Waterfall for our day-to-day management. Frederick Herbst, who is employed by Waterfall and serves as our Chief Financial Officer, is dedicated exclusively to our business, and seven of Waterfall’s accounting professionals are also dedicated exclusively to our business, and such persons are expected to be dedicated to us. In addition, Waterfall or we may in the future hire additional personnel that may be dedicated to our business. Waterfall is not, however, obligated under the management agreement to dedicate any of its personnel exclusively to our business, nor is it or its personnel obligated to dedicate any specific portion of its or their time to our business. We will also be responsible for the costs of our own employees. However, with the exception of our ReadyCap and GMFS subsidiaries, which will employ their own personnel, we do not expect to have our own employees. Accordingly, we believe that our success will depend to a significant extent upon the efforts, experience, diligence, skill and network of business contacts of the executive officers and key personnel of Waterfall. The executive officers and key personnel of Waterfall will evaluate, negotiate, structure, close and monitor our acquisitions of assets, and our success will depend on its continued service. The departure of any of the pending tax reform proposalsexecutive officers or key personnel of Waterfall could have a material adverse effect on our performance. In addition, we offer no assurance that Waterfall will remain our Manager or that we will continue to have access to Waterfall’s principals and professionals. The initial term of our management agreement with Waterfall only extends for three years from the closing of the ZAIS Financial merger, with automatic one-year renewal terms starting on the third anniversary of the closing of the ZAIS Financial merger. If the management agreement is terminated and no suitable replacement is found to manage the Company, we may not be able to execute our business plan.

Should one or more of Waterfall’s key personnel leave the employment of Waterfall or otherwise become unavailable to the Company, Waterfall may not be able to find a suitable replacement and the Company may not be able to execute certain aspects of our business plan.

There are various conflicts of interest in our relationship with Waterfall which could result in decisions that are not in the best interests of our stockholders.

We are subject to conflicts of interest arising out of our relationship with Waterfall and its affiliates. Frederick Herbst, who is employed by Waterfall and will serve as the Company’s Chief Financial Officer, is dedicated exclusively to the Company and seven of Waterfall’s accounting professionals also are expected to be dedicated exclusively to our Company. With the exception of our ReadyCap and GMFS subsidiaries, which will employ their own personnel, we do not expect to have our own employees. In addition, we expect that the Chief Executive Officer, President, portfolio managers and any other appropriate personnel of Waterfall will devote such portion of their time to our affairs as is necessary to enable us to effectively operate its business. Waterfall and our officers may have conflicts between their duties to us and their duties to, and interests in, Waterfall and its affiliates. Waterfall is not required to devote a specific amount of time or the services of any particular individual to our operations. Waterfall manages or provides services to other clients, and we will compete with these other clients for Waterfall’s resources and support. The ability of Waterfall and its officers and personnel to engage in other business activities may reduce the time they spend advising us.

There may also be conflicts in allocating assets that are suitable for us and other clients of Waterfall and its affiliates. Waterfall manages a series of funds and a limited number of separate accounts, which focus on a range of ABS and other credit strategies. With the exception of the Waterfall Olympic Offshore Fund, Ltd. (the “Olympic Fund”) discussed below, none of these other funds or separate accounts focus on SBC loans as their primary business strategy.

To address certain potential conflicts arising from our relationship with Waterfall or its affiliates, Waterfall has agreed in the side letter agreement that, for so long as the management agreement is in effect, neither it nor any of its affiliates will (i) sponsor or manage any additional investment vehicle where we do not participate as an investor whose primary investment strategy will involve SBC mortgage loans, unless Waterfall obtains the prior approval of a majority of our board of directors (including a majority of our independent directors), or (ii) acquire a portfolio of assets, a majority of which (by value or UPB) are SBC mortgage loans on behalf of another investment vehicle (other than acquisitions of SBC

ABS), unless we are first offered the investment opportunity and a majority of our board of directors (including a majority of our independent directors) decide not to acquire such assets.

In March 2014, due to the size of SBC mortgage loan opportunities, which exceeded our financing capacity at that time, Waterfall sponsored the Olympic Fund. The Olympic Fund was established to invest in assets that may not be qualifying assets for REIT purposes or to invest in SBC loan assets that we decline to purchase for any reason. These opportunities were first presented to us and a majority of our board of directors (including a majority of our independent directors) decided not to acquire such assets and consented to the formation of the Olympic Fund. Waterfall will continue to seek the consent of the Company board of directors (including a majority of the Company’s independent directors) before allocating asset opportunities to the Olympic Fund, and anticipates that as our debt and equity financing sources continue to grow, Waterfall will only allocate asset opportunities to the Olympic Fund that are not qualifying REIT assets.

