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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20192020
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                  to               
Commission File Number: 001-35543
WESTERN ASSET MORTGAGE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
27-0298092
(I.R.S. Employer Identification No.)
wmc-20201231_g1.gif
Western Asset Mortgage Capital Corporation
385 East Colorado Boulevard
Pasadena, California 91101
(Address of principal executive offices)
(626) 844-9400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.01 par value WMCNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated fileroAccelerated filerx
Non-accelerated filer

oSmaller reporting companyo
Emerging growth companyo
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
The aggregate market value of the registrant's common stock held by non-affiliates was $514,733,789$157,840,509 based on the closing sales price on the New York Stock Exchange on June 30, 2019.2020.
On March 3, 2020,2021, the registrant had a total of 53,523,87660,812,701 shares of common stock outstanding.






TABLE OF CONTENTS








FORWARD-LOOKING INFORMATION
The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the Securities and Exchange Commission (the “SEC”), press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such sections.  Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally and the effectiveness of federal, state and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on the U.S. economy and economic activity.

These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives.  When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, the Company intends to identify forward-looking statements.  Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company’s industry, interest rates, real estate values, the debt securities markets, the U.S. housing and the U.S. and foreign commercial real estate markets or the general economy or the market for residential and/or commercial mortgage loans; the Company’s business and investment strategy; the Company’s projected operating results; changes in interest rates and the market value of the Company's target assets; credit risks; servicing -related risks, including those associated with foreclosure and liquidation; the state of the U.S. and to a lesser extent, international economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’s ability to obtain and maintain financing arrangements, including under the Company's repurchase agreements, a form of secured financing, and securitizations; the current potential return dynamics available in residential mortgage-backed securities (“RMBS”), and commercial mortgage-backed securities (“CMBS” and collectively with RMBS, “MBS”); the level of government involvement in the U.S. mortgage market; the anticipated default rates on CMBS and Commercial Loans; the loss severity on Non-Agency MBS the general volatility of the securities markets in which the Company participates; changes in the value of the Company’s assets; the Company’s expected portfolio of assets; the Company’s expected investment and underwriting process; interest rate mismatches between the Company’s target assets and any borrowings used to fund such assets; changes in prepayment rates on the Company’s target assets; effects of hedging instruments on the Company’s target assets; rates of default or decreased recovery rates on the Company’s target assets; the degree to which the Company’s hedging strategies may or may not protect the Company from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company’s ability to maintain the Company’s qualification as a real estate investment trust for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”); the availability of opportunities to acquire Agency RMBS, Non-Agency RMBS, CMBS, Residential and Commercial Whole Loans, Residential and Commercial Bridge Loans and other mortgage assets; the availability of qualified personnel; estimates relating to the Company’s ability to make distributions to its stockholders in the future; and the Company’s understanding of its competition.competition; and the uncertainty and economic impact of pandemics, epidemics or other public health emergencies, such as the ongoing outbreak of COVID-19.
The forward-looking statements are based on the Company's beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Some of these factors, are described in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this annual report on Form 10-K. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


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Part I
Item 1.    Business
Our Company
Western Asset Mortgage Capital Corporation, a Delaware corporation, and Subsidiaries (the “Company” unless otherwise indicated or except where the context otherwise requires “we,” “us” or “our”) commenced operations in May 2012, focused on investing in, financing and managing a diversified portfolio of real estate related securities, whole loans and other financial assets, which we collectively refer to as our target assets.  We are externally managed by Western Asset Management Company, LLC (our “Manager”) pursuant to the terms of a management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated a subsidiary as a taxable REIT subsidiary, or TRS, to engage in such activities. We also intend to operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act, as amended, or the Investment Company Act. Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol "WMC."

Our objective is to provide attractive risk adjusted returns to our stockholders primarily through an attractive dividend, which we intend to support with sustainable core earnings, as well as the potential for higher returns through capital appreciation. Our investment strategy is based on our Manager's perspective of which mix of our target assets it believes provides us with the best risk-reward opportunities at any given time.  We also deploy leverage as part of our investment strategy to increase potential returns. 
Our Manager
We are externally managed and advised by our Manager, an SEC-registered investment advisor and a wholly-owned subsidiary of Legg Mason,Franklin Resources, Inc.("Legg Mason" (“Franklin”), headquartered in Pasadena, California, that specializes in fixed-income asset management. From offices in Pasadena, Hong Kong, London, Melbourne, New York, São Paulo, Singapore, Tokyo and Zurich, our Manager's 835804 employees provide investment services for a wide variety of global clients, including mutual funds, corporate, public, insurance, health care, union organizations and charitable foundations. In addition, two of our directors, James W. Hirschmann III and Jennifer W. Murphy, are also employees of our Manager. Our Manager is responsible for, among other duties: (i) performing all of our day-to-day functions; (ii) determining investment criteria in conjunction with our Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management.
On February 18, 2020, Franklin Resources, Inc. (“Franklin”) and Legg Mason, announced that they had entered into an agreement under which Franklin would acquire Legg Mason and its affiliates, including our Manager.   The transaction is expected to close in the third quarter of 2020 and is subject to customary closing conditions.  Upon completion of the transaction our Manager would become a wholly owned subsidiary of Franklin.
Our Competitive Advantages
Our competitive advantages in the marketplace stems from our relationship with our Manager. As of December 31, 2019,2020, our Manager had approximately $460.1$484.5 billion in assets under management. Our Manager's scale makes it an important trading partner for many of the largest broker-dealers and banks, which provides our investment team the ability to source real estate related opportunities directly from originators as well as access attractive financing.
Our Investment Strategy
 
Our Manager’s investment philosophy, which developed from a singular focus in fixed-income asset management over a variety of credit cycles and conditions, is to provide clients with a diversified, long-term value-oriented portfolio. We benefit from the breadth and depth of our Manager’s overall investment philosophy, which focuses on a macroeconomic analysis as well as an in-depth analysis of individual assets and their relative value. In making investment decisions on our behalf, our Manager seeks to identify assets across the broad mortgage universe with attractive risk adjusted returns, which incorporates its view on the outlook for the mortgage markets, including relative valuation, supply and demand trends, the level of interest rates, the shape of the yield curve, prepayment rates, financing and liquidity, commercial and residential real estate prices, delinquencies, default rates, recovery of various segments of the economy and vintage of collateral, subject to maintaining our REIT qualification and our exemption from registration under the 1940 Act.





Our Target Assets

     Residential Whole Loans. — Residential Whole Loans are mortgages secured by single family residences held directly by us or through consolidated trusts with us holding the beneficial interest in the trusts. Our Residential Whole Loans are mainly adjustable rate mortgages that do not qualify for the Consumer Finance Protection Bureau’s (or CFPB) safe harbor
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provision for “qualified mortgages” ("Non QM" mortgages). Our Manager’s review, relating to Non QM mortgages, includes an analysis of the loan originator’s procedures and documentation for compliance with Ability to Repay requirements.  As discussed in Note 7 "Financing," we have and may continue to securitize whole loan interests, selling more senior interests in the pool of loans and retaining residual portions.  The characteristics of our Residential Whole Loans may vary going forward.

Commercial Whole Loans. — Commercial Whole Loans are generally loans ranging from $5 million to $125 million, secured by commercial real estate typically short-term loans. The collateral types may include hospitality, senior care living facilities, multifamily, office retail and industrial properties. These loans may be held directly by us or through consolidated trusts with us holding the beneficial interest in the trust.

Commercial Mezzanine Loans. Commercialmezzanine loans are generally structured to represent a senior position in the borrower’s equity in, and subordinate to a first mortgage loan, on a property. These loans are generally secured by pledges of ownership interests, in whole or in part, in entities that directly or indirectly own the real property. At times, mezzanine loans may be secured by additional collateral, including letters of credit, personal guarantees, or collateral unrelated to the property. Mezzanine loans may be structured to carry either fixed or floating interest rates as well as carry a right to participate in a percentage of gross revenues and a percentage of the increase in the fair market value of the property securing the loan. Mezzanine loans may also contain prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns to the lender. Mezzanine loans usually have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms. Depending on the structure of a transaction, Commercial Mezzanine loans may or may not qualify as "qualifying real estate interests" for purposes of the 1940 Act.

Non-Agency RMBS. — RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS collateral may also include reperforming loans, which are conventional mortgage loans that were current at the time of the securitization, but had been delinquent in the past. Non-Agency RMBS may be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.

Non-Agency CMBS. — Fixed and floating rate CMBS for which the principal and interest payments are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity.  We do not have an established minimum current rating requirement for such investments.

 Agency CMBS. — Fixed and floating rate CMBS, for which the principal and interest payments are guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, but for which the underlying mortgage loans are secured by real property other than single family residences. These may include, but are not limited to Fannie Mae DUS (Delegated Underwriting and Servicing) MBS, Freddie Mac Multifamily Mortgage Participation Certificates, Ginnie Mae project loan pools, and/or CMOs structured from such collateral. These securities generally have prepayment protection in the form of defeasance, yield maintenance or points.

Agency RMBS. — Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by a U.S. Government agency, such as the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), or a U.S. Government-sponsored entity ("GSE"), such as the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”).  The Agency RMBS we acquire can be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Fixed-rate mortgages have interest rates that are fixed for the term of the loan and do not adjust. The interest rates on adjustable-rate mortgages generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index. Hybrid adjustable-rate mortgages have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index. Adjustable-rate mortgages and hybrid adjustable-rate mortgages generally have periodic and lifetime constraints on the amount by which the loan interest rate can change on any predetermined interest rate reset date.

Agency CMBS. — Fixed and floating rate CMBS, for which the principal and interest payments are guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, but for which the underlying mortgage loans are secured by real property other than single family residences. These may include, but are not limited to Fannie Mae DUS (Delegated Underwriting and Servicing) MBS, Freddie Mac Multifamily Mortgage Participation Certificates, Ginnie Mae project loan pools, and/or CMOs structured from such collateral. These securities generally have prepayment protectioninvestments can be in the form of defeasance, yield maintenancepools, TBA and CMO (including interest only, principal only or points.other structures).

Non-Agency RMBS
. — RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS collateral may also include reperforming loans, which are conventional mortgage loans that were current at the time of the securitization, but had been delinquent in the past. Non-Agency RMBS may be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.


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Non-Agency CMBS. — Fixed and floating rate CMBS for which the principal and interest payments are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity.  We do not have an established minimum current rating requirement for such investments.

Non U.S. CMBS. CMBS which is not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity and which is secured by commercial real estate located outside of the U.S.  Although our Manager believes that these investments can provide attractive risk-reward opportunities and offer additional asset diversification, investing in international real estate has a number of additional risks, including, but not limited to, currency risk, political risk and the legal risk of investing in jurisdictions with varying laws and regulations and potential tax implications. 

GSE Risk Sharing Securities Issued by Fannie Mae and Freddie Mac. — From time to time we have and may in the future continue to invest in risk sharing securities issued by Fannie Mae and Freddie Mac.  Principal and interest payments on these securities are based on the performance of a specified pool of Agency residential mortgages. The payments due on these securities, however, are not secured by the referenced mortgages. The payments due are full faith and credit obligations of Fannie Mae or Freddie Mac respectively, but neither agency guarantees full payment of the underlying mortgages.  Investments in these securities generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets.

TBAs. — We may utilize TBAs, in order to invest in Agency RMBS. Pursuant to these TBAs, we agree to purchase (or deliver), for future settlement, Agency RMBS with certain principal and interest terms and certain underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. Our ability to invest in Agency RMBS through TBAs may be limited by the 75% real estate income and asset tests applicable to REITs.


Mortgage pass-through certificates. — Mortgage pass-through certificates are securities representing interests in “pools” of mortgage loans secured by residential real property where payments of both interest and scheduled principal, plus pre-paid principal, on the underlying loan pools are made monthly to holders of the securities, in effect “passing through” monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor of the securities and servicers of the underlying mortgages.

Interest-Only Strips or IOs. — This type of security entitles the holder only to payments of interest based on a notional principal balance. The yield to maturity of Interest-Only Strips is extremely sensitive to the rate of principal payments (particularly prepayments) on the underlying pool of mortgages. We invest in these types of securities primarily to take advantage of particularly attractive prepayment-related or structural opportunities in the MBS markets, as well as to help manage the duration of our overall portfolio.
Inverse Interest-Only Strips or IIOs. — This type of security has a coupon with an inverse relationship to its index and is subject to caps and floors. Inverse Interest-Only MBS entitles the holder to interest only payments based on a notional principal balance, which is typically equal to a fixed rate of interest on the notional principal balance less a floating rate of interest on the notional principal balance that adjusts according to an index subject to set minimum and maximum rates. The current yield of Inverse Interest-Only MBS will generally decrease when its related index rate increases and increase when its related index rate decreases.
Agency and Non-Agency CMBS IO and IIO Securities. — Interest-Only and Inverse Interest-Only securities for which the underlying collateral is commercial mortgages the principal and interest on which may or may not be guaranteed by a U.S. Government agency or U.S. Government-sponsored entity.  Unlike single family residential mortgages in which the borrower, generally, can prepay at any time, commercial mortgages frequently limit the ability of the borrower to prepay, thereby providing a certain level of prepayment protection.  Common restrictions include yield maintenance and prepayment penalties, the proceeds of which are generally at least partially allocable to these securities, as well as, defeasance.
Principal-Only Strips or POs. — This type of security generally only entitles the holder to receive cash flows that are derived from principal repayments of an underlying loan pool, but in the case of Non-Agency Principal-Only Strips will also include cash flows from default recoveries and excess interest.  The yield to maturity of Principal-Only Strips is extremely sensitive to the rate of principal payments (particularly prepayments) on the underlying pool of mortgages. We invest in these types of securities primarily to take advantage of structural opportunities in the MBS markets.
Residential Whole Loans. — Residential Whole Loans are mortgages secured by single family residences held directly by us or through consolidated trusts with us holding the beneficial interest in the trusts. Our Residential Whole Loans include conforming fixed rate mortgages and adjustable rate mortgages that do not qualify for the Consumer Finance Protection Bureau’s (or CFPB) safe harbor provision for “qualified mortgages” ("Non QM" mortgages). Our Manager’s review, relating to Non QM mortgages, includes an analysis of the loan originator’s procedures and documentation for compliance with Ability-to-Repay requirements. As discussed in Note 7 "Financing," we have and may continue to securitize whole-loan interests, selling more senior interests in the pool of loans and retaining residual portions.  The characteristics of our Residential Whole Loans may vary going forward.

Residential Bridge Loans. Residential Bridge Loans are mortgages secured by non owner occupied single family and multi-family residences, typically short-term, held directly by us or through structured Non-Agency RMBS programs crafted specifically for us and other clients of our Manager.  These loans are held in a consolidated trust with us holding the beneficial interest in the trust. 
Commercial Whole Loans. — Commercial Whole Loans are generally loans ranging from, $5.0 million to $125.0 million, secured by commercial real estate typically short-term loans. The collateral types may include hospitality, senior care living facilities, multifamily, office, retail and industrial properties. These loans may be held directly by us or through consolidated trusts with us holding the beneficial interest in the trust.

Commercial Mezzanine Loans. Commercialmezzanine loans are generally structured to represent a senior position in the borrower’s equity in, and subordinate to a first mortgage loan, on a property. These loans are generally secured by pledges of ownership interests, in whole or in part, in entities that directly or indirectly own the real property. At times, mezzanine loans may be secured by additional collateral, including letters of credit, personal guarantees, or collateral unrelated to the property. Mezzanine loans may be structured to carry either fixed or floating interest rates as well as carry a right to participate in a percentage of gross revenues and a percentage of the increase in the fair market value of the property securing the loan. Mezzanine loans may also contain prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns to the lender. Mezzanine loans usually have maturities that match the maturity of the related mortgage loan but may have shorter


or longer terms. Depending on the structure of a transaction, Commercial Mezzanine loans may or may not qualify as "qualifying real estate interests" for purposes of the 1940 Act.

Collateralized Mortgage Obligations or CMOs. — These are securities, which can be Agency or Non-Agency, that are structured from residential and/or commercial pass-through certificates, which receive monthly payments of principal and interest. CMOs divide the cash flows which come from the underlying mortgage pass-through certificates into different classes of securities that may have different maturities and different weighted average lives than the underlying pass-through certificates.

ABS. — Debt and/or equity tranches of securitizations backed by various asset classes, including, but not limited to, automobiles, credit cards, equipment, franchises, recreational vehicles and student loans. Investments in ABS generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets.

Other investments. — In addition to MBS, our principal investment, and ABS from time to time, we may also make other investments in securities, which our Manager believes will assist us in meeting our investment objective and are consistent with our overall investment policies.  These investments will normally be limited by the REIT requirements that 75% our assets be real estate assets and that 75% of our income be generated from real estate, thereby limiting our ability to invest in such assets.

Our Investment Portfolio

Our investment portfolio composition at December 31, 20192020.    

Investment Portfolio

chart-8722cb306b675778835.jpgwmc-20201231_g2.jpg

Our Financing Strategy

During 2020, the uncertainties created by the COVID-19 pandemic made it challenging to obtain financing arrangements on favorable terms, including our repurchase agreements, term financings, and securitizations. In the fourth quarter of 2020, terms for financing arrangements improved significantly. We deploy leverage to increase potential returns to our stockholders and to fund the acquisition of our target assets. While we are not required to maintain any particular leverage ratio, we expect to maintain a debt-to-equity ratio of three to ten times the amount of our stockholders’ equity, depending onhave primarily financed our investment composition. Theacquisitions with repurchase agreements. We believe the amount of leverage we use foris consistent with our portfolio depends uponintention of keeping total borrowings within a prudent range, as determined by our Manager, taking into account a variety of factors, which a variety of factors, such as, general economic, political and financial market conditions, the anticipated liquidity and price volatility of our assets, the availability and cost of financing the assets, the credit worthinesscreditworthiness of financing counterparties and the health of the U.S. residential and commercial mortgage markets. At December 31, 2019,In utilizing leverage, we seek to enhance equity returns while limiting our aggregate debt-to-equityexposure to interest rate volatility and daily margin calls. We expect to continue to seek financing arrangements without daily

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ratio was approximately 5.4margin requirements or with margin requirements which apply only after a significant reduction in the valuation of the assets financed, , including but not limited to 1 excluding our non-recourse debtterm financing, securitization and 8.0convertible senior unsecured notes, as market permit. We are not required to 1 including our non-recourse debt. Themaintain any particular leverage ratio. We expect to maintain a debt-to-equity ratio is not a comprehensive statement of overalltwo to five times the amount of our stockholders’ equity, depending on our investment portfolio leverage which is affected by any leverage embedded in TBAs and derivative instruments.composition. 

Repurchase Agreements

We primarily finance our investments through repurchase agreements for which we pledge our assets. Our repurchase agreements have maturities generallybear interest at a contractually agreed-upon rate and historically had terms ranging from one month to twelve months, but in some cases longer. Repurchase18 months.  Under these repurchase agreements, involve the transferrespective counterparties retain the right to determine the fair value of the underlying collateral. A reduction in the value of pledged assets may require us to post additional securities as collateral, pay down borrowings or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon advance rates. Our inability to post adequate collateral for a margin call by a counterparty, at an agreed upon price in exchange for such counterparty’s simultaneous agreement to returna timeframe as short as the close of the same security back to the borrower atbusiness day, could result in a future date (i.e., the maturitycondition of the borrowing). Under our repurchase agreements, we retain beneficial ownership of the pledged collateral, while the counterparty maintains custody of such collateral.  At the maturity of a repurchase financing, unless the repurchase financing is renewed with the same counterparty, we are required to repay the loan, including any accrued interest, and concurrently reacquire custody of the pledged collateral or, with the consent of the counterparty, we may renew the repurchase financing at the then prevailing market interest rate and terms.  The amount borroweddefault under our repurchase agreements, is a specified percentage ofthereby enabling the asset’s applicable fair value, which is dependent oncounterparty to liquidate the collateral type.  pledged by us, which may have a material adverse effect on our financial position, results of operations and cash flows. 

Our repurchase agreement counterparties generally require collateral in excess of the loan amount, or haircuts. As of December 31, 2019,2020, the ranges of the haircuts on our investments were as follow:

  Minimum Maximum (excluding IOs and IIOs) Maximum (including IOs and IIOs)
Agency RMBS 3.0% 5.0% 30.0%
Agency CMBS(3)
 3.0% 5.0% 25.0%
Non-Agency RMBS 15.0% 50.0% n/a
Non-Agency CMBS 10.0% 35.0% n/a
Other securities 16.7% 50.0% n/a
Residential Whole Loans(1)
 5.0% 20.0% n/a
Commercial Loans(2)
 15.0% 60.0% n/a
MinimumMaximum (excluding IOs and IIOs)Maximum (including IOs and IIOs)
Agency RMBS25.0%n/a25.0%
Non-Agency RMBS35.0%35.0%35.0%
Non-Agency CMBS25.0%45.0%n/a
Other securities35.0%60.0%n/a
Residential Whole Loans(1)
16.0%80.0%n/a
Commercial Loans(2)
22.0%90.9%n/a
(1) Includes Residential Bridge Loans.
(2) Includes Securitized commercial loans.
(3) For Agency CMBS whose payment is not guaranteed by Freddie Mac haircuts can be as high as 25%.
A significant decrease in asset value, advance rate, or an increase in the haircut could result in us having to sell assets in order to meet additional margin calls by our repurchase agreement counterparties. Our inability to post adequate collateral for a margin call by the counterparty could result in a condition of default under our repurchase agreements. We expect to mitigate our risk to margin calls by deploying leverage at the portfolio level at amounts below our available financing under our repurchase agreements.

In order to reduce our exposure of risk associated with concentration to any one repurchase agreement counterparty, we seek to diversify our exposure by entering into repurchase agreements with multiple counterparties. At December 31, 2019, we had 34 master repurchase agreements with our counterparties and outstanding borrowings under 21 of such agreements. Our total outstanding borrowings under our repurchase agreements was $2.8 billion, with a maximum net exposure to any single repurchase agreement counterparty of $132.3 million, or 23.4% of equity.

Convertible Senior Unsecured Notes

As of December 31, 2019, we had $205.0 million of 6.75% convertible senior unsecured notes outstanding. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity. We view this financing as an attractive source of longer-term capital, which we believe was more cost efficient than issuing straight equity.

Securitized Debt

As of December 31, 2019, Arroyo Mortgage Trust 2019-2 (a subsidiary) had $801.1 million securitized mortgage backed notes outstanding . The notes, excluding the Owner Certificates, issued by were four classes, with a weighted average fixed interest rate of 3.425% per annum. All of the Notes are anticipated to have a final payment date in April 2049. We view the notes as an


attractive source of longer-term financing for our Residential Whole Loan portfolio. We may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or ii) the date on which the aggregate collateral balance is 20% of the original principal balance. The notes are redeemable at their face value plus accrued interest. The mortgage-backed notes are classified in "Securitized Debt" in the Consolidated Balance Sheets.

Separately, as of December 31, 2019, the Company had three consolidated variable interest entities that had outstanding borrowings of $681.7 million, which is classified in "Securitized Debt" in the Consolidated Balance Sheets.


Our Hedging and Risk Management Strategy
 
Our overall portfolio strategy is designed to generate attractive returns to our investors through various economic cycles. We believe our broad approach to investing in the real estate mortgage markets, which considers all categories of real estate assets, allows us to invest in a diversified portfolio and help mitigate our portfolio from risks that arise from investing in a single or limited collateral type. In connection with our risk management activities, we may enter into a variety of derivative and non-derivative instruments. OurWhen purchased, our primary objective for acquiring these derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control. Our derivative instruments are designed to mitigate the effects of market risk and cash flow volatility associated with interest rate risk, including prepayment risk. As part of our hedging strategy, we may enter into interest rate swaps, including forward starting swaps, interest rate swaptions, U.S. Treasury options, future contracts, TBAs, total return swaps, credit default swaps, foreign current swaps, and forwards and other similar instruments. There can be no assurance that appropriate hedging strategies will be available or that if implemented they will be successful.

Regulation
REIT Qualification
We elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ended December 31, 2012. We will generally not be subject to corporate U.S. federal income tax to the extent that we make qualifying distributions to stockholders, and provided that we satisfy, on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which we lost our REIT qualification. The failure to qualify as a REIT could have a material adverse impact on our results of operations and amounts available for distribution to stockholders.
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Investment Company Act Exemption
We conduct our operations so that we are not considered an investment company under the 1940 Act in reliance on the exemption provided by Section 3(c)(5)(C) of the 1940 Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires that: (i) at least 55% of our investment portfolio consist of "mortgages and other liens on and interest in real estate," or "qualifying real estate interests," and (ii) at least 80% of our investment portfolio consist of qualifying real estate interests plus "real estate-related assets." We have relied and intend to continue to rely on current interpretations of the staff of the SEC in an effort to continue to qualify for an exemption from registration under the 1940 Act. For more information on the exemptions that we utilize refer to Item 1A, "Risk Factors" of this annual report on Form 10-K.
Competition
Our net income depends, in part, on our ability to acquire assets at favorable spreads over our borrowing costs. In acquiring our target assets, we compete with other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities. In addition, other REITs with similar asset acquisition objectives, including a number that have been recently formed and others that may be organized in the future, compete with us in acquiring assets and obtaining financing. These competitors may be significantly larger than us, may have access to greater capital and other resources or may have other advantages. In addition, some 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 us. Current market conditions may attract more competitors, which may increase the competition for sources of financing. An increase in the competition for sources of funding could adversely affect the availability and cost of financing, and thereby adversely affect the market price of our common stock.
EmployeesEnvironmental Matters

We are not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or statement of position or result in material capital expenditures.

Employees and Human Capital
We have no employees. We are externally managed pursuant to the management agreement dated May 9, 2012. We have no employees. All of our officers and two of our directors, James W. Hirschmann III and Jennifer W. Murphy, are employees of our Manager. We benefit from our Manager's global infrastructure and operating platform, through which we are able to source, evaluate and manage potential investments in our target assets. Our Manager is responsible for, among other duties: (i) performing all of our day-to-day functions; (ii) determining investment criteriastrides to create a diverse and inclusive workforce in conjunction with our Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management.operating its business.
Corporate Governance and Internet Address
We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. In 2014, theThe Board took additional steps to enhance governance by appointinghas appointed a lead independent director and adding a fourthto enhance governance Currently five of seven directors are independent directordirectors so that our Board of Directors consists of more than two-thirds independent directors. The audit, nominating and corporate governance, risk, and compensation committees of our Board of Directors are composed entirely of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics, which delineate our standards for our officers and directors.
Our internet address is www.westernassetmcc.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K. We make available, free of charge through a link on our site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, if any, as filed or furnished with the SEC, as soon as reasonably practicable after such filing or furnishing. Our site also contains our code of business conduct and ethics, corporate governance guidelines and the charters of our audit committee, nominating and corporate governance committee and compensation committee of our Board of Directors. Within the time period required by the rules of the SEC and the New York Stock Exchange, or NYSE, we will post on our website any amendment to our code of business conduct and ethics as defined in the code. Our documents filed with, or furnished to, the SEC are also available for review on the SEC's website at www.sec.gov.
Item 1A.    Risk Factors
Our business and operations are subject to a number of risks and uncertainties, the occurrence of which could adversely affect our business, financial condition, results of operations and ability to make distributions to stockholders and could cause the value of our capital stock to decline.
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RISK FACTOR SUMMARY

Risks related to our business

The COVID-19 pandemic and measures intended to prevent its spread have had and may continue to have a material adverse effect on our business, results of operations, liquidity and financial condition.
We may not be able to successfully operate our business or generate sufficient revenueunable to make or sustain distributions to our stockholders.
We cannot assure you that we will be able to continue to operate our business successfully or implement our operating policies and strategies as described herein. The results of our operations depend on several factors, including the availability of opportunities for the acquisition of assets, the level and volatility of interest rates, the availability of adequate short and long-term financing, conditions in the financial markets and economic conditions.
We may change any of our strategies, policies or procedures without stockholder consent.
We may change any of our strategies, policies or procedures with respect to investments, acquisitions, growth, operations, indebtedness, capitalization, distributions, financing strategy and leverage at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described herein. These changes could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.
Increases in interest rates could adversely affect the value of our investments and cause our interest expense to increase, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to our stockholders.increase.
Our investment portfolio contains a significant allocation to MBS, as well Residential Whole Loans. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” In a normal yield curve environment, an investment in such assets will generally decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders. Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs will generally


increase more rapidly than the interest income earned on our assets. Because our investments on average, generally bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net interest margin, net income, book value and the market value of our net assets. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline, which would likely decrease our net income. A significant risk associated with our target assets is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increase significantly, the market value of these investments will decline, and the duration and weighted average life of the investments will increase. At the same time, an increase in short-term interest rates will increase the amount of interest owed on the repurchase agreements we enter into to finance the purchase of our investments.

Changes to, or the elimination of, LIBOR may adversely affect interest expense related to our loans and investments.
In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts, including agreements governing certain of our indebtedness, that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks. In addition, approximately half of our investment portfolio pays interest at a variable rate that is tied to LIBOR. If LIBOR is no longer available, we may need to renegotiate some of our agreements to determine a replacement index or rate of interest. To the extent the replacement index or rate of interest is lower than the existing LIBOR-based rate it could have an adverse impact on the value of such investments, our financial condition and results of operations. In September 2019, the FASB proposed guidance that would help facilitate the market transition from existing reference rates to alternative rates. However, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based securities, including our material contracts that are indexed to USD-LIBOR. Furthermore, we may need to renegotiate any agreements governing our indebtedness extending beyond 2021 that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, potential effect of any such event on our business, financial condition and results of operations cannot yet be determined.

We cannot assure you that our internal controls over financial reporting will consistently be effective.
We are responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. We cannot ensure you that there will not be any material weaknesses or significant deficiencies in our internal control over financial reporting in the future.
Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our 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 our investor relationships. As our reliance on technology has increased, so have the risks posed to both our information systems, both internal and those provided by our Manager and third party service providers. Our Manager has implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations or confidential information will not be negatively impacted by such an incident.




Risks related to our investing strategy

Market and economic disruptions caused by the COVID-19 pandemic have made it more difficult for us to determine the fair value of our investments.
Our investments in Non-Agency MBS, Residential Whole Loans, Commercial Loans and Residential Bridge Loans involve credit risks, which could materially adversely affect our results of operations.

The holder of a residential mortgages, commercial mortgages or MBS assumes the risk that the related borrowers may default on their obligations to make full and timely payments of principal and interest. Under our investment policy, we have the ability to acquire Non-Agency MBS, Residential Whole Loans, Commercial Loans and Residential Bridge Loans. In general, these investments carry greater investment risk than Agency MBS because the former are not guaranteed as to principal or interest by the U.S. Government, any federal agency or any federally chartered corporation. Higher-than-expected rates of default and/or higher-than-expected loss severities on these investments could adversely affect the value of these assets. Accordingly, defaults in the payment of principal and/or interest on our Residential Whole Loans, Commercial Loans, Residential Bridge Loans, and Non-Agency MBS and would likely result in our incurring losses of income from, and/or losses in market value relating to, these assets, which could materially adversely affect our results of operations.

In particular, our portfolio of Residential Whole Loans and Commercial Loans continued to be one of our faster growing asset class during 2019. We expect that our investment portfolio in Residential Whole Loans and Commercial Loans will continue to increase during 2020. As a holder of these loans, we are subject to the risk that the related borrowers may default or have defaulted on their obligations to make full and timely payments of principal and interest. A number of factors impact a borrower’s ability to repay including, among other things, changes in employment status, changes in interest rates or the availability of credit, and changes in real estate values. In addition to the credit risk associated with these assets, Residential Whole Loans and Commercial Loans are less liquid than certain of our other credit sensitive assets, which may make them more difficult to dispose of if the need or desire arises. If actual results are different from our assumptions in determining the prices paid to acquire such loans, particularly if the market value of the underlying properties decreases significantly subsequent to purchase, we may incur significant losses, which could materially adversely affect our results of operations.

We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire
desirable investments in our portfolio assets and could also affect the pricing of these securities.

We operate in a highly competitive market for investment opportunities. Currently, our profitability depends, in large part, on our ability to acquire our portfolio assets at attractive prices. In acquiring these assets, we compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds (including other funds managed by our Manager), commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. Other REITs have recently raised, or may raise, additional capital, and may have investment objectives that overlap with ours, which may create additional competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the U.S. Government. Many of our 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 our 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 us. Furthermore, competition for investments in our portfolio assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. We cannot assure you that the competitive pressures we 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 these 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 we will be able to identify and make investments that are consistent with our investment objectives.
A lack of liquidity in our investments may adversely affect our business.
Many of the assets we acquire are not publicly traded. A lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale or the unavailability of financing for these assets. In addition, mortgage-related assets generally experience periods of illiquidity, especially during periods of economic stress such as the economic recession in 2008 which resulted in increased delinquencies and defaults with respect to residential and commercial mortgage loans. The illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. Further, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our Manager has or could be attributed with material, non-


public information regarding such business entity. As a result, our ability to vary our 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.
An economic recession and declining real estate values could impair our assets and harm our operations.
The risks associated with our business are more severe during economic recessions and are compounded by declining real estate values. The Residential Whole Loans, Residential Bridge Loans, Commercial Loans, Non-Agency RMBS and Non-Agency CMBS in which we invest a part of our capital will be particularly sensitive to these risks. Declining real estate values will likely reduce the level of new mortgage loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase of additional properties. Borrowers will also be less able to pay principal and interest on loans underlying the securities in which we invest if the value of residential and commercial real estate weakens further. Further, declining real estate values significantly increase the likelihood that we will incur losses on these investments in the event of default because the value of collateral on the mortgages underlying such securities may be insufficient to cover the outstanding principal amount of the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect our net interest income from these investments, which could have an adverse effect on our financial condition, results of operations and our ability to make distributions to our stockholders
Our investments in Residential Whole Loans, Residential Bridge Loans and Commercial Loans subject us to servicing-related risks, including those associated with foreclosure and liquidation.

We rely on third-party servicers to service and manage the mortgages underlying our loan portfolio. The ultimate returns generated by these investments may depend on the quality of the servicer. If a servicer is not vigilant in seeing that borrowers make their required monthly payments, borrowers may be less likely to make these payments, resulting in a higher frequency of default. If a servicer takes longer to liquidate non-performing mortgages, our losses related to those loans may be higher than originally anticipated. Any failure by servicers to service these mortgages and/or to competently manage and dispose of REO properties could negatively impact the value of these investments and our financial performance. In addition, while we have contracted with third-party servicers to carry out the actual servicing of the loans (including all direct interface with the borrowers), for loans that we purchase together with the related servicing rights, we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that the loans are serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation. In light of the current regulatory environment, such exposure could be significant even though we might have contractual claims against our servicers for any failure to service the loans to the required standard.

The foreclosure process, especially in judicial foreclosure states such as New York, Florida and New Jersey, can be lengthy and expensive, and the delays and costs involved in completing a foreclosure, and then subsequently liquidating the REO property through sale, may materially increase any related loss. In addition, at such time as title is taken to a foreclosed property, it may require more extensive rehabilitation than we estimated at acquisition. Thus, a material amount of foreclosed residential mortgage loans, particularly in the states mentioned above, could result in significant losses in our Residential Whole Loan portfolio and could materially adversely affect our results of operations.
The commercial mortgage loans underlying the CMBS and our Commercial Loans we may acquire are subject to defaults, foreclosure timeline extension, fraud and commercial price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal,risks, which could result in losses to us.
CMBS may be secured by a single commercial mortgage loan or a pool of commercial mortgage loans. Commercial mortgage loans may be secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that may be greater than similar risks associated with loans made on the security of residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability or willingness to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things,
tenant mix;
success of tenant businesses;
property management decisions;
property location and condition;
competition from comparable types of properties;


changes in laws that increase operating expenses or limit rents that may be charged;
any need to address environmental contamination at the property or the occurrence of any uninsured casualty at the property;
changes in national, regional or local economic conditions and/or specific industry segments;
declines in regional or local real estate values;
declines in regional or local rental or occupancy rates;
increases in interest rates;
real estate tax rates and other operating expenses;
changes in governmental rules, regulations and fiscal policies, including environmental legislation; and
acts of God, terrorist attacks, social unrest and civil disturbances.
If our Manager overestimates the loss-adjusted yields of our CMBS investments, we may experience losses.
Our Manager will analyze any CMBS investments we may acquire based on loss-adjusted yields, taking into account estimated future losses on the mortgage loans included in the securitization's pool of loans, and the estimated impact of these losses on expected future cash flows. Our Manager's loss estimates may not prove accurate, as actual results may vary from estimates. In the event that our Manager underestimates the pool level losses relative to the price we pay for a particular CMBS investment, we may experience losses with respect to such investment.
If we do not control the special servicing of the mortgage loans included in the CMBS in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests.
With respect to CMBS in which we invest, overall control over the special servicing of the related underlying mortgage loans will be held by a "directing certificateholder" or a "controlling class representative," which is appointed by the holders of the most subordinate class of CMBS in such series. We may not have the right to appoint the directing certificateholder. In connection with the servicing of the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificateholder, take actions with respect to the specially serviced mortgage loans that could adversely affect our interests.
Our investments are recorded at fair value, and quoted prices or observable inputs may not be available to determine such value, resulting in the use of significant unobservable inputs to determine value.
We expect that the values of some of our investments may not be readily determinable. We measure the fair value of these investments on at least a monthly basis. The fair value at which our assets are recorded may not be an indication of their realizable value. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions that are beyond the control of our Manager, our Company or our Board of Directors. Further, fair value is only an estimate based on good faith judgment of the price at which an investment can be sold since market prices of investments can only be determined by negotiation between a willing buyer and seller. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset is valued. Accordingly, the value of our common stock could be adversely affectedeffected by our determinations regarding the fair value of our investments, whether in the applicable period or in the future. Additionally, such valuations may fluctuate over short periods of time.
Our determination of the fair value of our investments for GAAP includes inputs provided by third party dealers and pricing services. Valuations of certain investments in which we invest are often difficult to obtain. In general, dealers and pricing services heavily disclaim their valuations. Dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental, or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of a security, valuations of the same security can vary substantially from one dealer or pricing service to another. Therefore, our results of operations for a given period could be adversely affected if our determinations regarding the fair market value of these investments are materially different than the values that we ultimately realize upon their disposal. Due to an overall increase in market volatility, the valuation process has been particularly challenging recently as market events have made valuations of certain assets more difficult, unpredictable and volatile.
Declinesdeclines in value of the assets in which we invest will adversely affect our financial position and results of operations, and make it more costly to finance these assets.invest.


We use our investments as collateral for our financings. Any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. Our investments in mortgage-backed securities and Whole Loans are recorded at fair value under a fair value option election at the time of purchase with changes in fair value reported in earnings. As a result, a decline in fair values of our mortgage-backed securities and Whole Loans could reduce both our earnings and stockholders' equity. If market conditions result in a decline in the fair value of our assets, our financial position and results of operations could be adversely affected.
Interest rate mismatches between our RMBS and Whole Loans backed by ARMs or hybrid ARMs and our borrowings used to fund our purchases of these assets may cause us to suffer losses.
We may fund our RMBS and Whole Loans with borrowings that have interest rates that adjust more frequently than the interest rate indices and repricing terms of RMBS and Whole Loans backed by adjustable-rate mortgages, or ARMs, or hybrid ARMs. Accordingly, if short-term interest rates increase, our borrowing costs may increase faster than the interest rates on RMBS and Whole Loans backed by ARMs or hybrid ARMs adjust. As a result, in a period of rising interest rates, we could experience a decrease in net income or a net loss.
In most cases, the interest rate indices and repricing terms of RMBS and Whole Loans backed by ARMs or hybrid ARMs and our borrowings will not be identical, thereby potentially creating an interest rate mismatch between our investments and our borrowings. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods when the spread between these indices was volatile. During periods of changing interest rates, these interest rate index mismatches could reduce our net income or produce a net loss, and adversely affect the level of our dividends and the market price of our common stock.
In addition, RMBS and Whole Loans backed by ARMs or hybrid ARMs will typically be subject to lifetime interest rate caps that limit the amount an interest rate can increase through the maturity of the RMBS and Whole Loans. However, our borrowings under repurchase agreements typically 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 caps could limit the interest rates on these types of RMBS and Whole Loans. This problem is magnified for RMBS and Whole Loans backed by ARMs or hybrid ARMs that are not fully indexed. Further, some RMBS and Whole Loans backed by ARMs or hybrid 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 may receive less cash income on these types of RMBS and Whole Loans than we need to pay interest on our related borrowings. These factors could reduce our net interest income and cause us to suffer a loss during periods of rising interest rates.
As of December 31, 2019, our Non-Agency RMBS and Whole Loans were secured by ARMs, Hybrid ARMS, pay option ARMs and fixed-rate mortgages. There can be no assurance that this will not change in the future.
Prepayment may adversely affect our profitability.
The RMBS assets and Residential Whole Loans we acquire are backed by poolsGeographic concentration of residential mortgage loans. We receive payments, generally, from the payments that are made on these underlying residential mortgage loans. While commercial mortgages frequently include limitations on the ability of the borrower to prepay, residential mortgages generally do not. When borrowers prepay their residential mortgage loans at rates that are faster than expected, the net result is prepayments that are faster than expected on the related RMBS and Residential Whole Loans. These faster than expected payments may adversely affect our profitability.
We may purchase RMBS assets and Residential Whole Loans that have a higher interest rate than the then prevailing market interest rate. In exchange for this higher interest rate, we may pay a premium to par value to acquire the asset. In accordance with accounting rules, we amortize this premium over the expected term of the asset. If the asset is prepaid in whole or in part at a faster than expected rate, we must expense all or a part of the remaining unamortized portion of the premium, which can adversely affect our profitability.
Prepayments generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment are difficult to predict. House price appreciation, while increasing the value of the collateral underlying our RMBS and Residential Whole Loans, may increase prepayments as borrowers may be able to refinance at more favorable terms. Prepayments can also occur when borrowers default on their residential mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property (an involuntary prepayment), or when borrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physical relocation. Prepayments also may be affected by conditions in the housing and financial markets, increasing defaults on residential mortgage loans, which could lead to an acceleration of the payment of the related principal, general economic conditions and the relative interest rates on fixed-rate mortgages and ARMs. While we seek to manage prepayment risk, in selecting RMBS and Residential Whole Loans investments we must balance prepayment risk against other


risks, the potential returns of each investment and the cost of hedging our risks. No strategy can completely insulate us from prepayment or other such risks, and we may deliberately retain exposure to prepayment or other risks.
In addition, a decrease in prepayment may adversely affect our profitability. When borrowers prepay their residential mortgage loans at slower than expected rates, prepayments on the RMBS may be slower than expected. These slower than expected payments may adversely affect our profitability. We may purchase RMBS assets that have a lower interest rate than the then prevailing market interest rate. In exchange for this lower interest rate, we may pay a discount to par value to acquire the asset. In accordance with accounting rules, we accrete this discount over the expected term of the asset based on our prepayment assumptions. If the asset is prepaid at a slower than expected rate, however, we must accrete the remaining portion of the discount at a slower than expected rate. This will extend the expected life of the asset and result in a lower than expected yield on assets purchased at a discount to par.
We could be materially and adversely affected by poor market conditions where the properties securing the mortgage loans underlying our investments are geographically concentrated.exposes us to risk.

Our performance depends on the economic conditions in markets in which the properties securing the mortgage loans underlying our investments are concentrated. As of December 31, 2019, a substantial portion of our investments had underlying properties in California. Our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders could be materially and adversely affected by this geographic concentration if market conditions, such as an oversupply of space or a reduction in demand for real estate in an area, deteriorate in California. Moreover, due to the geographic concentration of properties securing the mortgages underlying our investments, the Company may be disproportionately affected by general risks such as natural disasters, including major wildfires, floods and earthquakes and , severe or inclement weather, should such developments occur in or near the markets in California in which such properties are located.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic and acts of terrorism.
The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as coronavirus, or other widespread health emergency (or concerns over the possibility of such an emergency) terrorist attacks could create economic and financial disruptions, and could lead to operational difficulties that could impair our ability to manage our businesses.

We may make investments in non U.S. dollar denominated securities, which will be subject to currency rate exposure and risks associated with the uncertainty of foreign laws and markets.
Some of our real estate-related securities investments may be denominated in foreign currencies, and therefore, we expect to have currency risk exposure to any such foreign currencies. A change in foreign currency exchange rates may have an adverse impact on returns on our non U.S. dollar denominated investments. Although we may hedge our foreign currency risk subject to the REIT income tests, we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations. To the extent that we invest in non U.S. dollar denominated securities, in addition to risks inherent in the investment in securities generally discussed in this Form 10-K, we will also be subject to risks associated with the uncertainty of foreign laws and markets, including, but not limited to, unexpected changes in regulatory requirements, political and economic instability in certain geographic locations, difficulties in managing international operations, currency exchange controls, potentially adverse tax consequences, additional accounting and control expenses and the administrative burden of complying with a wide variety of foreign laws.
We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to make distributions to all stockholders.
Our business is highly dependent on communications and information systems of our Manager and other third party service providers. Any failure or interruption of our Manager's or other third party service providers' systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.
Loss of our exemption from regulation pursuant to the 1940 Act would adversely affect us.
We conduct our business so as not to become regulated as an investment company under the 1940 Act in reliance on the exemption provided by Section 3(c)(5)(C) of the 1940 Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires that: (i) at least 55% of our investment portfolio consist of "mortgages and other liens on and interest in real estate," or "qualifying real estate interests," and (ii) at least 80% of our investment portfolio consist of qualifying real estate interests plus "real estate-related assets." In satisfying this 55% requirement, based on pronouncements of the SEC staff, we may treat whole pool Agency RMBS


and CMBS as qualifying real estate interests. The SEC staff has not issued guidance with respect to whole pool Non-Agency RMBS. Accordingly, based on our own judgment and analysis of the SEC's pronouncements with respect to whole pool Agency RMBS, we may also treat Non-Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate interests. We currently treat partial pool Agency, Non-Agency RMBS and partial pool CMBS as real estate-related assets. We treat any ABS, interest rate swaps or other derivative hedging transactions we enter into as miscellaneous assets that will not exceed 20% of our total assets. We rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets.
The SEC in 2011 solicited public comment on a wide range of issues relating to Section 3(c)(5)(C), including the nature of the assets that qualify for purposes of the exemption and whether mortgage REITs should be regulated in a manner similar to investment companies. There can be no assurance that the laws and regulations governing the 1940 Act status of REITs, including the guidance of the Division of Investment Management of the SEC regarding this exemption, will not change in a manner that adversely affects our operations. To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could require us to hold assets we might wish to sell or to sell assets we might wish to hold. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the exemption we rely on from the 1940 Act, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.
The mortgage related investments that we acquire are limited by the provisions of the 1940 Act and the rules and regulations promulgated thereunder. If the SEC determines that any of these securities are not qualifying interests in real estate or real estate-related assets, adopts a contrary interpretation with respect to these securities or otherwise believes we do not satisfy the above exceptions or changes its interpretation of the above exceptions, we could be required to restructure our activities or sell certain of our assets. We may be required at times to adopt less efficient methods of financing certain of our mortgage related investments and we may be precluded from acquiring certain types of higher yielding securities. The net effect of these factors would be to lower our net interest income. If we fail to qualify for an exemption from registration as an investment company or an exclusion from the definition of an investment company, our ability to use leverage would be substantially reduced. Further, if the SEC determined that we were an unregistered investment company, we could be subject to monetary penalties and injunctive relief in an action brought by the SEC, we would potentially be unable to enforce contracts with third parties which could seek to obtain rescission of transactions undertaken during the period for which it was established we were an unregistered investment company. If we were required to register as an investment company, it would result in a change of our financial statement requirements. Our business will be materially and adversely affected if we fail to qualify for this exemption from regulation pursuant to the 1940 Act. In addition, the loss of our 1940 Act exemption would also permit our Manager to terminate the Management Agreement, which could result in material adverse effect on our business and results of operations.
Compliance with our 1940 Act exemption will limit our ability to invest in certain of our target assets.
At times the Manager may be limited in allocating equity to target that do not qualify as real estate or real estate related assets for purposes of the 1940 Act exemption. This limitation could adversely affect the performance of our portfolio if thesenon qualifying assets presents more attractive investment opportunities. Among the current target assets that are not real estate assets are ABS, non pool Agency and Non-Agency MBS, GSE Risk Sharing Securities and certain Commercial Mezzanine Loans.
The downgrade of the U.S. Government's or certain European countries' credit ratings and any future downgrades of the U.S. Government's or certain European countries' credit ratings may materially adversely affect our business, financial condition and results of operations.
On August 5, 2011, Standard & Poor's downgraded the U.S. Government's credit rating for the first time in history. More recently, concerns over economic recession, geopolitical issues, the ability of certain European sovereigns to honor their debt obligations and the exposure of certain European financial institutions to such debt, potential deflationary pressures in Europe, slowing growth in China, rapid decline in the price of oil and certain other commodities, the availability and cost of financing, the mortgage market, uncertainty related to political events such as the government spending and tax policy and uncertain real estate market have contributed to volatility and relatively low expectations for the world economy and domestic and international markets. Europe remains vulnerable to volatile financial and credit markets due to economic and political uncertainties, including the United Kingdom's decision to withdraw from the European Union, the ongoing refugee crisis, financial uncertainty in Greece and a lack of confidence in the European Union's banking system. Because FNMA and FHLMC are in conservatorship of the U.S. Government, downgrades to the U.S. Government's credit rating could impact the credit risk associated with Agency MBS and, therefore, decrease the value of the Agency MBS in which we invest. In addition, the downgrade of the U.S. Government's credit rating and the credit ratings of certain European countries has created broader financial turmoil and uncertainty, which has recently weighed heavily on the global banking system. Therefore, the downgrade of the U.S. Government's credit rating and the credit


ratings of certain European countries and any future downgrades of the U.S. Government's credit rating or the credit ratings of certain European countries may materially adversely affect our business, financial condition and results of operations.
Risks related to financing and hedging

We may be unable to access funding on advantageous terms, if at all in light of ongoing market dislocations resulting from the COVID-19 pandemic.
Our strategy to address interest rate risk may not be effective and could result in future realized losses.
Our strategy involves significant leverage, which may amplify losses.
Our current target leverage generally ranges between three to ten times the amount of our stockholders' equity (calculated in accordance with U.S. GAAP). We incur this leverage by borrowing against a substantial portion of the market value of our assets. By utilizing this leverage, we can enhance our returns. Nevertheless, this leverage, which is fundamental to our investment strategy, also creates significant risks.
As a result of our significant leverage, weManager may incur substantial losses if our borrowing costs increase. Our borrowing costs may increase for any of the following reasons:
short-term interest rates increase;
the market value of our securities decreases;
interest rate volatility increases; or
the availability of financing in the market decreases.
Fluctuations in interest rates could materially affect our financial results
In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts, including agreements governing certain of our indebtedness that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks. In September 2019, the FASB proposed guidance that would help facilitate the market transition from existing reference rates to alternative rates. However, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based securities, including our material contract that are indexed to USD-LIBOR. Furthermore, we may need to renegotiate any credit agreements extending beyond 2021 that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, potential effect of any such event on our business, financial condition and results of operations cannot yet be determined.
There can be no assurance that our Manager will be able to prevent mismatches in the maturities of our assets and liabilities.
Because we employ financial leverage in funding our portfolio, mismatches in the maturities of our assets and liabilities can create risk in the need to continually renew or otherwise refinance our liabilities. Our net interest margins are dependent upon a positive spread between the returns on our asset portfolio and our overall cost of funding. Our Manager actively employs portfolio-wide and security-specific risk measurement and management processes in our daily operations. Our Manager's risk management tools include software and services licensed or purchased from third parties, in addition to proprietary systems and analytical methods developed internally. There can be no assurance that these tools and the other risk management techniques described above will protect us from asset/liability risks.
We may be subject to margin calls under our master repurchase agreements, which could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.agreements.
We have entered into master repurchase agreements with various financial institutions and borrow under these master repurchase agreements to finance the acquisition of assets for our investment portfolio. Pursuant to the terms of borrowings under our master repurchase agreements, a decline in the value of the subject assets may result in our lenders initiating margin calls. A margin call means that the lender requires us to pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of the borrowing. The specific collateral value to borrowing ratio that would trigger a margin call is not set in the master repurchase agreements and will not be determined until we engage in a repurchase transaction under these agreements.


Our fixed-rate securities generally are more susceptible to margin calls as increases in interest rates tend to have a greater negative affect on the market value of fixed-rate securities. If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. The threat of or occurrence of a margin call could force us to sell our assets, either directly or through a foreclosure, under adverse market conditions. Because of the significant leverage we have, we may incur substantial losses upon the threat or occurrence of a margin call.
If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term, or if we default on our obligations under the repurchase agreement, we will lose money on our repurchase transactions.
When we engage in repurchase transactions, we generally sell securities to lenders (repurchase agreement counterparties) and receive cash from these lenders. The lenders are obligated to resell the same securities back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender will be less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us we may incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). We would also lose money on a repurchase transaction if the value of the underlying securities has declined as of the end of the transaction term, as we would have to repurchase the securities based on their initial value but would receive securities worth less than that amount. Further, if we default on one of our obligations under a repurchase transaction, the lender can terminate the transaction and cease entering into any other repurchase transactions with us. Our inability to post adequate collateral for a margin call by the counterparty, in a time frame as short as the close of the same business day, could result in a condition of default under our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse effect on our financial position, results of operations and cash flows. Certain of our repurchase agreements contain cross-default provisions, such that if a default occurs under an agreement with any specific lender, that lender could also declare a default under other repurchase agreements or other financing or derivative contracts, if any, with such lender. Further, 16 of the counterparties to our repurchase agreements held, as of December 31, 2019, collateral valued in excess of 5% of our stockholders' equity as security for our obligations under the applicable repurchase agreements. Any losses we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution to our stockholders.
If a counterparty to one of our swap agreements or TBAs defaults on its obligations, we may incur losses.
If a counterparty to one of the bilateral swap agreements that we enter into or TBAs that we enter into defaults on its obligations under the agreement, weWe may not receive payments due under the agreement, and thus, we may lose any unrealized gain associated with the agreement. In the case of a swap agreement, the fact that such swap agreement hedged a liability means that the liability could cease to be hedged upon the default of a counterparty. Additionally, we may also risk the loss of any collateral we have pledged to secure our obligations under a bilateral swap agreement if the counterparty, or in the case of a cleared swap, if our clearing broker, becomes insolvent or files for bankruptcy.
Failurefail to procure adequate repurchase agreement financing which generally have short terms, or to renew or replace repurchase agreement financing as it matures, would adversely affect our results of operations.financing.
We use repurchase agreement financing as a strategy to increase the return on our investment portfolio. However, we may not be able to achieve our desired leverage ratio for a number of reasons, including if the following events occur:
our lenders do not make repurchase agreement financing available to us at acceptable rates;
certain of our lenders exit the repurchase market;
our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do; or
we determine that the leverage would expose us to excessive risk.
We cannot assure you that any, or sufficient, repurchase agreement financing will be available to us on terms that are acceptable to us. In recent years, investors and financial institutions that lend in the securities repurchase market, have tightened lending standards in response to the difficulties and changed economic conditions that have materially adversely affected the MBS market. These market disruptions have been most pronounced in the Non-Agency MBS market, and the impact has also extended to Agency MBS, which has made the value of these assets unstable and relatively illiquid compared to prior periods. Any decline in their value, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements then in place.
As of December 31, 2019, we had amounts outstanding under repurchase agreements with 21 separate lenders and had repurchase agreements with 34 different lenders. Prior to entering into a lending relationship with any financial institution, our Manager does a thorough credit review of such potential lender. Notwithstanding the foregoing, a material adverse development


involving one or more major financial institutions or the financial markets in general, in addition to the regulatory changes, could result in our lenders reducing our access to funds available under our repurchase agreements or terminating such agreements altogether.
Furthermore, because we rely primarily on short-term borrowings, our ability to achieve our investment objectives will depend not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. If we are unable to renew or replace our maturing short-term borrowings due to liquidity shortfalls in the repurchase agreement market and other short-term funding markets, changes in the regulatory environment or for any other reason, we will have to sell some or all of our assets, possibly under adverse market conditions which may have a material adverse effect on our financial position, results of operations and cash flows. In addition, the aforementioned changes to the regulatory capital requirements imposed on our lenders may significantly increase the cost of the financing that they provide to us. Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the recent changes in the regulatory environment and their management of perceived risk, particularly with respect to assignee liability.
Our repurchase agreement financing may require us to provide additional collateral and mayor restrict us from leveraging our assets as fully as desired.assets.
We use repurchase agreements to finance acquisitions of our investments. If the market value of the asset pledged or sold by us to a financing institution pursuant to a repurchase agreement declines, we may be required by the financing institution to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so, which could result in defaults. Posting additional collateral to support our credit will reduce our liquidity and limit our ability to leverage our assets, which could adversely affect our business. In the event we do not have sufficient liquidity to meet such requirements, financing institutions can accelerate repayment of our indebtedness, increase interest rates, liquidate our collateral or terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for bankruptcy protection.
On the date each month that principal payments are announced (i.e., the factor day for our Agency RMBS), the value of our Agency RMBS pledged as collateral under our repurchase agreements is reduced by the amount of the prepaid principal and, as a result, our lenders will typically initiate a margin call requiring the pledge of additional collateral or cash, in an amount equal to such prepaid principal, in order to re-establish the required ratio of borrowing to collateral value under such repurchase agreements. Accordingly, with respect to our Agency RMBS the announcement on factor day of principal prepayments is in advance of our receipt of the related scheduled payment, thereby creating a short-term receivable for us in the amount of such principal prepayments; however, under our repurchase agreements, we may receive a margin call relating to the related reduction in value of our Agency RMBS and prior to receipt of this short-term receivable, be required to post additional collateral or cash in an amount equal to the product of the advance rate of such repurchase agreement and the principal prepayment on or about factor day, which would reduce our liquidity during the period in which the short-term receivable is outstanding. As a result, in order to meet any such margin calls, we could be forced to sell assets in order to maintain liquidity. Forced sales under adverse market conditions may result in lower sales prices than ordinary market sales in the normal course of business.
Further, financial institutions providing the repurchase facilities may require us to maintain a certain amount of cash uninvested or to set aside non-levered assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose which could reduce our return on equity. If we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.
Lenders may require us to enter into restrictive covenants relating to our operations.
When we obtain further financing, lenders could impose restrictions on us that would affect our ability to incur additional debt, our capability to make distributions to stockholders and our flexibility to determine our operating policies. Loan documents we execute may contain negative covenants that limit, among other things, our ability to repurchase stock, distribute more than a certain amount of our funds from operations, and employ leverage beyond certain amounts.
Our rights under repurchase agreements may be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our counterparties under the repurchase agreements.
In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to take possession of and liquidate the assets that we have pledged under their repurchase agreements. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as the claim of an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit


Insurance Act, our ability to exercise our rights to recover our securities under a repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur.
An increase in our borrowing costs relative to the interest that we receive on our portfolio investments may adversely affect our profitability and cash available for distribution to our stockholders.
As long as we earn a positive spread between interest and other income we earn on our leveraged assets and our borrowing costs, we believe that we can generally increase our profitability by using greater amounts of leverage. We cannot, however, assure you that repurchase financing will remain an efficient source of long-term financing for our assets. The amount of leverage that we use may be limited because our lenders might not make funding available to us or they may require that we provide additional collateral to secure our borrowings. If our financing strategy is not viable, we will have to find alternative forms of financing for our assets which may not be available to us on acceptable terms or at acceptable rates. In addition, in response to certain interest rate and investment environments or to changes in the market liquidity, we could adopt a strategy of reducing our leverage by selling assets or not reinvesting principal payments as MBS amortize and/or prepay, thereby decreasing the outstanding amount of our related borrowings. Such an action could reduce interest income, interest expense and net income, the extent of which would be dependent on the level of reduction in assets and liabilities as well as the sale prices for which assets were sold.
As our financings mature, we will be required either to enter into new borrowings or to sell certain of our investments. Since we rely primarily on borrowings under repurchase agreementsOur inability to finance, our assets, our ability to achieve our investment objectives depends on our ability to borrow funds in sufficient amountsrefinance and on acceptable terms, and onsecuritize our ability to renew or replace maturing borrowings on a continuous basis. Our repurchase agreement credit lines are renewable at the discretion of our lenders and, as such, do not contain guaranteed roll-over terms. Our ability to enter into repurchase transactions in the future will depend on the market value of our assets pledged to secure the specific borrowings, the availability of acceptable financing and market liquidity and other conditions existing in the lending market at that time. If we are unable to renew or replace maturing borrowings, we could be forced to sell assets in order to maintain liquidity. Forced sales under adverse market conditions could result in lower sales prices than ordinary market sales in the normal course of business. Further, an increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between our returns on our assets and the cost of our borrowings. This would adversely affect our returns on our assets, which might reduce earnings and, in turn, cash available for distribution to our stockholders.
Our investments in Residential and Commercial Whole Loans are difficult to value and are dependent upon the ability to finance, refinance and securitize such investments. The inability to do so could materially and adversely affect our liquidity and earnings and limit the cash available for distribution to our stockholders.
We may seek to finance and refinance our Residential Whole Loans and Commercial Whole Loans to generate greater value from such loan. However, there may be impediments to executing either a financing or refinancing strategy for these investments. The financing of these investments presents additional challenges because in general it is less available than repurchase financing for MBS, especially Agency CMBS and Agency RMBS, and likely to have less advantageous pricing and more onerous terms. Accordingly, there can be no assurance that we will be able to finance Whole Loans at all, let alone on terms we believe are advantageous.
We may enter into hedging transactions that could expose us to contingent liabilities in the future.
Subject to maintaining our qualification as a REIT and exemption from registration under the 1940 Act, part of our investment strategy may involve entering into economic hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.
Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.
Subject to maintaining our qualification as a REIT and exemption from registration under the 1940 Act, we may pursue various economic hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging activity varies in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:
interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;


available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
due to a credit loss, the duration of the hedge may not match the duration of the related liability;
the amount of income that a REIT may earn from hedging transactions (other than hedging transactions that satisfy certain requirements of the Code or that are done through a taxable REIT subsidiary (a "TRS") to offset interest rate losses is limited by U.S. federal tax provisions governing REITs);
the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments or "mark-to-market losses," would reduce our stockholders' equity;
the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
Our hedging transactions, which are intended to limit losses, may actually adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.
While the majority of our interest rate swaps are traded on a regulated exchange, certain hedging instruments are traded over the counter and do not trade on regulated exchanges and, therefore, are not guaranteed by an exchange or a clearing house. In addition, over the counter instruments are more lightly regulated by U.S. and foreign governmental authorities. Consequently, there may be no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction which did not clear through a clearing house would most likely result in its default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our commitments, if any, at the then current market price. Although generally we seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into an offsetting contract in order to cover our risk. There can be no assurance that a liquid secondary market will exist for any hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

Risks associated with our relationship with our Manager
Our Board of Directors has approved very broad investment guidelines for our Manager and does not approve each investment and financing decision made by our Manager.
Our Manager is authorized to follow very broad investment guidelines. Our Board of Directors periodically reviews our investment guidelines and our investment portfolio but does not, and is not required to review all of our proposed investments, except that an investment in a security structured or issued by another entity managed by our Manager must be approved by at least two-thirds (2/3) of our independent directors prior to such investment. In addition, in conducting periodic reviews, our Board of Directors may rely primarily on information provided to them by our Manager. Furthermore, our Manager may use complex strategies, and transactions entered into by our Manager may be costly, difficult or impossible to unwind by the time they are reviewed by our Board of Directors. Our Manager has great latitude within thebeen granted broad parameters of our investment guidelines in determining the types and amounts of Agency and Non-Agency RMBS, CMBS, ABS and Whole Loan investments 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. Further, decisions made and investments and financing arrangements entered into by our Manager may not fully reflect the best interests of our stockholders.authority.
There are conflicts of interest in our relationship with our Manager that could result in decisions that are not inand the best interests of our stockholders.
We are subject to conflicts of interest arising out of our relationship with our Manager. We do not have any employees. All of our executive officers and two of our directors, James W. Hirschmann III and Jennifer W. Murphy, are employees of our Manager. Our Management Agreement with our Manager was not negotiated between related parties and its terms, including fees and other amounts payable, may not be as favorable to us as if it had been negotiated aton an arm's-length with an unaffiliated third party. In addition, the obligations of our Manager and its officers and personnel to engage in other business activities may reduce the time our Manager and its officers and personnel spend managing us.


We compete for investment opportunities directly with other client portfolios managed by our Manager. Clients of our Manager have investment mandates and objectives that target the same assets as us. A substantial number of client accounts managed by our Manager have exposure to RMBS, CMBS and other investmentsbasis and may have similar investment mandatesbe costly and objectives. While our Manager has only a limited number of client accounts investing in Whole loans, the supply of Whole Loan investments meeting the Manager's investment criteria is extremely limited. In addition, our Manager may have additional clients that compete directly with us for investment opportunities in the future. Our Manager has an investment allocation policy in place that is intendeddifficult to ensure that no single client is intentionally favored over another and that trades are allocated in a fair and equitable manner. We may compete with our Manager or its other clients for investment or financing opportunities sourced by our Manager; however, we may either not be presented with the opportunity or have to compete with our Manager to acquire these investments or have access to these sources of financing. Our Manager and our executive officers may choose to allocate favorable investments to itself or to its or other clients instead of to us. Further, at times when there are turbulent conditions in the mortgage markets or distress in the credit markets or other times when we will need focused support and assistance from our Manager, our Manager's other clients will likewise require greater focus and attention, placing our Manager's resources in high demand. In such situations, we may not receive the level of support and assistance that we may receive if we were internally managed or if our Manager did not act as a manager for other entities. There is no assurance that our Manager's allocation policies that address some of the conflicts relating to our access to investment and financing sources will be adequate to address all of the conflicts that may arise.terminate.
We pay our Manager a management fee that is not tied to our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us. This could hurt both our ability to make distributions to our stockholders and the market price of our common stock. Furthermore, the compensation payable to our Manager will increase as a result of future issuances of our equity securities, even if the issuances are dilutive to existing stockholders.
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As of December 31, 2019, our Manager owned 1,383,865 shares of our common stock. To the extent our Manager elects to sell all or a portion of these shares in the future, our Manager's interests may be less aligned with our interests.
We are dependent on our Manager and its key personnel for our success.
We have no separate facilities and are completely reliant on our Manager. All of our executive officers and two of our directors, are employees of our Manager. Our Manager has significant discretion as to the implementation of our investment and operating policies and strategies. 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 our Manager. The executive officers and key personnel of our Manager evaluate, negotiate, close and monitor our investments; therefore, our success depends on their continued service. The departure of any of the executive officers or key personnel of our Manager could have a material adverse effect on our performance. In addition, we offer no assurance that our Manager will remain our investment manager or that we will continue to have access to our Manager's principals and professionals. The term of our Management Agreement with our Manager expires on May 16, 2021, with automatic one-year renewals thereafter. If the Management Agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan. Moreover, our Manager is not obligated to dedicate any of its personnel exclusively to us nor is it obligated to dedicate any specific portion of its time to our business, and none of our Manager's personnel are contractually dedicated to us under our Management Agreement with our Manager.
The Management Agreement with our Manager was not negotiated on an arm's-length basis, may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.
All of our executive officers and two of our directors are employees of our Manager. Our Management Agreement with our Manager was negotiated between related parties and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.
Termination of the Management Agreement with our Manager without cause is difficult and costly. Our independent directors review our Manager's performance and any fees payable to our Manager annually and the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds (2/3) of our independent directors based upon: (i) our Manager's unsatisfactory performance that is materially detrimental to us; or (ii) our determination that any fees payable to our Manager are not fair, subject to our Manager's right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds (2/3) of our independent directors. We are required to provide our Manager 180 days prior notice of any such termination. Unless terminated for cause, we are required to pay our Manager a termination fee equal to three times the average annual management fee earned by our Manager during the prior 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination. This provision increases the effective cost to us of electing not to renew, or defaulting in our obligations under, the Management Agreement, thereby adversely affecting our inclination to end our relationship with our Manager, even if we believe our Manager's performance is not satisfactory.


Our Manager is only contractually committed to serve us until May 16, 2021. The Management Agreement is automatically renewable for one-year terms; provided, however, that our Manager may terminate the Management Agreement annually upon 180 days prior notice. If the Management Agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.
Pursuant to the Management Agreement, our Manager does not assume any responsibility other than to render the services called for thereunder and is not responsible for any action of our Board of Directors in following or declining to follow its advice or recommendations. Our Manager maintains a contractual as opposed to a fiduciary relationship with us. Under the terms of the Management Agreement, our Manager, its officers, stockholders, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager are not liable to us, our directors, our stockholders or any partners for acts or omissions performed in accordance with and pursuant to the Management Agreement, except because of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the Management Agreement. In addition, we indemnify our Manager, its officers, stockholders, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the Management Agreement.
Our Manager's management fee is payable regardless of our performance.
We pay our Manager a management fee regardless of the performance of our portfolio. Our Manager'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 our common stock.
Our Manager is subject to extensive regulation as an investment advisor, which could adversely affect its ability to manage our business.
Our Manager is subject to regulation as an investment advisor by various regulatory authorities that are charged with protecting the interests of its clients, including us. Instances of criminal activity and fraud by participants in the investment management industry and disclosures of trading and other abuses by participants in the financial services industry have led the U.S. government and regulators to the rules and regulations governing, and oversight of, the U.S. financial system, including the investment management industry and more aggressive enforcement of the existing laws and regulations. Our Manager could be subject to civil liability, criminal liability, or sanction, including revocation of its registration as an investment adviser, revocation of the licenses of its employees, censures, fines, or temporary suspension or permanent bar from conducting business, if it is found to have violated any of these laws or regulations. Any such liability or sanction could adversely affect its ability to manage our business. Our Manager must continually address conflicts between its interests and those of its clients, including us. In addition, the SEC and other regulators have increased their scrutiny of potential conflicts of interest. We believe our Manager has procedures and controls that are reasonably designed to address these issues. However, appropriately dealing with conflicts of interest is complex and difficult and if our Manager fails, or appears to fail, to deal appropriately with conflicts of interest, it could face litigation or regulatory proceedings or penalties, any of which could adversely affect its ability to manage our business.

Risks related to our common stock

We may pay taxable dividends in our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.
The market price and trading volume of our common stock may vary substantially.
Our common stock is listed on the NYSE under the symbol "WMC." The stock markets, including the NYSE, have experienced significant price and volume fluctuations over the past several years. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares. Accordingly, no assurance can be given as to the ability of our stockholders to sell their common stock or the price that our stockholders may obtain for their common stock.
Some of the factors that could negatively affect the market price of our common stock include:
actual or anticipated variations in our quarterly operating results;
changes in our earnings estimates or publication of research reports about us or the real estate industry;
changes in market valuations of similar companies;
adverse market reaction to any increased indebtedness we incur in the future;


additions to or departures of our Manager's key personnel;
actions by our stockholders;
changes in our dividend policy or payments; and
speculation in the press or investment community.
Market factors unrelated to our performance could also negatively impact the market price of our common stock. One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate as a percentage of our stock price relative to market interest rates. If market interest rates increase, prospective investors may seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and conditions in the capital markets can affect the market value of our common stock. For instance, if interest rates rise, it is likely that the market price of our common stock will decrease as market rates on interest-bearing securities increase.
Investing in our common stock may involve a high degree of risk.
The investments that we make in accordance with our investment objectives may result in a high amount of risk when compared to alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore an investment in our common stock may not be suitable for someone with lower risk tolerance.
Common stock eligible for future sale may have adverse effects on our share price.
We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock. The market price of our common stock may decline significantly when the restrictions on resale (or lock up agreements), which may attach to future sales of our common stock, by certain of our stockholders lapse. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock.
Also, we may issue additional shares in follow-on public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issuances, which may dilute the existing stockholders' interests in us.
We have not established ano minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.
We intend to pay quarterly distributions and to make distributions to our stockholders in an amount such that we distribute all or substantially all of our net taxable income, calculated in accordance with the REIT requirements, each year. We have not established a minimum distribution payment level and our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described herein. All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, debt covenants, maintenance of our REIT qualification and other factors our Board of Directors may deem relevant from time to time. We believe that a change in any one of the following factors could adversely affect our results of operations and impair our ability to pay distributions to our stockholders:
the profitability of our existing investments and the investment of net proceeds of any subsequent offering;
our ability to make profitable investments;
margin calls or other expenses that reduce our cash flow;
decreases in the value of our portfolio or defaults in our asset portfolio; and
the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions in the future. In addition, some of our distributions may include a return in capital.
Future offerings of debt or equity securities, which would rank senior to our common stock, may adversely affect the market price of our common stock.
If we decide to issue debt or equity securities in the future, which would rank senior to our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally,


any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us. Furthermore, the compensation payable to our Manager will increase as a result of future issuances of our equity securities, including issuances upon exercise of the warrants, described below, even if the issuances are dilutive to existing stockholders.
Conversion of our convertible senior unsecured notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their notes.stockholders.
The Company has issued $205.0 million aggregate principal amount of 6.75% convertible senior unsecured notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity.

The notes are convertible into, at the Company's election, cash, shares of the Company's common stock or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the agreement. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock.

To the extent we issue shares of our common stock upon conversion of the notes, the conversion of some or all of our notes will dilute the ownership interests of existing stockholders. Any sales in the public market of shares of our common stock issuable upon such conversion of the notes could adversely affect the prevailing market price.
Risks related to our organization and structure
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
Our amended and restated certificate of incorporation authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our Board of Directors may, without stockholder approval, amend our amended and restated certificate of incorporation to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our Board of Directors may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.
Ownership limitations may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares.
To maintain our qualification as a REIT, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. "Individuals" for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. To assist us in maintaining our qualification as a REIT, our amended and restated certificate of incorporation generally prohibits any person from directly or indirectly owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.
Provisions in our amended and restated certificate of incorporation, our amended and restated bylawsorganizational documents and Delaware law may have the effect of preventingprevent or hinderinghinder a change in control and adversely affecting the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price our common stock.
We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our operations.


We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our operations. Such distributions would reduce the amount of cash we have available for investing and other purposes and could be dilutive to our financial results. In addition, funding our distributions from our net proceeds may constitute a return of capital to our investors, which would have the effect of reducing each stockholder's basis in its shares of common stock.
Risks Related to REIT Status

We may fail to remain qualified as a REIT, incurring substantial tax liability.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
REIT distribution requirements could adversely affect our ability to execute our business plan.
Complying with REIT requirements may cause us to liquidate or forgo otherwise attractive opportunities.
Our reported taxable income for certain investments may exceed the economic income we ultimately realize.
Certain apportionment rules may affect our ability to comply with the REIT asset and gross income tests.
The "taxable mortgage pool" rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.
Our ability to invest in and dispose of "to be announced" securities could be limited by our REIT status.
Securities subject to our repurchase agreements may not qualify as real estate assets, adversely affecting our REIT status.
Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
Qualifying as a REIT involves highly technical and complex provisions of the Code.
Risks related to our business
The COVID-19 pandemic and measures intended to prevent its spread have had and may continue to have a material adverse effect on our business, results of operations, liquidity and financial condition.
The COVID-19 pandemic is causing significant disruptions to the U.S. and global economies and has contributed to volatility and negative pressure in financial markets. The outbreak has led governments and other authorities around the world to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. The actual and potential impact and duration of COVID-19 or another pandemic have and are expected to continue to have significant repercussions across regional, national and global economies and financial markets, and have triggered a period of regional, national and global economic slowdown and may trigger a longer term recession. The impact of the pandemic and measures to prevent its spread have negatively impacted us and could further negatively impact our business. To the extent current conditions persist or worsen, we expect there to be a materially negative effect on the value of our assets and our results of operations, and, in turn, cash available for distribution to our stockholders. Moreover, many risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 should be interpreted as heightened risks as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.

Our commercial mortgages collateralized by hotels, retail properties are disproportionately impacted by the effects of COVID-19. We expect over the near- and long-term that the economic impacts of the pandemic will impact the financial stability of these borrowers As a result, some of our borrowers experienced financial hardship, making it difficult to meet their payment obligations to us, leading to requests for forbearance and elevated levels of delinquency and default, which will have an adverse effect on our business, the value of these assets and our results of operations and financial condition. Future outbreaks involving other highly infectious or contagious diseases could have similar adverse effects.
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We are subject to risks related to residential mortgages. Over the near and long term, the economic and market disruptions caused by the COVID-19 pandemic are likely to adversely impact the financial condition of borrowers underlying our residential mortgage loan investments, As a result, we anticipate that the number of borrowers who become delinquent or default on their loans may increase significantly. Such increased levels of payment delinquencies, defaults, foreclosures, or losses would adversely affect our business, the value of these assets, results of operations and financial position. Future outbreaks involving other highly infectious or contagious diseases could have similar adverse effects.

In response to the pandemic, the U.S. government has taken various actions to support the economy and the continued functioning of the financial markets. The Federal Reserve has announced its commitment to purchase unlimited amounts of U.S. Treasuries, mortgage-backed securities, municipal bonds and other assets. In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, has and is expected to provide billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who have difficulty making their loan payments. There can be no assurance as to how, in the long term, actions by the U.S. government intended to counter the effects of the COVID-19 pandemic, including the CARES Act, will affect the efficiency, liquidity and stability of the financial and mortgage markets. To the extent the financial or mortgage markets do not respond favorably to these government actions, or such actions do not function as intended, our business, results of operations and financial condition may continue to be materially adversely affected.

The extent to which the COVID-19 pandemic impacts our business will depend on future developments which are highly uncertain and cannot be predicted including new information which may emerge concerning the severity of COVID-19 and the actions to contain the pandemic or treat its impact, among others. If these effects continue for a prolonged period or result in a global economic slowdown or recession, many of the risk factors identified in our Annual Report on Form 10-K could be exacerbated and such effects could have a material adverse impact on our results of operations, value of our investments and cash available for distribution to our stockholders.
We cannot predict the effect that government policies, laws, and plans adopted in response to the COVID-19 pandemic or other future outbreaks involving highly infectious or contagious diseases and resulting recessionary economic conditions will have on us.
Governments have adopted, and we expect will continue to adopt, policies, laws, and plans intended to address the COVID-19 pandemic and adverse developments in the credit, financial, and mortgage markets that it has caused. We cannot assure you that these programs will be effective, sufficient, or otherwise have a positive impact on our business.
We may not be able to successfully operate our business or generate sufficient revenue to make or sustain distributions to our stockholders.
We cannot assure you that we will be able to continue to operate our business successfully or implement our operating policies and strategies as described herein. The results of our operations depend on several factors, including the availability of opportunities for the acquisition of assets, the level and volatility of interest rates, the availability of adequate short and long-term financing, conditions in the financial markets and economic conditions.
We may change any of our strategies, policies or procedures without stockholder consent.
We may change any of our strategies, policies or procedures with respect to investments, acquisitions, growth, operations, indebtedness, capitalization, distributions, financing strategy and leverage at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described herein. These changes could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.
Increases in interest rates could adversely affect the value of our investments and cause our interest expense to increase, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to our stockholders.
    Our investment portfolio contains a significant allocation to MBS, as well Residential and Commercial Whole Loans. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” In a normal yield curve environment, an investment in such assets will generally decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders. Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs
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will generally increase more rapidly than the interest income earned on our assets. Because our investments on average, generally bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net interest margin, net income, book value and the market value of our net assets. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline, which would likely decrease our net income. A significant risk associated with our target assets is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increase significantly, the market value of these investments will decline, and the duration and weighted average life of the investments will increase. At the same time, an increase in short-term interest rates will increase the amount of interest owed on the repurchase agreements we enter into to finance the purchase of our investments.

Changes to, or the elimination of, LIBOR may adversely affect interest expense related to our loans and investments.
    In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts, including agreements governing certain of our indebtedness, that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks. In addition, approximately half of our investment portfolio pays interest at a variable rate that is tied to LIBOR. If LIBOR is no longer available, we may need to renegotiate some of our agreements to determine a replacement index or rate of interest. To the extent the replacement index or rate of interest is lower than the existing LIBOR-based rate it could have an adverse impact on the value of such investments, our financial condition and results of operations. In September 2019, the FASB proposed guidance that would help facilitate the market transition from existing reference rates to alternative rates. However, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based securities, including our material contracts that are indexed to USD-LIBOR. Furthermore, we may need to renegotiate any agreements governing our indebtedness extending beyond 2021 that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, potential effect of any such event on our business, financial condition and results of operations cannot yet be determined.

We cannot assure you that our internal controls over financial reporting will consistently be effective.
We are responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. We cannot ensure you that there will not be any material weaknesses or significant deficiencies in our internal control over financial reporting in the future.
Cybersecurity risk and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our 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 our investor relationships. As our reliance on technology has increased, so have the risks posed to both our information systems, both internal and those provided by our Manager and third party service providers. Our Manager has implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations or confidential information will not be negatively impacted by such an incident.

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Risks related to our investing strategy
Market and economic disruptions caused by the COVID-19 pandemic have made it more difficult for us to determine the fair value of our investments.

Market-based inputs are generally the preferred source of values for purposes of measuring the fair value of our assets under U.S. GAAP. However, the markets for our investments have and continue to experience extreme volatility, reduced transaction volume and liquidity, and disruption as a result of the COVID-19 pandemic, which has made it more difficult for us, and for the providers of third-party valuations that we use, to rely on market-based inputs in connection with the valuation of our assets under U.S. GAAP. The fair value of certain of our investments may fluctuate over short periods of time, and our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. The value of our common and our results of operations could be adversely affected if our determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon their disposal.

Our investments in Non-Agency MBS, Residential Whole Loans, Commercial Loans and Residential Bridge Loans involve credit risks, which could materially adversely affect our results of operations.

The holder of a residential mortgages, commercial mortgages or MBS assumes the risk that the related borrowers may default on their obligations to make full and timely payments of principal and interest. Under our investment policy, we have the ability to acquire Non-Agency MBS, Residential Whole Loans, Commercial Loans and Residential Bridge Loans. In general, these investments carry greater investment risk than Agency MBS because the former are not guaranteed as to principal or interest by the U.S. Government, any federal agency or any federally chartered corporation. Higher-than-expected rates of default and/or higher-than-expected loss severities on these investments could adversely affect the value of these assets. Accordingly, defaults in the payment of principal and/or interest on our Residential Whole Loans, Commercial Loans, Residential Bridge Loans, and Non-Agency MBS and would likely result in our incurring losses of income from, and/or losses in market value relating to, these assets, which could materially adversely affect our results of operations.

    In the last few years, our portfolio of Residential Whole Loans and Commercial Loans has increased. As a holder of these loans, we are subject to the risk that the related borrowers may default or have defaulted on their obligations to make full and timely payments of principal and interest. A number of factors impact a borrower’s ability to repay including, among other things, changes in employment status, changes in interest rates or the availability of credit, and changes in real estate values. Thr current pandemic has exacerbated many risks. In addition to the credit risk associated with these assets, Residential Whole Loans and Commercial Loans are less liquid than certain of our other credit sensitive assets, which may make them more difficult to dispose of if the need or desire arises. If actual results are different from our assumptions in determining the prices paid to acquire such loans, particularly if the market value of the underlying properties decreases significantly subsequent to purchase, we may incur significant losses, which could materially adversely affect our results of operations.

We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire
desirable investments in our portfolio assets and could also affect the pricing of these securities.

    We operate in a highly competitive market for investment opportunities. Currently, our profitability depends, in large part, on our ability to acquire our portfolio assets at attractive prices. In acquiring these assets, we compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds (including other funds managed by our Manager), commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. Other REITs have recently raised, or may raise, additional capital, and may have investment objectives that overlap with ours, which may create additional competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the U.S. Government. Many of our 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 our 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 us. Furthermore, competition for investments in our portfolio assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. We cannot assure you that the competitive pressures we 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 these assets may be limited in the future and we may not be able to take advantage of
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attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives.
A lack of liquidity in our investments may adversely affect our business.
Many of the assets we acquire are not publicly traded. A lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale or the unavailability of financing for these assets. In addition, mortgage-related assets generally experience periods of illiquidity, especially during periods of economic stress such as the economic recession in 2008 or the initial impact of the pandemic in 2020, which resulted in increased delinquencies and defaults with respect to residential and commercial mortgage loans. The illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. Further, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our Manager has or could be attributed with material, non-public information regarding such business entity. As a result, our ability to vary our 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.
An economic recession and declining real estate values could impair our assets and harm our operations.
The risks associated with our business are more severe during economic recessions and are compounded by declining real estate values. The Residential Whole Loans, Residential Bridge Loans, Commercial Loans, Non-Agency RMBS and Non-Agency CMBS in which we invest a part of our capital will be particularly sensitive to these risks. Declining real estate values will likely reduce the level of new mortgage loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase of additional properties. Borrowers will also be less able to pay principal and interest on loans underlying the securities in which we invest if the value of residential and commercial real estate weakens further. Further, declining real estate values significantly increase the likelihood that we will incur losses on these investments in the event of default because the value of collateral on the mortgages underlying such securities may be insufficient to cover the outstanding principal amount of the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect our net interest income from these investments, which could have an adverse effect on our financial condition, results of operations and our ability to make distributions to our stockholders
Our investments in Residential Whole Loans, Residential Bridge Loans and Commercial Loans subject us to servicing-related risks, including those associated with foreclosure and liquidation.

    We rely on third-party servicers to service and manage the mortgages underlying our loan portfolio. The ultimate returns generated by these investments may depend on the quality of the servicer. If a servicer is not vigilant in seeing that borrowers make their required monthly payments, borrowers may be less likely to make these payments, resulting in a higher frequency of default. If a servicer takes longer to liquidate non-performing mortgages, our losses related to those loans may be higher than originally anticipated. Any failure by servicers to service these mortgages and/or to competently manage and dispose of REO properties could negatively impact the value of these investments and our financial performance. In addition, while we have contracted with third-party servicers to carry out the actual servicing of the loans (including all direct interface with the borrowers), for loans that we purchase together with the related servicing rights, we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that the loans are serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation. In light of the current regulatory environment, such exposure could be significant even though we might have contractual claims against our servicers for any failure to service the loans to the required standard.

    The foreclosure process, especially in judicial foreclosure states such as New York, Florida and New Jersey, can be lengthy and expensive, and the delays and costs involved in completing a foreclosure, and then subsequently liquidating the REO property through sale, may materially increase any related loss. In addition, at such time as title is taken to a foreclosed property, it may require more extensive rehabilitation than we estimated at acquisition. Thus, a material amount of foreclosed residential mortgage loans, particularly in the states mentioned above, could result in significant losses in our Residential Whole Loan portfolio and could materially adversely affect our results of operations.
The commercial mortgage loans underlying the CMBS and our Commercial Loans we may acquire are subject to defaults, foreclosure timeline extension, fraud and commercial price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, which could result in losses to us.
CMBS may be secured by a single commercial mortgage loan or a pool of commercial mortgage loans. Commercial mortgage loans may be secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that may be greater than similar risks associated with loans made on the security of residential property. The
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ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability or willingness to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things,
tenant mix;
success of tenant businesses;
property management decisions;
property location and condition;
competition from comparable types of properties;
changes in laws that increase operating expenses or limit rents that may be charged;
any need to address environmental contamination at the property or the occurrence of any uninsured casualty at the property;
changes in national, regional or local economic conditions and/or specific industry segments;
declines in regional or local real estate values;
declines in regional or local rental or occupancy rates;
increases in interest rates;
real estate tax rates and other operating expenses;
changes in governmental rules, regulations and fiscal policies, including environmental legislation; and
acts of God, terrorist attacks, social unrest and civil disturbances.
If our Manager overestimates the loss-adjusted yields of our CMBS investments, we may experience losses.
Our Manager will analyze any CMBS investments we may acquire based on loss-adjusted yields, taking into account estimated future losses on the mortgage loans included in the securitization's pool of loans, and the estimated impact of these losses on expected future cash flows. Our Manager's loss estimates may not prove accurate, as actual results may vary from estimates. In the event that our Manager underestimates the pool level losses relative to the price we pay for a particular CMBS investment, we may experience losses with respect to such investment.
If we do not control the special servicing of the mortgage loans included in the CMBS in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests.
With respect to CMBS in which we invest, overall control over the special servicing of the related underlying mortgage loans will be held by a "directing certificateholder" or a "controlling class representative," which is appointed by the holders of the most subordinate class of CMBS in such series. We may not have the right to appoint the directing certificateholder. In connection with the servicing of the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificateholder, take actions with respect to the specially serviced mortgage loans that could adversely affect our interests.
Our investments are recorded at fair value, and quoted prices or observable inputs may not be available to determine such value, resulting in the use of significant unobservable inputs to determine value.
We expect that the values of some of our investments may not be readily determinable. We measure the fair value of these investments on at least a monthly basis. The fair value at which our assets are recorded may not be an indication of their realizable value. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions that are beyond the control of our Manager, our Company or our Board of Directors. Further, fair value is only an estimate based on good faith judgment of the price at which an investment can be sold since market prices of investments can only be determined by negotiation between a willing buyer and seller. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset is valued. Accordingly, the value of our common stock could be adversely affected by our determinations regarding the fair value of our investments, whether in the applicable period or in the future. Additionally, such valuations may fluctuate over short periods of time.
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Our determination of the fair value of our investments for GAAP includes inputs provided by third party dealers and pricing services. Valuations of certain investments in which we invest are often difficult to obtain. In general, dealers and pricing services heavily disclaim their valuations. Dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental, or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of a security, valuations of the same security can vary substantially from one dealer or pricing service to another. Therefore, our results of operations for a given period could be adversely affected if our determinations regarding the fair market value of these investments are materially different than the values that we ultimately realize upon their disposal. Due to an overall increase in market volatility, the valuation process has been particularly challenging recently as market events have made valuations of certain assets more difficult, unpredictable and volatile.
Declines in value of the assets in which we invest will adversely affect our financial position and results of operations, and make it more costly to finance these assets.
We use our investments as collateral for our financings. Any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. Our investments in mortgage-backed securities and Whole Loans are recorded at fair value under a fair value option election at the time of purchase with changes in fair value reported in earnings. As a result, a decline in fair values of our mortgage-backed securities and Whole Loans could reduce both our earnings and stockholders' equity. If market conditions result in a decline in the fair value of our assets, our financial position and results of operations could be adversely affected.
Interest rate mismatches between our RMBS and Whole Loans backed by ARMs or hybrid ARMs and our borrowings used to fund our purchases of these assets may cause us to suffer losses.
We may fund our RMBS and Whole Loans with borrowings that have interest rates that adjust more frequently than the interest rate indices and repricing terms of RMBS and Whole Loans backed by adjustable-rate mortgages, or ARMs, or hybrid ARMs. Accordingly, if short-term interest rates increase, our borrowing costs may increase faster than the interest rates on RMBS and Whole Loans backed by ARMs or hybrid ARMs adjust. As a result, in a period of rising interest rates, we could experience a decrease in net income or a net loss.
In most cases, the interest rate indices and repricing terms of RMBS and Whole Loans backed by ARMs or hybrid ARMs and our borrowings will not be identical, thereby potentially creating an interest rate mismatch between our investments and our borrowings. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods when the spread between these indices was volatile. During periods of changing interest rates, these interest rate index mismatches could reduce our net income or produce a net loss, and adversely affect the level of our dividends and the market price of our common stock.
In addition, RMBS and Whole Loans backed by ARMs or hybrid ARMs will typically be subject to lifetime interest rate caps that limit the amount an interest rate can increase through the maturity of the RMBS and Whole Loans. However, our borrowings under repurchase agreements typically 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 caps could limit the interest rates on these types of RMBS and Whole Loans. This problem is magnified for RMBS and Whole Loans backed by ARMs or hybrid ARMs that are not fully indexed. Further, some RMBS and Whole Loans backed by ARMs or hybrid 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 may receive less cash income on these types of RMBS and Whole Loans than we need to pay interest on our related borrowings. These factors could reduce our net interest income and cause us to suffer a loss during periods of rising interest rates.
As of December 31, 2020, our Non-Agency RMBS and Whole Loans were secured by ARMs, Hybrid ARMS, pay option ARMs and fixed-rate mortgages. There can be no assurance that this will not change in the future.
Prepayment may adversely affect our profitability.
The RMBS assets and Residential Whole Loans we acquire are backed by pools of residential mortgage loans. We receive payments, generally, from the payments that are made on these underlying residential mortgage loans. While commercial mortgages frequently include limitations on the ability of the borrower to prepay, residential mortgages generally do not. When borrowers prepay their residential mortgage loans at rates that are faster than expected, the net result is prepayments that are faster than expected on the related RMBS and Residential Whole Loans. These faster than expected payments may adversely affect our profitability.
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We may purchase RMBS assets and Residential Whole Loans that have a higher interest rate than the then prevailing market interest rate. In exchange for this higher interest rate, we may pay a premium to par value to acquire the asset. In accordance with accounting rules, we amortize this premium over the expected term of the asset. If the asset is prepaid in whole or in part at a faster than expected rate, we must expense all or a part of the remaining unamortized portion of the premium, which can adversely affect our profitability.
Prepayments generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment are difficult to predict. House price appreciation, while increasing the value of the collateral underlying our RMBS and Residential Whole Loans, may increase prepayments as borrowers may be able to refinance at more favorable terms. Prepayments can also occur when borrowers default on their residential mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property (an involuntary prepayment), or when borrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physical relocation. Prepayments also may be affected by conditions in the housing and financial markets, increasing defaults on residential mortgage loans, which could lead to an acceleration of the payment of the related principal, general economic conditions and the relative interest rates on fixed-rate mortgages and ARMs. While we seek to manage prepayment risk, in selecting RMBS and Residential Whole Loans investments we must balance prepayment risk against other risks, the potential returns of each investment and the cost of hedging our risks. No strategy can completely insulate us from prepayment or other such risks, and we may deliberately retain exposure to prepayment or other risks.
In addition, a decrease in prepayment may adversely affect our profitability. When borrowers prepay their residential mortgage loans at slower than expected rates, prepayments on the RMBS may be slower than expected. These slower than expected payments may adversely affect our profitability. We may purchase RMBS assets that have a lower interest rate than the then prevailing market interest rate. In exchange for this lower interest rate, we may pay a discount to par value to acquire the asset. In accordance with accounting rules, we accrete this discount over the expected term of the asset based on our prepayment assumptions. If the asset is prepaid at a slower than expected rate, however, we must accrete the remaining portion of the discount at a slower than expected rate. This will extend the expected life of the asset and result in a lower than expected yield on assets purchased at a discount to par.
We could be materially and adversely affected by poor market conditions where the properties securing the mortgage loans underlying our investments are geographically concentrated.

    Our performance depends on the economic conditions in markets in which the properties securing the mortgage loans underlying our investments are concentrated. As of December 31, 2020, a substantial portion of our investments had underlying properties in California. Our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders could be materially and adversely affected by this geographic concentration if market conditions, such as an oversupply of space or a reduction in demand for real estate in an area, deteriorate in California. Moreover, due to the geographic concentration of properties securing the mortgages underlying our investments, the Company may be disproportionately affected by general risks such as natural disasters, including major wildfires, floods and earthquakes and , severe or inclement weather, should such developments occur in or near the markets in California in which such properties are located.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic and acts of terrorism.
    The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as coronavirus, or other widespread health emergency (or concerns over the possibility of such an emergency) terrorist attacks could create economic and financial disruptions, and could lead to operational difficulties that could impair our ability to manage our businesses.

We may make investments in non U.S. dollar denominated securities, which will be subject to currency rate exposure and risks associated with the uncertainty of foreign laws and markets.
Some of our real estate-related securities investments may be denominated in foreign currencies, and therefore, we expect to have currency risk exposure to any such foreign currencies. A change in foreign currency exchange rates may have an adverse impact on returns on our non U.S. dollar denominated investments. Although we may hedge our foreign currency risk subject to the REIT income tests, we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations. To the extent that we invest in non U.S. dollar denominated securities, in addition to risks inherent in the investment in securities generally discussed in this Form 10-K, we will also be subject to risks associated with the uncertainty of foreign laws and markets, including, but not limited to, unexpected changes in regulatory requirements, political and economic instability in certain geographic locations, difficulties in managing international operations, currency
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exchange controls, potentially adverse tax consequences, additional accounting and control expenses and the administrative burden of complying with a wide variety of foreign laws.
We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to make distributions to all stockholders.
Our business is highly dependent on communications and information systems of our Manager and other third party service providers. Any failure or interruption of our Manager's or other third party service providers' systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.
Loss of our exemption from regulation pursuant to the 1940 Act would adversely affect us.
We conduct our business so as not to become regulated as an investment company under the 1940 Act in reliance on the exemption provided by Section 3(c)(5)(C) of the 1940 Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires that: (i) at least 55% of our investment portfolio consist of "mortgages and other liens on and interest in real estate," or "qualifying real estate interests," and (ii) at least 80% of our investment portfolio consist of qualifying real estate interests plus "real estate-related assets." In satisfying this 55% requirement, based on pronouncements of the SEC staff, we may treat whole pool Agency RMBS and CMBS as qualifying real estate interests. The SEC staff has not issued guidance with respect to whole pool Non-Agency RMBS. Accordingly, based on our own judgment and analysis of the SEC's pronouncements with respect to whole pool Agency RMBS, we may also treat Non-Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate interests. We currently treat partial pool Agency, Non-Agency RMBS and partial pool CMBS as real estate-related assets. We treat any ABS, interest rate swaps or other derivative hedging transactions we enter into as miscellaneous assets that will not exceed 20% of our total assets. We rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets.
The SEC in 2011 solicited public comment on a wide range of issues relating to Section 3(c)(5)(C), including the nature of the assets that qualify for purposes of the exemption and whether mortgage REITs should be regulated in a manner similar to investment companies. There can be no assurance that the laws and regulations governing the 1940 Act status of REITs, including the guidance of the Division of Investment Management of the SEC regarding this exemption, will not change in a manner that adversely affects our operations. To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could require us to hold assets we might wish to sell or to sell assets we might wish to hold. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the exemption we rely on from the 1940 Act, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.
The mortgage related investments that we acquire are limited by the provisions of the 1940 Act and the rules and regulations promulgated thereunder. If the SEC determines that any of these securities are not qualifying interests in real estate or real estate-related assets, adopts a contrary interpretation with respect to these securities or otherwise believes we do not satisfy the above exceptions or changes its interpretation of the above exceptions, we could be required to restructure our activities or sell certain of our assets. We may be required at times to adopt less efficient methods of financing certain of our mortgage related investments and we may be precluded from acquiring certain types of higher yielding securities. The net effect of these factors would be to lower our net interest income. If we fail to qualify for an exemption from registration as an investment company or an exclusion from the definition of an investment company, our ability to use leverage would be substantially reduced. Further, if the SEC determined that we were an unregistered investment company, we could be subject to monetary penalties and injunctive relief in an action brought by the SEC, we would potentially be unable to enforce contracts with third parties which could seek to obtain rescission of transactions undertaken during the period for which it was established we were an unregistered investment company. If we were required to register as an investment company, it would result in a change of our financial statement requirements. Our business will be materially and adversely affected if we fail to qualify for this exemption from regulation pursuant to the 1940 Act. In addition, the loss of our 1940 Act exemption would also permit our Manager to terminate the Management Agreement, which could result in material adverse effect on our business and results of operations.
Compliance with our 1940 Act exemption will limit our ability to invest in certain of our target assets.
At times the Manager may be limited in allocating equity to target that do not qualify as real estate or real estate related assets for purposes of the 1940 Act exemption. This limitation could adversely affect the performance of our portfolio if thesenon qualifying assets presents more attractive investment opportunities. Among the current target assets that are not real
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estate assets are ABS, non pool Agency and Non-Agency MBS, GSE Risk Sharing Securities and certain Commercial Mezzanine Loans.

Risks related to financing and hedging
Our inability to access funding or the terms on which such funding is available could have a material adverse effect on our financial condition, particularly in light of ongoing market dislocations resulting from the COVID-19 pandemic.
Our ability to fund our operations, meet financial obligations and finance our asset may be impacted by our ability to secure and maintain our financings through master repurchase agreements and other borrowings with our counterparties. Because repurchase agreements are short-term commitments of capital, lenders may respond to market conditions making it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings and have and may continue to impose more onerous conditions when rolling such financings. If we are not able to renew our existing facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under our financing facilities or if we are required to post more collateral or face larger haircuts, we may have to dispose of assets at significantly depressed prices and at inopportune times, which could cause significant losses. If we are subject to a larger haircut in order to roll repurchase agreement or other borrowings with a particular counterparty then we would be required to post additional margin. Similarly, if we were to move financing to another counterparty that was subject to a larger haircut we would have to pay more cash to the original repurchase agreement counterparty than would be able to borrow from new counterparty.

In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also have revised and may continue to revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, including haircuts and requiring additional collateral in the form of cash, based on, among other factors, the regulatory environment and their management of actual and perceived risk, particularly with respect to assignee liability. Moreover, the amount of financing we receive under our financing arrangements will be directly related to our lenders’ valuation of our assets subject to such agreements. Typically, repurchase agreements grant the lender the absolute right to reevaluate the fair market value of the assets that cover outstanding borrowings at any time. If a lender determines in its sole discretion that the value of the assets has decreased, it has the right to initiate a margin call. These valuations may be different than the values that we ascribe to these assets and may be influenced by recent asset sales and distressed levels by forced sellers. A margin call requires us to transfer additional assets to a lender without any advance of funds from the lender for such transfer or to repay a portion of the outstanding borrowings. We have experienced this phenomenon in recent weeks

In March and April 2020, we observed a significant mark-down on our assets by the counterparties to our financing arrangements, resulting in us having to pay cash or securities to satisfy higher than historical levels of margin calls. The significant decline in asset values resulted in us having to sell assets in order to these meet margin calls by our repurchase agreement counterparties. If in the future we are unable to post adequate collateral for a margin call by a counterparty, in a time frame as short as the close of the same business day, it could result in a condition of default under certain of our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse effect on our financial position, results of operations and cash flows.

In connection with the market disruptions in the first and second quarters of 2020, resulting from the COVID-19 pandemic, we changed our interest rate hedging strategy and closed out of, or terminated all of our interest rate hedges, incurring realized losses. As a result, interest rate risk exposure that is associated with certain of our assets and liabilities is no longer being hedged in the manner that we previously used to address interest rate risk and our revised strategy to address interest rate risk may not be effective and could result in the occurrence of future realized losses.
In response to the recent market dislocations resulting from the global pandemic of COVID-19, we made the determination that certain of our interest rate hedges were no longer effective in hedging asset market values and, as of March 23, 2020, had terminated or closed out all of our outstanding interest rate hedges and, overall, incurred realized losses. While we are monitoring market conditions and determining when we believe it would be appropriate and effective to re-implement interest rate hedging strategies, including by taking into account our future business activities and assets and liabilities, we will be exposed to the impact that changes in benchmark interest rates may have on the value of the loans, securities and other assets we own that are sensitive to interest rate changes, as well as long-term debt obligations that are sensitive to interest rate changes. There can be no assurance that future market conditions and our financial condition in the future will enable us to re-establish an effective interest rate risk hedging program, even if in the future we believe it would otherwise be appropriate or desirable to do so.
Our strategy involves leverage, which may amplify losses.
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Our current target leverage generally ranges between two to six times the amount of our stockholders' equity (calculated in accordance with U.S. GAAP). We incur this leverage by borrowing against a substantial portion of the market value of our assets. By utilizing this leverage, we can enhance our returns. Nevertheless, this leverage, which is fundamental to our investment strategy, also creates significant risks.
As a result of our significant leverage, we may incur substantial losses if our borrowing costs increase. Our borrowing costs may increase for any of the following reasons:
short-term interest rates increase;
the market value of our securities decreases;
interest rate volatility increases; or
the availability of financing in the market decreases.
Fluctuations in interest rates could materially affect our financial results
Interest rate fluctuations could reduce the income on our assets and could increase our financing costs, which may adversely affect our earnings and our cash available for distribution to our stockholders. Changes in interest rates will affect our operating results as such changes will affect the interest we receive on any floating rate interest bearing assets and the financing cost of our floating rate debt, as well as our interest rate swap that we may utilize for hedging purposes. Changes in interest rates may also affect borrower default rates, which may result in losses for us.

There can be no assurance that our Manager will be able to prevent mismatches in the maturities of our assets and liabilities.
Because we employ financial leverage in funding our portfolio, mismatches in the maturities of our assets and liabilities can create risk in the need to continually renew or otherwise refinance our liabilities. Our net interest margins are dependent upon a positive spread between the returns on our asset portfolio and our overall cost of funding. Our Manager actively employs portfolio-wide and security-specific risk measurement and management processes in our daily operations. Our Manager's risk management tools include software and services licensed or purchased from third parties, in addition to proprietary systems and analytical methods developed internally. There can be no assurance that these tools and the other risk management techniques described above will protect us from asset/liability risks.
We may be subject to margin calls under our master repurchase agreements, which could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.
We have entered into master repurchase agreements with various financial institutions and borrow under these master repurchase agreements to finance the acquisition of assets for our investment portfolio. Pursuant to the terms of borrowings under our master repurchase agreements, a decline in the value of the subject assets may result in our lenders initiating margin calls. A margin call means that the lender requires us to pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of the borrowing. The specific collateral value to borrowing ratio that would trigger a margin call is not set in the master repurchase agreements and will not be determined until we engage in a repurchase transaction under these agreements. Our fixed-rate securities generally are more susceptible to margin calls as increases in interest rates tend to have a greater negative affect on the market value of fixed-rate securities. If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. The threat of or occurrence of a margin call could force us to sell our assets, either directly or through a foreclosure, under adverse market conditions. Because of the significant leverage we have, we may incur substantial losses upon the threat or occurrence of a margin call.
If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term, or if we default on our obligations under the repurchase agreement, we will lose money on our repurchase transactions.
When we engage in repurchase transactions, we generally sell securities to lenders (repurchase agreement counterparties) and receive cash from these lenders. The lenders are obligated to resell the same securities back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender will be less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us we may incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). We would also lose money on a repurchase transaction if the value of the underlying securities has declined as of the end of the transaction term, as we would have to repurchase the securities based on their initial value but would receive securities worth less than that amount. Further, if we default on one of our obligations under a repurchase transaction,
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the lender can terminate the transaction and cease entering into any other repurchase transactions with us. Our inability to post adequate collateral for a margin call by the counterparty, in a time frame as short as the close of the same business day, could result in a condition of default under our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse effect on our financial position, results of operations and cash flows. Certain of our repurchase agreements contain cross-default provisions, such that if a default occurs under an agreement with any specific lender, that lender could also declare a default under other repurchase agreements or other financing or derivative contracts, if any, with such lender. Further, four of the counterparties to our repurchase agreements held, as of December 31, 2020, collateral valued in excess of 5% of our stockholders' equity as security for our obligations under the applicable repurchase agreements. Any losses we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution to our stockholders.
If a counterparty to one of our swap agreements or TBAs defaults on its obligations, we may incur losses.
If a counterparty to one of the bilateral swap agreements that we enter into or TBAs that we enter into defaults on its obligations under the agreement, we may not receive payments due under the agreement, and thus, we may lose any unrealized gain associated with the agreement. In the case of a swap agreement, the fact that such swap agreement hedged a liability means that the liability could cease to be hedged upon the default of a counterparty. Additionally, we may also risk the loss of any collateral we have pledged to secure our obligations under a bilateral swap agreement if the counterparty, or in the case of a cleared swap, if our clearing broker, becomes insolvent or files for bankruptcy.
Failure to procure adequate repurchase agreement financing, which generally have short terms, or to renew or replace repurchase agreement financing as it matures, would adversely affect our results of operations.
We use repurchase agreement financing as a strategy to increase the return on our investment portfolio. However, we may not be able to achieve our desired leverage ratio for a number of reasons, including if the following events occur:
our lenders do not make repurchase agreement financing available to us at acceptable rates;
certain of our lenders exit the repurchase market;
our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do; or
we determine that the leverage would expose us to excessive risk.
We cannot assure you that any, or sufficient, repurchase agreement financing will be available to us on terms that are acceptable to us. In recent years, investors and financial institutions that lend in the securities repurchase market, have tightened lending standards in response to the difficulties and changed economic conditions that have materially adversely affected the MBS market. These market disruptions have been most pronounced in the Non-Agency MBS market, and the impact has also extended to Agency MBS, which has made the value of these assets unstable and relatively illiquid compared to prior periods. Any decline in their value, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements then in place.
As of December 31, 2020, we had amounts outstanding under repurchase agreements with five separate lenders and had repurchase agreements with 37 different lenders. Prior to entering into a lending relationship with any financial institution, our Manager does a thorough credit review of such potential lender. Notwithstanding the foregoing, a material adverse development involving one or more major financial institutions or the financial markets in general, in addition to the regulatory changes, could result in our lenders reducing our access to funds available under our repurchase agreements or terminating such agreements altogether.
Furthermore, because we rely primarily on short-term borrowings, our ability to achieve our investment objectives will depend not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. If we are unable to renew or replace our maturing short-term borrowings due to liquidity shortfalls in the repurchase agreement market and other short-term funding markets, changes in the regulatory environment or for any other reason, we will have to sell some or all of our assets, possibly under adverse market conditions which may have a material adverse effect on our financial position, results of operations and cash flows. In addition, the aforementioned changes to the regulatory capital requirements imposed on our lenders may significantly increase the cost of the financing that they provide to us. Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the recent changes in the regulatory environment and their management of perceived risk, particularly with respect to assignee liability.
Our repurchase agreement financing may require us to provide additional collateral and may restrict us from leveraging our assets as fully as desired.
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We use repurchase agreements to finance acquisitions of our investments. If the market value of the asset pledged or sold by us to a financing institution pursuant to a repurchase agreement declines, we may be required by the financing institution to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so, which could result in defaults. Posting additional collateral to support our credit will reduce our liquidity and limit our ability to leverage our assets, which could adversely affect our business. In the event we do not have sufficient liquidity to meet such requirements, financing institutions can accelerate repayment of our indebtedness, increase interest rates, liquidate our collateral or terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for bankruptcy protection.
On the date each month that principal payments are announced (i.e., the factor day for our Agency RMBS), the value of our Agency RMBS pledged as collateral under our repurchase agreements is reduced by the amount of the prepaid principal and, as a result, our lenders will typically initiate a margin call requiring the pledge of additional collateral or cash, in an amount equal to such prepaid principal, in order to re-establish the required ratio of borrowing to collateral value under such repurchase agreements. Accordingly, with respect to our Agency RMBS the announcement on factor day of principal prepayments is in advance of our receipt of the related scheduled payment, thereby creating a short-term receivable for us in the amount of such principal prepayments; however, under our repurchase agreements, we may receive a margin call relating to the related reduction in value of our Agency RMBS and prior to receipt of this short-term receivable, be required to post additional collateral or cash in an amount equal to the product of the advance rate of such repurchase agreement and the principal prepayment on or about factor day, which would reduce our liquidity during the period in which the short-term receivable is outstanding. As a result, in order to meet any such margin calls, we could be forced to sell assets in order to maintain liquidity. Forced sales under adverse market conditions may result in lower sales prices than ordinary market sales in the normal course of business.
Further, financial institutions providing the repurchase facilities may require us to maintain a certain amount of cash uninvested or to set aside non-levered assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose which could reduce our return on equity. If we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.
Lenders may require us to enter into restrictive covenants relating to our operations.
When we obtain further financing, lenders could impose restrictions on us that would affect our ability to incur additional debt, our capability to make distributions to stockholders and our flexibility to determine our operating policies. Loan documents we execute may contain negative covenants that limit, among other things, our ability to repurchase stock, distribute more than a certain amount of our funds from operations, and employ leverage beyond certain amounts.
Our rights under repurchase agreements may be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our counterparties under the repurchase agreements.
In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to take possession of and liquidate the assets that we have pledged under their repurchase agreements. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as the claim of an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our securities under a repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur.
An increase in our borrowing costs relative to the interest that we receive on our portfolio investments may adversely affect our profitability and cash available for distribution to our stockholders.
As long as we earn a positive spread between interest and other income we earn on our leveraged assets and our borrowing costs, we believe that we can generally increase our profitability by using greater amounts of leverage. We cannot, however, assure you that repurchase financing will remain an efficient source of long-term financing for our assets. The amount of leverage that we use may be limited because our lenders might not make funding available to us or they may require that we provide additional collateral to secure our borrowings. If our financing strategy is not viable, we will have to find alternative forms of financing for our assets which may not be available to us on acceptable terms or at acceptable rates. In addition, in response to certain interest rate and investment environments or to changes in the market liquidity, we could adopt a strategy of reducing our leverage by selling assets or not reinvesting principal payments as MBS amortize and/or prepay, thereby
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decreasing the outstanding amount of our related borrowings. Such an action could reduce interest income, interest expense and net income, the extent of which would be dependent on the level of reduction in assets and liabilities as well as the sale prices for which assets were sold.
As our financings mature, we will be required either to enter into new borrowings or to sell certain of our investments. Since we rely primarily on borrowings under repurchase agreements to finance our assets, our ability to achieve our investment objectives depends on our ability to borrow funds in sufficient amounts and on acceptable terms, and on our ability to renew or replace maturing borrowings on a continuous basis. Our repurchase agreement credit lines are renewable at the discretion of our lenders and, as such, do not contain guaranteed roll-over terms. Our ability to enter into repurchase transactions in the future will depend on the market value of our assets pledged to secure the specific borrowings, the availability of acceptable financing and market liquidity and other conditions existing in the lending market at that time. If we are unable to renew or replace maturing borrowings, we could be forced to sell assets in order to maintain liquidity. Forced sales under adverse market conditions could result in lower sales prices than ordinary market sales in the normal course of business. Further, an increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between our returns on our assets and the cost of our borrowings. This would adversely affect our returns on our assets, which might reduce earnings and, in turn, cash available for distribution to our stockholders.
Our investments in Residential and Commercial Whole Loans are difficult to value and are dependent upon the ability to finance, refinance and securitize such investments. The inability to do so could materially and adversely affect our liquidity and earnings and limit the cash available for distribution to our stockholders.
We may seek to finance and refinance our Residential Whole Loans and Commercial Whole Loans to generate greater value from such loan. However, there may be impediments to executing either a financing or refinancing strategy for these investments. The financing of these investments presents additional challenges because in general it is less available than repurchase financing for MBS, especially Agency CMBS and Agency RMBS, and likely to have less advantageous pricing and more onerous terms. Accordingly, there can be no assurance that we will be able to finance Whole Loans at all, let alone on terms we believe are advantageous.
We may enter into hedging transactions that could expose us to contingent liabilities in the future.
Subject to maintaining our qualification as a REIT and exemption from registration under the 1940 Act, part of our investment strategy may involve entering into economic hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.
Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.
Subject to maintaining our qualification as a REIT and exemption from registration under the 1940 Act, we may pursue various economic hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging activity varies in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:
interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
due to a credit loss, the duration of the hedge may not match the duration of the related liability;
the amount of income that a REIT may earn from hedging transactions (other than hedging transactions that satisfy certain requirements of the Code or that are done through a taxable REIT subsidiary (a "TRS") to offset interest rate losses is limited by U.S. federal tax provisions governing REITs);
the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments or "mark-to-market losses," would reduce our stockholders' equity;
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the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
Our hedging transactions, which are intended to limit losses, may actually adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.
While the majority of our interest rate swaps are traded on a regulated exchange, certain hedging instruments are traded over the counter and do not trade on regulated exchanges and, therefore, are not guaranteed by an exchange or a clearing house. In addition, over the counter instruments are more lightly regulated by U.S. and foreign governmental authorities. Consequently, there may be no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction which did not clear through a clearing house would most likely result in its default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our commitments, if any, at the then current market price. Although generally we seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into an offsetting contract in order to cover our risk. There can be no assurance that a liquid secondary market will exist for any hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.
Risks associated with our relationship with our Manager
Our Board of Directors has approved very broad investment guidelines for our Manager and does not approve each investment and financing decision made by our Manager.
Our Manager is authorized to follow very broad investment guidelines. Our Board of Directors periodically reviews our investment guidelines and our investment portfolio but does not, and is not required to review all of our proposed investments, except that an investment in a security structured or issued by another entity managed by our Manager must be approved by at least two-thirds (2/3) of our independent directors prior to such investment. In addition, in conducting periodic reviews, our Board of Directors may rely primarily on information provided to them by our Manager. Furthermore, our Manager may use complex strategies, and transactions entered into by our Manager may be costly, difficult or impossible to unwind by the time they are reviewed by our Board of Directors. Our Manager has great latitude within the broad parameters of our investment guidelines in determining the types and amounts of Agency and Non-Agency RMBS, CMBS, ABS and Whole Loan investments 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. Further, decisions made and investments and financing arrangements entered into by our Manager may not fully reflect the best interests of our stockholders.
There are conflicts of interest in our relationship with our Manager that 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 our Manager. We do not have any employees. All of our executive officers and two of our directors, James W. Hirschmann III and Jennifer W. Murphy, are employees of our Manager. Our Management Agreement with our Manager was negotiated between related parties and its terms, including fees and other amounts payable, may not be as favorable to us as if it had been negotiated at arm's-length with an unaffiliated third party. In addition, the obligations of our Manager and its officers and personnel to engage in other business activities may reduce the time our Manager and its officers and personnel spend managing us.
We compete for investment opportunities directly with other client portfolios managed by our Manager. Clients of our Manager have investment mandates and objectives that target the same assets as us. A substantial number of client accounts managed by our Manager have exposure to RMBS, CMBS and other investments and may have similar investment mandates and objectives. While our Manager has only a limited number of client accounts investing in Whole loans, the supply of Whole Loan investments meeting the Manager's investment criteria is extremely limited. In addition, our Manager may have additional clients that compete directly with us for investment opportunities in the future. Our Manager has an investment allocation policy in place that is intended to ensure that no single client is intentionally favored over another and that trades are allocated in a fair and equitable manner. We may compete with our Manager or its other clients for investment or financing opportunities sourced by our Manager; however, we may either not be presented with the opportunity or have to compete with our Manager to acquire these investments or have access to these sources of financing. Our Manager and our executive officers
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may choose to allocate favorable investments to itself or to its or other clients instead of to us. Further, at times when there are turbulent conditions in the mortgage markets or distress in the credit markets or other times when we will need focused support and assistance from our Manager, our Manager's other clients will likewise require greater focus and attention, placing our Manager's resources in high demand. In such situations, we may not receive the level of support and assistance that we may receive if we were internally managed or if our Manager did not act as a manager for other entities. There is no assurance that our Manager's allocation policies that address some of the conflicts relating to our access to investment and financing sources will be adequate to address all of the conflicts that may arise.
We pay our Manager a management fee that is not tied to our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us. This could hurt both our ability to make distributions to our stockholders and the market price of our common stock. Furthermore, the compensation payable to our Manager will increase as a result of future issuances of our equity securities, even if the issuances are dilutive to existing stockholders.
As of December 31, 2020, our Manager owned 1,277,861 shares of our common stock. To the extent our Manager elects to sell all or a portion of these shares in the future, our Manager's interests may be less aligned with our interests.
We are dependent on our Manager and its key personnel for our success.
We have no separate facilities and are completely reliant on our Manager. All of our executive officers and two of our directors, are employees of our Manager. Our Manager has significant discretion as to the implementation of our investment and operating policies and strategies. 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 our Manager. The executive officers and key personnel of our Manager evaluate, negotiate, close and monitor our investments; therefore, our success depends on their continued service. The departure of any of the executive officers or key personnel of our Manager could have a material adverse effect on our performance. In addition, we offer no assurance that our Manager will remain our investment manager or that we will continue to have access to our Manager's principals and professionals. The term of our Management Agreement with our Manager expires on May 16, 2022, with automatic one-year renewals thereafter. If the Management Agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan. Moreover, our Manager is not obligated to dedicate any of its personnel exclusively to us nor is it obligated to dedicate any specific portion of its time to our business, and none of our Manager's personnel are contractually dedicated to us under our Management Agreement with our Manager.
The Management Agreement with our Manager was not negotiated on an arm's-length basis, may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.
All of our executive officers and two of our directors are employees of our Manager. Our Management Agreement with our Manager was negotiated between related parties and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.
Termination of the Management Agreement with our Manager without cause is difficult and costly. Our independent directors review our Manager's performance and any fees payable to our Manager annually and the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds (2/3) of our independent directors based upon: (i) our Manager's unsatisfactory performance that is materially detrimental to us; or (ii) our determination that any fees payable to our Manager are not fair, subject to our Manager's right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds (2/3) of our independent directors. We are required to provide our Manager 180 days prior notice of any such termination. Unless terminated for cause, we are required to pay our Manager a termination fee equal to three times the average annual management fee earned by our Manager during the prior 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination. This provision increases the effective cost to us of electing not to renew, or defaulting in our obligations under, the Management Agreement, thereby adversely affecting our inclination to end our relationship with our Manager, even if we believe our Manager's performance is not satisfactory.
Our Manager is only contractually committed to serve us until May 16, 2022. The Management Agreement is automatically renewable for one-year terms; provided, however, that our Manager may terminate the Management Agreement annually upon 180 days prior notice. If the Management Agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.
Pursuant to the Management Agreement, our Manager does not assume any responsibility other than to render the services called for thereunder and is not responsible for any action of our Board of Directors in following or declining to follow its advice or recommendations. Our Manager maintains a contractual as opposed to a fiduciary relationship with us. Under the terms of the Management Agreement, our Manager, its officers, stockholders, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager are not liable
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to us, our directors, our stockholders or any partners for acts or omissions performed in accordance with and pursuant to the Management Agreement, except because of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the Management Agreement. In addition, we indemnify our Manager, its officers, stockholders, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the Management Agreement.
Our Manager's management fee is payable regardless of our performance.
We pay our Manager a management fee regardless of the performance of our portfolio. Our Manager'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 our common stock.
Our Manager is subject to extensive regulation as an investment advisor, which could adversely affect its ability to manage our business.
Our Manager is subject to regulation as an investment advisor by various regulatory authorities that are charged with protecting the interests of its clients, including us. Instances of criminal activity and fraud by participants in the investment management industry and disclosures of trading and other abuses by participants in the financial services industry have led the U.S. government and regulators to the rules and regulations governing, and oversight of, the U.S. financial system, including the investment management industry and more aggressive enforcement of the existing laws and regulations. Our Manager could be subject to civil liability, criminal liability, or sanction, including revocation of its registration as an investment adviser, revocation of the licenses of its employees, censures, fines, or temporary suspension or permanent bar from conducting business, if it is found to have violated any of these laws or regulations. Any such liability or sanction could adversely affect its ability to manage our business. Our Manager must continually address conflicts between its interests and those of its clients, including us. In addition, the SEC and other regulators have increased their scrutiny of potential conflicts of interest. We believe our Manager has procedures and controls that are reasonably designed to address these issues. However, appropriately dealing with conflicts of interest is complex and difficult and if our Manager fails, or appears to fail, to deal appropriately with conflicts of interest, it could face litigation or regulatory proceedings or penalties, any of which could adversely affect its ability to manage our business.
Risks related to our common stock
We may pay taxable dividends in our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.
We generally must distribute annually at least 90% of our REIT taxable income (subject to certain adjustments and excluding any net capital gain), in order to qualify as a REIT, and any REIT taxable income that we do not distribute will be subject to U.S. corporate income tax at regular rates. In 2020, the Board of Directors of the Company determined it was prudent to conserve available liquidity and suspended the Company’s first and second quarter dividend. The Company resumed paying a quarterly dividend for the third and fourth quarters. The Board of Directors will evaluate dividends in future periods based upon customary consideration, such as our cash balances, and cash flows and market conditions and could consider paying future dividends in shares of common stock, cash, or a combination of shares of common stock and cash.

On May 4, 2020 the IRS issued Revenue Procedure 2020-19, which modifies Revenue Procedure 2017-45 solely with respect to distributions by publicly owned REITs. Pursuant to this revenue procedure, effective for distributions declared on or after April 1, 2020, the IRS will treat the distribution of stock pursuant to an elective stock dividend as a distribution of property under Section 301 of the Code (i.e., as a dividend to the extent of our earnings and profits), as long as at least 10% of the total dividend is available in cash and certain other requirements outlined in the revenue procedure are met.

If we make a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we make a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
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The market price and trading volume of our common stock may vary substantially.
Our common stock is listed on the NYSE under the symbol "WMC." The stock markets, including the NYSE, have experienced significant price and volume fluctuations over the past several years. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares. Accordingly, no assurance can be given as to the ability of our stockholders to sell their common stock or the price that our stockholders may obtain for their common stock.
Some of the factors that could negatively affect the market price of our common stock include:
actual or anticipated variations in our quarterly operating results;
changes in our earnings estimates or publication of research reports about us or the real estate industry;
changes in market valuations of similar companies;
adverse market reaction to any increased indebtedness we incur in the future;
additions to or departures of our Manager's key personnel;
actions by our stockholders;
changes in our dividend policy or payments; and
speculation in the press or investment community.
Market factors unrelated to our performance could also negatively impact the market price of our common stock. One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate as a percentage of our stock price relative to market interest rates. If market interest rates increase, prospective investors may seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and conditions in the capital markets can affect the market value of our common stock. For instance, if interest rates rise, it is likely that the market price of our common stock will decrease as market rates on interest-bearing securities increase.
Investing in our common stock may involve a high degree of risk.
The investments that we make in accordance with our investment objectives may result in a high amount of risk when compared to alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore an investment in our common stock may not be suitable for someone with lower risk tolerance.
Common stock eligible for future sale may have adverse effects on our share price.
We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock. The market price of our common stock may decline significantly when the restrictions on resale (or lock up agreements), which may attach to future sales of our common stock, by certain of our stockholders lapse. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock.
Also, we may issue additional shares in follow-on public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issuances, which may dilute the existing stockholders' interests in us.
We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.
We intend to pay quarterly distributions and to make distributions to our stockholders in an amount such that we distribute all or substantially all of our net taxable income, calculated in accordance with the REIT requirements, each year. We have not established a minimum distribution payment level and our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described herein. All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, debt covenants, maintenance of our REIT qualification and other factors our Board of Directors may deem relevant from time to time. We believe that a change in any one of the following factors could adversely affect our results of operations and impair our ability to pay distributions to our stockholders:
the profitability of our existing investments and the investment of net proceeds of any subsequent offering;
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our ability to make profitable investments;
margin calls or other expenses that reduce our cash flow;
decreases in the value of our portfolio or defaults in our asset portfolio; and
the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions in the future. In addition, some of our distributions may include a return in capital.
Future offerings of debt or equity securities, which would rank senior to our common stock, may adversely affect the market price of our common stock.
If we decide to issue debt or equity securities in the future, which would rank senior to our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us. Furthermore, the compensation payable to our Manager will increase as a result of future issuances of our equity securities, including issuances upon exercise of the warrants, described below, even if the issuances are dilutive to existing stockholders.
Conversion of our convertible senior unsecured notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their notes.
The Company has outstanding $175.0 million aggregate principal amount of 6.75% convertible senior unsecured notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity.

The notes are convertible into, at the Company's election, cash, shares of the Company's common stock or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the agreement. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock.

To the extent we issue shares of our common stock upon conversion of the notes, the conversion of some or all of our notes will dilute the ownership interests of existing stockholders. Any sales in the public market of shares of our common stock issuable upon such conversion of the notes could adversely affect the prevailing market price.
Risks related to our organization and structure
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
Our amended and restated certificate of incorporation authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our Board of Directors may, without stockholder approval, amend our amended and restated certificate of incorporation to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our Board of Directors may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.
Ownership limitations may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares.
To maintain our qualification as a REIT, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. "Individuals" for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. To assist us in maintaining our qualification as a REIT, our amended and restated certificate of incorporation generally prohibits any person
26



from directly or indirectly owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.
Provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law may have the effect of preventing or hindering a change in control and adversely affecting the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price our common stock.
We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our operations.
We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our operations. Such distributions would reduce the amount of cash we have available for investing and other purposes and could be dilutive to our financial results. In addition, funding our distributions from our net proceeds may constitute a return of capital to our investors, which would have the effect of reducing each stockholder's basis in its shares of common stock.
Risks Related to REIT Status
If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.
We believe we have operated and intend to continue to operate in a manner that allows us to qualify as a REIT. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the annual REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, there can be no assurance that the IRS will not contend that our interests in our subsidiaries or in securities of other issuers will not cause a violation of the REIT requirements.
If we were to fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be subject to U.S. federal income tax, on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to income from "qualified dividends" payable to U.S. stockholders that are individuals, trusts and estates is currently 20%, exclusive of the 3.8% investment tax surcharge. Dividends payable by REITs, however, generally are not eligible for the qualified dividend reduced rates. Stockholders that are individuals, trusts or estates generally may deduct 20% of the aggregate amount of ordinary dividends distributed by us, subject to certain limitations for taxable years beginning after December 31, 2017 and before January 1, 2026. While the qualified dividend rules do not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our net taxable income, determined without regard to the dividends paid deduction and excluding net capital gains, in order for U.S. federal corporate income tax not to apply to earnings that we
27



distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a nondeductible 4% excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to continue to make distributions to our stockholders to comply with the REIT requirements of the Code and avoid corporate income tax and the 4% annual excise tax.
From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with U.S. GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, the Code limits our ability to use capital losses to offset ordinary income, thereby requiring us to distribute such ordinary income. If we do not have other funds available in these situations we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the nondeductible 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.


Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, excise taxes, state or local income, property and transfer taxes, such as mortgage recording taxes, and other taxes. In addition, to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income, and to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through TRSs or other consolidated entities that will be subject to corporate-level income tax at regular corporate rates. We may also incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm's-length basis. The payment of any of these taxes would decrease cash available for distribution to our stockholders.
Complying with REIT requirements may cause us to liquidate or forgo otherwise attractive opportunities.
To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and securities. The remainder of our investments in securities (other than government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, and no more than 20% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments from our investment portfolio. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
In addition to the asset tests set forth above, to qualify as a REIT we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make and, in certain cases, to maintain ownership of, certain attractive investments.
We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them.
We have acquired and may acquire in the future mortgage-backed securities and other portfolio instruments in the secondary market for less than their face amount. In addition, pursuant to our ownership of certain mortgage-backed securities, we may be treated as holding certain debt instruments acquired in the secondary market for less than their face amount. The discount at which such securities or debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as "market discount" for U.S. federal income tax purposes. Under general tax rules, accrued market discount is reported as income when, and to the extent that, any payment of principal of the mortgage-backed security or debt instrument is made. If we collect less on the mortgage-backed security or debt instrument than our purchase price plus the market discount we had previously reported as
28



income, we may not be able to benefit from any offsetting capital loss deductions to the extent we do not have offsetting capital gains.
In addition, pursuant to our ownership of certain mortgage-backed securities or debt instruments, we may be treated as holding distressed debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are "significant modifications" under applicable Treasury regulations, the modified debt may be considered to have been reissued to us at a gain in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt, even if the value of the debt or the payment expectations have not changed.
Moreover, some of the mortgage-backed securities or debt instruments that we acquire may have been issued with original issue discount. Under general tax rules, we are required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such mortgage-backed securities will be made. If such mortgage-backed securities turn out not to be fully collectable, an offsetting loss deduction will become available only in the later year that uncollectability is provable.
Finally, in the event that mortgage-backed securities or any debt instruments we are treated as holding pursuant to our investments in mortgage-backed securities are delinquent as to mandatory principal and interest payments, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability. Similarly, we may be required to accrue interest income with respect to subordinate mortgage-backed securities at the stated rate


regardless of whether corresponding cash payments are received or are ultimately collectable. In each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectable, the utility of that deduction could depend on our having taxable income in that later year or thereafter.
Certain apportionment rules may affect our ability to comply with the REIT asset and gross income tests.
The Code provides that a regular or a residual interest in a real estate mortgage investment conduit, or REMIC, is generally treated as a real estate asset for the purpose of the REIT asset tests, and any amount includible in our gross income with respect to such an interest is generally treated as interest on an obligation secured by a mortgage on real property for the purpose of the REIT gross income tests. If, however, less than 95% of the assets of a REMIC in which we hold an interest consist of real estate assets (determined as if we held such assets), we will be treated as holding our proportionate share of the assets of the REMIC for the purpose of the REIT asset tests and receiving directly our proportionate share of the income of the REMIC for the purpose of determining the amount of income from the REMIC that is treated as interest on an obligation secured by a mortgage on real property.
The "taxable mortgage pool" rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.
Securitizations could result in the creation of taxable mortgage pools for U.S. federal income tax purposes. As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we generally would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax-exempt "disqualified organizations," such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion of our income from the taxable mortgage pool. In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. Moreover, we would be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.
Our ability to invest in and dispose of "to be announced" securities could be limited by our election to be subject to tax as a REIT.
We may purchase Agency RMBS through "to-be-announced" forward contracts, or TBAs. In certain instances, rather than take delivery of the Agency RMBS subject to a TBA, we may dispose of the TBA through a dollar roll transaction in which we agree to purchase similar securities in the future at a predetermined price or otherwise, which may result in the recognition of income or gains. We account for dollar roll transactions as purchases and sales of securities. The law is unclear regarding whether TBAs will be qualifying assets for the 75% asset test and whether income and gains from dispositions of TBAs will be qualifying income for the 75% gross income test. Accordingly, our ability to purchase Agency RMBS through TBAs and to dispose of TBAs, through dollar roll transactions or otherwise, could be limited.
29



The failure of securities subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT.
We enter into financing arrangements that are structured as sale and repurchase agreements pursuant to which we nominally sell certain of our securities to a counterparty and simultaneously enter into an agreement to repurchase these securities at a later date in exchange for a purchase price. Economically, these agreements are financings which are secured by the securities sold pursuant thereto. We believe that we will be treated for REIT asset and income test purposes as the owner of the securities that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership of the securities to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the securities during the term of the sale and repurchase agreement, in which case we could fail to qualify as a REIT.
Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.
To continue to qualify as a REIT, we must comply with requirements regarding the composition of our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resulting gain if we sell assets that are treated as dealer property or inventory.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.


The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute "gross income" for purposes of the 75% or 95% gross income tests, provided that certain identification requirements are met. To the extent that we fail to properly identify such transactions as hedges, or enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we limit our use of advantageous hedging techniques, and we may implement those hedges through a domestic TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRS.
Qualifying as a REIT involves highly technical and complex provisions of the Code.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence.
New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT
The U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in us. The U.S. federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in U.S. federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us.

Item 1B.    Unresolved Staff Comment
None
Item 2.    Properties
Our executive and administrative offices are located in Pasadena, California, in office space shared with our Manager. We do not own any materially important physical properties; however, we have residential homes (or real estate owned) that we acquire, from time to time, through foreclosures on mortgage loans.
Item 3.    Legal Proceedings
None.
30



Item 4.    Mine Safety Disclosures.
Not applicable.

31




PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the NYSE under the symbol "WMC."
The following table summarizes our dividends declared on common stock, on a per share basis, for the years ended December 31, 20192020 and 2018:
2019:
Declaration DateRecord DatePayment DateCommon Stock Dividend
2020
December 17, 2020December 28, 2020January 26, 2021$0.06
September 22, 2020October 2, 2020October 26, 2020$0.05
Declaration Date2019Record DatePayment DateCommon Stock Dividend
2019
December 19, 2019December 30, 2019January 24, 2020$0.31
September 19, 2019September 30, 2019October 25, 2019$0.31
June 20, 2019July 1, 2019July 26, 2019$0.31
March 21, 2019April 1, 2019April 26, 2019$0.31
2018
December 19, 2018December 31, 2018January 25, 2019$0.31
September 17, 2018September 27, 2018October 26, 2018$0.31
June 21, 2018July 2, 2018July 26, 2018$0.31
March 22, 2018April 2, 2018April 26, 2018$0.31
In order to maintain our qualification as a REIT, we must make annual distributions to our stockholders of at least 90% of our taxable income (not including net capital gains). We have adopted a policy of paying regular quarterly dividends on our common stock. Refer to Note 12-12- "Stockholders' Equity" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K for details on the tax characterization of our dividend.
A combination of cash and stock dividends has been paid on our common stock since our initial public offering. Dividends are declared at the discretion of the Board of Directors and depend on actual and anticipated cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors the Board of Directors may consider relevant.
As of March 3, 2020,2021, we had 67 registered holders of our common stock and 53,523,87660,812,701 shares outstanding.
Securities Authorized for Issuance Under Equity Compensation Plans
In conjunction with our IPO and concurrent private placement, our Board of Directors approved the Western Asset Mortgage Capital Corporation Equity Plan (the "Equity Plan") and the Western Asset Manager Equity Plan (the "Manager Equity Plan" and collectively the "Equity Incentive Plans"). For further details, see Note 11-11- "Share-Based Payments" to the Consolidated Financial Statements included under Item 8 in this Form 10-K.
The following table presents certain information about the Equity Incentive Plans as of December 31, 2019:
2020:
Award
Number of securities to be

issued upon exercise of

outstanding options,

warrants and rights
Weighted-average exercise

price of outstanding

options, warrants and

rights
Number of securities

remaining available for

future issuance under

equity compensation

plans
Restricted common stockN/A
N/AN/A
778,716 
688,305
Total

688,305778,716 
Stockholder Return Performance
The following graph is a comparison of the cumulative total stockholder return on the Company's common stock, the Standard & Poor's 500 Index (the "S&P 500 Index"), the Russell 2000 Index (the "Russell 2000") and the FTSE NAREIT Mortgage REITs Index (the "FTSE Mortgage REIT"), a peer group index for a five-year period from December 31, 20142015 to December 31, 2019,2020, and accordingly does not take into account the dividend the Company declared on December 19, 201917, 2020 and paid on January 24, 2020.26, 2021. The graph assumes that $100 was invested on December 31, 20142015 in the Company's common stock, the S&P 500 Index, the Russell 2000 and the FTSE Mortgage REIT and that all dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of the Company's shares will continue in line with the same or similar trends depicted in the graph below.

32



chart-26e2fb18f66a572fb68.jpg
Index12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
Western Asset Mortgage Capital Corp100.00
83.97
94.73
105.53
100.42
140.40
S&P 500100.00
101.38
113.51
138.29
132.23
173.86
Russell 2000100.00
95.59
115.95
132.94
118.30
148.49
FTSE NAREIT Mortgage REIT100.00
91.12
111.95
134.10
130.71
158.60
wmc-20201231_g3.jpg
Index12/31/1512/31/1612/31/1712/31/1812/31/1912/31/20
Western Asset Mortgage Capital Corp$100.00 $113.00 $125.83 $119.74 $167.56 $55.16 
S&P 500$100.00 $111.96 $136.40 $130.42 $171.49 $203.04 
Russell 2000$100.00 $121.31 $139.08 $123.76 $155.35 $186.36 
FTSE NAREIT Mortgage REIT$100.00 $122.85 $147.16 $143.45 $174.05 $141.38 
Recent Sales of Unregistered Securities: Use of Proceeds from Registered Securities
Not applicable.

Purchase of Equity Securities by the Issuer

On December 19, 2019, the Board of Directors of the Company reauthorized its repurchase program of up to 2,700,000 shares of its common stock through December 31, 2021. The previous reauthorization announced on December 21, 2017 of the Company's repurchase program of up to 2,100,000 shares of its common stock expired on December 31, 2019. The original authorization expired on December 31, 2015. Purchases made pursuant to the program will be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Securities and Exchange Commission. The authorization does not obligate the Company to acquire any particular amount of common shares and the program may be suspended or discontinued at the Company's discretion without prior notice.

The following table shows common shares repurchase activity during the year ended December 31, 2020:

MonthTotal Number of Shares Purchased
Average Price Paid Per Share(1)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs at the end of period
March 1 - 31, 2020100,000 5.78100,000 2,600,000 
Total100,000 100,000 

(1)Shares purchase price includes brokers commission of $0.03 per share.
(2) The Company repurchased 100,000 shares in 2020 of common stock accounted for as treasury stock pursuant to the authorization.

33




Item 6.    Selected Financial Data
The information below should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included in Item 8. "Financial Statements and Supplementary Data," included in this annual report on Form 10-K.

in thousands—except share and per share dataYear ended December 31, 2019 Year ended December 31, 2018 Year ended December 31, 2017 Year ended December 31, 2016 Year ended December 31, 2015
Operating Data:   
  
  
  
Net Interest Income66,990
 71,122
 75,918
 91,326
 125,099
Other Income (Loss)25,710
 (21,328) 30,444
 (91,939) (112,100)
Operating expenses12,873
 14,749
 10,519
 11,493
 12,888
General and administrative expenses8,071
 7,927
 7,259
 9,753
 9,595
Income (loss) before income taxes71,756
 27,118
 88,584
 (21,859) (9,484)
Income tax provision1,057
 709
 3,487
 3,156
 
Net Income (loss)$70,699
 $26,409
 $85,097
 $(25,015) $(9,484)
Net income (loss) per Common Share—Basic$1.37
 $0.61
 $2.03
 $(0.61) $(0.25)
Net income (loss) per Common Share—Diluted$1.37
 $0.61
 $2.03
 $(0.61) $(0.25)
Dividends Declared per Share of Common Stock$1.24
 $1.24
 $1.24
 $1.38
 $2.49
Balance Sheet Data (at period end):   
  
  
  
Total assets$5,160,971
 $4,497,395
 $3,886,906
 $3,156,016
 $3,414,429
Total liabilities$4,596,510
 $3,994,386
 $3,420,868
 $2,725,534
 $2,902,781
Total stockholders' equity$564,461
 $503,009
 $466,038
 $430,482
 $511,648
Other Data:   
  
  
  
Cash flow provided by (used in):   
  
  
  
Operating activities$(52,240) $107,052
 $59,382
 $11,546
 $133,898
Investing activities$(478,503) $(716,875) $(1,202,572) $504,631
 $1,359,855
Financing activities$537,227
 $639,594
 $1,145,043
 $(494,799) $(1,516,439)
in thousands—except per share dataYear ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018Year ended December 31, 2017Year ended December 31, 2016
Operating Data:    
Net Interest Income$45,437 $66,990 $71,122 $75,918 $91,326 
Other Income (Loss)(334,480)25,710 (21,328)30,444 (91,939)
Operating expenses27,939 12,873 14,749 10,519 11,493 
General and administrative expenses10,968 8,071 7,927 7,259 9,753 
Income (loss) before income taxes(327,950)71,756 27,118 88,584 (21,859)
Income tax provision396 1,057 709 3,487 3,156 
Net income (loss)(328,346)70,699 26,409 85,097 (25,015)
Net income attributable to non-controlling interest— — — — 
Net income (loss) attributable to common stockholders and participating securities$(328,354)$70,699 $26,409 $85,097 $(25,015)
Net income (loss) per Common Share—Basic$(5.72)$1.37 $0.61 $2.03 $(0.61)
Net income (loss) per Common Share—Diluted$(5.72)$1.37 $0.61 $2.03 $(0.61)
Dividends Declared per Share of Common Stock$0.11 $1.24 $1.24 $1.24 $1.38 
Balance Sheet Data (at period end):    
Total assets$3,336,009 $5,160,971 $4,497,395 $3,886,906 $3,156,016 
Total liabilities$3,080,895 $4,596,510 $3,994,386 $3,420,868 $2,725,534 
Total equity$255,114 $564,461 $503,009 $466,038 $430,482 
Other Data:    
Cash flow provided by (used in):    
Operating activities$(147,648)$(52,240)$107,052 $59,382 $11,546 
Investing activities$2,676,632 $(478,503)$(716,875)$(1,202,572)$504,631 
Financing activities$(2,505,518)$537,227 $639,594 $1,145,043 $(494,799)


34




ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion provides the reader a narrative from the perspective of management and should be read in conjunction with our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data" of this annual report on Form 10-K.
Overview
The sizeWe are a Delaware corporation that commenced operations in May 2012. We operate and composition ofelected to be taxed as a REIT, commencing with our portfolio depend on investment strategies implemented by our Manager, the accessibility to capital and overall market conditions, including availability of attractively priced target assets and financing. Our objective is to provide an attractive risk adjusted return to our stockholders over the long term. Our Manager has built a diversified portfolio of our target assets to better enable us to deliver attractive returns through market cycles.taxable year ended December 31, 2012. Our portfolio is mainly comprised of AgencyResidential Whole Loans and Commercial Loans, Non-Agency CMBS, Non-Agency CMBS, Residential Whole loansRMBS, and Commercial Loans. Toto a lesser extent we have investments in Agency RMBS, Residential Bridge Loans, Non-Agency RMBS, GSE Risk Sharing Securities and ABS investments secured by a portfolio of private student loans. In addition, our holdings include fourtwo securitized commercial loans from the threetwo consolidated third-party sponsored CMBS VIEs.
We use leverage as part of our business strategy in order to increase potential returns to our stockholders. We accomplish this by borrowing against existing investments primarily through repurchase agreements. We may also change our financing strategy and leverage without the consent of our stockholders.
We operate and elected to be taxed as a REIT, commencing with our taxable year ended December 31, 2012. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute, in accordance with the REIT regulations, all of our net taxable income to stockholders and maintain our intended qualification as a REIT. Certain of our non-qualifying investments were held in our taxable REIT subsidiary or "TRS." Net income generated in our TRS is taxable and subject to federal, state and local income tax at the applicable corporate tax rates.
We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the 1940 Act.
Factors Impacting Our Operating Results
Our business is affected by general U.S. residential and commercial real estate fundamentals and the overall U.S. and international economic environment. In particular, our strategy is influenced by the specific characteristicsresults of these markets, including, but not limited to, interest rate levels and credit spreads.

Our operating results can beoperations are affected by a number of factors and primarily depend on, among other things, the sizelevel of our investment portfolio, our netthe interest income changes infrom target assets, the market value of our investments, derivative instrumentsassets and to a lesser extent realized gains and losses on the sale of our investments and termination of our derivative instruments. Our overall performance is also impacted by the supply of, and demand for our target assetsresidential and commercial whole loans, Non-Agency CMBS, Non- Agency RMBS, and other real estate-related investments in the market, the terms and availability of financing for such assets, general economic conditions, the impact of U.S Government actions that affect the real estate and mortgage sectors,which we invest, and the unanticipated credit events experienced by borrowers whose loans are included infinancing and other costs associated with our MBS, as well as our Residential Whole Loans, Residential Bridge Loanbusiness. Interest income and Commercial Loan borrowers.
Our net interest income, which includes the amortization of purchase premiums and accretion of discounts, willborrowing costs may vary primarily as a result of changes in interest rates defaults and loss severity rates, borrowing costs, and prepayment speedsthe availability of financing, each of which could impact the net interest income we receive on our MBS and other Target Assets (as defined herein) investments. Similarly, the overall value of our investment portfolio willOur operating results may also be impacted by these factorsconditions in the financial markets, such as, well as changesunanticipated credit events experienced by our investment portfolio.
Changes in market interest rates. With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to increase; (ii) the value of residentialcertain of our assets to decline; (iii) to the extent applicable under the terms of our investments, prepayments on our investments to slow, and commercial real estate(iv) to the extent that we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase.

Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with variable rate borrowings to decrease; (ii) the value of certain of our investments to increase; (iii) to the extent applicable under the terms of our investments, prepayments on our investments to increase, and (iv) to the extent that we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease.

Credit risk. One of our strategic focuses is acquiring assets which are believed to be of high credit quality. Management believes this strategy will generally keep credit losses and financing costs low. However, we are subject to varying degrees of credit risk in connection with our target assets. Our Manager seeks to mitigate this risk by seeking to acquire high quality assets, at appropriate prices given anticipated and unanticipated losses and by deploying a value-driven approach to underwriting and diligence, consistent with our Manager’s historical investment strategy. However, unanticipated credit losses could occur which could adversely impact operating results.

Size of portfolio. The size of our portfolio of assets is a key revenue driver. Generally, as the size of our portfolio grows, the amount of interest income earned increases, and conversely as the size of our portfolio declines, the amount of interest income earned will decline.

Market conditions. During the first quarter of 2020, the outbreak of COVID-19, which the World Health Organization designated a pandemic, has created extensive disruptions to the global economy and the lives of individuals throughout the world. Governments, businesses, and the public have taken and are continuing regulatory changes.to take unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. The scope, duration, and full effects of COVID-19 are still not fully known. The pandemic and related efforts to contain the COVID-19 have disrupted global economic activity, impacted interest rates, increased economic and market uncertainty, disrupted trade and supply chains, and created unprecedented financial market conditions and disruptions. This rapid disruption in the fixed income
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markets specifically in mortgage markets had an adverse impact on our book value, liquidity, results of operations, and financial position.

While there is hope on the horizon with the development of a vaccine, our Manager's view is the road ahead will be a long and difficult path. The full impact of COVID-19 on our results of operations, financial position and cost of capital is still uncertain as it depends on several factors beyond our control. Our Manager outlook is that (i) COVID-19 related growth setbacks have meaningful reduced global and U.S. growth, (ii) the medical battle will take time and prolonged efforts but recent developments are encouraging, (iii) second half of 2021 should should see meaning pick up in growth as the economy reopens (iv) U.S. and global inflation are expected to be very subdued, (v) Fiscal policy and monetary policy will remain supportive, and (vi) Central banks are expected to keep rates low for long. We continue to operate with a defensive stance to preserve liquidity, reduce our exposure to short-term repurchase agreement financings, and reduce expenses.

See the Item 1A. "Risk Factors" inof this annual report on Form 10-K additional factors that may impact our operating results. Also, please see "Liquidity and Capital Resources" section of this annual report on Form 10-K for additional factors that maydiscussion surrounding the ongoing impact our operating results.
Recent Market Conditions
Our business is affected by general U.S. residential real estate fundamentals, domestic and foreign commercial real estate fundamentals and the overall U.S. and international economic environment. In particular, our strategy is influenced by the specific characteristics of these markets, including, but not limited to, prepayment rates and interest rate levels. Wewe expect the results of our operations to be affected by various factors, many of which are beyond our control.



Our Manager's outlook for 2020, is as follows; i) CoronavirusCOVID-19 will cause growth setbacks in the global recovery . ii) U.S. and global inflation will continue to be subdued, iii) sustained monetary policy accommodation by the Federal Reserve and European Central Bank suggests "low for long", and iv) spread products should outperform government bonds.
Against this backdrop, we remain constructive on housing fundamentals and expect modest home price growth over the coming years. Credit underwriting standards are historically high, making the quality of new loan production strong. We remain positive on the credit risk of GSEs (Fannie Mae and Freddie Mac) and recently issued non-agency loans as well as re-performing loans and securities. We also remain constructive on the CMBS market, due to broadly positive commercial real estate fundamentals and a favorable economic outlook. Here, we are positive on short-duration, well-structured single-borrower securitizations and loans; in conduit deals we see better value in AAA rated bonds.
During the fourth quarter of 2019, the Federal Reserve continued monetary easing, reducing the fed funds rate a quarter point in October 2019. They also significantly increased liquidity in the repurchase agreement market through its Open Market Operations. The yield curve steepened during the quarter, with 2-year Treasury yields declining five basis points and 10-year yields increasing 25 basis points. We saw credit spreads and spreads on Agency MBS tighten. Although there was a modest benefit from declining interest rates, the spread wideninghave on our Agency CMBS portfolio overshadowed this benefit resulting in a slight decline in our book value of 0.5%.liquidity and capital resources.

Critical Accounting Policies
The consolidated financial statements include our accounts, those of our consolidated wholly-owned TRS and certain variable interest entities (“VIEs”) in which we are the primary beneficiary.  All intercompany amounts have been eliminated in consolidation.  In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties.  In accordance with SEC guidance, the following discussion addresses the accounting policies that we currently apply. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. For a review of recent accounting pronouncements that may impact our results of operations, refer Note 2 - “Summary of Significant Accounting Policies” contained in this annual report on Form 10-K.
Valuation of Financial Instruments
 
We disclose the fair value of our financial instruments according to a fair value hierarchy (Levels I, II, and III, as defined below). ASC 820 "Fair Value Measurements and Disclosures" establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements. ASC 820 further specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:

Level I — Quoted prices in active markets for identical assets or liabilities.
 
Level II — Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable, for example, when there is little or no market activity for an investment at the end of the period, unobservable inputs may be used.
 
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Transfers between levels are determined by us at the end of the reporting period.

Mortgage-Backed Securities and Other Securities

Our mortgage-backed securities and other securities portfolio primarily consists of Agency RMBS, Non-Agency RMBS, Agency CMBS, Non-Agency CMBS, ABS and other real estate related assets. These investments are recorded in accordance with


ASC 320, “Investments - Debt and Equity Securities,” ASC 325-40, “Beneficial Interests in Securitized Financial Assets” or ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” We have chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for our mortgage-backed securities and other securities
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portfolio. Electing the fair value option allows us to record changes in fair value in the Consolidated Statements of Operations as a component of “Unrealized gain (loss), net.”

As of January 1, 2020, we adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments or CECL in the first quarter of 2020. The standard significantly changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through the income statement. The standard replaced the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. Since we elected the Fair Value Option for our mortgage-backed securities and other securities, we we do not apply the expected loss model instead we record changes in fair value of these investment in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net."

If we purchase securities with evidence of credit deterioration, we will analyze to determine if the guidance found in ASC 310-30, “Loans and Debt Securities Acquired with DeterioratedASU 2016-13, "Financial Instruments - Credit Quality”Losses, is applicable.

We evaluate securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired involves judgments, estimates and assumptions based on subjective and objective factors. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired, and the impairment is designated as either “temporary” or “other-than-temporary.” When a security is impaired, an OTTI is considered to have occurred if (i) if we intend to sell the security (i.e., a decision has been made as of the reporting date) or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If we intend to sell the security or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, the entire amount of the impairment loss, if any, is recognized in earnings as OTTI and the cost basis of the security is adjusted to its fair value. Additionally, for securities accounted for under ASC 325-40 an OTTI is deemed to have occurred when there is an adverse change in the expected cash flows to be received and the fair value of the security is less than its carrying amount. In determining whether an adverse change in cash flows occurred, the present value of the remaining cash flows, as estimated at the initial transaction date (or the last date previously revised), is compared to the present value of the expected cash flows at the current reporting date. The estimated cash flows reflect those a “market participant” would use and are discounted at a rate equal to the current yield used to accrete interest income. Any resulting OTTI adjustments are reflected in “Other than temporary impairment” in our Consolidated Statements of Operations.

Increases in interest income may be recognized on a security on which we have previously recorded an OTTI charge if the cash flow of such security subsequently improves.

In addition, unrealized losses on our Agency securities, with explicit guarantee of principal and interest by the governmental sponsored entity ("GSE"), are not credit losses but rather were due to changes in interest rates and prepayment expectations. These securities would not be considered other than temporarily impaired provided we did not intend to sell the security.

Residential Whole Loans

Investments in Residential Whole Loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs." We have chosen to make the fair value election pursuant to ASC 825 for our entire Residential Whole-Loan portfolio. Residential Whole Loans are recorded at fair value with periodic changes in fair market value being recorded in earnings as a component of "Unrealized gain (loss), net." All other costs incurred in connection with acquiring Residential Whole Loans or committing to purchase these loans are charged to expense as incurred.

On a quarterly basis, we evaluate the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, weWe do not record an allowance for loan losscredit losses under ASU 2016-13 as we have elected the fair value option. However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.

Residential Bridge Loans

For the Bridge Loans acquired prior to October 25, 2017, we did not elect the fair value option pursuant to ASC 825 and accordingly these loans are recorded at their principal amount outstanding, net of any premium or discount in the Consolidated


Balance Sheets. Commencing with purchases subsequent to October 25, 2017, we decided to elect the fair value option pursuant to ASC 825 to be consistent with the accounting of our other investments, which are all carried at fair value. These loans are recorded at fair value with periodic changes in fair market value being recorded in earnings as a component of "Unrealized gain (loss), net". All other costs incurred in connection with acquiring the Residential Bridge Loans or committing to purchase these loans are charged to expense as incurred.

A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. We evaluate each of Residential Bridge Loans on a quarterly basis. These loans are individually specific as they relate to the borrower, collateral type, interest rate, LTV and term as well as geographic location. We evaluate the collectability of both principal and interest of each loan. When a loan is impaired, the impairment is then measured based on fair value of the collateral, since these loans are collateral dependent. Upon measurement of impairment, we record an allowance for credit losses to reduce the carrying value of the loan with a corresponding charge to net income for those loans that we did not elect the fair value option. Significant judgments are required in determining impairment, including assumptions regarding the value of the loan, the value of the underlying collateral and other provisions such as guarantees. We willdo not record an allowance for loan losscredit losses for the Residential Bridge Loans under ASU 2016-13 that Company haswe elected the fair value option.

Income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or it is legally discharged.

Securitized Commercial Loans

Securitized commercial loans are comprised of commercial loans of consolidated variable interest entities which were sponsored by third parties. These loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs." We have chosen to make the fair value election pursuant to ASC 825. Accordingly, these loans are recorded at fair value with periodic changes in fair value being recorded in earnings as a component of "Unrealized gain (loss), net."

The securitized commercial loans are typically collateralized by commercial real estate. As a result, we regularly evaluate the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower on a loan by loan basis. On a quarterly basis, we evaluate the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan
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is impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, weWe do not record an allowance for loan losscredit losses under ASU 2016-13 as we have elected the fair value option. However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed. Interest income accrual is resumed when the loan becomes contractually current and performance is demonstrated. A loan is written off when it is no longer realizable and/or legally discharged.

Commercial Loans

Investments in Commercial Loans, which are comprised of commercial mortgage loans and commercial mezzanine loans, are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs." We have chosen to make the fair value election pursuant to ASC 825 for our Commercial Loan portfolio. Accordingly, these loans are recorded at fair value with periodic changes in fair value being recorded in earnings as a component of "Unrealized gain (loss), net." All other costs incurred in connection with acquiring the Commercial Loans or committing to purchase these loans are charged to expense as incurred.

Our loans are typically collateralized by commercial real estate. As a result, we regularly evaluate the extent and impact of any credit migration associated with the performance and or value of the underlying collateral property as well as the financial and operating capability of the borrower on a loan by loan basis. On a quarterly basis, we evaluate the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, weWe do not record an allowance for loan loss ascredit losses under ASU 2016-13 because we have elected the fair value option. However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when,


in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed. Interest income accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.
 
Interest Income Recognition
 
Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, rated AA and higher at the time of purchase
 
Interest income on mortgage-backed and other securities is accrued based on the respective outstanding principal balances and corresponding contractual terms. We record interest income in accordance with ASC subtopic 835-30 "Imputation of Interest," using the effective interest method. As such premiums and discounts associated with Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, rated AA and higher at the time of purchase, are amortized into interest income over the estimated life of such securities. Adjustments to premium and discount amortization are made for actual prepayment activity.  We estimate prepayments at least quarterly for our securities and, as a result, if the projected prepayment speed increases, we will accelerate the rate of amortization on premiums or discounts and make a retrospective adjustment to historical amortization. Alternatively, if projected prepayment speeds decrease, we will reduce the rate of amortization on the premiums or discounts and make a retrospective adjustment to historical amortization.
 
Non-Agency MBS and other securities that are rated below AA at the time of purchase and Interest-Only Strips that are not classified as derivatives
 
Interest income on Non-Agency MBS and other securities that are rated below AA at the time of purchase and Interest-Only Strips that are not classified as derivatives are also recognized in accordance with ASC 835, using the effective yield method.  The effective yield on these securities is based on the projected cash flows from each security, which is estimated based on our observation of the then current information and events, where applicable, and will include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses.  On at least a quarterly basis, we review and, if appropriate, make adjustments to our cash flow projections based on input and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Actual maturities of the securities are affected by the contractual lives of the underlying collateral, periodic payments of scheduled principal, and prepayments of principal. Therefore, actual maturities of the securities will generally be shorter than stated contractual maturities.
  
Based onWe adopted ASU 2016-13 beginning January 1, 2020. The ASU requires a company to measure credit loss using an expected credit loss model. We elected the fair value option for our investments and as such does not apply the expected loss model instead we record changes in fair value of these investment in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net." For the purposes of calculating interest income, to ensure that a projected cash flow of such securities purchased at a discount to par value, we may designate a portion of such purchase discount as credit protection against future credit losses and, therefore, not accrete such amount into interest income.  The amount designated as credit discount may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performanceloss of a security withdoes not impact the effective yield and interest income we maintain a credit discount“shadow allowance” account. We use the shadow allowance to create a management basis. The management basis which is more favorable than forecasted,the difference between the net present value of projected cash flows less shadow allowance amount. The shadow allowance and the management basis are operational accounts that are used solely for the purposes of determining and calculating accretable yield and accretable book value and are
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not recorded in the consolidated financial statements. The management basis is limited to a portionfair market value of the investment. Actual realized loss on a security is recorded as a reduction in both the management basis and the amortized cost basis. Interest income is computed using the amortized basis as the reference amount designated as credit discount may be accreted into interest income prospectively.and applying the yield calculated using management basis.

Loan Portfolio
 
Interest income on our residential loan portfolio and commercial loan portfolio is recorded using the effective interest method based on the contractual payment terms of the loan. Any premium amortization or discount accretion will be reflected as a component of "Interest income" in our Consolidated Statements of Operations.
 
Income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated.

Variable Interest Entities (“VIEs”)
 
VIEs are defined as entities that by design either lack sufficient equity for the entity to finance its activities without additional subordinated financial support or are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. We evaluate all of our interests in VIEs for consolidation. When the interests are determined to be variable interests, we assess whether we are deemed the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
 


To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers is deemed to have the power to direct the activities of a VIE.

To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests. This assessment requires that we apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by us.
 
In instances where the Companywe and itsour related parties have variable interests in a VIE, we consider whether there is a single party in the related party group that meets both the power and losses or benefits criteria on its own as though no related party relationship existed.  If one party within the related party group meets both these criteria, such reporting entity is the primary beneficiary of the VIE and no further analysis is needed.  If no party within the related party group on its own meets both the power and losses or benefits criteria, but the related party group as a whole meets these two criteria, the determination of primary beneficiary within the related party group requires significant judgment. The analysis is based upon qualitative as well as quantitative factors, such as the relationship of the VIE to each of the members of the related-party group, as well as the significance of the VIE's activities to those members, with the objective of determining which party is most closely associated with the VIE.
 
     Ongoing assessments of whether an enterprise is the primary beneficiary of a VIE is required.
 
Derivatives and Hedging Activities
 
Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, as part of our hedging strategy, we may enter into interest rate swaps, including forward starting swaps, interest rate swaptions, U.S. Treasury options, futures contracts, TBAs, Agency and Non-Agency interest only strips total return swaps, credit default swaps and foreign
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current swaps and forwards. Derivatives, subject to REIT requirements, are used for hedging purposes rather than speculation. We determine the fair value of our derivative positions and obtain quotations from third parties, including the Chicago Mercantile Exchange or CME, to facilitate the process of determining such fair values. If our hedging activities do not achieve the desired results, reported earnings may be adversely affected.
 
GAAP requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative. The fair value adjustment will affect either other comprehensive income in stockholders' equity until the hedged item is recognized in earnings or net income depending on whether the derivative instrument is designated and qualifies as a for hedge for accounting purposes and if so, the nature of the hedging activity. We have elected not to apply hedge accounting for our derivative instruments.  Accordingly, we record the change in fair value of our derivative instruments, which includes net interest rate swap payments/receipts (including accrued amounts) and net currency payments/receipts (including accrued amounts) related to interest rate swaps and currency swaps, respectively in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations. 

Proceeds and payments on settlement of swaptions, mortgage put options, futures contracts credit default swaps and TBAs are included in cash flows from investing activities.  Proceeds and payments on settlement of forward contracts are reflected in cash flows from financing activities in our Consolidated Statements of Cash Flows. For Agency and Non-Agency Interest-Only Strips accounted for as derivatives, the purchase, sale and recovery of basis activity is included with MBS and other securities under cash flows from investing activities in our Consolidated Statements of Cash Flows.

We evaluate the terms and conditions of our holdings of Agency and Non-Agency Interest-Only Strips, interest rate swaptions, currency forwards, futures contracts and TBAs to determine if these instruments have the characteristics of an investment or should be considered a derivative under GAAP.  In determining the classification of our holdings of Interest-Only Strips, we evaluate the securities to determine if the nature of the cash flows has been altered from that of the underlying mortgage collateral. Interest-Only Strips, for which the underlying mortgage collateral has been included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives. The carrying value of our Agency and Non-Agency Interest-Only Strips, accounted for as derivatives, is included in "Mortgage-backed securities and other securities, at fair value" in our Consolidated Balance Sheets.  The carrying value of interest rate swaptions, currency forwards, futures contracts and TBAs


is included in "Derivative assets, at fair value" or "Derivative liability, at fair value" in our Consolidated Balance Sheets. Interest earned or paid along with the change in fair value of these instruments accounted for as derivatives is recorded in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.
 
We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. An embedded derivative is separated from the host contact and accounted for separately when all of the guidance criteria are met.  Hybrid instruments that are remeasured at fair value through earnings, including the fair value option, are not bifurcated.  Derivative instruments, including derivative instruments accounted for as liabilities are recorded at fair value and are re-valued at each reporting date, with changes in the fair value together with interest earned or paid (including accrued amounts) reported in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.

20192020 Activity

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Investment Activity

We continually evaluate our investment portfolio, focusing on expected future prepayment trends, supplyThe COVID-19 pandemic has created unprecedented market disruption and dislocation. The extreme lack of liquidity in mortgage markets combined with forced selling led to swift and demand, costsdramatic price declines. During the first quarter of financing, costs of hedging, expected future interest rate volatility2020 and the overall shapeearly part of the U.S. Treasurysecond quarter, the significant decline in asset values resulted in us having to sell assets in order to meet margin calls by our repurchase agreement counterparties. In the second half of 2020, the equity and interest rate swap yield curves. We utilizedcredit markets rallied, driven by improved liquidity. As a result our portfolio has experienced improved valuations and we did not have significant asset sales or margin calls during the proceeds from our May secondary equity offering, our two convertible note issuances and net proceeds from sales and paydowns, along with related borrowing to acquire $3.6 billionsecond half of investments.2020.     
    
The following table presents our investing activity for the year ended December 31, 20192020 (dollars in thousands):
Investment Type Balance at December 31, 2018 Purchases Principal  Payments and Basis Recovery 
Proceeds  from
Sales
 Transfers to REO Realized Gain/(Loss) Unrealized Gain/(loss) Premium and discount amortization, net OTTI Balance at December 31, 2019
Agency CMBS and Agency CMBS IOs $1,486,142
 $762,648
 $(23,874) $(891,072) N/A
 $28,603
 $78,665
 $(2,327) $(216) $1,438,569
Agency RMBS and Agency RMBS IOs 19,837
 583,982
 (50,697) (205,310) N/A
 1,560
 8,247
 (711) (222) 356,686
Non-Agency RMBS 50,555
 
 (3,131) 
 N/A
 
 (230) (49) (1,331) 45,814
Non-Agency CMBS 200,301
 207,177
 (46,478) (40,235) N/A
 (1,308) (890) 4,017
 (6,565) 316,019
Other securities(1)
 59,906
 27,678
 (1,911) 
 N/A
 
 1,564
 (6,472) (604) 80,161
Total MBS and other securities 1,816,741
 1,581,485
 (126,091) (1,136,617) N/A
 28,855
 87,356
 (5,542) (8,938) 2,237,249
Residential Whole Loans 1,041,885
 579,124
 (262,149) 
 
 
 20,790
 (3,790) 
 1,375,860
Residential Bridge Loans 221,719
 
 (179,548) 
 (5,029) (487) 501
 (737) 
 36,419
Commercial Loans 216,123
 350,232
 (197,245) 
 
 
 (121) 1,224
 
 370,213
Securitized commercial loans 1,013,511
 1,113,231
 (1,214,688) 
 
 
 (1,070) (1,944) 
 909,040
Total Investments $4,309,979
 $3,624,072
 $(1,979,721) $(1,136,617) $(5,029) $28,368
 $107,456
 $(10,789) $(8,938) $4,928,781
Investment TypeBalance at December 31, 2019PurchasesLoan Modification/Capitalized InterestPrincipal  Payments and Basis RecoveryProceeds  from
Sales
Transfers to REORealized Gain/(Loss)Unrealized Gain/(loss)Premium and discount amortization, netVIE Consolidation / Deconsolidation, netBalance at December 31, 2020
Agency CMBS and Agency CMBS IOs$1,438,569 $185,082 N/A$(920)$(1,670,664)N/A$109,539 $(60,970)$(636)$— $— 
Agency RMBS and Agency RMBS IOs356,686 64,008 N/A(17,555)(402,965)N/A11,543 (9,728)(281)— 1,708 
Non-Agency RMBS45,814 — N/A(2,142)(12,658)N/A(61)(5,812)240 — 25,381 
Non-Agency CMBS316,019 48,505 N/A(13,757)(111,804)N/A(23,624)(50,841)6,468 (6,885)164,081 
Other securities(1)
80,161 23,401 N/A(1,022)(35,957)N/A(6,110)(6,938)(4,781)— 48,754 
Total MBS and other securities2,237,249 320,996 N/A(35,396)(2,234,048)N/A91,287 (134,289)1,010 (6,885)239,924 
Residential Whole Loans1,375,860 113,338 780 (298,197)(144,258)— (10,511)(22,891)(5,339)— 1,008,782 
Residential Bridge Loans36,419 — — (21,228)— (419)(300)(497)(59)— 13,916 
Commercial Loans370,213 — 49 (44,820)— — — (15,281)362 — 310,523 
Securitized commercial loans909,040 — — (349,609)— — — (58,421)9,842 1,094,483 1,605,335 
Total Investments$4,928,781 $434,334 $829 $(749,250)$(2,378,306)$(419)$80,476 $(231,379)$5,816 $1,087,598 $3,178,480 
(1) Other securities include $61.7$42.2 million of GSE CRTs and $18.5$6.5 million of ABS at December 31, 20192020.
.

During 2019, due to favorable risk adjusted returns, we opportunistically increased our exposure to Agency RMBS. We continued to see favorable risk-adjusted returns in credit sensitive investments, particularly Residential Whole Loans, Commercial Loans and Non-Agency CMBS. As a result, we continue to deploy capital into these investments. At December 31, 2019, we held $3.1 billion in credit sensitive investments, primarily consisting of 43.8% in Residential Whole Loans, 29.0% in securitized commercial loans (our risk is limited to only our direct ownership interest in the trust), 11.8% in Commercial Loans, 10.1% in Non-Agency CMBS, 1.5% in Non-Agency RMBS, 1.2% in Residential Bridge Loans, and 2.6% in GSE credit risk transfer and ABS securities. We work to mitigate the credit risk on our credit sensitive holdings by developing relationships with originators that adhere to our investment guidelines for our Residential Whole Loans. For our Commercial Loans and other investments, we perform a detailed credit analysis on the underlying collateral at the time of purchase.



Portfolio Characteristics

Our Agency Portfolio

The following table summarizes our Agency portfolio by investment category as of December 31, 20192020 (dollars in thousands): 
Principal BalanceAmortized CostFair ValueNet Weighted Average Coupon
Principal Balance Amortized Cost Fair Value Net Weighted Average Coupon
Agency CMBS$1,347,929
 $1,374,443
 $1,435,477
 3.4%
Agency CMBS IOs and IIOs accounted for as derivatives(1)
N/A
 N/A
 3,092
 0.4%
Total Agency CMBS1,347,929
 1,374,443
 1,438,569
 3.1%
       
Agency RMBS327,814
 333,287
 340,771
 3.5%
Agency RMBS IOs and IIOs (1)
N/A
 8,661
 10,343
 2.8%
Agency RMBS IOs and IIOs (1)
N/A$89 $143 2.1 %
Agency RMBS IOs and IIOs accounted for as derivatives (1)
N/A
 N/A
 5,572
 3.0%
Agency RMBS IOs and IIOs accounted for as derivatives (1)
N/AN/A1,565 2.6 %
Total Agency RMBS327,814
 341,948
 356,686
 3.3%Total Agency RMBS— 89 1,708 2.5 %
Total$1,675,743
 $1,716,391
 $1,795,255
 3.1%Total$— $89 $1,708 2.5 %
 
(1)IOs and IIOs have no principal balances and bear interest based on a notional balance.  The notional balance is used solely to determine interest distributions on the interest-only class of securities.
(1)IOs and IIOs have no principal balances and bear interest based on a notional balance.  The notional balance is used solely to determine interest distributions on the interest-only class of securities.

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Credit Sensitive Portfolio

The following table presents information by vintage(1) as it relates to our credit sensitive investment portfolio at December 31, 2019:
Credit Sensitive Securities Pre 2006 2006 2007 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total
Non-Agency RMBS % 0.1% % % % % % % % 0.9% 0.3% % 1.3%
Non-Agency RMBS IOs % % % % % % % % % 0.2% 0.1% % 0.3%
Non-Agency CMBS % 0.3% 0.4% 1.4% 0.1% % 0.9% 1.5% 0.4% 0.5% 1.9% 2.7% 10.1%
Other securities 0.3% % % % % % 0.1% 0.2% 0.7% 0.1% 1.1% % 2.5%
Residential Whole Loans % % % 0.2% 0.2% 1.5% 0.7% 0.1% 1.1% 4.9% 24.3% 10.9% 43.9%
Residential Bridge Loans % % % % % % % % % 0.2% 0.9% % 1.1%
Securitized commercial loans % % % % % % % 0.8% % % 21.6% 6.6% 29.0%
Commercial Loans % % % % % % % % % % 3.0% 8.8% 11.8%
Total 0.3% 0.4% 0.4% 1.6% 0.3% 1.5% 1.7% 2.6% 2.2% 6.8% 53.2% 29.0% 100.0%
(1)Based on carrying amount of the investments.

Non-Agency RMBS

The following table presents the fair value and weighted average purchase price for each of our Non-agency RMBS categories, including IOs accounted for as derivatives, together with certain of their respective underlying loan collateral attributes and current performance metrics as of December 31, 20192020 (fair value dollars in thousands):
 
   Weighted Average  Weighted Average
Category Fair Value  
Purchase
Price
 Life (Years) Original LTV 
Original
FICO
 
60+ Day
Delinquent
 
6-Month
CPR
CategoryFair Value Purchase
Price
Life (Years)Original LTVOriginal
FICO
60+ Day
Delinquent
6-Month
CPR
Prime $10,681
 $64.04
 12.1
 68.9% 769
 0.1% 12.6%Prime$8,431 $72.49 7.4 68.9 %769 4.0 %25.8 %
Alt-A 35,133
 64.87
 11.5
 80.9% 663
 8.7% 8.2%Alt-A16,950 47.60 12.2 80.6 %665 20.8 %0.8 %
Total $45,814
 $64.68
 11.6
 78.1% 688
 6.7% 9.2%Total$25,381 $55.87 10.6 76.7 %699 15.3 %9.1 %
 
Non-Agency CMBS



The following table presents certain characteristics of our Non-Agency CMBS portfolio as of December 31, 20192020 (dollars in thousands): 
  Principal Weighted Average
TypeVintageBalanceFair Value Life (Years)Original LTV
Conduit:    0
 2006-2009$12,997 $4,077 2.1 71.3 %
 2010-202094,107 51,326 4.8 61.8 %
  107,104 55,403 4.6 62.5 %
Single Asset:   
 2010-2020128,393 108,678 2.2 65.4 %
Total $235,497 $164,081 3.0 64.4 %
    Principal   Weighted Average
Type Vintage Balance Fair Value  Life (Years) Original LTV
Conduit:    
  
  
 0
  2006-2009 $35,830
 $22,785
 1.5
 72.7%
  2010-2019 104,106
 82,402
 4.1
 61.4%
    139,936
 105,187
 3.5
 63.8%
Single Asset:    
  
    
  2010-2019 214,522
 210,832
 2.3
 64.8%
Total   $354,458
 $316,019
 2.7
 64.4%

Residential Whole Loans
 
The Residential Whole Loans have low LTV's and are comprised of 2,9082,489 Non-QM adjustable rate mortgages 612 conforming fixed rate mortgages and 9eight investor fixed rate mortgages. The following table presents certain information about our Residential Whole-Loans investment portfolio as of December 31, 20192020 (dollars in thousands): 
      Weighted Average
Current Coupon Rate Number of Loans 
Principal
Balance
 Original LTV 
Original
FICO Score(1)
 
Expected
Life (years) (2)
 
Contractual
Maturity
(years)
 
Coupon
Rate
3.01 - 4.00% 53 $17,284
 61.7% 736
 2.4 28.0 3.9%
4.01 - 5.00% 1,689 557,144
 61.4% 744
 2.8 28.5 4.8%
5.01 - 6.00% 1,682 713,397
 62.0% 736
 3.0 28.3 5.4%
6.01 - 7.00% 103 37,102
 54.1% 727
 3.8 25.3 6.2%
7.01 - 8.00% 2 516
 73.2% 753
 4.7 28.6 7.1%
Total 3,529 $1,325,443
 61.5% 739
 3.0 28.3 5.2%
   Weighted Average
Current Coupon RateNumber of LoansPrincipal
Balance
Original LTV
Original
FICO Score(1)
Expected
Life (years) (2)
Contractual
Maturity
(years)
Coupon
Rate
2.01 - 3.00%4$3,239 66.7 %733 5.928.02.7 %
3.01 - 4.00%11841,489 55.8 %709 3.823.33.7 %
4.01 - 5.00%1,172403,398 61.8 %751 2.727.74.9 %
5.01 - 6.00%1,166523,105 64.2 %740 2.927.75.4 %
6.01 - 7.00%3512,813 67.5 %720 3.227.06.3 %
7.01 - 8.00%2511 73.2 %753 4.127.67.1 %
Total2,497$984,555 62.9 %744 2.927.55.1 %
(1)The original FICO score is not available for 286 loans with a principal balance of approximately $94.6 million at December 31, 2019. We have excluded these loans from the weighted average computations.
(2)Excludes the expected lives of the conforming Residential Whole Loans held by RCR Trust.
(1)The original FICO score is not available for 236 loans with a principal balance of approximately $75.2 million at December 31, 2020. We have excluded these loans from the weighted average computations.


Residential Bridge Loans

Our Residential Bridge Loans are comprised of short-term fixed rate mortgages secured by non-owner occupied single and multi-family residences with low LTVs, generally up to 85%. The following table presents certain information about our Residential Bridge Loans investment portfolio at December 31, 20192020 (dollars in thousands): 
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     Weighted Average   Weighted Average
Current Coupon Rate Number of Loans 
Principal
Balance
 Original LTV 
Contractual
Maturity
(months)
 
Coupon
Rate
Current Coupon RateNumber of LoansPrincipal
Balance
Original LTV
Contractual
Maturity
(months)(1)
Coupon
Rate
7.01 – 9.00% 36 $22,409
 70.2% 5.8 8.4%7.01 – 9.00%10$8,295 69.6 %1.48.7 %
9.01 – 11.00% 28 9,972
 74.0% 5.6 10.1%9.01 – 11.00%156,123 75.5 %0.510.1 %
11.01 - 13.00% 9 2,741
 63.1% 2.0 11.7%11.01 - 13.00%3705 69.8 %0.011.4 %
13.01 - 15.00% 1 1,125
 75.0% 0.0 13.5%
17.01 – 19.00% 2 949
 75.0% 0.0 18.0%17.01 – 19.00%1124 75.0 %0.018.0 %
Total 76 $37,196
 71.0% 5.6 9.5%Total29$15,247 72.0 %0.89.4 %
(1) Non-performing loans that are past their maturity date are excluded from the calculation of the weighted average contractual maturity. The weighted average contractual maturity for these loans is zero.

Non-performing Residential Loans



The following table presents the aging of the Residential Whole Loans and Bridge Loans as of December 31, 20192020 (dollars in thousands):

  Residential Whole Loans Bridge Loans
  No of Loans Principal Fair Value No of Loans Principal 
Fair Value (1)
Current 3,467 $1,300,238
 $1,350,590
 41 $23,353
 $23,329
1-30 days delinquent 41 13,537
 14,012
 2 303
 306
31-60 days delinquent 5 1,338
 1,334
 4 1,147
 1,135
61-90 days delinquent 4 3,205
 3,224
 2 285
 280
90+ days delinquent 12 7,125
 6,700
 27 12,108
 11,369
Total 3,529 $1,325,443
 $1,375,860
 76 $37,196
 $36,419
Residential Whole LoansBridge Loans
No of LoansPrincipalFair ValueNo of LoansPrincipal
Fair Value (1)
Current(2)
2,446$953,071 $977,875 5$2,906 $2,839 
1-30 days delinquent167,972 8,181 21,430 1,287 
31-60 days delinquent3823 810 1849 764 
61-90 days delinquent67,378 7,196 — — 
90+ days delinquent2615,311 14,720 2110,062 9,026 
Total2,497$984,555 $1,008,782 29$15,247 $13,916 
(1) Includes $3.1 million$124 thousand loans carried at amortized cost.

(2) Includes 7 loans in forbearance with unpaid principal balance of approximately $2.4 million and 142 loans that were previously in forbearance but are currently performing under the repayment phase following forbearance period with unpaid principal balance of approximately $59.0 million.

COVID-19 has materially disrupted business operations, resulting in significantly higher levels of unemployment or underemployment. As a result, some of its Residential Whole Loan borrowers have experienced financial hardship, making it difficult to meet their payment obligations to us, leading to requests for forbearance and higher levels of delinquency and potentially defaults. We maintain a strong relationship with our servicers and have utilized these relationships to manage the impacts of COVID-19 pandemic on our Non-QM loans. As of December 31, 2019,2020, we had 7 Non-QM loans in forbearance and 142 Non-QM loans in the repayment phase following forbearance. Under the forbearance agreement, the borrower can generally elect to defer the principal and interest payments for 3 months. At the end of the forbearance period, the borrower can either request an extension for payment deferral, repay the deferred principal and interest in full or over the next 9 months or capitalize the deferred principal and interest to the loan balance and calculate a new amortization payment. Loans under a forbearance agreement are treated as "Current" in the above table. These loans are carried at fair value and had an unpaid principal balance of approximately $2.4 million, a fair value of $2.4 million, a weighted average original LTV of 65.3% and represent approximately 0.2% of the total outstanding principal balance of our Residential Whole Loans.

    As of December 31, 2020, there were 12 Residential Whole Loans26 Non-QM loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $7.1$15.3 million and a fair value of approximately $6.7$14.7 million. These nonperforming loans represent approximately 0.5%1.6% of the total outstanding principal balance. No allowance or provision for credit losses was recorded as of and for the year ended December 31, 20192020 since the valuation adjustment, if any, would be reflected in the fair value of these loans. The CompanyWe stopped accruing interest income for these loan when they became contractually 90 days delinquent.
    
As of December 31, 2019,2020, there were 27was 1 Residential Bridge Loan carried at amortized cost in non-accrual status with an unpaid principal balance of approximately $123.8 thousand and 20 Residential Bridge Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $12.1$9.9 million and a fair value of $11.4$8.9 million. These nonperforming Residential Bridge Loans represent approximately 32.6%66.0% of the total outstanding principal balance. No allowance and provision for credit losses was recorded for loans carried at fair value as of and for the year ended December 31, 20192020 since valuation adjustments, if any, would be reflected in the fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.
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As of December 31, 2019,2020, we had 11three real estate owned ("REO") properties with an aggregate carrying value of $3.3$1.1 million related to foreclosed Bridge Loans. The REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The REO properties are classified in "Other assets" in the Consolidated Balance Sheet.

Commercial Real Estate Investments

Securitized Commercial Loans

In November 2015, we acquired a $14.0 million variable interest in CMSC Trust, which is a VIE that we were required to consolidate. Please refer to Note 6 - "Commercial Real Estate Investments" for details. The CMSC Trust holds a $24.0 million mezzanine loan collateralized by interests in commercial real estate.  The mezzanine loan serves as collateral forIn June 2020, the $24.0 million of securitized debt issued. Refer to Note 7 - "Financings" for details on the associated securitized debt.

In March 2018,variable interest we acquired a $67.8 million variable interest in RETL 2018 Trust, which is a VIE that we were required to consolidate. Please refer to Note 6 - "Commercial Real Estate Investments" for details. The RETL 2018 Trust held a commercial loan collateralized by first mortgages, deeds of trusts and interests in commercial real estate located throughout the United States and Puerto Rico.  The commercial loan served as collateral for the securitized debt issued by RETL 2018 Trust. Refer to Note 7 - "Financings" for details on the associated securitized debt. In March 2019, RETL, the securitized debt was refinanced and the outstanding principal balance of the securitized debt issued by RETL 2018 Trust was paid in fulloff and accordingly, the trust was liquidated.CSMC Trust is no longer consolidated.

RETL 20182018-RVP was refinanced with a new securitization RETL 2019-RVP ("RETL 2019 Trust") in March 2019. We acquired a $65.3 million variable interest in the trust certificates issued by RETL 2019 Trust, including $45.3 million which represents the 5% eligible risk retention certificate. Please refer to Note 6 - "Commercial Real Estate Investments" for details. The RETL 2019 Trust holds a commercial loan collateralized by first mortgages, deeds of trusts and interests in commercial real estate located throughout the United States and Puerto Rico. The outstanding principal balance on this commercial loan is $674.3$354.2 million as of December 31, 2019.2020. The commercial loan served as collateral for the $674.3$354.2 million securitized debt issued by RETL 2019 Trust.Trust and the securitized debt is non-recourse to us. Refer to Note 7 - "Financings" for details on the associated securitized debt.



In December 2019, we acquired a $161.4 million interest in the trust certificates issued by the MRCD 2019-PRKC Mortgage Trust (MRCD Trust"), including $10.5 million HRR certificates, which represents the initial controlling class. We determined that MRCD Trust was a VIE and that we were also the primary beneficiary because the Manager was involved in certain aspects of the design of the trust and we own the controlling class. As the primary beneficiary, we consolidated MRCD Trust and itsour investment in the trust certificates (HRR class and a portion of the A class) of MRCD Trust were eliminated in the consolidation. The

In March 2020, we sold our investments in the A Class certificates of MRCD Trust, and shortly after the sale, we entered into an agreement to assign our controlling rights and appoint one of the buyers as the new Directing Holder. As a result, the assets and liabilities of MRCD Trust were unconsolidated since we no longer have the power to direct the activities that significantly impact the economic performance of the MRCD Trust.

MRCD qualified as a CFE under GAAP and we measured both the financial assets and financial liabilities using the fair value of the financial liabilities, since it was more observable. We recognized an unrealized loss of $43.7 million in earnings, related to the periodic change in fair value of MRCD's assets and liabilities in March 2020 and prior to deconsolidation. Also, we retained the HRR certificates, which were measured at fair value at the date of deconsolidation and is included in the "Non-Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.

On August 1, 2020 we consolidated CSMC USA as a result of our ongoing reassessment of our CMBS VIE holdings for potential consolidation of the securitized trust. Our $14.9 million or 8.8% interest in the trust certificate of CSMC USA (F Class) was eliminated in the consolidation. Please refer to Note 6 - "Commercial Real Estate Investments" for details. The CSMC USA holds twoa commercial loans, collateralizedloan secured by a first mortgages, deeds of trustsmortgage lien on the borrowers’ fee and leasehold interests in commercial real estate.a portion of a super-regional mall. The outstanding principal balance on firstthis commercial loan is $234.5 million$1.4 billion as of December 31, 2019 and bears an interest rate of 4.27%2020. The outstanding principal balance on second commercial loan is $10.5 million as of December 31, 2019 and bears an interest rate of 12.02%. The loans'loan's stated maturity date is September 11, 2025 and bears a fixed interest rate of 4.38%. The commercial loan served as collateral for the $1.4 billion securitized debt issued by CMSC USA and the securitized debt is non-recourse to us. Refer to Note 7 - "Financings" for details on the associated securitized debt.

In December 9, 2024.2020, the commercial loan held by CSMC USA was amended to an interest only payment through maturity. Cash Management Forbearance Agreement previously entered into by Special Servicer and the borrower that required both increased reporting requirements and monthly net cash remittance continues to be in effect.

Non-Performing Commercial Loans

InThe impact of COVID-19 pandemic has adversely impacted a broad range of industries in which our commercial loan borrowers operate and could impair their ability to fulfill their financial obligations to us, most significantly hospitality assets. We believe our CRE loan sponsors are well capitalized and generally committed to supporting the assets collateralizing our
44



loans. Our portfolio’s low average LTV of 65.5% as of December 31, 2020 reflects significant equity value that our sponsors are motivated to protect through the COVID-19 disruption.

As of December 31, 2020, we commenced foreclosure procedures for our delinquent commercial loan with an outstanding principal balance of $30.0 million, secured by a hotel. However, on February 2019, our wholly-owned subsidiary, CRE LLC acquired24, 2021, the borrower filed for bankruptcy protection. We expect to move forward with the foreclosure subject to the bankruptcy process and believe there is a $76.0reasonable likelihood that the outstanding principal balance of $30.0 million, commercial first mortgagewill be recovered, although there is no assurance.

We hold a junior mezzanine loan ("CRE 3") secured by health care and rehabilitation centers. CRE 3 has a maturity date of January 9, 2021 loan) with a one-year extension option and bears an interest rate of one month LIBOR plus 7.0%. In May 2019, CRE 3 was paid in full.
In June 2019, CRE LLC acquired a $50.0 million commercial first mortgage loan ("CRE 4") secured by nursing facilities. CRE 4 has a maturity date of January 11, 2022 with two one-year extension options and bears an interest rate of one month LIBOR plus 4.75%.

In August 2019, CRE LLC acquired a $90.0 million commercial mezzanine loan ("CRE 5") secured by commercial real estate properties in retail and entertainment industries. CRE 5 has a maturity date of June 29, 2021 with a two-year first extension and a one-year second extension. The loan is interest only and bears an interest rate of one month LIBOR plus 9.25%.

In September 2019, CRE LLC acquired a $40.0 million commercial first mortgage loan ("CRE 6") secured by commercial real estate properties in retail industry. CRE 6 has a maturity date of August 6, 2021 with a two one-year extension and bears an interest rate of one month LIBOR plus 3.02%.

In December 2019, CRE LLC acquired three separate commercial first mortgage loans ("CRE 7," "CRE 8," and "CRE 9") with a totaloutstanding principal balance of $45.0$90 million secured by commercial real estate properties in the hospitality industry. Eacha retail facility. The CRE 3 loan has an initial maturity on June 29, 2021. The CRE 3 loan is currently receiving interest payments from a reserve that will become exhausted at maturity date of November 6, 2021 with a three one-year extension and bears an interest ratethe loan. We expect that the CRE 3 loan will become non performing upon depletion of one month LIBOR plus 3.75%.such reserve.

In
The following table presents the aging of the Commercial Loans as of December 2019, CRE LLC acquired a $4.4 million commercial first mortgage loan ("CRE 10") secured by assisted living centers. CRE 10 has a maturity date of December 6, 2022 and bears an interest rate of one month LIBOR plus 4.85%.31, 2020 (dollars in thousands):

Commercial Loan Trust

Commercial Loans
No of LoansPrincipalFair Value
Current10$295,444 $283,120 
1-30 days— — — 
31-60 days— — — 
61-90 days— — — 
90+ days30,000 27,403 
Total11$325,444 $310,523 
Revolving Small Balance Commercial Trust 2018-1

In January 2019, RSBC Trust acquired a $13.6 million commercial real estate mortgage loan ("SBC 4") secured by multi-family apartment complex. SBC 4 matures on December 1, 2021 with a one-year extension option, bears an interest rate of one month LIBOR plus 4.0% subject to a LIBOR floor of 2.0% and requires monthly principal and interest payments.

In January 2019, RSBC Trust acquired a $32.0 million interest-only commercial real estate mortgage loan ("SBC 5") secured by skilled nursing facilities. SBC 5 matures on July 6, 2021 and bears an interest rate of one month LIBOR plus 4.1%.    



Geographic Concentration

The mortgages underlying our Non-Agency RMBS and Non-Agency CMBS are located in various states across the United States and other countries. The following table presents the five largest concentrations by location for the mortgages collateralizing our Non-Agency RMBS and Non-Agency CMBS as of December 31, 2019,2020, based on fair value (dollars in thousands):
 Non-Agency RMBS Non-Agency CMBS
 ConcentrationFair Value ConcentrationFair Value
California28.8 %$7,320 California25.6 %$41,955 
Florida8.6 %2,179 Illinois12.0 %19,647 
New York7.8 %1,970 Nevada11.5 %18,917 
Maryland4.2 %1,066 Bahamas7.3 %11,927 
Georgia4.2 %1,054 Kansas6.0 %9,781 
 Non-Agency RMBS  Non-Agency CMBS
 Concentration Fair Value  Concentration Fair Value
California25.6% $11,728
 California16.2% $51,308
Florida9.2% 4,204
 Nevada10.9% 34,298
New York6.8% 3,104
 Illinois6.1% 19,193
Georgia5.1% 2,336
 Florida5.0% 15,698
Maryland4.7% 2,155
 Bahamas4.8% 15,041

The following table presents the various states across the United States in which the collateral securing our Residential Whole Loans and Residential Bridge Loans at December 31, 2019,2020, based on principal balance, is located (dollars in thousands): 
45



Residential Whole Loans Residential Bridge LoansResidential Whole LoansResidential Bridge Loans
Concentration Principal Balance Concentration Principal Balance ConcentrationPrincipal BalanceConcentrationPrincipal Balance
California66.1% $875,738
 California50.4% $18,763
California65.8 %$647,877 California37.5 %$5,713 
New York16.2% 214,141
 Washington13.1% 4,863
New York17.7 %173,788 New York17.3 %2,632 
Georgia3.4% 45,189
 New York12.1% 4,518
Georgia3.4 %33,577 Washington16.1 %2,461 
Florida2.8% 36,641
 Florida8.9% 3,296
Florida2.8 %27,274 Florida12.9 %1,969 
New Jersey2.3% 30,450
 New Jersey3.8% 1,424
New Jersey2.5 %24,704 Connecticut5.7 %872 
Other9.2% 123,284
 Other11.7% 4,332
Other7.8 %77,335 Other10.5 %1,600 
Total100.0% $1,325,443
 Total100.0% $37,196
Total100.0 %$984,555 Total100.0 %$15,247 

Financing Activity

 The market disruptions surrounding COVID-19 resulted in the decline of our asset values making it more difficult to obtain repurchase agreement financing with favorable terms or at all. Our repurchase agreement counterparties have increased borrowing rates and increased haircuts. We will continue to expand and diversify our financing sources, especially those sources that provide an alternative to short term repurchase agreements with daily margin requirements. Our amended Residential Whole Loan facility and supplemented Non-Agency CMBS and RMBS facility has significantly reducing our exposure to margin volatility.

Repurchase Agreements

Residential Whole Loan Facility

On April 21, 2020, we entered into amendments with respect to certain of our loan warehouse facilities. These amendments mainly served to convert an existing residential whole loan facility into a term facility by removing any mark to market margin requirements, and to consolidate our Non-Qualified Mortgage loans onto a single facility, which were previously financed by three separate, unaffiliated counterparties.

The target advance rate under the amended and restated facility is approximately 84% of the aggregate unpaid principal balance of the loans. The original maturity date for the facility was October 20, 2021. All principal payments and income generated by the loans during the term of the facility will be used to pay principal and interest on the facility. Upon the securitization or sale by us of any whole loan subject to this amended and restated facility, the counterparty is entitled to receive a recapture premium fee of 30% of all realized value on any whole loans above such counterparty’s amortized basis as well as an exit fee of 0.50% of the loan amount in circumstances where the counterparty was involved in the disposition of the loans. The financing cost of this facility was reflective of the challenging market conditions, at such time, when we entered into the agreement.

Initially, the aggregate borrowings under this facility with respect to its Residential Whole Loans was approximately $385.0 million and the market value of such loans was approximately $430.0 million. On June 29, 2020, we securitized approximately $355.8 million of the Residential Whole Loans and paid down the facility by approximately $339.4 million (see "Securitized Debt" below for additional details). As noted above as part of the financing arrangements we agreed to pay the lender a fee of 30% of all realized value on the Residential Whole Loans above the counterparty's amortized basis upon securitization or sale. As a result of refinancing the Residential Whole Loans through a securitization, we accrued a premium recapture fee of approximately $20.5 million, which was payable at the maturity of the facility, and was recorded in "Financing fees" in the Consolidated Statements of Operations. In October 2020, in connection with the amendment to the facility discussed below we paid $12.0 million of the premium recapture fee and the balance of $8.5 million is payable at the maturity of the amended facility, October 5, 2021.

On October 6, 2020 we entered into an amendment with respect to its residential loan warehouse facility. The amendment serves to convert the existing residential loan facility to a limited mark to market margin facility that bears an interest rate of LIBOR plus 2.75%, with a LIBOR floor of 0.25%. The target advance rate under the amended facility is 85% and the facility matures on October 5, 2021. As part of the amendment, the premium recapture fee was eliminated for investments financed under the amended facility.

Non-Agency CMBS and Non-Agency RMBS Facility

46



On May 4, 2020, we supplemented one of our existing securities repurchase facilities to consolidate most of our CMBS and RMBS assets, which were financed by multiple counterparties, into a single term facility with limited mark to market margin requirements. Pursuant to the agreement, a margin deficit will not occur until such time as the loan to value ratio surpasses a certain threshold (the “LTV Trigger”), on a weighted average basis per asset type, calculated on a portfolio level. If this threshold is reached, we may elect to provide cash margin or sell certain assets to the extent necessary to lower the ratio. The term of this facility is 12 months, subject to 12 month extensions at the counterparty’s option. All interest income generated by the assets during the term of the facility will be paid to us no less often than monthly. Interest on the facility is due from us at a rate of three-month LIBOR plus 5.00% payable quarterly in arrears. Half of all principal repayments on the underlying assets will be applied to repay the obligations owed to the counterparty, with the remainder paid to us, unless the LTV Trigger has occurred, in which case all principal payments will be applied to repay the obligations.

Certain of the repurchase agreements provide the counterparty with the right to terminate the agreement if we do not maintain certain equity, liquidity and leverage metrics, the most restrictive of which include a limit on leverage based on the composition of our portfolio. For all the repurchase agreements with outstanding borrowings, we were in compliance with the terms of such financial tests as of December 31, 2020.
 
At December 31, 2019,2020, we had 34 master repurchase agreements with our counterparties and had outstanding borrowings under 21five of suchour master repurchase agreements. The following table summarizes our 20192020 financing activity under our repurchase agreements for the twelve months ended December 31, 20192020 (dollars in thousands): 
Collateral Balance at December 31, 2018 Proceeds Repayments Balance at December 31, 2019
Agency CMBS $1,392,649
 $9,398,879
 $(9,439,280) $1,352,248
Agency RMBS 14,650
 1,936,698
 (1,603,074) 348,274
Non-Agency RMBS 30,922
 204,679
 (205,120) 30,481
Non-Agency CMBS 134,814
 847,909
 (792,333) 190,390
Residential Whole Loans(1)
 863,356
 4,635,432
 (5,022,616) 476,172
Residential Bridge Loans(1)

 204,754
 1,119,287
 (1,294,172) 29,869
Commercial loans(1)
 131,788
 2,609,859
 (2,517,053) 224,594
Securitized commercial loans(1)
 7,543
 319,022
 (210,478) 116,087
Other securities 38,361
 309,806
 (291,405) 56,762
Borrowings under repurchase agreements $2,818,837
 $21,381,571
 $(21,375,531) $2,824,877
Less unamortized debt issuance costs 
 N/A
 N/A
 76
Borrowings under repurchase agreements, net $2,818,837
 $21,381,571
 $(21,375,531) $2,824,801

CollateralBalance at December 31, 2019ProceedsRepaymentsBalance at December 31, 2020
Agency CMBS$1,352,248 $2,931,690 $(4,283,938)$— 
Agency RMBS348,274 215,896 (562,752)1,418 
Non-Agency RMBS30,481 95,217 (111,055)14,643 
Non-Agency CMBS(2)
190,390 822,708 (936,018)77,080 
Residential Whole Loans(1)
476,172 2,786,399 (3,202,547)60,024 
Residential Bridge Loans(1)

29,869 323,523 (342,138)11,254 
Commercial loans(1)
224,594 2,402,049 (2,467,331)159,312 
Securitized commercial loans(1)
116,087 179,649 (295,736)— 
Membership interest(3)
— 75,377 (56,533)18,844 
Other securities56,762 188,085 (228,576)16,271 
Borrowings under repurchase agreements$2,824,877 $10,020,593 $(12,486,624)$358,846 
Less unamortized debt issuance costs76 N/AN/A1,923 
Borrowings under repurchase agreements, net$2,824,801 $10,020,593 $(12,486,624)$356,923 
(1)The borrowings and collateral pledged attributed to loans owned through trust certificates.  The trust certificates are eliminated upon consolidation.

(1)The borrowings and collateral pledged attributed to loans owned through trust certificates.  The trust certificates are eliminated upon consolidation.

(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(3)The pledged amount relates to our non-controlling membership interest in our wholly owned subsidiary, WMC RETL LLC, which was financed under a repurchase agreement. The membership interest is eliminated in consolidation.

Certain of the financing arrangements provide the counterparty with the right to terminate the agreement if we do not maintain certain equity, liquidity and leverage metrics. With the exception of one repurchase agreement for which we received a waiver, we were in compliance with the terms of such financial tests as of December 31, 2020.


47



At December 31, 2019,2020, we had outstanding repurchase agreement borrowings with the following counterparties:
(dollars in thousands)
Repurchase Agreement Counterparties
 Amount Outstanding Percent of Total Amount Outstanding Company Investments Held as Collateral 
Counterparty Rating(1)
Citigroup Global Markets Inc. $576,634
 20.4% $595,702
  A+
Credit Suisse AG, Cayman Islands Branch (2)
 371,725
 13.2% 501,325
  A+
Royal Bank of Canada 337,664
 12.0% 349,439
  AA-
Barclays Capital Inc. 251,440
 8.9% 323,529
  A
JP Morgan Securities LLC 203,363
 7.2% 222,882
  A+
JPMorgan Chase Bank, National Association 164,265
 5.8% 175,294
  A-
Mirae Asset Securities (USA) Inc. 164,227
 5.8% 168,396
  BBB
UBS Securities LLC 140,048
 5.0% 142,804
  A+
South Street Securities LLC 108,678
 3.8% 112,174
 Unrated
Bank of Montreal 105,622
 3.7% 110,139
  A+
Nomura Securities International, Inc. (3)
 102,956
 3.6% 138,148
 Unrated
UBS AG, London Branch 76,774
 2.7% 109,523
 A+
The Bank of Nova Scotia 55,738
 2.0% 57,436
 A+
SunTrust Robinson Humphrey, Inc. (4)
 45,187
 1.6% 47,419
 Unrated
Mizuho Securities USA Inc. 39,705
 1.4% 43,320
 A
Credit Suisse Securities (USA) LLC 37,333
 1.3% 65,703
 A+
All other counterparties (5)
 43,518
 1.6% 52,573
 
Total $2,824,877
 100.0% $3,215,806
  
(dollars in thousands)
Repurchase Agreement Counterparties
Amount OutstandingPercent of Total Amount OutstandingInvestments Held as Collateral
Counterparty Rating(1)
Credit Suisse AG, Cayman Islands Branch (2)
$201,638 56.2 %$370,817  A
Citigroup Global Markets Inc.95,086 26.5 %205,508  A+
Nomura Securities International, Inc. (3)
47,796 13.3 %83,921 Unrated (3)
Credit Suisse Securities (USA) LLC12,907 3.6 %20,904 A+
All other counterparties (4)
1,419 0.4 %1,708 
Total$358,846 100.0 %$682,858  
 
(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated at December 31, 2019 by S&P.
(2)Includes master repurchase agreements in which the buyer includes Alpine Securitization LTD., a Credit Suisse sponsored asset-backed commercial paper conduit.
(3)Nomura Holdings, Inc., the parent company of Nomura Securities International, Inc., is rated BBB+ by S&P at December 31, 2019.
(4)SunTrust Banks Inc, the parent company of SunTrust Robinson Humphrey, Inc. is rated P-2 by Moody's at December 31, 2019.
(5)Represents amount outstanding with four counterparties, which each holds collateral valued less than 5% of our stockholders’ equity as security for our obligations under the applicable repurchase agreements as of December 31, 2019.
(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated at December 31, 2020 by S&P.
(2)Includes master repurchase agreements in which the buyer includes Alpine Securitization LTD., a Credit Suisse sponsored asset-backed commercial paper conduit.
(3)Nomura Holdings, Inc., the parent company of Nomura Securities International, Inc., is rated BBB+ by S&P at December 31, 2020.
(4)Represents amount outstanding with one counterparty, which holds collateral valued less than 5% of our stockholders’ equity as security for our obligations under the applicable repurchase agreements as of December 31, 2020.

The following table presents our average repurchase agreement borrowings, excluding unamortized debt issuance costs, by type of collateral pledged for the years ended December 31, 20192020 and December 31, 20182019 (dollars in thousands):
 
Collateral Year ended December 31, 2019 Year ended December 31, 2018CollateralYear ended December 31, 2020Year ended December 31, 2019
Agency CMBS $1,488,995
 $1,845,679
Agency CMBS$365,073 $1,488,995 
Agency RMBS 261,210
 424,525
Agency RMBS69,137 261,210 
Non-Agency RMBS 28,234
 62,971
Non-Agency RMBS14,459 28,234 
Non-Agency CMBS 159,336
 207,293
Non-Agency CMBS(2)
Non-Agency CMBS(2)
157,280 159,336 
Residential Whole Loans 562,871
 411,265
Residential Whole Loans267,609 562,871 
Commercial Loans 203,686
 37,975
Commercial Loans179,251 203,686 
Securitized commercial loans 29,569
 5,836
Securitized commercial loans— 29,569 
Residential Bridge Loans 105,657
 205,989
Residential Bridge Loans23,144 105,657 
Membership interestMembership interest4,749 — 
Other securities 48,592
 65,568
Other securities28,136 48,592 
Total $2,888,150
 $3,267,101
Total$1,108,838 $2,888,150 
Maximum borrowings during the period(1)
 $3,100,204
 $3,573,043
Maximum borrowings during the period(1)
$3,006,550 $3,100,204 
 
(1)
(1)Amount represents the maximum borrowings at month-end during each of the respective periods.
(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.


 Securitized Debt



We acquiredhold a controlling financial variable interest in CMSC Trust, RETL 2019 Trust and MRCD TrustCSMC USA and were required to consolidate the CMBS VIEs. Refer to Note 7 - "Financings" for details.

At December 31, 2019, the consolidated CMSC Trust's commercial mortgage pass-through certificate, which bears a fixed interest rate of 8.9% and matures on June 6, 2020, had an outstanding balance of $10.6 million and a fair value of $10.6 million.
The following table summarizes the consolidated RETL 2019 Trust's commercial mortgage pass-through certificates at December 31, 20192020 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):
 
Classes
Principal Balance(1)
Coupon
 Fair Value(1)
Contractual Maturity
Class A$219,431
2.9%$219,567
3/15/2021
Class B101,200
3.3%101,326
3/15/2021
Class C277,821
3.8%278,517
3/15/2021
Class X-CP(2)
N/A
1.2%1,026
4/15/2020
Class X-EXT(2)
N/A
—%31
3/15/2021
 $598,452
 $600,467
 
ClassesPrincipal BalanceCoupon Fair ValueContractual Maturity
Class B$502 1.7%$492 3/15/2021
Class C308,400 2.3%296,933 3/15/2021
Class X-EXT(1)
N/A1.1%31 3/15/2021
$308,902 $297,456 
(1) Excluded the principal and fair value of classes owned by us that are eliminated in the Consolidated Balance Sheets.
(2) Class X-CP and Class X-EXT areis an interest-only classesclass with an initiala notional balance of $308.4 million each.as of December 31, 2020.
48




The following table summarizes MRCD Trust'sthe consolidated 2014 CSMC USA's commercial mortgage pass-through certificates at December 31, 20192020 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):
  
Classes
Principal Balance(1)
Coupon
 Fair Value(1)
Contractual Maturity
Class A$83,560
4.3%$70,591
12/9/2024
 $83,560
 $70,591
 
ClassesPrincipal BalanceCoupon Fair ValueContractual Maturity
Class A-1$120,391 3.3 %$120,443 9/11/2025
Class A-2531,700 4.0 %538,469 9/11/2025
Class B136,400 4.2 %137,970 9/11/2025
Class C94,500 4.3 %85,140 9/11/2025
Class D153,950 4.4 %127,092 9/11/2025
Class E180,150 4.4 %131,906 9/11/2025
Class F153,600 4.4 %99,859 9/11/2025
Class X-1(1)
n/a0.5 %12,794 9/11/2025
Class X-2(1)
n/a0.4 %2,593 9/11/2025
$1,370,691 $1,256,266 
(1) ExcludedClass X-1 and Class X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of December 31, 2020, respectively.

The above table does not reflect the principal andportion of the class F bond held by us because the bond is eliminated in consolidation. Our ownership interest in the F bonds represents a controlling financial interest, which resulted in consolidation of the trust, during the quarter. The bond had a fair market value of classes owned by us that are eliminated$9.7 million at December 31, 2020, and our exposure to loss is limited to our ownership interest in the Consolidated Balance Sheets.this bond.

Residential Mortgage-Backed Notes

In May 2019, we completed a residential mortgage-backed securitization comprised of a portion of our Residential Whole Loan portfolio. RMI 2015 Trust and RNR Trust collectively transferred $945.5 million of Non-QM Residential Whole Loans, to aour wholly-owned subsidiary, of the Company, Arroyo Mortgage Trust 2019-2 ("Arroyo Trust") and Arroyo Trust issued $919.0 million of mortgage-backed notes and we retained the subordinate Non-Offered Securities. At September 30, 2019,December 31, 2020, Residential Whole Loans, with an outstanding principal balance of approximately $814.0$615.3 million, serve as collateral for the Arroyo Trust's securitized debt.

The following table summarizes the consolidated Arroyo Trust's issued mortgage-backed notes at September 30, 2019December 31, 2020 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):
 
ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Offered Notes:
Class A-1$511,623 3.3%$511,620 4/25/2049
Class A-227,414 3.5%27,414 4/25/2049
Class A-343,433 3.8%43,430 4/25/2049
Class M-125,055 4.8%25,055 4/25/2049
Subtotal607,525 $607,519 
Less: Unamortized deferred financing costsN/A4,398 
Total$607,525 $603,121 

In June 2020, we completed a residential mortgage-backed securitization comprised of a portion of our Residential Whole Loan portfolio. RMI 2015 Trust transferred $355.8 million of Non-QM Residential Whole Loans, to our wholly owned subsidiary, Arroyo Trust 2020. Arroyo Trust 2020 issued $341.7 million of mortgage-backed notes and we retained the subordinate non-offered securities. These non-offered securities with an estimated fair value of $27.7 million at December 31, 2020 were eliminated in the consolidation. At December 31, 2020, Residential Whole Loans, with an outstanding principal balance of approximately $300.0 million, serve as collateral for the Arroyo Trust 2020's securitized debt.

The following table summarizes the consolidated Arroyo Trust 2020's issued mortgage-backed notes at December 31, 2020 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):
49



ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Issued Mortgage-Backed Notes    
Class A-1$681,668
3.3%$681,666
4/25/2049
Class A-236,525
3.5%36,524
4/25/2049
Class A-357,866
3.8%57,864
4/25/2049
Class M-125,055
4.8%25,055
4/25/2049
Subtotal801,114
 $801,109
 
Less: Unamortized deferred financing costsN/A
 5,298
 
Total$801,114
 $795,811
 
ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Offered Notes:
Class A-1A$222,117 1.7%$222,112 3/25/2055
Class A-1B26,357 2.1%26,357 3/25/2055
Class A-213,518 2.9%13,517 3/25/2055
Class A-317,963 3.3%17,963 3/25/2055
Class M-111,739 4.3%11,739 3/25/2055
Subtotal$291,694 $291,688 
Less: Unamortized deferred financing costsN/A2,519 
Total$291,694 $289,169 




Convertible Senior Unsecured Notes

In August 2019,As of December 31, 2020, we issued $40.0had $175.0 million aggregate principal amount of 6.75% convertible senior unsecured notes (the "August 2019 Reopened Notes") for net proceeds of $38.8 million."2022 Notes) outstanding. The August 2019 Reopened2022 Notes have substantially identical terms as the existing notes issued in October 2017. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

On July 1, 2020, we issued an aggregate of 1,354,084 shares of our common stock in exchange for $5.0 million of our 2022 Notes pursuant to separate privately negotiated exchange agreements entered into on July 1, 2020 (collectively, the “Exchange Agreement”) between us and certain holders of the 2022 Notes. We did not receive any cash proceeds as a result of the Exchange Agreement, and the notes exchanged pursuant to the Exchange Agreement were retired and cancelled. See Note 7 – “Financings.”

In December 2019,the fourth quarter of 2020, we issued another $50.0repurchased $25.0 million aggregate principal amount of 6.75% convertible senior unsecured notes (the "December 2019 Reopened Notes") for net proceeds of $49.2 million. The December 2019 Reopenedthe 2022 Notes have substantially identical terms as the existing notes issued in October 2017. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuantat an approximate 13% discount to their terms,par value, plus accrued and are not redeemable by us except during the final three months prior to maturity.unpaid interest.

Hedging Activity
In connection with our risk management activities,March 2020, we enter into a variety of derivative and non-derivative instruments. Our primary objective for acquiring these derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control. Our derivative instruments are designed to mitigate the effects market risk and cash flow volatility associated with interest rate risk, including associated prepayment risk. As part of our hedging strategy, we may enter into, among other things,effectively terminated fixed-pay interest rate swaps including forward starting swaps,with a notional value of approximately $3.1 billion and variable-pay interest rate swaptions, U.S. Treasury options, Eurodollar, Volatility Indexwith a notional value of approximately $1.9 billion to reduce hedging costs and U.S, Treasury futures, TBAs, total return swaps, credit default swaps, foreign currency swaps and forwards and other similar instruments. associated market volatility. The effect of the termination is reflected in the table below for the year ended December 31, 2020 in Settlements, Terminations or Expirations.
The following tables summarize the hedging activity during the twelve months ended December 31, 20192020 (dollars in thousands):
Derivative InstrumentNotional Amount at December 31, 2019AcquisitionsSettlements, Terminations or ExpirationsNotional Amount at December 31, 2020
Fixed pay interest rate swaps$2,551,000 $783,000 $(3,334,000)$— 
Variable pay interest rate swaps1,405,000 794,800 (2,199,800)— 
Interest rate swaptions— 305,000 (305,000)— 
Credit default swaps151,000 164,000 (308,830)6,170 
TBA securities - long positions1,000,000 5,257,000 (6,257,000)— 
TBA securities - short positions1,000,000 5,257,000 (6,257,000)— 
Total derivative instruments$6,107,000 $12,560,800 $(18,661,630)$6,170 
50



Derivative InstrumentNotional Amount at December 31, 2018 Acquisitions Settlements, Terminations or Expirations Notional Amount at December 31, 2019 
Fixed pay interest rate swaps$3,127,800
 $3,497,500
 $(4,074,300) $2,551,000
 
Variable pay interest rate swaps728,400
 1,759,800
 (1,083,200) 1,405,000
 
Interest rate swaptions
 162,803
 (162,803) 
 
Options - long positions
 435,600
 (435,600) 
 
Options - short positions
 1,063,300
 (1,063,300) 
 
Futures contracts - long positions
 567,300
 (567,300) 
 
Futures contracts - short positions300,400
 1,437,200
 (1,737,600) 
 
Credit default swaps50,000
 151,000
 (50,000) 151,000
 
TBA securities - long positions
 3,200,000
 (2,200,000) 1,000,000
 
TBA securities - short positions
 3,200,000
 (2,200,000) 1,000,000
 
Total derivative instruments$4,206,600
 $15,474,503
 $(13,574,103) $6,107,000
 


Derivative InstrumentFair Value at December 31, 2018 Acquisitions Settlements, Terminations or Expirations Realized Gains / Losses Mark-to-market Fair Value at December 31, 2019 Derivative InstrumentFair Value at December 31, 2019AcquisitionsSettlements, Terminations or ExpirationsRealized Gains / LossesMark-to-marketFair Value at December 31, 2020
Fixed pay interest rate swaps$(5,470) $(32,894) $194,324
 $(160,611) $7,652
 $3,001
 Fixed pay interest rate swaps$3,001 $(32,894)$241,939 $(209,046)$(3,000)$— 
Variable pay interest rate swaps2,054
 7,608
 (55,099) 47,464
 (2,512) (485) Variable pay interest rate swaps(485)7,608 (36,633)29,025 485 — 
Interest rate swaptions
 332
   (332)   
 Interest rate swaptions— — (80)80 — 
Options - long positions
 485
 
 (485) 
 
 
Options - short positions
 (2,157) 294
 1,863
 
 
 
Futures contracts - long positions
 
 (3,801) 3,801
 
 
 
Futures contracts - short positions(4,657) 
 16,663
 (16,663) 4,657
 
 
Credit default swaps549
 (4,252) 367
 (540) 1,029
 (2,847) Credit default swaps(2,847)2,527 11,503 (9,844)(1,834)(495)
TBA securities
 
 (1,934) 1,934
 (928) (928) TBA securities(928)— 2,430 (2,430)928 — 
Total derivative instruments$(7,524) $(30,878) $150,814
 $(123,569) $9,898
 $(1,259) Total derivative instruments$(1,259)$(22,759)$219,159 $(192,215)$(3,421)$(495)
As of December 31, 2019,2020, we had approximately $2.6 billion ofno fixed pay rate interest rate swaps and $1.4 billion ofor variable pay rate interest rate swap. The following tables provide additional information on our fixed pay interest rate swaps and variable pay interest rate swaps (dollars in thousands):swaps.
 December 31, 2019
Fixed Pay Interest Rate Swap Remaining Term
Notional
Amount
 Average Fixed Pay Rate Average Floating Receive Rate Average Maturity (Years)
1 year or less$200,000
 1.8% 1.9% 0.4
Greater than 3 years and less than 5 years622,400
 2.6% 1.9% 4.1
Greater than 5 years1,728,600
 2.1% 2.0% 8.9
Total$2,551,000
 2.2% 2.0% 7.1
 December 31, 2019
Variable Pay Interest Rate Swap Remaining TermNotional Amount 
Average 
Variable Pay Rate
 Average Fixed Receive Rate Average Maturity (Years)
Greater than 1 years and less than 3 years$810,000
 2.0% 2.0% 1.6
Greater than 3 years and less than 5 years550,000
 1.9% 1.6% 5.0
Greater than 5 years45,000
 1.9% 2.3% 19.5
Total$1,405,000
 2.0% 1.9% 3.5
Capital Markets Activity
The following is a summary of activity during 2019:2020:
In MayStock Repurchase
On December 19, 2019, we completed a secondary public offering in which we sold 5,000,000our Board of Directors reauthorized the repurchase program of up to 2,700,000 shares of our common stock at athrough December 31, 2021. In March 2020, pursuant to the repurchase plan we acquired 100,000 shares with an average price, including commission, of $10.14$5.78 per share, for net proceeds oftotaling approximately $49.3 million after subtracting underwriting commissions and offering expenses of approximately $1.4 million. We used the net proceeds from the offering to opportunistically invest in our target assets in accordance with our investment guidelines.$578 thousand.

At-The-Market Program
In AprilMarch 2017, we entered into an equity distribution agreement with JMP Securities LLC, which was amended on June 5, 2020, under which we may offer and sell up to $100.0 million shares of common stock in an At-The-Market equity offering. During the year ended December 31, 2019,2020, we sold 299,4976,034,741 shares under this amended agreement with an average price of $3.70 per share for total net proceeds of $3.0$22.0 million.
Convertible Notes Exchange

On July 1, 2020, we issued an aggregate of 1,354,084 shares of our common stock in exchange for $5.0 million aggregate principal amount of our 2022 Notes. See Note 7 - "Financings" for information related to the convertible notes exchange.

Convertible Notes Repurchase

In the fourth quarter of 2020, we repurchased $25.0 million aggregate principal amount of the 2022 Notes at an approximate 13% discount to par value, plus accrued and unpaid interest.

Dividends

OurTo preserve liquidity, we suspended our first and second quarter of 2020 common stock dividends in light of extraordinary market volatility driven by uncertainty surrounding the COVID-19 pandemic.

In the third quarter of 2020, we resumed payment of our quarterly dividend remained stable at $0.31 for eachafter making progress strengthening our balance sheet and improving liquidity and earnings power of our investment portfolio. For the 15 quarters ending onended September 30, 2020 and December 31, 2019. For the quarter ended December 31, 2019,2020, we generateddeclared a $0.05 and $0.06 dividend per share, respectively, generating a dividend yield of approximately 12.0%6.7% based on the stock closing price of $10.33$3.26 at December 31, 2019.2020.

Book Value

The following chart reflects our book value per common share basic and diluted shares over five consecutive quarters:


51


chart-aa7557fa08d351cd8f4.jpg

wmc-20201231_g4.jpg
OurThe COVID-19 pandemic has created unprecedented market disruption and dislocation, requiring us to sell asset to meet margin calls. We have implemented measures to increase liquidity, reduce leverage, and seek alternative financing arrangements to preserve long-term shareholder value. We had improved financial results during the second half of 2020, which included significant recovery in asset valuations. The improved asset valuations resulted in the increase in book value per common share basic and diluted, net of our quarterly dividends was $10.55$0.13 to $4.20 at December 31, 2019, an increase of $0.10 or 1.0%2020 when compared to our December 31, 2018September 30, 2020 book value of $10.45. The increase in book value was mainly attributable to the composition of our portfolio and spread tightening in our Agency MBS portfolio when compared to the fourth quarter of 2018.$4.07.
Results of Operations
Comparison of the year ended December 31, 2020 to the year ended December 31, 2019
General
Our operating results mainly depend uponof operations were adversely impacted by the difference betweenCOVID-19 pandemic, which created unprecedented market disruption and dislocation. During the yieldfirst quarter of 2020, the uncertainty surrounding the pandemic created an extreme lack of liquidity in mortgage markets and when combined with forced selling led to swift and dramatic price declines. The significant decline in value of our investment portfolio resulted in substantial margin calls from our repurchase agreement counterparties. In order to satisfy the margin calls, we sold a significant portion of our investments. We also terminated our interest rate hedges because they were ineffective in the low interest rate environment and it further reduced margin call volatility. During the second half of 2020, our portfolio experienced improved valuations and earnings, and we did not have significant asset sales or margin calls during the quarter.
The full impact of COVID-19 on our investments,results of operations is still uncertain as it depends on several factors beyond our control including, but not limited to (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of the United States public health response, (iii) the pandemic’s impact on the U.S. and global economies, (iv) the timing, scope and effectiveness of additional governmental responses to the pandemic, (v) the timing and speed of economic recovery, including the availability and effectiveness of the vaccination for COVID-19 and (vi) the negative impact on our borrowers, asset values and cost of capital.

Due to the significant amount of investment sales, resulting from the market volatility created by the COVID-19 pandemic, our borrowings, includingresults of operations for the years ended December 31, 2020 and December 31, 2019 are not comparable.

During the second half of 2020, we continued to make progress towards strengthening our hedging activities,balance sheet, improving liquidity, shareholders equity and the composition and changes in market pricesearnings power of our portfolio and our expenses.the portfolio. For the year ended December 31, 2019,2020, we generated a net loss of $328.3 million or $5.72 per basic and diluted weighted common share, compared to net income of $70.7 million or $1.37 per basic and diluted weighted common share compared to net income of $26.4 million or $0.61 per basic and diluted weighted common share for the year ended December 31, 2018.2019. Our results of operations, for the year ended December 31, 2019,second half of 2020, was positively impacted by tighter spreadsimproved valuations on our Agency portfolio.investment portfolio, specifically our Residential Whole Loan Investments. Our credit sensitive portfolio continued to perform wellin line with the favorable environment in both residential and commercial real estate markets.our expectations.
52


Comparison of the year ended December 31, 2019 to the year ended December 31, 2018


Net Interest Income
The following tables set forth certain information regarding our net interest income on our investment portfolio for the years ended December 31, 20192020 and December 31, 20182019 (dollars in thousands):
Year ended December 31, 2020Average Amortized
Cost of Assets
Total Interest IncomeYield on Average Assets
Investments
Agency CMBS$342,673 $10,700 3.12 %
Agency RMBS58,491 1,988 3.40 %
Non-Agency RMBS32,905 1,539 4.68 %
Non-Agency CMBS262,372 21,798 8.31 %
Residential Whole Loans1,223,043 54,359 4.44 %
Residential Bridge Loans26,354 1,756 6.66 %
Commercial loans337,485 23,194 6.87 %
Securitized commercial loans1,093,487 59,212 5.41 %
Other securities53,753 3,482 6.48 %
Total investments$3,430,563 $178,028 5.19 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings   
Repurchase agreements$1,108,838 $35,243 3.18 %
Convertible senior unsecured notes, net193,516 16,252 8.40 %
Securitized debt1,864,964 81,096 4.35 %
Total borrowings$3,167,318 $132,591 4.19 %
Net interest income and net interest margin(2)
$45,437 1.32 %
Year ended December 31, 2019Average Amortized
Cost of Assets
Total Interest IncomeYield on Average Assets
Investments
Agency CMBS$1,517,394 $48,959 3.23 %
Agency RMBS268,554 9,128 3.40 %
Non-Agency RMBS47,982 2,468 5.14 %
Non-Agency CMBS226,072 18,195 8.05 %
Residential Whole Loans1,196,675 57,234 4.78 %
Residential Bridge Loans115,199 8,109 7.04 %
Commercial loans348,884 28,556 8.18 %
Securitized commercial loans830,311 39,454 4.75 %
Other securities69,894 5,161 7.38 %
Total investments$4,620,965 $217,264 4.70 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$2,888,151 $90,802 3.14 %
Convertible senior unsecured notes, net130,457 10,556 8.09 %
Securitized debt1,305,158 48,916 3.75 %
Total borrowings$4,323,766 $150,274 3.48 %
Net interest income and net interest margin(2)
$66,990 1.45 %
Year ended December 31, 2018 Average Amortized
Cost of Assets
 Total Interest Income Yield on Average Assets
       
Investments      
Agency CMBS $1,976,291
 $59,502
 3.01%
Agency RMBS 442,145
 14,415
 3.26%
Non-Agency RMBS 92,789
 6,047
 6.52%
Non-Agency CMBS 294,811
 26,424
 8.96%
Residential Whole Loans 494,438
 23,331
 4.72%
Residential Bridge Loans 223,015
 15,889
 7.12%
Commercial loans 88,091
 6,898
 7.83%
Securitized commercial loans 931,090
 48,422
 5.20%
Other securities 96,810
 8,434
 8.71%
Total investments $4,639,480
 $209,362
 4.51%
       
  Average Carrying Value Total Interest Expense 
Average Cost of Funds(1)
Borrowings      
Repurchase agreements $3,267,101
 $86,742
 2.66%
Convertible senior unsecured notes, net 109,456
 9,058
 8.28%
Securitized debt 957,816
 42,440
 4.43%
Total borrowings $4,334,373
 $138,240
 3.19%
       
Net interest income and net interest margin(2)
   $71,122
 1.53%


(1)Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
53



(1)     Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
(2) Since we do not apply hedge accounting, our net interest margin is this table does not reflect the benefit / cost of our interest rate swaps. See Non-GAAP Financial Measure section for net investment income table that includes the benefit / cost from our interest rate swaps.
Interest Income
For the years ended December 31, 2019 and December 31, 2018, we earned interest income on our investments of approximately $217.3 million and $209.4 million, respectively. The increase in interest income for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily the result of an overall higher yielding investment portfolio. The weighted average yield increased to 4.70% for the year ended December 31, 2019 from 4.51% for the year ended December 31, 2018. Our credit sensitive investments contributed approximately $159.2 million or 73.3% to interest income for the period. Under the current market conditions, we expect to continue to increase our investments in Residential Whole Loans, Commercial Loans, Non-Agency CMBS and opportunistically invest in Agency CMBS and Agency RMBS.
Interest Expense
Interest expense increased from $138.2 million for the year ended December 31, 2018 to $150.3 million for the year ended December 31, 2019. Our higher borrowing costs reflect: (i)  higher interest rates on our repurchase agreements in 2019 coupled with higher costs associated with financing our credit-sensitive investments, which generally have higher interest rates; (ii) the issuance of an additional $90.0 million aggregate principal amount of 6.75% convertible senior unsecured notes in 2019; and (iii) an increase in the average outstanding securitized debt of $347.3 million from the consolidation of the Arroyo Trust and MRCD Trust. Our average cost of funds on our repurchase agreements increased from 2.66% for the year ended December 31, 2018 to 3.14% for the year ended December 31, 2019. We utilize interest rate swaps to mitigate our interest rate exposure. However, since we do not apply hedge accounting the reduction in interest expense is reflected in "Gain (loss) on derivatives, net."
Other income (loss), net
Realized gain (loss) on investments, net
Realized gain (loss) on investments represents the net gain (loss) on sales or settlements from our investment portfolio. Our Manager regularly reviews the characteristics of our portfolio and may make changes to our portfolio in order to adjust such portfolio characteristics in response to and/or anticipation of changing market conditions in an effort to achieve the appropriate risk reward ratio. 
The following table presents the realized gains (losses) of our investments for each of the years ended December 31, 2019 and December 31, 2018 (dollars in thousands):
 Year ended December 31, 2019 Year ended December 31, 2018
 Proceeds Gross Gains Gross Losses Net Gain  (Loss) Proceeds Gross Gains Gross Losses Net Gain  (Loss)
Agency CMBS$891,072
 $32,793
 $(4,190) $28,603
 $1,534,967
 $
 $(51,045) $(51,045)
Agency RMBS205,310
 1,559
 
 1,559
 589,854
 18
 (23,997) (23,979)
Non-Agency RMBS(1)

 
 
 
 99,842
 7,008
 (478) 6,530
Non-Agency CMBS40,235
 317
 (1,624) (1,307) 140,292
 3,086
 (6,201) (3,115)
Other securities
 
 
 
 65,099
 8,400
 
 8,400
Residential Bridge Loans(1)

 232
 (762) (530) 569
 
 (48) (48)
Loans transferred to REO(2)
5,029
 516
 (473) 43
 
 
 
 
Disposition of REO1,761
 38
 (128) (90) 
 
 
 
Total$1,143,407
 $35,455
 $(7,177) $28,278
 $2,430,623
 $18,512
 $(81,769) $(63,257)
(1)Realized gains/losses recognized on the final settlement of the loans.
(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.

Other than temporary impairment


We evaluate securities for OTTI on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired involves judgments, estimates and assumptions based on subjective and objective factors. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

The following table presents the other-than-temporary impairments we recorded on our securities portfolio (dollars in thousands): 
 Year ended December 31, 2019 Year ended December 31, 2018
Agency RMBS(1)
$74
 $807
Non-Agency RMBS1,331
 996
Non-Agency CMBS6,565
 8,660
Other securities604
 717
Total$8,574
 $11,180
(1) Other-than-temporary impairment on Agency RMBS includes impairments on Agency RMBS IOs and unrealized loss on Agency RMBS securities that we had the intent to sell at the end of the period.

Unrealized gain (loss), net
Our investments and securitized debt, for which we have elected the fair value option, are recorded at fair value with the periodic changes in fair value being recorded in earnings.  The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period.  For the year ended December 31, 2019, unrealized gain (loss) increased to a net unrealized gain of $107.5 million from a net unrealized loss of $24.7 million for the year ended December 31, 2018. The majority of the increase in net unrealized gain (loss) was a result of tighter credit spreads on our Agency portfolio and in 2019, which positively impacted the value of these securities, accounting for the majority of the increase in unrealized gains in the portfolio.

The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt (dollars in thousands):
 Year ended December 31, 2019 Year ended December 31, 2018
Agency CMBS$78,544
 $(25,040)
Agency RMBS8,510
 (2,289)
Non-Agency RMBS(230) (3,960)
Non-Agency CMBS(890) 15,805
Residential Whole Loans20,790
 (444)
Residential Bridge Loans501
 (1,896)
Commercial loans(121) 631
Securitized commercial loans(1,070) (16)
Other securities1,564
 (7,352)
Securitized debt(294) 116
Other liabilities225
 (226)
Total$107,529
 $(24,671)
Gain (loss) on derivatives, net
In order to mitigate interest rate risk resulting from our repurchase agreement borrowings, we enter into a variety of derivative and non-derivative instruments. Our primary objective for acquiring these derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control.




The following table presents the components of gain (loss) on derivatives for the years ended December 31, 2019 and December 31, 2018 (dollars in thousands):
  Realized Gain (Loss), net        
Description Other Settlements / Expirations Variation Margin Settlement Mark-to-market Return
(Recovery)
of Basis
 
Contractual interest
income(expense), net
(1)
 Total
Year ended December 31, 2019          
Interest rate swaps $(4,978) $(108,169) $5,140
 $5,769
 $3,732
 $(98,506)
Interest rate swaptions (332) 
 
 
 
 (332)
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives 
 
 (508) (2,688) 3,277
 81
Options 1,378
 
 
 
 
 1,378
Futures contracts (12,862) 
 4,657
 
 
 (8,205)
Credit default swaps (178) 
 1,029
 
 
 851
TBAs 1,934
 
 (928) 
 
 1,006
Total $(15,038) $(108,169) $9,390
 $3,081
 $7,009
 $(103,727)
             
Year ended December 31, 2018          
Interest rate swaps $163
 $76,979
 $(5,147) $2,465
 $3,693
 $78,153
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives 
 
 (655) (3,661) 4,511
 195
Options (871) 
 300
 
 
 (571)
Futures contracts 6,112
 
 (5,285) 
 
 827
Credit default swaps (241) 
 396
 
 
 155
TBAs (800) 
 10
 
 
 (790)
Total $4,363
 $76,979
 $(10,381) $(1,196) $8,204
 $77,969
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.
Other, net
For the years ended December 31, 2019 and December 31, 2018, "Other, net" consisted of income of $2.2 million and loss of $189 thousand, respectively. The balance is mainly comprised of interest on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives and miscellaneous fees collected on residential mortgage loans.  
Expenses
Management Fee Expense
We incurred management fee expense of approximately $7.4 million and $8.7 million for the years ended December 31, 2019 and December 31, 2018, respectively. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. Although in May 2019, we completed a secondary public offering for net proceeds of approximately $49.3 million after subtracting underwriting commissions and had net realized gains on sales of investments of approximately $28.3 million, these increases were offset by the realized losses on our interest rate swaps which resulted in a decrease in the stockholders' equity that was utilized to calculate our management fee.

The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, “Related Party Transactions” to the consolidated financial statements contained in this annual report on Form 10-K.
Other Operating Expenses
We incurred other operating expenses of approximately $5.5 million and $6.1 million for the years ended December 31, 2019 and December 31, 2018, respectively. Other operating cost is comprised of derivative transaction costs, custody, and asset


management/loan servicing fees. The decrease was primarily a result of a reduction in asset management and servicing fees related to our Residential Bridge Loans, which were all acquired servicing released.

General and Administrative Expenses
General and administrative expenses was relatively flat year over year.

Comparison of the year ended December 31, 2018 to the year ended December 31, 2017
Net Interest Income
The following tables set forth certain information regarding our net interest income on our investment portfolio for the years ended December 31, 2018 and December 31, 2017 (dollars in thousands):
Year ended December 31, 2018 Average Amortized Cost of Assets Total Interest Income Yield on Average Assets
       
Investments      
Agency CMBS $1,976,291
 $59,502
 3.01%
Agency RMBS 442,145
 14,415
 3.26%
Non-Agency RMBS 92,789
 6,047
 6.52%
Non-Agency CMBS 294,811
 26,424
 8.96%
Residential Whole Loans 494,438
 23,331
 4.72%
Residential Bridge Loans 223,015
 15,889
 7.12%
Commercial loans 88,091
 6,898
 7.83%
Securitized commercial loans 931,090
 48,422
 5.20%
Other Securities 96,810
 8,434
 8.71%
Total $4,639,480
 $209,362
 4.51%
       
  Average Carrying Value Total Interest Expense 
Average Cost of Funds(1)
Borrowings      
Repurchase agreements $3,267,101
 $86,742
 2.66%
Convertible senior unsecured notes, net 109,456
 9,058
 8.28%
Securitized debt 957,816
 42,440
 4.43%
Total borrowings $4,334,373
 $138,240
 3.19%
       
Net interest income and net interest margin(3)
   $71,122
 1.53%



Year ended December 31, 2017 Average Amortized Cost of Assets Total Interest Income Yield on Average Assets
       
Investments  
  
  
Agency CMBS $1,354,720
 $40,571
 2.99%
Agency RMBS 898,883
 25,050
 2.79%
Non-Agency RMBS 88,566
 6,127
 6.92%
Non-Agency CMBS 323,769
 27,455
 8.48%
Residential Whole Loans 207,786
 8,515
 4.10%
Residential Bridge Loans 52,696
 4,487
 8.51%
Securitized commercial loan 24,964
 2,247
 9.00%
Other Securities 116,683
 9,839
 8.43%
Total $3,068,067
 $124,291
 4.05%
       
  Average Carrying Value Total Interest Expense 
Average Cost of Funds(1)
Borrowings      
Repurchase agreements $2,713,199
 $45,128
 1.66%
Convertible senior unsecured notes, net(2)
 108,743
 2,264
 8.34%
Securitized debt 10,984
 981
 8.93%
Total borrowings $2,832,926
 $48,373
 1.76%
       
Net interest income and net interest margin(3)
   $75,918
 2.47%
(1) Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
(2) The convertible senior unsecured notes, net are reflected at the balance as of December 31, 2017. The average cost of financing is calculated based on annualized interest expense divided by the average carrying value for the period outstanding.
(3) Since we do not apply hedge accounting, our net interest margin is this table does not reflect the benefit of our interest rate swaps. See Non-GAAP Financial Measure section for net investment income table that includes the benefit from our interest rate swaps.

Interest Income
For the yearyears ended December 31, 20182020 and December 31, 2017,2019, we earned interest income on our investments of approximately $209.4$178.0 million and $124.3$217.3 million, respectively. The decrease in interest income for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was driven by the sales of a significant portion of our investment portfolio to meet margin calls. We sold $2.0 billion of investments, mainly in March and April 2020. The majority of the impact of these sales were reflected in interest income in starting in the second of 2020. Our portfolio experienced improved valuations and we did not have significant asset sales in the second half of the year.
Interest Expense
Interest expense decreased from $150.3 million for the year ended December 31, 2019 to $132.6 million for the year ended December 31, 2020. The decrease was a result of the significant reduction in leverage associated with the sale of $2.4 billion of investments, mainly in March and April 2020. During the second quarter of 2020, we entered into two new financing facilities to limit our exposure to short-term mark to market financings. Also, we completed a securitization of approximately $355.8 million of our Residential Whole Loans, reducing our recourse leverage by $339.4 million or 46.0%.
Other income (loss), net
Realized gain (loss) on investments, net
Realized gain (loss) on investments represents the net gain (loss) on sales or settlements from our investment portfolio. To improve liquidity, reduce our repurchase agreement borrowing and satisfy our margin calls, we sold $2.4 billion in investments mainly in March and April 2020. These sales generated $80.6 million in net realized gains. Our portfolio experienced improved valuations and we did not have significant asset sales during the third quarter.

The following table presents the realized gains (losses) of our investments for each of the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):
 Year ended December 31, 2020Year ended December 31, 2019
 ProceedsGross GainsGross LossesNet Gain  (Loss)ProceedsGross GainsGross LossesNet Gain  (Loss)
Agency CMBS$1,668,149 $116,463 $(6,486)$109,977 $891,072 $32,793 $(4,190)$28,603 
Agency RMBS400,948 12,552 (506)12,046 205,310 1,559 — 1,559 
Non-Agency RMBS(1)
12,658 — (60)(60)— — — — 
Non-Agency CMBS111,804 (23,624)(23,623)40,235 317 (1,624)(1,307)
Other securities35,957 113 (6,223)(6,110)— — — — 
Residential Whole-Loans144,259 — (10,511)(10,511)— — — — 
Residential Bridge Loans(1)
— (404)(396)— 232 (762)(530)
Loans transferred to REO(2)
419 126 (32)94 5,029 516 (473)43 
Disposition of REO1,892 18 (808)(790)1,761 38 (128)(90)
Total$2,376,086 $129,281 $(48,654)$80,627 $1,143,407 $35,455 $(7,177)$28,278 
(1)Realized gains/losses recognized on the final settlement of the loans.
(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.

Unrealized gain (loss), net
Our investments, and securitized debt, for which we have elected the fair value option are recorded at fair value with the periodic changes in fair value being recorded in earnings.  The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period. The extreme lack of liquidity in mortgage markets combined with forced selling led to swift and dramatic price declines in the first quarter of 2020. While we have seen price recovery on our investments investments in the second, third, and fourth quarters, there is still a lot of
54



uncertainty surrounding the opening and recovery of the economy. Therefore, the recovery experienced was not sufficient to significantly reduce the substantial unrealized loss from the dramatic price declines.

The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt (dollars in thousands):
 Year ended December 31, 2020Year ended December 31, 2019
Agency CMBS$(61,033)$78,544 
Agency RMBS(9,131)8,510 
Non-Agency RMBS(5,812)(230)
Non-Agency CMBS(50,841)(890)
Residential Whole Loans(22,891)20,790 
Residential Bridge Loans(497)501 
Commercial loans(15,281)(121)
Securitized commercial loans(58,421)(1,070)
Other securities(6,938)1,564 
Securitized debt9,458 (294)
Other liabilities— 225 
Total$(221,387)$107,529 
Gain (loss) on derivatives, net
In March 2020, we effectively terminated all of our fixed-pay interest rate swaps and variable-pay interest rate swaps to reduce hedging costs and associated margin volatility. The effects of the termination is reflected in the table below for the December 31, 2020.
The following table presents the components of gain (loss) on derivatives for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):
Realized Gain (Loss), net
DescriptionOther Settlements / ExpirationsVariation Margin SettlementMark-to-marketReturn
(Recovery)
of Basis
Contractual interest
income(expense), net
(1)
Total
Year ended December 31, 2020
Interest rate swaps$(262)$(179,759)$(2,515)$262 $(1,395)$(183,669)
Interest rate swaptions80 — — — — 80 
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives(940)— (532)(1,096)1,324 (1,244)
Credit default swaps(9,534)— (1,834)— — (11,368)
TBAs(2,430)— 928 — — (1,502)
Total$(13,086)$(179,759)$(3,953)$(834)$(71)$(197,703)
Year ended December 31, 2019
Interest rate swaps$(4,978)$(108,169)$5,140 $5,769 $3,732 $(98,506)
Interest rate swaptions(332)— — — — (332)
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives— — (508)(2,688)3,277 81 
Options1,378 — — — — 1,378 
Futures contracts(12,862)— 4,657 — — (8,205)
Credit default swaps(178)— 1,029 — — 851 
TBAs1,934 — (928)— — 1,006 
Total$(15,038)$(108,169)$9,390 $3,081 $7,009 $(103,727)
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.
Other, net
55



For the years ended December 31, 2020 and December 31, 2019, "Other, net" consisted of income of $339 thousand and income of $2.2 million, respectively. The balance is mainly comprised of interest on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives and miscellaneous fees collected on residential mortgage loans.  
Expenses
Management Fee Expense
We incurred management fee expense of approximately $4.5 million and $7.4 million for the years ended December 31, 2020 and December 31, 2019, respectively. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. The decrease was mainly attributable to our Manager waiving the management fee from March 2020 to May 2020 as a result of the impact of COVID-19 and the disruption in the mortgage markets. Future waivers, if any, are at the Manager's discretion. Also, the termination of our interest rate swaps in March 2020 resulted in realized losses that reduced stockholders' equity that is used to calculate the management fee.

The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, “Related Party Transactions” to the consolidated financial statements contained in this annual report on Form 10-K.







Financing Fee

In the second quarter in order to manage the severe market conditions and the resulting large margin demands from lenders and pressure on our liquidity, we entered into a longer term financing arrangement for our Residential Whole Loans, as we sort to reduce our exposure to short-term financings with daily mark to market exposure. Under this agreement, we are required to pay the counterparty a 30% premium recapture fee of all realized value on any residential whole loans above such counterparty’s amortized basis upon the securitization or sale.

On June 29, 2020, we securitized approximately $355.8 million of the Residential Whole Loans and paid down the facility by approximately $339.4 million (see "Securitized Debt" below for additional details). As noted above, as part of the financing arrangements, we agreed to pay the lender a fee of 30% of all realized value on the Residential Whole Loans above the counterparty's amortized basis upon securitization or sale. As a result of refinancing the Residential Whole Loans through a securitization, we accrued a premium recapture fee of approximately $20.5 million, which is payable at the maturity of the facility. However, in connection with an amendment to this facility effective October 6, 2020, we paid $12.0 million of the fee with the balance of $8.5 million due on the new maturity if the facility on October 5, 2021. The amendment also eliminated the the premium recapture fee for assets financed under the amended facility.

Other Operating Expenses
We incurred other operating expenses of approximately $2.9 million and $5.5 million for the years ended December 31, 2020 and December 31, 2019, respectively. Other operating cost is comprised of derivative transaction costs, custody, and asset management/loan servicing fees. The decrease was primarily a result of a smaller bridge loan portfolio, which were acquired servicing released, thereby decreasing the associated third party asset management/loan servicing fees. In addition we incurred lower acquisition transaction costs, due to no investment acquisitions in the second, third and fourth quarters and lower derivative commissions and fees due to no new derivative transactions since we terminated our interest rate swaps in March 2020.

General and Administrative Expenses
General and administrative expenses for the years ended December 31, 2020 and December 31, 2019 were $11.0 million and $8.1 million, respectively. The increase was mainly attributable to an increase in the cost of our D&O insurance and additional legal fees incurred.
56




Comparison of the year ended December 31, 2019 to the year ended December 31, 2018
General
Our operating results mainly depend upon the difference between the yield on our investments, the cost of our borrowings, including our hedging activities, the composition and changes in market prices of our portfolio and our expenses. For the year ended December 31, 2019, we generated net income of $70.7 million or $1.37 per basic and diluted weighted common share, compared to net income of $26.4 million or $0.61 per basic and diluted weighted common share for the year ended December 31, 2018. Our results of operations, for the year ended December 31, 2019, was positively impacted by tighter spreads on our Agency portfolio. Our credit sensitive portfolio continued to perform well with the favorable environment in both residential and commercial real estate markets.
Net Interest Income
The following tables set forth certain information regarding our net interest income on our investment portfolio for the years ended December 31, 2019 and December 31, 2018 (dollars in thousands):
Year ended December 31, 2019Average Amortized Cost of AssetsTotal Interest IncomeYield on Average Assets
Investments
Agency CMBS$1,517,394 $48,959 3.23 %
Agency RMBS268,554 9,128 3.40 %
Non-Agency RMBS47,982 2,468 5.14 %
Non-Agency CMBS226,072 18,195 8.05 %
Residential Whole Loans1,196,675 57,234 4.78 %
Residential Bridge Loans115,199 8,109 7.04 %
Commercial loans348,884 28,556 8.18 %
Securitized commercial loans830,311 39,454 4.75 %
Other Securities69,894 5,161 7.38 %
Total$4,620,965 $217,264 4.70 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$2,888,151 $90,802 3.14 %
Convertible senior unsecured notes, net130,457 10,556 8.09 %
Securitized debt1,305,158 48,916 3.75 %
Total borrowings$4,323,766 $150,274 3.48 %
Net interest income and net interest margin(2)
$66,990 1.45 %

57



Year ended December 31, 2018Average Amortized Cost of AssetsTotal Interest IncomeYield on Average Assets
Investments   
Agency CMBS$1,976,291 $59,502 3.01 %
Agency RMBS442,145 14,415 3.26 %
Non-Agency RMBS92,789 6,047 6.52 %
Non-Agency CMBS294,811 26,424 8.96 %
Residential Whole Loans494,438 23,331 4.72 %
Residential Bridge Loans223,015 15,889 7.12 %
Commercial Whole-Loans88,091 6,898 7.83 %
Securitized commercial loan931,090 48,422 5.20 %
Other Securities96,810 8,434 8.71 %
Total$4,639,480 $209,362 4.51 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$3,267,101 $86,742 2.66 %
Convertible senior unsecured notes, net109,456 9,058 8.28 %
Securitized debt957,816 42,440 4.43 %
Total borrowings$4,334,373 $138,240 3.19 %
Net interest income and net interest margin(2)
$71,122 1.53 %

(1)     Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
(2) Since we do not apply hedge accounting, our net interest margin is this table does not reflect the benefit / cost of our interest rate swaps. See Non-GAAP Financial Measure section for net investment income table that includes the benefit / cost from our interest rate swaps.

Interest Income
For the years ended December 31, 2019 and December 31, 2018, we earned interest income on our investments of approximately $217.3 million and $209.4 million, respectively. The increase in interest income for the year ended December 31, 20182019 as compared to the year ended December 31, 20172018 was primarily the result of an overall higher yielding larger investment portfolio, generating an increaseportfolio. The weighted average yield increased to 4.70% for the year ended December 31, 2019 from 4.51% for the year ended December 31, 2018. Our credit sensitive investments contributed approximately $159.2 million or 73.3% to interest income of approximately $52.0 million fromfor the period. Under the current market conditions, we expect to continue to increase our Agency CMBS,investments in Residential Whole and Bridge Loans, Commercial Loans, Non-Agency CMBS and approximately $46.0 million from RETL securitized commercial loan, which was acquiredopportunistically invest in March 2018. This increase was partially offset by a decrease $10.6 million interest income from our Agency RMBS investments as a result of significantly reducing our investment in this asset class.CMBS and Agency RMBS.
Interest Expense
Interest expense increased from $48.4 million for the year ended December 31, 2017 to $138.2 million for the year ended December 31, 2018.2018 to $150.3 million for the year ended December 31, 2019. Our higher borrowing costs reflect: (i) an increase in our average outstanding borrowings due to a larger average outstanding investment portfolio. Our average outstanding borrowings increased by $1.5 billion to $4.3 billion for the year ended December 31, 2018 from $2.8 billion for the year ended December 31, 2017; (ii)  higher interest rates on our repurchase agreements in 20182019 coupled with higher costs associated with financing our credit-sensitive investments, which generally have higher interest rates.rates; (ii) the issuance of an additional $90.0 million aggregate principal amount of 6.75% convertible senior unsecured notes in 2019; and (iii) an increase in the average outstanding securitized debt of $347.3 million from the consolidation of the Arroyo Trust and MRCD Trust. Our average cost of funds on our repurchase agreements increased from 1.66% for the year ended December 31, 2017 to 2.66% for the year ended December 31, 2018.2018 to 3.14% for the year ended December 31, 2019. We utilize interest rate swaps to mitigate our interest rate exposure. As of December 31, 2018, we have effectively hedged approximately 85% of our repurchase agreement debt by entering into interest rate swaps with a weighted average fixed rate of 2.3% for a weighted average term of 5.3 years. However, since we do not apply hedge accounting the reduction in interest expense is reflected in "Gain (loss) on derivatives, net"; (iii) The issuance of $115.0 million aggregate principal amount of 6.75% convertible senior unsecured notes in October 2017; and (iv) the securitized debt of $957.8 million from the consolidation of the RETL securitized trust in March of 2018.net."
Other income (loss)
Realized gain (loss) on investments, net
 

58



Realized gain (loss) on investments represents the net gain (loss) on sales or settlements from our investment portfolio. Our Manager regularly reviews the characteristics of our portfolio and may make changes to our portfolio in order to adjust such portfolio characteristics in response to and/or anticipation of changing market conditions in an effort to achieve the appropriate risk reward ratio.  Accordingly, we expected to continue to redeploy capital into credit sensitive investments in order to adjust the overall characteristics of our portfolio.

The following table presents the sales and realized gains (loss) of our investments for the years ended December 31, 20182019 and December 31, 20172018 (dollars in thousands):
 
Year ended December 31, 2018 Year ended December 31, 2017 Year ended December 31, 2019Year ended December 31, 2018
Proceeds Gross Gains Gross Losses Net Gain  (Loss) Proceeds Gross Gains Gross Losses Net Gain  (Loss) ProceedsGross GainsGross LossesNet Gain  (Loss)ProceedsGross GainsGross LossesNet Gain  (Loss)
Agency CMBS$1,534,967
 $
 $(51,045) $(51,045) $
 $
 $
 $
Agency CMBS$891,072 $32,793 $(4,190)$28,603 $1,534,967 $— $(51,045)$(51,045)
Agency RMBS (1)
589,854
 18
 (23,997) (23,979) 1,251,985
 5,020
 (7,936) (2,916)
Agency RMBSAgency RMBS205,310 1,559 — 1,559 589,854 18 (23,997)(23,979)
Non-Agency RMBS(1)
99,842
 7,008
 (478) 6,530
 243,838
 24,356
 (2,241) 22,115
Non-Agency RMBS(1)
— — — — 99,842 7,008 (478)6,530 
Non-Agency CMBS140,292
 3,086
 (6,201) (3,115) 54,875
 2,543
 (1,803) 740
Non-Agency CMBS40,235 317 (1,624)(1,307)140,292 3,086 (6,201)(3,115)
Other securities65,099
 8,400
 
 8,400
 38,447
 713
 (54) 659
Other securities— — — — 65,099 8,400 — 8,400 
Residential Bridge loans (2)
569
 
 (48) (48) 
 
 
 
Residential Bridge loans (1)
Residential Bridge loans (1)
— 232 (762)(530)569 — (48)(48)
Loans transferred to REO(2)
Loans transferred to REO(2)
5,029 516 (473)43 — — — — 
Disposition of REODisposition of REO1,761 38 (128)(90)— — — — 
Total$2,430,623
 $18,512
 $(81,769) $(63,257) $1,589,145
 $32,632
 $(12,034) $20,598
Total$1,143,407 $35,455 $(7,177)$28,278 $2,430,623 $18,512 $(81,769)$(63,257)
(1)Excludes Interest-Only Strips, accounted for as derivatives.
(2)
(1)Realized gains/losses recognized on the final settlement of the loans.

Other than temporary impairment
We evaluate securities for OTTI on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired involves judgments, estimates and assumptions based on subjective and objective factors. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

The following table presents the other-than-temporary impairments we recorded on our securities portfolio (dollars in thousands): 
 Year ended December 31, 2018 Year ended December 31, 2017
Agency RMBS(1)
$807
 $5,774
Non-Agency RMBS996
 
Non-Agency CMBS8,660
 15,117
Other securities717
 1,982
Total$11,180
 $22,873
(1) Other-than-temporary impairment on Agency RMBS includes impairments on Agency RMBS IOs and unrealized loss on Agency RMBS securities that we had the intent to sell at the end of the period.loans.
(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.
Unrealized gain (loss), net
Our investments and securitized debt, for which we have elected the fair value option, are recorded at fair value with the periodic changes in fair value being recorded in earnings.  The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period.  For the year ended December 31, 2018,2019, unrealized gain (loss) decreasedincreased to a net unrealized gain of $107.5 million from a net unrealized loss of $24.7 million from a net unrealized gain of $28.4 million for the year ended December 31, 2017.2018. The decreasemajority of the increase in net unrealized gain (loss) was a result of significantly widertighter credit spreads on our Agency portfolio and in the fourth quarter of 2018,2019, which negativelypositively impacted the value of these securities, accounting for the majority of the increase in unrealized lossesgains in the portfolio.

The following table presents the net unrealized gains (losses) we recorded on our investment and securitized debt (dollars in thousands):


Year ended December 31, 2018 Year ended December 31, 2017 Year ended December 31, 2019Year ended December 31, 2018
Agency CMBS$(25,040) $5,747
Agency CMBS$78,544 $(25,040)
Agency RMBS(2,289) 7,207
Agency RMBS8,510 (2,289)
Non-Agency RMBS(3,960) (12,040)Non-Agency RMBS(230)(3,960)
Non-Agency CMBS15,805
 13,453
Non-Agency CMBS(890)15,805 
Residential Whole Loans(444) 723
Residential Whole Loans20,790 (444)
Residential Bridge Loans(1,896) 558
Residential Bridge Loans501 (1,896)
Commercial loans631
 
Commercial loans(121)631 
Securitized commercial loans(16) 805
Securitized commercial loans(1,070)(16)
Other securities(7,352) 12,297
Other securities1,564 (7,352)
Securitized debt116
 (354)Securitized debt(294)116 
Other liabilities(226) 
Other liabilities225 (226)
Total$(24,671) $28,396
Total$107,529 $(24,671)
Gain (loss) on derivatives, net
59



In order to mitigate interest rate risk resulting from our repurchase agreement borrowings, we enter into a variety of derivative and non-derivative instruments. Our primary objective for acquiring thesesthese derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control.

The following table presents the components of gain (loss) on derivatives for the year ended December 31, 20182019 and December 31, 20172018 (dollars in thousands):

Realized Gain (Loss), net
DescriptionOther Settlements / ExpirationsVariation Margin SettlementMark-to-marketReturn
(Recovery)
of Basis
Contractual interest
income(expense), net
(1)
Total
Year ended December 31, 2019
Interest rate swaps$(4,978)$(108,169)$5,140 $5,769 $3,732 $(98,506)
Interest rate swaptions(332)— — — — (332)
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives— — (508)(2,688)3,277 81 
Options1,378 — — — — 1,378 
Futures contracts(12,862)— 4,657 — — (8,205)
Credit default swaps(178)— 1,029 — — 851 
TBAs1,934 — (928)— — 1,006 
Total$(15,038)$(108,169)$9,390 $3,081 $7,009 $(103,727)
Year ended December 31, 2018
Interest rate swaps(2)
$163 $76,979 $(5,147)$2,465 $3,693 $78,153 
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives— — (655)(3,661)4,511 195 
Options(871)— 300 — — (571)
Futures contracts6,112 — (5,285)— — 827 
Credit default swaps
(241)— 396 — — 155 
TBAs(800)— 10 — — (790)
Total$4,363 $76,979 $(10,381)$(1,196)$8,204 $77,969 
  Realized Gain (Loss), net        
Description Other Settlements / Expirations Variation Margin Settlement Mark-to-market Return
(Recovery)
of Basis
 
Contractual interest
income(expense), net
(1)
 Total
Year ended December 31, 2018          
Interest rate swaps $163
 $76,979
 $(5,147) $2,465
 $3,693
 $78,153
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives 
 
 (655) (3,661) 4,511
 195
Options (871) 
 300
 
 
 (571)
Futures contracts 6,112
 
 (5,285) 
 
 827
Credit default swaps (241) 
 396
 
 
 155
TBAs (800) 
 10
 
 
 (790)
Total $4,363
 $76,979
 $(10,381) $(1,196) $8,204
 $77,969
             
Year ended December 31, 2017          
Interest rate swaps(2)
 $(150,607) $20,258
 $148,947
 $524
 $(14,606) $4,516
Interest rate swaptions (115) 
 
 
 
 (115)
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives 526
 
 (902) (5,995) 7,438
 1,067
Options (1,453) 
 (300) 
 
 (1,753)
Futures contracts (9,130) 
 3,044
 
 
 (6,086)
Foreign currency forwards 32
 
 35
 
 
 67
Total return swaps

 (552) 
 1,673
 
 469
 1,590
Credit default swaps

 (11) 
 (22) 
 
 (33)
TBAs 4,049
 
 (10) 
 
 4,039
Total $(157,261) $20,258
 $152,465
 $(5,471) $(6,699) $3,292
 
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.
(2)"Other Settlements /Expirations" and "Market to Market" include the effects of the April 2017 restructuring of our interest rate swaps.

(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.

(2)"Other Settlements /Expirations" and "Market to Market" include the effects of the April 2017 restructuring of our interest rate swaps.
Other, net
For the years ended December 31, 20182019 and December 31, 2017,2018, "Other, net" consisted of expenseincome of $2.2 million and loss of $189 thousand, and income of $1.0 million, respectively. The balance is mainly comprised of interest on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives and miscellaneous fees collected on residential mortgage loans.
Expenses
 
Management Fee Expense
 
We incurred management fee expense of approximately $8.7$7.4 million and $8.1$8.7 million for the years ended December 31, 20182019 and December 31, 2017,2018, respectively. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. In September 2018,Although in May 2019, we completed a secondary public offering for net proceeds of approximately $67.7$49.3 million after subtracting underwriting commissions and offering costs. Our Manager will not earn a management fee on the newly issued equity through March 31, 2019, to reduce any impact on earnings as the capital was deployed into our target assets. Therefore the increase was attributable tohad net realized gains on sales of investments of approximately $28.3 million, these increases were offset by the termination of certainrealized losses on our interest rate swaps increasingwhich resulted in a decrease in the stockholders' equity that was utilized to calculate theour management fee.

60



The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, “Related Party Transactions” to the consolidated financial statements contained in this annual report on Form 10-K.
 
Other Operating Expenses
 
We incurred other operating expenses of approximately $6.1$5.5 million and $2.4$6.1 million for the years ended December 31, 20182019 and December 31, 2017,2018, respectively. Other operating cost is comprised of derivative transaction costs, custody, and asset management/loan servicing fees. The increasedecrease was primarily a result of a larger portfolio ofreduction in asset management and servicing fees related to our Residential Bridge Loans, Commercial Loans and a portfolio of conforming Residential Whole Loans, which were all acquired servicing released, thereby increasing the associated third party management/loan servicing fees.released.

General and Administrative Expenses
 
We incurred general and administrative expenses of approximately $7.9 million and $7.3 million for the years ended December 31, 2018 and December 31, 2017, respectively. The following describes the key components of general and administrative expenses.
Compensation Expense
Compensation expense decreased from approximately $2.7 million for the year ended December 31, 2017 to approximately $2.2 million for the year ended December 31, 2018. The decrease was a result of lower stock-based compensation from awards becoming fully vested in the first half of 2018. We did not issue any new stock-based awards to our Manager or executive officers in 2018 and 2017.

Professional Fees
Professional fees increased to approximately $4.3 million for the year ended December 31, 2018 from approximately $3.2 million for the year ended December 31, 2017. The increase was primarily a result of higher professional fees incurred in connection with becoming Sarbanes Oxley 404(b) complaint, professional fees in connection with one-time transaction costs and higher outsourced accounting fees due to a larger investment portfolio.

Other general and administrative expenses

Other generalGeneral and administrative expenses was relatively flat year over year.

Non-GAAP Financial Measures
We believe that our non-GAAP measures (described below), when considered with GAAP, provide supplemental information useful to investors in evaluating the results of our operations. Our presentations of such non-GAAP measures may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, such non-


GAAPnon-GAAP measures should not be considered as substitutes for our GAAP net income, as measures of our financial performance or any measure of our liquidity under GAAP.
Core Earnings
Core Earnings is a Non-GAAP financial measure that is used by us to approximate cash yield or income associated with our portfolio and is defined as GAAP net income (loss) as adjusted, excluding: (i) net realized gain (loss) on investments and termination of derivative contracts; (ii) net unrealized gain (loss) on investments; (iii) net unrealized gain (loss) resulting from mark-to-market adjustments on derivative contracts; (iv) other than temporary impairment; (v) provision for income taxes; (vi) non-cash stock-based compensation expense; (vii) non-cash amortization of the convertible senior unsecured notes discount; (viii) one-time charges such as acquisition costs and impairment on loans and (ix) one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between us, our Manager and our independent directors and after approval by a majority of the our independent directors.
We utilize Core Earnings as a key metric to evaluate the effective yield of the portfolio. Core Earnings allows us to reflect the net investment income of our portfolio as adjusted to reflect the net interest rate swap interest expense.  Core Earnings allows us to isolate the interest expense associated with our interest rate swaps in order to monitor and project our borrowing costs and interest rate spread.
We believe that the Non-GAAP measure, when considered with GAAP, provides supplemental information useful to investors in evaluating the results of our operations. Our presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations.  As a result, Core Earnings should not be considered as a substitute for our GAAP net income, as a measure of our financial performance or any measure of our liquidity under GAAP.
61



In March and April 2020, we sold $2.4 billion of investments. The majority of the impact of these sales were reflected in net income in the first half of 2020. Due to the significant amount of investment sales, resulting from the market volatility created by the COVID-19 pandemic, our core earnings for the years ended December 31, 2020 and December 31, 2019 are not comparable.
The table below reconciles Net Income to Core Earnings for the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 2017:2018:
(dollars in thousands)Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
Net income (loss) attributable to common stockholders and participating securities$(328,354)$70,699 $26,409 
Income tax provision396 1,057 709 
Net income (loss) before income taxes(327,958)71,756 27,118 
Adjustments:   
Investments:   
Unrealized (gain) loss on investments, securitized debt and other liabilities221,387 (107,529)24,671 
Other than temporary impairment— 8,574 11,180 
Realized (gain) loss on sale of investments(80,627)(28,278)63,257 
One-time transaction costs21,232 1,084 812 
Derivative Instruments:   
Net realized (gain) loss on derivatives193,155 123,569 (81,534)
Net unrealized (gain) loss on derivatives3,953 (9,390)10,381 
Other:
Realized gain on extinguishment of convertible senior unsecured notes(3,644)— — 
Amortization of discount on convertible senior unsecured notes1,097 718 550 
Other non-cash adjustments3,304 — — 
Non-cash stock-based compensation expense699 564 265 
Total adjustments360,556 (10,688)29,582 
Core Earnings$32,598 $61,068 $56,700 
(dollars in thousands) Year ended December 31, 2019 Year ended December 31, 2018 Year ended December 31, 2017
Net Income $70,699
 $26,409
 $85,097
Income tax provision 1,057
 709
 3,487
Net Income before income taxes 71,756
 27,118
 88,584
       
Adjustments:  
  
  
Investments:  
  
  
Unrealized (gain) loss on investments, securitized debt and other liabilities (107,529) 24,671
 (28,396)
Other than temporary impairment 8,574
 11,180
 22,873
Realized (gain) loss on sale of investments (28,278) 63,257
 (20,598)
Realized (gain) loss on foreign currency transactions 
 
 1
One-time transaction costs 1,084
 812
 146
       
Derivative Instruments:  
  
  
Net realized (gain) loss on derivatives 123,569
 (81,534) 136,992
Net unrealized (gain) loss on derivatives (9,390) 10,381
 (152,465)
       
Amortization of discount on convertible senior unsecured notes 718
 550
 137
Non-cash stock-based compensation expense 564
 265
 981
Total adjustments (10,688) 29,582
 (40,329)
Core Earnings $61,068
 $56,700
 $48,255

Alternatively, our Core Earnings can also be derived as presented in the table below by starting with Adjusted net interest income, which includes interest income on Interest-Only Strips accounted for as derivatives and other derivatives, and net interest expense incurred on interest rate swaps and foreign currency swaps and forwards (a Non-GAAP financial measure) subtracting


Total expenses, adding Non-cash stock based compensation, adding one-time transaction costs, adding amortization of discount on convertible senior notes, and adding interest income on cash balances and other income (loss), net:
62



(dollars in thousands)Year ended December 31, 2019 Year ended December 31, 2018 Year ended December 31, 2017(dollars in thousands)Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
Net interest income$66,990
 $71,122
 $75,918
Net interest income$45,437 $66,990 $71,122 
Interest income from IOs and IIOs accounted for as derivatives589
 850
 1,912
Interest income from IOs and IIOs accounted for as derivatives228 589 850 
Net interest income (expense) from interest rate swaps9,501
 6,158
 (14,082)Net interest income (expense) from interest rate swaps(1,133)9,501 6,158 
Adjusted net interest income77,080
 78,130
 63,748
Adjusted net interest income44,532 77,080 78,130 
Total expenses(20,944) (22,676) (17,778)Total expenses(38,907)(20,944)(22,676)
Other non-cash adjustmentsOther non-cash adjustments3,304 — — 
Non-cash stock-based compensation564
 265
 981
Non-cash stock-based compensation699 564 265 
One-time transaction costs1,084
 812
 146
One-time transaction costs21,232 1,084 812 
Amortization of discount on convertible unsecured senior notes718
 550
 137
Amortization of discount on convertible unsecured senior notes1,097 718 550 
Interest income on cash balances and other income (loss), net2,566
 (381) 1,021
Interest income on cash balances and other income (loss), net649 2,566 (381)
Income attributable to non-controlling interestIncome attributable to non-controlling interest(8)— — 
Core Earnings$61,068
 $56,700
 $48,255
Core Earnings$32,598 $61,068 $56,700 

Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value

"Economic book value" is a non-GAAP financial measure of our financial position on an unconsolidated basis. We own certain securities that represent a controlling variable interest, which under GAAP requires consolidation; however, our economic exposure to these variable interests is limited to the fair value of the individual investments. Economic book value is calculated by taking the GAAP book value and 1) adding the fair value of the retained interest or acquired security of the VIEs held by us and 2) removing the asset and liabilities associated with each of consolidated trusts (RETL 2019, CSMC USA, Arroyo 2019-2 and Arroyo 2020-1). Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the actual financial interest of these investments irrespective of the variable interest consolidation model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders' Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The table below is a reconciliation of the GAAP Book Value to Non-GAAP Economic Book Value:

$ AmountPer Share
GAAP Book Value at December 31, 2020$255,112 $4.20 
Adjustments to deconsolidate VIEs and reflect our interest in the securities owned
Deconsolidation of VIEs assets(2,651,627)(43.60)
Deconsolidation of VIEs liabilities2,528,536 41.58 
Interest in securities of VIEs owned, at fair value122,533 2.01 
Economic Book Value at December 31, 2020$254,554 $4.19 

Net Interest Income and Net Interest Margin
63



The following tables set forth certain information regarding our net investment income for the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 20172018 (dollars in thousands):
Year ended December 31, 2020
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency CMBS$343,711 $10,751 3.13 %
Agency RMBS61,008 2,165 3.55 %
Non-Agency RMBS32,905 1,539 4.68 %
Non-Agency CMBS262,372 21,798 8.31 %
Residential Whole Loans1,223,043 54,359 4.44 %
Residential Bridge Loans26,354 1,756 6.66 %
Commercial loans337,485 23,194 6.87 %
Securitized commercial loans1,093,487 59,212 5.41 %
Other securities53,753 3,482 6.48 %
Total investments$3,434,118 $178,256 5.19 %
Adjustments:
Securitized commercial loans from consolidated VIEs(1,093,487)(59,212)5.41 %
Investments in consolidated VIEs eliminated in consolidation93,688 8,655 9.24 %
Adjusted total investments$2,434,319 $127,699 5.25 %
Average Carrying Value
Total Interest Expense(3)
Average Effective Cost of Funds
Borrowings   
Repurchase agreements$1,108,838 $35,243 3.18 %
Convertible senior unsecured notes, net193,516 16,252 8.40 %
Securitized debt, net1,864,964 81,096 4.35 %
Interest rate swaps— 1,133 0.04 %
Total borrowings$3,167,318 $133,724 4.22 %
Adjustments:
Securitized debt from consolidated VIEs(4)
$(986,786)$(53,118)5.38 %
Adjusted total borrowings$2,180,532 $80,606 3.70 %
Adjusted net interest income and net interest margin$47,093 1.93 %

64



Year ended December 31, 2019 
Average Amortized
Cost of Assets(1)
 
Total Interest Income(2)
 Yield on Average Assets 
        
Investments       
Agency CMBS $1,521,668
 $49,056
 3.22 % 
Agency RMBS 275,054
 9,620
 3.50 % 
Non-Agency RMBS 47,982
 2,468
 5.14 % 
Non-Agency CMBS 226,072
 18,195
 8.05 % 
Residential Whole Loans 1,196,675
 57,234
 4.78 % 
Residential Bridge Loans 115,199
 8,109
 7.04 % 
Commercial loans 348,884
 28,556
 8.18 % 
Securitized commercial loans 830,311
 39,454
 4.75 % 
Other securities 69,894
 5,161
 7.38 % 
Total investments $4,631,739
 $217,853
 4.70 % 
Adjustments:       
Securitized commercial loans from consolidated VIEs (830,311) (39,454) 4.75 % 
Investments in consolidated VIEs eliminated in consolidation 88,781
 7,875
 8.87 % 
Adjusted total investments $3,890,209
 $186,274
 4.79 % 
        
  Average Carrying Value 
Total Interest Expense(3)
 Average Effective Cost of Funds 
Borrowings  
  
  
 
Repurchase agreements $2,888,151
 $90,802
 3.14 % 
Convertible senior unsecured notes, net 130,457
 10,556
 8.09 % 
Securitized debt, net 1,305,158
 48,916
 3.75 % 
Interest rate swaps n/a
 (9,501) (0.22)% 
Total borrowings $4,323,766
 $140,773
 3.26 % 
Adjustments:       
Securitized debt from consolidated VIEs(4)
 $(729,745) $(30,312) 4.15 % 
Adjusted total borrowings $3,594,021
 $110,461
 3.07 % 
        
Adjusted net interest income and net interest margin   $75,813
 1.95 % 



Year ended December 31, 2018 
Average Amortized
Cost of Assets(1)
 
Total Interest Income(2)
 Yield on Average Assets 
        
Investments       
Agency CMBS $1,982,164
 $59,698
 3.01 % 
Agency RMBS 450,998
 15,069
 3.34 % 
Non-Agency RMBS 92,789
 6,047
 6.52 % 
Non-Agency CMBS 294,811
 26,424
 8.96 % 
Residential Whole Loans 494,438
 23,331
 4.72 % 
Residential Bridge Loans 223,015
 15,889
 7.12 % 
Commercial loans 88,091
 6,898
 7.83 % 
Securitized commercial loans 931,090
 48,422
 5.20 % 
Other securities 96,810
 8,434
 8.71 % 
Total investments $4,654,206
 $210,212
 4.52 % 
Adjustments:       
Securitized commercial loan from consolidated VIEs (931,090) (48,422) 5.20 % 
Investments in consolidated VIE eliminated in consolidation 60,006
 6,675
 11.12 % 
Adjusted total investments $3,783,122
 $168,465
 4.45 % 
        
  Average Carrying Value 
Total Interest Expense(3)
 Average Effective Cost of Funds 
Borrowings  
  
  
 
Repurchase agreements $3,267,101
 $86,742
 2.66 % 
Convertible senior unsecured notes, net 109,456
 9,058
 8.28 % 
Securitized debt 957,816
 42,440
 4.43 % 
Interest rate swaps n/a
 (6,158) (0.14)% 
Total borrowings $4,334,373
 $132,082
 3.05 % 
Adjustments:       
Securitized debt from consolidated VIEs(4)
 $(957,816) $(42,440) 4.43 % 
Adjusted total borrowings $3,376,557
 $89,642
 2.65 % 
        
Adjusted net interest income and net interest margin   $78,823
 2.08 % 


Year ended December 31, 2017 
Average Amortized
Cost of Assets(1)
 
Total Interest Income(2)
 Yield on Average Assets 
        
Investments       
Agency CMBS $1,363,269
 $40,827
 2.99% 
Agency RMBS 912,211
 26,197
 2.87% 
Non-Agency RMBS 88,835
 6,167
 6.94% 
Non-Agency CMBS 323,769
 27,455
 8.48% 
Residential Whole Loans 207,786
 8,515
 4.10% 
Residential Bridge Loans 52,696
 4,487
 8.51% 
Securitized commercial loan 24,964
 2,247
 9.00% 
Other securities 116,683
 9,839
 8.43% 
Total return swaps 3,629
 469
 12.92% 
Total investments $3,093,842
 $126,203
 4.08% 
Adjustments:       
Securitized commercial loan from consolidated VIE (24,964) (2,247) 9.00% 
Investment in consolidated VIE eliminated in consolidation 13,980
 1,265
 9.05% 
Adjusted total investments $3,082,858
 $125,221
 4.06% 
        
  Average Carrying Value 
Total Interest Expense(3)
 Average Effective Cost of Funds 
Borrowings  
  
  
 
Repurchase agreements $2,713,199
 $45,128
 1.66% 
Convertible senior unsecured notes, net(5)
 108,743
 2,264
 8.34% 
Securitized debt 10,984
 981
 8.93% 
Interest rate swaps n/a
 14,082
 0.51% 
Total borrowings $2,832,926
 $62,455
 2.27% 
Adjustments:       
Securitized debt from consolidated VIE(4)
 $(10,984) $(981) 8.93% 
Adjusted total borrowings $2,821,942
 $61,474
 2.18% 
        
Adjusted net interest income and net interest margin   $63,747
 2.07% 
Year ended December 31, 2019
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency CMBS$1,521,668 $49,056 3.22 %
Agency RMBS275,054 9,620 3.50 %
Non-Agency RMBS47,982 2,468 5.14 %
Non-Agency CMBS226,072 18,195 8.05 %
Residential Whole Loans1,196,675 57,234 4.78 %
Residential Bridge Loans115,199 8,109 7.04 %
Commercial loans348,884 28,556 8.18 %
Securitized commercial loans830,311 39,454 4.75 %
Other securities69,894 5,161 7.38 %
Total investments$4,631,739 $217,853 4.70 %
Adjustments:
Securitized commercial loan from consolidated VIEs(830,311)(39,454)4.75 %
Investments in consolidated VIE eliminated in consolidation88,781 7,875 8.87 %
Adjusted total investments$3,890,209 $186,274 4.79 %
Average Carrying Value
Total Interest Expense(3)
Average Effective Cost of Funds
Borrowings   
Repurchase agreements$2,888,151 $90,802 3.14 %
Convertible senior unsecured notes, net130,457 10,556 8.09 %
Securitized debt1,305,158 48,916 3.75 %
Interest rate swapsn/a(9,501)(0.22)%
Total borrowings$4,323,766 $140,773 3.26 %
Adjustments:
Securitized debt from consolidated VIEs(4)
$(729,745)$(30,312)4.15 %
Adjusted total borrowings$3,594,021 $110,461 3.07 %
Adjusted net interest income and net interest margin$75,813 1.95 %
Year ended December 31, 2018
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency CMBS$1,982,164 $59,698 3.01 %
Agency RMBS450,998 15,069 3.34 %
Non-Agency RMBS92,789 6,047 6.52 %
Non-Agency CMBS294,811 26,424 8.96 %
Residential Whole Loans494,438 23,331 4.72 %
Residential Bridge Loans223,015 15,889 7.12 %
Commercial loans88,091 6,898 7.83 %
Securitized commercial loan931,090 48,422 5.20 %
Other securities96,810 8,434 8.71 %
Total investments$4,654,206 $210,212 4.52 %
Adjustments:
Securitized commercial loan from consolidated VIE(931,090)(48,422)5.20 %
Investment in consolidated VIE eliminated in consolidation60,006 6,675 11.12 %
Adjusted total investments$3,783,122 $168,465 4.45 %
Average Carrying Value
Total Interest Expense(3)
Average Effective Cost of Funds
Borrowings   
Repurchase agreements$3,267,101 $86,742 2.66 %
Convertible senior unsecured notes, net109,456 9,058 8.28 %
Securitized debt957,816 42,440 4.43 %
Interest rate swapsn/a(6,158)(0.14)%
Total borrowings$4,334,373 $132,082 3.05 %
Adjustments:
Securitized debt from consolidated VIE(4)
$(957,816)$(42,440)4.43 %
Adjusted total borrowings$3,376,557 $89,642 2.65 %
Adjusted net interest income and net interest margin$78,823 2.08 %
(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.
(2)Refer to below table for components of interest income.
(3)Includes the net amount paid, including accrued amounts and premium amortization for MAC interest rate swaps during the periods included in gain/loss on derivative instruments for GAAP.
(4)Includes only the third-party sponsored securitized debt from RETL Trust, CMSC Trust and MRCD Trust.
(5)The convertible senior unsecured notes, net are reflected at the balance as of December 31, 2017. The average cost of financing is calculated based on annualized interest expense divided by the average carrying value for the period outstanding.
(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.
(2)Refer to below table for components of interest income.
(3)Includes the net amount paid, including accrued amounts and premium amortization for MAC interest rate swaps during the periods included in gain/loss on derivative instruments for GAAP.
(4)Includes only the third-party sponsored securitized debt from RETL Trust, CMSC Trust, MRCD Trust and CMSC USA.

The following table reconciles total interest income to adjusted interest income, which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 2017:


2018:
65



(dollars in thousands)Year ended December 31, 2019 Year ended December 31, 2018 Year ended December 31, 2017
Coupon interest income:     
Agency CMBS$51,286
 $60,148
 $40,064
Agency RMBS12,181
 19,507
 38,108
Non-Agency RMBS4,682
 7,120
 5,602
Non-Agency CMBS14,178
 20,058
 19,179
Residential Whole Loans61,024
 24,300
 9,609
Residential Bridge Loans8,846
 18,299
 4,863
Commercial loans27,332
 6,624
 
Securitized commercial loans41,398
 51,009
 2,247
Other securities11,633
 14,805
 8,280
Subtotal coupon interest$232,560
 $221,870
 $127,952
Premium accretion, discount amortization and amortization of basis, net:     
Agency RMBS$(3,053) $(5,092) $(13,058)
Agency CMBS(2,327) (646) 507
Non-Agency RMBS(2,214) (1,073) 525
Non-Agency CMBS4,017
 6,366
 8,276
Residential Whole Loans(3,790) (969) (1,094)
Residential Bridge Loans(737) (2,410) (376)
Commercial loans1,224
 274
 
Securitized commercial loans(1,944) (2,587) 
Other securities(6,472) (6,371) 1,559
Subtotal accretion and amortization$(15,296) $(12,508) $(3,661)
Interest income$217,264
 $209,362
 $124,291
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
   
  
Coupon interest income$3,277
 $4,511
 $7,438
Amortization of basis(2,688) (3,661) (5,995)
Total Return swaps
 
 469
Subtotal$589
 $850
 $1,912
Total adjusted interest income$217,853
 $210,212
 $126,203
(dollars in thousands)Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
Coupon interest income:
Agency CMBS$11,336 $51,286 $60,148 
Agency RMBS2,975 12,181 19,507 
Non-Agency RMBS2,732 4,682 7,120 
Non-Agency CMBS15,331 14,178 20,058 
Residential Whole Loans59,698 61,024 24,300 
Residential Bridge Loans1,815 8,846 18,299 
Commercial loans22,832 27,332 6,624 
Securitized commercial loans49,370 41,398 51,009 
Other securities8,263 11,633 14,805 
Subtotal coupon interest$174,352 $232,560 $221,870 
Premium accretion, discount amortization and amortization of basis, net:
Agency RMBS$(987)$(3,053)$(5,092)
Agency CMBS(636)(2,327)(646)
Non-Agency RMBS(1,193)(2,214)(1,073)
Non-Agency CMBS6,467 4,017 6,366 
Residential Whole Loans(5,339)(3,790)(969)
Residential Bridge Loans(59)(737)(2,410)
Commercial loans362 1,224 274 
Securitized commercial loans9,842 (1,944)(2,587)
Other securities(4,781)(6,472)(6,371)
Subtotal accretion and amortization$3,676 $(15,296)$(12,508)
Interest income$178,028 $217,264 $209,362 
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
  
Coupon interest income$1,324 $3,277 $4,511 
Amortization of basis(1,096)(2,688)(3,661)
Subtotal$228 $589 $850 
Total adjusted interest income$178,256 $217,853 $210,212 

(1)Reported in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.

(1)Reported in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.


Effective Cost of Funds includes the net interest component related to our interest rate swaps, as well as the impact of our foreign currency swaps and forwards. While we have not elected hedge accounting for these instruments, such derivative instruments are viewed by us as an economic hedge against increases in future market interest rates on our liabilities and changes in foreign currency exchange rates on our assets and liabilities and are characterized as hedges for purposes of satisfying the REIT requirements and therefore the Effective Cost of Funds reflects interest expense adjusted to include the realized gain/loss (i.e., the interest income/expense component) for all of our interest rate swaps and the impact of our foreign currency swaps and forwards.

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The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 2017:2018:
 Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
(dollars in thousands)ReconciliationCost of
Funds/Effective
Borrowing
Costs
ReconciliationCost of
Funds/Effective
Borrowing
Costs
ReconciliationCost of
Funds/Effective
Borrowing
Costs
Interest expense$132,591 4.19 %$150,274 3.48 %$138,240 3.19 %
Adjustments:
Interest expense on Securitized debt from consolidated VIEs(53,118)(5.38)%(30,312)(4.15)%(42,440)(4.43)%
Net interest (received) paid —interest rate swaps1,133 0.04 %(9,501)(0.22)%(6,158)(0.14)%
Effective Borrowing Costs$80,606 3.70 %$110,461 3.07 %$89,642 2.65 %
Weighted average borrowings$2,180,532  $3,594,020  $3,376,557  
 Year ended December 31, 2019 Year ended December 31, 2018 Year ended December 31, 2017
(dollars in thousands)Reconciliation 
Cost of
Funds/Effective
Borrowing
Costs
 Reconciliation 
Cost of
Funds/Effective
Borrowing
Costs
 Reconciliation 
Cost of
Funds/Effective
Borrowing
Costs
Interest expense$150,274
 3.48 % $138,240
 3.19 % $48,373
 1.94 %
Adjustments:           
Interest expense on Securitized debt from consolidated VIEs(30,312) (4.15)% (42,440) (4.43)% (981) (8.93)%
Net interest (received) paid —interest rate swaps(9,501) (0.22)% (6,158) (0.14)% 14,082
 0.51 %
Effective Borrowing Costs$110,461
 3.07 % $89,642
 2.65 % $61,474
 2.18 %
Weighted average borrowings$3,594,021
  
 $3,376,557
  
 $2,821,942
  


Liquidity and Capital Resources
General
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, and other general business needs.  To maintain our REIT qualifications under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income, excluding capital gains and, such distributions requirements limit our ability to retain earnings and increase capital for operations. We believe that our significant capital resources and access to financing will provide us with financial flexibility at levels sufficient to meet current and anticipated capital requirements, including funding new investment opportunities, paying distributions to our stockholders and servicing our debt obligations.

Our liquidity and capital resources are managed on a daily basis to ensure that we have sufficient liquidity to absorb market events that could negatively impact collateral valuations and result in margin calls as well as to ensure that we have the flexibility to manage our investment portfolio to take advantage of market opportunities. As of December 31, 2019,2020, we had $ 175.0 million of senior unsecured convertible notes and $356.9 million of asset specific financings. Our convertible senior unsecured notes are not due until October 2022. As of December 31, 2020, we had $31.6 million in cash and cash equivalents. In response to the unprecedented market conditions, we implemented measures to increase liquidity, reduce leverage, and seek alternative financing arrangements. We made further progress towards strengthening our principal sourcesbalance sheet by reducing debt and leverage, while improving liquidity, shareholders equity and the earnings power of cash consistthe portfolio.
As the duration and severity of borrowings under repurchase agreements, payments of principal and interestCOVID-19 remain unknown, so does the impact it will have on our investment portfolioborrowers, lenders, and cash generated from operations and, if market conditions permit, secondary public stock offerings.

As part of our risk management process, our Managerthe economy as a whole. We will continue to closely monitorsmonitor developments related to COVID-19 as it relates to our liquidity position. This includes the developmentposition and evaluation of various alternative processes and procedures, which continue to be updated with regard to scenario testing for purposes of assessing our liquidity in the face of different economic and market developments.  Wefinancial obligations. At this time we believe we have sufficient current liquidity and access to additional liquidity to meet financial obligations for at least the next 12 months.

Debt to Equity Ratio

December 31, 2020December 31, 2019
Total debt(1)
$527,720 $3,022,100 
Total equity$255,114 $564,461 
Debt to equity ratio2.1 5.4 

(1) Total debt excludes the securitized debt which is non-recourse to us.

Financing Arrangements

On April 21, 2020, we entered into amendments with respect to certain of our residential loan warehouse facilities. These amendments mainly served to convert an existing residential whole loan facility into a term facility by removing any mark to market margin requirements, and to consolidate our Non-Qualified Mortgage loans, which were previously financed by three separate, unaffiliated counterparties, into a single facility. See "Note 7 - Financings" for details.

On October 6, 2020 we entered into an amendment with respect to its residential loan warehouse facility. The amendment serves to convert the existing residential loan facility to a limited mark to market margin facility that bears an
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interest rate of LIBOR plus 2.75%, with a LIBOR floor of 0.25%. The target advance rate under the amended facility is 85% and the facility matures on October 5, 2021. The premium recapture fee was eliminated for holdings that had not yet been sold or otherwise disposed of. See "Note 7 - Financings " for details.

On May 4, 2020, we supplemented one of our existing securities repurchase facilities to confirm terms pursuant to which we will consolidate most of our CMBS and RMBS assets, which are currently financed by multiple counterparties, into a single term facility with limited mark to market margin requirements. See "Note 7 - Financings " for details.


SourcesAt-The-Market Program
    In March 2017, we entered into an equity distribution agreement with JMP Securities LLC, which was amended on June 5, 2020, under which we may offer and sell up to $100.0 million shares of Liquiditycommon stock in an At-The-Market equity offering. During the year ended December 31, 2020, we sold 6,034,741 shares under this amended agreement with an average price of $3.70 per share for total net proceeds of $22.0 million.    
Convertible Notes Exchange
Principal Sources
On July 1, 2020, we issued an aggregate of Cash1,354,084 shares of our common stock in exchange for $5.0 million aggregate principal amount of our 2022 Notes. See Note 7 - "Financings" for information related to the convertible notes exchange.
We held cash
Convertible Notes Repurchase

In the fourth quarter of 2020, we repurchased $25.0 million aggregate principal amount of the 2022 Notes at an approximate 13% discount to par value, plus accrued and unpaid interest.

Dividends

To preserve liquidity, we suspended our first and second quarter of 2020 common stock dividends in light of extraordinary market volatility driven by uncertainty surrounding the COVID-19 pandemic.

In the third quarter of 2020, we resumed payment of our quarterly dividend after making progress strengthening our balance sheet and improving liquidity and earnings power of our investment portfolio. For the quarters ended September 30, 2020 and December 31, 2020, we declared a $0.05 and $0.06 dividend per share, respectively, generating a dividend yield of approximately $31.3 million, $22.0 million and $48.0 million6.7% based on the stock closing price of $3.26 at December 31, 2019,2020.
Book Value

    The following chart reflects our book value per common share basic and diluted shares over five consecutive quarters:

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wmc-20201231_g4.jpg
The COVID-19 pandemic has created unprecedented market disruption and dislocation, requiring us to sell asset to meet margin calls. We have implemented measures to increase liquidity, reduce leverage, and seek alternative financing arrangements to preserve long-term shareholder value. We had improved financial results during the second half of 2020, which included significant recovery in asset valuations. The improved asset valuations resulted in the increase in book value of $0.13 to $4.20 at December 31, 20182020 when compared to our September 30, 2020 book value of $4.07.
Results of Operations
Comparison of the year ended December 31, 2020 to the year ended December 31, 2019
General
Our results of operations were adversely impacted by the COVID-19 pandemic, which created unprecedented market disruption and dislocation. During the first quarter of 2020, the uncertainty surrounding the pandemic created an extreme lack of liquidity in mortgage markets and when combined with forced selling led to swift and dramatic price declines. The significant decline in value of our investment portfolio resulted in substantial margin calls from our repurchase agreement counterparties. In order to satisfy the margin calls, we sold a significant portion of our investments. We also terminated our interest rate hedges because they were ineffective in the low interest rate environment and it further reduced margin call volatility. During the second half of 2020, our portfolio experienced improved valuations and earnings, and we did not have significant asset sales or margin calls during the quarter.
The full impact of COVID-19 on our results of operations is still uncertain as it depends on several factors beyond our control including, but not limited to (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of the United States public health response, (iii) the pandemic’s impact on the U.S. and global economies, (iv) the timing, scope and effectiveness of additional governmental responses to the pandemic, (v) the timing and speed of economic recovery, including the availability and effectiveness of the vaccination for COVID-19 and (vi) the negative impact on our borrowers, asset values and cost of capital.

Due to the significant amount of investment sales, resulting from the market volatility created by the COVID-19 pandemic, our results of operations for the years ended December 31, 2020 and December 31, 2017, respectively.2019 are not comparable.

During the second half of 2020, we continued to make progress towards strengthening our balance sheet, improving liquidity, shareholders equity and the earnings power of the portfolio. For the year ended December 31, 2020, we generated a net loss of $328.3 million or $5.72 per basic and diluted weighted common share, compared to net income of $70.7 million or $1.37 per basic and diluted weighted common share for the year ended December 31, 2019. Our primary sourcesresults of cash currently consistoperations, for the second half of repurchase agreement borrowings,2020, was positively impacted by improved valuations on our investment portfolio, specifically our Residential Whole Loan Investments. Our credit sensitive portfolio continued to perform in line with our expectations.
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The following tables set forth certain information regarding our net interest income on our investment portfolio for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):
Year ended December 31, 2020Average Amortized
Cost of Assets
Total Interest IncomeYield on Average Assets
Investments
Agency CMBS$342,673 $10,700 3.12 %
Agency RMBS58,491 1,988 3.40 %
Non-Agency RMBS32,905 1,539 4.68 %
Non-Agency CMBS262,372 21,798 8.31 %
Residential Whole Loans1,223,043 54,359 4.44 %
Residential Bridge Loans26,354 1,756 6.66 %
Commercial loans337,485 23,194 6.87 %
Securitized commercial loans1,093,487 59,212 5.41 %
Other securities53,753 3,482 6.48 %
Total investments$3,430,563 $178,028 5.19 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings   
Repurchase agreements$1,108,838 $35,243 3.18 %
Convertible senior unsecured notes, net193,516 16,252 8.40 %
Securitized debt1,864,964 81,096 4.35 %
Total borrowings$3,167,318 $132,591 4.19 %
Net interest income and net interest margin(2)
$45,437 1.32 %
Year ended December 31, 2019Average Amortized
Cost of Assets
Total Interest IncomeYield on Average Assets
Investments
Agency CMBS$1,517,394 $48,959 3.23 %
Agency RMBS268,554 9,128 3.40 %
Non-Agency RMBS47,982 2,468 5.14 %
Non-Agency CMBS226,072 18,195 8.05 %
Residential Whole Loans1,196,675 57,234 4.78 %
Residential Bridge Loans115,199 8,109 7.04 %
Commercial loans348,884 28,556 8.18 %
Securitized commercial loans830,311 39,454 4.75 %
Other securities69,894 5,161 7.38 %
Total investments$4,620,965 $217,264 4.70 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$2,888,151 $90,802 3.14 %
Convertible senior unsecured notes, net130,457 10,556 8.09 %
Securitized debt1,305,158 48,916 3.75 %
Total borrowings$4,323,766 $150,274 3.48 %
Net interest income and net interest margin(2)
$66,990 1.45 %
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(1)     Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
(2) Since we do not apply hedge accounting, our net interest margin is this table does not reflect the benefit / cost of our interest rate swaps. See Non-GAAP Financial Measure section for net investment income principal repayments on investmentstable that includes the benefit / cost from our interest rate swaps.
Interest Income
For the years ended December 31, 2020 and the proceeds from debt and equity offerings, to the extent available in the capital markets. In the future, we expect our primary sources of liquidity to consist of payments of principal, investment income, unused borrowing capacity under our financing sources and future issuances of equity and debt securities.



Repurchase Agreements
As of December 31, 2019, we had 34 master repurchase agreements withearned interest income on our counterparties.investments of approximately $178.0 million and $217.3 million, respectively. The decrease in interest income for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was driven by the sales of a significant portion of our investment portfolio to meet margin calls. We had borrowings under 21sold $2.0 billion of investments, mainly in March and April 2020. The majority of the 34 master repurchase agreementsimpact of these sales were reflected in interest income in starting in the second of 2020. Our portfolio experienced improved valuations and we did not have significant asset sales in the second half of the year.
Interest Expense
Interest expense decreased from $150.3 million for the year ended December 31, 2019 to $132.6 million for the year ended December 31, 2020. The decrease was a result of the significant reduction in leverage associated with the sale of $2.4 billion of investments, mainly in March and April 2020. During the second quarter of 2020, we entered into two new financing facilities to limit our exposure to short-term mark to market financings. Also, we completed a securitization of approximately $2.8$355.8 million of our Residential Whole Loans, reducing our recourse leverage by $339.4 million or 46.0%.
Other income (loss), net
Realized gain (loss) on investments, net
Realized gain (loss) on investments represents the net gain (loss) on sales or settlements from our investment portfolio. To improve liquidity, reduce our repurchase agreement borrowing and satisfy our margin calls, we sold $2.4 billion at December 31, 2019. in investments mainly in March and April 2020. These sales generated $80.6 million in net realized gains. Our portfolio experienced improved valuations and we did not have significant asset sales during the third quarter.

The following table presents the realized gains (losses) of our investments for each of the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):
 Year ended December 31, 2020Year ended December 31, 2019
 ProceedsGross GainsGross LossesNet Gain  (Loss)ProceedsGross GainsGross LossesNet Gain  (Loss)
Agency CMBS$1,668,149 $116,463 $(6,486)$109,977 $891,072 $32,793 $(4,190)$28,603 
Agency RMBS400,948 12,552 (506)12,046 205,310 1,559 — 1,559 
Non-Agency RMBS(1)
12,658 — (60)(60)— — — — 
Non-Agency CMBS111,804 (23,624)(23,623)40,235 317 (1,624)(1,307)
Other securities35,957 113 (6,223)(6,110)— — — — 
Residential Whole-Loans144,259 — (10,511)(10,511)— — — — 
Residential Bridge Loans(1)
— (404)(396)— 232 (762)(530)
Loans transferred to REO(2)
419 126 (32)94 5,029 516 (473)43 
Disposition of REO1,892 18 (808)(790)1,761 38 (128)(90)
Total$2,376,086 $129,281 $(48,654)$80,627 $1,143,407 $35,455 $(7,177)$28,278 
(1)Realized gains/losses recognized on the final settlement of the loans.
(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.

Unrealized gain (loss), net
Our investments, and securitized debt, for which we have elected the fair value option are recorded at fair value with the periodic changes in fair value being recorded in earnings.  The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period. The extreme lack of liquidity in mortgage markets combined with forced selling led to swift and dramatic price declines in the first quarter of 2020. While we have seen price recovery on our investments investments in the second, third, and fourth quarters, there is still a lot of
54



uncertainty surrounding the opening and recovery of the economy. Therefore, the recovery experienced was not sufficient to significantly reduce the substantial unrealized loss from the dramatic price declines.

The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt (dollars in thousands):
 Year ended December 31, 2020Year ended December 31, 2019
Agency CMBS$(61,033)$78,544 
Agency RMBS(9,131)8,510 
Non-Agency RMBS(5,812)(230)
Non-Agency CMBS(50,841)(890)
Residential Whole Loans(22,891)20,790 
Residential Bridge Loans(497)501 
Commercial loans(15,281)(121)
Securitized commercial loans(58,421)(1,070)
Other securities(6,938)1,564 
Securitized debt9,458 (294)
Other liabilities— 225 
Total$(221,387)$107,529 
Gain (loss) on derivatives, net
In March 2020, we effectively terminated all of our fixed-pay interest rate swaps and variable-pay interest rate swaps to reduce hedging costs and associated margin volatility. The effects of the termination is reflected in the table below for the December 31, 2020.
The following table presents the components of gain (loss) on derivatives for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):
Realized Gain (Loss), net
DescriptionOther Settlements / ExpirationsVariation Margin SettlementMark-to-marketReturn
(Recovery)
of Basis
Contractual interest
income(expense), net
(1)
Total
Year ended December 31, 2020
Interest rate swaps$(262)$(179,759)$(2,515)$262 $(1,395)$(183,669)
Interest rate swaptions80 — — — — 80 
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives(940)— (532)(1,096)1,324 (1,244)
Credit default swaps(9,534)— (1,834)— — (11,368)
TBAs(2,430)— 928 — — (1,502)
Total$(13,086)$(179,759)$(3,953)$(834)$(71)$(197,703)
Year ended December 31, 2019
Interest rate swaps$(4,978)$(108,169)$5,140 $5,769 $3,732 $(98,506)
Interest rate swaptions(332)— — — — (332)
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives— — (508)(2,688)3,277 81 
Options1,378 — — — — 1,378 
Futures contracts(12,862)— 4,657 — — (8,205)
Credit default swaps(178)— 1,029 — — 851 
TBAs1,934 — (928)— — 1,006 
Total$(15,038)$(108,169)$9,390 $3,081 $7,009 $(103,727)
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.
Other, net
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For the years ended December 31, 2020 and December 31, 2019, "Other, net" consisted of income of $339 thousand and income of $2.2 million, respectively. The balance is mainly comprised of interest on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives and miscellaneous fees collected on residential mortgage loans.  
Expenses
Management Fee Expense
We incurred management fee expense of approximately $4.5 million and $7.4 million for the years ended December 31, 2020 and December 31, 2019, respectively. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. The decrease was mainly attributable to our Manager waiving the management fee from March 2020 to May 2020 as a result of the impact of COVID-19 and the disruption in the mortgage markets. Future waivers, if any, are at the Manager's discretion. Also, the termination of our interest rate swaps in March 2020 resulted in realized losses that reduced stockholders' equity that is used to calculate the management fee.

The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, “Related Party Transactions” to the consolidated financial statements contained in this annual report on Form 10-K.







Financing Fee

In the second quarter in order to manage the severe market conditions and the resulting large margin demands from lenders and pressure on our liquidity, we entered into a longer term financing arrangement for our Residential Whole Loans, as we sort to reduce our exposure to short-term financings with daily mark to market exposure. Under this agreement, we are required to pay the counterparty a 30% premium recapture fee of all realized value on any residential whole loans above such counterparty’s amortized basis upon the securitization or sale.

On June 29, 2020, we securitized approximately $355.8 million of the Residential Whole Loans and paid down the facility by approximately $339.4 million (see "Securitized Debt" below for additional details). As noted above, as part of the financing arrangements, we agreed to pay the lender a fee of 30% of all realized value on the Residential Whole Loans above the counterparty's amortized basis upon securitization or sale. As a result of refinancing the Residential Whole Loans through a securitization, we accrued a premium recapture fee of approximately $20.5 million, which is payable at the maturity of the facility. However, in connection with an amendment to this facility effective October 6, 2020, we paid $12.0 million of the fee with the balance of $8.5 million due on the new maturity if the facility on October 5, 2021. The amendment also eliminated the the premium recapture fee for assets financed under the amended facility.

Other Operating Expenses
We incurred other operating expenses of approximately $2.9 million and $5.5 million for the years ended December 31, 2020 and December 31, 2019, respectively. Other operating cost is comprised of derivative transaction costs, custody, and asset management/loan servicing fees. The decrease was primarily a result of a smaller bridge loan portfolio, which were acquired servicing released, thereby decreasing the associated third party asset management/loan servicing fees. In addition we incurred lower acquisition transaction costs, due to no investment acquisitions in the second, third and fourth quarters and lower derivative commissions and fees due to no new derivative transactions since we terminated our interest rate swaps in March 2020.

General and Administrative Expenses
General and administrative expenses for the years ended December 31, 2020 and December 31, 2019 were $11.0 million and $8.1 million, respectively. The increase was mainly attributable to an increase in the cost of our D&O insurance and additional legal fees incurred.
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Comparison of the year ended December 31, 2019 to the year ended December 31, 2018
General
Our operating results mainly depend upon the difference between the yield on our investments, the cost of our borrowings, including our hedging activities, the composition and changes in market prices of our portfolio and our expenses. For the year ended December 31, 2019, we generated net income of $70.7 million or $1.37 per basic and diluted weighted common share, compared to net income of $26.4 million or $0.61 per basic and diluted weighted common share for the year ended December 31, 2018. Our results of operations, for the year ended December 31, 2019, was positively impacted by type of collateral pledged, as oftighter spreads on our Agency portfolio. Our credit sensitive portfolio continued to perform well with the favorable environment in both residential and commercial real estate markets.
Net Interest Income
The following tables set forth certain information regarding our net interest income on our investment portfolio for the years ended December 31, 2019 and December 31, 2018 and the respective effective(dollars in thousands):
Year ended December 31, 2019Average Amortized Cost of AssetsTotal Interest IncomeYield on Average Assets
Investments
Agency CMBS$1,517,394 $48,959 3.23 %
Agency RMBS268,554 9,128 3.40 %
Non-Agency RMBS47,982 2,468 5.14 %
Non-Agency CMBS226,072 18,195 8.05 %
Residential Whole Loans1,196,675 57,234 4.78 %
Residential Bridge Loans115,199 8,109 7.04 %
Commercial loans348,884 28,556 8.18 %
Securitized commercial loans830,311 39,454 4.75 %
Other Securities69,894 5,161 7.38 %
Total$4,620,965 $217,264 4.70 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$2,888,151 $90,802 3.14 %
Convertible senior unsecured notes, net130,457 10,556 8.09 %
Securitized debt1,305,158 48,916 3.75 %
Total borrowings$4,323,766 $150,274 3.48 %
Net interest income and net interest margin(2)
$66,990 1.45 %

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Year ended December 31, 2018Average Amortized Cost of AssetsTotal Interest IncomeYield on Average Assets
Investments   
Agency CMBS$1,976,291 $59,502 3.01 %
Agency RMBS442,145 14,415 3.26 %
Non-Agency RMBS92,789 6,047 6.52 %
Non-Agency CMBS294,811 26,424 8.96 %
Residential Whole Loans494,438 23,331 4.72 %
Residential Bridge Loans223,015 15,889 7.12 %
Commercial Whole-Loans88,091 6,898 7.83 %
Securitized commercial loan931,090 48,422 5.20 %
Other Securities96,810 8,434 8.71 %
Total$4,639,480 $209,362 4.51 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$3,267,101 $86,742 2.66 %
Convertible senior unsecured notes, net109,456 9,058 8.28 %
Securitized debt957,816 42,440 4.43 %
Total borrowings$4,334,373 $138,240 3.19 %
Net interest income and net interest margin(2)
$71,122 1.53 %

(1)     Average cost of funds (Non-GAAP financial measure)does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
(2) Since we do not apply hedge accounting, our net interest margin is this table does not reflect the benefit / cost of our interest rate swaps. See Non-GAAP Financial Measure section for net investment income table that includes the benefit / cost from our interest rate swaps.

Interest Income
For the years ended December 31, 2019 and December 31, 2018, we earned interest income on our investments of approximately $217.3 million and $209.4 million, respectively. The increase in interest income for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily the result of an overall higher yielding investment portfolio. The weighted average yield increased to 4.70% for the year ended December 31, 2019 from 4.51% for the year ended December 31, 2018. Our credit sensitive investments contributed approximately $159.2 million or 73.3% to interest income for the period. Under the current market conditions, we expect to continue to increase our investments in Residential Whole Loans, Commercial Loans, Non-Agency CMBS and opportunistically invest in Agency CMBS and Agency RMBS.
Interest Expense
Interest expense increased from $138.2 million for the year ended December 31, 2018 to $150.3 million for the year ended December 31, 2019. Our higher borrowing costs reflect: (i)  higher interest rates on our repurchase agreements in 2019 coupled with higher costs associated with financing our credit-sensitive investments, which generally have higher interest rates; (ii) the issuance of an additional $90.0 million aggregate principal amount of 6.75% convertible senior unsecured notes in 2019; and (iii) an increase in the average outstanding securitized debt of $347.3 million from the consolidation of the Arroyo Trust and MRCD Trust. Our average cost of funds on our repurchase agreements increased from 2.66% for the year ended December 31, 2018 to 3.14% for the year ended December 31, 2019. We utilize interest rate swaps to mitigate our interest rate exposure. However, since we do not apply hedge accounting the reduction in interest expense is reflected in "Gain (loss) on derivatives, net."
Other income (loss)
Realized gain (loss) on investments, net
58



Realized gain (loss) on investments represents the net gain (loss) on sales or settlements from our investment portfolio. Our Manager regularly reviews the characteristics of our portfolio and may make changes to our portfolio in order to adjust such portfolio characteristics in response to and/or anticipation of changing market conditions in an effort to achieve the appropriate risk reward ratio.

The following table presents the sales and realized gains (loss) of our investments for the years ended December 31, 2019 and December 31, 2018 (dollars in thousands):
 Year ended December 31, 2019Year ended December 31, 2018
 ProceedsGross GainsGross LossesNet Gain  (Loss)ProceedsGross GainsGross LossesNet Gain  (Loss)
Agency CMBS$891,072 $32,793 $(4,190)$28,603 $1,534,967 $— $(51,045)$(51,045)
Agency RMBS205,310 1,559 — 1,559 589,854 18 (23,997)(23,979)
Non-Agency RMBS(1)
— — — — 99,842 7,008 (478)6,530 
Non-Agency CMBS40,235 317 (1,624)(1,307)140,292 3,086 (6,201)(3,115)
Other securities— — — — 65,099 8,400 — 8,400 
Residential Bridge loans (1)
— 232 (762)(530)569 — (48)(48)
Loans transferred to REO(2)
5,029 516 (473)43 — — — — 
Disposition of REO1,761 38 (128)(90)— — — — 
Total$1,143,407 $35,455 $(7,177)$28,278 $2,430,623 $18,512 $(81,769)$(63,257)
(1)Realized gains/losses recognized on the final settlement of the loans.
(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.
Unrealized gain (loss), net
Our investments and securitized debt, for which we have elected the fair value option, are recorded at fair value with the periodic changes in fair value being recorded in earnings.  The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period.  For the year ended December 31, 2019, unrealized gain (loss) increased to a net unrealized gain of $107.5 million from a net unrealized loss of $24.7 million for the year ended December 31, 2018. The majority of the increase in net unrealized gain (loss) was a result of tighter credit spreads on our Agency portfolio and in 2019, which positively impacted the value of these securities, accounting for the majority of the increase in unrealized gains in the portfolio.

The following table presents the net unrealized gains (losses) we recorded on our investment and securitized debt (dollars in thousands):
 Year ended December 31, 2019Year ended December 31, 2018
Agency CMBS$78,544 $(25,040)
Agency RMBS8,510 (2,289)
Non-Agency RMBS(230)(3,960)
Non-Agency CMBS(890)15,805 
Residential Whole Loans20,790 (444)
Residential Bridge Loans501 (1,896)
Commercial loans(121)631 
Securitized commercial loans(1,070)(16)
Other securities1,564 (7,352)
Securitized debt(294)116 
Other liabilities225 (226)
Total$107,529 $(24,671)
Gain (loss) on derivatives, net
59



In order to mitigate interest rate risk resulting from our repurchase agreement borrowings, we enter into a variety of derivative and non-derivative instruments. Our primary objective for acquiring these derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control.

The following table presents the components of gain (loss) on derivatives for the year ended December 31, 2019 and December 31, 2018 (dollars in thousands):

Realized Gain (Loss), net
DescriptionOther Settlements / ExpirationsVariation Margin SettlementMark-to-marketReturn
(Recovery)
of Basis
Contractual interest
income(expense), net
(1)
Total
Year ended December 31, 2019
Interest rate swaps$(4,978)$(108,169)$5,140 $5,769 $3,732 $(98,506)
Interest rate swaptions(332)— — — — (332)
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives— — (508)(2,688)3,277 81 
Options1,378 — — — — 1,378 
Futures contracts(12,862)— 4,657 — — (8,205)
Credit default swaps(178)— 1,029 — — 851 
TBAs1,934 — (928)— — 1,006 
Total$(15,038)$(108,169)$9,390 $3,081 $7,009 $(103,727)
Year ended December 31, 2018
Interest rate swaps(2)
$163 $76,979 $(5,147)$2,465 $3,693 $78,153 
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives— — (655)(3,661)4,511 195 
Options(871)— 300 — — (571)
Futures contracts6,112 — (5,285)— — 827 
Credit default swaps
(241)— 396 — — 155 
TBAs(800)— 10 — — (790)
Total$4,363 $76,979 $(10,381)$(1,196)$8,204 $77,969 
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.
(2)"Other Settlements /Expirations" and "Market to Market" include the effects of the April 2017 restructuring of our interest rate swaps.
Other, net
For the years ended December 31, 2019 and December 31, 2018, "Other, net" consisted of income of $2.2 million and loss of $189 thousand, respectively. The balance is mainly comprised of interest on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives and miscellaneous fees collected on residential mortgage loans.  
Expenses
Management Fee Expense
We incurred management fee expense of approximately $7.4 million and $8.7 million for the years ended December 31, 2019 and December 31, 2018, respectively. See "Non-GAAPPursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. Although in May 2019, we completed a secondary public offering for net proceeds of approximately $49.3 million after subtracting underwriting commissions and had net realized gains on sales of investments of approximately $28.3 million, these increases were offset by the realized losses on our interest rate swaps which resulted in a decrease in the stockholders' equity that was utilized to calculate our management fee.

60



The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, “Related Party Transactions” to the consolidated financial statements contained in this annual report on Form 10-K.
Other Operating Expenses
We incurred other operating expenses of approximately $5.5 million and $6.1 million for the years ended December 31, 2019 and December 31, 2018, respectively. Other operating cost is comprised of derivative transaction costs, custody, and asset management/loan servicing fees. The decrease was primarily a result of a reduction in asset management and servicing fees related to our Residential Bridge Loans, which were all acquired servicing released.

General and Administrative Expenses
General and administrative expenses was relatively flat year over year.

Non-GAAP Financial Measures"Measures
    We believe that our non-GAAP measures (described below), when considered with GAAP, provide supplemental information useful to investors in evaluating the results of our operations. Our presentations of such non-GAAP measures may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, such non-GAAP measures should not be considered as substitutes for our GAAP net income, as measures of our financial performance or any measure of our liquidity under GAAP.
Core Earnings
Core Earnings is a Non-GAAP financial measure that is used by us to approximate cash yield or income associated with our portfolio and is defined as GAAP net income (loss) as adjusted, excluding: (i) net realized gain (loss) on investments and termination of derivative contracts; (ii) net unrealized gain (loss) on investments; (iii) net unrealized gain (loss) resulting from mark-to-market adjustments on derivative contracts; (iv) other than temporary impairment; (v) provision for income taxes; (vi) non-cash stock-based compensation expense; (vii) non-cash amortization of the convertible senior unsecured notes discount; (viii) one-time charges such as acquisition costs and impairment on loans and (ix) one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between us, our Manager and our independent directors and after approval by a majority of the our independent directors.
We utilize Core Earnings as a key metric to evaluate the effective yield of the portfolio. Core Earnings allows us to reflect the net investment income of our portfolio as adjusted to reflect the net interest rate swap interest expense.  Core Earnings allows us to isolate the interest expense associated with our interest rate swaps in order to monitor and project our borrowing costs and interest rate spread.
We believe that the Non-GAAP measure, when considered with GAAP, provides supplemental information useful to investors in evaluating the results of our operations. Our presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations.  As a result, Core Earnings should not be considered as a substitute for our GAAP net income, as a measure of our financial performance or any measure of our liquidity under GAAP.
61



In March and April 2020, we sold $2.4 billion of investments. The majority of the impact of these sales were reflected in net income in the first half of 2020. Due to the significant amount of investment sales, resulting from the market volatility created by the COVID-19 pandemic, our core earnings for the years ended December 31, 2020 and December 31, 2019 are not comparable.
The table below reconciles Net Income to Core Earnings for the years ended December 31, 2020, December 31, 2019 and December 31, 2018:
(dollars in thousands)Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
Net income (loss) attributable to common stockholders and participating securities$(328,354)$70,699 $26,409 
Income tax provision396 1,057 709 
Net income (loss) before income taxes(327,958)71,756 27,118 
Adjustments:   
Investments:   
Unrealized (gain) loss on investments, securitized debt and other liabilities221,387 (107,529)24,671 
Other than temporary impairment— 8,574 11,180 
Realized (gain) loss on sale of investments(80,627)(28,278)63,257 
One-time transaction costs21,232 1,084 812 
Derivative Instruments:   
Net realized (gain) loss on derivatives193,155 123,569 (81,534)
Net unrealized (gain) loss on derivatives3,953 (9,390)10,381 
Other:
Realized gain on extinguishment of convertible senior unsecured notes(3,644)— — 
Amortization of discount on convertible senior unsecured notes1,097 718 550 
Other non-cash adjustments3,304 — — 
Non-cash stock-based compensation expense699 564 265 
Total adjustments360,556 (10,688)29,582 
Core Earnings$32,598 $61,068 $56,700 

Alternatively, our Core Earnings can also be derived as presented in the table below by starting with Adjusted net interest income, which includes interest income on Interest-Only Strips accounted for as derivatives and other derivatives, and net interest expense incurred on interest rate swaps and foreign currency swaps and forwards (a Non-GAAP financial measure) subtracting Total expenses, adding Non-cash stock based compensation, adding one-time transaction costs, adding amortization of discount on convertible senior notes, and adding interest income on cash balances and other income (loss), net:
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(dollars in thousands)Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
Net interest income$45,437 $66,990 $71,122 
Interest income from IOs and IIOs accounted for as derivatives228 589 850 
Net interest income (expense) from interest rate swaps(1,133)9,501 6,158 
Adjusted net interest income44,532 77,080 78,130 
Total expenses(38,907)(20,944)(22,676)
Other non-cash adjustments3,304 — — 
Non-cash stock-based compensation699 564 265 
One-time transaction costs21,232 1,084 812 
Amortization of discount on convertible unsecured senior notes1,097 718 550 
Interest income on cash balances and other income (loss), net649 2,566 (381)
Income attributable to non-controlling interest(8)— — 
Core Earnings$32,598 $61,068 $56,700 

Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value

"Economic book value" is a non-GAAP financial measure of our financial position on an unconsolidated basis. We own certain securities that represent a controlling variable interest, which under GAAP requires consolidation; however, our economic exposure to these variable interests is limited to the fair value of the individual investments. Economic book value is calculated by taking the GAAP book value and 1) adding the fair value of the retained interest or acquired security of the VIEs held by us and 2) removing the asset and liabilities associated with each of consolidated trusts (RETL 2019, CSMC USA, Arroyo 2019-2 and Arroyo 2020-1). Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the actual financial interest of these investments irrespective of the variable interest consolidation model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders' Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The table below is a reconciliation of the GAAP Book Value to Non-GAAP Economic Book Value:

$ AmountPer Share
GAAP Book Value at December 31, 2020$255,112 $4.20 
Adjustments to deconsolidate VIEs and reflect our interest in the securities owned
Deconsolidation of VIEs assets(2,651,627)(43.60)
Deconsolidation of VIEs liabilities2,528,536 41.58 
Interest in securities of VIEs owned, at fair value122,533 2.01 
Economic Book Value at December 31, 2020$254,554 $4.19 

Net Interest Income and Net Interest Margin
63



The following tables set forth certain information regarding our net investment income for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 (dollars in thousands):
Year ended December 31, 2020
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency CMBS$343,711 $10,751 3.13 %
Agency RMBS61,008 2,165 3.55 %
Non-Agency RMBS32,905 1,539 4.68 %
Non-Agency CMBS262,372 21,798 8.31 %
Residential Whole Loans1,223,043 54,359 4.44 %
Residential Bridge Loans26,354 1,756 6.66 %
Commercial loans337,485 23,194 6.87 %
Securitized commercial loans1,093,487 59,212 5.41 %
Other securities53,753 3,482 6.48 %
Total investments$3,434,118 $178,256 5.19 %
Adjustments:
Securitized commercial loans from consolidated VIEs(1,093,487)(59,212)5.41 %
Investments in consolidated VIEs eliminated in consolidation93,688 8,655 9.24 %
Adjusted total investments$2,434,319 $127,699 5.25 %
Average Carrying Value
Total Interest Expense(3)
Average Effective Cost of Funds
Borrowings   
Repurchase agreements$1,108,838 $35,243 3.18 %
Convertible senior unsecured notes, net193,516 16,252 8.40 %
Securitized debt, net1,864,964 81,096 4.35 %
Interest rate swaps— 1,133 0.04 %
Total borrowings$3,167,318 $133,724 4.22 %
Adjustments:
Securitized debt from consolidated VIEs(4)
$(986,786)$(53,118)5.38 %
Adjusted total borrowings$2,180,532 $80,606 3.70 %
Adjusted net interest income and net interest margin$47,093 1.93 %

64



CollateralBorrowings Outstanding Value of Collateral Pledged 
Weighted
Average
Interest Rate
end of
period
 Weighted Average Cost of Funds 
Weighted Average Effective Cost of Funds
(Non-GAAP) (1)
 
Weighted
Average
Haircut
end of
period
December 31, 2019           
Agency CMBS, at fair value$1,352,248
 $1,400,230
 2.05% 2.51% 2.51 % 5.13%
Agency RMBS, at fair value348,274
 356,687
 1.99% 2.47% 2.47 % 5.35%
Non-Agency RMBS, at fair value30,481
 45,816
 3.56% 3.93% 3.93 % 36.70%
Non-Agency CMBS, at fair value190,390
 246,797
 3.05% 3.64% 3.64 % 22.46%
Residential Whole Loans, at fair value(2)
476,172
 529,495
 3.32% 4.03% 4.03 % 7.88%
Residential Bridge Loans(2)
29,869
 34,897
 3.93% 4.61% 4.61 % 20.00%
Commercial loans, at fair value(2)
224,594
 350,213
 3.93% 4.71% 4.71 % 33.60%
Securitized commercial loan, at fair value(2)
116,087
 171,640
 3.93% 3.61% 3.61 % 31.38%
Other securities, at fair value56,762
 80,031
 3.23% 3.85% 3.85 % 28.30%
Interest rate swapsn/a
 n/a
 n/a
 n/a
 (0.33)% n/a
Total$2,824,877
 $3,215,806
 2.61% 3.14% 2.81 % 11.11%
            
December 31, 2018           
Agency CMBS, at fair value$1,392,649
 $1,486,142
 2.71% 2.06% 2.06 % 5.03%
Agency RMBS, at fair value14,650
 19,837
 3.09% 2.00% 2.00 % 21.66%
Non-Agency RMBS, at fair value30,922
 50,555
 4.06% 3.57% 3.57 % 35.21%
Non-Agency CMBS, at fair value134,814
 186,552
 4.05% 3.69% 3.69 % 25.59%
Residential Whole Loans, at fair value(2)
863,356
 1,041,885
 4.08% 4.01% 4.01 % 15.94%
Residential Bridge Loans(2)
204,754
 221,486
 4.50% 4.50% 4.50 % 20.00%
Commercial loans, at fair value(2)
131,788
 196,123
 4.55% 4.65% 4.65 % 35.00%
Securitized commercial loan, at fair value(2)
7,543
 13,688
 4.30% 4.01% 4.01 % 45.00%
Other securities, at fair value38,361
 59,780
 4.18% 3.81% 3.81 % 35.83%
Interest rate swapsn/a
 n/a
 n/a
 n/a
 (0.19)% n/a
Total$2,818,837
 $3,276,048
 3.45% 2.66% 2.47 % 12.63%
Year ended December 31, 2019
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency CMBS$1,521,668 $49,056 3.22 %
Agency RMBS275,054 9,620 3.50 %
Non-Agency RMBS47,982 2,468 5.14 %
Non-Agency CMBS226,072 18,195 8.05 %
Residential Whole Loans1,196,675 57,234 4.78 %
Residential Bridge Loans115,199 8,109 7.04 %
Commercial loans348,884 28,556 8.18 %
Securitized commercial loans830,311 39,454 4.75 %
Other securities69,894 5,161 7.38 %
Total investments$4,631,739 $217,853 4.70 %
Adjustments:
Securitized commercial loan from consolidated VIEs(830,311)(39,454)4.75 %
Investments in consolidated VIE eliminated in consolidation88,781 7,875 8.87 %
Adjusted total investments$3,890,209 $186,274 4.79 %
Average Carrying Value
Total Interest Expense(3)
Average Effective Cost of Funds
Borrowings   
Repurchase agreements$2,888,151 $90,802 3.14 %
Convertible senior unsecured notes, net130,457 10,556 8.09 %
Securitized debt1,305,158 48,916 3.75 %
Interest rate swapsn/a(9,501)(0.22)%
Total borrowings$4,323,766 $140,773 3.26 %
Adjustments:
Securitized debt from consolidated VIEs(4)
$(729,745)$(30,312)4.15 %
Adjusted total borrowings$3,594,021 $110,461 3.07 %
Adjusted net interest income and net interest margin$75,813 1.95 %
Year ended December 31, 2018
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency CMBS$1,982,164 $59,698 3.01 %
Agency RMBS450,998 15,069 3.34 %
Non-Agency RMBS92,789 6,047 6.52 %
Non-Agency CMBS294,811 26,424 8.96 %
Residential Whole Loans494,438 23,331 4.72 %
Residential Bridge Loans223,015 15,889 7.12 %
Commercial loans88,091 6,898 7.83 %
Securitized commercial loan931,090 48,422 5.20 %
Other securities96,810 8,434 8.71 %
Total investments$4,654,206 $210,212 4.52 %
Adjustments:
Securitized commercial loan from consolidated VIE(931,090)(48,422)5.20 %
Investment in consolidated VIE eliminated in consolidation60,006 6,675 11.12 %
Adjusted total investments$3,783,122 $168,465 4.45 %
Average Carrying Value
Total Interest Expense(3)
Average Effective Cost of Funds
Borrowings   
Repurchase agreements$3,267,101 $86,742 2.66 %
Convertible senior unsecured notes, net109,456 9,058 8.28 %
Securitized debt957,816 42,440 4.43 %
Interest rate swapsn/a(6,158)(0.14)%
Total borrowings$4,334,373 $132,082 3.05 %
Adjustments:
Securitized debt from consolidated VIE(4)
$(957,816)$(42,440)4.43 %
Adjusted total borrowings$3,376,557 $89,642 2.65 %
Adjusted net interest income and net interest margin$78,823 2.08 %
(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.
(2)Refer to below table for components of interest income.
(3)Includes the net amount paid, including accrued amounts and premium amortization for MAC interest rate swaps during the periods included in gain/loss on derivative instruments for GAAP.
(4)Includes only the third-party sponsored securitized debt from RETL Trust, CMSC Trust, MRCD Trust and CMSC USA.

The following table reconciles total interest income to adjusted interest income, which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the years ended December 31, 2020, December 31, 2019 and December 31, 2018:
65



(dollars in thousands)Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
Coupon interest income:
Agency CMBS$11,336 $51,286 $60,148 
Agency RMBS2,975 12,181 19,507 
Non-Agency RMBS2,732 4,682 7,120 
Non-Agency CMBS15,331 14,178 20,058 
Residential Whole Loans59,698 61,024 24,300 
Residential Bridge Loans1,815 8,846 18,299 
Commercial loans22,832 27,332 6,624 
Securitized commercial loans49,370 41,398 51,009 
Other securities8,263 11,633 14,805 
Subtotal coupon interest$174,352 $232,560 $221,870 
Premium accretion, discount amortization and amortization of basis, net:
Agency RMBS$(987)$(3,053)$(5,092)
Agency CMBS(636)(2,327)(646)
Non-Agency RMBS(1,193)(2,214)(1,073)
Non-Agency CMBS6,467 4,017 6,366 
Residential Whole Loans(5,339)(3,790)(969)
Residential Bridge Loans(59)(737)(2,410)
Commercial loans362 1,224 274 
Securitized commercial loans9,842 (1,944)(2,587)
Other securities(4,781)(6,472)(6,371)
Subtotal accretion and amortization$3,676 $(15,296)$(12,508)
Interest income$178,028 $217,264 $209,362 
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
  
Coupon interest income$1,324 $3,277 $4,511 
Amortization of basis(1,096)(2,688)(3,661)
Subtotal$228 $589 $850 
Total adjusted interest income$178,256 $217,853 $210,212 
(1)The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments

(1)Reported in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.


Effective Cost of Funds includes the net interest component related to our interest rate swaps, net of premium amortization on MAC swaps, of approximately $9.5 million received and $6.2 million received for the years ended December 31, 2019 and 2018, respectively. While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements. See "Non-GAAP Financial Measures."
(2)Repurchase agreement borrowings collateralized by Whole Loans, Bridge Loans and securitized commercial loans owned through trust certificates. The trust certificates are eliminated upon consolidation.



We are also required to pledge cash or securities as collateral as part of a margin arrangement for our derivative contracts, calculated daily, subject either to the terms of individual agreements for bilateral agreements and the clearinghouse rules in the case of cleared swaps. The amount of margin that we are required to post will vary and generally reflects collateral posted with respect to swaps that are in an unrealized loss position to us and a percentage of the aggregate notional amount of swaps per counterparty as well as margin posted withthe impact of our clearing broker, pursuant to clearinghouse rules and practices, for cleared swaps. Conversely, if our bilateralforeign currency swaps and swaptionsforwards. While we have not elected hedge accounting for these instruments, such derivative instruments are viewed by us as an economic hedge against increases in an unrealized gain position,future market interest rates on our counterpartiesliabilities and changes in foreign currency exchange rates on our assets and liabilities and are requiredcharacterized as hedges for purposes of satisfying the REIT requirements and therefore the Effective Cost of Funds reflects interest expense adjusted to post collateral with us, underinclude the same terms that we post collateral with them. We may enter into a MACrealized gain/loss (i.e., the interest rate swap in which we may receive or make a payment at the timeincome/expense component) for all of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all otherour interest rate swaps theseand the impact of our foreign currency swaps and forwards.
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The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest rate swaps are also subjectexpense for the years ended December 31, 2020, December 31, 2019 and December 31, 2018:
 Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
(dollars in thousands)ReconciliationCost of
Funds/Effective
Borrowing
Costs
ReconciliationCost of
Funds/Effective
Borrowing
Costs
ReconciliationCost of
Funds/Effective
Borrowing
Costs
Interest expense$132,591 4.19 %$150,274 3.48 %$138,240 3.19 %
Adjustments:
Interest expense on Securitized debt from consolidated VIEs(53,118)(5.38)%(30,312)(4.15)%(42,440)(4.43)%
Net interest (received) paid —interest rate swaps1,133 0.04 %(9,501)(0.22)%(6,158)(0.14)%
Effective Borrowing Costs$80,606 3.70 %$110,461 3.07 %$89,642 2.65 %
Weighted average borrowings$2,180,532  $3,594,020  $3,376,557  

Liquidity and Capital Resources
General
Liquidity is a measure of our ability to margin requirements.
Convertible Senior Unsecured Notes
In August 2019,meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, and other general business needs.  To maintain our REIT qualifications under the Internal Revenue Code, we issued an additional $40.0must distribute annually at least 90% of our taxable income, excluding capital gains and, such distributions requirements limit our ability to retain earnings and increase capital for operations. As of December 31, 2020, we had $ 175.0 million aggregate principal amount of 6.75%senior unsecured convertible notes and $356.9 million of asset specific financings. Our convertible senior unsecured notes (the "August 2019 Reopened Notes")are not due until October 2022. As of December 31, 2020, we had $31.6 million in cash and cash equivalents. In response to the unprecedented market conditions, we implemented measures to increase liquidity, reduce leverage, and seek alternative financing arrangements. We made further progress towards strengthening our balance sheet by reducing debt and leverage, while improving liquidity, shareholders equity and the earnings power of the portfolio.
As the duration and severity of COVID-19 remain unknown, so does the impact it will have on our borrowers, lenders, and the economy as a whole. We will continue to closely monitor developments related to COVID-19 as it relates to our liquidity position and financial obligations. At this time we believe we have sufficient liquidity and access to additional liquidity to meet financial obligations for net proceedsat least the next 12 months.

Debt to Equity Ratio

December 31, 2020December 31, 2019
Total debt(1)
$527,720 $3,022,100 
Total equity$255,114 $564,461 
Debt to equity ratio2.1 5.4 

(1) Total debt excludes the securitized debt which is non-recourse to us.

Financing Arrangements

On April 21, 2020, we entered into amendments with respect to certain of $38.8 million.our residential loan warehouse facilities. These amendments mainly served to convert an existing residential whole loan facility into a term facility by removing any mark to market margin requirements, and to consolidate our Non-Qualified Mortgage loans, which were previously financed by three separate, unaffiliated counterparties, into a single facility. See "Note 7 - Financings" for details.

On October 6, 2020 we entered into an amendment with respect to its residential loan warehouse facility. The August 2019 Reopened Notes have substantially identical terms asamendment serves to convert the existing notes issued in October 2017.residential loan facility to a limited mark to market margin facility that bears an
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interest rate of LIBOR plus 2.75%, with a LIBOR floor of 0.25%. The notes maturetarget advance rate under the amended facility is 85% and the facility matures on October 1, 2022, unless earlier converted, redeemed5, 2021. The premium recapture fee was eliminated for holdings that had not yet been sold or repurchased by the holdersotherwise disposed of. See "Note 7 - Financings " for details.

On May 4, 2020, we supplemented one of our existing securities repurchase facilities to confirm terms pursuant to their terms,which we will consolidate most of our CMBS and RMBS assets, which are not redeemablecurrently financed by us except during the final three months priormultiple counterparties, into a single term facility with limited mark to maturity.market margin requirements. See "Note 7 - Financings " for details.

In December 2019, we issued an additional $50.0 million aggregate principal amount of 6.75% convertible senior unsecured notes (the "December 2019 Reopened Notes") for net proceeds of $49.2 million. The December 2019 Reopened Notes have substantially identical terms as the existing notes issued in October 2017. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

At-The-Market Program
In AprilMarch 2017, we entered into an equity distribution agreement with JMP Securities LLC, or "JMP,"which was amended on June 5, 2020, under which we may offer and sell up to $100.0 million shares of common stock in an At-The-Market equity offeringoffering. During the year ended December 31, 2020, we sold 6,034,741 shares under this amended agreement with an average price of $3.70 per share for total net proceeds of $22.0 million.    
Convertible Notes Exchange

On July 1, 2020, we issued an aggregate of 1,354,084 shares of our common stock in exchange for $5.0 million aggregate principal amount of our 2022 Notes. See Note 7 - "Financings" for information related to the convertible notes exchange.

Convertible Notes Repurchase

In the fourth quarter of 2020, we repurchased $25.0 million aggregate principal amount of the 2022 Notes at an approximate 13% discount to par value, plus accrued and unpaid interest.

Dividends

To preserve liquidity, we suspended our first and second quarter of 2020 common stock dividends in light of extraordinary market volatility driven by uncertainty surrounding the COVID-19 pandemic.

In the third quarter of 2020, we resumed payment of our quarterly dividend after making progress strengthening our balance sheet and improving liquidity and earnings power of our investment portfolio. For the quarters ended September 30, 2020 and December 31, 2020, we declared a $0.05 and $0.06 dividend per share, respectively, generating a dividend yield of approximately 6.7% based on the stock closing price of $3.26 at December 31, 2020.
Book Value

    The following chart reflects our book value per common share basic and diluted shares over five consecutive quarters:

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wmc-20201231_g4.jpg
The COVID-19 pandemic has created unprecedented market disruption and dislocation, requiring us to sell asset to meet margin calls. We have implemented measures to increase liquidity, reduce leverage, and seek alternative financing arrangements to preserve long-term shareholder value. We had improved financial results during the second half of 2020, which included significant recovery in asset valuations. The improved asset valuations resulted in the increase in book value of $0.13 to $4.20 at December 31, 2020 when compared to our September 30, 2020 book value of $4.07.
Results of Operations
Comparison of the year ended December 31, 2020 to the year ended December 31, 2019
General
Our results of operations were adversely impacted by the COVID-19 pandemic, which created unprecedented market disruption and dislocation. During the first quarter of 2020, the uncertainty surrounding the pandemic created an extreme lack of liquidity in mortgage markets and when combined with forced selling led to swift and dramatic price declines. The significant decline in value of our investment portfolio resulted in substantial margin calls from timeour repurchase agreement counterparties. In order to timesatisfy the margin calls, we sold a significant portion of our investments. We also terminated our interest rate hedges because they were ineffective in the low interest rate environment and it further reduced margin call volatility. During the second half of 2020, our portfolio experienced improved valuations and earnings, and we did not have significant asset sales or margin calls during the quarter.
The full impact of COVID-19 on our results of operations is still uncertain as it depends on several factors beyond our control including, but not limited to (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of the United States public health response, (iii) the pandemic’s impact on the U.S. and global economies, (iv) the timing, scope and effectiveness of additional governmental responses to the pandemic, (v) the timing and speed of economic recovery, including the availability and effectiveness of the vaccination for COVID-19 and (vi) the negative impact on our borrowers, asset values and cost of capital.

Due to the significant amount of investment sales, resulting from the market volatility created by the COVID-19 pandemic, our results of operations for the years ended December 31, 2020 and December 31, 2019 are not comparable.

During the second half of 2020, we continued to make progress towards strengthening our balance sheet, improving liquidity, shareholders equity and the earnings power of the portfolio. For the year ended December 31, 2020, we generated a net loss of $328.3 million or $5.72 per basic and diluted weighted common share, compared to net income of $70.7 million or $1.37 per basic and diluted weighted common share for the year ended December 31, 2019. Our results of operations, for the second half of 2020, was positively impacted by improved valuations on our investment portfolio, specifically our Residential Whole Loan Investments. Our credit sensitive portfolio continued to perform in line with our expectations.
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The following tables set forth certain information regarding our net interest income on our investment portfolio for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):
Year ended December 31, 2020Average Amortized
Cost of Assets
Total Interest IncomeYield on Average Assets
Investments
Agency CMBS$342,673 $10,700 3.12 %
Agency RMBS58,491 1,988 3.40 %
Non-Agency RMBS32,905 1,539 4.68 %
Non-Agency CMBS262,372 21,798 8.31 %
Residential Whole Loans1,223,043 54,359 4.44 %
Residential Bridge Loans26,354 1,756 6.66 %
Commercial loans337,485 23,194 6.87 %
Securitized commercial loans1,093,487 59,212 5.41 %
Other securities53,753 3,482 6.48 %
Total investments$3,430,563 $178,028 5.19 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings   
Repurchase agreements$1,108,838 $35,243 3.18 %
Convertible senior unsecured notes, net193,516 16,252 8.40 %
Securitized debt1,864,964 81,096 4.35 %
Total borrowings$3,167,318 $132,591 4.19 %
Net interest income and net interest margin(2)
$45,437 1.32 %
Year ended December 31, 2019Average Amortized
Cost of Assets
Total Interest IncomeYield on Average Assets
Investments
Agency CMBS$1,517,394 $48,959 3.23 %
Agency RMBS268,554 9,128 3.40 %
Non-Agency RMBS47,982 2,468 5.14 %
Non-Agency CMBS226,072 18,195 8.05 %
Residential Whole Loans1,196,675 57,234 4.78 %
Residential Bridge Loans115,199 8,109 7.04 %
Commercial loans348,884 28,556 8.18 %
Securitized commercial loans830,311 39,454 4.75 %
Other securities69,894 5,161 7.38 %
Total investments$4,620,965 $217,264 4.70 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$2,888,151 $90,802 3.14 %
Convertible senior unsecured notes, net130,457 10,556 8.09 %
Securitized debt1,305,158 48,916 3.75 %
Total borrowings$4,323,766 $150,274 3.48 %
Net interest income and net interest margin(2)
$66,990 1.45 %
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(1)     Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
(2) Since we do not apply hedge accounting, our net interest margin is this table does not reflect the benefit / cost of our interest rate swaps. See Non-GAAP Financial Measure section for net investment income table that includes the benefit / cost from our interest rate swaps.
Interest Income
For the years ended December 31, 2020 and December 31, 2019, we earned interest income on our investments of approximately $178.0 million and $217.3 million, respectively. The decrease in interest income for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was driven by the sales of a significant portion of our investment portfolio to meet margin calls. We sold $2.0 billion of investments, mainly in March and April 2020. The majority of the impact of these sales were reflected in interest income in starting in the second of 2020. Our portfolio experienced improved valuations and we did not have significant asset sales in the second half of the year.
Interest Expense
Interest expense decreased from $150.3 million for the year ended December 31, 2019 to $132.6 million for the year ended December 31, 2020. The decrease was a result of the significant reduction in leverage associated with the sale of $2.4 billion of investments, mainly in March and April 2020. During the second quarter of 2020, we entered into two new financing facilities to limit our exposure to short-term mark to market financings. Also, we completed a securitization of approximately $355.8 million of our Residential Whole Loans, reducing our recourse leverage by $339.4 million or 46.0%.
Other income (loss), net
Realized gain (loss) on investments, net
Realized gain (loss) on investments represents the net gain (loss) on sales or settlements from our investment portfolio. To improve liquidity, reduce our repurchase agreement borrowing and satisfy our margin calls, we sold $2.4 billion in investments mainly in March and April 2020. These sales generated $80.6 million in net realized gains. Our portfolio experienced improved valuations and we did not have significant asset sales during the third quarter.

The following table presents the realized gains (losses) of our investments for each of the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):
 Year ended December 31, 2020Year ended December 31, 2019
 ProceedsGross GainsGross LossesNet Gain  (Loss)ProceedsGross GainsGross LossesNet Gain  (Loss)
Agency CMBS$1,668,149 $116,463 $(6,486)$109,977 $891,072 $32,793 $(4,190)$28,603 
Agency RMBS400,948 12,552 (506)12,046 205,310 1,559 — 1,559 
Non-Agency RMBS(1)
12,658 — (60)(60)— — — — 
Non-Agency CMBS111,804 (23,624)(23,623)40,235 317 (1,624)(1,307)
Other securities35,957 113 (6,223)(6,110)— — — — 
Residential Whole-Loans144,259 — (10,511)(10,511)— — — — 
Residential Bridge Loans(1)
— (404)(396)— 232 (762)(530)
Loans transferred to REO(2)
419 126 (32)94 5,029 516 (473)43 
Disposition of REO1,892 18 (808)(790)1,761 38 (128)(90)
Total$2,376,086 $129,281 $(48,654)$80,627 $1,143,407 $35,455 $(7,177)$28,278 
(1)Realized gains/losses recognized on the final settlement of the loans.
(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.

Unrealized gain (loss), net
Our investments, and securitized debt, for which we have elected the fair value option are recorded at fair value with the periodic changes in fair value being recorded in earnings.  The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period. The extreme lack of liquidity in mortgage markets combined with forced selling led to swift and dramatic price declines in the first quarter of 2020. While we have seen price recovery on our investments investments in the second, third, and fourth quarters, there is still a lot of
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uncertainty surrounding the opening and recovery of the economy. Therefore, the recovery experienced was not sufficient to significantly reduce the substantial unrealized loss from the dramatic price declines.

The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt (dollars in thousands):
 Year ended December 31, 2020Year ended December 31, 2019
Agency CMBS$(61,033)$78,544 
Agency RMBS(9,131)8,510 
Non-Agency RMBS(5,812)(230)
Non-Agency CMBS(50,841)(890)
Residential Whole Loans(22,891)20,790 
Residential Bridge Loans(497)501 
Commercial loans(15,281)(121)
Securitized commercial loans(58,421)(1,070)
Other securities(6,938)1,564 
Securitized debt9,458 (294)
Other liabilities— 225 
Total$(221,387)$107,529 
Gain (loss) on derivatives, net
In March 2020, we effectively terminated all of our fixed-pay interest rate swaps and variable-pay interest rate swaps to reduce hedging costs and associated margin volatility. The effects of the termination is reflected in the table below for the December 31, 2020.
The following table presents the components of gain (loss) on derivatives for the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):
Realized Gain (Loss), net
DescriptionOther Settlements / ExpirationsVariation Margin SettlementMark-to-marketReturn
(Recovery)
of Basis
Contractual interest
income(expense), net
(1)
Total
Year ended December 31, 2020
Interest rate swaps$(262)$(179,759)$(2,515)$262 $(1,395)$(183,669)
Interest rate swaptions80 — — — — 80 
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives(940)— (532)(1,096)1,324 (1,244)
Credit default swaps(9,534)— (1,834)— — (11,368)
TBAs(2,430)— 928 — — (1,502)
Total$(13,086)$(179,759)$(3,953)$(834)$(71)$(197,703)
Year ended December 31, 2019
Interest rate swaps$(4,978)$(108,169)$5,140 $5,769 $3,732 $(98,506)
Interest rate swaptions(332)— — — — (332)
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives— — (508)(2,688)3,277 81 
Options1,378 — — — — 1,378 
Futures contracts(12,862)— 4,657 — — (8,205)
Credit default swaps(178)— 1,029 — — 851 
TBAs1,934 — (928)— — 1,006 
Total$(15,038)$(108,169)$9,390 $3,081 $7,009 $(103,727)
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.
Other, net
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For the years ended December 31, 2020 and December 31, 2019, "Other, net" consisted of income of $339 thousand and income of $2.2 million, respectively. The balance is mainly comprised of interest on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives and miscellaneous fees collected on residential mortgage loans.  
Expenses
Management Fee Expense
We incurred management fee expense of approximately $4.5 million and $7.4 million for the years ended December 31, 2020 and December 31, 2019, respectively. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. The decrease was mainly attributable to our Manager waiving the management fee from March 2020 to May 2020 as a result of the impact of COVID-19 and the disruption in the mortgage markets. Future waivers, if any, are at the Manager's discretion. Also, the termination of our interest rate swaps in March 2020 resulted in realized losses that reduced stockholders' equity that is used to calculate the management fee.

The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, “Related Party Transactions” to the consolidated financial statements contained in this annual report on Form 10-K.







Financing Fee

In the second quarter in order to manage the severe market conditions and the resulting large margin demands from lenders and pressure on our liquidity, we entered into a longer term financing arrangement for our Residential Whole Loans, as we sort to reduce our exposure to short-term financings with daily mark to market exposure. Under this agreement, we are required to pay the counterparty a 30% premium recapture fee of all realized value on any residential whole loans above such counterparty’s amortized basis upon the securitization or sale.

On June 29, 2020, we securitized approximately $355.8 million of the Residential Whole Loans and paid down the facility by approximately $339.4 million (see "Securitized Debt" below for additional details). As noted above, as part of the financing arrangements, we agreed to pay the lender a fee of 30% of all realized value on the Residential Whole Loans above the counterparty's amortized basis upon securitization or sale. As a result of refinancing the Residential Whole Loans through JMP. Duringa securitization, we accrued a premium recapture fee of approximately $20.5 million, which is payable at the maturity of the facility. However, in connection with an amendment to this facility effective October 6, 2020, we paid $12.0 million of the fee with the balance of $8.5 million due on the new maturity if the facility on October 5, 2021. The amendment also eliminated the the premium recapture fee for assets financed under the amended facility.

Other Operating Expenses
We incurred other operating expenses of approximately $2.9 million and $5.5 million for the years ended December 31, 2020 and December 31, 2019, respectively. Other operating cost is comprised of derivative transaction costs, custody, and asset management/loan servicing fees. The decrease was primarily a result of a smaller bridge loan portfolio, which were acquired servicing released, thereby decreasing the associated third party asset management/loan servicing fees. In addition we incurred lower acquisition transaction costs, due to no investment acquisitions in the second, third and fourth quarters and lower derivative commissions and fees due to no new derivative transactions since we terminated our interest rate swaps in March 2020.

General and Administrative Expenses
General and administrative expenses for the years ended December 31, 2020 and December 31, 2019 were $11.0 million and $8.1 million, respectively. The increase was mainly attributable to an increase in the cost of our D&O insurance and additional legal fees incurred.
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Comparison of the year ended December 31, 2019 to the year ended December 31, 2018
General
Our operating results mainly depend upon the difference between the yield on our investments, the cost of our borrowings, including our hedging activities, the composition and changes in market prices of our portfolio and our expenses. For the year ended December 31, 2019, we sold 299,497 shares undergenerated net income of $70.7 million or $1.37 per basic and diluted weighted common share, compared to net income of $26.4 million or $0.61 per basic and diluted weighted common share for the year ended December 31, 2018. Our results of operations, for the year ended December 31, 2019, was positively impacted by tighter spreads on our Agency portfolio. Our credit sensitive portfolio continued to perform well with the favorable environment in both residential and commercial real estate markets.
Net Interest Income
The following tables set forth certain information regarding our net interest income on our investment portfolio for the years ended December 31, 2019 and December 31, 2018 (dollars in thousands):
Year ended December 31, 2019Average Amortized Cost of AssetsTotal Interest IncomeYield on Average Assets
Investments
Agency CMBS$1,517,394 $48,959 3.23 %
Agency RMBS268,554 9,128 3.40 %
Non-Agency RMBS47,982 2,468 5.14 %
Non-Agency CMBS226,072 18,195 8.05 %
Residential Whole Loans1,196,675 57,234 4.78 %
Residential Bridge Loans115,199 8,109 7.04 %
Commercial loans348,884 28,556 8.18 %
Securitized commercial loans830,311 39,454 4.75 %
Other Securities69,894 5,161 7.38 %
Total$4,620,965 $217,264 4.70 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$2,888,151 $90,802 3.14 %
Convertible senior unsecured notes, net130,457 10,556 8.09 %
Securitized debt1,305,158 48,916 3.75 %
Total borrowings$4,323,766 $150,274 3.48 %
Net interest income and net interest margin(2)
$66,990 1.45 %

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Year ended December 31, 2018Average Amortized Cost of AssetsTotal Interest IncomeYield on Average Assets
Investments   
Agency CMBS$1,976,291 $59,502 3.01 %
Agency RMBS442,145 14,415 3.26 %
Non-Agency RMBS92,789 6,047 6.52 %
Non-Agency CMBS294,811 26,424 8.96 %
Residential Whole Loans494,438 23,331 4.72 %
Residential Bridge Loans223,015 15,889 7.12 %
Commercial Whole-Loans88,091 6,898 7.83 %
Securitized commercial loan931,090 48,422 5.20 %
Other Securities96,810 8,434 8.71 %
Total$4,639,480 $209,362 4.51 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$3,267,101 $86,742 2.66 %
Convertible senior unsecured notes, net109,456 9,058 8.28 %
Securitized debt957,816 42,440 4.43 %
Total borrowings$4,334,373 $138,240 3.19 %
Net interest income and net interest margin(2)
$71,122 1.53 %

(1)     Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
(2) Since we do not apply hedge accounting, our net interest margin is this agreementtable does not reflect the benefit / cost of our interest rate swaps. See Non-GAAP Financial Measure section for net proceedsinvestment income table that includes the benefit / cost from our interest rate swaps.

Interest Income
For the years ended December 31, 2019 and December 31, 2018, we earned interest income on our investments of $3.0 million.approximately $217.3 million and $209.4 million, respectively. The increase in interest income for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily the result of an overall higher yielding investment portfolio. The weighted average yield increased to 4.70% for the year ended December 31, 2019 from 4.51% for the year ended December 31, 2018. Our credit sensitive investments contributed approximately $159.2 million or 73.3% to interest income for the period. Under the current market conditions, we expect to continue to increase our investments in Residential Whole Loans, Commercial Loans, Non-Agency CMBS and opportunistically invest in Agency CMBS and Agency RMBS.

Interest Expense
Interest expense increased from $138.2 million for the year ended December 31, 2018 to $150.3 million for the year ended December 31, 2019. Our higher borrowing costs reflect: (i)  higher interest rates on our repurchase agreements in 2019 coupled with higher costs associated with financing our credit-sensitive investments, which generally have higher interest rates; (ii) the issuance of an additional $90.0 million aggregate principal amount of 6.75% convertible senior unsecured notes in 2019; and (iii) an increase in the average outstanding securitized debt of $347.3 million from the consolidation of the Arroyo Trust and MRCD Trust. Our average cost of funds on our repurchase agreements increased from 2.66% for the year ended December 31, 2018 to 3.14% for the year ended December 31, 2019. We utilize interest rate swaps to mitigate our interest rate exposure. However, since we do not apply hedge accounting the reduction in interest expense is reflected in "Gain (loss) on derivatives, net."
Secondary Public OfferingOther income (loss)
Realized gain (loss) on investments, net
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Realized gain (loss) on investments represents the net gain (loss) on sales or settlements from our investment portfolio. Our Manager regularly reviews the characteristics of our portfolio and may make changes to our portfolio in order to adjust such portfolio characteristics in response to and/or anticipation of changing market conditions in an effort to achieve the appropriate risk reward ratio.

The following table presents the sales and realized gains (loss) of our investments for the years ended December 31, 2019 and December 31, 2018 (dollars in thousands):
 Year ended December 31, 2019Year ended December 31, 2018
 ProceedsGross GainsGross LossesNet Gain  (Loss)ProceedsGross GainsGross LossesNet Gain  (Loss)
Agency CMBS$891,072 $32,793 $(4,190)$28,603 $1,534,967 $— $(51,045)$(51,045)
Agency RMBS205,310 1,559 — 1,559 589,854 18 (23,997)(23,979)
Non-Agency RMBS(1)
— — — — 99,842 7,008 (478)6,530 
Non-Agency CMBS40,235 317 (1,624)(1,307)140,292 3,086 (6,201)(3,115)
Other securities— — — — 65,099 8,400 — 8,400 
Residential Bridge loans (1)
— 232 (762)(530)569 — (48)(48)
Loans transferred to REO(2)
5,029 516 (473)43 — — — — 
Disposition of REO1,761 38 (128)(90)— — — — 
Total$1,143,407 $35,455 $(7,177)$28,278 $2,430,623 $18,512 $(81,769)$(63,257)
(1)Realized gains/losses recognized on the final settlement of the loans.
(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.
Unrealized gain (loss), net
Our investments and securitized debt, for which we have elected the fair value option, are recorded at fair value with the periodic changes in fair value being recorded in earnings.  The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period.  For the year ended December 31, 2019, unrealized gain (loss) increased to a net unrealized gain of $107.5 million from a net unrealized loss of $24.7 million for the year ended December 31, 2018. The majority of the increase in net unrealized gain (loss) was a result of tighter credit spreads on our Agency portfolio and in 2019, which positively impacted the value of these securities, accounting for the majority of the increase in unrealized gains in the portfolio.

The following table presents the net unrealized gains (losses) we recorded on our investment and securitized debt (dollars in thousands):
 Year ended December 31, 2019Year ended December 31, 2018
Agency CMBS$78,544 $(25,040)
Agency RMBS8,510 (2,289)
Non-Agency RMBS(230)(3,960)
Non-Agency CMBS(890)15,805 
Residential Whole Loans20,790 (444)
Residential Bridge Loans501 (1,896)
Commercial loans(121)631 
Securitized commercial loans(1,070)(16)
Other securities1,564 (7,352)
Securitized debt(294)116 
Other liabilities225 (226)
Total$107,529 $(24,671)
Gain (loss) on derivatives, net
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In Septemberorder to mitigate interest rate risk resulting from our repurchase agreement borrowings, we enter into a variety of derivative and non-derivative instruments. Our primary objective for acquiring these derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control.

The following table presents the components of gain (loss) on derivatives for the year ended December 31, 2019 and December 31, 2018 we completed a secondary public offer(dollars in which we sold 6,500,000 sharesthousands):

Realized Gain (Loss), net
DescriptionOther Settlements / ExpirationsVariation Margin SettlementMark-to-marketReturn
(Recovery)
of Basis
Contractual interest
income(expense), net
(1)
Total
Year ended December 31, 2019
Interest rate swaps$(4,978)$(108,169)$5,140 $5,769 $3,732 $(98,506)
Interest rate swaptions(332)— — — — (332)
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives— — (508)(2,688)3,277 81 
Options1,378 — — — — 1,378 
Futures contracts(12,862)— 4,657 — — (8,205)
Credit default swaps(178)— 1,029 — — 851 
TBAs1,934 — (928)— — 1,006 
Total$(15,038)$(108,169)$9,390 $3,081 $7,009 $(103,727)
Year ended December 31, 2018
Interest rate swaps(2)
$163 $76,979 $(5,147)$2,465 $3,693 $78,153 
Agency and Non-Agency Interest-Only Strips - accounted for as derivatives— — (655)(3,661)4,511 195 
Options(871)— 300 — — (571)
Futures contracts6,112 — (5,285)— — 827 
Credit default swaps
(241)— 396 — — 155 
TBAs(800)— 10 — — (790)
Total$4,363 $76,979 $(10,381)$(1,196)$8,204 $77,969 
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.
(2)"Other Settlements /Expirations" and "Market to Market" include the effects of the April 2017 restructuring of our common stock, including all 303,422 shares in treasury stock, at a priceinterest rate swaps.
Other, net
For the years ended December 31, 2019 and December 31, 2018, "Other, net" consisted of $10.85 per share,income of $2.2 million and loss of $189 thousand, respectively. The balance is mainly comprised of interest on cash balances, miscellaneous net interest income (expense) on cash collateral for net proceedsour repurchase agreements and derivatives and miscellaneous fees collected on residential mortgage loans.  
Expenses
Management Fee Expense
We incurred management fee expense of approximately $67.7$7.4 million after subtracting underwriting commissions and offering expenses$8.7 million for the years ended December 31, 2019 and December 31, 2018, respectively. Pursuant to the terms of approximately $2.8 million.
Inthe Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. Although in May 2019, we completed a secondary public offering in which we sold 5,000,000 shares of our common stock at a price of $10.14 per share, for net proceeds of approximately $49.3 million after subtracting underwriting commissions and offeringhad net realized gains on sales of investments of approximately $28.3 million, these increases were offset by the realized losses on our interest rate swaps which resulted in a decrease in the stockholders' equity that was utilized to calculate our management fee.

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The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, “Related Party Transactions” to the consolidated financial statements contained in this annual report on Form 10-K.
Other Operating Expenses
We incurred other operating expenses of approximately $1.4 million.$5.5 million and $6.1 million for the years ended December 31, 2019 and December 31, 2018, respectively. Other operating cost is comprised of derivative transaction costs, custody, and asset management/loan servicing fees. The decrease was primarily a result of a reduction in asset management and servicing fees related to our Residential Bridge Loans, which were all acquired servicing released.

General and Administrative Expenses
General and administrative expenses was relatively flat year over year.

Non-GAAP Financial Measures
    We believe that our non-GAAP measures (described below), when considered with GAAP, provide supplemental information useful to investors in evaluating the results of our operations. Our presentations of such non-GAAP measures may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, such non-GAAP measures should not be considered as substitutes for our GAAP net income, as measures of our financial performance or any measure of our liquidity under GAAP.
Core Earnings
Core Earnings is a Non-GAAP financial measure that is used by us to approximate cash yield or income associated with our portfolio and is defined as GAAP net income (loss) as adjusted, excluding: (i) net realized gain (loss) on investments and termination of derivative contracts; (ii) net unrealized gain (loss) on investments; (iii) net unrealized gain (loss) resulting from mark-to-market adjustments on derivative contracts; (iv) other than temporary impairment; (v) provision for income taxes; (vi) non-cash stock-based compensation expense; (vii) non-cash amortization of the convertible senior unsecured notes discount; (viii) one-time charges such as acquisition costs and impairment on loans and (ix) one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between us, our Manager and our independent directors and after approval by a majority of the our independent directors.
We utilize Core Earnings as a key metric to evaluate the effective yield of the portfolio. Core Earnings allows us to reflect the net proceedsinvestment income of our portfolio as adjusted to reflect the net interest rate swap interest expense.  Core Earnings allows us to isolate the interest expense associated with our interest rate swaps in order to monitor and project our borrowing costs and interest rate spread.
We believe that the Non-GAAP measure, when considered with GAAP, provides supplemental information useful to investors in evaluating the results of our operations. Our presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations.  As a result, Core Earnings should not be considered as a substitute for our GAAP net income, as a measure of our financial performance or any measure of our liquidity under GAAP.
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In March and April 2020, we sold $2.4 billion of investments. The majority of the impact of these sales were reflected in net income in the first half of 2020. Due to the significant amount of investment sales, resulting from the offeringmarket volatility created by the COVID-19 pandemic, our core earnings for the years ended December 31, 2020 and December 31, 2019 are not comparable.
The table below reconciles Net Income to opportunistically investCore Earnings for the years ended December 31, 2020, December 31, 2019 and December 31, 2018:
(dollars in thousands)Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
Net income (loss) attributable to common stockholders and participating securities$(328,354)$70,699 $26,409 
Income tax provision396 1,057 709 
Net income (loss) before income taxes(327,958)71,756 27,118 
Adjustments:   
Investments:   
Unrealized (gain) loss on investments, securitized debt and other liabilities221,387 (107,529)24,671 
Other than temporary impairment— 8,574 11,180 
Realized (gain) loss on sale of investments(80,627)(28,278)63,257 
One-time transaction costs21,232 1,084 812 
Derivative Instruments:   
Net realized (gain) loss on derivatives193,155 123,569 (81,534)
Net unrealized (gain) loss on derivatives3,953 (9,390)10,381 
Other:
Realized gain on extinguishment of convertible senior unsecured notes(3,644)— — 
Amortization of discount on convertible senior unsecured notes1,097 718 550 
Other non-cash adjustments3,304 — — 
Non-cash stock-based compensation expense699 564 265 
Total adjustments360,556 (10,688)29,582 
Core Earnings$32,598 $61,068 $56,700 

Alternatively, our Core Earnings can also be derived as presented in the table below by starting with Adjusted net interest income, which includes interest income on Interest-Only Strips accounted for as derivatives and other derivatives, and net interest expense incurred on interest rate swaps and foreign currency swaps and forwards (a Non-GAAP financial measure) subtracting Total expenses, adding Non-cash stock based compensation, adding one-time transaction costs, adding amortization of discount on convertible senior notes, and adding interest income on cash balances and other income (loss), net:
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(dollars in thousands)Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
Net interest income$45,437 $66,990 $71,122 
Interest income from IOs and IIOs accounted for as derivatives228 589 850 
Net interest income (expense) from interest rate swaps(1,133)9,501 6,158 
Adjusted net interest income44,532 77,080 78,130 
Total expenses(38,907)(20,944)(22,676)
Other non-cash adjustments3,304 — — 
Non-cash stock-based compensation699 564 265 
One-time transaction costs21,232 1,084 812 
Amortization of discount on convertible unsecured senior notes1,097 718 550 
Interest income on cash balances and other income (loss), net649 2,566 (381)
Income attributable to non-controlling interest(8)— — 
Core Earnings$32,598 $61,068 $56,700 

Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value

"Economic book value" is a non-GAAP financial measure of our target assetsfinancial position on an unconsolidated basis. We own certain securities that represent a controlling variable interest, which under GAAP requires consolidation; however, our economic exposure to these variable interests is limited to the fair value of the individual investments. Economic book value is calculated by taking the GAAP book value and 1) adding the fair value of the retained interest or acquired security of the VIEs held by us and 2) removing the asset and liabilities associated with each of consolidated trusts (RETL 2019, CSMC USA, Arroyo 2019-2 and Arroyo 2020-1). Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the actual financial interest of these investments irrespective of the variable interest consolidation model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders' Equity, as determined in accordance with GAAP, and our investment guidelines.calculation of this measure may not be comparable to similarly titled measures reported by other companies.

Securitized Debt

In May 2019,The table below is a wholly owned subsidiary completed a residential mortgage-backed securitization comprised of a portion of its Residential Whole Loan portfolio. RMI 2015 Trust and RNR Trust collectively transferred $945.5 million of Non-QM Residential Whole Loans, to a wholly-owned subsidiaryreconciliation of the Company, Arroyo Mortgage Trust 2019-2 ("Arroyo Trust")GAAP Book Value to Non-GAAP Economic Book Value:

$ AmountPer Share
GAAP Book Value at December 31, 2020$255,112 $4.20 
Adjustments to deconsolidate VIEs and reflect our interest in the securities owned
Deconsolidation of VIEs assets(2,651,627)(43.60)
Deconsolidation of VIEs liabilities2,528,536 41.58 
Interest in securities of VIEs owned, at fair value122,533 2.01 
Economic Book Value at December 31, 2020$254,554 $4.19 

Net Interest Income and Arroyo Trust issued $919.0 million of mortgage-backed notes and we retainedNet Interest Margin
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The following tables set forth certain information regarding our net investment income for the subordinate Non-Offered Securities. Atyears ended December 31, 2020, December 31, 2019 Residential Whole Loans, with an outstanding principal balanceand December 31, 2018 (dollars in thousands):
Year ended December 31, 2020
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency CMBS$343,711 $10,751 3.13 %
Agency RMBS61,008 2,165 3.55 %
Non-Agency RMBS32,905 1,539 4.68 %
Non-Agency CMBS262,372 21,798 8.31 %
Residential Whole Loans1,223,043 54,359 4.44 %
Residential Bridge Loans26,354 1,756 6.66 %
Commercial loans337,485 23,194 6.87 %
Securitized commercial loans1,093,487 59,212 5.41 %
Other securities53,753 3,482 6.48 %
Total investments$3,434,118 $178,256 5.19 %
Adjustments:
Securitized commercial loans from consolidated VIEs(1,093,487)(59,212)5.41 %
Investments in consolidated VIEs eliminated in consolidation93,688 8,655 9.24 %
Adjusted total investments$2,434,319 $127,699 5.25 %
Average Carrying Value
Total Interest Expense(3)
Average Effective Cost of Funds
Borrowings   
Repurchase agreements$1,108,838 $35,243 3.18 %
Convertible senior unsecured notes, net193,516 16,252 8.40 %
Securitized debt, net1,864,964 81,096 4.35 %
Interest rate swaps— 1,133 0.04 %
Total borrowings$3,167,318 $133,724 4.22 %
Adjustments:
Securitized debt from consolidated VIEs(4)
$(986,786)$(53,118)5.38 %
Adjusted total borrowings$2,180,532 $80,606 3.70 %
Adjusted net interest income and net interest margin$47,093 1.93 %

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Year ended December 31, 2019
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency CMBS$1,521,668 $49,056 3.22 %
Agency RMBS275,054 9,620 3.50 %
Non-Agency RMBS47,982 2,468 5.14 %
Non-Agency CMBS226,072 18,195 8.05 %
Residential Whole Loans1,196,675 57,234 4.78 %
Residential Bridge Loans115,199 8,109 7.04 %
Commercial loans348,884 28,556 8.18 %
Securitized commercial loans830,311 39,454 4.75 %
Other securities69,894 5,161 7.38 %
Total investments$4,631,739 $217,853 4.70 %
Adjustments:
Securitized commercial loan from consolidated VIEs(830,311)(39,454)4.75 %
Investments in consolidated VIE eliminated in consolidation88,781 7,875 8.87 %
Adjusted total investments$3,890,209 $186,274 4.79 %
Average Carrying Value
Total Interest Expense(3)
Average Effective Cost of Funds
Borrowings   
Repurchase agreements$2,888,151 $90,802 3.14 %
Convertible senior unsecured notes, net130,457 10,556 8.09 %
Securitized debt1,305,158 48,916 3.75 %
Interest rate swapsn/a(9,501)(0.22)%
Total borrowings$4,323,766 $140,773 3.26 %
Adjustments:
Securitized debt from consolidated VIEs(4)
$(729,745)$(30,312)4.15 %
Adjusted total borrowings$3,594,021 $110,461 3.07 %
Adjusted net interest income and net interest margin$75,813 1.95 %
Year ended December 31, 2018
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency CMBS$1,982,164 $59,698 3.01 %
Agency RMBS450,998 15,069 3.34 %
Non-Agency RMBS92,789 6,047 6.52 %
Non-Agency CMBS294,811 26,424 8.96 %
Residential Whole Loans494,438 23,331 4.72 %
Residential Bridge Loans223,015 15,889 7.12 %
Commercial loans88,091 6,898 7.83 %
Securitized commercial loan931,090 48,422 5.20 %
Other securities96,810 8,434 8.71 %
Total investments$4,654,206 $210,212 4.52 %
Adjustments:
Securitized commercial loan from consolidated VIE(931,090)(48,422)5.20 %
Investment in consolidated VIE eliminated in consolidation60,006 6,675 11.12 %
Adjusted total investments$3,783,122 $168,465 4.45 %
Average Carrying Value
Total Interest Expense(3)
Average Effective Cost of Funds
Borrowings   
Repurchase agreements$3,267,101 $86,742 2.66 %
Convertible senior unsecured notes, net109,456 9,058 8.28 %
Securitized debt957,816 42,440 4.43 %
Interest rate swapsn/a(6,158)(0.14)%
Total borrowings$4,334,373 $132,082 3.05 %
Adjustments:
Securitized debt from consolidated VIE(4)
$(957,816)$(42,440)4.43 %
Adjusted total borrowings$3,376,557 $89,642 2.65 %
Adjusted net interest income and net interest margin$78,823 2.08 %
(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.
(2)Refer to below table for components of approximately $814.0 million, serve as collateralinterest income.
(3)Includes the net amount paid, including accrued amounts and premium amortization for MAC interest rate swaps during the Arroyo Trust'speriods included in gain/loss on derivative instruments for GAAP.
(4)Includes only the third-party sponsored securitized debt.debt from RETL Trust, CMSC Trust, MRCD Trust and CMSC USA.

The following table summarizesreconciles total interest income to adjusted interest income, which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the consolidated Arroyo Trust's issued mortgage-backed notes atyears ended December 31, 2020, December 31, 2019 and December 31, 2018:
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(dollars in thousands)Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
Coupon interest income:
Agency CMBS$11,336 $51,286 $60,148 
Agency RMBS2,975 12,181 19,507 
Non-Agency RMBS2,732 4,682 7,120 
Non-Agency CMBS15,331 14,178 20,058 
Residential Whole Loans59,698 61,024 24,300 
Residential Bridge Loans1,815 8,846 18,299 
Commercial loans22,832 27,332 6,624 
Securitized commercial loans49,370 41,398 51,009 
Other securities8,263 11,633 14,805 
Subtotal coupon interest$174,352 $232,560 $221,870 
Premium accretion, discount amortization and amortization of basis, net:
Agency RMBS$(987)$(3,053)$(5,092)
Agency CMBS(636)(2,327)(646)
Non-Agency RMBS(1,193)(2,214)(1,073)
Non-Agency CMBS6,467 4,017 6,366 
Residential Whole Loans(5,339)(3,790)(969)
Residential Bridge Loans(59)(737)(2,410)
Commercial loans362 1,224 274 
Securitized commercial loans9,842 (1,944)(2,587)
Other securities(4,781)(6,472)(6,371)
Subtotal accretion and amortization$3,676 $(15,296)$(12,508)
Interest income$178,028 $217,264 $209,362 
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
  
Coupon interest income$1,324 $3,277 $4,511 
Amortization of basis(1,096)(2,688)(3,661)
Subtotal$228 $589 $850 
Total adjusted interest income$178,256 $217,853 $210,212 

(1)Reported in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.


Effective Cost of Funds includes the net interest component related to our interest rate swaps, as well as the impact of our foreign currency swaps and forwards. While we have not elected hedge accounting for these instruments, such derivative instruments are viewed by us as an economic hedge against increases in future market interest rates on our liabilities and changes in foreign currency exchange rates on our assets and liabilities and are characterized as hedges for purposes of satisfying the REIT requirements and therefore the Effective Cost of Funds reflects interest expense adjusted to include the realized gain/loss (i.e., the interest income/expense component) for all of our interest rate swaps and the impact of our foreign currency swaps and forwards.
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The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the years ended December 31, 2020, December 31, 2019 and December 31, 2018:
 Year ended December 31, 2020Year ended December 31, 2019Year ended December 31, 2018
(dollars in thousands)ReconciliationCost of
Funds/Effective
Borrowing
Costs
ReconciliationCost of
Funds/Effective
Borrowing
Costs
ReconciliationCost of
Funds/Effective
Borrowing
Costs
Interest expense$132,591 4.19 %$150,274 3.48 %$138,240 3.19 %
Adjustments:
Interest expense on Securitized debt from consolidated VIEs(53,118)(5.38)%(30,312)(4.15)%(42,440)(4.43)%
Net interest (received) paid —interest rate swaps1,133 0.04 %(9,501)(0.22)%(6,158)(0.14)%
Effective Borrowing Costs$80,606 3.70 %$110,461 3.07 %$89,642 2.65 %
Weighted average borrowings$2,180,532  $3,594,020  $3,376,557  

Liquidity and Capital Resources
General
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, and other general business needs.  To maintain our REIT qualifications under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income, excluding capital gains and, such distributions requirements limit our ability to retain earnings and increase capital for operations. As of December 31, 2020, we had $ 175.0 million of senior unsecured convertible notes and $356.9 million of asset specific financings. Our convertible senior unsecured notes are not due until October 2022. As of December 31, 2020, we had $31.6 million in cash and cash equivalents. In response to the unprecedented market conditions, we implemented measures to increase liquidity, reduce leverage, and seek alternative financing arrangements. We made further progress towards strengthening our balance sheet by reducing debt and leverage, while improving liquidity, shareholders equity and the earnings power of the portfolio.
As the duration and severity of COVID-19 remain unknown, so does the impact it will have on our borrowers, lenders, and the economy as a whole. We will continue to closely monitor developments related to COVID-19 as it relates to our liquidity position and financial obligations. At this time we believe we have sufficient liquidity and access to additional liquidity to meet financial obligations for at least the next 12 months.

Debt to Equity Ratio

December 31, 2020December 31, 2019
Total debt(1)
$527,720 $3,022,100 
Total equity$255,114 $564,461 
Debt to equity ratio2.1 5.4 

(1) Total debt excludes the securitized debt which is classified in "Securitized debt" innon-recourse to us.

Financing Arrangements

On April 21, 2020, we entered into amendments with respect to certain of our residential loan warehouse facilities. These amendments mainly served to convert an existing residential whole loan facility into a term facility by removing any mark to market margin requirements, and to consolidate our Non-Qualified Mortgage loans, which were previously financed by three separate, unaffiliated counterparties, into a single facility. See "Note 7 - Financings" for details.

On October 6, 2020 we entered into an amendment with respect to its residential loan warehouse facility. The amendment serves to convert the Consolidated Balance Sheets (dollars in thousands):existing residential loan facility to a limited mark to market margin facility that bears an

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ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Issued Mortgage-Backed Notes    
Class A-1$681,668
3.3%$681,666
4/25/2049
Class A-236,525
3.5%36,524
4/25/2049
Class A-357,866
3.8%57,864
4/25/2049
Class M-125,055
4.8%25,055
4/25/2049
Subtotal801,114
 $801,109
 
Less: Unamortized deferred financing costsN/A
 5,298
 
Total$801,114
 $795,811
 
interest rate of LIBOR plus 2.75%, with a LIBOR floor of 0.25%. The target advance rate under the amended facility is 85% and the facility matures on October 5, 2021. The premium recapture fee was eliminated for holdings that had not yet been sold or otherwise disposed of. See "Note 7 - Financings " for details.

On May 4, 2020, we supplemented one of our existing securities repurchase facilities to confirm terms pursuant to which we will consolidate most of our CMBS and RMBS assets, which are currently financed by multiple counterparties, into a single term facility with limited mark to market margin requirements. See "Note 7 - Financings " for details.


Sources of Liquidity
Our primary sources of liquidity are as follows:
Cash Generated from Operations
For the year ended December 31, 2020, net cash used in operating activities was approximately $147.6 million. This was primarily attributable to the net loss on our investments net of adjustments pertaining to the amortization/accretion of premiums and discounts and other non-cash items less operating expenses, general and administrative and margin settlements on our interest rate swaps. For the year ended December 31, 2019, net cash used in operating activities was approximately $52.2 million. This was primarily attributable to the net income we earned on our investments net of adjustments pertaining to the amortization/accretion of premiums and discounts and other non-cash items less operating expenses, general and administrative and margin settlements on our interest rate swaps. For the year ended December 31, 2018, net cash provided by operating activities was approximately$107.1 million. This was primarily attributable to the net income we earned on our investments net of adjustments pertaining to the amortization/accretion of premiums and discounts and other non-cash items less operating expenses, general and administrative and margin settlements on our interest rate swaps. For the year ended December 31, 2017, net cash provided by operating activities was by approximately $59.4$107.1 million. This was primarily attributable to the net income we earned on our investments net of adjustments pertaining to the amortization/accretion of premiums and discounts and other non-cash items less operating expenses, general and administrative and margin settlements on our interest rate swaps.
Cash Provided by and Used in Investing Activities
For the year ended December 31, 2020, net cash provided by investing activities was approximately $2.7 billion. This was primarily attributable to proceeds from sales and receipts of principal payments on our investments, which was partially offset by our investment acquisitions. For the year ended December 31, 2019, net cash used in investing activities was approximately $478.5 million. This was primarily attributable to our investment acquisitions, including an investment from a consolidated CMBS VIEs, which was partially offset by proceeds from sales and receipts of principal payments on our investments. For the year ended December 31, 2018, net cash used in investing activities was approximately $716.9 million. This was primarily attributable to our investment acquisitions, including an investment from a consolidated CMBS VIE, which was partially offset by proceeds from sales of MBS and other securities and by our receipt of principal payments on MBS and other securities. For the year ended December 31, 2017, net cash used in investing activities was approximately $1.2 billion. This was primarily attributable to our to our investment acquisitions, which was partially offset by proceeds from sales, and receipts of principal payments on our investments.
Cash Provided by and Used in Financing Activities
For the year ended December 31, 2020, net cash used in financing activities was approximately $2.5 billion. This was primarily attributable to net repayments of our repurchase agreement borrowings. For the year ended December 31, 2019, net cash provided by financing activity was approximately $537.2 million. This was primarily attributable to net proceeds from financings during the year and a secondary public offering. Our net cash provided by financing activities was partially offset by dividends paid on our common stock. For the year ended December 31, 2018, net cash provided by financing activity was approximately $639.6639.6 million. This was primarily attributable to net proceeds from financings during the year and a secondary public offering. Our net cash provided by financing activities was partially offset by dividends paid on our common stock. For

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Repurchase Agreements
As of December 31, 2020, we had 37 master repurchase agreements with our counterparties. We had borrowings under five of the 37 master repurchase agreements of approximately $358.8 million at December 31, 2020. The following table presents our repurchase agreement borrowings, by type of collateral pledged, as of December 31, 2020 and December 31, 2019, and the respective effective cost of funds (Non-GAAP financial measure) for the years ended December 31, 2020 and December 31, 2019, respectively. See "Non-GAAP Financial Measures" (dollars in thousands):
CollateralBorrowings OutstandingValue of Collateral PledgedWeighted
Average
Interest Rate
end of
period
Weighted Average Cost of Funds
Weighted Average Effective Cost of Funds
(Non-GAAP) (1)
Weighted
Average
Haircut
end of
period
December 31, 2020
Agency CMBS, at fair value$— $— — %2.21 %2.21 %— %
Agency RMBS, at fair value1,418 1,708 1.34 %2.00 %2.00 %25.00 %
Non-Agency RMBS, at fair value14,643 25,382 5.23 %4.81 %4.81 %33.33 %
Non-Agency CMBS, at fair value(2)
77,080 152,275 4.83 %4.10 %4.10 %40.24 %
Residential Whole Loans, at fair value(3)
60,024 97,566 4.61 %4.06 %4.06 %35.30 %
Residential Bridge Loans(3)
11,254 12,960 2.73 %3.32 %3.32 %20.00 %
Commercial loans, at fair value(3)
159,312 310,523 2.42 %3.14 %3.14 %36.39 %
Membership interest(4)
18,844 33,690 2.90 %3.01 %3.01 %35.00 %
Other securities, at fair value16,271 48,754 5.12 %4.12 %4.12 %36.88 %
Interest rate swapsn/an/an/an/a0.10 %n/a
Total$358,846 $682,858 3.57 %3.18 %3.28 %36.21 %
December 31, 2019
Agency CMBS, at fair value$1,352,248 $1,400,230 2.05 %2.51 %2.51 %5.13 %
Agency RMBS, at fair value348,274 356,687 1.99 %2.47 %2.47 %5.35 %
Non-Agency RMBS, at fair value30,481 45,816 3.56 %3.93 %3.93 %36.70 %
Non-Agency CMBS, at fair value190,390 246,797 3.05 %3.64 %3.64 %22.46 %
Residential Whole Loans, at fair value(3)
476,172 529,495 3.32 %4.03 %4.03 %7.88 %
Residential Bridge Loans(3)
29,869 34,897 3.93 %4.61 %4.61 %20.00 %
Commercial loans, at fair value(3)
224,594 350,213 3.93 %4.71 %4.71 %33.60 %
Securitized commercial loan, at fair value(3)
116,087 171,640 3.93 %3.61 %3.61 %31.38 %
Other securities, at fair value56,762 80,031 3.23 %3.85 %3.85 %28.30 %
Interest rate swapsn/an/an/an/a(0.33)%n/a
Total$2,824,877 $3,215,806 2.61 %3.14 %2.81 %11.11 %

(1)The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps, net of premium amortization on MAC swaps, of approximately $1.1 million received and $9.5 million received for the years ended December 31, 2020 and 2019, respectively. While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements. See "Non-GAAP Financial Measures."
(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.
(3)Repurchase agreement borrowings collateralized by Whole Loans, Bridge Loans and securitized commercial loans owned through trust certificates. The trust certificates are eliminated upon consolidation.
(4)The pledged amount relates to our non-controlling membership interest in our wholly owned subsidiary, WMC RETL LLC, which was financed under a repurchase agreement. The membership interest is eliminated in consolidation.

At-The-Market Program
    In March 2017, we entered into an equity distribution agreement with JMP Securities LLC, or "JMP", which was amended on June 5, 2020, under which we may offer and sell up to $100.0 million shares of common stock in an At-The-Market equity offering from time to time through JMP. During the year ended December 31, 2017, net cash provided by financing activity was approximately $1.1 billion. This was primarily attributable to2020, we sold 6,034,741 shares under this amended agreement with an average price of $3.70 per share for total net proceeds from financings duringof $22.0 million.

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Securitized Debt

In June 2020, we completed a residential mortgage-backed securitization comprised of a portion of our Residential Whole Loan portfolio. RMI 2015 Trust transferred $355.8 million of Non-QM Residential Whole Loans, to our wholly owned subsidiary, Arroyo Trust 2020. Arroyo Trust 2020 issued $341.7 million of mortgage-backed notes and we retained the year,subordinate Non-Offered Securities. These Non-Offered securities with an estimated fair value of $27.7 million at December 31, 2020 were eliminated in the consolidation. At December 31, 2020, Residential Whole Loans, with an outstanding principal balance of approximately $300.0 million, serve as collateral for the Arroyo Trust 2020's securitized debt.

The following table summarizes the consolidated Arroyo Trust 2020's issued mortgage-backed notes at December 31, 2020 which was partially offset by dividends paid on our common stock.is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):
ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Offered Notes:
Class A-1A$222,117 1.7%$222,112 3/25/2055
Class A-1B26,357 2.1%26,357 3/25/2055
Class A-213,518 2.9%13,517 3/25/2055
Class A-317,963 3.3%17,963 3/25/2055
Class M-111,739 4.3%11,739 3/25/2055
Subtotal$291,694 $291,688 
Less: Unamortized deferred financing costsN/A2,519 
Total$291,694 $289,169 



Contractual Obligations and Commitments
Our contractual obligations as of December 31, 20192020 are as follows (dollars in thousands):
 
Less than
1 year
 
1 to 3
years
 
3 to 5
years
 
More than
5 years
 Total
Borrowings under repurchase agreements$2,472,651
 $142,348
 $209,878
 $
 $2,824,877
Contractual interest on repurchase agreements30,255
 19,408
 5,433
 
 55,096
Convertible senior unsecured notes
 205,000
 
 
 205,000
Contractual interest on convertible senior unsecured notes13,838
 27,675
 
 
 41,513
Securitized debt(2)
10,581
 598,452
 83,560
 801,114
 1,493,707
Contractual interest on securitized debt(3)
52,810
 67,920
 62,912
 678,487
 862,129
Total: GAAP Basis - Excluding TBA - long positions2,580,135
 1,060,803
 361,783
 1,479,601
 5,482,322
TBA—long positions1,012,598
 
 
 
 1,012,598
Total$3,592,733
 $1,060,803
 $361,783
 $1,479,601
 $6,494,920
 Less than
1 year
1 to 3
years
3 to 5
years
More than
5 years
Total
Borrowings under repurchase agreements$320,557 $38,289 $— $— $358,846 
Contractual interest on repurchase agreements6,534 95 — — 6,629 
Convertible senior unsecured notes— 175,000 — — 175,000 
Contractual interest on convertible senior unsecured notes11,813 11,813 — — 23,626 
Securitized debt(2)
308,902 — 1,370,691 899,219 2,578,812 
Contractual interest on securitized debt(3)
84,540 165,592 151,559 656,187 1,057,878 
Total$732,346 $390,789 $1,522,250 $1,555,406 $4,200,791 

(1)The table above does not include amounts due under the Management Agreement (as defined herein) with our Manager, as those obligations do not have fixed and determinable payments.
(2)
The securitized debt is non-recourse to us and can only be settled with the loans that serve as collateral. The collateral for the securitized debt has a principal balance of $1.8 billion. Assumes entire outstanding principal balance at December 31, 2019
(1)The table above does not include amounts due under the Management Agreement (as defined herein) with our Manager, as those obligations do not have fixed and determinable payments.
(2)The securitized debt is non-recourse to us and can only be settled with the loans that serve as collateral. The collateral for the securitized debt has a principal balance of $2.7 billion. Assumes entire outstanding principal balance at December 31, 2020 is paid at maturity.
(3)For variable rate debt, the one month LIBOR rate as of December 31, 2020 of 0.2% was used to calculate the contractual interest.
(3)For variable rate debt, the one month LIBOR rate as of December 31, 2019 of 1.7% was used to calculate the contractual interest.
Management Agreement
On May 9, 2012, we entered into a management agreement (the "Management Agreement") with our Manager which describes the services to be provided by our Manager and compensation for such services. Our Manager is responsible for managing our operations, including: (i) performing all of our day-to-day functions; (ii) determining investment criteria in conjunction with our Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management, subject to the direction and oversight of our Board of Directors. Pursuant to the terms of the Management Agreement, our Manager is paid a management
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fee equal to 1.50% per annum of our stockholders' equity, (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. The Manager waived the management fee for March 2020 through May 2020 because of the unprecedented market disruption and dislocation across fixed income markets surrounding the uncertainty related to COVID-19 pandemic. Future waivers, if any, are at the Manager's discretion. Refer to Note 10 - "Related Party Transactions" to our Consolidated Financial Statements included in Item 8 included in this annual report on Form 10-K.
Off-Balance Sheet Arrangements
We do not have any relationships with any entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.
Further, other than guaranteeing certain obligations of our wholly-owned taxable REIT subsidiary or TRS and the obligations of our wholly-owned subsidiary, WMC CRE LLC, we have not guaranteed any obligations of any entities or entered into any commitment to provide additional funding to any such entities.
Dividends
We intend to make regularTo preserve liquidity, we suspended our first and second quarter common stock dividends given extraordinary market volatility driven by uncertainty surrounding the COVID-19 pandemic. Starting in the third quarter of 2020, we resumed paying a quarterly dividend distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually, in accordance with the REIT regulations, at least 90%after making progress strengthening its balance sheet and improving liquidity and earnings power of its REIT taxable income for the taxable year, without regardinvestment portfolio. We will continue to the deduction for dividends paid and excluding net capital gains as well as undistributed taxable income retained by a TRS. To the extent that we distribute less than 100% ofevaluate each subsequent quarter to determine our net taxable income, in accordance with the REIT regulations, for any given year, we will pay tax on such amount at the regular corporate rates. We intendability to pay regular quarterly dividends to our stockholders based on our net taxable income if and to the extent authorized by our Board of Directors.  Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debts payable.payments.  If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

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ITEM 7A.    Quantitative and Qualitative Disclosures about Market Risk.
We seek to manage the risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market values while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns from our assets through ownership of our common stock. While we do not seek to avoid risk completely, our Manager seeks to actively manage risk for us, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
 
Credit Risk
 
We are subject to varying degrees of credit risk in connection with our assets. Although we do not expect to encounter credit risk in our Agency CMBS and Agency RMBS, we are exposed to the risk of potential credit losses from general credit spread widening related to Non-Agency RMBS, Non-Agency CMBS, Residential Whole Loans, Residential Bridge Loans, Commercial Loans and other portfolio investments in addition to unexpected increase in borrower defaults on these investments. Investment decisions are made following a bottom-up credit analysis and specific relevant risk assumptions. As part of the risk management process, our Manager uses detailed proprietary models, applicable to evaluate, depending on the asset class, house price appreciation and depreciation by region, prepayment speeds and foreclosure/default frequency, cost and timing. If our Manager determines that the proposed investment can meet the appropriate risk and return criteria as well as complement our existing asset portfolio, the investment will undergo a more thorough analysis.
 
As of December 31, 2019, 162020, our of the counterparties that we had outstanding repurchase agreement borrowings held collateral which we posted as security for such borrowings in excess of 5% of our stockholders’ equity.  Prior to entering into a repurchase agreement with any particular institution, our Manager does a thorough review of such potential counterparty.  Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.
 
Interest Rate Risk
 
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations. In general, we expect to finance the acquisition of our assets through financings in the form of repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and public and private equity and debt issuances in addition to transaction or asset specific funding arrangements. Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we may utilize derivative financial instruments to hedge the interest rate risk associated with our borrowings. These hedging activities may not be effective. We also may engage in a variety of interest rate management techniques that seek to mitigate changes in interest rates or other potential influences on the values of our assets.
 
Interest Rate Effect on Net Interest Income
 
Our operating results will depend in large part on differences between the income earned on our assets and our borrowing costs. The cost of our borrowings is generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase and the yields earned on our leveraged fixed-rate mortgage assets will remain static. Further, the cost of such financing could increase at a faster pace than the yields earned on our leveraged ARM and hybrid ARM assets. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.
 
Interest Rate Cap Risk
 
To the extent we invest in adjustable-rate RMBS and Whole-Loans, such instruments may be subject to interest rate caps, which potentially could cause such instruments to acquire many of the characteristics of fixed-rate securities if interest rates were to rise above the cap levels. This issue is magnified to the extent we acquire ARM and hybrid ARM assets that are not based on mortgages which are fully indexed. In addition, ARM and hybrid ARM assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding or a portion of the incremental interest rate increase being deferred. To the extent we invest in such ARM and/or hybrid ARM assets, we could
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potentially receive less cash


income on such assets than we would need to pay the interest cost on our related borrowings. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “Interest Rate Risk.”

Interest Rate Effects on Fair value
 
Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than those of our liabilities, including our hedging instruments. See “Market Risk” below.
 
The impact of changing interest rates on fair value can change significantly when interest rates change materially. Therefore, the volatility in the fair value of our assets could increase significantly in the event interest rates change materially. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, changes in actual interest rates may have a material adverse effect on us.
 
Market Risk
 
Our MBS and other assets are reflected at their fair value with unrealized gains and losses included in earnings. The fair value of our investments fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the fair value of these assets would be expected to decrease; conversely, in a decreasing interest rate environment, the fair value of these securities would be expected to increase.
 
The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments, including interest rate swaps, Interest-Only Strips, and net interest income at December 31, 2019,2020, assuming a static portfolio of assets. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilizes our Manager’s assumptions, models and estimates, which are based on our Manager’s judgment and experience.
 
Change in Interest Rates 
Percentage Change in Projected
Net Interest Income
 
Percentage Change in Projected
Portfolio Value
Change in Interest RatesPercentage Change in Projected
Net Interest Income
Percentage Change in Projected
Portfolio Value
+1.00% 34.38% (1.09)%+1.00%(5.72)%(0.48)%
+0.50% 19.67% (0.52)%+0.50%(2.81)%(0.25)%
-0.50% 11.99% 0.48 %-0.50%3.42 %0.17 %
-1.00% 28.52% 0.94 %-1.00%7.15 %0.26 %
 
While the table above reflects the estimated immediate impact of interest rate increases and decreases on a static portfolio, we may rebalance our portfolio from time to time either to seek to take advantage of or reduce the impact of changes in interest rates. It is important to note that the impact of changing interest rates on market value and net interest income can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the market value of our assets could increase significantly when interest rates change beyond amounts shown in the table above. In addition, other factors impact the market value of and net interest income from our interest rate-sensitive investments and derivative instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, interest income would likely differ from that shown above and such difference might be material and adverse to our stockholders.
 
Certain assumptions have been made in connection with the calculation of the information set forth in the table above and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes.  The base interest rate scenario assumes interest rates at December 31, 2019.2020.  The analysis presented utilizes assumptions and estimates based on our Manager’s judgment and experience.  Furthermore, while we generally expect to retain such assets and the associated interest rate risk, future purchases and sales of assets could materially change our interest rate risk profile.

Prepayment Risk
 
The value of our Agency and Non-Agency RMBS and our Residential Whole Loans may be affected by prepayment rates on the underlying residential mortgage.  We acquire RMBS and Residential Whole Loans and anticipate that the
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underlying residential mortgages will prepay at a projected rate generating an expected yield.  If we purchase assets at a premium to par value, when borrowers prepay their residential mortgage loans faster than expected, the corresponding prepayments may reduce the


expected yield on our residential mortgage assets because we will have to amortize the related premium on an accelerated basis and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we are required to make a retrospective adjustment to historical amortization.  Conversely, if we purchase assets at a discount to par value, when borrowers prepay their residential mortgage loans slower than expected, such decrease may reduce the expected yield on such assets because we will not be able to accrete the related discount as quickly as originally anticipated and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we will be required to make a retrospective adjustment to historical amortization.
 
The value of our Agency and Non-Agency CMBS, as well as Commercial Whole Loans, will also be affected by prepayment rates; however, commercial mortgages frequently limit the ability of the borrower to prepay, thereby providing a certain level of prepayment protection.  Common restrictions include yield maintenance and prepayment penalties, the proceeds of which are generally at least partially allocable to these securities, as well as defeasance.
 
Likewise, the value of our ABS and other structured securities will also be affected prepayment rates.  The collateral underlying such securities may, similar to most residential mortgages, allow the borrower to prepay at any time or, similar to commercial mortgages, limit the ability of the borrower to prepay by imposing lock-out provisions, prepayment penalties and/or make whole provisions.
 
Extension Risk
 
Most residential mortgage loans do not prohibit the partial or full prepayment of principal outstanding.  Accordingly, while the stated maturity of a residential mortgage loan may be 30 years, or in some cases even longer, historically the vast majority of residential mortgage loans are satisfied prior to their maturity date.  In periods of rising interest rates, borrowers have less incentive to refinance their existing mortgages and mortgage financing may not be as readily available.  This generally results in a slower rate of prepayments and a corresponding longer weighted average life for RMBS and Residential Whole Loans.  The increase, or extension, in weighted average life is commonly referred to as “Extension Risk” which can negatively impact our portfolio.  To the extent we receive smaller pre-payments of principal, we will have less capital to invest in new assets.  This is extremely detrimental in periods of rising interest rates as we will be unable to invest in new higher coupon investments and a larger portion of our portfolio will remain invested in lower coupon investments.  Further, our borrowing costs are generally short-term and, even if hedged, are likely to increase in a rising interest rate environment, thereby reducing our net interest margin.  Finally, to the extent we acquired securities at a discount to par, a portion of the overall return on such investments is based on the recovery of this discount.  Slower principal prepayments will result in a longer recovery period and a lower overall return on our investment.
 
Prepayment rates on Agency and Non-Agency CMBS, as well as Commercial Whole Loans, are generally less volatile than residential mortgage assets as commercial mortgages usually limit the ability of the borrower to prepay the mortgage prior to maturity or a period shortly before maturity.  Accordingly, extension risk for Agency and Non-Agency CMBS and Commercial Whole Loans is generally less than RMBS and Residential Whole Loans as it presumed that other than defaults (i.e., involuntary prepayments), most commercial mortgages will remain outstanding for the contractual term of the mortgage.
 
Prepayment rates on ABS and our other structured securities will be determined by the underlying collateral.  The extension risk of such securities will generally be less than residential mortgages, but greater than commercial mortgages.

Real Estate Risk

Residential and commercial property values are subject to volatility and may be adversely affected by a number of factors, including, but not limited to: national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the supply of housing stock); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses. The COVID 19 pandemic could have a significant impact on real estate values generally or as certain sectors more affected by health related shut downs or reductions in activity.

 Counterparty Risk
 
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The following discussion on counterparty risk reflects how these transactions are structured, rather than how they are presented for financial reporting purposes.
 
When we engage in repurchase transactions, we generally sell securities to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same securities back to us at the end of


the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us, we could incur a loss on the transaction up to the amount of the haircut (assuming there was no change in the value of the securities).

If a counterparty to a bi-lateral interest rate swap cannot perform under the terms of the interest rate swap, we may not receive payments due under that agreement, and thus, we may lose any unrealized gain associated with the interest rate swap. We may also risk the loss of any collateral we have pledged to secure our obligations under interest rate swap if the counterparty becomes insolvent or files for bankruptcy. In the case of a cleared swap, if our clearing broker were to default, become insolvent or file for bankruptcy, we may also risk the loss of any collateral we have posted to the clearing broker unless we were able to transfer or “port” our positions and held collateral to another clearing broker. In addition, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended.  Most of our interest swaps are currently cleared through a central clearing house which reduces but does not eliminate the aforementioned risks.  Also see “Liquidity Risk” below.

Prior to entering into a trading agreement or transaction with any particular institution where we take on counterparty risk, our Manager does a thorough review of such potential counterparty.  Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.
 
Funding Risk
 
We have financed a substantial majority of our assets with repurchase agreement financing. Over time, as market conditions change, in addition to these financings, we may use other forms of leverage. Changes in the regulatory environment, as well as, weakness in the financial markets, the residential mortgage markets, the commercial mortgage markets, the asset-backed securitization markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.
 
Liquidity Risk
 
Our liquidity risk is principally associated with the financing of long-maturity assets with short-term borrowings in the form of repurchase agreements. Although the interest rate adjustments of these assets and liabilities fall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.
 
Should the value of our assets pledged as collateral suddenly decrease, margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position. Our inability to post adequate collateral for a margin call by the counterparty could result in a condition of default under our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse consequence on our business and results of operations.
 
In an instance of severe volatility, or where the additional stress on liquidity resulting from volatility is sustained over an extended period of time, we could be required to sell securities, possibly even at a loss to generate sufficient liquidity to satisfy collateral and margin requirements which could have a material adverse effect on our financial position, results of operations and cash flows.

Additionally, if one or more of our repurchase agreement counterparties chose not to provide on-going funding, our ability to finance would decline or exist at possibly less advantageous terms. Further, if we are unable to renew, replace or expand repurchase financing with other sources of financing on substantially similar terms, it may have a material adverse effect on our business, financial position, results of operations and cash flows, due to the long-term nature of our investments and relatively short-term maturities of our repurchase agreements. As such, there is no assurance that we will always be able to roll over our repurchase agreements.
 
The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while the yields earned on our existing portfolio of leveraged
75



fixed-rate MBS and other fixed rate assets will remain static. Further, certain of our floating rate assets may contain annual or lifetime interest rate caps as well as limit the frequency or timing of changes to the underlying interest rate index. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time, as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could have a material adverse effect on our liquidity and results of operations.
 


In addition, the assets that comprise our investment portfolio are not traded on a public exchange. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions.  Recent regulatory changes have imposed new capital requirements and other restrictions on banks and other market intermediaries’ ability and desire to hold assets on their balance sheets and otherwise make markets in fixed income securities and other assets resulting in reduced liquidity in many sectors of the market.  This regulatory trend is expected to continue.  As a result of these developments, it may become increasingly difficult for us to sell assets in the market, especially in credit oriented sectors such as Non-Agency RMBS and CMBS, ABS and Whole Loans.
 
We enter into interest rate swaps to manage our interest rate risk. We are required to pledge cash or securities as collateral as part of a margin arrangement, calculated daily, in connection with the interest rate swaps. The amount of margin that we are required to post will vary and generally reflects collateral required to be posted with respect to interest rate swaps that are in an unrealized loss position to us and is generally based on a percentage of the aggregate notional amount of interest rate swaps per counterparty.  Margin calls could adversely affect our liquidity. Our inability to post adequate collateral for a margin call could result in a condition of default under our interest rate swap agreements, thereby resulting in liquidation of the collateral pledged by us, which may have a material adverse consequence on our business, financial position, results of operations and cash flows. Conversely, if our interest rate swaps are in an unrealized gain position, our counterparties to bilateral swaps are required to post collateral with us, under the same terms that we post collateral with them.  We generally enter into a MAC interest rate swap in which we receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap.  Similar to all other interest rate swaps, MAC interest rate swaps are subject to the margin requirements previously described.
 
Inflation
 
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily directly correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with GAAP and our distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at least 90% of our net taxable income on an annual basis, in accordance with the REIT regulations, in order to maintain our REIT qualification.  In each case, our activities and consolidated balance sheets are measured with reference to historical cost and/or fair market value without considering inflation.
 
Foreign Investment risk
 
We have invested in non U.S. CMBS transactions and, in the future, we may make other investments in non U.S. issuers and transactions. These investments present certain unique risks, including those resulting from future political, legal, and economic developments, which could include favorable or unfavorable changes in currency exchange rates, exchange control regulations (including currency blockage), expropriation, nationalization, or confiscatory taxation of assets, adverse changes in investment capital or exchange control regulations (which may include suspension of the ability to transfer currency from a country), political changes, diplomatic developments, difficulty in obtaining and enforcing judgments against non U.S. entities, the possible imposition of the applicable country’s governmental laws or restrictions, and the reduced availability of public information concerning issuers. In the event of a nationalization, expropriation, or other confiscation of assets, we could lose our entire investment in a security. Legal remedies available to investors in certain jurisdictions may be more limited than those available to investors in the United States. Issuers of non U.S. securities may not be subject to the same degree of regulation as U.S. issuers.

Furthermore, non U.S. issuers are not generally subject to uniform accounting, auditing, and financial reporting standards or other regulatory practices and requirements comparable to those applicable to U.S. issuers. There is generally less government supervision and regulation of non U.S. exchanges, brokers, and issuers than there is in the United States, and there is greater difficulty in taking appropriate legal action in non U.S. courts. There are also special tax considerations that apply to securities of non U.S. issuers and securities principally traded overseas.
76



 
To the extent that our investments are denominated in U.S. dollars, these investments are not affected directly by changes in currency exchange rates relative to the dollar and exchange control regulations. We are, however, subject to currency risk with respect to such investments to the extent that a decline in a non U.S. issuer’s or borrower’s own currency relative to the dollar may impair such issuer’s or borrower’s ability to make timely payments of principal and/or interest on a loan or other debt security. To the extent that our investments are in non-dollar denominated securities, the value of the investment and the net investment income available for distribution may be affected favorably or unfavorably by changes in currency exchange rates relative to the dollar and exchange control regulations.
 


Currency exchange rates can be volatile and affected by, among other factors, the general economics of a country, the actions of governments or central banks and the imposition of currency controls and speculation. In addition, a security may be denominated in a currency that is different from the currency where the issuer is domiciled.
 
Currency Risk
 
We have and may continue in the future to invest in assets which are denominated in a currency other than U.S. dollars and may finance such investments with repurchase financing or other forms of financing which may also be denominated in a currency other than U.S. dollars.  To the extent we make such investments and/or enter into such financing arrangements, we may utilize foreign currency swaps, forwards or other derivative instruments to hedge our exposure to foreign currency risk.  Despite being economic hedges, we have elected not to treat such derivative instruments as hedges for accounting purposes and therefore the changes in the value of such instruments, including actual and accrued payments, will be included in our Consolidated Statements of Operations.  While such transactions are entered into in an effort to minimize our foreign currency risk, there can be no assurance that they will perform as expected.  If actual prepayments of the foreign denominated asset are faster, or slower, than expected, the hedge instrument is unlikely to fully protect us from changes in the valuation of such foreign currency.  Further, as with interest rate swaps, there is counterparty risk associated with the future creditworthiness of such counterparty.


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Table of Contents

Item 8.    Financial Statements and Supplementary Data.

Index to Financial Statements


Consolidated Balance Sheets as of December 31, 20192020 and 20182019
Consolidated StatementStatements of Operations for the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 20172018
Consolidated StatementStatements of Changes in Stockholders' Equity for the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 20172018
Consolidated StatementStatements of Cash Flow for the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 20172018
Index to Financial Statement Schedules
Financial Statements Schedules other than the one listed above are omitted because the required information is not applicable or deemed not material, or the required information is presented in the financial statements and/or in the notes to financial statements.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Western Asset Mortgage Capital Corporation:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Western Asset Mortgage Capital Corporation and its subsidiaries (the “Company”) as of December 31, 20192020 and 2018,2019, and the related consolidated statements of operations, of changes in stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019,2020, including the related notes and the financial statement schedule as listed in the accompanying schedule of mortgage loans on real estate as of December 31, 2019index (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and 2018,and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 20192020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013)issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Non-Qualified Residential Whole Loans

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As described in Note 3 to the consolidated financial statements, the fair value of the Company’s Non-Qualified Residential Whole Loans (“Non-QM”) was $1.01 billion as of December 31, 2020.

The Company’s valuation is based upon prices obtained from an independent third party pricing service that specializes in loan valuation, utilizing a discounted cash flow valuation model that is calibrated to recent loan trade execution. The valuation methodology incorporates commonly used market pricing methods, which include the inputs considered most significant to the determination of fair value of the Company's residential whole loans. The assumptions made by the independent third party pricing service include the market discount rate, default assumption, loss severity and prepayment speeds. Management reviews the analysis provided by pricing service as well as the key assumptions made available to the company.

The principal considerations for our determination that performing procedures relating to the valuation of the Company’s Non-QM Residential Whole Loans is a critical audit matter are the significant judgment by management to determine the fair value of these loans, which included significant assumptions related to the market discount rate, default assumption, loss severity and prepayment speeds, which in turn led to a high degree of auditor subjectivity, judgment, and effort in performing audit procedures and evaluating the audit evidence obtained related to the valuation and the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of Non-QM Residential Whole Loans, including controls over management’s loan data and the prices and significant assumptions received from the independent third party pricing service. These procedures also included, among others, (i) the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for the Non-QM Residential Whole Loan portfolio and (ii) comparing the independent range to management’s estimate to evaluate the reasonableness of management’s estimate. Developing the independent estimate involved (i) testing the loan data provided by management and (ii) independently developing the assumptions related to the discount rate, default assumptions, loss severity and prepayment speeds by utilizing data obtained from market sources and observable transactions under a variety of macroeconomic scenarios.

Valuation of Commercial Loans

As described in Note 3 to the consolidated financial statements, the fair value of the Company’s commercial loans was $310.52 million as of December 31, 2020. The Company’s valuation is based upon prices received from an independent third party pricing service that specializes in loan valuation, utilizing a valuation model that is calibrated to recent loan trade execution. The valuation methodology incorporates commonly used market pricing methods, which include the inputs considered most significant to the determination of fair value of the Company's commercial loans. The assumptions made by the independent third party pricing service include the market discount rate, default assumption and loss severity. Management reviews the analysis provided by pricing service as well as the key assumptions.

The principal considerations for our determination that performing procedures relating to the valuation of the Company’s commercial loans is a critical audit matter are the significant judgment by management to determine the fair value of these loans, which included the market discount rate assumption, which in turn led to a high degree of auditor subjectivity, judgment, and effort in performing audit procedures and evaluating the audit evidence obtained related to the valuation and the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of commercial loans, including controls over management’s loan data and the prices and market discount rate received from the independent third party pricing service. These procedures also included, among others, (i) testing the loan data provided by management, (ii) the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of fair values to evaluate management's estimate for a sample of loans, and (iii) comparing the independent range to management’s estimate to evaluate the reasonableness of management’s estimate. Developing an independent range involved projecting loan level cash flows using the market discount rate for loans with similar characteristics.


/s/ PricewaterhouseCoopers, LLP

Los Angeles, California
March 6, 2020

5, 2021
We have served as the Company’s auditor since 2011.

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 December 31, 2020December 31, 2019
Assets:  
Cash and cash equivalents$31,613 $31,331 
Restricted cash76,132 52,948 
Agency mortgage-backed securities, at fair value ($1,708 and $1,756,917 pledged as collateral, at fair value, respectively)1,708 1,795,255 
Non-Agency mortgage-backed securities, at fair value ($167,970 and $292,613 pledged as collateral, at fair value, respectively)189,462 361,833 
Other securities, at fair value ($48,754 and $80,031 pledged as collateral, at fair value, respectively)48,754 80,161 
Residential Whole-Loans, at fair value ($1,008,782 and $1,375,860 pledged as collateral, at fair value, respectively)1,008,782 1,375,860 
Residential Bridge Loans ($12,813 and $33,269 at fair value and $12,960 and $34,897 pledged as collateral, respectively)13,916 36,419 
Securitized commercial loans, at fair value1,605,335 909,040 
Commercial Loans, at fair value ($310,523 and $350,213 pledged as collateral, at fair value, respectively)310,523 370,213 
Investment related receivable30,576 19,931 
Interest receivable13,568 19,413 
Due from counterparties2,327 98,947 
Derivative assets, at fair value161 5,111 
Other assets3,152 4,509 
Total Assets(1)
$3,336,009 $5,160,971 
Liabilities and Stockholders' Equity:  
Liabilities:  
Repurchase agreements, net$356,923 $2,824,801 
Convertible senior unsecured notes, net170,797 197,299 
Securitized debt, net ($1,553,722 and $681,643 at fair value and $215,753 and $142,905 held by affiliates, respectively)2,446,012 1,477,454 
Interest payable (includes $784 and $647 on securitized debt held by affiliates, respectively)12,006 15,001 
Due to counterparties321 709 
Derivative liability, at fair value656 6,370 
Accounts payable and accrued expenses2,686 3,188 
Payable to affiliate3,171 2,148 
Dividend payable3,649 16,592 
Other liabilities84,674 52,948 
Total Liabilities(2)
3,080,895 4,596,510 
Commitments and contingencies00
Stockholders' Equity:  
Common stock, $0.01 par value, 500,000,000 shares authorized, and 60,812,701 and 53,523,876 outstanding, respectively609 535 
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding
Treasury stock, at cost 0,100 and 0 shares held, respectively(578)
Additional paid-in capital915,458 889,227 
Retained earnings (accumulated deficit)(660,377)(325,301)
Total Stockholders' Equity255,112 564,461 
Non-controlling interest
Total Equity255,114 564,461 
Total Liabilities and Stockholders' Equity$3,336,009 $5,160,971 
See notes to consolidated financial statements.
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Table of Contents
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)

(1)Assets of consolidated VIEs included in the total assets above:
 December 31, 2020December 31, 2019
Cash and cash equivalents$$7,589 
Restricted cash76,132 52,948 
Residential Whole-Loans, at fair value ($1,008,782 and $1,375,860 pledged as collateral, at fair value, respectively)1,008,782 1,375,860 
Residential Bridge Loans ($11,858 and $31,748 at fair value and $12,960 and $34,897 pledged as collateral, respectively)12,960 34,897 
Securitized commercial loans, at fair value1,605,335 909,040 
Commercial Loans, at fair value ($68,466 and $90,788 pledged as collateral, respectively)68,466 90,788 
Investment related receivable27,987 19,138 
Interest receivable10,936 10,829 
Other assets80 90 
Total assets of consolidated VIEs$2,810,678 $2,501,179 
 December 31, 2019 December 31, 2018
Assets: 
  
Cash and cash equivalents$31,331
 $21,987
Restricted cash52,948
 55,808
Agency mortgage-backed securities, at fair value ($1,756,917 and $1,505,979 pledged as collateral, at fair value, respectively)1,795,255
 1,505,979
Non-Agency mortgage-backed securities, at fair value ($292,613 and $237,107 pledged as collateral, at fair value, respectively)361,833
 250,856
Other securities, at fair value ($80,031 and $59,780 pledged as collateral, at fair value, respectively)80,161
 59,906
Residential Whole-Loans, at fair value ($1,375,860 and $1,041,885 pledged as collateral, at fair value, respectively)1,375,860
 1,041,885
Residential Bridge Loans ($33,269 and $211,999 at fair value and $34,897 and $221,486 pledged as collateral, respectively)36,419
 221,719
Securitized commercial loans, at fair value909,040
 1,013,511
Commercial Loans, at fair value ($350,213 and $196,123 pledged as collateral, at fair value, respectively)370,213
 216,123
Investment related receivable19,931
 42,945
Interest receivable19,413
 21,959
Due from counterparties98,947
 39,623
Derivative assets, at fair value5,111
 2,606
Other assets4,509
 2,488
Total Assets(1)
$5,160,971
 $4,497,395
Liabilities and Stockholders' Equity: 
  
Liabilities: 
  
Repurchase agreements, net$2,824,801
 $2,818,837
Convertible senior unsecured notes, net197,299
 110,060
Securitized debt, net ($681,643 and $949,626 at fair value and $142,905 and $246,802 held by affiliates, respectively)1,477,454
 949,626
Interest payable (includes $647 and $816 on securitized debt held by affiliates, respectively)15,001
 8,532
Due to counterparties709
 17,781
Derivative liability, at fair value6,370
 10,130
Accounts payable and accrued expenses3,188
 3,858
Payable to affiliate2,148
 4,615
Dividend payable16,592
 14,916
Other liabilities52,948
 56,031
Total Liabilities(2)
4,596,510
 3,994,386
Commitments and contingencies


 


Stockholders' Equity: 
  
Common stock, $0.01 par value, 500,000,000 shares authorized, and 53,523,876 and 48,116,379 outstanding, respectively535
 481
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding
 
Additional paid-in capital889,227
 833,810
Retained earnings (accumulated deficit)(325,301) (331,282)
Total Stockholders' Equity564,461
 503,009
Total Liabilities and Stockholders' Equity$5,160,971
 $4,497,395

(2)Liabilities of consolidated VIEs included in the total liabilities above:
Securitized debt, net ($1,553,722 and $681,643 at fair value and $215,753 and $142,905 held by affiliates, respectively)$2,446,012 $1,477,454 
Interest payable (includes $784 and $647 on securitized debt held by affiliates, respectively)7,882 3,886 
Accounts payable and accrued expenses89 185 
Other liabilities76,132 52,948 
Total liabilities of consolidated VIEs$2,530,115 $1,534,473 
See notes to consolidated financial statements.
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Table of Contents
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)

(1)Assets of consolidated VIEs included in the total assets above:
 December 31, 2019
December 31, 2018
Cash and cash equivalents$7,589
 $674
Restricted cash52,948

55,808
Residential Whole-Loans, at fair value ($1,375,860 and $1,041,885 pledged as collateral, at fair value, respectively)1,375,860

1,041,885
Residential Bridge Loans ($31,748 and $211,766 at fair value and $34,897 and $221,486 pledged as collateral, respectively)34,897

221,486
Securitized commercial loans, at fair value909,040

1,013,511
Commercial Loans, at fair value ($90,788 and $196,123 pledged as collateral, respectively)90,788

196,123
Investment related receivable19,138

42,945
Interest receivable10,829

15,540
Other assets90

178
Total assets of consolidated VIEs$2,501,179

$2,588,150

(2)Liabilities of consolidated VIEs included in the total liabilities above:
Securitized debt, net ($681,643 and $949,626 at fair value and $142,905 and $246,802 held by affiliates, respectively)$1,477,454
 $949,626
Interest payable (includes $647 and $816 on securitized debt held by affiliates, respectively)3,886
 2,419
Accounts payable and accrued expenses185
 708
Other liabilities52,948
 56,033
Total liabilities of consolidated VIEs$1,534,473
 $1,008,786
See notes to consolidated financial statements.



Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands—except share and per share data)

For the years ended December 31, For the years ended December 31,
2019 2018 2017 202020192018
Net Interest Income 
  
  
Net Interest Income   
Interest income$217,264
 $209,362
 $124,291
Interest income$178,028 $217,264 $209,362 
Interest expense (includes $5,674, $13,739 and $981 on securitized debt held by affiliates, respectively)150,274
 138,240
 48,373
Interest expense (includes $8,877, $5,674 and $13,739 on securitized debt held by affiliates, respectively)Interest expense (includes $8,877, $5,674 and $13,739 on securitized debt held by affiliates, respectively)132,591 150,274 138,240 
Net Interest Income66,990
 71,122
 75,918
Net Interest Income45,437 66,990 71,122 
     
Other Income (Loss) 
  
  
Other Income (Loss)   
Realized gain (loss) on sale of investments, net28,278
 (63,257) 20,598
Realized gain (loss), netRealized gain (loss), net84,271 28,278 (63,257)
Other than temporary impairment(8,574) (11,180) (22,873)Other than temporary impairment(8,574)(11,180)
Unrealized gain (loss), net107,529
 (24,671) 28,396
Unrealized gain (loss), net(221,387)107,529 (24,671)
Gain (loss) on derivative instruments, net(103,727) 77,969
 3,292
Gain (loss) on derivative instruments, net(197,703)(103,727)77,969 
Other, net2,204
 (189) 1,031
Other, net339 2,204 (189)
Other Income (Loss)25,710
 (21,328) 30,444
Other Income (Loss)(334,480)25,710 (21,328)
     
Expenses 
  
  
Expenses   
Management fee to affiliate7,354
 8,673
 8,100
Management fee to affiliate4,544 7,354 8,673 
Financing feeFinancing fee20,540 
Other operating expenses5,519
 6,076
 2,419
Other operating expenses2,855 5,519 6,076 
General and administrative expenses:     General and administrative expenses:
Compensation expense2,591
 2,186
 2,692
Compensation expense2,787 2,591 2,186 
Professional fees3,980
 4,299
 3,242
Professional fees4,878 3,980 4,299 
Other general and administrative expenses1,500
 1,442
 1,325
Other general and administrative expenses3,303 1,500 1,442 
Total general and administrative expenses8,071
 7,927
 7,259
Total general and administrative expenses10,968 8,071 7,927 
Total Expenses20,944
 22,676
 17,778
Total Expenses38,907 20,944 22,676 
     
Income before income taxes71,756
 27,118
 88,584
Income (loss) before income taxesIncome (loss) before income taxes(327,950)71,756 27,118 
Income tax provision1,057
 709
 3,487
Income tax provision396 1,057 709 
Net income$70,699
 $26,409
 $85,097
Net income (loss)Net income (loss)(328,346)70,699 26,409 
Net income attributable to non-controlling interestNet income attributable to non-controlling interest
Net income (loss) attributable to common stockholders and participating securitiesNet income (loss) attributable to common stockholders and participating securities$(328,354)$70,699 $26,409 
     
Net income per Common Share — Basic$1.37
 $0.61
 $2.03
Net income per Common Share — Diluted$1.37
 $0.61
 $2.03
Net income (loss) per Common Share — BasicNet income (loss) per Common Share — Basic$(5.72)$1.37 $0.61 
Net income (loss) per Common Share — DilutedNet income (loss) per Common Share — Diluted$(5.72)$1.37 $0.61 
See notes to consolidated financial statements.

83




Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(in thousands—except shares and share data)
84



Common Stock OutstandingAdditional
Paid-In Capital
Retained
Earnings
(Accumulated)
Deficit
Treasury StockTotal Stockholders' EquityNon-Controlling InterestTotal Equity
Common Stock Outstanding 
Additional
Paid-In Capital
 
Retained
Earnings
(Accumulated)
Deficit
 Treasury Stock Total SharesPar
Shares Par 
Balance at December 31, 201641,919,801
 $419
 $765,042
 $(334,979) $
 $430,482
Vesting of restricted stock
 
 981
 
 
 981
Equity component of convertible senior unsecured notes
 
 2,656
 
 
 2,656
Treasury Stock(125,722) 
 
 
 (1,232) (1,232)
Net income
 
 
 85,097
 
 85,097
Dividends on common stock
 
 84
 (52,030) 
 (51,946)
Balance at December 31, 201741,794,079
 419
 768,763
 (301,912) (1,232) 466,038
Balance at December 31, 201741,794,079 $419 $768,763 $(301,912)$(1,232)$466,038 $$466,038 
Net proceeds from public offerings of common stock6,196,578
 62
 64,818
 
 
 64,880
Net proceeds from public offerings of common stock6,196,578 62 64,818 — — 64,880 — 64,880 
Offering costs,
 
 (373) 
 
 (373)
Offering costsOffering costs— — (373)— — (373)— (373)
Vesting of restricted stock
 
 265
 
 
 265
Vesting of restricted stock— — 265 — — 265 — 265 
Treasury Stock125,722
 
 213
 
 1,232
 1,445
Treasury stockTreasury stock125,722 — 213 — 1,232 1,445 — 1,445 
Net income
 
 
 26,409
 
 26,409
Net income— — — 26,409 — 26,409 — 26,409 
Dividends on common stock
 
 124
 (55,779) 
 (55,655)Dividends on common stock— — 124 (55,779)— (55,655)— (55,655)
Balance at December 31, 201848,116,379
 481
 833,810
 (331,282) 
 503,009
Balance at December 31, 201848,116,379 481 833,810 (331,282)503,009 503,009 
Net proceeds from public offerings of common stock5,299,497
 53
 52,661
 
 
 52,714
Net proceeds from public offerings of common stock5,299,497 53 52,661 — — 52,714 — 52,714 
Offering costs
 
 (430) 
 
 (430)Offering costs— — (430)— — (430)— (430)
Grants of restricted stock108,000
 1
 (1) 
 
 
Grants of restricted stock108,000 (1)— — — — — 
Vesting of restricted stock
 
 564
 
 
 564
Vesting of restricted stock— — 564 — — 564 — 564 
Equity component of convertible senior unsecured notes
 
 2,445
 
 
 2,445
Equity component of convertible senior unsecured notes— — 2,445 — — 2,445 — 2,445 
Net income
 
 
 70,699
 
 70,699
Net income— — — 70,699 — 70,699 — 70,699 
Dividends on common stock
 
 178
 (64,718) 
 (64,540)Dividends on common stock— — 178 (64,718)— (64,540)— (64,540)
Balance at December 31, 201953,523,876
 $535
 $889,227
 $(325,301) $
 $564,461
Balance at December 31, 201953,523,876 535 889,227 (325,301)564,461 564,461 
Proceeds from public offerings of common stockProceeds from public offerings of common stock6,034,741 60 22,297 — — 22,357 — 22,357 
Offering costsOffering costs— — (371)— — (371)— (371)
Proceeds from non-controlling interest, net of offering costsProceeds from non-controlling interest, net of offering costs— — — — — — 
Exchange of convertible senior notesExchange of convertible senior notes1,354,084 14 3,574 — — 3,588 — 3,588 
Vesting of restricted stockVesting of restricted stock— — 699 — — 699 — 699 
Treasury stockTreasury stock(100,000)— — — (578)(578)— (578)
Net lossNet loss— — — (328,354)— (328,354)(328,346)
Dividends declared on non-controlling interestDividends declared on non-controlling interest— — — — — — (8)(8)
Dividends declared on common stockDividends declared on common stock— — 32 (6,722)— (6,690)— (6,690)
Balance at December 31, 2020Balance at December 31, 202060,812,701 $609 $915,458 $(660,377)$(578)$255,112 $$255,114 
See notes to consolidated financial statements.
85



 For the year ended December 31,
 202020192018
Cash flows from operating activities:   
Net income (loss)$(328,346)$70,699 $26,409 
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:   
Premium amortization and (discount accretion), net5,141 7,398 5,374 
Interest income earned added to principal of investments(829)
Amortization of deferred financing costs3,577 1,488 767 
Amortization of discount on convertible senior unsecured notes1,097 718 550 
Restricted stock amortization699 564 265 
Interest payments and basis recovered on MAC interest rate swaps202 5,772 2,465 
Premium on purchase of Residential Whole Loans          (3,858)(15,304)(15,850)
Premium on purchase of Residential Bridge Loans(3,889)
Premium on purchase of securitized commercial loans(3,769)(3,019)
Financing fee12,000 
Unrealized (gain) loss, net221,387 (107,529)24,671 
Unrealized (gain) loss on derivative instruments, net3,953 (9,390)10,381 
Other than temporary impairment8,574 11,180 
Realized gain on exchange and extinguishment of convertible senior notes(3,644)
Realized loss on sale of real estate owned ("REO"), net789 90 
Realized (gain) loss on investments, net(81,416)(28,368)63,257 
(Gain) loss on derivatives, net13,134 9,631 (10,316)
Changes in operating assets and liabilities: 
Decrease (increase) in interest receivable          5,845 2,546 (8,356)
Increase in investment related receivable(2,544)
Decrease (increase) in other assets(905)1,157 (184)
(Decrease) increase in interest payable(2,995)6,469 210 
(Decrease) increase in accounts payable and accrued expenses(499)(519)563 
Increase (decrease) in payable to related party          1,023 (2,467)2,574 
Increase in other liabilities8,541 
Net cash (used in) provided by operating activities(147,648)(52,240)107,052 
Cash flows from investing activities:   
Purchase of securities(320,996)(1,581,485)(1,128,399)
Proceeds from sale of securities2,234,048 1,136,617 2,430,054 
Principal repayments and basis recovered on securities35,352 126,091 123,837 
Proceeds from sale of REO2,620 1,033 
Purchase of Residential Whole Loans(109,480)(563,821)(873,911)
Proceeds from sale of Residential Whole Loans144,258 
Principal repayments on Residential Whole Loans288,568 254,125 76,942 
Purchase of commercial loans(350,232)(235,857)
Principal repayments on commercial loans44,819 197,245 20,638 
Purchase of securitized commercial loans(1,109,461)(1,350,000)
Principal repayments on securitized commercial loans349,608 1,214,688 361,781 
Purchase of Residential Bridge Loans(418,953)
86

Table of Contents
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)

 For the year ended December 31,
 202020192018
Principal repayments on Residential Bridge Loans22,075 211,316 274,964 
Payment of premium for option derivatives(780)(1,757)
Premium received from option derivatives2,158 1,236 
Premium for credit default swaps, net(14,028)3,885 (297)
Net settlements of TBAs(2,430)1,934 (800)
Proceeds from (Payments on) termination of futures, net(12,862)6,112 
Due from counterparties, net2,340 (2,850)
Interest payments and basis recovered on MAC interest rate swaps(202)(5,772)(2,465)
Premium for interest rate swaptions, net80 (332)
Net cash provided by (used in) investing activities2,676,632 (478,503)(716,875)
Cash flows from financing activities:   
Net proceeds from issuance of common stock22,357 52,714 64,880 
Payment of offering costs(374)(580)(195)
Repurchase of common stock(578)(1,733)
Proceeds from sale of treasury stock3,177 
Proceeds from repurchase agreement borrowings          10,020,593 21,381,571 21,472,963 
Proceeds from convertible note offering90,625 
Payments on extinguishment of convertible senior notes(21,975)
Proceeds from offering to non-controlling interest, net of offering costs
Repayments of repurchase agreement borrowings          (12,486,624)(21,375,531)(21,905,812)
Proceeds from securitized debt460,787 1,828,361 1,285,219 
Repayments of securitized debt(579,705)(1,292,141)(344,612)
Financing fee(12,000)
Payments made for deferred financing costs(5,437)(8,522)
Due from counterparties, net94,280 (56,474)47,307 
Due to counterparties, net(388)(17,072)16,291 
Increase (decrease) in other liabilities, net23,185 (2,860)55,808 
Dividends paid on common stock(19,633)(62,864)(53,699)
Dividends paid to non-controlling interest(8)
Net cash (used in) provided by financing activities(2,505,518)537,227 639,594 
Net increase in cash and cash equivalents23,466 6,484 29,771 
Cash, cash equivalents and restricted cash, beginning of period84,279 77,795 48,024 
Cash, cash equivalents and restricted cash, end of period$107,745 $84,279 $77,795 
Supplemental disclosure of operating cash flow information:   
Interest paid$119,957 $144,987 $138,524 
Income taxes paid$810 $549 $1,635 
Supplemental disclosure of non-cash financing/investing activities:   
Underwriting and offering costs payable$$27 $177 
Principal payments of securities, not settled$44 $$
Assets of deconsolidated VIE$(150,804)$$
See notes to consolidated financial statements.
87

 For the year ended December 31,
 2019 2018 2017
Cash flows from operating activities: 
  
  
Net income$70,699
 $26,409
 $85,097
Adjustments to reconcile net income to net cash (used in) provided by operating activities: 
  
  
Premium amortization and (discount accretion), net7,398
 5,374
 (2,070)
Interest income earned added to principal of securities
 
 (46)
Amortization of deferred financing costs1,488
 767
 192
Amortization of discount on convertible senior unsecured notes718
 550
 137
Restricted stock amortization564
 265
 981
Interest payments and basis recovered on MAC interest rate swaps5,772
 2,465
 525
Premium on purchase of Residential Whole Loans          (15,304) (15,850) (1,239)
Premium on purchase of Residential Bridge Loans
 (3,889) (753)
Premium on purchase of securitized commercial loans(3,769) (3,019) 
Unrealized (gain) loss, net(107,529) 24,671
 (28,396)
Unrealized (gain) loss on derivative instruments, net(9,390) 10,381
 (148,308)
Other than temporary impairment8,574
 11,180
 22,873
Realized loss on sale of real estate owned ("REO"), net90
 
 
Realized (gain) loss on sale of investments, net(28,368) 63,257
 (20,598)
(Gain) loss on derivatives, net9,631
 (10,316) 156,076
Loss on foreign currency transactions, net
 
 1
Changes in operating assets and liabilities:     
Decrease (increase) in interest receivable          2,546
 (8,356) 5,209
Decrease (increase) in other assets1,157
 (184) (1,763)
Increase (decrease) in interest payable6,469
 210
 (7,719)
(Decrease) increase in accounts payable and accrued expenses(519) 563
 (274)
(Decrease) increase in payable to related party          (2,467) 2,574
 (543)
Net cash (used in) provided by operating activities(52,240) 107,052
 59,382
Cash flows from investing activities: 
  
  
Purchase of securities(1,581,485) (1,128,399) (2,881,276)
Proceeds from sale of securities1,136,617
 2,430,054
 1,593,914
Principal repayments and basis recovered on securities126,091
 123,837
 240,785
Proceeds from sale of REO1,033
 
 
Purchase of Residential Whole Loans(563,821) (873,911) (87,640)
Principal repayments on Residential Whole Loans254,125
 76,942
 42,176
Purchase of commercial loans(350,232) (235,857) 
Principal repayments on commercial loans197,245
 20,638
 
Purchase of securitized commercial loans(1,109,461) (1,350,000) 
Principal repayments on securitized commercial loans1,214,688
 361,781
 154
Purchase of Residential Bridge Loans
 (418,953) (142,913)
Principal repayments on Residential Bridge Loans211,316
 274,964
 31,794
Payment of premium for option derivatives(780) (1,757) (16,355)
Premium received from option derivatives2,158
 1,236
 14,553
Premium for credit default swaps, net3,885
 (297) 74
Net settlements of TBAs1,934
 (800) 4,035
Table of Contents
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in thousands)

 For the year ended December 31,
 202020192018
Liabilities of deconsolidated VIE$143,952 $$
Mortgage-backed securities recorded upon deconsolidation$6,852 $$
Assets of consolidated VIE$1,245,287 $$
Liabilities of consolidated VIE$(1,231,549)$$
Mortgage-backed securities derecognized upon VIE consolidation$(13,737)$$
Dividends and distributions declared, not paid$3,649 $16,592 $14,916 
Principal payments of Residential Whole Loans, not settled$26,885 $17,254 $9,230 
Principal payments of Residential Bridge Loans, not settled$1,102 $1,949 $33,717 
Other assets - Transfer of Bridge Loans to REO$419 $5,029 143 
Proceeds from sale of REO, not settled$$728 $
Financing fee payable$(8,540)$$
Exchange of convertible senior notes for commons stock$3,588 $$
Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:
Cash and cash equivalents$31,613 $31,331 $21,987 
Restricted cash76,132 52,948 55,808 
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows$107,745 $84,279 $77,795 



See notes to consolidated financial statements.
88
 For the year ended December 31,
 2019 2018 2017
Proceeds from (Payments on) termination of futures, net(12,862) 6,112
 (9,130)
Due from counterparties, net(2,850) 
 8,449
Payments on total return swaps
 
 (552)
Interest payments and basis recovered on MAC interest rate swaps(5,772) (2,465) (525)
Premium for interest rate swaptions, net(332) 
 (115)
Net cash used in investing activities(478,503) (716,875) (1,202,572)
      
Cash flows from financing activities: 
  
  
Net proceeds from issuance of common stock52,714
 64,880
 
Payment of offering costs(580) (195) (94)
Repurchase of common stock
 (1,733) (1,094)
Proceeds from sale of treasury stock
 3,177
 
Proceeds from repurchase agreement borrowings          21,381,571
 21,472,963
 18,438,166
Proceeds from convertible note offering90,625
 
 115,000
Repayments of repurchase agreement borrowings          (21,375,531) (21,905,812) (17,342,124)
Proceeds from securitized debt1,828,361
 1,285,219
 
Repayments of securitized debt(1,292,141) (344,612) (68)
Proceeds from forward contracts
 
 8,246
Repayments of forward contracts
 
 (8,214)
Payments made for deferred financing costs(8,522) 
 (3,837)
Due from counterparties, net(56,474) 47,307
 (9,707)
Due to counterparties, net(17,072) 16,291
 750
Increase (decrease) in other liabilities, net(2,860) 55,808
 
Dividends paid on common stock(62,864) (53,699) (51,981)
Net cash provided by financing activities537,227
 639,594
 1,145,043
      
Effect of exchange rate changes on cash and cash equivalents
 
 (1)
      
Net increase in cash and cash equivalents6,484
 29,771
 1,852
Cash, cash equivalents and restricted cash, beginning of period77,795
 48,024
 46,172
Cash, cash equivalents and restricted cash, end of period$84,279
 $77,795
 $48,024
      
Supplemental disclosure of operating cash flow information: 
  
  
Interest paid$144,987
 $138,524
 $43,032
Income taxes paid$549
 $1,635
 $4,966
Supplemental disclosure of non-cash financing/investing activities: 
  
  
Underwriting and offering costs payable$27
 $177
 $
Repurchase of common stock, not settled$
 $
 $(137)
Securities purchased, not settled$
 $
 $(17,217)
Derivative collateral offset against derivatives$
 $
 $(157,913)
Dividends and distributions declared, not paid$16,592
 $14,916
 $12,960

Table of Contents
Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in thousands)


 For the year ended December 31,
 2019 2018 2017
Principal payments of Residential Whole Loans, not settled$17,254
 $9,230
 $2,286
Principal payments of Residential Bridge Loans, not settled$1,949
 $33,717
 $5,381
Other assets - Transfer of Bridge Loans to REO$5,029
 $143
 $
Proceeds from sale of REO, not settled$728
 $
 $
      
Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:     
Cash and cash equivalents$31,331
 $21,987
 $48,024
Restricted cash52,948
 55,808
 
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows$84,279
 $77,795
 $48,024



Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands—except share and per share data)


        The following defines certain of the commonly used terms in these Notes to Consolidated Financial Statements: "Agency" or "Agencies" refer to a federally chartered corporation, such as the Federal National Mortgage Association ("Fannie Mae" or "FNMA") or the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"), or an agency of the U.S. Government, such as the Government National Mortgage Association ("Ginnie Mae" or "GNMA"); references to "MBS" refer to mortgage backed securities, including residential mortgage-backed securities or "RMBS," commercial mortgage-backed securities or "CMBS," and "Interest-Only Strips" (as defined herein);"Agency MBS" refer to RMBS, CMBS and Interest-Only Strips issued or guaranteed by the Agencies while "Non-Agency MBS "refer to RMBS, CMBS and Interest-Only Strips that are not issued or guaranteed by the Agencies; references to "ARMs" refers to adjustable rate mortgages; references to "Interest-Only Strips" refer to interest-only ("IO") and inverse interest-only ("IIO") securities issued as part of or collateralized with MBS; references to "TBA" refer to To-Be-Announced Securities; references to "Residential Whole Loans," "Residential Bridge Loans" and "Commercial Loans" (collectively "Whole Loans") refer to individual mortgage loans secured by single family, multi-family and commercial properties.
See notes to consolidated financial statements.
89

Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands—except share and per share data)

Note 1—Organization
Western Asset Mortgage Capital Corporation, a Delaware corporation, and its subsidiaries (the "Company"“Company”), commenced operations in May 2012. The Company invests in, finances and manages a diversified portfolio of real estate related securities, Whole Loans and other financial assets.  The Company'sCompany’s current portfolio is comprised of Agency CMBS, Agency RMBS (including TBAs), Non-Agency RMBS, Non-Agency CMBS, Non-Qualified Residential Whole Loans ("Non-QM"), Conforming Residential WholeCommercial Loans, Non-Agency CMBS and to a lesser extent Agency RMBS, Non-Agency RMBS, Residential Bridge Loans, GSE Risk Transfer Securities and Commercial Loans. In addition, and to a significantly lesser extent, the Company has invested in other securities including certain Agency obligations that are not technically MBS as well as certain Non U.S. CMBS and in asset-backed securities ("ABS"(“ABS”) investments secured by a portfolio of private student loans.  The Company'sCompany’s investment strategy is based on Western Asset Management Company, LLC'sLLC’s (the "Manager"“Manager”) perspective of which mix of portfolio assets it believes provides the Company with the best risk-reward opportunities at any given time.  The Manager will vary the allocation among various asset classes subject to maintaining the Company'sCompany’s qualification as a REIT and maintaining its exemption from the Investment Company Act of 1940, as amended (the "1940 Act"“1940 Act”).  These restrictions limit the Company'sCompany’s ability to invest in non-qualifying MBS, non-real estate assets and/or assets which are not secured by real estate.  Accordingly, the Company'sCompany’s portfolio will continue to be principally invested in qualifying MBS, Whole Loans and other real estate related assets.
The Company is externally managed by the Manager, an investment advisor registered with the Securities and Exchange Commission ("SEC"). The Manager is a wholly-owned subsidiary of Franklin Resources, Inc. (“Franklin”), which on July 31, 2020 acquired the Manager's previous parent Legg Mason Inc ("Legg Mason").Inc. The Company operates and has elected to be taxed as a real estate investment trust or "REIT"“REIT” commencing with its taxable, year ended December 31, 2012.
90



Note 2—Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying financial statements and related notes have been prepared in conformity with generally accepted accounting principles in the United States of America ("GAAP"). The consolidated financial statements include the accounts of the Company, its wholly -owned subsidiaries and variable interest entities ("VIEs") in which it is considered the primary beneficiary. All intercompany amounts between the Company and its subsidiaries and consolidated VIEs have been eliminated in consolidation.
Variable Interest Entities
 
VIEs are defined as entities that by design either lack sufficient equity for the entity to finance its activities without additional subordinated financial support or are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. The Company evaluates all of its interests in VIEs for consolidation. When the interests are determined to be variable interests, the Company assesses whether it is deemed the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
 
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, it considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes: first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the
Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)

most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers isare deemed to have the power to direct the activities of a VIE.
 
To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, it considers all of its economic interests. This assessment requires the Company to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.
 
In instances where the Company and its related parties have variable interests in a VIE, the Company considers whether there is a single party in the related party group that meets both the power and losses or benefits criteria on its own as though no related party relationship existed.  If one party within the related party group meets both these criteria, such reporting entity is the primary beneficiary of the VIE and no further analysis is needed.  If no party within the related party group on its own meets both the power and losses or benefits criteria, but the related party group as a whole meets these two criteria, the determination of primary beneficiary within the related party group requires significant judgment. The analysis is based upon qualitative as well as quantitative factors, such as the relationship of the VIE to each of the members of the related-party group, as well as the significance of the VIE's activities to those members, with the objective of determining which party is most closely associated with the VIE.
  
Ongoing assessments of whether an enterprise is the primary beneficiary of a VIE are required.
 
Use of Estimates
 
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Impact of the COVID-19 Pandemic

91

Table of Contents
Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)


During the first quarter of 2020, the outbreak of COVID-19, which the World Health Organization designated a pandemic, created extensive disruptions to the global economy and the lives of individuals throughout the world. Governments, businesses, and the public have taken and are continuing to take unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. The scope, duration, and full effects of COVID-19 are still not fully known. The pandemic and related efforts to contain the COVID-19 have disrupted global economic activity, impacted interest rates, increased economic and market uncertainty, disrupted trade and supply chains, and created unprecedented financial market conditions and disruptions. This rapid disruption in the fixed income markets specifically in mortgage markets had an adverse impact on our book value, liquidity, results of operations, and financial position.

While the development and initial application of vaccines offer hope on the horizon, our Manager's view is the recovery will take a long time. The full impact of COVID-19 on our results of operations, financial position and cost of capital is still uncertain as it depends on several factors beyond our control. Our Manager's outlook is that (i) COVID-19 related growth setbacks have meaningfully reduced global and U.S. growth, (ii) vaccine distribution will take time but as noted recent developments are encouraging, (iii) second half of 2021 should should see a meaning pick up in growth as the economy reopens (iii) U.S. and global inflation are expected to be very subdued, (iv) fiscal policy and monetary policy will remain supportive, and (v) Central banks are expected to keep rates ultra low for long. We continue to operate with a defensive stance to preserve liquidity, reduce our exposure to short-term repurchase agreement financings, and reduce expenses.

Earnings (Loss) Per Share
 
GAAP requires use of the two-class method in computing earnings per share for all periods presented for each class of common stock and participating securities as if all earnings for the period had been distributed.  Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings.  During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.  The Company’s participating securities are not allocated a share of the net loss, as the participating securities do not have a contractual obligation to share in the net losses of the Company.

The remaining earnings are allocated to common stockholders and participating securities, to the extent that each security shares in earnings, as if all of the earnings for the period had been distributed.  Each total is then divided by the applicable number of weighted average outstanding common shares to arrive at basic earnings per share.  For the diluted earnings, the denominator includes the weighted average outstanding common shares and all potential common shares assumed issued if they are dilutive.  The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential common shares.
 
Offering Costs
 
Offering costs borne by the Company in connection with common stock offerings and private placements are reflected as a reduction of additional paid-in-capital. Offering costs borne by the Company in connection with its shelf registration will be deferred and recorded in "Other assets" until such time the Company completes a common stock offering where all or a portion will be reclassified and reflected as a reduction of additional paid-in-capital. The deferred offering costs will be expensed upon the expiration of the shelf if the Company does not complete an equity offering.

Cash and Cash Equivalents
 
Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)

The Company considers all highly liquid short-term investments with original maturities of 90 days or less when purchased to be cash equivalents.  Cash and cash equivalents are exposed to concentrations of credit risk. The Company places its cash and cash equivalents with what it believes to be high credit quality institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit.

Restricted Cash

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Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)
Restricted cash represents cash held by the trustee or servicer for mortgage escrows in connection with the Company's securitized loan and commercial loan investments held in its consolidated VIEs. These escrows consist of principal and interest escrows, capital improvement reserves, repair reserves, real estate tax and insurance reserves and tenant reserves. The corresponding liability is recorded in "Other liabilities" in the Consolidated Balance Sheets. The restricted cash is not available for general corporate use.

Valuation of Financial Instruments
 
The Company discloses the fair value of its financial instruments according to a fair value hierarchy (Levels I, II, and III, as defined below). ASC 820, "Fair Value Measurement and Disclosures" establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements. ASC 820 further specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:
 
Level I — Quoted prices in active markets for identical assets or liabilities.
 
Level II — Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable, for example, when there is little or no market activity for an investment at the end of the period, unobservable inputs may be used.
 
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Transfers between levels are determined by the Company at the end of the reporting period. Refer to Note 3 - "Fair Value of Financial Instruments."

Mortgage-Backed Securities and Other Securities
 
The Company's mortgage-backed securities and other securities portfolio primarily consistsconsisted of Agency CMBS, Non-Agency CMBS, Agency RMBS, Non-Agency RMBS, ABS and other real estate related securities, thesesecurities. These investments are recorded in accordance with ASC 320, “Investments - Debt and Equity Securities” and ASC 325-40, “Beneficial Interests in Securitized Financial Assets.” The Company has chosen to elect the fair value option pursuant to ASC 825, “Financial Instruments” for its mortgage-backed securities and other securities portfolio. Electing the fair value option allows the Company to record changes in fair value in the Consolidated Statements of Operations as a component of “Unrealized gain (loss), net.”

As of January 1, 2020, the Company has adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL") in the first quarter of 2020. The standard significantly changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through the income statement. The standard replaced the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. Since the Company elected the Fair Value Option for its mortgage-backed securities and other securities, the Company does not apply the expected loss model instead the Company records changes in fair value of these investment in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net."

If the Company purchases securities with evidence of credit deterioration, it will analyze to determine if the guidance found in ASC 310-30, “Loans and Debt Securities Acquired with DeterioratedASU 2016-13, "Financial Instruments - Credit Quality”Losses, is applicable.

The Company evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis. The determinationResidential Whole Loans

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Table of whether a security is other-than-temporarily impaired involves judgments, estimates and assumptions based on subjective and objective factors. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired, and the impairment is designated as either “temporary” or “other-than-temporary.” When a security is impaired, an OTTI is considered to have occurred if (i) the Company intends to sell the security (i.e., a decision has been made asContents
Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)

of the reporting date) or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or if it is more likely than not that the Company will be required to sell the real estate security before recovery of its amortized cost basis, the entire amount of the impairment loss, if any, is recognized in earnings as OTTI and the cost basis of the security is adjusted to its fair value. Additionally, for securities accounted for under ASC 325-40 an OTTI is deemed to have occurred when there is an adverse change in the expected cash flows to be received and the fair value of the security is less than its carrying amount. In determining whether an adverse change in cash flows occurred, the present value of the remaining cash flows, as estimated at the initial transaction date (or the last date previously revised), is compared to the present value of the expected cash flows at the current reporting date. The estimated cash flows reflect those a “market participant” would use and are discounted at a rate equal to the current yield used to accrete interest income. Any resulting OTTI adjustments are reflected in the “Other than temporary impairment” in the Consolidated Statements of Operations.

Increases in interest income may be recognized on a security in which the Company previously recorded an OTTI charge if the cash flow of such security subsequently improves.

In addition, unrealized losses on the Company's Agency securities, with explicit guarantee of principal and interest by the governmental sponsored entity ("GSE"), are not credit losses but rather were due to changes in interest rates and prepayment expectations. These securities would not be considered other than temporarily impaired provided the Company did not intend to sell the security.

Residential Whole Loans

Investments in Residential Whole Loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs." The Company has chosen to elect the fair value option pursuant to ASC 825 for our entire Residential Whole-Loan portfolio. Residential Whole Loans are recorded at fair value with periodic changes in fair market value being recorded in earnings as a component of "Unrealized gain (loss), net." All other costs incurred in connection with acquiring Residential Whole Loans or committing to purchase these loans are charged to expense as incurred.

On a quarterly basis, the Company evaluates the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, theThe Company does not record an allowance for loan loss ascredit losses under ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments because it has elected the fair value option. However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated.

Residential Bridge Loans

For the Bridge Loans acquired prior to October 25, 2017, the Company did not elect the fair value option pursuant to ASC 825. These loans are recorded at their principal amount outstanding, net of any premium or discount. Commencing with purchases on October 25, 2017, the Company decided to elect the fair value option pursuant to ASC 825 to be consistent with the accounting of its' other investments, which are all carried at fair value. These loans are recorded at fair value with periodic changes in fair market value being recorded in earnings as a component of "Unrealized gain (loss), net." All other costs incurred in connection with acquiring the Residential Bridge Loans or committing to purchase these loans are charged to expense as incurred.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. The Company evaluates each of its Residential Bridge Loans on a quarterly basis. These loans are individually specific as they relate to the borrower, collateral type, interest rate, LTV and term as well as geographic location. The Company evaluates the collectability of both principal and interest of each loan. When a loan is impaired, the impairment is then measured based on fair value of the collateral less cost to sell, since these loans are collateral dependent. For loans the Company did not elect the fair value option, upon measurement of impairment, the Company records an allowance for credit losses to reduce the carrying value of the loan with a corresponding charge to earnings. Significant judgments are required in determining impairment, including assumptions regarding the value of the loan, the value of the underlying collateral and other
Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)

provisions such as guarantees. The Company willdoes not record an allowance for loan losscredit losses for the Residential Bridge Loans under ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that it has elected the fair value option.

Income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated.

Securitized Commercial Loans

Securitized commercial loans are comprised of commercial loans of consolidated variable interest entities which were sponsored by third parties. These loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs." The Company has chosen to elect the fair value option pursuant to ASC 825. Accordingly, these loans are recorded at fair value with periodic changes in fair value being recorded in earnings as a component of "Unrealized gain (loss), net."

The securitized commercial loans are typically collateralized by commercial real estate. As a result, the Company regularly evaluates the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower on a loan by loan basis. On a quarterly basis, the Company evaluates the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, theThe Company does not record an allowance for loan loss as the Companycredit losses under ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments because it has elected the fair value option.  However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed. Interest income accrual is resumed when the loan becomes contractually current and performance is demonstrated.

Commercial Loans

Investments in Commercial Loans, which are comprised of first lien commercial mortgage loans and commercial mezzanine loans, are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs." The Company has
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Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)
chosen to make the fair value election pursuant to ASC 825 for its Commercial Loan portfolio. Accordingly, these loans are recorded at fair value with periodic changes in fair value being recorded in earnings as a component of "Unrealized gain (loss), net." All other costs incurred in connection with acquiring the Commercial Loans or committing to purchase these loans are charged to expense as incurred.

The Company’s loans are typically collateralized by commercial real estate. As a result, the Company regularly evaluates the extent and impact of any credit migration associated with the performance and or value of the underlying collateral property as well as the financial and operating capability of the borrower on a loan by loan basis. On a quarterly basis, the Company evaluates the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, theThe Company does not record an allowance for loan loss as the Companycredit losses under ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments because it has elected the fair value option.  However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed. Interest income accrual is resumed when the loan becomes contractually current and performance is demonstrated.

Interest Income Recognition
 
Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, rated AA and higher at the time of purchase
Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)

 
Interest income on mortgage-backed and other securities is accrued based on the respective outstanding principal balances and corresponding contractual terms. The Company records interest income in accordance with ASC subtopic 835-30 "Imputation of Interest," using the effective interest method. As such premiums and discounts associated with Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, are amortized into interest income over the estimated life of such securities. Adjustments to premium and discount amortization are made for actual prepayment activity.  The Company estimates prepayments at least quarterly for its securities and, as a result, if the projected prepayment speed increases, the Company will accelerate the rate of amortization on premiums or discounts and make a retrospective adjustment to historical amortization.  Alternatively, if projected prepayment speeds decrease, the Company will reduce the rate of amortization on the premiums or discounts and make a retrospective adjustment to historical amortization.


Non-Agency MBS and other securities that are rated below AA at the time of purchase and Interest-Only Strips that are not classified as derivatives
 
Interest income on Non-Agency MBS and other securities that are rated below AA at the time of purchase and Interest-Only Strips that are not classified as derivatives are also recognized in accordance with ASC 835, using the effective yield method.  The effective yield on these securities is based on the projected cash flows from each security, which is estimated based on the Company’s observation of the then current information and events, where applicable, and will include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses.  On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Actual maturities of the securities are affected by the contractual lives of the underlying collateral, periodic payments of scheduled principal, and prepayments of principal. Therefore, actual maturities of the securities will generally be shorter than stated contractual maturities.
 
Based onThe Company adopted ASU 2016-13 beginning January 1, 2020. The ASU requires a company to measure credit loss using an expected credit loss model. The Company has elected the projected cash flow offair value option for its investments and as such securities purchased at a discount to par value,does not apply the expected loss model instead the Company may designaterecords changes in fair value of these investment in the Consolidated Statements of Operations as a portioncomponent of such purchase discount as"Unrealized gain (loss), net." For the purposes of calculating interest income, to ensure that a projected credit protection against future credit losses and, therefore, not accrete such amount into interest income.  The amount designated as credit discount may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors.  If the performanceloss of a security withdoes not impact the effective yield and F interest income the Company maintains a credit discount“shadow allowance” account. The Company uses the shadow allowance to create a management basis. The management basis which is more favorable than forecasted,the difference between the net present value of projected cash flows less shadow allowance amount. The shadow allowance and the management basis are operational accounts that are used solely for the purposes of determining and calculating accretable yield and accretable book value and are not recorded in the Company's consolidated financial statements.
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Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)
The management basis is limited to a portionfair market value of the investment. Actual realized loss on a security is recorded as a reduction in both the management basis and the amortized cost basis. Interest income is computed using the amortized basis as the reference amount designated as credit discount may be accreted into interest income prospectively.and applying the yield calculated using management basis.
 
Loan Portfolio

Interest income on the Company's residential loan portfolio and commercial loan portfolio is recorded using the effective interest method based on the contractual payment terms of the loan. Any premium amortization or discount accretion will be reflected as a component of "Interest income" in the Consolidated Statements of Operations.

Income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated.
Purchases and Sales of Investments

The Company accounts for a contract for the purchase or sale of securities, or other securities that do not yet exist on a trade date basis, which it intends to take possession and thus recognizes the acquisition or disposition of the securities at the inception of the contract.
 
Sales of investments are driven by the Company’s portfolio management process. The Company seeks to mitigate risks including those associated with prepayments and will opportunistically rotate the portfolio into securities and/or other investments the Company’s Manager believes have more favorable attributes. Strategies may also be employed to manage net capital gains, which need to be distributed for tax purposes. Realized gains or losses on sales of investments, including Agency Interest-Only Strips not characterized as derivatives, are a component of "Realized gain (loss) on sale of investments, net" in the Consolidated Statements of Operations, and are recorded at the time of disposition.  Realized gains or losses on Interest-Only Strips which are characterized as derivatives are a component of "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations. 

 
Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)

Due From Counterparties / Due To Counterparties
 
"Due    "Due from counterparties" represents cash posted by the Company with its counterparties as collateral for the Company’s interest rate and/or futures contracts, repurchase agreements, and TBAs. "Due to counterparties" represents cash posted with the Company by its counterparties as collateral under the Company’s interest rate and/or currency derivative financial instruments, repurchase agreements, and TBAs.  Included in "Due from counterparties" and/or "Due to counterparties" are daily variation margin settlement amounts with counterparties which are based on the price movement of the Company’sCompany���s futures contracts. Daily variation margin on only the Company's centrally cleared derivatives was treated as a settlement and classified as either "Derivative assets, at fair value" or "Derivative liability, at fair value" in the Consolidated Balance Sheets. In addition, as provided below, "Due to counterparties" may include non-cash collateral in which the Company has the obligation to return and which the Company has either sold or pledged. To the extent the Company receives collateral other than cash from its counterparties, such assets are not included in the Company’s Consolidated Balance Sheets.  Notwithstanding the foregoing, if the Company either rehypothecates such assets or pledges the assets as collateral pursuant to a repurchase agreement, the cash received and the corresponding liability are reflected in the Consolidated Balance Sheets.
 
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Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)
Derivatives and Hedging Activities
 
Subject to maintaining its qualification as a REIT for U.S. federal income tax purposes, the Company as part of its hedging strategy, we may enter into interest rate swaps, including forward starting swaps, interest rate swaptions, U.S. Treasury options, Eurodollar, Volatility Index and U.S, Treasury futures, TBAs, total return swaps, credit default swaps and forwards to hedge the interest rate and currency risk associated with its portfolio and related borrowings. Derivatives, subject to REIT requirements, are used for hedging purposes rather than speculation.  The Company has also entered into a total return swap, which transfers the total return of the referenced security to the Company. The Company determines the fair value of its derivative positions and obtains quotations from third parties, including the Chicago Mercantile Exchange or CME, to facilitate the process of determining such fair values. The Company does not necessarily seek to hedge all such risks. In addition, if the Company’s hedging activities do not achieve the desired results, reported earnings may be adversely affected.
 
GAAP requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative. The fair value adjustment will affect either other comprehensive income in stockholders’ equity until the hedged item is recognized in earnings or net income depending on whether the derivative instrument is designated and qualifies as a for hedge for accounting purposes and if so, the nature of the hedging activity.  The Company elected not to apply hedge accounting for its derivative instruments.  Accordingly, the Company records the change in fair value of its derivative instruments, which includes net interest rate swap payments/receipts (including accrued amounts) and net currency payments/receipts (including accrued amounts) related to interest rate swaps and currency swaps, respectively, in "Gain (loss) on derivative instruments, net" in its Consolidated Statements of Operations.

In January 2017, the CME amended its rulebooks to legally characterize variation margin payments and receipts for over-the-counter derivatives they clear as settlements of the derivatives' exposure rather than collateral against exposure. As a result of the change in legal characterization, effective January 1, 2017, variation margin is no longer classified as collateral in the Consolidated Balance Sheets in either "Due from counterparties" or "Due to counterparties," but rather a component of the respective "Derivative asset, at fair value" or "Derivative liability, at fair value" in the Consolidated Balance Sheets. The variation margin is now considered partial settlements of the derivative contract and will result in realized gains or losses which prior to January 1, 2017 were classified as unrealized gains or losses on derivatives. Prior to the CME rulebook change variation margin was included in financing activities in the Company's Consolidated Statement of Cash Flows in either "Due from counterparties, net" or "Due to counterparties, net." Commencing in January 2017, cash postings for variation margin are included in operating activities in the Consolidated Statements of Cash Flows.

In the Company’s Consolidated Statements of Cash Flows, premiums received or paid on termination of its interest rate swaps are included in cash flows from operating activities. Notwithstanding the foregoing, proceeds and payments on settlement of swaptions, futures contracts and TBAs are included in cash flows from investing activities.  Proceeds and payments on settlement of forward contracts are reflected in cash flows from financing activities in the Company’s Consolidated Statements of Cash Flows.  For Agency and Non-Agency Interest-Only Strips accounted for as derivatives, the purchase, sale and recovery of basis activity is included with MBS and other securities under cash flows from investing activities in the Company’s Consolidated Statements of Cash Flows.
Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)


The Company evaluates the terms and conditions of its holdings of Agency and Non-Agency Interest-Only Strips, interest rate swaptions, currency forwards, futures contracts and TBAs to determine if these instruments have the characteristics of an investment or should be considered a derivative under GAAP. In determining the classification of its holdings of Interest-Only Strips, the Company evaluates the securities to determine if the nature of the cash flows have been altered from that of the underlying mortgage collateral. Interest-Only Strips, for which the underlying mortgage collateral has been included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives. The carrying value of the Agency and Non-Agency Interest-Only Strips, accounted for as derivatives, is included in "Mortgage-backed securities and other securities, at fair value" in the Consolidated Balance Sheets. The carrying value of interest rate swaptions, currency forwards, futures contracts and TBAs is included in "Derivative assets, at fair value" or "Derivative liability, at fair value" in the Consolidated Balance Sheets. Interest earned or paid along with the change in fair value of these instruments accounted for as derivatives is recorded in "Gain (loss) on derivative instruments, net" in its Consolidated Statements of Operations.

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Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.  An embedded derivative is separated from the host contact and accounted for separately when all of the guidance criteria are met.  Hybrid instruments that are remeasured at fair value through earnings, including the fair value option are not bifurcated.  Derivative instruments, including derivative instruments accounted for as liabilities, are recorded at fair value and are re-valued at each reporting date, with changes in the fair value together with interest earned or paid (including accrued amounts) reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
 
Repurchase Agreements and Reverse Repurchase Agreements
 
Investments sold under repurchase agreements are treated as collateralized financing transactions, unless they meet all the criteria for sales treatment. Securities financed through a repurchase agreement remain in the Company's Consolidated Balance Sheets as assets and cash received from the lender is recorded in the Company's Consolidated Balance Sheets as a liability. Interest payable in accordance with repurchase agreements is recorded as "Accrued interest payable" in the Consolidated Balance Sheets. Interest paid (including accrued amounts) in accordance with repurchase agreements is recorded as interest expense.

The Company may borrow securities under reverse repurchase agreements to deliver a security owned and sold by the Company but pledged to a different counterparty under a separate repurchase agreement when in the Manager’s view terminating the outstanding repurchase agreement is not in the Company’s best interest.  Cash paid to the borrower is recorded in the Company’s Consolidated Balance Sheets as an asset.  Interest receivable in accordance with reverse repurchase agreements is recorded as accrued interest receivable in the Consolidated Balance Sheets. The Company reflects all proceeds on reverse repurchase agreement and repayment of reverse repurchase agreement, on a net basis in the Consolidated Statements of Cash Flows.  Upon sale of a pledged security, the Company recognizes an obligation to return the borrowed security in the Consolidated Balance Sheet in "Due to counterparties."  The Company establishes haircuts to ensure the market value of the underlying asset remains sufficient to protect the Company in the event of default by the counterparty.  Realized gains and losses associated with the sale of the security are recognized in "Realized gain (loss) on sale of investments, net" in the Consolidated Statements of Cash Flows.
 
Convertible Senior Unsecured Notes

Convertible senior unsecured notes include unsecured convertible debt that is carried at its unpaid principal balance, net of any unamortized deferred issuance costs, in the Company’s Consolidated Balance Sheets. Interest on the notes is payable semiannually until such time the notes mature or are converted into shares of the Company’s common stock. ASC 470-20 "Debt-Debt with Conversion and Other Options" requires that convertible debt instruments with cash settlement features, including partial cash settlement, account for the liability component and equity component (conversion feature) of the instrument separately. The initial value of the liability component will reflect the present value of the discounted cash flows using the nonconvertible debt borrowing rate at the time of issuance. The debt discount represents the difference between the proceeds received from the issuance and the initial carrying value of the liability component, which is accreted back to the notes principal amount through interest expense over the life of the notes.





Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)

Share-based Compensation
 
Compensation cost related to restricted common stock issued to the Company’s independent directors, including any restricted stock which is subject to a deferred compensation program, is measured at its fair value at the grant date and amortized into expense over the service period on a straight-line basis. Compensation cost related to restricted common stock issued to the Manager and to employees of the Manager, including officers and certain directors, of the Company who are employees of the Manager and its affiliates, is initially measured at fair value at the grant date, and amortized into expense over the vesting period on a straight-line basis.

Income Taxes
 
The Company operates and has elected to be taxed as a REIT commencing with its taxable year ended December 31, 2012. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that the
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Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)
Company makes qualifying distributions to stockholders, and provided that the Company satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the Company lost its REIT qualification. Accordingly, the failure to qualify as a REIT could have a material adverse impact in the Company’s results of operations and amounts available for distribution to stockholders.

As a REIT, if the Company fails to distribute in any calendar year (subject to specific timing rules for certain dividends paid in January) at least the sum of (i) 85% of its ordinary income for such year, (ii) 95% of its capital gain net income for such year, and (iii) any undistributed taxable income from the prior year, the Company would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (i) the amounts actually distributed and (ii) the amounts of income retained and on which the Company has paid corporate income tax.
 
The dividends paid deduction for qualifying dividends paid to stockholders is computed using the Company’s taxable income as opposed to net income reported in the Consolidated Statements of Operations. Taxable income, generally, will differ from net income reported in the Consolidated Statements of Operations because the determination of taxable income is based on tax regulations and not GAAP.
 
From time to time the Company may create and elect to treat certain subsidiaries as Taxable REIT Subsidiaries ("TRS"). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A domestic TRS is subject to U.S. federal, state and local corporate income taxes, and its value, along with all other TRS's, may not exceed 20% of the value of the Company. If the TRS generates net income it may declare dividends to the Company, which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at the TRS level, no distribution is required and it can increase book equity of the consolidated entity. As of December 31, 2019,2020, the Company has a single wholly-owned subsidiary which it has elected to treat as a domestic TRS.

Current and deferred taxes are recorded on earnings (losses) recognized by the Company's TRS. Deferred income tax assets and liabilities are calculated based upon temporary differences between the Company's U.S. GAAP consolidated financial statements and the federal and state basis of assets and liabilities as of the Consolidated Balance Sheet date. The Company evaluates the realizability of its deferred tax assets and recognizes a valuation allowance if, based on available evidence, it is more likely than not that some or all of its deferred tax assets will not be realized. In evaluating the realizability of the deferred tax asset, the Company will consider the expected future taxable income, existing and projected book to tax differences as well as tax planning strategies. This analysis is inherently subjective, as it is based on forecasted earning and business and economic activity. Changes in estimates of deferred tax asset realizability, if any, are included in "Income tax provision (benefit)" in the Consolidated Statements of Operations.

Comprehensive Income (Loss)

The Company has none of the components of comprehensive income (loss) and therefore comprehensive income (loss) is not presented.
  
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Table of Contents
Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)

Recently adopted accounting pronouncements
DescriptionAdoption DateEffect on Financial Statements
DescriptionAdoption DateEffect on Financial Statements
In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivative and Hedges (Topic 815): Part I - Accounting for Certain Financial Instruments with Down Round Features and Part II - Replacement of the Indefinite Deferral for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Noncontrolling Interest with a Scope Exception." Part I of this update changes the classification analysis of certain financial instruments (such as warrants and convertible instruments) with down round features. Down round features are features of certain equity-linked financial instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. Entities that present earnings per share are required to recognize the effect of the down round feature when it is triggered. The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.First quarter 2019.The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting." The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.First quarter 2019.The adoption of this standard did not have a material impact on the Copompany's consolidated financial statements.
In July 2018, the FASB issued ASU 2018-09, "Codification Improvements." The amendments in this update affect a wide variety of Topics in the Codification including derivatives and hedging, stock compensation-income taxes, distinguishing liabilities from equity, debt modification and extinguishment, reporting comprehensive income, business combinations-income taxes, financial services and Plan accounting.First quarter 2019.The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)

Recently issued accounting pronouncements
DescriptionEffective DateEffect on Financial Statements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard significantly changes how an entity will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through the income statement. The standard will replace the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available for sale debt securities, entities will be required to record an allowance rather than reduce the carrying amount, as is currently done under the other than temporary impairment model. It also simplifies the accounting model for purchased credit impaired debt securities and loans. In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses." This update was issued related to ASU 2016-13 to increase the stakeholders' awareness of the amendments to scope and transition and effective date requirements and to expedite the improvements. In November 2019, the FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses." The amendments in this update clarify or address stakeholders' specific issues about certain aspects of the amendments in Update 2016-13.First quarter 2020.The Company evaluated the impact this standard will have on its consolidated financial statements. However, since the Company elects the fair value option for its financial assets, the adoption of this guidance willstandard did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this update modify the disclosure requirements on fair value measurements including the consideration of costs and benefits.First quarter 2020.The Company evaluated the impactadoption of this standard will have on its consolidated financial statements and the adoption willdid not have a material impact on its consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." The amendments in this update represent changes to clarify, correct errors in, or improve the Codification. The amendments should make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarification.First quarter 2020.The Company evaluated the impactadoption of this standard will have on its consolidated financial statements and the adoption willdid not have a material impact on its consolidated financial statements.
In May 2019, the FASB issued ASU 2019-05, "Financial Instruments-Credit Losses (Topic 326)." The amendments in this Update provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in the Subtopic 825-10, Financial Instruments-Overall, upon adoption of Topic 326. An entity that elects the fair value option should subsequently apply the guidance in Subtopic 820-10, Fair Value Measurement-Overall, and 825-10.First quarter 2020.The Company evaluated the impactadoption of this standard will have on its consolidated financial statements and the adoption willdid not have a material impact on its consolidated financial statements.

Recently issued accounting pronouncements
DescriptionEffective DateEffect on Financial Statements
In January 2020, the FASB issued ASU 2020-01, “Investments-Equity Securities (Topic 321), Investment-Equity Method and Joint Ventures (Topic 323, and Derivatives and Hedging (Topic 815).” The amendments in this Update clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchase options accounted for under Topic 815.

First quarter 2021.
The Company is evaluating the impact this
standard may have on its consolidated
financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.March 12, 2020 through December 31, 2022The Company is evaluating the impact this standard may have on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40).” The amendments in this Update affect entities that issue convertible instruments and/or contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed.First quarter 2022.The Company is evaluating the impact this standard may have on its consolidated financial statements.

    
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Table of Contents
Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(in thousands—except share and per share data)
Note 3—Fair Value of Financial Instruments
The following tables present the Company's financial instruments carried at fair value as of December 31, 20192020 and December 31, 2018,2019, based upon the valuation hierarchy (dollars in thousands):
 December 31, 2020
 Fair Value
AssetsLevel ILevel IILevel IIITotal
Agency RMBS$$$143 $143 
Agency RMBS Interest-Only Strips1,565 1,565 
Subtotal Agency MBS1,708 1,708 
Non-Agency CMBS155,093 8,988 164,081 
Non-Agency RMBS21,416 21,416 
Non-Agency RMBS Interest-Only Strips3,965 3,965 
Subtotal Non-Agency MBS155,093 34,369 189,462 
Other securities40,161 8,593 48,754 
Total mortgage-backed securities and other securities195,254 44,670 239,924 
Residential Whole Loans1,008,782 1,008,782 
Residential Bridge Loans12,813 12,813 
Commercial loans310,523 310,523 
Securitized commercial loans1,605,335 1,605,335 
Derivative assets161 161 
Total Assets$$195,415 $2,982,123 $3,177,538 
Liabilities    
Derivative liabilities$$656 $$656 
Securitized debt1,538,304 15,418 1,553,722 
Total Liabilities$$1,538,960 $15,418 $1,554,378 



101


 December 31, 2019
 Fair Value
AssetsLevel I Level II Level III Total
Agency CMBS$
 $1,435,477
 $
 $1,435,477
Agency CMBS Interest-Only Strips accounted for as derivatives, included in MBS
 3,092
 
 3,092
Agency RMBS
 340,771
 
 340,771
Agency RMBS Interest-Only Strips
 
 10,343
 10,343
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS
 
 5,572
 5,572
Subtotal Agency MBS
 1,779,340
 15,915
 1,795,255
        
Non-Agency RMBS
 
 38,131
 38,131
Non-Agency RMBS Interest-Only Strips
 
 7,683
 7,683
Non-Agency CMBS
 316,019
 
 316,019
Subtotal Non-Agency MBS
 316,019
 45,814
 361,833
        
Other securities
 62,965
 17,196
 80,161
Total mortgage-backed securities and other securities
 2,158,324
 78,925
 2,237,249
        
Residential Whole Loans
 
 1,375,860
 1,375,860
Residential Bridge Loans
 
 33,269
 33,269
Commercial loans
 
 370,213
 370,213
Securitized commercial loans
 
 909,040
 909,040
Derivative assets
 5,111
 
 5,111
Total Assets$
 $2,163,435
 $2,767,307
 $4,930,742
        
Liabilities 
  
  
  
Derivative liabilities$
 $6,370
 $
 $6,370
Securitized debt
 680,586
 1,057
 681,643
Total Liabilities$
 $686,956
 $1,057
 $688,013




 December 31, 2018
 Fair Value
AssetsLevel I Level II Level III Total
Agency CMBS$
 $1,481,984
 $
 $1,481,984
Agency CMBS Interest-Only Strips accounted for as derivatives, included in MBS
 4,158
 
 4,158
Agency RMBS Interest-Only Strips
 
 12,135
 12,135
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS
 
 7,702
 7,702
Subtotal Agency MBS
 1,486,142
 19,837
 1,505,979
        
Non-Agency RMBS
 
 39,026
 39,026
Non-Agency RMBS Interest-Only Strips
 
 11,529
 11,529
Non-Agency CMBS
 200,301
 
 200,301
Subtotal Non-Agency MBS
 200,301
 50,555
 250,856
        
Other securities
 50,955
 8,951
 59,906
Total mortgage-backed securities and other securities
 1,737,398
 79,343
 1,816,741
        
Residential Whole Loans
 
 1,041,885
 1,041,885
Residential Bridge Loans  
 211,999
 211,999
Commercial loans
 
 216,123
 216,123
Securitized commercial loan
 
 1,013,511
 1,013,511
Derivative assets
 2,606
 
 2,606
Total Assets$
 $1,740,004
 $2,562,861
 $4,302,865
        
Liabilities       
Derivative liabilities$4,657
 $5,473
 $
 $10,130
Securitized debt
 947,340
 2,286
 949,626
Total Liabilities$4,657
 $952,813
 $2,286
 $959,756

 December 31, 2019
 Fair Value
AssetsLevel ILevel IILevel IIITotal
Agency CMBS$$1,435,477 $$1,435,477 
Agency CMBS Interest-Only Strips accounted for as derivatives, included in MBS3,092 3,092 
Agency RMBS340,771 340,771 
Agency RMBS Interest-Only Strips10,343 10,343 
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS5,572 5,572 
Subtotal Agency MBS1,779,340 15,915 1,795,255 
Non-Agency CMBS316,019 316,019 
Non-Agency RMBS38,131 38,131 
Non-Agency RMBS Interest-Only Strips7,683 7,683 
Subtotal Non-Agency MBS316,019 45,814 361,833 
Other securities62,965 17,196 80,161 
Total mortgage-backed securities and other securities2,158,324 78,925 2,237,249 
Residential Whole Loans1,375,860 1,375,860 
Residential Bridge Loans033,269 33,269 
Commercial loans370,213 370,213 
Securitized commercial loan909,040 909,040 
Derivative assets5,111 5,111 
Total Assets$$2,163,435 $2,767,307 $4,930,742 
Liabilities
Derivative liabilities$$6,370 $$6,370 
Securitized debt680,586 1,057 681,643 
Total Liabilities$$686,956 $1,057 $688,013 
When available, the Company uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Company will use independent pricing services and if the independent pricing service cannot price a particular asset or liability, the Company will obtain third party broker quotes. The Manager's pricing group, which functions independently from its portfolio management personnel, reviews the third party broker quotes by comparing the broker quotes for reasonableness to alternate sources when available. If independent pricing services or third party broker quotes are not available, the Company determines the fair value of the securities using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and when applicable, estimates of prepayments and credit losses.
In instances when the Company is required to consolidate a VIE that is determined to be a qualifying collateralized financing entity ("CFE"), under GAAP and if the Company has elected the fair value option for the securitized debt, the Company will measure both the financial assets and financial liabilities of the VIE using the fair value of either the VIE’s financial assets or financial liabilities, whichever is more observable.
Mortgage-backed securities and other securities
In determining the proper fair value hierarchy or level the Company considers the amount of available observable market data for each security. Agency RMBS and Agency CMBS, given the amount of available observable market data,
102


generally are classified in Level II. For newly issued Agency CMBS securities that have not settled at period end and do not have a CUSIP yet, the Company utilizes a broker quote due to lack of observable market data, accordinglydata. Accordingly, these securities are classified in Level III. For Agency IOs, Non-Agency RMBS, CMBS and other securities, to determine whether a security should be a Level II, the

securities are grouped by security type and the Manager reviews the internal trade history, for the quarter, for each security type. If there is sufficient trade data above a predetermined threshold of a security type, the Manager determines it has sufficient observable market data and the security will be categorized as a Level II; otherwise, the security is classified as a Level III.
Values for the Company's securities are based upon prices obtained from independent third party pricing services. The valuation methodology of the third party pricing services incorporates market information and commonly used market pricing methods, which include actual trades and quoted prices for similar or identical instruments, and are designed to produce a pricing process that is responsive to market conditions. Depending on the type of asset and the underlying collateral, the primary inputs to the model include yields for TBAs, Agency RMBS, the U.S. Treasury market and floating rate indices such as LIBOR, the Constant Maturity Treasury rate and the prime rate as a benchmark yield. In addition, the model may incorporate the current weighted average maturity and additional pool level information such as prepayment speeds, default frequencies and default severities, if applicable. When the third party pricing service cannot adequately price a particular security, the Company utilizes a broker's quote which is reviewed for reasonableness by the Manager's pricing group.
Residential Whole Loans and Residential Bridge Loans
Values for the Company's Non-QM Residential Whole Loans and Bridge Loans are based upon prices obtained from an independent third party pricing service that specializes in loan valuation, utilizing a discounted cash flow valuation model that is calibrated to recent loan trade execution. Their valuation methodology incorporates commonly used market pricing methods, which include the inputs considered most significant to the determination of fair value of the Company's Residential Whole Loans and Residential Bridge Loans. The key loan inputs include loan balance, interest rate, loan to value, delinquencies and fair value of the collateral for collateral dependent loans. The assumption made by the independent third party pricing service includes the market discount rate, yield, default assumptionassumptions and loss severity. Other inputs and assumptions relevant to the pricing of Residential Whole Loans include FICO scores and prepayment speeds.
ValuesIn the second half of 2020 there was very limited, if any residential whole loans sale transactions. As a result the independent third party pricing service used recent residential whole loans securitization transactions, which was very active, to form their opinion on the appropriate discount rate. To arrive at the appropriate discount rate for residential whole loans, the vendor made adjustments for deal cost and liquidity premium.
    The values for the Conforming Residential Whole Loan Portfolio arewere based on a third party pricing service valuation model that assigns a loan value using TBA prices, adjusted for delivery to Fannie Mae using Fannie Mae's loan-level price adjustment matrix. In addition to pricing the underlying mortgages, the third party pricing service uses a service release premium valuation representing the sale of the right to service the mortgages. Together, the TBA price and service release premium price form the "All-In" price for these mortgages. During the second quarter of 2020, the Company sold its Conforming Residential Whole Loan portfolio and as of December 31, 2020, holds no Conforming Residential Whole Loans in its investment portfolio.
The Company reviews the analysis provided by pricing service as well as the key assumptions made available to the company.Company. Due to the inherent uncertainty of such valuation, the fair values established for residential loans held by the Company may differ from the fair values that would have been established if a readily available market existed for these loans. Accordingly, the Company's loans are classified as Level III.
Commercial Loans
Values for the Company's Commercial Loans are based upon prices obtained from an independent third party pricing service that specializes in loan valuation, utilizing a valuation model that is calibrated to recent loan trade execution. Their valuation methodology incorporates commonly used market pricing methods, which include the inputs considered most significant to the determination of fair value of the Company's Commercial Loans. The assumptions made by the independent third party pricing vendor include a market discount rate, default assumption and loss severity. The Company reviews the analysis provided by pricing service as well as the key assumptions. Due to the inherent uncertainty of such valuation, the fair values established for commercial loans held by the Company may differ from the fair values that would have been established if a readily available market existed for these loans. Accordingly, the Company's commercial loans are classified as a Level III.
Securitized commercial loans
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Values for the Company’s securitized commercial loans are based on the CFE valuation methodology.  Since there is an extremely limited market for the securitized commercial loans, the Company determined the securitized debt is more actively traded and therefore was more observable.  Due to the inherent uncertainty of the securitized commercial loan'sloans' valuation, the Company classifies its securitized commercial loans as Level III.
Securitized debt
Values for the Company's securitized debt that the Company elected the fair value option are based upon prices obtained from independent third party pricing services. The valuation methodology of the third party pricing services incorporates market information and commonly used market pricing methods, which include actual trades and quoted prices for similar or identical instruments. In determining the proper fair value hierarchy or level, the Company considers the amount of available observable market data for each security. Since the securitized

debt represents traded debt securities, the Manager's pricing team reviews the trade activity during the quarter for each security to determine the appropriate level within the fair value hierarchy. If there is sufficient trade data above a predetermined volume threshold, the Manager determines it has sufficient observable market data and the debt security will be categorized as a Level II. If there is not sufficient observable market data the debt security will be categorized as a Level III.
Derivatives
Values for the Company's derivatives are based upon prices from third party pricing services, whose pricing is subject to review by the Manager's pricing committee. In valuing its over-the-counter interest rate derivatives, such as swaps and swaptions, its currency derivatives, such as swaps and forwards and credit derivatives such as total return swaps, the Company considers the creditworthiness of both the Company and its counterparties, along with collateral provisions contained in each derivative agreement, from the perspective of both the Company and its counterparties. NaN credit valuation adjustment was made in determining the fair value of interest rate derivatives and/or futures contracts for the years ended December 31, 20192020 and December 31, 2018.2019.
Third Party Pricing Data Review
The Company performs quarterly reviews of the independent third party pricing data. These reviews may include a review of the valuation methodology used by third party valuation specialists and review of the daily change in the prices provided by the independent pricing vendor which exceed established tolerances or comparisons to executed transaction prices, utilizing the Manager's pricing group. The Manager's pricing group, which functions independently from its portfolio management personnel, reviews the price differences or changes in price by comparing the vendor price to alternate sources including other independent pricing services or broker quotations. If the price change or difference cannot be corroborated, the Manager's pricing group consults with the portfolio management team for market color in reviewing such pricing data as warranted. To the extent that the Manager has information, typically in the form of broker quotations that would indicate that a price received from the independent pricing service is outside of a tolerance range, the Manager generally challenges the independent pricing service price.
The following tables present a summary of the available quantitative information about the significant unobservable inputs used in the fair value measurement of financial instruments for which the Company has utilized Level III inputs to determine fair value as of December 31, 20192020 and December 31, 20182019 (dollars in thousands).
 Fair Value at  Range
December 31, 2020Valuation TechniqueUnobservable InputMinimumMaximumWeighted Average
Residential Whole-Loans1,008,782 Discounted Cash FlowMarket Discount Rate2.1 %7.5 %4.1 %
Weighted Average Life1.58.42.9
Residential Bridge Loans12,813 Discounted Cash FlowMarket Discount Rate8.0 %35.2 %(1)18.0 %
Weighted Average Life0.32.61.3
Commercial Loans310,523 Discounted Cash FlowMarket Discount Rate6.3 %18.4 %10.5 %
Weighted Average Life0.51.90.7

104


   Fair Value at     Range  
  December 31, 2019 Valuation Technique Unobservable Input Minimum Maximum Weighted Average
Residential Whole-Loans(2)
 1,200,566
 Discounted Cash Flow Yield 3.4% 7.0% 3.7%
      Weighted Average Life 1.4
 7.8
 3.0
Residential Bridge Loans(3)
 33,269
 Discounted Cash Flow Yield 7.5% 27.0%
(1) 
9.8%
      Weighted Average Life 0.3
 1.8
 0.8
Commercial Loans 370,213
 Discounted Cash Flow Yield 4.7% 10.9% 7.5%
      Weighted Average Lie 0.4
 2.9
 1.6
 Fair Value at  Range
December 31, 2019Valuation TechniqueUnobservable InputMinimumMaximumWeighted Average
Residential Whole-Loans(2)
1,375,860 Discounted Cash FlowMarket Discount Rate3.4 %7.0 %3.7 %
Weighted Average Life1.47.83.0
Residential Bridge Loans33,269 Discounted Cash FlowMarket Discount Rate7.5 %27.0 %(1)9.8 %
Weighted Average Life0.31.80.8
Commercial Loans:370,213 Discounted Cash FlowMarket Discount Rate4.7 %10.9 %7.5 %
Weighted Average Life0.42.91.6

   Fair Value at     Range  
  December 31, 2018 Valuation Technique Unobservable Input Minimum Maximum Weighted Average
Residential Whole-Loans 1,041,885
 Discounted Cash Flow Yield 3.5% 7.9% 5.5%
      Weighted Average Life 0.8
 10.3
 2.8
Residential Bridge Loans 211,999
 Discounted Cash Flow Yield 5.6% 145.3%
(1) 
11.3%
      Weighted Average Life 0.1
 1.6
 0.5
Commercial Loans: 216,123
 Discounted Cash Flow Yield 6.7% 9.2% 7.6%
      Weighted Average Life 0.9
 2.7
 2.1


(1)Yield to maturity is the total return on the loan expressed as an annual rate. Delinquent Bridge Loans that are nearing maturity and with fair value that is significantly less than the principal amount have a higher yield to maturity.
(2)Excludes $175,294 Conforming Residential Whole Loans, which are valued using TBA prices, adjusted for delivery to Fannie Mae using Fannie Mae's loan-level price adjustment matrix. As of December 31, 2019, the TBA prices used for valuing the conforming loans range from $101.39 to $107.63.
(1)     Yield to maturity is the total return on the loan expressed as an annual rate. Delinquent Bridge Loans that are nearing maturity and with fair value that is significantly less than the principal amount have a higher yield to maturity.
(2)    As of December 31, 2019, excludes $175,294 Conforming Residential Whole Loans, which are valued using TBA prices, adjusted for delivery to Fannie Mae using Fannie Mae's loan-level price adjustment matrix. As of December 31, 2019, the TBA prices used for valuing the conforming loans range from $101.39 to $107.63.
The following tables present additional information about the Company's financial instruments which are measured at fair value on a recurring basis for which the Company has utilized Level III inputs to determine fair value:
 Year ended December 31, 2020
$ in thousandsAgency MBSNon-Agency MBSOther SecuritiesResidential
Whole Loans
Residential
Bridge Loans
Commercial LoansSecuritized
Commercial Loans
Securitized
Debt
Beginning balance$15,915 $45,814 $17,196 $1,375,860 $33,269 $370,213 $909,040 $1,057 
Transfers into Level III from Level II— — — — — — — — 
Transfers from Level III into Level II— — (6,482)— — — — — 
Purchases— — — 92,822 — — — — 
Sales and settlements(11,529)(12,658)— (144,259)— — — — 
Transfers to REO— — — — (419)— — — 
VIE consolidation— — — — — — 1,245,287 17,960 
VIE deconsolidation— 6,852 — — — — (150,804)— 
Loan modifications / capitalized interest— — — 779 — 49 — — 
Principal repayments— (710)(154)(278,316)(19,105)(44,819)(349,609)— 
Total net gains/losses included in net income    
Realized gains/(losses), net on assets1,528 (60)— (10,511)(373)— — — 
Unrealized gains/(losses), net on assets(1)
(2,609)(4,013)(1,949)(23,094)(499)(15,282)(58,421)— 
Unrealized (gains)/losses, net on liabilities(2)
— — — — — — — (887)
Premium and discount amortization, net(1,597)(856)(18)(4,499)(60)362 9,842 (2,712)
Ending balance$1,708 $34,369 $8,593 $1,008,782 $12,813 $310,523 $1,605,335 $15,418 
Unrealized gains/(losses), net on assets held at the end of the period(1)
$(616)$(3,783)$(599)$(14,807)$(881)$(15,282)$746 $— 
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
$— $— $— $— $— $— $— $887 
105


 Year ended December 31, 2019
$ in thousandsAgency MBS Non-Agency MBS Other Securities Residential
Whole Loans
 
Residential
Bridge Loans
 Commercial Loans 
Securitized
Commercial Loans
 
Securitized
Debt
Beginning balance$19,837
 $50,555
 $8,951
 $1,041,885
 $211,999
 $216,123
 $1,013,511
 $2,286
Transfers into Level III from Level II
 
 8,386
 
 
 
 
 
Transfers from Level III into Level II
 
 
 
 
 
 
 
Purchases
 
 
 544,426
 
 274,422
 1,113,231
 
Sales and settlements(401) 
 
 
 
 
 
 3,769
Transfers to REO
 
 
 
 (2,677) 
 
 
Principal repayments
 (965) (555) (228,163) (175,422) (121,245) (1,214,688) 
Total net gains/losses included in net income 
      
      
  
Realized gains/(losses), net on assets
 
 
 
 (351) 
 
 
Other than temporary impairment(222) (1,332) 
 
 
 
 
 
Unrealized gains/(losses), net on assets(1)
762
 (229) 693
 20,887
 397
 (122) (1,070) 
Unrealized (gains)/losses, net on liabilities(2)

 
 
 
 
 
 
 (2,373)
Premium and discount amortization, net(4,061) (2,215) (279) (3,175) (677) 1,035
 (1,944) (2,625)
Ending balance$15,915
 $45,814
 $17,196
 $1,375,860
 $33,269
 $370,213
 $909,040
 $1,057
                
Unrealized gains/(losses), net on assets held at the end of the period(1)
$780
 $(229) $693
 $21,768
 $(488) $128
 $(1,042) $
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
$
 $
 $
 $
 $
 $
 $
 $375

 Year ended December 31, 2018
$ in thousandsAgency MBS Non-Agency MBS Other Securities Residential
Whole Loans
 
Residential
Bridge Loans
 Commercial Loans Securitized Commercial Loans Securitized Debt
Beginning balance$17,217
 $8,735
 $9,239
 $237,423
 $64,526
 $
 $24,876
 $10,945
Transfers into Level III from Level II22,795
 39,084
 9,708
 
 
 
 
 
Transfers from Level III into Level II(16,805) 
 (8,697) 
 
 
 
 (10,899)
Purchases2,093
 8,602
 
 860,576
 207,705
 215,322
 1,353,020
 
Sales and settlements
 (4,180) 
 
 
 
 
 12
Principal repayments(53) (307) (604) (55,186) (57,528) 
 (361,782) (44)
Total net gains / (losses) included in net income 
      
      
  
Realized gains/(losses), net on assets
 258
 
 
 
 
 
 
Other than temporary impairment(735) (918) (161) 
 
 
 
 
Unrealized gains/(losses), net on assets(1)
(630) 1,183
 (532) (415) (1,806) 631
 (16) 
Unrealized (gains)/losses, net on liabilities(2)

 
 
 
 
 
 
 1,996
Premium and discount amortization, net(4,045) (1,902) (2) (513) (898) 170
 (2,587) 276
Ending balance$19,837
 $50,555
 $8,951
 $1,041,885
 $211,999
 $216,123
 $1,013,511
 $2,286
                
Unrealized gains/(losses), net on assets held at the end of the period(1)
$(272) $1,184
 $(464) $351
 $(1,370) $631
 $(16) $
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
$
 $
 $
 $
 $
 $
 $
 $(1,998)
 Year ended December 31, 2019
$ in thousandsAgency MBSNon-Agency MBSOther SecuritiesResidential
Whole Loans
Residential
Bridge Loans
Commercial LoansSecuritized Commercial LoansSecuritized Debt
Beginning balance$19,837 $50,555 $8,951 $1,041,885 $211,999 $216,123 $1,013,511 $2,286 
Transfers into Level III from Level II— — 8,386 — — — — — 
Transfers from Level III into Level II— — — — — — — — 
Purchases— — — 544,426 — 274,422 1,113,231 — 
Sales and settlements(401)— — — — — — 3,769 
Transfers to REO— — — — (2,677)— — — 
Principal repayments— (965)(555)(228,163)(175,422)(121,245)(1,214,688)— 
Total net gains / (losses) included in net income   
Realized gains/(losses), net on assets— — — — (351)— — — 
Other than temporary impairment(222)(1,332)— — — — — — 
Unrealized gains/(losses), net on assets(1)
762 (229)693 20,887 397 (122)(1,070)— 
Unrealized (gains)/losses, net on liabilities(2)
— — — — — — — (2,373)
Premium and discount amortization, net(4,061)(2,215)(279)(3,175)(677)1,035 (1,944)(2,625)
Ending balance$15,915 $45,814 $17,196 $1,375,860 $33,269 $370,213 $909,040 $1,057 
Unrealized gains/(losses), net on assets held at the end of the period(1)
$780 $(229)$693 $21,768 $(488)$128 $(1,042)$— 
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
$— $— $— $— $— $— $— $375 
(1)Gains and losses are included in "Unrealized gain (loss), net" in the Consolidated Statements of Operations.
(2)Gains and losses on securitized debt are included in "Unrealized gain (loss), net" in the Consolidated Statements of Operations.

(1)Gains and losses are included in "Unrealized gain (loss), net" in the Consolidated Statements of Operations.
(2)Gains and losses on securitized debt are included in "Unrealized gain (loss), net" in the Consolidated Statements of Operations.

Transfers between hierarchy levels for the years ended December 31, 20192020 and December 31, 20182019 were based on the availability of sufficient observable inputs. Movements from Level II to Level III was based on the back-testing of historical sales transactions performed by the Manager, which did not provide sufficient observable data to meet Level II versus Level III criteria, resulting in the movement from Level II to Level III. Movements from Level III to Level II was based on information received from a third party pricing service which, along with the back-testing of historical sales transactions performed by the Manager, which provided the sufficient observable data for the movement from Level III to Level II. The Company did not have transfers between either Level I and Level II or Level I and Level III for the years ended December 31, 20192020 and December 31, 2018.2019.
Other Fair Value Disclosures
Certain Residential Bridge Loans, repurchase agreement borrowings, convertible senior unsecured notes and securitized debt are not carried at fair value in the consolidated financial statements. The following table presents the carrying value and estimated fair value of the Company’s financial instruments that are not carried at fair value, as of December 31, 20192020 and December 31, 2018,2019, in the consolidated financial statements (dollars in thousands):

 December 31, 2019 December 31, 2018
 Carrying Value  Estimated Fair Value Carrying Value  Estimated Fair Value
Assets       
Residential Bridge Loans$3,150
 $3,148
 $9,720
 $9,603
Total$3,150
 $3,148
 $9,720
 $9,603
        
Liabilities       
Borrowings under repurchase agreements$2,824,801
 $2,829,093
 $2,818,837
 $2,823,615
Convertible senior unsecured notes197,299
 209,172
 110,060
 108,531
Securitized debt(1)
801,109
 810,914
 
 
Total$3,823,209
 $3,849,179
 $2,928,897
 $2,932,146
106


December 31, 2020December 31, 2019
Carrying Value Estimated Fair ValueCarrying Value Estimated Fair Value
Assets
Residential Bridge Loans$1,103 $1,095 $3,150 $3,148 
Total$1,103 $1,095 $3,150 $3,148 
Liabilities
Borrowings under repurchase agreements$356,923 $359,799 $2,824,801 $2,829,093 
Convertible senior unsecured notes170,797 155,129 197,299 209,172 
Securitized debt(1)
899,207 922,362 801,109 810,914 
Total$1,426,927 $1,437,290 $3,823,209 $3,849,179 
(1) Carrying value excludes $5.3$6.9 million and $5.3 million of deferred financing costs as of December 31, 2020 and December 31, 2019, respectively.

"Due from counterparties" and "Due to counterparties" in the Company’s Consolidated Balance Sheets are reflected at cost which approximates fair value.
 
Residential Bridge Loans

Values for the Company's Bridge Loans are based upon prices obtained from an independent third party pricing service that specializes in loan valuation, utilizing a discounted cash flow valuation model that is calibrated to recent loan trade execution. Their valuation methodology incorporates commonly used market pricing methods, which include the inputs considered most significant to the determination of fair value of the Residential Bridge Loans. The key loan inputs include loan balance, interest rate, loan to value, FICO score, debt to income ratio and delinquencies. The assumption made by the independent third party pricing service includes the market discount rate, prepayment, default assumption and loss severity. The Company reviews the analysis provided by pricing service as well as the key assumptions made available to the Company. Due to the inherent uncertainty of such valuation, the fair values established for residential bridge loans held by the Company may differ from the fair values that would have been established if a readily available market existed for these loans. Accordingly, the Company's loans are classified as Level III.

Borrowings under repurchase agreements

The fair values of the borrowings under repurchase agreements are based on a net present value technique. This method discounts future estimated cash flows using rates the Company determined best estimates current market interest rates that would be offered for loans with similar characteristics and credit quality. The use of different market assumptions or estimation methodologies could have a material effect on the fair value amounts. This fair value measurement is based on observable inputs, and as such, are classified as Level II.

Convertible senior unsecured notes

The fair value of the convertible senior unsecured notes is based on quoted market prices. Accordingly, the Company's convertible senior unsecured notes are classified as Level I.


107


Securitized debt
 
Values for the Company's securitized debt, related to the securitization of a portion of its Residential Whole Loans, are based upon prices obtained from independent third party pricing services. The valuation methodology of the third party pricing services incorporates market information and commonly used market pricing methods, which include actual trades and quoted prices for similar or identical instruments. In determining the proper fair value hierarchy or level, the Company considers the amount of available observable market data for each security. Since the securitized debt represents traded debt securities, the Manager's pricing team reviews the trade activity during the quarter for each security to determine the appropriate level within the fair value hierarchy. If there is sufficient trade data above a predetermined threshold, the Manager determines it has sufficient observable market data and the debt security will be categorized as a Level II. If there is not sufficient observable market data the debt security will be categorized as a Level III. At December 31, 2019,2020, there was not sufficient observable market data for the debt to be classified as a Level II, accordingly it was classified as a Level III.

108


Note 4 - Mortgage-Backed Securities and other securities
The following tables present certain information about the Company's investment portfolio at December 31, 20192020 and December 31, 20182019 (dollars in thousands):
 December 31, 2020
 Principal
Balance
Unamortized
Premium
(Discount),
net
Amortized
Cost
Unrealized
Gain
Unrealized LossEstimated
Fair Value
Net
Weighted
Average
Coupon(4)
Agency RMBS Interest-Only Strips(1)
N/AN/A$89 $54 $$143 2.1 %
Agency RMBS Interest-Only Strips, accounted for as derivatives(1)(2)
N/AN/AN/AN/AN/A1,565 2.6 %
Total Agency MBS89 54 1,708 2.5 %
Non-Agency RMBS38,112 (14,649)23,463 451 (2,498)21,416 1.6 %
Non-Agency RMBS Interest- Only Strips(1)
N/A N/A6,271 (2,306)3,965 0.4 %
Subtotal Non-Agency RMBS38,112 (14,649)29,734 451 (4,804)25,381 0.6 %
Non-Agency CMBS235,497 (25,258)210,239 2,850 (49,008)164,081 5.0 %
Total Non-Agency MBS273,609 (39,907)239,973 3,301 (53,812)189,462 2.4 %
Other securities(3)
51,537 (8,239)49,420 1,152 (1,818)48,754 4.4 %
Total$325,146 $(48,146)$289,482 $4,507 $(55,630)$239,924 2.5 %
 December 31, 2019
 
Principal
Balance
 
Unamortized
Premium
(Discount),
net
 
Discount
Designated as
Credit Reserve and
OTTI
 
Amortized
Cost
 
Unrealized
Gain
 Unrealized Loss 
Estimated
Fair Value
 
Net
Weighted
Average
Coupon
Agency CMBS$1,347,929
 $26,514
 $
 $1,374,443
 $66,832
 $(5,798) $1,435,477
 3.4%
Agency CMBS Interest-Only Strips, accounted for as derivatives(1)(2)
N/A
 N/A
 N/A
 N/A
 N/A
 N/A
 3,092
 0.4%
Subtotal Agency CMBS1,347,929
 26,514
 
 1,374,443
 66,832
 (5,798) 1,438,569
 3.1%
Agency RMBS327,814
 5,473
 
 333,287
 7,484
 
 340,771
 3.5%
Agency RMBS Interest-Only Strips(1)
N/A
 N/A
 N/A
 8,661
 1,820
 (138) 10,343
 2.8%
Agency RMBS Interest-Only Strips, accounted for as derivatives(1)(2)
N/A
 N/A
 N/A
 N/A
 N/A
 N/A
 5,572
 3.0%
Subtotal Agency RMBS327,814
 5,473
 
 341,948
 9,304
 (138) 356,686
 3.3%
Total Agency MBS1,675,743
 31,987
 
 1,716,391
 76,136
 (5,936) 1,795,255
 3.1%
                
Non-Agency RMBS52,767
 4,492
 (20,256) 37,003
 1,388
 (260) 38,131
 4.8%
Non-Agency RMBS Interest- Only Strips(1)
N/A
  N/A
  N/A
 7,705
 636
 (658) 7,683
 0.6%
Subtotal Non-Agency RMBS52,767
 4,492
 (20,256) 44,708
 2,024
 (918) 45,814
 1.0%
Non-Agency CMBS354,458
 (17,909) (22,016) 314,533
 6,359
 (4,873) 316,019
 5.1%
Total Non-Agency MBS407,225
 (13,417) (42,272) 359,241
 8,383
 (5,791) 361,833
 2.7%
                
Other securities(3)
71,896
 (2,437) (6,203) 73,975
 6,392
 (206) 80,161
 6.7%
Total$2,154,864
 $16,133
 $(48,475) $2,149,607
 $90,911
 $(11,933) $2,237,249
 3.1%



 December 31, 2018
 
Principal
Balance
 
Unamortized
Premium
(Discount),
net
 
Discount
Designated as
Credit Reserve and
OTTI
 
Amortized
Cost
 Unrealized Gain 
Unrealized
Loss
 
Estimated
Fair Value
 
Net
Weighted
Average
Coupon
Agency CMBS$1,493,675
 $5,820
 $
 $1,499,495
 $12,083
 $(29,594) $1,481,984
 3.3%
Agency CMBS Interest-Only Strips, accounted for as derivatives(1)(2)
N/A
 N/A
 N/A
 N/A
 N/A
 N/A
 4,158
 0.4%
Subtotal Agency CMBS1,493,675
 5,820
 
 1,499,495
 12,083
 (29,594) 1,486,142
 3.0%
Agency RMBS Interest-Only Strips(1)
N/A
 N/A
 N/A
 11,480
 1,062
 (407) 12,135
 2.2%
Agency RMBS Interest-Only Strips, accounted for as derivatives(1)(2)
N/A
 N/A
 N/A
 N/A
 N/A
 N/A
 7,702
 2.9%
Subtotal Agency RMBS
 
 
 11,480
 1,062
 (407) 19,837
 2.5%
Total Agency MBS1,493,675
 5,820
 
 1,510,975
 13,145
 (30,001) 1,505,979
 2.9%
                
Non-Agency RMBS54,887
 6,909
 (23,731) 38,065
 961
 
 39,026
 4.8%
Non-Agency RMBS Interest- Only Strips(1)
N/A
 N/A
 N/A
 11,154
 382
 (7) 11,529
 0.6%
Subtotal Non-Agency RMBS54,887
 6,909
 (23,731) 49,219
 1,343
 (7) 50,555
 1.0%
Non-Agency CMBS240,431
 (20,317) (22,189) 197,925
 5,021
 (2,645) 200,301
 5.9%
Total Non-Agency MBS295,318
 (13,408) (45,920) 247,144
 6,364
 (2,652) 250,856
 2.4%
                
Other securities(3)
47,042
 (1,129) (7,603) 55,284
 5,012
 (390) 59,906
 9.0%
Total$1,836,035
 $(8,717) $(53,523) $1,813,403
 $24,521
 $(33,043) $1,816,741
 2.9%
 December 31, 2019
 Principal
Balance
Unamortized
Premium
(Discount),
net
Discount
Designated as
Credit Reserve and
OTTI
Amortized
Cost
Unrealized GainUnrealized
Loss
Estimated
Fair Value
Net
Weighted
Average
Coupon(4)
Agency CMBS$1,347,929 $26,514 $— $1,374,443 $66,832 $(5,798)$1,435,477 3.4 %
Agency CMBS Interest-Only Strips, accounted for as derivatives(1)(2)
N/AN/AN/AN/AN/AN/A3,092 0.4 %
Subtotal Agency CMBS1,347,929 26,514 — 1,374,443 66,832 (5,798)1,438,569 3.1 %
Agency RMBS327,814 5,473 — 333,287 7,484 — 340,771 3.5 %
Agency RMBS Interest-Only Strips(1)
N/AN/AN/A8,661 1,820 (138)10,343 2.8 %
Agency RMBS Interest-Only Strips, accounted for as derivatives(1)(2)
N/AN/AN/AN/AN/AN/A5,572 3.0 %
Subtotal Agency RMBS327,814 5,473 — 341,948 9,304 (138)356,686 3.3 %
Total Agency MBS1,675,743 31,987 — 1,716,391 76,136 (5,936)1,795,255 3.1 %
Non-Agency RMBS52,767 4,492 (20,256)37,003 1,388 (260)38,131 4.8 %
Non-Agency RMBS Interest- Only Strips(1)
N/AN/AN/A7,705 636 (658)7,683 0.6 %
Subtotal Non-Agency RMBS52,767 4,492 (20,256)44,708 2,024 (918)45,814 1.0 %
Non-Agency CMBS354,458 (17,909)(22,016)314,533 6,359 (4,873)316,019 5.1 %
Total Non-Agency MBS407,225 (13,417)(42,272)359,241 8,383 (5,791)361,833 2.7 %
Other securities(3)
71,896 (2,437)(6,203)73,975 6,392 (206)80,161 6.7 %
Total$2,154,864 $16,133 $(48,475)$2,149,607 $90,911 $(11,933)$2,237,249 3.1 %

(1)IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on interest-only class of securities. At December 31, 2019, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs and IIOs, Agency RMBS IOs and IIOs, accounted for as derivatives, and Agency CMBS IOs and IIOs, accounted for as derivatives was $121.7 million, $442.4 million, $64.8 million and $160.2 million, respectively. At December 31, 2018, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs and IIOs, Agency RMBS IOs and IIOs, accounted for as derivatives and Agency CMBS IOs and IIOs, accounted for as derivatives was $158.8 million, $519.9 million, $89.8 million, $172.2 million, respectively.
(2)Interest on these securities is reported as a component of "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
(3)Other securities include residual interests in asset-backed securities which have 0 principal balance and an amortized cost of approximately $10.7 million and $17.0 million, as of December 31, 2019 and December 31, 2018, respectively.

109


(1)IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on interest-only class of securities. At December 31, 2020, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs and IIOs, and Agency RMBS IOs and IIOs, accounted for as derivatives was $3.7 million, $306.0 million and $21.6 million, respectively. At December 31, 2019, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs and IIOs, Agency RMBS IOs and IIOs, accounted for as derivatives and Agency CMBS IOs and IIOs, accounted for as derivatives was $121.7 million, $442.4 million, $64.8 million and $160.2 million, respectively.
(2)Interest on these securities is reported as a component of "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
(3)Other securities include residual interests in asset-backed securities which have 0 principal balance and an amortized cost of approximately $6.1 million and $10.7 million, as of December 31, 2020 and December 31, 2019, respectively.
(4)The calculation of the weighted average coupon rate includes the weighted average coupon rates of IOs and IIOs accounted for as derivatives using their notional amounts.

As of December 31, 20192020 and December 31, 2018,2019, the weighted average expected remaining term of the MBS and other securities investment portfolio was 7.95.5 years and 8.57.9 years, respectively.
    Prior to the adoption of CECL on January 1, 2020, the Company recorded Other Than Temporary Impairment ("OTTI") when the credit quality of the underlying collateral of the beneficial interest deteriorates and or the scheduled payments are faster than previously projected. As of January 1, 2020, since we elected the fair value option for these investment a credit loss adjustment, if any, would be reflected in the fair value of these securities and reported as "Unrealized gain (loss), net in the Consolidated Statements of Operations.     
The following table presents the changes in the components of the Company's purchase discount and amortizable premium on its Non-Agency RMBS, Non-Agency CMBS and other securities for the years ended December 31, 2019 December 31, 2018 and December 31, 20172018 (dollars in thousands):


 Year ended December 31, 2019 Year ended December 31, 2018 Year ended December 31, 2017
 
Discount Designated as
Credit Reserve and OTTI
 
Accretable Discount(1)
 
Amortizable Premium(1)
 Discount Designated as
Credit Reserve and OTTI
 
Accretable Discount(1)
 
Amortizable Premium(1)
 
Discount Designated as
Credit Reserve and
OTTI
 
Accretable Discount(1)
 
Amortizable Premium(1)
Balance at beginning of period$(53,523) $(29,465) $14,928
 $(72,915) $(68,438) $20,872
 $(130,484) $(109,822) $44,527
Accretion of discount
 4,364
 
 
 7,137
 
 
 10,715
 
Amortization of premium
 
 (1,215) 
 
 (675) 
 
 (843)
Realized credit losses7,290
 
 
 5,863
 
 
 2,391
 
 
Purchases(28) (7,953) 819
 (7,182) (6,473) 435
 (19,385) (1,205) 7,259
Sales26,706
 
 (19,640) 32,301
 40,338
 (9,590) 89,628
 33,166
 (31,118)
Net impairment losses recognized in earnings(6,612) 
 
 (9,733) 
 
 (15,310) 
 
Transfers/release of credit reserve(2)
(22,308) 2,889
 19,419
 (1,857) (2,029) 3,886
 245
 (1,292) 1,047
Balance at end of period$(48,475) $(30,165) $14,311
 $(53,523) $(29,465) $14,928
 $(72,915) $(68,438) $20,872
 Year ended December 31, 2019Year ended December 31, 2018
 Discount Designated as
Credit Reserve and OTTI
Accretable Discount(1)
Amortizable Premium(1)
Discount Designated as
Credit Reserve and
OTTI
Accretable Discount(1)
Amortizable Premium(1)
Balance at beginning of period$(53,523)$(29,465)$14,928 $(72,915)$(68,438)$20,872 
Accretion of discount— 4,364 — — 7,137 — 
Amortization of premium— — (1,215)— — (675)
Realized credit losses7,290 — — 5,863 — — 
Purchases(28)(7,953)819 (7,182)(6,473)435 
Sales26,706 — (19,640)32,301 40,338 (9,590)
Net impairment losses recognized in earnings(6,612)— — (9,733)— — 
Transfers/release of credit reserve(2)
(22,308)2,889 19,419 (1,857)(2,029)3,886 
Balance at end of period$(48,475)$(30,165)$14,311 $(53,523)$(29,465)$14,928 

(1)Together with coupon interest, accretable purchase discount and amortizable premium is recognized as interest income over the life of the security.
(2)Subsequent reductions of a security's non-accretable discount results in a corresponding reduction in its amortizable premium.

(1)Together with coupon interest, accretable purchase discount and amortizable premium is recognized as interest income over the life of the security.
(2)Subsequent reductions of a security's non-accretable discount results in a corresponding reduction in its amortizable premium.

110


The following tables present the fair value and contractual maturities of the Company's investment securities at December 31, 20192020 and December 31, 20182019 (dollars in thousands):
 December 31, 2020
 < or equal to 10
years
> 10 years and < or
equal to 20 years
> 20 years and < or
equal to 30 years
> 30 yearsTotal
Agency RMBS Interest-Only Strips$$$143 $$143 
Agency RMBS Interest-Only Strips, accounted for as derivatives1,565 1,565 
Subtotal Agency1,565 143 1,708 
Non-Agency CMBS59,724 50,408 53,269 680 164,081 
Non-Agency RMBS7,958 13,458 21,416 
Non-Agency RMBS Interest-Only Strips472 3,493 3,965 
Subtotal Non-Agency59,724 50,408 61,699 17,631 189,462 
Other securities7,247 6,203 24,610 10,694 48,754 
Total$66,971 $58,176 $86,452 $28,325 $239,924 
December 31, 2019 December 31, 2019
< or equal to 10
years
 
> 10 years and < or
equal to 20 years
 
> 20 years and < or
equal to 30 years
 > 30 years Total < or equal to 10
years
> 10 years and < or
equal to 20 years
> 20 years and < or
equal to 30 years
> 30 yearsTotal
Agency CMBS$973,189
 $462,288
 $
 $
 $1,435,477
Agency CMBS$973,189 $462,288 $$$1,435,477 
Agency CMBS Interest-Only Strips, accounted for as derivatives
 
 
 3,092

3,092
Agency CMBS Interest-Only Strips, accounted for as derivatives3,092 3,092 
Agency RMBS
 
 340,771
 
 340,771
Agency RMBS340,771 340,771 
Agency RMBS Interest-Only Strips2,413
 1,966
 5,964
 
 10,343
Agency RMBS Interest-Only Strips2,413 1,966 5,964 10,343 
Agency RMBS Interest-Only Strips, accounted for as derivatives669
 3,893
 1,010
 
 5,572
Agency RMBS Interest-Only Strips, accounted for as derivatives669 3,893 1,010 5,572 
Subtotal Agency976,271
 468,147
 347,745
 3,092
 1,795,255
Subtotal Agency976,271 468,147 347,745 3,092 1,795,255 
         
Non-Agency CMBSNon-Agency CMBS89,782 125,282 92,610 8,345 316,019 
Non-Agency RMBS
 
 8,966
 29,165
 38,131
Non-Agency RMBS8,966 29,165 38,131 
Non-Agency RMBS Interest-Only Strips
 
 1,716
 5,967
 7,683
Non-Agency RMBS Interest-Only Strips1,716 5,967 7,683 
Non-Agency CMBS89,782
 125,282
 92,610
 8,345
 316,019
Subtotal Non-Agency89,782
 125,282
 103,292
 43,477
 361,833
Subtotal Non-Agency89,782 125,282 103,292 43,477 361,833 
         
Other securities25,824
 31,823
 2,768
 19,746
 80,161
Other securities25,824 31,823 2,768 19,746 80,161 
Total$1,091,877
 $625,252
 $453,805
 $66,315
 $2,237,249
Total$1,091,877 $625,252 $453,805 $66,315 $2,237,249 

 December 31, 2018
 
< or equal to 10
years
 
> 10 years and < or
equal to 20 years
 
> 20 years and < or
equal to 30 years
 > 30 years Total
Agency CMBS$1,101,820
 $380,164
 $
 $
 $1,481,984
Agency CMBS Interest-Only Strips, accounted for as derivatives
 
 
 4,158
 4,158
Agency RMBS Interest-Only Strips3,577
 2,402
 6,156
 
 12,135
Agency RMBS Interest-Only Strips, accounted for as derivatives1,089
 4,053
 2,560
 
 7,702
Subtotal Agency1,106,486
 386,619
 8,716
 4,158
 1,505,979
          
Non-Agency RMBS
 
 8,540
 30,486
 39,026
Non-Agency RMBS Interest-Only Strips
 
 4,310
 7,219
 11,529
Non-Agency CMBS28,754
 53,653
 72,921
 44,973
 200,301
Subtotal Non-Agency28,754
 53,653
 85,771
 82,678
 250,856
          
Other securities7,698
 26,020
 
 26,188
 59,906
Total$1,142,938
 $466,292
 $94,487
 $113,024
 $1,816,741

The following tables present the gross unrealized losses and estimated fair value of the Company's MBS and other securities by length of time that such securities have been in a continuous unrealized loss position at December 31, 20192020 and December 31, 20182019 (dollars in thousands):
111
 December 31, 2019
 Less than 12 Months 12 Months or More Total
 Fair Value 
Unrealized
Losses
 
Number
of
Securities
 Fair Value 
Unrealized
Losses
 
Number
of
Securities
 Fair Value 
Unrealized
Losses
 
Number
of
Securities
Agency CMBS$214,084
 $(5,798) 16
 $
 $
 
 $214,084
 $(5,798) 16
Agency RMBS Interest-Only Strips1,376
 (43) 4
 1,828
 (95) 7
 3,204
 (138) 11
Subtotal Agency215,460
 (5,841) 20
 1,828
 (95) 7
 217,288
 (5,936) 27
                  
Non-Agency RMBS13,214
 (260) 1
 
 
 
 13,214
 (260) 1
Non-Agency RMBS Interest-Only Strips1,716
 (658) 1
 
 
 
 1,716
 (658) 1
Non-Agency CMBS171,650
 (4,302) 31
 18,069
 (571) 4
 189,719
 (4,873) 35
Subtotal Non-Agency186,580
 (5,220) 33
 18,069
 (571) 4
 204,649
 (5,791) 37
                  
Other securities10,512
 (206) 2
 
 
 
 10,512
 (206) 2
Total$412,552
 $(11,267) 55
 $19,897
 $(666) 11
 $432,449
 $(11,933) 66


 December 31, 2018
 Less than 12 Months 12 Months or More Total
 Fair Value 
Unrealized
Losses
 
Number
of
Securities
 Fair Value 
Unrealized
Losses
 
Number
of
Securities
 Fair Value 
Unrealized
Losses
 
Number
of
Securities
Agency CMBS$29,413
 $(307) 3
 $879,549
 $(29,287) 72
 $908,962
 $(29,594) 75
Agency RMBS Interest-Only Strips3,277
 (124) 7
 3,917
 (283) 9
 7,194
 (407) 16
Subtotal Agency32,690
 (431) 10
 883,466
 (29,570) 81
 916,156
 (30,001) 91
                  
Non-Agency RMBS
 
 
 500
 
 1
 500
 
 1
Non-Agency RMBS Interest-Only Strips957
 (7) 2
 
 
 
 957
 (7) 2
Non-Agency CMBS65,339
 (712) 7
 19,323
 (1,933) 3
 84,662
 (2,645) 10
Subtotal Non-Agency66,296
 (719) 9
 19,823
 (1,933) 4
 86,119
 (2,652) 13
                  
Other securities15,208
 (390) 2
 
 
 
 15,208
 (390) 2
Total$114,194
 $(1,540) 21
 $903,289
 $(31,503) 85
 $1,017,483
 $(33,043) 106

At December 31, 2019 and December 31, 2018, the Company did not intend to sell any of its MBS and other securities that were in an unrealized loss position, and it is “more likely than not” that the Company will not be required to sell these MBS and other securities before recovery of their amortized cost basis, which may be at their maturity date.
Generally, the Company records Other Than Temporary Impairment ("OTTI") when the credit quality of the underlying collateral deteriorates, and or the scheduled payments are faster than previously projected. The credit deterioration could be as a result of, but not limited to, increased projected realized losses, foreclosures, delinquencies and the likelihood of the borrower being able to make payments in the future. Generally, a prepayment occurs when a loan has a higher interest rate relative to current interest rates and lenders are willing to extend credit at the lower current interest rate or the underlying collateral for the loan is sold or transferred. Refer to Note 2 "Summary of Significant Accounting Policies - Mortgage-Backed Securities and Other Securities."
 December 31, 2020
 Less than 12 Months12 Months or MoreTotal
 Fair ValueUnrealized
Losses
Number
of
Securities
Fair ValueUnrealized
Losses
Number
of
Securities
Fair ValueUnrealized
Losses
Number
of
Securities
Non-Agency CMBS$102,935 $(33,602)16 $50,887 $(15,406)15 $153,822 $(49,008)31 
Non-Agency RMBS18,242 (2,498)18,242 (2,498)
Non-Agency RMBS Interest-Only Strips3,492 (790)472 (1,516)3,964 (2,306)
Subtotal Non-Agency124,669 (36,890)23 51,359 (16,922)16 176,028 (53,812)39 
Other securities26,365 (1,818)26,365 (1,818)
Total$151,034 $(38,708)29 $51,359 $(16,922)16 $202,393 $(55,630)45 
 December 31, 2019
 Less than 12 Months12 Months or MoreTotal
 Fair ValueUnrealized
Losses
Number
of
Securities
Fair ValueUnrealized
Losses
Number
of
Securities
Fair ValueUnrealized
Losses
Number
of
Securities
Agency CMBS$214,084 $(5,798)16 $$$214,084 $(5,798)16 
Agency RMBS Interest-Only Strips1,376 (43)1,828 (95)3,204 (138)11 
Subtotal Agency215,460 (5,841)20 1,828 (95)217,288 (5,936)27 
Non-Agency CMBS171,650 (4,302)31 18,069 (571)189,719 (4,873)35 
Non-Agency RMBS13,214 (260)13,214 (260)
Non-Agency RMBS Interest-Only Strips1,716 (658)1,716 (658)
Subtotal Non-Agency186,580 (5,220)33 18,069 (571)204,649 (5,791)37 
Other securities10,512 (206)10,512 (206)
Total$412,552 $(11,267)55 $19,897 $(666)11 $432,449 $(11,933)66 
The following table presents the OTTI the Company recorded on its securities portfolio prior to the adoption of CECL (dollars in thousands):
 For the year ended December 31, 2019 For the year ended December 31, 2018 For the year ended December 31, 2017
Agency RMBS(1)
$74
 $807
 $5,774
Non-Agency RMBS1,331
 996
 
Non-Agency CMBS6,565
 8,660
 15,117
Other securities604
 717
 1,982
Total$8,574
 $11,180
 $22,873

 For the year ended December 31, 2019For the year ended December 31, 2018
Agency RMBS(1)
$74 $807 
Non-Agency RMBS1,331 996 
Non-Agency CMBS6,565 8,660 
Other securities604 717 
Total$8,574 $11,180 

(1)Other-than-temporary impairment on Agency RMBS includes impairments on Agency RMBS IOs and unrealized loss on Agency RMBS securities that the Company had the intent to sell at the end of the period, if applicable.
(1)     Other-than-temporary impairment on Agency RMBS includes impairments on Agency RMBS IOs and unrealized loss on Agency RMBS securities that the Company had the intent to sell at the end of the period, if applicable.
The following table presents components of interest income on the Company's MBS and other securities for the three years ended December 31, 2019,2020, December 31, 20182019 and December 31, 2017,2018, respectively (dollars in thousands):

112


 For the year ended December 31, 2020For the year ended December 31, 2019For the year ended December 31, 2018
 Coupon
Interest
Net (Premium
Amortization/
Amortization
Basis)
Discount
Amortization
Interest
Income
Coupon
Interest
Net (Premium
Amortization/
Amortization
Basis)
Discount
Amortization
Interest
Income
Coupon
Interest
Net (Premium
Amortization/
Amortization
Basis)
Discount
Amortization
Interest
Income
Agency CMBS$11,336 $(636)$10,700 $51,286 $(2,327)$48,959 $60,148 $(646)$59,502 
Agency RMBS2,975 (987)1,988 12,181 (3,053)9,128 19,507 (5,092)14,415 
Non-Agency CMBS15,331 6,467 21,798 14,178 4,017 18,195 20,058 6,366 26,424 
Non-Agency RMBS2,732 (1,193)1,539 4,682 (2,214)2,468 7,120 (1,073)6,047 
Other securities8,263 (4,781)3,482 11,633 (6,472)5,161 14,805 (6,371)8,434 
Total$40,637 $(1,130)$39,507 $93,960 $(10,049)$83,911 $121,638 $(6,816)$114,822 
 For the year ended December 31, 2019 For the year ended December 31, 2018 For the year ended December 31, 2017
 
Coupon
Interest
 
Net (Premium
Amortization/
Amortization
Basis)
Discount
Amortization
 
Interest
Income
 
Coupon
Interest
 
Net (Premium
Amortization/
Amortization
Basis)
Discount
Amortization
 
Interest
Income
 
Coupon
Interest
 
Net (Premium
Amortization/
Amortization
Basis)
Discount
Amortization
 
Interest
Income
Agency CMBS$51,286
 $(2,327) $48,959
 $60,148
 $(646) $59,502
 $40,064
 $507
 $40,571
Agency RMBS12,181
 (3,053) 9,128
 19,507
 (5,092) 14,415
 38,108
 (13,058) 25,050
Non-Agency RMBS4,682
 (2,214) 2,468
 7,120
 (1,073) 6,047
 5,602
 525
 6,127
Non-Agency CMBS14,178
 4,017
 18,195
 20,058
 6,366
 26,424
 19,179
 8,276
 27,455
Other securities11,633
 (6,472) 5,161
 14,805
 (6,371) 8,434
 8,280
 1,559
 9,839
Total$93,960
 $(10,049) $83,911
 $121,638
 $(6,816) $114,822
 $111,233
 $(2,191) $109,042


The following tables present the sales and realized gains (losses) of the Company's MBS and other securities for the three years ended December 31, 2019,2020, December 31, 20182019 and December 31, 2017,2018, respectively (dollars in thousands):
 For the year ended December 31, 2020
 ProceedsGross
Gains
Gross
Losses
Net
Gain (Loss)
Agency CMBS$1,668,149 $116,463 $(6,486)$109,977 
Agency RMBS400,948 12,552 (506)12,046 
Non-Agency CMBS111,804 (23,624)(23,623)
Non-Agency RMBS12,658 (60)(60)
Other securities35,957 113 (6,223)(6,110)
Total$2,229,516 $129,129 $(36,899)$92,230 

 For the year ended December 31, 2019
 ProceedsGross
Gains
Gross
Losses
Net
Gain (Loss)
Agency CMBS$891,072 $32,793 $(4,190)$28,603 
Agency RMBS205,310 1,559 1,559 
Non-Agency CMBS40,235 317 (1,624)(1,307)
Total$1,136,617 $34,669 $(5,814)$28,855 

113


For the year ended December 31, 2018
For the year ended December 31, 2019 ProceedsGross
Gains
Gross
Losses
Net
Gain (Loss)
Proceeds 
Gross
Gains
 
Gross
Losses
 
Net
Gain (Loss)
Agency RMBSAgency RMBS$589,854 $18 $(23,997)$(23,979)
Agency CMBS$891,072
 $32,793
 $(4,190) $28,603
Agency CMBS1,534,967 (51,045)(51,045)
Agency RMBS205,310
 1,559
 
 1,559
Non-Agency RMBSNon-Agency RMBS99,842 7,008 (478)6,530 
Non-Agency CMBS40,235
 317
 (1,624) (1,307)Non-Agency CMBS140,292 3,086 (6,201)(3,115)
Other securitiesOther securities65,099 8,400 8,400 
Total$1,136,617
 $34,669
 $(5,814) $28,855
Total$2,430,054 $18,512 $(81,721)$(63,209)

 For the year ended December 31, 2018
 Proceeds 
Gross
Gains
 
Gross
Losses
 
Net
Gain (Loss)
Agency CMBS$1,534,967
 $
 $(51,045) $(51,045)
Agency RMBS589,854
 18
 (23,997) (23,979)
Non-Agency RMBS99,842
 7,008
 (478) 6,530
Non-Agency CMBS140,292
 3,086
 (6,201) (3,115)
Other securities65,099
 8,400
 
 8,400
Total$2,430,054
 $18,512
 $(81,721) $(63,209)


 For the year ended December 31, 2017
 Proceeds 
Gross
Gains
 
Gross
Losses
 
Net
Gain (Loss)
Agency RMBS(1)
$1,251,985
 $5,020
 $(7,936) $(2,916)
Non-Agency RMBS(2)
243,838
 24,356
 (2,241) 22,115
Non-Agency CMBS54,875
 2,543
 (1,803) 740
Other securities38,447
 713
 (54) 659
Total$1,589,145
 $32,632
 $(12,034) $20,598

(1)Excludes proceeds for Agency RMBS Interest-Only Strips, accounted for as derivatives, of approximately $2.6 million and gross realized gains of approximately $432 thousand.
(2)Excludes proceeds for Non-Agency RMBS Interest-Only Strips, accounted for as derivatives, of approximately $2.2 million, gross realized gains of $274 thousand and gross realized losses of $180 thousand.

Unconsolidated CMBS VIEs
The Company’s economic interests held in unconsolidated CMBS VIEs are limited in nature to those of a passive holder of CMBS issued by securitization trusts; the Company was not involved in the design or creation of the securitization trusts. The Company evaluates its CMBS holdings for potential consolidation of the securitized trust, in which it owns the most subordinate tranche or a portion of the controlling class. As of December 31, 20192020 and December 31, 2018,2019, the Company held 107 and 710 variable interests in unconsolidated CMBS VIEs, respectively, in which it either owned the most subordinate class or a portion of the controlling class. The Company determined it was not the primary beneficiary and accordingly, the CMBS VIEs were not consolidated in the Company’s consolidated financial statements. As of December 31, 20192020 and December 31, 2018,2019, the Company’s maximum exposure to loss from these variable interests did not exceed the carrying value of these investments of $117.7$48.9 million and $118.4$117.7 million, respectively. These investments are classified in "Non-Agency mortgage-backed securities, at fair value" in the Company’s Consolidated Balance Sheets. Further, as of December 31, 20192020 and December 31, 2018,2019, the Company did not guarantee any obligations of unconsolidated entities or enter into any commitment or intent to provide funding to any such entities.

Note 5—Residential Whole Loans and Bridge Loans
Residential Whole-Loan Trust
The consolidated financial statements include the consolidation of Revolving Mortgage Investment Trust 2015-1QR2 ("RMI 2015 Trust") since it met the definition of a VIE and the Company determined that it was the primary beneficiary of the trust because it was involved in the design of the trust, has oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust.  RMI 2015 Trust has issued a trust certificate that is wholly-owned by the Company and represents the entire beneficial interest in pools of Non-QM Residential Whole Loans held by the trust. As of December 31, 20192020 and December 31, 2018,2019, the Company financed the trust certificate with $209.9$30.2 million and $618.7$209.9 million, respectively, on long-term financing facilities which automatically roll until such time as they are terminated or until certain conditions of default.facilities. The financing liability is held outside the trust. The Company classifies the underlying Residential Whole Loans owned by the trust in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets and has eliminated the intercompany trust certificate in consolidation.

In August 2018, the Company formed Revolving Mortgage Investment Trust 2018-RCR ("RCR Trust") to acquire Conforming Residential Whole Loans. The Company determined that RCR Trust was a VIE and that the Company was the primary beneficiary of the trust because it was involved in the design of the trust, has oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. As of December 31, 2019, and December 31, 2018, the Company financed the trust certificate with $164.3 million and $250.4 million, respectively, of repurchase agreements, which is a liability held outside the trust. The Company classifies the underlying conforming mortgages owned by the trust in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets. The Company has eliminated the intercompany trust certificate in consolidation. In May 2020, the conforming mortgages held by RCR Trust were sold and the trust was terminated.


In September 2018, the Company formed Revolving Mortgage Investment Trust 2018-RNR ("RNR Trust") to acquire Non-QM Residential Whole Loans. The Company determined that RNR Trust was a VIE and that the Company was the
114


primary beneficiary because it was involved in the design of the trust, has oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. As of December 31, 2019, and December 31, 2018, the Company's trust certificate was financed with $8.1 million and $15.1 million, respectively, of repurchase agreements, which is a liability held outside the trust. The Company classifies the underlying Non-QM Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets. The Company has eliminated the intercompany trust certificate in consolidation. In April 2020, the RNR Trust was terminated following the transfer of the Non-QM Residential Whole Loans it held to RMI 2015 Trust.

In May 2019, the Company completed a residential mortgage-backed securitization comprised of a portion of its Residential Whole Loan portfolio. During the securitization, RMI 2015 Trust and RNR Trust collectively transferred $945.5 million of Non-QM Residential Whole Loans, to a wholly-owned subsidiary of the Company, Arroyo Mortgage Trust 2019-2 ("Arroyo Trust"). The Company issued $919.0 million of mortgage-backed notes and retained all the subordinate and residual debt securities ("Owner Certificates"), which includes the required the 5% eligible risk retention. Refer to Note 7 - "Financings" for details on the associated securitized debt. The Company determined that Arroyo Trust was a VIE and that the Company was also the primary beneficiary because the Manager was involved in the design of the trust and the Company has significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the Arroyo Trust that could potentially be significant to the trust. The Company classifies the underlying Non-QM Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets. The Company has eliminated the intercompany Owner Certificates in consolidation.

In November 2019, the Company formed Revolving Mortgage Investment Trust 2019-RBR ("RBR Trust") to acquire Non-QM Residential Whole Loans. The Company determined that RBR Trust was a VIE and that the Company was the primary beneficiary because it was involved in the design of the trust, has oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. As of December 31, 2019, the Company's trust certificate was financed with $91.7 million of repurchase agreements, which is a liability held outside the trust. The Company classifies the underlying Non-QM Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets. The Company has eliminated the intercompany trust certificate in consolidation. In April 2020, the RBR Trust was terminated following the transfer of the Non-QM Residential Whole Loans it held to RMI 2015 Trust.

In June 2020, the Company completed a residential mortgage-backed securitization comprised of a portion of its Residential Whole Loan portfolio. During the securitization, RMI 2015 Trust transferred $355.8 million of Non-QM Residential Whole Loans, to a wholly-owned subsidiary of the Company, Arroyo Mortgage Trust 2020-1 ("Arroyo Trust 2020"). The Company issued $341.7 million of mortgage-backed notes and retained all the subordinate and residual debt securities, which includes the required 5% eligible risk retention. Refer to Note 7 - "Financings" for details on the associated securitized debt. The Company determined that Arroyo Trust 2020 was a VIE and that the Company was also the primary beneficiary because the Manager was involved in the design of the trust and the Company has significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the Arroyo Trust 2020 that could potentially be significant to the trust. The Company classifies the underlying Non-QM Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets. The Company has eliminated the intercompany Owner Certificates in consolidation.

Residential Bridge Loan Trust

In February 2017, the Company formed Revolving Mortgage Investment Trust 2017-BRQ1 ("RMI 2017 Trust") and acquired the trust certificate, which represents the entire beneficial interest in pools of Residential Bridge Loans and certain Residential Whole Loans held by the trust. Residential Bridge Loans are mortgage loans secured by residences, typically short-term. The Company determined that RMI Trust was a VIE and that the Company was the primary beneficiary because it was involved in the design of the trust, has oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. As of December 31, 20192020 and December 31, 2018,2019, the Company financed the trust certificate with $32.1$13.4 million and $207.5$32.1 million, respectively, of repurchase agreement borrowings, which is a liability held outside the trust. The Company classifies both the underlying Residential Bridge Loans carried at
115


amortized cost and the Residential Bridge Loans that it elected the fair value option in "Residential Bridge Loans" and the Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets. The Company has eliminated the intercompany trust certificate in consolidation.

Consolidated Residential Whole-Loan and Residential Bridge Loan Trusts

The Company assesses modifications to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment.  The fivethree consolidated Residential Whole-Loan trusts collectively hold 3,5202,489 Residential Whole Loans and the consolidated Bridge Loan Trust holds 6825 Residential Bridge Loans and 98 Residential Whole Loans as of December 31, 2019.

2020.
The following table presents a summary of the assets and liabilities of the consolidated residential whole-loan trusts and residential bridge loan trust included in the Consolidated Balance Sheets as of December 31, 20192020 and December 31, 20182019 (dollars in thousands):
 December 31, 2019 December 31, 2018
Cash and cash equivalents$1,811
 $674
Residential Whole-Loans, at fair value ($1,375,860 and $1,041,885 pledged as collateral, at fair value, respectively)1,375,860
 1,041,885
Residential Bridge Loans ($31,748 and $211,766 at fair value and $34,897 and $221,486 pledged as collateral, respectively)34,897
 221,486
Commercial loan, at fair value
 30,000
Investment related receivable19,138
 42,945
Interest receivable7,840
 11,807
Other assets90
 178
Total assets$1,439,636
 $1,348,975
Securitized debt, net$795,811
 $
Interest payable2,367
 
Accounts payable and accrued expenses173
 677
Other liabilities
 225
Total liabilities$798,351
 $902


 December 31, 2020December 31, 2019
Cash and cash equivalents$$1,811 
Residential Whole-Loans, at fair value ($1,008,782 and $1,375,860 pledged as collateral, at fair value, respectively)1,008,782 1,375,860 
Residential Bridge Loans ($11,858 and $31,748 at fair value and $12,960 and $34,897 pledged as collateral, respectively)12,960 34,897 
Investment related receivable27,987 19,138 
Interest receivable4,688 7,840 
Other assets80 90 
Total assets$1,054,497 $1,439,636 
Securitized debt, net$892,290 $795,811 
Interest payable2,222 2,367 
Accounts payable and accrued expenses77 173 
Total liabilities$894,589 $798,351 

The Company's risk with respect to its investment in each residential loan trust is limited to its direct ownership in the trust. The Residential Whole Loans, Residential Bridge Loans and Commercial Loan held by the consolidated trusts are held solely to satisfy the liabilities of the trust, and creditors of the trust have no recourse to the general credit of the Company. The Company is not contractually required and has not provided any additional financial support to the trusts for the years ended December 31, 20192020 and December 31, 2018.2019.
The following table presents the components of the carrying value of Residential Whole Loans and Residential Bridge Loans as of December 31, 20192020 and December 31, 20182019 (dollars in thousands):
 Residential Whole Loans, at Fair Value 
Residential Bridge Loans, at Fair Value(1)
 
Residential Bridge Loans, at Amortized Cost(1)
 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Principal balance$1,325,443
 $1,023,524
 $34,041
 $212,491
 $3,155
 $9,766
Unamortized premium28,588
 17,629
 79
 1,164
 6
 16
Unamortized discount(2,839) (3,145) (13) (316) (11) (62)
Amortized cost1,351,192
 1,038,008
 34,107
 213,339
 3,150
 9,720
Gross unrealized gains26,363
 7,573
 10
 212
 N/A
 N/A
Gross unrealized losses(1,695) (3,696) (848) (1,552) N/A
 N/A
Fair value$1,375,860
 $1,041,885
 $33,269
 $211,999
 N/A
 N/A
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 Residential Whole Loans, at Fair Value
Residential Bridge Loans, at Fair Value(1)
Residential Bridge Loans, at Amortized Cost(1)
 December 31, 2020December 31, 2019December 31, 2020December 31, 2019December 31, 2020December 31, 2019
Principal balance$984,555 $1,325,443 $14,144 $34,041 $1,103 $3,155 
Unamortized premium24,248 28,588 79 
Unamortized discount(1,799)(2,839)(13)(11)
Amortized cost1,007,004 1,351,192 14,147 34,107 1,103 3,150 
Gross unrealized gains9,282 26,363 10 N/AN/A
Gross unrealized losses(7,504)(1,695)(1,339)(848)N/AN/A
Fair value$1,008,782 $1,375,860 $12,813 $33,269 N/AN/A
(1) These loans are classified in "Residential Bridge Loans" in the Consolidated Balance Sheets
Residential Whole Loans

The Residential Whole Loans have low LTV's and are comprised of 2,9082,489 Non-QM adjustable rate mortgages 612 conforming fixed rate mortgages and 98 investor owned fixed rate mortgages. The following tables present certain information about the Company's Residential Whole Loan investment portfolio at December 31, 20192020 and December 31, 20182019 (dollars in thousands):
December 31, 2019
     Weighted Average
Current Coupon Rate
Number of
Loans
 
Principal
Balance
 
Original
LTV
 
Original
FICO
Score(1)
 
Expected
Life (years) (2)
 
Contractual
Maturity
(years)
 
Coupon
Rate
3.01 - 4.00%53
 $17,284
 61.7% 736
 2.4 28.0 3.9%
4.01 - 5.00%1,689
 557,144
 61.4% 744
 2.8 28.5 4.8%
5.01 - 6.00%1,682
 713,397
 62.0% 736
 3.0 28.3 5.4%
6.01 - 7.00%103
 37,102
 54.1% 727
 3.8 25.3 6.2%
7.01 - 8.00%2
 516
 73.2% 753
 4.7 28.6 7.1%
Total3,529
 $1,325,443
 61.5% 739
 3.0 28.3 5.2%
December 31, 2020
 Weighted Average
Current Coupon RateNumber of
Loans
Principal
Balance
Original
LTV
Original
FICO
Score(1)
Expected
Life (years)
Contractual
Maturity
(years)
Coupon
Rate
2.01 - 3.00%$3,239 66.7 %733 5.928.02.7 %
3.01 - 4.00%118 41,489 55.8 %709 3.823.33.7 %
4.01 - 5.00%1,172 403,398 61.8 %751 2.727.74.9 %
5.01 - 6.00%1,166 523,105 64.2 %740 2.927.75.4 %
6.01 - 7.00%35 12,813 67.5 %720 3.227.06.3 %
7.01 - 8.00%511 73.2 %753 4.127.67.1 %
Total2,497 $984,555 62.9 %744 2.927.55.1 %
(1)The original FICO score is not available for 236 loans with a principal balance of approximately $75.2 million at December 31, 2020. The Company has excluded these loans from the weighted average computations.

December 31, 2019
 Weighted Average
Current Coupon RateNumber of
Loans
Principal
Balance
Original
LTV
Original
FICO
Score(1)
Expected
Life (years)
Contractual
Maturity
(years)
Coupon
Rate
3.01 - 4.00%53 $17,284 61.7 %736 2.428.03.9 %
4.01 - 5.00%1,689 557,144 61.4 %744 2.828.54.8 %
5.01 - 6.00%1,682 713,397 62.0 %736 3.028.35.4 %
6.01 - 7.00%103 37,102 54.1 %727 3.825.36.2 %
7.01 - 8.00%516 73.2 %753 4.728.67.1 %
Total3,529 $1,325,443 61.5 %739 3.028.35.2 %
(1)The original FICO score is not available for 286 loans with a principal balance of approximately $94.6 million at December 31, 2019. The Company has excluded these loans from the weighted average computations.
(2)Excludes the expected lives of the conforming Residential Whole Loans held by RCR Trust.
December 31, 2018
     Weighted Average
Current Coupon Rate
Number of
Loans
 
Principal
Balance
 
Original
LTV
 
Original
FICO
Score(1)
 
Expected
Life (years)
 
Contractual
Maturity
(years)
 
Coupon
Rate
3.01 - 4.00%66
 $22,046
 61.6% 738
 6.5 29.0 3.9%
4.01 - 5.00%1,395
 490,073
 62.3% 739
 3.0 29.0 4.8%
5.01 - 6.00%1,283
 496,722
 62.7% 727
 2.5 28.5 5.4%
6.01 - 7.00%37
 14,589
 59.5% 731
 1.5 24.8 6.2%
7.01 - 8.00%1
 94
 70.0% 689
 1.8 29.1 8.0%
Total2,782
 $1,023,524
 62.4% 733
 2.8 28.7 5.1%
(1)The original FICO score is not available for 274 loans with a principal balance of approximately $93.2 million at December 31, 2018. The Company has excluded these loans from the weighted average computations.
(1)     The original FICO score is not available for 286 loans with a principal balance of approximately $94.6 million at December 31, 2019. The Company has excluded these loans from the weighted average computations.
(2)Excludes the expected lives of the conforming Residential Whole Loans held by RCR Trust.
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The following table presents the various states across the United States in which the collateral securing the Company's Residential Whole Loans at December 31, 20192020 and December 31, 2018,2019, based on principal balance, is located (dollars in thousands):
 December 31, 2020 December 31, 2019
StateConcentrationPrincipal BalanceStateConcentrationPrincipal Balance
California65.8 %$647,877 California66.1 %$875,738 
New York17.7 %173,788 New York16.2 %214,141 
Georgia3.4 %33,577 Georgia3.4 %45,189 
Florida2.8 %27,274 Florida2.8 %36,641 
New Jersey2.5 %24,704 New Jersey2.3 %30,450 
Other7.8 %77,335 Other9.2 %123,284 
Total100.0 %$984,555 Total100.0 %$1,325,443 
 December 31, 2019  December 31, 2018
StateConcentration Principal Balance StateConcentration Principal Balance
California66.1% $875,738
 California67.1% $686,275
New York16.2% 214,141
 New York17.1% 175,390
Georgia3.4% 45,189
 Georgia2.6% 26,918
Florida2.8% 36,641
 Massachusetts2.1% 21,197
New Jersey2.3% 30,450
 Florida1.9% 19,942
Other9.2% 123,284
 Other9.2% 93,802
Total100.0% $1,325,443
 Total100.0% $1,023,524


Residential Bridge Loans


The Residential Bridge Loans are comprised of short-term non-owner occupied fixed rate loans secured by single or multi-unit residential properties, with LTVs generally not to exceed 85%. The following tables present certain information about the Company’s Residential Bridge Loan investment portfolio at December 31, 20192020 and December 31, 20182019 (dollars in thousands):
 
December 31, 2020
   Weighted Average
Current Coupon RateNumber of LoansPrincipal
Balance
Original LTV
Contractual
Maturity
(months)
(1)
Coupon
Rate
7.01 – 9.00%10$8,295 69.6 %1.48.7 %
9.01 – 11.00%156,123 75.5 %0.510.1 %
11.01 - 13.00%3705 69.8 %0.011.4 %
17.01 – 19.00%1124 75.0 %0.018.0 %
Total29$15,247 72.0 %0.89.4 %
December 31, 2019
      Weighted Average
Current Coupon Rate Number of Loans Principal
Balance
 Original LTV 
Contractual
Maturity
(months)
(1)
 Coupon
Rate
7.01 – 9.00% 36 $22,409
 70.2% 5.8 8.4%
9.01 – 11.00% 28 9,972
 74.0% 5.6 10.1%
11.01 - 13.00% 9 2,741
 63.1% 2.0 11.7%
13.01 - 15.00% 1 1,125
 75.0% 0.0 13.5%
17.01 – 19.00% 2 949
 75.0% 0.0 18.0%
Total 76 $37,196
 71.0% 5.6 9.5%

December 31, 2018
      Weighted Average
Current Coupon Rate Number of Loans Principal
Balance
 Original LTV 
Contractual
Maturity
(months)
(1)
 Coupon
Rate
5.01 - 7.00% 8 $3,169
 60.4% 1.1 6.7%
7.01 – 9.00% 275 140,675
 72.6% 5.9 8.3%
9.01 – 11.00% 186 63,954
 73.8% 4.4 9.9%
11.01 – 13.00% 39 11,017
 71.3% 4.6 11.8%
13.01 – 15.00% 1 88
 65.0% 4.0 14.0%
17.01 - 19.00% 11 3,354
 73.7% 2.3 18.0%
Total 520 $222,257
 72.7% 5.3 9.1%


December 31, 2019
   Weighted Average
Current Coupon RateNumber of LoansPrincipal
Balance
Original LTV
Contractual
Maturity
(months)
(1)
Coupon
Rate
7.01 – 9.00%36$22,409 70.2 %5.88.4 %
9.01 – 11.00%289,972 74.0 %5.610.1 %
11.01 – 13.00%92,741 63.1 %2.011.7 %
13.01 – 15.00%11,125 75.0 %0.013.5 %
17.01 - 19.00%2949 75.0 %0.018.0 %
Total76$37,196 71.0 %5.69.5 %
(1) Non-performing loans that are past their maturity date are excluded from the calculation of the weighted average contractual maturity. The weighted average contractual maturity for these loans is zero.

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The following table presents the various states across the United States in which the collateral securing the Company’s Residential Bridge Loans at December 31, 20192020 and December 31, 2018,2019, based on principal balance, is located (dollars in thousands):
  
December 31, 2020December 31, 2019
StateConcentrationPrincipal BalanceStateConcentrationPrincipal Balance
California37.5 %$5,713 California50.4 %$18,763 
New York17.3 %2,632 Washington13.1 %4,863 
Washington16.1 %2,461 New York12.1 %4,518 
Florida12.9 %1,969 Florida8.9 %3,296 
Connecticut5.7 %872 New Jersey3.8 %1,424 
Other10.5 %1,600 Other11.7 %4,332 
Total100.0 %$15,247 Total100.0 %$37,196 
December 31, 2019 December 31, 2018
StateConcentration Principal Balance StateConcentration Principal Balance
California50.4% $18,763
 California53.9% $119,761
Washington13.1% 4,863
 New York9.5% 21,160
New York12.1% 4,518
 Washington6.6% 14,711
Florida8.9% 3,296
 Florida5.7% 12,672
New Jersey3.8% 1,424
 New Jersey4.7% 10,419
Other11.7% 4,332
 Other19.6% 43,534
Total100.0% $37,196
 Total100.0% $222,257



Non-performing Loans


The following table presents the aging of the Residential Whole Loans and Bridge Loans as of December 31, 20192020 (dollars in thousands):

Residential Whole LoansBridge Loans
No of LoansPrincipalFair ValueNo of LoansPrincipal
Fair Value (1)
Current(2)
2446$953,071 $977,875 5$2,906 $2,839 
1-30 days delinquent167,972 8,181 21,430 1,287 
31-60 days delinquent3823 810 1849 764 
61-90 days delinquent67,378 7,196 0
90+ days delinquent2615,311 14,720 2110,062 9,026 
Total2,497$984,555 $1,008,782 29$15,247 $13,916 
  Residential Whole Loans Bridge Loans
  No of Loans Principal Fair Value No of Loans Principal 
Fair Value (1)
Current 3467 $1,300,238
 $1,350,590
 41 $23,353
 $23,329
1-30 days delinquent 41 13,537
 14,012
 2 303
 306
31-60 days delinquent 5 1,338
 1,334
 4 1,147
 1,135
61-90 days delinquent 4 3,205
 3,224
 2 285
 280
90+ days delinquent 12 7,125
 6,700
 27 12,108
 11,369
Total 3,529 $1,325,443
 $1,375,860
 76 $37,196
 $36,419
(1) Includes $3.1 million loansa $124 thousand loan carried at amortize cost.
(2) Includes 7 loans in forbearance with unpaid principal balance of approximately $$2.4 million and 142 loans that were previously in forbearance but are currently performing under the repayment plan with unpaid principal balance of approximately $59.0 million.

COVID-19 has materially disrupted business operations, resulting in significantly higher levels of unemployment or underemployment. As a result, some of its Residential Whole Loan borrowers have experienced financial hardship, making it difficult to meet their payment obligations to the Company, leading to requests for forbearance and higher levels of delinquency and potentially defaults. The Company maintains a strong relationship with its servicers and has utilized these relationships to manage the impacts of COVID-19 pandemic on the Company's Non-QM loans. As of December 31, 2020, the Company had 7 Non-QM loans in forbearance and 142 Non-QM loans in the repayment phase following forbearance. Under the forbearance agreement, the borrower can generally elect to defer the principal and interest payments for 3 months. At the end of the forbearance period, the borrower can either request an extension for payment deferral, repay the deferred principal and interest in full or over the next 9 months or capitalize the deferred principal and interest to the loan balance and calculate a new amortization payment. Loans under a forbearance agreement are treated as "Current" in the above table. These loans are carried at fair value and had an unpaid principal balance of approximately $2.4 million, a fair value of $2.4 million, a weighted average original LTV of 65.3% and represent approximately 0.2% of the total outstanding principal balance of our Residential Whole Loans.

Residential Whole Loans

119


    As of December 31, 2020, there were 26 Residential Whole Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $15.3 million and a fair value of approximately $14.7 million. These nonperforming loans represent approximately 1.6% of the total outstanding principal balance. These loans are collateral dependent with a weighted average original LTV of 60.4%.

As of December 31, 2019, there were 12 Residential Whole Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $7.1 million and a fair value of approximately $6.7 million. These nonperforming loans represent approximately 0.5% of the total outstanding principal balance. NoThese loans are collateral dependent with a weighted average original LTV of 62.1%.

These loans are carried at fair value, and accordingly no allowance or provision for credit losses or credit loss expense was recorded, since the adjustment for credit losses, if any, would be reflected in the fair value of these loans as a component of "Unrealized gain (loss), net in the Consolidated Statements of Operations. The Company stops accruing interest income for these loans when they became contractually 90 days delinquent.

Residential Bridge Loans

    As of December 31, 2020, there was 1 Residential Bridge Loan carried at amortized cost in non-accrual status with an unpaid principal balance of approximately $123.8 thousand and 20 Residential Bridge Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $9.9 million and a fair value of $8.9 million. These nonperforming loans represent approximately 66.0% of the total outstanding Bridge Loans principal balance of $15.2 million. These loans are collateral dependent with a weighted average original LTV of 73.0%.

    As of December 31, 2019, there were 27 Residential Bridge Loans carried at fair value in non-accrual status with an unpaid principal balance of $12.1 million and a fair value of $11.4 million. These nonperforming loans represented approximately 32.6% of the total outstanding Bridge Loans principal balance of $37.2 million. These loans are collateral dependent with a weighted average original LTV of 72.1%.

    The Company concluded that an allowance for credit losses was not necessary for loans carried at amortized costs as of and for the years ended December 31, 2020 and December 31, 2019 since the fair value of the collateral balance less the cost to sell was in excess of the outstanding principal and interest balances. For loans carried at fair value no allowance for credit l;losses was recorded as of and for the yearyears ended December 31, 2020 and December 31, 2019 since the valuation adjustment, if any, would be reflected in the fair value of these loans. The Company stopped accruing interest income for these loans when they became contractually 90 days delinquent.

    As of December 31, 2018, there were no Residential Whole-Loans in non-accrual status.

Residential Bridge Loans

As of December 31, 2019, there were 27 Residential Bridge Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $12.1 million and a fair value of $11.4 million. These nonperforming loans represent approximately 32.6% of the total outstanding Bridge Loans principal balance of $37.2 million. These loans are collateral dependent with a weighted average original LTV of 72.1%.

As of December 31, 2018, there were 3 Residential Bridge Loans carried at amortized cost in non-accrual status with an unpaid principal balance of approximately $1.1 million and 9 Residential Bridge Loans carried at fair value in non-accrual status with an unpaid principal balance of $4.0 million and a fair value of $3.8 million. These nonperforming loans represented approximately 2.3% of the total outstanding Bridge Loans principal balance of $222.3 million. These loans are collateral dependent with a weighted average original LTV of 70.0%.

The Company concluded that an allowance for loan loss was not necessary for loans carried at amortized costs as of and for the years ended December 31, 2019 and December 31, 2018 since the fair value of the collateral balance less the cost to sell was in excess of the outstanding principal and interest balances. For loans carried at fair value no loan loss was recorded as of and for the years ended December 31, 2019 and December 31, 2018 since the valuation adjustment, if any, would be reflected in the fair value of these loans. The Company stopped accruing interest income for these loans when they became contractually 90 days delinquent.

As of December 31, 2019,2020, the Company had real estate owned ("REO") properties with an aggregate carrying value of $3.3$1.1 million related to foreclosed Bridge Loans. The REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The REO properties are classified in "Other assets" in the Consolidated Balance Sheet.

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Note 6 - Commercial Loans

Securitized Commercial Loans


Securitized commercial loans is comprised of commercial loans from consolidated third party sponsored CMBS VIE's. At December 31, 2019,2020, the Company had variable interests in 3two third party sponsored CMBS VIEs, CMSC Trust 2015 - Longhouse MZ, RETL 2019-RVP and MRCD 2019-PRKC MortgageCSMC Trust 2014-USA, that it determined it was the primary beneficiary and was required to consolidate. The commercial loans that serve as collateral for the securitized debt issued by these VIEs can only be used to settle the securitized debt. Refer to Note 7 - "Financings" for details on the associated securitized debt. The Company assesses modifications to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment.

CMSC Trust 2015 - Longhouse MZ

In November 2015, the Company acquired a $14.0 million interest in the trust certificate issued by CMSCCSMC Trust 2015 - Longhouse MZ (“CMSCCSMC Trust”), with an outstanding balance of $13.5 million and a fair value of $13.5 million at December 31, 2019.. The Company determined that CMSCCSMC Trust was a VIE and that the Company was the primary beneficiary because it was involved in certain aspects of the design of the trust, has certain oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that the Company believes could potentially be significant to the trust. As the primary beneficiary, the Company was required to consolidate CMSCCSMC Trust and accordingly its $13.5 million investment in CMSCCSMC Trust was eliminated in consolidation. The CMSCCSMC Trust holds a $24.0 million mezzanine loan which bears an interest rate of 9%, collateralized by interests in commercial real estate. The mezzanine loan serves as collateral for the $24.0 million of trust certificates issued. Refer to Note 7 - "Financings" for details oncertificates. In June 2020, the associated securitized debt.variable interest the Company acquired was paid off and, accordingly the CSMC Trust is no longer consolidated.

RETL 2019-RVP and RETL 2018-RVP
 
In March 2018, the Company acquired a $67.8 million interest in the trust certificate issued by RETL 2018-RVP (“RETL 2018 Trust”), which represents the 5% eligible horizontal residual interest under the Credit Risk Retention Rules of Section 15G of the Exchange Act. Under the credit risk retention rules, the Company must retain its investment for five years and is limited in its ability to finance and hedge its investment. The trust certificate's pass-through rate is one month LIBOR plus 9.5%. The Company determined that RETL 2018 Trust was a VIE and that the Company was the primary beneficiary because the Manager was involved in certain aspects of the design of the trust and the Company together with other related party entities own more than 50% of the controlling class. The owner of 50% or more of the controlling class has certain oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest from the trust that the Company believes could potentially be significant to the trust. As the primary beneficiary, the Company consolidated RETL 2018 and its investment in the trust certificates (HRR class) of RETL 2018 was eliminated in the consolidation. In March 2019, the securitized debt was refinanced and the outstanding principal balance issued by RETL 2018 Trust was paid in full.

RETL 2018 was refinanced with a new securitization RETL 2019-RVP ("RETL 2019 Trust") in March 2019. The Company acquired a $65.3 million interest in the trust certificates issued by the RETL 2019 Trust, including $45.3 million which represents the 5% eligible risk retention certificate. The Company determined that RETL 2019 Trust was a VIE and that the Company was also the primary beneficiary because the Manager was involved in certain aspects of the design of the trust and the Company together with other related party entities own more than 50% of the controlling class. As the primary beneficiary, the Company consolidated RETL 2019 Trust and its investment in the trust certificates (HRR class and a portion of the C class) of RETL 2019 Trust were eliminated in the consolidation. The RETL 2019 Trust holds a commercial loan collateralized by first mortgages, deeds of trusts and interests in commercial real estate. The outstanding principal balance on this commercial loan is $674.3$354.2 million as of December 31, 2019.2020. The loan's stated maturity date is March 15, 2021 (subject to the borrower's option to extend the initial stated maturity date for two successive one-year terms) and bears an interest rate of one month LIBOR plus 2.30%3.94%. As of December 31, 2020, the RETL HRR bonds are held in WMC RETL LLC, which is a wholly owned subsidiary of the Company.

MRCD 2019-PRKC Mortgage Trust

In December 2019, the Company acquired a $161.4 million interest in the trust certificates issued by the MRCD 2019-PRKC Mortgage Trust ("MRCD Trust"), including $10.5 million which represents the initial controlling class (HRR class). The Company determined that MRCD Trust was a VIE and that the Company was also the primary beneficiary because the Manager was involved in certain aspects of the design of the trust and the Company owns the controlling class. As the primary beneficiary, the Company consolidated MRCD Trust and its investment in the trust certificates (HRR class and a portion of the A class) of MRCD Trust were eliminated in the consolidation. The

On March 24, 2020, the Company sold its investments in the A Class certificates of the MRCD Trust. Shortly after the sale, the Company entered into an agreement to irrevocably assign the controlling rights and appointed one of the buyers as the new Directing Holder. As a result, the assets and liabilities of the MRCD Trust were deconsolidated, since the Company no longer has the power to direct the activities that significantly impact the economic performance of the MRCD Trust.

MRCD qualified as a CFE under GAAP and the Company measured both the financial assets and financial liabilities using the fair value of the financial liabilities, since it was more observable. The Company recognized an unrealized loss of $43.7 million in earnings, related to the periodic change in fair value of MRCD's assets and liabilities in March 2020, prior to deconsolidation. Also, the Company retained the HRR certificates, which were measured at fair value at the date of deconsolidation and is included in the "Non-Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.
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CSMC Trust 2014-USA

The Company together with other related party entities own more than 50% of the controlling class of CSMC Trust 2014-USA ("CSMC USA"). As of December 31, 2020, the Company held an 8.8% interest in the trust certificates issued by CSMC USA (F Class) with an outstanding principal balance of $14.9 million. The Company performs ongoing reassessment of its CMBS VIE holdings for potential consolidation of the securitized trust in which it owns a portion of the controlling class. Since the ownership of the controlling financial interest is held within a related party group, the Company must determine whether it is the primary beneficiary under the related party tie-breaker rule, which requires the evaluation of the following considerations: (1) the principal-agency relationship between parties; (2) relationship and significance of the VIE's activities to the variable interest holders; (3) variable interest holder's exposure to VIE's expected losses and (4) the design of the VIE. As a result of the Company's evaluation, it was determined that the Company is the primary beneficiary of CSMC USA, and effective on August 1, 2020, consolidated CSMC USA. The Company’s investment in the trust certificate of CSMC USA (F Class) was eliminated in the consolidation. The CSMC USA holds 2a commercial loans, class Aloan secured by a first mortgage lien on the borrowers’ fee and class HRR, collateralized by first mortgages, deeds of trusts andleasehold interests in commercial real estate.a portion of a super-regional mall. The outstanding principal balance on class Athis commercial loan is $234.5 million$1.4 billion as of December 31, 2019 and bears an interest rate of 4.27%2020. The outstanding principal

balance on class HRR commercial loan is $10.5 million as of December 31, 2019 and bears an interest rate of 12.02%. The loans'loan's stated maturity date is September 11, 2025 and bears a fixed interest rate of 4.38%. The Company elected the fair value option for the commercial loan as well as the associated securitized debt.

In December 9, 2024.2020, the commercial loan held by CSMC USA was amended to an interest only payment through maturity. As part of the modification a Cash Management Forbearance Agreement was entered into by Special Servicer and the borrower, that required both increased reporting requirements and monthly net cash remittance continues to be in effect.

Commercial Loans

In January 2019, WMC CRE LLC ("CRE LLC"), a wholly-owned subsidiary of the Company, and WMC CRE Mezzanine Loan Subsidiary LCC ("CRE Mezz"), a wholly-owned subsidiary of CRE LLC, werewas formed for the purpose of acquiring commercial loans.

The following table presents the commercial loans held by CRE LLC and CRE Mezz as of December 31, 20192020 (dollars in thousands):

LoanAcquisition DateLoan TypePrincipal BalanceFair ValueOriginal LTVInterest RateMaturity DateExtension OptionCollateralCollateral Location
CRE 1June 2018Interest-Only First Mortgage$30,000 $27,403 65%1-Month LIBOR plus 4.50%6/9/2021NoneHotelCA
CRE 2June 2019Principal & Interest First Mortgage47,219 46,776 75%1-Month LIBOR plus 4.75%1/11/2022Two One-Year ExtensionsNursing FacilitiesSC, GA
CRE 3August 2019Interest-Only Mezzanine loan90,000 80,291 58%1-Month LIBOR plus 9.25%6/29/2021Two-Year First Extension and One-Year Second ExtensionEntertainment and RetailNJ
CRE 4September 2019Interest-Only First Mortgage40,000 39,300 63%1-Month LIBOR plus 3.02%8/6/2021Two One-Year ExtensionsRetailCT
CRE 5December 2019Interest-Only First Mortgage24,535 23,887 62%1-Month LIBOR plus 3.75%11/6/2021Three One-Year ExtensionsHotelNY
CRE 6December 2019Interest-Only First Mortgage13,207 12,858 62%1-Month LIBOR plus 3.75%11/6/2021Three One-Year ExtensionsHotelCA
CRE 7December 2019Interest-Only First Mortgage7,259 7,067 62%1-Month LIBOR plus 3.75%11/6/2021Three One-Year ExtensionsHotelIL
CRE8December 2019Interest-Only First Mortgage4,474 4,475 79%1-Month LIBOR plus 4.85%12/6/2022NoneAssisted LivingFL
$256,694 $242,057 
LoanAcquisition DateLoan TypePrincipal BalanceFair ValueOriginal LTVInterest RateMaturity DateExtension OptionCollateral
CRE 1March 2018Interest-Only Mezzanine loan$20,000
$20,000
71%1-Month LIBOR plus 6.50%12/9/2020Two One-Year ExtensionsHotel
CRE 2June 2018Interest-Only First Mortgage30,000
30,000
65%1-Month LIBOR plus 4.50%6/9/2020One-Year ExtensionHotel
CRE 4June 2019Principal & Interest First Mortgage50,000
50,000
75%1-Month LIBOR plus 4.75%1/11/2022Two One-Year ExtensionsNursing Facilities
CRE 5August 2019Interest-Only Mezzanine loan90,000
90,000
58%1-Month LIBOR plus 9.25%6/29/2021Two-Year First Extension and One-Year Second ExtensionEntertainment and Retail
CRE 6September 2019Interest-Only First Mortgage40,000
40,000
63%1-Month LIBOR plus 3.02%8/6/2021Two One-Year ExtensionsRetail
CRE 7December 2019Interest-Only First Mortgage24,535
24,535
62%1-Month LIBOR plus 3.75%11/6/2021Three One-Year ExtensionsHotel
CRE 8December 2019Interest-Only First Mortgage13,206
13,206
62%1-Month LIBOR plus 3.75%11/6/2021Three One-Year ExtensionsHotel
CRE 9December 2019Interest-Only First Mortgage7,259
7,259
62%1-Month LIBOR plus 3.75%11/6/2021Three One-Year ExtensionsHotel
CRE 10December 2019Interest-Only First Mortgage4,425
4,425
79%1-Month LIBOR plus 4.85%12/6/2022NoneAssisted Living
   $279,425
$279,425
     

Commercial Loan Trust
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In March 2018, the Company formed the Revolving Small Balance Commercial Trust 2018-1 ("RSBC Trust") to acquire commercial real estate mortgage loans. The Company determined that the wholly-owned RSBC Trust was a VIE and that the Company was the primary beneficiary because it was involved in the design of the trust and holds significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. As of December 31, 2019,2020, the Company financed the trust certificate with $62.7$34.4 million of repurchase agreements, which is a liability held outside the trust.

The following table presents the commercial real estate loans held by RSBC Trust as of December 31, 20192020 (dollars in thousands):

LoanAcquisition DateLoan TypePrincipal BalanceFair ValueOriginal LTVInterest RateMaturity DateExtension OptionCollateralCollateral Location
SBC 1July 2018Interest-Only First Mortgage$45,188 $44,965 74%
One-Month LIBOR plus 4.25% (1)
8/1/2021One-Year ExtensionsNursing FacilitiesMI
SBC 2January 2019Interest-Only First Mortgage9,200 9,179 84%
One-Month LIBOR plus 4.00%(2)
12/1/2021One-Year ExtensionApartment ComplexMO
SBC 3January 2019Interest-Only First Mortgage14,362 14,322 49%One-Month LIBOR plus 4.10%7/1/2021NoneNursing FacilitiesCT
$68,750 $68,466 
LoanAcquisition DateLoan TypePrincipal BalanceFair ValueLTVInterest RateMaturity DateExtension OptionCollateral
SBC 1July 2018Interest-Only First Mortgage$45,188
$45,188
74%
One-Month LIBOR plus 4.25% (1)
7/1/2020Two One-Year ExtensionsNursing Facilities
SBC 4January 2019Interest-Only First Mortgage13,600
13,600
84%
One-Month LIBOR plus 4.00%(2)
12/1/2021One-Year ExtensionApartment Complex
SBC 5January 2019Interest-Only First Mortgage32,000
32,000
49%One-Month LIBOR plus 4.10%7/1/2021NoneNursing Facilities
   $90,788
$90,788
     

(1) Subject to LIBOR floor of 1.25%.
(2) Subject to LIBOR floor of 2.00%.
    
Consolidated Securitized Commercial Loan Trusts and Commercial Loan Trust
 
The Company assesses modifications to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment.  The 43 consolidated trusts, CMSC Trust, RETL 2019 Trust, MRCD TrustCSMC USA and RSBC Trust collectively hold 75 commercial loans as of December 31, 2019.2020. 

The following table presents a summary of the assets and liabilities of the 43 consolidated trusts included in the Consolidated Balance Sheets as of December 31, 20192020 and December 31, 20182019 (dollars in thousands):
 
 December 31, 2020December 31, 2019
Cash$$5,778 
Restricted cash76,132 52,948 
Securitized commercial loans, at fair value1,605,335 909,040 
Commercial Loans, at fair value68,466 90,788 
Interest receivable6,248 2,989 
Total assets$1,756,181 $1,061,543 
Securitized debt, at fair value$1,553,722 $681,643 
Interest payable5,660 1,519 
Accounts payable and accrued expenses12 12 
Other liabilities76,132 52,948 
Total liabilities$1,635,526 $736,122 
 December 31, 2019 December 31, 2018
Cash$5,778
 $
Restricted cash52,948
 55,808
Securitized commercial loans, at fair value909,040
 1,013,511
Commercial Loans, at fair value90,788
 166,123
Interest receivable2,989
 3,733
Total assets$1,061,543
 $1,239,175
Securitized debt, at fair value$681,643
 $949,626
Interest payable1,519
 2,419
Accounts payable and accrued expenses12
 31
Other liabilities52,948
 55,808
Total liabilities$736,122
 $1,007,884


The Company’s risk with respect to its investment in each commercial loan trust is limited to its direct ownership in the trust. The commercial loans held by the consolidated trusts are held solely to satisfy the liabilities of the trust, and creditors of the trust have no recourse to the general credit of the Company. The assets of a consolidated trust can only be used to satisfy the obligations of that trust. The Company is not contractually required and has not provided any additional financial support to the trusts for the years ended December 31, 20192020 and December 31, 2018.2019. 

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The following table presents the components of the carrying value of the securitized commercial real estateloans and commercial loans as of December 31, 20192020 and December 31, 20182019 (dollars in thousands):
 
 CMSC Trust Securitized Commercial Loan,
at Fair Value
RETL Trust Securitized Commercial Loan, at Fair ValueCSMC USA Trust Securitized Commercial Loan, at Fair ValueRSBC Trust Commercial Loans, at Fair ValueCommercial Loans, at Fair Value
 December 31, 2020December 31, 2019December 31, 2020December 31, 2019December 31, 2020December 31, 2019December 31, 2020December 31, 2019December 31, 2020December 31, 2019
Principal balance$$24,048 $354,202 $674,331 $1,385,591 $$68,750 $90,788 $256,694 $279,425 
Unamortized premium180 1,836 
Unamortized discount(135,653)(94)(215)(53)(294)
Amortized cost24,048 354,382 676,167 1,249,938 68,656 90,573 256,641 279,131 
Gross unrealized gains269 16,013 215 294 
Gross unrealized losses(14,998)(190)(14,585)
Fair value$$24,057 $339,384 $676,436 $1,265,951 $$68,466 $90,788 $242,057 $279,425 
 
CMSC Trust Securitized Commercial Loan,
at Fair Value
 RETL Trust Securitized Commercial Loan, at Fair Value MRCD Trust Commercial Loans, at Fair Value RSBC Trust Commercial Loans, at Fair Value Commercial Loans, at Fair Value
 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Principal balance$24,048
 $24,456
 $674,331
 $988,609
 $245,000
 $
 $90,788
 $166,432
 $279,425
 $50,000
Unamortized premium
 
 1,836
 431
 
 
 
 
 
 
Unamortized discount
 
 
 
 (35,119) 
 (215) (736) (294) (205)
Amortized cost24,048
 24,456
 676,167
 989,040
 209,881
 
 90,573
 165,696
 279,131
 49,795
Gross unrealized gains9
 
 269
 29
   
 215
 427
 294
 205
Gross unrealized losses
 (14) 
 
 (1,334) 
 
 
 
 
Fair value$24,057
 $24,442
 $676,436
 $989,069
 $208,547
 $
 $90,788
 $166,123
 $279,425
 $50,000
Non-Performing Commercial Loans


The following table presents the aging of the Commercial Loans as of December 31, 2020 (dollars in thousands):
Commercial Loans
No of LoansPrincipalFair Value
Current10$295,444 $283,120 
1-30 days
31-60 days
61-90 days
90+ days30,000 27,403 
Total11$325,444 $310,523 

The impact of COVID-19 pandemic has adversely impacted a broad range of industries in which the commercial loan borrowers operate and could impair their ability to fulfill their financial obligations to the Company, most significantly hospitality and retail asset. The Company believes its CRE loan sponsors are well capitalized and generally committed to supporting the assets collateralizing its loans. The low average original LTV of the Company's commercial loan portfolio of 65.1% reflects significant equity value that the sponsors are motivated to protect through the COVID-19 disruption.

As of December 31, 2020, the Company had 1 delinquent borrower with a total loan principal balance of $30.0 million secured by a hotel. The Company commenced foreclosure proceedings. However, on February 24, 2021, the borrower filed for bankruptcy protection. The Company expects to move forward with the foreclosure subject to the bankruptcy process and believes believes there is a reasonable likelihood that the outstanding principal balance of $30.0 million, will be recovered, although there is no assurance.

The Company holds a junior mezzanine loan ("CRE 3" loan) with an outstanding principal balance of $90 million secured by a retail facility. CRE 3 loan has an initial maturity on June 29, 2021.CRE 3 is currently receiving interest payments from a reserve that will become exhausted at maturity of the loan. The Company expects that the CRE 3 loan will become non performing upon depletion of such reserve.


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Note 7—Financings
Repurchase Agreements
The Company has primarily financesfinanced its investment acquisitions with repurchase agreements. The repurchase agreements bear interest at a contractually agreed-upon rate and typically havehistorically had terms ranging from one month to three18 months.  The Company’s repurchase agreement borrowings are accounted for as secured borrowings when the Company maintains effective control of the financed assets.  Under thethese repurchase agreements, the respective counterparties retain the right to determine the fair value of the underlying collateral. A reduction in the value of pledged assets normally requires the Company to post additional securities as collateral, pay down borrowings or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, and is referred to as a margin call.  The inability of the Company to post adequate collateral for a margin call by a counterparty, in a time frame as short as the close of the same business day, could result in a condition of default under the Company’s repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by the Company, which may have a material adverse effect on the Company’s financial position, results of operations and cash flows.  Under

The market disruptions surrounding COVID-19 resulted in the termsdecline of the Company's asset values making it challenging to obtain repurchase agreementsagreement financing with favorable terms or at all. The Company's repurchase agreement counterparties have increased borrowing rates and increased haircuts. In the second quarter in order to manage the severe market conditions and the resulting large margin demands from lenders and pressure on the Company’s liquidity, the Company entered into two longer term financing arrangements to reduce its exposure to short-term financings with daily mark to market exposure. Below is a summary of each of these financing arrangements.

Residential Whole Loan Facility

On April 21, 2020, the Company entered into amendments with respect to certain of its loan warehouse facilities. These amendments mainly served to convert an existing residential whole loan facility into a term facility by removing any mark to market margin requirements, and to consolidate the Company’s Non-Qualified Mortgage loans, which were previously financed by 3 separate, unaffiliated counterparties, into a single facility. The target advance rate under the amended and restated facility is approximately 84% of the aggregate unpaid principal balance of the loans. The original facility matured on October 20, 2021. All principal payments and income generated by the loans during the term of the facility w used to pay principal and interest on the facility. Upon the securitization or sale by the Company of any whole loan subject to this amended and restated facility, the counterparty was entitled to receive a recapture premium fee of 30% of all realized value on any whole loans above such counterparty’s amortized basis as well as an exit fee of 0.50% of the loan amount in circumstances where the counterparty was not involved in the disposition of the loans. The financing cost of this facility was reflective of the challenging market conditions, at the time, when we entered into the agreement.

On June 29, 2020, the Company securitized approximately $355.8 million of the Residential Whole Loans and paid down the facility by approximately $339.4 million (see "Securitized Debt" below for additional details). As noted above part of the financing arrangements the Company agreed to pay the lender a fee of 30% of all realized value on the Residential Whole Loans above the counterparty's amortized basis upon securitization or sale. As a result of refinancing the Residential Whole Loans through a securitization, the Company accrued a premium recapture fee of approximately $20.5 million, which is payable at the maturity of the facility, and is recorded in "Financing fees" in the Consolidated Statements of Operations.

On October 6, 2020 the Company entered into an amendment with respect to this residential loan warehouse facility. The amendment serves to convert the existing residential loan facility to a limited mark to market margin facility that bears an interest rate of LIBOR plus 2.75%, with a LIBOR floor of 0.25%. The target advance rate under the amended facility is 85% and the facility matures on October 5, 2021. In connection with the amendment to the facility the Company paid $12.0 million of the premium recapture fee and the balance of $8.5 million is payable at the maturity of the amended facility, October 5, 2021. The premium recapture fee was eliminated for investments financed under the amended facility. As of December 31, 2020 approximately $67.1 million in non QM loans remained in the facility with a borrowing amount of $30.2 million.

Non-Agency CMBS and Non-Agency RMBS Facility

125


On May 4, 2020, the Company supplemented one of its existing securities repurchase facilities to consolidate most of its CMBS and RMBS assets, which were financed by multiple counterparties, into a single term facility with limited mark to market margin requirements. Pursuant to the agreement, a margin deficit will not occur until such time as the loan to value ratio surpasses a certain threshold (the “LTV Trigger”), on a weighted average basis per asset type, calculated on a portfolio level. If this threshold is reached, the Company may rehypothecate pledged U.S. Treasury securities it receiveselect to provide cash margin or sell certain assets to the extent necessary to lower the ratio. The term of this facility is 12 months, subject to 12 month extensions at the counterparty’s option. All interest income generated by the assets during the term of the facility will be paid to the Company no less often than monthly. Interest on the facility is due from its repurchase agreement as incremental collateralthe Company at a rate of three-month LIBOR plus 5.00% payable quarterly in orderarrears. Half of all principal repayments on the underlying assets will be applied to increaserepay the Company’s cash position.  Atobligations owed to the counterparty, with the remainder paid to the Company, unless the LTV Trigger has occurred, in which case all principal payments will be applied to repay the obligations. As of December 31, 2019 and December 31, 2018,2020, the Company did not have any rehypothecated U.S. Treasury securities.outstanding balance under this facility was $95.1 million.

Certain of the repurchase agreementsfinancing arrangements provide the counterparty with the right to terminate the agreement if the Company does not maintain certain equity, liquidity and leverage metrics,metrics. With the most restrictiveexception of one repurchase agreement for which includethe Company received a limit on leverage based on the composition of the Company’s portfolio.   For all the repurchase agreements with outstanding borrowings,waiver, the Company was in compliance with the terms of such financial tests as of December 31, 2019.2020.

As of December 31, 2019,2020, the Company had 34borrowings under 5 of its master repurchase agreements with its counterparties and borrowings under 21 of the 34 counterparties.agreements. The following table summarizes certain characteristics of the Company's repurchase agreements at December 31, 20192020 and December 31, 20182019 (dollars in thousands):

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 December 31, 2019 December 31, 2018
Securities Pledged
Repurchase
Agreement
Borrowings
 
Weighted Average
Interest Rate on
Borrowings
Outstanding at end
of period
 
Weighted Average
Remaining Maturity
(days)
 
Repurchase
Agreement
Borrowings
 
Weighted Average
Interest Rate on
Borrowings
Outstanding at end
of period
 
Weighted Average
Remaining Maturity
(days)
Short Term Borrowings:           
Agency CMBS$1,352,248
 2.05% 26 $1,392,649
 2.71% 40
Agency RMBS348,274
 1.99% 52 14,650
 3.09% 21
Non-Agency RMBS30,481
 3.56% 9 30,922
 4.06% 18
Non-Agency CMBS190,390
 3.05% 35 134,814
 4.05% 48
Residential Whole Loans(1)
102,029
 3.51% 27 863,356
 4.08% 93
Residential Bridge Loans(1)
29,869
 3.93% 28 204,754
 4.50% 25
Commercial Loans(1)
62,746
 4.04% 28 131,788
 4.55% 26
Securitized commercial loans(1)
116,087
 3.93% 49 7,543
 4.30% 15
Other securities56,762
 3.23% 34 38,361
 4.18% 26
Subtotal2,288,886
 2.41% 32 2,818,837
 3.45% 54
Long Term Borrowings:           
Residential Whole Loans (1) (2)
374,143
 3.27% 898 
 % 
Commercial Loans (2)
161,848
 3.88% 590 
 % 
Subtotal535,991
 3.45% 805 
 % 
Repurchase agreements borrowings$2,824,877
 2.61% 179 $2,818,837
 3.45% 54
Less unamortized debt issuance costs76
 N/A
 N/A 
 N/A
 N/A
Repurchase agreements borrowings, net$2,824,801
 2.61% 179 $2,818,837
 3.45% 54
 December 31, 2020December 31, 2019
Securities PledgedRepurchase
Agreement
Borrowings
Weighted Average
Interest Rate on
Borrowings
Outstanding at end
of period
Weighted Average
Remaining Maturity
(days)
Repurchase
Agreement
Borrowings
Weighted Average
Interest Rate on
Borrowings
Outstanding at end
of period
Weighted Average
Remaining Maturity
(days)
Short Term Borrowings:
Agency CMBS$%0$1,352,248 2.05 %26
Agency RMBS1,418 1.34 %59348,274 1.99 %52
Non-Agency CMBS10,313 2.25 %14190,390 3.05 %35
Non-Agency RMBS%030,481 3.56 %9
Residential Whole Loans(1)
29,800 3.71 %15266,294 3.14 %202
Residential Bridge Loans(1)
11,254 2.73 %3629,869 3.93 %28
Commercial Loans(1)
34,375 3.32 %7562,746 4.04 %28
Securitized commercial loans(1)(4)
%0116,087 3.93 %49
Membership Interest18,844 2.90 %29%0
Other securities2,594 4.51 %1956,762 3.23 %34
Subtotal108,598 3.19 %392,453,151 2.44 %51
Long Term Borrowings:
Non-Agency CMBS (3)
66,767 5.23 %126N/AN/AN/A
Non-Agency RMBS14,643 5.23 %126N/AN/AN/A
Residential Whole Loans (1) (2)
30,224 3.00 %278209,878 3.55 %1358
Commercial Loans (2)
124,937 2.17 %287161,848 3.88 %590
Other Securities13,677 5.24 %126N/AN/AN/A
Subtotal250,248 3.74 %225371,726 3.70 %1024
Repurchase agreements borrowings$358,846 3.57 %169$2,824,877 2.61 %179
Less unamortized debt issuance costs1,923 N/AN/A76 N/AN/A
Repurchase agreements borrowings, net$356,923 3.57 %169$2,824,801 2.61 %179

(1)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.
(1)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.
(2)Certain Residential Whole Loans and Commercial Loans were financed under two new longer term repurchase agreements. The Company entered into a $700.0 million residential and $200.0 million commercial facility. These facilities automatically roll until such time as they are terminated or until certain conditions of default. The weighted average remaining maturity days was calculated using expected weighted life of the underlying collateral.
(2)Certain Residential Whole Loans and Commercial Loans were financed under 2 longer term repurchase agreements. The Residential Whole facility is 18 months and the Commercial Loan facility automatically rolls until such time as they are terminated or until certain conditions of default. The weighted average remaining maturity days was calculated using expected weighted life of the underlying collateral.
(3)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.
(4)Repurchase agreement borrowings on subordinate securities owned in the consolidated securitizations are reflected in Non-Agency CMBS for the year ended December 31, 2020.
At December 31, 20192020 and December 31, 2018,2019, repurchase agreements collateralized by investments had the following remaining maturities:
(dollars in thousands)December 31, 2020December 31, 2019
1 to 29 days$59,856 $1,480,286 
30 to 59 days13,421 552,786 
60 to 89 days35,321 255,814 
Greater than or equal to 90 days250,248 535,991 
Total$358,846 $2,824,877 

127


(dollars in thousands)December 31, 2019 December 31, 2018
1 to 29 days$1,480,286
 $1,867,957
30 to 59 days552,786
 144,778
60 to 89 days255,814
 555,695
Greater than or equal to 90 days535,991
 250,407
Total$2,824,877
 $2,818,837

At December 31, 2019,2020, the following table reflects amounts of collateral at risk under its repurchase agreements greater than 10% of the Company's equity with any counterparty (dollars in thousands):

 December 31, 2020
CounterpartyAmount of Collateral
at Risk, at fair
value
Weighted Average
Remaining
Maturity (days)
Percentage of
Stockholders'
Equity
Credit Suisse AG, Cayman Islands Branch$171,503 22467.2 %
Citigroup Global Markets Inc.111,562 12643.7 %
Nomura Securities International, Inc.36,654 6414.4 %
 December 31, 2019
Counterparty
Amount of Collateral
at Risk, at fair
value
 
Weighted Average
Remaining
Maturity (days)
 
Percentage of
Stockholders'
Equity
Credit Suisse AG, Cayman Islands Branch$132,306
 1024 23.4%
Barclays Capital Inc.73,203
 38 13.0%


Collateral for Borrowings under Repurchase Agreements
The following table summarizes the Company's collateral positions, with respect to its borrowings under repurchase agreements at December 31, 20192020 and December 31, 20182019 (dollars in thousands):
 December 31, 2019 December 31, 2018
 
Assets
Pledged
 
Accrued
Interest
 
Assets Pledged
and Accrued
Interest
 
Assets
Pledged
 
Accrued
Interest
 
Assets Pledged
and Accrued
Interest
Assets pledged for borrowings under repurchase agreements: 
  
  
      
Agency CMBS, at fair value$1,400,230
 $3,916
 $1,404,146
 $1,486,142
 $4,262
 $1,490,404
Agency RMBS, at fair value356,687
 1,336
 358,023
 19,837
 453
 20,290
Non-Agency RMBS, at fair value45,816
 414
 46,230
 50,555
 479
 51,034
Non-Agency CMBS, at fair value246,797
 951
 247,748
 186,552
 915
 187,467
Residential Whole Loans, at fair value (1)
529,495
 3,704
 533,199
 1,041,885
 8,145
 1,050,030
Residential Bridge Loans(1)
34,897
 471
 35,368
 221,486
 3,528
 225,014
Commercial Loans, at fair value(1)
350,213
 1,855
 352,068
 196,123
 1,067
 197,190
Securitized commercial loans, at fair value(1)
171,640
 674
 172,314
 13,688
 88
 13,776
Other securities, at fair value80,031
 128
 80,159
 59,780
 147
 59,927
Cash(2)
43,499
 
 43,499
 1,226
 
 1,226
Total$3,259,305
 $13,449
 $3,272,754
 $3,277,274
 $19,084
 $3,296,358
 December 31, 2020December 31, 2019
 Assets
Pledged
Accrued
Interest
Assets Pledged
and Accrued
Interest
Assets
Pledged
Accrued
Interest
Assets Pledged
and Accrued
Interest
Assets pledged for borrowings under repurchase agreements:   
Agency CMBS, at fair value$$$$1,400,230 $3,916 $1,404,146 
Agency RMBS, at fair value1,708 49 1,757 356,687 1,336 358,023 
Non-Agency CMBS, at fair value(1)
152,275 649 152,924 246,797 951 247,748 
Non-Agency RMBS, at fair value25,382 160 25,542 45,816 414 46,230 
Residential Whole Loans, at fair value(2)
97,566 543 98,109 529,495 3,704 533,199 
Residential Bridge Loans(2)
12,960 180 13,140 34,897 471 35,368 
Commercial Loans, at fair value(2)
310,523 1,850 312,373 350,213 1,855 352,068 
Securitized commercial loans, at fair value(2)
171,640 674 172,314 
Membership interest(3)
33,690 33,690 
Other securities, at fair value48,754 44 48,798 80,031 128 80,159 
Cash(4)
1,817 — 1,817 43,499 — 43,499 
Total$684,675 $3,475 $688,150 $3,259,305 $13,449 $3,272,754 
(1)Includes securities eliminated upon VIE consolidation.
(2)Loans owned through trust certificates are pledged as collateral. The trust certificates are eliminated upon consolidation.
(3)The pledged amount relates to the Company's non-controlling membership interest in its wholly owned subsidiary WMC RETL LLC, which was financed under a repurchase agreement. The membership interest is eliminated in consolidation.
(4)Cash posted as collateral is included in "Due from counterparties" in the Company's Consolidated Balance Sheets.

(1)Loans owned through trust certificates are pledged as collateral. The trust certificates are eliminated upon consolidation.
(2)Cash posted as collateral is included in "Due from counterparties" in the Company's Consolidated Balance Sheets.
A reduction in the value of pledged assets typically results in the repurchase agreement counterparties initiating a margin call. At December 31, 20192020 and December 31, 2018,2019, investments held by counterparties as security for repurchase agreements totaled approximately $3.2 billion$682.9 million and approximately $3.3$3.2 billion, respectively. Cash collateral held by repurchase agreement counterparties at December 31, 20192020 and December 31, 20182019 was approximately $43.5$1.8 million and $1.2$43.5 million, respectively. Cash posted by repurchase agreement counterparties at December 31, 20192020 and December 31, 2018,2019, was approximately $320 thousand and $709 thousand, and $17.8 million, respectively. In addition, at December 31, 2019 and December 31, 2018, the Company held securities with a fair value of $0 and $5.2 million, respectively, received as collateral from its repurchase agreement counterparties to satisfy margin requirements. The Company has the ability to repledge collateral received from its repurchase counterparties.
Convertible Senior Unsecured Notes
At    As of December 31, 2020 and December 31, 2019, the Company had $175.0 million and $205.0 million aggregate principal amount, of 6.75% convertible senior unsecured notes outstanding through three issuances described below.

In October 2017, the Company issued $115.0 million aggregate principal amount of 6.75% convertible senior unsecured notes for net proceeds of $111.1 million. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity.

In August 2019, the Company issued an additional $40.0 million aggregate principal amountrespectively, of 6.75% convertible senior unsecured notes (the "August 2019 Reopened"2022 Notes") for net proceeds of $38.8 million after subtracting underwriting commissions and debt offering expenses. The August 2019 Reopened Notes have substantially identical terms asoutstanding through three
128


issuances. Interest on the existing notes issued in October 2017. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

In December 2019, the Company issued another $50.0 million aggregate principal amount of 6.75% convertible senior unsecured notes (the "December 2019 Reopened Notes") for net proceeds of $49.2 million. The December 2019 Reopened Notes have substantially identical terms as the existing notes issued in October 2017. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

is paid semiannually. The notes are convertible into, at the Company's election, cash, shares of the Company's common stock or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the agreement. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

On July 1, 2020, the Company issued an aggregate of 1,354,084 shares of its common stock, par value $0.01 per share (the “Common Stock”), in exchange for $5.0 million aggregate principal amount of the 2022 Notes pursuant to separate privately negotiated exchange agreements entered into on July 1, 2020 (collectively, the “Exchange Agreement”) between the Company and certain holders of the 2022 Notes. The Company did not receive any cash proceeds as a result of the Exchange Agreement, and the 2022 Notes exchanged pursuant to the Exchange Agreement were retired and cancelled. The common stock was issued in reliance upon the exemption set forth in Section 3(a)(9) of the Securities Act of 1933 for securities exchanged by the Company and an existing security holder where no commission or other remuneration is paid or given directly or indirectly by the Company for soliciting such exchange.

In the fourth quarter of 2020, the Company repurchased $25.0 million aggregate principal amount of the 2022 Notes at an approximate 13% discount to par value, plus accrued and unpaid interest.

Securitized Debt

CMSC Trust 2015 - Longhouse MZ

CMSC Trust issued $25.0 million in commercial pass-through certificates. The outstanding principal balance of the trust certificates was $24.0 million at December 31, 2019, with a fair value of $24.1 million. The trust certificates bear a fixed interest rate of 8.9% and mature on June 6, 2020. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the periodic change in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net."Commercial Mortgage-Backed Notes
 
The Company owns $13.5 million of the trust certificates which was eliminated in consolidation and the remaining $10.6 million is held by related parties and is carried at a fair value of $10.6 million and recorded in "Securitized debt, net" in the consolidated balance sheets. The securitized debt of the CMSC Trust can only be settled with the commercial loan, with an outstanding principal balance of $24.0 million at December 31, 2019, that serves as collateral for the securitized debt and is non-recourse to the Company.
RETL 2019 Trust

The following table summarizes RETL 2019 Trust's commercial mortgage pass-through certificates at December 31, 20192020 (dollars in thousands):
 
ClassesPrincipal BalanceCoupon Fair ValueContractual Maturity
Class A$219,431
2.9%$219,567
3/15/2021
Class B101,200
3.3%101,326
3/15/2021
Class C308,400
3.8%309,171
3/15/2021
Class HRR45,300
10.2%45,314
3/15/2021
Class X-CP(1)
N/A
1.2%1,026
4/15/2020
Class X-EXT(1)
N/A
—%31
3/15/2021
 $674,331
 $676,435
 
ClassesPrincipal BalanceCoupon Fair ValueContractual Maturity
Class B$502 1.7%$492 3/15/2021
Class C308,400 2.3%296,933 3/15/2021
Class X-EXT(1)
N/A1.1%31 3/15/2021
$308,902 $297,456 
(1) Class X-CP and Class X-EXT areis an interest-only classesclass with an initiala notional balance of $308.4 million each.as of December 31, 2020.


TheAt December 31, 2020, the Company acquired $30.6 million of the class C certificates andowned the entire class of HRR certificates with a outstanding principal balance of $45.3 million, which areis eliminated in consolidation and the remaining RETL debt with a fair value of $600.5$297.5 million is recorded in "Securitized debt, net" in the consolidated balance sheets.Consolidated Balance Sheets. Of the remaining outstanding principal balance of $598.5the Securitized debt of $308.9 million, excluding the interest-only debt securities, $60.6$45.6 million is owned by related parties and $537.9$263.3 million is owned by third parties. The securitized debt of the RETL 2019 Trust can only be settled with the commercial loan, with an outstanding principal balance of approximately $674.3$354.2 million at December 31, 2019,2020, that serves as collateral for the securitized debt and is non-recourse to the Company. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the periodic changechanges in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net."

CSMC 2014 USA

The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at December 31, 2020 (dollars in thousands):
129


ClassesPrincipal BalanceCoupon Fair ValueContractual Maturity
Class A-1$120,391 3.3 %$120,443 9/11/2025
Class A-2531,700 4.0 %538,469 9/11/2025
Class B136,400 4.2 %137,970 9/11/2025
Class C94,500 4.3 %85,140 9/11/2025
Class D153,950 4.4 %127,092 9/11/2025
Class E180,150 4.4 %131,906 9/11/2025
Class F153,600 4.4 %99,859 9/11/2025
Class X-1(1)
n/a0.5 %12,794 9/11/2025
Class X-2(1)
n/a0.4 %2,593 9/11/2025
$1,370,691 $1,256,266 
(1) Class X-1 and Class X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of December 31, 2020, respectively.

At December 31, 2020, the Company owned a portion of the class F certificates with an outstanding principal balance of $14.9 million, which is eliminated in consolidation. The remaining CSMC USA debt that we elected the fair value option had a fair value of $1.3 billion, and is recorded in "Securitized debt, net" in the Consolidated Balance Sheets. Of the remaining outstanding principal balance of $1.4 billion, $208.2 million is owned by related parties and $1.2 billion is owned by third parties. The securitized debt of the CSMC USA can only be settled with the commercial loan with an outstanding principal balance of approximately $1.4 billion at December 31, 2020, that serves as collateral for the securitized debt and is non-recourse to the Company. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net."

Residential Mortgage-Backed Notes

Arroyo Trust 2019

In May 2019, the Company completed a residential mortgage-backed securitization comprised of $945.5 million of Non-QM Residential Whole Loans, issuing $919.0 million of mortgage-backed notes. The Company did not elect the fair value option for these notes and accordingly they are recorded at their principal balance less unamortized deferred financing costs and classified in "Securitized debt, net" in the Consolidated Balance Sheets. The following table summarizes the issued Arroyo Trust's residential mortgage pass-through certificates at December 31, 20192020 (dollars in thousands):
 
ClassesPrincipal BalanceCoupon Carrying ValueContractual Maturity
Offered Notes:
Class A-1$511,623 3.3%$511,620 4/25/2049
Class A-227,414 3.5%27,414 4/25/2049
Class A-343,433 3.8%43,430 4/25/2049
Class M-125,055 4.8%25,055 4/25/2049
Subtotal$607,525 $607,519 
Less: Unamortized Deferred Financing CostsN/A4,398 
Total$607,525 $603,121 
ClassesPrincipal BalanceCoupon Carrying ValueContractual Maturity
Offered Notes:    
Class A-1$681,668
3.3%$681,666
4/25/2049
Class A-236,525
3.5%36,524
4/25/2049
Class A-357,866
3.8%57,864
4/25/2049
Class M-125,055
4.8%25,055
4/25/2049
Subtotal$801,114
 $801,109
 
Less: Unamortized Deferred Financing CostsN/A
 5,298
 
Total$801,114
 $795,811
 


The Company retained the non-offered securities in the securitization, which include the class B, Class A-IO-S and Class XS certificates. These non-offered securities arewere eliminated in the consolidation. The securitized debt of the Arroyo Trust can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At December 31, 2019,2020, Residential Whole Loans, with an outstanding principal balance of approximately $814.0$615.3 million, serve as collateral for the Arroyo Trust's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the
130


three-year anniversary of the closing date or ii)(ii) the date on which the aggregate collateral balance is 20% of the original principal balance. The notes are redeemable at their face value plus accrued interest.

MRCDArroyo Trust 2020

In June 2020, the Company completed a residential mortgage-backed securitization comprised of $355.8 million of Non-QM Residential Whole Loans, issuing $341.7 million of mortgage-backed notes. The Company did not elect the fair value option for these notes and accordingly they are recorded at their principal balance less unamortized deferred financing cost and classified in "Securitized debt, net" in the Consolidated Balance Sheets.The following table summarizes MRCD Trust's commercialthe issued Arroyo Trust 2020's residential mortgage pass-through certificates at December 31, 20192020 (dollars in thousands):
 
ClassesPrincipal BalanceCoupon Carrying ValueContractual Maturity
Offered Notes:
Class A-1A$222,117 1.7%$222,112 3/25/2055
Class A-1B26,357 2.1%26,357 3/25/2055
Class A-213,518 2.9%13,517 3/25/2055
Class A-317,963 3.3%17,963 3/25/2055
Class M-111,739 4.3%11,739 3/25/2055
Subtotal$291,694 $291,688 
Less: Unamortized Deferred Financing CostsN/A2,519 
Total$291,694 $289,169 
ClassesPrincipal BalanceCoupon Fair ValueContractual Maturity
Class A$234,500
4.3%$198,104
12/9/2024
Class HRR10,500
12.0%10,443
12/9/2024
 $245,000
 $208,547
 


The Company acquired $150.9 million ofretained the class A certificatesnon-offered securities in the securitization, which include the Class B, Class A-IO-S and the entire class of HRR certificates principal, which areClass XS certificates. These non-offered securities were eliminated in consolidation and the remaining MRCD debt with a fair value of $70.6 million is recorded in "Securitized debt,

net" in the consolidated balance sheets. The remaining outstanding principal balance of $83.6 million is owned by related parties.consolidation. The securitized debt of the MRCDArroyo Trust 2020 can only be settled with the commercial loan, with an outstanding principal balance of approximately $245.0 million at December 31, 2019,residential loans that servesserve as collateral for the securitized debt and is non-recourse to the Company. At December 31, 2020, Residential Whole Loans, with an outstanding principal balance of approximately $300.0 million serve as collateral for the Arroyo Trust 2020's securitized debt. The Company has chosenmay redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to makeor less than 30% of the fairoriginal principal balance. The notes are redeemable at their face value election pursuant to ASC 825 for the debt and accordingly the periodic change in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net."plus accrued interest.

Note 8—Derivative Instruments
The Company's derivatives may include interest rate swaps, swaptions, options, futures contracts, TBAs, Agency and Non-Agency Interest-Only Strips that are classified as derivatives, credit default swaps and total return swaps.
The following table summarizes the Company's derivative instruments at December 31, 20192020 and December 31, 20182019 (dollars in thousands):
   December 31, 2020December 31, 2019
Derivative InstrumentAccounting DesignationConsolidated Balance Sheets LocationNotional
Amount
Fair
Value
Notional
Amount
Fair
Value
Interest rate swaps, assetNon-HedgeDerivative assets, at fair value$$$2,701,000 $3,017 
Credit default swaps, assetNon-HedgeDerivative assets, at fair value2,030 161 60,100 948 
TBA securities, assetNon-HedgeDerivative assets, at fair value1,000,000 1,146 
Total derivative instruments, assets   161  5,111 
Interest rate swaps, liabilityNon-HedgeDerivative liability, at fair value1,255,000 (501)
Credit default swaps, liabilityNon-HedgeDerivative liability, at fair value4,140 (656)90,900 (3,795)
TBA securities, liabilityNon-HedgeDerivative liability, at fair value1,000,000 (2,074)
Total derivative instruments, liabilities   (656) (6,370)
Total derivative instruments, net   $(495)$(1,259)
131


     December 31, 2019 December 31, 2018
Derivative InstrumentAccounting Designation Consolidated Balance Sheets Location 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Interest rate swaps, assetNon-Hedge Derivative assets, at fair value $2,701,000
 $3,017
 $1,128,400
 $2,057
Credit default swaps, assetNon-Hedge Derivative assets, at fair value 60,100
 948
 50,000
 549
TBA securities, assetNon-Hedge Derivative assets, at fair value 1,000,000
 1,146
 
 
Total derivative instruments, assets     
 5,111
  
 2,606
Interest rate swaps, liabilityNon-Hedge Derivative liability, at fair value 1,255,000
 (501) 2,727,800
 (5,473)
Futures contracts, liabilityNon-Hedge Derivative liability, at fair value 
 
 300,400
 (4,657)
Credit default swaps, liabilityNon-Hedge Derivative liability, at fair value 90,900
 (3,795) 
 
TBA securities, liabilityNon-Hedge Derivative liability, at fair value 1,000,000
 (2,074) 
 
Total derivative instruments, liabilities     
 (6,370)  
 (10,130)
Total derivative instruments, net     
 $(1,259)   $(7,524)
The following tables summarize the effects of the Company's derivative positions, including Interest-Only Strips characterized as derivatives and TBAs, which are reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations for the years ended December 31, 2019, December 31, 2018 and December 31, 2017 (dollars in thousands):


 Realized Gain (Loss), net        
DescriptionOther Settlements / Expirations Variation Margin Settlement 
Return
(Recovery) of
Basis
 Mark-to-Market 
Contractual interest
income (expense),
net
 Total
Year ended December 31, 2019           
Interest rate swaps$(4,978) $(108,169) $5,769
 $5,140
 $3,732
 $(98,506)
Interest rate swaptions(332) 
 
 
 
 (332)
Interest-Only Strips—accounted for as derivatives
 
 (2,688) (508) 3,277
 81
Options1,378
 
 
 
 
 1,378
Futures contracts(12,862) 
 
 4,657
 
 (8,205)
Credit default swaps(178) 
 
 1,029
 
 851
TBAs1,934
 
 
 (928) 
 1,006
Total$(15,038) $(108,169) $3,081
 $9,390
 $7,009
 $(103,727)
            
Year ended December 31, 2018           
Interest rate swaps$163
 $76,979
 $2,465
 $(5,147) $3,693
 $78,153
Interest-Only Strips—accounted for as derivatives
 
 (3,661) (655) 4,511
 195
Options(871) 
 
 300
 
 (571)
Futures contracts6,112
 
 
 (5,285) 
 827
Credit default swaps(241) 
 
 396
 
 155
TBAs(800) 
 
 10
 
 (790)
Total$4,363
 $76,979
 $(1,196) $(10,381) $8,204
 $77,969
            
Year ended December 31, 2017           
Interest rate swaps$(150,607) $20,258
 $524
 $148,947
 $(14,606) $4,516
Interest rate swaptions(115) 
 
 
 
 (115)
Interest-Only Strips—accounted for as derivatives526
 
 (5,995) (902) 7,438
 1,067
Options(1,453) 
 
 (300) 
 (1,753)
Futures contracts(9,130) 
 
 3,044
 
 (6,086)
Foreign currency forwards32
 
 
 35
 
 67
Total return swap(552) 
 
 1,673
 469
 1,590
Credit default swaps(11) 
 (22) 
 
 (33)
TBAs4,049
 
 
 (10) 
 4,039
Total$(157,261) $20,258
 $(5,471) $152,465
 $(6,699) $3,292

At2020, December 31, 2019 and December 31, 2018 (dollars in thousands):

Realized Gain (Loss), net
DescriptionOther Settlements / ExpirationsVariation Margin SettlementReturn
(Recovery) of
Basis
Mark-to-MarketContractual interest
income (expense),
net
Total
Year ended December 31, 2020
Interest rate swaps$(262)$(179,759)$262 $(2,515)$(1,395)$(183,669)
Interest rate swaptions80 — — — 80 
Interest-Only Strips—accounted for as derivatives(940)— (1,096)(532)1,324 (1,244)
Credit default swaps(9,534)— — (1,834)— (11,368)
TBAs(2,430)— — 928 — (1,502)
Total$(13,086)$(179,759)$(834)$(3,953)$(71)$(197,703)
Year ended December 31, 2019
Interest rate swaps$(4,978)$(108,169)$5,769 $5,140 $3,732 $(98,506)
Interest rate swaptions(332)— — — (332)
Interest-Only Strips—accounted for as derivatives— (2,688)(508)3,277 81 
Options1,378 — — — 1,378 
Futures contracts(12,862)— — 4,657 — (8,205)
Credit default swaps(178)— — 1,029 — 851 
TBAs1,934 — — (928)— 1,006 
Total$(15,038)$(108,169)$3,081 $9,390 $7,009 $(103,727)
Year ended December 31, 2018
Interest rate swaps$163 $76,979 $2,465 $(5,147)$3,693 $78,153 
Interest-Only Strips—accounted for as derivatives— (3,661)(655)4,511 195 
Options(871)— — 300 — (571)
Futures contracts6,112 — — (5,285)— 827 
Credit default swaps(241)— — 396 — 155 
TBAs(800)— — 10 — (790)
Total$4,363 $76,979 $(1,196)$(10,381)$8,204 $77,969 

    At December 31, 2020 and December 31, 2019, the Company had cash pledged as collateral for its derivatives which represents upfront cash collateral upon the Company entering into an interest rate swap transaction and cash collateral for other derivatives of approximately $55.4 million$510 thousand and approximately $38.0$55.4 million respectively, which is reported in "Due from counterparties" in the Consolidated Balance Sheets.
Interest rate swaps and interest rate swaptions
132


The Company enters into interest rate swaps and interest rate swaptions to mitigate its exposure to higher short-term interest rates in connection with its repurchase agreements. Interest rate swaps generally involve the receipt of variable-rate amounts

from a counterparty in exchange for the Company making fixed-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. Notwithstanding the foregoing, in order to manage its hedge position with regard to its liabilities, the Company on occasion will enter into interest rate swaps which involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. The Company also enters into forward starting swaps and interest rate swaptions to help mitigate the effects of changes in interest rates on a portion of its borrowings under repurchase agreements. Interest rate swaptions provide the Company the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company generally enters into MAC (Market Agreed Coupon) interest rate swaps in which it may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. At December 31, 2019, the Company had made upfront cash collateral payments of $52.6 million, which is classified in "Due from counterparties" in the Consolidated Balance Sheets. Similar to all other interest rate swaps, these interest rate swaps are also subject to margin requirements as previously described.requirements.
The Company has not elected to account for its interest rate swaps as "hedges" under GAAP, accordingly the change in fair value of the interest rate swaps not designated in hedging relationships are recorded together with periodic net interest settlement amounts in "Gain (loss) on derivatives instruments, net" in the Consolidated Statements of Operations.
Interest Rate Swaps
    The Company did not have any interest rate swaps in its holdings at December 31, 2020. The following tables provide additional information on ourthe Company's fixed pay interest rate swaps and the variable pay interest rate swapswaps as of December 31, 2019 and December 31, 2018 (dollars in thousands):
December 31, 2019 December 31, 2019
Fixed Pay Interest Rate Swap Remaining Term
Notional
Amount
 
Average Fixed Pay
Rate
 
Average Floating Receive
Rate
 
Average
Maturity (Years)
Fixed Pay Interest Rate Swap Remaining TermNotional
Amount
Average Fixed Pay
Rate
Average Floating Receive
Rate
Average
Maturity
(Years)
1 year or less$200,000
 1.8% 1.9% 0.41 year or less$200,000 1.8 %1.9 %0.4
Greater than 3 years and less than 5 years622,400
 2.6% 1.9% 4.1Greater than 3 years and less than 5 years622,400 2.6 %1.9 %4.1
Greater than 5 years1,728,600
 2.1% 2.0% 8.9Greater than 5 years1,728,600 2.1 %2.0 %8.9
Total$2,551,000
 2.2% 2.0% 7.1Total$2,551,000 2.2 %2.0 %7.1
 December 31, 2019
Variable Pay Interest Rate Swap Remaining TermNotional Amount 
Average 
Variable Pay Rate
 Average Fixed Receive Rate Average Maturity (Years)
Greater than 1 years and less than 3 years$810,000
 2.0% 2.0% 1.6
Greater than 3 years and less than 5 years550,000
 1.9% 1.6% 5
Greater than 5 years45,000
 1.9% 2.3% 19.5
Total$1,405,000
 2.0% 1.9% 3.5

 December 31, 2018
Fixed Pay Interest Rate Swap Remaining Term
Notional
Amount
 
Average Fixed Pay
Rate
 
Average Floating Receive
Rate
 
Average
Maturity
(Years)
1 year or less$400,000
 1.5% 2.8% 0.5
Greater than 1 year and less than 3 years200,000
 1.8% 2.6% 1.4
Greater than 3 years and less than 5 years1,104,700
 2.3% 2.5% 3.8
Greater than 5 years1,423,100
 2.5% 2.5% 9.9
Total$3,127,800
 2.3% 2.6% 6.0


  December 31, 2018
Variable Pay Interest Rate Swap Remaining Term Notional Amount 
Average 
Variable Pay Rate
 Average Fixed Receive Rate Average Maturity (Years)
Greater than 5 years $728,400
 2.5% 2.4% 8.3
Total $728,400
 2.5% 2.4% 8.3


 December 31, 2019
Variable Pay Interest Rate Swap Remaining TermNotional AmountAverage 
Variable Pay Rate
Average Fixed Receive RateAverage Maturity (Years)
Greater than 1 years and less than 3years$810,000 2.0 %2.0 %1.6
Greater than 3 years and less than 5 years550,000 1.9 %1.6 %5.0
Greater than 5 years45,000 1.9 %2.3 %19.5
Total$1,405,000 2.0 %1.9 %3.5
As
Interest Rate Swaptions
The Company did not have any swaptions in its derivative holdings as of December 31, 20192020 and December 31, 2018, the Company had 0 variable pay or fixed pay forward starting swaps.2019.
Futures Contracts
TheFrom time to time, the Company may enter into Eurodollar, Volatility Index, and U.S. Treasury futures. As of December 31, 2020 and December 31, 2019, the Company had no open futures contracts. As of December 31, 2018, the Company had entered into contracts to sell or short positions for U.S. Treasuries with a notional amount of $300.4 million, with a fair value in a liability position of $4.7 million and an expiration date of March 2019.
To-Be-Announced Securities
The Company purchased or sold TBAs during the years ended December 31, 20192020 and December 31, 2018.2019. There were no open TBA positions as of December 31, 2018.2020. The following is a summary of the Company's TBA positions as of
133


December 31, 2019, reported in "Derivative assets, at fair value" and "Derivative liability, at fair value" in the Consolidated Balance Sheets (dollars in thousands):
 December 31, 2019
 
Notional
Amount
 
Fair
Value
Purchase contracts, asset$1,000,000
 $1,146
Purchase contracts, liability(1,000,000) (2,074)
TBA securities, net$
 $(928)

 December 31, 2019
 Notional
Amount
Fair
Value
Purchase contracts, asset$1,000,000 $1,146 
Purchase contracts, liability(1,000,000)(2,074)
TBA securities, net$$(928)
The following tables presenttable presents additional information about the Company's contracts to purchase and sell TBAs for the year ended December 31, 20192020 (dollars in thousands):
 Notional Amount   Settlement, Termination, Notional Amount
 December 31, 2018 Additions  Expiration or Exercise December 31, 2019
Purchase of TBAs$
 $3,200,000
 $(2,200,000) $1,000,000
Sale of TBAs$
 $3,200,000
 $(2,200,000) $1,000,000

Notional AmountSettlement, Termination,Notional Amount
December 31, 2019Additions Expiration or ExerciseDecember 31, 2020
Purchase of TBAs$1,000,000 $5,257,000 $(6,257,000)$
Sale of TBAs$1,000,000 $5,257,000 $(6,257,000)$
Interest-Only Strips
The Company also invests in Interest-Only Strips. In determining the classification of its holdings of Interest-Only Strips, the Company evaluates the securities to determine if the nature of the cash flows has been altered from that of the underlying mortgage collateral. Generally, Interest-Only Strips for which the security represents a strip off of a mortgage pass through security will be considered a hybrid instrument classified as an MBS investment in the Consolidated Balance Sheets utilizing the fair value option. Alternatively, those Interest-Only Strips, for which the underlying mortgage collateral has been included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives at fair value with changes recognized in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations, along with any interest received. The carrying value of these Interest-Only Strips is included in "Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.
Credit Default Swaps


In 2019, the    The Company has previously entered into credit default swaps and, in the future, may continue to enter into these types of credit derivatives. Under these instruments, the buyer makes a monthly premium payment over the term of the contract in exchange for the seller making a payment for losses of the reference securities, upon the occurrence of a specified credit event.

Note 9—Offsetting Assets and Liabilities
The following tables present information about certain assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset in the Company's Consolidated Balance Sheets at December 31, 20192020 and December 31, 20182019 (dollars in thousands):
  December 31, 2019
  
Gross
Amounts
 
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
 
Net Amounts
of Assets
presented in the
Consolidated
Balance Sheets
 
Gross Amounts Not Offset
in the Consolidated Balance
Sheets
  

Description
    
Financial
Instruments(1)
 
Cash
Collateral(1)
 
Net
Amount
Derivative Assets            
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS $8,665
 $
 $8,665
 $(8,665) $
 $
Derivative asset, at fair value(2)
 5,111
 
 5,111
 (2,576) 
 2,535
Total derivative assets $13,776
 $
 $13,776
 $(11,241) $
 $2,535
             
Derivative Liabilities and Repurchase Agreements        
Derivative liability, at fair value(2)(3)
 $6,370
 $
 $6,370
 $(2,576) $(2,819) $975
Repurchase Agreements(4)
 2,824,801
 
 2,824,801
 (2,824,801) 
 
Total derivative liability $2,831,171
 $
 $2,831,171
 $(2,827,377) $(2,819) $975
134


December 31, 2020
Gross
Amounts
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
Net Amounts
of Assets
presented in the
Consolidated
Balance Sheets
Gross Amounts Not Offset
in the Consolidated Balance
Sheets

Description
Financial
Instruments(1)
Cash
Collateral(1)
Net
Amount
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS$1,565 $— $1,565 $(1,565)$— $
Derivative asset, at fair value(2)
161 — 161 (161)— 
Total derivative assets$1,726 $— $1,726 $(1,726)$— $
Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)
$656 $— $656 $(161)$(495)$
Repurchase Agreements(4)
356,923 — 356,923 (356,923)— — 
Total derivative liability$357,579 $— $357,579 $(357,084)$(495)$
(1)Amounts disclosed in the Financial Instruments column of the tables above represent securities, Whole Loans and securitized commercial loan collateral pledged and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the Cash Collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.
(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps, credit default swaps and futures contracts.
(3)Cash collateral pledged against the Company's derivative counterparties was approximately $510 thousand as of December 31, 2020.
(4)The carrying value of investments pledged against the Company's repurchase agreements was approximately $682.9 million as of December 31, 2020.
December 31, 2019
Gross
Amounts
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
Net Amounts
of Assets
presented in the
Consolidated
Balance Sheets
Gross Amounts Not Offset
in the Consolidated Balance
Sheets

Description
Financial
Instruments(1)
Cash Collateral(1)
Net
Amount
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS$8,665 $— $8,665 $(8,665)$— $
Derivative asset, at fair value(2)
5,111 — 5,111 (2,576)— 2,535 
Total derivative assets$13,776 $— $13,776 $(11,241)$— $2,535 
Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)
$6,370 $— $6,370 $(2,576)$(2,819)$975 
Repurchase Agreements(4)
2,824,801 — 2,824,801 (2,824,801)— — 
Total derivative liability$2,831,171 $— $2,831,171 $(2,827,377)$(2,819)$975 
(1)Amounts disclosed in the Financial Instruments column of the tables above represent securities, Whole Loans and securitized commercial loan collateral pledged and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the Cash Collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.
(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps, credit default swaps and futures contracts.
(3)
(1)Amounts disclosed in the Financial Instruments column of the tables above represent securities, Whole Loans and securitized commercial loan collateral pledged and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the Cash Collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.
(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps, credit default swaps and futures contracts.
(3)Cash collateral pledged against the Company's derivative counterparties was approximately $55.4 million as of December 31, 2019.
(4)The carrying value of investments pledged against the Company's repurchase agreements was approximately $3.2 billion as of December 31, 2019.
(4)
The carrying value of investments pledged against the Company's repurchase agreements was approximately $3.2 billion as of December 31, 2019.

  December 31, 2018
  
Gross
Amounts
 
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
 
Net Amounts
of Assets
presented in the
Consolidated
Balance Sheets
 
Gross Amounts Not Offset
in the Consolidated Balance
Sheets
  

Description
    
Financial
Instruments(1)
 
Cash Collateral(1)
 
Net
Amount
Derivative Assets            
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS $11,860
 $
 $11,860
 $(11,860) $
 $
Derivative asset, at fair value(2)
 2,606
 
 2,606
 (2,057) 
 549
Total derivative assets $14,466
 $
 $14,466
 $(13,917) $
 $549
             
Derivative Liabilities and Repurchase Agreements        
Derivative liability, at fair value(2)(3)
 $10,130
 $
 $10,130
 $(2,057) $(8,073) $
Repurchase Agreements(4)
 2,818,837
 
 2,818,837
 (2,818,837) 
 
Total derivative liability $2,828,967
 $
 $2,828,967
 $(2,820,894) $(8,073) $
135



(1)Amounts disclosed in the Financial Instruments column of the tables above represent securities, Whole Loans and securitized commercial loan collateral pledged and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the Cash Collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.
(1)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps, credit default swaps and futures contracts.
(2)Cash collateral pledged against the Company's derivative counterparties was approximately $38.0 million as of December 31, 2018.
(3)The carrying value of investments pledged against the Company's repurchase agreements was approximately $3.3 billion as of December 31, 2018.
Certain of the Company's repurchase agreement and derivative transactions are governed by underlying agreements that generally provide for a right of set-off in the event of default or in the event of a bankruptcy of either party to the transaction.
Note 10—Related Party Transactions
Management Agreement
In connection with the Company's initial public offering ("IPO") in May 2012, the Company entered into a management agreement (the "Management Agreement") with the Manager, which describes the services to be provided by the Manager and compensation for such services. The Manager is responsible for managing the Company's operations, including: (i) performing all of its day-to-day functions; (ii) determining investment criteria in conjunction with the Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management, subject to the direction and oversight of the Company's Board of Directors. Pursuant to the terms of the Management Agreement, the Manager is paid a management fee equal to 1.50% per annum of the Company's stockholders' equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. For purposes of calculating the management fee, "stockholders' equity" means the sum of the net proceeds from any issuances of the Company's equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus retained earnings, calculated in accordance with GAAP, at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount paid for repurchases of the Company's shares of common stock, excluding any unrealized gains or losses on our investments and derivatives and other non-cash items, (excluding OTTI) that have impacted stockholders' equity as reported in the Company's consolidated financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company's independent directors and after approval by a majority of the Company's independent directors. However, if the Company's stockholders' equity for any given quarter is negative based on the calculation described above, the Manager will not be entitled to receive any management fee for that quarter.
On August 3, 2016, the Company and the Manager entered into an amendment to the Management Agreement that amended the definition of "Equity" in the Management Agreement. Under the new definition, for all periods beginning on January

1, 2016, OTTI will reduce the Company's "Equity" for any completed fiscal quarter that OTTI was recognized, which in turn will reduce the Company's management fee from what would have been payable before the amendment.
In addition, the Company may be required to reimburse the Manager for certain expenses as described below, and shall reimburse the Manager for the compensation paid to the Company's chief financial officer, controller and their staff. Expense reimbursements to the Manager are made in cash on a regular basis. The Company's reimbursement obligation is not subject to any dollar limitation. Because the Manager's personnel perform certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, the Manager may be paid or reimbursed for the documented cost of performing such tasks, provided that such costs and reimbursements are in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm's-length basis.
The Management Agreement may be amended, supplemented or modified by agreement between the Company and the Manager. The Management Agreement expires on May 16, 20212022 It is automatically renewed for one year terms on each May 15th unless previously terminated as described below. The Company's independent directors review the Manager's performance and any fees payable to the Manager annually and, the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds (2/3) of the Company's independent directors, based upon: (i) the Manager's unsatisfactory performance that is materially detrimental to the Company; or (ii) the Company's determination that any fees payable to the Manager are not fair, subject to the Manager's right to prevent such termination due to unfair fees by accepting a reduction of management fees agreed to by at least two-thirds (2/3) of the Company's independent directors. The Company will provide the Manager 180 days prior notice of any such termination. Unless terminated for cause, the Company will pay the Manager a termination fee equal to three times the average annual management fee earned by the Manager 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.
136


The Company may also terminate the Management Agreement at any time, without the payment of any termination fee, with 30 days prior written notice from the Company's Board of Directors for cause, which will be determined by at least two-thirds (2/3) of the Company's independent directors, which is defined as: (i) the Manager's continued material breach of any provision of the Management Agreement (including the Manager's failure to comply with the Company's investment guidelines); (ii) the Manager's fraud, misappropriation of funds, or embezzlement against the Company; (iii) the Manager's gross negligence in the performance of its duties under the Management Agreement; (iv) the occurrence of certain events with respect to the bankruptcy or insolvency of the Manager, including an order for relief in an involuntary bankruptcy case or the Manager authorizing or filing a voluntary bankruptcy petition; (v) the Manager is convicted (including a plea of nolo contendere) of a felony; or (vi) the dissolution of the Manager.
In September    For the years ended December 31, 2020, December 31, 2019 and December 31, 2018 the Company completed aincurred $4.5 million, $7.4 million and $8.7 million in management fees, respectively. The Manager waived the management fee in part for six months from October 2018 through March 2019 to reduce the impact of 2018 secondary public offering in which it sold 6,500,000 shares of its common stock for net proceeds of approximately $67.7 million after subtracting underwriting commissions and offering expenses. Refer to Note12- "Stockholders' Equity" for details on the secondary public offering. The Company's Manager did not earn a management fee on the issued equity through March 31, 2019, to reduce any impact on earnings as the Company fully deployed the capital into its target assets. The Manger waived the management fee for three months from March 2020 through May 2020 because of the unprecedented market disruption and dislocation across fixed income markets surrounding the uncertainty related to the COVID-19 pandemic. Future waivers, if any, will be at the Manager's discretion.
For the years ended December 31, 2019, December 31, 2018 and December 31, 2017 the Company incurred $7.4 million, $8.7 million and $8.1 million in management fees, respectively.
In addition to the management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company, as defined in the Management Agreement. For the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 2017,2018, the Company recorded expenses included in general and administrative expenses totaling approximately $1.7 million, $1.6 million $1.5 million and $1.4$1.5 million, respectively, related to reimbursable employee costs. Any such expenses incurred by the Manager and reimbursed by the Company, including the employee compensation expense, are typically included in the Company's general and administrative expense in the Consolidated Statements of Operations. At December 31, 20192020 and December 31, 2018,2019, approximately $2.0$3.0 million and approximately $4.2$2.0 million, respectively, for management fees incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets. In addition, at December 31, 20192020 and December 31, 2018,2019, approximately $181$148 thousand and approximately $379$181 thousand, respectively of reimbursable costs incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets.
Note 1111—Share-Based Payments

In conjunction with the Company's IPO and concurrent private placement, the Company's Board of Directors approved the Western Asset Mortgage Capital Corporation Equity Plan (the "Equity Plan") and the Western Asset Manager Equity Plan (the "Manager Equity Plan" and collectively the "Equity Incentive Plans"). The Equity Incentive Plans include provisions for grants of restricted common stock and other equity-based awards to the Manager, its employees and employees of its affiliates and to the Company's directors, officers and employees. The Company can issue up to 3.0% of the total number of issued and outstanding shares of its common stock (on a fully diluted basis) at the time of each award (other than any shares previously issued or subject to awards made pursuant to one of the Company's Equity Incentive Plans) under these Equity Incentive Plans. Upon the completion of the Company's most recent secondary public offering, the number of shares of common stock available under the Equity Incentive Plans increased to 1,582,594.1,804,258. Approximately 894,2891,025,542 of shares have been issued under the Equity Plans with 688,305778,716 shares available for issuance as of December 31, 2019.2020.
Under the Equity Plan, the Company made the following grants during the years ended December 31, 20192020 and December 31, 2018:2019:
On June 7, 2018, the Company granted a total of 25,904 shares (6,476 each) of restricted common stock under the Equity Plan to the Company’s 4 independent directors. These restricted shares vested in full on June 1, 2019, the first anniversary of the grant date. Each of the independent directors has elected to defer the shares granted to him under the Company’s Director Deferred Fee Plan (the “Director Deferred Fee Plan”). The Director Deferred Fee Plan permits eligible members of the Company's board of directors to defer certain stock awards made under its director compensation programs. The Director Deferred Fee Plan allows directors to defer issuance of their stock awards and therefore defer payment of any tax liability until the deferral is terminated, pursuant to the election form executed each year by each eligible director.

On March 28, 2019, the Company granted 108,000 shares of restricted common stock to the Manager under the Manager Equity Plan. One-third of the shares will vestvested on March 28, 2020, one-third will vest on March 28, 2021 and the remaining one-third will vest on March 28, 2022.

On June 6, 2019, the Company granted a total of 28,780 shares (7,195 each) of restricted common stock under the Equity Plan to the Company’s 4 independent directors. These restricted shares will vestvested in full on June 6, 2020, the first anniversary of the grant date. Each of the independent directors has elected to defer the shares granted to him under the Company’s Director Deferred Fee Plan (the “Director Deferred Fee Plan”). The Director Deferred Fee Plan permits eligible members of the Company's board of directors to defer certain stock awards made under its director compensation programs.
137


The Director Deferred Fee Plan allows directors to defer issuance of their stock awards and therefore defer payment of any tax liability until the deferral is terminated, pursuant to the election form executed each year by each eligible director.

    On June 19, 2020, the Company granted a total of 127,275 shares (25,455 each) of restricted common stock under the Equity Plan to the Company’s 5 independent directors. These restricted shares will vest in full on June 19, 2021, the first anniversary of the grant date. Each of the independent directors has elected to defer the shares granted under the Director Deferred Fee Plan.
During the years ended December 31, 2020, December 31, 2019 and December 31, 2018, 67,480, 29,200 and December 31, 2017, 29,200, 84,203 and 152,630 restricted common shares vested, respectively, including shares whose issuance has been deferred under the Director Deferred Fee Plan. The Company recognized stock-based compensation expense of approximately $699 thousand, $564 thousand $265 thousand and $981$265 thousand for the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 2017,2018, respectively. In addition, the Company had unamortized compensation expense of $968$619 thousand and $117$968 thousand for equity awards at December 31, 20192020 and December 31, 2018,2019, respectively.
All restricted common shares granted, other than those whose issuance has been deferred pursuant to the Director Deferred Fee Plan, possess all incidents of ownership, including the right to receive dividends and distributions currently, and the right to vote. Dividend equivalent payments otherwise allocable to restricted common shares under the Company's Director Deferred Fee Plan are deemed to purchase additional phantom shares of the Company's common stock that are credited to each participant's deferral account. The award agreements include restrictions whereby the restricted shares cannot be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of prior to the lapse of restrictions under the respective award agreement. The restrictions lapse on the unvested restricted shares awarded when vested, subject to the grantee's continuing to provide services to the Company as of the vesting date. Unvested restricted shares and rights to dividends thereon are forfeited upon termination of the grantee.
The following is a summary of restricted common stock vesting dates as of December 31, 20192020 and December 31, 2018,2019, including shares whose issuance has been deferred under the Director Deferred Fee Plan:

 December 31, 2020December 31, 2019
Vesting DateShares VestingShares Vesting
March 202036,000 
June 202030,592 
March 202136,000 36,000 
June 2021130,365 
March 202236,000 36,000 
202,365 138,592 
 December 31, 2019 December 31, 2018
Vesting DateShares Vesting Shares Vesting
June 2019
 27,476
March 202036,000
 
June 202030,592
 
March 202136,000
 
March 202236,000
 
 138,592
 27,476

The following table presents information with respect to the Company's restricted stock for the years ended December 31, 20192020 and December 31, 2018,2019, including shares whose issuance has been deferred under the Director Deferred Fee Plan:
 December 31, 2019 December 31, 2018
 
Shares of
Restricted Stock
 
Weighted Average
Grant Date Fair
Value(1)
 
Shares of
Restricted Stock
 
Weighted Average
Grant Date Fair
Value(1)
Outstanding at beginning of period753,973
 $16.77
 725,449
 $17.00
Granted(2)
140,316
 10.34
 28,524
 10.75
Outstanding at end of period894,289
 $15.76
 753,973
 $16.77
Unvested at end of period138,592
 $10.34
 27,476
 $10.78
December 31, 2020December 31, 2019
 Shares of
Restricted Stock
Weighted Average
Grant Date Fair
Value(1)
Shares of
Restricted Stock
Weighted Average
Grant Date Fair
Value(1)
Outstanding at beginning of period894,289 $15.76 753,973 $16.77 
Granted(2)
131,253 2.79 140,316 10.34 
Outstanding at end of period1,025,542 $14.10 894,289 $15.76 
Unvested at end of period202,365 $5.50 138,592 $10.34 

(1)The grant date fair value of restricted stock awards is based on the closing market price of the Company's common stock at the grant date.
(2)Includes 3,536 shares and 2,620 shares of restricted stock attributed to dividends on restricted stock under the Director Deferred Fee Plan for the years ended December 31, 2019 and December 31, 2018, respectively.

(1)The grant date fair value of restricted stock awards is based on the closing market price of the Company's common stock at the grant date.
138


(2)Includes 3,978 shares and 3,536 shares of restricted stock attributed to dividends on restricted stock under the Director Deferred Fee Plan for the years ended December 31, 2020 and December 31, 2019, respectively.

Note 1212—Stockholders' Equity
At-The-Market Program
In AprilMarch 2017, the Company entered into an equity distribution agreement with JMP Securities LLC, which was amended on June 5, 2020, under which the Company may offer and sell up to $100.0 million shares of common stock in an At-The-Market equity offering. During the year ended December 31, 2020, the Company sold 6,034,741 shares under this agreement with an average price of $3.70 per share for a total net proceeds of approximately $22.0 million. During the year ended December 31, 2019, the Company sold 299,497 shares under thisthe agreement with an average price of $10.21 for a total net proceeds of approximately $3.0 million.
Secondary Public Offerings
In September 2018, the Company completed a secondary public offering in which it sold 6,500,000 of its common stock, including 303,422 shares of treasury stock, at a price of $10.85 per share, for net proceeds of approximately $67.7 million after subtracting underwriting commissions and offering expenses of approximately $2.8 million. The Company used the net proceeds from the offering to opportunistically invest in its target assets in accordance with its investment guidelines.
In May 2019, the Company completed a secondary public offering in which it sold 5,000,000 shares of our common stock at a price of $10.14 per share, for net proceeds of approximately $49.3 million after subtracting underwriting commissions and offering expenses of approximately $1.4 million. The Company used the net proceeds from the offering to opportunistically invest in its target assets in accordance with its investment guidelines.
Stock Repurchase Program
On December 19, 2019, the Board of Directors of the Company reauthorized its repurchase program of up to 2,700,000 shares of its common stock through December 31, 2021. The previous reauthorization announced on December 21, 2017 of the Company's repurchase program of up to 2,100,000 shares of its common stock expired on December 31, 2019. Purchases made pursuant to the program will be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Securities and Exchange Act of 1934, as amended. The

authorization does not obligate the Company to acquire any particular amount of common shares and the program may be suspended or discontinued at the Company's discretion without prior notice. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. TheIn March 2020, the Company has repurchased 303,422100,000 shares of common stock with a weighted average price of $5.78. The repurchased stock was not retired and will be accounted for as treasury stock.
Convertible Notes Exchange
    On July 1, 2020, the Company issued an aggregate of 1,354,084 shares of its common stock pursuantin exchange for $5.0 million aggregate principal amount of its 2022 Notes. See Note 7 - "Financings" for information related to the authorization. In September 2018,convertible notes agreement.
Dividends
    To preserve liquidity, the Company re-issued all 303,422 sharessuspended its first and second quarter of 2020 common stock dividends given extraordinary market volatility driven by uncertainty surrounding the COVID-19 pandemic. Starting in treasury stock as partthe third quarter of 2020, the Company resumed payment of the quarterly dividend after making progress strengthening its balance sheet and improving liquidity and earnings power of its secondary public offering.investment portfolio.
Dividends
The following table presents cash dividends declared and paid by the Company on its common stock:
Declaration Date Record Date Payment Date Amount per Share Tax Characterization
2019      
  
December 19, 2019 December 30, 2019 January 24, 2020 $0.31
 Ordinary income
September 19, 2019 September 30, 2019 October 25, 2019 $0.31
 Ordinary income
June 20, 2019 July 1, 2019 July 26, 2019 $0.31
 Ordinary income
March 21, 2019 April 1, 2019 April 26, 2019 $0.31
 Ordinary income
         
2018      
  
December 19, 2018 December 31, 2018 January 25, 2019 $0.31
 Ordinary income
September 17, 2018 September 27, 2018 October 26, 2018 $0.31
 Ordinary income
June 21, 2018 July 2, 2018 July 26, 2018 $0.31
 Ordinary income
March 22, 2018 April 2, 2018 April 26, 2018 $0.31
 Ordinary income
139



Declaration DateRecord DatePayment DateAmount per Share Tax Characterization
2020     
December 17, 2020December 28, 2020January 26, 2021$0.06  Not yet determined(1)
September 22, 2020October 2, 2020October 26, 2020$0.05  Return of capital
2019     
December 19, 2019December 30, 2019January 24, 2020$0.31  50% Ordinary income and 50% Return of Capital(2)
September 19, 2019September 30, 2019October 25, 2019$0.31  Ordinary income
June 20, 2019July 1, 2019July 26, 2019$0.31  Ordinary income
March 21, 2019April 1, 2019April 26, 2019$0.31  Ordinary income
(1)The cash distributions made on January 26, 2021, with a record date of December 28, 2020, are treated as received by stockholders on January 26, 2021 and taxable in calendar year 2021. The tax characterization of these distributions will be determined in January 2022.
(2)Only 50% of the cash distributions made on January 24, 2020, with a record date of December 30, 2019, were treated as received by stockholders on December 30, 2019 and taxable in calendar year 2019 as ordinary income with the remaining 50% taxable in calendar year 2020 and treated as return of capital.
Note 13—Net Income per Common Share
The table below presents basic and diluted net income per share of common stock using the two-class method for the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 20172018 (dollars, other than shares and per share amounts, in thousands):

 For the year ended December 31, 2019 For the year ended December 31, 2018 For the year ended December 31, 2017
Numerator:
 
  
  
Net income attributable to common stockholders and participating securities for basic and diluted earnings per share$70,699
 $26,409
 $85,097
Less: 
  
  
Dividends and undistributed earnings allocated to participating securities303
 138
 312
Net income allocable to common stockholders—basic and diluted$70,396
 $26,271
 $84,785
Denominator:
 
  
  
Weighted average common shares outstanding for basic earnings per share51,278,932
 43,388,810
 41,817,455
Weighted average common shares outstanding for diluted earnings per share51,278,932
 43,388,810
 41,817,455
Basic earnings per common share$1.37
 $0.61
 $2.03
Diluted earnings per common share$1.37
 $0.61
 $2.03


 For the year ended December 31, 2020For the year ended December 31, 2019For the year ended December 31, 2018
Numerator:
   
Net income attributable to common stockholders and participating securities for basic and diluted earnings per share$(328,354)$70,699 $26,409 
Less:   
Dividends and undistributed earnings allocated to participating securities36 303 138 
Net income allocable to common stockholders—basic and diluted$(328,390)$70,396 $26,271 
Denominator:
   
Weighted average common shares outstanding for basic earnings per share57,411,384 51,278,932 43,388,810 
Weighted average common shares outstanding for diluted earnings per share57,411,384 51,278,932 43,388,810 
Basic earnings per common share$(5.72)$1.37 $0.61 
Diluted earnings per common share$(5.72)$1.37 $0.61 
For the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 2017,2018, the Company excluded the effects of the convertible senior unsecured notes from the computation of diluted earnings per share since the average market value per share of the Company's common stock was below the exercise price of the convertible senior unsecured notes. For the years ended December 31, 2019 December 31, 2018 and December 31, 2017,2018, the Company excluded the effects of the warrants from the computation of diluted earnings per share since the average market value per share of the Company’s common stock was below the exercise price of the warrants.
Note 14—Income Taxes
140


As a REIT, the Company is not subject to federal income tax to the extent that it makes qualifying distributions to its stockholders and satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income and stock ownership tests.
Based on the Company's analysis of any potential uncertain income tax positions, the Company concluded that it does not have any uncertain tax positions that meet the recognition or measurement criteria as of December 31, 2019.2020. The Company files U.S. federal and state income tax returns. As of December 31, 2019,2020, U.S. federal tax returns filed by the Company for 2019, 2018 2017 and 20162017 and state tax returns filed for 2019, 2018, 2017, 2016 and 2015 are open for examination pursuant to relevant statutes of limitation. In the event that the Company incurs income tax related interest and penalties, the Company's policy is to classify them as a component of its provision for income taxes.
Income Tax Provision
Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more TRS. Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. For the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 2017,2018, the Company recorded a federal and state tax provision of approximately $396 thousand, $1.1 million, and $709 thousand, and $3.5 million, respectively.
The following table summarizes the Company's income tax provision for the years ended December 31, 2019,2020, December 31, 20182019 and December 31, 20172018 (dollars in thousands):
For the year ended December 31, 2020For the year ended December 31, 2019For the year ended December 31, 2018
Current Tax Provision (Benefit)
Federal$527 $860 $709 
State(452)197 
Total Current Provision for Income Taxes, net75 1,057 709 
Deferred Provision (Benefit) for Income Taxes
Federal(85)
State406 
Total Deferred Benefit for Income Taxes, net321 
Total Income Tax Provision, net$396 $1,057 $709 
  For the year ended December 31, 2019 For the year ended December 31, 2018 For the year ended December 31, 2017
Current Tax Provision (Benefit)      
Federal $860
 $709
 $4,076
State 197
 
 (267)
Total Current Provision for Income Taxes, net 1,057
 709
 3,809
Deferred Provision (Benefit) for Income Taxes      
Federal 
 
 85
State 
 
 (407)
Total Deferred Benefit for Income Taxes, net 
 
 (322)
Total Income Tax Provision, net $1,057
 $709
 $3,487


Deferred Tax Asset and Deferred Tax Liability

As of December 31, 20192020 and December 31, 2018,2019, the Company recorded a deferred tax asset of approximately $8.5$21.0 million and $6.0$8.5 million, respectively, relating to capital loss carryforward and temporary differences as a result of the timing of income recognition of certain investments held in the TRS. The capital loss carryforwards may only be recognized to the extent of capital gains. There is uncertainty as to the TRS ability to recognize capital gains in the future. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized and has recorded a full valuation allowance.

In addition, the REIT generated net operating losses ("NOL's"NOLs") forduring the yearyears ended December 31, 2020 and December 31, 2017, related to its swap terminations, and for theits California return a portion of the NOL'sNOLs is apportioned to the TRS. The Company recorded a deferred


state tax asset of $6.0$19.3 million and $5.5$6.0 million in the REIT and $1.3$2.1 million and $993 thousand$1.3 million in the TRS as of December 31, 20192020 and December 31, 2018,2019, respectively. The TRS can carryback the NOL'sNOLs generated during the years ended December 31, 2020 and December 31, 2017 to each of the two preceding years and receiveto request a refund for taxes paid. As a result,of December 31, 2020 and December 31, 2019, the Company has concluded it is more likely than not the deferred tax asset relating to the NOLs will not be realized, with the exception of the TRS carryback to 2015, and it has recorded a combined valuation allowance of $6.9$21.4 million and $6.1$6.9 million, as of December 31, 2019 and December 31, 2018, respectively. The Company also recorded a deferred federal tax liability of $85 thousand as of December 31, 2019 and December 31, 2018, in anticipation of the receipt of the state tax refund as a result of the carryback of the California NOL. The state tax refund was received during the year ended December 31, 2020.

141



The following tables disclose the components of the Company's deferred tax asset and deferred tax liability at December 31, 20192020 and 20182019 (dollars in thousands):

Deferred Tax Asset December 31, 2019 December 31, 2018
Net operating loss available for carry-back and carry-forward (1)
 $7,295
 $6,503
Net capital loss carry-forward (1)
 6,775
 4,271
Investments 1,719
 1,720
Deferred tax asset 15,789
 12,494
Allowance (15,382) (12,087)
Net deferred tax asset $407
 $407


Deferred Tax AssetDecember 31, 2020December 31, 2019
Net operating loss available for carry-back and carry-forward (1)
$21,402 $7,295 
Net capital loss carry-forward (1)
11,966 6,775 
Investments9,061 1,719 
Deferred tax asset42,429 15,789 
Allowance(42,429)(15,382)
Net deferred tax asset$$407 
Deferred Tax Liability December 31, 2019 December 31, 2018
Net operating loss available for carry-back and carry-forward $85
 $85
Net deferred tax liability $85
 $85

(1)
Deferred Tax LiabilityDecember 31, 2020December 31, 2019
Net operating loss available for carry-back and carry-forward$$85 
Net deferred tax liability$$85 
(1) Net operating loss available for carry-forward begin to expire in 2037. Net capital loss available for carry-forward begin to expire in 2020. 2021.


Reconciliation of Tax Rate to Effective Tax Rate

The Company's effective tax rate differs from its combined federal and state income tax rate primarily due to the deduction of dividends distributions to be paid under Code Section 857(a). The reconciliation of these rates are as follows:

  For the year ended December 31, 2019 For the year ended December 31, 2018
Federal statutory rate 21.0 % 21.0 %
State statutory rate, net of federal benefit (1.0)% 1.5 %
Other 0.1 % (0.8)%
Change in valuation allowance 3.6 % (1.3)%
REIT earnings not subject to corporate taxes (22.2)% (17.8)%
Effective Tax Rate 1.5 % 2.6 %


For the year ended December 31, 2020For the year ended December 31, 2019
Federal statutory rate21.0 %21.0 %
State statutory rate, net of federal benefit1.5 %(1.0)%
Other%0.1 %
Change in valuation allowance(4.4)%3.6 %
REIT earnings not subject to corporate taxes(18.2)%(22.2)%
Effective Tax Rate(0.1)%1.5 %

Tax Cuts and Jobs Act
On December 22, 2017, the President of the United States signed and enacted comprehensive tax legislation into law H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21%.
Note 15—Contingencies


From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any material contingencies at December 31, 2019.2020.
142



Note 16—Summarized Quarterly Results (unaudited)
The following is a presentation of selected unaudited results of operations:operations (in thousands - except per share data):
 Quarter Ended
 March 31, 2020
June 30, 2020(1) (Revised)
September 30, 2020December 31, 2020
Net Interest Income:
Interest income$54,846 $31,494 $43,970 $47,718 
Interest expense36,105 24,418 33,853 38,215 
Net Interest Income18,741 7,076 10,117 9,503 
Other Income (Loss):
Realized gain (loss), net89,186 (6,960)718 1,327 
Unrealized gain (loss), net          (296,111)16,040 54,690 3,994 
Gain (loss) on derivative instruments, net          (189,691)(8,143)(88)219 
Other, net461 (45)(31)(46)
Other Income (Loss)(396,155)892 55,289 5,494 
Expenses:
Management fee to affiliate1,039 464 1,513 1,528 
Financing fee20,540 
Other operating expenses1,000 796 1,198 (139)
General and administrative expenses:
Compensation expense662 692 716 717 
Professional fees1,480 1,541 827 1,030 
Other general and administrative expenses353 772 1,138 1,040 
Total general and administrative expenses2,495 3,005 2,681 2,787 
Total Expenses4,534 24,805 5,392 4,176 
Income (loss) before income taxes(381,948)(16,837)60,014 10,821 
Income tax provision (benefit)(93)255 205 29 
Net income (loss)(381,855)(17,092)59,809 10,792 
Net income attributable to non-controlling interest
Net income (loss) attributable to common stockholders and participating securities$(381,857)$(17,094)$59,807 $10,790 
Net income (loss) per Common Share — Basic$(7.15)$(0.31)$0.98 $0.18 
Net income (loss) per Common Share — Diluted$(7.15)$(0.31)$0.98 $0.18 
143


Quarter Ended
Quarter Ended March 31, 2019June 30, 2019September 30, 2019December 31, 2019
March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019
Net Interest Income       
Net Interest Income:Net Interest Income:
Interest income$52,033
 $53,818
 $55,652
 $55,761
Interest income$52,033 $53,818 $55,652 $55,761 
Interest expense36,400
 37,958
 39,082
 36,834
Interest expense36,400 37,958 39,082 36,834 
Net Interest Income15,633
 15,860
 16,570
 18,927
Net Interest Income15,633 15,860 16,570 18,927 
       
Other Income (Loss)       
Realized gain (loss) on sale of investments, net(5,105) (8) 21,399
 11,992
Other Income (Loss):Other Income (Loss):
Realized gain (loss), netRealized gain (loss), net(5,105)(8)21,399 11,992 
Other than temporary impairment(1,232) (3,295) (1,819) (2,228)Other than temporary impairment(1,232)(3,295)(1,819)(2,228)
Unrealized gain (loss), net 50,781
 74,614
 35,030
 (52,896)Unrealized gain (loss), net 50,781 74,614 35,030 (52,896)
Gain (loss) on derivative instruments, net (27,148) (71,530) (47,056) 42,007
Gain (loss) on derivative instruments, net (27,148)(71,530)(47,056)42,007 
Other, net236
 532
 918
 518
Other, net236 532 918 518 
Other Income (Loss)17,532
 313
 8,472
 (607)Other Income (Loss)17,532 313 8,472 (607)
       
Expenses       
Expenses:Expenses:
Management fee to affiliate1,735
 1,832
 1,800
 1,987
Management fee to affiliate1,735 1,832 1,800 1,987 
Other operating expenses1,598
 1,253
 1,589
 1,079
Other operating expenses1,598 1,253 1,589 1,079 
General and administrative expenses:       General and administrative expenses:
Compensation expense544
 705
 671
 671
Compensation expense544 705 671 671 
Professional fees1,215
 761
 973
 1,031
Professional fees1,215 761 973 1,031 
Other general and administrative expenses185
 530
 344
 441
Other general and administrative expenses185 530 344 441 
Total general and administrative expenses1,944
 1,996
 1,988
 2,143
Total general and administrative expenses1,944 1,996 1,988 2,143 
Total Expenses5,277
 5,081
 5,377
 5,209
Total Expenses5,277 5,081 5,377 5,209 
       
Income before income taxes27,888
 11,092
 19,665
 13,111
Income before income taxes27,888 11,092 19,665 13,111 
Income tax provision (benefit)12
 478
 (55) 622
Income tax provision (benefit)12 478 (55)622 
Net income$27,876
 $10,614
 $19,720
 $12,489
Net income$27,876 $10,614 $19,720 $12,489 
       
Net income per Common Share — Basic$0.58
 $0.21
 $0.37
 $0.23
Net income per Common Share — Diluted$0.58
 $0.21
 $0.37
 $0.23
Net income per Common Share—BasicNet income per Common Share—Basic$0.58 $0.21 $0.37 $0.23 
Net income per Common Share—DilutedNet income per Common Share—Diluted$0.58 $0.21 $0.37 $0.23 

 Quarter Ended
 March 31, 2018 June 30, 2018 September 30, 2018 December 31, 2018
Net Interest Income:       
Interest income$39,727
 $57,154
 $54,461
 $58,020
Interest expense20,697
 38,134
 38,517
 40,892
Net Interest Income19,030
 19,020
 15,944
 17,128
        
Other Income (Loss):       
Realized gain (loss) on sale of investments, net575
 (5,608) (24,229) (33,995)
Other than temporary impairment(2,916) (2,974) (2,533) (2,757)
Unrealized gain (loss), net          (68,961) (31,693) 13,128
 62,855
Gain (loss) on derivative instruments, net          79,582
 28,490
 24,625
 (54,728)
Other, net47
 (145) (2) (89)
Other Income (Loss)8,327
 (11,930) 10,989
 (28,714)
        
Expenses:       
Management fee to affiliate2,180
 2,259
 2,284
 1,950
Other operating expenses969
 1,555
 1,609
 1,943
General and administrative expenses:       
Compensation expense510
 572
 552
 552
Professional fees1,295
 818
 1,065
 1,121
Other general and administrative expenses361
 397
 335
 349
Total general and administrative expenses2,166
 1,787
 1,952
 2,022
Total Expenses5,315
 5,601
 5,845
 5,915
        
Income (loss) before income taxes22,042
 1,489
 21,088
 (17,501)
Income tax provision313
 36
 206
 154
Net income (loss)$21,729
 $1,453
 $20,882
 $(17,655)
        
Net income (loss) per Common Share—Basic$0.52
 $0.03
 $0.50
 $(0.37)
Net income (loss) per Common Share—Diluted$0.52
 $0.03
 $0.50
 $(0.37)


Note 17—Subsequent Events (unaudited)
On February 18,(1) The consolidated statements of operations for the three months ended June 30, 2020 Franklin Resources, Inc. (“Franklin”) and Legg Mason announced that they had entered into an agreementwas revised during the three months ended September 30, 2020 to reflect the under which Franklin would acquire Legg Mason and its affiliates, including the Manager.   The transaction is expected to closeaccrual of interest expense in the third quarteramount of 2020 and is subject to customary closing conditions.  Upon completion of the transaction the Manager would become a wholly owned subsidiary of Franklin.
$1.5 million.

144



Western Asset Mortgage Capital Corporation and Subsidiaries
Schedule IV
Mortgage Loans on Real Estate
As of December 31, 20192020


$ in thousands
Asset Type
DescriptionNumber of
Loans
Interest
Rate
Maturity
Date
Periodic Payment Terms(1)
Prior
Liens
Face
Amount of
Mortgages
Carrying
Amount of
Mortgages(5)
Principal
Amount of
Loans Subject to
Delinquent
Principal or
Interest
Residential Whole-Loans and Bridge Loans
Adjustable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $0 - $249,999616Hybrid ARM 3.5% to 6.4%11/01/2041 to 02/1/2050P&I$— $97,397 $99,803 $437 
Adjustable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $250,000 - $499,999871Hybrid ARM 2.7% to 6.5%01/01/2042 to 02/1/2050P&I— 286,860 294,282 3,352 
Adjustable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $500,000 - $749,999283Hybrid ARM 2.7% to 6.3%02/01/2042 to 02/01/2050P&I— 159,657 163,515 2,348 
Adjustable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $750,000 - $999,999125Hybrid ARM 3.5% to 6.4%05/01/2043 to 02/01/2050P&I— 101,109 103,489 790 
Adjustable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $1,000,000 - $1,249,99930Hybrid ARM 3.5% to 5.6%9/01/2043 to 02/01/2050P&I— 31,365 31,956 989 
Adjustable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $1,250,000 - $1,499,99916Hybrid ARM 3.5% to 5.6%12/01/2041 to 01/01/2050P&I— 21,025 21,514 — 
Adjustable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $1,500,000 and above25Hybrid ARM 2.7% to 6.1%02/01/2042 to 01/01/2050P&I— 61,014 62,306 2,658 
Variable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $0 - $249,9994Variable 4.2% to 5.2%02/01/2044 to 05/01/2044P&I— 546 571 — 
Variable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $250,000 - $499,9994Variable 4% to 5.2%04/01/2044 to 06/01/2046P&I— 1,288 1,343 — 
Variable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $500,000 - $749,9991Variable 5.2% to 5.2%04/01/2044 to 04/01/2044P&I— 440 449 — 
Variable Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $1,250,000 - $1,499,9992Variable 4.2% to 5.2%02/01/2044 to 05/01/2044P&I— 1,314 1,389 — 
Fixed Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $0 - $249,999163Fixed 4.6% to 7.1%07/01/2026 to 02/01/2050P&I— 24,752 25,457 340 
145



$ in thousands
Asset Type
 Description 
Number of
Loans
 
Interest
Rate
 
Maturity
Date
 
Periodic Payment Terms(1)
 
Prior
Liens
 
Face
Amount of
Mortgages
 
Carrying
Amount of
Mortgages
 
Principal
Amount of
Loans Subject to
Delinquent
Principal or
Interest
Residential Whole-Loans and Bridge Loans
Adjustable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $0 - $249,999 730 Hybrid ARM 4.5% to 6.6% 11/01/2041 to 12/01/2049 P&I $
 $120,652
 $125,569
 $
Adjustable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $250,000 - $499,999 1,051 Hybrid ARM 4.5% to 6.5% 01/01/2042 to 12/01/2049 P&I 
 356,183
 370,434
 1,446
Adjustable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $500,000 - $749,999 345 Hybrid ARM 4.5% to 6.5% 02/01/2042 to 12/01/2049 P&I 
 198,888
 206,818
 646
Adjustable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $750,000 - $999,999 147 Hybrid ARM 4.5% to 6.4% 05/01/2043 to 12/01/2049 P&I 
 121,140
 125,727
 790
Adjustable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $1,000,000 - $1,249,999 34 Hybrid ARM 4.0% to 5.9% 09/01/2043 to 12/01/2049 P&I 
 36,536
 37,649
 1,006
Adjustable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $1,250,000 - $1,499,999 14 Hybrid ARM 4.6% to 6.0% 12/01/2041 to 12/01/2049 P&I 
 18,452
 19,228
 
Adjustable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $1,500,000 and above 27 Hybrid ARM 4.8% to 6.2% 02/01/2042 to 11/01/2049 P&I 
 65,071
 67,418
 
Variable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $0 - $249,999 4 Variable 6.2% to 6.4% 02/01/2044 to 05/01/2044 P&I 
 558
 586
 
Variable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $250,000 - $499,999 6 Variable 5.5% to 6.3% 04/01/2044 to 11/01/2047 P&I 
 2,026
 2,128
 
Variable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $500,000 - $749,999 1 Variable 6.2% to 6.2% 04/01/2044 to 04/01/2044 P&I 
 450
 473
 
Variable Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $1,250,000 - $1,499,999 2 Variable 6.2% to 6.4% 02/01/2044 to 05/01/2044 P&I 
 1,344
 1,415
 
Fixed Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $0 - $249,999 422 Fixed 3.8% to 7.1% 07/01/2026 to 12/01/2049 P&I 
 66,458
 68,988
 247
$ in thousands
Asset Type
DescriptionNumber of
Loans
Interest
Rate
Maturity
Date
Periodic Payment Terms(1)
Prior
Liens
Face
Amount of
Mortgages
Carrying
Amount of
Mortgages(5)
Principal
Amount of
Loans Subject to
Delinquent
Principal or
Interest
Fixed Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $250,000 - $499,999194Fixed 4.2% to 7.2%09/01/2026 to 02/01/2050P&I— 66,638 68,391 691 
Fixed Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $500,000 - $749,99993Fixed 4.6% to 6.5%11/01/2033 to 02/01/2050P&I— 53,733 54,964 630 
Fixed Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $750,000 - $999,99935Fixed 2.7% to 5.9%11/01/2033 to 02/01/2050P&I— 29,259 29,974 805 
Fixed Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $1,000,000 - $1,249,99915Fixed 4.9% to 5.9%02/01/2048 to 01/01/2050P&I— 16,129 16,547 — 
Fixed Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $1,250,000 - $1,499,99910Fixed 4.7% to 6.3%02/01/2036 to 02/01/2050P&I— 12,443 12,822 — 
Fixed Rate Residential Mortgage Loan Held in Securitization TrustsOriginal Loan Balance $1,500,000 and above10Fixed 4.6% to 5.7%09/01/2048 to 02/01/2050P&I— 19,586 20,010 2,271 
Fixed Rate Residential Bridge Loans Held in Securitization TrustsOriginal Loan Balance $0 - $249,99912Fixed 9% to 18%12/31/2020 to 12/31/2020
Interest Only(3)
— 1,373 1,101 1,268 
Fixed Rate Residential Bridge Loans Held in Securitization TrustsOriginal Loan Balance $250,000 - $499,9993Fixed 8% to 11.3%12/31/2020 to 02/01/2021
Interest Only(3)
— 1,144 1,067 771 
Fixed Rate Residential Bridge Loans Held in Securitization TrustsOriginal Loan Balance $500,000 - $749,9994Fixed 8.8% to 10%12/31/2020 to 12/31/2020
Interest Only(3)
— 2,455 2,357 1,353 
Fixed Rate Residential Bridge Loans Held in Securitization TrustsOriginal Loan Balance $750,000 - $999,9997Fixed 8.5% to 10.5%12/31/2020 to 12/31/2020
Interest Only(3)
— 6,183 5,708 2,579 
Fixed Rate Residential Bridge Loans Held in Securitization TrustsOriginal Loan Balance $1,000,000 - $1,249,9991Fixed 9% to 9%12/31/2020 to 12/31/2020
Interest Only(3)
— 1,125 1,013 1,125 
Fixed Rate Residential Bridge Loans Held in Securitization TrustsOriginal Loan Balance $1,250,000 - $1,499,9991Fixed 10.8% to 10.8%12/31/2020 to 12/31/2020
Interest Only(3)
— 1,295 1,165 1,295 
Fixed Rate Residential Bridge Loans Held in Securitization TrustsOriginal Loan Balance $1,500,000 and above1Fixed 8.5% to 8.5%12/31/2020 to 12/31/2020
Interest Only(3)
— 1,672 1,505 1,672 
Total Residential Whole-Loans and Bridge Loans$ $999,802 $1,022,698 $25,374 













146

$ in thousands
Asset Type
 Description 
Number of
Loans
 
Interest
Rate
 
Maturity
Date
 
Periodic Payment Terms(1)
 
Prior
Liens
 
Face
Amount of
Mortgages
 
Carrying
Amount of
Mortgages
 
Principal
Amount of
Loans Subject to
Delinquent
Principal or
Interest
Fixed Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $250,000 - $499,999 552 Fixed 3.8% to 7.5% 09/01/2026 to 12/01/2049 P&I 
 189,163
 195,762
 719
Fixed Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $500,000 - $749,999 128 Fixed 3.9% to 6.4% 11/01/2033 to 12/01/2049 P&I 
 73,638
 76,076
 
Fixed Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $750,000 - $999,999 35 Fixed 4.6% to 5.9% 11/01/2033 to 12/01/2049 P&I 
 30,096
 31,212
 
Fixed Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $1,000,000 - $1,249,999 12 Fixed 5.0% to 5.9% 02/01/2048 to 12/01/2049 P&I 
 13,095
 13,586
 
Fixed Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $1,250,000 - $1,499,999 8 Fixed 4.7% to 6.3% 02/01/2036 to 12/01/2049 P&I 
 9,980
 10,371
 
Fixed Rate Residential Mortgage Loan Held in Securitization Trusts Original Loan Balance $1,500,000 and above 11 Fixed 5.3% to 5.7% 09/01/2048 to 10/01/2049 P&I 
 21,714
 22,420
 2,271
Fixed Rate Residential Bridge Loans Held in Securitization Trusts Original Loan Balance $0 - $249,999 34 Fixed 7.5% to 18.0% 12/31/2019 to 03/01/2021 
Interest Only(3)
 
 4,722
 4,545
 1,930
Fixed Rate Residential Bridge Loans Held in Securitization Trusts Original Loan Balance $250,000 - $499,999 13 Fixed 7.5% to 11.3% 12/31/2019 to 02/01/2021 
Interest Only(3)
 
 4,907
 4,887
 420
Fixed Rate Residential Bridge Loans Held in Securitization Trusts Original Loan Balance $500,000 - $749,999 10 Fixed 7.8% to 12.7% 12/31/2019 to 08/01/2020 
Interest Only(3)
 
 6,251
 6,133
 2,071
Fixed Rate Residential Bridge Loans Held in Securitization Trusts Original Loan Balance $750,000 - $999,999 11 Fixed 7.8% to 18.0% 12/31/2019 to 12/01/2020 
Interest Only(3)
 
 9,662
 9,418
 3,595
Fixed Rate Residential Bridge Loans Held in Securitization Trusts Original Loan Balance $1,000,000 - $1,249,999 4 Fixed 8.0% to 13.5% 12/31/2019 to 09/01/2020 
Interest Only(3)
 
 4,526
 4,464
 1,125
Fixed Rate Residential Bridge Loans Held in Securitization Trusts Original Loan Balance $1,250,000 - $1,499,999 2 Fixed 9.0% to 10.8% 12/31/2019 to 12/31/2019 
Interest Only(3)
 
 2,690
 2,624
 1,295
Fixed Rate Residential Bridge Loans Held in Securitization Trusts Original Loan Balance $1,500,000 and above 2 Fixed 7.8% to 8.5% 12/31/2019 to 08/01/2020 
Interest Only(3)
 
 4,437
 4,348
 1,672
Total Residential Whole-Loans and Bridge Loans $
 $1,362,639
 $1,412,279
 $19,233















Western Asset Mortgage Capital Corporation and Subsidiaries
Schedule IV
CommercialMortgage Loans on Real Estate Loans
As of December 31, 20192020


$ in thousands
Asset Type
DescriptionNumber of
Loans
Interest
Rate
Maturity
Date
Periodic Payment Terms(1)
Prior
Liens
Face
Amount of
Mortgages
Carrying
Amount of
Mortgages(5)
Principal
Amount of
Loans Subject to
Delinquent
Principal or
Interest
Commercial Loans
Commercial Loan Held in Securitization TrustOriginal Loan Balance $45,187,5001LIBOR + 4.25%08/06/2021
Interest Only(4)
$— $45,188 $44,965 $— 
Commercial Loan Held in Securitization TrustOriginal Loan Balance $13,600,0001LIBOR + 4.00%11/30/2021
Interest Only(4)
— 9,200 9,179 — 
Commercial Loan Held in Securitization TrustOriginal Loan Balance $32,000,0001LIBOR + 4.10%07/06/2021
Interest Only(4)
$— $14,362 $14,322 $— 
Commercial LoanOriginal Loan Balance $30,000,0001LIBOR + 4.5%06/09/2020
Interest Only(4)
— 30,000 27,403 30,000 
Commercial LoanOriginal Loan Balance $50,000,0001LIBOR + 4.75%01/11/2024
Interest Only(4)
— 47,219 46,776 — 
Commercial LoanOriginal Loan Balance $90,000,0001LIBOR + 9.25%06/29/2024
Interest Only(4)
— 90,000 80,291 — 
Commercial LoanOriginal Loan Balance $40,000,0001LIBOR + 3.02%08/09/2023
Interest Only(4)
— 40,000 39,300 — 
Commercial LoanOriginal Loan Balance $13,206,5211LIBOR + 3.75%11/06/2024
Interest Only(4)
— 13,207 12,858 — 
Commercial LoanOriginal Loan Balance $24,534,7831LIBOR + 3.75%11/06/2024
Interest Only(4)
— 24,535 23,887 — 
Commercial LoanOriginal Loan Balance $7,258,6961LIBOR + 3.75%11/06/2024
Interest Only(4)
— 7,259 7,067 — 
Commercial LoanOriginal Loan Balance $4,425,4001LIBOR + 4.85%12/06/2022
Interest Only(4)
— 4,474 4,475 — 
Total Commercial Loans$— $325,444 $310,523 $30,000 
Securitized Commercial Loans
Commercial Loan Held in Securitization TrustOriginal Loan Balance $900,000,0001LIBOR + 8.50%03/09/2021
Interest Only(4)
— 354,202 339,384 — 
Commercial Loan Held in Securitization TrustOriginal Loan Balance $1,400,000,0001Fixed 4.37%09/15/2025
Interest Only(4)
— 1,385,591 1,265,951 — 
Total Securitized Commercial Loans$— $1,739,793 $1,605,335 $
Total Residential and Commercial Loans$— $3,065,039 $2,938,556 $55,374 
147



$ in thousands
Asset Type
 Description Number of
Loans
 Interest
Rate
 Maturity
Date
 Periodic Payment Terms(1) Prior
Liens
 Face
Amount of
Mortgages
 Carrying
Amount of
Mortgages
 Principal
Amount of
Loans Subject to
Delinquent
Principal or
Interest
Commercial Loans
Commercial Loan Held in Securitization Trust Original Loan Balance $45,187,500 1 LIBOR + 4.25% 07/01/2020 
Interest Only(4)
 $
 $45,188
 $45,188
 $
Commercial Loan Held in Securitization Trust Original Loan Balance $13,600,000 1 LIBOR + 4.00% 12/01/2021 
Interest Only(4)
 
 13,600
 13,600
 
Commercial Loan Held in Securitization Trust Original Loan Balance $32,000,000 1 LIBOR + 4.10% 07/01/2021 
Interest Only(4)
 $
 $32,000
 $32,000
 $
Commercial Mezzanine Loan Original Loan Balance $20,000,000 1 LIBOR + 6.50% 12/09/2020 
Interest Only(4)
 
 20,000
 20,000
 
Commercial Loan Original Loan Balance $30,000,000 1 LIBOR + 4.50% 06/09/2020 
Interest Only(4)
 
 30,000
 30,000
 
Commercial Loan Original Loan Balance $50,000,000 1 LIBOR + 4.75% 01/11/2022 
Interest Only(4)
 
 50,000
 50,000
 
Commercial Loan Original Loan Balance $90,000,000 1 LIBOR + 9.25% 06/29/2021 
Interest Only(4)
 
 90,000
 90,000
 
Commercial Loan Original Loan Balance $40,000,000 1 LIBOR + 3.02% 08/09/2021 
Interest Only(4)
 
 40,000
 40,000
 
Commercial Loan Original Loan Balance $13,206,521 1 LIBOR + 3.75% 11/06/2021 
Interest Only(4)
 
 13,206
 13,206
 
Commercial Loan Original Loan Balance $24,534,783 1 LIBOR + 3.75% 11/06/2021 
Interest Only(4)
 
 24,535
 24,535
 
Commercial Loan Original Loan Balance $7,258,696 1 LIBOR + 3.75% 11/06/2021 
Interest Only(4)
 
 7,259
 7,259
 
Commercial Loan Original Loan Balance $4,425,400 1 LIBOR + 4.85% 12/06/2022 
Interest Only(4)
 
 4,425
 4,425
 
Total Commercial Loans $
 $370,213
 $370,213
 $
                   
Securitized Commercial Loans
Commercial Loan Held in Securitization Trust Original Loan Balance $900,000,000 1 LIBOR + 8.50% 03/09/2021 
Interest Only(4)
 
 674,331
 676,436
 
Commercial Loan Held in Securitization Trust Original Loan Balance $234,500,000 1 Fixed 4.27% 12/09/2024 
Interest Only(4)
 
 234,500
 198,104
 


$ in thousands
Asset Type
 Description Number of
Loans
 Interest
Rate
 Maturity
Date
 Periodic Payment Terms(1) Prior
Liens
 Face
Amount of
Mortgages
 Carrying
Amount of
Mortgages
 Principal
Amount of
Loans Subject to
Delinquent
Principal or
Interest
Commercial Loan Held in Securitization Trust Original Loan Balance $10,500,000 1 Fixed 12.02% 12/09/2024 
Interest Only(4)
 
 10,500
 10,443
 
Commercial Mezzanine Loan Held in Securitization Trust Original Loan Balance $25,000,000 1 Fixed 9.00% 07/06/2020 
P&I(2)
 
 24,048
 24,057
 
Total Securitized Commercial Loans $
 $943,379
 $909,040
 $
                   
Total Residential and Commercial Loans $
 $2,676,231
 $2,691,532
 $19,233


(1) Principal and interest ("P&I")
(2) Interest only payments for initial 2 years. After 2 years, monthly P&I payments are based on an 2 years amortization schedule and a balloon payment is due on the maturity date.
(3) Residential Bridge Loans are mainly interest only loans with a balloon payment at maturity.
(4) The borrower may prepay the commercial loan in whole or in part at any time in accordance with the terms of the loan agreement.
(5) The carrying value of the reflects the fair value of the mortgage loans.
Reconciliation of Carrying Value of Mortgage Loans on Real Estate:
 202020192018
Beginning balance$2,691,532 $2,493,238 $368,972 
Additions during period:   
New mortgage loans113,340 2,042,587 2,901,479 
Unrealized gains21,291 631 
Capitalized interest829 
Mortgage loan of consolidated VIE1,245,287 
Deductions during period:   
Collections of principal713,854 1,853,630 769,605 
Transfer to REO419 5,029 143 
Amortization of premium and (discounts), net(4,805)5,247 5,692 
Unrealized losses97,089 1,191 2,356 
Sales of mortgage loans144,259 
Realized losses10,812 487 48 
Mortgage loan of deconsolidated VIE150,804 
Balance at end of period$2,938,556 $2,691,532 $2,493,238 
  2019 2018 2017
Beginning balance $2,493,238
 $368,972
 $216,361
Additions during period:  
  
  
New mortgage loans 2,042,587
 2,901,479
 232,545
Unrealized gains 21,291
 631
 3,167
Deductions during period:  
  
  
Collections of principal 1,858,659
 769,748
 80,550
Amortization of premium and (discounts) 5,247
 5,692
 1,470
Unrealized losses 1,191
 2,356
 1,081
Realized losses 487
 48
 
Balance at end of period $2,691,532
 $2,493,238
 $368,972


148




ITEM 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A.    Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and therefore we are required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2019.2020.
(b) Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company's Chief Executive Officer and Chief Financial Officer and effected by the Company's Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Company has assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019.2020. In making its assessment of internal control over financial reporting, management used the criteria described in "Internal Control—Integrated Framework" (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission, ("COSO"). Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 20192020 based on criteria in "Internal Control—Integrated Framework" (2013 framework) issued by the COSO.
The effectiveness of the Company's internal control over financial reporting as of December 31, 20192020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended December 31, 2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
149



ITEM 9B.    Other Information
None.



PART III
ITEM 10.    Directors, Executive Officers and Corporate Governance
The information regarding the Company's directors, executive officers and certain other matters required by Item 401 of Regulation S-K is incorporated herein by reference to the Company's proxy statement relating to its annual meeting of stockholders to be held on or about June 6, 201910, 2021 (the "Proxy Statement"), to be filed with the SEC within 120 days after December 31, 2019.2020.
The information regarding compliance with Section 16(a) of the Exchange Act required by Item 405 of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2019.2020.
The information regarding the Company's Code of Business Conduct and Ethics required by Item 406 of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2019.2020.
The information regarding certain matters pertaining to the Company's corporate governance required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2019.2020.
ITEM 11.    Executive Compensation.
The information regarding executive compensation and other compensation related matters required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2019.2020.
ITEM 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
The tables on equity compensation plan information and beneficial ownership of the Company required by Items 201(d) and 403 of Regulation S-K are incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2019.2020.
ITEM 13.    Certain Relationships and Related Transactions and Director Independence
The information regarding transactions with related persons, promoters and certain control persons and director independence required by Items 404 and 407(a) of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2019.2020.
ITEM 14.    Principal Accounting Fees and Services
The information concerning principal accounting fees and services and the Audit Committee's pre-approval policies and procedures required by Item 9(e) of Schedule 14A is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2019.2020.
ITEM 15.    Exhibits
Documents filed as part of this report:
1)    Financial Statements


150



WESTERN ASSET MORTGAGE CAPITAL CORPORATION
Consolidated Statements of Operations for the years ended December 31, 2012029,0, December 31, 20182019 and December 31, 20172018
Consolidated Statements of Cash Flow for the years ended December 31, 2012029,0, December 31, 20182019 and December 31, 20172018
Financial Statements Schedules other than the one listed above are omitted because the required information is not applicable or deemed not material, or the required information is presented in the financial statements and/or in the notes to financial statements.
2)    Exhibits
The following exhibits are filed as part of this report.

Exhibit No.Description
3.1*
3.2*
3.3*
4.1*
4.2*
4.3*
4.4*
4.5*
10.1*
10.2*
10.3*
10.4*
10.5*+
10.6*+

151



Exhibit No.Description
10.7*
10.8*+
10.9*+
10.10*
23.1
10.11*
23.1 
31.1
31.2
32.1
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*    Fully or partly previously filed.
+    Management contract or compensatory plan arrangement.

152




ITEM 16. Form 10-K Summary

None.
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

WESTERN ASSET MORTGAGE CAPITAL CORPORATION
By:
/s/ Jennifer W. Murphy
Jennifer W. Murphy
 President, Chief Executive Officer and Director
March 6, 20205, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:
By:
/s/ Jennifer W. Murphy
Jennifer W. Murphy
 President, Chief Executive Officer and Director (Principal Executive Officer)
March 6, 20205, 2021
By:
/s/ LISA MEYER
Lisa Meyer
 Chief Financial Officer & Treasurer (Principal Financial and Accounting Officer)
March 6, 20205, 2021
By:
/s/ JAMES W. HIRSCHMANN III
James W. Hirschmann III
 Director
March 6, 20205, 2021
By:
/s/ EDWARD D. FOX JR.
Edward D. Fox Jr.
 Director
March 6, 20205, 2021
By:
/s/ RICHARD ROLL
Richard Roll
 Director
March 6, 20205, 2021
By:
/s/ M. CHRISTIAN MITCHELL
M. Christian Mitchell
 Director
March 6, 20205, 2021
By:
/s/ RANJIT M. KRIPALANI
Ranjit M. Kripalani
 Director
March 6, 20205, 2021

145
153