The side letter agreement does not cover SBC ABS acquired in the market and non-real estate secured loans and we may compete with other existing clients of Waterfall and its affiliates, including the Olympic Fund, other funds managed by Waterfall that focus on a range of ABS and other credit strategies and separately managed accounts, and future clients of Waterfall and its affiliates in acquiring SBC ABS, non-real estate secured loans and portfolios of assets less than a majority of which (by value or UPB) are SBC loans, and in acquiring other target assets that do not involve SBC loans.

We will pay Waterfall substantial management fees regardless of the performance of our portfolio. Waterfall’s entitlement to a base management fee, which is not based upon performance metrics or goals, might reduce its incentive to devote its time and effort to seeking assets that provide attractive risk-adjusted returns for our portfolio. This in turn could hurt both our ability to make distributions to our stockholders and the market price of our common stock.

The management agreement was negotiated between related parties and their terms, including fees payable, may not be as favorable to us as if they had been negotiated with unaffiliated third parties.

The termination of the management agreement may be difficult and require payment of a substantial termination fee or other amounts, including in the case of termination for unsatisfactory performance, which may adversely affect our inclination to end our relationship with Waterfall.

Termination of the management agreement without cause is difficult and costly. Our independent directors will review Waterfall’s performance and the management fees annually and, following the initial term, the management agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent directors, or by a vote of the holders of at least a majority of the outstanding shares of the Company common stock (other than shares held by members of our senior management team and affiliates of Waterfall), based upon: (i) Waterfall’s unsatisfactory performance that is materially detrimental to our Company, or (ii) a determination that the management fees or incentive distribution payable to Waterfall are not fair, subject to Waterfall’s right to prevent termination based on unfair fees by accepting a reduction of management fees or incentive distribution agreed to by at least two-thirds of our independent directors. We must provide Waterfall with 180 days prior notice of any such termination. Additionally, upon such a termination without cause, the management agreement provides that we will pay Waterfall a termination fee equal to three times the average annual base management fee earned by Waterfall during the prior 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination, except upon an internalization. Additionally, if the management agreement is terminated under circumstances in which we are obligated to make a termination payment to Waterfall, our operating partnership shall repurchase, concurrently with such termination, the Class A special unit for an amount equal to three times the average annual amount of the incentive distribution paid or payable in respect of the Class A special unit during the 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination. These provisions may increase the cost to our Company of terminating the management agreement and adversely affect our ability to terminate Waterfall without cause.

If we internalize our management functions or if Waterfall is internalized by another sponsored program, we may be unable to obtain key personnel, and the consideration we pay for any such internalization could exceed the amount of any termination fee, either of which could have a material and adverse effect on our business, financial condition and results of operations.

We may engage in an internalization transaction, become self-managed and, if this were to occur, certain key employees may not become our employees but may instead remain employees of Waterfall or its affiliates. An inability to manage an internalization transaction effectively could thus result in us incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management’s attention could be diverted from most effectively managing our investments. Additionally, if another program sponsored by Waterfall internalizes Waterfall, key personnel of Waterfall, who also are key personnel of the other sponsored program, would become employees of the other program and would no longer be available to us. Any such loss of key personnel could adversely impact our ability to execute certain aspects of our business plan. Furthermore, in the case of any internalization transaction, we expect that we would be required to pay consideration to compensate Waterfall for the internalization in an amount that we will negotiate with Waterfall in good faith and which will require approval of at least a majority of our independent directors. It is possible that such consideration could exceed the amount of the termination fee that would be due to Waterfall if the conditions for terminating the management agreement without cause are satisfied and we elected to terminate the management agreement and payment of such consideration could have a material and adverse effect on our business, financial condition and results of operations.

Waterfall and its affiliates have limited prior experience operating a REIT and therefore may have difficulty in successfully and profitably operating our business or complying with regulatory requirements, including the REIT provisions of the Code, which may hinder their ability to achieve our objectives or result in loss of our qualification as a REIT.

Prior to the completion of our private placement in 2013, Waterfall and its affiliates had no experience operating a REIT or complying with regulatory requirements, including the REIT provisions of the Code. The REIT rules and regulations are highly technical and complex, and the failure to comply with the income, asset, and other limitations imposed by these rules and regulations could prevent us from qualifying as a REIT or could force us to pay unexpected taxes and penalties. Waterfall and its affiliates have limited experience operating a business in compliance with the numerous technical restrictions and limitations set forth in the Code or the 1940 Act, applicable to REITs. We cannot assure you that Waterfall or our management team will perform on our behalf as they have in their previous endeavors. The inexperience of Waterfall and its affiliates described above may hinder our ability to achieve our objectives or result in loss of our qualification as a REIT or payment of taxes and penalties. As a result, we cannot assure you that we will be enacted, either piecemealable to successfully operate as revenue raisersa REIT, execute our business strategies or as partcomply with regulatory requirements applicable to REITs.

Waterfall’s base management fee may reduce its incentive to devote its time and effort to seeking attractive assets for our portfolio because the fee is payable regardless of our performance.

We will pay Waterfall a more comprehensive packagebase management fee regardless of tax reforms. Elimination or further restrictionsthe performance of our portfolio. Waterfall’s entitlement to non-performance-based compensation might reduce its incentive to devote its time and effort to seeking assets that provide attractive risk-adjusted returns for our portfolio. This in turn could hurt both our ability to make distributions to our stockholders and the market price of Company’s common stock.

The Class A special unit entitling Waterfall to an incentive distribution may induce Waterfall to make certain investments that may not be favorable to us, including speculative investments.

Under the partnership agreement of our operating partnership, Waterfall, the holder of the Class A special unit, will be entitled to receive an incentive distribution that may cause Waterfall to place undue emphasis on the mortgage-interest tax deductionmaximization of our “core earnings” as defined under the partnership agreement at the expense of other criteria, such as preservation of capital, to achieve a higher incentive distribution. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our portfolio.  For a discussion of the calculation of core earnings under the partnership agreement, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Incentive Distribution Payable to Our Manager” included in this annual report on Form 10-K.

Our board of directors will not approve each investment and financing decision made by Waterfall unless required by our investment guidelines.

We expect to authorize Waterfall to follow broad investment guidelines established by our board of directors. Our board of directors will periodically review our investment guidelines and investment portfolio but will not, and will not be required to, review all of our proposed investments. These investment guidelines may be changed from time to time by our board of directors without the approval of our stockholders. To the extent that our board of directors approves material changes to the investment guidelines, we will inform stockholders of such changes through disclosure in our periodic reports and other filings required under the Exchange Act. In addition, in conducting its periodic reviews, our board of directors may rely primarily on information provided to them by Waterfall. Furthermore, Waterfall may use complex strategies, and transactions entered into may be costly, difficult or impossible to unwind by the time they are reviewed by our board of directors. Accordingly, Waterfall will have great latitude in determining the types and amounts of target assets it may decide are attractive investments for us, which could result in investment returns that are substantially below expectations or that result in losses, which would materially and adversely affect our business operations and results.

We are highly dependent on information systems and communication systems; systems failures and other operational disruptions could significantly affect our business, which may, in turn, negatively affect our operating results and our ability to pay dividends to our stockholders.

Our business is highly dependent on our communications and our information systems, which may interface with or depend on systems operated by third parties, including market counterparties, loan originators and other service providers. Any failure or interruption of these systems could cause delays or other problems in our activities, including in our target asset origination or acquisition activities, which could have a material adverse effect on our operating results and negatively affect the U.S. housing market or the market value of mortgage loans.our common stock and our ability to pay dividends to our stockholders.

The CompanyAdditionally, we rely heavily on financial, accounting and other data processing systems and operational risks arising from mistakes made in the confirmation or settlement of transactions, from transactions not being properly booked, evaluated or accounted for or other similar disruption in our operations may cause us to suffer financial loss, the disruption of our business, liability to third parties, regulatory intervention or reputational damage.

We may be subject to liability in connection with itsour residential mortgage loans for potential violations of consumer protection laws and regulations.

Federal consumer protection laws and regulations have been enacted and promulgated that are designed to regulate residential mortgage loan underwriting and originators'originators’ lending processes, standards, and disclosures to borrowers. These laws and regulations include the ATR/Qualified Mortgage Rule and the Servicing Rules. In addition, there are various other federal, state, and local laws and regulations that are intended to discourage predatory lending practices by residential mortgage loan originators. For example, the federal Home Ownership and Equity Protection Act of 1994 prohibits inclusion of certain provisions in residential mortgage loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases may impose restrictions and requirements greater than those in place under federal laws and regulations. In addition, under the anti-predatory lending laws of some states, the origination of certain residential mortgage loans, including loans that are not classified as "high cost"“high cost” loans under applicable law, must satisfy a net tangible benefits test with respect to the borrower. This test, as well as certain standards set forth in the ATR/Qualified Mortgage Rule, may be highly subjective and open to interpretation. As a result, a court may determine that a residential mortgage loan did not meet the standard or test even if the originator reasonably believed such standard or test had been satisfied.

Mortgage loans also are subject to various other federal laws, including: